chapter 17 Flashcards
what does the Securities Act of 1933 work with?
buying any stock or investment contract
what is the Howey Test ?
- an investment of money
- in a common enterprise
- with a reasonable expectation of profit
- based on the efforts of others
what does it mean if ALL four requirements of the Howey Test are met?
it is a security
what does the Securities Act of 1933 apply to?
applies to the initial sale of a security
what does the Securities Act of 1933 require?
requires the disclosure of information to the potential investors
Information cannot be what under the Securities Act of 1933?
false or misleading
what are the documents under the ‘33 Act?
Registration Statement and Prospectus
what form is the registration statement ?
Form S-1
what is a registration statement?
detailed disclosure of financial information about the issuer filed with the SEC
what are the periods for filing a registration statement?
pre-filing
waiting
post-effective
what is the pre- filing period?
issuer may only engage in preliminary negotiations and agreements with underwriters
what is the waiting period?
issuer may only solicit buyers or receive offers to buy (BUT CANNOT ACCEPT)
what is the post effective period?
issuer may sell securities (20 days after)
what is the prospectus?
contains key information in the company’s registration statement
what is provided to an interested investor?
the prospectus
what are the regulated parties?
issuer
underwriter
controlling person
seller
what is an issuer?
individual or business offering security for sale to the public
what is an underwriter?
anyone who participates in the original distribution of securities by selling securities or guaranteeing their sale
what is a controlling person?
is one who controls or is controlled by the issuer
what is a seller?
anyone who contracts with a purchaser or who is motivating influence that cause the purchase transaction to occur
what is Criminal Liability (Section 24)?
willful violation of the act or fraud in the initial sale of securities
what is Civil Liability Section 12(a)(1)?
liability for failure to file registration statement
what is Civil Liability Section 11?
liability for false or misleading registration statment
what is Civil Liability Section 12(a)(2)?
liability for false or misleading prospectus or other interstate communication (by mail, telephone, internet)
what is Civil Liability Section 17?
imposes civil liability for using any device, scheme or artifice of fraud in the initial sale of security
what section is a catchall for the fraud not picked up by the other sections?
Civil Liability Section 17
what is the Securities Exchange Act of 1934?
regulates transfer of securities AFTER the initial sale
what Act created the SEC?
Securities Exchange Act of 1934
what important section is under the Securities Exchange Act of 1934?
Section 10(B) and Rule 10-B(5)
what is the primary antifraud law and rule relating to the secondary distribution of securities ?
Section 10(B) and Rule 10-B(5)
what law allows investors to sue?
Section 10(B) and Rule 10-B(5)
who is liable when an investor sues?
parties directly connected to the sale of securities
what must a plaintiff prove in a Section 10(B) and Rule 10-B(5) case?
- material misrepresentation of omission by defendant
- intent
- connection between misrepresentation and the transaction
- reliance on the misrepresentation
- economic loss
- loss causation
what is materiality under Section 10B - Rule 10B-5 ?
depends on the significance a reasonable investor would place on the withheld or misrepresented information
what is insider trading under Section 10B-5 considered?
FRAUD
what is the theory for insider trading under Section 10B-5?
trading on insider information is deceptive because the insider abuses the relationship of trust
what is insider trading under Section 10B-5?
the sale or purchase of securities by individuals privy to nonpublic, material information based upon her special relationship with the corporation
who is an insider under Section 10B-5?
officers, directors, employees and professions in fiduciary relationships with the firm AND
tippees
what is a tippee?
a person who learns nonpublic information from an insider
who is an insider under Section 16?
person who owns more than 10% of any security AND is a director or officer of the issuer of security
what does Section 16 prohibit?
short swing profits based on the assumption that insiders has material, nonpublic information during this period
what is a short swing profit?
profits made within a 6 month time period
what provides for criminal sanction of violations under Section 10B Rule 10B-5?
Section 17(a)(2)
what are Blue Sky Laws?
state statues designed to protect the public from the sale of fraudulent stocks and bonds
what do the State Blue Sky Laws protect potential investors from?
buying risky securities without other information
what do State Blue Sky Laws apply to?
applies to securities subject to federal laws and securities exempt from federal statutes
what was a model for Blue Sky Laws?
Uniform Securities Act of 1956
what is the primary purpose of the Sarbanes-Oxley Act of 2002?
to ensure accuracy and integrity in the financial reporting of public companies
who does the SOX Act apply to?
all public companies in the US and international companies registered with the SEC
what Act created the Public Company Accounting Board? (PCAOB)
SOX Act
how many members are in the PCAOB?
five members all appointed by SEC Commissioners
what does the PCAOB do?
monitors accounting firms that audit public companies
what is Section 302 of SOX?
requires CEOs and CFOs to certify the accuracy of the quarterly and annual financial statements
what is section 404 of SOX?
mandates the certification of internal financial controls
what shows how SOX has had a positive impact?
decline in restatements
what are the whistleblower protections under SOX?
- encourages individuals to report corruption
- whistleblowers can recover civil damages
- improperly terminated employees can be re-instated
what act addressed many financial reform issues ?
Dodd Frank Act of 2010
what did the Dodd Frank Act of 2010 require?
safety and soundness measures for large financial institutions
what did Congress authorize to achieve the goals of Dodd Frank Act?
the creation of new administrative agencies
