Chapter 23 - Government Regulations: Securities & Antitrust Flashcards
Be Smart
What is a Security?
Any transaction in which the buyer
- invests money in a common enterprise and
- expects to earn a profit predominantly from the efforts of others.
! This can include things other than just stocks, bonds, and notes.
What is an Issuer?
A company that sells its own stock.
What is Material?
Important enough to affect an investor’s decision.
What as an Initial Public Offering?
A company’s first public sale of securities.
What is a Secondary Offering?
Any public sale of securities by a company after the initial public offering.
What are the two major laws that regulate securities?
The Securities Act of 1933 (the 1933 Act) and
The Securities Exchange Act of 1934 (the 1934 Act).
What does the 1933 Act require regarding IPOs?
That before offering or selling the securities in a PUBLIC offering, the issuer must register the securities with the Securities and Exchange Commission.
What does the SEC not do when an issuer register securities?
Investigate the quality of the offering. It does not assess the value or merit of the investment.
What does the SEC’s approval of a security mean?
On the surface, the company has provided all required information about itself and its major products.
Under the 1933 Act, what is the seller of a security liable for?
Making any material misstatement or omission, either oral or written, in connection with the offer of sale of a security.
What is the liability for the issuers of a a fraudulent security? Who can sue?
- Anyone who issues fraudulent securities is in violation of the 1933 Act, whether or not the securities are registered. The Justice Department can bring criminal charges against anyone who willfully violates this statute.
- The SEC and any purchasers
What is an Accredited Investors?
Are institutions (such as banks and insurance companies) or wealthy individuals (with a net worth of more than $1 million or an annual income of more than $200,000)
What must a company file with the SEC to make a public offering?
A registration statement.
What are the two purposes of a registration statement?
1) To notify the SEC that the sale of securities is pending and
2) To disclose information of interest to prospective purchasers.
What must a registration statement include? 5
- Detailed information about the issuer
- Detailed information about their business
- A description of the stock
- The proposed use of the proceeds from the offering
- Two years of audited balance sheets and income statements.
(The prospectus is part of the registration statement)
What kind of information might a prospectus have compared to a registration statement?
The prospectus includes all of the important disclosures about the company
The registration statement includes additional information that is of interest to the SEC but not to the typical investor, such as the names and addresses of the lawyers for the issuer and underwriter.
What must all investors receive before purchasing stock?
A copy of the prospectus
When does the sales effort for a security begin?
Before the final registration statement and prospectus are completed. It cannot actually make sales during this period, but it can solicit offers.
Who makes the sales effort for a security?
The investment bank representing the issuer.
Why doe the SEC closely regulate the sales effort of a security?
To ensure that the stock is not hyped by making public statements about the company before the stock is sold.
What does the issuer get from the SEC after its review of the registration statement? What does it do?
A commitment letter.
Lists required changes to the registration statement.
Its role is ensure that the company has disclosed enough information to enable investors to make an informed decision.
What happens after the SEC has approved the final registration statement?
The issuer and underwriter agree on a price for the stock and the date to GO EFFECTIVE, that is, to begin its sale.
How else does the 1933 Act permit issuers to sell stock? What is a benefit?
- In a private offering
- It is much simpler and cheaper than an IPO
What is the registration requirement for securities sold in a private offering?
They are not required to register the securities.
What rule is the most common and important type of private offering under?
Regulation D (Reg D)
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors.
- The company may not advertise the stock publicly.
- The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don’t purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
When must an issuer register with the SEC?
If they:
- Complete a public offering under the 1933 Act, or
- It has at least 500 shareholders AND total assets that exceed $10 million.
What documents does the 1934 Act require public companies to file?
- Annual Reports
- Quarterly Reports
- Form 8-K
What is an Annual Report?
Annual reports on Form 10-K, containing
-audited financial statements,
-a detailed analysis of the company’s performance,
-and information about officers and directors.
A public company must deliver its annual report to shareholders.
What is a Quarterly Report?
Quarterly reports, on form 10-Q, which are less detailed than 10-Ks and contain unaudited financials.
What is Form 8-K?
Reports any significant developments, such as change in control, the registration of a director over a policy dispute, or a change in auditing firms.
Under the Sarbanes-Oxley Act of 2002, what must each company’s CEO and CFO certify?
That:
- The information in the quarterly and annual reports is true
- The company has effective internal controls, and
- The officers have informed the company’s audit committee and its auditors of any concerns that they have about the internal control systems.
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors.
- The company may not advertise the stock publicly.
- The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don’t purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
When must an issuer register with the SEC?
If they:
- Complete a public offering under the 1933 Act, or
- It has at least 500 shareholders AND total assets that exceed $10 million.
What documents does the 1934 Act require public companies to file?
- Annual Reports
- Quarterly Reports
- Form 8-K
What is an Annual Report?
Annual reports on Form 10-K, containing
-audited financial statements,
-a detailed analysis of the company’s performance,
-and information about officers and directors.
A public company must deliver its annual report to shareholders.
What is a Quarterly Report?
Quarterly reports, on form 10-Q, which are less detailed than 10-Ks and contain unaudited financials.
What is Form 8-K?
Reports any significant developments, such as change in control, the registration of a director over a policy dispute, or a change in auditing firms.
Under the Sarbanes-Oxley Act of 2002, what must each company’s CEO and CFO certify?
That:
- The information in the quarterly and annual reports is true
- The company has effective internal controls, and
- The officers have informed the company’s audit committee and its auditors of any concerns that they have about the internal control systems.
What does the 1933 Act require regarding IPOs?
That before offering or selling the securities in a PUBLIC offering, the issuer must register the securities with the Securities and Exchange Commission.
What does the SEC not do when an issuer register securities?
Investigate the quality of the offering. It does not assess the value or merit of the investment.
What does the SEC’s approval of a security mean?
On the surface, the company has provided all required information about itself and its major products.
Under the 1933 Act, what is the seller of a security liable for?
Making any material misstatement or omission, either oral or written, in connection with the offer of sale of a security.
What is the liability for the issuers of a a fraudulent security? Who can sue?
- Anyone who issues fraudulent securities is in violation of the 1933 Act, whether or not the securities are registered. The Justice Department can bring criminal charges against anyone who willfully violates this statute.
- The SEC and any purchasers
What must a company file with the SEC to make a public offering?
A registration statement.
What are the two purposes of a registration statement?
1) To notify the SEC that the sale of securities is pending and
2) To disclose information of interest to prospective purchasers.
What must a registration statement include? 5
- Detailed information about the issuer
- Detailed information about their business
- A description of the stock
- The proposed use of the proceeds from the offering
- Two years of audited balance sheets and income statements.
(The prospectus is part of the registration statement)
What kind of information might a prospectus have compared to a registration statement?
The prospectus includes all of the important disclosures about the company
The registration statement includes additional information that is of interest to the SEC but not to the typical investor, such as the names and addresses of the lawyers for the issuer and underwriter.
What must all investors receive before purchasing stock?
A copy of the prospectus
When does the sales effort for a security begin?
Before the final registration statement and prospectus are completed. It cannot actually make sales during this period, but it can solicit offers.
Who makes the sales effort for a security?
The investment bank representing the issuer.
Why doe the SEC closely regulate the sales effort of a security?
To ensure that the stock is not hyped by making public statements about the company before the stock is sold.
What does the issuer get from the SEC after its review of the registration statement? What does it do?
A commitment letter.
Lists required changes to the registration statement.
Its role is ensure that the company has disclosed enough information to enable investors to make an informed decision.
What happens after the SEC has approved the final registration statement?
The issuer and underwriter agree on a price for the stock and the date to GO EFFECTIVE, that is, to begin its sale.
How else does the 1933 Act permit issuers to sell stock? What is a benefit?
- In a private offering
- It is much simpler and cheaper than an IPO
What is the registration requirement for securities sold in a private offering?
They are not required to register the securities.
What rule is the most common and important type of private offering under?
Regulation D (Reg D)
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors.
- The company may not advertise the stock publicly.
- The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don’t purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
When must an issuer register with the SEC?
If they:
- Complete a public offering under the 1933 Act, or
- It has at least 500 shareholders AND total assets that exceed $10 million.
What documents does the 1934 Act require public companies to file?
- Annual Reports
- Quarterly Reports
- Form 8-K
What is an Annual Report?
Annual reports on Form 10-K, containing
-audited financial statements,
-a detailed analysis of the company’s performance,
-and information about officers and directors.
A public company must deliver its annual report to shareholders.
What is a Quarterly Report?
Quarterly reports, on form 10-Q, which are less detailed than 10-Ks and contain unaudited financials.
What is Form 8-K?
Reports any significant developments, such as change in control, the registration of a director over a policy dispute, or a change in auditing firms.
Under the Sarbanes-Oxley Act of 2002, what must each company’s CEO and CFO certify?
That:
- The information in the quarterly and annual reports is true
- The company has effective internal controls, and
- The officers have informed the company’s audit committee and its auditors of any concerns that they have about the internal control systems.
What does Section 10(b)(and rule 10b-5) of the 1934 Act prohibit?
Fraud in connection with the purchase and sale (or auditing) of any security, whether or not the security is registered under the 1934 Act.
When would an issuer who fails to disclose material information or make incomplete or inaccurate disclosures be liable?
If they did so
- Willfully
- Knowingly, or
- Recklessly
What is the purpose of Section 16 of the 1934 Act?
To prevent corporate insiders-officers, directors, and shareholders who own more than 10% of the company-from taking unfair advantage of privileged information to manipulate the market.
What is the two prong approach that Section 16 of the 1934 Act takes to prevent trading abuse?
- First, insiders must REPORT their trades within two business days
- Second, insiders must TURN OVER TO THE CORPORATION any profits they make from the purchase and sale or sale and purchase of company securities in a six-month period. Section 16 is a strict liability provision. It applies even if the insider did not actually take advantage of secret information or try to manipulate the market; if she bought and sold or sold and bought stock in a six-month period, she is liable for any profits she earned.
How is insider trading punishable?
By fines and imprisonment. The guilty party may also be forced to turn over to the SEC three times the profit made.
What landmark case established one of the most important rules regarding insider trading?
Chiarella v. United States. - A an employee of a printer that printed documents used to announce corporate take over bids that used that information to make a profit. Was found not guilty of insider trading.
When is insider trading illegal?
Only if the person with secret information has a duty to disclose to those with whom he trades.
What are the rules on insider trading? 6
- Fiduciary
- Temporary Insiders
- Possession vs. use of information
- Tippers
- Tippees
- Misappropriation
What is the ‘fiduciary’ rule on insider trading?
Someone who trades on insider information is only liable if he breaches a fiduciary duty.
What is the ‘temporary insider’ rule on insider trading?
Even outsiders who work for a company temporarily are considered to be fiduciaries.
What is the ‘possession v. use of information’ rule on insider trading?
An insider may trade while in possession of material, nonpublic information, if she has committed in advance to a plan to sell those securities.
If a person knows in advance they want to sell, they have to establish a sales plan, and despite any change in circumstances, must sell according to that plan.
What is the ‘tippers’ rule on insider trading?
Insiders who pass on important, secret information are liable, even if they do not trade themselves, so long as they:
1) Know the information is confidential
2) Expect some personal gain (gifts to friends count as personal gain)
What is the ‘tippees’ rule on insider trading?
Those who receive tips are liable for trading on insider information even if they do not have a fiduciary relationship to the company, so long as:
1) They knew the information was confidential
2) They know it came from an insider who was violating his fiduciary duty, and
3) the insider expected some personal gain
What is the ‘misappropriation’ rule on insider trading?
A person is liable if he trades securities
1) for personal profit,
2) using confidential information, and
3) In breach of a fiduciary duty to the Source of Information.
This is the same thing as embezzlement
Why is insider trading illegal? 3
- It offends our sense of fairness.
- Investors will lose confidence in the market if they feel that insiders have an unfair advantage
- Investments banks typically ‘make a market’ in stocks, meaning that they hold extra shares so that orders can be filled smoothly. These marketmakers expect to earn a certain profit, but insider traders skim some of it off. So marketmakers simply raise the commission they charge. As a result, everyone who buys and sells the stock pays a slightly higher price.
What are the laws that all states and DC have that also regulate the sale of securities called?
Blue Sky Laws (because crooks were willing to sell naive investors a “piece of the great blue sky”)
What is a Per Se Violation? What can defendants charged with this do?
An automatic breach of antitrust laws. To be found guilty an activity must not only be anticompetive, but also lack any redeeming virtue. Defendants charged with this type of violation cannot defend themselves. The court will not listen to excuses and violators may be sent to prison.
What is a Rule of Reason Violation?
An action that breaches antitrust laws only if it has an anti-competitive impact. Those who commit this violation are not sent to prison.
Why did congress pass the Sherman Act of 1890?
To prevent extreme concentrations of economic power. It was aimed at the Standard Oil Trust so it was termed Antitrust legislation.
What are the two categories of antitrust legislation?
- Per Se
- Rule of Reason
Who has authority to enforce the antitrust laws?
- Justice Department
- Federal Trade Commission
Who has the right to sue over antitrust violations? What can they collect?
- Government
- Anyone injured by an antitrust violation. A successful plaintiff can recover treble (triple) damages from the defendant.
What does the SEC not do when an issuer register securities?
Investigate the quality of the offering. It does not assess the value or merit of the investment.
What does the SEC’s approval of a security mean?
On the surface, the company has provided all required information about itself and its major products.
Under the 1933 Act, what is the seller of a security liable for?
Making any material misstatement or omission, either oral or written, in connection with the offer of sale of a security.
What is the liability for the issuers of a a fraudulent security? Who can sue?
- Anyone who issues fraudulent securities is in violation of the 1933 Act, whether or not the securities are registered. The Justice Department can bring criminal charges against anyone who willfully violates this statute.
- The SEC and any purchasers
What must a company file with the SEC to make a public offering?
A registration statement.
What are the two purposes of a registration statement?
1) To notify the SEC that the sale of securities is pending and
2) To disclose information of interest to prospective purchasers.
What must a registration statement include? 5
- Detailed information about the issuer
- Detailed information about their business
- A description of the stock
- The proposed use of the proceeds from the offering
- Two years of audited balance sheets and income statements.
(The prospectus is part of the registration statement)
What kind of information might a prospectus have compared to a registration statement?
The prospectus includes all of the important disclosures about the company
The registration statement includes additional information that is of interest to the SEC but not to the typical investor, such as the names and addresses of the lawyers for the issuer and underwriter.
What must all investors receive before purchasing stock?
A copy of the prospectus
When does the sales effort for a security begin?
Before the final registration statement and prospectus are completed. It cannot actually make sales during this period, but it can solicit offers.
Who makes the sales effort for a security?
The investment bank representing the issuer.
Why doe the SEC closely regulate the sales effort of a security?
To ensure that the stock is not hyped by making public statements about the company before the stock is sold.
What does the issuer get from the SEC after its review of the registration statement? What does it do?
A commitment letter.
Lists required changes to the registration statement.
Its role is ensure that the company has disclosed enough information to enable investors to make an informed decision.
What happens after the SEC has approved the final registration statement?
The issuer and underwriter agree on a price for the stock and the date to GO EFFECTIVE, that is, to begin its sale.
How else does the 1933 Act permit issuers to sell stock? What is a benefit?
- In a private offering
- It is much simpler and cheaper than an IPO
What is the registration requirement for securities sold in a private offering?
They are not required to register the securities.
What rule is the most common and important type of private offering under?
Regulation D (Reg D)
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors.
- The company may not advertise the stock publicly.
- The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don’t purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
When must an issuer register with the SEC?
If they:
- Complete a public offering under the 1933 Act, or
- It has at least 500 shareholders AND total assets that exceed $10 million.
What documents does the 1934 Act require public companies to file?
- Annual Reports
- Quarterly Reports
- Form 8-K
Under the Sarbanes-Oxley Act of 2002, what must each company’s CEO and CFO certify?
That:
- The information in the quarterly and annual reports is true
- The company has effective internal controls, and
- The officers have informed the company’s audit committee and its auditors of any concerns that they have about the internal control systems.
What does Section 10(b)(and rule 10b-5) of the 1934 Act prohibit?
Fraud in connection with the purchase and sale (or auditing) of any security, whether or not the security is registered under the 1934 Act.
When would an issuer who fails to disclose material information or make incomplete or inaccurate disclosures be liable?
If they did so
- Willfully
- Knowingly, or
- Recklessly
What is the purpose of Section 16 of the 1934 Act?
To prevent corporate insiders-officers, directors, and shareholders who own more than 10% of the company-from taking unfair advantage of privileged information to manipulate the market.
What is the two prong approach that Section 16 of the 1934 Act takes to prevent trading abuse?
- First, insiders must REPORT their trades within two business days
- Second, insiders must TURN OVER TO THE CORPORATION any profits they make from the purchase and sale or sale and purchase of company securities in a six-month period. Section 16 is a strict liability provision. It applies even if the insider did not actually take advantage of secret information or try to manipulate the market; if she bought and sold or sold and bought stock in a six-month period, she is liable for any profits she earned.
How is insider trading punishable?
By fines and imprisonment. The guilty party may also be forced to turn over to the SEC three times the profit made.
What landmark case established one of the most important rules regarding insider trading?
Chiarella v. United States. - A an employee of a printer that printed documents used to announce corporate take over bids that used that information to make a profit. Was found not guilty of insider trading.
When is insider trading illegal?
Only if the person with secret information has a duty to disclose to those with whom he trades.
What are the rules on insider trading? 6
- Fiduciary
- Temporary Insiders
- Possession vs. use of information
- Tippers
- Tippees
- Misappropriation
What is the ‘fiduciary’ rule on insider trading?
Someone who trades on insider information is only liable if he breaches a fiduciary duty.
What is the ‘temporary insider’ rule on insider trading?
Even outsiders who work for a company temporarily are considered to be fiduciaries.
What is the ‘possession v. use of information’ rule on insider trading?
An insider may trade while in possession of material, nonpublic information, if she has committed in advance to a plan to sell those securities.
If a person knows in advance they want to sell, they have to establish a sales plan, and despite any change in circumstances, must sell according to that plan.
What is the ‘tippers’ rule on insider trading?
Insiders who pass on important, secret information are liable, even if they do not trade themselves, so long as they:
1) Know the information is confidential
2) Expect some personal gain (gifts to friends count as personal gain)
What is the ‘tippees’ rule on insider trading?
Those who receive tips are liable for trading on insider information even if they do not have a fiduciary relationship to the company, so long as:
1) They knew the information was confidential
2) They know it came from an insider who was violating his fiduciary duty, and
3) the insider expected some personal gain
What is the ‘misappropriation’ rule on insider trading?
A person is liable if he trades securities
1) for personal profit,
2) using confidential information, and
3) In breach of a fiduciary duty to the Source of Information.
This is the same thing as embezzlement
Why is insider trading illegal? 3
- It offends our sense of fairness.
- Investors will lose confidence in the market if they feel that insiders have an unfair advantage
- Investments banks typically ‘make a market’ in stocks, meaning that they hold extra shares so that orders can be filled smoothly. These marketmakers expect to earn a certain profit, but insider traders skim some of it off. So marketmakers simply raise the commission they charge. As a result, everyone who buys and sells the stock pays a slightly higher price.
What are the laws that all states and DC have that also regulate the sale of securities called?
Blue Sky Laws (because crooks were willing to sell naive investors a “piece of the great blue sky”)
What is a Per Se Violation? What can defendants charged with this do?
An automatic breach of antitrust laws. Defendants charged with this type of violation cannot defend themselves. The court will not listen to excuses and violators may be sent to prison.
What is a Rule of Reason Violation?
An action that breaches antitrust laws only if it has an anti-competitive impact. Those who commit this violation are not sent to prison.
Why did congress pass the Sherman Act of 1890?
To prevent extreme concentrations of economic power. It was aimed at the Standard Oil Trust so it was termed Antitrust legislation.
What are the two categories of antitrust legislation?
- Per Se
- Rule of Reason
Who has authority to enforce the antitrust laws?
- Justice Department
- Federal Trade Commission
Who has the right to sue over antitrust violations? What can they collect?
- Government
- Anyone injured by an antitrust violation. A successful plaintiff can recover treble (triple) damages from the defendant.
What does the 1933 Act require regarding IPOs?
That before offering or selling the securities in a PUBLIC offering, the issuer must register the securities with the Securities and Exchange Commission.
What does the SEC not do when an issuer register securities?
Investigate the quality of the offering. It does not assess the value or merit of the investment.
What does the SEC’s approval of a security mean?
On the surface, the company has provided all required information about itself and its major products.
Under the 1933 Act, what is the seller of a security liable for?
Making any material misstatement or omission, either oral or written, in connection with the offer of sale of a security.
What is the liability for the issuers of a a fraudulent security? Who can sue?
- Anyone who issues fraudulent securities is in violation of the 1933 Act, whether or not the securities are registered. The Justice Department can bring criminal charges against anyone who willfully violates this statute.
- The SEC and any purchasers
What is an Accredited Investors?
Are institutions (such as banks and insurance companies) or wealthy individuals (with a net worth of more than $1 million or an annual income of more than $200,000)
What must a company file with the SEC to make a public offering?
A registration statement.
What are the two purposes of a registration statement?
1) To notify the SEC that the sale of securities is pending and
2) To disclose information of interest to prospective purchasers.
What must a registration statement include? 5
- Detailed information about the issuer
- Detailed information about their business
- A description of the stock
- The proposed use of the proceeds from the offering
- Two years of audited balance sheets and income statements.
(The prospectus is part of the registration statement)
What kind of information might a prospectus have compared to a registration statement?
The prospectus includes all of the important disclosures about the company
The registration statement includes additional information that is of interest to the SEC but not to the typical investor, such as the names and addresses of the lawyers for the issuer and underwriter.
What must all investors receive before purchasing stock?
A copy of the prospectus
When does the sales effort for a security begin?
Before the final registration statement and prospectus are completed. It cannot actually make sales during this period, but it can solicit offers.
Who makes the sales effort for a security?
The investment bank representing the issuer.
Why doe the SEC closely regulate the sales effort of a security?
To ensure that the stock is not hyped by making public statements about the company before the stock is sold.
What does the issuer get from the SEC after its review of the registration statement? What does it do?
A commitment letter.
Lists required changes to the registration statement.
Its role is ensure that the company has disclosed enough information to enable investors to make an informed decision.
What happens after the SEC has approved the final registration statement?
The issuer and underwriter agree on a price for the stock and the date to GO EFFECTIVE, that is, to begin its sale.
How else does the 1933 Act permit issuers to sell stock? What is a benefit?
- In a private offering
- It is much simpler and cheaper than an IPO
What is the registration requirement for securities sold in a private offering?
They are not required to register the securities.
What rule is the most common and important type of private offering under?
Regulation D (Reg D)
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors.
- The company may not advertise the stock publicly.
- The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don’t purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
When must an issuer register with the SEC?
If they:
- Complete a public offering under the 1933 Act, or
- It has at least 500 shareholders AND total assets that exceed $10 million.
What documents does the 1934 Act require public companies to file?
- Annual Reports
- Quarterly Reports
- Form 8-K
What is an Annual Report?
Annual reports on Form 10-K, containing
-audited financial statements,
-a detailed analysis of the company’s performance,
-and information about officers and directors.
A public company must deliver its annual report to shareholders.
What is a Quarterly Report?
Quarterly reports, on form 10-Q, which are less detailed than 10-Ks and contain unaudited financials.
What is Form 8-K?
Reports any significant developments, such as change in control, the registration of a director over a policy dispute, or a change in auditing firms.
Under the Sarbanes-Oxley Act of 2002, what must each company’s CEO and CFO certify?
That:
- The information in the quarterly and annual reports is true
- The company has effective internal controls, and
- The officers have informed the company’s audit committee and its auditors of any concerns that they have about the internal control systems.
What does Section 10(b)(and rule 10b-5) of the 1934 Act prohibit?
Fraud in connection with the purchase and sale (or auditing) of any security, whether or not the security is registered under the 1934 Act.
When would an issuer who fails to disclose material information or make incomplete or inaccurate disclosures be liable?
If they did so
- Willfully
- Knowingly, or
- Recklessly
What is the purpose of Section 16 of the 1934 Act?
To prevent corporate insiders-officers, directors, and shareholders who own more than 10% of the company-from taking unfair advantage of privileged information to manipulate the market.
What is the two prong approach that Section 16 of the 1934 Act takes to prevent trading abuse?
- First, insiders must REPORT their trades within two business days
- Second, insiders must TURN OVER TO THE CORPORATION any profits they make from the purchase and sale or sale and purchase of company securities in a six-month period. Section 16 is a strict liability provision. It applies even if the insider did not actually take advantage of secret information or try to manipulate the market; if she bought and sold or sold and bought stock in a six-month period, she is liable for any profits she earned.
How is insider trading punishable?
By fines and imprisonment. The guilty party may also be forced to turn over to the SEC three times the profit made.
What landmark case established one of the most important rules regarding insider trading?
Chiarella v. United States. - A an employee of a printer that printed documents used to announce corporate take over bids that used that information to make a profit. Was found not guilty of insider trading.
When is insider trading illegal?
Only if the person with secret information has a duty to disclose to those with whom he trades.
What are the rules on insider trading? 6
- Fiduciary
- Temporary Insiders
- Possession vs. use of information
- Tippers
- Tippees
- Misappropriation
What is the ‘fiduciary’ rule on insider trading?
Someone who trades on insider information is only liable if he breaches a fiduciary duty.
What is the ‘temporary insider’ rule on insider trading?
Even outsiders who work for a company temporarily are considered to be fiduciaries.
What is the ‘possession v. use of information’ rule on insider trading?
An insider may trade while in possession of material, nonpublic information, if she has committed in advance to a plan to sell those securities.
If a person knows in advance they want to sell, they have to establish a sales plan, and despite any change in circumstances, must sell according to that plan.
What is the ‘tippers’ rule on insider trading?
Insiders who pass on important, secret information are liable, even if they do not trade themselves, so long as they:
1) Know the information is confidential
2) Expect some personal gain (gifts to friends count as personal gain)
What is the ‘tippees’ rule on insider trading?
Those who receive tips are liable for trading on insider information even if they do not have a fiduciary relationship to the company, so long as:
1) They knew the information was confidential
2) They know it came from an insider who was violating his fiduciary duty, and
3) the insider expected some personal gain
What is the ‘misappropriation’ rule on insider trading?
A person is liable if he trades securities
1) for personal profit,
2) using confidential information, and
3) In breach of a fiduciary duty to the Source of Information.
This is the same thing as embezzlement
