Chapter 41: Securities Regulation (new)

Question 1

Two approaches to regulation

Answer 1

merit – agency decides fairness (usually disclosure)

disclosure – agency requires the giving of info to purchasers

Question 2

Blue Sky laws

Answer 2

state laws; for Missouri:
-comissioner of securities may refuse or revoke a registration if illegal, information is incomplete, or if any aspect is unfair
-anti-fraud remedies
securities and broker registration required

Question 3

“Security” defined

Answer 3

• an investment of money or property
• in a common enterprise
• where the return largely depends on the efforts of others

Question 4

Requirementsof 1933 act

Answer 4

company must provide prospectus and technical information

Question 5

ability to sell under 1933

Answer 5

“pre-filing” - may obtain an underwriter
“waiting period” - tombstone ads, red-herring (preliminary) prospectus, oral offers to buy or sell allowed
“post-effective” - sales allowed if prospectus delivered first

Question 6

securities exempt from regulation

Answer 6

• government issues
• nonprofit issues
• certain industries (banking)

Question 7

types of exempt offerings under 1933

Answer 7

1. small offerings
2. private placements
3. intrastate offerings

Question 8

small offerings

Answer 8

limits on amount of stock sold by issuer

• Regulation A: $5m, 12-month period
• Regulation D, 504: $1m, 12-month period

Question 9

private placements

Answer 9

non-advertised offerings to qualified groups, particularly accredited investors

Question 10

Regulation D, rule 505 (private placements)

Answer 10

issuer may sell up to $5m in any 12-month period to accredited investors and not greater than 35 unaccredited investors

Question 11

Regulation D, rule 506 (private placements)

Answer 11

issuer may sell unlimited amount of securities to accredited investors and not greater than 35 unaccredited

Question 12

Intrastate offerings

Answer 12

“all stock sold in the state of incorporation”

• greater than or equal to 80% of assets in home state
• greater than or equal to 80% of proceeds used in home state
• no resales outside home state for 9 months

Question 13

liability for misstatement

Answer 13

strict liability of issuer for loss in value if misstatement exists in registration; burden of proof on defendant

Question 14

4 defenses to liability for misstatements

Answer 14

1. due diligence (GAAP/GAAS)
2. reliance on other experts
3. lack of causation
4. plaintiff knowledge of falsity

Question 15

Securities exchange act of 1934 (4 areas of regulation)

Answer 15

regulates secondary trading in these 4 areas:

1. registration and reporting
2. insider trading
3. proxy regulation
4. tender offers

Question 16

1934 reporting requirements apply if…

Answer 16

• 500 or more shareholders and more than $10m assets
• stock traded on national exchange
• any covered under 1933

Question 17

insider

Answer 17

• greater than 10% ownership of stock
• officers and directors of issuers
• temporary insiders (law firm, accounting firm)
• tippees

Question 18

insider trading

Answer 18

trading on a security by an insider while in possession of material non-public information
-criminal and civil penalties possible

Question 19

For misstatement remedies, plaintiff must prove (3):

Answer 19

1. negligence
2. loss caused by the misstatement
3. investor read and relied on statement