Disclosure & Fairness

Question 1

Securities Act of 1933

Answer 1

Established the basic framework for federal regulation of the public distribution of securities thru the use interstate commerce or the mails. Primarily regulates the process of raising capital rather than trading in securities. Mandatory disclosure for initial public distributions of securities.

Question 2

Securities & Exchange Act of 1934

Answer 2

Principal focus= regulation of trading in securities after the initial issuance (secondary market). Sec. 12 requires registration of: any security that is traded on a natl. exchange, any security that is issued by corp. that has total assets exceeding $10m and is held by 500+ persons, file a 1933 act registration that becomes effective.

Question 3

Securities Defined

Answer 3

Anything used as collateral against an obligation including stocks, bonds, and most promissory notes, but also any offering that constitutes an investment K or certificate of interest or participation in any profit-sharing agreement, regardless of form.

Question 4

Securities

Answer 4

Issued & sold by govt. or private organizations. Traded in 2 ways: Individually- face to face or primary market; Exchange- secondary market or buy from someone else

Question 5

Securities Test

Answer 5

Whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. Is an interest a security under the 1933 Act?: 1) Is the property interest one that is specifically mentioned in the act? 2) Is it the type of interest that is commonly thought to be a security? 3) Is it an investment K or a participation in a profit making venture? 4) Is there a special need for protection of the Act?

Question 6

Options Defined

Answer 6

K to buy or sell a security, not actual ownership of a security; remain open for a set time; may not be revoked but may expire

Question 7

Options- 2 Types

Answer 7

Call: option to buy security at a fixed price even if market price goes up; right to make other party sell at set price. Put: to sell a security at a fixed price even if the market price goes down; right to make another buy.

Question 8

Registration Process

Answer 8

Registration statement filed w/SEC that details all matters pertaining to the proposed issuance (all factors that may affect fairness of issue & financial status of corp.). Statutory prospectus must also be filed; it sets forth key info contained in statement & must be given to every buyer of securities covered by registration statement.

Question 9

Registration Process- Effective Date & Exemptions

Answer 9

Registration statement becomes effective 20 days after filing. Exempt securities: can be sold & resold w/out being subject to registration requirements. Exempt transactions: only for 1st transactions.

Question 10

Violation of Act- Civil Liabilities SEC § 10b

Answer 10

Makes it unlawful to use any manipulative/deceptive device in contravention of SEC rules in connection with the sale or purchase of any security. D has to have acted knowingly or recklessly

Question 11

Violation of Act- Civil Liabilities § 11 of the 1933 Act

Answer 11

Imposes liability on persons for material misstatements/omissions in an effective registration statement unless D can show they had reasonable grounds to believe the statements made were accurate. P must prove that any misstatements/omissions were of a material fact. No privity required between parties to the suit. Key for defense is doing due diligence.

Question 12

Violation of Act- Civil Liabilities § 12(a)(2)

Answer 12

1) Sale of security 2) Thru instruments of interstate commerce or the mails 3) By means of a prospectus or oral communication 4) Containing an untrue statement/omission of a material fact 5) By a D who offered/sold the security 6) Which the D knew or should have known of the untrue statement. P must be in privity with the seller. Defenses: P can prove he did not know of misstatements, D proves that he did/could not know of them. Remedies: rescission & damages

Question 13

Types of Disclosure

Answer 13

1) Initial filings 2) Annual filings 3) Special filings. Disclosure Theory: acts depend upon disclosure of material info about the company

Question 14

Disclosure Forms & Requirements

Answer 14

Requirements: info about transaction & info about issuer. Forms: S-1- detailed info & S-3- focus on transaction & reference to annual filing for info about issuer

Question 15

Securities & Exchange Act Rule 10b-5

Answer 15

Unlawful in connection w/purchase or sale of any security for any person to: 1) employ any device, scheme, or artifice to defraud 2) make any untrue statement of material fact or omit a material fact 3) Engage in any act, practice or course of business that operates as fraud or deceit. Applies to purchases & sales of securities. Applies to any person who is connected w/a securities transaction. Remedies: injunction, damages, or rescission. Defenses: misrepresentation/omission did not distort market price

Question 16

Insider Trading

Answer 16

Where someone related to the corp. is in a position to have inside info about how the corp. is doing & what the corp.’s stock is or will be worth; insider then buys or sells w/advantage

Question 17

Misappropriation Theory

Answer 17

Premises liability on a trader’s deception of those who entrusted him w/access to confidential info. Info considered material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding on his course of action.

Question 18

Tippee & Tipper Liability

Answer 18

Tippee: a person who is not an insider but who trades on info received from an insider. Liable if: insider breached a fiduciary duty in communicating the info to the tippee and the tippee knew or should have known of the breach. To determine whether communication constitutes breach of fiduciary duty look to whether insider will personally benefit. Tipper: insider who provided insider info.

Question 19

Short Swing Profits

Answer 19

Insiders must report transactions in securities of own companies and must forfeit to their companies any profit resulting from short term trading (w/in period of less than 6 months) in their company’s securities. Disclosure Requirement: Directors, officers, and 10% shareholders of any class of equity securities must file periodic reports showing: 1) amount of corp.’s securities that he beneficially owns 2) any changes in those holdings. Liability: a corp. can recover any profit realized by such a person from a purchase and sale or sale and purchase w/in a 6 month period.