Federal Securities: 1934 Act

Question 1

Federal Securities:

1934 Act:

Answer 1

• Requires regular disclosure to investors
• Punish Fraud
• Created SEC: requires disclosure and punishes fraud

Question 2

Federal Securities:
1934 Act:
Who are reporting companies?

Answer 2

• traded on national exchange
• shares registered with SEC unless
  
  • 300 shareholders or
  • 500 shareholders and less than $10M in total assets for last 3 years
• non-registered companies with more $10M in total assets for last 3 years and 2,000 shareholders
• any company that made a registration during the year
• NASDAQ Bulletin Board companies
• EGC need not do this**

Question 3

Federal Securities:
1934 Act:
What documents do they file?

Answer 3

1. Initial Registration Form: Names of officers & Directors, nature of business, financial structure, bonus and profit sharing Provisions
2. Continuous Disclosure Forms
   - 10-K’s annual
   - 10-Q’s quarterly
   - 8-k’s event
3. Concentrations of shares: 5% class of security must file: purpose of purchase, amount and source of funds, name and background of acquirer. Purpose is to alert shareholders to potential changes in source of funds
4. Tender Offers: both acquirer and target must file
5. Proxy solicitations: in order to meet quorum. material facts about the vote. including proposals for corporate action and 2 years financials
6. Insider Trading: officers, directors, holders of 10% securities

Question 4

Federal Securities:
1934 Act:
Section 10(b) and Rule 10(b)-5

Answer 4

• Apply to all securities, no matter size, or registration status
• standard is scienter
• burden of proof on plaintiff
• SEC civil challenges and injury by plaintiff

Question 5

Federal Securities:
1934 Act:
Section 10(b) and Rule 10(b)-5
What plaintiffs must prove?

Answer 5

• False statement or omission of material fact
• Scienter by defendant
• Reliance by plaintiff
  
  • not in omission case
  • must prove reliance in misrepresentation case
• Causation
  
  • transaction causation: cause them to enter into the transaction
  • loss causation: show false statements or omissions actually caused loss
  • occurred in connection with purchase of securities
• Damages

Question 6

Federal Securities:
1934 Act:
Section 10(b) and Rule 10(b)-5
Defenses

Answer 6

Section 10(b) Defenses

• Statute of Limitations
  
  • within 2 years of when fraud was or should have been discovered
  • within 5 years of the fraud
• Fraudulent or reckless conduct by the plaintiff
• Bespeaks Caution doctrine: warning language
• Secondary liability; no aiding and abetting under 10(b)
• Damages
  
  1. Still owns: amount paid minus market value at time of suit
  2. Sold shares: amount paid minus sales price
  3. Punitive damages: not allowed in any federal securities law case

Question 7

Federal Securities:
1934 Act:
Section 18(a)

Answer 7

• false statements filed in documents
• saw, read, and believed
• 18(a) materially false, shifts burden of proof to defendants
  Defenses
• acted in good faith
• statute of limitations: 3 years

Question 8

Federal Securities:
1934 Act:
Private Securities Litigation Reform

Answer 8

• made it harder to bring fraud law cases against accountants

Question 9

Federal Securities:
1934 Act:
New Rules for Auditors

Answer 9

• procedural design to identify illegal acts, material related-party transactions, and ability to continue as a going concern
• when aware of an illegal act, determine whether likely it occurred, and the possible effect on issuer, and as soon as practicable, inform management
• after audit committee informed determine if, it has a material effect on financials, senior management has reacted properly and promptly, if failure of action, resign
• directly report conclusions to board. Board has one day to inform SEC.
  
  • either resign or
  • issue own copy of report to the SEC