FEDERAL SECURITIES REGULATION Flashcards

1
Q

TRANSACTIONS EXPEMT FROM 1933 ACT UNDER REGULATION D - SUMMARY CHART

A

RULE RULE RULE
504 505 506

General Advertising Allowed No No No

Notice Required to SEC 15 Days 15 Days 15 Days

Reoffers to Pub. Prohibited Yes Yes Yes

Dollar Limitation(Per 12/mos) $1 Mil. $5 Mil. None

Limits on Unaccredited
buyers? No Limit Upto 35 Upto 35
must be
soph’d

Limits on accredited No Limit No Limit No Limit
buyers

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2
Q

SEC Act of 1934 in General Regulates 3 things:

A

Regulates:

1) Transactions AFTER the IPO
2) Reporting Provisions
3) Anti-Fraud Provisions

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3
Q

SEC Act of 1934 - Registration Requirements

A

TWO types of Companies must register their securities.

1) Publically traded companies, and

2) Large Private companies with $10 million in assets, and
at least 2000 shareholders (or 500 unaccredited shareholders)

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4
Q

Accredited shareholders-definition

A

A person, institutional investor or a bank with at least $1 million in net worth OR $200,000 in annual income, officers or directors of the issuer, etc.

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5
Q

CPA “Statutory” Liability SECTION 11 of the 1933 Act (Regarding IPO’s)

A

LAM

1) L - suffered a LOSS
2 )A - AQUIRED the securities
3) M - defendant made a MATERIAL
MISREPRESENTATION or omission of fact.

(NO: Intent, Negligence or Reliance)

Damages are the only remedy - rescission is not available.

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6
Q

CPA “Statutory” Liability RULE 10b-5 of the 1934 Act

Regarding FRAUD

A

Must have LAM from above

1) L - suffered a LOSS
2 )A - AQUIRED the securities
3) M - defendant made a MATERIAL
MISREPRESENTATION or omission of fact.

AND

4) S -Scienter (Intent to DECEIVE or reckless disregard
for the truth)
5) R - Reliance on the misrepresentation
6) Interstate Commerce (telephone, internet, mail, etc.)

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7
Q

Synonyms for GROSS NEGLIGENCE

A

Also called CONSTRUCTIVE FRAUD

RECKLESS DEPARTURE FROM STANDARDS OF DUE CARE

CPA who commits constructive fraud is liable to all plaintiffs, not just those with whom the CPA dealt or of whom the CPA knew.

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8
Q

Securities Exempt from Regitration

A

BRINGS

B) Banks (CDs)
R) Railroads (regulated common carriers)
I ) Insurance policies
N) Not-for-Profit
G) Government securities
S) Short-term Commercial Paper (notes, bonds w. maturity of 9 mos or less.
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9
Q

Under 1934 Act 2 Types of Companies must Register their Securities.

A

1) Publically traded on a National Exchange
2) Large Private Companies ($10million in assets:
2,000+ shareholders or 500 Shareholders who are not accredited

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10
Q

Accredited Shareholder Definition

A

An institutional investor, bank, a natural person with at least $1 million in net worth or $200,000 in annual income, officers or directors of the issuer, etc.

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11
Q

Unaccredited Investor would be

A

someone smaller than the above.

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12
Q

Shelf Registration

A

Many issuers are almost constantly involved in issuing new securities. Shelf registration helps them prepare just ONE registration statement for all securities they will offer in the future.

Permitted if:

1) the issuer has continuously filed under the 1934 Act for one year, and
2) the information is continuously updated.

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13
Q

1934 Act - Reporting Requirements

A

REMEMBER - “5%TIP”

1) 5% OR MORE Owners must report to SEC, Issuer & Exchange (Background info, source of $, purpose in buying.
2) Tender Offers for >5% of stock must be reported by the one offering (same info as above)
3) Insiders must report (officers, directors, >10% stockholders, accountants or attorneys of a Co. Report holdings in the company and make mosly updates.
4) Proxy Solicitations and Proxy Statements must be reported.

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14
Q

1933 Act - TRANSACTION Exemptions

A

1) Casual Sales - Not an issuer, underwriter or dealer
2) Stock Dividends or Stock Splits
3) Intrastate Sales only sold by a co doing business in the state only to persons who are residents of the state, doing 80% of their business in that state, purchaser can’t sell securities to a non-resident for 9 months.
4)Reg A - Partial Exemption for SALES < $5 million in a 12 month period - Use a SIMPLIFIED FORM and UNAUDITED FINANCIALS OK, costs less than full registration. Files an OFFERING STATEMENT w. NOTIFICATION OF AN OFFERING instead of a prospectus.
5)Private Offering Exemption-REG D
SEE CHART ABOVE
General Conditions of ALL 3 types:
No Advertising
Immediate Resale to Public Prohibited (2 yrs or more)
SEC must be informed within 15 days after the sale

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15
Q

Without Good Faith =

A

Fraudulently

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16
Q

Section 10(b) of the 1934 Act, and Rule 10b-5 promulgated thereunder, only applies if

A

the wrongful act occurred through interstate commerce (for example, use of the U.S. Postal Service mail or via a state-to-state long distance telephone call) or via a national securities exchange.

17
Q

The statute of limitations for Section 11 of the Securities Act of 1933 is

A

one year after the discovery of the untrue statement or omission and within three years of the offering date.

18
Q

1933 Act Regulation A (Partial Exemption)

A

Regulation A is a short form registration that only requires an offering statement (which consists of a “notification” and an “offering circular”). Unaudited Financial Statements are okay.

Reg A sales can’t exceed $5million in a 12 mos period

19
Q

Best Defense for Common Law Negligence suit under 1933 Sec 11 Civil Liability

A

Due Diligence GAAP/GAAS ( keep those work papers!)

20
Q

Best Defense for Common Law Fraud or Constructive Fraud under 1933 Sec 12

A

An action for common law fraud requires a showing that the defendant with actual knowledge (that is, with an intent to deceive) either made a misstatement of a material fact or omitted a statement of a material fact.

With respect to constructive fraud, the defendant, with reckless disregard for the truth, either made a misstatement of a material fact or omitted a statement of a material fact. Just didn’t care.