Federal Securities Regulation

Question 1

Security

Answer 1

corporate stock, bonds, debentures, collateral trust certificates, puts, calls, straddles, options, and categories such as investment contracts “any interest or instrumentality commonly known as a ___.
** 1. Corporate stock is the proto-typical ______

Question 2

Elements of Investment Contract

Answer 2

1. Investment of money
2. In a common enterprise
3. With an expectation of profit
4. To be earned primarily by the actions of others

Question 3

Registration Process (Procedures)

Answer 3

• Issuer filed a registration statement with the SEC and waits 20 days for the SEC to declare the statement effective
  o During the 20 days, the SEC THEORETICALLY reviews the statements
• THREE periods allow different activities, roughly
  o 1. Pre-filing: no offers and no sales
  o 2. Waiting: oral offers and a few written offer, no sales
  o 3. Post-effective: offers and sales now okay
• Primary written document during the WAITING period, is the “red herring” prospectus, which is replaced by the final prospectus after the effective date

Question 4

Securities Offering Reform Package (SORP) 2005 changes

Answer 4

• IN 1980…Shelf registration was enacted to allow the largest companies to file one registration statement to cover all shares it intended to issue during the next 2 years.
• IN 2005…the SORP, the SEC enacted “company registration” for very large firms. 2 primarily things to remember are: *******will now covering following 3 years

Question 5

WKSIs - Well Know Seasoned Issuers

Answer 5

o can essentially offer their shares without regard to the rules mentioned before because the market is well informed about them
 About 30% of listed companies
 Control 95% of capital of listed companies
 Have FWPs, free writing prospectuses (supplemental written literature, brochures, pamphlets) IF they file them with the SEC

Question 6

Exempt Securities (from registration process)

Answer 6

primarily because they are subject to alternative forms of regulation, including:
o	Bank and government securities
o	Federally-regulated common carriers
o	Bankruptcy receivers/trustees
o	Insurance and annuity policies

Question 7

Exempt Transactions

Answer 7

o Three primary categories:
 1. Small offering exemptions (don’t have to file with the SEC)
• Securities less than 5 million in one year period
 2. Private placement exemptions
 3. Intrastate offering exemptions

Question 8

Regulation D

Answer 8

o Clarifies the key small offering and private placement exemptions mentioned earlier
 Three primary exempt transactions under D
• 1. Rule 504: allows qualified issuer to raise up to $1 million in a 12 month period without registering; resales generally restricted, notify SEC 15 days; NO investor limit
• 2. Rule 505: allows qualified issuer to raise up to $5 million in a 12 month period without registering (more requirements to be met here) no more than 35 non-accredited
• 3. Rule 506: allows qualified issuer to raise unlimited amounts without registering, IF sell ONLY to sophisticated investors or others represented by “purchaser representatives”; no more than 35 non-accredited
ALL 3 no general solicitation/advertising

Question 9

Blue Sky Laws

Answer 9

o	A state securities law; 
o	Much state securities regulation has been preempted by federal law, but remember
o	STATES can:
	Enforce antifraud laws
	Require “notice” filing
o	States CANNOT:
	Engage in “merit regulation”
	Register “covered” securities

Question 10

Regulation A

Answer 10

is exemption from registration requirements – instituted by the Securities Act – that apply to public offerings of securities that do not exceed $5 million in any one-year period.

Question 11

Rule 147

Answer 11

The Rule 147 is a rule that can be used by a company to raise funds without actually registering with the Securities and Exchange Commission (SEC). This rule usually only applies to small companies that wish to raise a small amount of money without incurring the expensive fees associated with registering with the SEC.

Question 12

Underwriter

Answer 12

Securities underwriting refers to the process by which investment banks raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt capital). The services of an underwriter are typically used during a public offering in a primary market.

Question 13

Job Act of 2012

Answer 13

• AFTER sub-prime mortgage crisis of 2007/8…
• CONGRESS: Did not think we had enough IPOs so they thought “how can we make going public more desirable?”
• EGCs CREATED (emerging growth companies)
• CROWDFUNDING
• GENERAL SOLICITATION
• PRIVATE COMPANY FLEXIBILITY & GROWTH ACT

Question 14

EGCs - Emerging Growth Companies

Answer 14

o 1. $1b in nonconvertible debt in prior 3 years
- EGC Benefits:
o IPO
 Only 2 years of audited f/s statements
 Reduced disclosure of executive pay
 Confidential SEC review
o Called EGC for up to 5 years, which need not comply with several SEC requirements, including:
 SOX Sec. 404(a) internal control audits
 Numerous rules on executive pay

Question 15

Crowdfunding

Answer 15

o Issuer cap: $1m w/in 12 month period
o Disadvantages for investor:
 Less disclosure
 Can’t sell for one year
o TO minimize losses; no individual may invest in all crowdfunding endeavors per more than:
 Greater of $2,000 or 5% of annual income of net worth if both are $100K
o Company MUST:
 Sell through “funding portals” that are responsible for providing investors with:
• Info on risks of investment loss
• Due diligence checks on issuer and its officers, directors and 20% shareholders
• Put proceeds into escrow until funding targets are met
 Make certain financial disclosures that become more onerous as they raise more money
***FOREIGN COMPANIES CANNOT USE THIS EXEMPTION

Question 16

General Solicitation

Answer 16

o Regulation D Rule 506 banned general solicitation, JOB Act took this away SO AS LONG as ALL purchasers are “accredited investors”
 Accredited investors: millionaires, individuals earning >$200K/yr, institutional investors with assets >$10m
o Regulation A & Mini IPOs
 Most companies did not use Regulation A because you could only raise 5million which is now 50million under JOB Act
 JOB Act also preempts state regulation if
• Using Regulation A: Shares are listed on national exchange or make sure they sell only to “qualified” purchasers

Question 17

Private Co. Flexibility & Growth Act

Answer 17

o Changes threshold for being a “reporting” or “public” company from $10m in assets and 500 shareholders to $10m and 2,000 shareholders (excluding employees who got shares as compensation and crowdfunding investors)

Question 18

Purposes - 1934 Act

Answer 18

o After 1929 stock crash, securities acts were passed
o PUNISHES fraud in the secondary markets
o REGULATES the securities industry
o CREATED the SEC and periodic DISCLOSURE system
o “Reporting” companies have to file Form 10, 10-K, 10-Q, 8-K
 Continuous stream of info to investors

Question 19

Key Provisions - 1934 Act - Section 10(b)

Answer 19

most significant law provision in world NO REQUIREMENT OF PRIVITY
• Public/private/primary/secondary/VERY BROAD
• NEED:
o 1. False statement or omission
o 2. Materiality
o 3. Reliance (omission case does not need this)
o 4. Causation (direct connection)
o 5. Purchaser or Sale
o 6. Damages
o 7. Scienter by the defendant
• Statute of limitations
o Within 2 years of discovery of loss discovery or within 5 years of the fraud

Question 20

Criminal Liability - 1934 Act

Answer 20

• The intentional violation of ANY provision of the 1933 or 1944 acts is a CRIME
  o Criminal charges brought by the Department of Justice DOJ and the civil charges are brought by the SEC
  o Burden of Proof = beyond a reasonable doubt
  o 1934 act potential penalty is 20 years in prison

Question 21

Dodd Frank Act of 2010

Answer 21

• Response to sub-prime mortgage crisis of 2007/8…
• Does NOT have major implications for the accounting profession
• PROVISIONS
  o Created (FSOC) Financial Stability Oversight Council
  o “Volcker Rule”
  o Consumer Protection
   Created the (CFPB) Consumer Financial Protection Bureau
  o Whistleblowers
   SEC can grant them monetary recoveries of 10-30% of judgement when recoveries over $1m
   Job protection

Question 22

FSOC - Financial Stability Oversight Council

Answer 22

to reduce systematic risk in the US financial statement

 Minimize “too big to fail” problem, regulates SIFIs systematically important financial institutions

Question 23

“Volcker Rule”

Answer 23

 Places limits on proprietary trading by large banks
 Adds transparency
• Requiring “standard derivatives” to be traded via clearinghouses so prices are transparent
• Registers hedge funds

Question 24

Key Provisions - 1934 Act - Section 18(a) + DEFENSES

Answer 24

• Not very important; very hard to win, you NEED:
o 1. Defendant made or caused to be made a false or misleading statement or omission
o 2. In a filed document
o 3. Materiality
o 4. Plaintiff’s purchase or sale of securities
o 5. Plaintiff’s “eyeball” reliance (PLAINTIFF actually has to see this false document)
o 6. Causation
o 7. Damages
• Defenses:
o D acted in good faith and without knowledge that the statement was false or misleading
o Statute of limitations (2year from discovery/5year from fraud)

Question 25

Warrant

Answer 25

The right to purchase corporate stock for a limited time @ a fixed price