Federal_Securities_Acts

Question 1

What are the purpose & key points of the 1933 Securities Act?

Answer 1

• Purpose is to provide potential investor with full and fair disclosure of all material information relating to the issuance of securities, including such information as the principal purpose for which the offering’s proceeds will be used.
• Governs Initial Public Offerings (not subsequent sales).
• Covers registration statements and accompanying information filed with SEC.
• Information must include audited financial statements & a prospectus.
• Note: Even if a company is exempt from registering under the 1933 Act; they still must adhere to the anti-fraud provisions of the Act

Question 2

What **securities & transaction **are exempt from registration under the 1933 Securities Act?

ACID BRAINS

Answer 2

**ACID BRAINS **

►Regulation A
►Commercial Paper (notes, bonds,checks) matures ≤ 9 months and used for commercial purposes
►Intrastate offerings – as long as shares aren’t resold to nonresidents for 9 months
►Regulation D – 504, 505, 506
►Brokerage transactions
►Regulated industries (saving and loan - FDIC)
►Agencies of the Gov. (railroads, municipal bonds)
►Insurance contracts/policies BUT stock issued by insurance companies is not exempt
►Nonprofit organization (church/charity)
►**Stock dividends and Splits **(no commission and same issuer)

Question 3

What are the key points of the 1933 Securities Act - Regulation A?

Answer 3

• Max amount: Issuer can issue up to $5M of securities
• Period: **12 months **
• Required reporting: an offering circular (not audited)
• Notify the SEC within 15 days of the first sale
• No restriction on resale or type of investors
• Non-issuers (AKA a private individual) can sell $1.5M per year and be exempt

Question 4

Under the 1933 Securities Act; Regulation D - 504

Answer 4

• Max Amount $1M per year
• Max investors: Unlimited
• No specific disclosure required
• Notify the SEC within 15 days of the sale

**• Resale to Nonaccredited investor permitted **

Question 5

What are the registration form options under the 1933 Securities Act?

Answer 5

• Form S-1 - Long Form
• Form S-2 and S-3 - Less Detailed and preferred by issuers

Question 6

Definition of Security & Name the securities registered under the Securities Act of 1933.

Answer 6

• Security is defined as an investment in an enterprise, where the investor intends to make profit through the managerial efforts of others, rather than through his own efforts.
• Some examples:
  • include Prefer & Common Stock, Bonds, Debentures, Warrants, Treasury Stock, Options, Limited Partnership Interests, investment contract
  • Do NOT include: General Partnerships intrest, Certificat of deposit

Question 7

Who can sue under the Securities Act of 1933?

Answer 7

**ANY Purchasers of securities **

Exempt securities: → subject to anti-fraud provision ⇒SEC and person defrauded can challenge the fraud committed in the course of selling the securities

Question 8

Name the Requirements for Accountant to be liable under Section 11 of the Securities Act of 1933

Answer 8

ONLY Damages & Material Misstatements of facts MILE

• Reliance on financial statements are not a requirement unless purchased more than a year after the security is registered
• Proving negligence is not a requirement

Question 9

Name the Defenses of an Accountant under the Securities Act of 1933

Answer 9

Accountant used Due Diligence

• Accountant followed GAAP
• Damages weren’t caused by accountant’s work
• Plaintiff knew of the material misstatements

Question 10

What does the Securities Exchange Act of 1934 govern?

Answer 10

• Encourage disclosure of relevant information so investor can make better decision
• Anti-fraud provision
• The trading/selling of securities after the IPO

Question 11

What reports must be filed under the Securities Exchange Act of 1934?

Answer 11

►Form 10-K Annual Report - Must be audited
►Form 10-Q Quarterly Report - Must be reviewed But NOT audited -filed 45 days at end of each quarter
►Form 8-K - A notice of a material event (change in officer, director, resignation of directors, and change in control); Must be filed within 4 days of event
►Proxy statement -shareholders may sign proxies authorizing the company to vote their shares, - must be file at least 10 days before sent to shareholders
► unsolicited tender offer to purchase a securities needs to be submitted to the SEC
► trading by insiders must be reported to the SEC

Question 12

Who can sue under the Securities Exchange Act of 1934?

Potential penalties

Answer 12

**Purchaser **and Seller of Securities

Note potential penalties are extensive and include both civil liability of monetary damages and criminal liability of a fine

Question 13

Name the** Requirements** for an Accountant to be liable for fraud under rule 10b-5 of the Securities Act of 1934

Answer 13

MILE

• Misstatement or omission of material fact
• Damages/Loss
• Reliance on financial statement/information
• Scienter or reckless disregard for the truth= Error

Question 14

What procedures must an Accountant have in place under the Securities Act of 1934?

Answer 14

Accountant must have procedures in place to:

• Determine if Going Concern is an issue
• Determine if any material related party transactions occurred
• Determine if material illegal acts occurred

Question 15

Insider trading rules under the Securities Excahnge Act of 1934 apply to which 4 individuals?

Answer 15

Insiders include
• Officers,
• Directors
• shareholder owing > 10% of outstanding class of shares,
• Accountants and Attorneys of the issuers

Question 16

What are the Proxy Solicitation Requirements under the Securities Exchange Act of 1934?

Answer 16

• Proxy must give shareholders audited balance sheets from 2 most recent years
• Requirement holds true even if one class of stock

Question 17

What statement required to be filed with the SEC before initial sale of Securities in intrastate commere under the Securities Act of 1933?

Answer 17

• Prospectus: part 1 a written, TV or radio offer to sell security, summarize the information in part 2: historical company information and risk involved
• Registration statement: part 2 basic information (describes the use of proceeds) and audit financial statements.
• The securities must be register before being offered to sale to the public.
• 20 days waiting period before registration is effective
• After waiting period, securities can be bought & sold
• In addition to Federal registration laws, states require registration under “blue-sky laws”
• Shelf registration used by companies that issue securities on a continuous basis such as mutual funds- must keep the original registration statement updated

Question 18

Define a “tombstone ad” and “red herring”

Answer 18

• Tombstone ad: AFTER waiting period a tombstone ad informs investor about obtaining prospectus, not consider as an offer to sell
• Red herring: DURING waiting period the company can issue a preliminary prospectus but is missing certain available information

Question 19

What companies must register under the Securities Exchanges Act of 1934?

Answer 19

• Company whose shares are traded/listed on a national exchange,

OR

• Company which has at **least $10M in assets & ≥500 shareholders **

Question 20

When does a registration statement and prospectus MUST be filed under Securities Act of 1933?

SPIN

Answer 20

A registration statement and prospectus MUST be filed under Securities Act of 1933 when applicable offerings are based on (SPIN)

►Offer Securities

►Public Issues by issuer, underwriter or dealer

►Interstate commerce

►No other exemptions is available (securities and transaction exemption)

Question 21

What information are required upon registration under the Securities Exchanges Act of 1934?

Answer 21

• Financial structure & nature of business
• Name of officers & directors
• Disclosures of bonus & profit-sharing arrangements

Question 22

Name the Defenses for an Accountant to be liable for fraud under rule 10b-5 of the Securities Act of 1934

Answer 22

• Audit was performed in due care NOTE due diligence is a defense for 1933 Act only
• Misstatement was immaterial
• Plaintiff’s knowledge of the error
• Lack of reliance by plaintiff
• Misstatement was not cause of loss

Question 23

**Sarbanes-Oxley Act of 2002 **

Answer 23

Expands the power of the SEC to regulate financial reporting
• CEO and CFO must certify in writing that financial statement are accurate
• Management is responsible of Internal Control (IC)
• Officer must disclose knowledge of IC deficiencies to auditor and audit committee
• Must also disclose evidence of fraud, even if immaterial, by employees involves in IC
• Prohibits most personal loans by company officers
• Requires insiders to report trades within 2 business days

Question 24

**The Wall Street Reform and Consumer Protection (Dodd-Frank) Act of 2010 **

Answer 24

Designed to “promote the financial stability of the US by improving accountability and transparency in the financial system”
♦ Created the Financial Stability Oversight Council to identify and react to emerging risks
♦ Increased the types of financial companies that could be seized and liquidated by the FDIC
♦ Created the Federal Insurance Officer to regulated insurance companies
♦ Prohibits any “banking entity” from engaging in proprietary trading
♦ Gives authority to the Commodity Futures Trading Commission and the SEC to regulate the derivatives (swaps) markets
♦ All member of the compensation committee must be independent

Question 25

Under the 1933 Securities Act - **Regulation D 505 **

Answer 25

►Rule 505:

• Max Amount: $5M per year;
• Max Investors: 35 Unaccredited - Unlimited Accredited;
• Notify SEC within 15 days;
• Resale restricted up to 2 years;
• Audited balance sheet for Nonaccredited/Unaccredited investor

Question 26

Under the 1933 Securities Act - Regulation D 506

Answer 26

►**Rule 506 ** (private placement offerings)

• Max Amount: Unlimited amount of time for issuance per year;
• Max Investors: 35 Sophisticated Unaccredited **- **Unlimited Accredited;
• Notify SEC within 15 days
• Audited balance sheet for Nonaccredited investor and represented by accredited
• Resale restricted up to 2 years

Question 27

Accredited investors

Answer 27

Accredited investors (sophisticated) include:

• Banks, savings and loans, credit unions, insurance companies, brokerdealers, certain trusts, partnerships and corporations
• Wealthy individuals -Net worth exceeding $1,000,000 (excluding primary residence) or net income of $200,000 ($300,000 –MFJ) for the two mostrecent years.

Question 28

There are 5 basic types of Opinions

Answer 28

1. Unqualified (unmodified) opinion, which is a standard “clean” Report
2. Unqualified (unmodified) opinion with emphasis of a matter paragraph added to the report - Uncertainty, division of responsibility, “emphasis of a matter” or “other matter”
3. Qualified opinion - “except for”
4. Disagreement (Non-GAAP, Inadequate Disclosure, Inconsistency), Scope Limitation
5. Disclaimer of opinion – “we do not express an opinion”