II-4 Government Regulation of Business 2 Flashcards
What does IPO stand for?
Initial public offering.
What are 3 key liability provisions under the Security Act of 1933?
- Sec. 11
- Sec. 12(a)(1)
- Sec. 12(a)(2)
1933 Act: Sec. 11: What does it remedy for?
False stmts or omissions in registration stmt as of the effective date.
1933 Act: Sec. 11: what must a plaintiff must prove to win?
- A fals stmt or omission in the RS (registration stmt) on the effective date.
- Materiality.
- Tracing AND
- Damages.
1933 Act: Sec. 11: tracing: who is this element primarily for?
Those who lost money in IPO rather than seasonal offering because it is very difficult to trace seasonal offering to original RS.
1933 Act: Sec. 11: who is potential defendants?
- The issuer.
- Officers and directors.
- Underwriters.
- “Experts” - primarily auditors who audited FS in RS.
1933 Act: Sec. 11: Defenses?
- Due diligence (NOT for the issuer no matter how careful they were).
- Alternate Causation (loss from elements other than the false or omitted info).
- Statute of limitations - must sue within 3 yrs after the effective date and within 1 yr when they learned or should have learned about the fact.
1933 Act: Section 12(a)(1): What does it remedy for?
Violation of section 5’s registration provision (pre-filing, waiting period process).
- Sale of unregistered securities.
- Failure to deliver prospectus.
- Use of inadequate prospectus.
- Offer before RS is filed.
1933 Act: Section 12(a)(1): what must plaintiffs show to win?
- D violated Section 5.
- D was a seller, AND
- P lost money.
1933 Act: Section 12(a)(1): Defenses?
Statute of limitations: must sue within 3 yrs after the effective date and within 1 yr when they learned or should have learned about the fact.
1933 Act: Section 12(a)(2): Remedy for?
False stmts and omissions in oral stmts and in “free writing”
1933 Act: Section 12(a)(2): What must plaintiffs prove?
- False stmts or omissions,
- Materiality,
- D is a seller
- Tracing AND
- Damages.
Who is “seller”? Examples? Are accountants sellers?
Someone who transfers the title or solicits sale.
Ex: underwriters, stock brokers
No if they just certify the FS, but they are if they are involved in “selling” activity.
1933 Act: Section 12(a)(2): Defenses?
- Due diligence (NOT for the issuer no matter how careful they were).
- Alternate Causation (loss from elements other than the false or omitted info).
- Statute of limitations - must sue within 3 yrs after the effective date (purchased) and within 1 yr when they learned or should have learned about the fact.
What are the purposes of Security Act of 1934?
- Punishes fraud in the secondary markets.
- Regulates the securities industry.
- Created the SEC.
- Created the periodic disclosures system,
1934 Act: periodic disclosures system: who must comply?
Reporting companies including firms that are: exchange listed, have 500 shareholders and $10m in assets
1934 Act: periodic disclosures system: what must be filed?
Form 10 (when they become reporting companies). Form 10-K (annually), Form 10-Q (quarterly), Form 8-K (for between quarters if important development), proxy stmts., reports of tender offer.
1934 Act: What are two key provisions?
Section 10(b) Section 18(a)
1934 Act: Section 10(b): What does it do?
Punishes fraudulent stmts and omissions in the purchase or sale of securities in virtually every setting - public company or private company, primary market or secondary market, written documents or oral like speeches.
1934 Act: Section 10(b): What must plaintiff prove to win?
All must be proven.
- False stmts or omission.
- Materiality.
- Reliance (not need to show if it’s the case of omission)(fraud on the market theory).
- Causation
- Did buy or sell securities.
- Damages.
- Scienter (intent) or reckless disregard by the defendant
1934 Act: Section 10(b): what is fraud-on-the-market theory
If entire market was misled, investors are indirectly misled.
(Even if investors did not read doc containing false stmt or omission, if others such as analysts, brokers and etc read them and were misled, the court will let all investors sue).
1934 Act: Section 10(b): defenses?
- Statute of limitations - within 2 yrs of when they discover or should have discovered AND within 5 yrs of fraud.
1934 Act: Section 18(a): defense?
Acted in good faith and had no knowledge of false or misleading stmt.
Statute of limitations (1 yr of discovery or should have / 3 yr of purchase).
1934 Act: Section 18(a): Plaintiff must prove?
- False or misleading stmt or omission
- In a filed doc.
- Materiality.
- Purchased or sold securities.
- Plaintiff’s “eyeball” reliance
- Causation AND
- Damages.
Is the owner of debenture creditor or shareholders?
Creditor.
Does 1933 Act and 1934 Act have only civil liability?
No, also criminal liability.
How can criminal liability determined under 1933 and 1934 Act?
Intentional violation of ANY provision of 1933 and 1934 Act.
Who charges for civil liability and criminal liability under 1933 and 1934 Act?
Civil: SEC.
Criminal: Department of Justice.
What is the burden of proof for criminal charge?
Beyond a reasonable doubt.
Can someone tried for both civil and criminal charges?
Yes.
What is payroll tax liability?
Employers must withhold federal income tax from employees’ wages and deposit them with the federal government.
What if employers don’t pay tax?
Maybe imposed of personal liability (out of your own pocket) to pay those taxes upon “responsible person” who willfully fail to pay over the taxes.
Who is “responsible person”? Key question?
One who was required to “collect, truthfully account for, and pay over” the tax.
Did the person have the discretion (authority) to decide which, when and in what order debts or taxes would be paid?