LEGL Chapter 17 Flashcards
What is under the Howey Test?
-an investment of money
-in a common enterprise
-with a reasonable expectation of profit
-based on the efforts of others
what happens if it meets all four requirements of the Howey test?
it is a security
What is SEC v W.J. Howey Co. (1946) (investment contract) about?
W.J. Howey owned orange farms and planned to sell one acre lots and lease the people who own the one acre plots would lease it back to the W.J. Howey. the investments ended up not being profitable.
why did people end up suing W.J. Howey?
because the investments were not profitable
what applies to the initial sale of the security ?
securities act of 1933
what documents are required under the securities act of 1933?
registration statement and prospectus
what are the sanctions for violating the securities act of 1933?
criminal punishment or civil liability
what is a registration statement?
detailed disclosure of financial information about the issuer filed with the SEC
what is the pre-filing period?
issuer may only engage in preliminary negotiations and agreements with underwriters
what is the waiting period?
issuer may only solicit buyers or receive offers to buy (but cannot accept)
what is the post effective period (20 days after)?
issuer may sell securities
what is prospectus?
contains key information contained in the company’s registration statement
who is the prospectus provided to?
interested investor
who are the regulated parties under the securities act of 1933?
issuer
underwriter
controlling person
seller
what is an issuer?
individual or business offering a security for sale to the public
what is an underwriter?
anyone who participates in the original distribution of securities by selling securities or guaranteeing their sale
what’s an example of an underwriter?
investment bank
who is the controlling person?
is one who controls or is controlled by the issuer
who is the seller?
anyone who contracts with a purchaser or who is motivating influence that cause the purchase transaction to occur
what is an example of a seller?
broker
how is liability imposed?
criminal liability (section 24)
civil liability (section 11 & 12(A))
civil liability (section 17)
what is willful violation of the act or fraud in the initial offer or sale of securities ?
criminal liability (section 24)
criminal liability (section 24) is punishable by…
fines or imprisonment
where are the actions of criminal liability (section 24) brought?
by Department of Justice
what is civil liability (section 12(a)(1))?
liability for failure to file registration statement
what is civil liability (section 11)?
liability for false or misleading registration statement
what is civil liability (section 12(a)(2))?
liability for false or misleading prospectus or other interstate commerce communication (by mail, telephone, internet)
what is civil liability (section 17)?
imposes civil liability for using any device, scheme, or artifice or fraud in the initial sale of security
what section is the catchall for the fraud not picked up by the other sections?
section 17
what does the securities exchange act of 1934 regulate?
regulates transfer or securities AFTER the initial sale (secondary distribution)
what act created the Securities and Exchange Commission (SEC)?
Securities Exchange Act of 1934
what is the primary anti fraud law and rule relating to the secondary distribution of securities ?
section 10(B) AND Rule 10B-5
what law allows investors to sue?
Section 10(B) and Rule 10B-5
who is liable under section 10(b) and rule 10b-5?
parties directly connected to the sale of securities are liable
to win a case under section 10(b) and rule 10b-5, the plaintiff must prove…
material misrepresentation of omission by defendant
scienter (intent)
connection between misrepresentation/ omission and the transaction
reliance on the misrepresentation/ omission
economic loss
loss causation
what is materiality under 10(b) and rule 10b-5?
depends on the significance a reasonable investor would place on the withheld or misrepresented information
what is the theory for insider trading =fraud under section 10b-5 ?
trading on insider information is deceptive because the insider abuses the relationship of trust
what is insider trading?
the sale or purchase of securities by individuals privy to non-public material information based upon her special relationship with the corporation
who is an insider?
include officers, directors, employees, and professionals in fiduciary relationships with the firm AND tippees
what is a tippee?
a person who learns non public information from an insider
what case is about the misappropriation theory?
US v O’Hagan
what is the misappropriation theory?
a person commits fraud in connection with a securities transaction
what did O’Hagan owe?
a duty of trust and confidence to his law firm and its clients
who is an insider under section 16?
person who owns more than 10 percent of any security AND is a director or officer of the issuer of the security
what does section 16 prohibit?
short-swing profits (profits made within a six month time period)
what are blue sky laws?
state statutes designed to protect the public from the sale of fraudulent stocks and bonds
what do state blue sky laws protect?
the potential investor from buying risky securities without financial and other information
what act provides a model for blue sky laws?
uniform securities act of 1956
what do state blue sky laws apply to?
to securities subject to federal laws and securities exempt from federal statutes
what is the primary purpose of the Sarbanes Oxley Act of 2002?
to ensure accuracy and integrity in the financial reporting of public companies
who does SOX apply to?
to all public companies in the US and international companies registered with the SEC
what created the public company accounting oversight board?
SOX
what does the PCAOB consist of?
five members appointed by SEC commissioners
what does the PCAOB do?
monitors accounting rims that audit public companies
what does section 302 of SOX require?
requires CEOs and CFOs to certify the accuracy of the quarterly and annual financial statements
what does section 404 of SOX mandate?
mandates the certificate of internal financial controls
what indicates the positive impact of SOX?
decline in restatements of financial reports
what are the whistleblower protections under SOX?
encourages individuals to report corruption
whistleblowers can recover civl damages
improperly terminated employees can be reinstated
what addressed many issues of financial reform?
Dodd frank Wall Street reform and consumer protection act of 2010
what is required under the Dodd frank Wall Street reform and consumer protection act of 2010?
required safety and soundness measures (stress testing, liquidity requirements) for large financial institutions
what did congress authorize to achieve goals of Dodd-frank act?
the creation of new administrative agencies
