NOTES SECTION 1: OVERVIEW Flashcards
Securties Act of 1933 (aka, truth in securities law).
The purpose of the Securities Act of 1933 is to ensure that investors have the material information they need before buying stocks or bonds issued on the primary market and that this information is accurate and not misleading.
Primary Market
The primary market is the initial offering of a security to investors.
The 2 Basic Objectives of the Securities Act of 1933:
1) to require that investors recive financial and other significant information concerning securities being offered for public sale; and
2) to prohibit deceit, misrepresentations, and other types of fraud in the sale of securities.
Focus of The Securities Act of 1933:
The Securities Act of 1933 focuses solely on the initial offering of securities to public investors by their issuers, and it requires issuers to register their securities offerings with the SEC before being allowed to offer or sell their securities to the public.
What is an ISSUER?
An issuer is any individual or entity issuing a stock, bond, or other security to investors for purchase. Facebook, for example,is the issuer of Facebook common stock.
Disclosure Documents under the Securities Act of 1933:
Because of the Securities Act of 1933, an investor must be provided with a disclosure document that details everything the investor might need to know about the company issuing the security. This document is usually called a prospectus, but may sometimes be referred to as an offering circular or a private placement memorandum, depending on the type offering
Blue Sky Law:
If an issue of stock is authorized for listing on the NYSE, the NASDAQ, or any other major securities exchange, the issuer must register with the SEC exclusively. If, however, the issue will not trade on these or any other exchanges, the stock must also be registered with the states in which it will be offered and sold. This state-level registration is often referred to as Blue skying the issue, as “Blue Sky Law” is a synonym for state securities laws.
BLUE SKY LAW EXEMPTION:
Some offerings are exempt from registration, such as securities listed on national stock exchanges or those falling under specific federal regulations.
Stocks that are listed on major national stock exchanges like the NYSE (New York Stock Exchange) or NASDAQ are typically exempt from state-level Blue Sky registration requirements. These exchanges have their own rigorous listing standards and regulatory oversight, which ensures transparency and investor protection. As a result, companies whose stocks are traded on these exchanges have already undergone thorough scrutiny and disclosure processes. However, it’s essential to note that while they may be exempt from state registration, they still need to comply with federal regulations and provide relevant information to investors.
Remember Blue Skying an issue of stock refers to STATE REGULATIONS:
“Blue skying an issue of stock” refers to a process that ensures a new stock offering complies with state regulations.
Blue Sky Law in a nutshell:
Blue Sky Laws:
These are state-level anti-fraud regulations designed to protect investors against securities fraud.
Blue sky laws require issuers of securities (such as stocks) to register their offerings and provide detailed financial information.
Investors can then make informed decisions based on this verifiable information.
Registration and Disclosure:
When an issue of stock has been “blue skyed,” it means that regulatory authorities have cleared it for sale to the public.
Issuers must reveal terms of the offering, including material information that may affect the security.
State administrators review the offering to ensure fairness and equitability.
Liability and Investor Protection:
Blue sky laws create liability for issuers who fail to comply with the regulations.
Legal actions can be taken against issuers for fraudulent statements or failure to disclose information.
The intent is to protect investors, especially those lacking experience or knowledge.
The term “blue sky” originated from a judge who compared the value of a stock offering to a patch of clear sky. So when an issue is “blue skyed,” it’s been given the regulatory green light!
OTC Securities:
Securities trading on the OTC Bulletin Board are required to register with both the SEC and state regulators if offering securities in more than one state, for example. Moreover, some offers are registered only with state regulators.
What is the “Effective Date”?
When the SEC give an issuer the “effective date” (i.e., the release date) on which to do so, sales from the underwriters to the investors can be finalized, and the issuer receives the capital it is seeking.
The “Effective Date” made simple:
Let’s break it down in simple terms:
Imagine a Lemonade Stand:
Picture a kid running a lemonade stand. They make delicious lemonade and want to expand their business.
To do that, they need more money to buy more lemons, cups, and maybe even a fancier sign for their stand.
The Lemonade IPO:
Our young entrepreneur decides to sell shares of their lemonade stand to other people. These shares represent ownership in the business.
The SEC (Securities and Exchange Commission) is like the grown-up supervisor overseeing this process. They make sure everything is fair and transparent.
The Effective Date:
The SEC reviews all the paperwork and information about the lemonade stand. They check if everything is accurate and complete.
When they’re satisfied, they give the green light—the “effective date.” It’s like saying, “Okay, lemonade stand, you’re good to go!”
Underwriters and Investors:
Now, the lemonade stand needs help selling those shares. That’s where the underwriters come in. They’re like the sales team.
Underwriters find people (investors) who want to buy a piece of the lemonade stand. Investors might be your neighbors, friends, or even big companies.
Finalizing the Deal:
On the effective date, the underwriters start selling shares to investors. It’s like saying, “Hey, want to own part of this awesome lemonade stand?”
When investors buy shares, they pay money to the lemonade stand. That money becomes the capital (fancy word for funds) the stand was seeking.
T
he Lemonade Stand Grows:
With the capital from selling shares, our little lemonade stand can now buy more lemons, cups, and maybe even hire more kids to help.
And voilà! The lemonade stand grows, and everyone who owns shares gets a piece of the profits.
Remember, stocks work similarly. Companies sell shares to raise money, and investors become part-owners. The SEC ensures it’s all done fairly. So next time you see a lemonade stand, think of it as a tiny stock market!
What is The Securities Exchange Act of 1934:
The Securities Exchange Act of 1934 gave the SEC broad powers over the securities markets. The Act requires such companies as Starbucks and Facebook to file quarterly and annual reports with the S. Additional reports are to be filed when officers and members of the board sell their shares of the company’s stock, and mergers and acquisitions must be announced through the filing of required reports.
What is an SRO (Self-regulatory organization) – FINRA, NASDAQ, or NYSE?
A self-regulatory organization is one that regulates its own members, including enforcing its own rules along with those of the SEC and securities laws. Broker-dealers belong to one or more SROs such as FINRA, NASDAQ, or NYSE. Under the Securities Exchange Act of 1934, these SROs register with the SEC and, in turn, regulate their member firms.
