Profesh. Responsibilities and Securities Regulation (II)

Question 1

What are securities?
+
2 things that are NOT securities

Answer 1

Courts have defined the term VERY broadly – check if investor is PASSIVE (eg relies solely on mgmt. to make money)

Such as: stocks, bonds, debentures, oil well interest, stock option, collateral trust certificates, warrants, LIMITED partnership int. (think limited = passive)

Certificates of Deposit and partnership interest = NO

Question 2

What does 1933 act do?

Answer 2

regulates original issuance of securities

The 1933 Act imposes liability on negligent users for making material misrepresentations in any written offer

Can be liable for ISSUING securities under false pretenses

Sec 11 - Due Diligence

Question 3

What does 1934 act do?

Answer 3

regulates Purchases and Sales AFTER initial issuances

Can be liable for making false STATEMENTS under the ‘34 act

Includes frauds on business reports (10K, 10Q, 8K,) incl. Unaudited financials in the 10Q’s, Mgmt proxy statements

(All publically traded corps. must register with the SEC and make certain periodic reports under the 1934 act.)

Question 4

What is Regulation D?

Answer 4

Private offerings, exempt from registration

Private offering exemptions listed under 504 ($1mil cap), 505($5mil cap), 506 (no cap)

Question 5

What is a prospectus?

Answer 5

A writer offer to sell securities - any “written, radio, or television offer” to sell

• Prospectus is PART 1 of a registration statement
• Unless an issuance is exempt, EACH investor must receive a copy of the prospectus BEFORE or WITH every sale of securities

Question 6

Reporting requirements of the 1934 Act?

Answer 6

1) Shares traded on a national exchange OR

2) 500 s/h in one class or more, NOT accredited, 10MIL+ in Assets (or more than 2,000 s/h total)

Question 7

What must be included in the Registration statement?

When does it become effective?

Answer 7

Audited balance sheet + P&L, (CPA with a PCAOB-registered firm)

• Names + Addresses of directors, officers, underwriters, any shareholder who owns 10%+ of the company’s shares
• Amnt. of Stock or Debt outstanding
• Principle purpose for which offering will be used
• Anything that might affect the value of the security (pending litigation etc.)

-20 days after filing

Question 8

What is the 30 days before registration, pre-filing period for?

Answer 8

No Sales Allowed UNLESS issuance is exempt

-Issuer MAY negotiate with an underwriter

Question 9

What are shelf registrations?

Answer 9

Registrations for future issuance. Something a company who is often involved in issuing securities, like a BLANKET statement.

Only permitted when issuer has been filing under 1934 act for one yr. and keeps info continuously updated

Question 10

The two exemptions from the 1933 Act?

Answer 10

Securities exemption (securities issued by certain types of issuers)

Transaction exemption
(Securities issuedin certain types of transactions)

Question 11

Securities exemptions (sec 3, 1933)

Answer 11

CDs, Nonprofs, gov-issued secs, common carriers (railroads), short-term commercial papers (notes-bonds,) w/ maturity 9 months or less, insurance POLICIES

• bankruptcy securities
• church securities/non-inv.

Question 12

What are the transaction exemption rules?

Answer 12

ONLY exists for the transaction in question (unlike securities exemptions which last forever)

Resold - must be registered unless they qualify

Casual sales, corporate re-org, INTRA-state (within) sales

• Regulation A (partially exempt, must issue OFFERING instead of reg. statement), may not exceed $5mil in 12 month pd.
• Private offerings under Reg. D (NO immediate re-sell to the public, 2 years restricted – SEC must be informed w/in 15 days of first sale)

Question 13

What does a tombstone ad do?

Answer 13

Makes known the availability of a prospectus

Question 14

Best defense against Sec. 11?

Answer 14

Due Diligence

Question 15

What is the SEC responsible for (hint - 3 things?)

Answer 15

1) requiring disclosure of facts concerning offerings listed on national exchanges
2) Regulate activities of securities broker
3) Investigate securities fraud

Question 16

What are the periodic business reports?

Answer 16

8K, 10K, and 10Q

8K w/in 4 days of major events! (Changing control, disposition of major assets, changing officers or directors)

Question 17

Successful suit in 10-b.. what is plaintiff entitled to?

Answer 17

1) amount of loss caused by fraud
and/or
2) Recission (essentially, a nullification of any contracts)

Punitive damages recoverable under common law, but NOT here.

SEC 11 = MONETARY DAMAGES ONLY

Question 18

5% rule for SEC?

10% ?

Answer 18

Any person owning 5% or more of common stock must file a report with the SEC

Only 10% or more subject to INSIDER reporting provisions

Question 19

Section 11 statute of limitations?

Answer 19

1 Year

(Remember - CPA Materially misstates or makes major omission, there are damages, and the plaintiff acquired (not even necessarily purchased) the security)

NO Negligence Reliance or Intention required!!