R5: Professional Responsibilities and Securities Regulation Flashcards
Securities Act of 1933: whats the purpose and who does it apply to?
Provide investors with sufficient information on investments prior to and during offerings. Primarily concerned with sales by issuers, underwriters and dealers.
Securities Act of 1933: Liability under Sections 11, 12 and 17
Section 11: imposes civil liability for misstatements
Section 12: civil anti-fraud section (in event there is no prospectus or registration, individual can sue for damages w/out proving scienter or reliance)
Section 17: criminal anti-fraud section (fraud in connection with securities issuance)
Securities Act of 1933: who is exempt?
1- corporate reorganizations (stock dividends, etc.)
2- municipal bond issuance
3- securities of: banks; carriers; S & L corporations; farm co-ops
4- commercial paper due w/in 9 months
5- insurance and conventional annuity contracts
6- intrastate issuances (80% in state, no sale out of state w/in 9 months)
7- charitable organizations
8- securities under Ch. 11 of bankruptcy code
9- issuances under church plan or similar non-investment company
10- casual sale (no underwriter, dealer, issuer)
11- Regulation A’s partial exemption and Regulation D’s 504, 505, 506 rules
IRS Discriminant Inventory Function (DIF) generally audits whom more often?
1- individuals w/ gross incomes in excess of $100,000
2- self employed individuals w. substantial income and deductions
3- cash businesses
Accuracy-related penalties apply to portion of tax underpayments attributable to:
- negligence or disregard of tax rules, and
- regulations as well as substantial understatements of income tax
Section 11 of SEC 1933 needs to prove the following: Also -what is a CPA’s defense against Section 11?
1- Plaintiff acquired the stock
2- Reg. stmnt was signed by CPA and contained a material misrepresentation
3- damages were incurred
CPA can use the due diligence defense.
Elements of negligence (4)
1- Duty of care
2- Breach (lack of due care)
3- Causality
4- Injury
Treatment of previously issued stock now traded on national exchange (previously not publicly traded)
Must be registered under 1934 even if thresholds don’t apply and 1933 rules don’t apply.
CPA is liable to…
Any foreseeable person or class of persons whom the CPA knows will be relying on the CPA’s work
Examples of insiders that must report under 1934
Officers, directors, more than 10% stockholders
Rule 10b-5 anti-fraud provisions of 1934 act
1- plaintiff must have bought securities
2- must have suffered a loss
3- there was a material misrepresentation of material fact
4- Scienter (intent to deceive)
5- reliance (must have relied on representation)
6- interstate commerce (must be shown, multiple states)
Rule 505
Limited to $5 million & issuer must make reasonable effort to ensure purchasers are purchasing for their own account and not for resale
- no specific information is required for an “accredited” investor, unaccredited there must be at least financial statements contained in a report.
1934 Act applies to companies…
1- who's shares are traded on a national exchange 2- who have at least 500 shareholders in any one class who are not accredited and the Co. has more than $10 million in assets
SEC Regulations A, 504, 505, 506 offering limitations and max time period in which an exempt offering can be made:
Reg A - Limited to $5 million
504 - limited to $1 million
505 - limited to $5 million
506 - unlimited amount
All issuance’s are limited to a 12 month period.
Rule 147 applies to what?
Intrastate sales - entire issue must be intrastate, issuer must do 80% of business in the state and purchasers cannot sell securities for 9 months to non-residents of the state.
