R7 Securities Regulation Flashcards
In general what is the purpose of the Securities Act of 1933?
Act of 1933 regulates the original distribution of securities (IPO), its goal is to assure that investors have sufficient information on which to make an informed investment decision, but the SEC does not judge the merits of the investment only looks at completeness.
Describe the registration statement
Contains all the information that a reasonable investor would consider important in deciding whether to invest.
Part 1 - the prospectus
Part 2 - audited financial information
other material facts requiring disclosure
When does the registration statement become effective?
20 days after filing unless the SEC issues a refusal or stop order, or unless it is made effective earlier by an SEC acceleration order
What activities can take place during the waiting period regardless of whether the company is a seasoned issuer or a well known seasoned issuer?
- Oral offers can be made (not written)
- Tombstone ads may be places
- Preliminary (red herring) prospectuses may be placed
- Summary prospectuses may be distributed
What securities are exempt from registration requirements of the Securities Act of 1933?
B - Banks and savings and loans R - Regulated common carriers (Railroad) I - Insurance polices N - Nonprofit organizations G - Government for governmental purposes S - Short term commercial paper less than 9 months 11 - Ch. 11 Bankruptcy code Church - Churches or similar entity that is not an investment company
What securities must be registered under the Securities Act of 1933?
- Offered in connection with interstate commerce
- Offered to the public
- Offered by issuer, underwriter or dealer
- Not excluded by statute
What is Regulation D?
Private offering NO IPO exempts certain issuance of securities from the registration requirement of the Securities Act of 1933 Rules 504, 505 and 506
Generally, is a general solicitation permitted under Regulation D?
General solicitation (newspapers or magazine ad) is prohibited in most cases under Regulation D
What are the dollar and investors limitations of Rule 504, 505 and 506 under Regulation D?
Rule 504: $1 million any number of investors does not need to give any information
Rule 505: $5 million unlimited accredited investors and only 35 unaccredited investors and any number of unaccredited must provide audited financial statements
Rule 506: Unlimited amount of $ and unlimited accredited investors and only 35 unaccredited but sophisticated investors
What must a plaintiff prove in a case brought under Section 11 of the Securities Act of 1933?
L - Suffered a loss
A - Acquired the Stock
M - Material misstatement in the registration statement
No need to prove fraudulent conduct, negligence or reliance on the statement
Does a CPA who singed off on financial information in a registration statement have any defenses to Section 11 liability?
Yes: Due diligence meaning reasonable grounds to believe the facts in the statements were true and no material facts were omitted (following GAAP/GAAS, workpapers, document everything and taking additional steps to review count)
What companies must register under Securities Exchange Act of 1934?
Generally any company:
- Whose shares are traded on the national exchange
- Which has at least 500 shareholders in any outstanding class and more than $10 million in assets
Note: National stock exchangers, brokers and dealers must also register
What securities are exempt from registration under the Securities Exchange Act of 1934?
R - Regulated common carriers (Railroad)
I - Investment companies
I - Insurance policies
N - Nonprofit organizations or charitable
G - Government for governmental purposes
S - Short term commercial paper less than 9 months
S - savings and loans
What persons may be classified as insiders?
- Directors
- Officer
- Shareholders owing more than 10% outstanding class of shares
- Accountants and attorneys of the issuer
Can a defendant be liable for negligently violating Rule 10b-5?
No, Rule 10b-5 requires the plaintiff to prove:
L - Suffered a loss
A - Acquired the Stock
M - Material misstatement in the registration statement
S - Scienter (intent to deceive the plaintiff or reckless disregard of the truth)
I - Interstate Commerce
R - Reliance on the misrepresentations
Proof of negligence is not enough
