Sarbanes Oxley Act: Chapter 37 Flashcards
What are the three different ways the SEC creates a law?
Rules, Releases, and No-Action Letters
SEC
Securities and Exchange Commission
Rules
SEC uses to fill in details for the securities statutes
Releases
informal pronouncements from the SEC on current issues, usually asks for comments as well
No-Action Letter
response where anyone who is in doubt about whether a particular transaction complies with the securities laws can ask the SEC directly - “ the staff will recommend that the commissions that no action”
Security
any transaction in which the buyer (1) invests money in a common enterprise and (2) expects to earn a profit predominantly from the efforts of others
Securities Act of 1933
requires that, before offering or selling securities, the issuer must register the securities with the SEC, unless the securities qualify for an exemption
issuer
company that uses the stock
When an issuer registers securities, does the SEC investigate the quality of the offering?
No
Anyone who issues fraudulent securities in violation of what act?
the 1933 Act
What securities are exempt from registration according to the 1933 Act?
Government Securities, Bank securities, short-term notes, nonprofit issues, insurance policies and annuity contracts
Short-term notes
high-quality negotiable notes or drafts that are due within nine months of issuance and are not sold to the general public
Do transactions in a private offering have to be registered according to the 1933 Act?
No, exempts “transactions by an issuer not involving any public offering”
What’s the difference between exempt securities and exempt transactions?
securities always exempt, transaction only that one time
What are three different trypes of private offerings?
intrastate, Rgulation D, and Regulation A
Intrastate Offering Exemption
Under SEC Rule 147, an issuer is not required to register securities that are offered and sold only to residents of the state in which the issuer is incorporated and does business
Why is Rule 147 a safe harbor?
if an issuer totally complies with it, the offering definitely qualifies as instrastate
What are the three different types of private offerings that can be made under Regulation D?
Rules 504, 505, and 506
Rule 504 of Regulation D
“seed capital” rule
a company may sell up to 1 million in securities in a year
a company may advertise the stock and solicit an unlimited number of investors(if it’s registered and sales are limited to accredited investors)
Accredited Investors
institutions such as banks and insurance companies or wealthy individuals with net worth of more than 1 million or an annual income of more than 200K
Restricted Stock
securities that aren’t registered under state law nor sold exclusively to accredited investors, must be purchased for investment purposes
Can a buyer resell restricted securities?
Neither publicly or privately for one year
Rule 505 under Reg D
permits a company to sell up to 5 million of stock during a year with restrictions
Restrictions to Rule 505 under Reg D
company may not advertise stock publicly, issuer can sell to as many accredited investors, but is limited to only 35 unaccredited investors, no info to accredited - some to unaccredited, stock purchased under this rule is restricted
Rule 506 under Reg D
similar to Rule 505 with differences: no limit on amount of stock a company can sell, unaccredited purchasers must have a purchaser representative to help evaluate investment
Regulation A
permits an issuer to sell 5 million of securities publicly in any year, requires disclosure
DPO
Direct Public Offerings, issuer typically sells shares to its stakeholders, requires disclosure ($)
IPO
Initial Public Offering; a company’s first public sale of securities
Firm Commitment Underwriting
the underwriter buys the stock from the issuer and resells it to the public
best efforts underwriting
the underwriter does not buy the stock but instead acts as the company’s agent in selling it
Registration Statement’s two purposes
to notify the SEC that a sale of securities is pending and to disclose info to prospective purchasers
red herring
a preliminary prospectus
Registration Statement
a document filed with he SEC under the Act of 1933 by an issuer seeking to sell securities in a public transaction
prospectus
under the Securities Act of 1933, an issuer must provide this document to anyone who purchases a security in a public transaction. The prospectus contains detailed information about the issuer and its business, a description of the stock, and audited financial statements
Quiet Period
begins when a company hires an underwriter and ends 25 days after the stock is first sold to the public
Waiting Period
the time after the registration statement has been filed but before the SEC has approved it
tombstone ad
a simple unadorned announcement of the offering that includes the amount and type of security, name of underwriter, and the price of stock
makes book
meaning that it talks with traders to determine how many shares it can sell and at what price
Road Show
the cross-country road trip to convince traders that it’s a stock their clients should buy
comment letter
lists changes that must be made to the registration statement
go effective date
date to begin selling the stock
Rule 144
limits the resale of two types of securities: control and restricted
control security
stock held by any shareholder who owns more than 10 percent of a class of stock or by an officer or director
restricted security
any stock purchased from the issuer in a private offering (such as Reg D)
What happens if a final registration statement contains a material misstatement or omission?
the purchaser of the security can recover from everyone who signed the reg statement
Material
Important or significant. Information that would affect a person’s decision if he knew it
due diligence
an investigation into everyone else who signed the registration statement and making sure they didn’t know about the misstatement
Under the 1934 Act, an issuer must register with the SEC if :
1 - it completes a public offering under the 33 Act
2 - its securities are traded on a national exchange (NYSE) or
3 - it has at least 500 shareholders and total assets that exceed $10 million
