Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Business Associations - Fall 2022 (Dexter) > Securities Regulation > Flashcards

Securities Regulation Flashcards

1
Q

Securities Regulation

Securities

A

Security means certain types of consideration, generally listed in the Exchange Act

Securities may be offered by both corporate and noncorporate entities.

Howey Test
1. Investment
2. In a common enterprise
3. Expectation of profits derived solely from the efforts of others
.

Automatically Qualifying Instruments

  1. Corporate Stock
  2. Bonds
  3. Debenture
  4. Options
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Securities Regulation

Determining Securities

A

Bright-line rules are discouraged in the context of federal securities laws for the reason that they tend to create loopholes that can be used by the clever and dishonest.

  1. Investment
  2. In a common enterprise
  3. With expectation of profits derived solely from the efforts of others
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Securities Regulation

1933 Securities Act

A

Securities Offerings Disclosure Requirements

Focuses on the initial offering.

All securities offered for sale must be registered with the SEC, or must qualify for an exemption.

The typical securities offering involves a corporation issuing equity securities (stocks) or debt securities (bonds)

Registration is about full disclosure, not the SEC evaluating the qualities or merits of the investment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Securities Regulation

1933 Securities Act
Registration Process

A
  1. Filing of Registration Statement
  2. Evaluation
  3. Quiet Period
  4. Declaration of Effective/Not Effective
  5. Sales may Occur
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Securities Regulation

1933 Securities Act
Registration Process
Filing of Registration Statement

A

Registration of an offering requires electronic filing with the SEC, including the Prospectus and Additional Information about the offering and the company.

Once the registration statement is filed with the SEC, it becomes a matter of public record

Prospectus
The prospectus must include a detailed description of the investment so investors can fully evaluate the potential risks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Securities Regulation

1933 Securities Act
Registration Process
Evaluation

A

After filing, the SEC evaluates for thoroughness and responds with comments.

The company may be required to file clarifying amendments to its registration statement.

The SEC does not evaluate the qualities or merits of the investment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Securities Regulation

1933 Securities Act
Registration Process
Quiet Period

A

The time between filing and declaration where companies and related parties are limited in what information can be made public

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Securities Regulation

1933 Securities Act
Registration Process
Declaration Effective/Not Effective

A

The SEC declares the registration statements as effective when they are deemed to satisfy the disclosure rules

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Securities Regulation

1933 Securities Act
Sale of Unregistered Securities

A

§ 5 Liability: **Strict liability** for the sale of unregistered, non-exempt securities in violation of the Act

To establish a § 5 violation, the plaintiff must prove three elements:

  1. An offer or sale of a security,
  2. That was not registered pursuant to the 1933 Securities Act, and
  3. Use by the sellers of mail or other facilities of interstate commerce
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Securities Regulation

1933 Securities Act
Registration Exemptions

A
  1. Government Securities
  2. Private Offerings
  3. Limited Offerings
  4. Regulation A+ Exemptions
  5. Shelf Registrants
  6. Direct Public Offerings

Most public offerings do not qualify for exemption from registration

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Securities Regulation

1933 Securities Act
Registration Exemptions
Private Offerings/Private Placement

A

A security offering that is not made to the public at large

If a private offering complies with the conditions of Rule 506 of Regulation D, it will be deemed exempt from registration

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Securities Regulation

1933 Securities Act
Registration Exemptions
Limited Offerings

A

The offer and sale of up to $5 million of securities over a 12-month period, may be exempt from registration.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Securities Regulation

1933 Securities Act
Registration Exemptions
Regulation A+ Exemptions

A

Regulation A+ provides two tiers of offerings:

Tier 1 - Offerings of up to $20 million over a 12-month period

Tier 2 - Offerings of up to $50 million over a 12-month period (requires audited financial statements)

Benefits of Regulation A+ Exemptions

  1. The issuing company may communicate with potential investors before or after filing
  2. Tier 2 are exempt from state securities or Blue Sky Laws
  3. Companies may submit draft offering statements for non-public review with the SEC before officially filing
  4. The securities issued are unrestricted and freely transferable
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Securities Regulation

1933 Securities Act
Registration Exemptions
Shelf Registrations

A

An issuer may file a registration statement for a new issue up to 3 years in advance of any sale.

The securities may be offered on an immediate, continuous, or delayed basis (“taken off the shelf”)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Securities Regulation

1933 Securities Act
Anti-Fraud Provisions

A

§ 17(a) of the 1933 Act

Applies to both public and private securities

Imposes liability for fraud in the registration statement, including the prospectus and oral communications

Includes as interstate commerce jurisdictional element

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Securities Regulation

1934 Securities Exchange Act

A

Securities Reporting Requirements

Focuses on after the IPO, regarding the the purchase and sale of offerings and reporting information by publicly held companies.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Securities Regulation

1934 Securities Exchange Act
§ 12 Registration Requirements

A

Unless exempted, companies are required to register securities if:

  1. The securities are listed on a national exchange,
  2. The company has
    a. Total assets of $10 million or more
    AND
    b. A class of equity securities held by: (i) 2,000+ people OR (ii) 500+ nonaccredited investors,
    OR
  3. The company has an effective registration statement

Companies that qualify under these requirements are considered Registrants, Registered Companies, Reporting Companies, or Section 12 Companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Securities Regulation

1934 Securities Exchange Act
§ 12 Registration Statement (Form 10)

A

Must be filed with the appropriate exchange and the SEC and is effective 60 days after filing

Generally includes information about:

  1. The corporation
  2. The offered securities
  3. The corporation’s financial structure
  4. The corporation’s management structure
  5. Executive compensation plan
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Securities Regulation

1934 Securities Exchange Act:
Ongoing Reporting Requirements & Certifications

A
  1. Annual Reporting (Form 10-K)
  2. Quarterly Reporting (Form 10-Q)
  3. Special Event Reporting (Form 8-K)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Securities Regulation

1934 Securities Exchange Act:
Annual Reporting

A

Form 10-K

Must include:

  1. Audited financial statements
  2. Comprehensive information about the company’s:
    a. Financial status
    b. Management, including identity and compensation
    c. Securities
21
Q

Securities Regulation

1934 Securities Exchange Act:
Quarterly Reporting

A

Form 10-Q

Includes unaudited financial statements and quarter over quarter financial position

Smaller reporting companies may use a simpler disclosure

22
Q

Securities Regulation

1934 Securities Exchange Act:
Special Event Reporting

A

Form 8-K

Reporting Companies must report any material events or important corporate changes, such as mergers, bankruptcy, or director resignation

23
Q

Securities Regulation

1934 Securities Exchange Act:
Anti-Fraud Provisions

A

§ 10(b) & Rule 10(b)-5

Makes it unlawful to use manipulation or deception in connection with the purchase and sale of any security (not just Reporting Companies’ securities)

24
Q

Securities Regulation

1934 Securities Exchange Act:
Anti-Fraud Provisions
Causes of Action Factors

A
  1. Misstatements or Actionable Omissions (Duty to Disclose)
  2. Of “Material” Fact
  3. Scienter
  4. In Connection with Purchase or Sale of Security
  5. Reliance
  6. Economic Loss
  7. Loss Causation
  8. Interstate Commerce
25
Q

Securities Regulation

1934 Securities Exchange Act:
Anti-Fraud Provisions
Materiality (Forward Looking Statements)

A

Certain forward-looking statements may be immaterial under:

  1. Safe Harbor
  2. Bespeaks Caution Doctrine
    ~~~
**Safe Harbor**
	
1. Identified forward-looking statements
2. Sufficient cautionary language

~~~
Bespeaks Caution Doctrine

  1. Unidentified forward looking statements
  2. Sufficient directly related cautionary language

The bespeaks caution doctrine is used when a company fails to properly utilize the safe harbor

26
Q

Securities Regulation

1934 Securities Exchange Act:
Anti-Fraud Provisions
Reliance

A

The plaintiff must prove reliance as a substantial factor.

  1. Fraud on the Market Presumption
  2. Securities Fraud Class Action Presumption

Fraud on the Market Presumption

The market price of shares reflects the publicly available information, including material misrepresentation

Securities Fraud Class Action Presumption
Requires the plaintiff to plead:

  1. Publicly Known AND Material Misrepresentations
  2. Efficient Market
  3. Traded during Relevant Period
27
Q

Securities Regulation

1934 Securities Exchange Act:
Anti-Fraud Provisions
Loss Causation

A

Loss was a foreseeable consequence of the misrepresentation or omission

28
Q

Securities Regulation

Sarbanes-Oxely Act of 2002

A

Introduced more event-driven reporting, internal controls, and certification requirements.

29
Q

Securities Regulation

Sarbanes-Oxely Act of 2002
Internal Controls Report

A

Form 10-K
.

Requires Reporting Companies to include an internal controls report in their annual reports on Form 10-K

  1. Statement of Responsibility of management in creating and maintaining adequate internal controls
  2. Assessment of Effectiveness of the internal controls structure
  3. Auditor Attestation

.

Exceptions

Smaller reporting companies are generally exempt due to the expensive cost of compliance

30
Q

Securities Regulation

Sarbanes-Oxely Act of 2002
Certification of Disclosures

A

Senior officers (certifiers) must certify that:

  1. Each report is accurate and reliable
  2. They are responsible for establishing and maintaining effective internal controls

Certifiers may be held personally liable, including jail time and fines.

31
Q

Securities Regulation

Insider Trading

A

Occurs when a person buys or sells a security based on material, non-public information

32
Q

Securities Regulation

Insider Trading:
Material

A

Something is material if:

  1. The investor considers it important in making the decision, and
  2. It alters the total mix of information available to the public
33
Q

Securities Regulation

Insider Trading:
Types of Liability

A
  1. Insiders (Actual or Constructive)
  2. Tippers/Tippees
  3. Misappropriators
34
Q

Securities Regulation

Insider Trading:
Insider Liability

A

Targets a corporate insider’s breach of duty to shareholders with whom the insider transacts.

Actual Corporate Insiders: Officers, Directors, Controlling Shareholders, Employees, etc.

Constructive Corporate Insiders: Consultants, Attorneys, CPAs, etc.

35
Q

Securities Regulation

Insider Trading:
Tipper/Tippee Liability

A

Tipper:
1. Person breaching fiduciary duty
2. Must gain some personal benefit, directly or indirectly, from their disclosure. (Considered as making a gift of confidential information to the tippee.)

Tippee:
1. Person who receives tips from insiders,
2. Knows the information was disclosed in breach of the tipper’s duty

36
Q

Securities Regulation

Insider Trading:
Misappropriators

A

Corporate Outsiders

Use of material, nonpublic information that is obtained in breach of duty to the source of the information (rather than the company/shareholders)
.
.
Considerations:

  1. Has the information subsequently been made public?
  2. Has the information gone stale?
  3. Is the information a sure thing?
    .
    .

Misappropriators:

  1. Persons who agree to keep information confidential
  2. Persons with established history of keeping confidences
  3. Relatives, Spouses, etc (barring countervailing proof)
37
Q

Securities Regulation

Short Swing Profits

A

§ 16(b) of the 1934 Act

Only applies to Reporting Companies

Directors, Officers, and Beneficial Owners of more than 10% must report their ownership in the corporation’s stocks to the SEC

Any profits realized or losses avoided from the purchase or sale of any stock within a 6 month period may be recaptured by the company, regardless of whether there was actually insider trading

Any short swing profits are disgorged to the corporation

38
Q

Securities Regulation

Short Swing Profits:
Directors & Officer Liability

A

Strict Liability

Assumes that insiders have access to material, nonpublic information so it imposes strict liability for the purchase or sale of any stock within a 6 month period

39
Q

Securities Regulation

Short Swing Profits
Beneficial Owners

A

The more than 10% threshold must be met immediately prior to both the sale and purchase at issue.

At time of purchase = immediately before the purchase, did they own 10%?

At time of sale = immediately before sale, did they own 10%?
~~~

**Examples:**

1/1/22 = obtained 11% 
2/1/22 = sells 5% --> **no short swing** (did not own *more than* 10% before **both** purchase and sale)

~~~
1/1/22 = obtained 11%
2/1/22 = obtained additional 5% (16% total)
3/1/22 = sells 5% (11% total) –> short swing (owned more than 10% before both purchase and sale)

40
Q

Securities Regulation

Short Swing Profits
Reporting Requirements

A

§ 16(a)

Requires reporting with the SEC:

  1. How much stock owned at the time the securities are registered
  2. How much stock owned within 10 days of becoming a director, officer, or beneficial owner
    Details of a change in securities ownerships within 2 days
41
Q

Securities Regulation

Voting by Proxy
“Proxy”

A

The written authorization for another to vote on the shareholder’s behalf

AND

The person actually voting on the shareholder’s behalf.

42
Q

Securities Regulation

Voting by Proxy:
Proxy Solicitation

A

Often, management will offer to serve as a shareholder’s proxy (distributing a “proxy solicitation”

Must include a proxy statement and other pertinent items (like annual reports) such that shareholders can make an informed decision

Generally, management will also include their recommendation

§ 14 of the 1934 Act regulates the proxy solicitation process for Reporting Companies to protect shareholders

43
Q

Securities Regulation

Voting by Proxy:
Shareholder Proposal Requirements
(generally and substantive and procedural requirements)

A

Either management or shareholders can make proposals to vote on at the annual shareholder’s meeting

Eligible shareholder proposals are to be included with the proxy statement

Shareholder proposals must satisfy certain procedural and substantive requirements before management is required to include the shareholder proposal in the proxy statement
.

Procedural Requirements

  1. Ownership requirements–amount and continuity
  2. Timing
  3. Attendance of Meeting

Substantive Requirements

  1. Legality
  2. No special/personal interest
  3. Proxy rules
  4. Direct management functions, such as ordinary business operations (unless substantial)
  5. No Conflict with other Proposals
    Etc
44
Q

Securities Regulation

Voting by Proxy:
Management Responses to Shareholder Proposals

A

In response to a shareholder proposal, management may seek to exclude it by:

  1. Filing a no action letter request with the SEC explaining why the corporation believes the shareholder proposal is excludable
  2. Seeking a declaratory judgment
45
Q

Securities Regulation

State Securities Regulations (Blue Sky Laws)
Common Registration Methods

A

Some states requires securities to be registered with the state before they are offered for sale

  1. Coordination Scheme
  2. Notice Filing
  3. Qualification Scheme
46
Q

Securities Regulation

State Securities Regulations (Blue Sky Laws)
Coordination Registration

A

Some states allow securities that have been registered under federal law to be issued in the state without further requirements, but may still require filing with the state the prospectus and other documents

47
Q

Securities Regulation

State Securities Regulations (Blue Sky Laws)
Notice Filing Registration

A

Some states allow securities to be issued simply with notice where the securities:

  1. Have been filed under the 1933 Act and
  2. The issuer has
    a. Been engaged in business in the US for some period of time, and
    b. A certain net worth
48
Q

Securities Regulation

State Securities Regulations (Blue Sky Laws)
Qualification Registration

A

Some states require the issuer to provide comprehensive information, similar to the requirements under the 1933 Act, to the state for review

49
Q

Securities Regulation

Listing Standards

A

The major securities exchanges have rules that companies must comply with in order for their shares to be listed and to continue being listed on the exchange

Common Listing Standards

  1. Corporate Characteristics
  2. Share Price
  3. Board Composition
  4. Shareholder Protections
  5. Etc.

Business Associations - Fall 2022 (Dexter) (13 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions