Securities Regulations

Question 1

What are the two types of securities?

Answer 1

• New securities (IPO, new securities)

- buy/sell on stock exchange

Question 2

Are securities governed by the federal or state law?

Answer 2

Regulated, but we only discuss the federal level (state law varies by state)

Question 3

What is the definition of a security?

Answer 3

Includes any note, stock, bond, pre-organization subscription, or investment contract

Question 4

What is the story of Howey and the pig/cow of real estate?

Answer 4

Howey sold you an orchard and leased it back, said he would only pay you if there was a good harvest. There was a bad harvest and he didn’t pay.
Howey made a pig look like a cow; he sold you a security, not real estate.
Since it’s a security, you get a recission.

Question 5

What do you have to disclose when you register?

Answer 5

All accurate material information, describe company

Question 6

What is integrated disclosure?

Answer 6

Permits simplified filings and shelf registration (gives opportunity to sell at different times)

Question 7

When can you make sales of securities?

Answer 7

Before registration - can’t make offers or sales
After reg, before effective - advertise, no sales
After effective - Make sales

Question 8

What are types of exempt securities and why?

Answer 8

• Short term commercial paper, municipal bonds, insurance policies, annuity contracts.
  Why? Because they’re regulated in other ways

Question 9

What is Rule 147?

Answer 9

If 80% business is in state and none outside, don’t need to register in other states

Question 10

What defines an accredited investor?

Answer 10

Wealthy (re unregulated.

Question 11

What are key factors for exempt transactions (issuers)?

Answer 11

• no general advertising
• amount of securities - the higher the more likely that registration is necessary
• number of investors - key numbers are 15 and 35

Question 12

What is Country-wide?

Answer 12

A non-bank bank that sold mortgages and it was a scam

Question 13

What are exempt transactions for non-issuers?

Answer 13

Resale by persons other than issuers that are exempt.

Question 14

What is the liability for unregistered sales?

Answer 14

No defenses, but defendants OTHER than the issuer company can use the defense of due diligence “I did my best”

Question 15

What is the Anti-fraud Provision for securities?

Answer 15

Any time a security is sold, seller must be honest to the buyer and disclose information independent of registration.

Question 16

Do exempt securities have unrestricted resales?

Answer 16

YES, but only IN STATE

Question 17

Do exempt transactions have unrestricted resales?

Answer 17

NO, THEY ARE RESTRICTED

Question 18

What must registered securities do?

Answer 18

• They must register and periodically report
• Must comply with SOX
• Must comply with anti-fraud provisions (federal law)

Question 19

What is insider trading?

Answer 19

Can’t buy/sellf securities when you have material, undisclosed information (doesn’t matter if you’re an “insider” or related party

Question 20

What are short swing profits? How do you avoid them?

Answer 20

• Imposes liability on certain insiders owning more than 10% of stock for all profits made on sales and purchases within six months of each other, with any recovery going to the issuer.
• To avoid, must liquidate on a regular basis, independent of good/bad news.
• Imposes liabilities on owners who sell stock based on info they know

Question 21

What is a proxy?

Answer 21

Authorizing someone to vote your stock, but you must tell why

Question 22

What is a tender offer?

Answer 22

A general invitation to shareholders to purchase their shares at a specific price for a specific time. This is material information and must be disclosed

Question 23

What is the Foreign Corrupt Practices Act?

Answer 23

prohibits making payments to foreign officials to obtain business.