Idea Transcript
Chapter 40: Securities Regulation The Securities Act of 1933 DEFINITION OF A SECURITY Security includes any note, stock, bond, preorganization subscription, and investment contract Investment Contract any investment of money or property made in expectation of receiving a financial return solely from the efforts of others REGISTRATION OF SECURITIES Disclosure Requirements disclosure of accurate material information required in all public offerings of nonexempt securities unless offering is an exempt transaction Integrated Disclosure and Shelf Registrations permitted for certain qualified issuers EXEMPT SECURITIES Definition securities not subject to the registration requirements of the 1933 Act Types exempt securities include short-term commercial paper, municipal bonds, and certain insurance policies and annuity contracts EXEMPT TRANSACTIONS FOR ISSUERS Definition issuance of securities not subject to the registration requirements of the 1933 Act Types exempt transactions include limited offers under Regulation D and Section 4(6), Regulation A, and intrastate issues EXEMPT TRANSACTIONS FOR NON-ISSUERS Definition resales by persons other than the issuer that are exempted from the registration requirements of the 1933 Act Types exempt transactions include Rule 144 and Regulation A LIABILITY Unregistered Sales Section 12(a)(1) imposes absolute civil liability; there are no defenses False Registration Statements Section 11 imposes liability on the issuer, all persons who signed the statement, every director or partner, experts who prepared or certified any part of the statement, and all underwriters; defendants other than issuer may assert the defense of due diligence Antifraud Provisions Section 12(a)(2) imposes liability upon the seller to the immediate purchaser, provided the purchaser did not know of the untruth or omission; but the seller is not liable if he did not know, and in the exercise of reasonable care could not have known, of the untrue statement or omission. Section 17(a) broadly prohibits fraud in the sale of securities Criminal Sanctions willful violations are subject to a fine of not more than $10,000 and/or imprisonment of not more than five years The Securities Exchange Act of 1934 DISCLOSURE Registration and Periodic Reporting Requirements apply to all regulated, publicly held companies and include one-time registration as well as annual, quarterly, and monthly reports Proxy Solicitations • Definition of a Proxy a signed writing by a shareholder authorizing a named person to vote her stock at a specified meeting of shareholders • Proxy Statements proxy disclosure statements are required when proxies are solicited or an issuer submits a matter to a shareholder vote Tender Offers • Definition of a Tender Offer a general invitation to shareholders to purchase their shares at a specified price for a specified time • Disclosure Requirements a statement disclosing specified information must be filed with the Securities and Exchange Commission and furnished to each offeree Foreign Corrupt Practices Act imposes internal control requirements on companies with securities registered
under the 1934 Act LIABILITY Misleading Statements in Reports Section 18 imposes civil liability for any false or misleading statement made in a registration or report filed with the Securities and Exchange Commission Short-Swing Profits Section 16(b) imposes liability on certain insiders (directors, officers, and shareholders owning more than 10 percent of the stock of a corporation) for all profits made on sales and purchases within six months of each other, with any recovery going to the issuer Antifraud Provision Rule 10b–5 makes it unlawful to (1) employ any device, scheme, or artifice to defraud; (2) make any untrue statement of a material fact; (3) omit to state a material fact; or (4) engage in any act that operates as a fraud • Requisites of Rule 10b–5 recovery requires (1) a misstatement or omission, (2) materiality, (3) scienter (intentional and knowing conduct), (4) reliance, (5) connection with the purchase or sale of a security, and economic loss • Insider Trading “insiders” are liable under Rule 10b–5 for failing to disclose material, nonpublic information before trading on the information Express Insider Trading Liability is imposed on any person who sells or buys a security while in possession of inside information Civil Penalties for Inside Trading may be imposed on inside traders in an amount up to three times the gains they made or losses they avoided Misleading Proxy Statement any person who distributes a false or misleading proxy statement is liable to injured investors Fraudulent Tender Offers Section 14(e) imposes civil liability for false and material statements or omissions or fraudulent, deceptive, or manipulative practices in connection with any tender offer Antibribery Provision of FCPA prohibited bribery can result in fines and imprisonment Criminal Sanctions individuals who willfully violate the 1934 Act are subject to a fine of not more than $5 million and/or imprisonment of not more than twenty years