© 2004 West Legal Studies in Business, a Division of Thomson Learning

19.1

Chapter 19Chapter 19

Securities RegulationSecurities Regulation

19.2

Federal Securities LawsFederal Securities Laws

The Securities Act of 1933The Securities Act of 1933

The Securities Exchange Act of 1934 The Securities Exchange Act of 1934

The Public Utility Holding Company The Public Utility Holding Company Act of 1935 Act of 1935

The Trust Indenture Act of 1939 The Trust Indenture Act of 1939

The Investment Company Act of The Investment Company Act of 1940 1940

The Investment Advisers Act of The Investment Advisers Act of 19401940

19.3

Federal Securities LawsFederal Securities Laws

Williams Act of 1968 Williams Act of 1968

Securities Investor Protection Act Securities Investor Protection Act of 1970 of 1970

Foreign Corrupt Practices Act of Foreign Corrupt Practices Act of 1977 1977

Insider Trading Sanctions Act of Insider Trading Sanctions Act of 19841984

The Private Securities Litigation The Private Securities Litigation Reform Act of 1995 Reform Act of 1995

Sarbanes-0xley Act of 2002 Sarbanes-0xley Act of 2002

19.4

Definition of a SecurityDefinition of a Security

Definition set forth in the Definition set forth in the Securities Act of 1933Securities Act of 1933

Substance, not formSubstance, not form

Howey Case definitionHowey Case definition

Changing philosophy Changing philosophy regarding securities regarding securities protectionprotection

19.5

Process of Process of Registering SecuritiesRegistering SecuritiesRegistration statementRegistration statement

ProspectusProspectus

Prefiling periodPrefiling period

Waiting periodWaiting period

Tombstone adTombstone ad

Red herring prospectusRed herring prospectus

Posteffective periodPosteffective period

Shelf registrationShelf registration

19.6

Exemptions from Exemptions from the Securities Actthe Securities Act

Two typesTwo types

Exempt securitiesExempt securities

Exempt transactionExempt transaction

Exemption tradeoffsExemption tradeoffs

Costly to businessesCostly to businesses

Lower investor protectionLower investor protection

19.7

Exempt Transactions Exempt Transactions Under the Securities ActUnder the Securities ActSecondary tradingSecondary trading

Private placementPrivate placement

Intrastate offeringsIntrastate offerings

Regulation ARegulation A

Regulation DRegulation D

Rules 501 through 506Rules 501 through 506

Section 4(6)Section 4(6)

19.8

Exempt Securities Under Exempt Securities Under the Securities Actthe Securities Act

Those issued/guaranteed by Those issued/guaranteed by federal, state, or municipal federal, state, or municipal governmentsgovernments

Commercial paperCommercial paper

Bank, religious/charitable Bank, religious/charitable organizations, savings and loan organizations, savings and loan securitiessecurities

Bankruptcy certificatesBankruptcy certificates

Annuity contractsAnnuity contracts

Insurance policiesInsurance policies

19.9

Civil Liability UnderCivil Liability Underthe Securities Actthe Securities Act

Section 11 claimsSection 11 claims

Section 11 defendantsSection 11 defendants

Extent of liability and recent Extent of liability and recent changeschanges

Defenses to Section 11Defenses to Section 11

Due diligence, immateriality, Due diligence, immateriality, purchaser knowledge, no purchaser knowledge, no reliance, statute of limitation, reliance, statute of limitation, and other causes of damageand other causes of damage

19.10

Purposes of the Purposes of the SEA of 1934SEA of 1934

Regulate securities marketsRegulate securities markets

Regulate securities traded in Regulate securities traded in those marketsthose markets

Register and regulate those Register and regulate those who trade in securities marketswho trade in securities markets

Regulate publicly held Regulate publicly held companiescompanies

Require public disclosure Require public disclosure

19.11

Main Provisions Main Provisions of the SEA of 1934of the SEA of 1934

Creation of the SECCreation of the SEC

Registration requirementsRegistration requirements

Reporting requirementsReporting requirements

Proxy solicitation rulesProxy solicitation rules

Regulation of credit in marketsRegulation of credit in markets

Antifraud provisionsAntifraud provisions

Insider trading infoInsider trading info

Tender offer limitsTender offer limits

19.12

SEA Registration SEA Registration Requirements Requirements

Securities registrationSecurities registration

Reporting requirementsReporting requirements

10-K: annual report of 10-K: annual report of operations, must be audited by operations, must be audited by independent auditorsindependent auditors

10-Q: quarterly, unaudited 10-Q: quarterly, unaudited report of operationsreport of operations

8-K: current report8-K: current report

19.13

Short-Swing ProfitsShort-Swing Profits

Insiders (officers, directors, Insiders (officers, directors, major stockholders)major stockholders)

Section 16(b)Section 16(b)

Insider reportsInsider reports

ExceptionsExceptions

Straw people Straw people

19.14

Section 10(b) and Section 10(b) and Rule 10b-5Rule 10b-5

Aimed at preventing fraud in Aimed at preventing fraud in securities tradingsecurities trading

Can stop profit taking by Can stop profit taking by insiders who have inside insiders who have inside informationinformation

Rule 10b-5Rule 10b-5

Applies to all securitiesApplies to all securities

Makes illegal any act or untrue Makes illegal any act or untrue statement to defraudstatement to defraud

19.15

Insider TradingInsider TradingSanctions ActSanctions Act

Civil penaltiesCivil penalties

Triple damages Triple damages

Criminal penaltiesCriminal penalties

Stock optionsStock options

Aiders and abettorsAiders and abettors

Statute of limitationsStatute of limitations

No definitionNo definition

19.16

Takeover Bids Takeover Bids (Tender Offers)(Tender Offers)

DefinitionsDefinitions

When someone offers to buy stock at When someone offers to buy stock at a set pricea set price

Federal regulationFederal regulation

Purpose of regulating tender Purpose of regulating tender offersoffers

To prevent golden parachutesTo prevent golden parachutes

To help target shareholders get To help target shareholders get facts from both sidesfacts from both sides

MisstatementsMisstatements

19.17

Foreign CorruptForeign CorruptPractices ActPractices Act

Internal reportingInternal reporting

Section 102Section 102

Section 103Section 103

Section 104Section 104

PenaltiesPenalties

Federal felonies for convictionsFederal felonies for convictions

19.18

State Securities State Securities Regulation Regulation

Individual states have police Individual states have police power to regulate securitiespower to regulate securities

Blue-sky lawsBlue-sky laws

State regulation unevenState regulation uneven

Sarbanes-Oxley ActSarbanes-Oxley Act

19.19

Recap – Terms to KnowRecap – Terms to Know

Securities Act of 1933Securities Act of 1933

Securities Exchange Act of 1934Securities Exchange Act of 1934

Registration statementRegistration statement

ProspectusProspectus

Prefilling, waiting, and posteffective Prefilling, waiting, and posteffective periodsperiods

Exemptions and exempt transactionsExemptions and exempt transactions

Securities and Exchange CommissionSecurities and Exchange Commission

Short-swing profitsShort-swing profits