Legal Environment of Business: INVESTOR PROTECTION

Securities Act of 1933

Federal statute regulating the initial issuance of securities to protect investors from deceptive, manipulative, and fraudulent practices during public offerings and requiring full disclosure of material information.

Security (Howey Test)

A financial instrument qualifies as a security when an investment of money in a common enterprise is made with a reasonable expectation of profits derived primarily from the efforts of others.

Common Enterprise

A pooling of investor funds in which financial returns are interdependent among participants, central to the Howey determination.

Material Information

Any fact that a reasonable investor would consider important in making an investment decision and whose omission or misstatement constitutes securities fraud.

Securities Exchange Act of 1934

Federal statute regulating secondary securities markets, mandating periodic disclosure by public companies, and prohibiting fraud, manipulation, and insider trading.

Securities and Exchange Commission (SEC)

Independent federal regulatory agency created by the 1934 Act to enforce federal securities laws, oversee stock markets, require corporate disclosures, and combat securities fraud.

Section 10(b)

Broad anti-fraud provision of the 1934 Act prohibiting manipulative or deceptive devices in connection with the purchase or sale of securities.

SEC Rule 10b-5

Anti-fraud rule prohibiting untrue statements of material fact, omissions of material fact, schemes to defraud, and manipulative practices in securities transactions.

Insider Trading

Trading in securities based on material, nonpublic information obtained through a breach of fiduciary duty or other duty of trust and confidence.

Insider (Traditional Theory)

Corporate officers, directors, employees, or others with regular access to confidential corporate information who owe fiduciary duties to shareholders.

Tipper-Tippee Liability

Doctrine imposing liability when a tipper breaches a fiduciary duty by disclosing material nonpublic information and the tippee knows or should know of the breach and trades on the information.

Misappropriation Theory

Insider trading liability for individuals who misappropriate confidential information from an employer, client, or source and use it in securities trading.

Fiduciary Duty

Duty of loyalty and confidentiality owed by insiders or trusted persons whose breach triggers insider trading liability.

Sarbanes-Oxley Act (SOX)

Corporate reform statute enhancing accountability through CEO/CFO certification, internal controls, auditor independence, and criminal penalties for fraudulent financial reporting.

SOX CEO/CFO Certification

Requirement that senior executives personally attest to the accuracy of financial statements, eliminating ignorance as a defense and creating criminal liability for misrepresentation.

SOX Internal Controls Requirement

Mandate that public companies establish, document, and test reliable internal financial control systems subject to annual auditor assessment.

SOX Small Firm Exemption

Reduced auditing requirements for companies with market capitalization below $75 million to limit compliance burden.

Ponzi Scheme

Fraudulent investment scheme paying returns to earlier investors from new investor funds rather than legitimate profits, inevitably collapsing when recruitment slows.

Offshore Investment Fraud

Fraud involving foreign entities used to evade U.S. securities regulations, often involving fictitious investments or exaggerated returns.

“Risk-Free” Investment Fraud

Scam promising guaranteed, above-market returns without risk, commonly used in high-yield investment fraud schemes.

Material Misrepresentation

False or misleading statement or omission of material fact used to induce investment decisions in violation of securities laws.