Chapter 39 Securities Regulations

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 of accurate material information required in all public offerings of nonexempt securities unless offering is an exempt transaction

emerging growth company (EGC)

have reduced disclosure requirements and expanded permissible communications

Exempt securities

securities not subject to the registration requirements of the 1933 Act

exempt transactions for issuers

issuance of securities not subject to the registration requirements of the 1933 Act

restricted securities

securities issued under an exempt transaction and subject to resale restrictions

crowdfunding exemption

allows eligible, domestic, nonpublic issuers to raise up to $1.07 million annually by sales of limited amounts of stock to a large number of individuals, whether accredited or not, through brokers or funding portals

Exempt transactions for nonissuers

resales by persons other than the issuer that are exempted from the registration requirements of the 1933 Act

affiliate

one who controls, is controlled by, or is under common control with the issuer

Control

the direct or indirect possession of the power to direct the management and policies of a person through ownership of securities, by contract, or otherwise

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

Material

matters to which a reasonable investor would attach importance in deciding whether to purchase a security

due diligence defense

defense to liability for false registration statements available to defendants who had a reasonable (non-negligent) belief that there were no untrue statements and no material omissions

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

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 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

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 (6) economic loss

scienter

intentional and knowing conduc

Insider trading

“insiders” are liable under Rule 10b-5 for failing to disclose material, nonpublic information before trading on the information

Insiders

directors, officers, employees, and agents of the issuer, as well as those with whom the issuer has entrusted information solely for corporate purposes

Express insider trading liability

is imposed on any person who sells or buys a security while in possession of inside information

Civil monetary penalties for insider 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 civil monetary penalties, 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