Securities Laws, SEC Regulations, and Insider Trading Fundamentals

Purpose of securities laws

Protect investors, require disclosure, and prevent fraud

Blue Sky Laws

State-level securities laws regulating local offerings

Role of the SEC

Enforces securities laws, writes regulations, investigates violations

Reporting company

A company required to file periodic reports with the SEC

When a company becomes a reporting company

Public exchange listing, registered offering, or $10M+ assets & 500+ unaccredited shareholders

Form 10-K

Annual SEC report

Form 10-Q

Quarterly SEC report

Form 8-K

Current event report for major company changes such as CEO departure or mergers

NYSE

Major global stock exchange for large companies

NASDAQ

Large electronic stock market with high trading volume

Initial Public Offering (IPO)

First sale of stock to the public by a company

Section 5 of the 1933 Act

Requires registration of securities before an IPO

S-1 registration statement

Document filed with the SEC containing offering details

Prospectus

Summary document given to investors describing the offering

Direct Public Offering (DPO)

Sale of securities directly to the public without an underwriter

Why companies use DPOs

Lower cost and sometimes exempt from SEC registration

Emerging Growth Company (EGC)

Company using reduced IPO requirements under the JOBS Act

Private placement

Sale of securities to private or sophisticated investors

Rule 505

Private offerings up to $5 million in 12 months

Rule 504

Private offerings up to $1 million in 12 months

Section 4(6) exemption

Exempts offerings under $5 million sold only to accredited investors

Intrastate offering

Securities sold only within one state

Exempt securities

Securities that are automatically exempt from SEC registration

Government securities exempt?

Yes, U.S. government securities are exempt

Short-term notes exempt?

Yes, notes under 9 months are exempt

Nonprofit securities exempt?

Yes

Stock splits and dividends exempt?

Yes

Accredited investor

Investor meeting financial/asset requirements for private offerings

Accredited investor net worth test

Net worth of $1 million or more

Accredited investor income test

Annual income of $200,000 or more for the last 3 years

Accredited investor entity test

Businesses with more than $5 million in assets

Section 11 liability

Liability for material misstatements or omissions in a registration statement

Who can be sued under Section 11?

Issuer, officers, directors, accountants, and signers of the filing

Section 12 liability

Liability for selling securities with invalid exemptions or false statements

Investor remedies under Section 12

Rescission or damages

Consent decree

Settlement with the SEC with no admission of guilt

Injunction

Court order stopping illegal activity

Disgorgement

Returning profits earned illegally

Who brings criminal securities cases?

The Department of Justice (DOJ)

Section 24 (1933 Act)

Imposes criminal liability for willful violations of the 1933 Act

Insider Trading Sanctions Act

Allows the SEC to impose civil penalties up to 3 times the illegal profits

Section 32 (1934 Act)

Imposes criminal penalties for willful violations of the 1934 Act

Insider trading

Trading based on material nonpublic information

Is all insider trading illegal?

No—legal if based on public information and no short-swing profits

Short-swing profits

Profits made by insiders who buy and sell stock within 6 months; illegal

Who is an insider?

Officers, directors, employees, lawyers, accountants, consultants

Tipper

Person who discloses material nonpublic information

Tippee

Person who receives material nonpublic information

When a tippee is liable

When they know the info is nonpublic and trade on it

When a tipper is liable

When the tippee trades and profits

Misappropriation theory

Outsiders commit fraud if they steal confidential info and trade on it

Rule 10b5-1

Prohibits trading based on material nonpublic info obtained through a breach of trust

Aider or abettor

Person who helps commit securities fraud

Can investors sue aiders/abettors?

No—only criminal liability applies

STOCK Act

Bans government officials from trading on nonpublic government information

What is a registration statement?

Document containing detailed offering information filed with the SEC

Exempt resales

Resales by non-issuers, non-dealers, and non-underwriters

Purpose of the 1933 Act

Regulates issuance of securities

Purpose of the 1934 Act

Regulates trading of securities after issuance

Primary enforcer of securities laws

The SEC