Securities Regulation + Insider Trading

Securities

A way for companies to raise money, including stocks, corporate bonds, and investment contracts.

Investment contracts

Involves an investment of money in a common enterprise with the expectation of future profits from the efforts of others.

Securities Exchange Act of 1933 ('33 Act)

Regulates the issuance of securities, governs IPOs, and aims at fraud prevention.

Steps of an IPO

1. banks underwrite IPO

2. registration with SEC

3. sales effort

4. going effective date

'33 Act Liability - Fraud in connection with sale

• when seller of security makes a misstatement or omission in connection w sale of a security

'33 Act Liability - Fraud in registration statement of prospectus

• Any misstatement or omission in registration Statement or Prospectus 

• Purchaser of security can recover against anyone who signed the document

Securities Exchange Act of 1934 ('34 Act)

Regulates ongoing issuers of securities, requires regular filings like Form 10-K, and enforces the Fair Disclosure Rule.

Fair disclosure rule

requires companies make material information — good and bad — available to everyone at the same time

‘34 Act Liability - Section 18

Everything in ‘34 Act filings must be true and valid. Civil/criminal liability can result if 

1. Company makes false/misleading statements in filings 

2. Somone relies on those statements 

3. The price was affected by the fraudulent filing 

‘34 Act Liability - Section 10b and Rule 10b-5

• Antifraud provisions 

• May not make public fraudulent statement in connection w purchase/sale of any security

Insider Trading

Involves the purchase or sale of securities based on material nonpublic information, with different theories like classic, tipper/tippee, and misappropriation insider trading.

Classic insider trading

When a corporate insider trades on material nonpublic information (MNPI) 

Tipper/Tippee Insider Trading 

When an insider (tipper) gives information to a 3^rd party (tippee) 

Misappropriation Insider Trading 

When someone trades on MNPI misappropriated from someone to whom the trader owes a fiduciary duty (i.e. attorney trading on client’s info)