law of comm transactions exam 4

securities

includes any instrument evidencing corporate ownership (stock) or debts (bonds)

securities must be in…

writing

Securities Act of 1933

governs initial sales of stock by businesses by requiring that investors receive significant information concerning securities offered for public sale

what is an example of selling public stock?

the stock exchange

prospectus

a disclosure document that describes the security being sold, the financial operations of the issuing corporation, and the investment risk attaching to the security

what is included in the financial operations in a prospectus?

how old the company is, what products you’re selling, the corporation’s properties, and all financial information certified by an independent accountant

issuing corporation

the corporation selling the stock

what can qualify a corporation as an investment risk?

bankruptcy or pending lawsuits

bankruptcy

a legal proceeding involving a person or business that is unable to repay their outstanding debts

what federal organization is does the Securities Act of 1933 require you to register with?

Securities Exchange Commission (SEC)

How do you join the SEC?

you must file a registration statement

what is in a registration statement?

securities being sold

corporations background

corporation’s properties

all needs to be certified by an independent accountant

needs to be filed with the SEC

what is the difference between a prospectus and a registration statement?

a prospectus is given to investors, and a registration statement is given to the government

where are registration statements filed in the SEC?

the electronic data gathering, analysis, and retrieval system (EDGAR)

initial public offering

the process by which a corporation can sell its stock to the general public

penalties for violating the Securities Act of 1933

criminal: prosecuted by the US DOJ- prison for 5 years and/or fined up to $10,000

civil lawsuits: SEC can sue you- you have to refund your profits, or they get an injunction or investors can sue you

injunction

an order by a judge that restrains a person from containing a certain action

Securities Exchange Act of 1934

provides for continuous periodic disclosures by publicly held corporations to enable the Securities Exchange Commission (SEC) to regulate subsequent trading

SEC Rule 10b-5

prohibits the commission of fraud in connection with the purchase or sale of any security and information that is considered material must not be misrepresented or omitted

material information

info that is essential in deciding whether to engage in a particular transaction

what are some examples of material information?

dividend changes, potential litigation, and a change in the corporation’s financial condition (i.e. bankruptcy)

dividend

the sum of money paid regularly by a company to its shareholders out of its profits

insider trading

the purchase or sale of securities on the basis of information that has not been made available to the public

insider

someone that has access to confidential information and a duty not to disclose that information

example of insiders

corporate shareholders, corporate directors, corporate officers, attorneys, and accountants

why does the SEC restrict insider trading?

it gives an unfair advantage

violations for violating the Securities Exchange Act of 1934

criminal- imprisoned up to 20 years and/or fined up to $5 million dollars

civil lawsuits- SEC can sue you or investor can sue you

negotiable instruments

a signed writing that contains an unconditional promise or order to pay an exact amount, either on demand or at a specific future time

negotiable instruments can substitute…

cash

what is an example of a negotiable instrument?

a check

Uniform Commercial Code (UCC)

the body of laws governing commercial transactions in the US

Forms allowed of negotiable instruments

paper or electronic

examples of paper negotiable instruments

physical check

examples of electronic negotiable instruments

using info from your checking account

parties involved in negotiable instruments

drawer, drawee, and payee

drawer

writer of the negotiable instrument. The person who is paying

drawee

where the money is being drawn from. The bank is always the drawee

payee

the person who is getting paid

unconditional

that payment cannot be conditioned on the occurrence or nonoccurrence of some event. If there is a condition is it invalid

promissory note

a written promise made by one person to pay another specified sum

what is an example of a promissory note?

a mortgage

order to pay

directs a third party to pay the instrument as drawn

who is the third party?

the drawee

what does as drawn mean?

the amount that is on the written section of the check will be taken out

demand instrument

any instrument that does not state any time for payment (i.e. a check)

postdating

occurs when a party puts a date on an instrument that is after the actual date that the check is written

false pretense

writing a bad check

postdating a check when you won’t have money in your account