CH39: Federal Securities Acts

LO1: Liabilities and Equity

• What is the difference between liabilities and equity on the balance sheet?

LO2: "Security" Defined

• What is a "security"?

• What are the different types of securities?

LO3: Securities Regulation

• How are securities regulated in the United States?

Introduction

• After market crash of 1929, Congress passed Securities Act of 1933 and Securities Exchange Act of 1934

  • These acts regulate the original issue of securities and subsequent trading of securities in secondary markets, respectively

  • These acts require companies to provide investors with accurate information about their finances and punish fraudulent and deceptive activities in the issuance and sales of securities

Securities Act of 1933

• Requires securities to be registered prior to being offered for sale for the first time in interstate commerce

  • There are exceptions

  • Securities (broad) : range of instruments such as stocks, bonds, debentures, evidence of indebtedness, voting trust certificates, investment contracts, and fractional undivided interests in oil, gas, or mineral rights

  • In SEC v. W. J. Howey Co

    • Supreme Court held that an investment contract constitutes a security under the act

    • Contract under the Howey test is any transaction in which a person

      • invests

      • in a common enterprise

      • reasonably expecting profits that are

      • derived primarily or substantially from the managerial or entrepreneurial efforts of others

• Registration

  • Before any new security can be offered to public through mail or any interstate commerce facility (stock exchange/internet), issuer must file a registration statement with the Securities and Exchange Commission (SEC)

  • Registration statement must be written in plain language and include all of the following:

    • a description of the significant provisions of the security offered for sale that includes the relationship between the security and other capital securities of the company;

    • a description of the company’s properties and business;

    • a description of the company’s management that includes information on the management;s security holdings, compensation, and benefits;

    • a financial statement certified by an independent public accounting firm;

    • and a description of pending lawsuits involving the company

  • Prefiling period : before filing for registration with SEC, company must avoid publicity about the new security and may not sell or offer to sell the security to anyone

  • Waiting period : After filing the registration and awaiting approval, still can’t sell the security but can start to offer security for sale through limited advertisements in ads stating where investors can request (tombstone ads)

    • Company may make a preliminary prospectus to investors that does not include the price of the security available

  • Post-effective period: Once SEC declares the registration effective and prospective buyers are given a final prospectus, company can finally offer and sell the new security

• Securities Exempt from Registration

  • Securities Act of 1933 exempts the following securities from registration

    • all bank securities sold prior to July 27, 1933;

    • commercial paper (checks, drafts, notes, and certificates of deposit) with a maturity date of not more than nine months;

    • government-issued securities;

    • securities issued by nonprofit religious, charitable, educational, benevolent, or fraternal organizations;

    • securities issued by a bank or savings and loan;

    • securities issued by common carriers regulated by the Interstate Commerce Commission;

    • an insurance policy or an annuity contract

Sanctions Under the Securities Act of 1933

• Section 12(a)(2) prohibits misstatements or omissions of material fact in any written or oral communication in connection with the general distribution of any security by an issuer

Securities Exchange Act of 1934

Sarbanes-Oxley Act of 2002

Securities Regulation by the States