Business Law and the Regulation of Business Chapter
Business Law and the Regulation of Business Chapter 40: Securities Regulation By Richard A. Mann & Barry S. Roberts
Topics Covered in this Chapter I. The Securities Act of 1933 A. B. C. D. E. F. Definition of a Security Registration of Securities Exempt Transactions for Issuers Exempt Transactions for Non-Issuers Liability II. The Securities Exchange Act of 1934 A. Disclosure B. Liability
Securities Act of 1933 Security includes any note, stock, bond, preorganization subscription, and investment contract. n Investment Contract - any investment of money or property made in expectation of receiving a financial return solely from the efforts of others. n
Registration of Securities Disclosure Requirements disclosure of accurate material information required in all public offerings of nonexempt securities unless offering is an exempt transaction. n Integrated Disclosure and Shelf Registrations - permitted for certain qualified issuers. n
Exempt Securities Definition securities not subject to the registration requirements of the 1933 Act. n Types - exempt securities include short term commercial paper, municipal bonds, and certain insurance policies and annuity contracts. n
Exempt Transactions for Issuers Definition issuance of securities not subject to the registration requirements of the 1933 Act. n Types - exempt transactions include limited offers under Regulation D and Section 4(6), Regulation A, and intrastate issues. n
Exempt Transactions for Issuers Under the 1933 Act
Exempt Transactions for Non issuers Definition resales by persons other than the issuer that are exempted from the registration requirements of the 1933 Act. n Types - exempt transactions include Rule 144, Regulation A, and Rule 144 A. n
Permissible Sales Activities Oral offers No sales Notice of public offering Certain written offers • tombstone ads • preliminary prospectus Written offers with prospectus Sales No sales Registration Filed Registration Effective
Registration and Exemptions Under the 1933 Act Security Exempt security Short-term commercial paper Other types Unrestricted resales Nonexempt security and transaction Register Unrestricted resales Exempt transaction Regulation A Intrastate transaction Unrestricted resales * Limited offers Restricted resales** *Under translate exemption, resales to nonresidents may only be made nine months after the last sale in the initial issuance. **Exempt under Rule 504.
Liability n n Unregistered Sales Section 12(a)(1) imposes absolute civil liability as 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.
Liability n n Antifraud Provisions - 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 up to $10, 000 and/or imprisonment of not more than five years.
Registration and Liability Provisions of the 1933 Act No Security? Yes Antifraud provision (Sect. 17(a)) applies* Exempt security? No Yes Exempt transaction? Yes No registration required Yes No Registration required False registration (Sect. 11) and antifraud provision (Sect. 12(2)) apply Unregistered sales (Sect. 12 (1)) applies Yes Security registered? No *Section 12(2) may apply to some of these issuance's.
Securities Exchange Act of 1934 n Registration and Periodic Reporting Requirements apply to all regulated publicly held companies and include one time registration as well as annual, quarterly, and monthly reports.
Applicability of the 1934 Act Antifraud provision of Rule 10 b-5 Antifraud provision for tender offers Antibribery provisions Issuers with assets over $5 million and a class of equity securities with 500 shareholders or more Registration Periodic reporting Proxy solicitations Issuers listed on a national stock exchange “Private” issuers -- all other issuers Tender offers Accounting requirements Short-swing profits Liability for misleading reports
Disclosure under the 1934 Act
Disclosure under the 1934 Act (cont. )
Proxy Solicitations Definition of a Proxy - a signed writing by a shareholder authorizing a named person to vote her stock at a specified meeting of shareholders. n Proxy Statements - proxy disclosure statements are required when proxies are solicited or an issuer submits a matter to a shareholder vote. n
Tender Offers A general invitation to shareholders to purchase their shares at a specified price for a specified time. n Disclosure Requirements - a statement disclosing specified information must be filed with the SEC and furnished to each offeree. n
Liability n n Misleading Statements in Reports Section 18 imposes civil liability for any false or misleading statement made in a registration or report filed with the SEC. 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 recovery going to the issuer.
Antifraud Provision n Rule 10 b– 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 10 b– 5 - recovery requires (1) a misstatement or omission, (2) materiality, (3) scienter (intentional and knowing conduct), (4) reliance, and (5) connection with the purchase or sale of a security. Insider Trading - “insiders” are liable under Rule 10 b– 5 for failing to disclose material, nonpublic information before trading on the information.
Insider Trading Express Insider Trading Liability - is imposed on any person who sells or buys a security while in possession of inside information. n Civil Penalties for Inside Trading may be imposed on inside traders in an amount up to three times the gains they made or losses they avoided. n
Parties Forbidden to Trade on Inside Information (1) Insider has breached fiduciary duty by disclosing information to tippee Underwriters Accountants Tippees Officers Directors Employees Agents Tippees Lawyers Consultants (2) Tippee knows or should know that there has been such a breach
Misleading Statements Misleading Proxy Statements - any person who distributes a false or misleading proxy statement is liable to injured investors. n 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. n
Sanctions Antibribery Provision of FCPA prohibited bribery can result in fines and imprisonment. n Criminal Sanctions - individuals who willfully violate the 1934 Act are subject to a fine of not more than $1 million and/or imprisonment of not more than ten years. n
Civil Liability under the 1933 and 1934 Acts Provision Conduct Section 12(1) Unregistered 1933 Act sale or sale without prospectus Culpability Standard Reliance Required Type of Liability Plaintiffs Defendants Purchasers from a violator Sellers in violation Strict liability No Issuer Directors Signers Underwriters Experts Strict liability No for issuer Negligence for others Express Damages Attorney’s fees Negligence Express Recission Damages Attorney’s fees Section 11 1933 Act Registration Purchasers of statement registered continuing security material misstatement or omission Section 12(2) 1933 Act Material Purchasers Sellers in misstatement from violator violation or omission No Express Remedies Rescission Damages Attorney’s fees
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