Investor Protection Chapter 28 I The Securities and Exchange Commission SEC a An independent regulatory agency created via the Securities and Exchange Act of 1934 b Administers the 1934 Act and the Securities Act of 1933 c Basic functions i Interpret federal securities laws and investigate securities law violations ii Issue new rules and amend existing rules iii Oversee the inspection of securities firms brokers investment advisers ratings agencies iv Oversee private regulatory organizations in securities accounting and auditing fields v Coordinate US securities regulation with federal state and foreign authorities d EDGAR free public database containing certain required information about companies II The Securities Act of 1933 a 33 Act is designed to prohibit fraud by requiring disclosure of essential information on the issuance of securities b A security exists in any transaction in which a person invests in a common enterprise reasonably expecting profits derived primarily or substantially from others managerial or entrepreneurial efforts including i Stocks ii Stock options iii Notes or other instruments of indebtedness iv Fractional undivided interest in oil gas or other mineral rights v Investment contracts c Shorthand Definition a security is any stake in the ownership or debt of a company usually stocks or bonds d A security must be registered before it is offered to the public for purchase e Issuer one who creates registers unless exempt and sells a security to finance business operations f Investor one who buys a security g Issuing corporations must file registration statement with SEC and issue all investors with a prospectus h Goal of registration statement to enable prospective investor to make a reasoned decision based on reliable information i Registration statement has two parts i Information that eventually forms the prospectus a disclosure document that describes the security being sold financial operations of issuing company and investment or risk attached to the security ii Information that SEC needs to know including 1 Description of securities offered for sale relationship to issuer s other securities 2 Management s aims and goals 3 Financial statement certified by independent accountant 4 Corporation management including compensation stock options pensions other benefits directors and officers interests if any 5 How corporation intends to use the sale proceeds 6 Any pending lawsuits or special risk factors j Registration statement only becomes effective when reviewed and approved for completeness by SEC i Exceptions for Well Known Seasoned Issuer firm that has issued at least 1 billion in securities in last three years or has at least 700 million of value of outstanding stock in public hands ii WKSI must file registration statement but does not need to wait for SEC review and approval of registration statement before selling securities k Restrictions on issuer activities are in place during each stage of the registration process if an issuer violates a restriction an investor can rescind his contract to buy the security securities i Prefiling Period before the registration statement is filed issuer cannot sell offer to sell securities ii Waiting Period registration statement has been filed and is under review by SEC lasts at least 20 days securities can be offered for sale but not sold iii Posteffective Period SEC has reviewed and approved registration statement issuer can offer and sell securities without restriction l Securities that are exempt from registration requirements though not exempt from antifraud provisions i Government issued securities ii Bank and financial institution securities iii Short term notes and drafts maturity does not exceed nine months iv Securities of nonprofit educational and charitable organizations v Securities issued by common carriers trucking companies railroads vi An insurance endowment or annuity contract issued by a state regulated insurance company vii Securities issued in a corporate reorganization where one security is exchanged for another or in a bankruptcy proceeding viii Securities issued in stock dividends and stock splits m Transactions exempt from registration requirements i Regulation A Offerings LAW RECENTLY CHANGED ii Regulation D Offerings offers that involve a small amount of money or are not made publicly are exempt includes 1 Rule 504 noninvestment company offerings up to 1 million in a 12 month period a No general solicitation or advertising is used b Buyers receive restricted securities 2 Rule 505 small offerings private noninvestment company offerings up to 5 million in a 12 month period IF a No general solicitation or advertising is used b The SEC is notified of the sales c May sell to accredited investors d There are no more than 35 unaccredited investors 3 Rule 506 Private Placement Exemption private nonpublic and unadvertised offerings in unlimited amounts are subject to the same requirements as Rule 505 except a There is no limit on the amount of the offering AND b The issuer must believe that each unaccredited investor has sufficient knowledge or experience to evaluate the investment n Restricted Security If you buy a security that was exempt from registration you have bought a restricted security o Resales most securities can be resold without re registration i EXCEPTION reselling restricted securities ii To resell a restricted security you must either first register it or find another exemption ex Rules 144 144A 1 Rule 144 a Must have owned security for six months if security exempt under Rule 505 or one year if exempt under 504 or 506 b Must be current public information about the security s owner c Issuer must give notice to the SEC of the resale 2 Rule 144A a Similar requirements to Rule 144 BUT b Only applies to Qualified Institutional Buyers p Violations of the 33 Act include i Intentionally defrauding investors by misrepresenting or omitting facts in a registration statement or prospectus ii Being negligent in not discovering fraud iii Selling securities before the effective date of the registration statement or under an exemption for which the security does not qualify q Violations of 33 Act could subject violators to civil lawsuits by private citizens r SEC is NOT a law enforcement agency but can refer matters to the US DOJ for criminal prosecution otherwise SEC may i Impose civil sanctions ii Request an injunction to prevent further sales of involved securities iii Ask a court to