Investor ProtectionChapter 28I. The Securities and Exchange Commission (SEC)a. An independent regulatory agency created via the Securities and ExchangeAct of 1934b. Administers the 1934 Act, and the Securities Act of 1933c. Basic functions:i. Interpret federal securities laws and investigate securities law violationsii. Issue new rules and amend existing rulesiii. Oversee the inspection of securities firms, brokers, investment advisers & ratings agenciesiv. Oversee private regulatory organizations in securities, accounting and auditing fieldsv. Coordinate US securities regulation with federal, state and foreign authoritiesd. EDGAR: free, public database containing certain required information about companiesII. The Securities Act of 1933a. 33 Act is designed to prohibit fraud by requiring disclosure of essential information on the issuance of securitiesb. A security exists in any transaction in which a person invests in a common enterprise reasonably expecting profits derived primarily orsubstantially from others’ managerial or entrepreneurial efforts; including:i. Stocks ii. Stock optionsiii. Notes, or other instruments of indebtednessiv. Fractional, undivided interest in oil, gas or other mineral rightsv. Investment contractsc. Shorthand Definition: a security is any stake in the ownership or debt of a company, usually stocks or bondsd. A security must be registered before it is offered to the public for purchasee. Issuer: one who creates, registers (unless exempt) and sells a security to finance business operationsf. Investor: one who buys a securityg. 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 informationi. 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 securities2. Management’s aims and goals3. Financial statement certified by independent accountant4. Corporation management, including compensation, stock options, pensions, other benefits, directors and officers’ interests, if any5. How corporation intends to use the sale proceeds6. Any pending lawsuits or special risk factorsj. Registration statement only becomes effective when reviewed and approved for completeness by SECi. 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 handsii. WKSI must file registration statement, but does not need to wait for SEC review and approval of registration statement before selling securitiesk. 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/securitiesi. Prefiling Period: (before the registration statement is filed) issuer cannot sell/offer to sell securitiesii. 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 soldiii. Posteffective Period: (SEC has reviewed and approved registration statement) issuer can offer and sell securities without restrictionl. Securities that are exempt from registration requirements (though not exempt from antifraud provisions): i. Government issued securitiesii. Bank and financial institution securitiesiii. Short term notes and drafts (maturity does not exceed nine months)iv. Securities of nonprofit, educational and charitable organizationsv. Securities issued by common carriers (trucking companies, railroads)vi. An insurance, endowment, or annuity contract issued by a state regulated insurance companyvii. Securities issued in a corporate reorganization, where one security is exchanged for another or in a bankruptcy proceedingviii. Securities issued in stock dividends and stock splitsm. Transactions exempt from registration requirements:i. Regulation A Offerings*****LAW RECENTLY CHANGEDii. Regulation D Offerings: offers that involve a small amount of money or are not made publicly are exempt; includes1. Rule 504: noninvestment company offerings up to $1 million in a 12 month perioda. No general solicitation or advertising is usedb. Buyers receive restricted securities2. Rule 505 (small offerings): private, noninvestment company offerings up to $5 million in a 12 month period, IFa. No general solicitation or advertising is used;b. The SEC is notified of the sales;c. May sell to accredited investorsd. There are no more than 35 unaccredited investors3. Rule 506 Private Placement Exemption: private (nonpublic and unadvertised) offerings in unlimited amounts are subject to the same requirements as Rule 505, excepta. There is no limit on the amount of the offering; ANDb. The issuer must believe that each unaccredited investor has sufficient knowledge or experience to evaluate the investmentn. Restricted Security: If you buy a security that was exempt from registration you have bought a restricted securityo. Resales: most securities can be resold without re-registrationi. EXCEPTION: reselling restricted securitiesii. To resell a restricted security you must either first register it or findanother exemption (ex. Rules 144 & 144A)1. Rule 144a. 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 ownerc. Issuer must give notice to the SEC of the resale2. Rule 144Aa. Similar requirements to Rule 144, BUTb. 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 prospectusii. Being negligent in not discovering fraudiii. Selling securities before the effective date of the registration statement or under an exemption for which the security does not qualifyq. Violations of 33 Act could subject violators to civil lawsuits by private citizensr. SEC is NOT a law enforcement agency, but can refer matters to the US DOJ for criminal prosecution; otherwise, SEC