B Law Exam 3 Notes Body of law is designed to help people when making investment decisions o SEC was formed Regulate financial markets enforcing laws Administrative agency duties delegated from congress to committee Created by 34 Act Mission is to maintain fair orderly Governed by 5 commissioners president appoints for 5 year term No more than 3 from the same party 5 divisions corporation finance oversees public companies registration of things such as mergers investment management economics and risk analysis enforcement division trading markets EDGAR company filings Securities Act of 1933 o Provides a definition of security then calls for registration of those securities o Security any stake in the ownership or debt of a companyprimarily stocks and bonds To sell must register with SEC File a registration statement and a prospectus with the SEC Registration statement o Part 1 eventually makes its way into prospectus o Part 2 more detailed info about the issuer info the SEC determined SEC needs to know but not necessarily the public o What are managements aims goals How many shares selling What is company doing with money raised Lawsuits Tax status Risks A financial statement signed off by independent auditor o To register security prior to sale must submit prospectus and registration statement to SEC Review process o About 20 days o SEC reviews registration for completeness o Can offer but not sell security during this time o If not approved letter of comment or deficiency o Preliminary prospectus allows you to offer security o If well known seasoned issuer you can file registration and sell on the same day before review process is completed Firm issued at least 1 billion securities in last 3 years 2 Has at least 700 million of outstanding stock in publics hands Exemption acception Some issuers are automatically exempt from registration Charitable non profit education o Exemption Qualifying a self determined if you feel you qualify you can go ahead and sell Regulation 504 o Private non investment company o Only issued up to 1 mil in previous 12 months o No solicitation advertising o Buyers receive restricted security Regulation 505 o Private non investment company o Up to 5 million in 12 month period o Only Up to 35 unaccredited unaccredited individual has a net worth of 1mil not including home or 200 000 of income for previous 2 3 years and reasonable expectation it will continue o No solicitation advertising o Buyer receives restricted security Regulation 506 o Private non investment companies o No dollar amount cap on securities issued o No advertising or solicitation o Buyer gets restricted security o Any accredited o Up to 35 unaccredited But unaccredited MUST be experienced If you purchase a restricted security and you want to sell it must register it unless you can find another exemption that applies o Best bet is rule 144 and rule 144a Both require a holding period have to hold unrestricted security for certain period of time before resell and must make sure there is adequate current public info notify SEC you plan on selling it 144a qualified institutional buyers not individuals 34 Act o created SEC a federal agency and authorizes the SEC to be in charge of exchanges and securities and implement laws 4 Securities Fraud under rule 106 and 105b o Plaintiff must show MATERIAL misrepresentation in connection with the purchase or sale of securities Defendant acted intentionally With intent scienter Misappropriation theory o Wrongfully attain information Plaintiff relied on material misrepresentation Economic loss Causation between 3 4 Exam 3 Review Questions 1 Federal administrative agencies can regulate beyond the powers granted by enabling legislation a False powers are confined to enabling legislation 2 In a general partnership all partners have equal rights in managing the partner a True 3 A LLP allows its partners to avoid personal liability for the malpractice of other partners a True unless you are the persons direct supervisor 5 4 Corporate officers hire the directors and other executive employees a False shareholders vote for directors directors hire executives 5 The Securities Exchange Act of 1934 is a one time disclosure law a False continuous 6 In a general partnership the partners are personally liable for the debts of the partnership a true 7 A LLC can be taxed as a partnership a True IS taxed as partnership unless they choose to be taxed as corporation must have at least 2 members owners to be taxed as corporation b Corporations are taxed twice 8 Insider trading occurs when persons buy or sell securities on the basis of material information that is not available to the public a True 9 Before filing the registration statement and issuer cannot sell or offer to sell the securities a True b Exceptions for well seasoned issuer 10 Shareholders are personally liable for the debts of a corporation a False i Shareholders are shielded from liability other than the amount of their investment Piercing corporate veil 11 Administrative agencies cannot make legislative rules or regulations that are as legally binding as laws that the congress passes a False admin agencies have just as much authority 12 a franchise is a contractual agreement 6 a true having a franchise is having a contract with the franchisor 13 The articles of incorporation serve as a primary source of authority for a corporation a True 14 Rulemaking is a major function of congress not admin agencies a False vice versa 15 Federal aviation administration uses notice and comment rule making The final rule in such a proceeding has binding legal effect a Unless a court overturns it i Congress does not have to approve court does not have to affirm it 16 Al and peg do business as ferguson partners In most states for purposes of suing and being sued they would be treated as a An entity names would not be on there b For tax purposes aggregate of the individual person 17 Gem saloon llc is a LLC It has 4 members like any other llc with 2 or more members unless the llc selects otherwise will be taxed as a A partnership 18 Glen and dot are directors and shareholders of somethingtocuddle inc dots written authorization to glen to vote dot s share at a shareholders meeting is a A proxy 19 After notice and comment rulemaking the US bureau of land management BLM issues new rule and applies it to clearcut timber company Clearcut appeals the application to federal court The court will most likely defer to blm s