1 Business Law 4510 Chapter 27 Notes Investor Protection Insider Trading and Corporate Governance I The Securities and Exchange Commission a Securities any documents or records evidencing corporate ownership stock or debts bonds i Heavily regulated after Stock Market Crash of 1929 to provide investors with more info to help them make better buying and selling decisions and to prohibit deceptive unfair and manipulative practices b Major Responsibilities of the SEC i Requires disclosure of facts concerning offerings of securities listed on national securities exchanges and certain securities traded over the counter OTC Investigates securities fraud ii Regulates trade in securities on national and regional securities exchanges and in the OTC markets iii iv Regulates activities of securities brokers dealers and investment advisers and requires their registration v Supervises activities of mutual funds vi Recommend sanctions injunctive remedies and prosecution for those who violate securities laws c The SEC s Expanding Regulatory Powers i Regulatory functions have increased by legislation granting it authority in different areas II Securities Act of 1933 a Also called Truth in Securities bill governs initial sales of stock by businesses i Designed to prohibit various forms of fraud and to stabilize securities industry by requiring that all essential info concerning issuance of securities be made available to investigating public Purpose is to require disclosure b What is a Security 1 i A security generally includes the following 1 Howey test c Registration Statement 1 2 Instruments and interests commonly known as securities such as preferred and common stocks treasury stocks bonds debentures and stock warrants Interests commonly known as securities stock options puts calls and other types of privilege on a security or on right to purchase a security or group of securities in a national security exchange 3 Notes instruments or other evidence of indebtedness including certificates of interest in a profit sharing agreement and certificates of deposit 4 Any fractional undivided interest in oil gas or other mineral rights 5 Investment contracts including interests in limited partnerships and other investment schemes ii Investment contract any transaction in which a person invests in a common enterprise reasonably expecting profits derived primarily or substantially from other s managerial or entrepreneurial efforts iii Basic definition stocks and bonds issued by corporations any stake in ownership or debt of a company i Unless it qualifies for an exemption securities must be registered before being offered to be public 1 Issuing corporations must file a registration statement with the SEC and must provide investors with a prospectus a written disclosure document describing the security being sold the financial operations of the issuing corporation and the investment or risk attaching to the security ii Contents of the Registration Statement 1 Must be written in plain English and fully describe the following Securities being offered for sale including link to registrant s other capital securities a b Corporations properties and business including financial statement certified by a CPA c Management of corporation including managerial compensation stock options pensions and other benefits any interests of directors or officers in any material transactions with the corporation must also be disclosed d How corporation intends to use proceeds of sale e Any pending lawsuits or special risk factors 2 EDGAR electronic data gathering analysis and retrieval SEC electronic database iii Registration Process 1 Registration statement not effective until after it has been reviewed and approved by the SEC 2 Pre filing Period Issuer can t sell or offer to sell securities can t advertise upcoming securities offering a 3 Waiting Period a Once filed 20 day period where SEC reviews registration statement for completeness 2 i Revisions extend waiting period b Securities can be offered for sale but cannot be sold by issuing corporation i Can use a preliminary prospectus red herring prospectus that contains most of the info that will be included in the final prospectus but often without a price 1 Free writing prospectus any type of written electronic or graphic offer that describes the issuer or its securities and includes a legend indicating that the investor can obtain prospectus at the SEC s website a Must be filed with SEC by the first date it is used ii Can advertise tombstone ad tells investor where to obtain prospectus 4 Post Effective Period a Once registration is effective issuer can offer and sell securities without restrictions i If company issued preliminary prospectus to investors must provide them with final copy before they purchase when they purchase securities d Exempt Securities from registration requirements of SEC i Government issued securities ii Bank and financial institution securities which are regulated by banking authorities iii Short term notes and drafts negotiable instruments with a maturity date that does not exceed 9 months iv Securities of nonprofit educational and charitable organizations v Securities issued by common carriers railroad truck companies vi Any insurance endowment or annuity contract issued by a state regulated insurance company vii Securities issued in a corporate reorganization in which one security is exchanged for another or in a bankruptcy proceeding viii Securities issued in stock dividends and stock splits Exempt Transactions from registration requirements of SEC e i Regulation A Offerings Securities issued by issuer that has offered 5 million in securities during any 12 month period 1 2 An issuer must file with the SEC a notice of issue and an offering circular which must also be provided to investors before sale a Can test the waters for potential interest before preparing offering circular and selling ii Small Offerings Regulation D 1 Rule 504 a Noninvestment company offerings up to 1 million in any 12 month period are exempt i Noninvestment companies firms that are not engaged primarily in business of 2 Rule 504A investing or trading in securities a Offerings up to 500 000 in any one year by so called blank check companies no specific business plan except to locate and acquire currently unknown businesses or opportunities are exempt if i No general solicitation or advertising is used ii SEC must be notified of sale iii Precautions are taken against