Chapter 21 Securities Regulation Intro o The Securities and Exchange Commission creates laws in three ways Rules Releases No action Letter anyone who is in doubt about whether a particular transaction complies with the securities laws can ask the SEC directly The response is called a no action letter b c it states that the staff will recommend that the Commission take no action if the transaction is done in a specified manner In addition SEC has the power to enforce laws by bringing cease and desist orders against those who violate the securities laws and it also levy fines or confiscate profits however it does not have the authority to bring a criminal action o What is a security any transaction in which the buyer invests money in a common enterprise and expects to earn a profit predominantly from the efforts of others Securities Act of 1933 requires that before offering or selling securities the issuer a company that sells its own stock must register the securities with the SEC unless the securities qualify for an exemption Also when an issuer registers securities the SEC does not investigate the quality of the offering o General Exemption based on two factors the type of security and the type of transaction o Exempt Securities are exempted b c they 1 are inherently low risk 2 are regulated by other statutes or 3 are not really investments Government securities Bank securities any security issued or guaranteed by a bank Short term notes high quality negotiable notes or drafts that are due within nine months of issuance and are not sold to the general public Nonprofit issues include any security issued by a nonprofit religious educational or charitable org Insurance policies and annuity contracts are governed by insurance regulation o Exempt Transaction Section 4 2 of the 1933 Act exempts from registration transactions by an issuer not involving any public offering Difference b w exempt securities and exempt transactions are that exempt securities are always exempt throughout their lives no matter how many times they are sold an exempt transaction is exempt is only exempt that one time not necessarily in any subsequent sale o Intrastate Offering Exemption Under SEC Rule 147 an issuer is not required to register securities that are offered and sold only to residents of the state in which the issue is incorporated and does business Rule 147 is a safe harbor a set of requirements that if met indicate automatic compliance with a law o Regulation D Accredited Investors institutions or wealthy individuals to qualify individuals must have a net worth not counting their home of more than 1MM or an annual income of more than 200K Sophisticated investors people who are unable to assess the risks of an offering themselves Restricted stock the securities must be purchases for investment purpose Rule 504 seed capital rule a company may either Rule 505 Rule 506 o Regulation A an offering under Reg A is called a private offering it really is a small public offering Reg A permits an issuer to sell up to 50MM of securities publicly in any 12 month period The issuer must give each purchaser an offering circular that provides the same disclosure required for unaccredited investors under Reg D Stock sold in a Reg A offering is not restricted o Crowdfunding Jumpstart Our Business Startups JOBS Act which permits privately held companies to sell up to 1MM in securities in any 12 month period provided that they do all of the following Direct Public Offerings in a DPO the issuer typically sells shares to its stakeholders The issuer makes a DPO offering under Rule 147 Reg D or Reg A Advantages Disadvantages o Public Offerings Initial Public Offering IPO a company s first public sales of securities Any public sale of securities after the IPO is called a secondary offering This is the process an issuer follows for either type of sale o Sales of Restricted Securities Rule 144 limits the resale of two types of securities issued by public companies control securities stock held by any shareholder who owns more than 10 percent of a class of stock or by any officer or director of the company and restricted securities stock purchased in a private offering Restricted security cannot be sold for one year But once the company goes public the holding period on restricted securities shrinks to six months from the date of purchase After six months these restricted securities can be sold freely unless they are also control securities in which case those restrictions still apply In any 3 mon period control security can sell only an amount of stock equal to the average weekly trading volume for the prior four weeks or 1 percent of the number of shares outstanding whichever is greater The purpose of this rule is to protect other investors from precipitous declines in stock price o Liability under the 1933 Act Liability for Selling Unregistered Securities section 12 a 1 of the 1993 Act imposes liability on anyone who sells a security that is neither registered nor exempt Fraud the seller of a security is liable for making any material misstatement or omission either oral or written in connection with the offer or sale of a security This applies to all public or private and registered or unregistered Criminal Liability Liability for the Registration Statement if a final registration statement contain a material misstatement or omission the purchase of the security can recover who signed the registration statement Damages to prevail under Section 11 the plaintiff need only prove that there was a material misstatement or omission and that she lost money Material means important enough to affect an investor s decisions Due Diligence an investigation of the registration statement by someone who signs it Everyone who signed the registration statement can avoid liability by showing that he investigated the registration since SEC can only ensure on the surface the issuer has supplied all relevant info Securities Exchange Act of 1934 o General Provisions of the 1934 Act Registration Requirement Disclosure Requirements Section 13 The difference b w 1933 Act is that the 1933 Act requires onetime disclosure when a company sells stock to the public The 1934 act requires ongoing regular disclosure for any company with a class of stock that is publicly traded Companies that register under the 1934 Act are called reporting companies Section 13 requires reporting companies to file the following doc In response to coporate scandals