12 08 2015 MGMT 200 Pg 529 554 Securities Regulation The Elements of Securities Corporate Finance Debt o Bonds Amount of debt Length of debt period Debt repayment method Rate of interest o Bonds can be traded o Debt securities Equity to profit o Stock can be traded Origins of Securities Regulation o Raising of funds through sale of company stock o Officers of company have fiduciary obligation to make effort Blue Sky Laws o Laws that prevent speculative schemes that have no more basis than feet in the blue school Beginnings of Federal Regulation o Securities Act of 1933 Regulates public offerings Must give investors material info on new securities Full disclosure of all material information Background Executives Plan of operation o Securities Exchange Act of 1934 Regulates trading in existing securities Disclosure requirements on securities that are publicly traded Securities Exchange Commission o Enforce and administering federal securities laws What Is a Security Supreme Court s Howey Test Howey test o Investment of money o In a common enterprise Turn over money to someone else for investment Investment is not the property of an investor Investor s capital is pooled with other investors money Investor owns undivided interest in the investment Owner of Ford stock cannot demand a ford truck for the value of his stock Stock owners own an undivided interest in the company Cannot divide company property among themselves o With an expectation of profits o Generated by the efforts of persons other than the investors Investors do not control the work Board controls the future of organization Securities Exempt from Regulation o Debts issued by federal state local government o Issued by banks religious and charitable organizations insurance policies annuity contracts o Exempted securities not subject to the registration requirements Subject to antifraud provisions Offering Securities to Investors Latta v Rainey o Mobile Billboards of America MBA o Investors buy a billboard unit o The billboard is leased to Outdoor Media Industries OMI o MBA claimed it had a Reserve Guaranty Trust RGT o Rainey was an advisor of MBA o Rainey brought in Latta o Latta invested 100k o Rainey got commission o It was actually a ponzi scheme so new investors were used to pay Lattas o Rainey filed for bankruptcy o Trail court held that MBA was unregistered securities and Rainey was unregistered broker o Latta won o Rainey Appealed o Decision Essential elements of actual fraud False representation or concealment of material fact Background execs plan of operation Calculated to deceive Made with intent to deceive It does deceive Injure a party risk Rainey claimed only false representation was very little However he didn t tell Latta where the OMI payments were coming from Rainey claimed he did not intend to deceive He just said that MBA told him not to tell the clients because then people would not have invested so he did have intent to deceive Rainey claimed that there was no reasonable reliance because Latta read the documents False because the documents did not revel where the payments were coming from Also unregistered security Latta won Registration Statement Prospectus o Condenses longer registration statement o Red herring Red ink on first page First version of prospectus not approved by SEC o Security issuers finances and business o Purpose of the offering o Plan for the funds collected o Risks involved o Managerial experience and financial compensation o Financial statements certified by independent public accountants Regulation S K o Financial background and past experience of issuers o More info about proposed business and the issuers Review by the SEC SEC does not give opinions on potential success Cost of Registration It requires the issuers to make high risk clear o Expensive o CPA o Attorney o Printer o Underwriter Morgan Stanley Market the securities Exemptions from Registration Private placement public o Registration not required for new securities not offered to the Such as IBM selling 250m worth bonds directly to MetLife and not general public o Rule 144A Qualified Institutional Buyers Expects US and Foreign Security Issuers from registration requirements for the sale of securities to institutions with portfolio of at least 100m Offerings subject to private placement exemption may be made only to ACCREDITED INVESTORS o Regulation D Sophisticated Banks Insurance companies Individuals Annual income 200k 300k couple Or net worth of 1m Raise 1m within 12 months Rule 504 Rule 505 Can be done on internet Offers up to 5m Rule 506 Offers over 5m Well Known Seasoned Issuers o Offered at least 1b in debt o Public equity market capitalization of at least 700m o File registration statements the day they announce new offerings o Simplifies registration does not exempt o May use free writing prospectus Same rules as traditional formal prospectus Allows for more communication Under shelf registration Securities may be sold at any time over the next 3 years Regulation of Securities Trading Regulation FD Level the playing field Have to release material info to the public rather than in concealment analysts Cannot hold meetings with big investors and favored securities o If material info is released in one of these meetings must be released to the public as well Can disclose information in any way possible o Reasonably designed for non exclusionary distribution of information to the public Web press FORM 8 K Proxies and Tender Offers Proxies o Proxies are sent to shareholders to vote on the major proposed changes in business o Vote on my behalf Tender offers o Must be registered with the SEC o When a company tries to buy out another company so they target shareholders of the target company and offer cash or some of their own stock in exchange for the target company stock Securities Fraud Basics for Securities Fraud Common law fraud and securities fraud Act of 1933 o Civil liability for misstatements 1934 act o Rule 10b 5 Unlawful to Employ device scheme or artifice to defraud Make untrue statement of material fact or omit statement of material fact Engage in any act practice or course of business which operates or would operate as a fraud or deceit upon any person in connection with sale Liability for Securities Law Violations SEC action o SEC can sue those alleged in violating securities law All the accountants lawyers CEO and everyone else Liability for Misstatements Safe Harbor Federal Exclusivity o Securities