SECURITIES AND EXCHANGE COMMISSION
The 1934 Act created the SEC.
Basic Functions of the
SEC:
·
Requiring
disclosure of facts concerning offerings of securities to the public;
·
Regulating the
trade in securities on national and regional securities exchanges and in the
over-the-counter ("OTC") markets;
·
Investigating
securities fraud;
·
Registering and
regulating the activities of securities brokers, dealers, and investment
advisers;
·
Supervising mutual
funds; and
·
Recommending
administrative sanctions , injunctions, and criminal
prosecution for violations of federal securities laws.
Security: A stock certificate, bond, note, debenture, warrant
or other document given as evidence of ownership in a corporation or as a
promise of repayment by a corporation.
Section 2(1) of the
Securities Act of 1933 requires that certain essential information about
a security be disclosed to the investing public. Section 2(1) applies to
any transaction in which a person
( 1 )
invests (by purchasing stock, a bond, or other security)
(2) in a common
enterprise,
( 3) from which he or she reasonably expects to
earn profits
(4) primarily
or substantially as a result of the managerial or entrepreneurial efforts of
others.
REGISTRATION STATEMENT
Section 5 of the 1933
Act requires that, except for certain exemptions (see next discussion), a security
must by registered before it is offered for sale to the public either through
the mails or other facility of interstate commerce including stock exchanges.
The issuer of the security
must file with the US Securities Commission (SEC) a registration statement,
which must include a description of:
( 1 ) other
outstanding securities of the same issuer;
(2) how the issuer
intends to use the proceeds from the sale of the offered security;
(3) the issuer's properties
and business activities
(4) the issuer's directors and officers, their
compensation securities holdings, and other benefits, and any interest in any
material transactions; and
(5) any pending lawsuits: plus
(6) a certified
financial statement.
·
There is a 20
day waiting period.
·
A red
Herring Prospectus is a
prospectus that has been filed but not yet approved.
·
A tombstone
ad is an advertisement about a security advising the investor to obtain a
prospectus.
The Securities Act of 1933 exempts certain securities from its
registration requirements, including but not limited to:
·
commercial
paper maturing in nine months or
less;
·
securities issued
by charitable organizations;
·
Stock
dividends and stock splits, (if no
commission paid for their receipt)
·
securities issued
exclusively for exchange for securities held by the issuer's
pre-existing security holders certificates issued by trustees, receivers, or
debtors-in-possession under the bankruptcy laws;
·
any insurance,
endowment, or annuity contract issued by a state-regulated insurance
company;
·
government-issued
securities;
·
securities issued
by banks, farmers' cooperatives, and similar institutions subject to
government supervision; and
·
securities offered by any issuer offering $5 million
or less worth of securities during a 12-month period. This is Regulation A
The 1933 Act and
SEC regulations provide certain transactional exemptions for otherwise
non-exempt securities most of which are subject to additional restrictions
discussed in the text:
Under Regulation D:
Rule 504: Offerings
of up to $1 million per year by a company that is not primarily engaged
in investing or trading securities (a noninvestment
company);
Rule 504a: Offerings
of up to $500,000 per year by a so-called blank check company;
Rule 505: Offerings
of up to $5 million per year by a noninvestment
company that are directed primarily to accredited investors;
Rule 506: Private
offerings, not generally solicited or advertised, regardless of the amount;
Rule 147: Offerings which are purely local or intrastate,
regardless of amount; and
Section 4(6): Offerings
of up to $5 million per year made solely to accredited investors.
SECURITIES FRAUD
· The Securities Exchange Act of 1934
provides for the regulation and registration of securities exchanges, brokers,
dealers, and national securities associations, as well as all corporations (i) whose stock is listed on a stock exchange or (ii) which
have assets in excess of $10 million and five hundred or more shareholders.
· Section 10(b) of the
1934 Act prohibits the use of "any manipulative or deceptive" statement,
instrument, or the like in an attempt to contravene the rules and regulations
set forth by the SEC.
· Rule l0b-5: An SEC
rule making it unlawful, in connection with the purchase or sale of any
security, to
(i) make any untrue statement of a material
fact or
(ii) omit a material fact, if such omission causes the statement
to be misleading.
· The key to liability under Rule l0b-5 is
whether the untrue statement or omission concerns a material fact.
INSIDER TRADING, TIPPERS & TIPPEES
· Insider Trading: The
purchase or sale of securities on the basis of information that has not been made
available to the investing public.
· Anyone who acquires
inside information as a result of a corporate insider's breach of his or her
fiduciary duty to the corporation -- even tippees, who
are not "insiders," but who receive inside information from an
insider -- can be liable under Rule 10b-5 for insider trading.
In order for a tippee to be
liable, he or she must:
(i) receive inside information,
(ii) which was disclosed,
in exchange for some personal benefit to a corporate insider (the tipper),
(iii) as a result of the
tipper's breach of his or her fiduciary duty to the corporation,
(iv) of which breach the tippee knows or should know, and
(v) from which breach
the tippee benefits financially.
INSIDER REPORTING AND TRADING
· Reporting Requirement: Section 12 of the 1934 Act requires
that all officers, directors, and shareholders owning 10 percent or more of any
class of a corporation's stock file reports with the SEC reflecting their
ownership and trading of the corporation's securities.
· Sanctions: Section 16(b)
of the 1934 Act allows the corporation to "recapture" any profits
realized by an insider on any sale and purchase or purchase and sale of the
corporation's stock, warrants, options, or other securities that can be
converted into stock within any six-month period --regardless of whether the
insider's trading was a result of any "inside information."
· In addition, the Insider
Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud
Enforcement Act of 1988 give the SEC broad powers to bring civil suit against
insiders and others who use inside information for their own benefit.
INVESTMENT COMPANIES
AND MUTUAL FUNDS
· Investment
Company: A company that acts on behalf of many smaller
shareholders/owners by buying a large portfolio of securities and
professionally managing that portfolio.
· Mutual Fund: A specific
type of investment company that continually buys or
sells to investors shares of ownership in a professionally-managed portfolio.
· Both investment companies and mutual finds are subject to the
Investment Company Act of 1940, which requires that any entity that is (i) engaged primarily "in the business of investing,
reinvesting, or trading in securities" or (ii) engaged (at all) in such
business and has more than 40 percent of its assets in investment securities to
(1) register with the
SEC;
(2) file an annual
report with the SEC describing the company's securities holdings and trading
activity; and
(3) have all of the
company's securities held in the custody of a bank or a stock exchange member.