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Securities Law. Historical background Regulation followed 1929 crash Little disclosure Lots of fraud. Securities Law. SEC Promulgate regulations Investigate violations Regulate brokers and advisors. Securities Law.

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Presentation Transcript
securities law
Securities Law
  • Historical background
    • Regulation followed 1929 crash
    • Little disclosure
    • Lots of fraud
securities law2
Securities Law
  • SEC
    • Promulgate regulations
    • Investigate violations
    • Regulate brokers and advisors
securities law3
Securities Law
  • Securities defined – investment contract that gives the owner evidence of business participation or indebtedness (Securities Act of 1933)
    • Notes
    • Stock
    • Bonds
    • Debentures
    • Warrants
    • Subscriptions
    • Voting-trust certificates
    • Mineral rights
    • Limited partnerships
  • Commodities covered by Commodity Exchange Act
securities act of 1933
Securities Act of 1933
  • Howey test
    • 1946 Supreme Court decision
    • “a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of a promoter or third party”
    • Broad interpretation of the law
exemptions
Exemptions
  • Exempt Securities
    • Government issued securities
    • Commercial paper
    • Banks, savings & loans, religious and charitable organizations
    • Insurance policies
    • Annuities
    • Securities regulated by the ICC
    • Stock dividends and splits
exemptions6
Exemptions
  • Exempt transactions
    • Non-issuers
    • Intrastate offering – all parties must be in that state
    • Small-Offerings
      • Simplification
      • Permits sales w/o registration
    • Corporate reorganization
    • Private placements
filing requirements of the 1933 act
Filing Requirements of the 1933 Act
  • Registration Statement & Prospectus
  • Review
    • Full disclosure standard
registration process
Registration Process
  • Prefiling period (until registration is filed)
    • Cannot sell or offer to sell
    • Cannot “condition the market” – no PR
  • Waiting period (filing until SEC declares it effective)
    • Conditioning the market is OK
  • Filing Options
    • Tombstone ads
    • Red herring prospectus (no price)
  • Posteffective period (registration effective through sale)
    • Final or statutory prospectus
  • Shelf registrations
violations of the 1933 act
Violations of the 1933 Act
  • Civil liability for false or incomplete filing or before the effective date
  • $100,000/10 years in prison
  • Injunction
  • Anyone who had any input into the registration (directors & officers - joint & several liability)
  • Defenses
    • Immateriality
    • Investor knowledge
    • Due diligence
1934 act
1934 Act
  • Created the SEC
  • Regulates securities after issuance
    • Registration of those securities traded on national stock exchange
    • Continuous reporting
      • 10-Q
      • 10-K
      • 8-K
1934 act11
1934 Act
  • Antifraud provisions
    • Everyone should have equal information
    • Applies to the sales of all securities
    • “false information” interpreted by SEC & courts
    • Who
      • Officers, directors, shareholders
      • Insiders & tippees
    • When public knowledge
    • What
      • Takeovers
      • Earnings drops
      • Dividends
      • lawsuits
1934 act12
1934 Act
  • Antifraud provisions
    • Sale or purchase of security in reliance of info
    • Intent to defraud
    • $100,000/5 years in prison
    • Officers: $1 million or treble profits + restitution
    • Civil liability
1934 act13
1934 Act
  • Insider trading
    • Insiders
      • Officers, directors, employees
      • Lawyers, accountants, consultants, or other agents
      • Anyone with a fiduciary duty to the company
    • Per se violation for officers, directors & large shareholders
    • Assumed they have inside knowledge
    • Must report holdings
    • Cannot keep short-swing profits (6 months)
    • Includes remote tippees if they should have known it was inside info
shareholder rights
Shareholder Rights
  • Proxy materials filing
    • Who is sending the proxy statement
    • How it will be sent
    • Who pays & how much
    • Why it is being sent
  • Invalid proxies
    • Resubmitted
    • Action following invalid proxy reversed
shareholder rights15
Shareholder Rights
  • Shareholder proposals not opposed by management to be included
  • Up to 200 words of shareholder material if opposed by management may be included
  • Proxy battles
    • Corporation can reimburse for costs up to limits
shareholder rights16
Shareholder Rights
  • Executive Compensation
    • Disclosure rules
      • Board Compensation Committee
      • Reports summarizing executive pay
shareholder rights17
Shareholder Rights
  • Williams Act
    • All offers to buy more than 5%
    • Details of offer must be published for shareholders
      • Offerer
      • Source of funding
      • Future plans
      • Number of shares currently held
    • Shareholders have 7 days to decide on offer
    • Civil and criminal penalties
shareholder rights18
Shareholder Rights
  • Uncontested Takeover - notice within 10 days to shareholders with justification:
    • Recommendation of acceptance/refection
    • Neutral position
    • Inability to take a position
shareholder rights19
Shareholder Rights
  • Hostile Takeover
    • Convince shareholders not to sell
    • File antitrust suits
    • Match the offerer’s price
    • Find a ‘white knight’
other securities laws
Other Securities Laws
  • Securities Enforcement Remedies and Penny Stock Reform Act of 1990
    • Authorized cease and desist orders
    • SEC may seek civil penalties
    • Enhanced disclosure for penny stocks
  • Market Reform Act of 1990
    • SEC sets limits on program trading
    • SEC can suspend trading if market too volatile
other securities laws21
Other Securities Laws
  • RICO
    • Can be applied to securities fraud
  • Private Securities Litigation Reform Act of 1995
    • Gives safe harbor for firms making predictions as long as accompanied by cautionary statements
state laws
State Laws
  • State laws affecting mergers & acquisitions
    • Supremacy of federal law
    • Protect shareholders through governance rather than securities issues
    • Slow pace of takeovers
  • State securities laws
    • Most states adopted Uniform Securities Act
    • May need state registration and merit review
international aspects
International Aspects
  • US has most stringent laws
  • Multiple stock exchanges
  • Various accounting rules
strategy implications
Strategy Implications
  • Choose state to issue securities
  • Consider timing of issues
  • Training of all employees & agents re insider trading
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