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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
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Securities Law

  • Historical background

    • Regulation followed 1929 crash

    • Little disclosure

    • Lots of fraud


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Securities Law

  • SEC

    • Promulgate regulations

    • Investigate violations

    • Regulate brokers and advisors


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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


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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


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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


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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


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Filing Requirements of the 1933 Act

  • Registration Statement & Prospectus

  • Review

    • Full disclosure standard


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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


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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


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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


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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


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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


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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


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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


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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


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Shareholder Rights

  • Executive Compensation

    • Disclosure rules

      • Board Compensation Committee

      • Reports summarizing executive pay


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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


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Shareholder Rights

  • Uncontested Takeover - notice within 10 days to shareholders with justification:

    • Recommendation of acceptance/refection

    • Neutral position

    • Inability to take a position


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Shareholder Rights

  • Hostile Takeover

    • Convince shareholders not to sell

    • File antitrust suits

    • Match the offerer’s price

    • Find a ‘white knight’


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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


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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


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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


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International Aspects

  • US has most stringent laws

  • Multiple stock exchanges

  • Various accounting rules


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Strategy Implications

  • Choose state to issue securities

  • Consider timing of issues

  • Training of all employees & agents re insider trading


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