Chapter 23 securities markets
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Module VIII – Stock Trading. Chapter 23 Securities Markets. Bar exam. Corporate practice. Stock trading: “Truth in Markets” Market efficiency Federal regulation: ’33Act, ’34 Act Relation to state Blue Sky laws Public companies: disclosure, proxy voting, disclosure of insider trading

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Chapter 23 Securities Markets

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Chapter 23 securities markets

Module VIII – Stock Trading

Chapter 23Securities Markets

Bar

exam

Corporate practice

Stock trading: “Truth in Markets”

Market efficiency

Federal regulation: ’33Act, ’34 Act

Relation to state Blue Sky laws

Public companies: disclosure, proxy voting, disclosure of insider trading

Securities offerings: “Truth in Securities”

Public offerings: registration

Registration exemptions

Stock trading

Intrastate offering

Statutory § 4(2) private placement

Reg D: 504 / 505 / 506

Resales of unregistered securities

Law profession

Citizen of world


Efficient market

Efficient Market


Federal securities regulation

Federal securities regulation …

Securities Act of 1933

Securities Exchange Act of 1934


Netfitness com

NetFitness.com

“Please invest ... I need your money!”


What is 33 act registration

What is ’33 Act registration?


Registration of securities offering

Registration of securities offering

Securities Act of 1933

§ 5 

(a) Unless a registration statement is in effect as to a security, it shall be unlawful for a person, directly or indirectly--

(1) ... to sell such security ...

(b) It shall be unlawful for any person, directly or indirectly--  

(2) to [have delivered] ... such security ... unless accompanied or preceded by a prospectus that meets the requirements of section 10(a).

(c) It shall be unlawful for any person, ... to offer to sell [a security] ... unless a registration statement has been filed as to such security, ...


Registration statement

Prospectus disclosure:

Issuer’s business, risks

Management

MD&A

Financial statements

Plans for proceeds

Nature of offering

Principal shareholders  

Signed by issuer and corporate insiders

EDGAR

S-1 / SEC Info

Final prospectus

Registration statement


Registration system

Controlled disclosure

no marketing until RS filed

no sales until RS effective

SEC review

Liability for misrepresentations

Issuer (strict liability)

Top executives

Directors

Underwriters

Experts (accountants) 

EDGAR

S-1 / SEC Info

Final prospectus

Registration system


Costs of ipo registration raise 120 million

Expenses

SEC registration fee.………....... . $ 45,000

NASD filing fee.............................. .. 18,500

Nasdaq NM listing fee………........ ..150,000

Blue Sky fees and expenses........ ..... 5,000

Printing.engraving expenses....... ….175,000

Legal fees and expenses............. ... 750,000

Accounting fees and expenses ...... 425,000

Transfer Agent and Registrar .......... 10,000

Miscellaneous expenses................... 21,500

Total........................................... $1,600,000

Underwriters’ spread………….. $8,400,000

EDGAR

S-1 / SEC Info

Final prospectus

Costs of IPO registration(raise $120 million)


Costs of ipo registration raise 120 million1

EDGAR

S-1 / SEC Info

Final prospectus

Costs of IPO registration(raise $120 million)


How avoid registration

How avoid registration?


Exemption from registration

Securities Act § 4 

Exempted Transactions

The provisions of section 5 shall not apply to--

(1) transactions by any person other than an issuer, underwriter, or dealer.

(2) transactions by an issuer not involving any public offering.

Exemption from registration


Private placement

Issues

Number of offerees?

Offerees “who can fend for themselves"? 

Sophistication

Access to information

Size of offering?  

Manner of offering?

Restrictions on resales?

Private placement


Doran v petroleum management corp 5 th cir 1977

Doran v. Petroleum Management, Corp.(5th Cir 1977)

Mystery

investors

Doran

offers

purchase

Limited Partnership


Regulation d

Regulation D

Rule 504

Up to $1 million

No marketing / unless state registration

Rule 505

Up to $5 million

No marketing / at most 35 unaccredited investors

Rule 506

No $$ limit

No marketing / at most 35 unaccredited investors, but must be savvy or rep.

Regulation D


What are restricted securities

What are “restricted securities” …

“Come to rest”

Rule 144


The end

The End


What is liability for false statements not registering

What is liability forfalse statements / not registering?


Liability falsehoods not registering

Liability – falsehoods / not registering

  • Failure to register

  • Section 12(a)(1)

    • Nonexempt, unregistered sales

    • Rescission - purchasers have one-year “put”

Fraud in registered offering

  • Section 11

    • any materially false or misleading statement in RS

    • Issuer – strict liability / others "due diligence“

    • Damages equal to losses

  • Section 12(a)(2)

    • Misrepresentation outside registration statement

    • Rescission – purchasers get money back from “sellers”


Liability falsehoods not registering1

Liability – falsehoods / not registering

  • Failure to register

  • Section 12(a)(1)

    • Nonexempt, unregistered sales

    • Rescission - purchasers have one-year “put”

Fraud in registered offering

  • Section 11

    • any materially false or misleading statement in RS

    • Issuer – strict liability / others "due diligence“

    • Damages equal to losses

  • Section 12(a)(2)

    • Misrepresentation outside registration statement

    • Rescission – purchasers get money back from “sellers”


What is security

What is “security”?


Definition of security

Carlo Ponzi (circa 1919)

Listed securities

Note

Stock

Bond

Debenture

Participation in profit-sharing plan

Preorganization subscription

Investment contract

Definition of “security”


Definition of security1

www.stockgeneration.com

Promises investors a risk-free, guaranteed return of 10% per month (215%/yr)

“Virtual stock exchange" trading stock in "virtual companies“

"privileged company" shares "only rise" - guaranteed 10% monthly return.

Card table with money: $ in from new players / $ out by old players

$4,700,000 “invested” on “virtual stock exchange” – a big game!

Investment contract

Howey Co. v. SEC (US 1940)

Investment of money 

in a collective enterprise 

with expectation of profits 

from the efforts [primarily] of others

Definition of “security”


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