Markets and Trading Set 5
|a. Securities markets are governed primarily by||federal law and involve primarily public corporations.|
|b. KS invented||securities law: the blue sky law which requires registration, information, and accountability|
|1. Market Efficiency Theory||Market participants absorb information from news sources, government reports, company disclosures, and stock trading patterns. They use that data to estimate future cash flows and the risk that such cash flows may not materialize and to establish the price at which they are willing to buy or sell the stock. When they decide a stock is undervalued, their demand to buy the stock leads to an increase in price. Conversely, when traders sell stocks they believe are overvalued, their selling depresses the price. Thus, the information market participants have absorbed is impounded into the price of the company's stock.|
|3. Fundamental efficiency|| Stock prices represent the best possible estimate of a company's risks and cash flows. |
a. There's substantial information that markets, in many cases, aren't fundamentally efficient.
|1. Securities Act of 1933 required||issuers of securities to provide investors with detailed information about the company, its management, its plans and finances, and the securities being offered. Must register with the government and give a lot of information to investors.|
|2. Securities Exchange Act of 1934 created||the SEC, put into place broad anti-fraud policies.|
|3. Blue Sky Laws||Speculative schemes which have no more basis than so many feet of blue sky. Laws generally prohibited fraudulent statements in connection with the sales of securities and also required the registration of securities before they could be sold or traded.|
|4. Section 18 Amendment of 1933 Act precludes||state registration requirements for many offerings of securities. Still allows states to bring antifraud proceedings|
|5. NSMIA||National offering, its federal law.|
|6. SOX||Rule at the federal level about corporate governance.|
|7. Dodd Frank Act||More corporate governance rules|
|iii. What is a security?||1. 1933 Act: Instruments commonly known as securities like stocks and bonds. Instruments specified by the 1933 act to be securities like factional undivided interest in oil, gas or other mineral rights. Broad, catch-all phrase investment contract which lets the courts make the determination.|
|iv. What happens with stock?|| 1. It's a security. 1933 Act apply to it. Have to register it with the SEC unless it falls within an exception.|
2. Section 5: Unless you have a registration statement, you can't sell a security.
|v. Registration of securities offerings||1. 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 proceeded by a prospectus that meets the requirement of 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|
|vi. What does Section 5 do?|| 1. Default is registration.|
2. Harsh penalties for violation: strict liability. Investor gets to rescind the transaction and get money back with interest. Investors sue and burden is on the company to establish exemption.
|vii. Going public||1. Business goes from closely help to a publicly held company. Lots of players: attorneys, underwriters, accountants, SEC.|
2. Company makes deal with underwriter. Underwriter gets the company ready to go public.
3. Firm commitment offering: company sells all of the shares to the underwriter at a discount.
4. Underwriters immediately sell shares at the original price to the people that they've lined up and they need an overallotment so they can buy extra.
5. Shares end up on an exchange.
|viii. Listing|| 1. NYSE-Euronext, NASDAQ.|
2. Competition, consolidation, brokers, technology.
|ix. Registration statement||1. Prospectus disclosure: Issue's business, risks, management, MD&A, financial statements, plans for proceeds, nature of offering, principal shareholders. Signed by issuer and corporate insiders|