Securities Regulation - Chapter 21

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Security can be in two forms. What are the two?

1) Debt - primarily money borrowed by a corporation, usually a note or bond that can be traded.
2) Equity - common stock

Bonds that are usually traded on the securities market are called ________

Debt securities

A debt instrument issued by a corporation, such as a bond specifies 4 things. What are the 4 things?

1) Amount of the debt
2) Length of the debt period
3) Debt repayment method
4) Rate of interest charged to the sum borrowed

This form of financing raises funds through the sale of company stock.

Equity financing

What does the purchaser of shares of stock gain?

Ownership or equitable interest in the corporation

Does a company have liability to repay shareholders the amount they have invested in equity financing?

No

What are blue sky laws?

State securities law - regulates the offering and sale of securities to protect the public from fraud

What does the 1933 Securities Act regulate?

the public offerings of securities, when they are first sold. It requires the investors to be given material information and prevents misrepresentation.

What the 1934 Securities Exchange Act regulate?

Regulates trading in existing securities and imposes disclosure requirements on corporations. Regulates securities markets and professionals.

What agency is responsible for enforcing and administrating the federal securities law?

Securities and Exchange Commission (SEC)

Do investors have legal protection if an investment instrument is a security?

Yes

For an investment to be classified as a security for the purpose of federal regulation under the Howey test, it must contain four basic elements.

1) Investment of money
2) In a common enterprise
3) With an expectation of profits
4) Generated by the efforts of persons other than the investors

What securities are exempt by both the 1933 and the 1934 Acts?

Debts issued or guaranteed by a federal, state, or local government. The 1933 Act provides exemption for securities issued by banks, religious and charitable organizations, insurance policies, and annuity contracts.

Securities exempt from 1933 and 1934 Acts are subject to which 2 provisions?

Anti fraud and civil liability provisions

What are the two parts in the registration statement?

1) Prospectus - a document providing the legal offering of the sale of the security
2) Detailed information required by the SEC

What does the prospectus do?

Condenses the longer registration statement provided to the SEC and helps investors evaluate a security.

What is the first version of the prospectus not yet approved by the SEC?

Red herring

Does the SEC rule on the merits of an offering - give an opinion about the likelihood of success of the proposed business?

No

How many days after filing does the registration of the security become effective?

20 days

Does a security not offered to the public need to be registered?

No - They are private placements

What exempts U.S. and foreign security issuers from registration requirements for the sale of bonds and stocks to institutions with a portfolio of at least $100 million in securities?

Rule 144A

Who are accredited investors?

Banks and insurance companies. Individual investors with at least $200,000 annual income or net worth of at least $1 million

Who may participate in private placement offerings of securities?

accreddited and unaccredited investors

Due diligence

term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care.

Regulation A - Reg A

An Securities and Exchange Commission (SEC) regulation that governs offerings of $5 million or less, which qualify for simplified registration (an exemption).

Regulation D - Reg D

A Securities and Exchange Commission (SEC) regulation governing private placement exemptions. Reg D allows usually smaller companies to raise capital through the sale of equity or debt securities without having to register their securities with the SEC.

Why is Regulation D advantageous?

Reg D offerings are advantageous to any private company or entrepreneur because they allow an entity to obtain funding faster and to avoid the costs associated with a public offering.
Even if the transaction only involves one or two investors, the company or entrepreneur wanting to raise capital still needs to provide the proper framework and disclosure documentation; however, these requirements are significantly less than what is required for a public offering.

How do people know about a private offering (Regulation D)?

Word of mouth. No public advertising.

Rule 504

Rule 504 provides an exemption for the offer and sale of up to $1 million of securities in a 12-month period. The company may use this exemption so long as it is not a blank check company and is not subject to Exchange Act of 1934 reporting requirements. General offering and solicitations are permitted under Rule 504 as long as they are restricted to accredited investors. The issuer need not restrict purchaser's right to resell securities.

Rule 505

Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period. Under this exemption, securities may be sold to an unlimited number of "accredited investors" and up to 35 "unaccredited investors" who do not need to satisfy the sophistication or wealth standards associated with other exemptions. Purchasers must buy for investment only, and not for resale. The issued securities are restricted, in that the investors may not sell for at least two years without registering the transaction. General solicitation or advertising to sell the securities is not allowed.

Securities interstate exemption

80% rule - has to be in state

Shelf Registration

Stock that has been around for a long time. Is a process authorized by the U.S. Securities and Exchange Commission under Rule 415 that allows a single registration document to be filed by a company that permits the issuance of multiple securities. This filing is a relaxed registration process that applies to well-known, seasoned issuers.

Securities Exchange Act of 1934

is a law governing the secondary trading of securities. The Act and related statutes form the basis of regulation of the financial markets and their participants in the United States. The 1934 Act also established the Securities and Exchange Commission (SEC),[1] the agency primarily responsible for enforcement of United States federal securities law.

What is secondary trading?

those securities between persons often unrelated to the issuer, frequently through brokers or dealers

Section 16

A section of the Securities Exchange Act of 1934 that is used to describe the various regulatory filing responsibilities that must be met by directors, officers and principal stockholders. According to Section 16, every person who is directly or indirectly the beneficial owner of more than 10% of the company, or who is a director or an officer of the issuer of such a security, shall file the statements required by this subsection with the Securities and Exchange Commission (SEC). Short swing profits by these individuals must be turned over to corp. 6 month rule.

Scienter

is a legal term that refers to intent or knowledge of wrongdoing. This means that an offending party has knowledge of the "wrongness" of an act or event prior to committing it.

Section 10b

This rule simply states that people who have access to material, nonpublic information should either disclose the information or abstain from trading that security.

Securities Investor Protection Act of 1970

SIPC maintains a fund that is intended to protect investors against the misappropriation of their funds and of most types of securities in the event of the failure of their broker.

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