Bài giảng Business Law (13th edition) - Chapter 45: Securities Regulation – Part 1

CorporationsHistory & Nature of CorporationsOrganizational and Financial Structure of CorporationsManagement of Corporations10McGraw-Hill/Irwin Business Law, 13/e© 2007 The McGraw-Hill Companies, Inc. All rights reserved.CorporationsShareholders’ Rights & LiabilitiesSecurities RegulationLegal & Professional Responsibilities of Auditors, Consultants, and Securities Professionals10McGraw-Hill/Irwin Business Law, 13/e© 2007 The McGraw-Hill Companies, Inc. All rights reserved.Securities Regulation – Part 1PAETRHC45“Quality, at its broadest and most basic level, is the protection of the investor interest. This principle reaffirms a simple and salient truth – markets exist by the grace of investors.” Arthur Levitt, Jr., former SEC chairman (Sept. 23, 1999)Learning ObjectivesPurposes of securities regulationThe Securities and Exchange CommissionThe Securities Act of 1933The Securities Exchange Act of 1934Tender offer regulationState securities law45 - *Security: investment of money in common enterprise with expectation of profits solely from efforts of others such as stocks, bondsThree purposes of Securities Act of 1933 and Securities Exchange Act of 1934: require disclosure of information material to investors, impose liability on those making inadequate or false disclosures, regulate the security industry and marketsWhat is a Security?45 - *The Securities and Exchange Commission (SEC) investigates violations of securities laws and holds administrative hearings to determine whether laws have been violatedLegislative, executive, and judicial functionsAdministrative decisions may be appealed to SEC commissioners and Court of AppealsElectronic filings made with SEC’s EDGAR:Electronic Data Gathering, Analysis, and Retrieval system www.sec.gov/edgar.shtmlThe SEC45 - *Most SEC actions resolved through consent orders rather than litigationSEC may impose civil penalties (fines) up to $500,000 and issue cease and desist orders SEC may ask courts to grant injunction Person may contact SEC in advance of a transaction or course of action, and ask SEC to issue a no-action letterSEC Enforcement 45 - *1933 Act regulates the sale of securities as they pass from issuer to public investors in with regard to registration and liabilityA corporate issuer may not offer to sell or sell securities unless securities are registered with SEC or exempt from registrationRegistration requires filing a registration statement with the SECSecurities Act of 193345 - *Sale of securities requires underwriting by securities market professionalsProspectus: sales document of an offering registered under the 1933 ActInformation in registration statement must be in the prospectusAllows potential investor to base decision on all relevant data about issuing companyUnderwriting & Prospectus45 - *Prefiling period: securities may not be offered or sold, must avoid publicityWaiting period: securities may be offered, but not sold; tombstone ad and road show for analysts and institutional investors allowed; preliminary prospectusPosteffective period: after effective date set by SEC and using final prospectus, securities may be offered and soldSecurities Offering Timeline45 - *Securities exemptionsExempt securities never need registration: short term note or draft, insurance policy or annuity contract, and securities issued by a nonprofit, banking institution, regulated common carriers, or the governmentTransaction exemptionsRegistration requirement depends upon type of transactionExemptions to Registration45 - *Intrastate (Rule 147)Offering securities solely to investors in one state by an issuer resident and doing 80% of firm’s business in that statePrivate Offering (Rule 506 of Regulation D)Offering to less than 35 unaccredited purchasers with sufficient investment knowledge and an unlimited accredited investor-purchasersTransaction Exemptions:Intrastate & Private Offerings45 - *Rule 504, Regulation D: Nonpublic issuer may sell up to $1 million of securities in a 12-month period to any purchaser General selling efforts permittedRule 505, Regulation D: Any issuer may sell up to $5 million of securities in a 12-month period to less than 35 unaccredited investors (unlimited accredited investors)General selling efforts prohibitedTransaction Exemptions: Small Offerings45 - *Regulation A: Nonpublic issuer may sell up to $5 million of securities in one yearNo limit on number of purchasers, no purchaser sophistication requirement, and no purchaser resale restrictionDisclosure document is the offering circular, which must be filed with SEC45 - *Transaction Exemptions: Small OfferingsSection 11: civil liabilities for damages when a registration statement misstates or omits a material fact on its effective datePurchaser may file suit for damages caused by misstatement or omissionDefenses: (a) purchaser knew of omission or misstatement when security was purchased, (b) due diligence defense1933 Act Liability Provisions45 - *Other 1933 Act ProvisionsSection 12(a)(2) prohibits misstatements or omissions of material fact in any written or oral communication regarding a securitySection 17(a) prohibits use of any device to defraud, or a false or misleading statement, in connection with offer or sale of securitiesSection 24 imposes criminal liability for willful violation of Act, rules, regulations45 - *Test Your KnowledgeTrue=A, False = BThe SEC only has executive power to enforce congressional statutes.Most SEC actions are resolved through consent orders rather than litigation.The 1933 Act regulates the sale of securities as they pass from the issuer to public investor.Registration requires underwriting by corporate insiders and financial controllers.45 - *Test Your KnowledgeTrue=A, False = BAn investment contract in a corporation is a security. Registration statements are sales documents of an offering registered under the 1933 Act.All securities are exempt from registration unless specifically required to be registered by statute.45 - *Test Your KnowledgeTrue=A, False = BRule 506, Regulation D exempts a private offering to less than 35 unaccredited purchasers from registration requirements. Rules 504 and 505 provide an exemption from registration for offering securities priced at less than $10.Section 11 establishes civil liability for damages when a registration statement misstates or omits a material fact.45 - *Test Your KnowledgeMultiple ChoiceThe important time periods in a securities offering are: (a) Prefiling period(b) Waiting period(c) Posteffective period(d) All of the above(e) All of the above plus due diligence period45 - *Thought Questions45 - *Do the registration requirements of the 1933 Act make sense? Are the provisions too harsh or to lax with regard to potential liability and penalties? Securities Exchange Act of 19341934 Act requires periodic disclosure of material information by issuers of publicly held equity securitiesMust file a 1934 Act Registration Statement1934 Act also regulates insiders’ transactions in securities, proxy solicitations, tender offers, brokers and dealers, and securities exchanges45 - *Periodic ReportingIssuers that register securities under 1934 Act must file several periodic reports:Annual report (Form 10-K), quarterly report (Form 10-Q), monthly report (Form 8-K) when material events occur; comparable reports to shareholdersIssuers who disclose under 1934 Act for registered offering under 1933 Act must file same reports45 - *Insider Holdings & TradingsSection 16(a) requires statutory insiders to disclose ownership of their firm’s securities within 10 days of becoming owners and report subsequent transactions within two business days after a trade of the securitiesStatutory insider: officer holding registered equity securities, director, owner of >10% of a class of registered equity securities45 - *1934 Act Liability ProvisionsSection 18 imposes liability on any person responsible for false or misleading statement of material fact in any filing under 1934 ActPerson who relies on a false or misleading statement in a filing may sue for damagesDefendant may raise defense of good faithNo knowledge (scienter) statement was false or misleading45 - *Section 10(b) & Rule 10b-5Section 10(b) prohibits use of any deceptive device in contravention of any SEC rulesDefendant must have had intent to deceiveRule 10b–5 prohibits misstatements or omissions of material informationPrivate plaintiff must proof relianceAny information a reasonable investor would consider important to a decision and for which disclosure would have altered decision45 - *Insider TradingRule 10b–5 prohibits a person with inside information (nonpublic, confidential) from using the information when trading securities with a person without the informationInsider: anyone with confidential corporate information for a corporate purposeDisclose-or-refrain rule: insider must disclose information before trading or refrain from tradingTippees receive inside information45 - *Rule 10b–5 prohibits a person trading in securities for personal profit from using confidential information misappropriated by a breach of fiduciary duty owed to source of the information (misappropriation theory)Thus, person violates Rule 10b–5 if s/he steals confidential information about firm’s intent to make a tender offer for another firm and buys securities of the second firm Misappropriation Theory45 - *Reg. FD (fair disclosure): when issuer or person acting for issuer discloses material nonpublic information to securities market professionals and holders of issuer’s securities, it must make public disclosure of that informationFile or furnish Form 8-K or use other method designed to effect broad, nonselective disclosure to the publicRegulation FD45 - *Section 32: Individuals may be fined up to $5 million and imprisoned up to 20 years for willful violations; businesses may be fined up to $25 millionForeign Corrupt Practices Act: no American firm may to offer, promise, or make gifts or payments of anything of value to foreign officials to influence governmental decision1934 Act Criminal Liability45 - *Test Your KnowledgeTrue=A, False = BThe 1934 Act requires periodic disclosure of material information by issuers with publicly held equity securities.Periodic reports include the Form 10-K, the Form 10-Q, and Form 8-K.If corporate management solicits proxies for a particular vote, it must issue an information statement.45 - *Test Your KnowledgeTrue=A, False = BRule 10b-5 defines an insider as anyone with confidential corporate information for a corporate purpose.Section 18 imposes liability on any person responsible for false or misleading statement of material fact in any filing under 1934 Act45 - *Test Your KnowledgeMultiple ChoiceWhich of the following is false regarding Regulation FD? (a) A company should establish clear rules for content of information that may be disclosed(b) If an issuer makes a disclosure of material nonpublic information to a stock broker, it should immediately publicize a denial of that information (c) “FD” stands for “fair disclosure” 45 - *Test Your KnowledgeMultiple ChoiceA lawyer knows that a client corporation is about to file for bankruptcy. To whom among the following may the lawyer relay this information? (a) No person(b) To a relative who might hold securities in the company(c) To the SEC to begin an investigation45 - *Thought Question45 - *Alan Greenspan stated: “Private capital markets are the fundamental building block of the capitalist systemSuch markets can function properly only if investors bear the costs of their bad decisions and bad luck and reap the benefits of their good decisions and good luck.” Speech to the Financial Crisis Conference on July 12, 2000Do you agree with his statement?