Bài giảng Business Law - Chapter 45: Securities Regulation

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin10History and Nature of CorporationsOrganization and Financial Structure of CorporationsManagement of CorporationsShareholders’ Rights and LiabilitiesSecurities RegulationLegal and Professional Responsibilities of Auditors, Consultants, and Securities ProfessionalsCorporationsPARTSecurities RegulationPAETRHC45Quality, 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, 1999Learning ObjectivesDefine “security” and explain how issuances and issuers of securities are regulatedDescribe communication rules for a public offering of securitiesList the Securities Act’s exemptions from registrationDiscuss liability for securities In general, security means any investment of money in a common enterprise with an expectation of profits solely from efforts of others, including but not limited to: A short-term note, stock, treasury stock, security future, bond, debenture, investment contract, participation in any profit-sharing agreement, or fractional undivided interest in oil, gas, or mineral rightsWhat is a Security?Securities Act of 1933 and Securities Exchange Act of 1934 have 3 purposes:Require disclosure of meaningful information about a security and its issuer to allow investors to make intelligent investment decisionsImpose liability on those who make inadequate and erroneous disclosures of informationRegulate insiders, professional sellers of securities, securities exchanges, and other self-regulatory securities organizationsThe Disclosure LawsThe 1934 Act created the Securities and Exchange Commission (SEC)Empowered to investigate violations of securities laws and hold hearings to determine whether laws have been violated, the SEC has legislative, executive, and judicial functionsMost SEC actions are resolved through consent orders rather than litigationThe SECIn SEC v. W. J. Howey Co., the court held that sales of plots in an orange grove plus a management contract were sales of securities because the investment contract was an investment of money in a common enterprise with an expectation of profits solely from the efforts of othersKnown as the Howey testDefining The Security1933 Act regulates the sale of securities while they pass from the hands of the issuer into hands of public investorsTwo principal regulatory components: Registration provisions Liability provisionsSecurities Act of 1933Under the 1933 Act, an issuer may not offer to sell or sell securities unless the securities are registered with the SEC or exempt from registrationRegistration requires underwriting by securities market professionalsRegistration requires filing a registration statement with the SECRegistration of SecuritiesThe prospectus is the sales document of an offering registered under the 1933 ActMost of the information in the registration statement must be in the prospectusA prospectus allows a potential investor to base an investment decision on all relevant data about the issuing company, not simply favorable information ProspectusThree important periods of time in the life of a securities offering: Prefiling period Waiting periodPost-effective periodThe Securities Offering TimelineTwo types of exemptions from the registration requirements of the1933 Act:Securities exemptionsExempt securities never need to be registeredTransaction exemptionsRequirement to register depends upon the type of transactionExemptions to RegistrationGovernment-issued securitiesShort-term note or draft (< 9 months to maturity)Security issued by a nonprofit religious, charitable, educational, benevolent, or fraternal organizationSecurities issued by a bank or savings and loanSecurities issued by common carriers regulated by the Interstate Commerce CommissionAn insurance policy or an annuity contract1933 Act Securities ExemptionsIntrastate (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):Rule 506, Regulation D: Private offering to less than 35 unaccredited purchasers with sufficient investment knowledge and an unlimited accredited investor-purchasersTransaction Exemptions – Intrastate and PrivateRule 504, Regulation D: Nonpublic issuer may sell up to $1 million of securities in a 12-month period to any purchaserRule 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)Regulation A: Nonpublic issuer may sell up to $5 million of securities in one year periodTransaction 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 omissionReliance and privity usually not requiredPurchaser need not prove that defendant negligently or intentionally misstated or omitted a material fact1933 Act Liability ProvisionsDefendant can escape liability by proving the purchaser knew of misstatement or omission when security was purchasedDefendant may raise due diligence defense:Defendant must prove that after reasonable investigation they had reasonable grounds to believe and did believe that the registration statement was true and contained no omission of material factSection 11 DefensesOther 1933 Act ProvisionsSection 12(a)(2) prohibits misstatements or omissions of material fact in any written or oral communication in connection with general distribution of any security by issuer Section 17(a) prohibits the use of any device or artifice to defraud, or the use of any untrue or misleading statement, in connection with the offer or sale of any securityTwo subsections of Section 17(a) require that defendant merely act negligently, while a third subsection requires proof of scienterScienter: intent to deceive, manipulate, or defraud the purchaser (may include recklessness)Section 24 of the 1933 Act provides for criminal liability for any person who willfully violates the act or its rules and regulationsMaximum penalty: $10,000 fine, or five years’ imprisonment, or bothOther 1933 Act ProvisionsSecurities Exchange Act of 19341934 Act requires periodic disclosure of material information by issuers with publicly held equity securitiesPurpose is to protect investors after the issuer becomes a public companyCompare to 1933 Act, which primarily is a onetime disclosure statute1934 Act also regulates insiders’ transactions in securities, proxy solicitations, tender offers, brokers and dealers, and securities exchangesRegistration Under 1934 ActIssuers must file a 1934 Act Registration Statement for classes of securities which remain registered until the issuer acts to deregister the securitiesCompare to 1933 Act which requires issuers to register only for the term of an issuance of securitiesResult: Issuer must disclose information about itself to its owners and the SECPeriodic ReportingIssuers that also register securities under the 1934 Act must file several periodic reports:Annual report (Form 10-K), quarterly report (Form 10-Q), and a monthly report (Form 8-K) when material events occurComparable reports must be sent to shareholdersIssuers who must disclose under 1934 Act due to registered offering under 1933 Act must file same reports, but need not provide annual report to shareholdersInsider Holdings & TradingsSection 16(a): statutory insiders must disclose ownership of their firm’s securities within 10 days of becoming owners and report subsequent transactions within 2 business days after a trade Statutory insider is any one of the following: An officer of a corporation having equity securities registered under the 1934 ActA director of such a corporationAn owner of more than 10 percent of a class of equity securities registered under the 1934 Act1934 Act Liability ProvisionsSection 18 is the 1934 Act counterpart to Section 11 of 1933 Act; imposes liability on any person responsible for false or misleading statement of material fact in any filing under 1934 ActPerson who relies on false or misleading statement in a filing may sue for damagesNeed not prove defendant’s faultDefendant may raise defense of good faith -- no knowledge (no scienter) that the statement was false or misleadingSection 10(b) & Rule 10b-5Section 10(b) broadly prohibits the use of any manipulative or deceptive device in contravention of any SEC rules prescribed as “necessary or appropriate in the public interest or for the protection of investors”Rule 10b-5 specifies the elements of the prohibition and applies to all transactions in all securities, whether or not registered under 1933 or 1934 actsInsider 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 either disclose the information before trading or refrain from tradingTippees receive inside informationReg. FD (fair disclosure) states that when an issuer or person acting for the issuer discloses material nonpublic information to securities market professionals and holders of the 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 FDSection 32: Individuals may be fined up to $5 million and imprisoned up to 20 years for willful violationsBusinesses may be fined up to $25 million1934 Act Criminal LiabilityA tender offer is a public offer by a bidder to purchase a subject company’s equity securities directly from shareholders at a specified price (generally well above market) for a fixed period of timeHostile tender offers: opposition from subject company’s management Williams Act amendments to the 1934 Act: bidders & subject companies must provide relevant information to shareholdersTender Offer RegulationState securities laws often called blue sky laws, since early state securities laws were to protect investors from promoters and security salespersons who would “sell building lots in the blue sky”Most state securities statutes have a registration scheme much like 1933 ActAll state statutes have a limited number of exemptions State Securities LawsThought QuestionAlan 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 by Former Federal Reserve Chairman to the Financial Crisis Conference on July 12, 2000Do you agree with his statement?