Chapter 41Chapter 41

Corporations: Corporations: Securities and Securities and

Investor Investor ProtectionProtection

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Security (Definition):Security (Definition):

Investment in a common Investment in a common enterprise with the reasonable enterprise with the reasonable

expectation of profit gained expectation of profit gained predominantly from others’ predominantly from others’

effortsefforts

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Securities and Exchange Securities and Exchange Commission (SEC)Commission (SEC)

Created in 1934 to:Created in 1934 to:

Enforce securities lawsEnforce securities laws

Interpret provisions of securities actsInterpret provisions of securities acts

Regulate the trade of securitiesRegulate the trade of securities

Regulate the activities of securities brokers, Regulate the activities of securities brokers, dealers, and advisersdealers, and advisers

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Expansion of SEC Powers in the Expansion of SEC Powers in the 1990s1990s

Securities Enforcement Remedies and Penny Securities Enforcement Remedies and Penny Stock Reform Act of 1990Stock Reform Act of 1990

Market Reform Act of 1990Market Reform Act of 1990

Securities Acts Amendments of 1990Securities Acts Amendments of 1990

National Securities Markets Improvement Act of National Securities Markets Improvement Act of 19961996

Sarbanes-Oxley Act of 2002Sarbanes-Oxley Act of 2002

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The Securities Act of 1933: Terminology, The Securities Act of 1933: Terminology, Rules, and ProceduresRules, and Procedures

Registration Statement: Document containingRegistration Statement: Document containing

Description of securities offeredDescription of securities offered

Explanation of how proceeds from sale will be usedExplanation of how proceeds from sale will be used

Description of registrant’s business and propertiesDescription of registrant’s business and properties

Information about management of companyInformation about management of company

Description of pending lawsuitsDescription of pending lawsuits

Certified financial statementsCertified financial statements

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The Securities Act of The Securities Act of 1933: Terminology, Rules, 1933: Terminology, Rules,

and Procedures and Procedures (Continued)(Continued)

Prospectus: Written document Prospectus: Written document similar to registration statement, similar to registration statement, used as a selling tool to attract used as a selling tool to attract

potential investorspotential investors

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The Securities Act of 1933: The Securities Act of 1933: Terminology, Rules, and Procedures Terminology, Rules, and Procedures

(Continued)(Continued)Periods of the registration statement and Periods of the registration statement and prospectus filing process:prospectus filing process:

Pre-filing PeriodPre-filing Period

Waiting PeriodWaiting Period

Post-effective PeriodPost-effective Period

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The Securities Act of 1933: Terminology, Rules, and The Securities Act of 1933: Terminology, Rules, and Procedures (Continued)Procedures (Continued)

Exempt Transactions-Securities exempt from standard SEC registration Exempt Transactions-Securities exempt from standard SEC registration requirements requirements

Limited Offers: Involve small amounts of money, or are offered only to Limited Offers: Involve small amounts of money, or are offered only to sophisticated investorssophisticated investors

Private Placement Exemption: Exempts private offerings of securitiesPrivate Placement Exemption: Exempts private offerings of securities

Rule 505: States that private offerings may not exceed $5 million in a Rule 505: States that private offerings may not exceed $5 million in a twelve-month period, and firms do not have to believe that investors twelve-month period, and firms do not have to believe that investors have a reasonable ability to evaluate riskhave a reasonable ability to evaluate risk

Rule 504: Exempts non-investment firms that offer no more that $1 Rule 504: Exempts non-investment firms that offer no more that $1 million in securities in a twelve-month periodmillion in securities in a twelve-month period

Section 4(6): Exempts securities offered only to accredited investors for Section 4(6): Exempts securities offered only to accredited investors for amount less than $5 millionamount less than $5 million

Intrastate Issues: Exempt local investors in local businessesIntrastate Issues: Exempt local investors in local businesses

Re-sales of Securities: Exempt transactions by any person other than an Re-sales of Securities: Exempt transactions by any person other than an issuer, underwriter, or dealerissuer, underwriter, or dealer

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The Securities Act of 1933: Terminology, The Securities Act of 1933: Terminology, Rules, and Procedures (Continued)Rules, and Procedures (Continued)

Restricted Securities: Securities acquired under Rule 505, Restricted Securities: Securities acquired under Rule 505, 506, or Section 4(6) that must be registered for resale, 506, or Section 4(6) that must be registered for resale, unless investor follows Rule 144 or 144(a)unless investor follows Rule 144 or 144(a)

Violations may result in:Violations may result in:

Administrative ActionAdministrative Action

Injunctive ActionInjunctive Action

Criminal ProsecutionCriminal Prosecution

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The Securities Exchange Act of 1934: The Securities Exchange Act of 1934: Terminology, Rules, and ProceduresTerminology, Rules, and Procedures

Section 10(b): Prohibits use of “manipulative Section 10(b): Prohibits use of “manipulative and deceptive devices” to bypass SEC rulesand deceptive devices” to bypass SEC rules

Insider Trading: Trading in which company Insider Trading: Trading in which company employee or executive uses material inside employee or executive uses material inside information to make profitinformation to make profit

Misappropriation Theory: Individual who Misappropriation Theory: Individual who wrongly acquires and uses inside information for wrongly acquires and uses inside information for profit is liable for insider tradingprofit is liable for insider trading

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The Securities Exchange Act of 1934: The Securities Exchange Act of 1934: Terminology, Rules, and Procedures Terminology, Rules, and Procedures

(Continued)(Continued)

Tipper/Tippee Theory: Individual who receives material Tipper/Tippee Theory: Individual who receives material inside information as a result of insider’s breach of duty is inside information as a result of insider’s breach of duty is guilty of insider tradingguilty of insider trading

Statutory Insiders: Certain stockholders, executive Statutory Insiders: Certain stockholders, executive officers, and directors who must file reports detailing their officers, and directors who must file reports detailing their ownership and trading of the corporation’s securitiesownership and trading of the corporation’s securities

Short-Swing Profits: Profits made from sale of company Short-Swing Profits: Profits made from sale of company stock within any 6-month period by statutory insider; per stock within any 6-month period by statutory insider; per Section 16(b), these profits must be returned to companySection 16(b), these profits must be returned to company

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The Securities Exchange Act of 1934: The Securities Exchange Act of 1934: Terminology, Rules, and Procedures Terminology, Rules, and Procedures

(Continued)(Continued) Proxy: Document that authorizes an individual to vote Proxy: Document that authorizes an individual to vote

shareholder’s share of stocks at a shareholder’s meetingshareholder’s share of stocks at a shareholder’s meeting

Proxy Solicitation: Process of obtaining authority to vote on Proxy Solicitation: Process of obtaining authority to vote on behalf of shareholderbehalf of shareholder

Violations of Securities Exchange Act of 1934 may result in:Violations of Securities Exchange Act of 1934 may result in:

Criminal penaltiesCriminal penalties

Civil penaltiesCivil penalties

Suits against those involved in insider trading under Suits against those involved in insider trading under Insider Trading Sanctions Act of 1984Insider Trading Sanctions Act of 1984

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State Securities LawsState Securities Laws

““Blue Sky” Laws: Regulate the Blue Sky” Laws: Regulate the offering and sale of securities offering and sale of securities

within the state onlywithin the state only

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