copyright © 2010 pearson education, inc. publishing as prentice hall.17-1 chapter 17 investor...
TRANSCRIPT
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 17-1
Chapter 17
Investor Protection and E-Securities Transactions
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The Securities and Exchange Commission (SEC)
Created by the Securities Exchange Act of 1934 and empowered to administer federal securities laws.
Major responsibilities Adopt rules Investigate alleged securities violations and
bring enforcement actions Regulate activities of securities brokers and
advisors
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Definition of a Security
A security must exist before securities laws apply. A security is:
An interest or instrument that is common stock, preferred stock, a bond, a debenture, or a warrant
An interest or instrument that is expressly mentioned in securities acts
An investment contract
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Investment Contracts An investment
contract is a security if: An investor invests
money In a common enterprise With the expectation of
profit from the significant efforts of others
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Going Public: The Securities Act of 1933
A federal statute that primarily regulates the issuance of securities by corporations, partnerships, associations, and individuals
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Registration Statement Document that an
issuer of securities files with the SEC that contains required information about the issuer, the securities to be issued, and other relevant information
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Prospectus Written disclosure document
that must be submitted with registration statement. It is provided to prospective investors to enable them to evaluate the financial risk of an investment.
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Regulation A Offerings Simplified registration process Issuers may sell up to $5 million of
securities to the public during a 12-month period.
An offering statement must be filed for any offering over $100,000.
There are no restrictions on resale.
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Violations of the Securities Act of 1933
Private actions Section 12 imposes civil
liability for violations, including making misrepresentations concerning the offer or sale of securities.
Section 11 provides for civil liability when a registration statement misstates or omits a material fact.
Due diligence defense may be used by all defendants except the issuer.
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Violations of the Securities Act of 1933
SEC Actions Consent order – defendant agrees
not to violate securities laws in the future but does not admit past violations.
Injunction Disgorgement of profits
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Violations of the Securities Act of 1933
Criminal liability for willful violation of the act or rules and regulations
Violator may be fined up to $10,000 or imprisoned for up to 5 years, or both.
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Trading in Securities: The Securities Exchange Act of 1934
A federal statute that primarily regulates the trading of securities
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Section 10(b) and Rule 10b-5
Section 10(b) prohibits the use of manipulative and deceptive devices in the purchase or sale of securities.
Prohibits insider trading Rule 10b-5 clarifies the scope of
Section 10(b) Applies to all transfers of securities Only conduct involving scienter is a
violation.
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Insider Trading It is illegal for a company insider to
use material nonpublic information to make a profit by trading in company securities.
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Insider Trading
Insiders include: Officers, directors, and employees at all
levels of the company Lawyers, accountants, consultants, and
other agents and representatives hired by a company on a temporary basis
Others who owe a fiduciary duty to the company
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Tipper-Tippee Liability Tipper
A person who discloses material, nonpublic information to another person
Tippee The person who
receives material, nonpublic information from a tipper
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Violations of the Securities Exchange Act of 1934
Private actions SEC actions
Consent order Injunction Disgorgement of profits
Criminal liability Sarbanes-Oxley Act – SEC may prevent a
person who has committed securities fraud from acting as an officer or director in a public company.
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Short-Swing Profits Section 16(a)-16(b)
Statutory insider – executive officer, director, or 10% shareholder
Short-swing profits from trades of company equity securities by a statutory insider within 6 months of each other belong to the company.
Involuntary transfers are not included.
There are generally no defenses; no intent needs to be proven.
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E-Securities Transactions E-Securities Exchange E-SEC Edgar- the SEC’s electronic
data and records system E-Public Offerings (E-IPOs)
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State Securities Laws Many states have adopted the
Uniform Securities Act, called “blue sky laws.”
Blue sky laws require registration of certain securities and provide exemptions from registration.
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