Presentation is loading. Please wait.

Presentation is loading. Please wait.

Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany.

Similar presentations


Presentation on theme: "Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany."— Presentation transcript:

1 Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 5 th Edition by Henry R. Cheeseman Chapter 31 Investor Protection and Online Securities Transactions

2 31 - 2Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Federal law did not regulate the securities markets until after the stock market crash of Securities laws are designed to help prevent a similar crash today.

3 31 - 3Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The Securities and Exchange Commission (SEC) Federal administrative agency that is empowered to administer federal securities laws interpretimplement The SEC can adopt rules and regulations to interpret and implement federal securities laws

4 31 - 4Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Definition of a Security security A security must exist before securities laws apply Securities are defined as: 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

5 31 - 5Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The Securities Act of 1933 Primarily regulates the issuance of securities by corporations, partnerships, associations, and individuals Section 5 Section 5 of the Act requires securities offered to the public through the use of the mails or any facility of interstate commerce to be registered with the SEC

6 31 - 6Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Registration Statement registration statement A covered issuer of securities must file a written registration statement with the SEC It contains required information about the issuer and the securities to be issued The SEC does not pass upon the merits of the registered securities It decides only whether the issuer has met the disclosure requirements

7 31 - 7Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Prospectus A written disclosure document that must be submitted to the SEC along with the registration statement It is provided to prospective investors to enable them to evaluate the financial risk of the investment

8 31 - 8Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Limitations on Activities During the Registration Process Section 5 Section 5 of the Securities Act of 1933 limits the types of activities that an issuer, an underwriter, and a dealer may engage in during the registration process These limitations are divided into three time periods: The Prefiling Period The Waiting Period The Posteffective Period

9 31 - 9Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Sale of Unregistered Securities Sale of securities that should have been registered with the SEC but are not violates the Securities Act of 1933 Investors can rescind their purchases and recover damages Civil and criminal penalties can be imposed by the U.S. government

10 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Regulation A Regulation A Offerings A regulation that permits the issuer to sell securities pursuant to a simplified registration process Such offerings may have an unlimited number of purchasers They do not have to be sophisticated investors There are no resale restrictions on the securities

11 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Private and Other Transactions Exempt from Registration (1 of 2) transactions Certain transactions in securities are exempt from registration Exempt transactions are subject to the antifraud provisions of the federal securities laws The issuer must provide investors with adequate information

12 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 1. Nonissuer Exemption 2. Intrastate Offering Exemption 3. Private Placement Exemption 4. Small Offering Exemption Private and Other Transactions Exempt from Registration (2 of 2)

13 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Resale Restrictions resale restrictions Certain resale restrictions are placed on securities issued pursuant to exemptions from registration Restricted Securities Restricted Securities – securities that were issued for investment purposes pursuant to the intrastate, private placement, or small offering exemptions Rule 147 Rule 144

14 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Rule 144A (1990) Rule adopted by the SEC to increase the liquidity of the registered securities “qualified institutional investors” The rule permits “qualified institutional investors” to buy unregistered securities without being subject to the holding periods of Rule 144

15 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Securities Exempt From Registration With the SEC (1 of 2) Securities issued by any government in the U.S. Short-term notes and drafts that have a maturity date that does not exceed nine months Securities issued by nonprofit issuers Securities of financial institutions that are regulated by the appropriate banking authorities Securities issued by common carriers that are regulated by the Interstate Commerce Commission Securities issued by any government in the U.S. Short-term notes and drafts that have a maturity date that does not exceed nine months Securities issued by nonprofit issuers Securities of financial institutions that are regulated by the appropriate banking authorities Securities issued by common carriers that are regulated by the Interstate Commerce Commission

16 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Securities Exempt From Registration With the SEC (2 of 2) Insurance and annuity contracts issued by insurance companies Stock dividends and stock splits Securities issued in a corporate reorganization where one security is exchanged for another security Insurance and annuity contracts issued by insurance companies Stock dividends and stock splits Securities issued in a corporate reorganization where one security is exchanged for another security

17 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Violations of the Securities Act of 1933 (1 of 2) SEC Actions SEC Actions Consent order Injunction Request ancillary relief from the court Criminal LiabilitySection 24 Criminal Liability – Section 24 imposes criminal liability on any person who willfully violates the act or the rules or regulations adopted thereunder

18 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Violations of the Securities Act of 1933 (2 of 2) Private Actions Private Actions – Private parties who have been injured by violations of the act have the following recourse against the violator: Section 12 – civil liability Section 11 – civil liability Due diligence defense

19 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Sarbanes-Oxley Act of 2002 Section 501 Section 501 of the Act established rules for separating investment banking and securities advice functions of securities firms, thus eliminating many conflicts of interests

20 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Trading in Securities The Securities Exchange Act of 1934: Trading in Securities Federal statute that primarily regulates the trading in securities It provides for the regulation of Securities exchanges Brokers Dealers Contains provisions that assess civil and criminal liability on violators of the act

21 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Section 10(b) A provision of the Securities Exchange Act of 1934 Prohibits the use of manipulative and deceptive devices in the purchase or sale of securities in contravention of the rules and regulations prescribed by the SEC

22 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Rule 10b-5 Section 10(b) A rule adopted by the SEC to clarify the reach of Section 10(b) against deceptive and fraudulent activities in the purchase and sale of securities All transfers of securities are subject to this rule i.e., stock exchange, over-the-counter, private sale, merger

23 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Insider Trading insider trading One of the most important purposes of Section 10(b) and Rule 10b-5 is to prevent insider trading When an insider makes a profit by personally purchasing shares of the corporation prior to public release of favorable information; or By selling shares of the corporation prior to the disclosure of unfavorable information

24 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Insiders are defined under Section 10(b) and Rule 10b-5 as: Officers, directors, and employees at all levels of the company Lawyers, accountants, consultants, and other agents and representatives who are hired by the company on a temporary and non-employee status to provide services or work to the company Others who owe a fiduciary duty to the company Officers, directors, and employees at all levels of the company Lawyers, accountants, consultants, and other agents and representatives who are hired by the company on a temporary and non-employee status to provide services or work to the company Others who owe a fiduciary duty to the company

25 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Tipper – Tippee Liability Tipper A person who discloses non-public information to another person Liable for the profits made by the tippeeTipper A person who discloses non-public information to another person Liable for the profits made by the tippeeTippee The person who receives material non-public information from a tipper Liable for acting on material information that he or she knew (or should have known) was not publicTippee The person who receives material non-public information from a tipper Liable for acting on material information that he or she knew (or should have known) was not public

26 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Violations of the Securities Exchange Act of 1934 (1 of 2) Criminal LiabilitySection 32 Criminal Liability – Section 32 imposes criminal liability on any person who willfully violates the act or regulations adopted thereunder SEC Actions SEC Actions – Consent order Injunction Seek court orders Insider trading sanctions

27 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Violations of the Securities Exchange Act of 1934 (2 of 2) Private Actions Section 10(b) and Rule 10b-5: Private Actions – The courts have implied private right of action under Section 10(b) and Rule 10b-5: Generally, a plaintiff may seek rescission of the securities contract or recover damages from a defendant who has engaged in manipulation and deceptive practices that have caused the plaintiff injury

28 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Statutory Insiders Short-Swing Profits: Statutory Insiders Section 16(a) Section 16 Section 16(a) of the 1934 act – defines any person who is an executive officer, a director, or a 10 percent shareholder of an equity security of a reporting company as a statutory insider for Section 16 purposes

29 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Section 16(b) Short-Swing Profits: Section 16(b) Short-Swing Profits Short-Swing Profits – Profits made by statutory insiders on trades involving equity securities that occur within six months of each other Section 16(b) Section 16(b) – A provision of the 1934 act that requires that any profits made by a statutory insider on transactions involving short-swing profits belong to the corporation

30 Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. State Securities Laws Most states have enacted securities laws that regulate the issuance and trading of securities These acts are often patterned after, and are designed to coordinate with, federal securities laws Uniform Securities Act The Uniform Securities Act (a model state statute) has been adopted by many states


Download ppt "Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany."

Similar presentations


Ads by Google