1. Securities Regulation

2. “Definition of insider trading: Stealing too fast.” Calvin Trillin Essayist

3.  Created in 1934 to regulate the securities industry  Creates laws in three different ways: ◦ Rules: Through which the SEC fills in the crucial details ◦ Releases: Informal pronouncements from the SEC on current issues ◦ No-action letters: States that the SEC will take no action if the transaction is done in a specified manner

4. Security Any transaction in which the buyer invests money in a common enterprise and expects to earn a profit predominately from the efforts of others

5.  Requires that before offering or selling securities, the issuer must register the securities with the SEC unless the securities qualify for an exemption ◦ Issuer: A company that sells its own stock  When an issuer registers securities, the SEC does not investigate the quality of the offering

6.  General exemption – Issuer must determine whether they are exempt from the registration under the 1933 Act ◦ Based on two factors:  Type of security  Type of transaction

7.  Inherently low-risk  Regulated by other statutes  Not really investments  Following securities are exempt from registration: ◦ Government securities ◦ Bank securities ◦ Short-term notes ◦ Non-profit issues ◦ Insurance policies and annuity contracts

8.  Section 4(2) of the 1933 Act exempts from registration “transactions by an issuer not involving any public offerings”  Interstate offering exemption: ◦ Under SEC Rule 147, an issuer is not required to register securities that are offered and sold only to residents of the state in which the issuer is incorporated and does business  Rule 147 is a safe harbor  Safe harbor: A set of requirements that, if met, indicate automatic compliance with a law

9.  Regulation D ◦ Accredited investors: Institutions (such as banks and insurance companies) or wealthy individuals  To qualify, individuals must have a net worth (not counting their home) of more than $1 million or an annual income of more than $200,000 ◦ Sophisticated investor: Someone who is able to assess the risk of an offering ◦ Restricted stock: Securities purchased strictly for investment purchase

10.  Regulation A ◦ Permits an issuer to sell up to $50 million of securities publicly in any 12-month period  Crowdfunding ◦ JOBS Act – Permits privately held companies to sell up to $1 million in securities in any 12-month period

11.  The issuer typically sells shares to its stakeholders: ◦ Customers ◦ Employees ◦ Suppliers ◦ Community

12.  Advantages: ◦ Cheaper and faster ◦ Effective marketing tool ◦ Easy mechanism for reaching potential investors  Downsides: ◦ Limit to how much a company can raise ◦ Company officers typically lack the expertise ◦ Each investor must receive written information about the company ◦ Tricky and time-consuming

13.  Initial public offering (IPO): A company’s first public sale of securities  Secondary offering: Any public sale of securities by a company after the initial public offering ◦ Followed by an issuer for either type of sale:  Underwriting  Firm commitment underwriting: The underwriter buys stock from the issuer and sells it to the public  Best efforts underwriting: The underwriter does not buy the stock from the issuer but instead acts as the issuer’s agent in selling the securities

14.  Registration statement: Two purposes  Notify the SEC that a sale of securities is pending  Disclose information to prospective purchasers  Prospectus  Sales effort  Going effective

15.  Rule 144 limits the resale of two types of securities issued by public companies: ◦ Restricted security: Any stock purchased from the issuer in a private offering ◦ Control security: Stock held by any shareholder who owns more than 10 percent of a class of stock or by any officer or director of the company

16.  Liability for selling unregistered securities ◦ Imposed on anyone selling unregistered and non- exempt securities  Fraud ◦ The seller of a security is liable for making any material misstatement or omission, either oral or written, in connection with the offer or sale of a security

17.  Criminal liability ◦ Imposed on anyone who willfully violates the Act  Liability for the registration statement ◦ If a final registration statement contains a material misstatement or omission, the purchaser of the security can recover from everyone who signed the registration statement  Damages – Only to prove that there was a material misstatement or omission and that plaintiff lost money  Material: important enough to affect an investor’s decision  Due diligence: An investigation of the registration statement by someone who signs it

18.  General provisions for the 1934 Act ◦ Registration requirements – An issuer must register with the SEC if:  It completes a public offering under the 1933 Act  Its securities are traded on a national exchange  It has at least 2000 shareholders and total assets that exceed $10 million

19.  Disclosure requirements—Section 13 - Requires companies to file the following documents: ◦ An initial, detailed information statement when the company first registers ◦ Annual reports on Form 10-K ◦ Quarterly reports on Form 10-Q, which are less detailed than 10-Ks ◦ Form 8-K to report any significant developments

20.  Proxy requirements—Section 14 – Allows shareholders to vote without attending the meeting  Short-swing trading—Section 16 – Prevents corporate insiders from taking unfair advantage of privileged information to manipulate the market: ◦ Insiders must report their trade within two business days ◦ Insiders must turn over to the corporation

21.  Section 18 ◦ Anyone who makes a false or misleading statement in a filing under the 1934 Act is liable to buyers and sellers who:  Acted in reliance on the statement  Can prove that the price at which they bought or sold was affected buy the false filing  Section 10(b) ◦ Prohibits fraud in connection with the purchase and sale of any security whether or not it is registered under the 1934 Act

22.  Insider trading ◦ A crime punishable by fines and imprisonment  Fiduciary duty ◦ Any corporate insider who trades while in possession of nonpublic material information in violation of his fiduciary duty to his company is liable under Rule 10b-5

23.  Misappropriation ◦ Anyone of the following is liable for insider trading:  Anyone with material, non-public information  Anyone who breaches a fiduciary duty to the source of the information  Anyone who reveals or trades in the information

24.  Tippers – Anyone who reveals material nonpublic information in violation of his fiduciary duty is liable if he: ◦ Knows the information is confidential ◦ Expected some personal gain

25.  Tippees - Those who receive tips are liable for trading on inside information, even if they do not have a fiduciary relationship to the company, as long as: ◦ They know the information is confidential ◦ They know it came from an insider who was violating his fiduciary duty ◦ The insider expected some personal gain

26.  Takeovers ◦ Rule 14e-3 prohibits trading on inside information during a tender offer if the trader knows the information was obtained from either the bidder or the target company  Advanced planning ◦ Under Rule 10b5-1, an insider can avoid insider trading charges if she commits in advance to a plan to sell securities

27.  An amendment to the 1934 Act  The Act: ◦ Requires companies to disclose if they have an ethics code and, if they do not, why not ◦ Imposes fines and imprisonments on anyone who interferes with federal investigation into fraud ◦ Permits a whistleblower on a securities law violation to sue the company if it retaliates  Makes it a crime to retaliate against a whistleblower ◦ Establishes a new Public Accounting Oversight Board to oversee the auditing of reporting companies

28.  Amends the 1934 Act to provide a reward system for whistle-blowers  Establishes a requirement that reporting companies tell the SEC and post on their websites information about their use of “conflict materials”

29.  Statutes that regulated the sale of securities  Exemption from state regulation ◦ National Securities Market Improvement Act of 1996, under which states may no longer regulate offerings of securities that are:  Traded on a national exchange  Exempt under Rule 506, or  Sold to a qualified purchaser

30.  State regulation ◦ States take one of the following approaches to securities offerings:  Registration by notification  Registration by coordination  Registration by qualification

31.  Facilitating state regulation - Options that ease the process of complying with state requirements: ◦ Coordinated equity review: Issuer deals with only one state, which coordinates comments from all other states ◦ Small company offering registration: For use in offerings of up to $1 million over any 12 month period ◦ Uniform limited offering exemption: Most states largely exempt from registration any offerings under Rule 505

32. “The 1929 stock market crash and the Great Depression that followed were an economic catastrophe for the United States. The Securities Act of 1933 and the Securities Exchange Act of 1934 were designed to prevent such disasters from ever occurring again. Whether or not they achieve that goal, they undoubtedly enhance the reliability and stability of the securities market.”