1. Business Law and the Regulation of Business Chapter 40: Securities Regulation By Richard A. Mann & Barry S. Roberts

2. Topics Covered in this Chapter I.The Securities Act of 1933 A. Definition of a Security B. Registration of Securities C. Exempt Securities D. Exempt Transactions for Issuers E. Exempt Transactions for Non-Issuers F. Liability II.The Securities Exchange Act of 1934 A. Disclosure B. Liability

3. Securities Act of 1933 n Security - includes any note, stock, bond, preorganization subscription, and investment contract. n Investment Contract - any investment of money or property made in expectation of receiving a financial return solely from the efforts of others.

4. Registration of Securities n Disclosure Requirements - disclosure of accurate material information required in all public offerings of nonexempt securities unless offering is an exempt transaction. n Integrated Disclosure and Shelf Registrations - permitted for certain qualified issuers.

5. Exempt Securities n Definition - securities not subject to the registration requirements of the 1933 Act. n Types - exempt securities include short- term commercial paper, municipal bonds, and certain insurance policies and annuity contracts.

6. Exempt Transactions for Issuers n Definition - issuance of securities not subject to the registration requirements of the 1933 Act. n Types - exempt transactions include limited offers under Regulation D and Section 4(6), Regulation A, and intrastate issues.

7. Exempt Transactions for Issuers Under the 1933 Act

8. Exempt Transactions for Non-issuers n Definition - resales by persons other than the issuer that are exempted from the registration requirements of the 1933 Act. n Types - exempt transactions include Rule 144, Regulation A, and Rule 144A.

9. Permissible Sales Activities No offers No sales Notice of public offering Oral offers Certain written offers tombstone ads preliminary prospectus No sales Written offers with prospectus Sales Registration Filed Registration Effective

10. Registration and Exemptions Under the 1933 Act Exempt security Security Nonexempt security and transaction Exempt transaction Short-term commercial paper Other types Register Regulation A Intrastate transaction Limited offers Restricted resales** Unrestricted resales Unrestricted resales * *Under translate exemption, resales to nonresidents may only be made nine months after the last sale in the initial issuance. **Exempt under Rule 504.

11. Liability n Unregistered Sales - Section 12(a)(1) imposes absolute civil liability as there are no defenses. n False Registration Statements - Section 11 imposes liability on the issuer, all persons who signed the statement, every director or partner, experts who prepared or certified any part of the statement, and all underwriters; defendants other than issuer may assert the defense of due diligence.

12. Liability n Antifraud Provisions - Section 12(a)(2) imposes liability upon the seller to the immediate purchaser, provided the purchaser did not know of the untruth or omission, but the seller is not liable if he did not know and, in the exercise of reasonable care could not have known, of the untrue statement or omission; Section 17(a)­broadly prohibits fraud in the sale of securities. n Criminal Sanctions - willful violations are subject to a fine of up to $10,000 and/or imprisonment of not more than five years.

13. Registration required No registration required Yes No Registration and Liability Provisions of the 1933 Act Security? Exempt security? Exempt transaction? Security registered? False registration (Sect. 11) and antifraud provision (Sect. 12(2)) apply Antifraud provision (Sect. 17(a)) applies* Unregistered sales (Sect. 12 (1)) applies Yes No *Section 12(2) may apply to some of these issuance's.

14. Securities Exchange Act of 1934 n Registration and Periodic Reporting Requirements - apply to all regulated publicly held companies and include one-time registration as well as annual, quarterly, and monthly reports.

15. Applicability of the 1934 Act Antifraud provision of Rule 10b-5 Antifraud provision for tender offers Antibribery provisions Issuers with assets over $5 million and a class of equity securities with 500 shareholders or more Issuers listed on a national stock exchange “Private” issuers -- all other issuers RegistrationTender offers Periodic reportingAccounting requirements Proxy solicitationsShort-swing profits Liability for misleading reports

16. Disclosure under the 1934 Act

17. Disclosure under the 1934 Act (cont.)

18. Proxy Solicitations n Definition of a Proxy - a signed writing by a shareholder authorizing a named person to vote her stock at a specified meeting of shareholders. n Proxy Statements - proxy disclosure statements are required when proxies are solicited or an issuer submits a matter to a shareholder vote.

19. Tender Offers n A general invitation to shareholders to purchase their shares at a specified price for a specified time. n Disclosure Requirements - a statement disclosing specified information must be filed with the SEC and furnished to each offeree.

20. Liability n Misleading Statements in Reports - Section 18 imposes civil liability for any false or misleading statement made in a registration or report filed with the SEC. n Short-Swing Profits - Section 16(b)­imposes liability on certain insiders (directors, officers, and shareholders owning more than 10 percent of the stock of a corporation) for all profits made on sales and purchases within six months of each other, with recovery going to the issuer.

21. Antifraud Provision n Rule 10b–5 makes it unlawful to (1)­employ any device, scheme, or artifice to defraud; (2)­make any untrue statement of a material fact; (3)­omit to state a material fact; or (4)­engage in any act that operates as a fraud n Requisites of Rule 10b–5 - recovery requires (1)­a misstatement or omission, (2)­materiality, (3)­ scienter (intentional and knowing conduct), (4)­ reliance, and (5)­connection with the purchase or sale of a security. n Insider Trading - “insiders” are liable under Rule 10b–5 for failing to disclose material, nonpublic information before trading on the information.

22. Insider Trading n Express Insider Trading Liability - is imposed on any person who sells or buys a security while in possession of inside information. n Civil Penalties for Inside Trading - may be imposed on inside traders in an amount up to three times the gains they made or losses they avoided.

23. Parties Forbidden to Trade on Inside Information Officers Directors Employees Agents (1) Insider has breached fiduciary duty by disclosing information to tippee Tippees Underwriters Accountants Lawyers Consultants (2) Tippee knows or should know that there has been such a breach

24. Misleading Statements n Misleading Proxy Statements - any person who distributes a false or misleading proxy statement is liable to injured investors. n Fraudulent Tender Offers - Section 14(e)­imposes civil liability for false and material statements or omissions or fraudulent, deceptive, or manipulative practices in connection with any tender offer.

25. Sanctions n Antibribery Provision of FCPA - prohibited bribery can result in fines and imprisonment. n Criminal Sanctions - individuals who willfully violate the 1934 Act are subject to a fine of not more than $1 million and/or imprisonment of not more than ten years.

26. Civil Liability under the 1933 and 1934 Acts