Securities Reg – Diamond
Exam Approach
1) Securities Markets and Regulation; Introduction; General Principles
a) Intersection of savings and investment, crucial to the way a capitalist system works.
b) Purpose: Moves excess wealth to its highest most efficient use, stimulate growth through investment.
i) Alternative to capital markets:
(1) Central banking
(a) Industry funded by loans rather than equity markets.
c) Why do we need securities regulation
i) To compel disclosure, make information available, protect the little guy
d) 5 Main sections to the materials
i) What is a security
(1) Define the world in which the statute exists
ii) Registration & Distribution Process
iii) Exemptions from registration requirement
iv) process of resale of the securities after they are issued
v) Liability
(1) This class focuses on civil liability
(a) Criminal penalties also available
e) Separating ownership and control
i) Owners of securities have ownership in the company; but who has control
ii) The company; the BOD
iii) This is why we need disclosure; because of the separation of ownership and control; owners don’t really control the company they own; so they need to know what they’re getting in to.
iv) Creates a principal/agent relationship; creates transaction costs
f) Diamond’s 4 features that you can find in any security that is worth considering at a general level. Themes that run throughout, what courts look for:
i) Manner of sale;
(1) are they really trying to go public under the guise of something else?
(a) If so, generally will find security.
(b) Not IPO in the formal sense, but are they trying to extract money from the general public whom they do not know or have a relationship with?
(2) If more like one to one, then you generally won’t see a problem with manner of sale
ii) What type of investor are they looking for?
(1) Large, sophisticated, informed about markets?
(a) Cuts against security
(2) Or naïve, passive, not terribly informed about financial markets?
(a) Cuts toward a finding of security.
iii) Economic reality
(1) Substance over form. Don’t get fooled by the name or structure. Think about what is really happening.
(2) Are they investing, parking money for a period and taking a real risk?
(a) Cuts toward security.
iv) Results oriented fundamental purpose analysis
(1) We want people to continue to invest, protect liquidity and viability of securities markets.
(2) Think about what the holding in this case would do to the credibility and integrity of financial markets.
v) These are the predominant underlying considerations. These are not rules, just observations of principles that seem to be applied. Use them loosely.
2) What is a security
a) First; items gener
character” loan to a bank customer
5. short term notes secured by an assignment of Accounts Receivable
6. or a note which simply formalizes an open account debt incurred in the ordinary course of business (particularly if it is collateralized, as in the case of the customer of a broker)
(iii) What it is about these notes that makes them not securities; and the criteria that must be satisfied to add a new note to the list. Use these four factors to (a) argue that the note in question bears a strong family resemblance to one of the notes listed above; or (b) the note in question ought to be added to the list above as a new exempted note.
1. Motivations of parties
a. Profit or consumption?
b. Seller wants to finance big project or raise money for general business use and buyer wants to earn interest; cuts toward security
c. But if exchanged to facilitate purchase of a minor asset to help correct a cash flow difficulty, cuts against security.
2. Plan of distribution
Assess the plan of distribution and determine whether it is an instrument in which there is a common trading for speculation or investment. Yes cuts toward security.
