Securities Regulation – Prof. Koehler
· Course overview:
o Business has a bright idea for a new product, or new service
o To best exploit the idea, product or service that business needs $$$
o One way to raise money is to offer ownership in the business (security)
o When an ownership interest is deemed a security there are a variety of legal and regulatory implications
o This course is about those legal and regulatory implications
o Understanding why securities are regulated
§ Understanding the dual foundations of the securities laws – disclosure of material info.
· Learning objective
o Understanding the legal rules and regulations governing the public offering of securities
§ Securities Act (’33 Act)
§ JOBS Act
o Understanding the legal rules and regulations governing issuers after an IPO
o Engaging in critical analysis of disclosure obligations
o Understanding the role of various securities market participants
o Understanding the public and private enforcement of securities law
o Understanding the real world events that motivated Congress to enact various securities laws and the goals of securities laws
§ Enron and related scandals
· Building Blocks
o Capital markets
§ Primary and secondary market transactions
o Types of securities
§ Common shares, preferred shares, bonds
o Securities laws
§ ’33 Act
§ ’34 Act
§ SOX
§ Dodd-Frank
§ JOBS Act
o Role of SEC
· Purpose of the Securities Laws
o To protect investors by encouraging full disclosure and deterring fraud
o “The mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation”
· Capital Markets
o Primary transaction
§ Issuer offers and sells its own securities to investors and money goes into corporate treasury
· Most often in IPOs, but not always
o Secondary transaction
§ Issuer does not participate in the transaction, the transaction is between investors
o Market
§ New York Stock Exchange
§ NASDAQ Stock Exchange
§ Exchange in other countries
o Types of Securities
§ Common shares
§ Preferred shares
§ Bonds
§ Right to share in profits
§ Voting power/control
§ Right to assets upon liquidation
o Common shares
§ Most common type of security
§ If the board of directors of the company declares a dividend, legally entitled to a pro-rata share
§ Certain voting rights including board of directors
§ Weakest claim to assets in the event of liquidation
o Preferred Shares
§ Wide range of attributes negotiated between the issuer and investor
§ Rights to profits will generally be negotiated
§ Generally, no voting rights
§ Preferred position compared to common stock upon liquidation
o Bonds
§ Issuer owes bondholders a fixed principal amount plus periodic interest payments until the maturity date of the bond
§ Wide range of attributes negotiated between the issuer and investor
§ No ownership interest
§ No right to vote or control
§ Priority compared to equity securities upon liquidation
o ’33 Act
§ Primary market transactions
· Disclosure via registration statement and prospectus
· Regulates the time period prior to the offering
· Fraud provisions
o ’34 Act
§ Secondary market transactions as well as market professionals and institutions that facilitate such transactions
· Disclosure via required and periodic filings
· Fraud provisions
o SOX (2002)
§ Increased regulation of various financial professionals
§ Enhanced corporate responsibility and financial disclosures
· Executive certifications
· Assessment of internal controls
§ Whistleblower retaliation provisions
o Dodd-Frank (2010)
§ Disclosure provisions impacting certain industries
§ Whistleblower bounty provisions
§ Shareholder say on pay
o JOBS Act
§ Relaxation of certain registration and disclosure requirements (both ’33 Act and ’34 Act) for “emerging growth companies”
o Role of SEC
§ An administrative agency that develops rules and regulations to interpret and implement the securities laws
§ A civil law enforcement agency that enforces the securities laws.
o Definition of a Security
§ While a boring topic, it is an important topic
§ IF an ownership interest, financial interest, etc. is deemed a security, THEN the securities laws apply.
· Is the field goal good here?
§ In many cases, there is no dispute that an ownership interest, financial interest, etc. is a security
§ But in many other cases there is a gray area
§ Statutory definitions of security
· Investment Contract is included in the definition
· But investment contract is not otherwise defined
o Court comes up with factors to determin
romises of variable returns for purposes of the test
§ “Investments pitched as low-risk are particularly attractive to individuals more vulnerable to investment fraud, including older and less sophisticated investors”
o SEC v. Merchant Capital
§ Solely from the efforts of the promoter or a third party
§ Should not be interpreted to narrowly; an interest does not fall outside the definition of investment contract merely because the purchaser has some nominal involvement in the operation of the business
§ The focus should be on the dependency of the investor on the entrepreneurial or managerial skills of the promoter or other party
§ A general partnership interest may qualify as an investment contract if a partner in fact retains little ability to control the profitability of the investment
· Power
· Experience and knowledge
· Dependent on some unique entrepreneurial or managerial ability of the promoter or manager
o Various forms of business organizations
§ Partnerships
§ Franchises
o NOTES – Reves v. Ernst & Young
§ Because the definition of security includes note, there is a presumption that every note is a security
§ Presumption can be rebutted if the note is to facilitate the purchase and sale of a minor asset or consumer good, to correct the seller’s cash flow difficulties, or to advance some other commercial or consumer transaction
§ WHY DOES THE MEANING OF SECURITY MATTER?
· When an ownership interest is deemed a security there are a variety of legal and regulatory implications
· The def. of a security is flexible
· The goal of the securities laws is to protect investors from a wide variety of schemes devised by those who seek the use of money of others on the promise of profits
o Unless an exemption applies
§ There are certain securities exempt from the ’33 Act registration requirements
§ In other words, some business organizations can offer and sell securities without having to register with the SEC
