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Securities Regulation
SUNY Buffalo Law School
Halpern, Phillip

Introduction to Securities Regulation Outline

Hapern Fall 2014

I. Types of Securities

a. Common Stock

i. Right to receive a corporation’s residual cash flows as dividends (Subject to the discretion of the board of directors

ii. Rights to the residual assets in liquidation after all other claimants are paid.

1. Absolute Priority Rule- Corporation earns profits only after it pays all other claimants, such as employees, suppliers, and banks.

b. Bonds

i. Provide their owners with a fixed and certain return in the form of periodic interest payments as well as a final principal payment when the bond matures

ii. Bondholders receive the return of their principal (and any interest due) before other claimants of the corporation.

iii. Less risky than common stock.

iv. No voting rights

c. Preferred Stock

i. Security that falls between Common Stock and Bonds

ii. Provides intermediate right to the cash flows of a corporation.

iii. Accords the holder with a right to a fixed dividend each quarter but the dividend is not guaranteed.

1. When dividends accumulate the preferred holders have a right to the unpaid dividends before the board may distribute dividends to the common stock holders.

iv. Intermediate right to assets in the event of liquidation

d. Options

i. Call Options

1. Contractual Right to buy a security, typically common stock, at a certain price (exercise price) for a specified period of time

ii. Put Option

1. Conveys the corresponding right to sell a security; sometimes used to hedge.

e. Securities Market Transactions

i. Primary Markets

1. Through Primary Market Transactions that corporations raise capital to fund their operations and expansion,

2. We want to encourage the purchase of securities in primary offerings.

3. Initial Piublic Offering

a. Made by companies raising capital for the first time

b. First time a corporation is required to disclose details about its operations and performance to the public.

4. Greatest amount of uncertainty and risk

ii. Secondary Markets

1. An organized market that allows buyers and sellers to come together.

2. Bid

a. An offer by an investor to buy a security at a specified bid price.

3. Ask

a. An offer by an investor to sell a security at a specified ask price.

4. Market Order

a. Allows an investor to specify the number of securities the investor is willing to buy

5. Limit order

a. Allows an investor to specify both the number of securities the investor will buy or sell and the price at which the investor will do so.

6. Bid-Ask spread

a. Difference between the bid and ask prices

f. The Regulatory Apparatus

i. The Securities Act of 1933

1. Regulates all primary market transactions

2. Imposes mandatory disclosure requirements, in the form of registration statements, and statutory prospectuses, as well as heightened antifraud liability for issuers selling securities in public offerings.

3. Imposes a rigid process (gun jumping rules) for issuers making public offerings of securities.

a. Issuers must go through a quiet period during which communications that might arouse the interest of investors is limited.

b. Also provides for a number of exemptions from the public offering requirements.

i. An issuer may sell securities through a private placement to sophisticated investors or through offshore transactions to investors outside of the United States.

4. Key Questions for the 33 Act

a. Who is protected by the public offerings requirements

b. Why should certain transactions be exempted from these requirements.

ii. The Exchange Act

1. Much broader than the Securities (1933) Act.

2. Deals primarily with the secondary market and provides for the registration of certain companies that achieve public company status.

a. Registration requires ongoing periodic disclosure in the form of:

i. Annual 10-K

ii. Quarterly 10-Q

iii. Episodic 8-K

3. Also provides for the registration and regulation of a number of secondary market participant

nt involves the concealment of an unlawful transaction

vii. Event Studies

1. May be used to determine materiality

2. Process:

a. Identify the event window (date on which the information as first made public).

b. A baseline for the company’s stock market returns is constructed.

i. Must look at the relation of the company’s stock returns and the overall market return for a specified time period.

ii. Must look to the beta which is the company’s sensitivity to the overall market.

c. Expected returns are subtracted from the actual returns for the company’s stock during the event window

i. The difference is the stock’s excess or abnormal return.

d. Based on the volatility of the company’s past stock price returns, the probability is calculated that the abnormal return is not just a random fluctuation but reflects a significant departure.

e. If it is a significant departure the courts may conclude tha that the info was material

viii. Total Mix of Information

ix. Puffery

1. Statements deemed to be mere puffery are presumptively immaterial

x. Forward looking information

1. Basic v. Levinson

a. Combustion engineering entered into merger discussions with Basic Inc. but basic publicly denied that it was negotiating. When basic announced the merger their shares jumped from $29.00-$44.00. Shareholders that sold at the lower price brought suit

b. Blackmun held that the materiality of a prospective merger requires balancing the (1) probability of the event along with (2) its anticipated magnitude.

c. Corporations/corporate boards have the option to say nothing but when they choose to speak they must tell the truth.