Federal Securities Regulation
Fall 2017 Cleveland
University of Oklahoma
Principal if buying for inventory or selling out of, market maker looking out for their interest. Agent if connecting a buyer and seller as has interest of another party as well, will get commission.
33 Act: demands securities are registered with SEC and provided certain info. Ex. Risk factors, if it’s an IPO, certified financial statements, etc. Pg.6
34 Act: Establish SEC. Form 10-K is most significant. 3 Categories of companies subject:
Companies listed on national exchange
Companies assets > 10 mil and equity held by at least 2k holders
Companies with effective 33 reg.
Efficient market: Assumption that the market is efficient and public info is reflected in the price.
Goal of disclosure: Minimize info costs.
Materiality:
Materiality is a mixed question of law and fact. Material if there is a substantial likelihood that disclosure of fact would have been viewed by reasonable investor as having significantly altered the total mix of info made available
5% rule: Financial statements erroneous by 5% or less is not material in and of itself.
Objective Test: what would the reasonable investor do/want?
Basic: materiality depends on the significant the RI would place on the info. Silence, absent a duty to disclose, is not misleading under 10b-5. Presumption of reliance based on fraud on the market theory.
Shorting stocks: borrowing stock at x, selling it, then buying once price drops.
Rule 408: material is any info as may be necessary to make the required statement, in light of the circumstances, not be misleading.
§ 11 of 33 Act: Can sue for material misleads or omissions
12a2 33 Act: can sue if sold pursuant to material misleading prospectus
17a2: anti -fraud
Truth on the Market:
cannot be held liable for omissions or misstatements, absent fraud, when the correct/omitted info is in the public domain as, assuming an efficient market, the info is already reflected in the price.
Puffery:
Nonspecific optimistic info as to the company’s proceedings cannot be held material.
Opinion:
an investor understands statements of opinion in full context, Not per se material.
Forward looking info:
Soft info describes events that will occurrence, if they are to occur,, at some point in the future. Qualities of soft info should be contrasted with historical info.
Item 303 of Reg -K:
requires mgmt. to assess past performance and provide projections of what forced will affect future operation.
Bespeaks Caution Doctrine:
Forward looking statements must be accompanied by meaningful cautionary statement that are substantive and specifically tailored to the future projections.
PSLRA:
added 27A to 33 act and 21E to 34 Act, statutory safe harbor for forward looking statements.
Asher:
When bringing fraud on the market claim based on forward looking information, must accept that cautionary language is reflected in the price whether it was distributed with the forward-looking statement. Still must be adequate to identify important factors that could cause results to materially differ.
Franchard: Corporation must disclose situation in which a conflict of interest may arise for members of the BoD
Item 403 of Reg S-K: requires disclosure of any known arrangements or pledge to which the operation of may result in a hange in control of the registrant.
Item 406 of Reg S-K: requires reporting company to disclose code of ethics for officers or explain why it doesn’t have one.
Item 103 of Reg S-K: requires disclosure of litiagation or pending legal proceedings outside ordinary incidental to business.
Item 402 of Reg S-K: extensive disclosure bearing on overall exec compensation.
Defining Security
Security means any stock, note, bond, or investment K.
Investment K:
Invest money in common enterprise and expect profits solely from efforts of others. Promise of returns not needed.
Common enterprise:
Horizontal commonality= pooled funds
Broad VC= uniformity of impact of the proter and success of investor
Strict vc= direct relationship between the success of the promoters and investors
Efforts of others:
need not be no investor involvement, substantial effort of promoter is required, must be post investment. consider whether under all the circumstances the offer was promoted primarily as an investment or as an opportunity for investors to pool their money and activity in a meaningful way.
Common Stock Characteristics:
right to receive dividends upon apportionment of profits
negotiability
ability to be hypothecated
voting rights proportionate to number of shared owned
capacity to appreciate in value.
Notes as Securities:
A note will be considered a security if its investors are interested in a profit from said note, the note is for common trading for investment, the public exp
des an exception to info distributed that is factual business info, meaning:
info on financial developments
advertisements of products or services
info must also been released:
by an issuer who has previously released such type of info
consistent in time manner and form to previous releases
intended towards customers or suppliers, not investors
issuer not registered under ICA of 1940.
Sec 5(d): permits emerging growth companies (EGC) to communicate with qualified institutional buyers (QIB) or institutions that are accredited investors (AcI)
Waiting Period:
Sec 5(c)’s prohibition against offers to sell/buy end once reg statement is filed, yet 5(a) barring actual sales and 5(b)(1) requiring prospectus be delivered meeting sec 10 requirements restrictions still apply.
Sec 10b allows SEC to adopt rules for prospectus that exclude info contained in summary prospectuses, but these prospectuses only fulfil section 5(b)(1) not 5(b)(2) final prospectuses.
Rule 430: Allows for Preliminary prospectuses containing substantially the same info as required for final prospectus, allow exclusion of offering price, underwriter and dealer compensation, amount of the proceeds, others.
Rule 431: allows issuers that have been reporting under the act and exchange act for 36 months, filed in timely manner.
Rule 134: List communications not deemed a prospectus. Includes tombstone ads, a brief description of issuer’s business, identifying securities offered, underwriters and procedures to express interest in the offering.
Rule 164: allows for free writing prospectus to be distributed as long as comply with rule 433.
Rule 433: list Eligibility and free writing prospectus conditions. Among those being they contain a legend indicating where prospectus is available form underwriters through a toll free number. Cannot conflict with reg statement.
Hyperlinks to prospectus are deemed offers to sell.
Section 5(b)(1) does not apply to oral selling efforts.
