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Securities Regulation
University of San Diego School of Law
Stiska, John C.

USD Fall 2011 John Stistka
Securities Regulation Outline
Two Statues govern this area of law:
(1)   Securities Act of 1933
·         enacted in response to ‘29 crash
·         policy of regulation through disclosure
·         requires registration of securities
(2)   Securities Exchange Act of 1934
·         deals with regulation of security exchanges
·         once you have disclosed under the ’33 Act you have continuing regulation under the ’34 Act
·         act seeks to insure fair and orderly securities markets by prohibiting certain types of activities and by setting forth rules regarding the operation of the markets and participants
Securities and Exchange Commission (SEC)
·         administers federal securities law and issue rules and regulations to provide protection for investors
·         independent commission
·         5 members serve staggered five year terms
·         no more than 3 members of the same party
PURPOSE Registration is intended to provide adequate and accurate disclosure of material facts concerning the company and the securities it proposes to sell.
            Division of Corporate Finance (of the SEC)
·         ensures disclosure requirements are met (executive role)
·         interprets security laws (judicial role)
·         drafts rules and regulations (legislative role)
In administering the securities statutes, the Commission issues a large number of rules and pronouncements:
Releases: a type of pronouncement in which the Commission interprets rules and statutes that have been brought to their attention, do not have force of law but are given that effect as a practical matter
No-action letter: is only binding upon the person to whom the letter is issued – if action recommended is taken then the SEC will recommend to the Commission that no action be taken – however this does not preclude someone else in Commission from taking action
Note: one reason for the ’29 crash was that shares were overvalued because investors did not have a lot of info on the companies – this is why the emphasis of the ’33 Act is on disclosure
Financial info is the big component of the disclosure requirement. The info is disclosed through a registration statement. The most prominent form is the S-1. The prospectus is contained in the registration statement.
“Going public” is the transformation of a closely held corporation to one in which the general public has a proprietary interest
A company goes public by selling its securities (primary offering) or by having present shareholders sell their securities to the public (secondary offering)
Both offerings are accomplished by means of a registration statement filed with the SEC pursuant to the ‘33 Act
Investment banking: term used to encompass such functions as acting as underwriter, dealer, broker, or market maker (see text p.29)
Underwriting: the function of helping a company, or one or more of its major shareholders, sell securities to the public through an offering under the Securities Act
            Three types of underwriting: (text p.28)
(1)   Firm Commitment underwriting: underwriter purchase securities from a company at an agreed price and then attempts to resell securities to the public.
(2)   Best efforts underwriting: underwriter agrees to use its best efforts to sell an agreed amount of securities to the public
(3)   Standby underwriting: company directly offers its existing security holders the right to purchase additional securities at a given price
If a company decides to go public, the management goes to investment bankers who agree to underwrite the stock offering – that is to buy all the public shares at a set price and resell them to the general public, hopefully at a profit. The underwriters help the company prepare a prospectus, a detailed analysis of the companies financial history, its products and services, and management’s background and experience
The primary reason for going public is too obtain new capital.  Other reasons include:
·         Obtaining negotiability for securities
·         Obtaining future capital on more favorable terms
·         Prestige
Disadvantages of going public include:
·         Expenses
·         Additional disclosure obligations
·         Market expectations may deter a company from making long-term investment decisions
·         Loss of control
·         Higher estate tax valuation
Some Definitions:
            Dealer: refers to a firm when it buys and sells securities for its own account
            Broker: refers to a firm when it buys and sells as an intermediary for a customer
Secondary market: market in which securities that have been bought and sold are traded – brokers and dealers make the trades in this market
Transfer agents: individuals who keep track of the stock ownership record – who owns what and how much
Pre-Filing Period
There are three time periods in an offering:
(1)   pre-filing period – period before a registration statement is filed
(2)   the waiting period – the period after filing but before the registration statement becomes effective
(3)   post-effective period – the period after effectiveness
These periods are important because you can’t do publicity by virtue of a press release or other means – you have to use a prospectus – but cannot use prospectus until registration is filed
§5(c) “It shall be unlawful; for any person … to offer to sell or offer to buy … any security … unless a registration statement has been filed as to such agency”
§5(a) unless a registration statement is in effect it is unlawful to sell a security (there are exceptions to this rule – e.g. for small businesses)
Rule for the pre-filing period: no offers, no sales
It is a broad prohibition
What is an offer?
            Is not a contracts definition of offer
            Includes almost any insinuation
§2(a)(3) “the term offer to sell, offer for sale, or offer shall include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value
The test is whether the conduct has conditioned the public mind by generating an interest in securities
see examples on pg. 42
In Re

y after sale, unless accompanied or preceded by a prospectus that meets the requirements of subsection (a) of section 10 of this title.
What is a sale?
2(a)(3) defines sale as “every contract of sale or disposition of a security or interest in a security, for value”
Ordinary offers should not be made in the waiting period, rather offerors should condition their offers in such a way that they cannot be accepted until the registration statement is effective – so firms often make conditional offers and collects “indications of interest”
In Re Franklin, a securities firm was accused of selling unregistered securities in violation of §5(a)(1). Two violations: (1) salesman sent customer a preliminary prospectus and enclosed his business card, which instructed customer to contact him as soon as possible. Since business card was enclosed with the preliminary prospectus it is considered a prospectus and must comply with the requirements for a preliminary prospectus (§10).(2) the salesmen accepted orders for the stock prior to effective date of registration – (accepted checks that said they were for a number of shares of the stock.) though they invited “indications of interest” they accepted payments for the stock during the pre-effective period – and therefore went beyond the permissible scope of the Act.(contract for sale in violation of §5(a)(1))
            What is a prospectus?
Under §2(a)(10), without the exceptions, any written offer, offer by radio or television, or confirmation of sale is a prospectus
§5(b)(1) makes it unlawful to transmit any prospectus after the filing of the registration statement unless the prospectus contains the info called for by §10
Exceptions: certain written offers in the waiting period are deemed not to be prospectuses and therefore are allowed. Written communications that meet the requirements of Rule 134 are allowed, common examples include: press releases, tombstones, and letters
You are allowed to disclose names, dates, name of issue, title of security, and other such info – this is usually done in a tombstone
SA 10(b) provides that the Commission may permit the use of  a prospectus which omits or summarizes some of the info required by §10(a) – these are called summary prospectuses and there are two types
Rule 430: allows offering price and related info to be omitted from a prospectus used prior to the effective date – special legend must be printed on the preliminary prospectus – Red line prospectus
Rule 431 – is  a true summary prospectus but is only available for ‘34 act companies