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Business Law for a New CenturyBusiness Law for a New Century Click your mouse anywhere on the screen to advance the text in each slide. After the starburst appears, click a blue triangle to move to the next slide or previous slide.
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Business Law for a New CenturyBusiness Law for a New Century
Quote of the DayQuote of the Day
“Definition of insider trading: Stealing too fast.”
Calvin Trillinessayist
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Business Law for a New CenturyBusiness Law for a New Century
Securities and Exchange Commission (SEC)
Securities and Exchange Commission (SEC)
Created in 1934 to regulate the securities industry:• Rules – to fill in gaps left by state securities
statutes.• Releases – informal pronouncements on
current issues, particularly proposed changes in the rules.
• No-Action Letters – the answer to a question; states that the SEC will take no action (meaning that they approve of the transaction in question.)
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Business Law for a New CenturyBusiness Law for a New Century
What is a Security?What is a Security? A security is any transaction in which
the buyer: • (1) invests money in a common enterprise
and, • (2) expects to earn a profit predominately
from the efforts of others.
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Business Law for a New CenturyBusiness Law for a New Century
Securities Act of 1933Securities Act of 1933 The 1933 Act requires that, before
offering or selling securities, the issuer must register the securities with the SEC, unless the securities qualify for an exemption.
When an issuer registers securities, the SEC does not investigate the quality of the offering.
The 1933 Act prohibits fraud in any securities transaction.
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Business Law for a New CenturyBusiness Law for a New Century
1933 Act -- Exemptions 1933 Act -- Exemptions General Exemption – those made by
the SEC “for the public interest.”
Exempt Securities• Government securities, Blank securities,
Short-term notes, Non-profit issues, Insurance policies and annuity contracts
Regulation D covers private offerings; Regulation A covers “small” public offerings.
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Business Law for a New CenturyBusiness Law for a New Century
1933 Act -- Exemptions 1933 Act -- Exemptions Exempt Transactions
• Section 4(2) of the 1933 Act exempts from registration “transactions by an issuer not involving any public offerings.”
• Under SEC Rule 147, an issuer is not required to register securities that are offered and sold only to residents of the state in which the issuer is incorporated and does business.
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Business Law for a New CenturyBusiness Law for a New Century
Public OfferingsPublic Offerings Direct Public Offerings – stock sold
directly by the company, without going through a broker.
A company’s first public sale of securities is called its initial public offering (IPO).
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Business Law for a New CenturyBusiness Law for a New Century
Public Offerings (cont’d)Public Offerings (cont’d)
A company selling stock may hire an investment bank to serve as the underwriter.• In a firm commitment underwriting, the
bank buys the stock, then resells it. Risk of loss is borne by the bank.
• In a best efforts underwriting, the bank acts as the agent, selling the stock for the company, which bears the risk of loss.
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Business Law for a New CenturyBusiness Law for a New Century
Public Offerings (cont’d)Public Offerings (cont’d)
A registration statement is required for a company preparing to sell stock. Its purpose is:• To notify the SEC that a sale of securities is
pending, and• To disclose information to purchasers.
A prospectus is a portion of the registration statement which must be given to prospective purchasers.
The company’s sales effort is restricted during the pre-filing and waiting periods.
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Business Law for a New CenturyBusiness Law for a New Century
Sales Restricted SecuritiesSales Restricted Securities Rule 144 limits the resale of two types
of securities: control securities and restricted securities.• A control security is one held by any
shareholder who owns more than 10 percent of a class of stock or by any officer or director.
• A restricted security is any stock purchased in a private offering.
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Business Law for a New CenturyBusiness Law for a New Century
LiabilityLiability Liability is imposed on anyone selling
unregistered and non-exempt securities.
Fraud imposes liability on the seller if any interstate commerce is used (such as U.S. mail, telephone, banks – which includes practically every transaction!)
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Business Law for a New CenturyBusiness Law for a New Century
Liability (cont’d)Liability (cont’d) Criminal liability is imposed on anyone
who willfully violates the Act of 1933.
Liability for the registration statement may be imposed on all its signers.
If a final registration statement contains a material misstatement or omission, the purchaser of the security can recover from everyone who signed the registration statement.
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Business Law for a New CenturyBusiness Law for a New Century
Securities Exchange Act of 1934
Securities Exchange Act of 1934
Registration – an issuer must register with the SEC if:• It completes a public offering under the
1933 Act,• Its securities are traded on a national
exchange, or• It has at least 500 shareholders and its
assets exceed $10 million.
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Business Law for a New CenturyBusiness Law for a New Century
Securities Exchange Act of 1934 (cont’d)
Securities Exchange Act of 1934 (cont’d)
Section 13 requires companies to file the following documents:• An initial, detailed information statement
when the company first registers.• Annual reports on Form 10-K, containing a
detailed analysis of the company’s performance, and information about officers and directors.
• Quarterly reports on Form 10-Q, which are less detailed than 10-Ks.
• Form 8-Ks to report any significant developments or changes.
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Business Law for a New CenturyBusiness Law for a New Century
Securities Exchange Act of 1934 (cont’d)
Securities Exchange Act of 1934 (cont’d)
Proxy Requirements - Section 14 – allows shareholders to vote without attending the meeting.
Short-Swing Trading - Section 16 – prevents insiders from manipulating the market, using inside information; this section limits how much stock can be sold and purchased within a 6 month period.
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LiabilityLiability Section 18 – holds liable anyone who
makes a false or misleading statement in a filing.
Section 10(b) prohibits fraud in connection with the purchase and sale of any security whether or not the security is registered under the 1934 Act. This applies to:• Misstatement or omission of material fact• Scienter (willful misstatement)• Either purchasers or sellers
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The Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 Insider Trading
• Someone who trades on inside information is liable only if he has a fiduciary duty to the company whose stock he has traded.
Fiduciaries• A fiduciary violates Rule 10b-5 if she trades
stock of her company while in possession of nonpublic material information.
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Reform Act of 1995 (cont’d) Reform Act of 1995 (cont’d) Tippers -- Insiders who pass on non-
public, material information are liable under Rule 10b-5, even if they do not trade themselves, as long as: • (1) they know the information is confidential
and, • (2) they expect some personal gain.
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Reform Act of 1995 (cont’d) Reform Act of 1995 (cont’d) Tippees --Those who receive tips are
liable for trading on inside information, even if they do not have a fiduciary relationship to the company, as long as: • (1) they know the information is
confidential, • (2) they know it came from an insider who
was violating his fiduciary duty, and • (3) the insider expected some personal
gain.
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Reform Act of 1995 (cont’d) Reform Act of 1995 (cont’d) Takeovers
• This rule prohibits trading on inside information during a tender offer if the trader knows the information was obtained from either the bidder or the target company.
Misappropriation• A person is liable if he trades in securities
(1) for personal profit, (2) using confidential information, and (3) in breach of a fiduciary duty to the source of the information.
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Foreign Corrupt Practices ActForeign Corrupt Practices Act
Under the Foreign Corrupt Practices Act, it is a crime for any American company (whether reporting under the 1934 Act or not) to make or promise to make payments or gifts to foreign officials, political candidates, or parties in order to influence a governmental decision, even if the payment is legal under local law.
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Blue Sky LawsBlue Sky Laws State statutes regulating securities are
called blue sky laws (because crooks were willing to sell investors “a piece of the great blue sky”).
There is little uniformity among state securities regulations; even the Uniform Securities Act has been customized in most states.
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“Congress passed the Securities Act of 1933 and the Securities Exchange
Act of 1934 to ensure that the country never suffers through
another economic crisis as catastrophic as the Great
Depression. It is in no small part owing to these laws that the United States has enjoyed so many years
of economic stability.”
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Link to the InternetLink to the Internet Clicking on the orange button below will link
you to the website for this book. (You must first have an active link to the internet on this computer.)
Once there, click:• Online Study Guide, then• Your choice of a chapter, then• Practice, then• Internet Applications
You should then see web links related to that chapter.
Click here!
Click above to return to the slide show.