SECURITIES REGULATION

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SECURITIES REGULATION
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STEPS

• Registration statement may have to be filed with
  SEC
• Prospectus must be prepared and made available to
  potential investors
• Requirements of applicable blue sky laws must
  satisfied

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TO DETERMINE IF A SECURITY EXISTS, THE SUPREME
COURT ASKS 3 QUESTIONS

• 1. IS THE INVESTMENT IN A COMMON BUSINESS
  ACTIVITY?
• 2. IS THE INVESTMENT BASED ON A REASONABLE
  EXPECTATION OF PROFITS?
• 3. WILL THESE PROFITS BE EARNED THROUGH THE
  EFFORTS OF SOMEONE OTHER THAN THE INVESTOR?

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SEC v. W.J. HOWEY CO.

• W. J. Howey Company and Howey-in-the-Hills
  Service, Inc. were Florida corporations under
  common control and management. Howey Co. offered
  to sell to the public its orange grove, tree by
  tree. Howey-in-the-Hills Service, Inc. offered
  these buyers a contract in which the appropriate
  care, harvesting and marketing of the oranges
  would be provided.
• Most of the buyers who signed the service
  contracts were nonresidents of Florida who had
  very little knowledge or skill needed to care for
  and harvest oranges. These buyers were attracted
  by the expectation of profits. When profits were
  not forthcoming, the buyers sued based on the
  1933 Securities Act registration requirements not
  being satisfied.
• Did Howey Company sell securities?

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EXCEPTIONS TO THE SUPREME COURTS DEFINITION

• 1. SALE OF BUSINESS DOCTRINE
• 2. FAMILY RESEMBLANCE TEST
• 3. DUPLICATE REGULATION

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SECTION 3 OF THE 1933 ACT EXEMPTS THE FOLLOWING
SECURITIES FROM THE REGISTRATION AND PROSPECTUS
REQUIREMENTS

• 1. Commercial paper arising out of current
  transactions with a maturity not exceeding nine
  months
• 2. Securities issued by not-for-profit
  corporations
• 3. Government securities
• 4. Securities of national banks, state banks, or
  the Federal Reserve Bank
• 5. Securities of savings and loan institutions
  and farmers cooperatives
• 6. Securities issued by carriers subject to the
  Interstate Commerce Commission
• 7. Insurance contracts
• 8. Exchanges with existing security holders
• 9. Intrastate offerings
• 10. Securities declared exempt by the SECs rules
  and regulations.

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Overview of Laws

• The Securities Act of 1933
• Securities Exchange Act of 1934
• Liability Provisions of the 1934 Act
• Tender Offer Regulation
• State Securities Regulation

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Introduction

• Overview of the Federal Legislation
• The Securities Act of 1933
• One-time disclosure
• Occurs when new securities are issued
• Securities Exchange Act of 1934
• Periodic disclosure
• Occurs throughout the life of the securities
• Securities and Exchange Commission

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The Securities Act of 1933

• DOCUMENTS INVOLVED
• Registration Statement
• Prospectus
• www.sec.gov

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REGISTRATION STATEMENT MUST INCLUDE DESCRIPTION OF

• other outstanding securities
• how issuer tends to use the proceed from the sale
  
• issuers directors and officers
• pending lawsuits
• certified financial statement

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The Basic Registration Form - Form S-1

• All companies can use Form S-1 to register their
  securities offerings. You should not prepare a
  registration statement as a fill-in-the-blank
  form, like a tax return. It should be similar to
  a brochure, providing readable information. If
  you file this form, your company must describe
  each of the following in the prospectus
• its business
• its properties
• its competition
• the identity of its officers and directors and
  their compensation
• material transactions between the company and its
  officers and directors
• material legal proceedings involving the company
  or its officers and directors
• the plan for distributing the securities and the
  intended use of the proceeds of the offering.
• Information about how to describe these items is
  set out in SEC rules. Registration statements
  also must include financial statements audited by
  an independent certified public accountant.

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The Basic Registration Form - Form S-1

• In addition to the information expressly required
  by the form, your company must also provide any
  other information that is necessary to make your
  disclosure complete and not misleading. You also
  must clearly describe any risks prominently in
  the prospectus, usually at the beginning.
  Examples of these risk factors are
• lack of business operating history
• adverse economic conditions in a particular
  industry
• lack of a market for the securities offered and
• dependence upon key personnel.

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Alternative Registration Forms for Small Business
Issuers

• If your company qualifies as a "small business
  issuer," it can choose to file its registration
  statement using one of the simplified small
  business forms. A small business issuer is a
  United States or Canadian issuer
• that had less than 25 million in revenues in its
  last fiscal year, and
• whose outstanding publicly-held stock is worth no
  more than 25 million.
• Form SB-1

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The Securities Act of 1933

• Antifraud Provisions of the 1933 Act
• Liability for Improper Offers and Sales
• Liability for Defective Registration Statements
• Due diligence
• Other Liability Provisions

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Securities Exchange Act of 1934

• Created the SEC
• Registration of Securities under the 1934 Act
• Periodic Reports
• Short-Swing Trading by Insiders
• Short-swing profits
• Regulation of Proxy Solicitations

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Annual reports and other 1934 filings are
available at www.sec.gov.Must post on own
website.Seehttp//www2.coca-cola.com/investors/an
nual_other_reports.html
Annual reports and other 1934 filings are
available at www.sec.gov.Must post on own
website.Seehttp//www2.coca-cola.com/investors/an
nual_other_reports.html
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Liability Provisions of the 1934 Act

• Manipulation of a Securitys Price
• Liability for False Statements in Filed Documents
• Section 10(b) and Rule 10b-5
• Misstatement or Omission
• Materiality
• Scienter
• Purchaser or Seller
• Reliance
• Statute of Limitations

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Examples of Material Facts

• A new ore discovery
• Fraudulent trading in the company stock by a
  broker-dealer
• A dividend change (whether up or down)
• A contract for the sale of corporate assets
• A significant change in the firms financial
  condition

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Liability Provisions of the 1934 Act

• Conduct Covered by rule 10b-5
• Continuous Disclosure of Material Information
• Trading on Inside Information
• Safe Harbor Legislation
• Safe harbor
• International Cooperation

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CHIARELLA v. UNITED STATES

• A financial printer had been hired by certain
  corporations to print corporate-takeover bids.
• Chiarella, an employee of the printer, was able
  to deduce the identities of both the acquiring
  companies and the companies which were targeted
  for takeover.
• Without disclosing the knowledge about the
  prospective takeover bids, Chiarella purchased
  stock in the target companies and then sold his
  purchased shares for a profit immediately after
  the takeover attempts were made public.
• After the SEC began an investigation, Chiarella
  entered into a consent decree in which he agreed
  to return the profits he had made as a result of
  his activities.
• Thereafter, Chiarella was indicted for violating
  Section 10(b) of the Federal Securities Exchange
  Act of 1934 and Rule10b-5.

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DIRKS v. SEC

• Dirks, an investment analyst for a brokerage
  firm, discovered from a former officer of an
  insurance company that the companys assets were
  overstated due to fraudulent accounting
  practices.
• During his investigation, Dirks personally dealt
  in the insurance companys securities. However,
  he talked about his investigation with his
  investing clients.
• These clients sold their interests before the
  fraud was publicly announced and before the
  insurance companys securities declined in value.
  
• The SEC found that Dirks had violated Section
  10(b) because he, as a tippee, failed to disclose
  the information gained from an insider to the
  public before that information was used to profit
  in trading.

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SHORT-SWING TRADING16

• Example
• Mary owns 15 of the stock in ABC Corporation.
  In May, Mary buys an additional 2000 shares of
  the companys stock at 10 a share. In
  September, when her daughter is about to start
  college, a scholarship that the daughter was
  expecting fell through. To help her daughter,
  Mary sells the 2000 shares for 15 per share,
  making a profit of 10,000.
• However, her daughter had better find a part-time
  job, because Mary has violated 16 and must turn
  over the profit to ABC.

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Tender Offer Regulation

• History
• Tender offer
• The Williams Act
• Provide investors with more information to make
  tender offer decisions
• State Regulation of Tender Offers

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State Securities Legislation

• Purpose and History
• Blue-sky laws
• Broker-Dealer Registration
• Uniform Securities Act
• Antifraud provisions
• Required registration of securities
• Demand of broker-dealer registration