Outline Securities Regulation - Securities Regulation

Securities Regulation

1. The Framework of Securities Regulation

   1. Securities Transactions

      1. Issuer Transactions: Transactions involving the sales of securities by the issuer to investors

         1. Private Placement of Securities

            • This is where the issuer sells securities to a select number of investors

            • This is the most expedient form of issuer transactions

            • Special exemptions exist under the securities laws to enable private placements to escape the rigors of regulation

         2. A Public Offering

            • This is a "Primary Distribution"

            • The selling effort usually occurs through a syndicate of broker-dealers, known as underwriters

            • An offering on behalf of an issuer going public for the first time is called an Initial Public Offering

      2. Trading Transactions: The purchasing and selling of outstanding securities among investors.

         1. Resale may occur either through private negotiation or through public markets

         2. "Secondary Distribution": This is where the amount of securities to be sold is so great as to support a public offering

      3. Securities Markets: The facilities through which the outstanding securities are publicly traded

         1. The Securities Markets can roughly be divided into:

            • (1) Bond Market

            • (2) Equity Market

            • (3) Derivative/Options Market

         2. Government Securities are exempt from the disclosure regulations

            • Regulation of government securities focuses on those who sell the government securities

   2. Legal Framework of Securities Regulation (Federal Securities Laws)

      1. The Securities Act of 1933 (Securities Act/'33 Act)

         1. Regulates the public offering and sale of securities in interstate commerce

         2. The Securities Act is all about DISCLOSURE

            • "Sunlight is said to be the best of disinfectants: electric light is the most efficient policeman." J. Brandeis

            • The Securities Act's disclosure demands apply to public offerings of securities that occur through the process of "registering" such an offering with the SEC.

         3. Registration Statements

            • Through the preparation of registration statements, the Securities Act seeks to ensure full and fair disclosure in connection with the public distribution of securities.

            • The required disclosures are set forth in the SEC regulations and covers all significant aspects of the issuer's business.

            • In General, the registration statement requires:

              • A thorough description of the issuers business, property, and management

              • Extensive financial information, including certified financial statements for the current and several previous years as well as revenues and earnings for each significant product line

              • Management must provide its analysis and review of the issuer's capital needs, solvency, and financial performance, including any analysis of any variances in revenues or profits from the proceeding years (MD & A)

              • A detailed description of the rights, privileges, and preferences of the offered security, as well as the existing capital structure of the firm

              • "Risk Factors" that make the offering speculative must also be disclosed in the first section of the Registration Statement

         4. Prospectus

            • Most of the registration statement's substantive information is also required to be disclosed in the prospectus.

            • The objective of the registration process is the production of a prospectus that includes most of the information disclosed in the Registration Statement.

              • The prospectus is designed to provide all material information necessary for investors to fully assess the merits of their purchase of the security.

         5. The underwriters' selling efforts cannot commence until the registration statement has been filed with the SEC, and no sales or deliveries of securities may occur until the registration statement is effective.

         6. Once the registration statement becomes effective, actual sales can be made, and the purchased securities can be delivered.

         7. § 3 exempts numerous categories of securities from the Securities Act's registration requirements

         8. § 4 exempts securities sold in certain types of transactions

         9. § 11 provides a private right of action for materially false statements in the registration statement

         10. § 12 imposes civil liability upon those who sell securities in violation of § 5's registration requirements as well as upon anyone who sells any security in a public offering by means of a materially misleading statement

         11. The SEC's enforcement powers include the power to issue cease-and-desist orders under § 8A and to prosecute violations civilly in the federal court under § 20.

      2. The Securities Exchange Act of 1934 (Exchange Act/'34 Act)

         1. § 4 created the SEC.

         2. The Exchange Act's concern is trading markets and their participants.

         3. The Act contains a system of continuous disclosure for companies required to register under its provisions

            • Three categories of companies are subject to continuous disclosure requirements. ANY COMPANY THAT MEETS (1), (2), or (3) = "Reporting Company":

              • (1) Companies that have a class of securities listed on a national securities exchange. § 12(b).

              • (2) Companies that have assets in excess of $10 million and that have a class of equity securities held by at least 2,000 persons. § 12(g) and Rule 12g-1.

                • The JOBS Act amended the Exchange Act here such that the requirement here was changed from 500 to 2,000 record shareholders.

              • (3) Companies that have filed a '33 Act registration statement that has become effective. § 15(d).

         4. Reporting Companies are required to register with the SEC and thereafter make timely filings of reports required by § 13 of the '34 Act

            • Unlike with respect to the '33 Act disclosures, there is no requirement here that disclosures be forwarded to investors or market professionals

            • All registrants are required to file their '33 Act registration statements and their periodic reports in electronic format

              • The present system is EDGAR (Electronic Data Gathering, Analysis, and Retrieval System

         5. Reports required by the '34 Act for Reporting Companies (§ 13)

            • Form 10-K (Annual Report)

              • An extensive description of the company's business, audited financial statements for the fiscal year, and MD & A

            • Form 10-Q (Quarterly Report)

              • Unaudited interim financial statements for the company as well as Management's analysis of financial operations and conditions

            • Form 8-K

              • Must be filed within a few days of the occurrence of a material development of the type specified in the form

                • Examples:

                  • Change in control

                  • Credit downgrade

                  • Acquisition or disposition of a significant amount of assets

                  • Commencement of insolvency proceedings

                  • Change in auditors

                  • Resignation of a director in a dispute over policy

         6. Integrated Disclosure

            • Certain companies registering securities under the '33 Act can fulfill many of the '33 Act's disclosure demands by incorporating into the '33 Act registration statement information from their '34 Act filings.

            • Under integrated disclosure, issuers are required to file a registration statement with the SEC in advance of their offering and for most issuers there is a period of delay before issuers can sell the registered securities.

         7. The '34 Act also requires companies that are subject to the continuous disclosure requirements under § 12(b) or § 12(g) [(1) of (2) above] to make full and fair disclosure of whenever soliciting their stockholders' proxies and to otherwise comply with the numerous proxy rules the commission has promulgated under § 14(a).

         8. Through the Williams Act, the '34 Act was amended such that disclosure by an outsider is required where more than 5% of a class of registered equity securities is or will be owned as a result of a tender offer or purchase.

      3. The Sarbanes-Oxley Act of 2002 (SOX)

         1. The Act sets forth broad prescriptions for corporate governance, authorizes the SEC to develop rules for professional conduct for lawyers, and regulates areas that have always been the province of the states, such as loans to officers and directors.

         2. SOX does not alter the core functioning of the securities laws, but the Act introduces important procedural and substantive requirements for public companies as additional safeguards to protect investors.

         3. SOX made various amendments to the '33 Act and the '34 Act

      4. Dodd-Frank Act

         1. Dodd-Frank made various amendments to the '33 Act and the '34 Act

      5. JOBS Act

         1. The JOBS Act made various amendments to the '33 Act and the '34 Act

      6. Regulation of Investment Advisors and Investment Companies

         1. The Investment Company Act of 1940

            • Regulates investment companies (e.g. money market funds, mutual funds)

              • "Investment Companies" are companies formed for the purpose of buying, selling, and holding a portfolio of securities for investment rather than for control.

         2. The Investment Advisers Act of 1940

            • Regulates Investment Advisors

            • An "Investment Advisor" is one engaged in the business of rendering investment advice to others for compensation.

      7. The SEC

         1. Organizational Structure

            • Five Commissioners appointed by the President for five-year terms

            • One Commissioner is designated by the President to be the Chairman

            • Four Principle Divisions:

              • (1) Division of Corporate Finance

              • (2) Division of Trading and Markets

              • (3) Division of Investment Management

              • (4) Enforcement Division

      8. Sources of Securities Law

         1. (1) Statutes

         2. (2) SEC Regulations

            • E.g. Rule 144 under the '33 Act, Rule 10b-5 under the '34 Act

         3. (3) Forms

         4. (4) SEC Releases

            • Proposing Release

              • Proposes a new rule

            • Adopting Release

              • Issuing final rule and discusses changes made from proposed rule

              • Helps practitioners to know what the SEC is trying to do

         5. (5) SEC No-Action Letters

            • A company says to the SEC, we propose to do X, and we believe it to be in compliance...