Securities Law

1. Securities Law • Historical background • Regulation followed 1929 crash • Little disclosure • Lots of fraud

2. Securities Law • SEC • Promulgate regulations • Investigate violations • Regulate brokers and advisors

3. Securities Law • Securities defined – investment contract that gives the owner evidence of business participation or indebtedness (Securities Act of 1933) • Notes • Stock • Bonds • Debentures • Warrants • Subscriptions • Voting-trust certificates • Mineral rights • Limited partnerships • Commodities covered by Commodity Exchange Act

4. Securities Act of 1933 • Howey test • 1946 Supreme Court decision • “a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of a promoter or third party” • Broad interpretation of the law

5. Exemptions • Exempt Securities • Government issued securities • Commercial paper • Banks, savings & loans, religious and charitable organizations • Insurance policies • Annuities • Securities regulated by the ICC • Stock dividends and splits

6. Exemptions • Exempt transactions • Non-issuers • Intrastate offering – all parties must be in that state • Small-Offerings • Simplification • Permits sales w/o registration • Corporate reorganization • Private placements

7. Filing Requirements of the 1933 Act • Registration Statement & Prospectus • Review • Full disclosure standard

8. Registration Process • Prefiling period (until registration is filed) • Cannot sell or offer to sell • Cannot “condition the market” – no PR • Waiting period (filing until SEC declares it effective) • Conditioning the market is OK • Filing Options • Tombstone ads • Red herring prospectus (no price) • Posteffective period (registration effective through sale) • Final or statutory prospectus • Shelf registrations

9. Violations of the 1933 Act • Civil liability for false or incomplete filing or before the effective date • $100,000/10 years in prison • Injunction • Anyone who had any input into the registration (directors & officers - joint & several liability) • Defenses • Immateriality • Investor knowledge • Due diligence

10. 1934 Act • Created the SEC • Regulates securities after issuance • Registration of those securities traded on national stock exchange • Continuous reporting • 10-Q • 10-K • 8-K

11. 1934 Act • Antifraud provisions • Everyone should have equal information • Applies to the sales of all securities • “false information” interpreted by SEC & courts • Who • Officers, directors, shareholders • Insiders & tippees • When public knowledge • What • Takeovers • Earnings drops • Dividends • lawsuits

12. 1934 Act • Antifraud provisions • Sale or purchase of security in reliance of info • Intent to defraud • $100,000/5 years in prison • Officers: $1 million or treble profits + restitution • Civil liability

13. 1934 Act • Insider trading • Insiders • Officers, directors, employees • Lawyers, accountants, consultants, or other agents • Anyone with a fiduciary duty to the company • Per se violation for officers, directors & large shareholders • Assumed they have inside knowledge • Must report holdings • Cannot keep short-swing profits (6 months) • Includes remote tippees if they should have known it was inside info

14. Shareholder Rights • Proxy materials filing • Who is sending the proxy statement • How it will be sent • Who pays & how much • Why it is being sent • Invalid proxies • Resubmitted • Action following invalid proxy reversed

15. Shareholder Rights • Shareholder proposals not opposed by management to be included • Up to 200 words of shareholder material if opposed by management may be included • Proxy battles • Corporation can reimburse for costs up to limits

16. Shareholder Rights • Executive Compensation • Disclosure rules • Board Compensation Committee • Reports summarizing executive pay

17. Shareholder Rights • Williams Act • All offers to buy more than 5% • Details of offer must be published for shareholders • Offerer • Source of funding • Future plans • Number of shares currently held • Shareholders have 7 days to decide on offer • Civil and criminal penalties

18. Shareholder Rights • Uncontested Takeover - notice within 10 days to shareholders with justification: • Recommendation of acceptance/refection • Neutral position • Inability to take a position

19. Shareholder Rights • Hostile Takeover • Convince shareholders not to sell • File antitrust suits • Match the offerer’s price • Find a ‘white knight’

20. Other Securities Laws • Securities Enforcement Remedies and Penny Stock Reform Act of 1990 • Authorized cease and desist orders • SEC may seek civil penalties • Enhanced disclosure for penny stocks • Market Reform Act of 1990 • SEC sets limits on program trading • SEC can suspend trading if market too volatile

21. Other Securities Laws • RICO • Can be applied to securities fraud • Private Securities Litigation Reform Act of 1995 • Gives safe harbor for firms making predictions as long as accompanied by cautionary statements

22. State Laws • State laws affecting mergers & acquisitions • Supremacy of federal law • Protect shareholders through governance rather than securities issues • Slow pace of takeovers • State securities laws • Most states adopted Uniform Securities Act • May need state registration and merit review

23. International Aspects • US has most stringent laws • Multiple stock exchanges • Various accounting rules

24. Strategy Implications • Choose state to issue securities • Consider timing of issues • Training of all employees & agents re insider trading