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“When there is blood on the street, I am buying.”
Nathaniel Mayer Victor Rothschild
I. Teacher to Teacher Dialogue
and duty to support this financial infrastructure. But should the rules remain the same for stock
investors as opposed to depositors? Many commentators argue that when investment choices are
made, these choices should bring a higher degree of awareness and risk.
It is a risk that must be fully emphasized at the outset of these materials. No government, no
c. Those rules are fairly and evenhandedly applied to the players.
d. An even playing field is used as a site for the contest.
With all these suppositions in place, can you feel rest assured your team will win? Or you can
hope that, win or lose, your team was engaged in a fair contest?
in the first place.
It is most difficult for professionals to master the ins and outs of the financial markets, let
alone the casual investor. Yet the lure of playing this game is so strong that every year millions of
people invest hard-earned money with nothing more than high hopes and a prayer. Securities law
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SECURITIES TRANSACTIONS
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trading practices coupled with a lot of hopes and prayers all pointed to a need for a better set of
ground rules by which this game could be played.
The basic rules of the game go back to the Securities Act of 1933 and the Securities
Exchange Act of 1934 that created the Securities and Exchange Commission. Over the years, the
II. Chapter Objectives
and Exchange Commission (SEC).
2. Describe e-securities transactions and public offerings.
exemptions from registration.
4. Describe insider trading that violates Section 10(b) of the Securities Exchange Act of 1934.
III. Key Question Checklist
What are the key elements of the Securities Act of 1933?
What are the key elements of the Securities Act of 1934?
What other related statutes may apply?
IV. Text Materials
Introduction to Investor Protection, E-Securities, and Wall Street Reform
Congress enacted federal securities statutes to regulate the securities markets in response to lack
of regulation. The federal securities statutes were designed to require disclosure of information to
investors, provide for the regulation of securities issues and trading, and prevent fraud.
Securities Law
The federal and state governments have enacted statutes that regulate the issuance and trading of
securities.
Landmark Law: Federal Securities Laws
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Congress has enacted a series of laws that regulate the issuance and trading of securities. These
include the Securities Act of 1933, which regulates the issuance of securities and the Securities
Securities and Exchange Commission (SEC) – The SEC is an administrative agency reporting
Reporting companies – File periodic reports with the SEC and to their shareholders.
Definition of Security
Securities are interests or instruments that are expressly mentioned in securities acts, stock,
Initial Public Offering: Securities Act of 1933
The Securities Act of 1933 regulates the issuance of securities, requiring registration of a
registration statement with the SEC. An issuer or investment banker sells the securities through
an initial public offering.
acceleration of the effective date.
Prospectus – This is a written disclosure document that helps investors evaluate the risk
involved.
along with the registration statement.
Business Environment: Facebook’s Initial Public Offering
Prior to the IPO, Facebook had a dual-class stock structure.
Regulation A Offering – A simplified registration process has been developed for sales of up to
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securities. An issuer must answer the questions on Form U-7, which then becomes the offering
circular that must be given to prospective investors.
Contemporary Environment: Jumpstart Our Business Startups Act: Emerging Growth
Company
Well-known Seasoned Issuer – In 2005, the SEC created a new category of issuer called a well-
known seasoned investor, which allows a large company, which meets certain qualifications, to
be granted flexibility in how it communicates with prospective investors.
Civil Liability Under Section 12 of the Securities Act of 1933 – Section 12 imposes civil
liability on any person who violates the provisions of Section 5 of the act. Violations include
selling securities pursuant to an unwarranted exemption and making misrepresentations
SEC Actions: Securities Act of 1933 – The SEC can issue a consent order where the defendant
agrees to not violate any SEC laws in the future, but does not admit to any wrongdoing; it can
bring an action for an injunction; or it can ask for ancillary relief.
and regulations adopted thereunder.
E-Securities Transactions
Electronic securities transactions, or e-securities transactions, are becoming commonplace in
securities to the public.
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securities exchange in the world.
EDGAR
The SEC requires both foreign and domestic companies to file registration statements, periodic
data and records system.
E-Public Offerings – E-securities offerings provide an efficient way to distribute securities to the
public. Google Inc. is one of the most famous IPOs to be conducted online.
Digital Law: Crowdfunding and Funding Portals
face.
Exempt Securities
Exempt Transactions
Certain transactions where securities are sold are exempt from registration with the SEC if they
meet specified requirements. These are called exempt transactions.
funding “on the cheap” for smaller companies.
Nonissuer Exemption – Average investors do not have to file a registration statement prior to
reselling securities.
Private Placement Exemption – This exemption allows issuers to raise capital from an
unlimited number of accredited investors without a dollar limit if the individual investors have a
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Small Offering Exemption – Rule 504 exempts sales not exceeding $1 million in twelve
months. Rule 144 states that these securities must be held for twelve months.
Restricted Securities – SEC Rule 147 states that securities issued pursuant to an intrastate
Trading in Securities: Securities Exchange Act of 1934
This Act primarily regulates subsequent trading of securities.
Civil Liability: Section 10(b) of the Securities Exchange Act of 1934 – A private plaintiff may
bring a civil action and seek rescission of the securities contract or recover damages.
SEC Actions: Securities Exchange Act of 1934 – The SEC may enter into consent orders and
avoided.
Criminal Liability: Section 32 of the Securities Exchange Act of 1934 – Under the Securities
Exchange Act of 1934 Section 32, it is a criminal offense to willfully violate the provisions of the
Act.
Insider Trading
duty to the organization.
Critical Legal Thinking – The government catches very little insider trading most likely.
However, the risks of pursuing such trading, if caught, tend to stamp down the illegal
Tipper-Tippee Liability – The person who discloses information to the tippee is the tipper, and
Case 41.1 Insider Trading: United States v. Bhagat
