Ch. 7: Securities Law and Corporate Governance – No. 1
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
SECURITIES AND EXCHANGE COMMISSION
Securities and Exchange Commission (SEC): An
independent regulatory agency, created by the Securities
Exchange Act of 1934, and empowered to enforce the various
federal securities laws and to promulgate regulations to aid in
their enforcement.
concerning public securities offerings;
securities laws.
and over-the-counter markets and coordinating with
state, other federal, and foreign securities regulators;
(3) investigating securities fraud;
(4) registering and regulating the activities of securities
Ch. 42: Securities Law and Corporate Governance – No. 2
Clarkson et al.’s Business Law (13th ed.)
DEFINING “SECURITY”
The Securities Act of 1933 defines a “security” as:
any note, stock, treasury stock, bond, debenture,
evidence of indebtedness, certificate of interest or
participation in any profit-sharing agreement, …
investment contract, … option, … or, in general,
any interest or instrument commonly known as a
“security,” or any certificate of interest or
security) in, or otherwise contributes capital to,
(2) a common enterprise
(3) from which she reasonably expects to earn profits
(4) primarily or substantially as a result of someone
else’s managerial or entrepreneurial efforts.
Ch. 42: Securities Law and Corporate Governance – No. 3
Clarkson et al.’s Business Law (13th ed.)
REGISTRATION
Subject to certain exemptions, an issuer or its agent must
register any security before offering it for public sale and
must provide all potential investors a prospectus describing
the security, the issuer, and any risks associated with
investing in the security.
and how the issuer intends to use the proceeds from the
sale of the offered security,
(2) the issuer’s properties and business activities,
(3) the issuer’s directors and officers, their compensation,
securities holdings, and other benefits, and any interest
Clarkson et al.’s Business Law (13th ed.)
REGISTRATION PROCESS
The 1933 Securities Act restricts an issuer’s activities until
Waiting Period: After filing, the issuer and its agents
may make oral offers to sell the securities to interested
investors, may distribute a preliminary prospectus –
which contains most of the information that will appear
the securities as long as they provide purchasers with a
final prospectus before or at the time of purchase.
In 2005, the SEC simplified the registration process for, and
relaxed some of the communication and solicitation
EXEMPT SECURITIES
The Securities Act exempts certain classes or types of
securities from registration, including:
subject to ongoing government supervision;
commercial paper maturing in nine months or less;
securities issued by charitable organizations;
securities issued exclusively for exchange for securities
held by the issuer’s pre-existing security holders; and
securities offered and sold only to persons within a
Ch. 42: Securities Law and Corporate Governance – No. 6
Clarkson et al.’s Business Law (13th ed.)
EXEMPT TRANSACTIONS
The Securities Act exempts from registration certain types of
securities transactions, including:
transactions by any person other than an issuer,
a registration statement’s effective date, if any; or
the first date upon which the security was bona fide
offered to the public by the issuer or by or through
an underwriter after such effective date, whichever
unsolicited brokers’ transactions; and,
private offerings of up to $5 million per year solely to
accredited investors and without any advertising or
public solicitation by or on behalf of the issuer.
Ch. 42: Securities Law and Corporate Governance – No. 7
Clarkson et al.’s Business Law (13th ed.)
ADDITIONAL EXEMPT TRANSACTIONS
Regulation A exempts an issuer that has offered for sale less
than $5 million of securities during the previous twelve
months. The issuer need only notify the SEC of the offering
and provide the SEC and potential investors an offering
circular.
or trading securities (a noninvestment company).
Rule 505 exempts offerings of up to $5 million per year
by a noninvestment company that are directed primarily
to accredited investors.
Ch. 42: Securities Law and Corporate Governance – No. 8
Clarkson et al.’s Business Law (13th ed.)
RESALES AND AFFILIATES
in common control with, the issuer. Affiliates are
subject to additional restrictions on resale.
Restricted Securities: If the securities the person wishes to
resell were acquired under Rule 504a, 505, or 506, or Section
months, if the issuer is subject to the 1934 Act’s
reporting requirements, or at least one year, if the issuer
is not, (3) the reseller sells the shares in limited
amounts in unsolicited brokers’ transactions, and
(4) the reseller notifies the SEC.
Clarkson et al.’s Business Law (13th ed.)
SECURITIES ACT LIABILITY AND DEFENSES
Any violation of the Securities Act’s registration
purchase the issuer’s securities.
A defendant can avoid Securities Act liability by proving one
or more of the following:
knew about the misrepresentation or omission and
bought the stock anyway; or
Due Diligence: The defendant (other than an issuer)
reasonably believed, at the time the registration
statement became effective, that the statements it
contained were true and there were no omissions of
material fact.
Ch. 42: Securities Law and Corporate Governance – No. 2
Clarkson et al.’s Business Law (13th ed.)
DEFINING “SECURITY”
The Securities Act of 1933 defines a “security” as:
any note, stock, treasury stock, bond, debenture,
evidence of indebtedness, certificate of interest or
participation in any profit-sharing agreement, …
investment contract, … option, … or, in general,
any interest or instrument commonly known as a
“security,” or any certificate of interest or
security) in, or otherwise contributes capital to,
(2) a common enterprise
(3) from which she reasonably expects to earn profits
(4) primarily or substantially as a result of someone
else’s managerial or entrepreneurial efforts.
Ch. 42: Securities Law and Corporate Governance – No. 3
Clarkson et al.’s Business Law (13th ed.)
REGISTRATION
Subject to certain exemptions, an issuer or its agent must
register any security before offering it for public sale and
must provide all potential investors a prospectus describing
the security, the issuer, and any risks associated with
investing in the security.
and how the issuer intends to use the proceeds from the
sale of the offered security,
(2) the issuer’s properties and business activities,
(3) the issuer’s directors and officers, their compensation,
securities holdings, and other benefits, and any interest
Clarkson et al.’s Business Law (13th ed.)
REGISTRATION PROCESS
The 1933 Securities Act restricts an issuer’s activities until
Waiting Period: After filing, the issuer and its agents
may make oral offers to sell the securities to interested
investors, may distribute a preliminary prospectus –
which contains most of the information that will appear
the securities as long as they provide purchasers with a
final prospectus before or at the time of purchase.
In 2005, the SEC simplified the registration process for, and
relaxed some of the communication and solicitation
EXEMPT SECURITIES
The Securities Act exempts certain classes or types of
securities from registration, including:
subject to ongoing government supervision;
commercial paper maturing in nine months or less;
securities issued by charitable organizations;
securities issued exclusively for exchange for securities
held by the issuer’s pre-existing security holders; and
securities offered and sold only to persons within a
Ch. 42: Securities Law and Corporate Governance – No. 6
Clarkson et al.’s Business Law (13th ed.)
EXEMPT TRANSACTIONS
The Securities Act exempts from registration certain types of
securities transactions, including:
transactions by any person other than an issuer,
a registration statement’s effective date, if any; or
the first date upon which the security was bona fide
offered to the public by the issuer or by or through
an underwriter after such effective date, whichever
unsolicited brokers’ transactions; and,
private offerings of up to $5 million per year solely to
accredited investors and without any advertising or
public solicitation by or on behalf of the issuer.
Ch. 42: Securities Law and Corporate Governance – No. 7
Clarkson et al.’s Business Law (13th ed.)
ADDITIONAL EXEMPT TRANSACTIONS
Regulation A exempts an issuer that has offered for sale less
than $5 million of securities during the previous twelve
months. The issuer need only notify the SEC of the offering
and provide the SEC and potential investors an offering
circular.
or trading securities (a noninvestment company).
Rule 505 exempts offerings of up to $5 million per year
by a noninvestment company that are directed primarily
to accredited investors.
Ch. 42: Securities Law and Corporate Governance – No. 8
Clarkson et al.’s Business Law (13th ed.)
RESALES AND AFFILIATES
in common control with, the issuer. Affiliates are
subject to additional restrictions on resale.
Restricted Securities: If the securities the person wishes to
resell were acquired under Rule 504a, 505, or 506, or Section
months, if the issuer is subject to the 1934 Act’s
reporting requirements, or at least one year, if the issuer
is not, (3) the reseller sells the shares in limited
amounts in unsolicited brokers’ transactions, and
(4) the reseller notifies the SEC.
Clarkson et al.’s Business Law (13th ed.)
SECURITIES ACT LIABILITY AND DEFENSES
Any violation of the Securities Act’s registration
purchase the issuer’s securities.
A defendant can avoid Securities Act liability by proving one
or more of the following:
knew about the misrepresentation or omission and
bought the stock anyway; or
Due Diligence: The defendant (other than an issuer)
reasonably believed, at the time the registration
statement became effective, that the statements it
contained were true and there were no omissions of
material fact.