1
Legal Test 3
April 1, 2016
Chapter 14
Business Organizations
Forms of Business Organizations
• Basic
o Sole proprietorship
o Partnerships
o Corporations
• Hybrid
o Limited partnerships
o S corporations
o Limited liability companies
o Limited liability partnerships
Factors to Consider When Selecting a Business’s Organizational Form
• Cost of creation
o Referring to the legal steps it takes to be considered an
organization
o Most people more concerned with how much paper work and how
much time it will take rather than how much money it will cost
• Continuity of the organization
o Stability and durability of the organization
o A death, retirement, or withdrawal of an owner creates issues of
whether an organization and its business will continue
▪ A dissolution is any exchange in the ownership of an
organization that changes the legal existence of the
organization
• Managerial control of decisions
o Consideration of potential conflict and mechanisms to resolve
disputes are essential to consider when selecting a form for a
business venture
• Owner Liability
o To what degree with the owner personally liable for the debts of the
business organization?
o When is the owner liable under the law for harm caused by the
business organization?
• Taxation
o How is the income of the business taxed?
o How is the money distributed to the owners taxed?
Corporate Form Selection Factors
Sole Proprietorship 2
• Creation
o Easiest and least expensive business organization to create
o Legally no formal documentation
o Only need business licenses
o A business may shift from the proprietorship form as it becomes
more successful
• Continuity
o So long as proprietor desires, but no transfer to others
o Proprietorship’s continuity is tied directly to the will of the owner
• Control
o Sole proprietor is in total control of the business’s goal and
operations
• Liability
o Personal obligation for all debts and liabilities
o Owner has unlimited liability for the obligations for the business
organization
• Taxation
o All business income subject to personal taxation whether the
proprietor actually receives any of the income from the organization
or not
o Not taxed as an organization
Partnership
❖ Agreement between two or more persons to share a common interest in
commercial endeavor and to share losses and profits.
o The word persons should be interpreted broadly enough to allow
business organizations, as well as individuals, to form a partnership
• Creation
o Relatively minimal costs for creation
o Automatic based on business conduct
o Modified by agreement
o The creation does not need to get permission from each state in
which is does business
o If there are two or more persons, a common interest n business,
and they share profits or loses they are a partnership whether they
call themselves partners or not
▪ However, partners should never rely on implied agreements
and should instead explicitly state the agreement among the
parties drafted into a formal document called the Articles of
Partnership.
▪ A partnership also has to give notice as to their actual
identity of the members under the assumed-name statue.
• Continuity
o Dissolved whenever one partner withdraws
o If a partner dies, retires, or otherwise withdraws from the
organization the partnership is dissolved. It is generally said that 3
the partnership organization is easily dissolved. Even if the
partnership agreement provides that the partnership will continue
for a stated number of year, any partner retains the power to
dissolve the organization
o Dissolution is not the same things as terminating an organization’s
business activity. Termination involved the winding up or liquidating
of a business; dissolution simply means the legal form of
organization no longer exists.
o Buy and Sell Agreement: Should be entered into when he business
entity is created; provides for the amount and manner of
compensation for the interest of the deceased or withdrawing
owner
• Control
o Each partner has equal voice unless modified by an agreement
• Liability
o All partners in a general partnership have personal obligation for all
debts and unlimited liabilities.
o These partner’s personal assets, which are not associate with the
partnership, may be claimed by the partnership’s creditors.
o Joint and several liability
• Taxation
o Partnerships are not a taxable entity
o A partnership files an information return that allocates to each
partner his or her proportionate share of profits or losses from
operations, dividend income, capital gains or loses, and other items
would affect the income tax owed by a partnership. Partners then
report their share of such items on their individual income tax
returns, irrespective of whether they have actually received the
items
o All business income subject to personal taxation
o Divided equally 4
April 4, 2016
Corporation
❖ A corporation is an artificial, intangible entity created under the authority of
a state’s law.
o Domestic corporation: in the state in which it is incorporated
o Foreign corporation: in all other states
o Alien corporation: corporation created under the authority of a
foreign country
• Creation
o Incorporators apply for state charter with Articles of Incorporations
▪ Must contain the proposed name including “corporation,”
“company,” “incorporated,” or “limited.”
▪ A corporate name must not be the same or similar to the
name of any domestic corporation of a foreign corporation
authorized to do business in the state
▪ Include corporation’s period of duration, the purpose for
which it is formed, the number of authorized shares, and
information about the initial corporate officials
o Corporations are more costly to form because of costs of creation
(fees) and also annual costs to continue operations
o Artificial and intangible entity created under the authority of a
state’s law
o Some organizations are owned by only a few people and are
known as closely held
▪ Those who own a majority of a closely held corporation can
rule with near-absolute authority
▪ If the majority is acting illegally or oppresses the rights of the
minority, they may file a derivative suit
▪ There is no ready market stock should the holder desire to
dispose of it
o Other organizations may be owned by hundreds and these are
known as publicly held
▪ The reason that publically held organizations are normally
corporations is so that stockholders can transfer their
ownership without interfering with the organizations
management
• Continuity
o Perpetual
o So long as it can conduct business
• Control
o Shareholders elect the board of directors
o The directors set the objectives and goals and appoint officers who
are charges with managing the daily operations
o Officers hire the employees
• Liability
o Shareholder’s have limited personal liability 5
o Absent other commitments
o Someone investing in a company listed on the NY stock exchange
will incur no risk greater than the investment
o If the company is a small, closely held corporation with limited
assets and capital, it will be difficult for it to obtain credit on the
strength of its own net worth. As practical matter, shareholders will
usually be required to add their own individual liability as security
for borrowing.
o Shareholders have limited liability for contract like obligations that
are imposed as a matter of law (such as taxes). Liability also is
limited when the corporate obligation results from torts committed
by the company employees while doing company business.
▪ If the corporate organization has been misused, the
corporate entity is disregarded and this is known as piercing
the corporate veil. If it is pierced, the shareholders are
treated like partners who have unlimited liability
o The Alter-Ego theory, by which the corporate veil can be pierced,
may also be used to impose personal liability upon corporate
officers, directors, and stockholders.
• Taxation
o Corporate income is taxed
o Corporate rates may be lower than individual rates
o Shareholders taxed only on income distributed
o Double taxation: corporate revenue/income is taxed when recorded
and then the dividend income is taxed for the shareholders despite
it already having been taxed
▪ Avoiding Double Taxation:
• Reasonable salaries paid to corporate officials may
be deducted in computing the taxable income of the
business
• Corporations provide expense accounts for many
employees including shareholders. These are used to
purchase travel, food, and entertainment. When so
used, the employee has compensation that is not
taxed. In an attempt to close this tax loophole the law
limits deductions for business meals and
entertainment to 50% of the costs
o For a deduction, business must be discussed
directly before, during, or after the meal
o Meal expenses are not deductible to the
extend of the meal if it is lavish or extravagant
• Capital structure of the corporation may include both
common stock and interest-bearing loans from
shareholders
• Not pay dividends and to accumulate earnings 6
• A corporation may elect to file under Subchapter S of
the Internal Revenue Code which eliminated the
corporate tax
• Advantages of Corporation:
o This form is best practical means of bringing together a large
number of investors
o Control may be held by those with a minority of investment
o Ownership may be divided into many unequal shares
o Shareholders’ liabilities are limited to their investments
o The organization can have perpetual existence
o In addition to being owners, shareholders may be employees
entitles to benefits such as workers comp
• Disadvantages of Corporations:
o The cost of forming and maintaining a corporation is significant
because of formal procedural requirements
o License fees and franchise taxes often are assessed against
corporations but not partnerships
o A corporation must be qualifies in all states where it is conducting
local or intrastate business
o Generally, corporations are subject to more governmental
regulation at all levels than are other forms of business
o Corporate income may be subject to double taxation
• You cannot bring your case to court if you do business in a foreign state
without registering your business in their state too
• 501 C 3- nonprofit organizations
o Must file articles of incorporation with the state
o Run by a board of directors and has limited liability
o Does not return profits to its owners. Instead returns profits to the
organization to be used for future operations
o Can have paid employees because that is considered an expense
o Tax exempt
Limited Partnership
• Creation
o Partnership agreement and certificate filed in public office in state
business is conducted. This certificate contains:
▪ The name of the partnership
▪ The character of the business
▪ Its location
▪ The name and place of residence of each member
▪ Those who are to be the general partners and those who are
to be the limited partners
▪ The length of time the partnership is to exist
▪ The amount of cash or the agreed value of property to be
contributed by each partner
▪ Share of profit or compensation each limited partner gets 7
o The limited partnership certificate is required to be recorded in the
country where the partnership has its principal place of business.
An additional copy has to be filed in every community where the
partnership conducts business or has an office
• Continuity
o Dissolved when general partner withdraws unless they have
assigned their interest to another person
• Control
o Limited partners have no right to participate in management
• Liability
o Limited partners are not personally liable for the partnership’s debts
o A limited partner’s surname may not be used in the partnership’s
name unless there is a general partner with the same last name. If
a partner’s name is used in the firm’s name, that partner will
become personally liable to unsuspecting creditors.
• Taxation
o All business income subject to personal taxation
S Corporation
• Creation
o Organizers apply for state charter with articles of incorporations
o Shareholders of certain corporations unanimously elect to have the
organization treated like a partnership for income tax purposes
o Has all legal features of a corporation
o Cannot have more than 100 shareholders
▪ Shareholders must be individuals. They cannot be other
corporations or partnerships, etc.
• Continuity
o Perpetual- so long as number of shareholder limited
• Control
o Managed by officers
o Appointed by directors who are elected by shareholders
• Liability
o Shareholder obligations limited to investment
o Absent other commitments
• Taxation
o All business income subject to personal taxation
o Shareholders have to account on their individual income tax returns
for shares of profits or losses
o Shareholders avoid having a tax assessed on the corporate income
Limited Liability Company or Partnership
• Creation
o Organizers file articles of organization with state official
o File Articles of Organization with the secretary of state
o Call the creator organizers 8
o Have to include LLC in your name with filing with the state. You
cannot try to mislead people by omitting it
o Shareholders are called members
• Continuity
o The owners of an LLC are called members
o Membership of an LLC is not limited to individuals
o Dissolved when member withdraws or dies, but may be continued
by those remaining if either provided in the articles of organization
or if remaining members decide to continue within 90 days
• Control
o The managerial control of an LLC is vested in its members, unless
the articles of organization provide for one of more managers
o Equal management by members unless manager designed
• Liability
o Members are agents, but not liable to third parties
• Taxation
o State laws and IRS recognize LLCs as nontaxable entities
o All business income subject to personal taxation
• Limited liability company (LLC)
o Treated as nontaxable entities
o Owners have more flexibility compared to S corporations
o Would be treated as non-taxable partnerships
o Very popular
• Limited Liability Partnership (LLP)
o Variation of the LLC
o Have characteristics of both a partnership and a corporation
o Primarily used by doctors, lawyers, accountants, CPAs
o No general partners
o All limited personal liability
▪ If you are in practice with someone else and your partner
makes a mistake it keeps people from coming after you
because you are technically separate
Deciding on Organizational Form
• Making the decision on the form
o Seek legal counsel
o It is not unusual for the growth in a business to be reflected in
changes in organizational forms as a part of a life cycle
• Trends in management of the organization
o Benefit organization
▪ Combines aspects of non-profit and profit organization in a
way intended to permit the business to make a profitable
while pursuing explicit, socially oriented goals
▪ “B-corp” and a benefit corporation are not the same things
▪ Make money for their shareholders 9
▪ In most states with the benefit corporation structure, firms
identify the targeted public benefit in the articles of
incorporation and subsequently provide reports to
shareholders on progress in achieving the benefit
▪ 501 c 3s aren’t supposed to be making money necessarily
because they’re nonprofit
o Treating businesses as persons under the law
▪ US code states that interpreting the law includes businesses
when saying persons
▪ Closely-held corporations are found to be persons that have
the right to the free exercise of religion
o Criminal prosecutions for corporate wrongdoings may be declining
due to the increased use of “deferred prosecution agreements” by
the federal government. A DPA is used to encourage self-reporting
and remediation of illegal acts before a criminal case is
commenced 10
April 8, 2016
Chapter 15
The Regulatory Process
Administrative Agencies
• Boards, bureaus, commissions, and organizations that make up the
governmental bureaucracy
• Types of regulatory authority
o Quasi-legislative: an agency can issue rules (regulations) that have
the impact of laws
o Quasi-judicial: agencies can make decision like a court
• Creative and enforce laws constituting the legal environment of business
Reasons for Agencies
• Almost every governmental agency exists because of a recognized
problem in society and the expectation that the agency may be able to
help solve the problem
• Provide Specificity
o The legislative branch often cannot legislate in sufficient detail to
cover all aspects of many problems
o Legislative branch can only do so much and then they toss it to an
agencies and say tighten all the loose ends
• Provide expertise
o A reason many agencies are created is to refer a problem or area
to experts for solution and management
o Administrative agencies often provide needed continuity and
consistency in the formulation, application, and enforcement of
rules and regulations governing business
• Provide protection
o Business often fails to regulate itself, and the lack of self-regulation
is contrary to the public interest
o A prevailing attitude exists that the government’s duty is to protect
the public from harm
• Provide regulation
o Agencies often replace competition with regulation
• Provide services
o Many agencies arise simply out of necessity.
o Since we need mail, a post office is necessary
Functions of Agencies
• Rule making
o By allowing time periods for public comments on proposed
regulations, interested parties have an opportunity to be heard on
the desirability and legality of the proposals
o Rules and regulations may apply to a business practice irrespective
of the industry involved, or they may apply only to an industry 11
o Guidelines are also issued by agencies to supplement rules
o Guidelines are administrative interpretations of the statues that an
agency is responsible for enforcing.
o Guidelines help businesses determine whether certain practices
may or may not be viewed as legal
o Guidelines do not have the same force of law as rules and
regulations do
• Adjudication
o The quasi-judicial function involved both fact-finding and applying
law to the facts
o A cease and desist order can be mandated which would require the
violator to stop the activity in question
o Consent order: requires that the organization or individual accused
admit to the jurisdiction for the agency and waive all rights to seek a
judicial review. There is no admission that the business has been
guilty of a violation of law, but there is an agreement not to engage
in the business activities that were the subject of the complaint. A
consent order saves considerable expense and has the same legal
force and effect as a final cease and desist order issued after a full
hearing
• Advising
o The advisory function of an administrative agency may be
accomplished by making reports to the president or to congress
o An agency may propose new legislation to congress, or it may
inform the attorney general of the need for judicial action due to
violations of the law.
o Agencies also report information to the general public that should e
known in the public interest, and they publish advisory opinions
• Investigating
o Agencies can gather and compile information concerning the
organization and business practices of any corporation or industry
engaged in commerce to determine whether there ahs been a
violation of the law.
o Agencies may use the subpoena power and require reports,
examine witnesses under oath, and examine copy documents, or
they may obtain information from other government offices
Power of agencies
Organization of Agencies
• Consist of 5-7 members
o One member is appointed as chairperson
• No more than a simple majority of the members may belong to the same
political party
• Appointments require Senate confirmation 12
• Appointees are not permitted to engage in other employment during the
terms
• Agencies have distinctive organizational structure to meet its
responsibilities
• They may be removed from office by the president only for inefficiency,
neglect of duty, or malfeasance in office
• In general:
o The chairperson is designed as such at the time of nomination by
the president
o The chairperson is equal in voting, but is somewhat more important
that the other agency members because of visibility and the power
to appoint staff
o The secretary is responsible for the minutes of agency meetings
and is legal custodian of its records. The secretary usually signs
order and official correspondence and it responsible for publication
of all actions in the Federal Register
o The office of General Counsel is so important in many agencies
that the appointment usually requires Senate approval. The
general counsel is the chief law officer and legal advisor. They are
often as powerful as a commissioner or board member
o Advisory councils are person not employed by the agency but
interested in its mission. These councils provide for interaction
between regulators and those being regulated
o The executive director for administration is the chief operating
official of an agency and supervises usual administrative functions
such as accounting, budgeting, and personnel. Since agencies
spend a great deal of time lobbying with congress, most of them
have legislative liaison, reporting to the executive director for
administration
o Regional offices investigate alleged violations of the law. In addition
they usually have an educational function
• Quasi-Judicial Staff
o Administrative law judges: perform the adjudicative fact-finding
functions. Like other types of judges, administrative law judges are
protected from liability for damages based on their decisions. This
protection is called immunity
o These administrative law judges hear cases of alleged law
violations and apply the law to the facts
o Administrative law judges use prior decisions or precedents
o Since even administrative law judges work for the appointed
agency, leaders who hear appeal of the decision made, there is a
clear appearance of bias that must be overcome to maintain the
confidence of the parties regulated. To reduce the likelihood of
being biased towards the agency, several states have created an
Office of Administrative Hearings 13
o Quasi-judicial proceeding usually begin with a complaint filed by the
agency
o The business or individual accused of some illegality is called the
respondent 14
April 11, 2016
Influencing Agencies
• Agencies give public notice of proposed rules and hold public hearings
• Interested parties present evidence in support or opposition to the
regulation
• Agencies react to the force of public opinion
• Each branch of government has control over the administrative process
Judicial Review of Agency Decisions
• Standing to Sue
o A party seeking the judicial review of any administrative agency’s
decisions must be able to prove standing to sue
o Reviewability
▪ Is the action or decision of the agency subject to judicial
review? The Federal Administrative Procedure Act provides
for judicial review except where:
• Statues preclude judicial review
• Agency action is committed to agency discretion by
law
o Aggrieved party
▪ Is the plaintiff an aggrieved party? Generally the plaintiff
must have been harmed by an administrative action of
decision to have standing
• Review of rule making
o Must not propose rules and regulations within the confines of its
grant of power from the legislature, or a court will find the proposal
void.
o An unwise or ineffectual law may be corrected by political action at
the polls; an unwise rule or regulation adopted by an agency may
be corrected by the legislature that gave the agency power to make
the rule in the first place.
o Two basic issues:
▪ Is the delegation valid?
• It must be definite and it must be limited
• Definiteness means that the delegation must be set
forth with sufficient clarity so that all concerned, and
especially reviewing courts, will be able to determine
the extend of the agency’s authority
• This delegation of authority must provide that the
agency’s power to act is limited to areas that are
certain, even if these areas are not specifically
defined
• The general language used in delegating quasi-
legislative authority usually involved grants of
substantial discretion to an agency 15
• This delegation of discretion is to the agency and not
to the judiciary
▪ Has the agency exceeded its authority?
• Courts will hold that an agency exceeds its authority if
an analysis of legislative intent confirms the view that
the agency has gone beyond that intent, however
noble its purpose may be
• Procedural Aspects
o Exhaustion of remedies
▪ The doctrine of exhaustion of remedies is a court-created
rule that limits when courts can review administrative
decisions. Courts refuse to review administrative actions
until a complaining party has exhausted all of the
administrative remedies and procedures available to him or
her for redress.
▪ The doctrine of exhaustion of remedies avoids the premature
interruption of the administrative process.
▪ Exceptions:
• When very fundamental constitutional guarantees
such as freedom of speech or press are involved or
when the administrative remedy is likely to be
inadequate.
• Probably no court would insist upon exhaustion when
the agency is clearly acting beyond its jurisdiction or
where is would result in irreparable injury to the
petitioner
• Fraud
o Primary jurisdiction
▪ Exhaustion applied when a claim must go in the first
instance to an administrative agency alone.
▪ Primary jurisdiction applies when a claim is originally filed is
the courts. It comes into play whenever enforcement of the
claim requires the resolution of issues that, under a
regulatory scheme, have been place within the special
competence of an administrative body.
▪ The doctrine is invoked when referral to the agency is
preferable because of its specialized knowledge or expertise
in dealing with the matter in controversy.
• Review of factual determinations
o It upholds the agency’s finding and conclusions on questions of fact
if they are supported by substantial evidence in the record.
o Courts do not (1) reweigh the evidence, (2) make independent
determinations of fact, or (3) substitute their view of the evidence
for that of the agency. However, courts do determine if there is
substantial evidence to support the action taken. 16
o For the courts to exercise their function of limited review, an agency
must provide a record that sets for the reasons and basis for its
decision
(Judicial Review of Agency Decisions in review)
• Regardless of whether a party is challenging an agency’s rule making or
adjudication, that party must have standing to sue
• The establish standing to sue, the challenger must show the reviewing
court that the agency’s decision is subject to review and that the
challenger is personally affected by the agency’s decisions
• When the decision challenged involves the agency’s rule-making function,
the court must determine if the agency’s authority was validity delegated
• If the delegation of authority is definite and limited, the court will decide if
the agency has exceeded its authority. If the answer is no, the agency’s
rule will be upheld
• When the decision challenged involved the agency’s adjudicatory function,
the law requires the challenger to exhaust the available administrative
remedies and the court to determine whether an agency should have
primary jurisdiction
• The factual findings of an agency are presumed to be correct
• Courts are not permitted to substitute their personal views for the agency’s
findings and conclusions if a reasonable person could reach the same
result as the agency.
• An agency’s expertise is entitles to great defense and will not be reversed
unless it is clearly erroneous
Criticisms of administrative agencies
• Relating to personnel
o Difficulty in hiring and retaining the best-qualified people
o Difficult to discharge unsatisfactory employees
o Personnel in top positions are selected for political reasons and
lack sufficient experience to effectively run organization
• Relating to procedures
o Delay in the decisions-making process
o Administrative process is overwhelmed with paperwork and
meetings
o Rules and regulations are written in complex legal language
o Often a lack of enforcement procedures to follow up on actions
taken to ensure compliance
o Dictatorial in nature
• Relating to substance
o Rules and regulations overlap and conflict
o “Sweet heart regulations” or favoring the industry or industries they
regulate over the public interest
o Actions for illegal conduct end only with consent orders 17
o Volume of rules adopted by agencies is beyond the ability of the
business community to keep up with an comply with
o Enforcement of laws varies over time
Costs to Business
• Regulation is a form of taxation. It directly increases the cost of
government
• The existence of a governmental agency usually forces a business subject
to the agency’s jurisdiction to create a similar bureaucracy within its own
organization to deal with the agency
• Other costs the public must absorb result from agency regulations that
inhibit competition and innovation
• Perhaps the most disturbing additional cost to the business community is
the cost of paperwork.
• Small businesses can be force out of business by the regulatory process
Costs to Society
• How do you apply cost-benefit analysis to a rule dealing with human life?
• The regulatory process can be so cumbersome that even the
administrative agency involved becomes less effective
• At the federal level, all agencies are required to publish guidelines and
rules in their proposed and final versions. The place for such publications
is the Federal Register, which appears daily
o There is nothing like a state or local version of the Federal Register
• The cost of “keeping up” is balances against the cost of being out of
compliance
Trends in Regulation:
• Although it was not the first federal administrative agency, the Federal
Trade Commission (FTC), created in 1914 to prevent unfair methods of
competition, started the growth of the administrative agencies in the
twentieth century
• Throughout the first half of the 20 century Congress attempted to
balance the bargaining power of business management and organized
labor
• The secondary half of the 20 century saw a focus on discriminatory
practices and their negative impact on society and business
• The latter portion of the last century saw a growing concern for protecting
the environment
April 15, 2016 - movie
April 18, 2016
Chapter 17
Financial & Securities Regulations
What is a security? 18
• An interest or instrument that offers the right to subscribe to or purchase
stock, bond, or any certificate of interest
• The Supreme Court has held that a security exists when one person
invests money and looking to others to manage the money for profit
• Security includes more than corporate stock
• Not to keep people from making a stupid investment but rather have a way
to allow people to make an informed decision making process
• Questions to determine whether a person has purchased a security:
o Is the investment in a common business activity?
o Is the investment based on a reasonable expectation of profits?
o Will these profits be earned through the efforts of someone other
than the investor
Securities and Exchange Commission (SEC)
• Created in 1934 and is responsible for administering the federal securities
laws
• Consists of five commissioners appointed by the president for five-year
terms
• Possess quasi-legislative and quasi-judicial powers
o Under its quasi-legislative power, it has adopted rules and
regulations relating to financial and other information that must be
furnished to the Commission. Other rules prescribe information
that must be given to potential investors. The SEC also regulated
the various stock exchanges, utility holding companies, investment
trusts, and investment advisers.
o Under its quasi-judicial powers, the SEC also is involved in a
variety of investigations
Securities Act of 1933
• Requires the disclosure of information to the potential investors and that it
be registered prior to any sale and that a prospectus be furnished to any
potential investor prior to any sale being consummated.
• Applies to the initial sale of the security
• Information must not be untrue or misleading
• Sanctions for violations
o Criminal punishment
o Civil liability
o Equitable remedy of an injection
• Regulated parties:
o Issuer is the individual or business organizations offering a security
for sale to the public
o An underwriter is anyone who participates in the original distribution
of securities by selling such securities for the issuer of by
guaranteeing their sale
o A controlling person is one who controls or is controlled by the
issuer, such as a major stockholder of a corporation. 19
o A Seller is anyone who contracts with a purchaser or who is
motivating influence that causes the purchase transaction to occur
• The issuer of securities must prepare:
o A registration statement
▪ The statement includes a details disclosure of financial
information about the issuer and the controlling individuals
involved in the offering of securities for sale to the public
▪ During the prefilling period, it is legal for the issuer of a
security to engage in preliminary negotiations and
agreements with underwriters. It is illegal to sell a covered
security during this period. Offers to sell and offers to buy
securities are also prohibited during the prefilling period
▪ The waiting period is next and lasts about 20 days. During
this time, the SEC staff investigates the accuracy of the
registration statement to determine whether the sale of the
securities should be permitted. During the waiting period, it
is still illegal to sell a security subject to the act. However, it
is not illegal to solicit a buyer or receive offers to buy. Offers
cannot be accepted during the waiting period. But during it
the sellers may solicit offers for later acceptance
• The solicitations during the waiting period are called
More
Less
