LEGL 2700 Chapter Notes - Chapter 17: Registration Statement, Financial Statement, Due Diligence
26 Apr 2018
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Chapter 17 | Financial and Securities Regulation
(Textbook)
• Security: exists when one person invests money and looks to others to manage the money
for profit; 3 questions determining whether a person purchased a security:
1. Is the investment in a common business activity?
2. Is the investment based on a reasonable expectation of profits?
3. Will these profits be earned through the efforts of someone other than the investor?
• Securities and Exchange Commission (SEC): an administrative agency created in 1934 that
is responsible for administering the federal securities laws
The Securities Act of 1933: Going Public
• Securities Act of 1933: disclosure law w/ respect to the initial sale of securities to the
public; makes it illegal to use the mails or any other means of interstate
communication/transportation to sell securities w/o disclosing certain financial info to
potential investors
• Parties regulated:
o Issuer: individual or business organization offering a security for sale to the public
o Underwriter: anyone who participates in the original distribution of securities by
selling such securities for the issuer or by guaranteeing their sale
o Controlling person: one who controls or is controlled by the issuer, such as a major
stockholder of a corporation
o Seller: anyone who contracts w/ a purchaser or who is motivating influence that
causes the purchase transaction to occur
• Documents involved:
o Registration statement: includes a detailed disclosure of financial info about the
issuer and the controlling individuals involved in the offering of securities for sale to
the public
• Prefiling period: legal for the issuer of a security to engage in preliminary
negotiations and agreements w/ underwriters
▪ Illegal to sell a covered security during the period; offers to sell and offers
to buy securities are prohibited
• Waiting period: lasts for 20 days; illegal to sell a security; legal to solicit a buyer
or receive offers to buy
▪ Tombstone ads: brief announcements identifying the security and stating
its price, by whom orders will be executed, and from whom a prospectus
may be obtained
o Prospectus: must be furnished to any interested investor, and it must conform to
the statutory requirements
• Securities Act defenses that may be used to avoid civil liability:
o Materiality
• Material: describes the kinds of info that an average prudent investor would
want to have so that he/she can make an intelligent, informed decision
whether or not to buy the security
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