Securities law Study Guide

📖 Core Concepts Securities Regulation – Governs all transactions involving securities (stocks, bonds, derivatives) through federal, state, and self‑regulatory organization (SRO) rules. Primary Federal Regulator – The Securities and Exchange Commission (SEC); the Commodity Futures Trading Commission (CFTC) oversees futures/derivatives. Self‑Regulatory Organizations (SROs) – FINRA (broker‑dealer rules) and SIPC (protects customer assets of failed broker‑dealers). Key Federal Statutes – 1933 Act (registration of new issues), 1934 Act (ongoing disclosure & insider rules), 1939 Trust Indenture Act (debt), 1940 Investment Company & Advisers Acts, Sarbanes‑Oxley (corporate controls), Dodd‑Frank (post‑2008 reforms), JOBS Act (capital‑raising relief). Howey Test – Determines whether a transaction is a “security”: Investment of money/property In a common enterprise With an expectation of profit Derived from the efforts of others. Rule 10b‑5 – Prohibits fraud and insider trading in any securities transaction; the basis for the private right of action. Exemptions – Intrastate (Rule 147), private placements (Rule 506), small offerings (Rule 504/505, Reg A), resale of restricted securities (Rule 144). --- 📌 Must Remember SEC registration is required for all public offerings (1933 Act). Section 12(a)(1) (1933) → purchaser may rescind or sue for damages if securities were sold in violation. Section 16 (1934) → insiders (officers, directors, ≥10% owners) must file Form 4 within 2 days of a transaction and disclose holdings 10 days prior. Rule 10b‑5 → “It is unlawful to make any untrue statement of a material fact or to omit a material fact necessary to make the statements not misleading.” Rule 506(b) – No public solicitation; only accredited/sophisticated investors; unlimited amount raised. Rule 506(c) – Allows general solicitation if all investors are verified accredited. Rule 504 – ≤ $1 million, no investor qualification, can solicit publicly. Rule 144 holding periods: 6 months if issuer is a reporting company, 1 year if not. Form 144 – Must be filed by affiliated sellers before resale of restricted securities. Blue‑Sky Laws – State securities laws; enforce registration, anti‑fraud, and broker‑dealer licensing. Criminal penalties – Imprisonment & fines; private right of action (Rule 10b‑5) allows investors to sue for rescission, damages, or disgorgement. --- 🔄 Key Processes Registering a New Issue (1933 Act) Prepare registration statement (Form S‑1) → include issuer info, risk factors, financials, management, use of proceeds. File with SEC → SEC staff review → effective → issue prospectus to investors. Ongoing Reporting (1934 Act) Annual Report (Form 10‑K) → filed within 90 days of fiscal year‑end. Quarterly Report (Form 10‑Q) → filed within 40 days of quarter‑end. Current Report (Form 8‑K) for material events. Insider Reporting (Section 16) Determine insider status (officer, director, ≥10% holder). File Form 3 (initial holdings). File Form 4 (transaction within 2 days). File Form 5 (annual summary of late filings). Obtaining a Private Placement Exemption (Rule 506) Verify each investor’s accredited status (income, net worth, or professional criteria). Obtain suitability letter from each investor. Prohibit public solicitation (unless using 506(c) with verification). File Form D with the SEC within 15 days of first sale. Resale of Restricted Securities (Rule 144) Confirm holding period met (6‑month or 1‑year). Verify that current public information about issuer is available. For affiliates: calculate trading‑volume formula (≤ 1% of the outstanding shares in any 3‑month period) and file Form 144. --- 🔍 Key Comparisons 1933 Act vs. 1934 Act 1933: Focuses on registration of new issues & liability for false statements. 1934: Focuses on ongoing disclosure, insider reporting, and market regulation. Rule 504 vs. Rule 506 Rule 504: ≤ $1 M, no investor qualification, allows general solicitation. Rule 506: No dollar cap, only accredited/sophisticated investors; 506(b) bans solicitation, 506(c) permits it with verification. Accredited Investor vs. Sophisticated Investor Accredited: Meets specific income, net‑worth, or entity criteria (e.g., $1 M net worth). Sophisticated: Possesses sufficient knowledge/experience to evaluate the investment, but may not meet the strict financial thresholds. Affiliated vs. Unaffiliated Seller (Rule 144) Affiliated: Must follow volume limits, file Form 144, and may sell only a “routine” amount. Unaffiliated: Can sell any amount after holding‑period requirements are satisfied. --- ⚠️ Common Misunderstandings “All securities must be registered.” – False; many exemptions (Rule 506, Rule 504, Reg A, intrastate offerings) avoid registration. “Rule 10b‑5 only covers insider trading.” – It also covers any fraudulent omission or misstatement in a securities transaction, not just insider trades. “Form 144 is required for every resale.” – Only required for affiliated sellers; unaffiliated holders may sell after the holding period without filing. “Blue‑sky laws are superseded by federal law.” – They coexist; state registration is still required unless a federal exemption expressly preempts state law (e.g., Rule 147 intrastate exemption). “Accredited investors can’t be harmed by fraud.” – They still have private rights of action under Rule 10b‑5 and can sue for damages. --- 🧠 Mental Models / Intuition “Disclosure Funnel” – Think of the 1933 Act as the wide opening (initial offering) that narrows into the 1934 Act continuous stream of reports; both together keep the market transparent. “Three‑Step Howey Filter” – When evaluating a new contract, ask: Money? Common enterprise? Profit from others? If yes/yes/yes, treat it as a security. “Exemption Ladder” – Start at the lowest dollar‑size exemption (Rule 504) and climb to higher‑capacity exemptions (Rule 506, Reg A) as the offering size and investor sophistication increase. --- 🚩 Exceptions & Edge Cases Intrastate exemption (Rule 147) – Federal registration not required only if the offering is confined to a single state and complies with that state’s blue‑sky laws. Rule 144(b) – Affiliate volume formula – Affiliates may sell more than the 1% limit if the resale is part of a “routine” brokerage transaction (e.g., market‑maker activity). Regulation A Tier 2 (under JOBS Act) – Allows up to $75 million (later increased to $50 M in outline) with audited financials but still requires some SEC review and imposes investor limits on non‑accredited purchasers. Form D filing timing – Must be filed within 15 days after the first sale, not after the entire offering closes. --- 📍 When to Use Which Choose 1933 vs. 1934 filing – Use 1933 for initial public offerings or private placements that need registration. Use 1934 for ongoing reporting after the securities are already issued. Rule 506(b) vs. 506(c) – Use 506(b) when you want to keep the offering private (no advertising). Use 506(c) when you need public solicitation and can verify every investor’s accredited status. Rule 504 vs. Reg A – Use Rule 504 for very small offerings (≤ $1 M) with minimal disclosure. Use Reg A for mid‑size offerings (up to $5 M or $50 M under JOBS) when you want a streamlined, semi‑public process. Rule 144 resale – Use Rule 144 when you hold restricted securities and want to sell them on the public market; verify holding period, public information, and (if affiliate) file Form 144. --- 👀 Patterns to Recognize “Six‑Month / One‑Year” pattern – Whenever a restricted security resale question appears, first check the issuer’s reporting status to determine the correct holding period. “Accredited + No General Solicitation” – In private placement questions, see if the scenario mentions public advertising; if yes, the exemption must be 506(c) with verification, otherwise 506(b). “Section 16” trigger – Any mention of officer, director, or 10% holder signals the need for Form 4 filing within 2 days after a transaction. “Material misstatement” – If a fact is omitted that a reasonable investor would consider important, Rule 10b‑5 likely applies. --- 🗂️ Exam Traps Distractor: “All insiders must file Form 4 within 10 days.” – Wrong; the filing deadline is 2 days after the transaction; the 10‑day rule applies to pre‑transaction holdings disclosure. Distractor: “Rule 504 allows general solicitation only if the issuer is a reporting company.” – Wrong; Rule 504 permits general solicitation regardless of reporting status (subject to state law). Distractor: “Rule 10b‑5 only applies to insiders.” – Wrong; it applies to any fraudulent conduct in securities transactions, insider or not. Distractor: “If an offering is exempt under Rule 506, no Form D filing is required.” – Wrong; a Form D must be filed within 15 days of the first sale. Distractor: “Blue‑sky laws are irrelevant for federal exemptions.” – Wrong; many exemptions (e.g., Rule 147 intrastate) still require compliance with state blue‑sky regulations. ---