ch 18 Securities Regulation Overview
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Questions and Answers

What must a plaintiff establish to prove a claim of securities fraud?

  • Reliance on a public statement.
  • An omission of material fact with knowledge. (correct)
  • A false statement with no knowledge.
  • An act of good faith in transactions.

    • Which of the following activities is explicitly prohibited by Rule 10b-5?

  • Churning accounts to increase commissions.
  • Trading on non-public, misappropriated information. (correct)
  • Making undisclosed payments to stock analysts.
  • Insider trading based on public information.

    • What consequence can defendants face for violating securities fraud laws?

  • No penalties if the information was not personally accessed.
  • Criminal charges recommended by the Department of Justice. (correct)
  • Imposition of only civil penalties.
  • Dismissal of all SEC charges.

    • Which court is exclusively responsible for securities fraud lawsuits involving nationally traded securities?

    <p>Federal courts.</p> Signup and view all the answers

    What term describes a broker buying a stock for personal gain while manipulating clients to drive up the price?

    <p>Scalping.</p> Signup and view all the answers

    Which of the following statements is true regarding equity securities?

    <p>They include stocks.</p> Signup and view all the answers

    What is included in the prospectus of a registration statement?

    <p>A summary of the issuer’s finances and business.</p> Signup and view all the answers

    Which act primarily regulates public offerings of securities?

    <p>Securities Act of 1933</p> Signup and view all the answers

    What characterizes a debt security?

    <p>They can be issued as bonds and debentures.</p> Signup and view all the answers

    What is one of the main roles of the Securities and Exchange Commission (SEC)?

    <p>To oversee the enforcement of securities laws.</p> Signup and view all the answers

    Which of the following is NOT exempt from the registration statement requirement?

    <p>Public company stocks</p> Signup and view all the answers

    Under what condition can a company raise equity funding through crowdfunding?

    <p>Up to $1 million within 12 months from non-accredited investors.</p> Signup and view all the answers

    What expectation defines an investment as a security according to the Howey test?

    <p>An expectation of profit generated by the efforts of others.</p> Signup and view all the answers

    Study Notes

    Securities Regulation Overview

    • A security is a financial instrument with monetary value, tradable.
    • Securities are categorized as equity (stocks) or debt (bonds, debentures).
    • The Howey Test defines an investment as a security if: (1) it's an investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) generated by others' efforts.
    • Companies use securities to raise capital.
    • Pension funds often invest in securities.

    History of Securities Regulation

    • Post-1929 stock market crash and Great Depression, Congress enacted securities laws.
    • The Securities Act of 1933 governs initial public offerings, requiring issuers to disclose material information.
    • The Securities Act of 1934 regulates trading in existing securities, demanding disclosure from public companies.
    • The Securities and Exchange Commission (SEC) enforces these laws.

    Registration Statements

    • Registration statements are detailed documents for new security offerings.

    • Prospectuses are condensed versions of the registration statements, outlining:

      • Issuer's finances and business
      • Offering purpose
      • Fund usage plans
      • Involved risks
      • Promoters' experience and compensation
      • Certified financial statements

    • Exemptions from registration include government bonds and private placements.

    Crowdfunding

    • Since 2016, crowdfunding allows raising up to $1 million from non-accredited investors, supporting smaller businesses.

    Securities Fraud

    • Rule 10b-5 prohibits fraudulent activities related to securities purchases or sales.

      • Prohibits using deceptive schemes, misstatements or omissions of material fact, and fraudulent acts.

    • Securities fraud cases are exclusively tried in federal courts.

    • To prove securities fraud, plaintiffs must show:

      • A false statement or material omission
      • With knowledge (scienter)
      • Reliance by the plaintiff
      • Proximate causation of the injury

    • Insider trading, the use of non-public information, is prohibited under Rule 10b-5.

    • Criminal charges or significant fines can be imposed for securities fraud.

    • Broker/dealer responsibilities include avoidance of churning (excessive trading) and scalping (buying for personal gain).

    Self-Regulation and Oversight

    • Stock exchanges (e.g., NYSE, NASDAQ) regulate themselves and their members.
    • The SEC oversees the self-regulation of exchanges and their members.

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    Description

    This quiz covers the basics of securities regulation, including definitions of securities, the Howey Test, and the historical context following the 1929 stock market crash. It also explores the roles of the Securities Act of 1933 and 1934, along with the functions of the SEC. Test your understanding of how securities are used to raise capital and the regulations that govern them.

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