1. investment of money,
2. in a common enterprise,
3. with an expectation of profit,
4. to be earned primarily by the actions of others

1. IPO
2. seasoned offerings
3. secondary offerings- when controlling officers or higherups sell their securities where its as if the company is selling it anyways

1. prefiling period- issuer files registration statement with the SEC. company can't sell nor offer to sell securities.
2. waiting period- issuer waits 20 days for SEC approval. issuer may make oral offers and certain types of written offers but cannnot sell the securities
3. post-effective- sales can begin

1. issuer
2. underwriter
3. broker
4. investor

similar to that for products

1. manufacturer
2. wholesaler
3. retalier
4. consumer

1. preliminary or "red herring" prospectus
2. "tombstone" ad

these contain cautionary words that neither offer to sell nor solicitate offers to buy and say that no binding contract can be entered into until after the registration statement become effective

1. financial statements audited by independent CPA
2. names of issuer, directors, officers, underwriters
3. risks
4. description of issuer's business
5. description of security and intented use for proceeds

black-bordered advertisement in the newspaper that contains only:

1. name of issuer,
2. full title of the security,
3. description of the business,
4. price range of security,
5. name of the managing underwriter,
6. contemplated date of the insurance,
7. few other inor items

1. used during waiting period but cannot be used after
2. contains most of the information of final prospectus except for info such as final price to be charged and fees to underwriters that can't be determinged until effective date

1. used after effective date
2. must be delivered to investors before or with the purchased securities (or written confirmation of purchase)
3. may be accompanied by written advertising material called "free writing" that is not permissible during the waiting period

SEC review 

1. 20 day period with statement becoming effective on 20th day (theoretically only, but this is whats on exam)
2. doesn't review merits of offer advice to investors, simply says they haven't found anything wrong with the disclosures
3. can find problems later on and act on them

• SEC began allowing largest 2,000 or so companies to file a single registration statement that covers securities they expect to sell for next 2 years
• if a "market window" presented itself, firms could then pull the securities "off the shelf" and begin selling within a day or two

1. SORP divides issuers into several categories, larget of which are called Well-Known Seasoned Issuers (WKSIs or "wicksees")
2. Free writing prospectus concept

make up 30% of listed firms and control 95% of listed firms' assets. only these firms can take full advantage of SORP rules.  To qualify, they must...

1. have been reporting regularly to SEC for at least a year
2. eligible to use form S-3 or F-3
3. have either $700 Million of worldwide public common equity afloat or have issued $1 billion of registered debt in previous 3 years

• WKSIs are allowed to use addition material (FWPs) at any time with few restrictions
• some other categories of issuers can use FWPS on a more restricted basis as well

1. bank and government securities (not including public utilities)
2. short-term notes
3. charitable organizations' securities
4. regulated savings & lonas
5. federally regulated common carriers
6. receivers or trustees in bankruptcy
7. insurance and annuity policies (doesn't include regular secutities issued by insurance companies)
8. domestic governmental obligations

1. "small offering" exemptions (reg A, rules 504 and 505 of reg D)
2. private placement exemptions (rule 506 of reg D)
3. intrastate offering exemptions (rule 147)

• accredited investors who can look out for themselves
• include: millionaires, people with incomes of  $200,000/$300,000 a year, institutional investors, insiders of the issuer, and charitable eductional or religious organizations worth at least $5 million

1. mostly used by small companies
2. limitation on amount- $1 million in any 12-month period
3. manner of offering- general solicitation and advertising are not allowed unless (a) securities are registered under a state law requiring public filing and delivery of a substantive disclosure document to investors before sale, or (b) issued under a state law exemption that permits general solicitation, as long as sales are made only to accredited investors
4. purchaser requirements- none
5. information requirements- none
6. filing requirements- form D withing 15 days of the first sale (failure to comply wont affect current exemption but may prevent isuer from using Reg D in future)
7. resale restrictions- restricted unless conditions mentioned for the manner of offering are met

preempts state regulation of "covered" securities including...

1. those listed on any national exchange,
2. those issued by registered investment companies, 
3. those sold to "qualified purchasers",
4. those sold pursuant to federal exemptions for Sec. 4(2) (rule 506)

doesn't affect Reg A or 504 and 505 (still use "blue-sky laws"

1. Section 11
2. Sec. 12(a)(1)
3. Sec. 12(a)(2)

remedies violations (of Sec. 5) for...

1. offering a security before filing a registration statement
2. selling a security before the registartion statement becomes effective
3. selling a security without providing a prospectus
4. providing a prospectus that does not comply with Sec. 10 requirements

1. accountants are deemed "experts" with special responsibility
2. only "sellors" or securities are liable so unless accountant "solicits" sales they shouldn't be liable

1. false statement or omission of fact appeared in a registration statement (acctg firm only liable for financial doc issues)
2. misstatement or omission was material
3. plaintiff bought securitires that were issued under the defective registration statement (need not be first purchaser if shares are "traceable" to registration statement)
4. damages sufered

1. Due diligence (reaosnable investigation, reasonable basis, good faith belief)
2. "experts" opinion is a special burdon that others can defend themselves with when relying on
3. issuing company is strictly liable for errors in registration statement
4. lack of reliance by purchaser on financial docs
5. alternative causation (widespread market failure)
6. statute of limitations

1. within one year from when purchaser discovers (or should have discovered) problem
2. within 3 years after the security was bona fide offered to the public

• defendants (include accountant) are jointly and severally liable under Sec. 11
• exceptions: outside directors (only severly liable), underwriters (only liable for amount of securities they underwrote)

1. calculate amount paid (lesser of amt. actually paid or price security was offered to public at)
2. apply propper formula

1. require regular disclosure by major companies even when they are not raising capital by filing registration statements
2. punish fraud in communications reguarding buy/sell of securities
3. create SEC

1. all companies whose shares are traded on national exchanges
2. all companies with more than $10 million in assets and more than 500 shareholders in a single class
3. a company that made a registered public offering during the year
4. NASDAQ "bulletin board" companies

initial registration form- (form 10. names of officers, directors and business, financial structure, bonus and profit sharing provisions for officers and directors)

continuous disclosures- (annual reports (10-Ks) with certified F/S, quarterly reports (10-Qs) with F/S that need not be certified, interim reports covering important developments to be filed within 4 business days of when the development occurs (8-Ks))

1. concentrations of shares
2. tender offers
3. proxy solicitations
4. insider trading

any individual who acquires 5% of a class of equity securities must within 10 days file a schedule 13D, disclosing:

1. purpose of purchase
2. amount and source of funds
3. name and background

1. if an acquirer makes tender offer to s/hs of target company to control target company, both parties must file information.
2. acquirer must file Schedule 13D info and discussion of plans for change if acquisition is successful
3. target filings must include managements position regarding whether S/Hs should do it or not

virtually all reporting companies must solicit proxies from s/hs in order to achieve necessary quorum to hold their state law mandated annual meeting to elect directors and special meetings to approve transactions that s/hs are entitled to vote on. 1934 Act mandates that these solicitations include proxy statements containing:

1. backgrounds of nominees
2. material facts about matters to be voted on
3. info about transactions (pros and cons)
4. s/h proposals (unless meet grounds for ommitting)
5. 2 years' audited f/s

3 classes of persons must disclose their transactions in own companies stocks:

1. officers
2. directors
3. holders of at least 10%

if these people don't disclose their transactions, company must disclose them on Form 10-K in proxy statements

1. must report significant transactions in their company's shares within 2 days of transaction
2. must disgorge any profits derived from "shortswing" transactions in their companies stock (insider buys within six months of selling or sells within 6 months of buying) 

1. False statement or omission of material fact
2. scienter by defendant ("recklessness" is sufficient to satisfy this requirement, but negligence wont suffice)
3. reliance by plaintiff (omission case=not required, active misrepresentation=required)
4. causation (transaction causation and loss causation)
5. standing (p actually bought shares (SEC can always sue))
6. plaintiff suffered damages

1. Statute of limitations
2. fraudulent or reckless conduct by plaintiff
3. bespeaks caution docterine
4. secondary liability

1. within 2 years of when the fraud was/should have been detected AND
2. within 5 years of the fraud

1. in a forward looking statement, the company clearly i.d.'s risks that might occur
2. the words "bespeak caution"

SEC can bring "aiding and abetting" claims against accountants but private claims can't

• P still owns shares: =amt. paid - MV at time of suit
• P has sold shares: =amt. paid - sales price
• Punitive damage NOT allowed

1. defendant made or caused to be made a false or misleading 
2. MATERIAL statement or omission,
3. in a filed doc,
4. that the plaintiff had "eyeball reliance" on,
5. causation, and 
6. damages occurred

1. acted in good faith and without knowledge
2. statute of limitations= within 1 year of discovering and within 3 years of sale

• made it harder to bring securities fraud class action lawsuits
• "whistle-blower" law for accountants against illegal activity of clients
• very "pro-accountant" law

1. procedures in each audit for detecting illegal acts
2. if illegal act detected and has material effects on f/s, accountant shall directly report its conclusions to the board, which shall inform SEC within 1 business day and give accountant a copy
3. if they don't, accountant should give SEC a copy and quit

Sec. 10(b)- scienter (or reckless), doesn't matter if securities are registered, Statute of limitation= 2/5

Sec. 11- P doesn't need to prove negligence or scienter, only applies to registration statement, Statute of lim=1/3

Sec. 18.- P doesn't need to prove negligence or scienter, only applies to registered docs, Statute of lim=1/3

• accountants are liable for any "willfull" violation of any provision of the Act
• penalties: up to $10,000 fine and/or 5 years in jail

fined and/or 25 years in prison for...

• defrauding any person in connection with any security of a public company, or
• obtains by means of false or fraudulent pretenses, representaions, or promises, any money or property in connection with a class of a public company