SECURITIES
AND ANTITRUST
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QUOTES OF THE DAY
“Definition of insider trading: Stealing too fast.”
Calvin Trillin
Essayist
“Is there not a causal connection between the development of these huge, indomitable trusts and the horrible crimes now under investigation? . . . Is it not irony to speak of the equality of opportunity in a country cursed with bigness?”
Louis D. Brandeis,
Supreme Court Justice.
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SECURITIES LAWS
- There are two major securities laws:
- the Securities Act of 1933 (the 1933 Act)
- Securities Exchange Act of 1934 (the 1934 Act)
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WHAT IS A SECURITY?
- A security is any transaction in which the buyer:
- (1) invests money in a common enterprise and,
- (2) expects to earn a profit predominately from the efforts of others.
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SECURITIES ACT OF 1933
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- The 1933 Act requires that, before offering or selling securities, the issuer must register the securities with the SEC, unless the securities qualify for an exemption.
- When an issuer registers securities, the SEC does not investigate the quality of the offering.
- The 1933 Act prohibits fraud in any securities transaction.
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LIABILITY
- Under the 1933 Act, the seller of a security is liable for making any misstatement or omission, either oral or written, in connection with the offer or sale of a security.
- Fraud imposes liability on the seller if any interstate commerce is used (such as U.S. mail, telephone, banks—which includes practically every transaction!)
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LIABILITY (CONT’D)
- A company’s first public sale of securities is called its initial public offering (IPO).
- A registration statement is required for a company preparing to sell stock. Its purpose is:
- To notify the SEC that a sale of securities is pending, and
- To disclose information to purchasers.
- A prospectus is a portion of the registration statement which must be given to prospective purchasers.
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PUBLIC OFFERINGS (CONT’D)
- Even before the final registration statement and prospectus are completed, the investment bank representing the issuer begins its sales effort.
- Company executives and the investment bankers conduct a road show.
- As part of the IPO sales process, company executives and investment bankers make presentations to potential investors.
- Going Effective
- Once its review of the preliminary registration statement is complete, the SEC sends the issuer a comment letter, listing changes that must be made to the registration statement.
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1933 ACT – EXEMPTIONS
- Regulation D
- Rule 504 – allows up to $1 million in securities sold in 12-month period; may advertise if transaction is registered and limited to accredited investors. (Sales that don’t meet this limit are restricted stock and cannot be resold in less than one year.)
- Rule 505 – may sell up to $5 million in 12-month period; may not advertise; may have unlimited accredited investors and 35 unaccredited investors.
- Rule 506 – like Rule 505 except amount is unlimited and unaccredited investors who cannot evaluate the risk for themselves must have a purchaser representative.
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EMERGING GROWTH COMPANIES
- An emerging growth company (EGC) is an issuer with annual gross revenues of less than $1 billion (indexed for inflation).
- Under new rules, when an EGC undertakes an IPO, it can keep its registration statement secret until 21 days before its road show begins.
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PRIVATE OFFERINGS
- Regulation D
- Rule 505 – may sell up to $5 million in 12-month period; may not advertise; may have unlimited accredited investors and 35 unaccredited investors.
- Crowdfunding
- Under the new Jumpstart Our Business Startups (JOBS) Act, privately held companies can sell up to $1 million in securities in any 12-month period.
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SECURITIES EXCHANGE
ACT OF 1934
- Registration – an issuer must register with the SEC if:
- It completes a public offering under the 1933 Act,
- Its securities are traded on a national exchange, or
- It has at least 500 shareholders and its assets exceed $10 million.
- A company can deregister if its number of shareholders falls below 300 or if it has fewer than 500 shareholders and assets of less than $10 million.
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SECURITIES EXCHANGE
ACT OF 1934 (CONT’D)
- The 1934 Act requires public companies to file the following documents:
- Annual reports on Form 10-K, containing a detailed analysis of the company’s performance, and information about officers and directors.
- Quarterly reports on Form 10-Q, which are less detailed than 10-Ks.
- Form 8-Ks to report any significant developments or changes.
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LIABILITY UNDER THE 1934 ACT
- Section 10(b) prohibits fraud in the purchase and sale of any security whether or not it is registered under the 1934 Act. Applies to:
- Misstatement or omission of material fact that was relied upon
- Scienter (willful misstatement)
- Either purchasers or sellers
- Injured party must have relied on the fraudulent statement and must have suffered economic loss that was caused by the statement.
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INSIDER TRADING:
§§16 AND 10(B)
- Insider Trading
- Someone who trades on inside information is liable only if he has a fiduciary duty to the company whose stock he has traded.
- Fiduciaries
- A fiduciary violates Rule 10b-5 if she trades stock of her company while in possession of nonpublic material information.
- Short-Swing Trading: Section 16
- This prevents insiders from manipulating the market using inside information; this section limits insiders from buying and then selling (or selling then buying) company stock within a 6 month period.
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INSIDER TRADING:
§§16 AND 10(B) (CONT’D)
- Tippers – Insiders who pass on non-public, material information are liable under Rule 10b-5, even if they do not trade themselves, as long as:
- (1) they know the information is confidential and,
- (2) they expect some personal gain (this term is loosely defined, and can even include the pleasure of giving a “gift” to a friend.)
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INSIDER TRADING:
§§16 AND 10(B) (CONT’D)
- Tippees – Those who receive tips are liable for trading on inside information, even if they do not have a fiduciary relationship to the company, as long as:
- (1) they know the information is confidential,
- (2) they know it came from an insider who was violating his fiduciary duty, and
- (3) the insider expected some personal gain.
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BLUE SKY LAWS
- In 1911, Kansas became the first state to regulate the sale of securities through statutes. It was concerned that some securities, “had no more substance than so many cubic feet of Kansas blue sky.”
- All the states and the District of Columbia have blue sky laws.
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ANTITRUST
- Congress passed the Sherman Act in 1890 to prevent extreme concentrations of economic power.
- Because this statute was aimed at the Standard Oil Trust, which then controlled the oil industry throughout the country, it was termed antitrust legislation.
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THE SHERMAN ACT – PRICE FIXING
- Section 1 of the Sherman Act prohibits all agreements “in restraint of trade.”
- When competitors agree on the prices at which they will buy or sell products, their price-fixing is a per se violation of §1 of the Sherman Act.
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MONOPOLIZATION
- Under §2 of the Act, it is illegal to monopolize or attempt to monopolize.
- To tell if a monopoly is illegal, ask:
- Does the company control the market?
- No matter what your market shares, you do not have a monopoly unless you can exclude competitors or control prices.
- How did they acquire or maintain control?
- —Possessing a monopoly is may not be illegal; using “bad acts” to acquire or maintain one is.
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PREDATORY PRICING
- Predatory pricing occurs when a company lowers its prices below cost to drive competitors out of business.
- To prove predatory pricing, show:
- The defendant is selling its products below cost.
- The defendant intends that the plaintiff goes out of business,
- If the plaintiff does go out of business, the defendant will be able to earn sufficient profits to recoup its prior losses.
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TYING ARRANGEMENTS
- Selling a product on the condition that the buyer also purchases a different (or tied) product.
- To determine if it is illegal, ask:
- Are the two products clearly separate?
- Is the seller requiring the buyer to purchase the two products together?
- Does the seller have significant power in the market for the tying product?
- Is the seller shutting out a significant part of the market for the tied product?
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ROBINSON-PATMAN ACT
- Under the Robinson-Patman Act (RPA), it is illegal to charge different prices to different purchasers if:
- The items are the same, and
- The price discrimination lessens competition.
- However, it is legal to charge a lower price to a particular buyer if:
- The costs of serving this buyer are lower, or
- The seller is simply meeting competition.
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In this chapter, you have learned about some of the important securities and antitrust laws that affect business. They can have a profound impact on your business—and on your life.
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