Fundamentals of Business Law
Quiz 26 :
Investor Protection, Insider Trading, and Corporate Governance
Facts: Person RB was appointed by the company E for updating information regarding the company on the social networking sites. He gained followers but the lawyers of the company warned him about the regulations of SEC which made RB write carefully and less spontaneously. The information regarding a company can be easily accessed through websites and blogs created by the companies. All the companies update the latest information on their websites which can be accessible to the investors. The companies should also follow the regulations of the SEC regarding the disclosure of the information. Outcome: SEC requires disclosing information regarding the prospectus and the document of the company that includes material information before making it public. Moreover, brokers and dealers of security are also required to register and keep the detailed information to themselves. The SEC ensures that the frauds can be avoided and transactions can be transparent. Therefore, it can be said that the tweets about the conference made by person RB do require SEC disclosures. For the technology related cases mentioning anything on the blogs refers to public disclosure and any public disclosure requires SEC approval. Thus, it can be concluded that all the information of the company should follow the antifraud provisions of federal securities laws for preventing the frauds and requires SEC approvals.
SEC Rule 10b-5 imposes liability if any corporation omits the material facts. Material information's are 1) Change in dividend (weather it goes up or down)2) Fraud dealings by a broker-dealer in company stock 3) If there is a financial change in organisation condition 4) If any lawsuit, potential litigations against the company 5) disclosure of any such contract or agreements which related to corporate assets 6) Whenever firm has a new discovery, new process, or a new product. These facts are termed as material facts because if these facts are not known to public but known to few related people like officers, directors etc. then there may be increase in insiders trading. People start selling and purchasing of stock on this internal information. That is why SEC enforces the condition of disclosing these material facts when organisation wishes to issue securities or enter into stock market. If any such information is not disclosed then law imposes liabilities for not disclosing these material facts.
Stocks sold to public are called securities. The Securities Act of 1933 states that all transactions related to securities must be registered with SEC (Security Exchange Commission). Securities are generally in form of Shares, Bonds. Securities may in other forms also like beavers, worms and interests in whiskey. So now it is clear that any form of ownership in any corporation is termed as security. Franchisees, Limited Partnerships in real estate, rights in minerals, oil and gas are other forms of securities. Section 2(1) of the securities act defines the securities in broader perspective. It describes securities 1) Stocks like treasury and common stocks, debentures, bonds, and stock warrants are known as securities 2) Any Stock options, Calls, Privileges, rights to purchase a security or a group of securities in NSE. 3) Any limited partnership contract or any other type of investment contract 4) Any notes and instruments including certificate of deposit. 5) Any small partnership of undivided interest in oil, gas and minerals rights.
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