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Chapter 31
Federal Securities and Antitrust Laws
Now that you have studied corporations and are familiar
with the concept of stock (see Chapter 30
(http://content.thuzelearning.com/books/AUBUS670.12.2/sectio
ns/ch30#ch30) ), this chapter turns to the study of some of
the rules that govern the sale and
purchase of such stock (also called securities) and the
issuance of stock, as well as the preservation of free
economic markets. The �irst half of this
chapter examines the major laws governing securities and
the stock exchanges, and the second half reviews the
legislative efforts to keep competition fair
and unfettered under antitrust laws.
https://content.ashford.edu/books/AUBUS670.12.2/sections/ch3
0#ch30
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John Moore/Getty Images
Listing and selling stock on public stock
exchanges, such as the New York
Stock Exchange,is heavily regulated by both federal
and state
governments.
31.1 Securities Laws
The Securities Act of 1933 applies only to initial public
offerings (IPOs). Issuance
refers to listing the stock on a public stock exchange, such
as the New York Stock
Exchange, thereby making the stock available for purchase
by anyone. Listing and
selling stock on public stock exchanges is heavily regulated
by both federal and state
governments. In the aftermath of the stock market crash of
1929, Congress passed
the Securities Act of 1933 and the Securities Exchange
Act of 1934. These landmark
acts regulate the original issuance of securities and the
subsequent trading of
securities in the secondary markets, respectively. These acts,
as amended, require
companies to provide investors with accurate information
about their �inances and
set forth penalties for fraudulent and deceptive activities in
the issuance and sale of
securities. In these ways, the government seeks to keep the
markets free from illegal
and deceptive activities that might take advantage of the
average investor on the
street.
This federal law requires that securities be registered before

being offered for sale
for the �irst time. Registration means that the corporation
that plans to sell the stock
must �ile paperwork with the Securities and Exchange
Commission (SEC), a federal
agency that oversees public sales of securities. The
paperwork that is �iled must meet
the precise requirements of the law, whose purpose is to
protect the public by
requiring that companies �ile detailed information about
their companies. In that way, initial investors can make an
intelligent decision about whether or
not to invest in the securities offered by the company. The
act de�ines securities broadly to include a range of
instruments such as stocks, bonds,
debentures, evidence of indebtedness, voting trust
certi�icates, investment contracts, and fractional undivided
interests in oil, gas, or mineral rights. In SEC
v. W. J. Howey Co. (328 U.S. 293), the U.S.
Supreme Court held that an investment contract constitutes a
security under the act. Affectionately called the
"Howey test," an investment contract is de�ined as any
transaction in which a person:
Invests
In a common enterprise
Reasonably expecting pro�its that are
Derived primarily or substantially from the managerial or
entrepreneurial efforts of others.
Registration
Before any new security can be offered to the public

through the mails or through any interstate commerce
facility (such as a stock exchange or the
Internet), the issuer must �ile a registration statement with
the SEC. The registration statement must be written in plain
language and include all of the
following elements:
A description of the signi�icant provisions of the security
offered for sale that includes the relationship between the
security and other capital
securities of the company;
A description of the company's properties and business;
A description of the company's management that includes
information on the management's security holdings,
compensation, and bene�its;
A �inancial statement certi�ied by an independent public
accounting �irm; and
A description of pending lawsuits involving the company.
Before �iling for registration with the SEC (the pre�iling
period), a company must avoid publicity about the new
security and may not sell or offer to sell
the security to anyone. Once the company �iles the
registration statement with the SEC and its approval is
pending (the waiting period), the company may
still not sell the security, but may begin to offer it for sale
through limited advertisements in ads that tell prospective
investors where they may request a
prospectus for the new security (see Figure 31.1 for a
sample).
Figure 31.1: A sample prospectus

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At this point, a company may make available a preliminary
prospectus to investors that does not include the price of
the security. Once the SEC declares
the registration effective and prospective buyers are given
a �inal prospectus (the posteffective period), the company
may �inally offer and sell the new
security.
Securities Exempt From Registration
As noted previously, there are some limited exemptions to
the requirement that new securities be registered with the
SEC prior to their being offered to
the public. According to the Securities Act of 1933, the
following securities are exempt from registration:
All bank securities sold prior to July 27, 1933;
Commercial paper (such as checks, drafts, notes, and
certi�icates of deposit) with a maturity date of not more
than nine months;
Government-issued securities;
Securities issued by nonpro�it religious, charitable,
educational, benevolent, or fraternal organizations;

Securities issued by a bank or savings and loan;
Securities issued by common carriers regulated by the
Interstate Commerce Commission; and
An insurance policy or an annuity contract.
Under Rule 147, securities offered for sale solely in one
state by a company that does at least 80% of its business
in the state are also exempt from �iling.
State securities regulations, however, may require the
company to �ile with the SEC. Resale of these securities
is also restricted to residents of the state for
nine months following the initial sale. In addition to the
intrastate sales and security exemptions noted above, the
act allows several exemptions involving
small securities offerings:
Rule 506 of Regulation D: Exempts private offerings
to accredited investors (expert investors such as banks,
executive of�icers, directors, and
partners of the business issuing the security and wealthy
investors) and limited offerings to not more than 35
nonaccredited investors (e.g., regular,
nonexpert investors).
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Rule 504 of Regulation D: Nonpublic issuers may sell
up to $1 million of securities in a 12-month period to

any purchaser. General advertising of the
issue is permitted, as long as the dollar limit of the issue
is not exceeded.
Rule 505 of Regulation D: Any issuer may sell up to
$5 million of securities in a 12-month period to fewer
than 35 nonaccredited investors and to an
unlimited number of accredited investors. However, general
advertising of the issue is not permitted.
Regulation A: Any nonpublic issuer may sell up to $5
million of securities in a one-year period with no limit on
the number of purchasers and no
purchaser sophistication requirement. The offering circular
is considered the disclosure document for such a �iling
and must be �iled with the SEC,
but registration of the offering itself is not required.
Securities purchased under Rules 504, 505, and 506 must
generally be held for one year prior to resale, or the
seller may be subject to penalties as an
underwriter of an unregistered security.
Sanctions Under the Securities Act of 1933
Section 12(a)(2) of the Securities Act of 1933
prohibits misstatements or omissions of material fact in
any written or oral communication in connection
with the general distribution of any security by an issuer.
Section 17(a) of the Securities Act of 1933
prohibits the use of any device or arti�ice to
defraud, or the use of any untrue or misleading statement,
in connection with the offer or sale of any security.
The act provides for civil and criminal sanctions for willful
and negligent violations. It gives the SEC the power to

investigate and bring civil enforcement
proceedings under the act and allows the SEC to seek
injunctive relief against violators of the act. Section 11 of
the Securities Act of 1933 provides civil
liability for damages when a registration statement
misstates or omits a material fact on its effective date. A
purchaser may �ile suit for damages caused by
misstatement or omission. The purchaser does not have to
prove reliance on the misstatement or omission in
purchasing the securities or prove that the
defendant negligently or intentionally misstated or omitted
a material fact. However, a defendant can escape liability by
proving that the purchaser knew
of the misstatement or omission when the security was
purchased. In addition, defendants can successfully assert the
defense of due diligence and
escape liability if they can establish that after a reasonable
investigation, they had reasonable grounds to believe,
and did believe, that the registration
statement was true and contained no omission of material
fact.
Section 24 of the Securities Act of 1933 provides
for criminal liability for any person who willfully violates
the act or its rules and regulations. Violators
are subject to �ines of up to $10,000 and/or imprisonment
for up to �ive years for each criminal violation of the
act, which are prosecuted by the
Department of Justice.
Securities Exchange Act of 1934
Unlike the disclosure requirements of the Securities Act of
1933, which apply only to the IPO of a security, the
Securities Exchange Act of 1934 regulates
the trading of securities after their original public offering.

The act also regulates securities brokers, dealers, securities
exchanges, and national securities
associations. In addition, the act created the SEC and
empowered it to enforce the securities laws under the 1933
and 1934 acts.
Scope
Under the Securities Exchange Act of 1934, companies
whose securities are traded on any public securities
exchange, and companies whose assets exceed
$10 million whose stock is owned by 500 or more
shareholders, are required to �ile information on an annual
and quarterly basis with the SEC.
Companies are also required to provide the SEC with
noti�ication of material changes when they occur by means
of a monthly report. The reported
information is then made available to prospective investors
and to the general public through the Electronic Data
Gathering Analysis and Retrieval
(EDGAR) database maintained by the SEC. EDGAR is
available online at http://www.sec.gov/edgar.shtml
(http://www.sec.gov/edgar.shtml) .
The act also requires company insiders (de�ined as
corporate of�icers, directors, and anyone who controls 10%
or more of any company's class of equity
securities) to disclose their holdings and transactions in
company securities. Proxy solicitations, which are
attempts by a group of shareholders to garner
votes from other shareholders on speci�ic issues, are also
regulated under the act.
Violations of the Securities Exchange Act of 1934
Both civil and criminal sanctions are available under the

act. These include the following:
Section 18 imposes liability on any person responsible
for a false or misleading statement of a material fact in
any �iling under the act. Anyone who
relies on the false or misleading statement may sue for
damages without the need to prove that the defendant was
negligent in providing the false or
misleading information to the SEC. However, a defendant
may avoid liability by proving that the false or misleading
information was provided in good
faith.
Section 10(b) prohibits the use of manipulative or
deceptive devices through misstatement or omission of a
material fact in the sale of securities. A
material fact can be de�ined as any information where
there is substantial likelihood that a reasonable investor
would consider it important in making
the decision to purchase the security. A seller is not liable
under section 10(b) unless he or she acts with scienter
(the mental state embracing the
intent to deceive, manipulate, or defraud). The prohibition is
made applicable to all transactions in securities under Rule
10(b)(5), whether or not the
securities need to be registered with the SEC under the
1933 or 1934 acts.
Section 32 provides criminal liability for violations of
the act of up to $5 million in �ines and imprisonment for
up to 20 years for willful violations of
the act. Businesses may be �ined up to $25 million for
violations of the act.
http://www.sec.gov/edgar.shtml

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Sarbanes–Oxley: The Public Company Accounting
Reform and Investor ProtectionAct of 2002
One of the most important pieces of legislation with which
you need to be familiar as a business manager is the
Sarbanes–Oxley Act of 2002 (SOX). The
highly publicized management and accounting scandals
involving Enron, Tyco International, WorldCom, Arthur
Andersen, and other companies in the
recent past led Congress to adopt this law in 2002, with
near unanimity in both the House of Representatives and
the Senate. The legislation established
new or enhanced standards for the boards of all U.S.
publicly traded companies, their management, and all public
accounting �irms. It imposed criminal
penalties for certain violations of the act and charged the
SEC with implementing rules for complying with the
provisions of the act. SOX created a new
agency: the Public Company Accounting Oversight Board
(PCAOB), which it charged with the oversight,
inspection, regulation, and disciplining of
accounting �irms in their roles as auditors of public
companies. Its website can be found here
(http://pcaobus.org/Pages/default.aspx) .
Key provisions of the act include:
Section 906 requires chief executive of�icers (CEOs) and
chief �inancial of�icers (CFOs) of most publicly traded

companies to certify the accuracy of
�inancial statements �iled with the SEC.
Section 302 requires both quarterly and annual statements
to be certi�ied by the chief executive of�icer (CEO) and
chief �inancial of�icer (CFO) of
reporting companies as having been reviewed by a signing
of�icer of the company and to contain no factual errors to
the best knowledge of the
signing of�icer. The signing of�icer must also certify the
existence of an internal control system to identify all
material information that must be
reported by the company.
Section 806 provides protection for employees who report
securities violations (whistleblower protection), preventing
employers from �iring or taking
other retaliatory action against such employees.
Enhanced penalties, including �ines of up to $5 million
and/or up to 20 years in jail for criminal violations of the
Section 906 certi�ication
requirements.
For an interesting and comprehensive look at the Enron
scandal, go to "Behind the Enron Scandal
(http://www.time.com/time/specials/packages/0,28757,2021097,
00.html) ". See Chapter 4
ns/ch04#ch04) , Business Ethics, for more on this topic.
Securities Regulation by the States
Federal securities regulation does not preempt the states
from also regulating the sale of securities within their
borders. In cases where the issuance or

sale of securities is not covered by the federal acts (such
as in the case of intrastate offerings), states impose their
own regulatory requirements on
issuers under what are often referred to as blue sky laws.
Every state has its own regulatory scheme covering the
issuance and sale of securities. In most
states, securities regulation is patterned after the federal
acts.
http://pcaobus.org/Pages/default.aspx
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Microsoft vs. the Government
31.2 Federal Antitrust Law
The integrity of our economic system depends not only on
regulating the stock markets but also on maintaining a
system that allows for free and fair
competition. But the system can be undermined if companies
are allowed to engage in anticompetitive practices that
arti�icially manipulate prices, restrict
the availability of products, or �ix prices by agreements
that undermine basic market forces. While the states and the
federal government both regulate
and punish anticompetitive practices, it is the federal
government that regulates anticompetitive practices that can

impact interstate commerce, primarily
through the Sherman Antitrust Act of 1890 and the
Clayton Act of 1914 as amended. In this section, we will
focus on these two acts and examine the
basic tenets of federal antitrust law.
Sherman Antitrust Act of 1890
As noted above, the U.S. economy depends on a �luid
exchange and needs unfettered
and fair competition to �lourish. Trusts and monopolies
are arrangements among
competitors that destroy competition and regulate pricing.
Thus, the courts have
determined that trusts defeat competition and should be
outlawed. The act also
prohibits cartels, which involve the collusion of companies
in the same industry to �ix
prices. While restricted in the United States under the
Sherman Antitrust Act, cartels are
still allowed to some extent in Europe. For example, in
1999, Hoffman–La Roche
pleaded guilty to a worldwide conspiracy involving
international cartels to �ix the price
of vitamins and paid a $500 million �ine.
Violations of the Sherman Act
Section 1 of the Sherman Antitrust Act (15 U.S.C. § 1), as
amended, declares illegal every
"contract, combination in the form of trust or otherwise, or
conspiracy, in restraint of
trade or commerce among the several States, or with
foreign nations." Violation of the
act is punishable as a felony and carries a maximum
penalty of $10 million if the

violator is a corporation and a maximum �ine of $350,000
and/or imprisonment of up
to three years if the violator is an individual. Because
contracts and conspiracies
require the participation of two or more persons, Section 1
of the act applies only to
concerted efforts by two or more persons or entities to
restrain trade or commerce.
(Section 3 of the act extends the same prohibition and
penalties for conduct in restraint
of trade affecting Washington, D.C., and U.S. territories.)
Section 2 of the act (15 U.S.C. § 2) makes it a felony to
"monopolize . . . or conspire with any other person or
persons, to monopolize any part of the
trade or commerce among the several States, or with
foreign nations." The maximum penalty for persons or
corporations found guilty of violating Section
2 of the act is the same as for violations of Section 1:
namely, a maximum �ine of $10 million for corporations
and $350,000 and/or imprisonment for up
to three years for individuals. Under this section, individual
and concerted action to arti�icially create a monopoly is
criminalized. Note that monopolies as
such are not prohibited; rather, it is the effort to
arti�icially create a monopoly by restraining trade that is
criminalized.
To successfully prosecute individuals or companies for a
conspiracy to monopolize, the prosecutor must establish that
the defendants planned a course of
action with the intent to destroy competition in order to
create a monopoly and that they engaged in some overt act
to carry out that plan.
In addition to the criminal penalties discussed above,

Section 4 of the act (15 U.S.C. § 4) gives U.S. Attorneys,
under the direction of the U.S. Attorney
General, the power to obtain injunctive relief (such as
cease and desist orders) in federal district courts
against violators of the act.
The Sherman Act also provides civil penalties to individuals
or companies harmed by those who violate the act that
include treble damages (triple the
amount of actual damages suffered by a plaintiff due to a
defendant's violation of the act).
An individual or corporation may in theory create and
maintain a monopoly as long as it is done without
engaging in illegal anticompetitive activity. Thus,
if an inventor were to invent an engine that runs on tap
water, the inventor could patent the invention and be
guaranteed a manufacturing monopoly for
a period of 20 years from the date that the patent
application was �iled, once the patent was issued. Likewise,
if a corporation discovered a new process
for genetically engineering a bacterium that ingests waste
products and excretes crude oil, it could either patent the
new organism or protect its
manufacturing as a trade secret and thereby guarantee for
itself a monopoly without violating the Sherman Antitrust
Act (see Chapter 20
ns/ch20#ch20) , Intellectual Property, for more on patents
and trademarks). In other words,
dominating a market by producing a superior product or
service at a lower price than the competition does not
violate the act.
The overwhelming majority of suits against violators of the
Sherman Act have come from private parties. For an

example of a recent case involving the
Sherman Act, see U.S. v. Microsoft
(http://www.microsoft.com/en-
us/news/download/legal/RemediesTrial/PubIntDeterm11-1.pdf)
, Civil Action No. 98-1232.
Legal Standards
Microsoft vs. the Government
From Title: Microsoft vs. the Justice Department: Playing ...
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The courts apply a "rule of reason" test, �irst
announced by the U.S. Supreme Court in Standard Oil
Co. v. United States (221 U.S. 1 (1911)), to
determine
whether speci�ic actions that may arguably result in
restraint of trade under the act are illegal. Under the rule

of reason test, conspiracies in restraint of
trade are held to be illegal under the Sherman Act only if
they constitute undue or unreasonable restraints of trade
and unreasonable attempts to
monopolize. Therefore, only contracts or actions that unduly
restrict trade are deemed to violate the act.
Some types of agreements are so harmful to free
competition that they are held to be per se violations of
the Sherman Act and punishable in
themselves without having to be examined for their
reasonableness or potential restraint on commerce. Common
examples of per se violations of the act
include agreements among competitors to �ix prices or
limit the availability of commodities, group boycotts in
which groups of sellers refuse to deal with
a speci�ic company or person, and agreements by
competitors to carve out geographic areas in which they
will not compete with one another. The
following examples will illustrate:
Three book publishers conspire to �ix the price of e-
books. This is a price-�ixing agreement and a per se
violation of Section 1 of the Sherman
Antitrust Act (for more information on the actual case, see
"Settlements in e-book price-�ixing suit
(http://www.upi.com/Business_News/2012/08/30/Settlements-
in-e-book-price-�ixing-suit/UPI-12161346368728/) ".
Slick's Lube Works and Do-Em-Fast Oil Changes, two
national competing chains specializing in oil changes and
related automotive services, agree to
divide areas of each state in which they do business so
that only one of the companies does business in any given
city or town in each state. This
agreement, intended to lessen competition and increase the

pro�itability of each franchise for both companies, is a per
se violation of the act.
Three major food retailers, ABC Corp., DEF Corp., and GHI
Corp., agree not to purchase produce from JKL Corp., a
produce wholesaler, until JKL
makes major price concessions to each company. This is
an illegal boycott and a per se violation of the act.
Clayton Act of 1914
The Clayton Act modi�ies and strengthens the antitrust
provisions of the Sherman Act in a number of signi�icant
ways. We'll explore some of these next.
Prohibition on PriceDiscrimination
Section 2 of the Clayton Act (15 U.S.C. §
13) prohibits sellers from charging different
competitive buyers different prices for "commodities of like
grade
and quality." Temporary price reductions are permitted if
made in a good-faith effort to meet a competitor's price
reductions. Different prices may also be
charged to re�lect higher shipping costs when delivering
commodities to buyers in different geographic areas.
Quantity discounts are also allowable,
provided they are available to all buyers who purchase
similar quantities of goods. Giving and soliciting
discriminatory pricing are punished equally under
the act. Schools, colleges, universities, public libraries,
churches, hospitals, and not-for-pro�it charitable institutions
are not subject to the provisions of this
section of the act. Violation of this section of the act is
punishable by �ines of not more than $5,000 and/or
imprisonment for not more than one year.

Prohibition on Sale and Lease Contracts That Prevent
the Buyer From Purchasing Commodities
From the Seller's Competitors
14) makes it illegal for sellers of commodities
involved in commerce to enter into sale or lease contracts
that
restrict the ability of buyers to purchase the goods or
services of the seller's competitors when the effect is to
lessen competition or tend to create a
monopoly in any line of commerce. The effect of this
section is to prohibit exclusive dealing contracts and tie-in
sales arrangements in which a buyer must
agree to purchase one or more product lines as a
precondition to being able to purchase what is typically a
highly desirable product line with limited
availability.
Antitrust Laws Inapplicable to Labor
Organizations
17) exempts labor organizations from coverage under
antitrust laws, stating that "[t]he labor of a human being
is not a commodity or article of commerce" and that the
lawful activities of unions cannot be "held or construed to
be illegal combinations or conspiracies
in restraint of trade, under the antitrust laws."
Acquisition by One Corporation of the Stock of
Another
18) generally prohibits the acquisition of one

company's stock by another company when "the effect of
such
acquisition may be substantially to lessen competition, or
to tend to create a monopoly." Corporations may, however,
expand their operations through
subsidiaries and purchase the stock of subsidiary companies
when the effect is not to substantially lessen competition.
PremergerNoti�ication
Section 7A of the Clayton Act (15 U.S.C. §
18a) requires premerger noti�ication by the companies
involved. Such notice must be given to the Federal
Trade Commission (FTC) and the Assistant Attorney
General in Charge of the Antitrust Division of the
Department of Justice prior to the acquisition of
voting securities when the acquisition would leave the
acquirer with voting securities and aggregate assets in the
company whose securities are being
acquired of $200 million or more. In certain circumstances,
the threshold amount is set at $50 million. The amounts are
adjusted annually and, as of
February 27, 2012, were raised to $272.8 million and $68.2
million, respectively. A waiting period of 30 days (15 days
for cash tender offers) is imposed
prior to the consummation of acquisitions requiring
noti�ication of the FTC and Department of Justice, with
the waiting period starting on the day that the
noti�ication is received by the FTC. In 2011, AT&T
attempted a merger with T-Mobile. The Justice Department
sued under the act, claiming that the merger
would constitute a violation of the antitrust laws, and in
2012 AT&T dropped its attempt at the acquisition. See "AT
& T Ends $39 Million Bid for T-
Mobile (http://dealbook.nytimes.com/2011/12/19/att-
withdraws-39-bid-for-t-mobile/) ".

http://www.upi.com/Business_News/2012/08/30/Settlements-in-
e-book-price-fixing-suit/UPI-12161346368728/
http://dealbook.nytimes.com/2011/12/19/att-withdraws-39-bid-
for-t-mobile/
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Prohibition on Of�icers and Directors Serving
Competing Companies
19) prohibits interlocking directorates and
of�icers serving competing companies if both companies
have
aggregate capital, surplus, and undivided pro�its of $10
million or more each. (The amount is also adjusted
annually by the FTC on September 30 and was
$27.784 million as adjusted for 2012.) Directors and
of�icers serving two companies that meet the minimum
capital amount may still lawfully serve both
companies as long as one of the following conditions is
met:
1. The competitive sales of either company are less than
$1,000,000 ($2,778,400 as adjusted for 2012);
2. The competitive sales of either corporation are less than
2% of that corporation's total sales; or
3. The competitive sales of each corporation are less than

4% of that corporation's total sales.
Directors and of�icers of banks, banking associations, and
trust companies are exempt from the provisions of this
section.
Violations of the Clayton Act
The Department of Justice through the Assistant Attorney
General in Charge of the Antitrust Division, state attorneys
general, and the FTC all have
jurisdiction over violations of the act. The federal and state
attorneys general may seek injunctive relief, such as cease
and desist orders, in federal district
courts. The act also provides treble damages and reasonable
attorney's fee reimbursement in private actions against
violators of the act. As with the
Sherman Act, the overwhelming majority of suits against
violators have come from private parties.
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Key Terms
Click on each key term to see the de�inition.
accreditedinvestors
ns/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.
2/sections/fm/books/AUBUS670.12.2/section

Expert investors such as banks, executive of�icers, directors,
and partners of the business issuing the security and
wealthy investors.
blue sky laws
State laws that regulate the issuers and sellers of
securities; often modeled after federal laws.
cartels
Prohibited by the Sherman Antitrust Act, cartels involve the
collusion of companies in the same industry to �ix prices.
While restricted in the United
States, cartels are allowed to some extent in Europe.
cease and desist order
A type of injunctive relief or court order wherein the
person or entity must refrain from undertaking or
continuing a certain type of conduct.
Clayton Act of 1914

Act that modi�ies and strengthens the antitrust provisions of
the Sherman Antitrust Act.
due diligence
A level of care in which a business takes reasonable care
to investigate all facts, repercussions, and legal and
�inancial aspects of making a decision.
ElectronicData Gathering Analysis and Retrieval (EDGAR)
database
Electronic data gathering analysis and retrieval database
maintained by the Securities and Exchange Commission.
exempt from registration
Refers to securities that do not have to be registered with
the Securities and Exchange Commission prior to becoming
public offerings.
Federal Trade Commission (FTC)

The federal agency that has jurisdiction over business
practices that are anticompetitive, deceptive, or unfair to
consumers.
Howey test
The test developed by the U.S. Supreme Court in SEC v.
W. J. Howey Co. to determine whether paper (an
investment contract) is in fact a security.
initial public offering (IPO)
The �irst time a stock is offered for sale on a stock
exchange to the public.
insiders
Corporate of�icers, directors, and anyone who controls 10%
or more of any company's class of equity securities.
interlocking directorates
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Under the Clayton Act, an of�icer or director of one
corporation is prohibited from serving as an of�icer or
director of another competing
corporation if each corporation has capital, surplus, and
undivided pro�its aggregating to more than $10 million.
issuance
Listing of stock on a public stock exchange, such as the
New York Stock Exchange, thereby making the stock

available for purchase by the public.
per se violations of the Sherman Act
Types of agreements that are so harmful to free
competition that they are punishable in themselves without
having to be examined for their
reasonableness or potential restraint on commerce.
posteffective period
Period in which the SEC declares the registration effective
and prospective buyers are given a �inal prospectus, after
which the company may �inally
offer and sell the new security.
pre�iling period
Period before the �iling for registration with the
Securities and Exchange Commission, when a company
must avoid publicity about the new security
and may not sell or offer to sell the security to anyone.
prospectus

A booklet of information provided by a corporation for
buyers to read so that they may determine whether the
stock is a good investment.
proxy solicitation
Prior to the annual meeting, a mailing to shareholders by
the corporation giving each shareholder an option to vote
on corporate matters via a
proxy card, that is, giving their voting rights over to a
group who will vote on the issues on their behalf rather
than the shareholder voting
individually.
Public Company Accounting Oversight Board
(PCAOB)
A new agency created by the Sarbanes–Oxley Act of 2002,
charged with the oversight, inspection, regulation, and
disciplining of accounting �irms in
their roles as auditors of public companies.
registration
The �iling of paperwork with the Securities and Exchange
Commission by a corporation that plans to sell stock.

registration statement
Initial paperwork �iled with the Securities and Exchange
Commission that must be approved by the SEC before stock
can be issued.
Regulation A
Any nonpublic issuer may sell up to $5 million of
securities in a one-year period with no limit on the
number of purchasers and no purchaser
sophistication requirement.
Rule 147 of the Securities Act of 1933
Securities offered for sale solely in one state by a
company that does at least 80% of its business in the state
are also exempt from �iling. State
securities regulations, however, may require the company to
�ile with the Securities and Exchange Commission.
Rule 504 of Regulation D

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Nonpublic issuers may sell up to $1 million of securities
in a 12-month period to any purchaser.

Any issuer may sell up to $5 million of securities in a
12-month period to fewer than 35 unaccredited investors
and to an unlimited number of
accredited investors.
Exempts private offerings to accredited investors and
limited offerings to not more than 35 nonaccredited
investors (e.g., regular, nonexpert
investors).
"rule of reason" test
A test employed by the courts to determine whether an
action is a restraint of trade contracts or action unduly
restrictive.
scienter
The mental state embracing the intent to deceive,
manipulate, or defraud.

13)
Prohibits sellers from charging different competitive buyers
different prices for "commodities of like grade and
quality."
14)
Makes it illegal for sellers of commodities involved in
commerce to enter into sale or lease contracts that restrict
the ability of buyers to purchase
the goods or services of the seller's competitors when the
effect is to lessen competition or tend to create a
monopoly in any line of commerce.
17)
Exempts labor organizations from coverage under antitrust
laws.
18)

Prohibits the acquisition of one company's stock by another
company when "the effect of such acquisition may be
substantially to lessen
competition, or to tend to create a monopoly."
Section 7a of the Clayton Act (15 U.S.C. §
18a)
Requires noti�ication of the Federal Trade Commission and
the Assistant Attorney General in charge of the Antitrust
Division of the Department of
Justice prior to the acquisition of voting securities when
the acquisition would leave the acquirer with voting
securities and aggregate assets in the
company whose securities are being acquired of $200
million or more.
19)
Prohibits interlocking directorates and of�icers serving
competing companies if both companies have aggregate
capital, surplus, and undivided
pro�its of $10 million or more each.
Section 10(b) of the Securities Exchange Act of
1934

Prohibits the use of manipulative or deceptive devices
through misstatement or omission of a material fact in the
sale of securities.
Section 11 of the Securities Act of 1933
Provides civil liability for damages when a registration
statement misstates or omits a material fact on its effective
date.

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