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UT / Business Law / BLAW 301 / What is considered a professional corporation?

What is considered a professional corporation?

What is considered a professional corporation?


School: University of Tennessee - Knoxville
Department: Business Law
Course: Legal Environment of Business
Professor: Vicki mayfield
Term: Fall 2015
Cost: 50
Name: Business Law Exam 3 Study Guide
Description: Ch. 16,17,18,28
Uploaded: 04/07/2018
28 Pages 30 Views 10 Unlocks

Business Law Exam 3 Study Guide 

What is considered a professional corporation?

Ch. 18 (Corporations), Ch. 16 & 17 (Non-Corporate Business Organizations), Ch. 28  (Investor Protection)  

Ch. 18 Key Terms: 

Dividends= a distribution of corporate profits to the corporation’s  shareholders in proportion to the number of shares held

Proxy= authorization to represent a corporate shareholder to  serve as his/her agent and vote his/her shares in a certain manner

Voting trust= an agreement (trust contract) under which a  shareholder assigns the right to vote his/her shares to a trustee,  usually for a specified period of time

Retained earnings= the portion of a corporation’s profits that has  not been paid out as dividends to shareholders

Stock certificates= certif. issued by a corp. evidencing the  ownership of a specified number of shares in the corporation

What companies are benefit corporations?

Stock warrants= rights given by a company to buy stock at a  stated price by a specific date

Preemptive rights= the right of a shareholder in a corp. to have  the first opportunity to purchase a new issue of that corps. stock  in proportion to the amount of stock already owned by the  shareholder

Inside director= a person on a corporation’s board of directors  who is also an officer of the corporation

Outside director= a person on a corporation’s board of directors  who does not hold a management position at the corporation We also discuss several other topics like How is fallacy different from a mistake?

Quorum= the minimum number of members of a body of officials  that must be present for business to be validly transacted

Watered stock= shares issued by corporation for less than their  fair market value

Holding company= a company whose business activity is holding  shares in another company

What are implied powers?

Domestic corporation= in a given state, a corporation that is  organized under the law of that state  

Foreign corporation= in a given state, a corporation that does  business in that state that it is not incorporated in

Alien corporation= a corporation formed in another country but  doing business in the United States

Benefit corporation= a type of for-profit corporation, available by  statute in a number of states, that seeks to have a material  positive impact on society and the environment  

Bylaws= the internal rules of management adopted by a  corporation at its first organizational meeting

De jure= rightful and lawful, term often used to describe a  corporation that has substantially complied with all conditions  precedent to incorporation Don't forget about the age old question of What is the international criminal court?

Securities= stocks, bonds, other items that represent an  ownership interest in a corporation or a promise of repayment of  debt by a corporation

Stocks= equity securities, an ownership interest in a corporation  measured in units of shares

Bonds= debt securities, a security that evidences a corporate (or  gov.) debt

Crowdfunding= people network/pool funds and other resources  via the internet to assist a cause (such as disaster relief) or invest in a business venture (startup)

Ch. 18: 

A corporation is a legal entity created and recognized by state law as a person (an artificial legal person, as opposed to a natural  person). As a “person” it enjoys many of the same  rights/privileges under state and federal law as U.S. citizens do.

o Constitutional guarantees of due process, free speech,  and freedom from unreasonable searches and seizures all  apply to corps.  We also discuss several other topics like How does language influence our thinking?
We also discuss several other topics like What are the two dominate environmental factors that affect how people live in micronesia?

o The Catholic Church is incorporated, cities can be  incorporated  

Board of Directors: hold the responsibility for the overall  management of the firm, members are elected by the  shareholders.  

o Make the policy decisions

o Hire/fire corporate officers and other employees to run the daily business operations

o When an individual purchases a share of stock in a  corporation, that person becomes a shareholder/owner of  the corporation  

o Unlike partners in a partnership, the body of shareholders  can change constantly without affecting the continued  existence of the corp.  

o Shareholder can sue the corporation, and corp. can sue a  shareholder

o Under certain circumstances a shareholder can sue on  behalf of a corp.

Limited Liability of Shareholders

∙ Typically, corporate shareholders are not personally liable  for the obligations of the corporation beyond the extent of their investments Don't forget about the age old question of What are the economic systems around the world?

∙ However, a court can pierce the corporate veil and impose liability on shareholders for the corporation’s obligations

∙ Additionally, creditors often will not extend credit to small  companies unless the shareholders assume personal  liability, as guarantors, for corporate obligations

Corp. Earnings/Taxation: when a corporation earns profits, it can  either pass them on to shareholders in the form of dividends or  retain them as profits. These retained earnings will yield higher  corporate profits in the future, higher profits cause the price of  the company’s stock to rise.  

o Failure to pay income taxes can lead to suspension of the  organization’s corporate status until taxes are paid and  can even dissolve the corp. for failing to pay If you want to learn more check out What is an example of iconography?

o Corporate profits can be subject to double taxation:  company pays tax on its profits, then if profits are passed  on to shareholders as dividends, the shareholders must  also pay income tax on them  

o Corporations don’t usually receive tax deductions for  dividends it distributes  

o Double taxation is a major disadvantage of the corporate  form

Holding company (parent company) is a company whose business activity consists of holding shares in another company. o Typically established in a low-tax/no-tax offshore  jurisdiction such as the Cayman Islands, Dubai, Hong  Kong, Luxembourg, Monaco, or Panama.  

o This way the U.S. corp. can transfer cash, bonds, stocks,  and other investments to the holding company and any  profits received on these investments are taxed at the  rate of the offshore jurisdiction (once profits are brought  “onshore” they are then taxed at federal corporate income tax rate, as well as any payments received by the  shareholders

Criminal Acts: a corporation may be held liable for the criminal  acts of its agents and employees… this is known as respondeat  superior.

-Two-part analysis in determining if they are to be held liable:

1. you must decide if the wrongful act occurred during  time of employment

2. Did it benefit the company in some way?  

Ex: Flower Delivery Co: driver runs red light while delivering some flowers… Was it during the scope of employment? Yes. Was it  deriving benefit for the company? Yes. Therefore, you are  responsible.  

o Corps. cannot be imprisoned, but can face fines  amounting to hundreds of millions of dollars (corp.  directors and officers may be imprisoned)

A corporation does not have an automatic right to do business in  a state other than its state of incorporation, unless it obtained a  certificate of authority.  

o Once certificate has been issued the corp. can exercise in  that state all of the powers conferred on it by its home  state

o If a foreign corp. does business in a state without  obtaining a certificate, the state may impose substantial  fines/sanctions on that corporation

o A foreign corp. does not need a certificate to sell  goods/services via the Internet or by mail

A public corporation is one formed by the government to meet  some political/governmental purpose.  

Ex: cities/towns that incorporate, U.S. Postal Service, TVA,  and AMTRAK

A publicly held corporation (public company) is any  corporation whose shares are publicly traded in a securities  market…the New York Stock Exchange or NASDAQ. o Privately owned, publicly traded

A private corporation is created either wholly or in part for  private benefit (profit).

o Most corporations are private

o Owned by private persons rather than by a government o Privately owned, not publicly traded

A nonprofit corporation is formed for purposes other than  making money.

Ex: private hospitals, educational institutions, charities,  religious organizations, etc.

o Nonprofit corp. and its members may also be immune  from liability for a personal injury caused by its negligence

A close corporation is one whose shares are held by relatively  few persons, often members of a family (a.k.a. closely held,  family, or privately held corporations)  

o Only some states allow for them

o operated more like a partnership than a corporation (all  SH must agree in writing), corp. can operate without  directors and bylaws

o management resembles that of a sole proprietorship or  partnership (control is held by a single shareholder or  tightly knit group of SHs)  

…allowed to be a close corporation if the following criteria are  met:  

1. no public offering of stock

2. small number of shareholders (usually between 30-35)

***A potential for corporate assets to be used for personal  consumption is especially high in a close corporation. The  conmingling of corporate and personal funds and the  shareholders’ continuous personal use of corporate property  (vehicles) invite trouble for close corps.  

A close corp. that meets the requirements specified in Subchapter S of the Internal Revenue Code can choose to operate as an S  Corporation (defined by tax treatment)  

o taxed like a partnership, able to avoid double taxation o must exist in a state that allows for close corporations

…requirements for S Corporation status:

1. the corporation must be a domestic corporation 2. corporation must not be a member of an affiliated group  of corporations

3. shareholders must be individuals, estates, or certain trusts and tax- exempt organizations.  

Partnerships and non-qualifying trusts cannot be  

shareholders. Corporations can be shareholders under  certain circumstances.  

4. must have no more than 100 shareholders

5. must have only one class of stock

6. no shareholder of the corporation may be a nonresident  alien  

A professional corporation is typically identified by the letters  P.C. (professional corporation), S.C. (service corporation), or P.A.  (professional association).

Ex: physicians, lawyers, dentists, and accountants can  incorporate

-for liability purposes, courts treat professional corporations  like partnerships and hold each professional liable for  malpractice by others in the firm.

A benefit corporation is a for-profit corporation that differs from traditional corporations in the following ways:  

1. Purpose: to benefit the public as a whole (unlike that of  ordinary business corporations which aim to provide long-term  shareholder value).  

-directors must consider the impact of their decisions  on society

2. Accountability: shareholders determine whether the  company has achieved a material positive impact,  - if not, they may sue the corporation if it fails to pursue or create public benefit

3. Transparency: must issue an annual benefit report on its  overall social and environmental performance that uses a  recognized third-party standard to assess performance.  

-report must be delivered to all SHs and posted on a  public website

Forming your corporation… after deciding the nature of your  business:

o pick a state to incorporate in

o secure your corporate name

o prepare your articles of incorporation (these include) o business name

o # of shares authorized to issue

o name & address of registered agent

o name & address of each incorporator

o (possibly) name of board members

o hold first organizational meeting

o adopt corp. bylaws (rules of internal management) o elect board of directors (if not named in articles of  incorp.)

The courts will treat a corporation as a legal corporation despite a defect in its formation if the following three requirements are met: 1. a state statute exists under which the corporation can be  validly incorporated

2. the parties have made a good faith attempt to comply  with the statute

3. the parties have already undertaken to do business as a  corporation

Express Powers of a corp. are found in its articles of incorporation, in the law of the state of incorporation, and in the state and  federal constitutions. Corporate bylaws and the resolutions of the  corporation’s board of directors also establish express powers.  

The following order of priority is used if a conflict arises among  the various documents involving a corporation:

1. The U.S. Constitution

2. state constitutions

3. state statutes

4. the articles of incorporation

5. bylaws

6. resolutions of the board of directors

Implied Powers: a corporation has the implied power to  borrow/lend funds within certain limits and to extend credit to  parties with whom it has contracts.

o The corp. has the implied power to perform all acts  reasonably necessary to accomplish its corp. purpose o The president or chief executive officer of the corp. signs  the necessary documents on behalf of the corp. and have  the implied power to bind the corp. in matters directly  connected with the ordinary business affairs of the  enterprise

o A corporate officer does not have authority to bind the  corp. to an action that will greatly affect the corp. purpose or undertaking (sale of substantial corp. assets)

In corporate law, acts of a corporation that are beyond its express or implied powers are ultra vires acts.  

o Typically involve nonprofit corps. or municipal (public)  corporations

o Corporation or its shareholders can seek damages from  the officers/directors who were responsible for ultra vires  acts

Piercing the Corporate Veil…occasionally owners will use a  corporate entity to perpetrate a fraud or accomplish an  illegitimate objective. In these situations, courts will ignore the  corporate structure by piercing the corporate veil and exposing  the shareholders to personal liability.  

o Only happens if plaintiff in a lawsuit asks a court to order  PCV, but courts are generally reluctant to PCV

o Court will PCV if…

o Corporate entity is used to perpetrate fraud/get around  the law

o Corp. entity is abused for personal gain of shareholders o Corp. form treated carelessly

Some factors the court considers when deciding whether to PCV… Did the corporation comply with requisite formalities?

Did the corporation conceal or misrepresent assets or  shareholders?

Did the corporation not pay dividends when appropriate?

Did the corporation intermingle shareholders and corp.  assets?

Was there a proper separation of the corp. and shareholders  or was the corp. operated as alter ego of shareholders?  

Whether or not the corporation was undercapitalized  (insufficient capital at the time of formation causing inability to meet debts/potential liabilities)

Was a party tricked into dealing with the corporation rather  than the individual?

The Alter Ego Theory: applied when a corporation is so dominated and controlled by an individual (or group) that the separate  identities of the person (or group) and the corporation are no  longer distinct.  

Board Members (directors):

- The board of directors is the ultimate authority in every  corporation

- Hires/fires officers and high-level employees, determines  capital structure of the corporation, and declares  


- Few qualifications required for directors (few states  impose min. age)

- Directors are elected by shareholders, and may also be a  shareholder themselves

- Holds regular meetings with recorded minutes, each board member gets one vote

- Has fiduciary duty of care and loyalty/good faith to corp. & shareholders

- Directors can be removed for cause (not performing req.  duties)  

- Do not have protection from liability

Boards of large, publicly held corporations typically create  committees of directors and delegate certain tasks to these  committees.

*Executive committee: handles interim management  decisions between board meetings, does not have the power to  declare dividends, amend the bylaws, or authorize the issuance  of stock.

*Audit committee: responsible for the selection,  

compensation, and oversight of the independent public  accountants that audit the firm’s financial records.  **The Sarbanes-Oxley Act requires all publicly held  corps. have an audit committee

Corporate officers:

- Responsible for day to day operations

- Hired/fired by board members

- Have duty of care & loyalty

- Do not have protection from liability  

- Business judgement rule: officers are not liable for honest  mistakes or bad business decisions

- At minimum, most corps. have a president, VPs, secretary, & treasurer


- Have right to sell shares

- Have right to vote on directors nominated by other board  members

- Have right to propose shareholder resolutions

- Have right to receive dividends

- Have right to purchase a number of shares when issued - Must hold annual meetings where board is elected - Have right to receive notice of annual meeting in writing - No right to make policy decisions

- Right to bring shareholders derivative suit

- Majority shareholders owe a fiduciary duty to minority  shareholders

Liabilities… shareholders are not personally liable for the  debts of the corporation. If corp. fails, shareholders can lose  their investments but that’s it (unless court decides to PCV  which would hold shareholders individually liable).  

- Can be personally liable if a majority shareholder attempts to exclude minority shareholder from receiving certain  benefits.  

- Shareholders who receive watered stock may be liable to  creditors of corporation for unpaid corporate debts - If majority shareholder breaches fiduciary duty to a  minority shareholder, minority can sue for damages

Ch. 17: Limited Liability Business Forms 

Key terms:

Member= person who has an ownership interest in a limited  liability company

Operating agreement= members of a LLC set forth the details  of how the business will be managed and operated

Certificate of limited partnership= the document that must  be filed with a designated state official to form a limited  partnership

Limited partner= a partner who contributes capital to the  partnership but has no right to participate in its management and  has no liability for partnership debts beyond the amount of his/her investment

General partner= in a LP, a partner who assumes responsibility  for the management of the partnership and has full liability for all  partnership debts


-must file a lot of paperwork and pay fees

- a hybrid between partnership and corporation

-the owners are called members

- members of LLC have the same protection from liability that  corporate shareholders have- limited liability  

-foreign investors are allowed to become LLC members -statutes are not uniform, businesses that operate in more than  one state may not receive consistent treatment in these states

Formation: articles of organization must be filed with a  central state agency (usually the secretary of state’s office).  Articles must include: the name of the business, its principal  address, the name and address of a registered agent, the  members’ names, and how the LLC will be managed.  

Preincorporation contracts: persons who are forming a corporation may enter into contracts during the process of incorporation but  before the corporation becomes a legal entity.  

- The individual promoters who sign the contracts are  bound to their terms

- Once the corp. is formed and adopts the preincorporation  contracts by means of novation (which substitutes a new  contract for the old) it can then enforce the contract terms

Tax Liability: if your LLC has two or more members you can  choose to be taxed as corporations or as a partnership (most  often prefer taxation as a partnership to avoid “double taxation”)

- Unless an LLC indicates that it wishes to be taxed as a  corp. the IRS automatically taxes it as a partnership… meaning the LLC, as an entity, pays no taxes, profits are  passed through the LLC to the members who then  personally pay taxes on the profits

- An LLC with only one member cannot be taxed as a  partnership

- for federal income tax purposes, one-member LLCs are  automatically taxed as sole proprietorships unless they  indicate they wish to be taxed as corporations

How to operate an LLC: 

Operating agreement: agreement in which the members of a limited liability company set forth the details of how the  business will be managed and operated

- not required for an LLC to exist, need not be in writing  

*members of LLC have the power to dissociate at any time but  may not have the right to dissociate

- voluntary withdrawal, expulsion by other members, court  order, incompetence, bankruptcy, and death

- a dissociated member may have their interest bought out  by the other members through the provisions establishing a  buyout price, or at fair value

- if member’s dissociation violates the LLC’s operating  agreement, it is considered legally wrongful, and the  dissociated member can be held liable for damaged caused by  the dissociation

LLP: hybrid form of business designed mostly for professionals  who normally do business as partners in a partnership.  -you are not responsible for another partners malpractice -only responsible for your own bad acts, such as negligence

-if you and a partner screw up your other partners are not  responsible for it unless your partner is your supervisor

Major advantage: allows a partnership to continue as a pass through entity for tax purposes but limits personal liability for  partners, attractive for big service firms and family businesses

All of the “Big Four” accounting firms are organized as LLPs  (including Ernst & Young, LLP, and PricewaterhouseCoopers,  LLP)

Formation: must be formed/operated in compliance with state  statutes which include provisions of the Uniform Partnership Act  (UPA). Form must be filed with a central state agency, usually the  secretary of state’s office, and the business’s name must include  either “Limited Liability Partnership” or “LLP”. Must file an annual  report with the state to remain qualified as an LLP in that state.  

Family limited liability partnership (FLLP): partners are related to  each other.  

- A person acting in a fiduciary capacity for persons so  related can also be a partner, all of the partners must be  natural persons or be acting in a fiduciary capacity for the  benefit of natural persons

- Most often seen in agriculture by family-owned farms  

LP: consists of at least one general partner and one or more  limited partners

-the general partnership is responsible for firm management  and has full responsibility for the partnership and for all its  debts

- they make managerial decisions

- the limited partners are not involved with management… they contribute cash or other property and own an interest in  the firm

Formation: public and formal proceeding, partners must strictly  follow statutory requirements.

Must sign a certificate of limited partnership which includes  the name, mailing address, and the capital contribution of  each general and limited partner.  

- Certificate must be filed with the designated state official under the RULPA, the secretary of state…usually open to  public inspection

Liabilities- general partners are personally liable to the  partnership’s creditors

- If a corporation is the general partner, no one in the  limited partnership has personal liability

- The liability of a limited partner is limited to the capital  that he/she contributes or agrees to contribute to the  partnership

- A limited partner who participates in management will be  just as liable as a general partner to any creditor who  transacts business with the limited partnership

Rights & Duties: limited partners have essentially the same rights  as general partners (except for the right to participate in  management), this includes the right of access to the  partnership’s books and to information regarding partnership  business

- On dissolution of the partnership, limited partners are  entitled to a return of their contributions in accordance  with the partnership certificate

- They can also assign their interests subject to the  certificate

- They can sue an outside party on behalf of the firm if  general partners with authority to do so have refused to  file suit

- Limited partner can withdraw by giving 6 mo. notice  

*bankruptcy of a limited partner does not dissolve the  partnership unless it causes the bankruptcy of the firm *death or an assignment of the interest of a limited partner  does not dissolve a limited partnership

*LP can be dissolved by court decree

On dissolution, creditors’ claims, including those of partners who  are creditors take first priority.  

A limited liability limited partnership (LLLP): in this, the general  partner has the same liability as a limited partner in a limited  partnership.  

- Liability of all partners is limited to amount invested in the firm

Ch. 16 Key Terms:  

Entrepreneur= one who initiates/assumes the financial risk of a  new business enterprise and undertakes to provide or control its  management

Articles of partnership= a written agreement that sets forth  each partner’s rights and obligations with respect to the  partnership

Goodwill= the valuable reputation of a business viewed as an  intangible asset

Franchise= any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use that trademark,  trade name, or copyright in the selling of goods or services

Franchisee= one receiving a license to use another’s (the  franchisor’s) trademark, trade name, or copyright in the sale of  goods and services

Franchisor= one licensing another (the franchisee) to use the  owner’s trademark, trade name, or copyright in the selling of  goods or services

Partnership by estoppel= a partnership imposed by a court  when nonpartners have held themselves out to be partners, or  have allowed themselves to be held out as partners, and others  have detrimentally relied on their misrepresentations

Pass-through entity= a business entity that has no tax liability.  The entity’s income is passed through to the owners, and they  pay taxes on the income

Winding up= the second of two stages in the termination of a  partnership or corporation, in which the firm’s assets are  collected, liquidated, and distributed, and liabilities are  discharged

Buyout price= the amount payable to a partner on his or her  dissociation from a partnership, based on the amount  distributable to that partner if the firm were wound up on that  date, and offset by any damages for wrongful dissociation

In selecting which organizational form to take, entrepreneurs  must consider:

1. ease of creation

2. liability of the owners

3. tax considerations

4. ability to raise capital  

Requirements for All Business forms:

1. business name registration

2. occupational licensing

3. state tax registration  

4. health and environmental permits

5. zoning and building codes  

6. import/export regulations

Trademarks should be registered with the U.S. Patent and  Trademark Office (PTO)

Loans with desirable terms may be available from the U.S. Small  Business Administration (SBA).  

Sole Proprietorship- simplest form of business, the owner is the business

- More than 2/3 of all U.S. businesses

- No protection, high risk=high reward

- Pass through entity

- No longevity, unless stated in a will (when owner dies so  does business)

- Only pays personal income taxes on business’s profits - More flexibility than a partnership or corporation - Unlimited liability, creditors can pursue owner’s personal  assets to satisfy any business debts

Partnership (general)- an association of two or more persons to  carry on as co-owners of a business for profit

…arises from an agreement, express or implied, between two or  more persons to carry on a business for profit

- Co-owners of business with joint control over its operation  and the right to share in its profits

- Fiduciary duty to one another

- UPA (uniform partnership act) governs the operation of  partnerships in the absence of express agreement - A corporation can be a partner in a partnership

- Pass-through entity- a business entity that has no tax  liability


- A sharing of profits and losses  

- A joint ownership of the business

- An equal right to be involved in the management of the  business

If a partner leaves a partnership it is called “dissociation”, it  could dissolve and become a sole proprietorship or it could get  more partners.

Dissolution= when a partnership comes to an end and  ceases to do business.

Winding up= process of finishing business & collecting,  liquidating and distributing partnership assets.

Order of dissolution operations: finish business, pay debts,  distribute remaining capital among remaining partners

Indemnification- with joint and several liabilities, a partner who  commits a tort can be required to indemnify (reimburse) the  partnership for any damages it pays


An arrangement in which the owner of intellectual property- such  as a trademark, a trade name, or a copyright- licenses others to  use it in the selling of goods/serv.

Franchisee- a purchaser of a franchise, generally legally  independent of the:

Franchisor- the seller of the franchise

*Distributorship, a manufacturer (the franchisor) licenses the dealer (the franchisee) to sell its product (ex: auto dealers,  beer distributors)

*Chain-Style Business Operation, a franchise operates under  a franchisor’s trade name and is identified as a member  

*Manufacturing Arrangement, or processing plant  arrangement, the franchisor transmits to the franchisee the  essential ingredients or formula to make a particular product  (ex: Pepsi-Cola/other soft drink bottling co.)

Ch. 28: 

∙ Businesses unregulated started making more money. The  federal reserve lowered interest rates almost to zero.  

o Soldiers come home from Europe

 Have wages they can spend on everything else

 S

∙ Securities act of 1933 and 1934

o 1933

 2 things

 Offers Definition of a security

 Requires registration of that security if you  want to sell it  

o 1934

 Creates Securities Exchange Commission  o Securities Exchange Commission

 Administrative agency of federal government  

 An arm of the government to add protection  to certain areas  

 Enforce securities laws and protect the  


 Give investors opportunity to educate  

themselves before they invest  

 Headed by 5 sitting commissioners  

 Chairman  

 Jay Clayton  

 No more than 3 can be part of the  

same party  

 5 Divisions

 Corporation Finance

 Oversees all disclosures made by public  


 Focus of the 33 act

 Oversees EDGAR  

 Receives 3,000 Filings per day  

 Investment Management division

 Oversees Investment  

 Financial  

Registering A security  

 Must File a Prospectus AND a registration  statement

 Registration statement has 2 part:

 Part One is basically repeat of  


 Part 2 contain additional information  

sough by SEC, including:  

 Management aims & goals

 # of shares company is selling

 Issuer’s plans for proceeds

 Company’s tax status

 Are there any pending lawsuits?

 Contingent plan for potential legal  


 Income & Expenses

 Inherent risks of enterprise  

 ***Financial Statement certified by  

independent auditor

 If you are a well known seasoned issuer  you still have to prepare everything, but if you  

are a well known seasoned issuer you don’t have  

to wait for SEC approval to start selling  

 Seasoned issuer is someone who  

has issued 3 billion dollars  

 If you have 700 million dollars in  

external hands  

Types of securities that are exempt from registration: Government backed, Non-profits  

General rule is you have to register  

Exemption rules  

1. Regulation A exemption

2. Regulation D exemption -  concerns itself with exemptions for smaller  


 The rules 504  Applies to

 Non- Investment Companies

 Up to $1,000,000 in 12-month period

 No Solicitation

 No Advertising

 Buyers receive restricted securities

 The rules 505  Private, Non-Investment company

 Up to $5,000,000 in 12-month period

 May sell to unlimited # of accredited investors  Only up to 35 unaccredited investors  

 No solicitation

 No advertising

 Buyers receive restricted securities

 The rules 506  Private, Non-investment company  

 Unlimited Dollar amount

 May sell to unlimited # of accredited investors

 Only up to 35 unaccredited investors  

 Must check that unaccredited investors are able to  evaluate risks/merits of investment  

 Must give non-accredited investors a prospectus-like  document  

 No solicitation  

 No Advertising

 Buyers receive restricted securities

2 things to file: 

 Prospectus

 Regulation statement (has 2  parts)

 Register, then sell (and  


 If you register it once you don’t have to re


 Most securities are resold without further  


 Selling options

Restricted Securities

 Rule 144

- Must be adequate current public information about the  issuer

- Holding period (6 months for 505 & 506; ONE YEAR FOR  504)

- SEC is notified of resale

 Rule 144A

- Securities may only be sold to qualified institutional buyer  34 act is designed to prevent FRAUD  

 In connection with purchase of sales  

and securities  

 Section 10B

- The difference is that section 10B is a statute written by  congress

 Rule 10B5

- Written by securities exchange commission to better  enable them to enforce laws and securities

 If one is violated chances are the  other is also violated  

Securities fraud

1. Material misrepresentation in connection with the  purchase or sale of securities

2. Intent (Scienter)

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