Securities Tools

Securities Law Glossary

Blue Sky Laws — A phrase used to describe state securities laws. State securities laws vary depending on the state, but generally they aim to protect investors.

Broker — A person who buys and sells securities on behalf of someone else, usually a client.

Churning — A broker's excessive trading of an account for the purpose of generating commissions while disregarding the client's best interests.

Due Diligence — The review and other steps that various parties undertake to make sure that all information in the prospectus and related documents is accurate and truthful, and does not contain any material misstatements or omissions.

FINRA — FINRA is the abbreviation for the Financial Industry Regulatory Authority (formerly the National Association of Securities Dealers (NASD)). FINRA oversees more than 5,000 securities firms and 666,000 registered representatives. Among other things, the organization is in charge of rule writing, enforcement of those rules and the securities laws, firm examination and arbitration and mediation.

Golden Parachute — This is a term used to describe a generous severance pay-out to a chief executive officer (CEO) or other top executive in the event of a corporate takeover when the leadership and control of the target company changes.

Initial Public Offering — An initial public offering (IPO) is the first time a company offers securities publicly. Also known as "going public."

Insider Trading — Insider trading is the illegal trading of securities by officers, directors, major shareholders or others who hold material, nonpublic inside information that allows them to benefit unfairly from the buying or selling of securities.

Misappropriation — When a broker keeps the proceeds from a sale of a client's accounts for himself or herself.

Poison Pill — Refers to a target company's attempt to stop another company from acquiring it by a hostile takeover. The target company tries to make it unattractive to the acquiring company. For example, current shareholders of the target company may be allowed to buy stock at a lower price.

Ponzi Scheme — Named after Charles Ponzi, a Ponzi scheme is a fraudulent investment scheme in which investors are paid returns not from profits, but from their own money or money from subsequent investors. Investors are generally promised extremely high and quick returns. To keep a Ponzi scheme going there needs to be continual investment by new investors so that the early investors can be paid.

Prospectus — A formal written offer to sell securities. It sets out the business plan, and should contain additional facts that an investor needs to make an informed decision regarding his or her purchase. A prospectus must be accessible to anyone who buys or offers to buy the new issue.

Public Company — A company that issued securities in a public offering. Securities of public companies are publically traded. Also called a publically held company.

Registration Statement — This document is the primary vehicle for disclosing information about the security to potential investors so they can make informed decisions. There are two main parts to the registration statement. The first part contains the same information that is in the prospectus. The second part contains additional information and exhibits that are not distributed with the prospectus, but which are available for public inspection in the SEC files.

Short Sale — This is when an investor tells his or her broker to sell a security, which the investor does not own, at current market price. In order to have the security to sell and deliver to the buyer, the investor will purchase it on a later date. The hope is that on the later date, the security will be at a lower price so the investor will make money.

SOX — SOX refers to the federal Sarbanes-Oxley Act of 2002. SOX was enacted in response to high-profile corporate and accounting scandals such as those concerning Enron and WorldCom. SOX sets forth requirements regarding financial reporting so potential investors receive accurate and honest information.

Stock — A type of security. An investor who buys stock in a company (called a stockholder or a shareholder) generally has an ownership stake in the corporation and a share in the company's profits. Stockholders also may have the right to vote for the corporation's directors.

Target Company — The name for a company that another company attempts to takeover. Also called a "subject company."

Tender Offer — An offer to purchase a large amount of a company's stock from the company's shareholders above market price. Often a way to take over or gain control of a target company.

Underwriter — An underwriter helps a company find buyers for its securities. Typically, an underwriter will buy securities from the issuing company in order to distribute, offer or sell the securities for the issuing company.

White Knight — A term for a person to whom a target company reaches out in an effort to avoid being taken over. The white knight may purchase a large amount of the target company's stock, and is seen as a more desirable option to control the company than the one attempting the hostile takeover.

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