Chapter 8 Study Guide: Intellectual Property
What is Intellectual Property?
Definition: Intellectual property (IP) refers to creations of the mind, such as inventions, literary
and artistic works, designs, and symbols, names, and images used in commerce.
Simplified Explanation: It’s the legal protection for anything you create with your mind—like an
app, song, book, logo, or product design. The goal is to give creators rights over how their
creations are used.
Example: Apps on your phone, songs on Spotify, or a company’s logo like Apple’s apple.
Constitutional Basis: The U.S. Constitution (Article I, Section 8) gives Congress the power to
protect authors and inventors to promote progress in science and the arts.
8-1: Trademarks and Related Property
Trademark
Definition: A word, phrase, symbol, or design that identifies and distinguishes the source of
goods.
Simplified Explanation: Trademarks help consumers know where a product comes from. It
prevents confusion between brands.
Example: Nike's "swoosh" logo or McDonald’s golden arches.
Case: The Coca-Cola Co. v. The Koke Co. of America – Coca-Cola sued Koke for using a
confusingly similar name. The Supreme Court ruled in favor of Coca-Cola, saying the trademark
was well-known and deserved protection.
Trademark Dilution
Definition: When a famous trademark’s uniqueness or reputation is weakened, even without
consumer confusion.
Simplified Explanation: Using a famous brand's name or look in a way that harms its
reputation—even if the products are different.
Example: “Sambuck’s Coffee” vs. “Starbucks” – Though they weren’t identical products, the
name and theme diluted Starbucks’ brand.
Law: Trademark Dilution Revision Act (TDRA, 2006) protects famous marks from uses that
reduce their uniqueness.
Trademark Registration
Explanation: Trademarks can be registered with the U.S. Patent and Trademark Office
(USPTO). You can register a mark:
● If it's already used in commerce
● Or if you intend to use it within six months (extendable up to 3 years)
Benefit: Registration allows the use of the ® symbol and gives national protection.
Trademark Infringement
Definition: Using someone else's trademark without permission in a way that’s likely to confuse
consumers.
Remedies:
● Injunction (stop use)
● Actual damages and profits
● Destruction of infringing goods
● Possibly attorney fees
Example: A company using a similar logo or name that tricks people into thinking the products
are related.
Distinctiveness of the Mark
Strong Marks Get More Protection:
● Fanciful (made-up): "Xerox"
● Arbitrary (common word, strange use): "Dutch Boy" for paint
● Suggestive: "Dairy Queen" (suggests ice cream but doesn’t describe it)
Secondary Meaning: When a common name becomes closely linked to a specific product
(e.g., Calvin Klein).
Generic Terms: Words like "computer" or "bicycle" can’t be trademarked.
Case: Google – Courts ruled “Google” is still protected even if people use it as a verb (“to
google something”).
8-1e: Service, Certification, and Collective Marks
● Service Marks: Identify services (e.g., airlines, TV shows)
● Certification Marks: Certify quality, region, or origin (e.g., UL Tested)
● Collective Marks: Used by members of an organization (e.g., union labels)
Case: In Re Vox Populi – ".SUCKS" domain was not considered a valid trademark because it
was generic and not seen as a brand source.
8-1f: Trade Dress
Definition: Overall look and feel of a product or business.
Example: The unique interior design of a restaurant or packaging of a product.
Case: Nike v. Ralph Lauren – Ralph Lauren copied Converse shoe designs; Nike won and got
damages.
8-1g: Counterfeit Goods
Definition: Fake copies of trademarked goods.
Law: Stop Counterfeiting in Manufactured Goods Act (SCMGA)
Penalties:
● Up to $2 million fine
● Up to 10 years prison
● Destruction of counterfeit goods
● Victim compensation
Case: Charles Jones – Sold fake drugs online. Court ordered prison and $633,019 in restitution.
8-1h: Trade Names
Definition: A name used to identify a business.
Example: "Safeway" for a grocery store chain.
Case: RVC Floor Decor v. Floor and Decor Outlets – RVC claimed its name had secondary
meaning. The court said that could only be decided at trial.
8-1i: Licensing
Definition: A legal contract to use someone’s intellectual property (like a trademark).
Explanation: Instead of stealing IP, businesses can pay to use it legally.
Terms: The contract sets limits. Licensors can restrict how/where their IP is used.
8–2: Patents
Definition: A patent is a government-granted right to exclusively make, use, or sell an
invention.
Duration:
● Inventions: 20 years
● Designs: 15 years (if issued after May 13, 2015)
Law Update: First-to-file system (not first-to-invent) now applies.
What’s Patentable? New, useful, and non-obvious:
● Processes
● Machines
● Designs
● Compositions of matter
Not Patentable: Laws of nature, abstract ideas, natural phenomena
Case: Monsanto – Sued farmers who reused patented seeds. Monsanto won millions.
8-2c: Patent Infringement
Definition: Using someone else's patented invention without permission.
Explanation: Even partial copying can be patent infringement. All steps in a patented process
must be copied to infringe.
Example: A phone company copying Apple’s patented design features.
Case: Apple v. Samsung – Samsung's phones copied Apple’s design and interface. Court
found infringement. Supreme Court later clarified that individual components can be relevant in
damages.
Foreign Sales Case: Microsoft v. AT&T – Microsoft wasn't liable for overseas copies of
software, since it only sent a master copy.
8-2d: Remedies for Patent Infringement
Remedies:
● Injunctions
● Damages (lost profits, royalties)
● Attorney’s fees
● Treble damages (if willful infringement)
Case: Cordance v. Amazon – Court refused to grant a permanent injunction because Cordance
didn’t show serious harm or direct competition with Amazon.
8-3: Copyrights
Definition: A copyright gives the creator of original works the exclusive right to use and
distribute them for a limited time.
Duration:
● Life of the author + 70 years
● Works for hire: 95 years from publication or 120 years from creation (whichever is
shorter)
Protected Works:
● Books, music, art, software, films, photos, architecture
Not Protected:
● Ideas, facts, methods, concepts
Public Domain: When copyright expires, the work becomes public property.
Case: Sherlock Holmes – Early stories entered the public domain after copyright expired.
Infringement: Copying original expression without permission, even if not exact.
Example: LEGO sued ZURU for making toys too similar to its Minifigures.
Remedies:
● Actual or statutory damages
● Injunctions
● Criminal penalties for willful violations
Case: LEGO v. ZURU – Court ruled ZURU’s toys were too similar to LEGO’s and issued an
injunction.
Fair Use Doctrine: Allows limited use for education, news, criticism, etc.
Factors Considered:
1. Purpose of use (commercial or educational)
2. Nature of the work
3. Amount used
4. Market effect
Case: Jimmy Smith Rap v. Drake – Court ruled Drake’s sampling was fair use.
First Sale Doctrine: Once you buy a copyrighted product, you can resell it.
Case: Kirtsaeng v. Wiley – Kirtsaeng resold foreign textbooks in the U.S.; Supreme Court ruled
in his favor.
Software Protection: Includes source code, object code, structure, and organization—but not
general "look and feel."
Case: Oracle v. Google – API packages were protected by copyright law.
8-4: Trade Secrets
Definition: Business information that gives a company a competitive edge and is kept secret.
Examples:
● Customer lists
● Recipes
● Marketing strategies
● Software code
Law:
● Uniform Trade Secrets Act (state)
● Economic Espionage Act (federal)
Case: Furstenau v. Radiant – Employee took sensitive data to competitor. Court restricted his
contact with clients and use of info.
Protection Tips:
● Use NDAs and contracts
● Limit access to information
Trade Secrets in Cyberspace: Easy to steal with emails or USBs. Courts act if info is stolen
digitally.
8-5: International Protection of Intellectual Property
Berne Convention: Countries recognize each other’s copyrights.
TRIPS Agreement: WTO countries must protect IP equally, no discrimination.
Example: A U.S. company can sue for IP violations in Germany.
Madrid Protocol: Allows international trademark registration through one application.
ACTA (Anti-Counterfeiting Trade Agreement): Improves international cooperation against
piracy and counterfeit goods.
Includes:
● Border inspections
● Online IP enforcement
● International info-sharing
Chapter 9 Study Guide: Internet Law, Social Media, and Privacy
Introduction
Key Idea: The internet has expanded access to information and markets, but it has also brought
legal challenges in areas like defamation, privacy, and intellectual property. Courts must often
make decisions with no clear precedent.
Example: Someone creates a fake Facebook page of Frank Smith with humiliating content.
Can he sue for defamation? Possibly, but proving online torts is difficult.
9-1: Internet Law
Spam
Definition: Unsolicited commercial email.
Federal Law: CAN-SPAM Act - bans false/misleading info, dictionary attacks, and harvesting
email addresses.
Case: ZooBuh v. [Link] – Spam caused customer losses. ZooBuh won $3 million.
International Reach: U.S. Safe Web Act allows FTC to work with foreign agencies. ISPs are
protected if they help investigations.
Domain Names
Definition: The internet address name, e.g., [Link].
● TLD = Top-level domain (e.g., .com, .edu)
● SLD = Second-level domain (chosen by user)
Regulation: ICANN oversees domain names and allows companies to register their own
(e.g., .google, .bmw).
Cybersquatting
Definition: Registering domain names identical/similar to trademarks to sell them back.
Law: Anticybersquatting Consumer Protection Act (ACPA)
Case: CrossFit v. Davalos – Davalos redirected domain names to a competing business. Court
awarded $200,000 in damages.
Typosquatting: Registering misspelled names (e.g., [Link])
Case: Facebook v. Counter Balance – $2.8 million awarded to Facebook.
Meta Tags
Definition: Key words in site code to increase visibility.
Rule: Using someone else’s trademark in meta tags = likely trademark infringement.
Case: Toyota v. Tabari – Auto brokers used "lexus" in domain and meta tags. Court ruled
against them.
Trademark Dilution Online
Definition: Weakening of a famous brand’s value without needing consumer confusion.
Case: Hasbro v. Internet Entertainment Group – Adult site used [Link]. Court gave
injunction to Hasbro.
Licensing
Definition: Legal permission to use someone’s IP.
Explanation: Downloading an app = license to use, not ownership. Licenses often limit use to
one device or a set time.
9-2: Copyright in Digital Information
Digital Millennium Copyright Act (DMCA)
Key Provisions:
● Prohibits bypassing encryption
● Protects ISPs unless they know of violations
● Allows fair use exceptions (e.g., education, security testing)
Case: Lenz v. Universal ("Dancing Baby" case) – Court ruled UMG should have considered fair
use before takedown.
File-Sharing and Piracy
Tech Used: MP3, BitTorrent, Cloud Computing
Case: UN4 Productions – Sued users for pirating a movie. Court awarded $750 each.
9-3: Social Media Law
Legal Issues
● Posts are used in litigation, settlement enforcement, and criminal investigations.
Example:
● Daniels case: Social media posts reduced damages award.
● Snay case: Daughter’s Facebook post voided confidential settlement.
Electronic Communications Privacy Act (ECPA)
Covers: Emails, online messages
Employer Exceptions:
● OK if device is provided for business use
● OK if employee consents
Stored Communications Act (SCA):
● Bars unauthorized access to stored messages
● Protects user privacy
Case: Facebook disability case – Court allowed search warrants for user messages.
Social Media Password Protection
State Laws: Many states ban employers/schools from asking for passwords.
Problem: Hard to prove discrimination from social media snooping due to private browsing.
Internal Company Social Networks
Benefits:
● Protects trade secrets
● Improves communication
● Real-time problem solving
9-4: Online Defamation
Definition: Hurting reputation through false statements online.
Challenge: Identifying anonymous posters
Case: Cohen v. Hansen – $38.3 million awarded for defamatory websites
ISPs Not Liable Under CDA:
● Communications Decency Act (CDA) protects ISPs unless they create or edit content
Exceptions:
● If site promotes illegal content (e.g., [Link])
● ISPs can remove content under their own policies (Vimeo case)
9-5: Other Online Tort Actions
Examples:
● Emotional distress
● Wrongful interference
Any form of online misconduct can lead to a lawsuit.
9-6: Online Privacy
Expectation of Privacy
Rule: If it's shared publicly (e.g., Facebook, Twitter), there may be no expectation of privacy.
Case: Campbell v. Facebook – Settlement required Facebook to disclose message-scanning in
Help Center.
Data Collection & Cookies
Definition: Cookies track browsing to create targeted ads.
Case: Vizio Smart TVs – Collected viewing data, sold it. Paid $11M to settle.
Company Privacy Policies
FTC Role: Enforces violations of stated privacy policies.
Trend: Some privacy rules are now legislated (e.g., Illinois biometric law)
Case: Facebook Facial Recognition – Settled for $550M under Illinois law.
Chapter 16 Study Guide: Sole Proprietorships, Franchises, and
Partnerships
Introduction to Entrepreneurship and Business Forms
● Entrepreneur: A person who starts a new business and assumes risk.
● Key considerations when selecting a business form:
○ Ease of creation
○ Owner liability
○ Taxation
○ Access to capital
16-1: General Considerations for Small Businesses
a. Requirements for All Business Forms
● Legal requirements: name registration, licenses, tax IDs, zoning, permits, employment
laws.
b. Intellectual Property Protection
● Trademarks: Unique names/symbols identifying a brand. Register with USPTO for full
protection.
● Trade Secrets: Protected if kept confidential. Use NDAs and non-compete clauses.
c. Obtaining Loans
● Bank loans keep owner control but may require personal guarantees.
● SBA offers microloans up to $50,000.
● Some states offer grants.
16-2: Sole Proprietorships
a. Advantages
● Complete control and full profits.
● Easy and cheap to start.
● No separate business taxes.
● Flexible decision-making.
b. Disadvantages
● Unlimited personal liability.
● Personal assets at risk.
● Business ends when owner dies.
● Limited ability to raise capital.
DBA (Doing Business As): Allows use of a business name different from the owner's. Does
not create a separate legal entity.
Case Law: Ruiz case - DBA does not separate the individual from the business in sole
proprietorship.
16-3: Franchises
a. Types of Franchises
● Distributorship: Sells product (e.g., auto dealerships).
● Chain-style: Uses trade name and operational guidelines (e.g., McDonald’s).
● Manufacturing Arrangement: Makes product using franchisor’s formula (e.g., Pepsi
bottling).
b. Laws Governing Franchises
● Federal: FTC’s Franchise Rule—requires full disclosure.
● State: May require registration of FDD, approval of ads, and financial disclosures.
c. Franchise Contract
● Covers fees, location, premises, organization, quality control, and termination rights.
● Too much control by franchisor risks liability.
Cybersecurity Case: Brinker (Chili’s) held liable after data breach even though franchisee
controlled POS system.
d. Franchise Termination
● Requires notice and may include cure periods.
● Wrongful terminations can lead to lawsuits.
● Good faith and fair dealing required.
16-4: Partnerships
a. Basic Concepts
● Governed by UPA (Uniform Partnership Act).
● Treated as a legal entity.
● Pass-through taxation.
Key Elements:
1. Sharing profits/losses
2. Joint ownership
3. Equal right to manage
b. Formation and Operation
● Can be oral, written, or implied.
● Partnership by Estoppel: Non-partner is held liable if third party reasonably believes
they are a partner.
c. Duties and Liabilities
● Fiduciary Duties: Loyalty and care.
● Joint and Several Liability: Each partner can be held fully liable.
● New partners not liable for past debts beyond their contribution.
Classic Case: Meinhard v. Salmon - Duty of loyalty requires disclosing new opportunities.
d. Dissociation and Termination
● Partner leaves = dissociation.
● May lead to dissolution.
● Buyouts: Based on what partner would have received if firm wound up.
● Liability continues for 2 years unless notice is given.
Chapter 17 Summary – Limited Liability Business Forms
Limited Liability Company (LLC)
● Definition: A hybrid structure that combines the limited liability of a corporation with the
tax advantages of a partnership.
● Governed by: State statutes (some states follow the ULLCA).
Key Features:
● Members (owners) have limited liability.
● LLC is a separate legal entity.
● Can sue/be sued, own property, enter contracts.
● Foreign LLC = doing business in another state.
Formation:
● File Articles of Organization with the state.
● Must include: name, address, agent info, management structure.
● Name must include LLC or Limited Liability Company.
● One-member LLCs allowed in most states.
Preformation Contracts:
● Like corporations, LLCs can adopt contracts made before formation through novation.
Jurisdictional Requirements:
● LLC citizenship includes all member states for federal diversity jurisdiction.
Advantages:
● Limited liability for members.
● Flexible taxation (default: pass-through as partnership; can elect corporate tax).
● Allows foreign members.
Disadvantages:
● State statutes vary, leading to inconsistency across states.
LLC Management
● Member-Managed: All members manage.
● Manager-Managed: One or more managers, who may/may not be members.
Fiduciary Duties:
● Duty of loyalty and care (to LLC and possibly to members, depending on state).
Operating Agreement:
● Optional but recommended.
● Covers: management, profit sharing, member exit rules, voting rights, etc.
Dissociation & Dissolution
● Dissociation: Member leaves; loses management rights.
● Buyout of interest usually required.
● Can be wrongful (liable for damages).
● Dissolution:
○ Can be triggered by operating agreement or court.
○ Judicial dissolution possible due to misconduct, deadlock, or impracticality.
○ Winding up: distribute assets > pay debts > return capital > split remainder.
Limited Liability Partnerships (LLP)
● Definition: Partnership form mainly for professionals; limits liability of partners.
● Formation: File state registration + annual reports. Name must include LLP.
● Liability:
○ Partners not liable for others’ malpractice (unless supervising).
○ Some states use proportionate liability; others allow full liability.
● FLLP: Partners must be related. Common in agriculture.
Limited Partnerships (LP)
● Definition: At least one general and one limited partner.
● Formation: Public filing of Certificate of Limited Partnership.
● Liability:
○ General partners: fully liable.
○ Limited partners: liable only up to their investment (unless manage).
● Safe Harbors: Allow limited roles (consulting, employee, etc.) without losing protection.
Rights:
● Access to records, return of contribution, sue third parties.
Dissociation:
● General partner’s dissociation may dissolve LP.
● Limited partners usually can’t withdraw if agreement says so.
Dissolution:
● Priority: creditors > return contributions > distribute balance.
● Valuation issues can arise.
● Buy-sell agreements help but don't prevent disputes.
Limited Liability Limited Partnership (LLLP)
● Definition: Like LP, but general partner also has limited liability.
● Availability: Only in some states, or may register as LLLP where allowed.
18-1: Nature and Classification of Corporations
Corporation
● Definition: A legal entity created under state law, distinct from its owners.
● Simplified: It’s a company treated by the law like a person, separate from the people
who own it.
● Example: Apple Inc. is a corporation—its shareholders don’t personally own the iPhones
or stores.
● Case: Fidrych v. Marriott—Marriott not “at home” in SC for jurisdiction.
Limited Liability of Shareholders
● Definition: Shareholders aren't personally liable for company debts.
● Simplified: You can lose what you invested, but not more.
● Example: If a corporation owes $1M, a shareholder who invested $5k loses $5k max.
● Note: Courts can “pierce the veil” if abuse occurs.
Corporate Earnings & Taxation
● Definition: Profits can be kept (retained) or paid out (dividends); both are taxed.
● Simplified: Profits are taxed twice—first by the company, then by the shareholder.
● Example: You get $100 in dividends—you pay tax, even though the company already
did.
Criminal Acts
● Definition: Companies can be fined for crimes; officers can be jailed.
● Simplified: The company pays, the people responsible might go to prison.
Torts & Respondeat Superior
● Definition: A company is responsible for employee mistakes made on the job.
● Simplified: If a worker hurts someone while working, the company may be liable.
Classification
● Domestic = In home state
● Foreign = In another state
● Alien = Foreign country
● Public = Created by the government
● Private = For-profit, private owners
● Close = Few shareholders, often family-run
● S Corp = Pass-through taxation
● P.C. = Professionals (e.g., doctors)
● Benefit Corp = Profit + social mission
● Example Case: Farmer v. Troy Univ. – waived immunity by doing business in NC.
18-2: Corporate Formation and Powers
Formation Steps
1. Choose state
2. Select name
3. Prepare articles of incorporation
4. File with state
5. Hold first meeting, adopt bylaws
De Jure vs. De Facto
● De Jure: Legally valid if requirements mostly met
● De Facto: Treated as valid if they tried in good faith
● Case: TY Builders II—upheld lease via estoppel
Corporate Powers
● Express = Written in law or docs
● Implied = Needed to run the business
● Ultra Vires = Beyond legal power
● Case: Armenian Genocide Museum—trustee exceeded powers
18-3: Piercing the Corporate Veil
Definition
● Holding shareholders personally liable when the company is misused.
When Courts Pierce Veil
● Commingled funds
● Undercapitalized company
● Ignored formalities
● Personal use of company
Cases
● Denny v. Breawick: Contractor used funds for personal use
● Brennan’s Inc.: No piercing—no fraud
● Steiner v. Maniscalco: Companies were alter egos—pierced veil
18-4: Directors and Officers
Roles
● Directors: Set policies, vote, declare dividends
● Officers: Day-to-day operations (CEO, CFO)
● Duties: Care & Loyalty
Duty of Care
● Be informed, supervise, make smart decisions
● Protected under Business Judgment Rule if acting in good faith
Duty of Loyalty
● No conflicts of interest, no stealing opportunities
● Case: Guth v. Loft—CEO took Pepsi opportunity for himself
Rights
● Participation, Inspection, Indemnification
● Case: NavLink—directors had right to see records
18-5: Shareholders
Rights
● Vote (1 vote/share)
● Approve major changes (mergers, dissolution)
● Receive dividends
● Inspect books
● Sue in derivative suits
Voting
● Cumulative Voting helps minority shareholders get representation
● Example: 3 board seats × 3,000 shares = 9,000 votes to use on 1 candidate
Derivative Suits
● Shareholders sue on behalf of the company
● Case: Hammoud v. Advent—she was entitled to inspect despite disputes
Duties and Liabilities
● Usually limited to investment
● Liable for illegal dividends or watered stock
● Majority shareholders owe duties to minority
● Example: Ella was denied info and benefits—oppressive conduct
18–6: Major Business Forms Compared
When choosing a business form, consider:
● Ease of creation
● Owner liability
● Taxes
● Ability to raise capital
Chapter 28 – Securities Law
28–1: The Securities Act of 1933
Definition:
The Securities Act of 1933 governs initial public offerings (IPOs) and aims to prevent fraud by
requiring full disclosure of material facts.
Simplified:
It makes companies share important information before selling stocks or bonds to the public.
Example:
A tech company launching its IPO must file paperwork with the SEC detailing its finances and
risks.
What Is a Security?
Definition:
A “security” includes stocks, bonds, notes, investment contracts, and more.
Howey Test (Used to define investment contracts):
1. Investment of money
2. In a common enterprise
3. With expectation of profit
4. Primarily from others’ efforts
Example:
Someone puts money into a crypto fund expecting a return from the manager’s efforts—it may
be a security.
Case:
SEC v. Scoville (2019) – Adpacks from Traffic Monsoon were ruled securities under the Howey
Test.
Registration Statement & Prospectus
Definition:
Companies must file a registration statement and give investors a prospectus before offering
securities.
Simplified:
Before selling stock, a company must register and tell investors everything they need to know.
Example:
The prospectus includes company finances, risks, and how money will be used.
Case:
Pino v. Cardone Capital (2022) – Misleading return projections led to SEC violations.
Well-Known Seasoned Issuers (WKSIs)
Definition:
Big companies with strong market presence that can sell securities faster with fewer restrictions.
Example:
Apple can sell securities quickly without waiting for SEC approval.
28–1d/e: Exempt Securities and Transactions
Exempt Securities:
Government bonds, bank securities, short-term notes, nonprofits, etc.
Exempt Transactions:
● Private offerings (Reg D)
● Intrastate offerings (Rule 147)
● Crowdfunding (JOBS Act)
● Reg A (less than $75M offerings)
Example:
Zeta LP raises $600,000 from a few investors—exempt under Rule 504.
28–2: The Securities Exchange Act of 1934
Definition:
Regulates ongoing trading, companies, brokers, and fraud prevention.
Simplified:
Covers what happens after a company is public—includes trading rules and reporting.
Section 10(b) and SEC Rule 10b-5
Definition:
Prohibits fraud in any securities transaction.
Elements of Violation:
● Misstatement or omission
● Scienter (intent)
● Reliance
● Economic loss
● Causation
Example:
If a CEO hides bad news before selling shares, it may violate Rule 10b-5.
Case:
SEC v. Texas Gulf Sulphur (1968) – Insiders bought stock before disclosing a big mineral find.
Insider Trading
Definition:
Buying/selling stock based on nonpublic info.
Types of liability:
● Tipper/Tippee – Insider shares info; recipient trades on it.
● Misappropriation – Outsider steals info and trades on it.
Case:
Bray case – Traded based on info shared by a bank exec friend. Convicted of insider trading.
Section 16(b) – Short-Swing Profits
Definition:
Insiders must return profits from stock trades within 6 months.
Simplified:
Directors/officers can’t make quick profits from company stock.
Example:
A CEO buys and sells shares in 3 months—the profit goes back to the company.
Private Securities Litigation Reform Act (PSLRA)
Definition:
Protects companies from lawsuits over future projections, if risks are clearly stated.
28–2b: Regulation of Proxy Statements
Definition:
SEC controls what companies tell shareholders when asking for votes.
Example:
A company can't lie or omit facts in materials for shareholder meetings.
28–2c: Violations and Penalties
Criminal:
Fines up to $5M (individuals), $25M (companies), or 25 years in prison (if willful).
Civil:
SEC can sue and get triple damages; private parties can sue too.
Case:
Hannan case – Lied to investors and spent their money on personal use. Sentenced to 20
years.
28–2d: Online Securities Fraud
Definition:
Fraud using websites, social media, and online newsletters.
Example:
Promoting fake COVID-19 treatments to inflate stock prices.
28–3: State Securities Laws (Blue Sky Laws)
Definition:
Each state regulates securities sold within its borders.
Simplified:
States have their own rules too—especially for local (intrastate) sales.
Case:
Fincke case – Lied about patents in business plan. Violated Massachusetts securities law.
28–4: Corporate Governance
Definition:
How a company is run, especially how managers are held accountable to shareholders.
Key Components
● Board of Directors – Oversees managers. Elected by shareholders.
● Audit Committee – Checks accounting and internal controls.
● Compensation Committee – Sets exec pay to align with shareholder interests.
Example:
If a CEO earns more when profits rise, they’re more likely to act in shareholder interest.
28–4c: Sarbanes-Oxley Act (SOX)
Definition:
Law passed to improve accountability after corporate scandals.
Key Provisions:
● CEOs/CFOs must certify financials
● Independent audit committees
● Stronger internal controls
● Public Company Accounting Oversight Board created
Simplified:
Makes executives and boards more responsible for accurate financial reporting.