SEC Policy: Protecting the Rich, Fighting Competitors, Presumption of Guilt? | Hacker Noon

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Double standards in SEC. The opinion of Kiyosaki.

Well, how not to remember Robert Kiyosaki and his sayings about investors, investments and the SEC from the ‘’Rich dad’s guide to investing’’.

Here are just a few phrases of the rich dad (character from the guidebook) that will reveal the true purpose of such a regulator:

‘’What is the SEC? This is a securities and exchange commission. It was created in the 30s under the leadership of Joseph Kennedy, father of President John F. Kennedy. It was created for good purposes, to protect the public from unscrupulous traders, businessmen, brokers, and investors’’, rich dad said this and laughed a lot! ‘’But why are you laughing?’’ — I asked, ‘’I think such a commission is doing the right thing’’. ‘’Yes, that is the right thing, before the crash of the 1929 stock market many dark businesses and fake investments were exposed. The public was offered many lies. Therefore, the SEC was created, which was supposed to protect the public from all this. This agency helps compile and follow instructions. Without the SEC, there would be a chaos’’. ‘’So what’s so funny about that?’’, I asked. Rich dad replied: ‘’Because by protecting the public from bad investments, it also protects them from better investments’’.

It is clear from this dialogue, that SEC protects the public from the worst investments and at the same time from the best investments and projects; then what is the American public investing in? Well, based on the logic of Kiyosaki, the American public makes a normal investment. This means only those investments that the SEC advises to make. And these investments do not always mean the best investment projects, in most cases, these are just ordinary projects. This insidious control algorithm from SEC performs one very important function — this is the reason that the rich become even richer. SEC controls only for the rich, the poor and the strangers have no place there — they are limited in investment rights. And this is the irony of this regulator, which, despite the functions of law enforcement, protects the gate to another world of possibilities. People invest because they want to become richer. Nevertheless, since they are not rich, they are not allowed to invest in investments that can make them rich. Only when you are rich you can investing in investments for the rich. Therefore, the rich become richer. This is the insidious irony of the SEC. The system is built in such a way as to protect the poor and middle class from the rich and from themselves. Because there are many more dark deeds than good ones. If a person does not realize, all projects — good and bad look the same for him. You need to have a good education and experience to sort out difficult investments into good and bad. To be experienced is to be able to understand what makes an investment good and another investment dangerous. In addition, most people do not have such experience and knowledge. Moreover, they won’t be able to have it, since the main provisions of the 1933 security act clearly indicate that only an accredited investor has the right to invest, with whom:

· The wealth is valued at $1,000,000 or more

· Has an annual income of $200,000 or more in recent years (or $300,000 family couple) and can prove that he will receive the same amount of net income in next year

· The minimum amount of money to be invested is $35,000 — the so-called value of an investment unit

The SEC is on guard for investment for the rich, but at the same time on guard against investment losses for the poor and inexperienced. However, the SEC cannot guarantee for accredited investors to become an experienced one. An accredited investor is only one who has the necessary amount of money, but this sum does not guarantee him the experience and ability to invest. Accredited investors can only invest in projects that SEC advises them or trust their money to professional managers so that they invest their money, again guided by SEC directives. But why does the SEC limit access to better investments? What is the danger in this for the balance of the world of accredited investors? Well, the answer is obvious. The best investment in projects is a threat to the richest, why should someone from the large crowd of accredited investors be even richer, making it possible to gain investment experience in the best investments and projects. Normal investment is a guarantee that everyone’s wealth grows proportionally (minimally) according to the traditional scheme and the proven cash flow generation algorithm. How does the SEC limit the best investment from attention? Simple — the regulator makes it possible to snitch competitors to each other. It would seem that the regulator’s good intentions of informing about alleged violations and fraudulent actions of affected investors are also used to denounce competitors with the best investment offer on the market. The regulator itself, in addition to the real prosecution of violators and fraudsters, can safely refer the project to fraudsters, which threatens the tranquility of the entire financial enrichment system. To find a reason to blame anyone — the legislative framework for the SEC allows this to be done, which, incidentally, the regulator systematically uses, filing unambiguous lawsuits against projects. In this regard, it is enough to recall the controversial claims of the regulator to a number of non-standard projects that have collected investments through ICOs. What is the basis of the SEC:

· Securities Exchange Act of 1934

· Securities Act of 1933

· the Trust Indenture Act of 1939

· the Investment Company Act of 1940

· the Investment Advisers Act of 1940

· the Sarbanes-Oxley Act of 2002

· The Dodd-Frank Act, 2010

What is SEC and what does it do?

SEC is the main government agency that oversees the trading of securities and the process of acquiring companies by purchasing a controlling stake. This is a government agency that closely monitors the activities of stockbrokers and securities traders. The Commission also monitors U.S. takeovers. In the event that a person or organization acquires 5 or more percent of the company’s share capital, they are obliged to report their purchase to the SEC within 10 days. The main function is to regulate all aspects of the issue and sale of securities by commercial organizations.

The Commission is given the right to determine the requirements for external financial statements and the accounting standards and practices of companies falling under its jurisdiction, that is, companies that issue shares on open sale and are listed on exchanges. Such companies are required to submit to the SEC annual financial statements certified by the auditor in the form of 10-K and quarterly financial reports without the approval of the auditor in the form of 10-Q. To obtain permission to issue securities, companies must provide the SEC with an issue project/program (prospectus) containing information about the company, its representative offices, and financial condition and certified by the auditor. SEC issues its own directives related to accounting regulation: Regulations S-X, containing requirements for the preparation and form of financial statements that must be submitted to the SEC; Financial Reporting Releases; Accounting and Auditing Enforcement Releases and other publications. SEC is one of the few government (state) organizations that most actively influence the development of accounting standards in the United States. The Commission works closely with the Financial Accounting Standards Board (FASB) and requires adherence to standards developed by the accounting profession. At the same time, the SEC often identifies problems arising in areas where, from its point of view, the interests of investors are infringed, and puts pressure on the FASB to resolve them. Undoubtedly, this is not the entire list of powers, but the ones already listed above are impressive. But the most important thing for the purpose of creating the Commission is to ensure effective protection of investors, increase public confidence in financial markets, as well as transparent and fair pricing in the securities markets and the stability of their functioning. SEC promotes a culture of investment and capital formation for economic growth.

Law Enforcement

The world of investment is exciting, challenging and can be very profitable. But unlike the world of banks, where deposits are guaranteed by the federal government in the United States, stocks, bonds, and other securities can fall in value. There are no guarantees here. That is why investing cannot be a spectacular sport; in fact, for investors, the main way to save their money invested in securities markets is to conduct research and ask questions. Law enforcement powers are key to the effectiveness of the SEC. Each year, the Commission files 400 to 500 civil lawsuits against individuals and companies that violate securities laws. Typical violations are the use of confidential (insight) the information obtained at the auction due to official position, fraud in financial statements and the provision of false or misleading information about securities and companies issuing them. However, the fight against securities fraud requires a collective effort. The main link in the effective protection of investors is a competent and cautious investor. The Securities and Exchange Commission offers the public extensive information on its sec.gov website. The site also includes the EDGAR database, which contains forms that disclose the financial position of documents for filling out by joint-stock companies in accordance with the requirements of the Commission. Although the SEC acts as the main supervisor and regulator in the US securities markets, it works closely with many organizations, including Congress, other federal ministries and departments, self-regulatory organizations (such as exchanges), government securities regulators, and various private sector organizations. The SEC consists of five members of the Commission appointed by the President, 4 branches and 18 bureaus. With approximately 2,900 employees, the Securities and Exchange Commission is considered small by federal agency standards. The SEC, headquartered in Washington, DC, has 11 regional and county offices throughout the country. The SEC is divided into five departments: Division of Corporation Finance, Division of Trading and Markets, Division of Investment Management, Division of Enforcement and the Division of Economic and Risk Analysis.

SEC Information Processing Algorithm

How does the tool for monitoring and verifying incoming information work? All investigations by the Securities and Exchange Commission are conducted in confidence. The facts are studied as comprehensively as possible through informal inquiries, monitoring the media and promoting investment material, interviewing witnesses, examining brokerage accounts, reviewing data from tenders, and in other ways. After the Commission issues a formal order of inquiry, the office may induce witnesses to testify and submit bookkeeping, reports, and other relevant documents by calling the court. After the investigation, the apparatus of the SEC presents its findings to the Commission. The commission may instruct the apparatus to file a lawsuit with a federal court or bring a civil lawsuit. Individuals and companies that are accused of certain violations sometimes prefer to resolve the conflict, while others dispute the allegations. Under securities law, the Commission may either institute criminal proceedings in federal courts or file an internal lawsuit to administrative law judge. Factors considered by the Commission when deciding on further prosecution include the seriousness of the offense, the technical nature of the case, tactical considerations and the type of sanctions or whether they should be exempted. For example, the Commission may prohibit anyone from working in the brokerage industry through administrative proceedings, but an order prohibiting anyone from acting as an officer of the corporation must be obtained in federal court.

Often, when it is caused by the severity of abuse, SEC refers to both types of proceedings:

· Civil action

· Administrative action

Civil action. The Commission files a complaint with a U.S. District Court and asks the court for a sanction or remedy. Often the Commission asks for a court order, called an injunction, that prohibits any further acts or practices that violate the law or Commission rules. An injunction can also require audits, accounting for frauds, or special supervisory arrangements. In addition, the SEC can seek civil monetary penalties or the return of illegal profits (called disgorgement). The court may also bar or suspend an individual from serving as a corporate officer or director. A person who violates the court’s order may be found in contempt and be subject to additional fines or imprisonment.

Administrative action. The Commission can seek a variety of sanctions through the administrative proceeding process. Administrative proceedings differ from civil court actions in that they are heard by an administrative law judge (ALJ), who is independent of the Commission. The administrative law judge presides over a hearing and considers the evidence presented by the Division staff, as well as any evidence submitted by the subject of the proceeding. Following the hearing, the ALJ issues an initial decision that includes findings of fact and legal conclusions. The initial decision also contains a recommended sanction. Both the Division staff and the defendant may appeal all or any portion of the initial decision to the Commission. The Commission may affirm the decision of the ALJ, reverse the decision, or remand it for additional hearings. Administrative sanctions include cease and desist orders, suspension or revocation of broker-dealer and investment advisor registrations, censures, bars from association with the securities industry, civil monetary penalties, and disgorgement.

The SEC also includes 18 Offices (departments), among which one of the most famous is the Office of Compliance Inspections and Examinations (OCIE). OCIE regularly carries out thorough inspections and monitoring of stock market participants. OCIE research allows the SEC to detect cases of poorly executed or infringed securities laws. Based on the information provided by OCIE, the SEC forwards the so-called deficiency letters, i.e. notifications to the issuer of securities that the prospectus requires a review, addition or correction. OCIE reports serious violations to the Law Enforcement Division so that it can take further action to address them. Information provided by SEC reporting companies:

· registration statements for newly-offered securities;

· annual and quarterly filings (Forms 10-K and 10-Q);

· proxy materials sent to shareholders before an annual meeting;

· annual reports to shareholders;

· documents concerning tender offers (a tender offer is an offer to buy a large number of shares of a corporation, usually at a premium above the current market price); and

· Filings related to mergers and acquisitions.

Common conduct that may lead to SEC investigations include:

· misrepresentation or omission of important information about securities;

· manipulating the market prices of securities;

· stealing customers’ funds or securities;

· violating broker-dealers’ responsibility to treat customers fairly;

· insider trading (violating a trust relationship by trading while in possession of material, non-public information about a security); and

· Selling unregistered securities.

Procedure

Registration with the SEC is a key provision of US securities law. It should be noted that the SEC does not register companies. According to the Law “On Securities”, an issuer must register a transaction, an issue, and in accordance with the Law “On Exchanges”, a class of securities (Cohen et al, 2003). Securities registration is designed to protect US capital markets and all investors buying securities in US capital markets, whether they are US citizens or foreigners. Under the 1933 Law, the registration of any transaction entailing the placement or sale of securities is required, except when this type of securities is exempted from registration, or the transaction is structured using the method subject to exemption from registration. The terms “offer” and “sale” are broadly understood in US law. The company must comply with the comprehensive requirements for financial disclosure and financial reporting. Registration of a transaction results in the company falling within the scope of the 2002 Act (US Sarbanes Oxley Act20021). Requirements for unregistered transactions are much milder. However, if a foreign issuer wants to conduct a public offering of securities among retail investors, then it needs to register a transaction. To register a transaction (issue) with securities, a foreign issuer must fulfill the detailed requirements for the disclosure of financial information. At the same time, the potential issuer is under monitoring by the SEC. Unregistered transactions are less complex, and their implementation takes much less time. When making unregistered transactions, you do not need to fill out an application for registration with the SEC. Subsequent continuous presentation of financial statements is also not required. Aligning reporting with US GAAPs (a very expensive procedure that is becoming a major obstacle for SEC registration for many companies) is not mandatory for unregistered transactions. For foreign issuers, there are three main types of exemption from registration of transactions: offshore transactions of Regulation S category (offshore placement without registration and disclosure of financial information), private placement of Regulation D category, and Rule 144A category transactions (permission to resell privately placed securities in the USA among professional investors). Regulation S and D, by the way, are very popular among crypto projects going to ICO, and less extent to IEO:

· Regulation S establishes rules by which a placement of securities outside the United States cannot be registered with the SEC. Regulatory S category securities may begin to enter US capital markets. Often Regulation S is used in conjunction with a transaction of category Rule 144A. The securities then go to the Portal e-commerce system and in this way attract the attention of analysts, securities market professionals, and institutional investors

· The SEC adopted Regulation D to exempt from registration of certain categories of issues of securities, based on the size of the transaction and the category of investors purchasing securities. The focus of Regulation D is the so-called, accredited investors: banks, savings & loan financial institutions, insurance and investment companies, corporations with assets worth more than $5 million, individuals with a wealth of more than $1 million, or those whose annual income exceeds $200 thousand, trusts with assets of more than $5 million and some other groups of investors

· In April 1990, the SEC approved Rule 144A, which allows firms to raise capital from institutional investors without registering securities with the SEC and not complying with GAAP requirements. Rule 144A permits immediate resale without registering private placements with qualified institutional buyers (QIB). The SEC concluded that certain investors are quite capable of independently understanding the information about the issuer and decide on the purchase of private securities. Today, only large financial companies and other accredited investors operate in the market of QIB. Among them may be financial institutions, banks or savings & loan associations, registered brokers or dealers, any legal entities whose shareholders are qualified as institutional investors.

Rule 144A makes it possible not to disclose detailed financial information about the issuer, but requires the issuer to provide brief information about the nature of its business, the products or services it provides, as well as the presentation of the main financial statements for the past two years. But also in these opportunities not to register your issue, there is one danger — according to statistics, it is in this category that the SEC considers the maximum number of complaints, monitors your activities in more details (as in the investment, marketing, and PR area) and accordingly files a lot of lawsuits. The logic is simple — if you do not want to submit officially information for regulator and try to use these preferential terms, then, by a tacit opinion, you are hiding something, you have not transparent intentions to the US and its investors, maybe you are a threat to investment stability of a wealthy class of accredited investors (remember the words Kiyosaki at the beginning of the article). A kind of presumption of guilt.

Complaint Channel

SEC receives many types of complaints from individual investors, including complaints against brokers, brokerage firms, investment advisers, transfer agents, mutual funds, and other market participants. Anybody can submit an investor complaint form to https://www.sec.gov/oiea/Complaint.html to report problems with investments, an investment account, or a financial professional, including problems involving:

· Order handling, trade execution, or confirmations;

· Delivery of funds or securities;

· Dividends;

· Fees, commissions, or mark-ups;

· Inaccurate or misleading disclosures by financial professionals;

· Margin;

· Suitability, or excessive trading or other account abuses; and

· Opening, transferring, or closing an account, or redeeming or transferring mutual funds.

One also may send copies of documents, letters, and other materials one believes would be helpful in understanding complaints according to contacts on the SEC web. SEC will inform when it receives your complaint and will note the file number assigned to your complaint. SEC helps ensure that individuals and entities regulated by the SEC respond to investor complaints when appropriate. SEC may refer an investor complaint to other Offices or Divisions within the SEC, including the Division of Enforcement. The Division of Enforcement generally conducts investigations on a confidential basis. As a result, SEC will not confirm or deny the existence of an investigation and will not update an investor on the status of a complaint. SEC’s principal use of information from an investor complaint is to resolve the complaint, but the office may also share the information with other Offices and Divisions in the SEC or outside of the SEC where appropriate. Records and information may be used by the SEC or disclosed outside the SEC pursuant to 5 U.S.C. 552a(b) for multiple purposes, including to assist with SEC examinations or investigations to determine whether an entity or person is complying with, or has violated, the federal securities laws or certain rules, and civil or administrative proceedings. Federal and state securities laws provide investors with important legal rights and remedies that may apply to a dispute with an individual or entity regulated by the SEC. You can seek to resolve a complaint through the courts, arbitration, or mediation.

As you can see, the reviewed procedure has a clear algorithm for processing incoming information. However, the online complaint form itself is simple and does not require special identification for the complainant. A lot of individual information (who places a complaint) is not checked whether the person is fake or not. Therefore, the main goal of pro forma is to collect any information not only about bad investments, but also about the best (what Kiyosaki talked about in his book) investments. The best investments are competitors to normal investments. Now it should become clear what is the danger of such complaint online channel. You can add fairy tales about competitors, combine facts into a whole incompatible because the main goal is to throw off the information that will be checked. In addition, we can say with confidence (since we wrote a complaint for the sake of the experiment) that you by yourself will notice 100% that your project is already under control and under monitoring. How does it look like? It’s just that a number of unexpected organizations will become interested in your project by third parties and potential beneficiaries, some very unexpected media will be interested in you and interviewed. You will be 100% offered legal support by a number of law firms with which you didn’t even plan to interact, one will start banning you on social networks, but the most unpleasant thing is that you will begin to feel that someone is starting to block oxygen for your project.

In the worst case, if you really have sins — in such a situation, wait for news from the SEC and a warning. In the better case, if you are not lucky to become the best project — your project will be trolling, which will lead to a fall in its reputation, and further, it is already clear that the project may lose investment interest. Here, just in the last case, it is important to understand the hidden reason, and despite the problems, continue to work on your best project by taking a number of steps, including minimizing jurisdictional risks (either change the jurisdiction or limit the participation of investors from the USA, or go into dialogue and conversation with SEC, even if you were not invited there). Well, you should not forget that SEC also uses a program of whistleblowers in this channel, whose denunciations are stimulated by large payments for reporting information about the probable law violation (from 10 to 30% of the amount of a possible fine to the offender). In addition, all messages received on their website through the complaint link form are entered and stored, and then after is constant monitoring of the activities of whom they complained to the TCR System.

Instead of Output

SEC has a wider influence on the markets — it is responsible for licensing and regulating all types of exchanges, brokers and dealers in the USA, as well as any public companies. The SEC maintains transparency by insisting that banks and issuers of securities show as much information as possible to the public. In the event of a serious regulatory violation, the SEC will assist in conducting a criminal investigation. As in other countries, the SEC requires public companies, licensed traders and brokers to send reports regularly that available to the public. This helps to keep moving towards market transparency, promoting honesty as the main quality of market participants. SEC’s responsibilities also include the control of all acquisitions of companies. Any entity issuing securities, whether by mail or online, must be registered with the SEC. After registering with the SEC, the issuer, which turns into a reporting company, is required to regularly submit financial and audit reports. Unlike US private issuers, foreign issuers are not required to submit quarterly reports to the SEC. Private foreign issuers who register for the first time with the Commission may provide data on a confidential basis. “Behind closed doors” resolve difficult issues arising during registration in such cases. The closed-door procedure itself is an interesting and non-public process. However, all information must be made public before the issuer starts the Road Show or the sale of securities to investors. Foreign issuers are exempt from compliance with the requirements of Regulation FD (Fair disclosure), in addition, they do not include the requirements of Section 16 (b). So, the world of big investments is not a liberal shop and freedom, but rather a regulated process, with its pluses for the common goals of financial security and minuses — in the name of the good goals of protecting you from the world of all the same big money, this is a world of whistleblowers and TCR system. Remember the SEC and try not to tease it!

Sergey Golubev (Сергей Голубев)

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