1933 Securities Act

Overview
Central Objective: preparation of a registration statement for securities offered to the public
Act protects offerees in public distributions
5 is crucial component makes it illegal to
sell or
offer to sell or
offer to buy
without a valid registration statement on file
REGISTRATIO STATE!ETS
Infor"ation Re#uired in Registration Statement see Sc$edule A
Includes:
i! Info About Re%istrant
S"# re$uires details on registrant%s business& property& management
'inancial Statements re$uired by Reg S"(
)*+A forces management to identify trends and developments Item ,-,!
.igger companies can integrate using S"/ or S", below!
ii! Info about distribution and use of proceeds
01 must disclose terms of agreement and compensation
Registrant must disclose
23pected net proceeds
23pected 0S2 of those proceeds
iii! &escription of Securities of Registrant
Rights& 4rivileges of securities offered an
4rice and 5uantity offered
)0S6 I7890*2 any provision that would subordinate rights to other security holders& dividend restrictions
iv! E'$ibits and (nderta)in%s
)ust include
Articles of incorp& bylaws
Attorney%s opinion as to legality of securities offered
Any #-": or #-"5 incorporated by reference
ITEGRATE& &isclosure
*urpose: to eli"inate overlappin% and unnecessary disclosure
Allows certain reportin% co"panies to incorporate prior disclosures e;g; in #-"5! into registration statements
T$ree +asic ,or"s
S-3 9arge reporting companies that have
.een reporting for #/ months under #/ or #5d! A7*
<ave =>5) in market cap held by non-affiliates
S-. Reporting 8ompanies not $ualified for S",
S-1 everyone else
&ut/ to (pdate
If using shelf registration& must update by filing posteffective amendments
Review of Re%0 State"ents
0nder ?a! reg; statement becomes effective /- days after filing in reality& may take )08< longer
SEC Review
,or"al process if statement deficient S28 can issue a
Refusal @rder ?b!
Stop @rder ?d!
1etter of Co""ent !et$od all found more helpful if S28 issued letter AcommentingB on deficiencies
7ash Sec Reg 23am @utline 4age # of C?
A &ela/in% A"end"ent keeps the reg statement from becoming effective until the S28 has no more
comments for the issuer
*elaying amendment is a 92D27* on the reg statement pursuant to rule 233
Acts as though issuer updated reg statement Eust before /- days passes to continually reset the clock
Selective Review
S28 reviews all first time issuers
S28 Selectively reviews seasoned issuers
Acceleration of Effectiveness Rule CF#
1hen reg; statement amended to S28 satisfaction& issuer will re$uest and S28 grant an acceleration don%t
have to wait the /- days
*ricin% A"end"ent
Denerally:
01 won%t sign contracts until reg statement ok%d by S28
Rule 234A allows
i! offerings of securities for cash to become effective w5out price infor"ation
4rice info must be given wGin #5 days after becoming effective
ii! Reduction in amount of Securities being offered so long as 7@6 )A62RIA9
/-H reduction considered not material
4roblems:
i! Cannot ICREASE nu"ber of shares without filing new reg statement Rule C#,!
ii! If "iss 16-da/ window for price information& $ave to refile
*anger: posteffective amendments reset clock for Section ## liability if any info in reg; statement
changed& could be material omission or misstatementI
+lan) C$ec) Offerin%s Rule C#J
Special rules apply for corps w5out specified business plan
!one/ raised $eld in escrow
1hen issuer decides what to do with ?-H& issuer must
disclose plan to investors
Investors have option to get their money back
8annot escrow money for more than #? )onths after effective date of initial reg; statement
*lain En%lis$ *isclosure Rule C/#
Registrants re$uired to use Aplain englishB in reg statement and prospectus
Two t/pes of offerin%s
i! *ri"ar/ from an AissuerB to the market
ii! Secondar/ " the trading of securities btw investors on the markets e;g; 7KS2!
*ri"ar/ Offerin%s Generall/
*arties involved in 4rimary @fferings
i! (nderwritin% S/ndicate
9ead 0nderwriter
ii! Sellin% Group the people that sell the securities
iii! Investors those buying the securities
Consistent (nderpricin%
6rue in late J-%s and before
7o one really knows why
Suggestions:
a! Dood publicity
b! Reduces liability to underwriters
if price goes up& unlikely that investors will sue
c! Reduce risk to 0nderwriter 8apital
01 often have money on table if overpriced they will lose money
I' underpriced will have enough demand to fill subscription: won%t hold the bag
I4@ Shares 8@7SIS62769K 07*2R42R'@R) the market
7ash Sec Reg 23am @utline 4age / of C?
(nderwriters
&efinition of 0nderwriter 7.011
A(nderwriterB means any person who has purc$ased fro" an issuer with a view to& or offers or sells for an issuer
in connection wit$& the distribution of any security& or participates or has direct or indirect participation in any such
undertakingL but such term shall OT include a person whose interest is li"ited to a co""ission from an
underwriter or dealer not in e3cess of the usual and customary distributor%s or sellers% commission; As used in this
paragraph the term AissuerB s$all include& in addition to an issuer& any person directly or indirectly controllin% or
controlled by the issuer& or any person under direct or indirect control with the issuer
1<@ IS an 07*2R1RI62RM
Anyone who purc$ases securities from an issuer with a view to distribution
Anyone who offers or sells securities from an issuer in connection with a distribution
Anyone w$o participates in distribution or
1ho IS 7@6 an 0nderwriterM
4eople paid usual co""ission by underwriter to sell or distribute the securities
8e/ Ter"s in *efining 0nderwriter
i! Securit/ See .elow MMM
ii! &istribution 7@6 defined by A86
Denerally: a lar%e scale sale5offerin% of a security to a wide ran%e of investors
9ook to:
S28 Regulations
Ralston Apubic offeringB test
7o"Action 9etters
iii! Issuer 7.92:
a! every person who issues or proposes to issue any securit/
b! 'or the purposes of /##! definition of underwriter! 8@76R@9 SI60A6I@7S anyone directly or
indirectly controlling or controlled by the issuer or under common control
e;g; 8ontrolling S<< will be an AissuerB for purposes of defining underwriters
iv! Sell /;, ANevery contract of sale or disposition of a security or interest in a security for valueB
v! Offers /,! ANevery attempt or offer to dispose of a security or interest in a security& for valueB
vi! &ealer /#/!
0nderwriting how it works
I".anks organiOe an Aunderwriting syndicateB
2ach 0nderwriter agrees to .0K a specified amount of securities and sell them at a specified price
ASpreadB the amount btw the price paid issuer and price paid by public
0sually btw #H and #-H
StabiliOation:
)anaging 01 places bid in primary market to keep share price from dropping
T/pes of (nderwritin%
+EST E,,ORTS
Denerally: brokerGdealers to not purchase securities& but agree to use Abest effortsB to sell them
, 6ypes:
i! Straight all securities sold stay sold
ii! )iniG)a3i certain min P must be sold for the deal to go through& money held in escrow until floor reached
iii! All or none all of securities must sell or deal does not go through money held in escrow
4ossible 9IA.I9I6K
If deal collapses cannot fudge the deal to get commission
#5c/"C deems it Afraudulent& deceptive and manipulativeB to close an offering before satisfying its stated
conditions
Rules #-b"J and #5c/"/ re$uire specifying time period& price and clear escrow agreement in writing
,IR! CO!!IT!ET
7ash Sec Reg 23am @utline 4age , of C?
Denerally: one or more I".ank firms buys the securities if they don%t sell them& they%re stuck with them
0nderwriting Ris)
1i"ited 1iabilit/
##e! limits liability of each underwriter to the total price at which securities underwritten b/ $i" and
distributed the public were offered to the public
Anti-,lippin%
i;e; selling I4@ shares $uickly onto market to make a $uick profit
01 agreements often impose penalties on flipped shares if traced to an 01%s allotment
!ar)et Out Clauses in firm commitment conte3t& allow 01 to back out of deal prior to public offering or
settlement date as a result of some catastrophic event
Inde"nification
01%s will often make issuers indemnify them against liability for omissions or misstatements of material facts
Recall ## *02 *I9ID2782 *2'27S2 allows 01%s to escape liability if Aafter reasonable investigation& had
reasonable ground to believe or did believeB that Reg Statement not misleading
.ut e3pensive& so prefer indemnity
Co"fort 1etters
Contribution Clauses
+ou%$t &eals 1hen large reporting companies that are able to incorporate registration info by reference on form S"/
or S",; Reduces need for preregistration consultation and preparation so underwriters .I* 8@)426IQ29K for the
offered securities
'act that institutional investors buy huge blocks helps drive these Abought dealsB
&utc$ Auctions bids made for amount and price& arranged in order from highest to lowest all bids irrevocable
;$/ $ave (nderwriterM
<elpful institutional buyer relations$ips e;g; Doldman!
<elpful retail investor relationships e;g; )errell 9ynch!
Reputational +ondin%
Induces buying& builds confidence
.efore ,, Act was important aspect of issuance
Ris) Allocation
e;g; 'irm 8ommitment underwriter bears some risk
E'pertise on how to structureGmarketGtime the offering
7ash Sec Reg 23am @utline 4age C of C?
Traditional Re%istration
Deneral 6imeline:
'ile R 8omment 9etters R )ake 8hanges R repeat R Accelerate CF# R .ecomes 2ffective
<*re-,ilin% *eriod=
>
,ilin% of Re%istration State"ent
>
<;aitin% *eriod=
>
Effective &ate of Re%istration State"ent
>
<*ost-Effective *eriod=
*efinition of AIn RegistrationB
6he entire process of re%istration from
Aat least the time the issuer reaches an understandin% managing underwriterB
until the co"pletion of t$e offerin%
A7* the 24 or 94 da/ period during which dealers must deliver a prospectus
7@62: it is 7@6 necessary for the terms to be agreed upon to be Ain registrationB
Section 6 ? *RO@I+ITIOS
a! sellin%5trans"ittin%! 0nless a registration statement is in effect I992DA9 to:
#! SE11 securities or
/! Carr/ securities in interstate commerce for sale or delivery after sale
b! prospectuses! Illegal to carryGtransmit through interstate mails
#! any prospectus with respect to a security with a filed registration statement 0792SS it meets the re$uirements
of #-
/! carryGtransmit any security for sale or delivery after sale that is not A88@)4A7I2* or 4R2822*2* by a
prospectus meeting the re$uirements of #-
c! offer5sell! Illegal to offer to sell or offer to buy any security
unless a reg; statement is filed @R
after reg; statement has been filed but .2'@R2 it is effective
General E'e"ptions fro" 76
C#! Secondary )arket
23empts persons other than an 0nderwriter& Issuer or *ealer 0I*!
0nderwriter /;a;## anyone who has
4urchased from issuer with view to distribution @R
@ffers or sells for an issuer in connection with distribution
23cludes persons limited to commissions
8ontrol person considered AissuerB for these purposes
Issuer /;a;C
any one who issues or proposes to issue a security
*ealer /;a;#/
4erson engaged in buyingGsellingGetc; securities
Includes brokers
C/! 4rivate 4lacement
*efinition of 4R@S42860S
/;a;#- .R@A* *2'I7I6I@7
#- 4reliminary 4rospectus
7ash Sec Reg 23am @utline 4age 5 of C?
Gun Au"pin%
5c! and *re-,ilin% *eriod
Section 5;c pro$ibits
offers to S299
offers to .0K
before a registration statement is filed or
ii! if the S28 has issued a Stop @rder or Refusal
AOfferB *efinition Q2RK .R@A* two key phrases
i! AConditionin% t$e public "indB
ii! Aarousin% public interestB
7ote:
*on%t have to mention that selling securities at all
@nly applies if Ain registrationB otherwise any advertisement would be violation
@ne month before invitation to underwrite clearly violation
/& ,& C& months Eudgment call
#- years definitely not
Release 3B22 clarified "eanin% of AofferB two key phrases above and
23amples
7o; # +roc$ure *iscussing issuer%s line of business distributed by underwriter violation of 5
7o; F Speec$ OT in conte"plation of offerin%
Speech okay
*on%t distribute copies bGc would reach too wide an audience
7o; > Speec$ in conte"plation of offerin%
Qiolation of 5
Re$uired prospectus be delivered with speech
7o; J &istribution of annual report
7@6 a violation if was of character and content normally published
E'e"ptions to COfferin%D &an%ers
9i: Rule 136 Issuer Announcements " 4ress Release 8heck list
4ermits in registration issuers to release certain information
@::
Intention to have public offering
.asic terms of offering
6ime of offering
7ame of issuer
4rohibited:
7ame of prospective underwriters
@ffering 4rice
AQaluationB See 8hris"8raft held Avalued at =?- or moreB went beyond allowed infor
Rationale:
4ublic companies need to release information bGc
i! they may have duties to disclose info
ii! delays increase risk of insider trading charges see e;g; Reg '*!
9ii: Rule 133 7on"4articipant Recommendations
4ermits non"participating brokerGdealers to publish or distribute
Information
@pinions
Recommendations
Regarding an issuer in registration I7 6<2IR @R*I7ARK 8@0RS2 of business
9imited to information about R24@R6I7D 8@)4A7I2S under
7ash Sec Reg 23am @utline 4age F of C?
#,
#5d!
*efines who is 7@6 and 07*2R1RI62R
9iii: Rule 13B Recommendations of 7on"@ffered Securities i;e; different class! for S"/ and S",!
Allows brokerGdealers to publish recommendations or opinions for a companies securities *I''2R276 from that
being offered
Re$uirements
I' issuing 8ommon Stock
8an write about nonconvertible preferred stock or nonconvertible debt
I' issuing nonconvert preferred or debt
8an write about common stock
8ompany must meet S"/ or S", re$uirements
Rationale:
)arkets for the different securites are separate
9iv: Rule 139 9imited 4articipant Recommendations for S",!
4ermits brokerGdealers& whether participating or not to publish opinionsGrecommendations for Ain registrationB
companies
Re#uire"ents
i! Reportin% 8ompany under #, or #5;d
ii! )ust meet S-3 Re#uire"ents =>5) in market cap by non"affiliates!
iii! Recommendation& etc; must
a! be in a publication that appears with reasonable re%ularit/
b! not "ore favorable than the last previous recommendation before becoming a participant
Rationale:
<ave to rela3 rules for big companies always Ain registrationB
9v: 7.0a03 A%ree"ents a"on% underwriters not an A@fferB
5;c does not apply to prelim negotiation or agreements btw and issuer and underwriters and among underwriters
7ote: members of selling group are 7@6 underwriters
9vi: ,actual Infor"ation Releases 6449 and 61B4
5--J
allowed:
4urely factual information ought not be prohibited but if close call ask the S28
5#?-
allowed:
factual responses to AlegitimateB $uestions about financial condition or business operation
e;g; sales and earnings and value
7ormal advertising but beware of Aconditioning the marketB! e;g; Aindustry leaderB!
7ot allowed:
4roEections& forecasts estimates& opinions concerning value
0se of the Internet in 4re"'iling 4eriod
&isclosure *olic/ Tensions and SEC Response
E'ceptions to 760c *re-,ilin% Restrictions on Offers
Available to ature of Safe
@arbor
Allows ,orbids
/a;,
7ash Sec Reg 23am @utline 4age > of C?
T$e ;AITIG *ERIO&
Denerally
.egins A'62R filing Reg; Statement ends when becomes effective
7@ SA92S
5;a still bars sales until reg statement is effective
S299I7D A86IQI6K S6AR6S
5;c prohibitions on AoffersB ends
5;b regulation of selling activity begins
*er"itted Sellin% Activit/ " 5;b
i! ORA1 communications that are offers to sell
ii! To"bstone Ads meeting re$uirements of Rule #,C
/;a;#- e3cepts from definition of AprospectusB announcements that state
states from whom a #- prospectus may be obtained
*oes 7@ )@R2 than
Identify the security
State its price
7ame the underwriters who will e3ecute orders
iii! Identif/in% State"ents
Rule #,C e3pands 6ombstone ad pursuant to /;a;#-!
Allows you to give "ore details than 6ombstone I'
E'plain w$o is selling and w$ere to obtain preli"inar/ prospectus
.06 don%t have to e3plain if
#! include only info in tombstone ad @R
/! you send the preliminary prospectus along with more info
@R Can solicit interest in the offering wit$ a return card I' 132d!
Send preli" prospectus with card
23plain no co""it"ent to buy later
iv! *rospectus that meets re$uirements of
Rule C,- *reli"inar/ *rospectus
Rule C,# Su""ar/ *rospectus
v! Road S$ows
4resentations attended by underwriters& officers of issuer& analysts& sec professionals& institutional investors
7@6 attended by R26AI9 investors
@: if only @RA9 and only prelim prospectus delivered
S28 has approved use of electronic media
@::
Audio video tapes distributed to specified individuals
Qideo 8onferencing
4assword protected access to website to view
SubEect to caveat that cannot be downloaded and distributed to un$ualified persons
8harles Schwab 7o Action allowing access to individuals with AsignificantB trading e3perience /C trades
annually or e$uity position S =5--:! high water mark
vi! T$e R(1ES from Above still okay
136 Issuer Announcements
133 7on"4articipating Recs; Reporting 8os only!
13B *ifferent Securities Recs; S"/ or S",!
7ash Sec Reg 23am @utline 4age ? of C?
139 9imited Recommendations for 4articipants S", only!
*RO@I+ITE& Selling Activity " 5;b
Any of the following that does not $ualify as a 4R29I) or S0))ARK 4rospectus
Any written communication that offers
Any Radio or 6Q ad that offers
*reli" *rospectus Rule C,-
*efines document that meets re$uirements of 5;b;#
8ontains substantially the same information as will appear in 'I7A9 4rospectus
.06 may 2(890*2
offering price
underwriter rates
dealer compensation
amount of proceeds
conversion rates
call prices
A7* @6<2R offering price dependent info
.ears a 92D27* reading something to the effect of:
not an offer to sell securities&
security described not registered and
no sales can occur until reg; statement effective
2)AI92* 12.SI62
@ften made available to investors electronically
7@62: does not meet re$uirements of #-;a the ,inal *rospectus
Su""ar/ *rospectus Rule C,#
9ike C,- defines prospectus that meets re$uirements of 5;b;#
Summary 4rospectus now rarely used
7@62: does not meet re$uirements of #-;a the ,inal *rospectus
;ebsites and 1aiting 4eriod
*roble": 8ompany websites may Acondition the marketB and constitute an offer to sell in pre"filing! or a
AprospectusB in waiting"period!
S28 Duidelines
O8
)erely including info on website in pro3imity to #- prospectus does not& alone make it an Aoffer to sellB
@: to advertise products and services
@: to have links to answers to unsolicited in$uiries from securities analysts
@: to list not hyperlink! website on #- prospectus
&an%ers:
9inking to third party sites that may condition market e;g; analyst recommendations& etc;!
Including on website more than ordinary business and financial information
<yperlinks on #- prospectus to the website
1ebsites and Roadshows
AudioGQideo tapes with limited distribution @:
Qideo 8onferencing @:
4assword protected streaming media on website @:
*rospectus &eliver/ Re#uire"ents
*roble": *uring waiting period there is
a! I7627S2 oral selling efforts .06
b! no re$uirement that prelimn prospectus be send to those solicited
Solution: S28 developed two rules to I7S0R2 investors get preliminary prospectus .2'@R2 they buy
7ash Sec Reg 23am @utline 4age J of C?
16c.-B 932 Act:
a! *eceptive act for a 0nderwriter or member of selling group to participate in distribution and 7@6 meet
the re$uirements b g below
b! I' 7@6 a reporting company under #,a or #5d! then
)0S6 *eliver 4relim 4rospectus at least C? hours prior to sending confirmation of sale
c! )ust take reasonable steps to deliver prelim prospectus if re$uested in writing
d! Reasonable steps to deliver 'I7A9 prospectus if re$uested in writing
e! f! )ust make available prelim and final prospectus and amendments available to all soliciting
customer%s orders
g! )anging 01 has to get sufficient P of prospectuses to all participating brokerGdealers
Rule 2E4 *istribution of 4reliminary 4rospectus %,, Act!
Allows commission to condition A88292RA6I@7 on the AreasonableB efforts of issuer to make reg;
statement info available to the public through the 01!
1ays to Avoid 5;b Qiolation " MMMM complete this
@utside of definition AprospectusB:
*efined as e3empt from AprospectusB
)eets re$uirements of #-;a final!
)eets all re$uirements of #-;b 4reliminary or Summary!
Safe <arbors
Rules to be Aware of
Rule #,C
Rule #,?
Rule #,J
Rule #,5
;$at $as to be in a prospectus
Any info in Reg; Statement e3cept
" /? to ,/ in Schedual A #-;a;# MMM
" price and fee related info
*ost-Effective *eriod
Denerally
Can SE11 when reg; statement is effective& 5;a;# ban on selling 9I'6S
Can &E1IFER when reg; statement effective 5;a;/ ban on delivery 9I'6S
1i"its On &E1IFERG
5;b;/ re$uires delivered securities go with 'I7A9 4R@S42860S
1i"its on CO!!(ICATIOS
5;b;# Remains effective after registration i;e; 7@ 1RI6627 8@@)07I8A6I@7
Denerally allowed: oral& tombstone& identifying statements Rule #,C!& prelimGsummary prospectus& road show
Denerally disallowed: any written communication& radio& 6Q& etc;
,ree ;ritin% Rule " /;#- e3emption
2ffect: Rela'es restrictions of 760b01 prospectus re$uirement in the post"effective period
<ow it works:
A'62R reg; statement is effective
8ommunications not considered a AprospectusB if
4R2822*2* by @R
A88@)4A7I2* by a 'I7A9 4R@S42860S
4articipants in offering can circulate their own materials 2(6@99I7D the offered security
,inal *rospectus
)ust Accompany all
7ash Sec Reg 23am @utline 4age #- of C?
i! *eliveries of Sold Securities
ii! 8onfirmations of Sales
Confir"ations are considered a prospectus under /;a;#- and
t$us ille%al under 5;b;#
(nless acco"panied by a #-;a final! prospectus
.rokerG*ealers re$uired to send confirmations under #-;b;#-
Ti"in% *roble" 'inal 4rospectus
Settlement *ates amended to 6 T , three days after trade
)akes it difficult for 0nderwriters to compile& print and send confirmations
Rule C,C;a 6erm Sheet @ption solves problem
Rule 232 Ter" S$eet Option
.asically allows fra%"entin% of final prospectus for delivery at different times under certain circumstances
7o need to deliver self-contained #-;a prospectus
General Re#uire"ents
Rule C,C available @79K I':
i! cas$ offerin%
ii! fir" co""it"ent underwriting
iii! invest"ent %rade securities
*IS6I7D0IS<2S 'orm S", and 7on"'orm S", 8ompanies
i! If OT usin% ,or" S-3
Aprospectus subEect to completionB! T 6erm Sheet! U #-;a 'inal 4rospectus
A4rospectus subEect to 8ompletionB defined as
a! 4relim 4rospectus @R
b! 4rospectus @miiting info pursuant to C,-A
6erm Sheet must contain
Any price"related info omitted from prospectus
Any revisions to the prospectus
7ote: Rule C,C allows underwriters to create a final& up to date prospectus with a single mailing of a term
sheet
ii! If (SIG ,or" S-3
4relim 4rospectus! T Abbreviated 6erm Sheet! U #-;a final prospectus
Abbreviated Ter" s$eet must include
Deneral description of securities
Any material changes since last #-"5 or ?":
Rest 'iled with the S28
@ffering specific info including
4roceeds and
4lan of distribution
AR2 filed with the S28 and not sent directly to the investors
Electronic &eliver/ of ,inal *rospectus
S28 allows electronic delivery
2"*elivery 2''286IQ2 onl/ I,H
Custo"er prior consented to electronic delivery @R
0nderwriter $as confir"ation of deliver/ e;g; via return receipt! regardless of consent
OT effective delivery to notify customers where they can find the 'inal 4rospectus online:
Rationale: assumes all parties have access to the internet
&uration of *rospective &eliver/ Re#uire"ents
ISS(ERS
4ursuant to 5;b
)ust deliver prospectus as long as they are offering the security to the public
7ash Sec Reg 23am @utline 4age ## of C?
*articipatin% (&ER;RITERS and *2A92RS
4ursuant to C;,;c
)ust deliver prospectus as long as their allotment or subscription in distribution is unsold
8A77@6 avail self of C;, e3emption if participating in distribution
on-*articipatin% &EA1ERS or 0nderwriters who have sold allotment!
Still must deliver prospectus under certain circumstances
'our 4eriods time period after later of reg; effectiveness or first sale that prospectus must be delivered!
- *ays if the issuer was a reporting company prior to registration Rule #>C 8ontraction of C;,!
/5 *ays if not reporting but security is listed on e3change or 7AS*A5 Rule #>C 8ontraction of C;,!
C- *ays Deneral rule for non"participating brokerGdealers
J- *ays if issuer never before sold securities through a registered offering Rule #>C 23pansion of C;,!
on-Solicited +ro)er Sales
4ursuant to C;C
23empt from prospectus delivery re$uirements if client%s interest 7@6 solicited by the broker
SEC ? CECO(RAGIGD *rospectus &eliver/
*roble": *uring waiting period there is
a! I7627S2 oral selling efforts .06
b! no re$uirement that prelimn prospectus be send to those solicited
Solution: S28 developed two rules to I7S0R2 investors get preliminary prospectus .2'@R2 they buy
16c.-B 932 Act:
a! *eceptive act for a 0nderwriter or member of selling group to participate in distribution and 7@6 meet the
re$uirements b g below
b! I' 7@6 a reporting company under #,a or #5d! then
!(ST &eliver *reli" *rospectus at least 2B $ours prior to sendin% confir"ation of sale
c! )ust take reasonable steps to deliver prelim prospectus if re$uested in writing
d! Reasonable steps to deliver 'I7A9 prospectus if re$uested in writing
e! f! )ust make available prelim and final prospectus and amendments available to all soliciting customer%s
orders
g! )anging 01 has to get sufficient P of prospectuses to all participating brokerGdealers
Rule 2E4 *istribution of 4reliminary 4rospectus %,, Act!
Allows commission to condition A88292RA6I@7 on the AreasonableB efforts of issuer to make reg; statement
info available to the public through the 01!
;a/s SEC can stop re%istration effectiveness:
i! Rule 233 dela/in% a"end"ent
Informal
Dood for minor revisions to filed reg; statement& pre"effectiveness
ii! ?b! Refusal Order
'ormal seldom 0sed
6he Aweakest 1eaponB
Reaches only 4A6276 )isstatements must be clear on its face!
)ust be issued .2'@R2 Reg; Statement becomes effective
S28 must give notice of hearing in #- days from filing and hearing with #- more days S28 cannot act that
fact!
iii! ?;d Stop Order
'ormal more fle3ible than refusal order
Standard: if it AappearsB at anytime that reg; statement contains a Auntrue statement of a material factB
)ust be untrue A6 6I)2 of R2DIS6RA6I@7 e3 post changes cannot bring a stop order
Important informational tool
S28 can issue stop order A'62R all securities sold tips off public to problem
iv! ?;A 8ease + *esist or /- 'ederal 8ourt @rders
7ash Sec Reg 23am @utline 4age #/ of C?
4roblem: other section ? powers don%t reach reg; statements that become misleading due to 4@S6"2''286IQ2
date
S28 can use ?A or /- to prevent violation of any provision of the Act e;g; #>;a Antifraud!
(pdate or A"end *ealing with post-effective c$an%es
Two Options for fi3ing untrueGmisleading statements due to post"effectiveness events
#! Stic)erin% literally AstickeringB new info to the prospectus
4ursuant to Rule C/C;b;,"5
*oes 7@6 count as amendment to the Registration Statement
/! *ost-Effective A"end"ents
Amend post"effectiveness to fi3
i! )isstates as of effective date
ii! 6o fi3 A)aterial 8hangesB in the post"effective world that make the reg; statement misleading
@oo)
S28 uses the language of #-;a Aa prospectus s$all contain t$e infor"ation in t$e re%istration
state"entB to create dut/ to update
!ateriall/ &eficient *rospectus leads to
71.0a0. 9iability A7*
I32 Act anti-fraud provisions see )anor 7ursing!
Standard: A!aterial c$an%e "erits a post-effective a"end"entB
1hich @ption R2A99K )A662RS
Stic)erin% not amendment to reg; statement
9iable only under anti"fraud #/;a! 7@6 ##
*ost-Effective A"end"ent amendment to reg; statement
Amendment becomes effective with S28 staff approval
1hen declared effective is REA,,IR!S A11 STATE!ETS in the reg; statement
Entire re%0 state"ent spea)s as of t$at date
Results:
1iable under 711 for all state"ents
<ave to review ETIRE re%0 state"ent for accuracy
Inconsistency btw 4rospectus and Reg; Statement does not mean liability automatically
Ask:
@bligation to amend Registration Statement or Eust 4rospectusM
6est: A)aterial 8hange merits post"effective amendmentB
Item 5#/;a Shelf Registration Amendments
MMM
7ash Sec Reg 23am @utline 4age #, of C?
ITEGRATE& &ISC1OS(RE
%,, Act and %,C Act have different %oals
,, protects offerees
,C protects the secondar/ "ar)et
Also had *I''2R276 *IS89@S0R2 re$uirements
40S< to integrate when people started buying the 2)<
3 ,or"s
S-1
Available to
those company reporting less t$an 3 /ears
an/one else who wants to use it
Re$uires co"plete disclosure " no incorp by reference
S-.
Available to
Reportin% 3 or "ore /ears
7ot in default
Allows registrant to either
i! deliver a copy of #-": incorporated by reference!
ii! provide registrant"oriented info in the prospectus along with offering description
S-3
Available to:
i! 0S 8ompanies that
have been reporting for # year or more
not in default
"in float of J36! held by non"affiliates
ii! 0S 8ompanies issuing Ainvest"ent %rade asset-bac)ed securitiesB
Allows registrant to provide
Aust t$e transaction info in the prospectus
*istribution
4roceeds
*escription of securities
All ot$er info incorporated b/ reference do not have to provide a copy!
Incon%ruence of Standards btw %,, and %,C Act potential problem
%,, Act reg e3poses companies to S6RI86 9IA.I9I6K
Registration statements carefully prepared
%,C Act practically! imposes liability for intentional or reckless conduct
9ower standard of care in preparing them
4R@.92):
If S-3 and S-. incorporate s$odd/ 14-8s b/ reference e3poses companies to series ris)
7ash Sec Reg 23am @utline 4age #C of C?
S@E1, REGISTRATIO
*roble": cannot dela/ under traditional registrations
F;a reg; statement deemed effective only as to securitiesNas proposed to be offered
Allows for registration of Securities for later distribution either
Continuousl/
So"e ti"e in the future
(ses ? reason for $avin%
9arge companies making fre#uent debt offerin%s avoids delays and e3pense
Saves "one/
Allows for "ar)et ti"in%
e;g; issue debt when rates are favorable& e$uity when stock price is high
4reparation for mergers& etc;
Conversion
If issuing preferred stock convertible to common
/;,
I' convertible immediately upon sale then it is an AofferB and must be registered
I' 7@6 then not an AofferB to sell
1i"itations on (se of Shelf Reg;
If issuing *ebt and 2$uity
i! Issuer must reasonably e3pect to ta)e off t$e s$elf w5in . /ears of reg; statement%s effective date
ii! Onl/ for lar%eK seasoned co"pan/ that is able to use ,or" S-3
note: does not have to use S", in the shelf reg;
iii! Issuer must update for material changes in plan of distribution
other amendmentsMMM See slide MMM
If issuing dela/ed e#uit/ to be sold at market price& A**I6I@7A99K:
iv! securites "ust be sold t$rou%$ underwriters named in prospectus
v! If Q@6I7D securities cannot e'ceed 14L of publicly held voting stock
&ut/ to (pdate Shelf Registrations
Regulated by Item 5#/;a of Reg S":
Re$uirements
(pdate financials annuall/
'ile post"effective amendments for Afunda"entalB changes
AfundamentalB used to capture A"ajor or substantial c$an%esB
Amendments usually become effective in 2B $ours
Deneral effect has been to lower (nderwritin% fees
1IA+I1ITG (&ER T@E 1933 ACT
Sources of 1iabilit/
## )aterial )isrepresentations or @mission in a Reg; statement
Related liability
#5 8ontrol 4ersons
#/;a;#
#/;a;/
#5 8ontrol 4ersons
#>;a
#? %,C Act!
711 ? !aterial !isrepresention5O"ission in a Re%0 State"ent
Generall/
7ash Sec Reg 23am @utline 4age #5 of C?
)isrep or omission in reg; statement subEects ISS(ER and t$ose ASSOCIATE& with issuer or distribution to
damages in suit by AGOE w$o bou%$t securities issued pursuant to the statement
6ruthfulness "easured as of effective date
7o ## for e3 post events
;$o "a/ brin% suitM
An/one w$o bou%$t securities pursuant to reg; statement
Reliance on Reg; Statement 7@6 necessary
Tracin% Re#uired
<ave to show shares bought pursuant to reg; statement& even if did not rely
i;e; If bought on the open market 7@ ## liability
7@ statistical arguments e;g; J>H of stock on 7AS*A5 came from issue!
)akes 8lass Actions easy
*ossible &efendants in ## Suit S*ECI,IE& b/ STAT(TE loathe to vary!
i! Issuer
ii! Si%natories to Reg; Statement " ##;a;#
4rinciple 23ecutive @fficers
82@
8'@
8ontroller
Accounting @fficer
)aEority of .oard of *irectors
iii! &irectors at ti"e of erroneous filing " ##;a;/
iv! 4eople about to be directors " ##;a;,
v! Accounts and other 2(42R6S named in the reg; statement " ##;a;C
vi! 2very (&ER;RITER wrt the security " ##;a;5
importance of underwriter analysis
vii! Control *ersons " #5
Standards of 1iabilit/
Issuer is S6RI869K 9IA.92
@ther 4arties on a S1I&IG SCA1E Rule #>F
;$et$er M $as valid &ue &ili%ence &efense consider:
a! 6ype of Issuer
b! 6ype of Security
c! 6ype of 4erson
d! If @fficer position held
e! If *irector or 4roposed *irector other relationship with the issuer
f! Reasonable Reliance on @fficers& 2mployees& @thers
1hose duties Ashould have given them knowledgeB
g! If 0nderwriter
6ype of underwriting deal
Role of underwriter
Availability of info e;g; shelf reg;M S", companyM!
h! If incorp by reference whether particular person was responsible for fact or document at the time filing
&efenses
i! Issuer
Strict 9iability " no defense as to culpability
8an argue that V knew that misrep or omission hard in a class action to beat everyone this way!
ii! Ever/one Else &ue &ili%ence &efenses
##;b *ivides Reg; Statement into portions
i! EN*ERTISE& *ortion reasonable investigationGreasonable grounds!
7ash Sec Reg 23am @utline 4age #F of C?
4reparedGAuthoriOed by 2(42R6S
2;g; Accountant& Deologist& 2ngineer& 9awyers
23pert is 9IA.92 unless Ahe had& after reasonable investigation& reasonable grounds to believe& and did
believeB statements complete and accurate
7one3perts get $ualified reliance as to e3pertised portions
6est: Ahad no reasonable ground to believeB there was a inaccuracy or omission
ii! onEN*ERTISE& *ortion
2veryone must investigate or risk the conse$uences
Two-Step Anal/sis in ** *efense
i! !ust conduct investi%ation
ii! )ust have no doubt as to accuracy
Can be liable if
a! fail to investigate @R
b! %o forward after investigation with doubts
7ote: &irectors CAOT ar%ue t$at t$eir law/ers are t$e Ce'pertsD
2rgo& lawyers hold *ue *iligence meetings with the board
iii! ;@IST1E+1O;IG " ##;b;# and b;/
An AoutB for a named officer or director
If .efore Reg; Statement is 2ffective& *G@
Resigns and
7otifies S28 of withdrawal
8onflict for Attorneys who are @fficersG*irectors professional responsibility to protect client confidences
##;b;/ provides similar out for reg; statement that became effective without a person%s knowledge
iv! *laintiff 8E; there was a misrep or omission at the time " ##;a
v! !isrepresentations OT !ATERIA1
I' 'orward"9ooking Statements
a! *S1RA Safe @arbor
@nly for reporting cos;
OT for
I4@
6ender @ffers
Doing 4ublic
See AmaterialityB below
b! Rule 136
@therwise <istorical! .espeaks 8aution *octrine
vi! 1oss Causation
if W can show that stock price drop caused by something else might
preclude recovery
limit it
vii! Statute of 1i"itations
# year after disclosureGshould have known
, years after sale
1aw/ers and 711
1aw/ers OT listed in 7110a as possible defendants
8ourts hold Ae'pertsB only as to discrete portions of Reg; Statement
8ourt *@ 7@6 impose liability on AI*I7D A7* A.266I7D theories would e3pand enumerated list!
Result:
9awyers unlikely directly liable in ## suit
7ash Sec Reg 23am @utline 4age #> of C?
@ther sources of 9iability
#/;a;/
#-b"5 higher burden knowing involvement in the fraud!
)alpractice
Controllin% S@@ 1iabilit/
#5 imposes Aoint and Several liability on 8ontroller of violator
0792SS Ahad no knowledge of or reasonable ground to believe in the e3istence of the factsNB
#5 applies to A11 violations of the %,, Act not Eust ##
(nderwritersI &ili%ence in Conte't
Ideally 0nderwriters and other responsible parties serve as DA62:2242RS& protecting the investor
In pratice 0nderwriters have less ti"e5reduced gatekeeping role
S$elf Re%istrations
6ypically Reg; Statements prepared and effective .2'@R2 choosing 01
01 chosen on competitive .I*S
.idding reduces incentive to do *ue *iligence bGc e3pensive to review before awarded Eob
S"/ and S", Registrations may become effective in C? hours
9eaves little time for diligence
.@0D<6 *2A9S in effect direct issues from issuer to institutional investors
Rule 13E @elps (nderwriters
8onsiders position of underwriter
.06 reduces protection of the investor bGc fewer people really monitoring
&a"a%es under 7110e
Denerally 8A442* R28ISSI@7
X sues for rescission
Amount of Recovery is:
i! Amount paid value at time of suitL or
ii! Amount paid consideration if sold before suitL or
iii! Amount paid consideration if sold after suit& before Eudgment I' lesser than i!
Recover/ a"ount based on FA1(E not )AR:26 4RI82
Allows V to argue market price inflated to recover more
Allows W to argue QA902 much higher price depressed e;g; by panic selling .eecher!
&efenses to Recovery
7@ 9IA.I9I6K if )arket price goes 04
W can argue 9@SS 8A0SA6I@7 drop in price due to @6<2R 'A86@RS
6o e3tent caused factor other than reg; statement& not recoverable
Apportion"ent of &a"a%es
'or )ost Yoint and Several
Any one W liable for the whole with rights of contribution from co"defendants
0nderwriters
*amages 8A442* at total price at which allotment was sold to the public
@utside *irectors
4S9RA amended Y+S rule
I' outside director not engaged in Aknowing misconductB
6<27 ##;f grants proportionate liability not Y+S!
Inde"nification5Contribution
Denerally S28 is against director indemnification
See Dlobus I court struck down indemnification
8ontribution by : " not so bad
Allowed in Dlobus II
6wo 1ays of 8ontributing
i! 8omparative 'ault
7ash Sec Reg 23am @utline 4age #? of C?
ii! 4er 8apita
Akerman v; @ry3
.eecher v; Able
71.0a01 ? 1IA+I1ITG ? CIlle%al offers or SalesD
8ause of action for @''2R or SA92 in violation of 5
*laintiff !(ST S$ow:
5 violation
0sed interstate commerce
Ade$uate tender of security if still owned
1ithin Statute of 9imitations #,
# year from date of violation
4laintiff 7@6 R250IR2* to show
7o state of mind re$uirement strict liability
7o re$uirement of inEury
Tri%%ered b/ AG ille%al offer or sale regardless of subse$uent events
i;e; later co"pliance with 5 does OT C(RE
e;g; if send written offer in waiting period in violation of 5;b cause of action lies 2Q27 if subse$uent sale and
transfer in compliance with other sections
Onl/ STAT(TORG SE11ERS 1iable
1IA+1E
i! 4erson who passes title the true owner!
ii! 4ersons w$o solicit offer to buy I,
a! 6hey benefit financiall/ e;g; commission& share of profits!
b! 'or the benefit of t$e true owner
7ote: re$uirement comes from Afor valueB language have to show e;g; *ahl! was acting Afor valueB
OT 1IA+1E
Gratuitous solicitors people who solicit offers to buy e;g; out of desire to share attractive investment
opportunity
#/;a;# Remedy
If still owned:
23change security for consideration paid T interest
If sold:
*ifference btw price paid and amount received
#/;a;# *efenses
23empt transaction ergo no 5 violation!
Statute of 9imintation
# year from violation
7ash Sec Reg 23am @utline 4age #J of C?
1.0a0. 1I+I1ITG ? !isstate"ents or O"issions in 4R@S42860S A4ublicB @fferings!
1.0a0. 8ause of Action for )isrepresentation& @mission in 4R@S42860S
A**1IES O1G TO C*(+1IC O,,ERIGSD
ASS0)2* at one time that #/;a;/ applied to .@6<
4ublic @fferings and
4rivate placements
Diven the broad reach of /;#-%s definition of AprospectusB
0SS8 R2Y2862* this argument
Court li"ited A*rospectusB to definition in 714 Aa prospectus Nshall contain the information contained in the
reg; statementB!
&irect Tensions of Gustafson
*efinition of AprospectusB is /;#-
@n its face& #/;a;/ does not refer to 5 #/;a;# does!
C private placement& secondary market! is an e3emption from 5 2RD@ " C e3emptions would not apply to
#/;a;/
.06 court essentiall/ "a)es 20. e'e"pt fro" 1.0a0.
Gustafson makes a !ESS of Securities law
4R@.92)S:
Interpreting AprospecutsB to mean widely dissemintated sales literature undermines Afree writingB stricture
Reading of Aoral communications that relate to a prospectusB might make @RA9 statements actionable under
#/;a;/ but 2(890*2 written statements
A4ublicB @ffering very ambiguous
Small , @fferings e;g; intrastate& Reg; *& Reg; A 5-C or 5-5! are technically e3empt ApublicB offerings
8ould argue that 4rivate 4lacement contract that contained R2g; Statement like info would be covered by #/;a;/
&E,E&ATS in 1.0a0.
9ower courts
Same W as #/;a;#
i! sellers w$o pass title
ii! @thers w$o solicit bGc
personal gain or
to benefit title holder
Ele"ents of #/;a;/ Action
i! !isrepresentation of )aterial 'act in prospectus
ii! In a A*ublicB offering
iii! Transaction Causation
Individual V not have to show reliance& but have to s$ow causal lin) btw the misinformation and the transaction
from Aby means ofB language!
Enou%$ for misinformation to bolster "ar)et for securities
&efenses to 1.0a0.
i! AReasonable CareB
W can show did not know Aand in the e3ercise of reasonable care could not have knownB of the untruth
ii! 1oss Causation
W can limit damages by showing other cause for drop in price
iii! Statute of 1i"itations
wGin one /ear of learning
wGin 3 /ears after sale
,ir" Co""it"ent (; and 1.0a0.
8ourts split on w$et$er fir" co""it"ent ISS(ERS are CsellersD and thus liable
5
th
8ir; held they are sellers& analogiOed to car dealers Abell v; 4otomac!
7ash Sec Reg 23am @utline 4age /- of C?
#
st
8ir; held not sellers bGc
i! did not pass title to buyers and
ii! did not AsolicitB offers to buy
7ote: if Issuer does any soliciting sending circulars& conditioning market! could be seen as AsellerB
*roble"s5Open Ouestions after Gustafson
i! Status of other A4ublicB @fferings
Some e3empt offerings are ApublicB
,;b Small offerings
Reg; * 5-C and 5-5
Reg; A
Are these subEect to #/;a;/ liability or notM
ii! 8an you use #/;a;/ for an unregistered public offering if used a misleading written circularM
Section #>;a and 4rivate Rights of Action MMM
&efinition of CSecurit/D
7.01 of t$e I33 Act *efinition of Security
6he term Zsecurit/Z "eans any note& stoc)& treasury stock& security future& bond& debenture& evidence of
indebtedness& certificate of interest or participation in any profit"sharing agreement& collateral"trust certificate&
preorganiOation certificate or subscription& transferable share& invest"ent contract& voting"trust certificate&
certificate of deposit for a security& fractional undivided interest in oil& gas& or other mineral rights& any put& call&
straddle& option& or privilege on any security& certificate of deposit& or group or inde3 of securities including any
interest therein or based on the value thereof!& or any put& call& straddle& option& or privilege entered into on a national
securities e3change relating to foreign currency& or& in general& an/ interest or instru"ent co""onl/ )nown as a
Psecurit/P& or any certificate of interest or participation in& temporary or interim certificate for& receipt for& guarantee
of& or warrant or right to subscribe to or purchase& any of the foregoing;
730a014 of t$e I32 Act
6he term Zsecurit/Z "eans any note& stoc)& treasury stock& security future& bond& debenture& certificate of interest or
participation in any profit"sharing agreement or in any oil& gas& or other mineral royalty or lease& any collateral"trust
certificate& preorganiOation certificate or subscription& transferable share& invest"ent contract& voting"trust
certificate& certificate of deposit for a security& Nor in general& an/ instru"ent co""onl/ )nown as a
Psecurit/PQbut S@A11 OT include currency or any noteK draftK bill of e'c$an%eK or ban)erRs acceptance
which has a !AT(RITG at t$e ti"e of issuance of not e'ceedin% IE !OT@S& e3clusive of days of grace& or
any renewal thereof the maturity of which is likewise limited;
&efinitions of Securit/
2numerated 9ist of Items 8overed in
/;# of %,, Act
note
stock
bond
investment contract see <owey 6est!
anything commonly known as a security
,;a;#- of the %,C Act
note
stock
bond
investment contract See <owey6est!
any thing commonly known as a security
7ash Sec Reg 23am @utline 4age /# of C?
.06 2(890*2S
7oteGdraftGbill of e3change with maturity of J months or less
;a/s to Avoid Re%istration:
i! ot a Securit/
danger is that easy to create a security
ii! E'e"pt Securit/
commercial paper
Dov%t municipality
And etc;
iii! o Transaction
iv! E'e"pt Transaction
Intrastate ,;a;##! and Rule #C>
*rivate *lace"ents C;/
S"all @fferings ,;b
Re%0 & implementations of ,;b and C;/!
Issuer E'c$an%es ,;a;J
&efinition of CInvest"ent ContractD
@owe/ Test means a contract& transaction or scheme whereby
i! person invests "one/
ii! in a co""on enterprise
iii! is led to e'pect profits
iv! solel/ from the efforts of others
v! absence of other re%ulator/ sc$e"eM added in *aniel!
7ote: leaves open possibility that circumvention if investors nominally participate closed by 'orman!
'oreman Reformulation
A6ouchstone is the presence of investment in a common venture premised on a reasonable e3pectation of profits to
be derived from the entrepreneurial or managerial efforts of othersB
See also 6urner and :oscot finding I8 even with investor participation
Co""onalit/ Re#uire"ents
8ourts Split on *efinition of A8ommon 2nterpriseB
Two T/pes
i! @oriSontal pooling of investment funds& shared profits& shared losses
i;e; all investors in the Asame boatB
aka Interdepenence among investors
2conomies of scale may U <8 e;g; more investors mean more profits bGc admin costs down!
8apital 6hreshold maybe U <8 e;g; Yaguar e3ample: if don%t get certain amount of cash& no deal!
0ni$ue Investment U court split
7@6 S0''I8I276 for <8 mere commingling of funds
Some courts R250IR2 finding of <8
ii! Fertical emphasiOes relation between promoter and investor
a! .road Qertical re$uires only connection between efforts of promoter and investor successGloss
criti$ue: merges ii! common enterprise and iv! efforts of others
b! Strict Qertical re$uires connection between success of promoter and investors i;e; Shared Risk!
4roblems with Split
i! *iscretionary 6rading Accounts vest broker wGdiscretionary authority to trade
7@ <oriOontal 8ommonality bGc no pooling of assets
7@ Strict Qertical bGc broker pay not tied to success paid commission!
K2S .road Qertical bGc investor depends on brokers efforts
4olicy why have federal remedy when broker and investors interest are aligned but not when only interest is
in churningM
7ash Sec Reg 23am @utline 4age // of C?
Co""onalit/ concerned wit$ AGECG COSTS
S28 concerned about investors who& bGc pooled together suffer agency costs:
i! 8ollective action problems if pooled with others
ii! 8ontrol if they have no control over the decisions made for them
i! Suffer AD278K 8@S6S
E'a"ples:
GES Invest"ent Contracts:
Strips of land where W tended under [optionalB service contract
OT Invest"ent Contracts
AShareB enabling purchase of apartment not like stock!
Interest in viatical settlements W only ministerial& pre"purchase efforts!
&iscretionar/ Tradin% Accounts as Investment 8ontracts
i! 4ooled assets& fee tied to performance U security
ii! 4ooled assets& flat fee U maybe not
the fi3ed fee makes less of a Acommon enterpriseB
iii! @ne investor& fee tied to performance U probably not
no horiOontal commonality
yes vertical .06 does not have any agency cost issues
iv! @ne investor& flat fee U probably not
;a/s out of .eing 8alled an Investment 8ontract
i! !inisterial Actions onl/
Idea: not deriving profit from the Aactivities of othersB
ii! *re-*urc$ase Activities onl/
Idea: AIf the value of the promoter%s efforts has already been impounded into the promoter%s fees or into the
purchase price& and if neither the promoter nor anyone else is e3pected to make further efforts that will affect the
outcome of the investment& thenNthe need for federal securities regulation is greatly diminishedB
iii! I"personal !ar)et
if profits dependent on market then 7@6 relying on the efforts of others
iv! Consu"ption not Invest"ent
see 'oreman
v! *rivate arran%e"ent 9face to face: not co""onl/ considered a Csecurit/D
see e;g )arine .ank
vi! A lot of investor participation
<owey any is enough
'oreman& 6urner& :oscot can still have I8 if investor is involved
.06 'ranchise 8ases attacks on franchise agreements fail bGc too much investor participation
6he Importance of RIS: for determining whether I8
<owey: Ais immaterial whether enterprise is speculativeB
)arine .ank: backs off this decision
SEC v0 Aoiner 1easin%
SEC 0 @owe/ W sells customers land rows! in 8itrus Droves and offers a service contract net profits
calculated on profits& purchasers not from '9& not citrus growers <eld: Ainvestment
contractB C factor test
!arine +an) v0 ;eaver 1eaver pledges bank 8* to secure bank loan to 8olumbus 4acking& in return& 1eavers got
share of net profits and right to use pasture and barn and veto right for further borrowing
@eld: not a security bGc Anot the type of instrument that comes to mindB and privately
negotiated
(nited @ousin% v0 ,or"an 7onprofit coop sells AsharesB entitling holders to buy apartments in 8oop 8ity; 2rror in
7ash Sec Reg 23am @utline 4age /, of C?
bulletin& try to sue under #>;a and #-;b;5 @eld: 7ot a security; Appellation not
dispositive& no dividends& pledgibility& voting& appreciation& and they wanted to AconsumeB
not AinvestB
4roblem: 1hether AinvestmentB might depend on how look at the deal
1ife *artners W arranges to sell interests in viatical settlements to retail customers @eld: 'ractional
interests 7@6 securities bGc profits did not derive from effort of other parties
7ote: purely pre"purchase or ministerial services not Aefforts of othersB
;alls v0 ,o' @ills &evelop V buys week 5 in time share& but enters arrangement to swap for week in summer but not
occupy it rather rent it out to get profit; V argues it transformed from R2 deal to I8
@eldH 7o I8 bGc no <oriOontal 8ommonality
Associational ,or"alities Interests in 8orps& 4artnerships and 998s as S280RI6I2S
STOC8
<oweyG'oreman Aeconomic realityB consideration not necessary if stock is clearly what is commonly considered
stock
(SSC 8illed CSale of +usinessB in 1andret$
9ower courts had allowed arguments that sale of businesses in stock deals should be e3empt from securities
laws bGc buying a company& not stock and etc;
0SS8
reEected Aall econ reality all the timeB approach: <owey was for determining whether I8 was security
reEected argument that Acts only to protect 4ASSIQ2 I7Q2S6@RS
C$aracteristics Co""onl/ Associated wit$ Stoc)
Right to receive dividends
e%otiabilit/
Ability to be pled%ed or hypothecated
Fotin% ri%$ts in proportion to P of shares
8apacity to appreciate in value
Really a 49AI7 )2A7I7D approach
8annot take approach for notes bGc too much would get swept into securities laws
*ARTERS@I* Interests
Denerally
7@6 enumerated in /;# or ,;a;#-
2rgo apply Investment 8ontract analysis
Specifically: are the investors dependent for their profits on the efforts of othersM
D4 or Yoint Qenture Interest might be security if see 1illiamson v; 6ucker!
i! agreement leaves so little power in hands of partner that works like an 94L or
ii! partner so ine3perienced and unknowledgeable that incapable of e3ercising powersL or
iii! partner is dependent upon uni$ue skillGability of the promoter or manager
Reality
Qery few cases have found D4 interests as securities
94 more likely to prevail
11C Interests
*epends on structure
I' typical 998 having D4 structure then that analysis
I' amend in favor of central management do investment contract analysis
7ash Sec Reg 23am @utline 4age /C of C?
OTES as Securities
*iverging 6reatment in %,, and %,C Acts
#J,, Act
/;# includes Aany noteB
,;a;, e3empts from registration a note that Aarises out of a current transaction or the proceeds of which have
been or are to be used for the current transactionB and that will mature within nine months
.06 #>;c makes clear that 7@6 an e3emption from anti"fraud provisions
#J,C Act
,;a;#- includes Aany noteB
but same e3cludes notes with maturities of less than nine months
2''286
Short term notes are 6@6A99K e3empt from ,C Act& and e3empt from registration under the ,, act 5!& but
otherwise subEect to the ,, Act
Still Apply:
#>
#/;/
@verbreadth note that the coverage literally e3tends to include home mortgages& consumer installment purchases&
and ordinary commercial financing
8ourt simply don%t apply it
REFES ,a"il/-Rese"blance Test when a AnoteB is a AsecurityB
7ote: 8ourt reEects <owey analysis for notes& but comes up with very similar test an oddity
*ifferences btw <owey and Reves
a! Interest payments satisfy Reves but not <owey
in Reves wanting to get interest U investment intent
in <owey interest not considered AprofitsB
b! 4resumptions are different
in Reves presumed a note
in <owey no presumption
REFES TEST: to determine if 7@62 is a S280RI6K consider:
#! !otivation of the 4arties
Security"ish
Deneral business
Interest payments
7@6
8onsumer goods
Interest payments are sufficient to make security
/! *lan of &istribution
Security"ish if
widely offered and widely traded
Reaching non"institutional investors those we want to protect!M
7ot:
'ace to face negotiation with limited group
,! *ublic E'pectations
would the public think they were securitiesM
8ircular: e3pectations set by legal rules
C! E'istence of Alternative Re%ulator/ Structure
is there some other form of regulatory protection for the investorsM
e;g; .anking laws
Security"ish if 7@6 8@99A62RA9I\2*
23ample: In )arine .ank court held 8*s 7@6 securities despite fact that long term debt held for investment bGc
of banking laws;
7ash Sec Reg 23am @utline 4age /5 of C?
Co""ercial *aper E'ception
,;a;, of the %,, Act e3empts S<@R6 62R) *2.6
e3empts from registration a note that Aarises out of a current transaction or the proceeds of which have been or
are to be used for the current transactionB and that will mature within nine months
8ommercial 4aper is understood as
Short"6erm prime"$uality paper debt! used for Acurrent operationsB purchased by institutional investors
Includes:
AGR funding
Short 6erm 'inancing
*oes 7@6 Include:
9ong term capital proEect funding
Sub prime $uality paper
)oney raised for mergersGac$uisitions not AcurrentB operations!
4roblem: *oes ,;a;, @79K apply to 8ommercial 4aper or does it e3empt 84 and @6<2R Short 6erm *ebtM
In Reves& the Eustices split
C refused to take a position
C said ,;a;, likely applies to more than Eust commercial paper
Stevens both refer only to commercial paper
7ote @ddity in Statutes
8onsidered a security under the ,, Act& but e3empted
*efined as 7@6 a security under the %,C Act
&e"and otes
)ay depend on practiceGe3pectation of the parties
If e3pect to e3ercise in , months then short term
Rollover *rovisions
Auto"atic Roll over investor does not have to make decision
7@6 commercial paper& not subEect to e3ception 7o Action 9etters!
Optional Roll @ver
)ight be allowed commercial paper e3ception if have to A''IR)A6IQ29K R2502S6
Stevens would ask whether institutional& prime $uality& current ops& etc;
1oan *articipations
8ases on point
.anco
4ollack
.asically& held loan participations are 7@6 securities
Apply Reves 'amily Resemblence 6est
oteH sellin% an CinterestD in a securit/ "i%$t be a sale under .03 ? so if t$e underl/in% OTE is a securit/K
"ore li)el/ to be an ille%al sale0
ENE!*T SEC(RITIES
Some securities are permanently e3empt from registration under the %,, Act
7@62: not necessarily and often 7@6! e3empted from other provisions including
#> anti"fraud provisions
#/;a;/ misstatements or omissions in prospectus
#-;b "
Dovernment Securities
.ank Securities
8ommon 8ollective and Single 6rust 'unds
,;a;, Short 6erm 7otes
7ash Sec Reg 23am @utline 4age /F of C?
,;a;C 7onprofit Issuers
,;a;5 Securities issued by S+9s 8ooperative .anks and Similar Institutions
,;a;? Insurance 4olicies and Annuities
Reves
.anco 2spanol de
8redito v; Security
4acific .ank
+oundaries of t$e 1933 Act ? ENE!*T TRASACTIOS
'ocus on the 'ollowing TRASACTIO E'e"ptions:
,;a;## Intrastate 23emption
,;b Small @ffering 23emption
7@62: e3emption from A6his 6itleB
Recall 4revious
C;# Section 5 does not apply to transactions by any person other than ISS02R& 07*2R1RI62R or *2A92R
C;/ Section 5 not apply to transactions by an issuer 7@6 involving a 40.9I8 @''2RI7D
7@62: these only e3empt from 5
ITRASTATE ENE!*TIO - 730a011
AAn/ securit/ which is a part of an issue offered and sold onl/ to persons resident wit$in a sin%le State or
6erritory& w$ere t$e issuer of such security is a person resident and doin% business within or& if a corporation&
incorporated by and doing business within& such State or 6erritory;B
Re#uire"ents for 23emption
i! Sold only to residents of sin%le state
Release CC,C an offer to a nonresident which is considered part of the intrastate issue will render the
e3emption unavailable to the entire offeringB
ii! *erson 9or Corporation: sellin% !(ST
a! be a resident incorporated! of same state
b! be Adoin% businessB there
T;O Options for 8laiming this e3emption
i! 'all under Rule 123 S28 Safeharbor S28%s definition of what is e3empt!
ii! 'all under Statutor/ E'e"ption if fail to satisfy Rule #C>
!ajor Issues in Intrastate Offerin%
i! Issue
1hole AissueB has to be offered and sold and come to rest! with residents
Integration Analysis Applies
Single plan of financing
Same class of security
At or about the same time
Same type of consideration
)ade for same general purpose
ii! &oin% +usiness in a State
Satisfied only if perform Asubstantial operational activitiesB in the state of incorporation
8hapman re$uired ApredominantB
iii! 'unds for O(T O, STATE *rojects
If using intrastate for funds to use in another state *@7%6 rely on ,;a;##
iv! Residence wit$in a State
7ash Sec Reg 23am @utline 4age /> of C?
)ere presence 7@6 enough e;g; military personnel!
@: to use out of state underwritersGdealers as long as A99 come to rest with R2SI*276S
v! 1ar%e Offerin%s Increase Risk that 7ot Available
vi! Resales
Securities have to Acome to restB before resale to out of state residents
Rule of 6humb: # year
vii! Solicitations
S28 allows broad advertising but must make clear offer is only available to R2SI*276S
e;g; 9egend on all solicitations reading A@ffer Available only to )A ResidentsB
Rule 123 Safe @arbor
Rationale: many issuers sought clarification of the ,;a;## e3emption bGc uncertainties could e3pose to too much
liability rescission by 2Q2RK@72 in the issue!
<ave to co"pl/ wit$ A11 *rovisions of Rule #C> to enEoy protection cf; Reg; *!
8e/ *rovisions
#! A&oin% +usinessB ?-G?-G?- 6est Rule #C>;c;/!
*eemed doing business if
B4L of Dross Revenue from state
B4L of Assets located in state
B4L of net proceeds to be used in state
A7* *rinciple Office of issuer located there
/! Resales #C>;e!
Re$uired holding period: 9 !ont$s fro" date of last sale b/ issuer
,! *recautions #C>;f!
Issuer S<A99:
i! put legend on certificate that 7@6 R2DIS62R2* and gives notice of 9I)I6S on R2SA92
ii! issue S6@4 6RA7S'2R instructions to issuer%s transfer agent
iii! get 1RI6627 R24R2S276A6I@7 from each purchaser as to residence
C! &efinition of CResidenceD #C>;d;/!
*eemed resident if Aat time of offer and saleNhas principal residence in the state or territoryB
7ote: eliminates subEective intent
@: if have home in state but move out still resident
5! Inte%rateT One Issue or !an/T #C>;b;/!
An issue deemed 7@6 include others made
4rior to F months before and after F months after the ,;a;## offering
4R@QI*2* that during the F month windows& no other ,;a;## offerings same securities
@therwise use 5 factor integration test
C$ap"an v0 &unn
SEC v0 !c&onald
+usc$ v0 Carpenter
720. E'e"ption ? t$e *RIFATE *1ACE!ET
C;/ e3empts Atransactions by an issuer no involving any public offeringB
Scope of 23emption defined by 6<R22 things:
#! Deneral 8ounsel 9etter C"'actors of Importance
still obli$uely in play& but focus has shifted to other /
/! S28 v; Ralston 4urina
0SS8 decision that now dominates C;/
,! Rule 5-F a non"e3clusive safe harbor under C;/ part of Reg; *& below!
Deneral 8ounsel 9etter
Identified C factors of particular importance:
i! 7umber of @fferees and their relations
7ash Sec Reg 23am @utline 4age /? of C?
preliminary negotiations with large P e$uals public offering
not more than /5 is presumably private
ii! 7umber of 0nits @ffered
large numberGsmall denominations gives hint that future involves public trading
small numberGlarge denominations evidence that really a private placement
iii! SiOe of the @ffering
intended to apply to small offerings
iv! )anner of the @ffering
direct negotiations look private
advertising& public solicitation& etc; look public
RA1STO *(RIA Anal/sis is there a 40.9I8 @''2RI7D
i! 'ocus on @''2R22S not purchasers!
ii! If able to Afend for t$e"selvesB then not a public offering
8an Afend for themselvesB if
a! @ave ACCESS to the information e;g; insiders!
b! @AFE t$e infor"ation e;g; provided to them!
7ote: sophistication is relevant but 7@6 sufficient for meeting re$uirements of A882SS e;g; if not
sophisticated then cannot read financials& so no access!
General otes about Ralston
i! +urden is on Offeror to establish accessGsophistication
As P of offerees increases the <AR*2R this gets
e;g; general solicitation kills 4rivate 4lacement bGc cannot identify all offerees
ii! One non-sop$isticated offeree )ills e3emption
iii! 4rofessionals& e;g; securities lawyers& are not de facto AsophisticatedB
*roble"s wit$ Ralston *urina
i! 8ourt did not define Afend for selfB
ii! *id not establish clear rules a lot of chilling
e;g;
did not define AfendB
did not set a P as did the Den 8ounsel 9etter
iii! *ARA&ON
a! 1hy re$uire registration for the unsophisticated but not for the sophisticatedM
6he sophisticated need the information and can use it the unsophisticated can%t read it
b! If have to supply all information to avoid get the e3emption why not Eust registerM
@ne benefit if actually $ualify& not subEect to ##
EE& for Re%ulator/ Safe @arbor
i! 5
th
8ir; @pinions narrowl/ construed 20.
basically re$uiring replication of disclosure to e3empt from disclosure stoopid
ii! Fa%ueness of AsophisticationB and AaccessB
vague U dangerous to rely on
iii! +urden of *roof T Ralston%s focus on offerees
have to be able to show that A99 offerees met the sophistication and access re$uirementsI
iv! &an%er of Resales
if someone bought with intent to resell and sold to non"sophisticate& then wreck e3emption
v! the 1IA+I1ITG
violate 5 ergo #/;a;# Aillegal offer or saleB! Rescissionar/ &a"a%es
1E& to REG(1ATIO &

7ash Sec Reg 23am @utline 4age /J of C?

REG(1ATIO &
Rule 642 Rule 646 Rule 64E
Stat0
Aut$orit/
,;b S28 *iscretionary ,;b S28 *iscretionary C;/ 4rivate 4lacement
!a' Offerin% =#) =5) 7o )a3
U of
*urc$asers
7o 9imit 7o more than ,5
e3cluding AI!
7o more than ,5
e3cluding AI!
&isclosure
Re#0
7one Kes& if non"AI involved Kes& if non"AI involved
Investor
Sop$0
Standards
7one 7one Kes non"AI and reps; must
meet sophistication re$;
!anner of
Sale
0sually 7o Den; Solictitations
see pg; C#/ for e3ceptions!
7o Deneral Solicitations
4ublic 8o can disclose fact of 44
Rule #,5;c!
7o Deneral Solicitations
4ublic 8o can disclose fact of 44
Rule #,5;c!
Resale
Restrict
Kes Restricted Kes Restricted Kes Restricted
Ot$er .ad .oy *is$ualifier
Overview of Re%0 &
8rucial for RETAI1 Transactions e;g; those involving non"AI!
@therwise C;/ is good enough
*esigned to reduce burden on s"all issuers
Re"e"ber Gustafson
Dinsberg%s reading that , e3emptions still subEect to #/;a;/ liability S@ could sue under #/;a;/ in 5-5
Could OT sue under 1.0a0. in a 64E offerin% ? t$e statutor/ basis is different 9not 73 but 720.:
E'c$an%e Act Cos CAOT use 642
Rationale:
e3change act co is alread/ disclosin% less burdensome for them to meet re$uirements of 5 bGc can Eust
incorporate in form S"# or S"/
It is the non"disclosing& non"reporting cos that need the e3emption
,or" &
Rule 643 says have to file 'orm * no later t$an 16 da/s after first sale under 5-CG5-5G5-F
'ailure to do so does not wreck e3emption .06
4ursuant to Rule 5-> may preclude use of Reg; * in the future
General Solicitation Restrictions ? 64.0c
Denerally AGeneral SolicitationsB are OT per"itted in Reg; * @fferings
7ote: can be tougher than under Ralston bGc 5-/;c is a complete bar if no pre"e3isting relationship
64.0c Applies to
i! Issuers and
ii! 6hose Aactin% on be$alfB of Issuers
*efinition of Aon behalfB
If issuer pa/in% definitely
If "an/ contacts wit$ issuer likely
If interview e;g; analyst! likely
E'ceptions
i! Rule 1360c public companies can disclose fact of Reg; *; offerings to comply with duties to disclose
ii! *re-E'istin% Relations$ips
It is 7@6 gen solic to contact persons with whom have established relationships
7ash Sec Reg 23am @utline 4age ,- of C?
iii! I*O et *re-Screenin%
S28 7o Action 9etter @:%s 1eb Site 4rocedure if
a! Initial solicitation has 7@ infoGreference to any offerings
b! If $ualified by Registered .rokerG*ealer then would get password for info about Reg; * offerings
c! *elay btw $ualification and offerings they could invest in
d! 5ualificaion might go stale have to be updated
If want to solicit have to follow I4@ 7et 8arefully
Self"Accreditation 1I99 7@6 $ualify must use broker dealer!
E'a"ple FIO1ATIOS
)ass "ailin%s
4osting information on website
ewsletters by ,
rd
parties paid for by issuers containing info prepared by issuers
Cold calls by .roker *ealers
23amples that are OT Fiolations
I*O et Sc$e"e
Investment *atabase where network matched investors and entrepenuers but not paid for by fees!
.roker *ealer solicitations of clients for Reg; * offerings that provide for screening& delay and do not initially
provide info about the offerings
*roble"s wit$ 64.0c
8reates bar to usefulness of Reg; *
9imits scope of investors
ecessit/ of 64.0c
ecessar/ for 64E
bGc based on C;/& have to be limited to offerings that are Anot publicB
ot ecessar/ for 6425646
bGc based on ,;b not re$uired
Accredited Investor Oualifications
1hy Important:
i! AI do not count to ma3; purchasers under 5-5 and 5-F
ii! If all are AI no affirmative disclosure re$uirements
iii! In 5-F conte3t
AI are presumed sophisticated
7on"AI must be demonstrated sophisticated difficult and risky to prove!
&efinition of AI ? Rule 6410a
Accredited Investors:
,inancial Institutions banks& registered brokerGdealers& insurance& etc;!
*ension 4lans
Fenture Capital 'irms
8orporationsG4artnershipsG@rganiOations with assets V J6!
Issuer ISI&ERS
*irectors
23ecutive @fficers
4res;&
Q4 in charge of principal business unit&
Anyone engaged in 4@9I8K making capacity
Deneral 4artners
atural persons w$ose
a! 7et worth e'ceeds J1!
b! Annual inco"e e'ceeds J.448 for each of last two years and likely not to change
=,--: if married
2ntities owned by AI
;$/ does wealt$ "atterM
In Ralston& investors needed to be smart& but now only need to be RI8<
7ash Sec Reg 23am @utline 4age ,# of C?
Rule favor AI
)any issuers limit Reg; * offerings to AI to avoid 5-/;b disclosure re$uirements
2''286: cuts sophisticated investors out of market
7@6 Strict 9iability
Recall under C;/ if were wrong& then S9
<ere& standard is Areasonable groundsB e;g; in evaluating personal wealth& if use credible appraiser and they get it
wrong solid defense
64E Sop$istication Re#uire"ents
64E A1OE re#uires non"accredited investors to meet SO*@ISTICATIO Re#uire"ents
2ach purc$aser )0S6
i! be )nowled%eable5e'perience in businessGfinance and be able to assess "erits5ris)s alone or with rep!L @R
ii! issuer reasonabl/ believe this is the case
ot Clear $ow to "easure Sophistication 8onsider I4@ 7et 5uestions:
Q8 investments
4revious e3perience buying restricted securities
2ducation
2mployer
.usiness activities
0se professional advisorM 1hen relied onM
Effect of Re#uire"ents
Issuers will not e3tend 5-F to non"AI or
Issuer will structure as 5-5 to avoid but possibly run into =5) cap!
*urc$aser Representatives ? 6410$01
1ho 8an Serve as Reps: anyone who meets or who issuer reasonably believes meets the following:
#! 7@6 an affiliate& director& officer or other employee of issuer e3cept purchaser is
relative of the rep; by blood or marriage or adoption not more remote than #
st
cousin
/! hs knowledge and e3perience in financial and business matters & can weigh benefits and risks
,! acknowledge are rep; by purchaser in writing
C! discloses to purchasers prior to sale
any material relationship btw rep; and its affiliates that
then e3ists
or is mutually understood to be contemplated
or that has e3isted in previous / years
and any compensation
Countin% Investors IssuesG*roble"sG*itfalls
6he 'ollowing &OIT Count under 5-5G5-F
i! Relative& spouse or relative of spouse having sa"e principal residence as the purchaser
ii! Any trust or estate in which purchaser or relative in i! collectively have more than 5-H interest
iii! An/ corp in w$ic$ purc$aser or relative in i! collectively own "ore t$an 64L
iv! Any Accredited Investor
CAOT set up S@E11 entities 5-#;e;/!
7on"Accredited corpsGpartnerships etc; count as @72 0792SS it was formed for the purpose of ac$uiring
securities
<ow determine purposeM 8onsider:
a! e3istence& duration and nature of org;
b! structure of entity centraliOedM!
c! proposed activities
d! siOe of capitilOation relative to investment
7ash Sec Reg 23am @utline 4age ,/ of C?
&isclosure Obli%ations under 646 and 64E
Denerally
i! I, all purc$asers are AI no disclosure re$uirements
ii! I' some are non"AI& issuer must give:
a! specified info a Areasonable ti"e prior to saleB
b! any material written information provided to an AI
&isclosure re#uire"ents var/ on +OT@
Reportin%G7on"Reporting 8ompany A7*
SiSe of Offerin%
If RE*ORTIG
Affirmative disclosure met by
i! providing re$uired S28 filings
I' OT a RE*ORTIG 8o;
)ust disclose Ato the e3tent material to an understanding of the issuer& its business and the securities offeredB
i! *isclosure of 7@7"'inancial info:
I' offering )@R2 than =5)
Similar disclosures as a reg; statement
If offering 92SS than =5)
Similar to disclosures in a Reg; A offering
ii! *isclosure of 'I7A78IA9 Info Qaries more
I' 0nder =/)
'inancials including balance sheets audited and dated wGin #/- days
I' btw =/) and =>;5 )
23tensive audited financials
I' over =>;5)
2ven more e3tensive audited financials
@ards$ip E'ception:
8an Eust meet re$uirements for =/) threshold if demonstrate that re$uired statements cannot be prepared Awithout
unreasonable effort and e3penseB
AGGREGATIO of Offerin% *rice 5-C and 5-5!
&istin%uis$ A%%re%ation5Inte%ration
A%%re%ation narrow& applies only to total offering price in 5-CG5-5 offering& including any other ,;b offerings
@nly looks .A8:1AR*
Inte%ration when two transactions are treated as one
8reates problems for price caps& ma3; investors& residentGnon"resident re$uirements& etc;
9ooks backward and forward
T$e 1i"itations
5-C ma3imum aggregate offering price is =#) within any #/ month period
e3ception: at least =5--: has to be registered in a state!
5-5 ma3imum aggregate offering price is =5) in any #/ month period
no state registration re$uirements
1i"its are RE&(CE& by the aggregate offering price of securities sold within previous #/ months
Relying on ,;b e3emptions @R
In violation of 5;a
@ow Calculated:
Denerally:
5-#;c a%%re%ate offerin% price is t$e su" of all cash& services& property& notes& cancellation of indebtedness
and other consideration the issuer receives for securities
If 8AS< no problem
If 8AS< and 7on"8ash 8onsideration
8alculate based on value of the cash sale see pg; C/F!
7@62: would be easier to Eust add cash and value of non"cash and voila but that is not the rule
7ash Sec Reg 23am @utline 4age ,, of C?
If 7@6 8AS<
2ither
6he value of consideration determined by bona fide sales wGin reasonable time @R
Afair value as determined by an accepted standardB
T;O Relevant TI!E *ERIO&S
i! 6he #/ )onth period preceding the commencement of the 5-CG5-5 offering
ii! 4eriod of 6ime *uring the 5-CG5-5 offering
23ample:
5-C @ffering started on CG#& by FG# =#) sold
necessary that no ,;b sales btw CG# and the #/ months before A7*
necessary that no ,;b sales btw CG# and FG#
I' have 5-5 offering on FG#
5-5 cap reduced to =C) bGc of the 5-C offering
if sells =5) 5-C offering unaffected but 5-5 offering S<@6
1i"itations on Resale
Reg; * is 7@6 a means of circumventing registration ERGO resale is restricted
Issuers "ust ta)e REASOA+1E CARE that purchasers are 7@6 07*2R1RI62RS
Rule 5-/;c says may be demonstrated by
i! reasonable in#uir/ that buying for their own accounts
ii! written disclosures that securities unregistered and cannot be sold unless registered or under an e3emption
iii! le%end on securities identifying as restricted
Special e3ceptions to the restriction of 5-C apply see pg; C,- if necessary!
Rule 646 and +ad +o/ &is#ualifiers
Absent 1aiver& 5-5 is 07AQAI9A.92 if:
Issuer or 4redecessor of issuer or affiliate or
0nderwriter& director& officer or general partner of an issuer or
#-H or greater shh
engaged in conduct violating 'ederal Securities laws
@perates 1I6<@06 R2DAR* to reasonable belief
Inte%ration and its Re%0 & Safe @arbor
Denerally:
Inevitable conse#uence of transactional focus of the #J,, Securities Act
<ave to know when transactions AbeginB and when they AendB
Integration treats separate transactions as @72 if certain criteria are met
9ooks forward and backward easy to wreck re$uirements of e;g; Intrastate e3emption of Reg; * offerings if the
two get integrated
General Test inte%rate two offerings I'
i! Sale are part of single plan of financing
ii! involve same class of securities
iii! sales made at or about same time
iv! same type of consideration received
v! if the sales were made for the same general purpose
Re%0 & Gives Inte%ration Safe @arbor with F month 9ook"'orward and 9ook".ack Duideline 5-/;a!
Te't: A@ffers and sales that are made "ore t$an si' "ont$s before the start of a Reg; * offering or are made
"ore t$an si' "ont$s after the completion of a Reg; * offering will not be considered part of t$at Re%0 &
offering
8aveat: so long as during those F month windows issuer sellsGoffers no other securities of same class
2ffect:
I' have Reg; * offering outside si3 month window won%t be integrated
7ash Sec Reg 23am @utline 4age ,C of C?
2mployee 8ompensation 4lans 7@6 integrated with Reg; * offerings Rule C-5!
Insi%nificant &eviations not ,atal Rule 5-?
'ailure to comply with a termGconditionGre$uriment of 5-C& 5-5& 5-F not fatal I' W shows:
#! failure did not pertain to a termGconditionGre$; directly intended to protect that particular individual or entity&
and
/! failure was insignificant relative to offering as a whole& and
,! Dood faith and reasonable attempt to comply
Qiolation of 5-/;c is 7@6 @:AK
Re%ulation A ? Testin% t$e ;aters
An issuer may publis$ or deliver to prospective purchasers a written docu"ent or make scripted radio or television
broadcasts to deter"ine w$et$er t$ere is an/ interest in a contemplated securities offering; ,ollowin% sub"ission of
the written document or script of the broadcast to the 8ommission& as re$uired by paragraph b! of this section& oral
communications with prospective investors and other broadcasts are permitted; 6he written documents& broadcasts and
oral communications are each subject to t$e antifraud provisions of the federal securities laws; o solicitation or
acceptance of "one/ or other consideration& nor of an/ co""it"ent& binding or otherwise& from any prospective
investor is per"itted; o sale "a/ be "ade until #ualification of t$e offerin% state"ent;
Reg; A is an important alternative to Reg; * adopted as part of #JJ/ Small .usiness Initiatives
Available only to 7on"Reporting 8o;
)aEor 'eatures of Reg; A
i! Admin e3emption under ,;b authoriOed e3mption from registration up to =5)
ii! Available for Secondary @fferings
i;e; sales to e3isting shareholders& up to =#;5)
note: cuts into Reg; A =5) cap
iii! Resales are 7@6 Restricted
iv! Reg; A offerings are 7@6 Integrated with
prior or later registered compensatory benefit plans
Reg; S offerings
)ore than F months after the Reg; A offering
v! Re$uires offering of A@ffering StatementB a mini" reg; statement
vi! 8an 6est the 1aters for the offering see above!
Re%ulation CE
,b! e3emption if you comply wG 8A law; 9imited to issuers that are 8A corps; Rule #--#; 8. C,5;
A%%re%ate Offerin% A"ount; =5m per transaction rule;
General Announce"ents allowed so long as they contain only certain info; .ased on test"the"waters concept;
Oualified *urc$asers; )ore strict def than ai A$ualified purchasersB who buy for investment purposes and not
redistribution!;
*esignated prof or instit purchasers
Affiliates of Issuer
8ertain relatives of 54s
2ntities whose e$uity owners are limited to *+@%s and any affiliate of the issuer;
Reporting co%s if the trans involves the ac$uis of all the issuer%s : stock for investment
7atural persons: net worth S =5--&--- or net worth S=/5-&--- and annual income S=#--&--- A7* trans involving
only # class voting stock& ]#-H purchaser%s net worth& purchaser able to protect his own interest alone or wG a
professional advisor!;
7at%l 4ersons must receive disclosure docs per Rule 5-/ 5 days prior to sale;
Resale Restrictions apply buyers receive Arestricted secs;B
7ash Sec Reg 23am @utline 4age ,5 of C?
SECO&ARG &ISTRI+(TIOS
4rivately
4laced
4rivately
4laced
,;a;## ,;a;## #CC Resales
Restricted
#CC Resales
8ontrol
#CCA
Resales
)anner of
sale
<olding
4eriod
9imit on
Amt
Status in
<ands of
.uyer
;$o is Subject to 76 Re%istration Re#uire"entsM
ISS02RS generally wGin scope of 5 Registration Re$uirements 0792SS
Issuing 23empt Security
MMM
@r engaged in 23empt 6ransaction
MMM
I7*IQI*0A9S @6<2R 6<A7 ISS02RS are in reach of 5 if they are 07*2R1RI62RS under /;a;##
If 7@6 an underwriter under /;a;## then e3empted by C;#
/;a;## A%0nderwriter% means any person who has purchase from an issuer with a view to& or offers or sells for
an issuer in connection with& the distribution of any securityNB
C;# A6he provisions of section 5 shall not apply to transactions by any person other than an issuer& underwriter
or dealer;B
Two *roble"s associated with Secondar/ &istributions:
#! Restricted Securities does the resale destroy the e3emption relied upon by the issuerM
6urns on whether securities have Acome to restB or are Ain connection with a distributionB
/! Control *ersons 8ontrol persons are issuers for the purposes of /;a;## and so 8R2A62 07*2R1RI62RS
when the purchaseGassistance is part of the control person%s distribution;
3 ;a/s OT to be an (nderwriter
i! o &istribution
maybe bGc *2'I72* as not a distribution
23amples:
MMM
7ote: it is not buying from an issuer that makes you an underwriter& but buying from an issuer in connection with
a distribution
ii! Co"e to Rest i;e; demonstrated investment intent
iii! .e a member of the public offerings sellin% %roup
if commission received is customary

2 wa/s to +ECO!E an (&ER;RITER
i! *urc$ase fro" an issuer wit$ a view to distribution
23amples:
.uy without investment intent $uick resell!
'irm 8ommitment underwriters
ii! Offer or sell for an issuer in connection wit$ a distribution
23amples:
7ash Sec Reg 23am @utline 4age ,F of C?
8lassic underwriting syndicate people firm commitment or best efforts!
iii! *articipate or have direct or indirect participation in i! or ii!
23amples:
8hinese 8onsolidated .enevolent Assoc ; bGc they AparticipatedB in the distribution
@fficers& promoters or control persons who actively promote the sale of unregistered securities might be covered
Rachal!
@wners of unregistered shares who e3ercise : right to have registered with offering held to be AparticipantsB in
the distribution and thus underwriters .yrnes!
iv! *articipate or $ave participation in the direct or indirect underwriting of an such undertaking
23amples:
Investment bank retained for due diligence even if never bought or sold distributed securities! <arden!
Invest"ent Intent
@ne cure for Apurchasing with a view to distributionB
A8hange in 8ircumstancesB reEected as possible definition of intent in Dilligan too easy to manipulate worried about
unloading on the unsuspecting when the AchangeB is for the worse!
9ength of 6ime <eld is a better test
/ years is good general rule of thumb
I' more than / years definitely had intent
I' less than / years consider change in circumstances of the purchaser
e;g; 7euwirth change of circumstances when purchaser%s unregistered shares were sold by a li$uidator
Rule #CC now uses # year should this standard changeM
&efinition of C&ISTRI+(TIOD
*istribution& despite centrality is 7@6 defined in the Act
2rgo use Ralston analysis: a distribution if sales are to those who cannot fend for themselves
A*istributionB or A4ublic @fferingB
8onfusion in case law whether criteria for Apublic offeringB e;g; sophistication! need to be met for there to be a
AdistributionB
Sale b/ OCOTRO1 4ersons
o Section 6 violation I'
Re%istered
Sold after establishing Ainvest"ent intentB
Section 5 violation if:
<ave a AdistributionB of unregistered securities
*istributions:
7@6 a distribution is sell restricted securities .06 wit$in sa"e e'e"ption
e;g; if Issuer e3empt under ,;a;## and purchaser resells to $ualifying buyer
*IS6RI.06I@7 if violate terms of e3emption
e;g; sell shares e3empt under ,;a;## to out of stater
R2S096: e3emption destroyed and have an offering of unregistered securitiesI
Sales b/ COTRO1 *ersons
/;a;## includes control persons in the definition of AissuerB for the purposes of defining an underwriter
6hus you might be an underwriter if you
4urchase from a control person
Sell for control person
@r otherwise participate directly or indirectly in the distribution of a control person%s securities
Rationale:
8ontrol persons hold a lot of stock
All same risks are present
8ontrol person has access to necessary information for disclosure
Control is OT an ISS(ER for A11 *(R*OSES
7ash Sec Reg 23am @utline 4age ,> of C?
*efinition of AcontrolB as AissuerB is limited to the conte3t of defining underwriters
2ffect:
Control 4ersons CAOT (SE Issuer-based E'e"ptions:
20. 4rivate 4lacement Anot involving a public offeringB!
20E sales to accredited investors
Re%0 & " 5-CG5-5G5-F
Rule 123 S28 implementation of ,;a;## Intrastate Aissuers doing businessB!
7ote:
*istinguish 6RA7SA86I@7S and *IS6RI.06I@7S
6ransactions are e3empt
*istributions are 7@6
In re @aupt 9192E: 8ontrolling S<< of li$uor distiller sell shares through broker dealer <aupt pursuant to standing
order tied to each $uarter point increase; 8ompany announces dividends to be paid in li$uor&
sales take off @eld: .roker%s 6ransaction C;C! e3emption not available to <aupt bGc e3emption
applies only to trading transactions& not distributions which this was given volume
(S v0 ;olfson 919EB: 1olfson& controlling S<< salls his block in #H batches through different brokers; All brokers
get C;C e3emptions; 1olfson argues he entitled to C;# e3emption bGc not a issuer& underwriter
or dealer; @eld: 6ransaction has an issuer 8ontrolling S<<! and underwriters the brokers!
and thus C;# is not available; 9et the brokers have C;C bGc were unsuspecting pawns
8odified in #CC if brokers don%t reasonably! know in secondary distribution& then get C;C;
Rule 122

4roblems:
i! 8ontrol 4ersons trigger A*istributionsB
8ontrol persons have hard time selling restricted or unrestricted stock bGc
they are AissuersB for the purposes of defining AunderwritersB easily trigger AdistributionsB
8annot avail themselves of ordinary e3emptions
C;/
Reg; *
Rule #C>
ii! <ow 0nload Restricted SecuritiesM
If ruin e3emption for issuer by reselling restricted security& then have a AdistributionB and trigger 5
e;g; Sell C;/ private placement security to unsophisticated or sell #C> security to out"of"stater
Solution: Rule #CC
6he dense te3t: 1220b A8onditions to be met; Any affiliate or other person who sells restricted securities of an issuer
for his own account& or any person who sells restricted or any other securities for the account of an affiliate of the
issuer of such securities& shall be deemed not to be engaged in a distribution of such securities and therefore not to be
an underwriter thereof within the meaning of /;a;## of the Act if all the conditions of this section are met
1hat it )2A7S:
6he following are OT distributions:
i! Sales by non"control persons of restricted stock
ii! Sales by control persons of restricted stock
iii! Sale of control persons unrestricted stock
I"portant &efinitions
ARestricted Securit/B #CC;a;,
i! Securities ac$uired in non-public offerin%
7ash Sec Reg 23am @utline 4age ,? of C?
ii! subEect to Re%0 & resale restrictions even if Reg; * offering is AillegalB!
iii! securities in Rule 122A transaction
iv! securities obtained in Re%0 CE transaction
v! Reg S
7@62: 730a011 are 7@6 ARestrictedB and thus not subEect to Rule #CC
AAffiliateD ? 1220a01
Aa person that directly& or indirectly through one or more intermediaries& controls& or is controlled by& or is under
common control with& such issuerB
Conditions of Rule 122
9c: Infor"ation Re#uire"ents
Ade$uate& current info must be available either
#! 'iling of Reports if Reporting under #, or #5;d!
/! @ther information specified in Rule #5c/"## name of issuer& address& state of incorp;& etc!
9d: @oldin% Re#uire"ents
If R2S6RI862*
@ne Kear I' comply with c! Information& e! Sale limitations& g! 0se .roker and h! 7otice
@therwise& 6wo Kears
If 7@6 R2S6RI862*
7o holding re$uirements III
9e: 1i"itations on A"ount Sold
'or 8ontrol 4ersons
9imited to the greater of
#H of outstanding sharesL @R
Average weekly trading volume in any , month period
'or 7on"8ontrol 4ersons
Same limits 0792SS hold for / years then no limit Rule #CC;k!
7@62: Securities sold in transaction e3empt pursuant to C of the act and not involving any public offering
*@7B6 8@076 towards the limit #CC;e;,;vii!
9f: and 9%: 1i"itations on !anner of Sale
.rokers cannot get more than customary commission
8an do no more than e3ecute orders to sell
8annot solicit or arrange for solicitation e;g; cannot ask market maker to look for unfilled orders!
9$: otice of *roposed Sale
If amount sold is greater than 5-- Shares or =#-:& must file 'orm #CC
9j: on-E'clusivit/ *rovision
Rule #CC does not affect availability of other e3emptions
7201 W E'e"ption
6wo 23emptions AcombinedB to apply to a C;# 23emption where there is no Adistribution;B 6he use of C;/ criteria
to determine whether there is Apublic offeringB and hence AdistributionB! gives the half
Recall
C;# A6he provisions of 5 shall not apply to the transactions by any person other than an issuer& underwriter
or dealer;B
C;/ A6he provisions of 5 shall not apply to transactions by an issuer no involving any public offering;B
REA11G just an application of 7201H
6he R2SA92 of securities originally purchased in an e3empt C;/ private placement and then resold in another
private transaction is not a AdistributionB and does not create an AunderwriterB and thus e3empt under C;# bGc they
don%t involve an issuer& underwriter or dealer;
7ash Sec Reg 23am @utline 4age ,J of C?
Ac)erber% v0 Ao$nson
'A86S:
Ackerberg buys #/: unregistered shares from Yohnson a controlling shareholder;
Sale handled by a broker
Sale accompanied by JJ page private placement memo
ISS02: 5 QiolationM
Analysis
@nly 5 violation if there is AdistributionB
<ere no distribution bGc going to a private shh
2rgo no AunderwriterB bGc all definitions re$uire a AdistributionB
2rgo no 5 violation
Rule 122A ? Institutional Tradin%
Important: Rule #CCA does not AcleanseB shares of restrictions like Rule #CC;
6e3t: AAny person& other than as issuer or a dealer& who offers or sells securities in compliance with the conditions set
for in paragraph d! of this section shall be deemed not to be engaged in a distribution N and therefore not to be an
underwriter Nwithin the meaning of /;## and C;# of the Act;B
Effect: allows for private place"ents of restricted securities with Oualified Institutional +u/ers 5I.s! without
registration under the act
Re#uire"ents:
i! Available @79K to
Sellers w$o are neit$er issuers or dealers
+u/ers w$o are OI+s
ii! 8ertain Information must be available
iii! 9imitations on 2ligible Securities
Aanti"fungibilityB i;e; does not cover securities that& when issued& were of same class as securities listed on
national e3change
worried about development of parallel markets
iv! o Resale Restrictions
if resell to other 5I.s
Inte%ration and Rule 122A
7@ I762DRA6I@7
#CCA;e A@ffers and sales of securities pursuant to this ruleNdeemed not to affect the availability of any
e3empt or safe harbor relating to any previous or subse$uent offer or sale of such securities by the issuer or any
prior or subse$uent holder thereofB
7ash Sec Reg 23am @utline 4age C- of C?
RecapitaliSationsK Reor%aniSations and Ac#uisitions
Overview of 1932 E'c$an%e Act
Ad"inistrative Sections
C 8reation of the S28
F Registration of 23changes
#5& #5A& #>A& #J Self Regulatory @rganiOations SR@! Rules
/#A to /#8 2nforcement 4rovisions
Antifraud *rovisions
#- #-;b;5 located here
#5;c Special .roker"*ealer Rules
J Anti")anipulation
#? 9iability for )isstatements
Re#uire"ents for *ublic Co"panies
#/ Registration Re$uirements
#/;a for 23change"9isted Securities
079A1'09 for .roker"*ealers to effect transaction unless securities are registered
Applies to both debt and e$uity
#/;g for public @68 issuers
A4ublicB if
=#-) in Assets A7*
)ore than 5-- shareholder of a class of equity security
6ermination of obligations I'
*rop below ,-- shh
'ile deregistration forms
#, Reporting Re$uirements
S28 authoriOed to re$uire reports
Annual Report #-":!
5uarterly Report #-"5!
4eriodic Reports ?":! for special events like bankruptcy& fire accountant& etc;
#C 4ro3y and 6ender @ffer Rules
#5;d 'or 4ublic @fferings
#F Short Swing 4rofit Rules
'iling Re$uirement
I' #-H Shareholder or *irectorG@fficer of registered company must file reports regarding transactions
involving e$uity securities
Short Swing 4rofit Rule
Any profits made within any period less than F months have to be disgorged to the company

8rucial 4rovisions
/;a;,
,;a;J
Rule #C5
&efinition of ASA1EB T$e C,or FalueD Re#uire"ent
/;a;, A6he term ^sale% or ^sell% shall include every contract of sale or disposition of a security or interest in a
security& for value;B
Sales
Regular e3chages for value
Stock 4ledges see e;g; Duild 'ilms but generally e3empt under C;#!
Immediately 8onvertible Stock the underlying sec; has to be registered!
7@6 Sales:
Stock *ividends not a AsaleB bGc no consideration
Stock Splits not a AsaleB bGc no consideration
7ash Sec Reg 23am @utline 4age C# of C?
8hoice btw 8ash or Stock *ividend
7ot Immediately 8onvertible @ptions
Re%ulation of Spinoffs ? &atronics
4roblem 8ompanies were using the Afor valueB loophole to end"run registration re$uirements;
6he scheme: 4rivately held company issues unregistered securities in merger with public company; 4ublic
8ompany issues unregistered securities to its shareholders as a dividend; Qoila private co has Agone publicB as a
market in their shares ensues;
7o AsaleB in the merger
7o AsaleB in dividend
And the individuals are e3empt from 5 under C;#
8ourt put an end to this in *atronics
8ourt considered *atronics a
A8o"IssuerB and an
A0nderwriterB
4roblem is Eustifying this outcome really no logic to it& Eust a 4@9I8K A44R@A8<
8ourt%s attempts are analytically unsound:
i! 'or Qalue Re$uirement met
8ourt argues that Afor valueB met bGc of the value of the shares created in the market&
odd bGc the value is not Ain e3changeB for the stock
ii! *atronics is s /;C Issuer
simply strains the te3t& A7* still need a /;a;, offerGsale
iii! *atronics is /;## 0nderwriter
.ut only part of a AdistributionB if there is a AsaleB
61@ Additional R2D09A6I@7S of S4I7@''S
#! S28 7o"Action 9etters 4osition
a! Info Statements
b! Resale Restrictions
/! Rule #5c/"## prohibition on .roker"*ealer 5uotations unless stock of
Issuers with recent %,, Act 'ilings
Issuers subEect to #5;d or #,
E'c$an%es Offers - 730a09 E'e"ption
Denerally
,;a;J is a transactional e3emption allowing issuers to e3change securities with current shareholders provided
there is no commission or other remuneration for soliciting the e3change;
23ample:
Issuer wants to issue its bondholders stock in e3change; Is it a AsaleMB K2S bGc the current bondholders Agive upB
the value of their bonds for stock
Re$uirements for ,;a;J 23emption
i! wGe3isting security holders e3clusively
ii! no paid solicitation
Amendments
Rule #CJ security holders can be re$uired to make cash payments when Anecessary to effect an e$uitable
adEustmentB in the dividends or interest for the e3changed securities as btw security holders accepting the
e3change
Rule #5- allows additional consideration to pass from the issuer to the e3isting shh
*+@ can urge S<< to accept the offer the e3emption in condition on Ano commission or other remuneration for
soliciting the e3changeB
23emption is for the 6RA7SA86I@7 not the S280RI6I2S e3changed
i;e; e3isting shh will have to find their own e3emption or register the shares
1atch for I762DRA6I@7 4roblems
If integrate with another offering will ruin the Ae3clusivityB provision
7ash Sec Reg 23am @utline 4age C/ of C?
1933 Act and Corporate Control Transactions 6ender @ffers& )ergers& 4urchaseGAssumption!
Rule 126 AAn ^offer&% ^offer to sell&% offer for sale&% or ^sale% shall be deemed to be involved& within the meaning of
/;, of the Act& so far as the security holders of a corporation or other person are concerned where& pursuant to _state
corporate law` or otherwise& there is submitted for the vote or consent of such security holders a plan or agreement
for #! Reclassification& /! )erger or consolidation or ,! 6ransfer of AssetsNB
<istory:
4re"#J>/ S28 had Ano saleB position on corporate control transactions
Rationale:
@nce approved by S<<& re$uired no volition on part of S<<
S28 did not want to be in business of regulating )+A
Result:
S<< only got disclosures re$uired under the 4ro3y Rules
#J>/ S28 reverses A7o SaleB *octrine
#JJJ S28 Revises rules to simplify the process
*etails
If S<< vote 7@6 re$uired then 7@6 a #C5;a transaction
#C5;a Reclassifications& )ergers and Asset 6ransfers are SA92S under /;,
#C5;b authoriOes communications re$uired in announcing 6ender @ffer otherwise would have a Aconditioning
the marketB problem!
#C5;c restrictions on parties other than the issuer i;e; target! engaged in distribution if offer to public
#C5;d persons in #C5;c i;e; target! 7@6 involved in *istribution I'
i! Sell in accordance with Rule #CC;c& e!& f! and g!
ii! Such person is 7@6 an affiliate of issuer& # year has elapsed and meets re$uirement of #CC;c info!
iii! Such person is 7@6 an affiliate of an issuer& and / years have elapsed since ac$uiring securities
Effects of Rule 126
i! SA92S
8orporate 8ontrol 6ransactions are SA92S and must be registered using form S"C
ii! Secondary 6ransactions Restricted
#C5;c says that affiliates i;e; control persons! of a party A6 6<2 6I)2 of a Rule #C5;a transaction who
40.9I89K offer or sell securities so ac$uired are engaged in a *IS6RI.06I@7
iii! 1ay out of Restrictions if the Securities are R2DIS62R2*
#C5;d says will not be underwriterGno distribution if meet one of three conditions
Rule #C5;d allowing the secondary market sale of securities applies O1G to REGISTERE& SEC(RITIES
If you are party to a corporate control deal& and you%re not the issuer or an affiliate i;e; you%re the target! A7* you
receive unregistered securities you will have to find another e3emption to sell them
8ontrol could use
C;# the C;# a !
Rule #CC
7ash Sec Reg 23am @utline 4age C, of C?
!ATERIA1ITG
6he Appearances of A)aterialB
Rule #-b;5 AIt shall be unlawful for any personN/! to make any untrue statement of material fact or omit to state
a material factNB
## Acontained an untrue statement of material fact or omitted to state a material factNB
Rule C-?
Item ,-,;a;, of Reg; S:
#/;a;/
*istinguish
)ateriality and
*uty to *isclose
Info might be AmaterialB i;e; something investors would want to know& but 7@6 A86I@7A.92 if no duty to
disclose
Source of *uties
i! S28 'iling @bligations
ii! *uty to be <onest
'rom anti"fraud provisions& you have to
a! not make materially false statements
b! A misleading statements
c! correct a! or b!
d! update statements
!aterialit/ Standards:
i! Te'as Gulf Sulp$ur probabilit/ and "a%nitude calculation
)ateriality Awill depend at any given time upon a balancing of both the indicated probability that the event will
occur and anticipated magnitude of the event in light of the totality of the circumstances
ii! TSC Industries would it have Aaltered t$e total "i'B
)aterial if ANthe omitted fact would have assumed actual significance in the deliberations of the reasonable
shareholderNthere must be a substantial likelihood that Nhave significantly altered the ^total mi3% of information
made available;B
iii! +asic v0 1evinson adopted Te'as Gulf Sulp$ur Cprobabilit/5"a%nitudeD test for materiality of merger
discussion
Yust bGc )aterial does not mean have duty to disclose 8ompany in .asic could have said Ano commentB
0S2 .asic 6estIII
1hen to apply which test:
<istoric info 6S8
8annot use Safe <arbors
Stuck with Yudicial A.espeaks 8autionB
Speculative info .asic
Soft info
;a/s to ar%ue infor"ation OT !aterial
i! 'ail probabilityGmagnitude test 6e3as Dulf& .asic!
ii! would not have assumed Aactual significanceB in deliberationsNtotal mi3 test 6S8!
iii! Trut$ on t$e !ar)et
If information already impounded& then already reflected and ergo 7@6 material
8onsider:
SiOe of company e;g; S",!
P of Analysts following
6rading Qolume
I' historical impoundedM
7ash Sec Reg 23am @utline 4age CC of C?
I' 'orward"looking might the market have assess probability correctly e3 anteM e;g; 1ieglos power plant!
*oes 7@6 apply for disclosures in 4ro3y Statements
iv! 1ess stron% version of iii! investors not stupid& would not believe statements
note: don%t need 2)< or know whether impounded
v! )ere sales Apuffer/B is not actionable see e;g; 2isenstadt!
vi! +espea)s Caution &octrine
,orward 1oo)in% Infor"ation
*istinguish
i! Soft Infor"ation things that will occur in the future
I' Soft
Statutory Safe <arbors #>5 and 49SRA! apply
ii! @istorical &ata reports on things that have happened
I' <istorical
8A77@6 0S2 Safe <arbors
9eft with common law bespeaks caution
S28 now R250IR2S forward looking statements I62) ,-, )anagement *iscussion and Analysis of 'orm S:
*irectly re$uests disclosure of
@perations
6rends
'orces that will affect future operations
T$ree &efenses for 'raud 8harges
#! +espea)s Caution &octrine Yudicial! cautionary language& if sufficient& renders alleged omission or
misrepresentations immaterial as a matter of law
8autionary statement sufficient if: Asubstantive and tailored to the specific future proEections& estimates or
opinions in the prospectus which the plaintiff challengesB
7@6 8ured: knowingly or recklessly issued erroneous forward"looking statements
e;g; predictions of oil reserves not cured when failed to disclose 'A86S suggesting less Rubenstein v; 8ollins
e;g; attorney not protected by statement that could not predict IRS action if facts are different when knew facts
were different
/! Rule 136 S28 Safe <arbor
4rotection for ,-, re$uired disclosures
,orward-1oo)in% State"ents deemed 7@6 'raudulent 0792SS
Show that was made or affirmed without reasonable basisL @R
*isclosed other than in good faith
Applies to
'orward"looking statements defined as revenue proEections& income& earnings& and other financial items!
In document filed with the S28
9imited to Asoft informationB like financials& etc;
,! 7.3A of t$e *S1RA
<as parallel provision in %,C Act saves from e;g; #-;b"5!
4rotection from 4RIQA62 actions for forward loo)in% state"ents
Available only
to R24@R6I7D 8ompanies
for '@R1AR* 9@@:I7D Statements
7@6 Available for:
I4@
6ender @ffers
Doing 4ublic
6wo alternative safe"harbors
i! reaches a forward looking statement that is accompanied by meaningful cautionary statements identifying the
important factors that could cause actual results to differ materiallyL @R
7ash Sec Reg 23am @utline 4age C5 of C?
ii! plaintiff fails to prove that forward"looking statement was made with A860A9 :7@192*D2 that it was
misleading
7ote possibility: V might not recover for knowingly false statement if W includes cautionary language
Application to ORA1 State"ents
/>;a applies to both oral and written statements
I' @ral& cautionary statements can either
i! be saidL @R
ii! tell audience where to find additional info in a readily available written document
I' @06SI*2 apply common law bespeaks caution doctrine
1awsuitsK &iscover/ and *leadin%
.espeaks 8aution easy to stop litigation at 492A*I7D all depends on details
Rule #>5 has to go to discovery refers to Areasonable basisB and Agood faithB
.reach of &ut/ of Care or &ut/ of 1o/alt/
In re 'ranchard W fails to disclose self"dealing with by controlling S<<;
*istinguish
*uty of 8ar left to state courts
*uty of 9oyalty fed; courts likely to consider
1hy differentM S<< likely to care bGc
i! )anagerial integrity important to investors
ii! Incentive Structure acting in best interests in the long run or propping up price for short term gain
iii! <ow good a business man the manager is
.reach of loyalty might then be )A62RIA9
7ash Sec Reg 23am @utline 4age CF of C?
,raud in Connection wit$ t$e *urc$ase or Sale of a Securit/
Rule 14b-6
Denerally principal tool for promoting informational integrity of securities transactions proscribes Aany
manipulative or deceptive device or contrivanceB in connection with the purchase or sale of a security note: not Eust
of public companies!;
6he rule bars use of instrumentality of interstate commerce:
A#! to employ any device& scheme or artifice to defraud&
A/! to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make
the statements made& in light of the circumstances under which they were made& not misleading& or
A,! to engage in any act& practice or course of business which operates or would operate as a fraud or deceit upon
any person;B
:ey 2lements of #-b"5 Action
i! Ain connection withB
ii! standing
iii! scienter
iv! circumstances under which nondisclosure is fraudulent
i! AIn 8onnection 1ithB
.asically the fraud has to be Ain connection withB the purchase or sale of a security
6e3as Dulf Sulphur lead case:
*irector issues press release claiming reports e3aggerated operations at drill site& a matter of routine testing;
Statements were untrue;
<eld Ain connectionB satisfied I' Awould cause reasonable investors to rely thereon& and in connection
therewith& so relying& cause them to purchase or sell a corporation%s securitiesB
i;e; Rule #-b"5 violated Awhenever assertions are made in a manner reasonably calculated to influence the
investing publicB
7otes:
ApurposeB of influencing 7@6 necessary must only show that released statement into medium on which
investors rely
6hat released to different or specific audience i;e; not Athe publicB! does 7@6 matter if information generally
publicly available
e;g; A7eurology )agaOineB or marketing
At the )argins the Ain connectionB re$uirement is *I82K courts all over the map see pg; >#-">#/!
ii! Standing did not read for class
iii! Scienter
0SS8 in <ochfelder derived a scienter re$uirement from the Amanipulative& deceptiveNcontrivancesB language of
the statute all sound like Aintentional wrongdoingB
)eant to make #-b"5 suits more difficult
1hat is S8I2762R R250IR2)276M
Intentionality will certainly suffice
Reckless most courts!
i! Dross Recklessness
ii! SubEective Recklessness most courts follow this!
idea: when made statement you knew subEectively! that it was likely false& but Eust didn%t care
4ure )otive 7@6 necessarily a cure
I' W could foresee affect on market& scienter satisfied even if motivation is pure
See e;g; .asic v; 9evinson were denied merger talks to ma3imiOe share value for benefit of S<<
492A*I7D Re$uirements
#JJ5 Amendments
)ust 4lead 'raud with 4articularity giving rise to a Astrong inferenceB must
i! specify each statement alleged to have been misleading
7ash Sec Reg 23am @utline 4age C> of C?
ii! specify reason or reasons why statement is misleading
iii! state with particularity all facts on which belief is formed
)ust be able to 7A)2 your source /d 8ir;!
Dreeble two important aspects
i! Strong showing of )otive and @pportunity to defraud will satisfy pleading re$uirements
ii! *efined ArecklessnessB
7@62: S28 can sue under #> which only re$uires showing of 72D9ID2782
R29IA782 and 8A0SA6I@7 in #-b"5 suits
R29IA782
Specific reliance 7@6 necessary can rely on 'raud on the )arket
2ffect: makes class actions possible
9@SS 8A0SA6I@7
1hat it is:
X must allege and prove that .06 '@R the defendant%s wrongdoing& the V would not have been harmed
Rationale:
*on%t want #-b"5 to make insurers of AdefraudersB
4roving 9oss 8ausation
8an be difficult
Re$uires some Acausal ne3usB between improper conduct and the losses
*amages
6wo @ptions
i! @ut of 4ocket
awards to a V buyer the difference btw the amount paid and its actual value at the time of the transaction
ignores post"transaction events
calculation of Aactual value at timeB is obviously problematic: have to guess hypothetical value wGdisclosure
ii! Rescissionary
Remedy: get either purchase price or security
)easure of *amages: If fraudulently ac$uired securities already sold& the difference between purchase price
and value upon disposition
1hat to do with 1I7*'A99S
In Rowe used out of pocket damages& so huge windfall stayed with defendant
If using Rescissionary measure of damages& might recoup if captured in sale price
Restitution some courts apply Eust calculate windfall and give it to the V
7ote: which you get may vary by court
/#*g! 4roportionate 9iability
7ash Sec Reg 23am @utline 4age C? of C?