Sie sind auf Seite 1von 46

Securities Regulation Hypos

HYPO: Lets say the facts are identical. You buy the piece of the orange field and get a service K. You get a crate of
oranges on your doorstepis that a security?
1-Invesment of money: YES
2-Common enterprise: YES
3-Profits: NOoranges
-Similar to Forman ase! getting "se! not profits
-#"t an ma$e arg"ments regar%ing selling oranges an% getting money
-#"t! yo" %o &ant t'e "se of t'e oranges
(-From efforts of ot'ers: YES
HYPO: Lets say that you get forged certificates. Can see the D arguing that this is NO a security.
-)'at ma$es it a se"rity is )*+, IS OFFE-E.! not &'at is sol%
-If t'ey offer yo" sto$ in &'at t'ey laim is a ompany! t'at mattersnot &'at t'ey laim is a ompany
HYPO: !hat if you pay "oney to be a "e"ber of #a"s Club?
1-Investment of money: YES
2-Common enterprise: YES
3-Profits: NO
-Yo" are e/peting to get S,0FF
-Yo" mig't get it at a %iso"nt
-,'is remin%s "s of Forman: &'at yo" are e/pete% to get from t'e Co-op is t'e 0SE of t'e Co-Op +, +
.ISCO0N,
(-From efforts of ot'ers: YES
Problem 2-1 (pg. 34:
$n %&'&( )euters carried a story describing *aguars plans to develop the +*,,-( a ,-- "ph sports car( to be sold for
./'0(---. he story continued1
*aguar unveiled a prototype of the +*,,- last year( but e2ecs feared it 3ould never go on sale because flagging
profits 3ould prevent production. Custo"ers are being as4ed to put do3n a deposit of .'-(--- but 3ill have to
3ait until %&&, before the first "odels roll off the production line. he 3ait could be 3orth it. he i"es
ne3spaper esti"ated that collectors 3ould be prepared to pay .%.5 "illion for one of the cars.
6nder 6.#. la3( 3as *aguar selling invest"ent contracts?
*o&ey ,est:
11 Investing money: YES
21 Common enterprise: YES
31 E/petation of profits: NO
a2 3ig't e/pet to get a profit! 4"t loo$s li$e ar is for personal ons"mption
42 +re yo" trying to get money or "se t'e ar5
i2 In t'e fats! it %oes say t'at t'ey get yo" to 4"y in 'ere is t'at yo" o"l% sell 3 / as m"' one
yo" get it: may4e t'is &o"l% 4e a se"rity
12 3ig't 4e a4le to re-sell for a normal prie 4ea"se it %epreiates t'e normal &ay:
&o"l% mean yo" are 4"ying for "se
22 #"t! if t'e 4ig goal is t'at yo" are offering t'is 4ea"se yo" mig't 4e getting a '"ge
%iso"nt: mig't 4e similar to a se"rity
a2 6in% of sit"ation &'ere se"rities la&s are nee%e%
42 People &'o %o not $no& a4o"t engineering of ars! etnee% protetion of
se"rities la&s
(1 From efforts of ot'ers: YES
a2 Yo" are not ma$ing t'e ar
Problem 2-2 on pg. 4!:
78$ is in the business of "anaging co""ercial real estate. $t has sold .&- "illion in debt securities to ,- investors9 the
proceeds 3ill be used by 78$ to ac:uire eight suburban shopping centers that it 3ill renovate and "anage. o raise an
1
additional .%- "illion needed to co"plete the ac:uisition( 78$ has entered into an agree"ent 3ith ;andso"e rust.
6nder the agree"ent( ;andso"e 3ill invest .%- "illion and 3ill have the right to a substantial percentage of the net
profits of the eight properties if and 3hen a certain inco"e threshold has been passed. ;as ;andso"e purchased an
invest"ent contract? Does the ans3er depend upon 3hich theory of co""on enterprise is e"ployed?
Is t'ere any liste% speifi $in% of se"rity t'at fits t'is5
-+4ove a ertain t'res'ol%! t'ey s'are profits: profit-s'aring agreements
-.o &e respet a la4el li$e t'is5
-From Forman! &e %o not respet a"tomatially t'is la4el
*o&ey test:
11 Invest money: YES
21 Common enterprise: nee% to %o tests
a2 *ori7ontal ommonality: 8robably
i2 One &ay: t'ere is not anyone investing in t'e same &ay t'at 'e is
ii2 Ot'er &ay: even t'o"g' t'e %etails are %ifferent! all investing in t'e same enterprise an% &ill
all get profits
12 Professor: Co"rt &ill li$ely ome o"t t'is &ay
42 8ertial ommonality: 8robably
i2 #roa%: .o t'e fort"nes of t'e last investor %epen% on t'e fort"nes of t'e promoter5 YES
ii2 Strit: S'aring profits after a ertain points'aring t'e ris$s: YES
12 ,'e entreprene"r &ill 'ope t'at t'e s'opping enters are a 4ig s"ess
22 #ot' of t'eir fort"nes are tie% to t'e s"ess of t'e s'opping enters
31 E/petation of profits: YES
(1 From t'e efforts of ot'ers: YES
Problem 2-3 on pg. 41:
#< rading Co"pany "aintains a 3ebsite allo3ing individuals to play a ga"e called =#toc4<eneration.> he
lure of this ga"e is easy "oney( or as is stated on the 3ebsite( ?!ould you li4e your "oney to double each "onth? hen
3elco"e to the @irtual #toc4 A2change #<.>
he ga"e allo3s participants to purchase shares in eleven different virtual co"panies on the 3ebsites virtual
stoc4 e2change. Blthough the co"panies are fantasy co"panies that e2ist only in cyberspace( participants invest real
"oney in this ga"e. #< arbitrarily sets the purchase and sales price of each of the virtual co"panies CadDusted bi3ee4lyE
and guarantees that investors can buy or sell any :uantity of shares at the posted prices. $nvested funds are pooled in a
single account used to settle participants online transactions. #< believes that the syste" 3ill 3or4 as long as the base
of investors continues to gro3. o ensure that condition( #< pro"ises to pay #toc4<eneration participants 3ho recruit
ne3 participants bonuses e:ual to ,- percent of the ne3 recruits pay"ents.
#< also pro"ises that the share price for one ?privileged co"pany> 3ill continuously rise and that investors in
that co"pany 3ill enDoy a %-F per "onth return. o "a4e sure that this happens( #< pledges that it 3ill allocate a
portion of its profits derived fro" its 3ebsite operations to a special reserve fund designed to support the price of the
privileged co"panys shares.
Does this ga"e involve an invest"ent contract?
--Promises ret"rn! 29: in rer"iting ne& people ;Pan"i sc#eme : 'o& 3a%off &as allo&e% to s"ee%! allo&e% ne&
people to pay off t'e ret"rns to t'e ol%1
--Is t'is fa$e sto$ investment a se"rity5
11 $nvest"ent of "oney1 YES
21 Co""on enterprise1
-*ori7ontal ommonality: YES
-#"n' of people provi%ing money 'ere
-8ertial ommonality:
-#roa%: s"ess of t'eir ompany %epen%s on if yo" %o &ell too
-Strit: t'e ret"rns yo" get are 4ase% on 'o& &ell t'e entreprene"rs r"n t'e 4"siness
31 A2pectation of profits1
-. o"l% arg"e t'at t'is &as <"st f"n an% games
-Playing it to get a profit5 ="estion of fat
-Certain gam4ling games yo" play <"st 4ea"se t'ey are f"n
-E/: going to >as 8egas even t'o"g' yo" $no& yo" are going to lose money
2
-*o& &o"l% t'is iss"e 4e resolve%5
->oo$ at t'e reasona4le e/petations &ere
-)'at &o"l% a reasona4le person t'in$5
-Promise% a ertain ret"rn! et?
-@"st somet'ing to "se5
(1 Gro" the efforts of others1 YES
-Certainly some partiipation from t'e investors of ot'ers
-#"t! not eno"g' to ta$e "s o"t
--0>E IS 3+IN>Y F-O3 ,*E EFFO-,S OF O,*E-S
-Profita4ility for t'e investor is from t'e efforts of ot'ers
Problem 2-$ on pg. 4$:
7c#ushi( $nc. has been for"ed to develop *apanese fast food restaurants. $ts initial capitaliHation is very s"all( and the
plan is to raise funds to pro"ote the concept and gain public recognition by selling franchises to operate specific
restaurants. Gor an invest"ent of .I/(--- plus a percentage of gross receipts( 7c#ushi 3ill train franchisees in the
preparation of *apanese food( provide e:uip"ent needed in the restaurants( engage in e2tensive advertising to pro"ote
the 7c#ushi lable( and supervise the restaurants to ensure :uality control and unifor"ity of operation. Joth food and
unifor"s "ust be purchased fro" 7c#ushi. he franchisees are e2pected to 3or4 as onKsite "anagers. hey "ay(
ho3ever( establish "enu prices and engage in local pro"otions. Bre these franchises securities?
HYPO: )'at a4o"t Fran'ises5
-Not mainly from t'e efforts of ot'ers! t'erefore NO
-Se"rities la&s %o not protet fran'isees
Problem 2-4 on pg. 4$:
Jel"ont )eid needs funds to develop its gold "ines. $t offers to sell gold( in the for" of coins( directly to investors. he
coins are sold in sets of %,. he price is at a substantial discount to the 3orld "ar4et price of gold at the ti"e of the
offering. Delivery of the coins 3ill be in the future( and purchasers are advised that the gold re:uired to "int the coins
has not yet been e2tracted. $n the event the 3orld "ar4et price of gold declines to a level belo3 the prepay"ent price(
Jel"ont )eid pro"ises to refund the difference to purchasers. o secure both its guarantee and its perfor"ance( Jel"ont
)eid puts the deed to one of its "ines in a trust account. $s Jel"ont )eid selling a security? Does your ans3er depend
upon 3hether the sales are "ade during a period in 3hich the price of gold is rising?
*o&ey ,est:
11 Investment of money: YES
21 Common enterprise: YES! lots investing
31 E/petation of profits: YES
(1 Efforts of ot'ers: NO
a2 )'et'er yo"r profits e/ist or %onAt e/ist %epen%s on t'e mar$et prieall t'e person is is a gol%
4ro$er
42 #0,! t'ere is a fat t'at t'ey are selling t'e prie at #E>O) mar$et prie: %o t'ey 'ave aess to
s"perior mining te'nology5
i2 If t'at is &'at is going on! t'en t'eir profits %o %epen% on t'eir a4ility to mine
ii2 ,'e fat t'at t'ey are offering t'e prie at 4elo& mar$et prie %oes not neessarily mean t'at
t'ey 'ave t'is te'nology rig't no&
Boo% 'ane t'at t'is &ill not 4e treate% as a se"rity
.oes it matter t'at t'ey %o not 'ave t'e gol% rig't no&5
-Still 'ave to p"ll t'e gol% o"t of t'e gro"n%
-Professor: may4e
Problem 2-% on pg. 4&:
#a" has agreed to purchase ;illarys real estate bro4erage business( @istas( $nc. he parties are e2ploring alternative
3ays to structure the transaction. ;illary 3ould li4e for #a" si"ply to purchase her stoc4 in @istas( but #a" 3ould
prefer to use a corporation he o3ns to purchase all of the assets and assu"e all of the liabilities of @istas. $n either case(
#a" 3inds up o3ning ;illarys business. ;o3 does the structure of the transaction affect the analysis of 3hether it
involves a security?
3
Can all t'e sto$ in t'e ompany an% get money! or yo" an $eep all t'e sto$ an% tra%e all t'e assets ;ma'ines! et1
an% reC"ire t'e 4"yer to ass"me all t'e lia4ilities
-Yo" en% "p &it' 3ONEY vers"s a ompany
-)'i' &ay s'o"l% yo" set "p t'is %eal5
Sell t'e assets so yo" are not s"4<et to t'e se"rities reg"lation
-)'at motivate% t'e seller &as t'e fat 'e sol% t'e sto$
-*a% to give money 4a$
-*a% 'e $ept t'e sto$ an% sol% t'e assets! no se"rities
Problem 2-' on pg. 4&:
CB) organiHes auto races( "ost notably the $ndianapolis /--. B share of stoc4 in CB) "a4es the holder a "e"ber of
CB)( 3hich is a condition to participating in the races. No o3ner "ay enter a car in a race 3ithout the "e"bership
that is li4ed to CB) stoc4 o3nership. ransfer of any CB) shares re:uires approval of CB)s board( 3hich "ay be
had only if CB) deter"ines that the buyer is fit to race. Gailure of a CB) shareholder to participate in races "ay lead
to a rede"ption of the shareholders stoc4. CB) shareholders elect the board. hey also are entitled to dividends(
although historically( CB)s profit distributions have been "ini"al and the stoc4s "aDor attraction is the opportunity it
provides to generate inco"e fro" racing and conse:uent endorse"ents. $s stoc4 in CB) a security? Do you need
additional infor"ation?
Car raers 4"y sto$ in organi7ation in or%er to rae t'eir ars2 Is t'is a se"rity5 >etAs s"ppose t'at someone 4"ys t'is
sto$ an% t'ey %onAt get t'e 4enefits t'ey e/pete% an% &ant to get t'eir money 4a$2 S'o"l% t'ey 4e a4le to arg"e t'at
t'e sto$ omplie% &it' t'e se"rity la&s5
-Similar to Forman ase
-E/petation of profits5
-3ay not &in% "p getting money
-3ay <"st li$e to rae ars
-Seems to 4e a fat"al iss"e
-From ot'ers
-+lso %epen%s on yo" an% ot'ers
-D3ainlyE from t'e efforts of ot'ers
)ill see in partners'ips t'at if yo" partiipate at all s"4stantially! t'en t'e Defforts of ot'ersE &ill not 4e satisfie%
(nterests in )imite* Partners#ips
Problem 2-& on pg. $%
;ibbert and ;ubbert is a la3 fir" head:uartered in NY. he fir" has "ore than L-- partners and branch offices in eight
cities. Jecause of the departure of a probate la3yer in the LB office( ;ibbert "ade an offer of partnership last year to
#lic4person( a senior associate at another fir". 6nder the ter"s of the offer( #lic4person 3ill "a4e a "odest capital
contribution of .I/(---. #lic4persons inco"e fro" the partnership p3ill be set by a co"pensation co""ittee on the
basis of #lic4persons productivity C"easured by billable hours collected and clients brought to the fir"E. #lic4person
3as given only abbreviated financial state"ents on the fir" and 3as led to believe it 3ould be unsee"ly to push for "ore
infor"ation. No disclosures 3ere "ade that the partners in the 7ia"i( Dc( and #G offices 3ere about to leave and
establish their o3n fir"s. No3( the partners have left( leaving the fir" in dire financial straits. $s #lic4persons
partnership interest a security? !ould it "a4e any difference if the fir" 3as a professional corporation( rather than a
partnership?
Not ontri4"ting as m"'F ot'ers are more responsi4lemainly from t'e efforts of ot'ers t'at efforts of ot'ers evolves
,'e 'ypot'etial tal$s a4o"t g"y 4eing ine/periene%&o"l% 'ave to loo$ an% see if t'e people &'o manage t'e firm
'ave "niC"e s$ills as &ell
>etAs s"ppose yo" are at a firm &'ere Dyo" eat &'at yo" $ill2E )o"l% yo"r efforts 4ase% on yo"r o&n or efforts or
ot'ers5
-Still &o"l% ome from efforts or ot'ers ;C"estion of fat1
--eason yo" are part of t'e firm is t'at yo" t'in$ yo"A% %o 4etter in a firm
(nterest in ))+s
(
Pro4lem 2-G: )o"l% li$ely fin% it to 4e a se"rity
Real ,state as Security
HYPO: !hat if $ Dust sell you land and convince you that it 3ill appreciate a lot? Your land is right ne2t to Disneyland
and it is 3orth a lot of "oney. $s this a security?
11 Investing money
21 Common enterprise: NO
a2 One t'e seller sells! not %oing anyt'ing
31 E/petation of profits: %epen%s on &'at yo" "se t'e lan% for
(1 Efforts of ot'ers
Problems
,K%%1 Karla is a bro4er 3ith an addiction to ga"bling 4no3n only to her fa"ily. o pay so"e overdue debts( she borro3s
"oney fro" %- of her clients( issuing each a pro"issory notes bearing ' percent interest and payable on de"and. he
clients( 3ho are not terribly sophisticated in financial "atters( are happy 3ith this arrange"ent because the return it
offers is "uch higher than they had been receiving in their "oney "ar4et accounts. Bre Karlas notes securities? !ould
your analysis change if each of the clients 3as highly sophisticated in financial "atters?
Starts &it' t'e pres"mption t'at it is a se"rity
>oo$ to list to see if it is not a se"rity: %oesnAt fall on list
No&! loo$ to see if a%%itional e/eption o"g't to 4e a%%e% &it' list:
11 3otivation: #"yerAs motivation &as to generate investment inome
21 ,ra%ing to a 4roa% %istri4"tion: not t'at 4roa%
-Sop'istiation level: not t'at sop'istiate%
31 -easona4le e/petations of investors
--aising money
-Investing in a sto$
(1 -is$-re%"ing fators: NO! no ollateral! iss"e
H1 G-mont' iss"e: t'ese &ere %eman% notes
-In pratie! &'en %o people re%eem t'ese notes5
-If every one re%eeme% t'em 3 &ee$s later! t'en t'at &o"l% 4e t'e important fator
-One ir"it 'as 'el% t'at t'is only %eals &it' ommerial paper
,K%,1 Jradford Custo" ;o"es intends to finance its ho"ebuilding activities by borro3ing "oney fro" :ualified
individuals. Aach transaction is specific to a particular property and the lenders funds are ear"ar4ed for an identified
ho"e. Jradford plans to have as "any as ,/ lenders for each parcel. his "ode of financing departs fro" the industry
practice of creating pools of funds available for financing "ultiple ho"es. 6nder the Jradford plan( each lender 3ill
receive a note 3ith a "aturity date & "onths fro" the closing of the loan 3ith % rene3al option. he note 3ill be secured
by a deed of trust on the property for the benefit of the lenders. he letters 3ill not participate in Jradfords profits and
are "otivated solely by the desire to earn interest on reasonably shortKter" loans. $# Jradford selling a security? Do
you need additional infor"ation?
Starts &it' a pres"mption t'at it is a se"rity
>oo$ to list to see if it is not a se"rity: %oesnAt fall on list
>oo$ to t'e fators:
11 3otivation: generate money
21 ,ra%ing to a 4roa% %istri4"tion
-Sop'istiate%5 Yes! se"rity
-0nsop'istiate%5 NO
31 -easona4le e/petations of investors
-.i% t'ey vie& t'is as sto$! s'ort-term loan5
-*ar% to tell 'ere
(1 -is$-re%"ing fators5 Se"re%
-Fat t'at it is se"re% &o"l% go to re%"ing t'e ris$
-,'is &o"l% ta$e a&ay from t'e ris$-re%"ing me'anism
-,'ere is ollateral t'ere for t'e loanma$e it safer t'an "nse"re% loan
H
--,'is is %iffi"lt to tellSEC t'o"g't t'is &as a se"rity! 4"t an ma$e arg"ments eit'er &ay
2-13: #a"e co"pany as above. o finance its e2pansion into ne3 regions( J 3ould li4e to issue .%- "illion in %-Kyear(
%% percent bonds. he bonds 3ill be collateriHed by Hero coupon 6# reasury securities Ci.e. govern"ent debt
instru"ents that do not pay interest and are issued at deep discountsE. 6nder this arrange"ent( J 3ill ta4e ,- cents of
evey dollar raised in the bond offering and purchase the Hero coupon securities. he "aturity of the securities 3ill
coincide 3ith that of the J bonds. Bs their "aturity shortens( the discount on the govern"ent securities lessens and is
eventually eli"inated at "aturity. Bccordingly( purchasers of J bonds are assured sufficient funds 3ill be available to
pay principal on the bonds 3hen they "ature in %- years. $s J selling a security?
Iero-o"pon 4on%: %oesnAt 'ave any interest paymentsprovi%es no interest
-)'y &o"l% anyone 4"y a 4on% &it' no interest5
-Seller of t'e 4on% rig't off t'e 4at sells it at a '"ge %iso"nt
-6no& t'at t'e val"e of t'e 4on% &ill go "p
--Collateral on t'e prinipal of t'e loan! 4"t not &it' respet to t'e interest
--,'ere is a sale to "nsop'istiate% investors an% ollateral
--,'is is sort of in t'e mi%%le
-.o t'e analysis! 'ave an opinion
-CanAt pre%it &'at t'e Co"rt &o"l% %o
a2 @"st 4ea"se t'e promoter lie% to yo"! %oesnAt mean t'at is a se"rity
i2 -eally t'e fat t'at someone %efra"%s yo"! %oesnAt mean t'at is a se"rity "nless t'at person %oes
somet'ing
ii2 S"e "n%er state la& fra"%
,--icient .ar/et Hypot#esis
Problems on pg. 11!:
IK%1 o illustrate so"e of the "echanis"s that contribute to "ar4et efficiency( assu"e Blpha co""on shares and Jeta
co""on shares are each currently trading at .%/ per share. Christine Dust discovered so"e ?bad> ne3s regarding Blpha
and so"e ?good> ne3s regarding Jeta.
*ave to $no& 'o& s'e learne% t'e information
-If insi%e information! t'en s'e o"l% ma$e money ;strong 'ypo is fa"lt1
-)'at if s'e learns info on ,8! o"l% not ma$e money from 4"ying sto$ ;prie &o"l% 'ave reate% a long time
ago1
>etAs s"ppose an insi%er p"r'ases t'e sto$ 4ase% on insi%e information! &ill t'at affet t'e prie of t'e sto$5
-,'is is ompliate%<"st 4ea"se someone 4"ys on insi%e information %oes not mean t'at it &ill affet t'e
mar$et
-If some ran%om person ran%omly p"r'ases t'e sto$ of B3! t'at &onAt affet t'e sto$%oesnAt onvey t'e
"n%erlying val"e of &'at is 'appening in B3
-If t'e CEO 4"ys 29 s'ares of B3! t'at may a"se t'e sto$ to inreasepeople &ill t'in$ t'at an insi%er is
p"r'asing sto$ an% t'at &ill in%iate t'at somet'ing goo% is going on in t'e ompany
If an analyst p"r'ases sto$! &ill t'at a"se t'e prie of sto$ to 'ange5
-Sometimes analysis 'ave insi%e information! so t'at may a"se prie movements to
IK,1 Job believes his day has started out on a good note. Over his "orning coffee( he is intrigued by a story in his local
ne3spaper( the #an *ose 7ercury( reporting on local ru"ors that O"ega Co"pany( a large phar"aceutical co"pany( is
e2pected to file that day a patent application for a che"ical co"pound that reduces significantly the adverse affects of
asth"a. !asting little ti"e( Job called his cousin( Carol( 3ho 3or4s in O"egas research depart"ent. Carol confir"ed
the ru"or. Job could hardly contain hi"self. ;e called his bro4er( leaving a "essage on the bro4ers voice "ail to
purchase %--- O"ega shares. he order 3as e2ecuted later in the day( appro2i"ately 5 hours after the O"ega patent
application 3as filed in !ashington( DC. $n an insider trading prosecution against Job( ho3 li4ely is it that the #AC 3ill
be able to establish that Job benefited substantially by purchasing O"ega shares?
*e p"r'ase% after mar$ets 'a% alrea%y a%<"ste%for a laim for insi%e information! yo" 'ave to 'ave P-OFI,E.
-,'ere is no profit 'ere! alt'o"g' 'e tra%e% on insi%e information 'e &as slo& in %oing so an% 4y t'e time 'e
tra%e% it &as p"4li information
-J 'o"rs is an eternity for mar$ets
J
-#ase% on semi-strong 'ypot'esis! mar$ets 'ave alrea%y a%<"ste%
No finanial a%vantage after tra%ing J 'o"rs later
Omega 0un 1umping Problems
For t'e follo&ing pro4lems! Omega is a C"pertino! C+ ompany2 Nee%s to raise money to e/pan%2 )ants to iss"e
ommon sto$ via p"4li offering2 +ss"me itAs nonreporting o2! "nless ot'er&ise in%iate%2 .oes it violate K H of +t5
Problem 4.1:
On Gebruary %-
th
( Job( O"egas @8 of "ar4eting( places an ad to appear in & upco"ing issues of Jusiness !ee4. he ad
previously had run for several "onths in Jyte( a co"puter trade "agaHine( and in addition to listing the full range of
products "anufactured by O"ega( it carried a :uote fro" a trade "agaHine that =O"ega is the e"erging leader in the
develop"ent and design of fiber optic s3itches.>
If yo" are not relying on t'e safe-'ar4or an% t'is is o"tsi%e t'e 39-%ay perio% an% &ant to 4e e/tra aref"l! t'is %oes not
mean yo" a"tomatially lose
-Is t'is $in% of a% t'e normal t'ing yo" 'ave %one 4efore5
-,'e a% is t'e same t'ing yo" 'ave %one 4efore! 4"t yo" 'ave plae% it in #"siness )ee$aiming t'is at
people &'o mig't invest rat'er t'an people &'o %o omp"ters
-)o"l% 'ave 4een safer to $eep it at #yte
8IO>+,ION

Problem 4.2: 6nder3riting Discussions
On Gebruary %L
th
( Blice( O"egas @8 of finance( invites / representatives of #G invest"ent ban4ing fir"s to "eet 3ith her
to e2plore each fir"s possible interest in under3riting O"egas forthco"ing offering. Bs4s one of the fir"s to serve as
O"egas under3riter. On Gebruary %/
th
( they e2ecute a draft agree"ent calling for the fir" to head a fir" co""it"ent
under3riting syndicate of .L "illion. O"ega shares are to be sold for appro2i"ately .%/ per share. Bll discussions
3ere conducted in #G solely 3ith the fir"s CB based staff.
O"ega "eets 3ith invest"ent ban4ing fir"s. One fir" agrees to under3rite and e2ecutes draft agree"ent. Bll
discussions 3ere in CB.
+ns&er: NO 8IO>+,ION OF ,*E +C,
;11 .is"ssions &it' "n%er&riter are allo&e%: Setion 2;a1;31 e/l"%es from t'e %efinitions of sale! offer to sell!
an% offer to 4"y 4ot' t'e negotiations an% agreements t'at t'e iss"er 'as &it' its "n%er&riter
;21 Interstate Commere : Setion H %oes not apply if all t'e ativities are on a fae-to-fae 4asis &it' no "se of
t'e mail! p'one! or ot'er ommerial me%i"m to arrange or arry o"t t'e sale'ere! all t'e onversations
&ere in C+ ;no interstate ommere1
a2 3ay4e 'ere! even if it &as pro'i4ite%! all %is"ssions in C+
42 Professor: loser of an arg"ment 4ea"se somet'ing 'appene% over t'e p'one s"rely
Problem 4.3: Bgree"ent is fa2ed
Job( the head of ;edley( ;adleys #G office( on Gebruary %5
th
( fa2es the under3riting agree"ent to his supervisors in
NYC( 3here the agree"ent is signed on behalf of ;edley( ;adley.
+NS)E-: NO 8IO>+,ION OF ,*E +C,
--Falls "n%er Setion H no& &it' interstate ommere
--E/empt 'o&ever! 4ea"se %is"ssions 4et&een "n%er&riter an% iss"er are private an% %onAt violate H;1same as a4ove
-Speifi e/l"sion for %is"ssions &it' "n%er&riter
Problem 4.4: Nonreporting issuer prepares brochure
Gro" its #G office( ;edley( ;adley circulates a letter inviting '- national and regional bro4erage houses to participate as
under3riters in the upco"ing O"ega offering.
,'is is O6normal omm"niations are O6
-Ne/"s is 'ere 4"t "n%er&riters are e/l"%e%
Problem 4.$: 6nder3riter 3rites letter
B fe3 of the s"aller fir"s invited by ;edley( ;adley to Doin in the under3riting have stated that they are not in the
position to under3rite any part of the O"ega offering. ;edley( ;adley responded 3ith an offer to pay the" their usual
L
co""ission rate for any shares they sold in the O"ega offering.
+NS)E-: ,*IS IS P-O*I#I,E.
Setion 2;+1;31: are t'e people &'o are not going to 'elp sell 4"t &ill provi%e apitalare t'ey "n%er&riters5
-Setion 2;+1;111: t'ese people are not "n%er&riters
-.efinition of "n%er&riter in Set2 2+11 &'i' e/l"%es s"' people t'at are tal$e% a4o"t in pro4lem ;e/l"%es
people &'o &ill partiipate only as ommission 4ro$er %ealers1F t'en flip to %efinition of offer to sell "n%er 2+3
&'i' e/l"%es %is"ssions among "n%er&riters! 4"t t'is isnAt 4M people &'o reeive only ommission are
e/l"%e% from %efinition of "n%er&ritersmeans anAt ma$e t'is $in% of onversation2
Problem 4.%: $ssuer prepares brochure
On 7arch %/
th
( O"egas public relations tea" prepared a brochure highlighting the co"panys rapid develop"ent and
innovative products for distribution to the financial "edia. Copies 3ill also be distributed to la3yers( accountants(
invest"ent advisers( and other localities 3here O"egas na"e is li4ely to be recogniHed. he brochure indicates that
O"ega intends to "a4e a public offering in the near future and includes esti"ates of its future production capacity as a
result of the forthco"ing offer.
8ario"s possi4ilities:
-1J3+: t'is mentions t'e offer
-1J3: <"st for reporting ompaniesanAt "se
-1JN: <"st for reporting ompaniesanAt "se
-1JG: giving a for&ar%-loo$ing pro<etionanAt "se
-13H: 4are-4ones! 4"t t'ey are going 4eyon% t'at
8IO>+,ION
Problem 4.': )eporting $ssuer 8repares Jrochure
Same as (2J! 4"t Omega is a reporting ompany reently file% Form 1962
If t'is &ere a )6SI! &o"l% 4e O6 "n%er -"le 1J3: permits s"' iss"ers to engage in "nrestrite% oral an% &ritten
offers 4efore a registration statement is file%
-Yo" an %o &'atever yo" &ant &'en yo" are )6SI &it' respet to t'e pre-filing perio%
If not )6SI! annot give information "n%er 1JN&o"l%nAt &or$
Problem 4.&: 6nder3riter prepares brochure on issuer
#a"e as L.0( but under3riter prepares and distributes brochure under caption( ?Co"panies to !atch.>
+ns&er: 8iolation
-,'ese e/emptions are %esigne% to let t'e ISS0E- $eep %oing t'e normal finanial statements it 'as %onean
"n%er&riter %oing t'is is not t'e same
--esear' e/emptions5
-13N: only for reporting iss"ers ;'ere! non-reporting1
Problem 4.2: *ournalists print stories about issuer
O"ega invites Dournalists to tour production facilities and ne3spapers print stories about its products on Bpril /
th
. he
business section of a nu"ber of ne3spapers around the country print stories about a particularly intriguing product that
O"ega highlighted. Does resolving this proble" depend on 3hat 4ind of Dournalists O"ega invited to Doin on its tour?
3ay get 1J3+:
-Prior to 39-%ay limit:
-Not 4y "n%er&riterM%ealer
-.oesnAt mention iss"e
-*o&ever! an reasona4ly e/pet t'at reporters &ill ta$e a fe& %ays to &rite it "p an% stories may appear %"ring
t'e 39-%ay perio% too lose to t'e iss"e ;even if appears o"tsi%e limit! it may 'ave impat in perio%1
-#est if t'e ompany invites t'e non-finanial press
,'erefore! may >OSE 1J3+ safe-'ar4or 1JG may &or$ ;arg"e prototype as F>I! is t'is reg"larly intro%"e%
information! an% inten%e% a"%iene non-finanial press1
-*o&ever! %epen%s if )6SI
Problem 4-1!: Jro4er circulates report on nonreporting issuer to its clients in invest"ent letter
N
Lang"an( ;illvort M Co"pany( a regional bro4erage for"( on Bpril %/
th
( circulates a glo3ing report of O"ega in its
"onthly invest"ent letter to its %%(--- clients
,*IS IS O6 "n%er -"le 13L: permits non-partiipating 4ro$ers an% %ealers to p"4lis' or %istri4"te information
regar%ing se"rities of an iss"er in a registration
-)ill get it as long as it is not ompensate%
-Not'ing in t'e pro4lem t'at in%iates t'ey are going to partiipate in t'e offering
Problem 4-11: Jro4er 3ho circulated report then participates in offering
#a"e as L.%-( but bro4er then participates in under3riting. Can it do so?
NO
,'is is not permitte% "n%er -"le 13Lpermits only non-partiipating 4ro$ers an% %ealers to p"4lis'
-Iss"e% t'e report #EFO-E an% impat of report is still effeting t'e mar$et
-If t'ey &ere still reporting an% &ere tal$ing a4o"t ompany at same time see$ing to partiipateso t'is &o"l% 4e
pro'i4ite%
,'is is not permitte% "n%er -"le 13G: 4ro$er or %ealer may p"4lis' opinions or reommen%ations fo"se% solely on t'e
iss"er4"t must be a reporting company an% no t'e ase 'ereO
Problem 4-12: Jro4er circulated report on reporting issuer
#a"e as L.%%( but O"ega is reporting co.
NO 8IO>+,ION ;reporting ompany1
-"le 13G &ill allo& t'is&e 'ave lots of information so %o not 'ave as many onerns 4ea"se of EC3* an% not as
m"' %anger of people 4eing misle%
Problem 4-13: 6nder3riter issues on its letterhead an announce"ent and issuer posts it on its 3ebsite
$n late Bpril( under3riter issues on its letterhead an announce"ent that is carried over the various financial 3ire services
disclosing that O"ega 3ill soon underta4e a public offering through a syndicate of under3riters of about L "illion
co""on shares. he announce"ent further discloses that the proceeds of the offering 3ill be used to e2pand O"egas
production capabilities as 3ell as to broaden its research base. O"ega obtains a copy of the announce"ent and posts it
to its 3ebsite.
-0>E 1J3+ %oes not apply 4ea"se it is o"tsi%e 39-%ay limitr"le an only 4e "se% 4y t'e iss"er an% un*er3riters
cannot e4ploit t#at
-"le 13H: an provi%e 4are-4one% notie of propose% offering&ill not 'elp t'at 4ea"se yo" annot name
"n%er&riters ;"sing its o&n letter'ea%1
-Omega posting t'e letter &o"l% 4e vie&e% as on%itioning t'e mar$et
-,'is is vie&e% as a%opting t'e statement of t'e "n%er&riter
-Cannot "se statement of t'e "n%er&riter
Problem 4-14: $ssuer "ails annual report. $t contains opinions and is glossy
On Bpril ,0
th
( O"ega "ails its annual report to its shareholders. $n the report( O"egas CAO states so"e really good
thingsglossier rendering of prior reports1 he current report is filled 3ith highK:uality color photos of the co"panys
products( and regal graphics are used to portray the co"panys earnings and sales progress since its for"ation.
Safe-'ar4ors:
-1J3+ &o"l% not apply: not 39 %ays 4efore
-13H: 'ave too m"' information to C"alify "n%er t'is provision
-#a$gro"n% r"le: still permitte% to %istri4"te normal info t'at yo" al&ays %istri4"te% even &'en yo" are not
iss"ing se"rities
*ere! mailing &o"l% 4e O6 if it is %one in t'e same manner as it 'as al&ays 4een %one in t'e past ;in t'e normal
o"rse of 4"siness1
-Sine t'is is not in t'e tra%itional form! an% seems to 4e a selling %o"ment! it is li$ely t'at SEC &o"l% not 4e
O6 &it' t'is
Co"l% 'ave gotten t'is 4y +>)+YS sen%ing o"t glossy reports an% ma$ing t'at t'e norm"sing -"le 1JG
Problem 4-1$: Digital recording of presentation on 3ebsite. 7a4es a prediction about earnings and then responds to a
:uestion about earnings 3N forecast prediction
G
On Bpril ,'
th
( O"ega paced on its 3ebsite a digital recording of Blices recent presentation to a gathering of invest"ent
analysts. he analysts invitation to Blice 3as "ade before O"ega had begun its discussions 3ith ;edley( ;adley. Bt the
"eeting( Blice volunteers that "anage"ent fully e2pects that the proceeds of the ne3 offering 3ill "a4e a substantial
contribution to earnings 3ithin a year or t3o. $n response to a financial colu"nists :uestion as4ing for Blices reaction
to ru"ors that the ne3 offering is li4ely to boost earnings by ,/ centsNshare( Blice observed that ?,/Ncents 3as certainly
in the ballpar4.>
-"le 1J3+ ;&'en o"tsi%e t'e 39 %ays1 %oesnAt over omm"niations t'at tal$ a4o"t t'e offeringonly for
information t'at &o"l% 'ave normally 4een reveale% 4eforet'is is &it'in 39 %ays so 1J3+ %oes not apply
-*ere! t'ere &ere lots of C"estions a4o"t t'e se"rities offer
+ pre-e/isting invitation to spea$ is aepta4le! an% it is O6 to go for&ar% &it' t'e spee'4"t s'e ma%e foreasts
an% pre%itions an% t'is is over t'e line ;pg2 1L91
-+ns&ering an "nsoliite% C"estion a4o"t fat"al info is O6! 4"t 'ere t'e analysis is respon%ing to a C"estion &it'
a pre%ition rat'er t'an fat"al information
-3ay &in on t'is
,'e plaing of t'e spee' on t'e &e4site: is t'is normal for t'e ompany! or is t'is t'e first time t'e ompany 'as ever
%one somet'ing li$e t'is5
If a safe 'ar4or %oesnAt &or$! go 4a$ to tra%itional analysis: in registration P on%itioning t'e mar$et
-E/ample J: Se"rities +t -elease No2 3N((
Problem 4.1%: Digital recording of presentation on 3ebsite( but a reporting issuer
Same as (21H! 4"t Omega is reporting ompany2
.oesnAt 'ange anyt'ing'o&ever! if )6SI an %o &'atever yo" &antO
-.oes 1JN &or$5 NO
-Cannot provi%e information a4o"t t'e offering
-1J3+ &onAt &or$too lose to filing of registration statement
-If )6SI! an %o &'atever t'ey &ant
No safe 'ar4or applies! 4"t go to analysis on 4a$gro"n% r"les an% mig't still 4e O6
Problem 4.1': Jro4er offers to purchase shares for his personal account
In late +pril! Carl! a 4ro$er in St2 >o"is! 'ear% of t'e Omega offering an% &rote to *e%ley! *a%ley offering to p"r'ase
1999 s'ares for 'is personal ao"nt
8iolate% t'e atF e/pete% to $no& t'e se"rities la&s
-0n%er&riter annot 4e e/pete% to respon% to 'is inC"iry
-S'o"l% respon% t'at 'e annot ans&er t'e C"estion an% &ill get 4a$ in a o"ple of &ee$s
S5..6RY:
--,'ere are vario"s safe-'ar4ors! 4"t t'ey P-O,EC, ,*E ISS0E-
-,'e iss"er an protet normal information
--+lso! analysts &'o are not onnete% &it' t'e offering ;finanial professionals1 an ontin"e provi%ing t'eir normal
4a$gro"n% information
--,'e "n%er&riters an% %ealers &'o are at"ally going to 4e 'elping &it' t'e se"rities s'o"l% not %o anyt'ing
Waiting Period
PRO7),.S
-eall t'e earlier 4a$gro"n% information regar%ing OmegaAs pen%ing p"4li offering t'at &as %is"sse% at t'e en% of t'e
materials fo"se% on t'e pre-filing perio%2 On 3ay 1
st
! after several &ee$s of intense &or$ 4y Omega! its la&yers an% t'e
staff from *e%ley! *a%ley! Omega files a registration statement &it' t'e SEC onverting ( million of its ommon s'ares2
Ea' of t'e follo&ing ativities o"rs %"ring t'e &aiting perio%2 For ea' of t'e follo&ing pro4lems! resolve &'et'er
Setion H of t'e Se"rities +t 'as 4een violate%2 0nless %irete% ot'er&ise! yo" are to ass"me t'at Omega is not a
reporting ompany an% 'as not previo"sly offere% its se"rities to t'e p"4li2
(-1N2 Athan( a bro4er 3ith ; <aines( one of the under3riters for the O"ega offering( telephones <ail and strongly
reco""ends that she purchase so"e of the upco"ing O"ega offering. <ail says she is "ildly interested( and Athan sends
her a preli"inary prospectus for revie3.
+ns&er: t'is is O6
19
Oral soliitations are O6t'e &ritten prospet"s t'at is %istri4"te% an% t'at is O6 ;t'at is t'e one %o"ment t'at is
tra%itionally 4een permitte% to 4e %istri4"te%1
---"le (39
(-1G2 Jecause Athan has not heard fro" <ail for several days and his phone "essages are not being returned( Athan
"ails <ail a for" that as4s her to indicate ho3 "any shares of the offering she 3ould li4e to purchase. Athan attaches
his business card to the for"( 3ith a note( ?his is still a good buy.>
)oman %oesnAt respon% to alls: soliitations of interest are o$ "n%er 13(;%1 if t'e reC"irements are f"lfille%'ere
&o"l% 'ave to 'ave a %islaimer &'i' in%iates &'at setion H reC"ires ;an 'ave e/pression of interest 4"t no at"al
ontrat "ntil t'e registration statement 4eomes effetive1
Note on 4"siness ar% saying Dt'is is still a goo% 4"yE ,'is is not a f"ll preliminary prospet"s! 4"t t'is is a free
&riting ;for4i%%en "nless (33 e/eption1
--"le (33: Sine t'is is an "nseasone%! non-reporting iss"er! &o"l% 'ave first %istri4"te a preliminary prospet"s!
free &riting nee%s to 'ave a legen% t'at refers yo" to SEC &e4site! an% filing reC"irements
-.oesnAt appear t'ere &as a legen% 'ere
-Pro4a4ly &o"l%nAt 4e allo&e%
(-29. <ail responds to Athans co""unication by sending hi" a chec4 in the a"ount of .%/--( penning a note( ?put "e
do3n for %-- shares. han4s for your thoughtfulness( <ail.>
,'is is not allo&e% 4ea"se &e are in t'e &aiting perio%annot 4e any sale "ntil t'e registration statement 4eomes
effetive
-,'e 4ro$er &o"l% file a&ay t'e ar%
-One t'e statement 4eame effetive! &o"l% get 'e$ t'en
-0ntil t'en! ret"rn t'e 'e$
--Co"l% 4e a post-%ate% 'e$ in %ra&er--Q 4"t "ns"re of %ate! so ret"rn t'e s'are
(-212 Glorence is a ne3 bro4er 3ith ;edley( ;adley and has yet to develop a solid clientele. Bs a step to3ard developing
so"e rapport 3ith prospective clients( she eK"ails a preli"inary prospectus to the entire "e"bership of her health club( a
total of LI' addressees. B fe3 days later( she follo3s up 3ith a phone call to each person to 3ho" she earlier "ailed the
prospectus.
Oral p'one alls: Setion H %oes not over oral effortsontating "stomers 4y t'e p'one is O6 4ea"se it is oral
omm"niation
E-mails to (3N people:
-Can sen% prelim prospet"s "n%er H41F an sen% to (3N a%%resses 4M a p"4li offering
-)'at a4o"t follo& "p telep'one alls5 o$ 4M t'is is e/atly &'at is s"ppose% to 'appen &it' oral sales
(-222 ;edley( ;adley publishes an advertise"ent in all of the leading financial ne3spapers announcing that it is the lead
under3riter for a public offering of L "illion O"ega co""on shares. he advertise"ent also $Ds the other under3riters
and states that a prospectus can be ac:uired for any of the under3riters listed in the advertise"ent.
,'is is a tom4stone a%! so it is allo&e% "n%er -"le 13( an% 2;+1;191 as to &'at t'e %efinition of a prospet"s is
-,'is is O6
(-232 @arious under3riters associated 3ith the offering prepare and distribute their o3n sales brochure to bro4ers and
potential custo"ers. hese are not shared 3ith other under3riters in the offering and are not filed 3ith the #AC.
,'is &o"l% normally 4e pro'i4ite% free &riting 4ea"se it is not t'e reg"lar prospet"s an% not a tom4stone
Bo to -"le (33: t'is is an "nseasone% iss"er 4ea"se t'ey are not a reporting ompany&o"l% 4e O6 as long as t'ere
is a legen% &it' a lin$ to SEC reC"irements an% omply &it' filing reC"irements
-,'ere is a filing pro4lem 'erefaile% to fileO
,'is &o"l% apply to "n%er&riters an% iss"ers as &ell-"le (33 is not a filing sam
(-2(2 !hat result in 8roble" LK,I if O"ega is a reporting co"pany?
.o not nee% to iss"e a preliminary prospet"s in a%vane 'ave filing reC"irement! legen% reC"ire% or email saying
ot'er information availa4le on SEC &e4site an% free &riting email are all file% &it' SEC NO -E= for reporting
11
ompany to 'ave at"ally %istri4"te% t'e preliminary prospet"s in a%vane
Problems on Pg. 121-122
4-2$: !ic4ersha" M Dibble( a bro4erKdealer that does not intend to participate in the O"ega offering( places on its
3ebsite a glo3ing report of O"ega co""on stoc4. !ic4ersha" M Dibble periodically revie3s the reports on its 3eb site(
re"oving so"e( a"ending others( and adding ne3 ones. $ts report "entions that O"ega is about to "a4e a public
offering through a syndicate headed by ;edley( ;adley.
--Can %o itgoal of se"rities la& is not to stop ot'ers
--If later alle% to 4e part of a syn%iate! &o"l% t'at 4e pro4lemati5
-CanAt 4e iss"ing reports if t'ey are going to 4e partiipating
-3ig't say t'ey are iss"ing t'e report an% iss"ing after&or%s&o"l% still 4e ma$ing t'at report an% &o"l% not 4e
a4le to partiipate
---"le 13G: even if t'e 4ro$er is partiipating! an still iss"e reports! 4"t t'at is for reporting iss"ers an% t'is is not %eeme%
to 4e a reporting iss"er
LK,51 O"egas registration state"ent lists its 3eb site address and states ?Our #AC filings are also available to the
public fro" our 3eb site.> B"ong the ite"s on its 3eb site its a hyperlin4 to the !ic4ersha" M Dibble 3eb site report
regarding O"ega.
KK$ssuer has a reference on its 3ebsite to a report by an outsider
--,ra%itional r"le: t'is is a prospet"sloo$ at envelope r"le
-If 'yperlin$! &o"l% 4e e-mailing same st"ff an% &o"l% 4e a pro'i4ite% free &riting prospet"s
--#0,! t'e r"les 'ave 'ange%:
--"le (33: m"st 'ave a legen%! 'ave a prospet"s on file &it' SEC
-,'is &o"l% 4e O6 if t'ese reC"irements &ere omplie% &it'
->oo$s li$e t'ey 'ave not! t'erefore t'is is not O6
-"le (33: can generally use free 3ritings during the 3aiting period as long as you Du"p through so"e "inor hoops
-,'e &aiting perio% 'as 4een s"4stantially opene% "p for previo"sly for4i%%en free &ritings
LK,01 *ust after the registration state"ent is filed( the "aterials on O"egas 3eb site that are described in LK%/ are
relocated on O"egas 3eb site under a ne3ly created heading( ?;istorical Develop"ents.>
,'e reor%ing is not a onversation one yo" reor%Mlin$ so t'is is a %o"mentan 4e %eeme% a prospet"s
-Not <"st an oral omm"niation t'at &o"l%nAt 4e overe% at all
-)'en yo" 'ave a reor%ing an% sti$ it in yo"r &e4site! loses oral nat"re
>oo$ to -"le (33 for free-&riting
-)o"l% 'ave to omply an% 'ave legen% reC"irements
-If non-reporting! nee% to file preliminary prospet"s
0n%er -"le 13(: an 'ave 4are4ones information a4o"t t'e offering
-#"t t'is is a m"' more e/pansive offering! so &o"l%nAt &or$
0n%er -"le 1JL-1JG: information 4y t'e iss"er allo&ing t'e iss"er to ontin"e information if it 'a% in%iate%
information 4efore'an% ;4efore registration1
-,'is &o"l% not satisfy t'ese r"les 4ea"se t'is %ealt &it' previo"s information an% not t'e iss"e itselft'is %eals
&it' t'e iss"e an% is aime% at investors
--,'"s! it is o$ to ma$e for&ar% loo$ing statements in a free &riting as long as yo" <"mp t'ro"g' t'e 'oopsO
LK,'1 !hat result in the above proble" if O"ega is a reporting co"pany?
.o not nee% to %eliver t'e preliminary prospet"s%o not nee% to t'in$ if S3 ompany
-Not t'at m"' %ifferent
-Still 'ave to "se t'e legen% on t'e free &riting
LK,&1 Blice( O"egas @8 of finance( undergoes a %Khour intervie3 3ith so"e of the under3riters for the forthco"ing
offering. he intervie3 is digitally recorded and placed on the under3riters 3ebsite 3here it is pass3ord protected. he
pass3ord is then discretely distributed a"ong the under3riters( "e"bers of the selling group( and select investors 3ho
12
are told that the recorded intervie3 can be accessed through the under3riters 3eb site and that the pass3ord can also
provide access to a special eK"ail address to Blice 3ho is available to ans3er eK"ail sub"itted :uestions.
.esri4ing a roa% s'o&%oesnAt fit &it' speifi stat"tory safe-'ar4ors
--Pro4a4ly o$ &it'o"t (33! 4"t even &it' (33 &o"l% 4e O6
--.oesnAt fit &it'in (33 4"t is not a pro4lem 4ea"se "n%er prior SEC r"lings! roa%s'o&s an 4e reor%e% an% provi%e% to
a limite% n"m4er of sop'istiate% investors
-If anyone o"l% loo$ at t'e &e4site! violation of Setion H
>ive e-mail: ,'is &o"l% pro4a4ly NO, 4e o$---'at session as an oral omm"niation5
-E-mails t'emselves are li$e &riting letters
-CEO s'o"l% 'ave pi$e% "p t'e p'one
-E-mails &o"l% 4e free &riting an% may 4e e/eption "n%er (33! 4"t nee% legen%s! et2
LKI-1 O"egas 4ey e2ecutives "eet 3ith Dournalists and other "e"bers of the "edia on 7ay %0. hey tal4 up the
co"pany and indicate ho3 pleased they are 3ith ho3 the offering is going. #tories to that effect appear in a nu"ber of
ne3spapers and on so"e financial 3eb sites. O"ega provides hyperlin4s to so"e of those stories on its o3n 3eb site.
Oral omm"niations are o$! 4"t if reporters t'en &rite %o&n &'at yo" say! &o"l% 'ave to file &it'in ( %ays
--"le (33;f1;11: t'is is O6 as long as yo" file t'e story &it' t'e SEC
-.o not nee% to file preliminary prospet"s
--"le (33;f1 &o"l% say t'at stories event"ally printe% in t'e me%ia are free &riting an% nee% to satisfy t'e
reC"irementsompany annot meet t'ose reC"irements ;legen%! filing! et1
--)o"l% 'ave to file ne&s story &it' SEC an% inl"%e legen%
LKI%1 $n the 3a4e of ne3s reports critical of O"egas recent perfor"ance( Blice( O"egas @8 of finance( sent an eK"ail
to pep up the co"panys IIL e"ployees. he "e"o spo4e opti"istically about O"egas future. #o"eho3 a copy of the
eK"ail "essage 3as posted on a popular online chat roo".
-"le (91: e/emption from se"rities for everyone 4"t t'e "n%er&riters! iss"ers! an% t'e %ealers
+re omm"niations to employees overe% 4y t'e se"rities la&s5
-,'ere is not'ing in t'e se"rities la&s t'at e/l"%es employees
-Se"rities are sol% to employees ;potential investors1
-+ll of t'e %angers t'at t'e se"rities la&s are %esigne% to prevent are t'e same ones mar$ete% an% entitle% to
employees
-So! t'is is not O6
-.oesnAt fit &it' e/eptions in (33! not file%! no legen%! et2
-Not'ing t'at e/empts omm"niations to employees or ma$es it more onero"s
If t'is omm"niation &as sent to someone o"tsi%e t'e ompany5
-,'is is a for4i%%en free &riting
LKI,1 ;edley( ;adley eK"ails copies of an article fro" the !all #treet *ournal to "any of its custo"ers. he article
paints a very positive picture of O"egas perfor"ance and discusses the li4ely effects of its forthco"ing public offering(
including several bits of infor"ation about O"ega that are not in the docu"ents filed 3ith the #AC Ce.g.( a :uote fro" its
CGO forecasting a %/F Du"p in earnings in the ne2t fiscal yearE. he eK"ail contains a hyperlin4 to ;edley( ;adleys
3eb site 3here a preli"inary prospectus for O"ega can be obtained.
-"le (33: &o"l% still 'ave to meet filing &it' SEC in fo"r %ays
-If someone <"st p"4lis'es an artile a4o"t t'e iss"ane! t'e iss"er %oesnAt 'ave to %o anyt'ing
-If t'e iss"er t'en &rites an email an% 'as a lin$ to it! t'en li$e t'em %istri4"ting t'e artile4eomes li$e t'ey
'a% &ritten t'e artile
-,'e potential violation of t'e se"rities la&s is t'e e-mail referring to t'e iss"e
)o"l% 'ave to satisfy t'e reC"irements of (33
--(33;41;21;i1: in t'is sit"ation! no filing reC"irementnee% legen% on e-mail provi%ing reC"ire% lang"age
S5..6RY: (.POR8698 PO(98S
#efore -"le (33! really 'a% to 4e C"iet %"ring t'e &aiting perio%
No&! (33 'as opene% it "p a lotas long as yo" <"mp t'ro"g' some 'oops: if "nseasone%! 'ave to file a
13
prospet"s ;reC"irement an 4e satisfie% 4y 'aving a lin$ to preliminary prospet"s1! legen%! an% filing
reC"irementst'en free &ritings are permitte% %"ring t'e &aiting perio%O
Post-Effective Period
Problems on Pg. 12$
LKII1 )eprise of 8roble" LKI,. ;edley( ;adley eK"ails copies of an article fro" the !all #treet *ournal to "any of its
custo"ers. he article paints a very positive picture of O"egas perfor"ance and discusses the li4ely effects of its
forthco"ing public offering( including several bits of infor"ation about O"ega that are not in the docu"ents filed 3ith
the #AC Ce.g.( a :uote fro" its CGO forecasting a %/F Du"p in earnings for the ne2t fiscal yearE. he eK"ail contains a
hyperlin4 to ;edley( ;adleys 3eb site 3here a final prospectus for O"ega can be obtained.
O>. )+Y: ,ra%itionally! &o"l% 'ave to inl"%e a final prospet"s sine t'is is a free-&riting
-Setion H;41;11: annot %istri4"te any prospet"s "nless it meets t'e reC"irements of Setion 19
-2;a1;191: somet'ing is not a prospet"s if 4efore yo" sent t'at ot'er t'ing ;or at t'e same time1 yo" sent a
f"ll 19;a1 final prospet"stra%itionally! 'ave to inl"%e a final prospet"s to satisfy H-4-1
NE) )+Y: 0n%er (33! 'ave to provi%e a legen% an% if a non-seasone% iss"er an% &o"l% 'ave to provi%e a f"ll final
prospet"s 4"t o"l% 4e satisfie% t'ro"g' a lin$ to final
-)o"l% get yo" off t'e 'oo$ in t'is sit"ation
LKIL1 ;edley( ;adley eK"ails confir"ations for sales to all its custo"ers 3ho "ade efforts to purchase during the 3aiting
period. Aach custo"er had earlier been given a preli"inary prospectus and "ost have consented to the electronic
delivery of infor"ation via eK"ail. he confir"ation infor"s the custo"er that by accessing ;edley( ;adleys 3eb site
the custo"er can obtain a ?ter" sheet> that sets forth infor"ation about the offerings price( a"ount( and under3riter
co""issions that 3as o"itted fro" the preli"inary prospectus.
1H--2-N is satisfie%2 %ays 4efore! "stomers 'ave to 4e given preliminary prospet"s
0n%er -"le 1L2! %o not 'ave to sen% t'e f"ll! final prospet"s along &it' t'e onfirmation as long as yo" provi%e a
notie t'at yo" are NO, sen%ing t'e f"ll! final prospet"s an% it 'as 4een file% &it' SEC
LKI/1 C <aines( one of the under3riters in the O"ega offering( sold its entire allot"ent by *uly /
th
. On *uly %-
th
( Nida(
one of the bro4ers 3ith C <aines( reco""ended that Oscar purchase a bloc4 of O"ega co""on stoc4 on Nasda:. 7ust
C <aines for3ard a final prospectus to Oscar 3hen it confir"s the sale and delivers the shares to Oscar?
Setion (;(1: 4ro$erAs e/eption%oes t'is fit5
-,'ere is an e/eption for ertain $in%s of 4ro$er transations
-Or%er 'as to 'ave 4een "nsoliite%! 4"t t'is is soliite%
-If t'e "stomer 'a% alle%! t'en (;(1 &o"l% apply
,ra%itionally! "n%er (;31 ! &o"l% 'ave reC"ire% a (9-%ay reC"irement t'at t'e 4ro$er! even &'en involve% in sales on
t'e seon%ary mar$et! t'e %elivery reC"irements &o"l% 'ave still applie%%oesnAt apply anymore 4ea"se of 1L2
-"le 1L2;41: o4ligation to for&ar% a final prospet"s &'en %elivering se"rities is satisfie% if t'e iss"er 'as file% &it'
t'e Commission as prospet"s meeting t'e reC"irements of 19;a1provi%e% t'at t'e registration statement is not t'en
s"4<et to an a%ministrative enforement ation
-.o not 'ave to %eliver onfirmation along &it' se"ritiesO
LKI51 8olly( a bro4er 3ith ;edley( ;adley in *une sent to )alph a preli"inary prospectus for the O"ega offering. )alph(
after studying the prospectus and tal4ing 3ith his bo3ling buddies on *uly %'
th
( phones 8olly and purchases %-- O"ega
co""on shares at the offering price. !hat further infor"ation "ust ;edley( ;adley provide )alph?
No final prospet"s nee%s to 4e %elivere% 4ea"se of 1L2! 4"t still nee% preliminary prospet"s
LKI01 o"( a longti"e custo"er of 8ollys and a very independent sort( instructs 8olly to purchase I-- O"ega shares on
the "ar4et. 8olly purchases the shares through the Nasda: syste"( even though ;edley( ;adley still has not sold its
allot"ent for the O"ega public offering. ;edley( ;adley does not include a prospectus 3ith the confir"ation it "ails to
o".
Polly is not a %ealer 4ea"se s'e %i% not soliit t'e interest in t'e se"rity an% is a %ealer
-S'e &o"l% 4e e/empt "n%er (;(1
1(
LKI'1 ;edley( ;adley learns that not all the bro4ers 3ith C <aines have been provided 3ith copies of the ter" sheet for
the O"ega Offering. $ posts a copy of the ter" sheet on its 3eb site and gives notice of the posting to C <aines. ;as
;edley( ;adley fulfilled its obligations 3ith respect to this "e"ber of the syndicate?
--8erm s#eet: piee of paper t'at s"pplements a preliminary prospet"s to t"rn it into a final prospet"s
-2 %o"ments toget'er satisfy t'e final prospet"s
---"le 1L2: %oesnAt reC"ire t'e %ealers to even pass it on to t'e lients
-,'e only C"estion is &'et'er t'e preliminary prospet"s 'as 4een %elivere%
--,'is pro4a4ly &o"l%nAt 4e a violation 4"t t'e only reC"irement for t'e "n%er&riter is t'at t'ey 'ave to 'ave %elivere%
t'e preliminary prospet"s in s"ffiient time so t'e %ealer an %eliver it &it'in t'e 2-%ay a%vane perio% to t'e at"al
"stomers
-.o not $no& if t'is 'as 4een %one
Shelf Registration
Problems on pg. 2!4:
LKI&1 horprods( $nc. co""on stoc4 is listed on the NY#A and satisfies the listing re:uire"ents in Gor" #KI( but it is not
a 3ellK4no3n seasoned issuer. horprods co""on shares currently trade at .%/Nshare. horprods proposes to register
.%-- "illion of bonds to be issued in .%--- deno"inations bearing a face rate of interest in %% percent( payable each
:uarter. Aach bond is convertible at any ti"e into /- horprods co""on shares. Jonds of the sa"e ris4 classification as
horprods currently carry an effective rate of interest of about %,F. hroprods is not desperate for the cash fro" the
offering and hopes to be able to place the bonds 3hen there is a deadline in interest rates( 3hich it hopes 3ill be in the
near future. Can the securities horprods proposes to offer be registered for the shelf?
,'e &ay t'e la&s loo$ at t'is is t'at t'ere are 2 sales of se"rities to 4e ao"nte% forsale of 4on%s an% information
to &'i' t'ey an 4e onverte% ;ommon s'ares1
--,'e sale of t'e 4on%s: "se (1H;a1;/1
--For t'e onversion to t'e sto$: "se (1(;a1;(1tal$s a4o"t se"rities to 4e iss"e% "pon onversion of ot'er o"tstan%ing
se"rities
LKL-1 Bssu"e Jeta Che"( $nc. is considering raising capital. $t is uncertain 3hether it 3ill do via issuing % or , "illion
additional shares or via a senior security( such as preferred stoc4 or even bonds. $t 3ould prefer not to issue co""on
shares but is concerned that rising interest rates "ay "a4e bonds or even preferred shares carry too high an interest or
dividend( respectively. JetaChe" believes it needs to "ove for3ard in satisfying its regulatory re:uire"ents so that it
can be in a position to "ove :uic4ly to ta4e advantage of any positive develop"ents in capital "ar4ets. !hat regulatory
fle2ibility is available for it to register the offering 3ithout identifying the a"ount and type of security it proposes to offer
assu"ing it "ust register the security on Gor" #K%? !hat fle2ibility does it enDoy if its eligible to use Gor" #KI( but is not
a !K#$? ;o3 does your ans3er change if JetaChe" is a !K#$?
)'at if not a S3 ompany 4"t a S1 ompany5
-)o"l%nAt 'ave any fle/i4ility 4ea"se not a S3 ompany
--Cannot "se (1H;a1;11;/14"t try (1H;a1;11;i1-;i/1
-CanAt %o a s'elf registration an% 'ave to %o normal registration
-Speify in yo"r registration materials &'at $in% yo" &ant to iss"e an% go t'ro"g' SEC proess
-*ave to speify t'e type an% amo"nt
IF yo" are an S3 4"t not a )6SI5
-,al$e% of "niversal registration
-)o"l% 4e a4le to not even speify &'at $in% of se"rities yo" are going to iss"e
IF yo" are )6SI5
-Can pretty m"' %o anyt'ing%o not nee% to speify
-Can file an amen%ment later &'en at"ally going to iss"e t'e se"rities
LKL%1 avist Co"pany( a s"all co"pany 3hose shares are traded in the overKtheKcounter "ar4et( has been a reporting
co"pany for less than one year. $ts controlling shareholder( Blice( 3ishes to sell a significant a"ount of her stoc4.
Jecause avist stoc4 is :uite volatile( Blice is conte"plating registering %--(-- shares for the shelf and selling as "any
shares as she can 3henever the stoc4 price is above .%/ or .%5 per share. Can Blices shares be registered for the self?
,'is is not an S-3 ompany ;nee% to 'ave reporte% for 12 mont's1! so (1H;a1;11;/1 %oes not applyloo$ to e/eptions
in (1H;a1;11;i1 R;i/1
1H
-Iss"er annot %o s'elf registration
--(1H;a1;11;i1: t'is &o"l% applyan %o t'is
-If not onnete% &it' t'e ompany at all! %o not 'ave to &orry a4o"t t'is provision
-#0,! if yo" are a ontrolling person in a ompany! t'en yo" %o 'ave to &orry%eeme% to 'ave to
omply &it' t'e se"rities la&s <"st as if yo" &ere t'e ompany
-I%ea t'ere is t'at t'e insi%ers of t'e ompany 'ave <"st t'e same informational a%vantage as t'e ompany
itself
LKL,1 )alston 8urina Co. is a large and highly successful corporation and a 3ellK4no3n seasoned issuer. o foster
strong relations 3ith its e"ployees( the fir"s "anage"ent e"bar4ed on a concentrated effort to encourage ?4ey
e"ployees at all levels to beco"e o3ners of the co"panys shares. his could occur by the e"ployees devoting so"e of
their personal retire"ent accounts to the purchase of )alston shares or using a payroll deduction plan. Bs an incentive(
)alston offers to "atch Cup to /F of the e"ployees annual gross salaryE the individual e"ployees purchase 3ith an
incre"ental increase in the e"ployees salary. #hares 3ill be sold to the e"ployees at the closing "ar4et price on the
day the e"ployees order is received. Bn elaborate process 3as established to $D 4ey e"ployees 3ho 3ould beco"e the
beneficiaries of this progra". !hat infor"ation "ust )alston "a4e available to the 4ey e"ployees singled out pursuant
to this progra" and ho3 should it proceed 3ith registering the securities?
,'e ompany ma%e a *0BE mista$e
-If yo" sell se"rities to someone else! t'e ompany &o"l% 'ave to register t'e se"rities in t'e normal &ay or it
&o"l% 'ave to %o s'elf registration
-Is it any %ifferent &'en it sells sto$ to employees5
-NO! <"st t'e same
-,'e ompany goofe% it "p: s'o"l% 'ave registere% t'e se"rities
,'ey are &anting to %o a s'elf registrationtelling employees t'at t'ey an 4"y t'e se"rities &'enever t'ey &ant
-,'ere &o"l% nee% to 4e some $in% of s'elf registration 'ere
-#0,! t'ey %i%nAt %o anyt'ingse"rities la&s %o apply 'ere
--,'is is pro4a4ly a )6SI ompany! &o"l% only 'ave to file S3 an% &o"l% 'ave 4een an a"tomati s'elf registration
--(1H;a1;11;ii1: allo&s s'elf registration of employees sol% in an employee 4enefit plan
-So! t'ey o"l% 'ave %one t'is 4"t 'a% to %o t'e reC"irements
--So if t'e sto$ %oes poorly! t'e employees an get t'eir money 4a$O
Post-Effective Amendments
Problem on pg. 2!&
LKLI1 Blpha Co"panys registration state"ent beca"e effective on *uly %,
th
( and reported that Blpha o3ned &--(---
acres of unKcut Oregon ti"berland and that the co"pany 3ould soon obtain per"its to log the ti"berland. On *uly %'
th
(
3ith les than O of the Blpha offering sold( I/-(--- acres of Blphas Oregon ti"berland 3as lost to forest fires then
ravaging the 8acific North3est. On the basis of the readings that follo3( consider the source of Blphas duty to a"end its
registration state"ent as 3ell as the #ACs po3er to co"pel such an a"end"ent. Consider ho3 your response is altered
if the registration state"ents initial figure 3as inflated by an error "ade by the co"panys surveyor and the actual
a"ount of ti"berland is I/-(---.
)as t'is material tr"e at t'e 4eginning or 'as somet'ing 'appene% to ma$e it "ntr"e5
-,'is is an e/ample of a%%ing information
-,'is &o"l% 4e vie&e% as a%%ing information! rat'er t'an 'anging information t'at may 4e false
-.o not 'ave to amen% t'e registration statement
-#0,! &o"l% &ant to amen% t'e prospet"s
-,'e prospet"s is a selling %o"ment
-Provisions reate lia4ility for fra"% if t'ey are &rong
-)o"l% nee% to omply &it' t'e 3anor N"rsing reC"irements too
)'at if t'e registration statement 'a% a typo ;sai% G million ares &'en t'ere are really only G99!999 ares1%o yo"
nee% to amen% t'e registration statement in t'is instane5
-YES! nee% to 'ange t'e original information rat'er t'an a%%ing somet'ing to it
-*ave a %"ty if t'e information is false an% yo" fin% o"t
1J
8ra*ing Practice Rules
7anipulating the 7ar4et
;Y8O1 #uppose that there is lots of a co"panys stoc4 that has been issued and the co"pany 3ants to issue so"e "ore.
#uppose the registration state"ent has beco"e effective and price has been set. hen( so"ething horrible happens in the
3orld and BLL stoc4s are 3orthless. he under3riters are stressed1 the price has been set alreadyP !hat is the incentive
for the under3riter and issuer to do?
-Inentive is for t'em to prop "p prie of t'e se"rity
-)o"l% %o t'is 4y P0-C*+SINB t'e ol% s'ares of t'e sto$
-)'at %etermines t'e prie t'at t'e ne& s'ares &ill sell at is t'e e/isting mar$et prie
-Inentive for mar/et manipulation
--,'e r"les! 'o&ever! pro'i4it t'isO
--"le 192 of -eg"lation 3 ;pg2 LLH1
Problems on pg. 21&:
LKLL1 Girst Jan4 recently announced it 3ould ac:uire !atchoveru Jan4 by issuing shares it to the ! shareholders. Girst
Jan4 has filed a registration state"ent covering the shares to be issued in the "erger. #oon after Girsts announce"ent(
#un Jan4 announced it 3ould soon for"ally announce an offer to ac:uire all the outstanding shares of the ! by offering
its shares to the ! stoc4holders. Bfter #uns announce"ent( but 3ell before it filed a registration state"ent covering the
shares it 3ill offer for the ! shares( the Gederal )eserve Jan4 increased substantially the net capital re:uire"ents that
apply to national ban4s such as Girst and #un. Gearing that Geds actions 3ill depress their stoc4s value by engaging in
substantial "ar4et purchases of their co"panys shares. Can they do this?
First #an$ &'o 'as registere% se"rities:
-S"ppose t'e 4an$ is a me%i"m or small 4an$
--eally annot %o t'is
-,'is is after t'e registration %ate 'as 4eome effetive
-First #an$ s'o"l% &it'%ra& t'e registration statement to see &'at ) #an$ is going to %o
) #an$: 'as not registere%
-)o"l% 4e permitte% to tra%e its o&n se"rities
-No registration statement file%! no prie set
-Is t'is "nfair5
-One of t'e potential ompetitors is 'o44le% 4y r"les! an% one isnAt
--Pro4lem %oesnAt in%iate &'et'er t'e -S 'as 4eome effetive! 4"t t'e P-ICE 'as 4een sett'is is &'at impliates t'e
perio%s for restrition
-)'en a as' iss"ane! normally <"st starts &'en effetive
--For t'e tra%ing pratie restritions! &'at matters is &'en t'e prie &as SE, ;prie 'as 4een set as in%iate% 4y t'e
pro4lem1
LKL/1 e"pco( a large "ultiKnational corporation( earlier filed a registration state"ent for the shelf for a .%/- "illion
offering of its %- percent( ,-Kyear debentures that beca"e effective *anuary %-
th
9 it sold .I- "illion of the registered
debentures at that ti"e. he debentures are not rated as invest"ent grade by any rating agency. e"pco soon began to
plan another . L- "illion of the registered debentures to be sold through co"petitive bidding on or about 7arch %/
th
( if
"ar4et conditions 3ere favorable. On 7arch %-
th
( e"pos @8 of finance called the leading under3riting fir"sQ
--L9J: .efinition of D%istri4"tion partiipantE inl"%es prospetive "n%er&riters: inl"%es t'ose t'at 'ave s"4mitte% a 4i%
an% are s"4stantially ertain of &inning
-,'e iss"e: &'en t'ey ma%e t'is 4i%! %i% t'ey f"lly e/pet t'at t'ey &o"l% 4e partiipating5
-Permitte% to $eep transating in t'e ompanyAs sto$ in t'e seon%ary mar$et
-If t'ey f"lly e/pete% t'e 4i% to 4e e/pete%! t'en t'ey are not
--Even if t'ey %i% reasona4ly e/pet to 4e partiipating! &'at are possi4le o"ts5
11 191;41;L1: %e minim"m e/eption
-Can ma$e tiny p"r'ases if small ompare% to ++,8 ;less t'an 2:1
1L
-)o"l% 4e ignore% for p"rposes of restritions
-)'at perent is p"r'ase of SJ996 of ++,85
-,otal float is S39 million
-,'is is not t'e ++,8
-)o"l% NO, fit &it'in t'e %e minim"s e/eption "nless t'ey tra%e a ertain amo"nt ea'
%ay&'i' almost never 'appens
21 *"ge float an% '"ge ++,8 ompany
-Not 'ere
31 Investment gra%e se"rities
-Not 'ere
--IS t'is %"ring t'e restrite% perio%5
-3ore t'an a %ay 4efore! so t'is is O6
-+not'er &ay of getting o"t of t'is
-Pro'i4its manip"lative p"r'ases %"ring a restritive perio% for iss"ers
--"le 191
-Pro'i4its manip"lative p"r'ases %"ring a restrit perio% for "n%er&riters
--.oes t'is mean it is +>)+YS for4i%%en5
-,'ere is a restricte* perio* &'ere yo" anAt %o t'is
*YPO: Lets suppose you price on a certain day the securities at .I-Nshare. Bt the ti"e that you priced those securities(
the "ar4et price of these securities in the afterK"ar4et 3as .,/Nshare.
-)'atAs t'e 'ig'est prie yo" are a4le to 4i% for if affiliate% &it' t'is offering5
-S2H
-Cannot %o S39t'at &o"l% 4e a sam
-,'is is a %anger &'en yo" 'ave a ompany &it' S3+>> F>O+,
-No one $no&s a4o"t t'e se"rities 4eing tra%e%
-Possi4ility of real manip"lation
Problems on pg. 22!
LKL51 ;edley( ;adley is the lead under3riter of ecto Co"pany co""on stoc4. ecto co""on shares are currently
:uoted on Nasda:( and ;edley( ;adley has "aintained a bid to purchase ecto co""on at .& for several days prior to
ectos registration state"ent beco"ing effective. he last :uoted price before ;edley( ;adley entered its .& bid 3as
.&.,/. *ust before it filed the pricing a"end"ent( the last sale price of ecto co""on stoc4 3as .&./-. ecto filed its
pricing a"end"ent( setting an offering price of .&./-( and the Co""issions staff per"itted acceleration of that
a"end"ent( so that the registration state"ent beca"e effective at %- B7 that day. ;edley( ;adley then increased its bid
to .&./-. Do ;edley( ;adleys actions constitute la3ful stabiliHation?
--,'is is O6 4ea"se t'e last mar$et prie is t'e same as t'e prie in &'i' t'ey prie% t'e se"rity
--For4i%%en from going a4ove eit'er of t'ose 2 n"m4ers4"t t'ey are not! so t'is is O6O
Sine t'e iss"ane prie &as SG2H9! an% t'e last prie on t'e mar$et &as SG2H9! t'is is a la&f"l sta4ili7ation
-,'e 4i% annot e/ee% t'e offering prie
(nternational O--erings
PRO7),.S O9 P0 23&
LKL01 e2tron( Ltd.( a Jritish te2tile co"pany( plans to raise .,- "illion by selling co""on stoc4 in London and oronto.
e2trons co""on stoc4 is traded on the L#A and also on the B"e2 Cappro2i"ately O of its 3ee4ly trading volu"e occurs
on each e2changeE. he offering circular has been prepared essentially by its NY counsel in close cooperation 3ith its
Canadian and Jritish under3riters. e2tron e2pects that all arrange"ents for the offering 3ill be such that sales can
co""ence on *anuary %/
th
. Can the e2tron co""on shares be sold to B"ericans 3or4ing or traveling in Canada or
<J? !hat steps "ust the under3riters ta4e to assure that the offering does not flo3 bac4 to the 6#? $s it li4ely that these
steps 3ill cause the offering price to be less than the price :uoted on B"e2?
Category 1 %oes not apply 4ea"se t'ere is a s"4stantial 0S mar$et interest ;sol% on +me/1
-If main loation of tra%ing is in 0S! t'en t'at it %eeme% to 4e s"4stantial mar$et interest
1N
-+lso! o"l% also not C"alify for Category one 4ase% on 29: an% not HH: in any ot'er o"ntry'ere! more t'an
29: in 0S! an% less t'an HH: in anot'er o"ntry%oesnAt C"alify 'ere eit'er
-*ave to %iret to only 1 non-0S o"ntry ;sol% in 4ot' >on%on an% ,oronto1
-,'is is eC"ity sto$:
-Not 4a$e% 4y FFC or 4a$e% 4y 0S iss"er
Category 2: )o"l% FI,
-EC"ity 4y reporting foreign iss"er t'at is tra%e% on +merian E/'ange
-)'at are t'e restritions5
-Can it sell to 0S iti7ens &or$ing or traveling in >on%on or ,oronto5
-.epen%s on 'o& yo" %efine 0S iti7en&'at if t'ey are resi%ents an% non-0S person
-If a resi%ent of t'e foreign o"ntry! t'en NO, a 0S person
-If <"st a to"rist! t'en o"l% not sell to t'em
)'at steps %o t'e "n%er&riters 'ave to ta$e5
-CanAt 'ave re-sales
-Offering restritions
-Ea' %istri4"tor 'as to agree to no-resales or violations
-.islaimers on materials
-.istri4"tor 'as to sen% noties &'o &ill "ltimately p"r'ase in%iating restritions
)ill t'e prie 4e lo&er 'ere t'an in t'e 0S5
-YES
-,a$e a s"4stantial amo"nt of 4"yers o"t of play
LKL'1 $s )egulation # still available in 8roble" LKL0 if so"e of the e2tron shares are sold to $ra Jlue( a 6# citiHen 3ho
heads up the London office of a "aDor NY la3 fir"?
.epen%s if 'e is an at"al >on%on resi%ent
-+lt'o"g' 0S iti7en! 'is resi%ene is in t'e ot'er o"ntry an% is not a 0S person
-O6 to sell to 'im
LKL&1 Bssu"e in 8roble" LKL0 that e2tron 3as incorporated in Dela3are. !hat steps then "ust its under3riters ta4e to
assure the offering does NO flo3 bac4 to the 6#?
Not a foreign iss"er "n%er Category 1 or 2! so falls "n%er Category 3: all ot'er iss"ers
-No longer eC"ity reporting foreign iss"er
-,'erefore! m"st 4e in Category 3
-+ll eC"ity offerings 4y %omesti offerings 4y foreign an% %omesti iss"ers
-*ave to omply &it' reC"irements
--S"4<et to offs'ore an% no %irete% selling efforts
-One year primary an% resale restritions
--*O) YO0 ,E>> FO-EIBNM.O3ES,IC ISS0E-: 4ase% on plae of inorporation
LK/-1 Bssu"e e2trons "anage"ent in the proble" above 3ishes to infor" its 6# stoc4holders that the co"pany is
raising capital by issuing additional shares at a discount fro" their :uoted "ar4et price and that the offerings proceeds
3ill be used to "oderniHe e2trons facilities. !ill this announce"ent DeopardiHe the )egulation # safe harbor?
Is t'is on%itioning t'e 0S 3ar$et5
--"le 13H;1: an %esri4e 4riefly in a tom4stone-li$e &ay! &'at yo" are %oing
LK/%1 7oneyConnections.co" operates a AuropeanKbased financial bulletin board service through its 3eb site.
Bppro2i"ately ,-F of the bulletin boards subscribers are residents of the 6#. $n return for a "odest co"pensation paid
by the under3riter representing e2tron in 8roble" LKL0( 7oneyConnections has placed on the bulletin board offering
"aterials for the e2tron offering. 7onneyConnections 3eb site and the offering "aterials placed on the bulletin board
clearly 3arn that the offering is not available to 6# residents. Does this render )egulation # unavailable for the e2tron
offering?
Is t'is a %irete% selling effort5
1G
->oo$ to 29: r"le
-If t'e pro4lem sai% 19:! t'en &eA% 4e o6
-#"t t'e pro4lem says 29:! so it may or may not still 4e a %irete% selling effort
--Nee% to 4e aref"l 4ea"se it appears t'e material ontains not <"st t'e 4are4ones t'ingsontains offering materials
t'at are for4i%%en 4y G92;1
--If not t'ere! t'en -eg"lation S &o"l% not apply
-)'at %o yo" 'ave to %o
->oo$ to -elease LH1J: "n%er -eg"lation S! an% says yo" &o"l% nee% prominent %islaimers an% &e4site
&o"l% 'ave to implement speial me'anisms to ma$e s"re t'is &asnAt %esigne% to promote sales to
people
Materiality
Problem p. $&3
#loomsters is raising SHm 4y selling Ms to 39 investorsF %etaile% information a4o"t stea%y gro&t' of 4"siness! its 'istory
as a ompany an% s'ifting pro%"ts- "sing proee%s of offering to f"n% e/pansionF investor Carl alle% #loomsterTs
presi%ent &'o faile% to mention t'at ompany &as easing ol% operations 4"t ans&ere% CarlTs C"estions a4o"t ne&
pro%"tsF &ere material misrepresentations ma%e to Carl &'o p"r'ase% Ms5
It is a reasona4le investor stan%ar% an% t'is is pro4a4ly immaterial 4ea"se a reasona4le investor &o"l% are a4o"t
&'at t'e profits &ere going to 4e an% not 'o& t'ey &ere %erive%F it is an ob:ecti;e stan*ar*
It is material if say profits are S19m 4"t are at"ally SHm
If reveal a pre%ition t'at profits &ill 4e S19m 4"t t"rn o"t to 4e SHm- li$ely overe% 4y safe 'ar4or if s"ffiient
a"tionary lang"age an% reasona4le 4elief for 4asis
Problem p. $22
+lie is ompleting a 19-6 for 'er lient an% %isovers t'at ompanyTs main lan% enroa'es on neig'4orMmain
ompetitors lan% an% &o"l% 4e e/tremely e/pensive to 4"y t'e lan% an% &it'o"t t'e p"r'ase! CompanyTs plant &o"l% 4e
inoperativeF t'e 29 year a%verse possession perio% en%s in 3 mont'sF is t'e information UmaterialU for p"rposes of t'e 19-
65
--)'at is t'e iss"e is &'et'er t'e ompany &ill 'ave to tear %o&n t'eir fatory in t'e f"t"re
--)'en apply t'e pro4a4ilityMmaterial test ;S'ep'er%- Ut'is is a &eir% pro4lemU1! 'ar% to %etermine 4ea"se in t'e
Umay4eU 4o/
--*o&ever! -eg"lation S-6 says t'at t'is is material so no nee% to apply t'e testV
Problem p. %!!
6i&i! tra%e% on NYSE! reporte% on 19-6 'ig'ly ompetitive mar$et engage% inF #ill reT% report an% p"r'ase% 1999
s'aresF a &ee$ 4efore t'e report a lass ation &as file% against 6i&i alleging prie fi/ing an% s'are pries %eline%
slig'tly on t'e say t'e s"it &as file%F a year later 6i&i settle% t'e s"it an% anno"ne% lo&er profit pro<etionsF #ill file%
s"it alleging fra"% on 19-6F %oes 6i&i 'ave a Utr"t' on t'e mar$etU %efense5
.oes t'e filing of t'e la&s"it inform t'e mar$et t'at t'is statement is false ;t'ere is no ompetitive mar$et an%
6i&i &as engage% in prie fi/ing1- o"rts &o"l% pro4a4ly say no- lots of time anti-tr"st la&s"its lose - t'is is
somet'ing a reasona4le investor &o"l% &ant to $no& a4o"t an% a mere filing of a la&s"it is ins"ffiient to
overome t'e CEOTs statements
One t'e plaintiffs &in an% t'e CEO ma$es t'e statement! t'e tr"t' on t'e mar$et %efense &o"l% apply
o 3ar$ets 'a% alrea%y a%<"ste%may or may not 4e tr"e: %epen%s on 'o& t'e mar$et respon%s to t'e
on%"t
Problem p. %21
8enor operates 'ospitalsMn"rsing 'omes an% potential legislation! if passe%! &o"l% %erease profits an% s'are priesF after
t'e legislation &as passe% 4"t 4efore t'e presi%ent signe% it into la& 8enor file% its 19= an% state% its 4"siness &o"l% not
4e a%versely affete% 4y t'e legislation &it' a%%itional legislation t'at not all possi4le a%verse effets o"l% 4e pre%ite%F
8enorTs s'are prie s"4seC"ently pl"mmete% as a res"lt of t'e legislationF is 8enor overe% 4y t'e for&ar% loo$ing
statement safe 'ar4or5
PSRLA and Bespeaks Cation
29
Problem 11-4:
Co"pany says ne3 legislation 3ill not hurt its earnings Csays this before 8resident signs the legislation( but after
Congress passes itE. $t also contains cautionary language that it says it doesnt 4no3 if it 3ill pass( but it does loo4
certain that it 3ill. he co"pany also 4no3s that if the legislation passes( it 3ill reduce the co"panys earnings.
No lia4ility for a for&ar% loo$ing statements if:
+ompanie% 4y meaningf"l! a"tionary statements
Even if itAs not! if t'e P anAt prove t'at t'e %efen%ant $ne& t'e statement &as false
PS>-+:
-)o"l% t'e PS>-+ apply5
-YES
-.oes it protet t'e statement5
-Is it for&ar%-loo$ing statement5
-YES: pre%ition of f"t"re earnings: g"essing t'e earnings &ill not 4e affete% 4ea"se legislation
&ill not affet
-+lso loo$s li$e a misrepresentation of 'istorial fat
-Says it o"l% not pre%it t'e impat of t'e 4ill an% it at"ally o"l%also $ne& t'at t'e
passage of 4ill &as m"' more ertain t'an represente%
--P &o"l% pro4a4ly lose 'ere 4ea"se it &as a pre%ition a4o"t earningsf"t"re eonomi performane! so &o"l% 4e a
for&ar%-loo$ing statement
--If for&ar%-loo$ing! is it &it'in t'e safe 'ar4or5
-ItAs false an% a $no&ing misstatement: %oes not eliminate appliation of PS>-+
-Even if lie! still protete% as long as t'ere is speifi a"tionary lang"age
-,'is so"n%s $in% of 4oilerplate! rat'er t'an a speifi $in% of statement t'at is reC"ire%
--+s t'ings %evelop! 'ave to ma$e s"re t'e a"tionary statements %evelop tooto 4e safe! la&yer s'o"l% 'ave insiste% t'e
a"tionary statements &ere "p%ate% to reflet t'e state of t'e &orl%
!ty to !isclose "or#ard Looking Statements
Problems on Pg. %2$
11-H: #pandy Anterprises is traded on the B"erican #toc4 A2change and on #epte"ber ,I beca"e the target of a hostile
ta4eover by Blliance Co"pany. #pandy is a conglo"erate 3hose products include paint( air conditioners( cos"etics( and
highKfashion apparel. #oon after Blliances bid 3as announced( #pandys "anage"ent launched an aggression search
for a ?3hite 4night(> 3hich on October & cul"inated in enticing Jethel $ndustries to "a4e a higher bid for #pandy than
Blliance had. #pandy shared 3ith Jethel certain confidential forecasts and appraisals of #pandys operations and assets.
he internal proDections forecast a LIF increase in cos"etic sales( #pandys 4ey product line( and the asset appraisals
revealed that no less than .,-- "illion in profit could be garnered by selling to so"e third party the paint and air
conditionings product lines. he forecasts and appraisals shared 3ith Jethel 3ere prepared using highly conservative
assu"ptions( infor"ation( and procedures. 7ust these forecasts and appraisals be disclosed in a Doint pro2y state"ent
prepared by #pandy and Jethel that see4s stoc4holder approval of their "erger?
Span%y Co &as a target of a 'ostile aC"isition2 ,'ey trie% to fin% a &'ite $nig't ;some ot'er ompany t'at mig't 4e
&illing to merge &it' t'e target instea% of t'e original aC"iring ompany1 an% in %oing so s'are% some onfi%ential
internal pro<ets t'at s'o&e% great earnings ;so t'ey &o"l% 4i% 'ig'er t'an t'e 'ostile aC"ierer12 .o t'ey nee% to s'are
t'ese &it' t'e S* in t'e pro/y statements5
-Is t'is material information5
-YES! somet'ing t'e s'are'ol%er &o"l% &ant to $no&
-,'ere is no over-ar'ing %"ty for anyone to reveal if materialC"estion is t'ere a %"ty to %islose5
-Co"rt in t'e at"al ase fo"n% t'ere to 4e a %"ty
-Fi%"iary %"ty o&e% to t'e s'are'ol%ers
-Co"rt sai% t'at in t'is speial sit"ation t'ere &as a %"ty
-.anger of onflit of interest ;trying to not get fire%1
--NO,E: 3OS, OF ,*E ,I3E NO .0,Y ,O .IC>OSE FIN+NCI+> P-O@EC,IONS
-Only time to %islose is &'en yo" %onAt &ant to ma$e t'e information mislea%ing ;'ave alrea%y %islose%14"t
o"rts &ill "s"ally si%e &it' t'e orporation in not %islosing t'e rest of t'e information
21
11-J: Bssu"e in 8roble" %%K/ that the la3yer representing #pandy in its negotiations 3ith Jethel purchased Jethel stoc4
after Jethel announce"ent its bid for #pandy. he record docu"ents that the la3yers purchase 3as guided by his belief
that Jethel 3as purchasing #pandy at a bargain and 3ould soon reap a great 3indfall as a result. ;as the la3yer traded
on "aterial nonKpublic infor"ation?
Insi%er la&yer involve% in transation tra%es on info2 *e 4elieves val"ations 'ave not 4een reveale% to
s'are'ol%ers &ill s'o& t'at aC"irer is getting a '"ge 4argains'o"l% 'e 4e lia4le for insi%er tra%ing5
o Is it material5
YES
o Is t'ere a %"ty to %islose5
YES: 'ave a %"ty to %islose in a%vane of tra%ingor o"l% 'ave a4staine% for tra%ing
--In t'e insi%er tra%ing onte/t! t'e tra%ing itself reates t'e %"ty to %islose or a4stain from tra%ing
-Yo" reate t'e %"ty to %islose 4ase% on tra%ing t'e insi%er information
Corporate $overnance
11-L: Bn interesting report in the press raise an intriguing disclosure :uestion. #tephen L. Lane( chief e2ecutive of
A"erson )adio Corporation( a large publicly traded corporation( sued his 3ife for "is"anaging his account 3hile she
3as a bro4er 3ith Dre2el Jurnha" La"bert. 7r. Lane co"plained that unsuitable stoc4s and options 3ere purchased
for his account at the suggestion of his bro4erK3ife over at threeKyear period during 7r. Lane alleged he 3as unable to
"onitor his personal finances due to his having undergone surgery t3ice for brain tu"ors and once for a spinal tu"or.
During that sa"e period( no public disclosure of 7r. Lanes "edical proble"s 3as "ade by A"erson or anyone else.
7r. Lane did "anage to participate in several "eetings 3ith invest"ent analysts in that threeKyear period. Bssu"ing that
7r. Lane 3as indeed unable to "onitor his o3n affairs and assu"ing further that during the period of 7r. Lanes illness
A"erson sold securities pursuant to a registration state"ent that did not disclosure 7r. Lanes proble"s( did the
registration state"ent o"it a "aterial fact?
.iretor of ompany s"es 'is &ife for ma$ing 4a% tra%es &'ile 'e &as "na4le to monitor 'is personal finanes 4ea"se of
'is repeate% 4rain s"rgery2 ,'e C"estion is if t'e ompany 'e &or$e% for s'o"l% 'ave 4een %islosing 'is me%ial
on%ition all along ;t'is &as a t'ree year perio%12
Is t'is information material5
-Co"l% may4e arg"e t'at 'e &asnAt ompetent
-)o"l% a reasona4le investor &ant to $no& if t'e CEO is 'elpless5
-Is t'ere a %"ty to %islose5
-Pro4a4ly a o"rt &o"l% say t'ere is a 4a$gro"n% %"ty to %islose
--0n%er -"le (9N: general %"ty to provi%e any a%%itional information t'at is reC"ire% to ma$e earlier information t'at yo"
'ave alrea%y provi%e% not mislea%ing
-Similar to Fran'ar% ase: presenting to t'e &orl% image of t'e CEO 4eing normal 4"t instea%! 'e is ompletely
inompetent 'ere
-Pro4a4ly! t'e onl"sion &o"l% 4e .0,Y ,O .ISC>OSE an% &it'o"t %"ty t'is is a violation
--)'at important ompany 'as a sit"ation li$e t'is5
-+PP>E: Steve @o4s
-Investors saying t'at 'e 'as in%iate% t'at 'e is totally 'ealt'y
-,"rns o"t t'at 'e %i% 'ave a 'ealt' iss"e
Problems on pg. %3%
11-N: Bctono"ics( $nc. is listed on the NY#A and has a code of conduct that a"ong other features re:uires that ?any
transaction "ust be approved by the co"panys Budit Co""ittee if the transaction involves an a"ount in e2cess of
.%-(--- bet3een the co"pany and a senior officer( or bet3een the co"pany an entity in 3hich its senior officer has a
financial interest( is a director( or is an officer. ? !illis is Bctono"ics CAO( a devoted alu"nus of prestigious $vy
6niversity( and a "e"ber of that institutions board of trustees. o "a4e it "ore li4ely that he 3ill be selected to be the
ne2t chair of $vys board of trustees( he persuaded Bctono"ics board of directors approve a ./ "illion donation to
establish the !illis #tudent Center at $vy 6niversity. Bre there reasonable argu"ents for concluding this transaction is
not "aterial?
CEO tal$s t'e 4oar% into ma$ing a si7a4le %onation to 'is al"mni so 'e an 4e on t'e 4oar% of tr"stees for t'e s'ool2
So"n%s li$e 'eAs "sing t'e ompany f"n%s for personal gains! t'at s'o"l% 4e %islose%2
-,'is is similar to Bli$man'eAs f"nneling money to 'imself an% 'e is ating %is'onest ;violating t'e spirit of
22
t'e ompanyAs internal o%es1
-If t'e 4oar% is not ating properly! itAs material to 'o& t'e s'ares are tra%e%
-Fat t'at ot'er orporations %o not it is not a goo% %efense to rely "pon
--If &e alle% any time a CEO got a orporate 4enefit! if &e alle% t'at illegalalmost every orporate gift &o"l% 4e
illegalF 'o&ever! t'is %oes seem more e/treme
Problems on pg. %43
%%K&1 !herehouse( $nc. issued .%/ "illion of bonds through a registered public offering. Bn i"portant feature of the
bonds 3as that( if "ore than '-F of !herehouses co""on stoc4 3as ac:uired by anyone( the bonds could be tendered
for cash e:ual to their face value unless the ac:uisition 3as approved by !herehouses independent outside directors. 5
"onths after the bonds 3ere sold( !herehouse announced all the co""on stoc4 3ould be ac:uired in a "anage"ent
buyout that had been approved by all of !herehouses directors. his announce"ent pi:ued the interest of a group of
institutions that then held ILF of the !herehouse bonds( in part because as a result of the leveraged buyKout the value of
the outstanding bonds declined /-F. Bfter a brief investigation( they report to you that it appears that I individuals have
served as outside directors for !herehouse during the past L years and 3ere serving 3hen the buyout 3as approved by
!herehouses JOD. he institutions investigation has turned up several facts not revealed in any public filings by
!herehouse( including that the I outside directors have never voted against a position advocated by "anage"ent and
have al3ays Dustified their decisions as being in the stoc4holders best interest. Did !herehouse co""it a "aterial
o"ission in failing to disclose these facts in the bond registration state"ent?
For 3 years! t'e o"tsi%e mem4ers of t'e 4oar% &ere <"st r"44er-stamping anyt'ing presente% to t'e 4oar%2 ,'e
ompany 'a% promise% t'at t'ere &o"l% 4e in%epen%ent %iretors2 ,'e 4on%-'ol%ers say t'at t'e votes are al&ays in t'e
interests of t'e s'are'ol%ers! not t'e 4on% 'ol%ers2 Is it eno"g' t'at sine t'ey al&ays vote &it' management! t'ey are not
in%epen%ent5
--)'en &e say a %iretor is in%epen%ent! %oes t'at mean t'ey are s"ppose% to vote in t'e interest of t'e 4on%-'ol%ers5 NO
-In general! t'e 4on% 'ol%ers! are not represente% 4y t'e managers
-,'e %iretors are not reC"ire% to loo$ o"t for t'e interest of t'e 4on% 'ol%ers&'atever rig'ts t'ey 'ave are
reate% in t'e %o"ments ;no over-ar'ing %"ty to t'em1
-,'ere are no fi%"iary %"ties to 4on% 'ol%ersF only ontrat"al %"ties
--)'at a4o"t t'e fat t'at t'ey %o ten% to vote &it' management%oes t'is mean t'ey are not in%epen%ent in some &ay5
-Cannot <"st neessarily ass"me t'ey &ere not in%epen%ento"l% 'ave 4een %isiplining t'e managers so t'ey
vote% &it' t'e %iretors
-,'e fat yo" 'ave t'em voting t'e same &ay %oes not in%iate m"' a4o"t t'em not 4eing in%epen%ent
NO -ECO0-SE FO- #ON. *O>.E-S: #on% 'ol%ers are given title only to &'at t'ey are given in t'e 4on%
ontratF st"$ &it' t'e 4a% %ealO
%%K%-1 )uth has filed suit challenging the disclosures in the pro2y state"ent for the reelection of Curly( 7oe( and Larry
to the JOD of <o <o @alue Gund( a "utual fund "anaged by #ilver #leaves Bssociates. )uth faults the pro2y state"ent
not only for its e2press representation that the I individuals are independent outside directors( but also for failing to
disclose that they serve on bet3een ,, and I' other boards of "utual funds "anaged by #ilver #leaves and receive fro"
all such board service aggregate director fees of .5/(--- and .'%(---. $s the pro2y state"ent "aterially "isleading?
,'ree %iretors t'at laim to 4e in%epen%ent! 4"t on t'e 4oar%s of a lot of ot'er ompanies2 Can t'ese %iretors 4e
%eeme% in%epen%ent5
First! t'ere are lots of %iretors &'o are %iretors of lots of ompanies<"st 4ea"se t'ey serve on ot'er 4oar%s %oes
not mean t'ey are not in%epen%ent
-+not'er arg"ment t'at t'ey mig't ma$e is: 'o& an yo" possi4ly 4e a4le to %o yo"r <o4 as a %iretor if yo" are
al&ays a %iretor of ot'er ompanies ;'ave a %"ty to 4e informe%! oversig't! et1annot %o t'at if yo" %o not
'ave time ;violation of %"ty of are1
-*a% to vote along &it' management 4ea"se yo" %i%nAt 'ave time to resear'
11-11: he CAO of a publicly o3ned national ban4 had over so"e period of ti"e caused an e2cessive a"ount of ban4
"oney to be funneled to a series of related real estate develop"ent proDects being pro"oted by an old college friend.
6lti"ately( these proDects failed( and the ban4 is no3 in serious trouble. B"ong other things( such loans violated a
provision of federal ban4ing la3s that precludes co""itting too "uch of the ban4s assets to a single borro3er. he
23
federal ban4ing authorities are no3 seeing the CAOs re"oval fro" office on the grounds that he 3illfully endangered
the safety and soundness of the ban4. hat "atter is currently in litigation. !as the nonKdisclosure of such "alfeasance
at the ti"e "aterial? o 3ho"? 6nder 3hat circu"stances? 7ust the ongoing action by the federal ban4ing authorities
be disclosed?
--,'is is self-%ealing an% a violation of fi%"iary %"tyertainly material
-Pen%ing litigation: Item (91;f1
-)'en t'ere is litigation against t'e ompany itself! %oes t'at 'ave to 4e resolve% if not resolve%5 YES! if
a4ove a finanial level
-In ontrast! &'en tal$ing a4o"t litigation against offiersM%iretors:
-Criminal: %islose%! even if pen%ing an% not resolve%
-Civil: %oes not 'ave to 4e %islose% "ntil <"%gment
-If &e loo$ at t'is as <"st litigation! t'is &o"l% not 'ave to 4e reveale%&o"l% in%iate somet'ing a4o"t t'e
integrity in%epen%ently
--,'e on%"t t'at is a%<"%ge% 'ere %oes reflet on management integrity&o"l% 4e safe to reveal ;S'ep'er%: o"l% see
someone seeing t'is as refleting on management integrity1
-Note: (91 %oes not say anyt'ing a4o"t settlements
--*ere! &e 'ave a government ageny see$ing &'at loo$s li$e a ivil a"se! 4"t &'at may 'ave risen to t'e level of
riminalpro4a4ly nee%s to 4e %islose%
-)o"l% 'ave to %islose t'e litigation per (91! 4"t also t'e "n%erlying ation per Bli$man ;sine itAs integrity of
management1
If t'e loans in t'e Bli$man ase reflete% integrity of management an% Bli$man 'a% 4een s"e%&o"l% t'at
eliminate t'e %"ty to report if t'e ase is not resolve%5 NO
--,'ere are lots of reasons to report:
11 >itigation re%"e% to <"%gment
21 0n%erlying a"ses of ation ;integrity of management1
--Somet'ing t'at is s"4<et to litigation s'o"l% not 4e &it''el% from 4eing reveale%&ise general o"nsel &o"l% %eem it
appropriate to reveal
)'at if yo" are a CEO an% go an% 4"n' someone at yo"r 'il%As 4ase4all game5 )o"l% t'is reflet on t'e integrity of
t'e managementnot neessarily<"st 4ea"se t'ere is a mis%ee% %oes not mean it 'as to 4e reveale%
Problems on pg. $!&-$!2
&K%1
Jeta Corporation( a s"all soft3are fir"( recently "ade its $8O. Bt the ti"e the )# 3as being prepared( the
co"panys sales staff had been hearing ru"ors fro" a variety of custo"ers regarding the plans of one of the "aDor
soft3are co"panies to launch a ne3 product that 3ould be co"parable to Jetas "ost innovative and profitable offering.
One had 3ritten a "e"o to the @8 for "ar4eting( passing this infor"ation along. he @8 too4 no action other than to
as4 that he be 4ept posted in the event that any hard infor"ation ca"e along. No other Jeta officials 3ere infor"ed.
he )# spo4e of the "ar4et niche Jeta had found as a result of its innovative efforts( 3ith the usual disclai"er
that there 3as no guarantee that co"petitive conditions 3ould per"it this niche to continue indefinitely. No "ention 3as
"ade of any "ore concrete "ar4et ris4s. B fe3 "onths after the offering( 7icrosoft indeed ca"e out 3ith the co"petitive
product( and a short ti"e later( Jeta 3as on the verge of insolvency.
B #ection %% suit has been brought for failure to disclose the infor"ation in :uestion( na"ing Jeta and all the
usual defendants. $n discovery( the "e"o to the @8 3as obtained. $n deposition( the @8 testified that he had 3ithheld the
infor"ation fro" others because he did not 3ant to thro3 a "on4ey 3rench into the financing effort( especially since the
infor"ation 3as ?only in the for" of ru"ors.> $nvestigation and discovery by the plaintiffs have also established that
3hen the registration state"ent 3as prepared( there 3as no publicly available infor"ation about the bigger co"panys
plans( and the fe3 invest"ent analysts 3ho follo3ed Jeta 3ere reco""ending purchases at the ti"e of the offering. On
the other hand( there is so"e indication that a fe3 analysis 3ho specialiHe in technology stoc4s 3ere a3are of the ne3
product( and infor"ation about the plans had indeed spread to its sales staff( 3ho in a "aDor nu"ber of instances( had
as4ed retailers and others to hold off "a4ing "aDor purchases of Jetas product.
;o3 li4ely is it that( a"ong the defendants( the follo3ing 3ould be held liable1 CaE the @89 CbE Jetas CAO9 CcE
the "anaging under3riter9 or CdE a soft3are industry "agaHine publisher 3ho sits on Jetas board?
2(
#eta Company! a small soft&are %eveloper! is registering for t'eir IPO2 ,'e 8P of mar$eting is tol% a r"mor t'at
3irosoft may ome o"t &it' a ompeting pro%"t2 ,'ey %o not %islose t'is in t'e -S an% go p"4lit'en 3irosoft
omes o"t &it' a pro%"t an% t'e sto$ pl"mmets2 Is t'ere a violation5
11 3+,E-I+> an% ."ty to .islose
a2 3aterial: Seems to 4e spe"lative sine it &as r"mors so &o"l% "n%ergo t'e #asi v2 >evinson test
;3agnit"%e v2 pro4a4ility1
i2 Pro4a4ility is lo& sine only possi4ility! 4"t if it %oes ome o"t &it' a ompeting pro%"t t'at
is 4a% for t'e ompanyt'en large magnit"%e 3+,E-I+>
42 ."ty: *a% t'ey sai% not'ing! no %"typro4lem &as t'at t'ey sai% t'ey 'a% fo"n% a Dni'e mar$etE
&'ere no one else &as ompeting
i2 3ay4e t'is &as li$e t'e internal finanial reports! no %"ty to %islose 4ea"se so spe"lative!
not a 'ar% fat
ii2 No %"ty to %islose internal pro<etions
2 For&ar%-loo$ing5 #espea$s a"tion5
i2 For&ar%: Yes! &eA% 'ave to &ait an% see if t'ere &as ompetition5 Or no! sine t'ey &ere
stating fat5
ii2 .islaimers 'ere are rat'er generi regar%less
21 Ot'er %efenses:
a2 ,r"t' in t'e mar$et ;if ot'ers $ne& of t'e r"mors1
42 No stat"tory 'elp ;itAs an IPO14"t mar$et test ;t'e prie %roppe%1
31 IF +SS03E 3+,E-I+>I,Y an% .0,Y:
a2 )'o is lia4le5
i2 CompanyMIss"er: YES ;only %efense is if t'e p"r'aser $ne& t'e tr"t' an% t'ere are no fats
to t'at regar% 'ere1
12 If t'ere are materially inorret aspets of t'e registration! t'en t'e iss"er is >I+#>E
ii2 8P of 3ar$eting:
12 Not on list "n%er K 11"nless t'ey are on t'e 4oar%
a2 *e is not a prinipal offier so pro4a4ly not lia4le
22 If so! s'o"l% 'ave %one more t'an sit 4a$%"ty for %"e %iligene
iii2 CEO: YESon t'e K 11 list
12 *a% a %"ty to investigate non-e/pert informationannot <"st rely on information
t'at ame aross 'is %es$nee%s to %o reasona4le investigation
22 +lso 'as a %"ty to set "p internal str"t"res for reporting
32 >i$e #arC'ris! CEO is %eeme% to $no& everyt'ingall ot'ers are agents
a2 Sli%ing sale: 'ig'er level on t'e sale yo" are! t'e more yo" are e/pete% to
$no& ;not strit lia4ility! 4"t approa'ing t'at1
iv2 3anaging 0n%er&riter: YESonly a %"e %iligene %efense! 4"t t'ey %i%nAt %o any
investigation
12 S'o"l% 'ave 4een a&are of r"mors a4o"t 3irosoft entering t'eir mar$et
22 *ave a profo"n% %"ty to investigate
v2 O"tsi%e #oar% 3em4er: YES
12 *ave a %"e %iligene %efenseo"rts are more lenient on o"tsi%e %iretors
22 S'o"l% t'ey 'ave $no&n a4o"t 3irosoftAs plans5
32 +lt'o"g' t'e o"tsi%e %iretor &as a soft&are in%"stry maga7ine p"4lis'er! 'e may
'ave 4een vie&e% as 'aving a greater %"e %iligene responsi4ility 4ea"se of 'is
e/pertise
a2 )'at is e/pete% of yo" is &'at $in% of person yo" are: if yo" are a finanial
&'i7! t'en yo" 'ave more %"ties in regar%s to t'at
--Breat potential for lia4ility for t'e 'ig'er-"ps in t'e ompany! 4"t not for t'e 8P of 3ar$eting
-,'e "n%erling &'o 'a% t'e information may not en% "p 4eing lia4le! 4"t &ill not ma$e 4osses 'appy
--."e %iligene reC"ires t'at overlings %o t'e %"e %iligene to fig"re o"t &'at is going on &it' t'e "n%erlings
. an still try to s'o& t'at any prie %rop or losses of Ps &ere not %"e to false statements ;. an try to re4"t t'e
pres"mption t'at t'ey are %"e to false statements1
2H
G-2: Bssu"e the facts above( but the ru"ors about 7icrosofts co"petitive product begin to spread shortly before the date
of the public offering. o s:uelch ru"ors( Jeta and the "anaging 6! prepare and disse"inate a state"ent in the for" of
a free 3riting prospectus indicating that the ru"ors are unfounded and are sourced in co"petitors 3ho did not 3ish Jeta
to have a successful stoc4 offering. Bssu"ing it is false( 3hat are the #ection %% liability i"plications of the state"ent?
Does your ans3er depend on 3hether the state"ent is filed 3ith the #AC?
--Setion 11 only applies to registration statements so go to setion 12;a1;21 for false statements
-,'ere it tal$s a4o"t statements ot'er t'an t'ose in t'e registration statement
---eforms a%opte% 4y t'e SEC in 299H permit t'e "se of a free &riting prospet"s t'at inl"%es information 4eyon% t'at
&'i' is onstraine% in t'e prospet"s t'at forms t'e part of t'e -S"nless t'e iss"er elets to t'e ontrary! a free &riting
prospet"s &ill not 4e part of t'e -S an% t'erefore &ill 4e 4eyon% t'e rea' of Setion 11
--,'ere is lia4ility for a false or mislea%ing prospet"s as &ell as lia4ility "n%er t'e anti-fra"% provisions of t'e se"rities
la&s &ill apply to t'e free &riting
%ntrastate E&emption
Problems on pg. 2%&
/K%1 3o physicians plan to for" a 7B insurance co"pany that 3ill 3rite "edical "alpractice insurance policies fro"
7B physicians. hey 3ould li4e to "a4e an offering of co""on stoc4 in the co"pany to all 7B physicians. hey
propose to advertise the offering in the Joston <lobe and include infor"ation on the offering on their 3ebsite. Bre there
any proble"s 3ith the breadth of this offering? hey also propose a direct "ailing to all physicians on a Jlue #hield
"ailing list of 7B doctors Cproviding the officer addresses of Jlue #hield doctorsE. Bny proble"s?
)'at a4o"t if yo" 'ave lots of %otorsis t'at a pro4lem5 NO
-+s long as all omply! %oesnAt matter t'e n"m4er
-Even one fla& eliminates t'e e/emption for everyone
No integration pro4lem 4ea"se t'ey are iss"ing it at one time
-eC"irement: iss"er inorporate% in t'e state an% m"st %o 4"siness t'ere ;ass"me orporation1
-)o"l% 'ave to 4e inorporate% t'ere an% 4e %oing 4"siness t'eresatisfies t'at
-.oing pre*ominant amount o- business t#ere: loo$s li$e t'ey &ill <"st 4e selling to 3+ %otors
+% in #oston Blo4e is O6 so long as t'ere is a %islaimer on it
NO,E: pro4lem is &'et'er t'e p'ysiians are really 3+ resi%entsan only 4e for people t'at are from t'e state
-)'at %oes resi%ent from t'e state mean5 <O.(+(), ;resi%ent &it' intent to remain1
-So! if yo" are a st"%ent from #oston! 4"t 4orn an% raise% in 3aine! t'en yo"r %omiile is 3aine
-Is it possi4le t'at some %otors &'o pratie in 3+ mig't not 4e from t'ere5
-Someone &'o lives in N*! for e/ample&o"l% not fit
-*ave to 4e aref"l t'at ma$ing offers to +>> %otors &o"l% 4e a mista$e'ave to say .O3ICI>E. in
3+
)it' large offerings li$e t'is! 'ave to 4e aref"l: &'at if someone flips5 >ies5
If t'is is offere% in t'e 'eart of ,W some&'ere! t'en t'ere &o"l%nAt 4e so m"' %anger t'at t'ere &o"l% 4e o"t-of-state
resi%entspro4lems &it' small states ;s'o&ases &'y people %onAt "se t'is e/emption very m"'1
H-2: 8ro"oters intend to for" a !B li"ited partnership for the purpose of investigating in oil and gas drilling ventures.
Bll of the general and li"ited partners 3ill be !B residents( all of the boo4s and records of the partnership Cincluding
securities and si"ilar evidences of o3nership in the venturesE 3ill be "aintained in !B( and the sole office of the
partnership 3ill be in !B. 7oreover( invest"ents in the oil and gas ventures 3ill be e2ecuted through !B bro4ers.
Bl"ost all of the ventures in 3hich the partnership 3ill invest( ho3ever( 3ill be outside of !B. !ill this partnership be
doing business in !B for purposes of the intrastate offering e2ception?
+ll t'e partners &ill 4e )+ resi%ents an% everyt'ing is in )+'o&ever! everyt'ing t'ey invest in &ill 4e o"tsi%e of
)+2 +re t'ey %oing 4"siness insi%e )+ for t'e p"rposes of t'e e/emption5
--3ainly &'at t'ey are %oing is %oing 4"siness O0,SI.E t'e state4"siness &o"l% not fit e/emption 'ere
--Iss"er is inorporate% in t'e state 4"t pre%ominant amo"nt of 4"siness is not neessarily t'ere
--*ave to see if t'e offering ame to rest &it' people o"tsi%e )+ ;'ave to see if it is flippe%1
--*ave to ma$e s"re t'at only offere% to people &it'in t'e state
2J
8roble"s 3ith the A2e"ption
--People reogni7e% t'e fail"res of t'is e/emption: people fo"n% t'at it &as safe to "se only in sit"ations &'ere yo"
offere% se"rities only to a small amo"nt of people
-,'ere are ot'er e/emptions t'at &or$ for iss"anes to small amo"nt of people
-So people "se% t'ose
-3oreover! t'is e/emption offers S,-IC, >I+#I>I,Y
-Even if someone lies an% tells yo" t'eir a resi%ent! t'en t'e e/emption still fails
Problems on Pg. 2'2
H-3: 7innesota Cablesyste"s is planning an intrastate offering of li"ited partnership interests. One of the potential
investors recently accepted a Dob offer 3ith a ChicagoKbased co"pany. ;e has listed his 7inneapolis ho"e for sale( but
it is li4ely to ta4e several "onths to co"plete the sale. $n the "eanti"e( he 3ill stay in a Chicago hotel during the 3ee4
and return ho"e on the 3ee4ends. 7ay this investor participate in the 7N offering?
Safe 'ar4or: prinipal resi%ene: still 3innesota 4ea"se 'e omes 4a$ 'ome t'ere
Stat"tory e/emption: %omiile: Pro4a4ly 'as move% to C'iago an% inten%s to remain t'ere! so arg"a4ly %omiile 'as
'ange% to I> ;4ea"se 'e &ill &or$ t'ere1
-)o"l%nAt C"alify for stat"tory e/emption an% &o"l% eliminateeveryone &o"l% get t'eir money 4a$ if t'ey
sol% to 'im "n%er t'e stat"tory e/emption
--*o& an t'e SEC reate a safe 'ar4or t'at %oesnAt seem to omply &it' t'e stat"te it is interpreting5 SEC C+N .O
)*+,E8E- I, )O-6SO
H-(: @aldosta 3ill "erge into a subsidiary of O"ega Corporation( a <B corporation. 7ost of the @aldosta shareholders
not electing to receive cash 3ill be giving co""on stoc4( for 3hich a registration state"ent 3ill be filed. #hareholders
3ho are residents of <B( ho3ever( "ay elect instead to receive pro"issory notes issued by O"ega. O"ega 3ould li4e to
rely on the intrastate offering e2e"ption and avoid regulation of the notes. ;o3 does the co""on stoc4 issuance affect
the availability of this e2e"ption for the notes? !hat if the notes are convertible into co""on stoc4?
Safe 'ar4or: Sine t'e offerings are &it'in J mont's of ea' ot'er! it is one iss"e an% t'erefore annot get intrastate
e/emption
-Safe 'ar4or only applies if yo" are %oing t'em at %ifferent times
Stat"tory e/emption: nee% to loo$ at H-favor test ;"nlear1
-Single plan: YES
-Same lass: NO
-3a%e at t'e same time: YES
-Same type of onsi%eration: NO
-Same general p"rpose: 5
-If t'e o"rt vie&s t'e %ifferent lasses as %ifferent! t'en mig't not 4e integrate%
-)o"l% 'ave 4een smarter to separate t'e transations &it'in J mont's
H-H: he 7oney CafR( $nc. is a CB co"pany in the business of "a4ing consu"er loans. $t has about I-- e"ployees 3ho
3or4 in a LB office 3ere all 3or4 relating to loan approvals and collections are done. Bbout I- percent of its gross
revenues is in the for" of interest fro" loans "ade to outKofKstate borro3ers. he co"pany has operated for the past
several years under financing provided by a + ban4. $ 3ould li4e to refinance this debt by issuing debt securities to CB
residents and using the proceeds to pay do3n the ban4 debt. $s )ule %L0 available even though C%E the co"pany has
substantial inco"e fro" interest paid by outKofKstate custo"ers( and C,E the co"pany 3ill be sending the proceeds out of
the state to the + ban4?
Safe 'ar4or: ,'e SEC r"le% t'at t'is &as all intra-state ativityt'at everyt'ing t'ey &ere %oing an% "sing t'e money
for &as for in-state reasons
-Even t'o"g' itAs a ,W loan! t'ey &ere "sing t'e proee%s to promote an in-state 4"siness
-,'e fat t'at t'e proee%s are F-O3 anot'er state %oesnAt mean t'at t'e proee%s are going to 4e 0SE. in t'e
ot'er state
--39: of reven"es seem to ome from o"t-of-state nee% N9: in-state! not L9:--4"t t'e reven"es o"l% 4e from in-state
4ea"se t'e 4an$ ma$es loans in C+ even t'o"g' t'e loans are to people &'o &ill "se t'e money o"t-of-state
--It is operating in C+ an% t'e original loan for ,W 4an$ &as for loans in C+ an% t'e proee%s for t'e operation go to
2L
C+ SEC reogni7es t'at t'ese are strit reC"irements an% interpret t'em in &ays to 'elp t'e iss"er an% promote t'e
4"siness
H-J: + Corp. co""ences a )ule %L0 offering on *anuary %. B purchases shares on *anuary %/. he final sale to D
occurs on 7arch %. !hen "ay B reKsell the shares to a nonKresident?
>oo$s at safe-'ar4or for re-sales
G mont's from &'en t'e iss"e is ompleteso G mont's from 3ar' 1! or .eem4er 1
H-L: B C corporation plans to offer stoc4 to C residents. $n lieu of paying cash( investors "ay elect to purchase their
stoc4 on an install"ent plan calling for I5 easy "onthly pay"ents. Bt 3hat point 3ill )ule %L0s holding period e2pire?
!hat if before this point one of the purchasers "oves to another state? !hat can be done to ensure the holding period
e2pires at the earliest possible date?
G mont's from t'e last payment t'is is 4ea"se t'e se"rity is not really sol% "ntil t'e last payment is ma%e
-O"t-of-state resi%ent at t'e en% of t'e 3J-mont' payment: anAt move for 3J mont's an% t'en G mont's after
SEC: &'at o"nts is t'e last payment 4eing ma%e an% t'e se"rity 4eing %elivere%
H-N: 8reparation of a balance sheet in accordance 3ith <BB8 "ay result in an understate"ent of the value of certain
assets( particularly real estate. Bssu"e an issuer cannot satisfy )ule %L0s inKstate asset standards unless a "ethod of
valuation not sanctioned by <BB8 is used. Gurther assu"e an independent appraisal using such a "ethod sho3s the
'-F test is easily satisfied. Bny proble"s? !hat if the balance sheet prepared in accordance 3ith <BB8 sho3s 0&F of
the assets are in the state? Can the issuer round this up to '-F?
*ave to loo$ at t'e ao"nting statements an% annot loo$ at tr"e eonomi val"e
-3ay "n%erstate t'e tr"e val"e of yo"r statements
I%ea is t'at t'e 4oo$ val"e is a lear-"t r"le an% appraisals an 4e mon$eye% &it': so B++P m"st 4e "se%
-,'e r"le is t'at yo" 'ave to reflet t'e assets as t'ey are reflete% on yo"r ao"nting statements
)'at if yo" almost ma$e N9: 4"t yo" are at LG:5
-Can ro"n% "p 4et&een perents
-If yo" are at LG:! s'o"l% ro"n% "p to N9:
Private 'ffering E&emption
Problem on pg. 2'&:
H-G: )alston decides to reestablish its stoc4 plan in confor"ity 3ith the #Cs opinion. $t li"its participation in the plan to
officers at the level of @8 or higher( directors( and plant "anagers. Does the access to infor"ation these individuals "ay
have raise :uestions regarding i"proper insider trading because of the use of the infor"ation? 7oreover( does a @8 of
personnel necessarily have the 4ind of access to infor"ation the Court in )alston had in "ind? Does a plant "anager?
>oo$ing at t'e aess reC"irement "n%er -alston:
-8P an% plant managers: &o"l% 'ave to loo$in some ompanies! every employee is not t'e "sto%ian of t'e 8P
-3ay4e t'e plant manager %oesnAt 'ave information on t'e ompany as a &'ole
Insi%er tra%ing iss"e: if yo" are only selling sto$ to t'ose &it' insi%e information! may 'ave iss"es &it' insi%er
tra%ing
-)'at %o ompanies %o in t'is sit"ation to avoi% t'is5
--eC"ire systemati p"r'ases of t'e sto$: agree to 4"y 199 s'ares every C"arter! or somet'ing
-Cannot 4e any $in% of insi%er tra%ing laim if yo" are agreeing to a sto$ p"r'ase plan 4efore yo"
aC"ire t'e sto$
H-19: Nolote4 is an oil and gas operation that 3ould li4e to "a4e a private place"ent of unsecured debentures to ;erb( a
high school dropout 3ho recently 3on ./ "illion in the state lottery. here are no other offerees( and resale of the
securities 3ill be restricted to prevent the possibility of a public distribution. Jecause it feels an offering li"ited to one
person( is( by definition( a private offering( Nolote4 does not intend to incur the e2pense of preparing a disclosure
docu"ent for ;erb9 it is 3illing( ho3ever( to ans3er any of his :uestions. 6nder )alston( is Nolote4 safe?
Even t'o"g' 'e may 'ave aess to t'e information! 'e is not sop'istiate% ;"nless one vie&s all ri' people as
sop'istiate%1an see t'at even &it' f"ll registration! t'ere is a %anger t'at "nsop'istiate% people &ill get rippe% off
al&ays
2N
-0n%er -alston! arg"ment t'at t'is person is not sop'istiate%
--)'at a4o"t aess to information5
-,'is person %oes not 'ave %iret aess as an insi%er! 4"t an yo" <"st give 'im t'e same info t'at &o"l% go in a
registration statement5 YES
--*ere! not sop'istiate% an% not an insi%er 4"t o"l% potentially 'ave aessso C"estiona4le "n%er -alston
-->oo$ to stat"tory fators:
SEC release fators: s'o"l% satisfy
-Only 1 offeree
-Only 1 "nit offere%
-.o not $no& t'e e/at si7e
-3anner of t'e offering: No p"4li a%vertising: only fae-to-fae
)'at a4o"t 4asing analysis on 'o& sop'istiate% someone is 4ase% on 'o& ri' t'ey are5
-.otors may not $no& a lot a4o"t finane! for e/ample
--i' people may not al&ays $no& t'e finane
Problems on pg. 2&&:
H-11: 3o physicians recently sold their interests in a "edical center for a siHable profit. Glush 3ith cash and in urgent
need of a ta2 shelter( they co""ence negotiations 3ith a pro"oter e2perienced in developing and operating oil and gas
li"ited partnerships. he physicians have no e2perience 3ith oil and gas ventures( but they have "ade a nu"ber of past
invest"ents in real estate ventures. Over the ne2t I "onths( the physicians and the pro"oter 3or4 on developing a L8
custo" tailored to "eet the physicians needs. $n the vie3 of the physicians( this is an educational process and by the
ti"e the agree"ent is struc4 and they "a4e an invest"ent of .0--(---( they are :uite confident about their o3n level of
e2pertise on the oil and gas business. ;o3 sophisticated are these investors? ;o3 easy 3ill it be for the" in a
subse:uent suit to establish their lac4 of sophistication? !hat level of disclosures is re:uired in order for the pro"oter
to protect itself?
2 %otors 'ave no e/periene an% investi in oil an% gas vent"re&or$ &it' a promoter to %evelop a limite% partners'ip
an% invest SL996
)ill t'ey fit &it'in t'e e/emption5 NO
-+re t'ey sop'istiate%5 NO
-,'ey loo$e% into t'is for 3 mont's: 4"t t'is is not &'at o"rts &ill loo$ into
-Even sop'istiate% 4"siness people! not eno"g' to 4e sop'istiate%
-Nee% sop'istiation in investments
-If t'ey 'a% 'ire% an investment professional to 'elp t'em! t'en sop'istiation is imp"te% to t'e investors
to 'elp t'em
-,4pert: t'is &o"l% 'ave to 4e a sop'istiate% 4"siness people! li$e CP+ or an investment
professional! a 4asi la&yer &o"l% not 4e eno"g' ;&o"l% nee% speifi e/pertise in t'is area1
*o& m"' aess to information is neessary5
-,o 4e safe! t'e promoter &o"l% give t'e %otors some %islos"re t'at loo$s li$e a registration statement
.o yo" 'ave to 4e a speiali7e% e/pert5 .o yo" 'ave to 4e an e/pert in oil an% gas5
-0s"al minim"m is t'at t'e person 'as to 'ave e/periene in investmentMfinaning
-Co"rts ome o"t in %ifferent &ays
Problems on pg. 221
H-13: Bssu"e a pool of 5- offerees( half of 3ho" :ualify as accredited investors. Aach offeree is 3iling to invest
.%--(--- in )egulation D offering. he issuer 3ould li4e to structure the offering in a 3ay that "ini"iHes the e2pense of
preparing a disclosure docu"ent. $t also has reason to believe so"e of the offerees are not terribly sophisticated and
3ants to assu"e no ris4 in this regard. Bdvise the issuer on its options and the tradeKoffers of each of the )egulation D
e2e"ptions.
J9 potential offerees! an% ea' is &illing to invest S1996 4"t only X are are%ite%2 ,'e iss"er %oesnAt &ant to "se a
%islos"re statement an% %oesnAt &ant to 'ave to &orry a4o"t anyone 4eing sop'istiate% or not2 *o& s'o"l% is "se H9(!
H9H! an% H9J to get t'e largest amo"nt of money possi4le5
H9H or H9J:
2G
-Co"l% only raise S3 million &it' <"st are%ite% investors
-Co"l% raise SJ million in going into t'e pool of non-are%ite%
IF 'e sti$s to t'e are%ite% investors! is t'ere a sop'istiation reC"irement5 NO
-#eing are%ite% is %ifferent t'an 4eing sop'istiate%
-@"st nee% to 'ave a ertain amo"nt of inomeMassets
-So an 4e D"nsop'istiate% 4"t are%ite%E
-)o"l% not 'ave to &orry a4o"t %islos"res if all investors are are%ite%
SO: S 3 million &it' <"st are%ite%
Can 'e got S ( million5 0se H9( an% H9H
-Co"l% 'ave 39 are%ite% investors "n%er H9H
-*ave 19 non-are%ite% investors "n%er H9( ;S1 million1
-,iming iss"es
-,'ere is no reC"irement "n%er H9( for are%ite%
->oo$ to aggregation an% integration r"les: tells "s 'o& long to &ait 4efore DflippingE
Problems on pg. 224-22$:
/K%L: #ybil is the @8 in charge of govern"ental relations for $nterg. ;er principal functions are to coordinate the
co"panys legislative lobbying and to disse"inate infor"ation on i"portant regulatory develop"ents. !ill she :ualify as
an accredited investor by virtue of her position as an officer in the co"pany?
S'e is not really t'e person involve% in poliy-ma$ing
--)o"l% s'e 4e privy to lots of information a4o"t t'e iss"er5 3ay4e not
-.istri4"ting info a4o"t t'e poliies not setting t'e poliy
--)o"l% not C"alify as an are%ite% investor
/K%/1 8erson 3ith lists of assetsis this person accredited?
YESF "n%er H91;a1;H1net assets are more t'an t'e t'res'ol%
--Is t'is a goo% i%ea5
-)e ass"me t'at someone &'o is are%ite% is sop'istiate%
--If t'is investor ame to yo" an% &ante% to invest&'at &o"l% yo" %o5 )o"l% yo" <"st aept &'at 'e sai%5
-)o"l% 'ave to 8+>I.+,E: may 4e lying a4o"t 'o& val"a4le all 'is st"ff is
-3ay 'ave an inentive to lie in or%er to get yo" to sell 'im t'e se"rities
--)'at if 'e %oes totally lie an% tries to get money 4a$ later5
-*e annot rep"%iate: 'e is estoppe% from saying 'e &asnAt an are%ite% investor
--)'at a4o"t t'e ot'er investors: t'ere &ere alrea%y 3H non-are%ite% investors in t'e offering an% no& t'ere are 3J as a
res"lt of t'e liar ;failing t'e e/emption15
-Some fle/i4ility 4"ilt ine/emption &o"l% not fail
-*ave to Dreasona4ly 4elieve t'ey are are%ite%E H9J;41;21
-If yo" are reasona4ly tri$e%! t'en t'e e/emption %oes not faileven if t'at 'anges t'e n"m4er to 3J
Problem on pg. 22$
H-1J: hree purchasers participate in the )ule /-5 offering. he issuer 3as 3ithout legal counsel and "ade no atte"pt to
assess 3hether the purchasers :ualified as accredited investors or co"plied 3ith the provisions of )egulation D
applicable 3hen purchasers are nonKaccredited. $n fact( each of the purchasers satisfied the accreditation standards at
the ti"e of the offering. he invest"ent has soured( and the purchasers 3ould no3 li4e to rescind. !hat is the relevance
of the issuers lac4 of reasonable belief that the investors 3ere accredited?
,'e iss"er %i%nAt reasona4ly 4elieve t'at t'e investors &ere are%ite%F 4"t 'a% goo% l"$ an% t'ey .I. C"alifyan
t'e p"r'asers get t'eir money 4a$5
-,o satisfy t'e reC"irements of t'e e/emption! %o yo" 'ave to reasona4ly 4elieve or %o yo" <"st 'ave to 4elieve5
-H91;a1: are%ite% investor is any person &'o omes &it'in any of t'e ategories or &'o t'e iss"er
reasona4ly 4elieves to ome &it'in t'e ategories if t'e person omes &it'in t'e ategories! t'en
are%ite%
-If t'ey %onAt! 4"t t'e iss"er reasona4ly 4elieves! t'en t'e iss"er is %eeme% are%ite%
*ere! goo% to 4e l"$y%oesnAt matter t'at t'e iss"er $no&s t'at t'ey are! <"st 'ave to 4e
39
H-3(: Bn issuer has co"pleted a . 0 "illion private place"ent under )ule /-5. he purchasers consist of & pension trusts
Ceach :ualifying as an accredited investorE and % individual 3ho purchased a relatively s"all a"ount of securities
offered. he individual had no preKe2isting relationship 3ith the issuer or any of its agents( did not satisfy the standards
of an accredited investor( is not sophisticated( and did not have a purchaser representative. hree of the pension trusts
3ould no3 li4e to rescind the transaction( and the issuer clai"s substantial co"pliance under )ule /-'. !hat result?
--,o ai% investors &'o are properly are%ite%! t'ere &as 1 investor &'o &as not properly are%ite% an% NO,
sop'istiate%an t'e ot'ers get t'eir money 4a$5
--.i% t'e violation 'arm t'e ot'er investors5 NO
--Is it insignifiant5
-,al$ of 4eing a soliitationif general soliitation! t'en a"tomatially signifiant 4"t t'e e/emption &o"l% fail
;nee% to $no& more a4o"t t'e nat"re of t'e soliitation1
-.oesnAt say anyt'ing a4o"t amo"nt 4eing 'ig'
-.oesnAt say anyt'ing a4o"t more t'an 3H
--In a%%ition! for H9N to apply! 'ave to loo$ at BOO. F+I,* %oesnAt loo$ li$e t'ere &as! <"st %i%nAt %o any of t'e
t'ings t'ey &ere s"ppose% to
Problems pg. 22&
H-1L: 7arvella is interested in purchasing securities in a )ule /-5 offering by #ynertech. Blthough 7arvella lac4s the
re:uisite sophistication re:uired by the e2e"ption( she relies on her brotherKinKla3 <eorge for advice. Bssu"ing <eorge
has the re:uisite e2perience to "eet the sophistication standard( 3hich of the follo3ing circu"stances 3ould dis:ualify
<eorge fro" acting as a purchaser representative?
aE 7arvella divorces her husband Crep no longer relatedE
--,'is is fine: t'ere is no reC"irement t'at yo" are relate% to yo"r representativeonly arises &'en representative is also
an insi%er ;not ass"ming insi%er 'ere1
--Can 'ire a representative &'o is not a relative
41 <eorge is an officer of #ynertech
--,'is is not O6: -elate%: 4loo%! marriage! or a%option&o"l% C"alify 4ea"se 'e fits &it'in t'is
--One t'ere is a %ivore! t'en not relate% anymore an% o"l% not %o it after t'at
cE <eorge is an officer of #ynertech and does not tell 7arvella of his position
--8iolation for 2 reasons: 'e is an offier of t'e ompany an% %i% not %islose it
%1 <eorge is planning to buy a substantial bloc4 of stoc4 offered by #ynertechnot an officer yet
--In general! %oesnAt a"tomatially %isC"alify 'im: not an offier of t'e ompany yet
--+llo&e% to 'ave a representative as long as t'ey 'ave not alrea%y %one t'att'e one potential 4arrier is t'at yo" are
reC"ire% to %islose any relations'ip &it' t'e ompany t'at is m"t"ally ontemplate%
H-1N: Bssu"e 7arvella decides not to rely upon <eorge for advice. $nstead( she consults 8riscilla( her attorney( on the
"erits of the invest"ent. Does the issuer need to ta4e any steps to satisfy itself that 8riscilla is sophisticated? !hat if
8riscilla is a C8B( rather than attorney? !hat if 8riscilla is a C8B( rather than an attorney? !hat is 8riscilla is both a
8CB and an attorney?
E/emption in H9J applies only if non-are%ite% investor is sop'istiate%
--Is an attorney a"tomatially sop'istiate%5
-*ave to loo$ at &'at speialty t'e la&yer praties
-+n attorney is not a"tomatially sop'istiate%
--Is a CP+ a"tomatially sop'istiate%5 NO
-Co"l% 'ave ao"ntants t'at %o not $no& a4o"t investing
-*ave to C*EC6 an% %o %"e %iligene
H-1G: Bs an attorney( 3hat ris4 of liability 3ill 8riscilla incur if she acts as a purchaser representative for 7arvella? $s it
li4ely that this liability is covered by her "alpractice insurance policy?
Is it smart for t'e attorney to serve as t'e representative5
-,'e stan%ar% of are: of a normal la&yer ;normal legal t'ings1
-*ere! yo" re 4eing 'ire% to 4e an investment e/pert ;stan%ar% goes "p1
-*ave to satisfy stan%ar% of are as an investment e/pert
-*ave to 4e aref"lpro4a4ly not overe% 4y malpratie ins"rane
-Covers only legal mista$es
31
--S'o"l% %eline to ta$e t'is $in% of representation
H-29: #uppose 7arvella( 3ho is thrifty and un3illing to pay high fees to anyone( refuses to hire a representative. 7ay the
issuer pay the fee of 7arvellas representative?
Co"l% see t'at it is smart for t'e iss"er to sell to a sop'istiate% investorif s'e %oesnAt &ant to 'ire t'e representative
'erself! t'en t'e e/emption &o"l% fail
--Can see onflit of interest
-.islos"re of t'e relations'ip is %eeme% 4y H9(;'1;(1 to 4e s"ffiient: %islos"re to t'e p"r'aser regar%ing any
material relations'ip 4et&een t'e representative an% t'e iss"erif yo" %islose t'e relations'ip t'an t'at is
s"ffiient
Problems on pg. 222:
H-21: 8riscilla is a CB resident and a nonKaccredited investor in a )ule /-/ offering. ;er father( a NY resident( is a nonK
accredited investor in the sa"e offering( as is a corporation in 3hich 8riscilla and her father each have /-F beneficial
o3nership interests. Bssu"ing the corporation does not :ualify as an accredited investor( 3ill 8riscilla( her father( and
the corporation be counted as %( , or I purchasers?
,'e orporation is o"nte% as a separate p"r'aser 4ea"se t'e p"r'asers ea' 'ave H9: 4enefiial o&ners
,&o relatives &ill 4e o"nte% separately 4ea"se t'ey 'ave separate resi%enes
Y 3 p"r'asers ;%a%! %a"g'ter! an% orporation1
H-22: B partnership not :ualifying as an accredited investor has %- partners. $f the partnership purchases securities( 3ill
the transaction be regarded as % by a single purchaser( %- purchasers( or %% purchasers? 7ust the individual partners
satisfy the accreditation standards? !hat if the partnership 3as for"ed for the purpose of ac:uiring the securities being
offered?
,'e partners'ip &ill o"nt as 1 p"r'aser "nless t'e partners'ip &as solely forme% for t'is investment ;t'en it is 191
H-23: Bn individual 3ho is a purchaser in a )ule /-5 offering satisfies the net 3orth standards for accredited investor
status. ;e lives in the sa"e ho"e 3ith his 3ife and her brother( 3ho is not an accredited investor( but 3ho 3ould li4e to
purchase securities in the offering. Does the brother count for purposes of co"puting the nu"ber of purchasers?
H91;e1;11;i1: %oesnAt o"nt relatives or spo"ses living in t'e same 'o"se'ol%
-*O)E8E-! sine t'e '"s4an% is are%ite% an% never o"nte%! t'en t'e 4rot'er %oes o"nt
Y 1 non-are%ite% ;even if 4rot'er! mot'er! et &ante% to 4"y1
--+re%ite% Y not a p"r'aser relative %oes not o"nt
Problem on pg. 3!3
H-2(: *.). is a pro"oter of oil drilling ventures and a "e"ber of the ;ouston 8etroleu" Club. ;e has sent an offering
circular to the Clubs "e"bers Cappro2i"ately ,-- individualsE describing the ?deal> he is no3 putting together and
soliciting their interest in participation as investors. *) is confident that all of the Clubs "e"bers are accredited
investors for purposes of )egulation D( but to avoid any proble"s( he has sta"ped in red( on the first page of the offering
circular1 ?GO) BCC)AD$AD $N@A#O)# ONLY.> ;as *) engaged in a general solicitation? Does it "a4e a
difference if all of the offerees are in fact accredited investors?
Sent an offering ir"lar to all t'e mem4ers of t'e l"42 #y ir"lating t'is soliitation to t'em! is t'is a general
soliitation or not5
-Is t'is t'e $in% of prior relations'ip t'at t'e SEC is ontemplating5
-NOO
--*ave to 'ave some $in% of relations'ip in &'i' t'ey 'ave eit'er reeive% se"rities 4efore! or 4een "stomers 4efore
<"st $no&ing someone soially is not eno"g'
Problem on pg. 3!$
H-2H: B bro4erKdealer uses suitability re:uire"ents to preK:ualify potential investors in )egulation D offerings. he
:uestionnaire is of the type described in the ;utton noKaction letter. 7oreover( the fir" follo3s the lesion of the Jate"an
Aichler noKaction letter and i"poses a L/Kday 3aiting period bet3een preK:ualification and any subse:uent offer.
Bssu"e a client preK:ualifies Con the basis of ne3 3orth and annual inco"eE on Gebruary %. On *uly % of the follo3ing
year( the fir" 3ould li4e to offer securities to the client. Need it be 3orried about the clients continuing :ualification? $f
32
so( 3hat should it do?
One people sen% in t'eir omplete% C"estionnaires! 'ave to &ait (H %ays2 )'at if %iretly after t'e (H %ays t'ere is a
-eg"lation . offering an% t'e 4ro$er &as 'ire%5 )o"l% t'ese people &'o <"st signe% "p (H %ays 4efore 4e appropriate
p"r'asers p"rs"ant to -eg"lation .5
-,'is &o"l% 4e O6
-,'is is &'at yo" are s"ppose% to %o: (H %ays is eno"g' of a &ait
)'at if yo" &ait 1& mont#s@"ly 1
st
of t'e ne/t year5 )'at are t'e iss"es t'ere5
-)o"l% still 'ave a pre-e/isting relations'ip &it' t'e 4ro$er
-Ot'er pro4lems t'at &o"l% 'ave to 4e solve% for t'e pre-C"alifie% person:
-Investor &o"l% &ant to ma$e s"re t'e investor still meets t'e C"alifiations nee%e% an% to ma$e s"re t'at
everyt'ing is O6 &it' t'e p"r'aser
-+ lot of t'ings an 'appen in 1N mont's: &'at 'appens if t'ey 'ave lost t'eir <o4 or assets5
-Is not a la& to 'e$ "p on t'e investorF 4"t it is pr"%entit &ill not 4e a reasona4le 4elief to let t'e investor go
"n'e$e% if t'ere is a later la& s"it
-It is not reasona4le to rely on 1-year ol% information &it'o"t 'e$ing "p
H-2J: 7urphy( a registered invest"ent advisor( plans to publish a "onthly ne3sletter that 3ill be sold by subscription to
ta2 attorneys and accountants in CB. he ne3sletter 3ill provide infor"ation concerning )egulation D offerings that
"ay be of interest to subscribers 3ho have clients in need of suitable invest"ent opportunities. 7urphy 3ill gather
infor"ation on the offerings by collecting private place"ent docu"ents and choosing for coverage the "ore interesting of
the offerings. he ne3sletter 3ill cover the selected offerings by su""ariHing infor"ation gleaned fro" the private
place"ent docu"ents( supple"enting the infor"ation 3ith additional data produced by intervie3s 3ith the issuers( and
providing an analysis of the ta2 and econo"ic ra"ifications of the invest"ents. 7urphy 3ill rate each covered
invest"ent on a scale of I Cgood( neutral( or negativeE.
Bssu"ing 7urphy has no relationship 3ith any of the issuers covered and his co"pensation is derived solely
fro" the subscription sales of the ne3sletter( do 7urphys activities create proble"s under /-,CcE? !hat if the
ne3sletter is also sold to potential investors?
#"t! &'at if an in%epen%ent person p"4lis'es an artile a4o"t a ompanyAs offerings an% se"rities5
-,'e only ontat &it' t'e person 'as &it' t'e iss"er is t'at it may go intervie& t'e CEO an% as$ 'im a4o"t
"poming -eg"lation . offerings
-.oes t'at onstit"te general soliitation s"' t'at it &ill %estroy H9(-H9J5
Can %o it if 'e <"st gets t'e info from p"4li so"res4"t if 'e intervie&s CEOs from t'e ompany! t'e SEC 'as 'el%
t'at t'ese %o not a"se a pro4lem
-Can intervie& CEOs &it'o"t it %estroying -eg . e/emption
H-2L: 7urphy instead decides to publish a ne3sletter for attorneys and accountants containing only infor"ation derived
fro" public sources. $s this per"issible under )ule /-,S?
Seems to 4e O6 sine it is from p"4li so"res
H-2N: D#7 "aintains a 3eb site that includes a nu"ber of )egulation D offerings. o obtain infor"ation on any of the
offerings( an investor "ust first register 3ith D#7. he registration for" includes a ?full access> option for an
?accredited individual investor.> his status can be achieved by chec4ing % of the , bo2es that provide1
$ alone( or in co"bination 3ith "y spouse( have a net 3orth in e2cess of . % "illion9 or Gor each of the past ,
years( "y annual inco"e has been greater than .,--Kor the co"bined annual inco"e of "y spouse and $ has
been greater than .I--K.
6pon chec4ing the bo2( the investor is registered and i""ediately has access to "aterials on the offerings. $s there a
proble"?
One iss"e: t'ey are ta$ing t'e lients &or% for it an% not %o"4le-'e$ing if t'ey lient is telling t'e tr"t' ;'o& %o &e
$no& if t'ey are millionaires15
o One iss"e is t'at t'ey are ta$ing t'e lients &or% for it- t'ey are not %o"4le 'e$ing &'et'er t'e lient is
telling t'e tr"t'2 ,'ey may not 4e millionaires
,'erefore! s'o"l% reC"ire t'e &e4site to 'ave a follo&-"p proess t'at 4efore aess is grante%! t'ey 'ave to sen% in
opies of ta/ ret"rns or 4an$ing statements to provi%e some s"ffiient evi%ene t'at t'ere is a reasona4le 4asis for t'e
4ro$erMiss"er to feel t'at t'ey are an are%ite% investor2
+not'er iss"e: sign "p an% an get imme%iate aess yo" are s"ppose% to &ait for a s"4stantial perio% so t'e &e4site
33
an arg"e for a pre-e/isting relations'ip
-It is not pre-e/isting if yo" sign "p an% t'en get an offering a fe& %ays later
Problems on pg. 314:
H-2G: On *anuary %( an issuer co""ences an offering under )ule /-/. Jy Bpril %( ./ "illion in securities has been sold(
and the offering is ter"inated. !hen "ay the issuer co""ence a ne3 offering under any of the #ection ICbE e2e"ptions?
!hen "ay the issuer safely co""ence an offering of the sa"e class of securities under )ule /-5?
0n%er H9(MH9H! t'e ne& offering s'o"l% only 4e offere% on +pril 1
st
of t'e ne/t year ;&ait 12 mont's from +pril
1
st
1
3ay 4e a4le to iss"e anot'er offering earlier %epen%ing on t'e %ate of t'e se"rities t'at &ere sol%
o E/: IF ( million &as sol% on @an"ary 1
st
! yo" o"l% only sell ( million more 4y t'e ne/t @an"ary2
H9J offering5
o Sine t'ere is no aggregation or %ollar limit for H9J ;allo&s yo" to iss"e infinite amo"nts of se"rities1!
t'ere is an integration &orry&o"l% &ant to &ait % mont#s from +pril to iss"e2 Yo" o"l% &ait 12
mont's from +pril 1
st
2 If ( million &as sol% on @an"ary first! yo" o"l% sell ( million 12 mont's from
@an"ary2
3;41: stat"te t'at ena4les t'e a%option of any $in% of e/emption 'aving to %o &it' a small offering ;H9( an% H9H! for
e/ample1
H-39: Bn issuer has not offered or sold securities in the preceding %, "onths. On *anuary %( it begins a )ule /-/ offering
that re"ains open until *une %9 it sells .L./ "illion in securities in the offering. On 7ay % of the sa"e year( the issuer
begins a )ule /-L offering9 in this second offering( 3hich is open for , "onths( the issuer sells .0/-(--- in securities.
!hat is the effect of the aggregation rules on each of these offerings?
Nee% to e/amine t'e at"al timing of &'en t'e SLH96 &as sol%
--If everyt'ing &as sol% +F,E- @"ne 1! t'en yo" are o$
--If sol% 4efore @"ne 1
st
! violating t'e S H million limit "n%er H9Hso potentially 'ave a pro4lem &it' t'e H9H offering
;loo$ 4a$ &it'in t'e last 12 mont's1
-Co"l% 'ave sol% a ma/ of S H million
-*ave to loo$ an% see t'e timing of H9H sales
-If t'ey sol% t'e entire SLH96 4efore H9H offering! t'en pro4lem
--H9( may also present pro4lems:
-+t t'e instant yo" start H9(! over t'e S 1 million
-+ggregate p"rs"ant sales t'at o"rre% &it'in t'e last 12 mont's
-.ea% even 4efore it starts
H-31: Bn issuer sells securities in a transaction structured to co"ply 3ith )ule /-L and co"pletes Gor" D clai"ing this
e2e"ption. $t not deter"ines that the earlier offering satisfied the conditions of )ule /-5. $n order to avoid aggregation
3ith a ne3 )ule /-L offering it 3ould li4e to have( "ay the issuer no3 treat the earlier offering as a )ule /-5 rather than
a )ule /-L transaction?
Yes! as long as yo" satisfy t'e reC"irements! it %oesnAt matter &'at yo" alle% it 4eforeso if it C"alifies! t'en yo" are
O6
-Possi4le t'at yo" C"alify "n%er H9( an% H9J! an% pi$ t'e one yo" &ant to "se
--+%vantage to 'ave "n%er H9J'ave "nlimite% amo"nts an% %o not 'ave to &orry a4o"t aggregation
H-32: B L8 has been for"ed for the purpose of ac:uiring and developing real estate. B total of L- units of the partnership
3ill be sold to investors at a cash price of .%-(--- per unit. Bn additional ten units 3ill be sold for nonKcash
consideration in the for" of real estate. <iven the "i2 of cash and nonKcash consideration( ho3 3ill the aggregate
offering price be deter"ined? !hat if the offering is structured so that all investors contributed real estate and here is no
cash consideration?
-"les say t'at if it is part real estate an% part as'! yo" ass"me t'e real estate is eC"al to t'e as' per "nit ;"n%er H91Z1
'ere! ea' "nit of real estate &ill 4e val"e% at 196
-,otal aggregate val"e: SH99!999
)'at if no as' 4eing sol%! all 4eing sol% as real estate5
-)'at is t'e possi4le sam 'ere5
3(
-If trying to eva%e t'e %ollar limits of H9(MH9H! &'at is t'e inentive if yo" are selling real estate5
-Play &it' t'e val"e of t'e real estate
-E/: H91;1: if t'e se"rities are not offere% for as'! loo$ to ot'er sales an% in t'e a4sene of
sales! t'en t'e fair val"e 4y an aepte% stan%ar% ;appraisal1
Problem on pg. 312:
H-33: Bn issuer is subDect to an inDunction because of its failure to file Gor" D notices. Not3ithstanding this
dis:ualification( the issuer proceeds 3ith a )ule /-5 offering that is in co"plete confor"ity 3ith the re:uire"ents of the
)ule. o 3hat e2tent can the dis:ualification deny the issuer the benefits of the private place"ent safe harbor? !hat if
the second offering is under )ule /-/?
Can it en<oy t'e protetions of H9J5
->oo$ to H9L;a1: yo" annot "se H9(MH9HMH9J if s"4<et to in<"ntions 4y SEC
--.oes t'is mean t'e offering &o"l% not en<oy an e/emption5 )'at are yo" left &it' in t'at sit"ation5
-Can go to (;21: t'e stat"tory e/emption ;private offering1
-If yo" sre& "p -eg .! an still en<oy an e/emption
Reglation A
Problem on Pg. 331:
H-3G: Jrocon has prepared a brochure for potential investors in anticipation of a sale of co""on stoc4 under )egulation
B. he brochure includes a coupon C3ith a return postage preKpaidE that allo3s an investor to co""unicate to Jrocon an
interest in the offering. $s the coupon allo3ed in a ?test the 3aters> docu"ent? !hat is the effect on the availability of
)egulation B if Jrocon forgets to sub"it a copy of the brochure to the #AC? Bnd "ay Jrocon use the brochure together
3ith the offering state"ent after the latter is filed 3ith the #AC?
--,'is is an appropriate testing t'e &aters %o"ment
--Is a o"pon o$5
-YES -"le 2H(;1: o"pon ret"rna4le
--S"ppose% to s"4mit t'e 4ro'"re to t'e SEC: &'at if yo" forget5 .oes t'is eliminate t'e e/emption5
-2H(;41: not a on%ition of t'e e/emption ;forgetting to mail1so %oes not eliminate t'e e/emption
-#"t! if t'e SEC gets ma%! an stop t'e offering ;-"le 2HN;a1;11 fail"re to omply &it' t'e provision is gro"n%s
for SEC to prevent iss"e1
--Can yo" $eep "sing t'e 4ro'"re after t'e offering statement is file%5
-NO: -"le 2H(;41;31 annot test t'e &aters after yo" file t'e offering statement
-)'y5
-Can "se t'e preliminary offering ir"lar instea%
-,'ere are ot'er %o"ments t'at are availa4le
H-(9: On Bprill %( Li"itbeat begins testing the 3aters for a ./ "illion )egulation B $nternet offering. On 7ay % Cthe date
the last prospective purchaser 3as contactedE( it concludes that he de"and for its securities 3as so great that it can
proceed 3ith an offering in the .5 "illion to .0 "illion range. Bccordingly( it decides to proceed 3ith a )ule /-5
offering( rather than a )egulation B offering. !hat is the earliest point at 3hich it "ay safely begin the )ule /-5
offering? !hat are the , options if it 3ishes to proceed "ore :uic4ly?
3;41: allo&s SEC to ome "p &it' e/emptions for "p to S H million2 >etAs s"ppose yo" test t'e &aters an% an raise
more t'an SH million2 Can yo" a4an%on t'e -eg"lation + offering an% engage in a -eg"lation . offering5
-*ave to see if t'ere is an integration pro4lem
-Integration r"les for a -eg"lation + offering: 'ave to &ait % mont#s "n%er 2H1;1: a reg"lation offering
&ill not 4e integrate% &it' s"4seC"ent offerings ma%e J mont's after t'e ompletion of t'e offering
-If yo" a4an%on t'e offering! t'at means it 'as 4een omplete%! an% nee% to &ait for J mont's
If yo" &ant to engage in a reg"late%! f"ll-on offering! 'ave to &ait 3! *ays: 2H(;%1
H-(1: On 7arch %( ;ightech co"pleted a .% "illion )ule /-L offering. On Nove"ber %( it co""ences a )egulation B
offering. ;o3 large "ay the )egulation B offering be?
+ggregation: )'at is t'e ma/ amo"nt yo" an iss"e5
-SH million
-Yo" %o not 'ave to o"nt ot'er -eg"lation . offerings: aggregation r"les for -eg"lation + offerings say yo"
3H
only loo$ at -eg"lation + offerings! not ot'er e/empt offerings
For integration: -"le 2H1;1: -eg"lation + offerings &ill NO, 4e integrate% &it' prior offerings of se"rities &ill
not 4e integrate%
-Not going to 4e integrate% &it' any prior offering
Secondary 'fferings
Problem %-1: pg. 3$3
Carl( as a favor to his cousin( Blice( assists her in drafting an offering brochure for securities of her ne3 co"pany(
Jirdseed.co". Bt the conclusion of the drafting process( Carl 3as so i"pressed 3ith the venture that he provided Blice
3ith eK"ail addresses of ,/- "e"bers of the local chapter of the National Budubon #ociety for 3hich he is secretary.
Blice for3arded the offering brochure of the eK"ail addresses and thereby sold a significant portion of the offering to L-
of the chapters "e"bers. $n gratitude to Carl( she gave hi" /-- shares of the offering stoc4. $s Carl an under3riter?
="estion is &'et'er Carl is a D'elperE "n%er Category 1
-)'at &as 'is level of 'elp ompare% to t'e C'inese ase5
-*e is 'elping a lot
-So! 'e is an 0) an% (;11 %oes not apply
-.oes it matter if 'e is pai%5
-.oes not matter if yo" are pai% for yo"r servies! <"st matters if yo" are ai%ing t'e %istri4"tion
)'at if 'e 'a% 4een 'elping o"t not t'e iss"er! 4"t + to sell 'er o&n s'ares5
-C &o"l% still 4e onsi%ere% an "n%er&riter! if + is a ontrol person
-Category 1: 'elpers for t'e iss"er or ontrol person
)'at if instea% of 'elping o"t! yo" p"r'aseMresell
-Category 2: p"r'ase &it' an intent to re-sell
-Not an 0)! 4ea"se instea% of an intent to re-sell! yo" 'ave investment intent
)'at if t'ere is a private plaement sale! an% t'en flip t'em5
-.o 'ave to register if I am a p"r'aser &it' an intent to re-sell
-)'en %oes someone 'ave an intent to resell
-If yo" originally p"r'ase% &it' investment intent( yo" are not an 0) 4ea"se yo" %i% not 'ave an
intent to resell
--It is %iffi"lt to 'ave t'is %efinition to apply sine investment intent is S0#@EC,I8E
Problems on pg. %$%
J-2: %5 "onths ago( J purchased %--- unregistered Chro"iu" 7ines( $nc. co""on shares through a private place"ent.
7uch to her surprise( J had Dust been ad"itted to the prestigious and e2pensive 8 6niversity graduate school. $f J no3
sells her Chro"iu" shares to pay the tuition deposit( 3ill she violate #ection /?
,'ere is a 'ange in ir"mstane: if s'e $ne& a4o"t it! t'en mig't not 4e a 'ange
-Not really an "nforeseen ir"mstaneforeseea4le t'ing t'at s'e 'ope% &o"l% 'appen ;as oppose% to getting
'it 4y a meteor1
-If 'er ir"mstanes 'a%nAt really 'ange%! t'en s'e is an iss"er
IF s'e &aite% 3 years! &o"l% not even 'ave to s'o& a 'ange of ir"mstane
-S'e &aite% 1J mont's! so t'e pres"mption of 'ange in ir"mstane is lo&er
J-3: *( in desperate financial shape( e2changed 3orthless desert real estate for %,/(--- shares of issuer unregistered
co""on stoc4. hereupon( * pledged all the shares to Jan4 as collateral for a loan. #he obtained the loan through
fraudulently prepared financial state"ents. * pro"ptly left to3n. !hile * has de"onstrated several i"portant fla3s in her
character( can Jan4 nevertheless resell the shares to satisfy the outstanding loan?
--S'e %efra"%s t'e 4an$ an% gives s'ares as ollateralan t'e 4an$ re-sell t'e s'ares5
-No! &o"l% loo$ at t'e p"r'aserAs investment intent 'ere
-*ere! t'e p"r'aser is %efra"%ing t'e 4an$ an% %oesnAt inten% to pay 4a$ t'e loan
-Pro'i4its t'e 4an$ from re-selling 4ea"se not investment intent
-.o not fo"s on t'e 4an$! 4"t fo"s on &'at 'er intent &as: lots of sit"ations &'ere yo" ple%ge se"rities for a
loanC"estion is &'et'er s'e e/pete% to pay off t'e loan5
-Pro4a4ly not if s'e %efra"%e%
-,'erefore! investment intent &o"l% NO, e/ist
3J
--#an$ &o"l% not 4e a4le to resell t'e s'ares &it'o"t even registering t'em or &aiting for 3 years
--Ot'er&ise! t'is is a &ay for 'er to re-sell t'e s'are an% get o"tsi%e of private plaement e/emption
)'at an t'e 4an$ %o5
--Co"l% get a promise from t'e iss"er
-#an$ &ants a letter from t'e iss"er saying t'at if &e nee% to re-sell t'em! t'e iss"er promises to register t'em or
promise to 4"y t'em 4a$
--#an$ &o"l% 4e a4le to sell t'e sto$ to sop'istiate% people &it' aess: not %eeme% to 4e a %istri4"tion if yo" resell
onsistent &it' -alston
--#an$ o"l% 'ol% on t'e sto$ for a long time so t'at it &ill 4e %eeme% to 'ave investment intent5
Problems on pg. 3$&:
J-(: % year ago( Jurt ac:uired %--- shares of #unech( $nc. in a private place"ent. #unechs annual report( 3hich has
Dust been released( reflects that earnings have :uadrupled in the past year. Jurt is both ecstatic and in need of cash for a
ne3 addition to his house and has approached his neighbor Carol( a bro4erKdealer( about possibly reKselling the shares.
Carol offers to contact several of her clients about their purchase of Jurts shares. Jurt agrees. Jefore Carol actually
begins soliciting her clients( she as4s for your advice. !hat 3ould you tell Carol?
-->etAs s"ppose # <"st &ant to sell on t'e mar$etan 'e %o t'at rig't after 'e p"r'ase% it5 NO
-,'e iss"er is t'at 'e is %eeme% to 4e a 0)! t'erefore not fit &it'in (;11 if 'e &as
a p"r'aser from t'e iss"er ;'e p"r'ase% from t'e private plaement1 &it' an intent to re-sell ;'o& long 'e 'el%
on to it1
-+ year is not a long eno"g' &ait to esta4lis' t'e investment intent
--)'at ot'er &ay are yo" allo&e% to sell restrite% se"rities earlier t'an 3 years5
-Can arg"e 'ange of ir"mstanes: Dsto$ prie &ent %o&nOE
-)it' t'at e/"se &ill not s"ee%
-,'e p"r'aser 'as to e/periene t'e 'ange in ir"mstane: in or%er to &in! 'ave to s'o& t'at t'e 'ange in
ir"mstane is not a res"lt of t'e ompany ;less profita4leMmore profita4le1! t'e only ones t'at s"ee% are t'e
ones t'at 'appen to t'e p"r'aser ;e/: aner1
-*ere! 'as not 'el% long eno"g'! 'as not satisfie% 'ange of ir"mstane
--)'at 'e &o"l% 'ave to %o is as$ t'e ompany to register t'e se"ritiesO
--0nless some ot'er e/emption applies: &ay to onvine t'e o"rt t'at 'e fits (;11 an% not a 0)
--*e &o"l% arg"e t'at 'e is going to sell to people in a &ay t'at is NO, a %istri4"tion: selling to ot'er sop'istiate%
people &it' aess
--)'at if 'e p"r'ase% s'ares p"rs"ant to registere% s'ares p"rs"ant to t'e offering5
-Sine 'e is a non-ontrol person! t'is is a tra%ing transation so yo" an %o t'at
-Not t'e fats 'ere ;say it is a private plaement1
BO ,*-O0B* (;11 +-B03EN, P .IS,-I#0,ION ,O BE, +-O0N. 0)
J-H: Bssu"e in 8roble" 5KL that( 3hen Jurt ac:uired his #unech shares( there already e2isted trading in #unech
shares in the overKtheKcounter "ar4et. Nevertheless( #unech had issued shares to selected purchasers in a private
place"ent to raise funds :uic4ly and cheaply. One year after purchasing his shares( Jurt approaches Carol about selling
the shares into the OC "ar4et. ;o3 3ould you advise Carol?
Can 'e sell in t'e ative O,C mar$et5
-,'e ans&er %oesnAt 'ange at all: if yo" p"r'ase% p"rs"ant to a private plaement! %oesnAt matter t'at t'ere is a
mar$et
-)it' t'e 4a$gro"n% la& ;not loo$ing at 1((1! %oesnAt matter if t'ere is an ative mar$et or notstill 'ave to sell
ON>Y to people &'o are sop'istiate% or 'ave aess ;or 'ange of ir"mstane or la$s investment intent1
J-J: !hat results if the shares had been sold to Jurt as part of a registered offering and shortly after Jurt purchased
those shares he resold the" through Carol in the OC "ar4et?
,'en o"l% flip t'em imme%iately
-)'en yo" re-sell t'em! not %eeme% to 4e a %istri4"tion
3L
Problems on pg. 3%$:
J-L: Orange Co"pany( $nc. is a highly successful soft3are co"pany( its shares are traded on NB#DBT( and it has a 5K
"e"ber board of directors. Blice( 3ho o3ns %'.IF of the outstanding Orange co""on shares and is Oranges largest
shareholder( has as4ed Job( a bro4er 3ith Gedder $nvest"ents( $nc.( to sell hi" in the "ar4et appro2i"ately oneKthird of
her Orange shares. Job is a3are that three of the si2 "e"bers of Oranges board of directors are Blices no"inees. Job
has also been as4ed by Carl( one of Blices no"inees( to sell his Orange shares. Bdvise Blice( Job( and Carl 3hether they
have any section / concerns. Bssu"e the shares held by Blice and Carl 3ere issued L years ago pursuant to a registered
public offering.
Is +lie a ontrol person5
-S'e 'as t'e po&er to elet 3 of t'e %iretors
-S'e o&ns 1N23: of t'e sto$
-,'erefore! it loo$s li$e s'e &o"l% 4e a CP
-If s'e &ante% to sell 'er s'ares! s'e o"l% fore t'e ompany to register
+ss"ming +lie is a ontrol person! t'en #o4 &o"l% 4e %eeme% 'er D'elperE
-S'e &o"l% satisfy t'e (;11 reC"irement
-.oes (;11 apply if t'ere is 0) involve%5
-(;11 applies if 0) is involve%! t'en loo$ to 2;a1;111: if someone is 'elping o"t a CP! t'en same analysis
as if t'ey are 'elping o"t t'e iss"er
-#o4! 'elping o"t CP! 'as same legal impat as 'elping o"t iss"er
*o& an t'ey get off t'e 'oo$5
-,'ey an s'o& t'at p"r'asers satisfie% -alston reC"irements ;sop'istiate% P aess1
IF +lie &as not a CP! o"l% instantly flip t'em2 #"t! s'e is&'at is s"ggeste% 'ere5
11 Co"l% get ompany to register t'em
21 ( 1 X e/emption: sell to -alston people &it'o"t registering t'em
)'y ( 1 X5
-S"ppose t'e iss"er &as trying to sello"l% eit'er register or sell p"rs"ant to a private plaementMintrastate
-Co"l% a CP "se a intrastate e/emption5
-)'at t'e CP an %o is "se t'is <"%iially reate% ( X e/emption to %o t'e private plaement t'e same as an iss"er
-If a CP 'as sto$! 'o& an t'ey sell it5
-Eit'er 'ave to register or sell in a private plaement: sell to sop'istiate% people &it' aess
Rule 144
Problems on Pg. 3'$
J-19: *eff is the o3ner of %-(--- unregistered Bpe2 co""on shares that he purchased in a private offering. ;e no3
3ishes to sell so"e of these shares.
--*as to &ait J mont's sine 'e is an affiliate
-Comply &it' 'ol%ing perio%! one 'e 'as &aite% J mont's! &o"l% 'ave to let t'em tri$le o"t p"rs"ant to vol"me
limits! file forms &it' SEC! an% omply &it' 4ro$erAs transation
--If not an affiliate! 'e &o"l% 'ave to &ait J mont's an% omply &it' informational reC"irementsif 'e &aits for 1 year
&o"l% not even 'ave to %o t'at2
J-11: Bssu"e the shares *eff o3ns in the above proble" 3ere initially issued to *eff pursuant to the intraKstate offering
and Blice sold the shares to *eff.
+s far as 1(( goes! t'ese are "nrestrite% se"rities
--If not an affiliate! no J-mont' reC"irement
--1(L for t'e intra-state e/emption says G mont's in t'is sit"ation
-,'ere &o"l% 4e not'ing reC"ire% for a non-affiliate for 1((! 4"t ot'er stat"tes %o reC"ire t'ings
)'at is t'e r"le &'en a non-affiliate an sell p"rs"ant to a registere% p"4li offering5
-.o not nee% a safe 'ar4or: if non-affiliate an <"st re-sell imme%iately
)'at if yo" are an affiliate an% %ealing &it' se"rities sol% in registere% p"4li offering5
-.eeme% to 4e t'e same as t'e iss"er "n%er 2;a1;111
-In t'e same s'oes as t'e iss"er&o"l% 'ave to 'ave t'e ompany register t'e se"rities or fin% an e/emption
-,'e main &ay 1(( is "se%:
3N
->oo$ to &'et'er p"r'ase% 4y affiliate "n%er intra-state ;non-restrite%1 or ones t'at satisfy
normal restrite% se"rities offering
-If person o&ns 4ot' $in%s! 'ave to loo$ to 'ol%ing perio% an% &o"l% 'ave to omply &it' t'e
reC"irements: vol"me limits! information! file forms! et2
J-12: %./ years ago( Ueta issued , "illion co""on shares pursuant to an offering under )ule /-/. ;o3ever( Uetas
attorney failed to 4eep trac4 of the nu"ber of purchasers in that offer( so that there 3ere about L0 nonKaccredited
purchasers in that offer. #usan( one of those purchasers( no3 3ishes to resell her shares.
,'ey &rote 1(( speifially to %eal &it' t'is sit"ation
--@"st 4ea"se t'ere &as a te'nial pro4lem 4y t'e iss"er! yo" s'o"l% not 4e prevente% from re-selling
@"st 4ea"se t'e original e/emption &as messe% "p! t'is %oes not stop S"san from 4eing a4le to re-sell
Even t'o"g' t'ey sol% to too many people! still s"4<et to restritions of -eg"lation .
-Sine t'ese are restrite% se"rities! 'ave to %etermine if affiliate or not to %etermine &'at 'as to 4e %one
-.oesnAt say t'at s'e is an affiliate or not
-)'at if s'e is NO, an affiliate5
-S'e 'as to &ait for J mont's &it' information reC"irement! t'en 'as to &ait for a 1 year &it' no
information reC"irement
-)'at if s'e IS an affiliate5
-Still 'as to &ait for J mont's &it' information reC"irements! an% also vol"me limits ;tri$le
t'em o"t! 4ro$erAs transations! et1
J-13: Jill( a control person of O"ega Co"pany( is negotiating to sell his control bloc4 to Blice. Bll discussions bet3een
Jill and Blice have been on a direct personal basis so far.
--1(( is not t'e e/l"sive &ay to re-sell se"rities
-In t'e a4sene of 1((! 'o& o"l% yo" sell se"rities5
-Sell on street orner
-Negotiate %eal yo"rself as t'e e/ample s"ggests
--In general! SEC reogni7es t'at if t'e stat"te says somet'ing! SEC annot pass r"les to ontra%it &'at t'e stat"te says
1(( &o"l% respet t'e street orner approa'
--1((;41;21: Bffiliates or persons selling on behalf of affiliates. Bny affiliate of the issuer( or any person 3ho 3as an
affiliate at any ti"e during the &- days i""ediately before the sale( 3ho sells restricted securities( or any person 3ho
sells restricted or any other securities for the account of an affiliate of the issuer of such securities( or any person 3ho
sells restricted or any other securities for the account of a person 3ho 3as an affiliate at any ti"e during the &- days
i""ediately before the sale( shall be dee"ed not to be an under3riter of those securities 3ithin the "eaning of section
,CaEC%%E of the Bct if all of the conditions of this section are "et2--Q ,*0S S,+N.INB ON S,-EE, CO-NE- IS FINE
J-1(1 $n the preceding proble"( Jill has gro3n restless 3ith his negotiations 3ith Blice. ;e has hired Jro4er to sell a
large a"ount of his shares through NY#A.
0n%er 1((! %eeme% an affiliate'ere! falls "n%er 1(( an% 'as to omply 4ea"se someone is 'elping 'im ;street
orner approa' %oesnAt &or$ anymore1
--*ere! &o"l% 'ave to omply &it' 1((;41
-*ere! a 4ro$er &ill 4e selling for t'e ao"nt of an affiliate ;t'is is O61 4"t 'ave to omply &it' 1((: 'ol%ing
perio%! vol"me reC"irements! 4ro$er transation reC"irements! et2
NO,E: If CP gets someone to 'elp t'em! t'at person is %eeme% as a 0) 4ea"se itAs li$e CP is iss"er
J-1H: Blpha Co"pany is / "onths later in filing 3ith the #AC the %-KT report for its third :uarter( 3hich it is no3
re:uired to file under #ection %I of the #AB. Carla( an o3ner of Blpha restricted stoc4 for 0 "onths( 3ishes to resell her
shares. Consider also the result if Carla o3ned her shares for 5 "onths but the shares had been issued by Blpha %L
"onths prior to the proposed sale. !hat result if Carla 3as Blphas CAO?
,'e ompany 'as messe% "p in provi%ing t'e information! Carla &ants to re-sell 'er s'ares&'at is t'e %eal if s'e is
an affiliate or not affiliate5
-If Carla is NO, an affiliate! for 1 year! t'e non-affiliate is s"4<et to information reC"irements
-If t'e ompany 'asnAt omplie% &it' reC"irements! an still sell if s'e &aits for 1 year an% s'e an sell
t'em all as an affiliate
3G
-If Carla is an affiliate! t'e information reC"irements go a&ay after 1 year&o"l% 'ave to get t'e ompany to
provi%e t'e neessary %islos"res
-If s'e is a CPMaffiliate! 'as po&er to infl"ene
-,reate% more 'ars'ly &it' respet to information! 4"t only sa%%le% &it' t'at reC"irement 4ea"se s'e is
a CP
J-1J: Jeta $nc. is a s"all publicly o3ned co"pany 3ith %/- stoc4holders( but is not subDect to the A2change Bcts
reporting provisions. Jeta recently "ailed to its stoc4holders its "ost recent annual report( 3hich includes I years of
co"parative audited financial state"ents. Dave had o3ned his restricted Jeta co""on stoc4 for %% "onths and 3ishes to
resell.
Iss"e is &'et'er information is t'e same as in ann"al report
-If 'e &aite% anot'er mont' ;1 year1! t'en %oesnAt 'ave t'is
-)ait 1 mont' 4ea"se 'e may lose ot'er&ise
--If 'e sells t'e sto$! prie goes %o&n! t'en 4"yer &ants t'e money 4a$so! t'e safe t'ing to %o is &ait anot'er
J-1L: Allen( the CAO of Ocean Anterprises( %- "onths ago purchased %-(--- Ocean Anterprises co""on share son the
NY#A. #he no3 3ishes to sell those shares.
#ea"se t'e sto$ is registere%! t'is is not a restrite% se"rity
-J mont' 'ol%ing perio% %oesnAt apply! 4"t all ot'er reC"irements apply
--egar%less of 'o& s'e got t'em ;NYSE or p"4li offering or &'atever1! if s'e 'as t'em! t'en treate% as 'aving
same information a%vantage of ompany itself! se"rities la&s sa%%le 'er &it' same 4"r%en
--,'ere &o"l% 4e no 'ol%ing perio%! 4"t only a4le to tri$le t'em o"treC"irement t'at t'eyAre sol% only to 4ro$erAs
transations! et2
IF yo" sell t'em in H mont's! &o"l% t'ey 4e s"4<et to 1J;41 so yo" &o"l%nAt 4e a4le to ma$e a profit5
-1J;41: a"ses an insi%er ;e/e"tive! 4oar% mem4er! or someone &'o o&ns more t'an 19: of t'e sto$1 t'en t'ey
'ave to %isgorge profits to t'e "stomer
-3ig't 'ave to %isgorge t'e profits
J-1N: I years ago( *ohn ac:uired in a private offering B"alga"ated Co"pany co""on shares in e2change for his
personal note in the a"ount of the shares purchase price. *ohn is B"alga"ateds CAO. he note is full recourse note
due on de"and and bears interest at the rate of & F per annu". he shares are collateral for the note. *ohn no3 plans to
sell the shares( receiving enough after pay"ent of the note to have earned a s"all profit.
,'is %eals &it' t'e iss"e of 'o& st"ff &or$s &'en &e 4"y t'ings on re%it2 *ave t'e CEO! an% 'e p"r'ases s'ares 4y
4orro&ing money from t'e s'ares for t'e ompany2 It is f"ll reo"rse an% t'e s'ares are ollateral2 )'at 'appens5
-If yo" 4orro& money from t'e ompany ;%ifferent if yo" 4orro& from a 4an$1 for t'e se"ritiest'e time starts
r"nning from &'en yo" at"ally pay for t'e se"rities "nless f"ll reo"rse loan an% se"re% 4y ollateral O,*E-
t'an s'ares itself an% 'ave to at"ally pay off s'ares 4efore yo" sell t'em
-,'is is not t'e ase 'ere! %oesnAt fit &it'in r"les of 1((;%1;21
-+lt'o"g' f"ll reo"rse loan! t'e only ollateral is t'e s'ares t'emselves
-*as not pai% off loan'opes to sell t'e s'ares an% "se t'em to pay off t'e loan
--#efore t'e time starts r"nning! 'as to pay off t'e loanso t'is is O0,SI.E 1((
-,'ro&n 4a$ to s'o& investment intent! et ;4a$gro"n% loan1
--)'at s'o"l% 'e %o instea%5
-Fig"re o"t some ot'er &ay to pay off t'e loan
-One t'at 'as 'appene%! t'en &ait J mont's
-)ill not 4e a4le to sell imme%iately! 'as to omply &it' vol"me reC"irements ;%o not $no& 'o& m"' 'e is
selling1
If 1(( %oesnAt apply 4ea"se 'e 'asnAt not pai% off t'e loan! &'at %oes pay5
-( ;1 X1: )'en %oes it apply5
-In a sit"ation &'ere an affiliate 'as se"rities t'at &o"l% 4e "nrestrite% 4"t 4ea"se 'e is an
affiliate! t'ere are pro4lems2 )'at t'is %oes is say t'at as long as 'e sells to sop'istiate% people
&it' aess! 'e is O62 #0,! 'ave to ome to rest'ave t'ey ome to rest5
-3ay4e ;3 years1
(9
J-1G: Bssu"e in the preceding proble" that %0 "onths ago( *ohn pledged his shares 3ith National Jan4( using the loan
proceeds to pay B"alga"ated. *ohn is no3 hopelessly insolvent and has defaulted on the loan fro" the ban4( so that
National Jan4 3ishes to sell the B"alga"ated shares. !hat result if *ohn 3as B"alga"ateds CAO?
Ple%ge% t'e s'ares to o"tsi%e 4an$ an% "se% loan proee%s to pay off note to iss"ert'en! not going to 4e a4le to re-
pay loan to 4an$2 *E is t'e CEO2 )'at an t'e 4an$ %o5 -Can sell t'e ollateral&'en5
-,a$e% to &'en 'e first p"r'ase% t'em
-,'e normal r"le &o"l% 4e t'e 4an$ o"l%nAt sell t'em "ntil t'e 4an$ &aite% an a%%itional J mont's
-*ere! t'e transation &it' t'e 4an$ ;4an$ &it' affiliate&o"l% t'in$ t'ey &o"l% 'ave to &ait "ntil J mont's
after affiliate %efa"lt14"t ,+C6INB allo&s to a%% affiliate time ;r"le for 'elping 4an$s1
-#0,! e/eption for t'is r"le: 'as to 4e a f"ll reo"rse loan
-If not f"ll reo"rse ;li$e a pa&n s'op1! t'en t'e time starts r"nning from &'en 'e %efa"lts
-#"t! if a f"ll reo"rse loan t'at 'e got from t'e 4an$! t'en ta$ing
Note: "se% to 4e a lot longer t'at 4an$s 'a% to &ait ;no& J mont's1
If s'ares are from a non-reporting ompany! t'an 'ave to 4e 1 year
J-29: 7ary is a control person of heta. #he ac:uired her shares in a registered public offering. heta shares are listed
on B"e2( 3here the average 3ee4ly trading volu"e for heta co""on stoc4 is %/-(--- shares and there are %' "illion
outstanding heta co""on shares. During the first I "onths of the current calendar year( 7ary sold %/-(--- of her
heta shares( /-(--- shares each "onth. ;o3 "any heta shares "ay she sell in Bpril?
CP gets s'ares in p"4li offering2 *o& C"i$ly an s'e re-sell t'em5
-.oes s'e 'ave a 'ol%ing perio%5
-No! t'ese are not restrite% s'ares ;so no 'ol%ing perio%1 4"t still restritions
-)'at are t'e restritions5
-8ol"me restritions for affiliate: &it'in 3 mont's annot sell t'e greater of eit'er t'e &ee$ly tra%ing
vol"me or 1: of t'e n"m4er of o"tstan%ing s'ares &'i' is greater5 1: of t'e 1N million Y 1N9!999
vs2 1H9!999 ;&ee$ly tra%ing vol"me1
-S'e sol% H9!999 ea' mont' in a 2-mont' perio%! an% in t'e 3
r%
mont'! s'e an only sell N9!999
4ea"se s'e 'as alrea%y sol% 199!999
--8ol"me limit says yo" annot %"mp s'ares all at onean only tri$le t'em o"t2 ,'e most yo" an sell in any 3-
mont' perio% is average &ee$ly vol"me or 1: of total o"tstan%ing s'ares2 >oo$ to t'e B-E+,E- of t'ose 2 n"m4ers
an% t'at is yo"r 3+WI303 for a 3-mont' perio%2
J-21: Bssu"e in the preceding proble" that prior to her sale of the %/-(--- shares 7ary gave Cornell 6niversity %,-(---
heta shares. $f Cornell sold all of those shares in the second :uarter of the current year( ho3 "any shares can 7ary sell
during that sa"e :uarter?
S'e gave s'ares to 'er ollege an% t'e ollege t'en sol% t'ose s'ares %"ring t'e perio% s'e &ants to sell t'e s'ares2
*o& many an s'e sell5
-+ss"ming s'e is still 4o"n% 4y 1N9!999 total! so only J9!999 more
--Point is t'at 1((;e1;31;iii1: t'e re-sale of a gift t'at yo" 'ave given to someone! if t'e %onee resells t'ose s'ares in a
given mont'! t'en t'at o"nts to&ar%s t'e perio% yo" sol%
;1N9!999 R 129!999 Y J9!9991
-)'y5 )'at ot'er &ay o"l% s'e give val"e to Cornell5
-Co"l% sell t'e s'ares 'erself an% give money to Cornell! 4"t t'en 'ave vol"me limits
J-22: Bssu"e heta co""on shares are traded in the OC "ar4et. 7ary retained Jro4er to dispose of so"e of her heta
shares. Jro4er 3rote 7argin M Co.( 3hich "a4es a "ar4et in heta co""on shares( to in:uire if it had any unfulfilled
orders for heta shares at or near the current "ar4et price.
3ary ;an affiliate1 'ires a 4ro$er to sell 'er s'ares2 ,'e 4ro$er t'en ontats someone else to fin% o"t if it 'as any
or%ers for t'ose s'ares so t'at t'e 4ro$er mig't 4e a4le to "se "nfille% or%ers2 .oes t'at o"nt as a 4ro$erAs transations5
-One of t'e reC"irements: if an affiliate! only ertain &ays to resell
-+ 4ro$erAs transation: "nsoliite% transation
--.oes t'is o"nt &it' t'is in min%5
(1
-,ra%itionally! 4ro$erAs transation means 4ro$er &it'o"t sales efforts <"st sells se"rities
-#"t! 1((;g1 loosens t'at "p: allo&s 4ro$er to go o"t an% tal$ to ot'er 4ro$ers &'o 'ave in%iate% an interest in
t'e se"rities in t'e last J9 %ays
-)'at is in t'is C"estion is pro4a4ly not inl"%e %in 1((;g1
--Not as$ing t'e 4ro$er if t'ey are intereste%! as$ing if t'ey 'ave ot'er "stomers &'o are intereste%
--NO,E: S'ep'er% %oesnAt are if &e $no& t'at m"' a4o"t 4ro$erAs transations! 4"t <"st a4o"t 1((;g1 an% t'e
reC"irements for 4ro$erAs transation are ompliate%
J-23: Bssu"e the heta co""on shares in 8roble" 5K,, are traded over the counter and 7ary has retained Jro4er to
dispose of a siHable a"ount of her heta shares over ti"e. 6nbe4no3nst to Jro4er( 7ary has entered into a si"ilar
agree"ent 3ith a doHen other bro4ers( all of 3ho" are selling for 7arys account siHable a"ounts of heta shares.
)'at 'appens if s'e 'ires t'is 4ro$er to tri$le o"t t'e s'ares 4"t s'e is also illegally 'ire% a 4"n' of ot'er 4ro$ers to
%o somet'ing else5 Ea' 4ro$er t'in$s t'ey are %isposing t'e amo"nt allo&e% in t'e vol"me reC"irements! 4"t s'e is
violating t'e vol"me restritions 4y not telling t'em2 )'at 'appens in t'is sit"ation5 ;similar to )olfson ase1
-In )olfson! t'e 4ro$ers &ere not lia4le
-,'e same r"le is in%iate% 'ere: 1((;g1;(1
-If t'e 4ro$er "n%erta$es a reasona4le inC"iry an% not a&are of ir"mstanes t'at t'ey are part of a 4ig
%istri4"tion! t'en t'e 4ro$er is not lia4le
-.oes t'at mean t'e person at"ally selling s'ares an still "se 1((5 NO
-#ro$er is protete% t'ere
-0ltimate re-seller is NO, protete% li$e in )olfson
5K,L1 Bssu"e 7ary( in the preceding proble"( 3ill sell shares in the OC "ar4et e2clusively through Jro4er. 7ary
discloses to Jro4er that( at the sa"e ti"e Jro4er is selling 7arys control shares to the public( 7ary 3ill privately sell
5-(--- shares to o". o" is not a sophisticated buyer( but he and 7ary have negotiated directly 3ith one another
3ithout the assistance of any inter"ediary. 7ust Jro4er ta4e account of 7arys sale to o" 3hen considering the
nu"ber of shares Jro4er can sell?
*ave CP %oing 2 t'ings at t'e same time: s'e is "sing t'e 4ro$er to sell some s'ares p"rs"ant to 1(( an% s'e is
stan%ing on a street orner an% selling s'ares2 .o yo" o"nt t'e amo"nt s'e is selling on t'e street orner &it' t'e vol"me
reC"irements5
-Yes! 4"t &'at is t'e iss"e5
-,'e iss"e is a4o"t t'e ma/ n"m4er of s'ares s'e an sell
-)ill t'e 2 transations 4e integrate%5
-Street orner o"tsi%e 1((! 4"t if integrate%! vol"me transations violate%
--1((;e1;31;vii1
--1((;1%onAt 'ave to o"nt ( ;1 X1 offering( ;1 X1 transation &o"l% 'ave to 4e to a person &'o is sop'istiate% an%
'as aess
-Pro4a4ly t'e 4est ans&er is t'at t'is )O0>. CO0N, an% s'e &o"l% 'ave 4lo&n 1(( 4y %oing t'e transation
at t'e same time
-,'ere is a great %anger of t'at an% s'e s'o"l%nAt 'ave %one t'at
--S'e s'o"l% 'ave omplie% &it' 1(( an% 1((;a1 if availa4le
Rule 1446
Problems on Pg. 3&3:
J-2H: G7BC needs to :uic4ly raise .0- "illion by issuing /Kyear bonds carrying an ' percent interest rate. G7BC
co""on shares are traded over NB#DBT. !ith ti"e being of the essence( a registered public offering is not practicable.
7arge( G7BCs CGO( has e2cellent ties to nu"erous financial institutions. #he see4s your advice on 3hich of the
follo3ing strategies G7BC should pursue. 6nder Option $( 7arge( by "ail and phone( 3ill solicit appro2i"ately ,--
large financial institutions to buy the unregistered bonds. Option $$ calls for G7BC first placing all the bonds 3ith an
invest"ent ban4ing fir" 3ith the understanding that the invest"ent ban4ing fir" 3ill dispose of the bonds by selling the"
to the sa"e ,-- large financial institutions targeted in Option $. You are told that each of the financial institutions has an
invest"ent portfolio in e2cess of .%-- "illion. !hich of these , options do you reco""end?
12 Option I: CFO &ill ontat 299 finanial instit"tions 4y mail an% p'one
a2 #y -"le 1((+! t'ey an iss"e t'e %e4t 4"t not ommon s'ares as t'ey are alrea%y sol% on a national
(2
e/'ange
a2 ,'e iss"er selling 4on%s to finanial instit"tion: not a re-sale "n%er 1(( or 1((+ ;1(( only pertains to
sale of sto$ to someone &'o 'as alrea%y p"r'ase%1
42 Options:
a2 H9J: *ave a pro4lem of violating t'e -"le H9J safe 'ar4or ;'as no limit1 4y ontating t'e finanial
instit"tions to fit &it'in H9J! &o"l% 'ave to 4e all are%ite% an% 'o& are yo" going to I. t'ese
people5
i2 Cannot <"st soliit t'em
ii2 *ave to %o 4a$gro"n% 'e$: prior relations'ip! et2 Cannot <"st 'ave a general soliitation
or violate H9J
42 Private plaement: 299 people mig't 4etoo m"' for t'is
2 If yo" &ere a4le to get t'e s'ares to t'e 299 finanial instit"tions! t'ey o"l% "se 1((M1((+ to re-sell t'e
s'ares &o"l% NO, ome into play &it' an initial sale
22 Option II: iss"er &ill plae all t'e 4on%s &it' one finanial instit"tion &'o &ill t'en %ispose of t'e 4on%s to t'e
targete% finanial instit"tions from Option I
a2 It is t'e 4etter option
42 )o"l% sell t'e s'ares to t'e investment 4an$
a2 0n%er H9J! an <"st ma$e s"re t'at 1 is are%ite%
42 No %anger of relations'ip
2 ,'en! investment 4an$ an t'en "se 1((+ to get t'e 4on%s into t'e 'an%s of t'e people yo" &ante% to
sell %iretly
i2 Note: investment 4an$ %oes not 'ave to 'ave s'ares over S199 million
ii2 1((M1((+ are for re-sales! not initial s'ares
12 *ave to ma$e s"re 4on%s are not f"ngi4le for 4on%s t'at are alrea%y sol% on p"4li
mar$ets
22 *ere! t'ey are NO, selling sto$ on p"4li mar$et 4"t t'ey are only trying to sell
#ON.S
--1((+ is a really po&erf"l toolin or%er to "se it! t'e iss"er annot "se2 ,'ere is no r"le saying iss"er an a"tomatially
sell to &'oever it &ants so long as 4"yers 'ave more t'an S199 million2 ON>Y people &'o &ant to -ESE>> an "se
1((+2
-,o e/ploit 1((+! &ant t'e 4on%s in t'e 'an%s of someone else &'o an re-sell
-+rrange% simple transation to 1 investment 4an$ &'o an re-sell t'em "sing 1((+ to all t'e ot'er instit"tions
-)'y investment 4an$ is &illing to pay a lot of money for t'e s'ares
--)'at 1((+ %oes is t'at it is a &ealt' gift to investment 4an$s: t'e iss"er itself annot "se 1((+! an% 'ave to P+Y an
investment 4an$ to "se 1((+
J-2J: Bssu"e Jancorp purchased ,-F of the G7BC bonds sold through the invest"ent ban4er in 5K,/. hree "onths
after this purchase( Jancorp is in financial distress and si"ultaneously sells half the G7BC bonds to its o3n crossKto3n
rival( CitiHens Jan4( and the re"aining half to 0 3ealthy( albeit unsophisticated( individual investors. Does G7BC or its
invest"ent ban4er have any e2posure under #ection / because of Jancorps reKsale? !hat are Jancorps proble"s under
#ection /?
If someone engages in a vali% 1(( transation ;sol% to investment 4an$ &'o re-sol%1! letAs ass"me #anorp %i%nAt %o
t'ings rig't %oes t'at a"se pro4lems for t'e initial seller5
INI,I+> SE>>E-: If t'e original seller sol% p"rs"ant to 1((+ an% it &as all part of a sam an% $ne& t'e =I# &o"l%
sell in a non-omplying &ayt'at &o"l% not &or$
-Normal r"le: initial "ser of 1((+ %oesnAt 'ave to &orry a4o"t re-sales to non-ompliers
-0ser of 1((+ %oesnAt 'ave to &orry a4o"t resales later
-Not going to eliminate t'e safe 'ar4or later
#+NCO-P:
-+re ri' people =I#s5 NO
-)'at a4o"t H9J5 NO
--eC"irement for are%ite% investor is merely t'at yo" are ri'
-#"t! ON>Y iss"ers an "se H9J
-)'at a4o"t (;1 X15 NO
-Nat"re of t'e person &'o sol% t'e se"rities: 4"yer 'as to 4e ri' an% sop'istiate% an% 'ave aess to
(3
informationpeople 'ere are not sop'istiate%
--,'e sales to #aorp to ot'er =I# &o"l% normally 4e t'o"g't to 4e o$4"t t'ey 'ave sol% part of t'em in a omplying
&ay an% a part in a non-omplying &ay
->oo$ to 1((+;e1
-No integration t'erefore %o not lose 1((+ 4ea"se of non-ompliane
J-2L: B partial reprise of 8roble" 5K%%. %I "onths ago( Blice ac:uired %-(--- Bpe2 co""on shares in an intrastate
offering. Bfter holding the shares for 5 "onths( she sold the" to #tate Jan4( a T$J. Bfter holding the shares for 0 "onths(
#tate Jan4 sold the shares to *eff. Can *eff reKsell the shares in the OC "ar4et?
1((;a1;21;iii1: -estrite% se"ritiesones to &'i' t'e safe 'ar4or mig't apply if yo" %o &'at is reC"ire%
transations aC"ire%
--Every lin$ in t'e 'ain 'as 4e a 1((+t'e ot'er &ay to loo$ at it is t'at t'ere is <"st 1 lin$ t'at is 1((+
-*ere! t'is is a sit"ation in &'i' only 1 lin$ is 1((+: sale of +lie ;p"r'ase% from iss"er1 to =I# &as 1((+! 4"t
t'e sale to =I# to @eff &as not 1((+ 4ea"se 'e is not a =I#
--3ig't 1(( apply to @effAs sales 4ea"se at least 1 lin$ t'at 'e reeive% t'e se"rities &as 1((+5
-3ost o"rts &o"l% say YES
-,'at &o"l% &or$O
-,'erefore! t'ese &o"l% 4e onsi%ere% to 4e restrite% se"rities to &'i' 1(( safe 'ar4or &o"l% apply
--)'at &o"l% 'ave to %o for 1(( to apply5
-)'at are t'e reC"irements &'en a non-affiliate attempts to "se 1((5
-J mont' 'ol%ing perio% P information
-If yo" &ait 1 year! information reC"irements fall a&ay
Problems on Pg. 32!:
J-2N: Candice is a C8 of B"alga"ated Dry <oods. #he resold %--- shares of B"alga"ated to Devin , "onths after she
ac:uired her control shares fro" B"alga"ated in a private offering. Devin is B"alga"ateds ne3ly recruited CGO.
Private offering an% C"i$ re-sale to someone &it' aess: CP p"r'ase% s'ares in private offering ;(;21 &as "se%
4ea"se s'e &as a sop'istiate% person &it' aesss'e is t'e CPMCEO1 an% no& &ants to re-sell: an s'e %o t'is5
-NO
-Permitte% to re-sell se"rities as long as yo" sell t'em onsistently &it' t'e e/emption 'ere! t'ere &as a
sale for 'er p"rs"ant to private plaement an% s'e is re-selling p"rs"sant to same private plaement
-,'at is O6 4ea"se t'e re-sale %oesnAt onflit &it' t'e first e/emption
>etAs say t'e first sale &as intrastate! an% resale &as intrastate: t'at &o"l% 4e O6 4ea"se t'e re-sale %oes not onflit
&it' t'e original e/emption ;not ( ;1 X1
>etAs s"ppose t'ere &as a sale "n%er intrastate an% t'en a sale to a sop'istiate% person &it' aess o"tsi%e t'e state
%oes ( ;1 X1 apply5
--"le of onsisteny %esri4e% a4ove %oes not apply
-Cannot "se ( ;1 X1: ( ;1 X1 applies to sit"ations in &'i' &e are tal$ing a4o"t "nrestrite% se"rities 4"t for
t'e fat &e 'ave an affiliatet'e se"rities sol% p"rs"ant to intrastate are restrite% an% to 4eome
"nrestrite%! &o"l% 'ave to 'ol% t'em for H years
-*ave to 'ol% t'em for H years an% t'en an re-sale
--If in t'e 'an%s of non-affiliate! o"l% t'ey 4e freely sol%5 Yes! 4"t anAt sell t'em any &ay yo" &ant an% "se ( ;1 X1:
sell to sop'istiate% P aess
[[!hat is an unrestricted security?
-Sol% p"rs"ant to any e/emption t'at 'ave ome to rest
-Can 4e freely resol% if o&ner is non-affiliate! if affiliate! annot resale
--+ll t'ese e/emptions: as long as ome to rest! at some point! 4eome "nrestrite%
--+t some point! someone &'o 'as p"r'ase% se"rities 'as to 4e a4le to <"st re-sell t'em: 'ave to s'o& investment intent
an% 'ave to &ait a &'ile
-Not freely allo&e% to re-sell if yo" are an affiliate
-ECOBNIIE ,*+, (;1 X1 ,O +PP>Y: SEC0-I,IES 30S, #E O,*E-)ISE 0N-ES,-IC,E.
-0n%erstan% &'y ( ;1 X1 annot applysol% p"rs"ant to same e/emption t'at t'ey &ere originally resol%
((
J-2G: Bssu"e B"alga"ated issued the shares to Candice( its controlling stoc4holder( and others pursuant to the intraK
state offering e2e"ption of #ection ICaEC%%E. , "onths later( Candice resold %--- of those shares to her brother( Ad3ard(
a sophisticated and e2perienced investor 3ho lives in a neighboring state.
Intrastate offeringiss"er sells to ontrolling people! CP later resells to sop'istiate% person &it' aess &'o is
o"tsi%e t'e state
-+s long as t'e re-sale is p"rs"ant to t'e original e/emption! t'en t'at is o$: is t'e re-sale p"rs"ant to t'e original
e/emption5 NO ;not to anot'er person &it'in t'e state1
-)o"l% ( ;1 X1 &or$5 NOnot Dot'er&ise "nrestrite%E
J-39: Bssu"e the sa"e facts as 8roble" 5K,&( e2cept that Candices resale to Ad3ard occurs / years after she ac:uired
the shares fro" B"alga"ated and that her attorney negotiated the ter"s of the sale to Ad3ard.
*ere t'ere is no pro4lem 4ea"se t'e s'ares ame to rest2 ,'e resale &o"l% o$ "n%er K(;1 X1 an% an sell to
sop'istiate% &it' aess
J-31: / years ago( Candice ac:uired her control shares as part of B"alga"ateds intraKstate offering. here is no active
"ar4et in B"alga"ated co""on stoc4. Candice 3ishes to sell so"e of her shares and proposes to fly to NYC( 3here( on
a street corner outside of NY#A( she 3ill atte"pt to sell so"e of her shares to any and all pedestrian traffic. ;o3 3ould
you advise her?
+n affiliate an 'a&$ t'ings t'emselves as long as no one 'elps t'em o"t
--,'e e/emption t'at applies 'ere: (;11
-.o not 'ave to apply se"rities la&s "nless iss"er! "n%er&riter! or %ealer
-*ere! %efinition of 0) %oes not inl"%e t'is affiliate
-Only &'en yo" 'ave someone 'elping t'e affiliate is t'e 'elper %eeme% to 4e in t'e same position as t'e
iss"er <"st 'ave someone &'o is not 'elping
J-32: Bssu"e the facts of 8roble" 5KI%( e2cept that Candice is too busy to "a4e the trip to NY. Gor a standard
co""ission fee( she retains her bro4er of "any years to carry out this selling effort to her.
No& t'at s'e 'as ontrate% a 4ro$er 4ea"se s'e 'as an 'elper &'o is 'elping o"t an affiliate! so (;11 %oes not
apply so s'e nee%s an e/emption
--Co"l% try "sing 1((: 4"t t'is is intra-state
--( ;1 X1: annot sell on street orner in t'is &ay one yo" get someone to 'elp yo" ;if yo" %o it yo"rself! t'en yo" an1
-Nee% to sell to sop'istiate% people &it' aess
J-33: Candice has been a controlling stoc4holder of B"alga"ated for ' years. B"alga"ated co""ons toc4 is traded on
the OC "ar4et. #he no3 3ishes to diversify her invest"ents and has retained #"ith Jaley and Co. to sell I-(--- of her %
"illion shares in an orderly "anner in the OC "ar4et. Candice has herself privately negotiated to sell /-(--- of her
shares to ;arrold( an unsophisticated and ine2perienced( albeit 3ealthy( investor. #oon after ;arrolds purchase(
B"alga"ateds "ar4et price declines sharply. Bdvise ;arrold of his rights.
>etAs s"ppose s'e arranges a sale 'erself to *arrol%2 )o"l% <"st t'is 4e O65
-.oing it 'erself! t'en it is O6 even if person is "nsop'istiate%
->i$e t'e street orner e/ample
)'at a4o"t sales in t'e mar$et5
-S'e is trying to sell in an or%erly mar$et in O,Cloo$s li$e s'e is "sing 1(( ;tri$ling t'em o"t &'en affiliates
"se 1((1
+re 'er sales integrate% &it' 1((5 )*O 6NO)S
-,'is %oesnAt arise
8#eory o- t#e Sale
Problems on pg. 4!1
L-1: @entures Corporation has I--(--- shares of preferred stoc4 outstanding. he preferred shares carry a cu"ulative
dividend of .,Nshare( 3ith a possibility of receiving an additional .% per share annually if the JOD so decides. @entures
board resolved that the preferred shares should be entitled to choose bet3een %E receiving their regular dividend of .,
per share( or ,E forgoing that dividend and receiving for each %- preferred shares o3ned % share of co""on stoc4 as a
stoc4 dividend. he co""on stoc4s current "ar4et price is .,LNshare.
(H
Company says yo" o"l% even 'ave a S2 %ivi%en% or getting 19 more s'ares of sto$&o"l% t'at 4e Dfor val"eE5
-SEC 'as sai% t'at it is NO,
-NO
L-2: Bssu"e in the preceding proble" that the regular ., per year dividends on the @entures preferred shares 3ere L
years in arrears. Bssu"e that @ JOD has resolved to per"it I shares of preferred stoc4 to be e2changed for % share of
co""on stoc4the co""on stoc4s current "ar4et value is .,LNshare.
--If yo" alrea%y 'ave an entitlement to preferre% s'ares ;in arrears1at t'at point an yo" e/'ange for s'ares instea%5
--NO, &it'in t'e 'ol%ing of SECt'is is %ifferent 4ea"se yo" are 4eing as$e% to give "p somet'ing yo" alrea%y 'a% for
t'e s'ares instea%
-)o"l% 4e a s'are for val"e: SN in %ivi%en% or SN instea%
6s long as you are gi;en t#e S6., +HO(+, in money or stoc/= e;en i- one is 3ort# more or less= t#at is 9O8 a
S6), >OR ?6)5,
-9ee*s to be at t#e same time to be not -or ;alue
(- you alrea*y #a;e a entitlement -or money= an* t#e company says t#ey 3ill gi;e you stoc/ instea*@t#at is a
S6), >OR ?6)5, (gi;ing up ;alue
L-3: Bssu"e in 8roble" 0K% that @entures JOD( in order to deal 3ith the preferred stoc4 dividends that are in arrears(
proposes that @entures JOD( in order to deal 3ith the preferred stoc4 dividends that are in arrears( proposes that @s
article of incorporation be a"ended to "a4e @s preferred shares convertible into co""on shares at any ti"e. $f the
preferred shareholders approve the a"end"ent and "any of the preferred shares are converted( has there been a sale?
If t'is is a s"4stantial 'ange in t'e se"rity! &o"l% 'ave to re-register
-C'ange in t'e nat"re of t'e preferre% s'ares &o"l% 4e eno"g' to trigger t'e %otrine
--)o"l% 'ave to register for t'e ommon s'ares sine t'ere are 2 se"rities 'ere
--Common s'ares into &'i' t'e preferre% s'ares 4eing onverte%! as &ell as original s'ares
L-(: !hat if they 3ant to reKincorporate in a state 3ith 3orse la3 for shareholders?
--,'e r"le is t'at yo" %o not 'ave to register t'at
(J

Das könnte Ihnen auch gefallen