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I. Securities Transactions
a. Securities are bought and sold in two principal settings:
i. Issuer Transactions: those involving the sales of securities by the issuer to
ii. Trading Transactions: the purchasing and selling of outstanding securities among
II. Reasons for Regulation
a. Regulation for the public interest
i. Will cure market failures and provide efficiencies by increasing information.
b. Interest Group apture
i. Rules made to help!s"uelch another group
c. Regulators #enefit
i. ertain rules help the S$% itself
III. &arious 'pproaches to Securities Regulation
a. 'ntifraud
i. (itigation over defrauding someone
ii. 'fter)the)fact regulation
iii. $*ists on a federal and state level +,b)-
b. Registration and .isclosure
i. /sed prior to selling securities
ii. Incentive to have more disclosure to have more people to trust you
iii. Included in the 011 'ct. opied from what was done by seasoned issuers of
securities prior to the implementation of the 211 'ct.
c. 3erit Regulation
i. Regulation that a company may not be able to sell securities in a particular state%
unless that company is a good one and has merit and is deemed worthy and in the
public interest by the state
ii. Re"uired in some states 4+56 still% but mostly preempted by federal law
d. S$: Securities and $*change ommission
i. Regulatory body to control securities
ii. 3ost commissioners come from industry and return to the industry after.
IV. 1933 Securities Act
a. State laws were allowed to run concurrently% unless the
i. Stock was traded on the big stock e*changes 47'S.'8% '3$9% 7:S$6
ii. If you sell stock to sophisticated people: states are not able to regulate
iii. 7ame certain e*emptions that states can0t regulate
b. #asic Structure
i. .iscussion of registration and new issues
ii. &arious e*emptions
iii. 'ntifraud: makes state
c. #asic ;hilosophy: <ocus on the I7ITI'( S'($ by the ISS/$R
d. $ffect: make disclosure mandatory
i. 'pplies to new issuances only or if the controlling persons are selling in the
secondary market
V. 1934 Securities Act
a. Regulation of the trading market
i. 'fter the 011 act has been complied with% the 01= act regulates the market
afterwards or delegate that regulation to self regulatory organi>ations 4i.e. the
b. 'ntifraud Rules
i. ? +, and a rule that has been adopted pursuant @ Rule +,b)-
c. ontinuing .isclosure Re"uirements
i. 'fter issuance% there are continued disclosure re"uirements
+. 'nnual report 4+,k6
5. 8uarterly Report 4+,"6
ii. .isclosure only re"uired for companies:
+. Traded on a national e*change
5. If company is big% i.e.
a. 3ore than A+, million dollar in assets '7.
b. 3ore than -,, shareholders
c. Br if you filed the 011 act registration statement
d. ;hilosophy:
i. 'llows the govt to delegate to private% SRBs
&I. Sources of all Rules of Securities Regulation
a. onstitution
b. Statutes: 011 and 01= 'ct
c. Bfficial S$ rules and pronouncements
d. S$ interpretations
i. S$ can interpret the laws and regulations
ii. Sort)of have the force of law
e. Bfficial S$ formsCin practice very important
i. <orce of law 4not as much as 011 act6
f. S$ Staff Bpinions
i. 7o)'ction (etters
+. ;ublished letters that okay your particular activities
5. Theoretically% doesn0t limit S$ action% but practically S$ will not take
action against the company if there is a no)action letter.
33 Act: Secti! "#$%#1%
Unless the context otherwise requires...The term security means any note, stock, treasury stock,
security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any
profit-sharin areement...investment contract...any interest or instrument commonly knows as a
I. Introduction
!. "#$ v. $.% &oiner 'easin $orp.
i. S$0s attempt to stop the offering and sale of assignments of oil leases. 7o actual
interests in the oil 4as part of the definition of security in the 011 act6% but Dust a
sublease. The "uestion is this a securityE
+. ourt rules that the courts should test the character of the instrument
a. $ven if the type used isn0t e*actly mentioned% if it smells like a
security and looks like a security% and has risks like a security% it
likely is a security.
b. ;olicy Reasons at times determine what should be regulated by the securities acts
i. $conomists ask:
+. .oes it make sense to be regulatedE
5. .oes it solve a market inefficiency for these disclosuresE
a. ompany should do the disclosure if there are too many buyers
who will not do the disclosure% otherwise% let the one buyer do the
ii. ;sychological
+. ;eople tend to be overly optimistic
5. 'nd don0t recogni>e the amount of fluctuation there actually is.
c. Implications of the .efinition
i. If defined to be a security% a host of re"uirements are triggered.
+. Registration and .isclosures for public offerings
5. .isclosures for e*emptions
1. (iabilities for selling unregistered securities and misrepresentations
=. 'ntifraud provisions
-. (imits on insider trading
F. 'dministrative and Gudicial liability for insider trading law
II. Investment ontracts: Howey Test
a. Test for determining whether an investment fits into the definition of a security by being
an investment contract
i. I!&est '!e(
ii. I! $ c))! e!ter*rise
iii. E+*ect$ti!s , -r,its
iv. Fr) t.e e,,rts , Ot.ers
b. ase (aw
i. "#$ v. (.&. )owey $o.
+. Two orchard companies sold parcels of land. (and is not a security% but
here they are also offering service contracts to harvest the fruit from the
land. +-I hired someone else% J-I took the service contract.
a. $conomically structured this way to allow people to Dust see the
land as an investment
b. Holding: definitely a security because it met the = part test. This
was an investment in a common enterprise that e*pected profits
solely from the efforts from others.
c. Gust selling the land would not have been an issueK it was the fact
that it was coupled w! a service contract 4or i.e a rental agreement
on a condo6
c. 'lternative to the Howey Test: Ris/ C$*it$0 Test
i. ' security will not e*ist under the risk capital test unless capital provided by
investors is at substantial risk.
ii. State ourt view that information must be disclosed because the investment is at a
substantial risk
+. 3uch easier test to satisfy
5. #ut Howe reDects it.
iii. <ocuses on the e*tent to the investor0s initial outlay is subDect to the risk of the
enterprise over which the investors have no managerial control.
+. Howey: Reliance on promoters0 efforts
*. %arine +ank v. (eaver
i. The Weavers pledged a bank . as collateral to guarantee a bank loan to
olumbus ;acking. When the bank reneged on its promise to deliver the loan
proceeds to olumbus% the Weavers claimed the bank had defrauded them uner
Rule +,b)- when they pledged their .. The Weavers also claimed that their
agreement with the owners of olumbus to share -,I of the company0s profit
was La profit)sharing agreementM so that their guarantee was also in connection
with this security. This was a one)on one agreement made between the #ank and
the Weavers.
+. Holding : The court said this was a uni"ue agreement% negotiated one)on)
one by the partiesK it is not a common enterprise. The court relied on the
Lunless the conte*t otherwise re"uiresM language of the statutory
definition. 'lso this isn0t solely for profits b!c they got to use the pasture.
The efforts were not solely for the efforts of others because Weavers had
veto control over further borrowing by olumbus.
a. 7ot the type of the investment that comes into mind when you
think of securities.
5. $conomically : Bne)on)one agreements provide no scale advantages for
either party in the transaction in the production or verification of
information that would have suggested that the issuer was the low cost
provider of relevant information.
III. Howey Test 'pplied @ .efinitions of the $lements
a. Two applications:
i. ;romoter will attempt to evade the securities laws
ii. Someone else will something and will be advised by not good lawyers and will
call it a stock or something else to fall under the definition when its not really a
+. ,rofits *efined
i. United )ousin -oundation, .nc. v. -orman
+. 7: built co)op housing and low)income individuals were able to live
there as long as they also paid a bit to buy LstockM in the ownership rights.
There was a lawsuit because 7: increased the price to how much the
monthly rental rate increased because of problems budgeting. They
claimed that these LstockM were securities and they should have complied
w! all the registration!securities laws.
i. )oldin : 7ot a security. There was no e*pectation of
profits. B7S/3;TIB7 H$R$. When a purchaser is
motivated by a desire to use or consume the item purchase%
the securities laws do not apply.
+. $ven if it was called a stock% did not meet the
re"uirements of being a security.
a. 7B dividends
b. 7o profits e*pected
ii. 'lso% look to see whether this is Dust a game% or an actual investment for profit.
+. In determining this% look at the reasonable investor0s point of view on
whether this was done for profit or in a game.
iii. "#$ v. #dwards /"ale-'easeback -inancin0
+. ;ayphone sales and lease back. Initially contract provided a +=I of
returns via a pyramid scheme 4;on>i scheme6. The defendants said this
was not a security b!c there was a fi*ed return.
a. ourt holds that e*pectation of profits does not re"uire variable
returns. <i*ed rates of return do not e*clude the investment from
securities laws
b. 7o reason to distinguish b!w variable!fi*ed returns because the
reason people are attracted is because of the profits themselves
i. 7othing the )owey test re"uired that profits be variable.
'nd that a fle*ible interpretation furthered the purpose of
the securities laws to snag unscrupulous marketers who
promise low)risk investments 4i.e. guaranteed fi*ed returns6
from the elederly!unsophisticated
c. .ifferent 3eanings of ommon $nterprise
i. Horizontal Commonality: There are several people all investing in the same
+. /sually applicable in every Durisdictions
5. 5 Ways to Get Hori>ontal ommonality
a. Whether investors are investing in the same way
b. Whether investors are all investing in the same enterprise and are
investing in the same manner.
ii. Vertical Commonality: 5 forms
+. Broad vertical commonality: the most broad form% only a connection
between the efforts of the promoter and re"uire only a connection between
the efforts of the promoter and the collective success or losses of the
5. Strict vertical commonality: re"uires a direct relationship between the
success 4as opposed to the efforts6 of the promoter and that of the
a. Re"uires the promoters and investors to share the risks of a venture
.. $fforts of Bthers
i. S$ v. (ife ;artners
+. 'I.S patients life policies were sold to others% but everyone lost money
because the 'I.S drugs were released and the patients were living longer.
5. Holding: This was a securityCfrom the efforts of others factors. The
promoters in this situation worked very hard prior and thus% satisfied the
a. $very other case looks only to the future actions of the promoter to
see whether the meet they efforts of others.
ii. In the case of figuring out whether efforts of others may not come into play
because profits are based on the world market prices 4i.e. fluctuations in the price
of gold6 look ne*t to whether the efforts of the promoter are the cause of the
profits or the world market price is the cause of the price fluctuations.
iii. $fforts of others should be analy>ed by how much control a person retains in their
IV. Assci$ti!$0 Fr)$0ities: I!terests i! Cr*r$ti!s1 -$rt!ers.i*s1 $!2 LLCs $s
'. Cr*r$ti!s : Stock as Security
i. 7on)investment stock
+. <oreman stock: definition of security represents the economic reality
5. 3ost of these stocks have none of the characteristics of a stock
investment: no right to dividends%
ii. Sale of the #usiness .octrine
+. <ormed in the early +NJ,s
5. If you transferred a maDority of a stock in a closely)held corporation% it
was deemed not to be a securities transaction.
a. (andreth reDected it for corporations and refused to apply Howey.
iii. Landreth Timber Co .: Investor bought J-I of the stock of a closely)hold
corporation and sued when the purchase went bad% saying that this was a security.
+. Going through the Howey test% this would not be a security because there
was no commonality.
5. ourt adopts a literal approach to the securities laws and adopts the plain
meaning of the statute
a. The plain meaning of the statutory definition mandates that the
stock be treated as LsecuritiesM subDect to the coverage of the 'cts.
b. Instruments that bear both the name and all of the usual
characteristics of stock seem to be the clearest case for coverage by
the plain language of the definition.
c. ourt ignores whether he was a passive investor and economic
substance of the deal 4J-I v. +,,I of the stock6.
1. Howey test was designed to determine whether a particular instrument is
an investment contract not whether it fits into any of the e*amples listed in
the statutory definition.
#. -$rt!ers.i* Interests as Securities
i. Since partnership interests are not listed as a definitional item% it must fall under a
catch)all provision 4i.e. investment contract6
+. ;roblem arises under the fourth factor from the efforts of others.
a. ' partnership is the pooled efforts of the partners.
5. 7ot a security% unless treated as a security
ii. $*ception: (illiamson case
+. General partnership is not a security% unless:
a. 7o legal control: ;artnership agreement eliminates investor control
b. 7o capacity to control: Ine*perienced investor BR
i. Securities laws are supposed to protect the ine*perienced%
and thus securities laws should apply.
c. 7o practical control: ;romoter has uni"ue skills that can0t be
iii. (imited partnerships is generally more likely a security
+. $*ception: limited partner that gains more control and becomes liable for
his actions.
a. State statues and R/(;'Crules that allows a limited partner to do
certain things w!o gaining liability
5. "teinhardt 1roup v. $iticorp : (imited partnership created to sell of its
nonperforming assets. #ut there was only one limited partner @ Steinhardt.
The investment was not successful and he sued under the securities laws
for rescission. Was he Dust a passive investorE
a. The ourt held that because Steinhardt had significant powers
under the (;' and he directly profited from his efforts% this could
not be considered from the efforts of others.
i. He retained pervasive control of the partnership
b. 7ot an investment contract and thus not a security.
c. 'lso% at play is that Steinhardt was a sophisticated investor and
didn0t need the protection of the securities laws.
i. #ut other courts don0t agree with this.
. LLCs as Securities
i. 5 types
+. 3ember managed @ structured like a partnership
a. 7ot a securityCe"ual rights to management
b. If there is a very large member managed firm with +%,,, members%
have to look to the structure to make sure it doesn0t act more like
manager managed
i. 7ot hard and fast rules
5. 3anager)3anaged @ structured like a corporation
a. 3ost likely a security
a. /sually% buying real estate% you are not a security.
i. 7o hori>ontal or vertical commonality
ii. $*pect use of the land!real estate
b. If there is an attached management rental agreement% may be a security
i. Gust looking for someone else to handle the rental and for you to profit out of it.
ii. ommonality is satisfied if there is some sort of rental pool @ Rental ;ool
'greement 4R;'6
$. )ockin v. *ubois
i. Hocking a resident of (as &egas wants to buy an investment condominium in
Hawaii. He gets into contact w! .ubois a real estate agent licensed in Hawaii% but
tells him he wants to be a Lfirst person buyerM from the developer. $nds up buying
in the secondary market. He signs a rental management agreement with H;% but
says it was a passive investment that .ubois selected and managed. He however
defaults on the payments of the condominium% but says that it was caused by the
failure to receive the e*pected rental income and other misrepresentations by
ii. Issue : Is it still a security when the rental agreement is not directly w! the land
developer under the Howey testE
+. 7ot purchased from the developer so not e*actly like the Howey case.
iii. Holding : ourt looks to the Howey test but under the e*pectation of the profits%
they applied the Williamson test. 416 the investor here was so dependent on the
services of the manager that he could not replace the manager of the enterprise or
e*ercise meaningful partnership or venture powers. The owner of the condo had
no control of the administration of the condominium. This is a security.
+. Williamson test is for partnerships. They analogi>ed to the partnership.
iv. #rokers now afraid they can0t recommend a service contract.
a. 7otes are defined in both the 011 and 01= act
i. Securities laws define a security to include Lany noteM
+. Securities 'ct 40116 ? 54+6 and
5. $*change 'ct 401=6 ? 14a64+,6
ii. However% under the Securities 'ct a note that Larises out of a current transactionM
and matures within nine months is e*empt from registration under the 'ct.
+. Intended for commercial paperCunsecured promissory notes issued by
large% financially sound companies to finance current operations and sold
to institutional investors in large denominations.
b. When is a LnoteM a securityE
i. Reves v. Ernst !oun" #use the $%& 'ct(
+. o)Bp is an agricultural cooperative that had 51k members. They sold
promissory notes payable on .$3'7. by the holder% and paid a variable
rate of interest that was adDusted monthly to keep above the rate paid by
local financial institutions. The note was offered as an investment. The
o)Bp filed for bankruptcy in +NJ=% but the holders filed suit under Rule
+,b)- against the accounting firm that handled the financial statements
citing a failure to disclose insolvency.
5. Issue: Is the note issued by the o)Bp a security within the meaning of the
+N1= act to "ualify as a +,b)-E
1. Holding: :es. <or money with common trading with no risk)reducing
=. Reasoning: <amilial Resemblance Test
a. ourt reDected the Howey test because notes are 7BT investment
b. The familial resemblance test presumes that any note is a security%
but the presumption may be rebutted only by a showing that the
note bears a strong resemblance to a non)e*haustive list created by
the 5nd circuit.
c. Steps in the <amilial Resemblance Test
i. <irst% look and see if it fits in the family.
+. <amily of things not considered not notes
a. 7otes in consumer financing
b. 7otes secured by a mortgage on a home
c. Short)term note secured by a lien on a small
d. haracter loan to a bank customer
e. 7ote secured by a business0 accounts
5. 3ainly consumer loans and normal day)to)day
business loans especially short term loans don0t
have to comply w! securities laws.
ii. Second% if it doesn0t fit the list% should the list be e*pandedE
See if there is a family resemblance using the = part test.
1. 'ti&$ti! ,r Tr$!s$cti!:
a. If solely for profit or investment% then it is a
security% but if it is used to buy consumer
goods or for some commercial purpose% not
a security.
5. -0$! , Distri3uti!: Is there common tradingE
a. If the notes are widely offered and traded% it
is more likely a security. If the note is given
in a face)to)face negotiation to a limited
group of sophisticated investors% it is more
likely not a security.
3. I!&estrs Re$s!$30e E+*ect$ti!s:
a. .id the investors believe this investment
would be protected by securities lawsE
i. Then more likely a security
4. Ris/4Re2uci!5 F$ctrs , t.e I!&est)e!t
a. 're there other factors that reduce the risk of
this securityE
i. i.e. collateral
b. Br are there nonsecurities governmental
regulations to protect investorsE
c. If there are neither% it is more likely a
d. annot meet the nine)months e*ception. These notes are on
demand and the maturity is indefiniteCanytime from a short term
to a very long term.
i. .issent disagrees and calls these securities for less than
nine months because it can be called upon at anytime.
ii. 2eeves applied
3. Securities and E)chan"e Commission v. *allenbroc+
a. Wallenbrook sold promissory notes secured by the accounts
receivable of 3alaysian late* glove manufacturers. The buyers
future payment 4ninety days later6 was assigned to Wallenbrock%
who would then buy the account receivable for O-)J,I of its
value. The individual investor and Wallenbrock would split the
cost of the receivable% with each party owning a -,I undivided
security interest in the account receivable. 7otes had a 1)month
maturity. Turns out to be a pyramid scheme.
i. ourt holds that it does not fall into any of the members of
the family% and it also does not meet the family
resemblance test.
+. 3otiveCsold for profit 45,I return6
5. ;lan of distributionC(arge: sold to +%,,, investors
over 5- states
1. Reasonable e*pectations of publicCthought of as
an investment
=. Risk)reducing <actors: none
ii. ourt also holds that it does not fall into the nine)month
e*ception even if the securities are of 1 months duration
1. Curt !$rr6s t.e 94)!t. e+e)*ti!1 2e,i!i!5
5. 'lso% many individuals were told to roll over their
notes and thus% the investments lasted much longer
than N months.
c. (oan ;articipation!.erivatives as Securities
i. What happens when the bank sells off parts of the loans or the entire loan to third
+. Split cases
a. If the loans are sold are only to sophisticated buyers and
institutions% then not a security.
b. /nder Reeves% not a security.
,'R-ETS './ THE0R E110C0E.C!
I. The Bverview of the /.S. Securities 3arkets
a. Structure of the Trading 3arkets
i. /.S. $"uity Securities 3arkets could be described as having three distinct
+. $*changes
a. 7:S$ and '3$9 and - regional e*changes
b. Pnown as auction markets because the orders are e*ecuted at a
central location.
i. Try to match up the person who wants to sell for the lowest
amount and the buyer that will offer the lowest price.
ii. Want anti)competitive practices% i.e. minimum price levels.
c. Specialists are involved to make sure that the market runs
efficiently and functions properly.
i. ' specialist holds a bunch of securities and buys!sells when
no one else wants to.
ii. The specialist engages in limit ordersCbuy if the price falls
to a certain level. The specialist takes the order and
e*ecutes when the price falls or vice versa.
d. 3arket Restraints on ommission
i. 7:S$ had minimum that commissions couldn0t go below%
but in +NO- got rid of these restrictions. 7ow very cheap.
5. 7'S.'8
a. omputer)based system for over)the)counter stocks.
i. 3atch buyer)seller through computer systems
ii. 7ow% other e*changes use the computer systems 4i.e.
(ondon Stock $*change6
b. 7'S.'8 is a competition for other e*changes now.
1. Bver)the)ounter 3arket 4BT6
a. 7on)listed stocks
b. #roker)dealers buy and sell the stocks% if the broker!dealer doesn0t
have the stock then he buys it from a market maker.
ii. Technology% the increasing role of institutions in trading markets% and
globali>ation not only have blurred many of the distinctions% but have also
introduced new trading mediums.
+. Regional e*changes:
a. 'bout 5,I of the orders for 7:S$ stocks are e*ecuted on a
regional e*change
5. ;roprietary Trading Systems: operated by broker)dealers
a. Some systems focus on the most active 7:S$ stocks and match
buy and sale orders for small investors without the order ever
being routed to the 7:S$.
1. $lectronic ommunication 7etworks
a. omputer)based market that automatically matches consumer limit
=. #lock)Trading:
a. Involves trading of shares directly between institutional investors
without the use of a broker)dealer
b. Trading of blocks of +,%,,, or more shares.
-. $lectronic #ulletin #oards:
a. ;rice "uotes are available electronically for non)7asda" over)the)
counter stocks.
F. #ond 3arkets
a. 'lmost totally dealer markets
b. Globali>ation of 3arkets
i. Internationali>ation of 3arkets
+. Briginally% international markets were all separate when the 011 and 01=
acts were passed.
5. In the 2F,s% $uropean 3arkets opened up to /.S. companies for debt
a. 3any /.S. ompanies sold bonds abroad because the regulations
were much easier to comply with and less stringent and less forms
to fill out. 'ble to initiate the securities faster and raise money
b. /.S. investment bankers were losing money and so it lead to a
modest reduction in the amount of forms for /.S. regulations.
i. i.e. Shelf)registration.
1. /.S. companies list in $uropean $*changes.
a. (ondon had become a wealthy e*change and attracted financial
services markets as the gateway of money into the $uropean
=. $uropean ompanies listing in the /.S.
a. (ess fre"uent because the /.S. has additional regulations
i. /.S. accounting rules may change $uropean profits into
-. <oreign Securities owned by /.S. individuals
a. 7ot done directly but through a mutual fund
b. .omestic companies are competing for capital with international
II. $fficiency of the 3arkets
a. The e,,icie!t c$*it$0 )$r/et .(*t.esis posits that particular information in an efficient
market affects the market price of a company0s stock as though everyone had the same
information at the same time.
i. 7ew information becomes impounded in the stock price so that it is as though all
investors simultaneously discovered the information and reached a consensus on a
new price.
ii. In an efficient market% there are no opportunities for super)profitable trading
b. The hypothesis leaves two different "uestions:
i. If markets are efficient% do we need securities lawsE
ii. If markets are efficient% doesn0t that help tell us what the best securities laws
should beE .oes the e*isting regulatory scheme make any senseE
c. Three different hypotheses
i. Weak)<orm $fficiency
+. When a stock market impounds information about historic trading patterns
so that investors can0t draw charts of past prices to e*trapolate future
prices% the market is said to have weak)form efficiency.
5. Studies show that price is totally random.
a. Greedy people will s"uee>e all predictable trends of increased
returns out until the returns are e"uali>ed with other stocks.
i. Btherwise% arbitrage opportunities would e*ist.
b. ;rices are a Lrandom walkM with an upward drift to stay
competitive with other prices.
ii. Semi)strong)<orm $fficiency
+. When a stock market promptly impounds all publicly available
information% the market is said to have semi)strong)form efficiency.
a. Brdinary investors cannot beat the market by using public
information because the market price reflects all the public
information that sophisticated investment pros can get.
b. If a price spikes before information is released% this is evidence of
insider trading used by the S$.
5. 7o cosmetic changes to financials 4i.e. changing accounting methods6
affect the price of your stock.
a. +,P and +,8 and other S$ filings do not affect market price
because the market already knows this.
1. 3arkets in weak and semi)strong form efficiency function as to
distributional efficiency
=. Investment analysts and mutual funds are worthless
a. an0t beat the market using the public information% because the
market has taken this into account
iii. Strong $fficiency
+. ;rices reflect all information% public and private.
5. 7ot trueCcan make money doing insider trading which you shouldn0t be
able to do.
1. To be strong efficiency% the markets would have to be allocative efficient.
d. There are two kinds of efficient marketsK
i. Distri3uti!$01 S*ecu0$ti&e E,,icie!c( 4Information 'rbitrage6
+. Bne person shouldn0t be able to make money!profit off the mistakes of
others on the market
a. There are no bargains on the market
5. 3easures whether the market reacts to spontaneously and fully to the new
ii. A00c$ti&e E,,icie!c(
+. If it is true% then funds will always go to the companies that have the best
investment opportunities 4i.e. the best return!risk6.
5. <or this to be true% the prices would truly reflect the fundamental value of
the companies.
1. 3arkets can0t be allocatively efficient because:
a. The stock prices above intrinsic value stay there because it was too
e*pensive to correct the information.
b. 'nomaliesCyou can0t make money off them because it0s too hard
and too e*pensive to find them.
=. 3easures whether the market allocates capital to its highest and best use
e. Synopsis:
i. Weak hypothesis is true
ii. Semi)strong market hypothesis is true
iii. Strong hypothesis is wrong because you can still make money from insider
f. (essons of 3arket $fficiency
i. 3arkets have no memory
+. 'll prices are a random walk and will not necessarily bounce up or down
based on past occurrences.
ii. Trust market prices
+. Shouldn0t purchase shares because its LundervaluedMCnot undervalued
because the market has taken the information into account.
iii. 3arket prices tell a lot about performance
+. (ook to bond prices to see whether a company is going bankrupt
a. If the prices are low% then the sophisticated professionals are
betting that the company will go bankrupt.
b. #ut if it0s a high price% then they have confidence in the company.
iv. 7o financial illusions
+. Stock splits happen when management has good information
5. ;rices tend to go up when people think management has secret good
v. :ou can0t do better than the market.
g. Implications of $fficient 3arket Hypothesis
i. Greatly influenced the amount of disclosure from other companies
ii. The market0s best guess of a price of the security or worth of the security is the
market price.
I. Introduction
a. .ifferent Type of Bfferings
i. -ri&$te O,,eri!5:
+. Bffering to a small number of investors who are sophisticated. an be
done by the issuer directly to avoid the high costs of registration and a
public offering.
a. ? =456 $*emption to the registration laws% much cheaper
5. /sed with offerings to officers of the company and to the board or &
firms. Sophisticated persons who don0t need the protection of the
securities laws.
ii. Ri5.ts O,,eri!5
+. Sell stock only to e*isting shareholders. This is a common method for
those firms that are not public firms yet% and cheaper than public offerings.
a. /nderwriters still involved
5. Tricky to correctly price the security% but a low price benefits shareholders
and% thus% indirectly benefits the firm.
1. Typically% issuer will enter into a standby agreement with the investment
banker under which the banker agrees to purchase any of the offering0s
shares that are not subscribed for by the e*isting shareholders e*ercising
their rights.
iii. -u30ic O,,eri!5s: offerings to the general public
+. I;Bs: issued by a company for the first time
b. .ifferent Risks that are associated with the offerings.
i. How is the risk of the offering distributedE
+. ;rice Risk: who bears the risk if the price of the securities falls during the
period of the offering.
5. Risk that the stock won0t be sold
1. (iability Risk
II. ;ublic /nderwriting Bfferings
a. History: G0$ss4Ste5$00 Act
i. Separated commercial banking and investment banking
ii. /sed to eliminate the conflicts of interest when the same financial institution sells
securities to customers while lending them money to buy the securities on credit.
iii. Repealed in +NNN% each section of the bank is regulated by a different agency but
they are all allowed to co)e*ist under the same roof.
+. SecuritiesCS$% bankingCfederal!state bank regulators% insurance by
state insurance agencies.
b. Issuing Securities through the help of /nderwriters
i. Fir) U!2er6riti!5
+. The underwriter purchases the security from the issuer at an agreed price
and then resells the securities to brokerage firms or to the public at a
5. The participants in the underwriting receive a spread between the purchase
price and the public offering price.
a. 3anagement fee% underwriting compensation% and the selling
concession received for any sales to the public by broker!dealers.
i. Selling concession is for those that do the most work can be
anywhere form F,)F-I
ii. ' broker!dealer is also called a market maker.
+. ' dealer% however% sells from his own inventory but
a broker only acts as your agent and puts you in
touch w! the other half of the trade you want to
b. Handsome pay: 5,)-,I of the amount to be raised in a public
i. <ees:
+. 3anaging underwriter will get a large fee
a. 3anaging underwriters
i. Review the registration statement
and help write the RS
ii. (iable on the hook for any mistakes
5. Bther fees given for Dust underwriting
4buying!selling6 for those in the syndicate
ii. 8est E,,rts U!2er6riti!5
+. #est efforts to help the issuer sell the security. The issuer directly offers a
stated amount of its securities to the public and the underwriter agrees to
use its best efforts to find investors.
5. The issuer pays the underwriter a fee for helping place the issue.
1. .ifferent clauses in the agreement to show what types of best efforts:
a. 'll or 7one lause: The sales will not go through unless all of the
securities are sold
b. 3inimum percentage: Br can specify some intermediate number
=. /sually used with smaller underwriters unwilling to risk buying the
offered securities
-. .isadvantages: bad signal to the market% the issuer couldn0t get an
underwriter to buy the capital.
iii. Re5u0$r U!2er6riti!5:
+. Issuer directly offers securities to the public% and the underwriter agrees to
purchase from the issuer any securities not purchased by the public. The
standby underwriter is paid a fee for assuming the insurance risk.
5. /sually used in rights offerings.
c. Structure:
i. Letter , i!te!t is signed first
+. 'greement between the issuer and the lead underwriter laying out what
the underwriter gets even if the issuance is not successfulCworded so as
not to be binding
a. Bnly binding on the compensation so that bank0s reputations are
b. .oesn0t provide any price for the offering.
5. This starts the Lin registrationM period. S$ has never really defined what
is Lin registrationM
ii. Get an u!2er6riter s(!2ic$te to distribute the risk and harms of the issuance
+. /nderwriter Syndicate is a group of underwriters that acts together under
the leadership of the managing underwriter
". A5ree)e!t A)!5 U!2er6riters:
a. Bnce% the underwriting syndicate is assembled: the underwriters
enter into an agreement among themselves.
b. The agreement% finali>ed Dust before the registration statement
becomes effective% authori>es the managing underwriter to act on
behalf of the syndicate in negotiations with the issuer.
c. The agreement specifies the managing underwriter0s compensation
and imposes Doint liability on the underwriters for selling e*penses
iii. The registration documents are being produced with the help of the underwriter
and the issuer
+. ;rospectus and registration statement of the S$ filings
a. -rs*ectus: information pamphlet that is distributed to potential
investors% other underwriters.
b. Re5istr$ti! St$te)e!t: describes the offering and the issuer. The
RS is filed with the S$% and the prospectus becomes the principal
selling document for the offering.
i. /sually prepared by the counsel for the issuer% with careful
review by counsel for the managing underwriter.
i&. U!2er6riti!5 A5ree)e!t:
+. Issuer enters into an agreement with each of the underwriters% signed on
their behalf by the managing underwriter.
5. The agreement specifies the price and amount of securities to be offered
and specifies each participating underwriter0s allotment
a. 'greements may also include an over)allotment optionC
sometimes called a Green Shoe option
b. Bver)allotment allows underwriters to buy additional shares from
the issuer if demand outstrips the original number of shares
i. Helps stabili>e the post)offering price by first over selling
by +-I and then buying back to buttress the post)market
price to prevent it from falling below the offering price
1. Signed Dust before the registration statement becomes effective and the
offering begins.
a. 3arkets change so they want the least amount of risk% but the S$
wants the price specified in advance.
v. Se00i!5 De$0er A5ree)e!ts!Selling)Group 'greements
+. The underwriters often enter into agreements with securities firms that will
act as retail dealers in the offering.
5. <inali>ed Dust before the offering begins% re"uire that all sales be at the
offering price.
a. 7ot allowed during the pre)filing period% but is allowed during the
2. I!e,,icie!t -rici!5 , I-Os
i. /nderwriters usually underprice I;Bs to ensure that the issue clears and to create
profit opportunities for the first I;B purchasers% typically institutional investors
and other favored customers of the underwriters.
+. 7ot beneficial to the company because even if the price sky rockets% the
company doesn0t get the money% the people who purchased it and sold it
after the day0s increase make the money.
a. .emand for hot I;B stocks where investors can sell them "uickly
and make a "uick and si>eable trading profit 4a practice known as
5. (ess risk to the underwriter if they do this because the risk is to sell it off.
If they price too high% won0t sell.
a. 'lso% underwriters used I;Bs to arrange L"uid pro "uoM
arrangements where I;B shares are allocated to customers who
agreed to pay e*cessive commissions on unrelated trades.
b. 'lso% underwriters face a larger chance of lawsuits when the price
dips from an overpriced stock.
c. Wanting to rip off their own company for their own personal gain%
i.e. trying to help sell a different I;B.
e. Restrictions on Securities Bfferings
i. A!ti4F0i**i!5 C0$uses
+. .on0t want individuals to unload the stock "uickly Dust to get a "uick
buck. 7ow there is a tendency to make it harder to flip.
a. If flips are prevented among one class% they must be prevented
from every class. 4i.e. institutional flippers have to be prevented if
individual flippers are prevented6
5. reates incentives to the uw to place the shares w! investors who are likely
to hold the stock for longer.
3. I!si2er Lc/4U*s
a. Insiders aren0t able to flip the shares because this signals to the
market that the insiders think the stock is overpriced and will cause
the markets to move and depreciate.
ii. (imiting!.iluting lauses: (imiting the 'mount of Shares to be Sold
+. It is commonplace to have a limit on the amounts that can be sold because
of the possibility of dilution
a. Stock prices are high because individuals are willing to pay a
certain amount b!c its uni"ue and not common% but if you issue
more it will decrease the stock price.
b. Rare ;icasso $*ampleCif there is only +!-,% value higher than
iii. I!2e)!i,ic$ti! C0$uses
+. If the price of the security drops% there will be many more lawsuits. ? ++4a6
4-6 makes all underwriters severally liable for any false statements for the
chunk of securities that they sold.
5. Indemnification clauses between the issuer and the underwriter provides
that the issuer will provide insurance for any false statements
a. S$ doesn0t like this because the underwriters then aren0t as
careful in making sure the registration statement is correct if they
don0t face liability.
i. Have to have boiler plate in the RS if they receive
b. Want the underwriter to do due diligence: investigate in a careful
way that is defined by the case law.
i&. C),rt Letters
+. /nderwriters typically demand that the issuer0s counsel write a letter to
the underwriters assuring them the issuer0s legal house is in order: i.e. duly
incorporated% the securities are authori>ed% etc.
5. 'lso demand a comfort letter from the issuer0s accounting firm regarding
the accuracy of the financial disclosure in the prospectus.
a. In effect% Dust like an indemnification clauseCcertification from an
accountant and get contribution in any lawsuit.
1. 'ccountant and (awyer will be compensated for this additional risk
f. ;roblems of <i*ed ;rice Bfferings
i. 'll members of the underwriting syndicate must sell the offered security to the
public at a fi*ed price that is stated in the registration statement and
accompanying prospectus
+. 'ny deviation from the stated price would render the prospectus
5. 7ot allowed to price differently for buying in bulk% but this should be
changed because it costs the same whether you buy one share or - million.
a. The large buyers are subsidi>ing the small buyers.
ii. 1 ircumventions around the fi*ed selling prices
+. .esignated Brder Techni"uesCdistributing uw helps to give institutions
free goods or discount on research services to be a discount on the price.
5. Bvertrader Swap: institutional buyer swap securities in their portfolio for
the new one in the I;B% which is an indirect discount
1. Recapture: broker)dealer form a subsidiary that purchases the security and
then sells it off and reaps the benefit of the purchasing spread
III. Re5istr$ti! -rcess
a. Registration Statement
i. Registration Statement under ? O4a6 is re"uired to include:
+. ;rospectus))? +,4a6 specifies which of the Schedule ' information must
be included in the prospectus
a. Information about the registrant and the registration
b. Information about the securities being offered
c. Information about the issuer and its business
d. The issuer0s financial history
e. Information about the distribution and its proceeds
5. $*hibits and /ndertakings:
a. /nderwriting agreement
b. #ylaws and incorporation of the corporation
c. (awyers have to provide an opinion paper that it will sell that
many shares
d. &arious financial statements 4Regulation S)96
e. 7on)financial re"uirements 4Regulation S)P6
i. #oth regulation S)P and S)9 are now integrated to the
periodic disclosure statements.
ii. (essens the e*pense of issuing new securities because most
of the information is already in the periodic forms.
iii. 3anagement .iscussion and 'nalysis
iv. 01= 'ct Re"uirements in S)P and S)9
+. 'nnual Report
5. <orm +,P: annually
1. <orm +,8: "uarterly
=. <orm JP: if some huge event happens in the life of
a company 4maDor events6
-. 'll of this is contained in the company0s #asic
Information ;ackage 4L#I;M6
f. 'll material information that may lead to a showing of conflict of
interest between key management 4board of directors and officers6
and issuers
g. Issuers have to use plain $nglish in writing the prospectus
ii. What is re"uired in the registration statement is the best practices of what was
provided in +N5N 4re"uiring everyone to do what others had always done.6
+. .ifferent forms that re"uire different amounts of detail% as well as the
latitude they give registrants to incorporate by reference information in
other S$ filings
a. Fr) S41: This contains the most detailed set of "uestions and
must be used by companies that do not "ualify to use <orm S)1%
either non-reportin issuers /makin an .,40 or small or
unseasoned reportin issuers
i. <our groups of information included in the registration
statement 4#asic Information ;ackage for the company is
+. Information about the registrant or the issuer
5. .istribution of the securities
1. 7ature of the SecuritiesCi.e. preferred stock
=. &arious e*hibits and undertakings
a. Bnly part that is not also included in the
ii. (ist of things that have to be included: very complicated
+. Item 5: inside front and outside back cover
5. Item 1: summary information% risk factors% and
ratio of earnings to fi*ed charges
1. Item =: use or proceeds
=. Item -: determination of offering price
-. Item F: .ilution
F. Item O: Selling security holders
a. Some of the founders will sell their shares
O. Item J: ;lan of distribution: how its going to be
J. Item N: .escription of securities
N. Item +,: Interests of named e*perts and counsel
+,. Item ++: Information with respect to the registrant
iii. Includes more than the S)1 re"uirements because it is much
more risky when there is no established market price
3. Fr) S4"
i. $liminated by the 5,,- ;ublic Bffering Reforms
ii. Had permitted smaller% reporting companies to use a
prospectus that incorporated by reference information from
the company0s annual report and other periodic S$
c. Fr) S43: this form is available to companies that have reported
for more than one year 4a.k.a. a seasoned reporting issuer6 '7.
one of the following re"uirements:
i. 3ore than AO- million in Lpublic floatM 4i.e. of non)
affiliates% can0t be $B holding most of the stock6 BR
ii. Their common stock is traded on a national stock e*change
iii. Issue +!1 of their public float in a +5 month period BR
iv. Rated as Linvestment)grade securitiesM from the rating
agencies 4SQ; and 3oodies6
+. The investment)grade rating independently
guarantees that there isn0t fraud going on
d. Bther more speciali>ed forms
i. S)= forms for securities issued in a merger or ac"uisition
ii. S)J: ac"uisition as part of an employee stock purchase
iii. S)++: real estate companies
iv. S#+ and S#5: small businesses
iii. Who has to sign the registration statementE
+. ? F4a6:
a. $B on behalf of officers% comptroller% chief accounting officer%
and the board.
b. 'ny signer is on the hook if there are defects in the statement
5. ? ++ creates liability for the underwriters.
b. ? J4a6: $*plains when registration statement becomes effective
c. ? -: annot make any sales until the registration statement has become effective 4when
approved by the S$6
i. ;artial Selling $fforts are allowed by distributing the prospectus% and getting
individuals to agree that when the stock has become available% they will be
+. In essence% these agreements are binding.
d. Timing
i. 8uiet ;eriod: time between when the issuer decides to sell and when they are
filing the registration statement.
ii. Waiting period: filing until effective registration statement
+. If the company sells or talks during this period% investors can compel
I&. Registration Statement ;rocess
a. ? -: the heart of the Securities 'ct and registration process
b. ISS/$R 'T$GBRI$S: The activities permitted durin the reistration period vary
reatly dependin on which cateory the issuer falls into5on the theory that investors
will learn about new issuers with an established market presence.
i. 7on)reporting Issuers
+. ompanies that are not re"uired to file under the $*change 'ct 4i.e.
issuers going public in an I;B6
ii. /nseasoned Issuers:
+. ompanies that are re"uired to file $*change 'ct reports% but are not
eligible for <orm S)1
iii. Seasoned Reporting Issuers
+. If you have been an issuer for more than +5 months% and as long as part of
a. Registration process BR
b. A+, million dollar of assets and greater than -,, shareholders BR
c. Bn a national e*change
5. Reporting companies that are eligible for <orm S)1
a. 3ore than one year since going public and
b. ' AO- million public float
iv. 9:SI: Well)Pnown Seasoned Issuer
+. Issuers must satisfy the re"uirements of S)1 but must be larger:
a. AO,, million in e"uity float or A+ billion in debt float issued in the
last three years
b. 'nd cannot be an ineligible issuer 4can0t have violated any rules
from the S$6
5. (east amount of informationCmarket already knows about this company
because of the established market price and the information that goes into
that price.
a. 3erit the greatest amount of fle*ibility
c. O&er&ie6 on the Three ;eriods during the Registration ;rocess
i. -re4Fi0i!5 -eri2:
+. #egins when the issuer prepares for the offering and thus is Lin
5. The marketing and sale of any security is prohibited% and written
marketing efforts are strictly regulated. 7othing public is supposed to be
a. 'ny violations of the "uiet period instituted when a company is in
registration is known as a gun Dumping.
ii. 9$iti!5 -eri2
+. 'fter a registration statement is filed with the S$% but before it becomes
5. ? -: Sales are still prohibited% and written marketing efforts are strictly
1. /nder ? J4a6% the S$ has a 5, day waiting period 4unless S$ allows for
"uicker6% but usually that0s not long enough so use different tools to delay
the waiting period.
a. $ffectiveness: the registration statement becomes effective
automatically 5, days after its filing 4or 5, days from any
amendment unless the S$ determines an earlier effective date. ?
b. S$ Review: +, days to review the registration for incomplete or
misleading disclosure and give notice of its intention to issue a
refusal order that keeps the registration statement from becoming
i. Refusal Brder under ? J4b6
+. S$ says on the face of the registration materials%
the RS can0t be effective because there are defects
in it.
c. S$ Bversight: #efore or after effectiveness% the S$ can begin a
nonpublic administrative investigation. 'fter the registration
statement becomes effective% the S$ can issue a stop order if it
notices a defect in disclosure. 7o offering activities are permitted
when a refusal or stop order is outstanding or the S$ is
investigating a registration statement.
i. Stop Brder: ? J4d6:
+. .uring the waiting period or even during the post)
effective period% issuer must stop any activity in
selling the securities.
a. Stop order is available at any time
d. ;roceed for an 'ccounting
i. If during the post)effective period% the S$ can re"uire the
company to cough up all the money if something was
e. ease and .esist Brders
i. S$ telling the company to stop the offering or stop doing
what they are doing. S$ can specify.
f. /sually% none of these = is the methods to stop registration.
/sually% the S$ will Dust ask the company to fi* certain sections
through various letters of comment.
i. Bnce the registrant amends the statement% the 5, day period
starts all over again or the S$ can set it up so that upon
amendment the RS becomes immediately effective%
shortening the 5, day period.
+. $ssential to the ;ricing 'mendment that is done
right before the issuance to avoid the risk of the
securities not being able to be sold. S$ has to
accelerate the RS and then upon pricing% say that the
RS is effective.
5. However% under ; 43<#$%1 $!( issu$!ce ,r CAS7
will be allowed to become effective without the
price% but you have to add the price in within 5 days
of it becoming effective.
a. In addition to fi*ing the price% the si>e of the
offering can vary by 5,I.
b. .esigned to increase fle*ibility for the
c. /sed with 80$!/ C)*$!ies:
i. ompanies without any specific
business plan or purpose or whose
plan is to engage in Lac"uisitionsM of
an unidentified company.
ii. Ru0e 419: investments go into an
escrow account until the promoter
gets a business plan. 't that point%
investors have a right to opt in. If
they do not get a right to opt in% the
money is automatically refunded to
the investors.
iii. -st4e,,ecti&e -eri2
+. 'fter the registration statement becomes effective% until the offering ends
and the issuer is no longer Lin registrationM
5. Sales are permitted% but written marketing continues to be regulatedK
purchasers must receive a prospectus that complies with statutory and S$
a. ;rohibited 'ctivities
i. 7o Sales or .eliveries
+. ? -4a6 prohibits sales of unregistered securities or deliveries for purposes
of sale.
a. The prohibition is straightforward: ? 54a6416 defines sale as
including every contract of sale or disposition of a security for
ii. 7o Bffers
+. ? -4c6 prohibits any person to Loffer to sellM or Loffer to buyM any security%
unless a registration statement has been filed.
a. .efinition of an Bffer to Sell
i. ? 54a6416: Levery attempt or offer to dispose of% or
solicitation of an offer to buy% a security or interest in a
security for value.M
3. *oesn6t apply to underwriter and underwritin
syndicate and issuer preliminary neotiations.
a. (ook for a Durisdictional ne*us.
7. !ny bindin contract between the issuer and uw5a
final sale5remains prohibited by 8 9/a0/30
a. 4therwise, an underwriter would assume
the full financial risk of an offerin before
effectiveness with nobody to sell to, a
temptation too danerous for the "#$.
ii. &ery #road .efinitionCany attempt that may contribute to
conditioning the public mind or arousing public interestM in
the offering can be seen as part of a selling effort and thus
constitute a prohibited LofferM
iii. S$ wants to prevent early% incomplete% and misleading
information to poison the disclosure.
5. ;rospectus materials cannot be used for an offer to sell
a. ? 54a64+,6: prospectus is defined broadly% anything written
i. ? -4c6 also makes sure that no oral sales are made either.
'ny communication thru interstate commerce is prohibited
4i.e. email or phone6.
+. /nderwriter!issuer negotiations are e*cluded from
interstate commerce
ii. ? =4a64+6: provisions of section - shall not apply to anyone
other than uw% issuer% or dealer and thus% secondary markets
are not regulated by these rules
1. Interpreted by the S$ very strictlyCmust remain 8/I$T
a. .oes not apply to setting up deals with the underwriters
b. ;ermitted 'ctivities
i. Traditional Rule is that you can continue to distribute information that you would
normally would distribute in the absence of the intention to sell securities.
+. 7ow% S$ provides issuers with certain Safe Harbors
5. If however the safe harbor does not apply% must look to traditional rules
ii. S$,e 7$r3rs
+. Revealing $*istence of the /pcoming Issue: RULE 13=
a. Rule +1- permits the issuer to announce its intention to make a
public offering by stating:
i. the amount and type of security to be offered and
ii. the timing% manner% and purpose of the offering.
b. The statement must say that the Loffering will be by prospectusM
but cannot identify prospective underwriters or the e*pected
offering price.
i. $nsures that people aren0t contacting the underwriters.
c. an be issued by issuers or a selling security holder or anyone
acting on behalf of them.
5. ;reregistration ommunications: RULE 1>3#$%
a. ommunications by issuers and those acting on their behalf 4other
than prospective underwriters or dealers6 are permitted when made
more than 1, days before the registration statement is filed.
b. (imits:
i. St$te)e!ts c$! !0( 3e )$2e 3( t.e issuer % not
underwriters or dealers.
+. Issuers must issue statements in the r2i!$r(
curse , 3usi!ess
a. ' glossy report seems to be the first step in
the sales of the securities% and would not be
in the ordinary course. #ut a president0s
long)standing speaking engagement is in the
normal ordinary course.
5. General Rule: things that would have been
announced before in normal course of business can
be continued% but no other information can be
ii. The statement cannot refer to Dust the issuance of securities.
The statement must have general information about the
+. .n re $arl %. 'oeb and 2hoades : $o. /3;9;0:
disciplinary proceeding against two underwriters
that issued press releases concerning a land
development company that proposed a public
offering before the company had filed a registration
a. The S$ sanctioned the two firms for
violating ?- and arousing investor!dealer
interest before a registration statement was
filed. The statements provided an
incomplete and misleading picture of the
details of the offering.
b. Issued safe harbors because of the problems
in this case.
iii. The issuer must take reasonable steps to ensure these
preregistration communications are not further distributed
or published within the 1, days before filing
+. i.e. stop Dournalists from reprinting statements later.
1. WPSI ommunications: RULE 1>3
a. WPSI0s are able to make any Loral offersM during registration.
b. WPSI0s can make Lwritten offersM that bear a legend that states
where to get a prospectus% along with a warning to read the
i. 'll written offers must be filed with the S$
+. 3ust have a legend
ii. Bnly the issuer can make statements
iii. In effect% the S$ has decided that WPSIs are unable to
condition the market with pre)filing disclosures
+. #asically a Ldo whatever they wantM mentality.
=. Regularly Released Information: RULE 1>? @ 1>9
a. Ru0e 1>?: Issuers that are reporting companies do not need to
remain completely silent% they can still continue to release not only
factual business information% but also forward)looking information
about the company0s operations and finances)))including to
i. Li)its:
+. Bnly issuer can make statements
5. Same information as was provided before
a. an issue forward)looking proDections only
if they had done so in the past.
1. 7o information about the offering.
b. Ru0e 1>9: 7on)Reporting% 7ew Issuers
i. 'll issuers can continue to release factual business
information to their customers% suppliers% and other non)
ii. (imits:
+. an0t include forward looking statements
a. Br e*plain how they e*pect their business to
5. annot reference the offering
1. 3ust be intended only for non)investors.
=. Bnly issuer can make statements
iii. $*ample 7o. F in the S$ release: the president0s speech
would be at the time of the registration and it was deemed
okay before there was any intent to file a registration.
+. #/T .B 7BT ;RB&I.$ '7: WRITT$7
5. .B not allow recordings.
$. N!4-$rtici*$!t Rese$rc. Re*rts: RULE 13A
i. ' securities firm not participating in the distribution may
publish research reports about an in registration if:
+. The report is in the regular course of the firm0s
a. an0t be done specifically for the sale of the
b. /sually for brokers and dealers
5. The issuer 4which need not be non)reporting
company6 is not a blank)check% shell% or penny)
stock company% and
1. The securities firm has received no special
compensation from any participant4or anyone
interested in the offering6 related to the report
a. annot then become a participant of the
issuance if the report is what still affecting
the market.
b. Research Reports Report on Issuer0s 7on)Bffered Securities
i. Ru0e 13?: $ven if you are a participant in an offering% you
can continue to publish reports about the kinds of securities
not being offered 4i.e. fi*ed income securities if the
offering is for common stock6
+. The market for other securities 4i.e. fi*ed income6 is
largely institutional% and it assumes investor interest
in the market for common stock will not be
5. The securities firm must have previously issued
reports on similar securities in the regular course of
a. 'lso% must be over domestic re*rti!5
companies and some foreign issuers.
ii. -$rtici*$!t Rese$rc. Re*rts: Ru0e 139
+. ;articipants can offer information about the
securities being sold% i.e. company)specific research
report about the issuer:
a. If the report appears in a regular publication
b. The issuer is a large% seasoned reporting
company that meets the re"uirements of S )1
5. (imits:
a. ;articipant must have already issued regular
reports about this issuer 4even if they
weren0t a participant before6
b. 7ot as worried
F. Bnly underwriters and dealers are not able to provide information.
a. #ut can negotiate with the issuer.
c. If you do not meet the safe harbors% look back to the traditional analysis. 'sk:
i. Issue2 3( s)e!e t.$! $! issuer1 u!2er6riter r 2e$0erB $!2
ii. I! re5istr$ti!B
+. S$ hasn0t defined this but
5. In registration...means the entire process of registration% at least from the
time the issuer reaches an understanding with the broker)dealer% which is
to act as a managing underwriter until the completion of the offering and
the period of =, or N, days during which dealers must deliver a
iii. C!2iti!e2 t.e )$r/etB
a. The period after the filing the registration statement.
b. ;rohibited 'ctivities
i. 7o Sales or .eliveries
+. ? -4a6 prohibition during sales re"uires that no binding contracts be
created. To avoid creating a binding contract% any solicitation of interest
must be phrased not to constitute a common)law offer capable of
a. /sual practice is for participants in an offering to collect
indications of interest from investors, but not to take checks or
otherwise accept orders.
ii. 7o ;rospectuses:
+. ? -4b64+,6: prohibition to use any prospectus unless it complies with ? +,
a. ? 54a64+,6 defines prospectus to be: Lany communication written
or by radio or television, which offers any security for sale.
i. +asically anythin written or broadcast.
c. ;ermitted 'ctivities
i. Bral Bffers:
+. ? -4b64+6: no prohibition against oral selling efforts.
5. SubDect to the antifraud provisions only.
1. 7o need to send a prospectus
ii. -re0i)i!$r( -rs*ectus:
+. ? +,4b6 authori>es the S$ to permit the use during the waiting period of
an incomplete prospectus.
5. RULE 43<: allows a preliminary or Lred herringM prospectus% which is
filed with the registration statement and includes a marginal legend that
cautions the securities cannot yet be sold.
a. Re2 7erri!5: special legend on the front of the document in red
b. The preliminary prospectus contains the information found in the
final prospectus but omits information on:
i. the offering price and
ii. the name of the underwriter
iii. the dealer compensation
iv. amount of the proceeds
v. conversion rates
vi. call prices and other matters dealing w! price.
iii. T)3st!e A2s: Ru0e 134
+. Section 54a64+,6 e*cepts from the definition of LprospectusM
advertisements 4typically made in the financial press using a tombstone)
like border6 that state from whom a ? +, prospectus may be obtained.
5. The Tombstone 'd lists the underwriter% the security% and the price only.
i&. I2e!ti,(i!5 St$te)e!ts
1. Ru0e 134
a. :ou can give specified written information about the issuer% the
underwriter% and the offering 4more detailed than a tombstone ad6
i. :ou include a legend if the RS is not yet effective and
e*plain who is selling the securities and where to obtain a
preliminary prospectus% with the S$0s address and phone
number #/T
ii. :ou need not give e*planation if
+. :ou include only the information of a tombstone ad
5. Send 4or send a hyperlink to6 the preliminary
prospectus BR
iii. :ou can ask investors to indicate their interest in the
offering by return card% if you also send 4or hyperlink to6 a
preliminary prospectus and e*plain there is no
b. Information that can be included: issuer info% info about the
security% issuer0s business% price of security% use of proceeds%
identity of sender% names of /Ws% schedule% and nature of offering.
'lso% it can see investor interest.
i. .ifferent from Ru0e 13=Coffering announcement which
only allows:
+. the amount and type of security to be offered and
5. the timing% manner% and purpose of the offering.
c. 'ny communication that complies with Rule +1= is deemed not a
prospectus for purposes of ? -4b64+6Crule +1=4d6
i. <ree Writings are prohibited.
&. Free 9riti!5 -rs*ectus
+. The use of brochures% news clippings% and other non)prospectus sales
material% provided they are accompanied or preceded by a final
prospectus. ' free writing prospectus is any written or graphic
communication by the issuer or in its behalf 4not including live
;ower;oint presentations6 that satisfies certain conditions.
a. 'llowed or would otherwise violate ? -4c6
b. $mployees also "ualify as potential investors and writings to them
"ualify as free writings
5. Ru0e 433: now allows free writing prospectus
a. 9:SIs: can send out free writings without issue
i. When combined with +F1 from pre)filing period% amounts
to no restrictions during the pre)filing period or anytime
before effective date.
b. Se$s!e2 IssuerCRe*rti!5 C)*$!(:
i. C$! use ,ree)writing prospectuses and they do not have to
provide a preliminary prospectus
ii. Instead the user of a free writing prospectus must notify the
recipient through a re"uired legend of the filing of a
registration statement and the /R( for the S$0s web site
where the recipient can access or hyperlink the prospectus.
iii. The free writing must contain a 0e5e!2 that advises the
investor to read the preliminary prospectus and how to
obtain a copy% on the S$ website. 4Rule =114c6456.
+. Still have to file
c. U!se$s!e2 Issuer:
i. 'ny free writing must be accompanied or preceded by a
preliminary prospectus 4Rule =114b64566 but can Dust
provide a link to the prospectus
+. If its an I;B there must be a price range in the
ii. Supplementing with various other material is allowed now
1. 'ny free writing prospectus must be filed w! the S$ on or before the day
of first use.
a. 'ny <W; that follows these rules is deemed a prospectus% but a
prospectus that follows ? +,4b6 and% thus% is permitted for use
during the waiting period.
b. $*ceptions: previously filed info% non)final terms% offerings of
asset)backed securities% and business combinations.
c. The breadth of the distribution of the <W; deems whether it
should be filed.
i. The wider the distribution the more the need for the filing
and distribution of a preliminary prospectus
=. 'ny media company that covers the securities and interviews the issuer
can do so as long as the issuer or other offering participants have not
compensated the media company. The story is treated as a <W;. Ru0e
a. The issuer or offering participants however must file the media
story and include a legend 6it.i! ,ur 3usi!ess 2$(s of becoming
aware of it.
i. an get around filing the story% you Dust have to send them
all the information in the story.
b. 7o re"uirement to send a preliminary prospectus.
c. 'ny distribution of the article 4i.e. thru email or mail6 would
re"uire a legend because you become the author of the article.
d. IF CO'-ENSATED: If you did pay for the article% you can still
fall under =11% but need to meet the filing re"uirements and the
legend and the distribution of the preliminary prospectus.
&i. R$2s.6s: 433#2%#?%
+. 3eetings in various cities arranged by the underwriter during the waiting
periodCat which the issuer0s e*ecutives make presentations and answer
"uestions for institutional and wealthy% individual investors.
5. 'ny written material used at a road show% such as a handout or a
;ower;oint presentation% that is later printed out and redistributed is
treated as a free writing prospectus.
a. oncentrate on whether the roadshow was distributed broadly% if it
was live% and whether it was redistributed broadly.
i. If there are emailsCbecomes free writing.
ii. If it was a live chat session% may be able to argue it was
oral and thus% do not need to follow =11
b. If you are using the information to a live audience in a closed
room% this is not a <W;
c. #ut if this is broadcasted to a large audience% even if live% then it
still is considered a <W;.
i. Still must provide legends and provide a preliminary
prospectus% and file.
d. 'lso% anything on posted on the issuer0s web site as dealing with
the road shows are considered free writing prospectus as long as
legending and prospectus)accompaniment are met.
i. E!&e0*e Ru0e: anything posted on the website is
considered a <W; if a certain document contains links to
anotherK must be as if they were a part of the same
+. (inks to other websites and analysts reports can be
5. Bnly in violation of the securities laws if the
information was a contradiction of the registration
a. This information would be outside of ? -4b6
4+6 4prospectuses that are in line w! ? +,4b6%
but if you would then be in violation of ?
1. :ou can link to any historical fact because the
information is already on the market.
a. $ven recordings are okay% but still have to
follow =11.
2. Acce0er$ti!
i. /nder ? J of the 011 act% the S$ has authority to set the effective date of the
registration statement earlier than the 5, day filing of a registration statement or
any pre)effective amendment
ii. #efore a registration statement becomes effective% the S$ needs to accelerate the
iii. 'fter acceleration and the RS becomes effective% the securities can be transported%
sold% and delivered.
+. /nless there is acceleration% the issuance can0t succeed.
iv. Traditionally to accelerate%
+. The issuer must add a pricing amendment and then seek acceleration
5. If the S$ was okay with it% they would accelerate the securities.
v. RULE 4><: To help the S$ determine whether it will accelerate:
+. The S$ focuses on whether there has been sufficient circulation of the
preliminary prospectus 4the prospectus that is used after the registration
statement is filed and before the registration statement becomes effective6
among underwriters and dealers and also on the ade"uacy of the
information in the preliminary prospectus.
e. ;rospectus .elivery Re"uirement
i. ;reliminary ;rospectus is not re"uired by ? -4b64+6 in the Waiting period unless
there is a <W;. In order to plug this regulatory hole% ongress re"uired:
+. #asic Rule: 1=c"4?: have to deliver a preliminary prospectus at least =J
hours in advance of confirmation of a sale to any investor.
a. ;rohibited 'ctivities
i. 7o .elivery of Securities unless accompanied by a <I7'( ;RBS;$T/S
+. ' final prospectus is the preliminary prospectus with the addition of the
pricing amendment.
5. ? -4b6456 prohibits any deliveries of securities% unless accompanied 4or
preceded by a ? +,4a6 prospectus6.
a. Re"uired so that individuals get a disclosure about the offering
b. 'fter the 5,,- ;ublic Bffering Reforms make physical delivery
unnecessary. 'ccess to the final prospectus on the S$ website is
deemed to be delivery
b. ;ermitted 'ctivities
i. .elivery of the securities accompanied by a final prospectus
ii. $*panded L;rospectusM Types:
+. ? -4b64+6 permits the use of any prospectus that complies with ? +,.
'lthough this usually means a final prospectus at this period% there are
some e*ceptions:
a. Rule =1,': ash Bfferings can omit price)related and offering)
related information% provided this information is filed within +-
days after effectiveness
i. If made after +- days must be done as a post)effective
amendment to the registration statement.
b. Rule =1,#: Shelf)Registration ;rospectus
c. Rule =1,: 7ot):et <inal ;rospectus for non)cash offerings.
iii. Free 9riti!5
+. The ? -4b64+6 prohibition against written offers continues% but ? 54a64+,6
e*empts from the definition of LprospectusM any written sales literature
4free writing6 if it is accompanied by a final ? +,4a6 prospectus
5. Ru0e 433 4see Waiting period for e*planation6C;ermits the use of a <W;
at any time after the registration statement is filed% thus including the post)
effective period.
a. <or non)reporting and unseasoned issuers% the <W; must be
accompanied by a final prospectus 4if available6 in the post)
effective period.
i. an be met thru a hyperlink.
i&. C!,ir)$ti!s:
+. ' confirmation is necessary to finali>e sales under $*change 'ct rules and
applicable state statute of frauds.
a. 'ny writing that confirmed a sale was considered a prospectus
because under ? 54a64+,6 a prospectus includes any writing that
confirms the sale of any security
b. $*ception: a confirmation is not a prospectus if
it is preceded or accompanied by a final
prospectus under ? +,4a6.
5. ' final prospectus must be placed in the hands of the purchasers when
their sale is confirmed.
Rule WhoE
+O54a6 $*empts written confirmation from ? -4b64+6 4<inal
;rospectus .elivery6
#roker!.ealers and
+O54b6 $*empts delivery re"uirements for transfers of securities Issuers% #roker!.ealers
and /nderwriters
+O1 If not e*empt by =416 4=,)N, day re"uirements6 or +O=%
must provide a final prospectus within 5 days of the
Issuers% .ealers% and
completion of the sale BR give notice that the sale was
made pursuant to the RS
4#rokers have a =4=6
+-1 $*cuses need for a dealer to deliver a prospectus in
connection with the delivery of securities sold through an
Bnly dealer to dealer
+O= ' dealer that is not an /W is relieved of re"uirement to
make a final prospectus available under =,)N, day
re"uirement 4=4166 if the issuer% prior to filing a
registration statement was a reporting company
+O=4d6 7o final prospectus re"uirement for dealers if:
4+6 non)reporting
456 R 5- days after offering and
416 if:
4a6 national e*change BR
4b6 7'S.'8
=416 7on)reporting company that is not on the stock e*change
or 7'S.'8% must send a final prospectus% unless less
then =, days from the sales began or when RS becomes
effective% N, days if I;B
vi. However% no actual delivery of a final prospectus is needed
+. 's long as you have filed a final prospectus% you may provide notice that
the investor may access that final prospectus thru the S$.
a. Rule +O54a6: for #rokers!.ealers!/W
i. Written confirmations and allocation notices don0t need to
be accompanied or preceded by final prospectus
ii. 8ut ,r U9: 1=#c%"4?: t.e( )ust 2e0i&er *re0i)i!$r(
*rs*ectus t 3u(ers $t 0e$st 4? .urs 3e,re se!2i!5
c!,ir)$ti! , s$0e.
+. Rule +O54b6: 7o obligation to forward final
prospectus when delivery of the securities if filed w!
the S$
a. 'ccess e"uals delivery
b. 'pplies to the issuer as well
iii. 'pplies as well to transactions b!w securities firms
b. Rule +O1: <ile a notice of registration including that RS has been
filed and final pricing statement would be sent absent an e*cuse
i. 7ot a <W;
ii. Should be submitted within 5 days of the completion of the
iii. 'pplies to issuers% underwriters and dealers
c. Dur$ti! , NticeCC!,ir)$ti! r -rs*ectus De0i&er(
i. How long must participants in an offering deliver either the rule +O1 notice or the
final prospectusE
+. ? - does not apply to anyone that is not involved in the issuance% defined
by ? =4+6 as issuers% underwriters% and dealers.
a. So anyone that is not a participant may buy!sell w!o worrying
about ? -.
5. Issuers: Re"uirements apply as long as they are still selling the issuance
to the public. When this issuance is totally sold out% then no longer
obligated. 4Re"uired until the /Ws sell their shares as well6
1. U!2er6riters:
a. <or the original allotment% the /W and any other securities firm
that is part of the selling grp must provide notice and prospectuses
until the allotment is sold.
4. N!4-$rtici*$ti!5 De$0ersC N 0!5er *$rtici*$ti!5 U!2er6riters
a. Secti! 4#3%: Securities firms must continue to deliver notices
depending on how much information is available about the issuer
i. If a reporting company: do not need to provide a prospectus
4e*ception under Rule +O=6
ii. =, days after the later of the registration statement
becoming effective or the security being offered to the
public if the issuer has made other registered offerings 4?
iii. N, days% if an I;B 4? =4166
iv. Bnly applies if in special offerings
b. Rule +O5 has eliminated the scope of this obligation
i. Rule +O54c64=6: .ealers are not re"uired to deliver a
prospectus in connection w! their transporting the
distributed security.
c. However% Rule +O1 does re"uire that issuers% uws% and dealers who
are not otherwise e*empt by Section =416 must provide a final
prospectus not later than 5 business days following the completion
of a sale or give notice that the sale was made pursuant to the RS
and the RS was filed and that a final prospectus will not be sold.
2. E+ce*ti!s:
i. Ru0e 1=3: e*cuses the need for a dealer to deliver a
prospectus in connection with the delivery of securities sold
thru a national e*change
ii. Ru0e 1A4: if the issuer is a reporting company under the
01= act% a dealer that is not an underwriter is completely
relieved of the need to make available a prospectus w!in the
=, or N, day period.
+. +O=4d6: If not a reporting company% no need to send
a final prospectus 5- days after the offering date% if
listed on 7ational $*changes or 7'S.'8
=. 8r/ers:
a. If unsolicited orders% then the broker falls under the so)called
Lbroker e*emptionM under ? =4=6 and does not need to deliver a
prospectus on customer orders
i. ' selling customer must find his own e*emption% i.e. a
control person.
b. If solicited the investor to purchase in the secondary market a
security of a company whose RS had Dust recently become
effective must still comply w! the =,!N, day rules.
I. I!tr2ucti!
a. 7ecessity of a shelf)registration because:
i. The entire registration process takes months or more to complete.
ii. There was a large demand for companies to be able to register faster to e*ploit
market interest rate.
iii. ompanies started turning to international markets to get "uicker fundraising.
b. Shelf)Registration: permits registration of securities for later sale if the registrant
undertakes to file a post)effective amendment disclosing any LfundamentalM change in
the information set forth in the original registration statement.
i. 'llowed in +NJ1
II. ReDuire)e!ts
a. 3ust be an S)1 Reporting ompany that:
i. ;ublic float of AO- million and
+. Has reported for +5 months or
5. Investment grade securities and
ii. Issuers with less than AO- million% can still "ualify if:
+. Has reported for +5 months and
5. (isted on a national e*change
1. Sell more than a +!1 of their float in a +5 month period.
b. an be S)+ company if it meets =+-4a64+64i6)4i*6
i. 3ust verify very specific types and amounts
ii. 7ot used often because you can0t take advantage of the main advantages of shelf.
c. ' control person can also sell through a shelf)registration under =+-4a64+64i6
d. Time (imit
i. Three)year time limit on shelf offerings.
ii. an only register securities that are e*pected to be sold within 5 years.
e. /pdates: Have to promise to update as stated in Item -+54a6 of Regulation S)P.
i. Re"uirements:
2. ,ust 3romise to file a ne4 3ros3ectus if any fundamental chan"es or if
securities are ta+en off the shelf more than 5 months after the effective
5. 3ust update the ;rospectus timely: ? +,4a6416 prohibits the use of a
prospectus with stale information more than +F months old.
1. Rule =+-4a6416: <ile a post)effective amendment if any material changes to
the plan of distribution 4i.e. change in the number of shares6
=. 3ust update registration after 1 years
f. Rule =+- in its $ntirety
i. =+-4a64+64i6)4i*6: if you wanted to sell securities not from the issuer but from one
of the $Bs of the issuers. 'llowed you to register the securities from the $B in
the shelf registration process that were traditionally offered. Some company wants
to raise moneyCwant to do a shelf registration.
ii. 'dding =+-4a64+64*64+,6: as long as you "ualify for <orm S)1: you can register for
the shelf)registration in advance but don0t have to know what the securities are.
:ou can go thru all the steps and get a pre)approval from S$% and then you Dust
wait on it until the market is right.
iii. =+-4a64+64iv6: allowed to register for securities that are convertible
iv. =+-4a64+64*6: allows registration of bonds
g. /niversal registration:
i. ;rior to universal registration% most only used shelf)registration for debt
securities. They were afraid that by telling the market that they were issuing more
e"uity% the market prices would drop at the prospect of being dilutedCcalled a
)$r/et &er.$!5 e,,ectCbecause of the impending e*tra shares.
ii. S$ changed this by allowing universal registration.
1. D!t .$&e t re5ister t.e t(*e , securities #i.e. 2e3tCeDuit(
r c!&erti30e (u 6i00 issue%
". Sti00 .$&e t re5ister
III. 9:SIs
a. ' WPSI can file a shelf)registration on <orm S)1 by checking a bo* and it immediately
becomes effective.
i. Ru0e 4>": /sually% automatic shelf registration statements become effective when
filed w! the S$% but without S$ review.
b. Time limit
i. Three)year time limit on shelf offerings.
ii. an only register securities that are e*pected to be sold within 1 years.
c. 9S:I c$! re5ister 6it.:
i. A! u!s*eci,ie2 $)u!t , securities $!2
ii. T.e c0$ss , securities 3ei!5 re5istere2 )itte2
d. Rule =1,#: ' WPSI can omit information unknown at the time of filing% including:
i. Whether the offering is a ;rimary!Secondary filing
ii. ;lan of .istribution
iii. .escription of securities.
iv. 7ames of any selling security holders
e. 'ny post)effective amendments are automatically effective.
i. .one b!c a WPSI can register a new class of securities or securities of an eligible
subsidiary to an automatic shelf registration statement at any time before sale of
those securities
ii. 'llowed because the price is already set by the market% so even misleading
statements won0t really harm the public.
I&. ;roblems with Shelf Registration
a. .ue).iligence Issues
i. /nderwriters are still on the hook for the RS% but they have much less time to do
ii. Issuer0s counsel will issue the RS but will contact the underwriters only when
they want to sell. This usually gives the /Ws a 5)day turn)around on due)
+. Rule +OF: /Ws in a shelf registration will have slightly less due diligence
a. World om ase: Investors relied under the /Ws to have done
due diligence% but the /Ws didn0t do anything at all% so they were
still on the hook. Would have met +OF if they would have done
some due diligence.
5. (ess of an issue because these are S)1 companies that already have a lot of
information in the market.
iii. /Ws are shut out because the issuer will call +, /Ws to seek the best price.
I. .uty to /pdate <ilings .uring ;rospective ;eriods
a. SEC &. '$!r Nursi!5 Ce!ters1 I!c. #"!2 Cir.% #rought by the S$ to enDoin fraud
and allow investors to get their money back because information in the Registration
Statement failed to mention that participating securities firms were to be paid special
commission that some of the securities would be sold for other than cash% and less than
all securities would be sold in an ostensibly Lall or nothingM offering. The prospectus and
RS weren0t amended to reflect material changes.
+. The S$ could not sue under ? ++ because that only allows suits for fraud
in the RS when the RS becomes effective. The false statements were not at
the time the RS became effective.
a. 'lso% ? ++ re"uires that there be a duty to amend the fraudulent
statements. There is no duty to amend the RS.
ii. Instead% the S$ sued under ? -4b6456Cviolation of prospectus delivery
+. 'lthough ? -4b6456 only re"uires that the prospectus comply with ? +,%
and neither say that the statements have to be true% the ourt said that a
false prospectus is the e"uivalent of sending no prospectus. ' prospectus
must be true.
5. The ourt held that the people were strictly liable and eliminated any
iii. Holding: &iolation of the prospectus delivery re"uirements and ordered rescission
of the sales and returned purchasers0 money.
b. &iews on 3anor 7ursing
i. omplaints about holding because many felt that this gave the issuers absolutely
no defense. There were other sections of liability that could have been used to
punish defendants but that also carried with it defenses.
+. i.e. ? +54a6456 : civil liability for a prospectus that is false% carries with it a
defense of due diligence
5. Still the law in the 5nd ir. @ absolute liability for false prospectuses% no
II. -st4E,,ecti&e A)e!2)e!ts
a. The registration statement can be amended after it has become effective.
i. 'mendments under ; ?#c% become effective whenever the ommission
ii. The principal purpose of a post)effective amendment is to correct any material
inaccuracy appearing in the registration statement when it became effective.
iii. There are reasons people don0t want to amend if they can avoid it:
+. Section ++ liability @ only liable if statement was false at time of
registration statement becomes effective. If becomes defective later% not
liable. If you do amend it% then everything in the statement must be true as
of the new date 4the date the amendment became effective6.
a. Thus one small change means that everything must be updated
b. When making the amendment the liability date changes to this new
b. #asic Rule: an issuer is only re"uired to file a post)effective amendment when the post)
effective information is to be substituted for% but not added to% information appearing in
the registration statement. ' material addition is for the prospectus% a material
substitution of information re"uires an amendment to the RS.
i. Instead when the change is Dust an addition to the RS!;rospectus% Ru0e 4"4#3%#3%4
#=% allows new information to be included in the prospectus as long as a sticker is
placed containing the new information on the prospectus.
+. 7ot considered an amendment to the RS.
5. The sticker can be affi*ed to the cover page or other appropriate pages in
the prospectus.
1. Hard to determine when the RS has to be amended and when stickers can
be placed on the informationCmany confusing situations.
ii. ? +,4a6416: Whenever a prospectus is used more than nine months after the RS
became effective% the information in the prospectus must not be from a date more
than +F months prior to such use.
III. 9it.2r$6$0 , t.e Re5istr$ti! St$te)e!t
a. Ru0e 4AA: ;rovides that an issuer may withdraw its registration statement or any
amendment or e*hibit thereto. The withdrawal is effective immediately% unless the
ommission obDects within +- days of the withdrawal application being filed.
b. Bnly allowed to withdraw when the S$ allows it% but even then the S$ will fre"uently
publish opinions setting forth the statement0s deficiencies in the belief that the publicity
will help the public for this issuer0s future offerings or issue a stop order.
i. S$ has successfully deterred withdrawals for:
+. Has already sold securities covered by the deficient RS
5. Where the registrant had previously sold securities in the same class
ii. Btherwise market would have no idea of their fraud.
IV. Tr$2i!5 -r$ctice Ru0es
a. Rules that were established to prevent the issuer% uws% and their associates from
influencing the secondary trading market for the security being distributed.
i. In the case of emergencies the issuer!uw!associates have an incentive to purchase
the old stock to raise the market price.
ii. Rules prohibit 3anipulation
+. Regulation 3CRule +,5: creates the rule for the issuer
5. Rule +,+: for /Ws and .ealers
1. - days or + day% unless you are an e*tremely large company or you are a
broker responding to an unsolicited sale in the secondary market.
b. ;urchases .uring a .istribution
i. S$ acting in its rulemaking authority pursuant to ? +,4b6 of the $*change 'ct%
enacted Regulation 3 that prevents those involved in the distribution of securities
from artificially conditioning the market for securities to facilitate the distribution.
+. The prohibition against bids and purchases during a distribution applies
until the regulated person has completed his participation in the
distribution. /nable to sell during the restricted period.
5. Restricted period starts either:
a. When the person becomes a distribution participant BR
b. When the price is set
c. #oth of these re"uire that the RS becomes effective.
i. If you haven0t filed a RS% you have no restrictive period
1. Restricted period:
a. <or $9TR$3$(: ('RG$ B3;'7I$S% greater than A+ million
average trading volume and a float of A+-, million% no restrictions
i. Impossible to have any restrictions.
b. <or ('RG$ companies% with greater than: A+,,P trading volume
and A5-3 float% they cannot purchase or make bids B7$
#/SI7$SS .': prior to determination of price or becomes a
participant. $nds at the end of participation% i.e. the sell off your
i. an do so before the one day before the determination of
ii. 'llowed until the last minute because the market is
efficient and there is too many analysts and too much
information% for the price to be changed in a few hours.
'ny change would re"uire too much capital.
c. <or S3'(( companies% less than A+,,P trading volume and
A5-3 float% <I&$ .':S prior to determination of price or
becomes a participant.
i. ' broker is still allowed to purchase stock in the secondary
market of the stock that will be issued if by the order of a
=. = Ways to Get 'round these Rules:
a. +. .e 3inimus $*ception 4+,+4b64O66: /Ws can purchase shares
that are tiny compared to the average trading volume. 3ust be less
then 5I of the atv. These purchases are ignored for the
b. 5. The investment grade nonconvertible debt don0t have a
restrictive period 4+,+4c64566
c. 1. The $*tremely (arge ompany e*ception
d. =. The broker e*emption =4=6Ca broker can respond to any
unsolicited order of any si>e.
i. Stabili>ation is the pegging or fi*ing of a security0s market price through
purchases or bids for the limited purpose of preventing or retarding decline in the
security0s price during a public offering of the security.
+. Bnly allowed in certain situations.
ii. 'llowed to prop up the price to what the RS has labeled the price of the offering
4Lissuance priceM6.
+. #y setting a price that is constant with the previously set market price you
are able to purchase to keep at that level.
5. #eneficial because it reduces the risk for /Ws and increases li"uidity to
a. 'nd encourages ppl to purchase securities.
iii. Ru0e 1<4#,%: an0t bid or attempt to stabili>e at a price higher than the lower of:
+. The issuance price 4at the time of the filing of the pricing amendment6
5. The last independent price before you sell
1. (et0s say you price at A1, a share% and at that time the market price was
A5- a share. What0s the highest price you are allowed to stabili>e toE A5- a
shareSS an0t stabili>e higher than the lower.
a. #ackground
i. Securities 'ct of 011 gives the S$ control over Luse of any interstate
commerce or of the use of the mails.M
ii. Interstate ommerce is defined to include securities activities Lb!w any foreign
country and any StateM% including
+. ;ublic offerings by /.S. issuers to foreign investors outside the /.S.
5. Secondary distributions by /.S. investors who resell to foreign investors%
1. ;ublic offerings by foreign issuers outside the /.S. if any of the securities
are purchased by /.S. investors.
iii. This broad reading scared many investors and foreign issuers because they would
have to comply w! /.S. regulations% even when no /.S. purchasers are
iv. To allay the alarm% the S$ has stated that the securities offerings in ? - does not
reach offerings to foreign investors if the offerings are reasonably designed to
come to rest abroad and not be redistributed to /.S. nationals.
b. 'ccommodating <oreign Issuers0 Bfferings in the /.S.
i. 'ny issuer contemplating an offering in the /nites States must consider
registration on <orm <)+ or <)1 4parallels S)+ and S)1 for /.S. ompanies6
+. <)1:
a. (imited to issuers who have been subDect to the 01= 'ct0s reporting
provisions for one year and all of whose filings under that 'ct have
been made in a timely manner during the +5 months preceding the
filing of its RS.
b. an0t have failed to pay a dividend% interest% debt% etc. since the
end of the fiscal year for which it has filed certified financial
c. (imited to issuers whose worldwide float held by non)affiliates is
e"ual to AO-3
5. <)+
a. 'nyone that cannot meet form <)1 eligibility
ii. In adopting these forms% the ommission has in many areas lightened the foreign
issuer0s disclosure burdens.
+. 'ccounting Standards: permit foreign accounting standards provided the
ommission is satisfied that this discloses enough information for
investors to make informed investment choices
5. an also choose not to disclose certain category of info that is re"uired for
/.S. investors: revenues or line of business information
1. (ess disclosure when it comes to management compensation.
=. 'llowed b!c:
a. ;olitical: have to return the favor to allow our companies to sell
b. Want /.S. investors to have access to these securities
c. /.S. stock e*changes get prestige and fees when they get foreign
companies to list their stocks on the e*changes
c. Bfferings Butside the /.S.
i. #ecause of ? -0s broad powers and the increasing importance of international
securities offerings% the ommission has put together Regulation S to clarify the
application of the S$ registration rules under ? -.
+. 'ny type of communication with the /.S. 4mailings% phone calls% emails6
ii. Regulation S
+. Ru0e 9<3: 1 categories of safe harbors for offshore distributions and re)
sales 4N,=6 of unregistered securities of /.S. and foreign issuersC
categories turn on: the kind of issuer% foreign or domesticK the type of
security offered% e"uity or debtK the level of the /.S. issuer% reporting or
non)reportingK and the level of /.S. interest in the marketK and the market
in which the offering is made. I< any of these safe harbors are met% ? -
re"uirements to register do not apply.
$. Ge!er$0 Restricti!s:
i. N,14a64+6: Bffshore transactions
+. #uyer must be outside the /.S. or the transactions
must take place on a foreign e*change
". 9<1#$%: i, $ s$0e ccurs e!tire0( utsi2e , t.e
U.S. t.e! (u 2 !t .$&e t c)*0( 6it. t.e 33
$. D!t .$&e t ,i0e Fr) F411 F4"1 r F43
3. Sti00 *e! t $!ti4,r$u2 *r&isi!s
1. 's long as offshore% you can still sell to a /.S.
ii. 7o directed selling efforts in the /.S.
+. .efined in Rule N,5: can0t do anything to condition
the /.S. market
5. $*ception for tombstone ads for a publication in a
foreign country% even if some of the publication will
find its way into the /.S. 4up to 5,I6.
iii. 7ot selling to /.S. people
+. /.S. people: this is a residency re"uirement. <ocus
is on the people actually living in the /nited States.
b. #ased on the type of issuance% there are additional re"uirements
i. C$te5r( 1: (east Re"uirements: Ru0e 9<3#8%#1%
+. Bnly re"uirements are the general re"uirements
a. 7o Bffshore transactions
i. #uyers must be outside the /.S. and
ii. Transaction must be on a foreign
b. 7o directed selling effort in the /.S.
i. 7o advertisements in /.S.
periodicals% otherwise deemed to be
an offering in the /nited States.
c. 7o selling to /.S. people
5. Securities Bfferings that fit into this category
a. <oreign Issuer w! no substantial /.S.
b. Substantial /.S. interest for e"uity)
i. if principal market is w!in the /.S.
ii. if greater than 5,I of the trades
occur in the /.S. and no other
country has greater than --I then it
does not "ualify
iii. Substantial interest for debt: if held
by more than + million ppl% or more
than 1,, shareholders in the /.S%.
and greater than A+ bil in debt by
/.S. ppl% or more than 5,I held by
/.S. people
c. Bffering of a foreign issuer of debt or
e"uity% directed at + non)/.S. country
i. This means a company that is not
incorporated in the /.S. (ook to the
place of incorporation to determine
whether foreign!domestic.
d. Bffering of /.S. issuer of debt directed at +
non)/.S. country
i. .ebt is to sophisticated institutional
investors only.
e. #acked by <ull faith and credit of foreign
i. 7o dangers when backed by another
f. $mployee benefit plan in another country.
ii. C$te5r( ": those not eligible for ategory +
+. .ebt offering by foreign or domestic reporting
a. Reporting foreign issuer: sell stocks in the
secondary market so they have to comply
with the 01= act
5. .ebt by a non)reporting foreign issuer
1. $"uity by reporting foreign issuer.
=. 'll reporting companies are in category 5% e*cept
domestic 4/.S.6 issuers of e"uity.
-. <oreign issuers are in category 5 only if there is
substantial /.S. 3arket interest and it is directed to
more than Dust + foreign country.
a. 3ore restrictions because of the greater
possibility of flow)back to the /.S.% but
since there is still a lot of information in the
market price less restrictions.
F. Restrictions:
a. #oth of the general restrictions% but also:
b. annot sell to a /.S. person until =, days
after date of the closing of the offer.
c. 7o re)sales during the =, days after the date
of the closing of the offering
d. Bffering restrictions:
i. $ach distributor must agree to no
ii. .isclaimers given to all
iii. .istributor must send out notices to
those who will purchase setting out
the resales
iii. C$te5r( 3: everything else
+. 'll e"uity offerings by domestic issuer% reporting or
5. .ebt offerings by non)reporting domestic issuer
4unless to a single non)/.S. ountry6
1. $"uity by non)reporting foreign issuers 4unless no
/.S. market interest or to Dust + country6
=. Restrictions
a. Inclusive of all the restrictions from
ategory 5 and the General Restrictions
b. <or debt% additionally only a temporary
certificate of ownership given for =, days to
ensure that the debt can0t be flipped until the
=, days are over.
i. Get a real certificate after the =,
days are over and only if you can
certify you are a non)/.S. citi>en
c. <or e"uity% an additional + year rather than
=, days if they certify non)/.S. citi>ens.
i. .istributor has to verify the
information and cannot take the
ii. ;urchaser has to agree not to flip
w!in the + yr.
iii. 'lso must promise they are not
going to resell to a /.S. person.
d. ;ress onferences in 'nother ountry
i. $ven though the restrictions include a general restriction against sales being
directed at a /.S. person% a /.S. trustee may still attend the foreign country press
ii. <oreign ountry pursuant to Regulation S
1. Ru0e 13=#e%: its /$( i,:
a. ;ress conference must be offshore
b. Bffering not made solely in the /.S.
c. 3aterials must have disclaimers
iii. If a /.S. company is selling to a foreign country% they cannot have a /.S. trustee
attend the press conference.
+. Rule +1-4e6 only applies to foreign countries
iv. $*ception for tombstone ads
+. Tombstone ads are allowed under Rule +1-4c6: okay for a reporting /.S.
or a foreign issuer.
5. Bnly for reporting countries.
v. <or non)reporting companies% Rule +1- Safe Harbor doesn0t apply% look back to
the broader categories for an e*emption
+. an still fall under category + when less than 5,I of the circulation was
in /.S. then still deemed to not be directed at the /.S.
&I. Bfferings Butside Regulation S: GB back to the #ackground Rules
a. Euro3e and 6verseas Commodity Traders7 S.'. v. Ban8ue 9aribas London 45nd ir.
+NNJ6: ))arr% the sole shareholder and agent of $B% a ;anamanian company with a
mailing address in 3onaco% commenced discussions in (ondon with 'rida% a /P
national% regarding a substantial investment $B would make through 'rida. arr then
departed to <(Che approved the purchase by $B of shares from 'rida. arr% believing
that 'rida had lied to him% sued for fraud under Section +54a64+6Calleging that 'rida had
sold a security in the /S in violation of section -
i. Issue: was there conduct to Dustify /.S. DurisdictionE
ii. Holding: 7B
+. 7o market was created in the /.S.
5. arr0s presence was entirely fortuitous and personal% and the actual
purchaser of shares was an offshore corporation without a place of
business here.
1. Really Dust a sale of securities that is a foreign saleK doesn0t implicate the
rationales that would otherwise re"uire registration
b. If a transaction doesn0t fit within Regulation S% it can escape coverage by normal
securities laws by flipping back to background law before Regulation S e*isted
I. Introduction
a. To avert both informational scarcity and overload the federal securities laws draw the
boundaries of mandatory disclosure w! the concept of L)$teri$0it(.M
b. To meet the re"uirements of materiality and re"uired disclosure% the issuer must have $!
i!2e*e!2e!t 2ut( t 2isc0se the information.
i. .uty relates to when and whether information must be disclosed. 3ateriality
relates to what information must be disclosed.
+. The first concern will always be the duty to disclose because w!o it
materiality is only of theoretical interest.
a. $ither formed from fraud law or duty of honesty.
ii. There is no general duty to disclose. Instead% this duty to disclose comes from:
+. 'nti)<raud (aw 47o duty to immediately disclose% but if you do speak up%
can0t say anything false6.
5. ? ++% +5% and Rule +,b)-: all re"uire the issuer to disclose if there is a
statement of material fact or an omission of a material fact that would be
necessary to make other statements that are not misleading.
1. The re"uirements of
a. 'll the registration statements
b. 'nnual Reports
c. ;ro*y Statements
d. Regulation S)9 and S)P
i. The S$ provides a list of certain things that must be
disclosed 4even if they don0t meet the materiality standards
of the later tests6.
=. Rule =,J: if other info was re"uired to make other filings not misleading%
you have a duty to disclose
iii. #uried <acts .octrine: If you do have a duty to disclose% cannot bury the truth
beneath convoluted language.
+. an still be held liable as if you never disclosed the information.
5. .isclosure is still considered misleading if it contains material information
that is inaccessible or difficult to assemble.
II. General .efinition of 3ateriality
$. Su3st$!ti$0 Li/e0i.2 Test:
i. ' fact is material if there is a substantial likelihood that a reasonable investor
would consider it important in making a securities)related decision.
+. Gust has to assume some significance in that person0s deliberations
a. .oesn0t have to change the decision
5. The facts must alter the total mi* of information made available to a
reasonable investor.
ii. .efining Reasonable Investor:
+. 'ny subclass of investor would find it reasonable
5. .oesn0t matter if the investor is naTve or informed.
1. BbDective Standard.
III. S*ecu0$ti&e I!,r)$ti!
$. -r3$3i0it( '$5!itu2e Test
i. The pre)e*isting law before #asic v. (evinson was you didn0t have to reveal
anything unless it was going to happen w! a reasonable certainty. The concern
was that people shouldn0t be overloaded with too much information.
ii. Basic v. Levinson : *efendant was a manufacturer. .n 3;<=, +asic made three
public statements denyin that it was enaed in merer neotiations when in
fact they were in neotiations. /want suitor to run because the stock price ets too
inflated or competitive competitors would want to et in0. ,laintiffs sold their
shares when the price was artificially deflated.
+. 'lthough this was a speculative merger% the court ruled that it was
material for 1 reasons:
a. That disclosure would create too much information is not a valid
argument. .on0t need to be paternalistic% Dust release the
b. 'lthough there was an argument that it was a business necessity to
keep this "uiet% the court doesn0t care. 7eed to find some other
way of concealing people other than tricking people.
c. Sometimes materiality will e*ist at an earlier time% other times it is
later. Have to analy>e what is material to a reasonable investor.
i. <ell into the :es bo* because they were all the way to
discussing the price of the merger. loser to certainty on
the continuum than uncertainty% so material
5. 8$0$!ci!5 Test: %ateriality will depend on the balancin of both the
indicated probability that the event will occur and the anticipated
manitude of the event in liht of the totality of the company6s activity.
a. -r3$3i0it( F certainty
i. Interest of the upper)level management shown through
+. #oard resolutions
5. Talks with underwriters
1. 'nd 'ctual 7egotiations
b. '$5!itu2e F importance
i. How large the ramifications
ii. Si>e of the entities
iii. 'nd premiums over market value
Cert$i!t( 3aybe :es
Nt cert$i! 7o 3aybe
iii. In these situations% the only reason there was a problem was because lies were
told. Instead% there is no affirmative duty to tell about mergers. If asked% remain
silent. Silent% absent a duty to disclose% is not misleading under Rule +,b)-.
+. To make sure people don0t take silence as evidence of secret information%
the company should have a policy of always remaining silent.
5. <n. +O in the case stated Lno comment statements are the e"uivalence of
a. Silence is not actionable and Lno commentM is treated as polite
corporate silence.
b. 'lso% no duty to respond to market rumorsCno need to correct
false stories in the news media.
IV. Tt$0 'i+ , I!,r)$ti! $!2 '$r/et E,,icie!c(
a. 'ny lie or misinformation if material does not necessarily incur liability. If the market
already knew the information% there is no liability for a failure to disclose material
i. $ven false disclosures may not incur liability if the market knows that these
disclosures are false.
ii. Truth on the ,ar+et : If the market knows the truth% and even if you heard only
the false statements% you do not have standing to bring a lawsuit for misleading
disclosures. There was no effect on the market priceK the misinformation was
already discounted. 4.efense to lawsuits6
+. *iel"os v. Common4ealth Edison Co. : 'lthough there were many
problems for launching the utility0s nuclear power plants% including
hernobyl and cost increases% the company released optimistic cost
estimates. The plaintiffs didn0t hear the problematic information% but the
market did and adDusted ade"uately to all the bad news.
a. The court held that the optimistic estimates% although lacking a
reasonable basis when the company issued securities% were not
materially misleading because professional traders knew. Truth on
the market saved the company from liability.
iii. 1raud on the ,ar+et : $ven if you didn0t hear the false information% you are still
able to recover and have standing to bring suit because the market heard the false
information and accordingly reacted in its pricing.
V. -u,,er(
a. Speculative information that is an overstatement of present circumstances based on a
hope that events will turn out well.
b. ;uffery is not actionable% because it isn0t really misleading.
i. These are Dust statements of general positive enthusiasm.
ii. $veryone knows they are lying% they can0t rely on that information. Truth on the
iii. 'lthough you may fool one investor% you will not fool many% and% thus% the
market price is unaffected.
c. Eisenstadt v. Centel Cor3.
i. ompany puts together an auction for their companyK it doesn0t do very well.
They don0t find a buyer% but during the auction the company was saying it was a
great auction. ' person buys stock after based on the puffery. Is that material
information that should have been introducedE
+. ourt says this is puffing and you cannot sue. ;eople e*pect this type of
lyingCno one bad mouth their own auction while they were trying to sell
their company.
VI. Fr6$r2 L/i!5 St$te)e!ts
a. The S$ once took a rigid stance against the disclosure of favorable soft information.
The agency asserted that disclosure should be limited to verifiable historic information.
i. ;roblem with historic information: doesn0t allow the purchaser to e*plain any
impact on the future stock. The past information is only helpful to the e*tent as it
gives hints about the future% which are few.
ii. The S$ now re"uires the company in Regulation S)P to have a section entitled
3anagement .iscussion and 'nalysis
+. This section are fwd)looking statements from managers that identify:
a. 3aterial trends in li"uidity
b. apital Resources as they stand and
c. Results of Bperations.
b. Since this information is not always reliable% the courts developed protections
i. 8es*e$/s C$uti! Dctri!e:
+. If you make forward)looking statements% but they are accompanied by
cautionary language% you can0t be held liable for false predictions.
5. -aufman v. Trum3$s Castle 1undin" : The interest rates on these bond
were much higher than others 4also they are getting a huge discount on the
bond6. The market recogni>es the additional risk and re"uires a higher
interest rate. These risks were definitely laid out in the prospectus. There
was still A-- million unaccounted for to pay out the bonds @ they hoped
the operations would provide for this% but they weren0t sure. The statement
that people sued over LThe operations will be able to cover the debt
a. There were% however% many cautions that were attached to this.
#ased on the price of the bonds and the high interest offered% the
market believed that they were risky. Thus% the cautionary
language protected Trump from liability.
1. The bespeaks caution requires that the cautionary lanuae be riht there
w> the fwd lookin statements.
a. an0t be in the back in an appendi*.
b. If the information is accompanied by meaningful caution% won0t
affect the total mi* of information% and thus% creates no liability for
=. 8i0er*0$te c$uti!$r( 0$!5u$5e: doesn0t avail issuers of the protection.
an0t be boilerplate information% must be tailored to be forward looking
statements given at that moment.
-. The warnings must be s*eci,ic% and provide the reasons for the risk.
a. The rule is that issuers must include information on the )$i!1
)e$!i!5,u01 $!2 s*eci,ic risks.
i. If you include the main risks and some other risk causes a
default% the issuer is protected from liability. This% however%
is not true if the issuer left out a key risk.
b. The bespeaks caution allows dismissal before trial and often before
discovery. Bnly need to look at the prospectus and other offering
materials and that will have enough to understand whether there
was cautionary language.
i. This is main benefit as it decreases settlement leverage.
F. an0t be intentionally false statementsCthose will not be protected by the
bespeaks caution doctrine.
O. .oes not limit liability if the bad events have already occurred
a. an0t say might occur if the event has already occurred
ii. St$tutr( S$,e 7$r3r: -ri&$te Securities Liti5$ti! Re,r) Act #-SLRA%
+. 33 Act: ;"A#$%: 'pplies only to forward looking statements made by
R$;BRTI7G companies only
a. reated in +NN-
b. Still turn to #espeaks aution .octrine for non)reporting
5. Requirements: 7o liability for a fwd)looking statement if:
a. C$uti!$r( St$te)e!ts: 'ccompanied by meaningful cautionary
statements BR
i. .ismisses a lawsuit if the statements are accompanied by
identifying important factors that could cause actual results
to differ materially from those proDected in the future
looking statements.
b. N Actu$0 :!60e25e: ;laintiff is unable to prove that the
defendant knew the statement was false
i. $ven though the statement is false% there is no liability as
long as the person creating the statements doesn0t know it
to be false.
ii. Seems to cover statements that are intentionally untrue and
known to be so by the company.
+. 'cademically conDectured to be a license to lie.
c. I))$teri$0it(: if the statement was immaterial
i. The safe harbor focuses on whether the
forward-looking statements were too soft to be
ii. ;uffery
3. C&er$5e:
a. PSLRA 27a!" does not a##l$ to"
i. %on-re#orting com#anies
ii. &ad-bo$ issuers
iii. &lank check issuers
i'. Penn$ Stock issuers
'. (P)s
'i. *oesn+t a##l$ for offerings from #artnershi#s
b. #espeaks aution applies generally.
=. 'sher v. Ba)ter :
a. #a*ter% a manufacturer% released its 5nd)"uarter financial results%
and sales and profits didn0t match analyst0s e*pectations. ;laintiffs
sued saying the prices set out were the result of materially
misleading proDections.
b. ourt ruled: #a*ter may be liable.
i. ;laintiff never e*plained what caused the proDections to go
wrong% and whether the cautionary statements would have
saved them from going wrong.
+. .on0t have to nail the e*act risk but should e*plain
the main risks
5. 7eed more discovery
ii. ompetitive pressures changed% and the same risks were
left in. Seems more like boilerplate language that doesn0t
deserve the protection of the ;S(R'
iii. <alse statements were made in the speeches
+. 7eed to meet two re"uirements for protection of
oral statements. The declarant must say:
a. 'ctual results may differ from the
b. 'nd tell ppl where to look for risks.
5. .efendant didn0t do that. <raud on the market
because market prices were affected by these false
c. Historical v. <orward (ooking Statements
i. 7either #espeaks aution .octrine or the ;S(R' apply to historical facts.
ii. $*amples:
+. Historical Statements:
a. $arnings were A-, per share.
b. 7egotiations are going great% and a merger is imminent
i. Historical statement because a summary of information that
has happened in the past.
c. 8uestions in the press about whether our 'I.S drug has been
approved by the <.'. We e*pect profits to be very large.
5. ;uffery
a. 7egotiations are going great
1. <orward)(ooking Statements
a. ;S(R' 5O4a64i64+6: fwd)looking statement is a prediction that will
affect the future
b. Statements that are a mi* of past and fwd looking are deemed to be
fwd looking
i. $*amples:
+. Bur business plan and underlying business
strategies are sound.
a. 'ffects future economic performance.
5. /ni"ue challenges are behind the company.
d. .uty to .isclose <orward)(ooking Statements
i. Bnly have an independent duty to disclose soft information if the overall
disclosure rule that no half)truths should appear in fillings w! the S$ and public
+. Generally% there is no duty to disclose. Bnly a duty to disclose when you
need to amend previous statements to make sure they are not misleading.
5. ourts generally side w! the corporation.
ii. In the Insider trading informationCthe trading itself creates the duty to disclose
the information. To create liability% there had to be a dutyCthe trading creates this
rule. <rom not abstaining% there is a duty to disclose.
iii. When analy>ing% use the following framework.
+. Is the statement forward)looking or is it historicalE
5. Would the forecast be materialE
1. Is there a duty to discloseE
a. /nder normal fraud law
b. /nder Securities regulations
c. /nder Insider Trading
=. .oes it fit within any of the protectionsE
a. #espeaks aution
b. ;S(R'
a. .isclosures about 'ANAGE'ENT INTEGRITY
i. <or shareholders% mgmt0s e*perience and integrity are often critical to their
investments. The S$ has asserted the materiality of information that bears on
mgmt integrity.
+. S$ has based materiality on whether a fact bears on a company0s
"uantitative assets.
ii. (awsuits:
+. Issuer: Regulation S)P 4Item +,16: issuer has a duty to disclose those
litigations that are at least +,I of the issuer0s assets.
5. .irectors: Bnly must reveal pending litigation if it0s a criminal case%
otherwise% only completed cases must be revealed.
a. .on0t have to reveal everythingK too many cra>y lawsuits. Reveal
if the lawsuit has some weight to it.
1. Regulation S)P 4Item =,+6: have to disclose certain types of adDudications
w!in the past five years that are material to an evaluation but only w!in the
past - years% against the d!o or the company.
a. ;assed after Watergate.
iii. .ishonesty among 3anagers
2. 0n re 1ranchard Cor3. #25:&(
a. ompany0s $B was engaging in sketchy activities% including
using the money for personal uses and promising to pay it back at
lower interest rates than the banks. 'lso% borrowed money from
lenders and pledged the company0s securities as collateral.
.irectors were not paying attention to any of this.
b. Issues: Should they have disclosed this information: either about
the $B or the directors not paying attentionE
c. Holding: 3ust disclose information about $B but not about the
directors not paying attention.
i. $B0s management: material information because they
thought he was a great manager and turns out that he
engaged in fraudulent activities. If you didn0t take back this
information% you would leave a false impression that he
was a good manager.
+. 'lso% the fact that he used the securities as collateral
is material information because that could signal
change in the company.
a. 'ny default in the loan would shift
ownership to the bank
ii. .irectors: ,ourt didn+t re-uire directors to disclose
anything more than the re"uisite standard of diligence for
the registration statement
+. How the board carried out its state)mandated
oversight duties was not a matter for federal
securities laws.
iii. .o disclosure re8uirements to "enerally admit you are
horrible or "eneral laziness. 6nly have to disclose if
fraudulent activities.
5. Rules have changed slightly since +NF= and the <ranchard case:
a. ompanies are now encouraged to have a C2e , Et.ics under
Sarbanes)B*ley 4Item =,F6.
i. The company must disclose whether it has a code of ethics
covering its principal e*ec and financial officers.
+. Br e*plain why there isn0t one.
ii. The code must contain standards for promoting honest and
ethical conduct.
iii. 'lso% S)B*ley re"uires an audit committee.
iv. Management Pay
+. Regulation S)P 4Rule =,56: $*ecutive ompensation must be disclosed in
the registration materials or the periodic materials
5. Impact of the disclosures is actually to raise management pay.
b. Interface of 3ateriality and orporate Governance: CONFLICTS OF INTEREST
i. The S$ has taken the view that disclosure duties are heightened when
management self)dealing is a possibility.
ii. In the Matter of W.R. Grace & Co.
.. Lucrati'e retirement #ackage gi'en to retiring ,/)0 and
the directors didn+t do an$thing about the #lan. There was
also a sale of a di'ision to his son.
a. If an officer or director knows or should know that his or her
company0s statements concerning particular issues are inade"uate
or incomplete% he or she has an obligation to correct that failure.
b. 'n officer or director may rely upon the company0s procedures for
determining what disclosure is re"uired only if he or she has a
reasonable basis for believing that those procedures have resulted
in full consideration of those issues.
c. Bfficers and directors here had particular knowledge of the
transactions% and should have in"uired as to whether the securities
laws re"uired their disclosure. The in"uiry could have included
seeking the specific and fully informed advice of counsel and if not
reasonably satisfied% they should have insisted on disclosure.
c. The 1aterialit$ of #eing a L#adM iti>en: &iolations of State or <ederal (aws
i. SEC v. Jos. Schlitz Brewing Co.
.. (llegal kickbacks to the bars to get #lacement of their
#roduct. Are these bribes needed to be disclosed2
a. (i"uor laws% although not the the S$0s normal business% the
violation of one law will put the financial integrity of the securities
at issue
i. Schlit> had already been found to be in violation of the
<ederal 'lcohol 'dministration 'ct.
ii. The federal secrities law !andates
disclosre of the co!"an#$s violations with
other non%secrities la4s onl# if
nonco!"liance is clear and its
ra!ifications have financial significance.
3. 1enerally, the "#$ doesn6t require the disclosure
of executives6 criminal behavior unless it has
resulted in an indictment or conviction in the last
five years. 2eulation "-? /.tem @A30.
b. 3uestion of management integrit$
i. This was a violation of the law in the interest of the
company but regardless this was still a violation of a law
and must be disclosed.
c. Gust a small amount of the company0s money% does it need to be
i. Sometimes there is such a small impact there is not an
issue. #/T the deciding factor is not the total amount but
the financial im3act of the bribes.
ii. 1orei"n 9ractices 'ct ; %<#a(B requires disclosure of
bribin of forein officials if it is material.
I. Introduction
a. +N11 'ct:
i. ? ++: false statements or omissions found in the RS
+. If a RS% including the prospectus% contains a materially false or misleading
statement% purchasers in a registered offering can recover damages from
specified participants in the offering.
ii. ? +54a64+6: Rescission for failure to comply with violations of ? -
+. If a seller or offeror violates the registration or gun)Dumping re"uirements
of ? -% securities purchasers can rescind their investment.
iii. ? +54a6456: (iability for Bther <raud not in RS
+. If sales or offers in a registered offering 4not subDect to ? ++ liability6 are
accomplished by means of materially false or misleading information%
purchasers can rescind their investment.
b. +N1= 'ct:
i. +,b)-: /niform basis for most securities fraud claims.
a. What kind of conduct creates liabilityE
i. Section ++ creates a civil remedy for purchasers in a registered offering if they
can point to a material misrepresentation or omission in the registration statement.
+. Goint and several liability falls on the issuer and other specified defendants
associated with the distribution% subDect to non)culpability 4Ldue diligence6
defenses for non)issuer defendants.
5. Section ++ re"uires that the plaintiff show a material misstatement or
omission without showing scienter% a reliance or causation.
a. Instead% reliance and causation become defenses that must be
established by the defendant.
b. ? ++ ;laintiffs:
i. 'ctual ;urchasers
+. 'll purchasers of registered securities have standing to sue. ? ++4a6
5. 'ny person who obtains securities pursuant to a registration statement.
ii. Tr$ci!5 ReDuire)e!t:
+. Hertzber" v. /i"nity 9artners: ' purchaser must Dust purchase the
security to this particular registration statement% whether it was in the
original offering or in the post)offering aftermarket 4secondary market6.
a. "ome courts have ordered it must be subCect to the oriinal
5. ourts impose upon ? ++ plaintiffs a tracing re"uirement.
a. Section ++ liability is broadly interpreted% but unless it is an I;B% it
is tough to determine pursuant to which RS this was bought.
b. If the plaintiff bought directly from an /W or a dealer selling its
allotment% tracing is possible. Btherwise% on the secondary market%
tracing becomes near impossible given the absence of any
numbering system or other identification of securities in the /.S.
iii. Re0i$!ce:
+. In the usual ? ++ case% proof of reliance is unnecessary. The plaintiff need
not have read the registration statement or prospectus% much less have
known of the false or misleading information.
5. Reliance is relevant in 5 cases 4? ++4a66:
a. There can be no recovery if the defendant proves that the plaintiff
knew the alleged misinformation was false
b. Reliance is re"uired to be shown if the 3laintiff bou"ht the
security after the issuer had released an earnin"s statement for
the one=year 3eriod after the reistration statement6s effective
i&. Lss C$us$ti!:
+. ? ++ plaintiff need not prove that the challenged misinformation caused
his loss.
a. $asy to show and be sued.
5. 7egative ausation .efense: .efense for .efendants
a. If the defendant can show how other factors besides the
misinformation e*plain 4or contributed to6 the depreciation in
v. D$)$5es:
+. ? ++4e6: difference between the price of the securities 4not greater than the
offering price6 and the price you can get now.
a. This means that a ? ++ plaintiff0s recovery is capped by the
offering price% and defendants are not liable for the e*tra damages
if the plaintiff purchased registered securities in a trading market
above the offering price.
c. De,e!2$!ts $!2 T.eir De,e!ses
i. ;otential .efendants
+. ? ++4a64+6: Section ++ lists potential defendants
a. 'll people who signed the registration statement
i. /nder ? F4a6 this includes:
+. The issuer
5. ;rincipal e*ecutive officer
1. ;rincipal financial officer
=. ;rincipal accounting officer
-. 3aDority of the board of directors 4entire board isn0t
re"uired to sign it6
b. 'll directors
c. ;rofessionals 4accountants% engineers% etc6
i. (iable when they certify some information of which they
are an e*pert
ii. (awyers only rarely
+. Tend to get sued indirectly and have some other
rule @ i.e. if they are also directors
5. 'lso% held liable later for malpractice% even tho not
held liable right now% held liable later.
d. 'll underwriters of the Bffering
i. .efinition of underwriters is very e*pansive
+. 'nyone that helps w! the issuance
ii. .efenses
+. Issuer: Strictly (iable. #ut everyone else is not absolutely liable
5. ? ++ provides other defenses))
a. Whistle #lower .efense:
i. If you resign before the RS becomes effective you are not
liable for the false statements within the RS.
ii. .one to encourage whistle blowing.
b. Reasonable are .iligence .efense
i. .ue .iligence: The investigation by potential ? ++
defendants of information contained in the registration
statement and prospectus.
+. The due diligence task is often delegated to outside
law firms.
5. If they can say they take reasonable care thru
investigations% they are off the hook.
ii. ? ++4b6416: The level of due diligence depends on whether
the defendant is an e*pert and whether the alleged
misinformation had been e*pertised.
+. 7on)$*pertised
a. 7o liability if after due diligence is done the
investigator didn0t actually know the
statement was false.
b. $B and main officers are basically
guarantors of the information in the RS% they
can rarely use this defense.
5. $*pertised:
a. ;arts of a RS where a statement is certified
and prepared by an e*pert% i.e. an accounting
firm or legal opinions from lawyers.
b. <or e*perts that have written!worked on the
e*pertised sections% they are held to a higher
standard of diligence than non)e*perts
i. If false information in the e*pertised
section% the e*pert is liable .f he
didn6t do due dilience and
reasonably knew that the statements
were false.
ii. !n expert cannot rely on the
information iven to them by the
issuer, they must do their own due
c. <or non)e*perts% they are not re"uired to
have any knowledge if they can show they
had no reasonable rounds to believe and
did not believe that the expertised disclosure
was not true or misleadin.
i. Good faith and reasonable ignorance
is an e*cuse ? ++4b641646
ii. Too complicated of information to
re"uire non)e*perts to learn.
1. N!4e+*ert sue2 ,r !!4
e+*ertise2 )$teri$0s
". N! e+*ert $!2 e+*ertise2
3. E+*erts 6it. res*ects t t.eir
e+*ertise2 2cu)e!ts:
$*pert is liable for misstatements or
omissions unless:
he did re$s!$30e
re$s!$30e 5ru!2 t
3e0ie&e% '7.
Di2 3e0ie&e that at the time
such part of the registration
statement became effective
that the statements were
complete and accurate.
3ay raise the defense that they:
Had no reasonable ground
to believe% '7.
.id not believe that there
was any inaccuracy or
N 3ur2e! , 2ue 2i0i5e!ce
i!&esti5$ti!. Have a "ualified
right to rely on the e*perts efforts.
$*pert is liable for misstatements
or omissions unless:
he had after re$s!$30e
re$s!$30e 5ru!2 t
3e0ie&e% '7.
Di2 3e0ie&e that at the time
such part of the registration
statement became effective
that the statements were
complete and accurate.
>Same as bo) 2.?
Hiring lawyers may not be enough
unless they did a reasonable
investigation. :ou don0t have to
personally go through the
documents% but you must send
someone to do that.
If you had reasonable ground to
believe it was false% you are on the
H:;B: something is false that has
been certified by the accountants.
%. Escott v. BarChris Construction Co.
a. /pon the failure to collect payments due upon completion of the
construction of numerous bowling alleys% the company wants to
raise funds thru a bond issuance. #ut the RS is prepared by cutting
and pasting from older statements from the company successful
issuance of stock with very minor updates.
i. (iability of the various players:
+. $B: (iable for not doing due)diligence
5. <B: liable for the non)e*perted part% off the hook
for the e*perted part
1. Inside ounsel that signed the RS: liable for the
non)e*perted part% off the hook for the e*perted part
=. Butside director: liable for the non)e*perted part%
off the hook for the e*perted part
a. $ven though he was made a director only 5
days before the RS was signed the first time%
the second RS afforded him opportunity to
conduct due diligence
-. (awyer but also a director
a. .efense was that he did due diligence% but
the court doesn0t believe that he reasonably
didn0t know these statements to be false. He
relied on others to put it together.
b. 3ust check information yourself.
F. /nderwriters: liable for the non)e*perted part% off the hook for the e*perted partK must do own due)
iii. .ue .iligence and Shelf)Registration
+. #ecause under shelf)registration the underwriters come in at the last
minute 4usually only 5 days before6% they have less time to do due
a. ompetitive bidding process% which will reduce the underwriter0s
inventive to launch an e*tensive review of the issuer0s registration
statement. .on0t want to delay the offering because the bid will
most likely not win then. .on0t want to spend too much in due
diligence because need to spend less to place the winning bid.
5. Recogni>ing these problems% the S$ passed Ru0e 1A>: 'n uw in a shelf)
registration has a little less re"uired diligence due than those regularly
%. 0n re *orldCom
a. ourts say that investors are re"uiring the underwriters to do due
diligence and so they are still on the hook.
b. Hugely e*pensive systemCdue diligence re"uires a lot of time and
I. Introduction
a. Registering a security under the 011 'ct is e*pensive with all the costs of disclosure%
underwriting% and potential liability.
b. The Securities 'cts also e*empts specified kinds of securities from ?- registration
re"uirements when other market or regulatory protections make S$ registration
c. 'll e*empt securities remain subDect to the antifraud provisions of the securities laws.
i. ? +54a6456: liability for offers for sale of a security whether or not e*empted by
section 1% unless the state or local government
ii. State regulation of many small and intrastate offerings e*empt from federal
registration is not preempted.
II. Types of $*emptions
a. $*empted Securities: doesn0t have to comply with securities laws regardless of how its
b. $*empted Transactions: ? =
i. Bnly sales in a certain manner are e*empt.
ii. If sold in one way% its e*empt% but if you sell it in another way% its no longer
iii. ? =4+6: Re)sales e*empt by anyone that is not an issuer% underwriter% or dealer
iv. ? =4=6: brokerage transaction
+. Bnly the buys and sells based on solicited orders.
5. Transactions are e*empt% not the security
v. Transactions that should be under ? 1
+. ? 14a64++6: intrastate e*emption.
5. ? 14a64N6)securities e*changed w! a company0s own stockholders)
1. ? 14a64+,6% authori>ed govt. okays it.
=. ? 14b6: rules that e*empt special small offerings% that0s a transaction
e*emption. Intrastate offeringsCe*empt
c. $*empt Securities: ? 1
i. Whether debt or stock% doesn0t have to comply with the securities laws. .oesn0t
have to do with the nature of the transaction.
ii. ? 14a6456K Government Securities
+. <ederal or local government
5. i.e. T)#ills
iii. ? 14a6416: ommercial ;aper
+. 7otes arising out of a current transaction that matures in less than nine
iv. ? 14a64=6: bonds!stocks of 7on);rofit Issuers
+. not)for profit need not register their securities so long as none of the
issuer0s net earnings benefit any person% private stockholder% or individual.
v. ? 14a6456: ertificates Issued by #ankruptcy Trustees
vi. ? 14a64F6: ;articipation Interests in Railroad ars of a <ederally Regulated
ommon arrier.
a. Introduction
i. $*empts from registration purely local offeringsCthose by in)state issuers to in)
state residents.
+. #ased on the location of the business 4underwriters location does not
5. $*empts the securities from the Durisdictional means of the S$ and the
reaches of ? -.
1. 7o limits to amount of money that can be raised% how often the e*emption
can be used% or the number or sophistication of offerees and purchasers.
=. Remains subDect to the state0s blue)sky laws.
ii. Statute (anguage
+. L'ny security% which is a part of an issue offered and sold only to persons
resident within a single State or Territory% where the issuer of such
security is a person resident and doing business within% or% if a
corporation% incorporated by and doing business% within such state or
territory. L
iii. Rationale:
+. (ocal businesses should be able to raise money without complying with
the federal rules.
iv. &ery narrow and strictly enforced regulation.
3. INTEGRATION F Sc*e , t.e O,,eri!5
i. 'n offering sought to be e*empted under a transaction e*emption must meet all
the e*emption0s conditions.
+. 'n issuer cannot slice and dice an offering so that different parts fit
separate e*emptions if the offering as a whole fits none.
5. Statute0s languageCpart of an issue the whole of which is within one state
ii. - <actor Test
+. .etermines when offerings will be integrated.
5. &ery vague% and never determinative.
1. <actors
a. 4+6 're the offerings part of a single plan of financingE
i. Suppose the issuer plans to raise money to fund some
business operation% all transactions within raising the
money for financing will be part of the same transaction.
b. 456 .o the offerings involve an issuance of the same class of
i. 7o specific time limit!duration given.
c. 416 're the offerings made at or about the same timeE
i. &ague time limit
ii. If you sell inside the state one day% and then the ne*t day
sell to outside investors% these sales would be integrated.
d. 4=6 Is the same type of consideration to be receivedE
i. i.e. all cash or all redemptions of corporate notes.
e. 4-6 're the offerings made for the same general purposeE
i. Reiterates @single plan of financing
=. If the sale passes the - factor test% look to the ne*t re"uirement.
i. The statutory e*emption specifies that the issue may be Loffered and sold only to
persons resident within a single State.M
+. 7o "ualitative or numerical limits on in)state offerees or purchasers.
ii. 'll offerees and purchasers must have actual residence and domiciliary intent in
the issuer0s state.
+. The e*emption is lost if any sale or any offer is made to an out)of)state
iii. Re"uirement that the offering Lcome to restM with the purchaser prior to resale
+. The purchasers cannot turn around and sell them to out of state residents
a. The purchasers cannot invest with a view to distribute to out)of)
state purchasers
5. S$ seems to allow + yr. as a long enough time to rest
iv. 'ny $2&ertise)e!ts can be used% as long as the ad is accompanied with ade"uate
disclaimers that state that this is an intrastate e*emption that can only be offered
to in)state people.
i. Issuer must be a person resident and doing business within the state of the
+. ' corporation resides in the state of incorporation. BR
5. 'n issuer is okay if it predominately does business in a state
a. If its revenues% assets% principal office% and use of the offerings
proceeds are principally in)state.
b. $*. (.(. #ean
ii. (ocation of the business is what matters% not the location of the underwriters and
dealers and brokers.
e. ;roblems with the statutory e*emptions
i. ;;l thought this was safe for only small numbers of people% but there is already
and e*emption for that.
ii. This e*emption re"uires strict liabilityCb!c +,,I compliance re"uirement
i. Rule +=O is narrower than ? 14a64++6
+. .eemed to be within ? 14a64++6 if within this rule.
5. Without the safe harbor% you are not automatically e*cluded% check under
? 14a64++6
1. Still an all)or)nothing ruleCthe offers and sales that are Lpart of an issueM
must satisfy all the conditions of the statutory e*emption.
ii. Integration: ;art of an Issuance: Rule +=O4b6456
+. Bffers and sales made si* months before the intrastate offering begins% as
well as offers and sales made si* months after it ends% are not integrated
with the intrastate offering.
a. 3ust be F months from any offers% not Dust actual sales
b. 't the end of the offer% stay out of the market for F months
i. If you can0t% make sure the sales don0t integrate through the
five)factor test.
iii. 7ature of the Issuer: Rule +=O4c64+6
+. ;artnership
a. State of the principal office is located @ deemed to be wherever
most of the partners live
5. orporations:
a. Incorporated and doing business in the state
b. .oing business is defined by R +=O as:
i. ;redominate business: at least -,I of the business is in the
ii. 'lso% triple J,I re"uirement
+. J,I of gross revenues located within the state
5. J,I of the assets located within the state
1. J,I of the net proceeds must be used w!in the state
=. Round up only ON.-I and up.
iii. 3ust be valued thru G'';
iv. Residents of ;urchasers: +=O4d64+6 and 456
+. 'll the purchasers must be residents
a. <or individuals: principal residence defines residencyCnot based
on domiciliary intent
b. <or corporations: primary residence is deemed to be where the
primary office is
i. .ifferent then test for determining its residency for issuers.
v. (imitation on Resales
+. $*emption is securities come to rest in N monthsCin)state purchasers can
resell after a nine)month holding period.
a. #ut if even one out)of)state offer or resale voids the rule0s
e*emption if it occurs during the nine)month period after the issue
is completed.
b. Rule +=O is a transaction e*emption and doesn0t cover secondary
sales by the control person
; 3#$%#11% Ru0e 14A
I!te5r$ti! 'll securities
offered as Lpart of
an issueM are
integrated. /se -
factor test
Sets of sales
separated by si*
months are not
Issuer LResident and
doing businessM
within the state
;rincipal office
within state% and
J,I of gross
revenues% assets% and
proceeds used are
within the state
4oncentrate on the
I!4St$te O,,erees Bfferees must be
domiciled within
the state
Bffeees must have
principal residence
within the state
Restricti! !
Securities must
Lcome to restM prior
to being resold
4around + yr.6
7ine)month safe
harbor holding
period from the final
a. Introduction
i. Section =456 e*empts from ? - registration any offering Lby any issuer not
involving any public offeringM
+. Registration is unnecessary when investors on their own have ade"uate
sophistication and information to protect themselves.
5. 'lso% if only selling to a few people% shouldn0t have to register and go thru
the large e*pense.
ii. $conomic Gustifications
+. /sually there is no incentive to do any personal investigation. When
selling to a large group of people% there is an incentive to free ride off of
other people to get information. If everybody free rides% than no one does
5. #ut since there is only a small number of people who are being sold the
securities% each individual has an incentive to do the research and benefit
fully. Thus% no reason for the S$ to step in.
iii. ourts have interpreted ? =456 to not limit the AA amount of a private offering or
the number of investors. #ased restrictions on the investor "ualificationCi.e.
sophistication and access to information about the issuer.
b. #efore Ralston ;urina: 3apping the Scope of the $*emptionC<actors in .etermining a
;rivate Bffering
i. 7umber of Bfferees
+. <ocus is the number of offerees to make sure it is a LprivateM placement
5. 'ny offering that is disposed to a substantial number of offerees will cause
the offering to be public in nature
ii. Relationship of the Bfferees to $ach other and to Issuer
+. If the group that is approached by the issuer is a pre)identified group that
has relationships already established% it is easier to tell this is a private
a. i.e. #oard of directors at the companyCalready had a relationship
and have access to the company info.
iii. 7umber of /nits Bffered:
+. The issuance of securities in a large number of units of small
denominations is an indication the issuer anticipates subse"uent public
trading in the securities.
5. onversely% an issuance of a small number of units in large denominations
is evidence of a private offering
iv. Si>e of the Bffering
+. The e*emption was intended to apply chiefly to small offerings
v. 3anner of the Bffering
+. Transactions effectuated through diret negotiations are more likely to be
private offerings than those effected through the use of the machinery of
public distribution 4such as advertising6
5. S$(( <'$)TB)<'$
C. SEC v. Ralston 9urina
i. Ralston ;urina o. had a policy of selling tock to their employeesCwithout
registration. Hundreds of employees in a variety of positions% including stocking
clerks and trainees% had purchased unregistered stock on their own initiative.
+. S$ sued saying that this did not meet the ? =456 e*emption because these
were the e*act type of people that needed the help of the S$ registration.
5. ? =456 applies only to people who can Lfend for themselvesM
a. 5 factors:
i. 3ust have access to the information
+. 7ot a subDective test of whether these people
actually knew the information% Dust if they had
access to the information.
5. 3ust be able to access the information that the
registration statement would have shown.
ii. Sophisticated
+. #oard% $B is probably sophisticated enough% but
lower down they would not be sophisticated enough
b. Here% most of the employees failed to meet these two re"uirements
and as such% the e*emption did not apply.
c. ourt was unclear as to whether both factors must be present.
i. The "uestion is whether the person is able to fend for
ii. ourts have held both ways
iii. The fifth circuit: seems to place greater emphasis on
disclosures than sophistication and admits that evidnce of
offeree sophistication is not re"uired in all cases in which
the availability of the private offering e*emption is
1. riti"ues:
a. S$ wanted a numerical limitCbut the court failed to give one.
=. #urden of ;roof is on the issuer to see that they have applied.
-. ases now proceed ? ++ and ? +5%
d. Sophistication of Investors:
i. <inancial $*perts
+. $ven if the purchaser isn0t sophisticated% the issuer!purchaser can hire a
financial e*pert to advise them.
a. The financial e*pert must have e*pertise in the finance area 4can0t
be an airline pilot or a doctor6
b. The issuer has an incentive to hire an e*pert as a reassurance that
the e*emption won0t be lost if one purchaser isn0t sophisticated
ii. Investment professionals are e*perts% but e*perience businessmen are not
sophisticated w!o the help of investment professionals
iii. Do provision in the securities act can be waived. !ll potential buyers must be
sophisticated and have access to the information.
iv. SEC v. -enton Ca3ital7 0nc.
+. Some guy was hired to solicit investorsC=,,I return. S$ didn0t contest
the manner of the offeringCit was a focused sale. #ut the "uestion here
was did the issuer meet its burden to show that the ppl were sophisticated.
5. ourt held that the offerees although screened% were only screened with
irrelevant information that had nothing to do w! sophistication.
a. 7o access to information or sophistication. Bnly were given
numbers to sales officials to ask information.
b. ourt re"uires both sophistication and access to information.
e. (itigation
i. 'pplicable Securities (aws ;rovisions
+. The securities acts would be allowed to proceed under
a. Section ++: <alse RS
b. Section +5: ivil liability for any offering that violates ? -
i. Bfferings that are offered and sold in the absence of a RS
ii. To have a suit% a plaintiff must show
+. Who the offerees were
5. That they had access to info
1. That they were sophisticated
=. Records must be kept of anyone that is approached by the issuer.
&. REGULATION D and the (imited Bffering $*emption
a. Introduction
i. Response to easing burdens on ongressional demands that registration burdens
on small businesses% who want to issue securities.
ii. Regulation . carries with it three e*emptions 4Rules -,=% -,-% and -,F6 that
taken together cover the vas maDority of offerings e*empt from registration.
+. Rule -,= and Rule -,- were based on ? 14b6 of the 011 'ct% which
authori>es the S$ to develop e*emptions covering offerings up to A-
million in amount
a. -,=: offerings less than + million
b. -,-: offerings up to - million
c. -,F: safe harbor for the private offering e*emption
5. Rule -,F is a none*clusive safe harbor for the private offering e*emption
of Section =456
b. haracteristics
i. Rule -,=: Small Bffering Registered or $*empt /nder #lue Sky (aw
+. 7on)reporting companies seeking to raise capital for specific purposes can
sell up to A+ million in securities in any +5)month period.
a. Statutory e*emption focuses on offerees
5. 'ny securities issued under this e*emption became LrestrictedM which
meant that there can be no resales
1. 7o general solicitations or general advertising% unless:
a. 4+6 Sales only to accredited investors BR
b. 456 State disclosure documents allow it.
ii. Rule -,-: 3edium)Si>ed offering SubDect to S$ onditions
+. ompanies can sell up to A- million in securities in a +5)month period.
a. The offering can be sold to an unlimited number of Laccredited
investorsM but only 1- non)accredited investors.
b. If there are any non)accredited investors they must receive
specified written disclosure and have an opportunity to ask
"uestions of the issuer.
c. 3ust be companies that are neither investment companies nor Lbad
guysM under the criteria of Regulation '
i. i.e. be a worthy purchaser
d. Rule -,- securities become Lrestricted securitiesM and cannot be
resold 4minus compliance w! other rules6
i. 3ust be a legend on the certificates to show that there are
restrictions on resale
e. 7o general solicitation allowed and there is no e*ception.
i. ;romise from the buyer they will not be resold
iii. Rule -,F: ;rivate Bfferings SubDect to S$ Safe Harbor onditions
+. 'ny company can sell an unlimited amount of securities in a +)month
period to 1- non)accredited investors and an unlimited number of
accredited investors.
a. $ach non)accredited investor must be sophisticated.
i. 3ust have sufficient knowledge and e*perience in business
and financial matters so she can evaluate the merits and
risks of the investment.
ii. ' representative may be sophisticated for the purchaser.
b. 7o general solicitations with no e*ceptions.
=<4 #,e6est restricti!s% =<= =<> #)st restricti!s%
'$+ siHe A+ million A - million 7o limit
'$+ I , -urc.$sers /nlimited 1- U as many
investors as you
1- U as many accredited
investors as you want.
Disc0sure ReDuire)e!ts 7o affirmative re"uirement
e*cept under state law.
:es but only for
:es if non)accredited
Re*rti!5 c)*$!ies c$!
7o :es :es
Restricti!s ! res$0e Sometimes no :es :es
Restricti!s !
Sometimes no :es :es
Restricti!s !
7o :es :es
Li)ite2 t 9rt.( Issuers
#ter) , $rt ,r issuers
6. .$&e!t 3ee! i!
tru30e 6C t.e securities
7o :es 7o
c. .isclosures:
i. 3ost companies still will disclose information even if they aren0t re"uired
because they are still subDect to the anti)fraud provisions.
+. Will have to okay by lawyers what they are saying% otherwise very likely
they will get sued.
ii. Rule -,= has no affirmative disclosure re"uirements
iii. Rule -,- and Rule -,F have no disclosure re"uirements unless the sales are made
to non)accredited investors.
+. If it0s a reporting company% the company Dust has to provide it0s most
recent disclosure information 4i.e. +,)P6% pro*y statement% and any
subse"uent $*change 'ct filings% along w! a brief description of the
particular offering.
5. .isclosure re"uirements for non)reporting companies varies with the si>e
of the offering:
a. /p to A5 million:
i. Relatively brief information
ii. Regulation ' offering circular with financials re"uired of
small business issuers
b. #etween A5 million and AO.- million
i. 'dditional re"uirements but not the full RS
c. 'bove AO.- million
i. Have to provide all the information in the RS
ii. ;eople still choose not to register because there is no back
and forth with the S$ even though the costs are mainly
the same.
+. 'lso% they are saved from section ++ liability
because even if they provided all the information in
a RS% they still didn0t provide a RS.
a. Still subDect to ? +54a6456: anyone who made
false statements.
d. 'ccredited Investors:
i. The status of purchasers as accredited investors is important for purposes of both
Rule -,- and Rule -,F.
+. $ach rule limits availability of the e*emption to offerings in which there
are no more than 1- purchasers% but accredited investors are not counted in
that total number.
ii. To avoid double counting:
+. -,+4e6: e*cludes accredited investors from the 1- count
a. Trusts or estates where beneficial interests e*ceeding -,I
b. When an investor purchases for himself% additional purchases by
his spouse or relatives who live w! him or purchases for a trust%
estate or other organi>ation in which he has significant interest are
not counted.
i. 'ny relative or spouse that has the same principal residence
as the purchaser will be e*cluded from the count.
ii. However% if the original purchaser is accredited% then his
relatives who purchase will not be double credited but they
will be counted as + non)accredited purchasers.
c. orporation if purchases as an accredited investor and then an
individual who owns more than -,I of that company will be
counted as one purchase. 4-,+4e64+64iii6
i. If the individuals live in the same house and own
B3#I7$. over -,I of the corporation% then the
corporation and the two% would only count as one investor.
d. ;artnership!orporation is counted as one investment unless the
partnership is made solely for investment.
i. (ook to the e*istence!duration!nature of the prior activities
ii. Structure of the entity
iii. ;roposed activities of the entity
iv. Si>e of the entities capitali>ation in relation to its
investment in the -,- and -,F offering
v. $*tent to which all e"uity owners will participate in the
entity0s investment
iii. Rule -,+4a6 defines accredited investors and includes:
+. .nstitutional investorsB #anks% saving institutions% brokerage firms%
insurance companies and investment companies
5. ,ension plansB employee retirement plans that are managed by an
institutional trustee or registered investment adviserCas long as company
with assets over A- million.
1. Eenture $apital -irmsB a & firm provides capital and loans to business
that have significant growth potential% but are not yet large enough to have
a public offering of their own
@. $orporations exceedin assets of F9 million
9. .nsiders of the .ssuersB
a. .irectors
b. $*ecutive Bfficers
i. ? -,+4a64=6: Who is an e*ecutive officerE
+. -,+4f6: .efinition
a. ;resident% any &; in charge of a principal
business unit.
b. 'ny other officer that makes a policy
decision for the company 4performs similar
e*ecutive functions6
i. an0t implement the policy
=. !n entity owned wholly by accredited investors
<. Datural ,ersons with (ealth or .ncome
a. .eemed to be accredited if they have net worth in e*cess of A+
million or
b. 'n individual with income for 5 years over A5,,k a year% or A1,,k
if a spouse.
c. If the individual gave you their wealth information% you still have a
duty to investigate.
i. If he argues that you violated the e*emption because he
was unsophisticated% he is estopped from getting his money
ii. If someone else argues that this guy wasn0t accredited% the
e*emption would fail.
+. The e*emption does not always failCas long as you
did due diligence and investigated and have a
reasonable belief that they are accredited.
a. If they falsified everything% then you are
b. If they meet the accreditations without you
having done any investigation% you are safe.
i. $ither meet the categories BR the
issuer must reasonably believe they
5. Ru0e =<?: designed to protect that some technical
detail doesn0t fail the entire e*emption.
a. ;olicy reasoning: give some breaks to the
issuer so that any small defect defeats the
b. ' defect as to one investor doesn0t defeat
the e*emption as long as the following is
i. If the violation didn0t harm others
ii. <ailure was insignificant
iii. 'ttempt to comply in good faith 4most likely if you don0t meet the reasonable belief standard of the
individual being accredited you didn0t meet good faith6
c. 7ot as useful as one would think because
automatically significant things include%
i. General Solicitation
ii. Bffering amount is too high for the
offering e*emption 4more than A-
million under -,-6
iii. <or -,- or -,F% more than 1- non)
accredited investors
d. Rule -,J arises in the following situation:
i. We think there are , non)accredited
investors. .on0t want to have to
provide disclosures. #ut it turns out
that one of the investors
+. The violation didn0t harm
anyone else% and the one
individual who was
misrepresented is estopped
from doing anything.
5. 7ot deemed to be
automatically significant
under -,J.
1. 'ttempted to comply in
good faith.
e. Sophistication
i. 'ny unaccredited investor under Rule -,F 4only under this rule6 must be
+. Reasoning: much more money at stake so that you want the people to be
5. Standard used for determining sophistication: $ach purchaser is
sophisticated either alone or thru a purchaser if he has knowledge and is
capable of evaluating the investment.
ii. Mar& v. 'SC Secrities Cor". : <S wanted to issue securities through
-,F private placement e*emption. The issuer however had no reasonable believe
that the purchasers were sophisticated. 'lthough they re"uired certain income
levels 4levels too low to be accredited6% they weren0t sophisticated as they
indicated on their documents.
+. Held: The issuer should have done background research and re"uired
documents that showed that they were sophisticated.
a. ,an+t rel$ on the buyers to tell you whether they are
b. Have to retain the form that they signed to show that they
acknowledge that they are sophisticated.
iii. ;urchaser Representatives:
+. Rule -,F4b64564i6: can satisfy sophistication by having someone else be
5. Representatives can0t have a conflict of interest
a. i.e. can0t be the $B of the company
i. 'lso% the purchaser representative is not an affiliate%
director% officer% or other employee of the issuer% or
beneficial owner of +,I or more of any class of the e"uity
securities% e*cept where the purchaser is:
+. ' relative of the purchaser representative by blood%
marriage% or adoption
VV:ou can be related% or a relative and an officer%
but you can0t Dust be officer.VV
a. If an officer is a relative of the purchaser%
the officer!relative must disclose the conflict
of interest.
1. Representative must have such knowledge and e*perience in financial
business matters that he is capable of evaluating% alone% or together with
other purchaser representatives of the purchaser% or together with the
purchaser% the merits and risks of the prospective investment
=. (awyers are not automatically sophisticated and shouldn0t do it because
different liabilities than Dust being a lawyerCliability insurance won0t
cover this.
-. If the investor doesn0t want to pay for the representative% can the issuer
pay for itE
a. .eemed by rule -,=4h64=6 to be sufficient as long as it is an
independent contractor% but must disclose any relationship to the
investor of any relationship to the issuer.
b. 3ost likely smarter for them to pay for it so they can sell their
stock w!o getting into trouble
,. Ge!er$0 S0icit$ti!: =<"#c%
i. /nder -,= 4not subDect to state re"uirements6% -,-% and -,F% an issuer or its
representatives cannot engage in a general solicitation or advertising
+. General advertising
5. #roadcasting
ii. Refers to case law that defines Lgeneral solicitationM
+. In re (en!an Cor".) .ifferent list of people were gathered from
si* sources: ;articipants in prior offerings from Penman% $*ecutive
officers of <ortune -,, companies% 7ames of all those who had invested
over A+,k in real estate ventures by issuers other than Penman% (ist of
physicians in the state% 3anagerial engineers% and ;residents of
ompanies located in 7G.
a. Held : The issuer must have a Lpre)e*isting relationshipM with each
i. %o such relationshi# here with an$ investor.
ii. Re"uiring a pre)e*isting relationship ensures that the issuer
knows the investment sophistication and financial
circumstances of all offerees
+. an0t contact rich people if you didn0t know them
5. Have to have the kind of relationship where they
have received securities before or been offered
securities before.
a. Gust knowing them socially is not.
iii. This re"uires that a suitability screening occurs before any
Regulation . offering occurs so that its not deemed to be a
+. ritici>ed for forcing issuers to hire securities
brokers because issuers don0t have their own list of
people to get around this.
a. Issuer is allowed to piggyback onto the
personal relationships of the broker% and the
issuer is deemed to have relationships.
b. There is some holding #eriod
re-uired on the information set up by
brokers. an0t get information and then
immediately flip it to an issuer.
i. an solicit before and develop a
ii. 7o)action letter: wait =- days to
ripen the relationship before you
solicit to them.
5. 7ewsletters:
a. Bkay unless the issuer commissioned or paid for the article.
i. I< an independent person published then it is not a problem
as long as from public sources.
+. 3ere interviews of the e*ecutives also does not
cause a problem.
b. 'lso% they can0t not disclose in articles that things are happening if
they are a reporting company. ertain things have to be revealed
by reporting companies in their +,k and +,".
i. To be safe% issuers should Dust issue a bare bones disclosure
under Rule +1-4c6 for reporting companies
+. annot be used to condition the market
1. Regulations on the Internet
a. an have a website where people can sign up with a broker or
representative and after an appropriate waiting period they can be
contacted after some time for a potential investment.
b. S$ has issued no)action letters that as long as the website issues a
"uestionnaire and verifies the information to make sure these
individuals are accredited% this is an acceptable form of
g. 'GGR$G'TIB7
i. 'ggregation involves a simple calculation of whether the amount to be financed
in a +5)month period e*ceeds the -,=!-,- dollar limit.
+. Bnly look backwards.
ii. Rules -,= and -,- cap the aggregate dollar amount that an issuer may raise in any
+5)month period. The cap is calculated by aggregating:
+. The offering price of all securities sold pursuant to the Rule -,= or -,-
e*emption% plus
". T.e ,,eri!5 *rice , $00 securities s02 6it.i! t.e *re&ius 1" )!t.s
i! re0i$!ce ! $!( ; 3#3% e+e)*ti!JRu0e =<41 =<=1 Re5. A1 Ru0e A<11
$. NOT =<> r I!tr$st$te.
1. The offering price of all securities sold in the previous +5 months in
violation of the ? - registration re"uirementsCi.e. none*empt unregistered
iii. an0t e*ceed A+ million for -,= and A- million for -,-
iv. 'ggregation is a rolling clock.
+. If on Gan. +st you raise% A=.NNNN million and on 'pril +% you raise the last
dollar. :ou can raise A=.NNNN million on Gan +F of the following year and
the last dollar on the following 'pril.
v. an only aggregate with 14b6 4-,=% -,-% Reg. '6
h. Integration
i. Integration involves treating different offers and sales as a single offeringC
treated together they may 4or may not6 satisfy the conditions of the relevant
ii. Regulation . creates a safe harbor against integration for offers and sales
occurring si* months before the start 4and si* months after the completion6 of the
Reg . offering. Rule -,54a6
+. If you don0t meet the Reg. . safe harbor% turn back to the five)factor test.
iii. =<> $!2 I!tr$st$te $!2 $00 3#3% i!te5r$te.
iv. If it is within the F month period% turn back to the - <actor Test
+. - <actor Test
a. .etermines when offerings will be integrated.
b. &ery vague% and never dispositive.
c. <actors
i. 4+6 're the offerings part of a single plan of financingE
+. Suppose the issuer plans to raise money to fund
some business operation% all transactions within
raising the money for financing will be part of the
same transaction.
ii. 456 .o the offerings involve an issuance of the same class
of securitiesE
+. 7o specific time limit!duration given.
iii. 416 're the offerings made at or about the same timeE
+. &ague time limit
5. If you sell inside the state one day% and then the ne*t
day sell to outside investors% these sales would be
iv. 4=6 Is the same type of consideration to be receivedE
+. i.e. all cash or all redemptions of corporate notes.
v. 4-6 're the offerings made for the same general purposeE
+. Reiterates @single plan of financing
v. If you want to avoid integration of later
+. <orm . is not an e*clusive electionK the issuer can also claim the
availability of any other applicable e*emption.
i. (imitations on Resale
i. The resale of securities ac"uired under Regulation . is restricted
ii. To ensure resale is effectively restricted% Rule -,54d6 originally re"uired the
issuer to use reasonable care to ensure the purchasers of the securities are not
iii. The re"uirements:
+. 3ake reasonable in"uiry that the purchasers are ac"uiring the securities
for their own accounts and not with an intention to re)sell
5. ;rovide written disclosures to each purchaser that the securities are
unregistered and cannot be sold unless registered or under the e*emption
1. ;lace a legend on the securities identifying their status as restricted shares
=. <ile a Regulation . form: Rule -,1
a. .o not automatically lose the e*emption% if you forget to fileC
S$ can give you a break
D. State Regulation
i. Section +J: federal statute that preempts a lot of state regulation
ii. States however can supply additional rules for -,=!-,- offerings
+. Section +J allows for the additional state regulation
5. .on0t create federal regulations because the state already has regulations
in place.
k. 7otice to S$C<orm .
i. 7otice must be filed with the S$ within +- days after the first sale. 4Rule -,14a66
l. alculating the 'ggregate Bffering ;rice
i. If it is if for cash and non)cash% the price is for the cash price.
+. 'ssume the real estate purchases are the same as the cash% and base the
real estate value on the cash value.
5. 'sk yourself how much you would pay in cash and that0s the value of the
real estate
ii. If there is no cash to value% then rely on the fair market value.
m. InDunctions by the S$
i. If you have been issued an inDunction by the S$% by the rules of -,O4a6 none of
the Reg. . offerings can enDoy the e*emptions.
ii. If there is an inDunction% go back to =456.
VI. Re5u0$ti! A
a. ' regime of mini)registrations or offerings during any continuous +5)month period.
i. /sed to help make sure that small issuers provide enough information but the
offering isn0t so e*pensive
ii. A- million dollar limit for Regulation '
#. 9rt.( Issuers:
i. Reg ' is limited to worthy issuers% those not dis"ualified by the Lbad boyM
provisions: 4Rule 5F56
+. Issuers under pending administrative Review
5. Issuers subDect to S$ orders in the last five years
1. Issuers convicted or enDoined for federal or state securities violations or
postal fraud in the last five years
=. Issuers whose e*ecutives or +,I shareholders have been subDect to similar S$ sanctions or court
orders 4fraud provisions6
a. (imited not only to the issuers of Regulation '% but also that
directors and officers and none of them have done anything bad.
-. Issuers or underwriters with a comparable tainted past.
F. an0t be any offenses within the fraud provisions
c. Structuri!5 t.e O,,eri!5
i. $asier than a registration process
+. Instead of a registration statement% you have an offering statement
ii. ;rospectus is called an offering circular% a subset of information 4mini)version6 of
the offering statement
+. The offering circular is a simplified disclosure document% which permits
issuers to choose either a registration)type or "uestion)and)answer
a. <inancial information is re"uired% but it need not be audited
5. The offering circular must be filed with S$% and the S$ must "ualify it
to become effective before there can be sales.
a. Gust like in registration% there is a preliminary offering circular
4parallel to the preliminary prospectus6 that can be used. 4Rule
2. Ge!er$0 S0icit$ti!s
i. /nlike Registration .% there can be a general solicitation% i.e. go on T& and have
print ads
+. 3ust test the waters after the filing of the Bffering Statements
ii. 'lso% Reg. ' permits issuers to Ltest the watersM and solicit investor interest even
before filing an offering statement.
+. If interest is provoked% the issuer can then proceed with filing.
5. ' testing the waters document is not a prospectus under the Rules.
a. oupon is okay Rule 5-=4c6 if included
i. (ike a postcard.
b. 3ust file the testing the waters solicitation document under 5-=4b6
i. I< you fail the S$ may under 5-J4a64+6 prevent the issue
for failure to fileK could result in the stop order.
+. #/T merely not submitting the issue does not give
everyone their money% but it will e*clude you
a. Good <aith and Reasonable 'ttempt under
Rule 5F,
ii. So you should file the documents.
e. A3$!2!)e!t
i. Switching from a Reg. ' offering to a regular registration is allowed.
ii. 3ust wait at least 1, days from the last solicitation of interest and the filing of the
new offering before pursuing a regular offering
+. If you are Dust issuing a Regulation . offering instead% the normal F)month
integration safe harbor applies for other ? 14b6.
a. Reg. . won0t let you solicit before and for that reason you
wouldn0t test the water
iii. /sually done when you test the waters and shore up more interest than e*pected
,. V0u)e Li)its
i. 'ust 3e 6it.i! K= )i00i! ,r t.e *$st 1" )!t.s
+. $B or e*ecutive officers can also sell up to the limit of A+.- million in
a. This is considered a secondary offering.
b. #/T there is no resale restriction under Regulation '
5. #ut the amount is subtracted from the total A- million that can be offered.
5. A55re5$ti!
i. Regulation ' can only be aggregated with other Regulation ' offerings.
ii. #ut -,=!-,- still aggregates Regulation ' offerings.
+. If there had been a Regulation ' offering *or 5 million dollars% and three
months after you want to do a -,-. How much can you issue the -,- forE
a. -rir t 1" )!t.s from the other 14b6 offerings. If there is a 5
million regulation ' offering on Ganuary +% and then on 'pril +
there is a -,- offering% you will have to subtract the Reg ' offering
on Gan. + because it was within +5 months.
b. #ut if you flip the scenario% and do the Reg. ' offering 1 months
after the -,-% the Reg. ' can be the full A- million because you
only subtract other Reg. ' offerings.
.. I!te5r$ti!
i. Safe harbor for Reg. ' offerings
+. /nder Rule 5-+4c6: Loffers and sales will not be integrated with other
offers and salesM
a. 5 way languageK there is no integration of the intrastate offering
into Regulation ' offering% and likewise there will be no
integration the other way.
b. Two way safe harbor unlike the -,- safe harbor that only
integration of a -,- offering if there is F months on either side
5. Safe harbor lasts for an infinite amount of time going backwards% but is
3BR$ TH'7 F month safe harbor going forward.
a. 'll prior offerings do not get integrated
i. C)*$ris! , Re5u0$ti! A &. Re5u0$ti! D
i. Reg. ' allows testing of the waters
ii. 7o ? ++ liability @ only for people more directly involved
+. Bnly under ? +54a6456
iii. Trading isn0t restricted in Regulation '. Resales are allowed.
+. Regulation . has limits on resale
iv. Regulation . doesn0t re"uire any disclosures if the sales are completely to
accredited investors% but if the investors are not accredited% the disclosures are
much more difficult than those under Regulation '.
v. Regulation ' is cheaper than Reg. .
I. Introduction
a. Secondary .istributions
i. Sales by others other than the issuer
ii. $ach transaction 3/ST fit an e*emption or it has to be registered
iii. $ach resale is a secondary sale
+. 'lso must be registered or fit an e*emption.
b. Securities regulations divide transactions into 5 groups:
i. .istributions: regulated by the securities laws% especially the 011 act
ii. 3arket Trading: no regulation
+. 7o regulation when transactions are not a part of a distribution
II. Secti! 4#1% E+e)*ti!
i. Section =4+6 is the central transaction e*emption of the Securities 'ct.
ii. $*empts everyone e*cept issuers% underwriters and dealers
+. If you are not an /W or control person of the company% you can
immediately resell your shares on the market without issue.
a. The =4+6 e*emption would apply
5. .efinition of an issuer ? 54a64=6
a. $very person who issues or proposes to issue any security
1. .efinition of a .ealer: ? 54a64+56
a. 'ny person who engages in the business of dealing or trading in
III. .efinition of an /nderwriter:
$. A! u!2er6riter i,:
i. 7e0*ers ,r t.e issuer r t.e c!tr0 *ers! r !e 6. ,,ers $!2 se00s ,r
t.e issuer i! c!!ecti! 6C$ 2istri3uti!.
+. 7o re"uirement to get paid.
ii. -urc.$ser ,r) issuers c!tr0 *ers! 6it. $! i!te!t t rese00
1. I!te!t t rese00 L 6it. $ &ie6 t 2istri3ute.
iii. -e*0e 6. *$rtici*$te 2irect0( r i!2irect0( i! #$% r #3%
+. .irectors and promoters
5. 'ny promotional efforts 4research reports6 will be deemed to help in the
3. AND 'ust 3e *$rt , $ 2istri3uti!
i. Distri3uti!s
+. .istribution is not defined. The meaning is to be found in the standard
announced through Ralston.
a. ' distribution e*ists if there is a sale that is to people that cannot
fend for themselves.
c. $*amples:
i. <irm)ommitment /nderwriting
+. #uy the shares from the issuer and then sell them off.
a. Shares must be registered.
b. This is part and parcel of the distributionCthese shares are sold to
the immediate buyers.
5. .oesn0t meet =4+6 e*emption
d. <irst ategory: Helpers of an issuer or control person
i. SEC v. Chinese Consolidated Benevolent 'ssociation #@nd Cir.(
+. hinese Government issues bonds to raise funds while Gapan invades
hina. hinese #enevolent 'ssociation 4#'6 solicited investors in
bonds. Bf their members% the benevolent association was able to get
AF,,P to purchase the bonds. #' was not compensated% nor were they
associated with the #ank of hina in anyway.
a. Issue: .oes #' "ualify as an underwriter for the purposes of ?
i. #' was not an issuer or a dealer
b. Holding: The activities by the #' constituted transactions by an
underwriter and because the bonds were not registered% were illegal
under ?- of the Securities 'ct.
i. They% however% were deemed to be underwriters
+. They are helpers% even if they didn0t get paid.
5. /nder the definition% indirect helpers still are
considered underwriters.
ii. The ourt also held that even though the #' wasn0t
actually selling% the continued solicitation efforts constitute
enough for them to be considered underwriters.
c. Rationale for deeming them to be /nderwriters
i. /nless this company was called an /W% there was no other
way to distribute the information to the investors.
+. The court reasoned that the purchasers deserved the
information and protection of registration% whether
or not the issuer authori>ed or compensated the
selling activities made on its behalf.
ii. .efinition is applied broadly to ensure that individuals are
given proper information.
5. .issent:
a. The association had no relationship w! the issuer and thus% should
not be deemed an underwriter.
i. The words Lfor an issuerM deem a relationship w! the issuer.
b. The broad reading could have <irst 'mendment implications by
rendering a newspaper a statutory LunderwriterM if it printed an
editorial urging the purchase of bonds in the name of patriotism.
e. Sec!2 C$te5r(: -urc.$se ,r) Issuer 6it. $ Vie6 t Re2istri3ute
i. Rationale: If you were allowed to immediately flip restricted securities or control
securities% then there would be too many unregistered securities.
ii. /nder ? 54a64++6% any security that is bought pursuant to an e*emption with an
intent to resell is a security that will have to be registered. The central element is
that these securities be made for value.
iii. 1 Re"uirements:
+. &iew to distribute
5. 3ade for &alue
1. Investment Intent
a. .ifficult to figure out whether the buyer has i!&est)e!t i!te!t
because it is a subDective intent% but the courts use obDective criteria
i. Investment Intent: important indication of intent has been a
holding period before resale% evidence that the purchaser
had assumed the investment risk and was not acting as a
scheming conduit of bad securities.
ii. Investment intent is important to figure out:
+. Whether you% yourself% will incur liability
a. If you flip the securities% you are deemed to
be an underwriter and become liable
5. Whether the original issuer0s e*emption will be
preempted as well by the resell.
a. Reg. .C-,54d6: the issuer should e*ercise
reasonable care to assure that these
purchasers do not have the intent to resell.
b. 4+6 Temporal (imits: Holding ;eriod #efore Resale.
i. I, (u .02 it ,r $ 6.i0e r 5re$ter1 (u .$&e t.e
reDuisite i!&est)e!t i!te!t $!2 (u 2 !t .$&e t
re5ister t.e).
ii. The re"uirement is 1 years but this is not really a definitive
+. These securities do not have to be registered.
5. 7o definitive period will ever satisfy the re"uisite
investment intent.
a. reates the need for the bright)line rules of
c. 456 Investment Intent at Time of ;urchase
i. Showing that at the time of purchase you had the re"uisite
ii. &ery subDective standard% and hard to determine.
iii. The longer you hold the security% the easier it is to show
that you have the re"uisite intent.
d. 416 If there is a desire to resell without the re"uisite holding period%
the securities laws re"uires the resale% as long as the seller shows $
c.$!5e i! circu)st$!ces.
i. ' change in circumstances indicates that the purchaser0s
reason for reselling is to obtain li"uidity and not to act as a
conduit for bad securities.
+. The purchaser may have at one time have had the
investment intent% but now they want to find a way
around holding for that period of time.
5. 3ust be a change in the circumstances of the
-URC7ASER not the issuer.
a. annot be that the issuer went bankrupt or
stock price going down.
b. #ut it is okay if you got cancer.
ii. The longer you hold the securities% the change in
circumstances needed is much more modest.
+. If you want to sell after one month% you need a
serious form of cancer to convince the S$.
i&. Fu!5i3i0it( , S.$res
+. If you buy shares under a public offering% and then buy more in a private
offering% can you sell the first batch of sharesE
a. 7ot if the shares are identical.
i. Since we can0t tell the difference b!w the two shares%
allowing someone to sell the first batch% would effectively
allow them to sell their private offering shares.
&. -0e25es , S.$res
+. If someone buys shares pursuant to a private offering% but offers the shares
up as collateral for a bank loan% a problem will arise when the bank
attempts to resell the securities from the holder.
a. The bank may be deemed to have gotten the shares with a view to
5. The result depends on whether the bank received the pledged securities
e*pecting that the borrower would default.
a. The intent of the ;($.G$R is the focus% not the bank.
b. (ook to the interest rate of the bank to see if the bank actually
believed it would get repaid.
1. Solutions to this problem:
a. Bftentimes% a bank will ask for a non)fraudulent letter from the
issuer to assure that these shares if needed to be resold will be
b. The bank can resell them to people who are sophisticated and with
access to information 4Ralston re"uirements6. 7ot considered a
resell that violates ? -
i. 3ore circumspectness approach.
IV. Tr$!s$cti!s t.$t D!t .$&e t 3e Re5istere2
a. ' non)affiliate with unrestricted securities.
i. This is not considered a distribution and% instead% are considered market trading.
ii. 7o need to register 4as long as not a control person6
b. Securities sold pursuant to an intrastate offering or private placement% and they are resold
to non)Ralston people
i. <or this to be okay% there must be the re"uisite investment intent and must follow
the holding period re"uirement.
ii. #ut for control people% holding periods will not clear you of other re"uirements.
+. General Rule: a control person is treated the same as the issuer. If the
control person waits for a while and then sells% they still have to either
register or find an e*emption.
c. 7on)'ffiliates who purchase pursuant to a private placement. Resell can happen
immediately if resold to Ralston people
i. Ralston people W sophisticated persons with access.
ii. This is a = 4+ X6 e*emption.
V. Distri3uti!s
a. .istribution is not defined. The meaning is to be found in the standard announced
through Ralston.
i. ' distribution e*ists if there is a sale that is to people that cannot fend for
3. C!tr0 -ers! Distri3uti!s
i. C!tr0 -ers!s
+. Rule =,- defines a control person!affiliate to include any person that%
directly or indirectly% controls the issuer.
a. ontrol is defined to mean the possession% direct or indirect% of the
power to direct management and policies of the issuer% whether
through ownership of voting securities or otherwise.
5. 'll control people are deemed to be an issuer for the definition of an
underwriterC3ust be involved w! registration.
a. Rationale: information asymmetries: the person that controls the
issuer also controls the information of the company
b. This information should be disclosed.
ii. Bther definitions of a control person
+. Someone who:
a. an force a registration statement within the company or
b. Someone who owns +,I of the shares.
iii. ontrol ;erson0s sale of shares can be attacked in 5 ways:
+. ontrol person e"uated to an /W
a. If they sell shares that haven0t Lcome to restM yet% the ; is
considered an underwriter themselves because they didn0t have the
re"uisite investment intent and bought with a view to distribute.
5. ontrol person e"uated to the issuer
a. 'nyone that helps a ; is deemed to be an /W.
i. ? 54a64++6 defines underwriters to include those persons
who act for a control person in a distribution or who
purchase from a control person with a view to distribute.
b. The effect is to make securities professionals who assist control
persons in dumping their stock into public markets% without
registration liable as statutory uws by virtue of their participation.
iv. Rationale: It is fair to impart this type of restriction upon ; because:
+. Information 'symmetry: the person that controls the issuer also controls
the information of the company
5. ' ; has the power to get the company to register the securities
&. U!ite2 St$tes &. 90,s! :
+. Wolfson and his immediate family are ;s in the company because they
own over =,I of the shares of this company. He% his immediate family%
and his right hand man sell much of their stock thru brokers. The "uestion
is whether as a control person% these sales of shares should have been
a. Wolfson and his family argued they fell under ? =4+6 e*emption.
These were not distributions% but were Dust market trading.
b. The court disagrees and holds that for the purposes of determining
whether these securities should be registered% Wolfson is an issuer.
i. The =4+6 e*emption does not apply.
c. The brokers% however% do not face any liability.
i. These were unsolicited orders and the broker is e*empt
under =4=6.
ii. #/T: /nder Rule +-=4a64=6:
+. 4a6 The term Lbrokers transactionM shall be deemed
to include transactions by a broker acting as agent
for the account of any person controlling% controlled
by% or under common control with the issuer of the
securities which are the subDect of the transaction:
a. 4=6: T7E 8RO:ER IS NOT A9ARE OF
i. Seems like a hairy line.
ii. R$'SB7'#($ I78/IR:
d. ' ;% however% can0t hide under the broker e*emption. The ;
needs to find his own e*emption.
vi. &iolations of registration re"uirements for these sales do not arise unless the ;
uses a broker to help with the sale of the stock.
+. ' control person is in the shoes of the issuer only in the limited
description of determining helper0s status as an /W.
a. ' ; is only considered an issuer for the purposes of determining
whether this helper is an /W. If there is no helper% there is no /W%
and thus% no issuer.
5. Solutions:
a. Street orner $*emption: If no help is used% the ; does not have
to fit an e*emption or register the securities.
b. Register the shares
c. Sell them to Ralston ;eople 4= 4+X6 $*emption6
i. Sophisticated people with access.
VI. RULE 144
a. Introduction
i. The rule specifies the conditions when restricted securities or control securities
can be resold.
+. 7ot deemed to be a distribution for the purposes of securities.
ii. Safe harbor for the secondary offerings of restricted or control securities. +== was
created because:
+. Statutory e*emption was vague
5. Too confusing
a. The investment intent and blanket prohibition against ;s using
intermediaries to sell into public market was too confusing.
b. 'lso% the length of the holding period didn0t make sense if there
was a lot of information in the market.
1. Instead% +== provides obDective criteria for determining that the person
selling the securities to the public has not ac"uired the securities from the
issuer from distribution.
iii. +== focuses on:
+. How long you have held the security and
5. How much of the securities is going to be resold.
iv. overage of +==:
+. The rule covers securities held by affiliates or restricted securities.
a. If you abide by all the rules of +==% the sale will not be deemed to
be a distribution and the ; or restricted securities helper will not
be deemed to be an underwriter.
5. Securities that are Restricted
a. +==4a6416 defines what securities are restricted
i. ;rivate ;lacements: +==4a64164+6
ii. Regulation . offerings: +==4a6416456
+. Securities offered by the issuer that are subDect to
the resale offerings restrictions under Regulation .
5. 's long as there was an attempted Reg. . offering%
then there is still restricted security for the purposes
of +==
iii. $*empted securities from foreign offerings 4Regulation S6
3. U!restricte2 Securities
i. I!tr$st$te securities $re u!re5istere2 3ut (u sti00 .$&e
t $3i2e 3( 14A.
v. Bnly used for Reporting ompanies
+. +==4c6456: a non)reporting company may still use +== but they must still
market as if they were reporting
a. Re"uires giving the market a (BT of information% but
re"uirements of what to provide are very vague.
5. Rely on this only if you are a reporting company
b. Rules
i. The rules only apply to restricted securities.
+. If these are unrestricted securities sold by an affiliate or a control person%
there may not be a holding period but there will be volume limits and
other limitations.
ii. 702i!5 -eri2
+. Reporting ompanies
a. F month holding period: +==4d64+64i6
i. F months have to elapse from the later of the sale by the
issuer or the affiliates sale to the non)affiliate.
+. If the issuer sold to a non)affiliate% the non)affiliate
can resell to anyone after F months of holding on to
it. If others had held it for si* months prior to this
non)affiliate getting it% the F)month safe harbor has
been met.
a. Gust re"uires that there be F months from the
time of the sale to the non)affiliate from the
5. If% however% the non)affiliate then sells to an
affiliate% the clock starts all over again. The affiliate
must now wait F months.
5. 7on)Reporting ompany
a. Increased holding period to + year.
1. Holding ;eriods for SALES ON CREDIT
a. If you borrow money from some entity other than the issuer 4i.e. a
bank6% it is deemed is still a purchase and the holding period
remains the same.
b. However% if you borrow from the issuer% the sale is deemed not to
be a purchase until you fully pay for the price. 't that point% you
will have to start the F)month holding period.
i. /nless% you have $ ,u00 recurse 0$!
+. ' full recourse loan allows the issuer to take away
some other collateral of the debtor.
5. Re"uirements:
a. 3ust be a full)recourse loan '7.
b. Secured by collateral that is not the
securities '7.
c. The amount of the loan must be paid off
without the resale of the securities.
1. The F)month loan period starts with the signing of
the loan.
=. T$c/i!5 of the Holding ;eriods
a. Rule +== says that if you own the same amount of shares and the
same ownership that it is unfair for the F)month period to restart.
i. If you received shares from a stock split but it makes
economically no difference in your ownership% you can
resell right away.
b. This rule only applies to non)affiliates.
i. 'pplies to affiliates: bank can tack on when it0s a holding
period for stock.
-. Holding ;eriod for Stock /sed as C00$ter$0
a. 144#2%#3%#i&%: ;ledges of Stock by an 'ffiliate
i. If the loan isn0t paid off% the bank ends up having the same
re"uirements as the pledgor of the stock.
+. i.e. if the affiliate has to still wait F months then so
does the bank before it sells the stocks.
a. <or non)recourse loans% its an automatic F
month holding period if it0s a reporting
company and + year if it0s a non)reporting
company from the time the pledgor defaults
on the loan% regardless of whether the
affiliate had waited F the months or + year.
b. I< it0s a full recourse loan% allowed to resell
immediately% so long as the affiliate has held
for the appropriate period.
b. If it0s pledged to the bank by a non)affiliate% the bank is able to sell
after ensuring that F months have elapsed from the sale by the
F. onversion
a. ;ermitted to go back to the same time the stock was issued.
A. Gi,ts
a. #y non)affiliates
i. an resell after ensuring that F months have elapsed from
the sale by the issuer!affiliate.
b. #y affiliates
i. The holding period is tacked onto the affiliate0s holding
+. If somebody dies w! stock and the person is an
affiliate% the estate can resell as long as the affiliate
had held onto the stock for an appropriate amount
of time% then the estate held stock for the same time.
a. &olume (imits still apply.
5. If the stock was purchased by the affiliate through a
public offering% there is no holding period% but the
volume limits still apply.
iii. I!,r)$ti! ReDuire)e!ts
+. 7on)'ffiliates:
a. an resell without issue after the F month holding period is up% but
still may have to comply with information re"uirements
i. +==4b64+64i6: I< a non)affiliate has held onto the stock for F
months% it can resell% e*cept that he must comply with the
information re"uirements.
ii. I< it0s sold after + year% the information re"uirement is
5. 'ffiliates:
a. 7o matter the time period% the affiliate always must ensure that the
market has the current public information from the issuer.
i. This harsher rule is fair because the affiliate has the power
to get the company to issue information.
1. Information has to be the re"uirements of a reporting company or the
e"uivalent of the reporting company.
a. 7on)reporting companies must have issued information that is
subDect to the standards of the non)reporting company.
i&. V0u)e Li)its
+. 'n affiliate can only sell every 1 months the greater of +I of the
outstanding shares or the average weekly trading volume.
a. <or debt% the amount that can be sold is larger
i. /p to +,I of the variety of bond you are selling.
5. 'ffiliates only have this restriction.
1. +==4e6416: 'ny resells by those who were gifted stock or any resells by the
bank when stock is used as collateral counts towards the affiliates limit.
=. Integration for the &olume (imits: +==4e64164vii6
a. Securities sold effective to this need not be included:
i. Securities sold pursuant to an effective RS
ii. Securities sold pursuant to R$G '
iii. Securities sold in a transaction e*empt pursuant to section =
of the act and not involving any public offering.
iv. Securities sold offshore pursuant to Regulation S
&. '$!!er , S$0e #144#,%%
+. Bnly a restriction for affiliates
5. These can be sold pursuant to broker transactions in =4=6
a. #efore a broker was not allowed to solicit re"uests.
b. 7ow the broker may do a bit more pushing% Dust can0t fully engage
the sale. 4Rule +==4g66
i. .oes no more than e*ecute the orders
ii. .oes not receive more than regular compensation
iii. an0t solicit but can respond to interests and in"uiries
+. #ut can put in "uotations for the security in the
interdealer "uotation system.
1. <or affiliates% all sales must be notified to the S$.
a. The affiliate must file notice of sale forms with the S$
c. +== is not an e*clusive safe harbor and an affiliate can use other e*emptions under the
i. The S$% however will not provide no action letter for sales that are deemed to fit
under +==.
ii. The S$ wants to encourage companies to become reporting companies and use
VII. Ru0e 144A
a. Resales of unregistered privately placed securities to "ualified institutional buyers 48I#s6
are deemed not to be pursuant to a distribution and purchasers are not deemed to be
statutory underwriters.
i. 7BT <BR ISS/$RS
b. Introduction:
i. The safe harbor that codifies partially the = 4+X6 e*emption.
ii. The rule0s operative precept is that persons who satisfy its conditions are deemed
not to be engaged in a distribution and therefore are not deemed underwriters.
c. .efinition of 8I#s
i. 'ny institution with an investment portfolio of at least A+,, million.
ii. ' registered broker)dealer 4with an investment portfolio of at least A+, million6
that buys for itself or for a 8I#.
iii. 'ny registered broker)dealer buying for a 8I#% and
iv. ' registered investment company that is part of a mutual fund family with a total
investment portfolio of at least A+,, million and
v. 8$!/s and Savings and (oan 'ssociations% must in addition to owning and
investing on a discretionary basis at least A+,, million% must in addition have an
audited net worth of at least A5- million.
+. 3ust be demonstrated in their latest published filings.
VVVRich people are not 8I#sVVV
d. &olume (imitations:
i. There are no volume limitations under +=='% unlike +==.
+. This helps & firms that want to resale their ownership of the firm or
ac"uire ownership in a firm.
5. 'ny dealer that complies with a large dealer also will not be deemed to be
a participant.
a. .ealers can help the & firms without any problems.
e. Information Re"uirements
i. Information about the issuer must be available to the 8I#s.
+. Issuer must either be a reporting company or foreign issuers with an
e*empt '.R program in the /.S. or a company that has undertaken to
provide current financial information 4audited if possible6 4i.e. a non)
reporting company6.
f. Restrictions:
i. These securities '77BT be traded on a 7'TIB7'( $9H'7G$
ii. The rule presupposes that there will be the creation of a private market in +=='
VIII. ; 4#1M% E+e)*ti!
a. 'n e*emption for affiliates that allows them to immediately resell their stocks without
limitations as long as they are to s*.istic$te2 *e*0e 6it. $ccess 4the Ralston
i. Same rule as =456% but that is only for an issuer.
ii. =4+X6 was created for affiliates to resell securities immediately by the same
b. This e*emption arises in 5 ways for affiliates:
i. The affiliate purchased pursuant to a public offering 4i.e. an I;B6
ii. Br the affiliate purchased restricted securities% but they have already come to rest
and are no longer restricted
iii. These are otherwise% unrestricted securities% but because they are held by the
affiliate% the securities still hold restrictions. 4i.e. 3anner!&olume!7otice6
c. Ac/er3er5 &. N.!s!
i. Gohnson% founder and largest shareholder of &ertimag% sold a block of his shares
to 'ckerberg% an investor fitting the Ralston standard. The sale had been brought
together by a brokerage firm that gave 'ckerberg a detailed private placement
memo about the issuer. 'ckerberg argued that these sales had to be registered.
+. Held: .o not have to be registered pursuant to the ? = 4+X6 e*emption.
a. Gohnson an affiliate had held onto these shares for four years and
the shares had come to rest already.
b. 'lso% these shares were sold to a sophisticated% person with access.
i. 'ckberg had the knowledge to gauge his risk in purchasing.
c. Gohnson was able to resell these shares immediately after they had
come to rest without the volume limitations.
d. How can an 'ffiliate sell his securitiesE
i. an always resell pursuant to the e*emption
ii. Bn a street corner: ? +==4b6456
+. Sell it on your own.
5. If you sell it on your own% you don0t fall under ? =4+6
iii. +==
iv. +==' or
&. 4 #1M%
1. Use2 6.e! t.e securities $re t.er6ise u!restricte2
$. -urc.$se2 ! $! *e! )$r/et r
3. Ot.er6ise c)e t rest
". 4 #1M% *er)its s$0es t.er6ise t t.ese *e*0e 6. $re s*.istic$te2
6C $ccess.
Rec$*it$0iH$ti!s $!2 Rer5$!iH$ti!s
I. Theory of the Sale: <or &alue
a. The securities laws only apply to sales and offers to sell.
i. ? 54a6416 defines these e*pressions as involving Levery attempt to dispose of a
security <BR &'(/$M
If an affiliate wants to resell: he will violate ? =4+6 unless% he sells to:
8I#s: 144A
Ralston ;eople Sophisticated with 'ccess: #4#1M%%
o 2emember must be otherwise unrestricted in the hands of a
Bpen 3arket: 144
7o issue with ? =4+6 at all if the affiliate resells to:
Street Cr!er
b. To constitute as a sale a security must be sold for value
i. Gi,ts , Stc/: <BR &'(/$
+. The S$ has been resourceful in coming up with a reason for these stocks
to be considered for value.
5. <or gifts of stock given away for free% it creates a public% li"uid market for
the stock.
a. Bnce you create a public market% you have increased the value of
the stock 5,I. Thus% you have received value.
b. Hypo: Start)up gives stock if you click on my 6e3site. This is for value
and therefore falls into ?54a6416. 3ore people will advertise on your
webpage. This will benefit the distributor b!c maybe they0ll buy stuff at
your site.
ii. Stc/ Di&i2e!2: 7BT <BR &'(/$
+. The stock dividend arises when a corporation issues shares to its e*isting
shareholders and receives nothing in return.
5. #ecause there is no consideration from those who receive the stock
divided% the typical stock dividend does not involve the sale of a security.
a. H:;B: if the shareholder is given the choice between receiving a A5
cash dividend and a stock dividend% it would appear that the issuer has
thereby offered to sell a security. #/T S$ says if you are given both
choices at the e*act same instant% there is no value being received for that
choice so it is not a security.
1. $*ception: If you are entitlement to some money but the company gives you
stock instead. This is considered for value because you have given up value.
iii. 9$rr$!ts $!2 C!&erti30e Securities:
+. Sale of the option or warrants itself needs to be registered because an
option is defined as a security Y?54a64+6Z
5. If the option is not immediately e*ercisable% the underlying security does
not need to be currently registered. 4when it is e*ercisable% then you do
have to register6
1. If the option is currently e*ercisable% the underlying security needs to be
a. The underlying stock is usually registered through Shelf
Registration under =+-4a64+64iii6
i&. A)e!2)e!ts , 8!2 I!2e!turesCRei!cr*r$ti!
+. When have a change in the nature of the security% ask two "uestions:
a. Whether a sale of a security is involved
b. Whether that sale involves the type of e*change of securities
e*empted under ?14a64N6
5. In lengthening the maturity of a bond% the bond0s nature has changed% and
thus% a new security has been issued. This is the e"uivalent of taking away
the bond and then giving them a new one.
a. 3inority .ecision: If the underlying bond doesn0t change% you
don0t have to register.
1. Reincorporation: .on0t have to re)register
a. Hypo: What if you are incorporated in a state that is good for
shareholdersE #ut then the company reincorporates the company in a
state that is bad for shareholdersE
b. S$ says not an e*change for vale. 7o registration.
a. What if a parent company did the followingE
i. If the parent company creates a subsidiary% puts some assets into the subsidiary%
and retains all the stock of the subsidiary. It then distributes the stock of the
subsidiary to the e*isting shareholders of the parent. The shareholders still own an
interest in e*actly the same thing 4before it was Dust the assets of the parent
ii. The S$ in *atronics held that the spinoff distribution was a LsaleM because the
parent company received value.
b. SEC v. /atronics: The subsidiary is set up by the parent company. The subsidiary has to
pay cash to merge with some private company. The parent having all the shares% the main
asset of which is the private company. What will the parent doE .istribute all the shares
of the sub to the e*isting shareholders of the parent. This increases the value of the
previous stock by 5,I because of the spinoff plus the private company merger. .id the
shareholders receive anything of valueE
i. The argument was no: the shareholders previously owned the company that
owned a sub% and now they owned the sub. They owned the same thing as before.
+. However% the spinoff raises the value of the shares by 5,I by creating a
public market for a previously private company.
a. The end result is that this is a scam to get the private company
publicly traded without registering.
b. The S$ reali>ed the scam and re"uired that the security be
c. The S$ then has come up w! various guidelines to come up w! whether the spinoff will
be considered for value. Bnly some spinoffs are considered for value.
i. 7o registration for a spinoff if
+. 7o consideration for shares and
5. ;ro rata distribution of shares
1. 'de"uate info provided to Shareholders and the market
a. The e*isting shareholders don0t already need the information% but
the people who buy the shares from them on the public market.
Want to avoid this being a scheme for getting a private company to
trade publicly
=. 3ust be a valid business purpose for distribution.
-. Shares distributed to the shareholders% must be a restricted security
a. i.e no transfers for 1 years.