Securities Regulation

Margaret Bancroft
(Fall 2007)
Class 1: The Role of the Securities Act of 1933: Making the Capital
Markets in the US Safe for Pulic !n"estors##########################################$
Class $: Pre%&ffering Perio' in a Pulic &ffering an' Con'itioning the
Market############################################################################################################$
Class 3: The (aiting Perio') The Post%*ffecti"e Perio'##########################+
Class ,-The Registration Process: Section . an' Acceleration)
Principles of /isclosure#################################################################################.
Class 0-/isclosure Philosoph1###################################################################9
Class +-Materialit1###################################################################################12
Class 3-(hat is a Securit14#####################################################################11
Class .-Pri"ate Place5ent *6e5ption####################################################13
Class 9-Regulation / 7Rules 02,8 0208 02+9############################################1,
Class 12-Reg / Refor58 Regulation S####################################################13
Class 11:Class 13-Resales of Restricte' Securities################################1.
Class 1$-The Role of the Un'er;riter-Section 11 an' Section 1$7a97$9
<iailit1########################################################################################################$2
Class 1,-Responsiilit1 of <a;1ers########################################################$$
1
Class 1: The Role of the Securities Act of 1933: Making the Capital Markets
in the US Safe for Pulic !n"estors#
=oals of 1933 Act: Investors need for information; consumer protection !ere t!ere is no real
relations!ip it! compan"# spur investment !ere t!ere is ris$# economic efficienc"%
/ra;acks of Partnerships: cannot &e a passive investor; capital it!dra !en partner leaves;
no limited lia&ilit"% '(ee !andout)
Corporate Structure: (uited for &usinesses t!at need to raise great amounts of capital from
sources outside of management% *ont re+uire s!are!olders $no eac! ot!er# permits investment
it!out ris$ of personal lia&ilit"# provides stead" &ase of capital t!at cannot &e it!dran%
Class $: Pre%&ffering Perio' in a Pulic &ffering an' Con'itioning the
Market
Three Perio's: 1) ,re-filing (.. /(a)# (c))# 2) 0aiting (.. /(a)# (&)(1)# 1) ,ost-effective (. /(&))%
1933 Act
. /(a) 2nless a registration statement is in effect as to a securit"# it is unlawful to:
o 1) sell a security t!roug! a prospectus or ot!erise t!roug! transportation or
communication
o 2) carry a security for t!e purpose of a sale or for deliver" after sale t!roug! mail or
interstate commerce
. /(c) Unlawful to offer to sell or offer to buy t!roug! t!e use of an" prospectus or
otherwise an" securit" t!roug! transportation or communication# unless t!e registration
statement !as &een filed as to suc! securit"# or !ile t!e registration statement is t!e su&3ect
of a refusal order or stop order%
/efinitions:
. 2(a)(10) Prospectus4an" prospectus# notice# circular# advertisement# letter# or
communication# ritten or &" radio or television# !ic! offers an" securit" for sale or
confirms t!e sale of an" securit"% *6ception:
. 2(a)(1)
o Sale4ever" contract of sale or disposition of a securit" or interest in a securit" for
value
o &ffer to Sell4 (&road definition) ever" attempt or offer to dispose of# or solicitation
of an" offer to &u"# a securit" or interest in t!e securit"# or value%
*oes not include preliminar" negotiations or agreements &eteen an issuer
and an underriter
5!is e6ception is limited to underriters and t!erefore does not
cover dealers%
(pecial situations (p% /2):
7 securit" given as a bonus counts as part of t!e offer8sale%
7n underl"ing securit" does not !ave to &e registered originall"
!en t!e conversion or e6ercise cannot occur immediatel"# &ut
2
rat!er can onl" ta$e place at some point in t!e future (convertible
security or option)%
S*C Rules
Rule 130 49otice of ,roposed :egistered ;fferings '9ote: can &e used &" issuer or
underriter)
o 9otice ill not &e deemed an offer if notice:
1) includes a statement t!at it does not constitute an offer; and
2) notice includes no more t!an t!e folloing: i) name of issuer; ii) title#
amount and &asic terms; iii) amount of offering; iv) anticipated timing; v)
&rief statement of manner and purpose; vii) !et!er directed to particular
class; viii) (note ot!er specifics a&out ot!er t"pes of offerings)
Rule 1+3 4,rovides fle6i&ilit" for well-known seasoned issuers% 5!e" ma" ma$e oral or
written offers at an" time% <oever# ritten offers must &ear certain legends# &e retained for
1 "ears# and &e filed it! t!e =ommission% 5!ese ritten offers meeting t!ese re+uirements
are called >free writing prospectuses%? '(ee 0aiting ,eriod%)
Rule 1+3A 47n" communication made &" or on &e!alf of an issuer more t!an 30 days prior
to t!e filing of a registration statement ill not &e deemed to &e an offer if t!at
communication does not refer to t!e offering of securities% 5!e issuer must# !oever# ta$e
reasonable steps to control furt!er distri&ution or pu&lication of t!e communication it!in
10 da"s &efore a filing%
Rule 1+. 4,ermits reporting companies under @6c!ange 7ct (and certain ot!ers) to
continue to communicate regularl" released factual business and forward-looking
information8 notit!standing t!e t"pe of recipient% '(ee rule for specific factors%)
Rule 1+9 4,ermits non-reporting issuers to continue to communicate factual business
information regularl" released to persons ot!er t!an in t!eir capacity as investors or
potential investors in t!e securities%
o 9ote: 1A17# 1AB# 1AC provide t!at communications ill not constitute offers%
<oever# :ule 11/ provides an e6emption from (ection /(c) (&ut are nonet!eless
offers for ot!er purposes of t!e 7ct)%
Release >o 3.,, 719039 ,u&lication of Info ,rior to or after t!e @ffective *ate of a
:egistration (tatement
o Ma" not issue a public sales campaign prior to t!e filing of t!e registration
statement%
o @6ample 1: 2nderriter arranging mining pu&lic financing distri&utes &roc!ure
descri&ing in >gloing generalities? t!e future possi&ilities for use of specific
mineral# &ut made no reference to an" issuer or securit"% It as >designed to aa$en
interest !ic! later ould &e focused on t!e specific financing%? Diolation of
(ection /%
o @6ample E: ,rior to filing# underriter incorporated financial information from
issuer into a &roc!ure and idel" distri&uted it# and t!e current position as muc!
less favora&le t!an suggested &" t!e &roc!ure% Diolation of (ection /%
o @6ample A: In 7ugust# ,resident accepted to give speec! in Fanuar"% In Fanuar"#
pu&lic financing &" t!e compan" as aut!oriGed% <ere# its clear t!at sc!eduling of
t!e speec! !ad not &een arranged in contemplation of a pu&lic offering; t!us# no
o&3ection as raised%
o @6ample 7: (p% E0) '5!e opposite result as reac!ed for a similar speec!%)
1
!n re Carl M# <oe8 Rhoa'es ? Co# 7S*C 19099
o Offer is defined broadly is it not limited to communications !ic! constitute an offer
in t!e common la contract sense; t!e" include an" document !ic! is designed to
procure orders for a securit"%
o Publicity prior to filing must &e presumed to set in motion or &e a part of t!e
distri&ution process and t!erefore involves an offer to sell%
o In t!is case: emanated from underriters# t!roug! interstate commerce# and >as of a
c!aracter calculated# &" arousing and stimulating investor and dealer interest? t!at
constituted part of a selling effort%
Release >o# 01.2 4Huides for :elease of Info &" Issuers 0!ose (ecurities 7re in
:egistration
o (5!ere are conflicting duties for pu&licl" !eld companies: informing securit"
!olders# and release of securit" t!at mig!t fall under :elease 9o% 1BEE)
o Issuers and t!eir reps s!ould not 1) initiate pu&licit" !en in registration# &ut 2)
s!ould nevert!eless respond to legitimate in+uiries for factual information a&out
t!e compan"s financial condition and &usiness operations%
o 5!e commission as a matter of polic" encourages t!e flo of factual information
to s!are!olders and t!e investing pu&lic%
Release >o# 3.0+ 42se of @lectronic Media
o (ection / includes info on an issuers e&site# as ell as information on a 1
rd

part" e&site to !ic! t!e issuer !as esta&lis!ed a !"perlin$%
o 5o ensure compliance# issuer s!ould carefull" revie e&site and an"
information on 1
rd
part" e&sites to !ic! it !"perlin$s%
o 7 non-reporting offeror t!at !as esta&lis!ed a !istor" of ordinar" course of
&usiness communications t!roug! its e&site s!ould &e a&le to continue to
provide &usiness and financial information on its site%
E
Su55ar1 Chart (p% 7/)
T1pe of !ssuer Pre%@iling Perio' (aiting Perio' Post%*ffecti"e Perio'
>on%
Reporting
Per5itte':
,reliminar" negotiations
and agreements it!
underriters% . 2(a)(1)
=ommunications pursuant
to :ule 11/ (9otice)
=ommunications more t!an
10 da"s in advance t!at do
not reference t!e offering
(:ule 1A17)
:egularl" :eleased Factual
Information (:ule 1AC)
Per5itte':
;ral ;ffers
,reliminar" negotiations and
agreements it! underriters%
. 2(a)(1)
=ommunications pursuant to
:ule 11E (or . 2(a)(10(&))%
. 10 ,rospectuses: 1)
preliminar" (. 10(&) and :ule
E10)# 2) summar" (. 10(&) and
:ule E11)# 1) free-riting (.
10(&) and :ules 1AE and E11;
must &e accompanied or
preceded &" a prospectus%)
Per5itte':
;ral offers
(ales
=ommunications pursuant to
:ule 11E
. 10 prospectuses (no longer
including preliminar"
prospectus)
Free riting (. 2(a)(10)(a)#
must &e accompanied or
preceded &" a final
prospectus)
Unseasone' (ame as non-reporting plus:
:egularl" released forard
loo$ing information (:ule
1AB)
(ame as non-reporting# e6cept:
@6c!ange 7ct :ule 1/c2-B
compliance less demanding
(ame as non-reporting# e6cept:
;nl" participating dealers
are non-e6empt under . E(1)
and :ule 17E%
@6c!ange 7ct :ule 1/c2-B
compliance less demanding
Seasone' (ame as unseasoned (ame as non-reporting and
2nseasoned# e6cept:
Free riting prospectuses not
need &e accompanied or
preceded &" preliminar"
prospectus% (:ule E11)
(ame as unseasoned# plus:
Free riting prospectus
permitted; need not &e
accompanied or preceded &"
final prospectus (:ule E11)%
(9ote t!is is in addition to
free riting under . 2(a)(10)
(a)%)
(ell%Ano;n
Seasone'
(ame as unseasoned# plus:
;ral offers at an" time
(:ule 1A1)
Free riting prospectuses at
an" time; need not &e
accompanied or preceded &"
an" ot!er prospectus (:ule
1A1)
9ot 7pplica&le (ame as (easoned
/
Class 3: The (aiting Perio') The Post%*ffecti"e Perio'
The (aiting Perio'
. /(a) still pro!i&its sales/transportation of securities during t!e aiting period%
. /(&) is also applica&le# not permitting t!e use of a prospectus (offer to sell) t!at does
not meet t!e re+uirements of . 10 (>Information :e+uired in ,rospectus)? (5!ere are to
$inds of prospectuses# a . 10(a) and a . 10(&)4. 10(&) involves :ule E10# E11)%
5!e pro!i&ition on oral offers is lifted during t!e aiting period%
o 7 prospectus does not compl" it! . 10(a) !en it contains &lan$s !ere
re+uired information is to &e added% In t!e usual case# a . 10(a) prospectus is not
availa&le in t!e aiting period (certain information is not $non)%
o 7 prospectus t!at meets t!e re+uirements of . 10(&) is availa&le% :ules E10 and
E11 allos preliminary prospectuses and summary prospectuses%
o :ule E11 allos a free writing prospectus# &ut must &e accompanied &" a
preliminary prospectus under :ule E01%
<oever# seasoned issuers are permitted to use Rule 33 it!out regard
to !et!er t!e" are accompanied &" an" ot!er prospectus%
!lectronic preliminary prospectus t!at is !"perlin$ed to a free riting
prospectus is deemed to accompan" or proceed it%
!lectronic delivery is permissi&le if recipient gives informed consent
(it! a record of consent $ept)% (p% A7)
Rule 13,4=ommunications not deemed a prospectus after filing% Iists man" e6amples#
li$e factual information# indication of general t"pe of &usiness# title of securities# amount
&eing offered# underriters participating# etc% :e+uires a legend% 5!ese facts can &e
used to attract investors (p% 71)%
Rule 1+34@6emption from . /(c) for =ertain =ommunications &" 0ell-Jnon
(easoned Issuers
o 0ritten communication is a >free riting prospectus? under :ule E0/ and a
prospectus under . 2(a)(10) 0ritten offers must &ear certain legends# &e retained
for 1 "ears# and &e filed it! t!e =ommission% '(ee pre-filing period%)
Rule 1+,4,ost-Filing Free 0riting ,rospectuses in =onnection it! =ertain :egistered
;fferings% >Free riting prospectus? ill &e deemed a >prospectus? (10(&)) provided
t!at conditions in :ule E11 are met%
Rule ,204>;ritten co55unication? includes >grap!ic communication? (emails#
internet communications# are included# &ut live communications carried in real time to a
real audience are e6cluded%
o *efines >free ;riting prospectus? as an" ritten communication t!at
constitutes an offer to sell (&asicall"# an" ritten material t!ats not in t!e
prospectus)%
o (=,: p 1E !as e6amples%)
Rule ,3247llos >preliminar" prospectus? or >prospectus su&3ect to completion?# it!
includes su&stantiall" all t!e information# e6cept for certain t!ings (offering price and
ot!er matters dependent on it)%
Rule ,334,ost-filing Free 0riting ,rospectus%
o 2nseasoned and 9on-reporting free riting prospectuses must &e
accompanied8preceded &" a preliminar" prospectus% (easoned and 0ell-Jnon
(easoned do not !ave t!is re+uirement%
A
o 5!ere are filing conditions# legend re+uirements% Information cannot conflict
it! registration statement# prospectus# ot!er filings%
o 7pplies to information disseminated on websites%
o 7vaila&le to an" offering participant (including underriters)%
o 7ddresses statements to the media !ic! lead to articles# resulting in
prospectuses% :ule E11 re+uired response it!in E da"s of $noing of it% (p% A2#
see also :ule 1AE)
Rule ,+2-*istri&ution of ,reliminar" ,rospectus% @ncourages mailing to underwriters
and dealers reasona&l" li$el" to &e e6pected to purc!ase t!e securities (not less t!an EB
!ours prior to mailing confirmations)% (:elease 9o% ECAB) (p% AA)
Sale . 2(a)(1)4ever" contract of sale or disposition of a securit" or interest in a securit" for
value%
;rdinar" offers cannot &e made in t!e aiting period# &ut offerors can condition t!eir
offers in suc! a a" t!at t!e" cannot &e accepted until t!e registration statement is
effective (e%g%# conditional offers)%
In Fe Fran$lin# Me"er K Barnett
o Found t!at salesmen# despite initiall" inviting indications of interest# accepted
pa"ments for stoc$ during t!e pre-effective period in t!e form of c!ec$s and t!e
proceeds of a sale of ot!er securities oned &" t!e customers# and t!ere&" ent
&e"ond t!e permissi&le scope of t!e 7ct% In addition# t!e &usiness card enclosed
it! t!e preliminar" prospectus and cover letter solicited an offer to &u" and as
t!erefore a prospectus it!in t!e meaning of . 2(a)(10)%
9ote: t!is pus!es t!e definition of sale past t!e meaning of contract la%
:elease 9o% ECAB 45!e =ommission !as declared its polic" in :ule EA0 t!at it ill not
accelerate the effective date of a registration statement unless t!e preliminar" prospectus
contained in t!e registration statement is distri&uted to underriters and dealers !o it is
reasonably anticipated ill &e invited to particulate in t!e distri&ution of t!e securit" to
&e offered or sold%
Post%*ffecti"e Perio'
B 079719 continues to appl" during post-effective period (proscri&ing use of an"
prospectus unless it satisfies re+uirements of . 10)%
o 9e e"ception applies: . 2(a)(10)4communication is not deemed a prospectus
!en it is accompanied or proceeded &" an prospectus t!at meets t!e
re+uirements of . 10(a)%
. 0797$9 no applies: securit" ma" not &e delivered to a &u"er unless t!e &usiness
simultaneousl" received# or !as received# a cop" of t!e final prospectus%
o Rule 13$79 !oever provides t!at for t!e purposes of t!is section t!e final
prospectus is deemed# in most instances# to &e delivered !en t!e registration
statement &ecomes effective8final version is filed it! (@=% 7llos sending of
written confirmation of sale (access e+uals deliver" model)# and transfer of the
security%
o Rule 133 re+uires providing purc!asers eit!er final or a prescri&ed form of notice
it!in to &usiness da"s of completing t!e sale t!at it as made pursuant to a
registration statement%
9ote: 172 and 171 did aa" it! t!e need to actuall" deliver final
prospectuses%
Oral offers ma" &e made# since . /(c) does not appl" during t!is period%
#ritten offers ma" &e made &" means of a final prospectus (. /(&)(1))%
7
Other offers ma" continue to &e made under e6ception (&) to . 2(a)(10) (.10 prospectus
alread" given)
(easoned (including ell-$non seasoned) issuers ma" continue to use free riting
prospectuses t!at are not accompanied or preceded &" an" ot!er prospectus%
$ombstone advertisements (:ule 11E)
#ritten confirmation of sale (:ule 172)%
Rule 1094&u"er must !ave all relevant information at time of purc!ase (ot!erise# t!ere
can &e lia&ilit" under . 12(a)(2))%
(@= v% Manor 9ursing =enters (2d =ir% 1C72)
Implicit in t!e statutor" provision t!at t!e prospectus contain certain information is t!e
re+uirement t!at suc! information &e true and correct% 7 prospectus does not meet t!e
re+uirements of . 10(a)# t!erefore# if information re+uired to &e disclosed is materiall"
false or misleading%
9ote t!at ot!er circuits !ave criticiGed t!is reasoning# and &elieve t!is s!ould &e covered
under antifraud provisions instead%
0!en events occur after t!e effectiveness of a registration statement t!at ma$e t!e final
prospectus materiall" false or misleading# t!e prospectus must &e corrected (&ecause antifraud
provisions%) 5!e issuer ma" 1) file a post-effective amendment to t!e registration statement# or
2) amend or supplement t!e final prospectus%
Class +,The Registration Process: Section - an' Acceleration) Principles
of .isclosure
Sections +8 38 . contain statutor" sc!eme for registration process%
o . A4*eals it! filing and fees
o . 740!at a registration statement must contain
o . B4@ffectiveness of registration statement
5o recent c!anges:
o 1) =ommission dela"s effectiveness in order to revie and comment%
o 2) :egistration statements of #%&'s &ecome effective immediately%
Re"ie; an' Co55ent proce'ure4registration statements of first time issuers are
given a t!oroug! revie# and statements filed &" second and later time issuers are
revieed selectivel"%
$2 'a1 automatic effectiveness can &e avoided%
o Rule ,334*ela"ing 7mendments% Issuer ma" include a paragrap! on t!e cover
of t!e registration statement t!at effects its continuing amendment% Must
specificall" state on t!e amendment t!at specificall" states it ill &ecome
effective%
Rule ,+24(,reliminar" ,rospectus)4(@= uses acceleration to encourage distri&ution of
t!e preliminar" prospectus%
Rule ,+14allos issuer and underriter to re+uest acceleration# specif"ing t!e da" and
time t!e" desire t!e registration statement to &ecome effective% Iists ot!er factors to
consider in acceleration re+uests (i%e%# !et!er prospectus is concise# reada&le# inade+uate
preliminar" prospectus# is t!e (@= currentl" ma$ing an investigation against issuer# etc%)
o (ome ot!er reasons (@= mig!t not declare registration statement effective:
B
If certain parts arent in plain @nglis! (:ule E21(d); if preliminar"
prospectus as materiall" inaccurate and t!ere as no recirculation# if
under current investigation# etc%)
(@= uses threat of acceleration denial to force actions not re+uired &" t!e statute (e%g%#
distri&ution of preliminar" prospectuses)%
o Ias Degas <aaiian (p% BE)
. /(c) sa"s t!at if t!e (@= !as &roug!t a proceeding under . B# (!et!er a
stop order as necessar") t!at stops ever"t!ing in its trac$s% <ere# t!e (@=
started !earing under . B(e)# and t!en relied on . /(c) and anted issuer to
seiGe and desist offering t!ese securities%
9ote: . B(&) as a 10 da" limitation% . B(d) can &e issued an"time (as issued
after registration as declared effective in 2niversal =amera)% =an also
e6amine it!out issuing a stop under . B(e)%
Rule ,104 allos for >shelf registration%? (p% C1) ,ermits shelf registrations of 0J(Is
to &ecome effective immediatel"%
Because of revie and comment procedure# refusal and stop order rarel" are used to
prevent effectiveness of registration%
Regulation S%A4serves as (@=s general repositor" of disclosure re+uirements%
o !te5 01$7h94re+uires disclosure of indemnification for acceleration
((@= uses acceleration as a tool against indemnification provisions)%
2niversal =amera 4'Involved a dilution arrangement%) (tatement did not disclose
prospective investors relative interest in t!e assets# earnings# or voting poer of t!e
compan"; did not give a clear description of proposed &usiness activities% 5!e *ilution
arrangement as not plainl" evident# and onl" an e6perienced securit" anal"st could
understand it; disclosure s!ould &e plainly understandable to t!e ordinar" investor%
A"oi'ing /ela1s in Processing Registration State5ents: (ecurities las ant to
o&tain full and fair disclosure% Die t!e prospectus as a lia&ilit" document and not a
selling document% 5!e unfavora&le data must &e disclosed as ell as t!e favora&le%
Class /,.isclosure Philosoph0
Rule ,2. (7dditional Information)4In addition to information e"pressly re(uired# t!ere s!all &e
added suc! further material information# as ma" &e necessar" to ma$e t!e re+uired statements#
in lig!t of circumstances under !ic! t!e" are made# not misleading%
Selecte' S%A /isclosure !te5s:
Item 10(&)% ,olic" on ,ro3ections
Item 11(e)% 7udited Financial (tatements
Item 201(c)% (tatement on *ividends
Item 202% *escription of (ecurities%
Item 101% Managements *iscussion87nal"sis of Financial =ondition
Item 10/% Luantitative and Lualitative *isclosures a&out Mar$et :is$%
Item E01% *irectors and ;fficers%
Item E02% @6ecutive =ompensation
Item E01% (ecurit" ;ners!ip of =ertain Beneficial ;ners and Management%
Item E0E% =ertain :elations!ips it! ;fficers and Business *irectors
C
Item E0A% =ode of @t!ics%
Item /01% (&(1)# &(2)# &(1)# &(1)(/))% =over page info: 9ame# 7mount of (ecurities#
;ffering ,rice# =ross-:eference to ris$ factors
Item /02% 5a&le of =ontents% *eliver" ;&ligations
Item /01% ,rospectus (ummar"% :is$ Factors%
Item /0E% 2se of ,roceeds%
Item /0/% *etermination of ;ffering ,rice%
Item /0A% *ilution%
Item /12(!)% Indemnification%
Class 1,Materialit0
Henerall":
>7 misrepresentation or omission is material if t!ere is a substantial likelihood t!at t!e
disclosure of t!e omitted fact ould !ave &een vieed &" t!e reasonable investor as
!aving significantly altered t!e total mi" of available information% Parnes
7n alleged misrepresentation can &e immaterial for t!e folloing reasons: Parnes
o 1) 5!e" are common knowledge t!at a reasona&le investor can &e presumed to
understand t!em% Gateway
o 2) 'nsignificant data t!at# in t!e total mi6 of information# ould not matter to t!e
reasona&le investor%
o 1) )ague and obvious hyperbole t!at no reasona&le investor ould rel" on t!em%
Gateway%
o E) If accompanied &" sufficient cautionary statements (t!e >bespeaks caution
doctrine?)%
Must &e su&stantive and tailored to t!e specific pro3ection# estimate# or
opinion% Numerex
9ote: B $3A4!as a safe harbor for forward looking statements t!at is
accompanied &" cautionar" statements# immaterial# lac$ of $noledge
t!at statement as false%
7lso remem&er Rule ,2.4add furt!er information to ma$e t!e re+uired statements not
misleading%
,arnes v% Hatea"
o ;verstatement of assets &" MA%B million immaterial (represented onl" 2N of
Hatea"s total assets)%
o >,ro3ection of significant grot!? is immaterial (vague and o&vious !"per&ole)
4courts dont ant to deter companies from ma$ing pro3ections%
o Lualit" and desira&ilit" of products as not misrepresented in lig!t of cautionar"
statements%
9umere6
o >(u&stantial increase? in profit is a fair and accurate summar"# &ecause profits
!ave increased su&stantiall"%
o 7n" reasona&l" prudent investor reading t!is prospectus ould recogniGe t!e
ris$s in!erent in a compan" t!at depends upon one purc!ase for almost !alf of its
sales4its mentioned in unam&iguous# specific terms in prominent displa" on t!e
prospectus%
o *autionary language negates an" allegedl" misleading representations
concerning plans to develop sales orldide%
10
o Materialit" of e"ecutive personnel changes must &e gauged &" &usiness
circumstances of eac! case% <ere# resignation of e6ecutive officer is not material
&ecause !e !ad onl" &een it! compan" for a "ear# !ad not entered into an
emplo"ment agreement# and did not &ring and particularl" valua&le tec!nical or
&usiness e6pertise to t!e compan"
Hreenapple
o 5!e intended audience ill &e e6tremel" &road (includes anal"sts and
la"persons)% *isclosure must steer a middle course; it needs to &e accurate# "et
accessi&le to survive a claim t!at its misleading &ecause t!e negative
information is incompre!ensi&le%
Fis!er v% :oss 'Failure to disclose t!at some of t!e directors ere involved in a prior
&an$ruptc"%)
o 5!ere ere rules t!at said "ou !ad to release &an$ruptc" info if it !appened
it!in / "ears# since it did not !appen it!in t!e last / "ears t!at it as not
material%
9ote: it ould &e material if t!ere as evidence of rongdoing &" t!em
in t!e previous &an$ruptcies# or if it as related to t!is compan"%
7lso# remem&er :ule E0B sa"s to include an"t!ing else# a catc! all
disclosure re+uirement%
:oss v% 0arner
o H5@ !as &een c!arged it! ma$ing improper $ic$&ac$s !ere it !ad &usiness
ties%
o 5!is report made partial disclosure of improper acts# &ut t!e !ole stor" as not
told until it got reported in t!e 9O 5imes and 0all (treet 3ournal# at !ic! point
t!e s!are of stoc$ plummeted%
o Fudge sa"s cant sa" its not immaterial (its material to integrit")# and so !e no
!as to loo$ at !et!er plaintiffs s!oed damages# and !e doesnt see t!at t!e
mar$et price moved% (o# in lig!t of t!e minimal materialit" and t!e mar$ets
value to react in a certain a"# !e cant see damages% But !es illing to see t!at
t!is is an integrit" issue%
Class 2,(hat is a Securit03
. 2(a) defines security4an" note# stoc$# &ond# evidence of indebtedness# certificate of interest#
investment contract# an" put# call# option%
7 swap (agreement to e6c!ange cas! flos over period of time is not a securit"% (p%
1/E)%
!n"est5ent Contracts
(@= v% 0F <oe" (1CEA)
>Investment contract? means a contract+ transaction or scheme !ere&" a person 1)
invests !is mone" in a 2) common enterprise and is 1) led to e"pect profits solel" from
t!e E) efforts of t!e promoter or a third party+ it &eing immaterial !et!er t!e s!ares in
t!e enterprise are evidenced &" formal certificates or &" nominal interests in t!e p!"sical
assets emplo"ed in t!e enterprise%
=itrus opportunit" as an investment contract: contri&uted mone" to s!are in propert"
managed &" a t!ird part"; investors lived in distant localities# lac$ e6perience and
e+uipment re+uisite to cultivation; individual development ould not &e economicall"
feasi&le%
11
2nited <ousing Foundation v% Forman (1C7/)
5!e name given to an instrument is not dispositive as to !et!er its a securit"
5!e stoc$ in t!e lo-cost !ousing as not a securit": no rig!t to receive dividends from
profits; not negotia&le# cannot &e pledged or !"pot!ecated# t!e" confer no voting rig!ts;
cannot appreciate in value% 5!is involved purc!asing a commodit" for personal
consumption# not investing it! t!e !ope of receiving profit%
(@= v% @dards (200E)
Investment contracts can !ave varia&le or fi6ed returns%
5!e fact t!at investors !ave &argained for a return on t!eir investment does not mean t!at
t!e return is not also e6pected to come solel" from t!e efforts of ot!ers%
(@= v% Joscot (/
t!
=ir% 1C7E)
>(olel" derived from t!e efforts of ot!ers? is not to &e applied literall"% Instead# t!e
in+uir" is !et!er >efforts made &" t!ose ot!er t!an t!e investor are undenia&l"
significant ones# t!ose essential managerial efforts !ic! affect t!e failure or success of
t!e enterprise%
5!e p"ramid sc!eme as an investment contract: promoters retained immediate control
over essential managerial conduct of t!e enterprise# and t!e investors realiGation of
profits in ine6trica&l" tied to t!e success of t!e promotional sc!eme%
5!is does not appl" to franchises% (p% 1E7)
9ote: court applied vertical commonality !ere%
o Dertical commonalit" P focuses on communit" of interest of individual investor
and t!e manager of t!e enterprise%
o <oriGontal commonalit" P concentrated on t!e interrelated interest of t!e various
investors in a particular sc!eme ((ee *e0it in coursepac$)
*"i'ence of !n'ete'ness
2( v% Fones (1C71)
>@vidence of inde&tedness? em&races onl" suc! documents as promissor" notes !ic! on
t!eir face esta&lis! a primary obligation to pa" t!e !olders t!ereof a sum of mone"%
'7irline tic$ets do not esta&lis! a primar" o&ligation to pa" mone"%)
In re 5uc$er =orp (1CE7)
,ranchise agreements t!at provide for t!e repa"ment of deposits received ere
>securities? under t!e 7ct%
Unless the Conte6t &ther;ise ReCuires
7 >certificate of deposit? issued &" a national &an$ is not a securit"# &ecause &an$s are
su&3ect to compre!ensive regulation designed to protect investors and it is federall"
insured% Marine Ban$ (1CB2)%
o =ourts !ave adopted t!is reason in cases t!at involve compre!ensive regulator"
sc!emes%
Iandret! 5im&er v% Iandret! (1CB/)
&ale of all the stock of a compan" does fall under t!e meaning of securit"% (5!is stoc$
carries t!e rig!t to dividends contingent on profits%)
:eves v% @rnst K Ooung (1CC0)
,amily resemblance test: >note? is presumed to &e a >securit"#? and t!at presumption
ma" &e re&utted onl" &" a s!oing t!at t!e note &ears a strong resem&lance (in terms of
t!e E factors &elo) to one of t!e enumerated categories of instruments (suc! as note in
consumer financing# note securit" &" a mortgage# s!orter-term note securit" &" lien on
small &usiness# etc%) (p% 1A/)
12
o 1) 7ssess !at motivation ould prompt reasona&le seller and &u"er to enter into
transaction%
o 2) @6amine t!e >plan of distri&ution? to determine !et!er it is an instrument in
!ic! t!ere is >common trading or speculation or investment%?
o 1) @6amine t!e reasona&le e6pectations of t!e investing pu&lic%
o E) @6amine !et!er some factor (li$e e6istence of anot!er regulator" sc!eme)
significantl" reduces t!e ris$ of t!e investment%
5!e =o-;p notes !ere are securities: t!e" ere soled to raise capital for general &usiness
operations# and purc!asers &oug!t t!em in order to earn a profit in t!e form of interest%
Class -,Pri"ate Place4ent *5e4ption
. 14@6empted (ecurities:
1(a)(2)4government securities# securities guaranteed &" &an$s
1(a)(E)4securities &" religious# educational# or c!arita&le organiGations%
1(a)(B)4Insurance8endoment polic"# or annuit" contract issued &" a corporation and
su&3ect to supervision of t!e insurance commissioner# &an$ commissioner# or an" ot!er
agenc"% '5!is e6empts guarantees as ell%)
1(a)(C)4securities e6c!anged &" an issuer it! its e6isting securit" !olders 'e6empt
transaction)
1(a)(11)4intrastate securities 'e6empt transaction)
. E(1)4:egistration re+uirements of . / not re+uired for transactions &" any person other t!an
an issuer# underriter# or dealer%
. E(2)4:egistration re+uirements of . / not re+uired for transactions &" an issuer not involving
a public offering%
:ule /0A4(a separate e6emption from . E(2))--. E(2) is a fall&ac$ !en :ule /0A fails%
(@= v% :alston ,urina
,rivate placement e6emption s!ould turn on !et!er t!e particular class of persons
affected needs the protection of t!e 7ct% 7n offering involving t!ose !o can fend for
t!emselves is a transaction t!at does not involve a pu&lic offering%
(ome emplo"ee offerings ma" &e e6empt (e%g%# one made to e6ecutives !o &ecause of
t!eir position !ave access to t!e same $ind of information t!at t!e 7ct ould ma$e
availa&le in a registration statement)% ;t!erise# !oever# emplo"ees are mem&ers of
t!e pu&lic%
(ecurities 7ct :elease 9o% E//2
,u&lic8private offering distinction necessitates consideration of all surrounding
circumstances: relations!ip &eteen offeree and issuer# t!e nature# scope# siGe# t"pe and
manner of t!e offering%
o -eneral solicitations (advertising) are inconsistent it! private offerings%
o (ale to promoters t!at initiate founding t!e organiGation come it!in t!e
e6emption%
o 7ll offerees matter (not 3ust t!e ones t!at &u")%
o &i.e of t!e offering ma" raise +uestions a&out !et!er t!ere is a re+uisite
association%
o ,urc!asers s!ould not &e merel" conduits for wider distribution%
11
o Must consider !et!er t!e offering s!ould &e regarded as part of a larger
offering made (Integration of ;fferings)%
o ,recautions are reselling are effective (i%e%# restrictive legends)# &ut not re+uired%
Relevant ,actors from case la: (from earl" opinion &" (@= Heneral =ounsel# p% 1BA)
9um&er of offerees8t!eir relations!ip to eac! ot!er and issuer
9um&er of units offered
(iGe of t!e offering
Manner of t!e offering
(op!istication of purc!asers
:elations!ip it! t!e issuer
7B7 ,osition ,aper
,our attri&utes:
o 1) ;fferee Lualification
0ealt! (a&ilit" to &ear ris$)# personal relations!ip (famil"# friends#
emplo"ment# &usiness%
o 2) 7vaila&ilit" of information
(9eed not &e as e6tensive as info in (c!edule 7) Its pro&a&l" ade+uate
to give &asic information covering financial conditions# results of
operations# etc%
o 1) Manner of offering
;ffering s!ould &e made t!roug! direct communication%
o E) 7&sence of redistri&ution
<ill Oor$ v% 7merican
=ourt uses t!e (@= :elease to find t!at sale of securities to 11 sop!isticated &usiness and
la"er t!at &oug!t MA/J of securities% 5!e court said its a pu&lic offering# and t!at t!e"
s!ould &e alloed to get t!eir mone" &ac$% 5!e court !ere sa"s t!e sop!isticated
&usinessmen !ere needed to !ave all t!e information in order to put t!eir sop!istication to
good use%
7fter t!is decision comes don# !o can "ou advise anyone t!at t!e" could do a private
placementQ (Bancroft sa"s "ou ouldntR)
9ote also: 5!is as a p"ramid sc!eme# and t!e court as tr"ing to get to t!e rig!t result%
7nd proving t!at it as a pu&lic offering is easier t!an proving fraud for a plaintiff%
Class 9,Regulation . 6Rules /7+8 /7/8 /719
B 379 allos (@= to promulgate rules t!at e6empt certain offerings :ules /0E and /0/
B ,7$9 e6empts pu&lic offerings :ule /0A
9ote: Investor can fall &ac$ on . E(2) !en :ule /0A fails# &ut t!ere is not t!e same
protection for :ules /0E and /0/%
9ote: B ,7+9 e6empts transactions involving sales one or more accredited investors# it! some
conditions%
Preli5inar1 >otes4:eg * is e6empt from registration# &ut not antifraud and ot!er provisions%
Rule 0214(*efinitional)
1E
/ccredited investor is an"one issuer !as reasonable belief falls under t!e folloing:
o 1) Ban$s# &ro$ers8dealers# insurance companies# etc%
o 2) private &usiness development compan";
o 1) corporation8partners!ip8organiGation it! more t!an M/ million assets;
o E) director# e6ecutive officer# or general partner of t!e issuer or an" of t!ose of a
general partner of t!at issuer;
o /) net ort!# it! ones spouse# of more t!an M1 million#
o A) net income in eac! of t!e to most recent "ears of more t!an M200J (or
M100J it! ones spouse)%
o 7) 5rust it! assets greater t!an M/ million%
o B) @ntit" in !ic! all e+uit" oners are accredited investors%
o 9ote: 5!ese are investors t!at can bear risk%
=alculation of number of purchasers4e6clude relatives it! same residence# accredited
investors# corporations8trusts8estates !ere purc!aser !as more t!an /0N interest
Rule 02$4(=onditions)
!ntegration: :emoves from t!e possi&ilit" of integration offers and sales t!at occur more
t!an 0 months before t!e start of t!at Regulation 1 offering or more t!an 0 months after
its completion# so long as during t!ose A mont!s t!ere are no offerings of t!e
same/similar class sold under :eg *%
o Factors to consider to determine !et!er integration is appropriate:
0!et!er sales are part of single plan of financing
0!et!er sales involve issuance of t!e same class of securities
0!et!er sales !ave &een made at8a&out t!e same time
0!et!er t!e same t"pe of consideration is received
0!et!er sales are made for t!e same general purpose
:e+uirements for furnishing information to investors
,roscri&es general solicitations or advertisements%
(ets fort! re+uirements designed to prevent illegal resales (reasonable care in avoiding
sales to underriters &" reasona&le in+uir"# disclosure t!at securities cannot &e resold#
legends)%
Rule 0234Filling in Form *
Rule 02.47n insignificant deviation from t!e re+uirements of one of t!e :eg * e6emption
rules ill not result in t!e loss of t!e registration e6emption provided &" t!e rule (if t!e violation
did not involve a condition intended to protect investors# it as insignificant in t!e conte6t of t!e
offering as a !ole# or good fait! and reasona&le attempt as made)%
Rule 10$4*efinition of transactions not involving pu&lic offering% (9ote t!at pu&lic offering at
t!e same as a E(2) e6empt private placement ould not cause t!e e6emption to &e unavaila&le4
see :eg * ,roposed :evisions)
Rule 10047&andoned ;fferings
Aan'one' pri"ate offering (E(2)# E(A)# :ule /0A) folloed &" registered offering
ill not &e considered part of an offering for !ic! t!e issuer later files a registration
statement if conditions are met (including not filing at least 30 calendar days after
termination of all offering activit")% @6empt for if t!e private offering as onl" to
persons !o ere accredited investors# or !o !ave $noledge8e6perience (:ule
/0A(&)(2)(ii))%
o 9ote: t!e result is similar for private offerings folloing a&andoned
registration%
1/
Regulation / *6e5ptions 7p# $129
Rule 02, Rule 020 Rule 02+
Aggregate Offering
Price Limitation
M1 million (12 mos%) M/ million (12 mos%) 2nlimited
Number of Investors 2nlimited 1/ plus unlimited accredited
Investor Qualification 9one re+uired ,urc!aser must &e
sophisticated (&)(2)
(ii) (alone or it!
representative)4
accredited presumed
to &e +ualified
Sales Commissions ,ermitted
Limitations on
anner of Offering
2suall" no general
solicitation permitted
(e6ceptions for
offerings under state)
la)
9o general
solicitation permitted
9o general solicitation
permitted
Limitations on !esale 2suall" restricted :estricted
Issuer Qualifications =annot &e @6c!ange
7ct reporting# >&lan$-
c!ec$#? or investment
companies
=annot &e investment
companies# or issuers
dis+ualified under
:egulation 7 (e6cept
upon (@=
determination)
9one
Notice of sales / copies of Form * filed it! (@= 1 da"s after first sale (called for &"
:eg *# &ut not re+uired for e6emption)%
Information
!e"uirements
9one 1) If purc!ased &" accredited investors# no
information specified%
2) If purc!ase &" non-accredited investors#
a) nonreporting companies must furnis! same
$ind of info as in registered offering# &ut it!
less financial statement re+uirements
&) reporting companies must furnis! specified
@6c!ange 7ct documents%
c) Issuers must ma$e availa&le prior to sale i)
e6!i&its# ii) ritten information given to
accredited investors# iii) opportunit" to as$
+uestions and receive ansers# iv) advise on
t!e limitation of resale% 'see p% 210 of te6t)
Calculation of Aggregate Price:
:ule /0E45!eres a M1 million limit t!at e6tends for 23 months# and includes :ule /0/
offerings%
:ule /0/45!eres a M/ million limits t!at e6tends for 23 months# and includes :ule /0E
offerings%
(ecurities 7ct :elease 9o% AE// (p% 211)
7 person must &e an >accredited investor? at t!e time of sale# regardless of c!anges t!at
occur after t!e sale%
7n e6ecutive officer of t!e parent issuer t!at performs a polic" ma$ing function for its
su&sidiar" is an e"ecutive officer of the subsidiary%
1A
1isclosure can &e in multiple installments# so long as all information is delivered prior to
t!e sale%
2nder :ule /0/ and /0A# "ou can !ave unlimited accredited investors% Oou can also
e6clude a relative !o !as same principle residence it! t!e purc!aser%
Partnership/partnership/entity is counted as one investor under :ule /01(e)(2); issuer is
not o&ligated to consider sop!istication of individual partners%
Class 17,Reg . Refor48 Regulation S
Reg / Refor5-
Propose' Rule 023 9e e6ception for >large accre'ite' in"estors? it!
significantl" !ig!er t!res!olds t!at accredited investors% ,ermits li5ite' a'"ertising%
o (!ared c!aracteristics it! :ule /0A: 2nlimited sales to unlimited investors;
focus on purc!asers; non-e6clusive%
o *ifferences from :ule /0A: Iarge accredited investor standard; limited
advertising permitted; no sales to persons !o dont +ualif" as large accredited
investors; aut!orit" under . 2B
;t!er proposals:
o =!anging definition of accredited investor
o Inflation ad3ustments
o :educe integration period from A mont!s to C0 da"s%
Regulation S
,rotects 2( residents# not citi#ens%
9ote: onl" applies to offers8sales outside of U&; securities can onl" &e resold in 2( if
anot!er e6emption is availa&le%
B 9214an offer or sale s!all not &e deemed to include t!ose t!at occur outside of the U&
B 9234offer s!all occur outside of U& of it as made in an offshore transaction and no directed
selling efforts are made in t!e 2( &" t!e issuer (i%e%# condition t!e 2( mar$et)% :e+uires
additional conditions depending on categor":
Categor1 !4foreign corporations t!at are ma$ing offering outside t!e 2( !ere
t!eres no substantial U& market interest% 9o additional conditions%
Categor1 !!4(ome!ere in-&eteen t!e to (i%e%# foreign corporation !ere t!ere
is some 2( interest) =annot ma$e offer8sale to U& person or for account8&enefit
of 2( person for t!e first 0 days%
Categor1 !!!4(2( issuers in e+uit" offerings) put in place procedures t!at police
against an" 2( person &u"ing t!ose e+uit" s!ares for 1 1ear (E0 da"s for de&t)%
,urc!asers must certif" t!at t!e" are not a U& person or ac+uiring for a 2( person;
purc!aser agrees to resell conditions; securities contain a legend%
o :estrictions are too great for =ategor" III to &e used%
B 92$4*efinitions% Je" definitions t!at matter:
US Person-2( residents# partners!ip8corporation under 2( las# estate8trust of 2(
person# agenc"8&ranc! of foreign entit" located in 2(%
&ffshore Transaction4offer not made to a person in t!e 2nited (tates# 79*:
o 7) @it!er &u"er is or is reasonable believed to &e outside of 2( at t!e time
buy order is originated# or
o B) 5ransaction is e6ecuted t!roug! p!"sical trading floor of esta&lis!ed
foreign securities e"change (:ule C01)# or transaction e6ecuted t!roug!
17
facilities of designated offs!ore securit" mar$et and seller does not $no t!at
transaction !as &een pre-arranged it! a &u"er in t!e 2( (:ule C0E)%
But note (!)(1)4offers targeted at identifiable groups of 2( citiGens a&road (2(
armed forces) s!all not &e deemed to &e offs!ore transactions%
/irecte' Selling *fforts4activit" underta$en for t!e purpose of# or could
reasonably &e e6pected to condition the market in t!e 2(%
o Includes placing ad it! general circulation in t!e 2(%
o *oes not include:
7ds re+uired &" la accompanied &" certain language%
=ontact it! non-2( ,ersons
=ertain tom&stone advertisements
'7 fe ot!ers mentioned%)
Class 11:Class 13,Resales of Restricte' Securities
. E(1)4allos sales of securities it!out registration &" an" person ot!er t!an an issuer#
underriter# or dealer% ((ee section 2 definitions of t!ese terms%) (p% 221)% *ealers !ave
e6emptions under E(1) and E(E)%
>issuer?4includes an" person directl" or indirectl" controlling or controlled &" t!e
issuer# or an" person under direct or indirect common control it! t!e issuer%
>un'er;riter?4an" person !o !as purc!ased from an issuer or an affiliate of t!e
issuer it! a vie to# or offers or sells for an issuer or an affiliate t!e distri&ution of an"
securit"%
o (distri&ution is &asicall" s"non"mous it! pu&lic offering)
>Control securities?4securities oned &" person !o is an affiliate of t!e issuer
>Control? possession# direct or indirect# of t!e poer to direct or cause t!e direction of
t!e management and policies of a person# !et!er t!roug! oners!ip of voting securities#
&" contract# or ot!erise%
o 10 percent e+uit" oners!ip is a rule of t!um&% (p% 217)
In re <ira <aupt (p% 222)
E(2) permits individuals to sell t!eir securities t!roug! a &ro$er it!out a registration
statement% But t!e process of the distribution itself is su&3ect to (ection /% Bu"ing from
an affiliate it! a vie ma$es "ou an underriter%
0olfson (p% 210)
0!ere brokers provide outlets for t!e stoc$ of issuers# t!e" are considered underwriters%
Bro$ers can claim an e"emption !ere t!e &ro$er is not aware of circumstances
indication t!at t!e transactions are part of a distri&ution of securities on &e!alf of !is
principal%
Rule 1,,-Persons /ee5e' >ot to De *ngage' in a /istriution an' Therefore >ot
Un'er;riters
(a) *efinitions
>Affiliate?4person t!at directl"# or indirectl" t!roug! one or more intermediaries#
controls or is controlled &"# or is under common control it!# t!e issuer
1B
>Person?4!ose accounts securities are sold includes !is relative# !is trusts8estates#
and an" corporation8organiGation !ere t!e person ons 10 percent or more of an" class
of e+uit" securit" or e+uit" interest%
>Restricte' Securities?
o (ecurities ac+uired directl" or indirectl" from t!e issuer or issuers affiliate in a
transaction or c!ain of transactions not involving a pu&lic offering:
o :egulation * (ecurities
o (ecurities ac+uired in transaction or c!ain of transactions under :ule 1EE7
o @+uit" securities ac+uired in transaction or c!ain of transactions under
:egulation (
(9 Con'itions
i) Reporting issuer# an" person !o is not an affiliate of t!e issuer !o sells restricted
securities of an issuer for !is on account is deemed not to &e an underriter if
conditions of (c) and (d) are met% 9ote: :e+uirements of (c) s!all not appl" if 2 year !as
passed since person ac+uired securities%
ii) 4on-reporting issuer# an" person !o is not an affiliate of t!e issuer !o sells
restricted securities of an issuer for !is on account is deemed not to &e an underriter
if conditions of (d) are met%
(c)4/de(uate current public information it! respect to t!e issuer must &e availa&le (mentions
specific re+uirements for reporting and non-reporting issuers% 9on-reporting must provide some
limited information%)
(d)(i)4For reporting issuers# 0 months must elapse &eteen t!e later of t!e date of ac+uisition of
t!e securities from t!e issuer8affiliate and an" resale of suc! securities in reliance on t!is section
for t!e account of eit!er t!e ac+uirer or an" su&se+uent !older of t!ose securities%
(d)(ii) For non-reporting issuers# 2 year must elapse &eteen t!e later of t!e date of ac+uisition of
t!e securities from t!e issuer8affiliate and an" resale of suc! securities in reliance on t!is section
for t!e account of eit!er t!e ac+uirer or an" su&se+uent !older of t!ose securities%
(d)(iii) holding period s!all not &egin until t!e full purchase price or ot!er consideration is paid
or given &" t!e person ac+uiring t!e securities%
,romissor" note is not deemed full pa"ment unless provides 1) full recourse against
purc!aser; 2) secured &" collateral ot!er t!an securities; 1) pa"ment in full%
(e) Iimitation on amount of securities sold by affiliates% '*ontrolled &ecurities)
&ales by affiliates4t!e amount of securities sold# toget!er it! all sales of restricted
and other securities of the same class it!in t!e preceding 3 months s!all not e6ceed
t!e greater of:
o i) 1N of s!ares or ot!er units of t!e class outstanding
o ii) t!e average ee$l" reported volume of trading in suc! securities on all
national securit" e6c!anges8automated +uotation s"stem
o iii) 7verage ee$l" volume of trading
(ales &" non-affiliates4'(@= dispensed it! limitations for non-affiliates)
(f) Manner of sale% (ecurities s!all &e sold in >rokersE transactions?# and t!e person selling
securities s!all not 1) solicit or arrange for solicitation of orders to &u" t!e securities# or 2) ma$e
an" pa"ment in connection it! t!e sale ot!er t!an to t!e &ro$er !o e6ecutes t!e order to sell
t!e securities%
(g) Control P t!e poer to direct or cause t!e direction of management and policies#
t!roug! oners!ip of voting securities# or ot!erise% 10 percent e+uit" oners!ip is a
rule of t!um&% (p% 217)
1C
% >DrokersE transactions? in . E(E) ill &e deemed to include transactions in !ic! t!e &ro$er:
1) *oes no more t!an e6ecute t!e order as agent for t!e person !ose account securities
are sold and receives nor more t!an t!e usual and customar" &ro$ers commission%
2) 9eit!er solicits no arranges for solicitation of customers orders to &u" t!e securities in
anticipation of or in connection it! t!e transaction; provided t!at t!e foregoing s!all not
preclude i) in+uiries &" &ro$er to ot!er &ro$ers8dealers !o !ave indicated interest in t!e
securities it!in preceding A0 da"s; ii) in+uiries &" &ro$er of !is customers !o !ave
indicated unsolicited &ona fide interest in t!e securities it!in t!e preceding 10 &usiness
da"s; iii) pu&lication &" &ro$er of &id and as$ +uotations for t!e securit" in an inter-
dealer +uotation s"stem# provided t!at suc! +uotations are incident to t!e maintenance of
t!e &ona fide inter-dealer mar$et for t!e securit" for t!e &ro$ers on account%
1) 7fter reasona&le in+uir" is not aare of circumstances indicating t!at person is an
underriter or t!at transaction is part of a distri&ution of securities of t!e issuer%
:ule 1EE7 ((ee 5a& B)
@sta&lis!es a safe !ar&or for certain private resales of restricted securities &" providing
t!at seller ill not &e deemed to &e an underriter%
7vaila&le onl" !en &u"er is or is reasona&l" &elieved to &e a Cualifie' institutional
in"estor%
9ot availa&le for resale of securities 1) t!at at time of t!eir issuance ere of t!e same
class of securities listed on t!e national securities e6c!ange or +uoted in a 2( automated
inter-dealer +uotation s"stem# or 2) t!at ere issued &" compan" re+uired to &e registered
under Investment =ompan" 7ct%
(eller must ta$e reasona&le steps to ensure t!at purc!aser is aare t!at seller ma" rel" on
t!e e6emption from t!e registration re+uirements provided &" t!e rule%
=an &e used &" sellers ot!er t!an t!e issuer% (=, 17A)
,rivate :esales ;utside :ule 1EE7
For private resales of restricted securities t!at fall outside :ule 1EE7# (. E(182)) t!e seller
must structure t!e transaction so t!at t!e seller is not 1) not an underriter; and 2) cannot
&e made an underriter &" actions of t!e purc!aser%
o ,ersons mig!t meet t!ese re+uirements &" onl" selling to persons !o can meet
re+uirements of purc!asing in a private transaction (small num&er of purc!asers#
!ig! +ualifications# access to information# and restrictions on resale)# &ut no-
action letters s!o some fle6i&ilit" it! t!is%
In t!e case of control securities# t!e seller must insure t!at t!e purc!aser is not an
underriter%
Class 1$,The Role of the Un'er;riter,Section 11 an' Section 1$6a96$9
<iailit0
&ection 224Iia&ilities for False :egistration (tatement% Iia&ilit" for untrue8omitted material
fact for underwriters
,laintiff does not need to s!o reliance
;t!ers t!at face lia&ilit":
o @ver"one t!at signed t!e registration statement
o 1irector/partner in t!e issuer at time of filing
20
o 7ccountants# engineers# appraisers t!at prepare/certify part of t!e statement
o 'ssuer (strict lia&ilit") (&)
*efense if meet &urden of proof of:
o Resignation# and advised commission and issuer of no responsi&ilit" for
statement
o Public notice t!at registration statement !ad &ecome effective it!out !is
$noledge
o Reasonable ground to &elieve and did &elieve at effective date t!at statements
ere true8no omissions# and
:easona&leness standard P prudent man managing !is on propert"%
Rule 13+4=ircumstances 7ffecting *etermination of 0!at =onstitutes
:easona&le Investigation
5"pe of issuer; t"pe of securit"; t"pe of person; office !eld !en
person is an officer# etc%
9otes:
o If earning statement is generall" made availa&le 23 months &eginning after
effective date# t!en proof is re+uired t!at t!e person ac+uired t!e securit" rel"ing
on t!e untrue statement (&ut does not !ave to prove reading t!e registration
statement)% (a)(/)
o 2nderriter still lia&le even if !e &ecomes an underriter after effective date (d)
o ,laintiff cannot recover damages if defendant proves t!at did not result from t!e
misleading registration statement%
o Iimits to damages (cannot get more t!an t!e issue price)%
o Its purpose is to protect investors% ($arc%ris)
Section 1$% Iia&ilities in =onnection it! ,rospectuses and =ommunications
o Ma" sue in la or e(uity (rescission)
o =an sue for an" offer or sale t!at violates section / (doesnt re+uire untrue
statement)%
o ;r# can sue for material untrue statement8omission from prospectus%
o Iia&ilit" for free riting prospectuses%
Darchris
5!e court ipes out ever" one of t!ese defendants# no one met t!eir defenses%
o :usso (=@;)4!e $ne all relevant facts# t!e compan" as entering into
&an$ruptc"# so !e didnt !ave an" defense%
o Ditolo and ,ugliese (Business Founders)4t!e fact t!at t!e" are of limited
education and mig!t not !ave &een a&le to read t!e prospectus is not a defense#
and its li$el" t!at t!e" $ne a&out some of t!e pro&lems%
o Jirc!er (=F;)4court said !e !ad t!e full picture of t!e financial affairs# !e !ad
to $no t!at t!e prospectus as untrue%
o 5rilling (anot!er insider)4similar%
o Birn&aum (Bar=!ris !ouse counsel# director)4pro&a&l" did not $no of
inaccuracies# &ut made no investigation and relied on ot!ers to# and !e !ad an
o&ligation to%
o 7uslander (;utside *irector)4<e didnt ma$e ade+uate investigation%
o Underwriters4t!e court sa"s "ou cant 3ust sa" its t!e compan"s prospectus;
investors rel" on t!e reputation of t!e underriters; underriters cannot rel" on
!at t!e issuer sa"s (issuer !as an interest in not &eing candid)%
21
Its not sufficient to as$ +uestions it!out verif"ing t!e ansers t!roug!
a furt!er investigation%
Oou !ave to verif" !at t!e compan" is telling "ou in ot!er a"s%
2nderriters do t!is no (going to tal$ to lending &an$s# suppliers# to
investigate t!e compan")%
Rule 1094For t!e purposes or 12(a)(2) onl"# information conve"ed to t!e purc!aser after t!e
time of sale ill not &e ta$en into account in determining !et!er prospectus8statement as
materiall" untrue8misleading%
:elevant data at time of sale can include preliminar" prospectus# plus an" ritten or oral
update to it%
o Iia&ilit" for misstatement at t!is time is under (ection 12(a)(2) (p% E/-/0 of =,)
Rule 13$4o&ligation to deliver a final . 10(a) prospectus is fulfilled &" filing a final version
it! t!e (@=%
Class 1+,Responsiilit0 of <a;0ers
(ommer (1C7E)
In securities matters# attorne" ill !ave to function in a manner more a$in to auditor t!an
to t!at of t!e advocate% 5!is means more independence# responsi&ilit" to t!e pu&lic#
!ealt!" s$epticism% Ma" call for resignation in certain circumstances%
Ai'ing an' Aetting: (elements)
1) 7not!er person !as committed a securities la violation%
2) 7ider !ad general aareness t!at !is role as part of an overall activit" t!at is
improper or illegal (does not include someone !o acts in efforts of 3udgment#
carelessness# or good fait!)
1) %nowingly and substantially assisted t!e violation%
(@= v% 9ational (tudent Mar$eting =orp (1C7B)
Heneral aareness is esta&lis!ed &" t!e presence at t!e meeting% 7ttorne"s silence as
a &reat! of t!e dut" to spea$# and in addition lent t!e appearance of legitimac" to t!e
closing# !ic! provides su&stantial assistance to t!e closing%
In3unctive relief not granted !er !ere (@= !as not demonstrated t!at t!eres a
reasona&le li$eli!ood of future illegal conduct%
In :e =arter (1CB1)
Rule 12$7e97197iii94(@= man" den"# temporar" or permanentl"# t!e privilege of
appearing or practicing &efore it to an" person found to !ave illfull" violated or aided
and a&etted t!e violation of federal securities las# rules# or regulations%
7 la"er must ma$e all efforts it!in reason to persuade !is client to avoid or terminate
proposed illegal action% (uc! efforts could include# !ere appropriate# notification to t!e
&oard of directors of a corporate client%
Ia"er oes a dut" to t!e entit"# not t!e management or an" individual of t!e entit"%
=ounseling accurate disclosure is sufficient initiall"; t!en la"er must ta$e furt!er
affirmative steps and prompt action (ma" resign# or approac! &oard of directors# &ut need
not report out)%
(ection 107 of (ar&anes4;6le" 7ct (5a& 12)
22
:e+uires la"ers t!e report evidence of material violation of securities las or &reac! of
fiduciar" dut" or similar violation to issuers c!ief legal offer and8or =@;% =!ief legal
officer t!an !as a dut" to investigate% (5a& p% 2/1)
If t!eres no appropriate response# la"er must report evidence to t!e audit committee#
anot!er committee of independent directors# or to t!e full &oard of directors%
(@= doesnt re+uire a nois" it!draal an"more% (p% AA0)% (5a&# p% 2/2)
:emem&er: (;S onl" applies to issuers%
Model :ules of ,rofessional =onduct
:ule 1%A% =onfidentialit" of Information4Ia"er ma" reveal information to
prevent/rectify substantial in5ury to financial interest or propert" of anot!er if
reasonably certain to !ave resulted from clients commission of a crime or fraud of
!ic! client !as used la"ers services%
:ule 1%11% ;rganiGation 7s =lient% (p% AA1)
Ia"er s!all proceed as reasona&l" necessar" in t!e &est interest or t!e organiGation%
2nless not in &est interest of organiGation# s!all refer matter to !ig!er aut!orit" in t!e
organiGation# including t!e !ig!est aut!orit" t!at can act on &e!avior of t!e organiGation%
If t!eres a failure to act# or la"er &elieves violation is reasona&l" certain to result in
su&stantial in3ur" to corporation# t!e la"er ma" reveal information relating to t!e
representation !et!er or not :ule 1%A permits suc! disclosure# &ut onl" to t!e e6tent
necessar" to prevent su&stantial !arm%
21