Securities Regulation

Margaret Bancroft
(Fall 2010)
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############################################################################################################3
Class 3: The (aiting Perio') The Post%*ffecti"e Perio'########################11
Class +,The Registration Process: Section - an' Acceleration)
Principles of .isclosure###############################################################################1/
Class 0,.isclosure Philosoph1#################################################################1-
Class /,Materialit1###################################################################################19
Class 2,(hat is a Securit13#####################################################################$$
Class -,Pri"ate Place4ent *5e4ption####################################################$+
Class 9,Regulation . 6Rules 07+8 0708 07/9############################################$/
Class 17,Regulation S###############################################################################$9
Class 11:Class 13,Resales of Restricte' Securities################################31
Class 1$,The Role of the Un'er;riter,Section 11 an' Section 1$6a96$9
<iailit1########################################################################################################3+
Class 1+,Responsiilit1 of <a;1ers########################################################32
1
Class 1: The Role of the Securities Act of 1933: Making the Capital Markets
in the US Safe for Pulic !n"estors#
=oals of 1933 Act: Investors need for information; consumer protection were tere is no real
relationsip wit compan!" spur investment were tere is ris#" economic efficienc!$
%&e 1'(( )ct is a*out stri#ing a *alance *etween providing access to capital and
protecting pu*lic investors$
.ra;acks of Partnerships: cannot *e a passive investor; capital witdraw wen partner leaves;
no limited lia*ilit!$ +,ee andout-
Corporate Structure: ,uited for *usinesses tat need to raise great amounts of capital from
sources outside of management$ .ont re/uire sareolders #now eac oter" permits investment
witout ris# of personal lia*ilit!" provides stead! *ase of capital tat cannot *e witdrawn$
%&e magnificence of corporations 0 te most !ou can lose is te mone! !ou ave
invested$
4 Major ideas of the 1933 act/ways it controls
1. Section 5 of the 1933 Act mandates disclosure.
2. Section 5 prevents conditioning/priming of the market outside of disclosures
3. 11 1-5 sta!lishes a statutor" #a" for investors to recover
$. %ot ever" offering has to !e registered &'emptions under $.2 for e'ample(
The $770 Pulic &ffering Refor4s i'entif1 four categories of issuers#
1$ >on%reporting !ssuers: companies tat are not re/uired to file under te 12cange
)ct (suc as issuers going pu*lic in an I34)$
2# Unseasone' reporting issuers: 5ompanies tat are re/uired to file 12cange )ct
reports" *ut not eligi*le for Form ,%($
($ Seasone' Reporting issuers: 6eporting companies tat are eligi*le for Form ,%(
(more tan one !ear since going pu*lic and a 789 million pu*lic float)$
:$ (ell%kno;n Seasone' Reporting !ssuers (;<,Is): ,easoned reporting companies
tat ave eiter (a) 7800 million worldwide pu*lic float or (*) if issuing non%converti*le
de*t" 71 *illion in de*t issues in te last tree !ears$
2
Class $: Pre%&ffering Perio' in a Pulic &ffering an' Con'itioning the
Market
Three Perio's: 1) 3re%filing (== 9(a)" (c))" 2) ;aiting (== 9(a)" (*)(1)" () 3ost%effective (= 9(*))$
1933 Act
= 9(a) >nless a registration statement is in effect as to a securit!" it is unlawful to:
o 1) sell a security troug a prospectus or oterwise troug transportation or
communication
o 2) carry a security for te purpose of a sale or for deliver! after sale troug mail or
interstate commerce
= 9(c) Unlawful to offer to sell or offer to buy troug te use of an! prospectus or
otherwise an! securit! troug transportation or communication" unless te registration
statement as *een filed as to suc securit!" or wile te registration statement is te su*?ect
of a refusal order or stop order$
FI@IAB 1ffective
Prefiling perio'
)fter te compan! is Cin
registration"D *ut *efore te
registration statement is filed$
(aiting Perio'
)fter te registration
statement is filed" *ut *efore it
*ecomes effective$
Posteffecti"e perio'
)fter te registration statement
*ecomes effective" until te
distri*ution ends and te issuer
is no longer Cin registrationD
= 9(a)(1) E no CsalesD
= 9(a)(2) E no CdeliveriesD
= 9 (*)(1) E no CprospectusD unless complies wit = 10
=9(*)(2) E no deliver!" unless
accompanied *! =10(a)
prospectus
= 9(c) E no CoffersD
(
.efinitions:
= 2(a)(10) ProspectusFan! prospectus" notice" circular" advertisement" letter" or
communication" written or *! radio or television" wic offers an! securit! for sale or
confirms te sale of an! securit!; *5cept that (see =2 (a)(10)$
= 2(a)(()
o &e term sale or sell sall include ever! contract of sale or disposition of a
securit! or interest in a securit! for value
o &ffer to SellF (*road definition) ever! attempt or offer to dispose of" or solicitation
of an offer to *u!" a securit! or interest in te securit!" or value$
.oes not include preliminar! negotiations or agreements *etween an issuer
and an! underwriter or among underwriters wo are to *e in privit! of
contract wit an issuer$
&is e2ception is limited to underwriters and terefore does not
cover dealers $
,pecial situations (p$ 92):
) securit! given as a bonus counts as part of te offerGsale$
)n underl!ing securit! does not ave to *e registered originall!
wen te conversion or e2ercise cannot occur immediatel!" *ut
rater can onl! ta#e place at some point in te future (convertible
security or option)$
%;<,Is: &e reason for loosening tings up for ;<,Is is tat all of te information is availa*le
and *eing consumed instantaneousl! *! te mar#et" terefore te! reall! cant do muc to
condition te mar#et$
% 5apital 3 prospectus vs p prospectus: 3 is part of te registration statement" p is a*out
an!ting else under 2(a)(10)
:
S*C Rules
Rule 130 $ >otice of Propose' Registere' &fferings +5an *e used *! issuer or underwriter-
o Aotice will not *e deemed an offer if notice:
1) includes a statement tat it does not constitute an offer; and
2) notice includes no more tan te following: 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) weter directed to particular
class; viii) (note oter specifics a*out oter t!pes of offerings)
E&E Rule 135: om!any "nnouncements#
-)ule 135 permits the issuer to announce its intention to make a pu!lic
offering !" stating &1( the amount and t"pe of securit" to !e offered* and &2(
the timing* manner* and purpose of the offering. +he announcement must
state that the offering #ill !" prospectus !ut cannot identif" prospective
under#riters or the e'pected offering price.
E&E $ummary of Rule 135: offerin% announcements#
-allo#s notice of pu!lic offering &e'empted from definition of offer(
-can onl" contain limited information &issuer* securit"* amount offered* timing*
manner and purpose
-applica!le onl" to issuer, cannot name under#riter or e'pected offering price
Rule 1/3# *5e4ption fro4 Section 06c9 of the Act for Certain Co44unications 1 or on
?ehalf of (ell%@no;n Seasone' !ssuers 6(@S!s9
Rule 1/3 F3rovides fle2i*ilit! for well-known seasoned issuers$ &e! ma! ma#e oral or
written offers at an! time$ However" written offers must *ear certain legends" *e retained for
( !ears" and *e filed wit te 5ommission$ &ese written offers meeting tese re/uirements
are called Cfree writing prospectuses$D +,ee ;aiting 3eriod$-
E&E Rule 1&3: '($) ommunications# *!+ 14&,
-+he 2--5 .u!lic /ffering )eforms give a special e'emption to #ell-kno#n
seasoned reporting issuers &01S2s( for offering-related communications
during the pre-filing period. )ule 133 &e'empting such communications from
5&c(* though still treating them as 4offers5 for antifraud purposes(. 6irst*
01S2s ma" make an" 4oral offers5 during registration. Second* 01S2s can
make 40ritten offers5 that !ear a legend &#here to get a prospectus* along
#ith an admonition to read it( and are filed #ith the S7 8 that is* #hen the
#ritten offer meets the criteria for a 4free #riting prospectus5 &60.(.
-2n effect* the S7 has decided that 01S2s &#hose securities are assumed to
trade in informationall" efficient markets( are unlikel" to !e a!le to condition
the market #ith prefiling disclosures. %onetheless* prefiling communications
!" 01S2s remain su!9ect to the prohi!itions against selective disclosures
under )eg 6:.
E&E Rule 1&3 $ummary: -ree writin% !ros!ectus#
-permits #ritten communications* if the" contain legend &#here to get a cop"
of the prospectus and instructions to read it( and are filed #ith S7 after filing
)S
9
-availa!le onl" to 01S2s in pre-filing period, not availa!le to under#riters
&;0s( or other participants.
Rule 1/3A# *5e4ption fro4 Section 06c9 of the Act for Certain Co44unications Ma'e 1
or on ?ehalf of !ssuers More than 37 .a1s efore a Registration State4ent is Aile'#
Rule 1/3A F)n! communication made *! or on *ealf of an issuer more tan 30 days prior
to te filing of a registration statement will not *e deemed to *e an offer if tat
communication does not refer to te offering of securities$ &e issuer must" owever" ta#e
reasonable steps to control furter distri*ution or pu*lication of te communication witin
(0 da!s *efore a filing$
E&E Rule 1&3" .rere%istration ommunications#
+he 2--5 .u!lic /ffering )eforms create a !right-line starting point for #hen
an issuer is 4in registration5 8 and thus #hen 4offers5 are prohi!ited.
7ommunications !" issuers and those acting on their !ehalf &other than
prospective under#riters or dealers( are permitted #hen made more than 3-
da"s !efore the registration statement is filed* provided the proposed offering
is not mentioned. )ule 133A &e'cluding such communications from the
definition of 4offer5(. +he issuer must take reasona!le steps to ensure these
preregistration communications are not further distri!uted or pu!lished #ithin
the 3- da"s !efore filing.
E&E Rule 1&3" $ummary: .rere%istration ommunications#
-permits communications 3-< da"s !efore filing the )S, 7A%%/+ reference
offering.
-creates safe har!ors for issuers* =;+ %/+ under#riters or other participants.
Rule 1/-# *5e4ption Aro4 Sections $6a96179 an' 06c9 of the Act for Certain
Co44unications of Regularl1 Release' Aactual ?usiness !nfor4ation an' Aor;ar'%
<ooking State4ents#
Rule 1/- F3ermits reporting companies under 12cange )ct (and certain oters) to
continue to communicate regularl! released factual business and forward-looking
information8 notwitstanding te t!pe of recipient$ +,ee rule for specific factors$-
E&E Rule 1&/ Re%ularly Released )nformation#
)ssuers that are already re!ortin% com!anies can continue to release
factual 0usiness information and forward1loo2in% information *-3),
a0out the com!any4s o!erations and finances 5 includin% to in6estors+
Rule 1&/ *no information a0out offerin%s,+
E&E $ummary Rule 1&/: re%ular communications *0y re!ortin% issuers,
-.ermits factual information and S7-filed 6>2* provided timing* manner* and
form are similar to past releases &e'cluded from definition of offer(? @AA %/+
reference offering
-applies to domestic reporting issuers &and seasoned reporting foreign
issuers(* !ut not under#riters or other participants.
)ule 13B Allo#s dividend information under factual !usiness information
&)ule 139 does not(
I
Rule 1/9 F3ermits non-reporting issuers to continue to communicate factual business
information regularl! released to persons oter tan in teir capacity as investors or
potential investors in te securities$
o Aote: 1I()" 1IJ" 1I' provide tat communications will not constitute offers$
However" 6ule 1(9 provides an e2emption from ,ection 9(c) (*ut are noneteless
offers for oter purposes of te )ct)$
E&E Rule 1&9 Re%ularly Released )nformation#
-All issuers can continue to release factual !usiness information to their
customers* suppliers* and other non-investors.
E&E Rule 1&9 $ummary Re%ular ommunications# *0y new
issuers/non1re!ortin% issuers,
-.ermits regularl" released factual information* !ut not for#ard-looking
information &e'cluded from definition of 4offer(, @AA %/+ reference offering,
must !e intended /%>A for non-investors
-Applies to non-reporting issuers* !ut not under#riters or other participants
-%/ :2C2:%: 2%6/)@A+2/% A>>/0: under )ule 139 for ne#
issuers/non-reporting issuers.
8
Release >o 3-++ 619029 3u*lication of Information 3rior to or after te 1ffective .ate of a
6egistration ,tatement
o Ma! not issue a public sales campaign prior to te filing of te registration
statement$
o 12ample 1: >nderwriter arranging mining pu*lic financing distri*utes *rocure
descri*ing in Cglowing generalitiesD te future possi*ilities for use of specific
mineral" *ut made no reference to an! issuer or securit!$ It was Cdesigned to awa#en
interest wic later would *e focused on te specific financing$D Kiolation of
,ection 9$
o 12ample :: 3rior to filing" underwriter incorporated financial information from
issuer into a *rocure and widel! distri*uted it" and te current position was muc
less favora*le tan suggested *! te *rocure$ Kiolation of ,ection 9$
o 12ample I: In )ugust" 3resident accepted to give speec in Lanuar!$ In Lanuar!"
pu*lic financing *! te compan! was autoriMed$ Here" its clear tat sceduling of
te speec ad not *een arranged in contemplation of a pu*lic offering; tus" no
o*?ection was raised$
o 12ample 8: (p$ :0) +&e opposite result was reaced for a similar speec$-
!n re Carl M# <oe8 Rhoa'es B Co# 6S*C 19099
o Offer is defined broadly is it not limited to communications wic constitute an offer
in te common law contract sense; te! include an! document wic is designed to
procure orders for a securit!$
o Publicity prior to filing must *e presumed to set in motion or *e a part of te
distri*ution process and terefore involves an offer to sell$
o In tis case: emanated from underwriters" troug interstate commerce" and Cwas of a
caracter calculated" *! arousing and stimulating investor and dealer interestD tat
constituted part of a selling effort$
Release >o# 01-7 FBuides for 6elease of Info *! Issuers ;ose ,ecurities )re in
6egistration
o (&ere are conflicting duties for pu*licl! eld companies: informing securit!
olders" and release of securit! tat migt fall under 6elease Ao$ (J::)
o Issuers and teir reps sould not 1) initiate pu*licit! wen in registration" *ut 2)
sould neverteless respond to legitimate in/uiries for factual information a*out
te compan!s financial condition and *usiness operations$
o &e commission as a matter of polic! encourages te flow of factual information
to sareolders and te investing pu*lic$
Release >o# 2-0/ F>se of 1lectronic Media
o ,ection 9 includes info on an issuers we*site" as well as information on a (
rd

part! we*site to wic te issuer as esta*lised a !perlin#$
o &o ensure compliance" issuer sould carefull! review we*site and an!
information on (
rd
part! we*sites to wic it !perlin#s$
J
o ) non%reporting offeror tat as esta*lised a istor! of ordinar! course of
*usiness communications troug its we*site sould *e a*le to continue to
provide *usiness and financial information on its site$
'
Su44ar1 Chart (p$ 89)
T1pe of !ssuer Pre%Ailing Perio' (aiting Perio' Post%*ffecti"e Perio'
>on%
Reporting
Per4itte':
3reliminar! negotiations
and agreements wit
underwriters$ = 2(a)(()
5ommunications pursuant
to 6ule 1(9 (Aotice)
5ommunications more tan
(0 da!s in advance tat do
not reference te offering
(6ule 1I())
6egularl! 6eleased Factual
Information (6ule 1I')
Per4itte':
4ral 4ffers
3reliminar! negotiations and
agreements wit underwriters$
= 2(a)(()
5ommunications pursuant to
6ule 1(: (or = 2(a)(10(*))$
= 10 3rospectuses: 1)
preliminar! (= 10(*) and 6ule
:(0)" 2) summar! (= 10(*) and
6ule :(1)" () free%writing (=
10(*) and 6ules 1I: and :((;
must *e accompanied or
preceded *! a prospectus$)
Per4itte':
4ral offers
,ales
5ommunications pursuant to
6ule 1(:
= 10 prospectuses (no longer
including preliminar!
prospectus)
Free writing (= 2(a)(10)(a)"
must *e accompanied or
preceded *! a final
prospectus)
Unseasone' ,ame as non%reporting plus:
6egularl! released forward
loo#ing information (6ule
1IJ)
,ame as non%reporting" e2cept:
12cange )ct 6ule 19c2%J
compliance less demanding
,ame as non%reporting" e2cept:
4nl! participating dealers
are non%e2empt under = :(()
and 6ule 18:$
12cange )ct 6ule 19c2%J
compliance less demanding
Seasone' ,ame as unseasoned ,ame as non%reporting and
>nseasoned" e2cept:
Free writing prospectuses not
need *e accompanied or
preceded *! preliminar!
prospectus$ (6ule :(()
,ame as unseasoned" plus:
Free writing prospectus
permitted; need not *e
accompanied or preceded *!
final prospectus (6ule :(()$
(Aote tis is in addition to
free writing under = 2(a)(10)
(a)$)
(ell%@no;n
Seasone'
,ame as unseasoned" plus:
4ral offers at an! time
(6ule 1I()
Free writing prospectuses at
an! time; need not *e
accompanied or preceded *!
an! oter prospectus (6ule
1I()
Aot )pplica*le ,ame as ,easoned
10
Class 3: The (aiting Perio') The Post%*ffecti"e Perio'
The (aiting Perio' 6after filing8 ut efore registration state4ent eco4es effecti"e9
= 9(a) still proi*its sales/transportation of securities during te waiting period$
= 9(*)(1) is now applica*le also" and doesnt permit te use of a prospectus (offer to sell)
tat does not meet te re/uirements of = 10 (CInformation 6e/uired in 3rospectus)D
(&ere are two #inds of prospectuses" a = 10(a) and a = 10(*)F= 10(*) involves 6ule
:(0" :(()$
&e proi*ition on oral offers is lifted during te waiting period$
o ) prospectus does not compl! wit = 10(a) wen it contains *lan#s were
re/uired information is to *e added$ In te usual case" a = 10(a) prospectus is not
availa*le in te waiting period (certain information is not #nown)$
o ) prospectus tat meets te re/uirements of = 10(*) is availa*le$ 6ules :(0 and
:(1 allows preliminary prospectuses and summary prospectuses$
o 6ule :(( allows a free writing prospectus" *ut must *e accompanied *! a
preliminary prospectus under 6ule :0($
However" seasoned issuers are permitted to use Rule 33 witout regard
to weter te! are accompanied *! an! oter prospectus$
!lectronic preliminary prospectus tat is !perlin#ed to a free writing
prospectus is deemed to accompan! or proceed it$
!lectronic delivery is permissi*le if recipient gives informed consent
(wit a record of consent #ept)$ (p$ I8)
Rule 13+F5ommunications not deemed a prospectus after filing$ @ists man! e2amples"
li#e factual information" indication of general t!pe of *usiness" title of securities" amount
*eing offered" underwriters participating" etc$ 6e/uires a legend$ &ese facts can *e
used to attract investors (p$ 81)$
Rule 1/3F12emption from = 9(c) for 5ertain 5ommunications *! ;ell%<nown
,easoned Issuers
o ;ritten communication is a Cfree writing prospectusD under 6ule :09 and a
prospectus under = 2(a)(10) ;ritten offers must *ear certain legends" *e retained
for ( !ears" and *e filed wit te 5ommission$ +,ee pre%filing period$-
Rule 1/+F3ost%Filing Free ;riting 3rospectuses in 5onnection wit 5ertain 6egistered
4fferings$ CFree writing prospectusD will *e deemed a CprospectusD (10(*)) provided
tat conditions in 6ule :(( are met$
Rule +70FC;ritten co44unicationD includes Cgrapic communicationD (emails"
internet communications" are included" *ut live communications carried in real time to a
real audience are e2cluded$
o .efines Cfree ;riting prospectusD as an! written communication tat
constitutes an offer to sell (*asicall!" an! written material tats not in te
prospectus)$
o (53: p 1: as e2amples$)
Rule +37F)llows Cpreliminar! prospectusD or Cprospectus su*?ect to completionD"
wic includes su*stantiall! all te information" e2cept for certain tings (offering price
and oter matters dependent on issuer t!pe$ I34s must include price range$ 6ule :(((*)
(2)
11
Rule +33FPost%filing Aree (riting Prospectus
%) free ;riting prospectus (F;3) is an! written or grapic communication *! te issuer
or on its *ealf (including we* postings" mass e%mails" *ut not live 3ower3oint
presentations) tat satisfies certain conditions$
%Consistent infor4ation an' legen'$ &e F;3 ma! include information *e!ond tat
found in te prospectus" *ut must not conflict wit information in te registration
statement or an! oter ,15 filings incorporated *! reference$ 6ule :(((c)(1)$
%&e F;3 must also include a legend tat advises te investor to read te preliminar!
prospectus and ow to o*tain a cop!$ 6ule :(((c)(2)$
%Ailing$ &e F;3 must *e filed wit te ,15 (and tus made availa*le on 1.B)6) on
or *efore te da! first used$ 6ule :(((d)$ &ere are e2ceptions for previousl! filed
information" non%final terms" etc$ If not filed" te issuer or offering participant must
retain te F;3 for tree !ears$
%Prospectus Acco4pani4ent: For offerings *! non%reporting and unseasoned issuers"
te F;3 must *e accompanied or preceded *! a preliminar! prospectus$ 6ule :(((*)(2)
(A4&1: I34 M>,& IA5@>.1 36I51 6)AB1)$
%If te F;3 is electronic" te preliminar! prospectus can *e !perlin#ed$
%&e prospectus accompaniment condition is eliminated for seasoned issuers and well%
#nown seasoned issuers (;<,Is)$ 6ule :(((*)(i) (preliminar! prospectus must *e on file
wit ,15)$
%Media companies can disseminate press stories *ased on interviews of te issuer and oter
offering participants witout tem *eing considered a proi*ited CprospectusD$ 6ule 1I:(a)$
%)s long as te pu*liserG*roadcaster is in te media *usiness and H), A4& B11A
54M31A,)&1. *! te issuer or oter offering participants" te media stor! is a free
writing prospectus$ 6ule :(((f) (e2empting media companies from informationGlegend
and filing re/uirements)$
%&e issuer or offering partipants" owever" must file te media stor! (and include a
legend) witin four *usiness da!s of *ecoming aware of it$ 6ule :(((f)(1)" (f)(2)$
(>nless information in stor! as previousl! *een filed; permitting te filing re/uirement
to *e satisfied *! filing te Ctranscript of interviewsD given to te media source$
%Issuer is under no dut! to correct a misstatement in te stor! (caveat)" *ut ma! coose to
include additional information in its filing to correct te stor!$ 6ule :(((f)(2)(ii)$
o )pplies to information disseminated on websites$
o )vaila*le to an! offering participant (including underwriters)$
%A(P an' roa' sho;s: )n! written material used at a road sow" suc as a andout or
3ower3oint presentation" is specificall! treated as a F;3$ 6ule :(((d)(J)$ &e legending and
prospectus%accompaniment conditions appl! to road%sow presentations" toug filing is
generall! not re/uired$ 6ule :(((d)(J) (re/uiring filing of road%sow presentations onl! in e/uit!
offerings *! non%reporting issuers" unless te latest version of te road sow wit management
presentations is posted on te issuers ;e* site)$
%6oad sows posted on te issuers ;e* site are considered Cgrapic communicationsD *ut are
treated as a F;3 if te consistenc!" legending" and prospectus%accompaniment conditions are
met$
%Filing is not re/uired if te online road sow is C*ona fide"D tat is" if it contains presentations *!
te issuers management$
12
%&e ,15 allows non%compliant issuers and offering participants to cure Cimmaterial or
unintentionalD failures to legend or file a F;3$ 6ule 1I:(*)" (c)$ &o /ualif!" te issuer or
offering participant must originall! ave a made a Cgood fait and reasona*le effortD to compl!
wit te legending and filing re/uirements" and must ta#e correction action Cas soon as
practica*leD once te failure is discovered$ 6ule 1I:(d) (also forgiving failures to compl! wit
record retention re/uirements" toug not re/uiring corrective action to do so$
A4&1: te ,15 is unforgiving wen it comes to communications tat are inconsistent wit te
prospectus (or oter ,15 filings) or tat do not compl! wit te prospectus accompaniment
condition$
Rule +/7,.istri*ution of 3reliminar! 3rospectus$ 1ncourages mailing to underwriters
and dealers reasona*l! li#el! to *e e2pected to purcase te securities (not less tan :J
ours prior to mailing confirmations)$ (6elease Ao$ :'IJ) (p$ II)
Sale = 2(a)(()Fever! contract of sale or disposition of a securit! or interest in a securit! for
value$
4rdinar! offers cannot *e made in te waiting period" and offerors cannot condition teir
offers in suc a wa! tat te! cannot *e accepted until te registration statement is
effective (e$g$" conditional offers)$ ,olicitations of interest are te wa! to go$
In Fe Fran#lin" Me!er N Barnett
o Found tat salesmen" despite initiall! inviting indications of interest" accepted
pa!ments for stoc# during te pre%effective period in te form of cec#s and te
proceeds of a sale of oter securities owned *! te customers" and tere*! went
*e!ond te permissi*le scope of te )ct$ In addition" te *usiness card enclosed
wit te preliminar! prospectus and cover letter solicited an offer to *u! and was
terefore a prospectus witin te meaning of = 2(a)(10)$
Aote: tis puses te definition of sale past te meaning of contract law$
6elease Ao$ :'IJ F&e 5ommission as declared its polic! in 6ule :I0 tat it will not
accelerate the effective date of a registration statement unless te preliminar! prospectus
contained in te registration statement is distri*uted to underwriters and dealers wo it is
reasonably anticipated will *e invited to particulate in te distri*ution of te securit! to
*e offered or sold$ 6ule :I0 (condition for acceleration)
To4stone A's: =2(a)(10) e2cepts from te definition of CprospectusD advertisements (t!picall!
made in te financial press using a tom*stone%li#e *orer) tat state from wom a =10 prospectus
ma! *e o*tained and ten do no more tan identif! te securit!" state its price" and name te
underwriters wo will e2ecute te order$
!'entif1ing State4ents: 6ule 1(: allows for e2panded communications$
%&e ,15 ca?oles te issuer to ensure tat preliminar! prospectuses ave *een made availa*le to
all participating underwriters and delaers$ 6ule :I0 (condition for acceleration)$
%&e ,15 re/uires participating underwriters and dealers to furnis copies of preliminar!
prospectuses to teir salespeople" as well as to an! investor wo ma#es a written re/uest for a
cop!$ (1'(: 12cange )ct" 6ule 19c2%J(c)" (e))
1(
=un%Cu4ping Rules 6(aiting Perio'9 Su44ar1
Rule 13+: !'entif1ing State4ent
%permits identif!ing information a*out issuer (e2empted from definition of CprospectusD
%(a) permitted: issuer info" info a*out securit!" issuers *usiness" price of securit!" use of
proceeds" identit! of sender" names of >;s" scedule" and nature of offering
%(*) during waiting period: must include legend and were to o*tain preliminar!
prospectus
%(c) can avoid (*)" if tom*stone ad or accompanied *! preliminar! prospectus
%(d) can see# investor interest" if accompanied *! preliminar! prospectus and includes
statement tat interest is not *inding" *ut full! revoca*le
%availa*le to issuer" >;" or oter participants
Rule 130: &ffering Announce4ent
Rule 1/+: Aree ;riting
%permits Cfree writing prospectusD (F;3) (deemed to satisf! =10(*) if 6ule :(( conditions are
satisfied)
%e2cuses immaterial or unintentional failure to file or legend F;3" if
(1) it was good%fait attempt" (2) filing or legend appens as soon as practica*le after discover!"
(() properl! legended F;3 is resent
%availa*le to issuer" >;" or oter participants
%ineligi*le issuers (6ule :09)
Rule +33: Con'itions
%F;3 can include info not in 6," *ut cannot conflict wit 6, or ,15 filings
%F;3 must include legend (read prospectus" ow to o*tain)
%must accompan! F;3 wit (or lin# to) preliminar!Gfinal prospectus
%non%reporting" unseasoned issuers: if *! issuer (or someone paid *! issuer) or oter
participants
%seasoned issuers" ;<,Is: need not accompan! wit prospectus
%must file wit ,15 (on date of first use or prior)
%issuers must file ,;3 and issuer info (press interview)" oter participants must file F;3
if C*road unrestricted disseminationD
%must retain F;3 for tree !ears" if not filed
Rule 1/-: Regular co44unications 61 reporting issuers9
Rule 1/9: Regular co44unications 6for ne; issuers9
Rule +70:+33: Roa' Sho;s
%treats live or real%time we*cast road sows as oral communications
%33& presentations at sow (deemed Cgrapic communicationsD are su*?ect to F;3 consistenc!
and legending conditions; must *e accompanied *! prospectus
%Filing of 33& or oter andouts at road sows is generall! not re/uired; owever"
%e/uit! offering *! non%reporting issuers: must file 33& unless C*ona fide electronic road
sowD (officers present" similar info as oter road sows) and availa*le online
Rule +33: Press inter"ie;s
%conditions for media%disseminated F;3 originating from issuer or oter participant (suc as
press interview); consistent wit 6," oter ,15 filings; file witin : da!s after issuer *ecomes
1:
aware (filing can *e *! transcript); not su*?ect to prospectus%accompaniment rules and need not
*e legended if no pa!ment was made$
DPost%*ffecti"e Perio' 6after the registration state4ent eco4es effecti"e9
E 069619 continues to appl! during post%effective period (proscri*ing use of an!
prospectus unless it satisfies re/uirements of = 10)$
o Aew e"ception applies: = 2(a)(10)Fcommunication is not deemed a prospectus
wen it is accompanied or proceeded *! an prospectus tat meets te
re/uirements of = 10(a)$
= 0696$9 now applies: securit! ma! not *e delivered to a *u!er unless te *u!er
simultaneousl! received" or as received" a cop! of te final prospectus$
o Rule 12$69 owever provides tat for te purposes of tis section te final
prospectus is deemed" in most instances" to *e delivered wen te registration
statement *ecomes effectiveGfinal version is filed wit ,15$ )llows sending of
written confirmation of sale (access e/uals deliver! model)" and transfer of the
security$
o Rule 123 re/uires providing purcasers eiter final or a prescri*ed form of notice
witin two *usiness da!s of completing te sale tat it was made pursuant to a
registration statement$
Aote: 182 and 18( did awa! wit te need to actuall! deliver final
prospectuses$
Oral offers ma! *e made" since = 9(c) does not appl! during tis period$
#ritten offers ma! *e made *! means of a final prospectus (= 9(*)(1))$
Other offers ma! continue to *e made under e2ception (*) to = 2(a)(10) (=10 prospectus
alread! given)
,easoned (including well%#nown seasoned) issuers ma! continue to use free writing
prospectuses tat are not accompanied or preceded *! an! oter prospectus$
$ombstone advertisements (6ule 1(:)
#ritten confirmation of sale (6ule 182)$
Rule 109F*u!er must ave all relevant information at time of purcase (oterwise" tere
can *e lia*ilit! under = 12(a)(2))$
,15 v$ Manor Aursing 5enters (2d 5ir$ 1'82)
Implicit in te statutor! provision tat te prospectus contain certain information is te
re/uirement tat suc information *e true and correct$ ) prospectus does not meet te
re/uirements of = 10(a)" terefore" if information re/uired to *e disclosed is materiall!
false or misleading$
Aote tat oter circuits ave criticiMed tis reasoning" and *elieve tis sould *e covered
under antifraud provisions instead$
;en events occur after te effectiveness of a registration statement tat ma#e te final
prospectus materiall! false or misleading" te prospectus must *e corrected (*ecause of antifraud
provisions$) &e issuer ma! 1) file a post-effective amendment to te registration statement" or
2) amend or supplement te final prospectus$
19
Class +,The Registration Process: Section - an' Acceleration) Principles
of .isclosure
Sections /8 28 - contain statutor! sceme for registration process$
o = IF.eals wit filing and fees
o = 8F;at a registration statement must contain
o = JF1ffectiveness of registration statement
&wo recent canges:
o 1) 5ommission dela!s effectiveness in order to review and comment$
o 2) 6egistration statements of #%&'s *ecome effective immediately$
Re"ie; an' Co44ent proce'ureFregistration statements of first time issuers are
given a toroug review" and statements filed *! second and later time issuers are
reviewed selectivel!$
$7 'a1 automatic effectiveness under =J(a) can *e avoided (and almost alwa!s is)
o Rule +23F.ela!ing )mendments$ Issuer ma! include a paragrap on te cover
of te registration statement tat effects its continuing amendment$ Must
specificall! state it will *ecome effective upon te filing of a furter amendment
or on a date suc as te ,15 ma! determine$
Rule +/7F(3reliminar! 3rospectus)F,15 uses acceleration to encourage distri*ution of
te preliminar! prospectus to eac underwriter and dealer wo it is reasona*l! anticipated
will *e invited to participate in te distri*ution of te securit!" a reasona*le time in
advance of te anticipated effective date of te registration statement" of as man! copies
of te proposed form of preliminar! prospectus permitted *! 6ule :(0 as appears to *e
reasona*le to secure ade/uate distri*ution of te preliminar! prospectus$
Rule +/1Fallows issuer and underwriter to re/uest acceleration" specif!ing te da! and
time te! desire te registration statement to *ecome effective$ @ists oter factors to
consider in acceleration re/uests (i$e$" weter prospectus is concise" reada*le" inade/uate
preliminar! prospectus" is te ,15 currentl! ma#ing an investigation against issuer" etc$)
o ,ome oter reasons ,15 migt not declare registration statement effective:
If certain parts arent in plain 1nglis (6ule :21(d); if preliminar!
prospectus was materiall! inaccurate and tere was no recirculation" if
under current investigation" etc$)
,15 uses threat of acceleration denial to force actions not re/uired *! te statute (e$g$"
distri*ution of preliminar! prospectuses)$
o @as Kegas Hawaiian (p$ J:)
= 9(c) sa!s tat if te ,15 as *rougt a proceeding under = J" (weter a
stop order was necessar!) tat stops ever!ting in its trac#s$ Here" te ,15
started earing under = J(e)" and ten relied on = 9(c) and wanted issuer to
cease and desist offering tese securities$
Aote: = J(*) as a 10 da! limitation$ = J(d) can *e issued an!time (was
issued after registration was declared effective in >niversal 5amera)$ 5an
also e2amine witout issuing a stop under = J(e)$
1I
Rule +10F allows for Cshelf registration$D (p$ '1) O3ermits shelf registrations of
;<,Is to *ecome effective immediatel!$
E-# Taking *ffect of Registration State4ents an' A4en'4ents Thereto
=J(a) 12cept as ereinafter provided" te effective date of a registration statement sall *e te
twentiet da! after te filing tereof or suc earlier date as te 5ommission ma! determineP If
an! amendment to an! suc statement is filed prior to te effective date of suc statement" te
registration statement sall *e deemed to ave *een filed wen suc amendment was filed$
=J(*) ,15 61KI1;: )fter te filing" te ,15 as 10 da!s to review te registration statement
for incomplete or misleading disclosure and give notice of its intention to issue a refusal order
tat #eeps te registration statement from *ecoming effective$
=J(c)
=J(d) )fter te registration statement is effective" te ,15 can issue a stop order if it notices a
defect in disclosure$ &e 5ommission" ma! after notice *! personal service or te sending of
confirmed telegrapic notice" and after an opportunit! for earingP (,@4;)
=J(e) Before or after effectiveness" &e 5ommission is ere*! empowered to ma#e an
e2amination in an! case in order to determine weter a stop order sould issue under su*section
1FF15&: =9(c)$ Ao offering activities are permitted wen a refusal or stop order is outstanding
or te ,15 is investigating a registration statement$
Because of review and comment procedure" refusal and stop order rarel! are used to
prevent effectiveness of registration$
Regulation S%@Fserves as ,15s general repositor! of disclosure re/uirements$
o !te4 01$6h9Fre/uires disclosure of indemnification for acceleration
(,15 uses acceleration as a tool against indemnification provisions)$
>niversal 5amera F+Involved a dilution arrangement$- ,tatement did not disclose
prospective investors relative interest in te assets" earnings" or voting power of te
compan!; did not give a clear description of proposed *usiness activities$ &e .ilution
arrangement was not plainl! evident" and onl! an e2perienced securit! anal!st could
understand it; disclosure sould *e plainly understandable to te ordinar! investor$ ,ee
,%< Item 90I$
A"oi'ing .ela1s in Processing Registration State4ents: ,ecurities laws aim to o*tain
full and fair disclosure$ ,ecurities laws view te prospectus as a lia*ilit! document and
not as a selling document$ &e unfavora*le data must *e disclosed as well as te
favora*le$
18
Class /,.isclosure Philosoph0
Rule +7- ()dditional Information)FIn addition to information e"pressly re(uired" tere sall *e
added suc further material information" as ma! *e necessar! to ma#e te re/uired statements"
in ligt of circumstances under wic te! are made" not misleading$
Selecte' S%@ .isclosure !te4s:
Item 10(*)$ 3olic! on 3ro?ections (mgmt as ave reasona*le *asis for pro?ections)
Item 11(e)$ )udited Financial ,tatements
Item 201(c)$ ,tatement on .ividends
Item 202$ .escription of ,ecurities$
Item (0($ Managements .iscussionG)nal!sis of Financial 5ondition
Item (09$ Quantitative and Qualitative .isclosures a*out Mar#et 6is#$
Item :01$ .irectors and 4fficers$ (5overs identification of directors" famil!
relationsips" involvement in certain legal proceedings witin te past 9 !ears (e2cluding
traffic violations and oter minor offenses)" or an! violation of Federal or ,tate securities
laws)
Item :02$ 12ecutive 5ompensation
Item :0($ ,ecurit! 4wnersip of 5ertain Beneficial 4wners and Management$
Item :0:$ &ransactions ;it 6elated 3erson" 3romoters" and 5ertain 5ontrol 3ersons
(5ertain 6elationsips wit 4fficers and Business .irectors)
Item :09$ 5ompliance wit ,ection 1I(a) of te 12cange )ct
Item :0I$ 5ode of 1tics$ (.isclose weter te registrant as a code of etics tat
applies to e2ecutive offers" and if it doesnt" e2plain w!)
Item 901$ (*(1)" *(2)" *(()" *(()(9))$ 5over page info: Aame" )mount of ,ecurities"
4ffering 3rice" 5ross%6eference to ris# factors
Item 902$ &a*le of 5ontents$ .eliver! 4*ligations
Item 90($ 3rospectus ,ummar!$ 6is# Factors$
Item 90:$ >se of 3roceeds$
Item 909$ .etermination of 4ffering 3rice$
Item 90I$ .ilution$
Item 912()$ Indemnification$ (6e/uest for acceleration of effective date or filing of
registration statement *ecoming effective upon filing E disclose indemnification and
su*mit to a court weter suc indemnification is against pu*lic polic! as e2pressed in
te )ct and will *e governed *! te final ad?udication of suc issue)
1J
Class 1,Materialit0
Benerall!:
C) misrepresentation or omission is material if tere is a substantial likelihood tat te
disclosure of te omitted fact would ave *een viewed *! te reasonable investor as
aving significantly altered te total mi" of available information$ Basic v. Levinson$
CTotal Mi5 TestD: )n omission is not material (even if te information is important to
investors) if reasona*le investors alread! #now or can infer te omitted information from
oter disclosure$ () su*?ective test tat relies on a gut reaction from te 5ourts$)
%C&e /uestion of materialit! ma! *e decided as a matter of law if te alleged omission is Cso
o*viousl! unimportant to a reasona*le investor tat reasona*le minds could not differ on te
/uestions of its importance$D
)n alleged misrepresentation can *e immaterial for te following reasons:
o 1) &e misrepresentation is common knowledge tat a reasona*le investor can *e
presumed to understand$ Gateway
o 2) &e misrepresentation is insignificant data tat" in te total mi2 of
information" would not matter to te reasona*le investor$
o () )ague and obvious hyperbole tat no reasona*le investor would rel! on tem$
Gateway$
o :) If accompanied *! sufficient cautionary statements (te Cbespeaks caution
doctrineD)$ >nder te C*espea#s caution doctrineD" cautionar! disclosure
(*e!ond *oilerplate warnings) can negate te materialit! of" or reliance on" an
undul! optimistic prediction$
Must *e su*stantive and tailored to te specific pro?ection" estimate" or
opinion$ Numerex
Aote: E $2AFas a safe harbor for forward looking statements tat is
accompanied *! cautionar! statements" immaterial" or if tere is a lac# of
#nowledge tat statement was false (see *elow)$
)lso remem*er Rule +7-FIn addition to te info re/uired in a registration statement"
tere sall *e added furter material information to ma#e te re/uired statements" in te
ligt of te circumstances under wic te! are made" not misleading$
Securities Act E$2A: !44uniFes pulic co4panies an' their e5ecuti"es fro4 ci"il
liailit1 6ut not a'4inistrati"e liailit19 for for;ar'%looking state4ents that co4pl1
;ith the ActGs safe haror pro"isions#
&e 3,@6) contains tree separate safe ar*ors$ ,atisf!ing an! one of tem precludes a
sareolder lawsuit *ased on written forward%loo#ing statements tat later turn out wrong$
1) >o actual kno;le'ge (te plaintiff fails to prove te defendant ad actual #nowledge
tat te forward%loo#ing statement was false$ &is safe ar*or applies to oral or written
forward%loo#ing statements and immuniMes rec#less or negligent forward%loo#ing statements
from private lia*ilit!$
1'
29 !44aterialit1$ &e forward%loo#ing statement was immaterial$ &is safe ar*or
focuses attention on weter te forward%loo#ing statement is too CsoftD to *e material and
opens te door to te ?udicial C*espea#s cautionD doctrine as a separate *asis for immunit!$
(9 Cautionar1 state4ents$ &e forward%loo#ing statement Cis identified as a forward%
loo#ing statement and is accompanied *! meaningful cautionar! statements identif!ing
important factors tat could cause actual results to differ materiall! from tose pro?ected in
te forward loo#ing statement$
%Puffing state4ents generall! lac# materialit! *ecause te mar#et price of a sare is not inflated
*! vague statements predicting growt$ (3arnes)
Parnes v* +ateway
o Some matters are such common knowledge that a reasonable investor can be
presumed to understand them$
o 4verstatement of assets *! 7I$J million immaterial (represented onl! 2R of
Batewa!s total assets)$ (Alleged misrepresentations may also present or conceal
such insignificant data that in the total mix of information it simply would not
matter to a reasonable investor$)
o C3ro?ection of significant growtD is immaterial puffing (vague and o*vious
!per*ole)Fcourts dont want to deter companies from ma#ing pro?ections$
o Qualit! and desira*ilit! of products was not misrepresented in ligt of cautionar!
statements$
'n re ,umere" -orporation &ecurities .itigation
o C,u*stantial increaseD in profit is a fair and accurate summar!" *ecause profits
ave increased su*stantiall!$
o )n! reasona*l! prudent investor reading tis prospectus would recogniMe te
ris#s inerent in a compan! tat depends upon one purcase for almost alf of its
salesFits mentioned in unam*iguous" specific terms in prominent displa! on te
prospectus$
o -autionary language" if sufficient" can negate an! allegedl! misleading
representations concerning plans to develop sales worldwide$ (Bespea#s 5aution)
o Materialit! of e"ecutive personnel changes must *e gauged *! *usiness
circumstances of eac case$ Here" resignation of e2ecutive officer is not material
*ecause e ad onl! *een wit compan! for a !ear" ad not entered into an
emplo!ment agreement" and did not *ring and particularl! valua*le tecnical or
*usiness e2pertise to te compan!
o Factors to *e considered regarding materialit! of e2ecutive personnel canges
include time" weter or not tere was an emplo!ment agreement" weter te
person as an! valua*le e2pertise or tecnical #nowledge" and mar#et reaction$
+reenapple v* /etroit !dison
o &e intended audience will *e e2tremel! *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 tat its misleading *ecause te negative
information is incompreensi*le$
0isher v* Ross +Failed to disclose some directors were involved in a prior *an#ruptc!)
6ules (6eg ,%< Item :01) said !ou ad to release *an#ruptc! info if it
appened witin 9 !ears$ .s claimed tat since te act didnt appen
witin te last 9" it was terefore immaterial$
20
Aote: )ltoug not witin te previous 9 !ears" it would *e material if
tere was evidence of wrongdoing *! tem in te previous *an#ruptcies"
or if it was related to tis compan!s financial condition or prospects at
te time of offering$
)lso" remem*er 6ule :0J sa!s to include an!ting else$
Item :01: Includes involvement in certain legal proceedings tat
occurred during te past five !ears and are material to an evaluation of
te a*ilit! of an! director$ Includes conviction of a criminal proceeding"
*ut e2cludes traffic violations and oter minor offenses$ &rading
activitiesGviolations are also included$
Ross v* #arner
o B&1 as *een carged wit ma#ing improper #ic#*ac#s$ &is report made partial
disclosure of improper acts" *ut te wole stor! was not told until it got reported
in te AS &imes and ;all ,treet ?ournal" at wic point te sare of stoc#
plummeted$
o It is material to integrit! of management" and so te ?udge loo#s at weter
plaintiffs sowed damages$ He doesnt see tat te mar#et price moved in
response$ ,o" in ligt of te minimal materialit! and te mar#ets failure to react"
.efendants not eld lia*le$ (&rut on te Mar#et .octrine E relies on 1MH)
21
Class 2,(hat is a Securit03
= 2(a) defines securityFan! note" stoc#" *ond" evidence of indebtedness" certificate of interest"
investment contract" an! put" call" option$
) swap (agreement to e2cange cas flows over period of time is not a securit!$
!n"est4ent Contracts
&!- v* #1 2owey (1':I)
CInvestment contractD means a contract3 transaction or scheme were*! a person 1)
invests is mone! in a 2) common enterprise and is () led to e"pect profits solel! from
te :) efforts of te promoter or a third party3 it *eing immaterial weter te sares in
te enterprise are evidenced *! formal certificates or *! nominal interests in te p!sical
assets emplo!ed in te enterprise$
5itrus opportunit! was an investment contract: contri*uted mone! to sare in propert!
managed *! a tird part!; investors lived in distant localities" lac# e2perience and
e/uipment re/uisite to cultivation; individual development would not *e economicall!
feasi*le$
United 2ousing 0oundation v* 0orman (1'89)
1conomic realit!: Form sould *e regarded for su*stance$ &e name given to an
instrument is not necessaril! dispositive as to weter its a securit!
&e stoc# in te low%cost ousing was not a securit!: no rigt to receive
dividends from profits; not negotia*le" cannot *e pledged or !potecated" te! confer no
voting rigts; cannot appreciate in value$ ;at distinguises a securit! transaction is an
investment were one parts wit is mone! in te ope of receiving profits from te
efforts of oters" and not were e purcases a commodit! for personal consumption or
living /uarters for personal use$
&!- v* !dwards (200:)
Investment contracts can ave varia*le or fi2ed returns$
&e fact tat investors ave *argained for a return on teir investment does not mean tat
te return is not also e2pected to come solel! from te efforts of oters$
&!- v* %oscot 'nterplanetary3 'nc* (9
t
5ir$ 1'8:)
C,olel! derived from te efforts of otersD is not to *e applied literall!$ Instead" te
in/uir! is weter Cefforts made *! tose oter tan te investor are undenia*l!
significant ones" tose essential managerial efforts wic affect te failure or success of
te enterprise$
&e p!ramid sceme was an investment contract: promoters retained immediate control
over essential managerial conduct of te enterprise" and te investors realiMation of
profits in ine2trica*l! tied to te success of te promotional sceme$
22
&is does not appl! to franchises werein te promoter e2ercises merel! remote control
over an enterprise and te investor operates largel! unfettered *! promoter mandates$
Aote: court applied vertical commonality ere$
o Kertical commonalit! 0 focuses on communit! of interest of individual investor
and te manager of te enterprise$
o HoriMontal commonalit! 0 Multiple investors ave interrelated interests in a
common sceme; concentrates on te interrelated interest of te various investors
in a particular sceme$
*"i'ence of !n'ete'ness
U& v* 1ones (1'81)
C1vidence of inde*tednessD em*races onl! suc documents as promissor! notes wic on
teir face esta*lis a primary obligation to pa! te olders tereof a sum of mone!$
+)irline tic#ets do not esta*lis a primar! o*ligation to pa! mone!$-
'n re $ucker -orp (1':8)
0ranchise agreements tat provide for te repa!ment of deposits received were
CsecuritiesD under te )ct$
Unless the Conte5t &ther;ise ReHuires
) Ccertificate of depositD issued *! a national *an# is not a securit!" *ecause *an#s are
su*?ect to compreensive regulation designed to protect investors and it is federall!
insured$ 4arine 5ank (1'J2)$
5ourts ave used tis reason in cases tat involve compreensive regulator! scemes$
.andreth $imber v* .andreth (1'J9) (,toc# is so /uintessentiall! a securit! as to foreclose
furter anal!sis (3rofessor @oss)
&ale of all the stock of a compan! does fall under te meaning of securit!$ (&is stoc#
carries te rigt to dividends contingent on profits$)
&e 5ourt pointed out tat te stoc# in te transaction ad *ot te name and all te
traditional indicia of corporate stoc#: 1) dividend rigts" 2) li/uidit! rigts" ()
proportional voting powers" and :) appreciation potential$
&e 5ourt also pointed out tat tere would *e line%drawing issues in ac/uisitions of
less tan 100 percent of a corporations stoc# or wen a purcaser arranged to ave te
seller sta! on to manage te *usiness" as ad appened in Landreth$
Reves v* !rnst 6 7oung (1''0)
0amily resemblance test : &e Cfamil! resem*lanceD test *egins wit a re*utta*le
presumption tat ever! note is a Csecurit!D unless it falls into a categor! of instruments
tat are not securities$ ) CnoteD is presumed to *e a Csecurit!"D and tat presumption ma!
*e re*utted onl! *! a sowing tat te note *ears a strong resem*lance (in terms of te :
factors *elow) to one of te enumerated categories of instruments (suc as note in
consumer financing" note secured *! a mortgage" sorter%term note securit! *! lien on
small *usinessGaccounts receiva*le" etc$)
For new t!pes of CnoteD transactions" !eves set out four factors to determine te Cfamil!D
into wic te note fits$
2(
o 1) Moti"ation of seller an' u1er# If te issuer of te note uses te proceeds for
general *usiness purposes" it is more li#el! a securit!$ If te issuer gives te note
to *u! consumer goods or for CcommercialD purposes" it is li#el! not a securit!$
o 2) Plan of 'istriution$ If te notes are widel! offered and traded" it is more
li#el! a securit!$ If te note is given in a face%to Eface negation to a limited
group of sopisticated investors" it is more li#el! not a securit!$
o () Reasonale e5pectations of in"esting pulic# If investors generall! view te
t!pe of notes to *e investments" it is more li#el! a securit!$
o :) &ther factors re'uce risk# If te note is not collateraliMed and not su*?ect to
nonsecurities regulation" it is more li#el! a securit!$ If te note is secured or
oterwise regulated" it is more li#el! not a securit!$
&e 5o%4p notes ere are securities: te! were soled to raise capital for general *usiness
operations" and purcasers *ougt tem in order to earn a profit in te form of interest$
Class -,Pri"ate Place4ent *5e4ption
= (F12empted ,ecurities:
((a)(2)Fgovernment securities" securities guaranteed *! *an#s
((a)(:)Fsecurities *! religious" educational" or carita*le organiMations$
((a)(J)FInsuranceGendowment polic!" or annuit! contract issued *! a corporation and
su*?ect to supervision of te insurance commissioner" *an# commissioner" or an! oter
agenc!$ +&is e2empts guarantees as well$-
((a)(')Fsecurities e2canged *! an issuer wit its e2isting securit! olders +e2empt
transaction-
((a)(11)Fintrastate securities +e2empt transaction-
= :(1)F6egistration re/uirements of = 9 not re/uired for transactions *! any person other tan
an issuer" underwriter" or dealer$
= :(2)F6egistration re/uirements of = 9 not re/uired for transactions *! an issuer not involving
a public offering$
5ourts and te ,15 ave interpreted te =:(2) private placement e"emption to em*od! a
congressional ?udgment tat registration is unnecessar! wen investors on teir own ave
ade/uate sopistication and information to protect temselves$
&e private placement e2emption e2ists in two forms:
1) Statutor1 e5e4ption# &e =:(2) statutor! e2emption completel! e2empts issuers from
all ,ecurities )ct disclosure and regulation re/uirements$
2) Safe Iaror Rule# ) regulator! safe ar*or e2emption (6ule 90I of 6egulation .)
provides clear guidance for issuers" altoug it mandates disclosure to certain investors$
:(2) is a fall*ac# wen 6ule 90I fails to *e a safe ar*or$
&!- v* Ralston Purina
3rivate placement e2emption sould turn on weter te particular class of persons
affected needs the protection of te )ct$ &e 5ourt eld tat te =:(2) e2emption
applies wen offerees and investors" regardless of teir num*er" are Ca*le to fend for
temselvesD$ ()n offering involving tose wo can fend for temselves is a transaction
tat does not involve a pu*lic offering$)
,ome emplo!ee offerings ma! *e e2empt (e$g$" one made to e2ecutives wo *ecause of
teir position ave access to te same #ind of information tat te )ct would ma#e
availa*le in a registration statement)$ 4terwise" emplo!ees are mem*ers of te pu*lic$
2:
&ecurities 8ct Release ,o* 99:
3u*licGprivate offering distinction necessitates consideration of all surrounding
circumstances: relationsip *etween offeree and issuer" te nature" scope" siMe" t!pe and
manner of te offering$
o +eneral solicitations (advertising) are inconsistent wit private offerings$
o ,ale to promoters tat initiate te founding te organiMation come witin te
e2emption$
o )ll offerees matter (not ?ust te ones tat *u!)$ (&e person claiming te =:(2)
e2emption must sow tat eac purcaser and offeree (even one wo doesnt
purcase) meets te sliding scale test$ 4terwise" e2emption lost for transaction$
o &i;e of te offering ma! raise /uestions a*out weter tere is a re/uisite
association$
o 3urcasers sould not *e merel! conduits for wider distribution$
o Must consider weter te offering sould *e regarded as part of a larger
offering made (Integration of 4fferings)$
o 3recautions are reselling are effective (i$e$" restrictive legends)" *ut not re/uired$
Relevant 0actors from case law: (from earl! opinion *! ,15 Beneral 5ounsel" p$ 1JI)
Aum*er of offereesGteir relationsip to eac oter and issuer
Aum*er of units offered
,iMe of te offering
Manner of te offering
,opistication of purcasers
6elationsip wit te issuer
)B) 3osition 3aper
0our attri*utes:
o 1) 4fferee Qualification
;ealt (a*ilit! to *ear ris#)" personal relationsip (famil!" friends"
emplo!ment" *usiness$
o 2) )vaila*ilit! of information
(Aeed not *e as e2tensive as info in ,cedule )) Its pro*a*l! ade/uate
to give *asic information covering financial conditions" results of
operations" etc$
o () Manner of offering
4ffering sould *e made troug direct communication$
o :) )*sence of redistri*ution
Hill Sor# v$ )merican
&e court denied a =:(22) e2emption wen sopisticated investors in a francise received
no disclosure document or oter access to information$ &e court said te e2emption
re/uires tat investors (no matter ow sopisticated) ave access to information a*out te
issuer$
5ourt uses te ,15 6elease to find a sale of securities to 1( sopisticated *usinessmen
and a law!er wo *ougt 7I9< of securities$ &e court said its a pu*lic offering" and
tat te! sould *e allowed to get teir mone! *ac#$ &e court ere sa!s te
sopisticated *usinessmen ere needed to ave all te information in order to put teir
sopistication to good use$
29
)fter tis decision comes down" ow can !ou advise anyone tat te! could do a private
placementT (Bancroft sa!s !ou wouldntU)
Aote also: &is was a p!ramid sceme" and te court was tr!ing to get to te rigt result$
)nd proving tat it was a pu*lic offering is easier tan proving fraud for a plaintiff$
DResale Restriction: Investors wo purcase in a private placement cannot resell to un/ualified
investors$ ,uc resales transform te wole offering into a pu*lic distri*ution and te reselling
investors into statutor! underwriters$ For tis reason" issuers see# to restrict te transfera*ilit! of
privatel! placed securities" #nown as Crestricted securities$D &!picall!" te purcase agreement in
a private placement will contain transfer restrictions (noted on te securities certificates)" and te
issuer will instruct its transfer agent (often a *an# tat #eeps records on sareolder ownersip)
not to record an! transfer unless it is sown te resale is not su*?ect to te ,ecurities )cts
registration re/uirements$
Class 9,Regulation . 6Rules /7+8 /7/8 /719
E 369 allows ,15 to promulgate rules tat e2empt certain offerings 6ules 90: and 909$
&e ,15 as used its =((*) autorit! to e2empt small offerings up to 71 million (6ule
90:) and nonpu*lic offerings up 79 million wit (9 or fewer Cnonaccredited investorsD
(6ule 909)$
E +6$9 e2empts from registration an! offering C*! an issuer not involving an! pu*lic offerings
Aote: Issuers can fall *ac# on = :(2) wen 6ule 90I fails" *ut tere is not te same =:(2)
protection for 6ules 90: and 909$
Aote: E +6/9 e2empts transactions involving sales solel! to one or more accredited investors" wit
some conditions (see rule)
Preli4inar1 >otesF6eg . gives detailed guidance on wen an offering /ualifies for te =:(2)
private placement e2emption (6ule 90I) and creates additional e2emptions for Csmall offeringsD
as autoriMed *! =((*) (6ules 90: and 909)$
Rule 071F(.efinitional)
8ccredited investor is an!one te issuer as a reasonable belief falls under te following:
o 1) Ban#s" *ro#ersGdealers" insurance companies" etc$
o 2) private *usiness development compan!;
o () corporationGpartnersipGorganiMation wit more tan 79 million assets;
o :) director" e2ecutive officer" or general partner of te issuer or an! of tose of a
general partner of tat issuer;
o 9) net wort" wit ones spouse" of more tan 71 million"
o I) net income in eac of te two most recent !ears of more tan 7200< (or
7(00< wit ones spouse)$
o 8) &rust wit assets greater tan 79 million$
o J) 1ntit! in wic all e/uit! owners are accredited investors$
o Aote: &ese are investors tat can bear risk$
2I
5alculation of number of purchasersFe2cludes relatives wit same residence"
accredited investors" corporationsGtrustsGestates were purcaser as more tan 90R
interest
Rule 07$F(5onditions)
!ntegration: 6emoves from te possi*ilit! of integration offers and sales tat occur more
tan < months before te start of tat Regulation / offering or more tan < months after
its completion" so long as during tose I monts tere are no offerings of te
same/similar class sold under 6eg .$
o 9 Factors to consider to determine weter integration is appropriate:
;eter sales are part of single plan of financing
;eter sales involve issuance of te same class of securities
;eter sales ave *een made atGa*out te same time
;eter te same t!pe of consideration is received
;eter sales are made for te same general purpose
6e/uirements for furnishing information to investors
3roscri*es general solicitations or advertisements$
,ets fort re/uirements designed to prevent illegal resales (reasonable care in avoiding
sales to underwriters *! reasona*le in/uir!" disclosure tat securities cannot *e resold"
legends)$
Rule 073FFiling in Form .
Rule 07-F)n insignificant deviation from te re/uirements of one of te 6eg . e2emption
rules will not result in te loss of te registration e2emption provided *! te rule (if te violation
did not involve a condition intended to protect investors" it was insignificant in te conte2t of te
offering as a wole" or good fait and reasona*le attempt was made)$
Rule 10$F.efinition of transactions not involving pu*lic offering$ (Aote tat pu*lic offering at
te same as a :(2) e2empt private placement would not cause te e2emption to *e unavaila*leF
see 6eg . 3roposed 6evisions)
Rule 100F)*andoned 4fferings
Aan'one' pri"ate offering (:(2)" :(I)" 6ule 90I) followed *! registered offering
will not *e considered part of an offering for wic te issuer later files a registration
statement if conditions are met (including not filing at least 30 calendar days after
termination of all offering activit!)$ 12empt for if te private offering was onl! to
persons wo were accredited investors" or wo ave #nowledgeGe2perience (6ule
90I(*)(2)(ii))$
o Aote: te result is similar for private offerings following a*andoned
registration$
Regulation . *5e4ptions 6p# $179
Rule 07+ Rule 070 Rule 07/
Aggregate "ffering
#rice Limitation
71 million (12 mos$) 79 million (12 mos$) >nlimited
Number of $nvestors >nlimited (9 plus unlimited accredited
$nvestor %ualification Aone re/uired Must *e sophisticated
(*)(2)(ii) (alone or wG
representative)F
accredited presumed
to *e /ualified
Sales &ommissions 3ermitted
Limitations on >suall! no general Ao general Ao general solicitation
28
'anner of "ffering solicitation permitted
(e2cept for offerings
o# under state law)
solicitation permitted permitted
Limitations on !esale >suall! restricted 6estricted
$ssuer %ualifications 5annot *e 12cange
)ct reporting" C*lan#%
cec#"D or investment
companies
5annot *e investment
companies" or issuers
dis/ualified under
6egulation ) (e2cept
upon ,15 determ$)
Aone
Notice of sales 9 copies of Form . filed wit ,15 10 da!s after first sale (called for *!
6eg ." *ut not re/uired for e2emption)$
$nformation
!e(uirements
Aone 1) If purcased *! accredited investors" no
information specified$
2) If purcase *! non%accredited investors"
a) nonreporting companies must furnis same
#ind of info as in registered offering" *ut wit
less financial statement re/uirements
*) reporting companies must furnis specified
12cange )ct documents$
c) Issuers must ma#e availa*le prior to sale i)
e2i*its" ii) written information given to
accredited investors" iii) opportunit! to as#
/uestions and receive answers" iv) advise on
te limitation of resale$ +see p$ 210 of te2t-
Calculation of Aggregate Price:
6ule 90:F71 million limit tat e2tends for =: months" and includes 6ule 909 offerings$
6ule 909F79 million limit tat e2tends for =: months" and includes 6ule 90: offerings$
,ecurities )ct 6elease Ao$ I:99 (p$ 211)
) person must *e an Caccredited investorD at te time of sale" regardless of canges tat
occur after te sale$
)n e2ecutive officer of te parent issuer tat performs a polic! ma#ing function for its
su*sidiar! is an e"ecutive officer of the subsidiary$
/isclosure can *e in multiple installments" so long as all information is delivered prior to
te sale$
>nder 6ule 909 and 90I" !ou can ave unlimited accredited investors$ Sou can also
e2clude a relative wo as same principle residence wit te purcaser$
Partnership/partnership/entity is counted as one investor under 6ule 90((e)(2); issuer is
not o*ligated to consider sopistication of individual partners$
Reg . Refor4,
Propose' Rule 072 Aew e2ception for Clarge accre'ite' in"estorsD wit
significantl! iger tresolds tat accredited investors$ 3ermits li4ite' a'"ertising$
o ,ared caracteristics wit 6ule 90I: >nlimited sales to unlimited investors;
focus on purcasers; non%e2clusive$ ''J20(9
2J
o .ifferences from 6ule 90I: @arge accredited investor standard; limited
advertising permitted; no sales to persons wo dont /ualif! as large accredited
investors; autorit! under = 2J
4ter proposals:
o 5anging definition of accredited investor
o Inflation ad?ustments
o 6educe integration period from I monts to '0 da!s$
Class 17,Regulation S
%&o satisf! te ,15 safe ar*ors" *ot issuer offerings and investor resales (1) must *e made in
an Coffsore transactionD" and (2) ma! not involve Cdirected selling effortsD into te >nited
,tates$ In addition to tese two *asic conditions" issuer offerings >nder 6ule '0( and investor
resales under 6ule '0: must satisf! additional flow*ac# safeguards$
)n Coffshore transaction D is one in wic no offer is made to a person in te >$,$ (6ule '02()
(1) )A. te sale is accomplised in one of te following wa!s (6ule '02()(ii)
1) &e *u!er (weter in an issuer offering or investor resale) is outside te >$,$ wen te *u!
order is placed" or te seller and its agents reasona*l! *elieve tis is te case; or"
2) &e sale (in an issuer offering) is e2ecuted on an! Cesta*lised foreign securities e2cange$D
() &e sale (in an investor resale) is e2ecuted on a Cdesignated offsore securities mar#etD
(defined to include te leading foreign stoc# e2canges)" and te transaction is not prearranged
wit a *u!er in te >$,$
(B14B6)3HS I, <1S)
Bot 6eg , safe ar*ors also proi*it C'irecte' selling effortsD in te >nited ,tates *! te issuer
or seller" or an! person acting on teir *ealf$ (6ule '0((a)(2); 6ule '0:(a)(2))$ &e definition of
Cdirected selling effortsD refers to activities tat migt condition te >$,$ mar#et and raise
investor interest for an! of te offered securities$ (6ule '02(c))$ 12cluded from te proi*ition
are legal notices re/uired *! >$,$ or foreign autorities" tom*stone ads or identif!ing statements
(6ule 1(9)" and stoc# /uotations *! foreign securities firms primaril! in foreign countries$
%In addition" foreign issuers are permitted to allow ?ournalist to attend teir press conferences eld
outside te >nited ,tates$ (6ules '02(c)(()(vii)" 1(9e)
%,ee 1N1 carts for determinations of wic 5ategor! a pro*lem falls in$
2'
Regulation S (all a*out flow*ac# concerns)
3rotects >, residents" not citi)ens$
Aote: 12emption onl! applies to offersGsales outside of U&; securities can onl! *e resold
in >, if anoter e2emption is availa*le$
E 971Fan offer or sale sall not *e deemed to include tose tat occur outside of the U&
E 973Foffer sall occur outside of U& of it was made in an offshore transaction and no directed
selling efforts are made in te >, *! te issuer (i$e$" condition te >, mar#et)$ 6e/uires
additional conditions depending on categor!:
Categor1 !Fforeign corporations tat are ma#ing offering outside te >, were
teres no substantial U& market interest$ Ao additional conditions$
Categor1 !!F,omewere in%*etween te two (i$e$" foreign corporation were tere
is some >, interest) 5annot ma#e offerGsale to U& person or for accountG*enefit
of >, person for te first 0 days$
Categor1 !!!F(>, issuers in e/uit! offerings) put in place procedures tat police
against an! >, person *u!ing tose e/uit! sares for 1 1ear (:0 da!s for de*t)$
3urcasers must certif! tat te! are not a U& person or ac/uiring for a >, person;
purcaser agrees to resell conditions; securities contain a legend$
o 6estrictions are too great for 5ategor! III to *e used$
E 97$F.efinitions$ <e! definitions tat matter:
US Person,>, residents" partnersipGcorporation under >, laws" estateGtrust of >,
person" agenc!G*ranc of foreign entit! located in >,$
&ffshore TransactionFoffer not made to a person in te >nited ,tates" )A.:
o )) 1iter *u!er is or is reasonable believed to *e outside of >, at te time
buy order is originated" or
(0
o B) &ransaction is e2ecuted troug p!sical trading floor of esta*lised
foreign securities e"change (6ule '0()" or transaction e2ecuted troug
facilities of designated offsore securit! mar#et and seller does not #now tat
transaction as *een pre%arranged wit a *u!er in te >, (6ule '0:)$
But note ()(1)Foffers targeted at identifiable groups of >, citiMens a*road (>,
armed forces) sall not *e deemed to *e offsore transactions$
.irecte' Selling *ffortsFactivit! underta#en for te purpose of" or could
reasonably *e e2pected to condition the market in te >,$
o Includes placing ad wit general circulation in te >,$
o .oes not include:
)ds re/uired *! law accompanied *! certain language$
5ontact wit non%>, 3ersons
5ertain tom*stone advertisements
+) few oters mentioned$-
1N1 p$ 92'%9(9 as #e! carts$
Class 11:Class 13,Resales of Restricte' Securities
= :(1)Fallows sales of securities witout registration *! an! person oter tan an issuer"
underwriter" or dealer$ (,ee =2 definitions of tese terms$) (p$ 221)$ .ealers ave e2emptions
under :(() and :(:)$
CissuerDFincludes an! person directl! or indirectl! controlling or controlled *! te
issuer" or an! person under direct or indirect common control wit te issuer$
Cun'er;riterDFan! person wo as purcased from an issuer or an affiliate of te
issuer wit a view to" or offers or sells for an issuer or an affiliate te distri*ution of an!
securit!$
o (distri*ution is *asicall! s!non!mous wit pu*lic offering)
CControl securitiesDFsecurities owned *! person wo is an affiliate of te issuer
CControlD possession" direct or indirect" of te power to direct or cause te direction of
te management and policies of a person" weter troug ownersip of voting securities"
*! contract" or oterwise$
o 10 percent e/uit! ownersip is a rule of tum*$ (p$ 218)
In re Hira Haupt (p$ 222)
:(2) permits individuals to sell teir securities troug a *ro#er witout a registration
statement$ But te process of the distribution itself is su*?ect to ,ection 9$ Bu!ing from
an affiliate wit a view to sale ma#es !ou an underwriter$
;olfson (p$ 2(0)
;ere brokers provide outlets for te stoc# of issuers" te! are considered underwriters$
(1
Bro#ers can claim an e"emption were te *ro#er is not aware of circumstances
indicating tat te transactions are part of a distri*ution of securities on *ealf of is
principal$
Rule 1++,Persons .ee4e' >ot to ?e *ngage' in a .istriution an' Therefore >ot
Un'er;riters
(a) .efinitions
CAffiliateDFperson tat directl!" or indirectl! troug one or more intermediaries"
controls or is controlled *!" or is under common control wit" te issuer
CPersonDFwose accounts securities are sold includes is relative" is trustsGestates"
and an! corporationGorganiMation were te person owns 10 percent or more of an! class
of e/uit! securit! or e/uit! interest$
CRestricte' SecuritiesD
o ,ecurities ac/uired directl! or indirectl! from te issuer or issuers affiliate in a
transaction or cain of transactions not involving a pu*lic offering:
o 6egulation . ,ecurities
o ,ecurities ac/uired in transaction or cain of transactions under 6ule 1::)
o 1/uit! securities ac/uired in transaction or cain of transactions under
6egulation ,
(9 Con'itions
i) Reporting issuer" an! person wo is not an affiliate of te issuer wo sells restricted
securities of an issuer for is own account is deemed not to *e an underwriter if
conditions of (c) and (d) are met$ Aote: 6e/uirements of (c) sall not appl! if = year as
passed since person ac/uired securities$
ii) ,on-reporting issuer" an! person wo is not an affiliate of te issuer wo sells
restricted securities of an issuer for is own account is deemed not to *e an underwriter
if conditions of (d) are met$
(c)F8de(uate current public information wit respect to te issuer must *e availa*le (mentions
specific re/uirements for reporting and non%reporting issuers$ Aon%reporting must provide some
limited information$)
(d)(i)FFor reporting issuers" < months must elapse *etween te later of te date of ac/uisition of
te unregistered securities from te issuerGaffiliate and an! resale of suc securities in reliance on
tis section for te account of eiter te ac/uirer or an! su*se/uent older of tose securities$
(d)(ii) For non%reporting issuers" = year must elapse *etween te later of te date of ac/uisition of
te securities from te issuerGaffiliate and an! resale of suc securities in reliance on tis section
for te account of eiter te ac/uirer or an! su*se/uent older of tose securities$
(d)(iii) holding period sall not *egin until te full purchase price or oter consideration is paid
or given *! te person ac/uiring te securities$
3romissor! note is not deemed full pa!ment unless provides 1) full recourse against
purcaser; 2) secured *! collateral oter tan securities; () pa!ment in full$
(e) @imitation on amount of securities sold by affiliates$ +-ontrolled &ecurities-
&ales by affiliatesFte amount of securities sold" togeter wit all sales of restricted
and other securities of the same class witin te preceding 3 months sall not e2ceed
te greater of:
o i) 1R of sares or oter units of te class outstanding
o ii) te average wee#l! reported volume of trading in suc securities on all
national securit! e2cangesGautomated /uotation s!stem
o iii) )verage wee#l! volume of trading
(2
,ales *! non%affiliatesF+,15 dispensed wit limitations for non%affiliates-
(f) Manner of sale$ ,ecurities sall *e sold in CrokersG transactionsD" and te person selling
securities sall not 1) solicit or arrange for solicitation of orders to *u! te securities" or 2) ma#e
an! pa!ment in connection wit te sale oter tan to te *ro#er wo e2ecutes te order to sell
te securities$
(g) Control 0 te power to direct or cause te direction of management and policies"
troug ownersip of voting securities" or oterwise$ 10 percent e/uit! ownersip is a
rule of tum*$ (p$ 218)
$ C?rokersG transactionsD in = :(:) will *e deemed to include transactions in wic te *ro#er:
1) .oes no more tan e2ecute te order as agent for te person wose account securities
are sold and receives nor more tan te usual and customar! *ro#ers commission$
2) Aeiter solicits no arranges for solicitation of customers orders to *u! te securities in
anticipation of or in connection wit te transaction; provided tat te foregoing sall not
preclude i) in/uiries *! *ro#er to oter *ro#ersGdealers wo ave indicated interest in te
securities witin preceding I0 da!s; ii) in/uiries *! *ro#er of is customers wo ave
indicated unsolicited *ona fide interest in te securities witin te preceding 10 *usiness
da!s; iii) pu*lication *! *ro#er of *id and as# /uotations for te securit! in an inter%
dealer /uotation s!stem" provided tat suc /uotations are incident to te maintenance of
te *ona fide inter%dealer mar#et for te securit! for te *ro#ers own account$
() )fter reasona*le in/uir! is not aware of circumstances indicating tat person is an
underwriter or tat transaction is part of a distri*ution of securities of te issuer$
Rule 1++A$ Pri"ate Resales of Securities to !nstitutions 6Ta -9
1sta*lises a safe ar*or for certain private resales of restricted securities *! providing
tat seller will not *e deemed to *e an underwriter wen te seller is selling to a QIB$
)vaila*le onl! wen *u!er is or is reasona*l! *elieved to *e a Hualifie' institutional
in"estor$
,afe Har*or is A4& availa*le for resale of securities 1) tat at time of teir issuance were
of te same class of securities listed on te national securities e2cange or /uoted in a >,
automated inter%dealer /uotation s!stem" or 2) tat were issued *! compan! re/uired to
*e registered under Investment 5ompan! )ct$
,eller must ta#e reasona*le steps to ensure tat purcaser is aware tat seller ma! rel! on
te e2emption from te registration re/uirements provided *! te rule$
6ule 1::) does not provide an issuer wit an e2emption for registration$ )n issuer must
loo# to 6eg ." 6eg ," or =:(2) for an e2emption$ ,ee te title %% 5an *e used *! sellers
oter tan te issuer$ (53 18I)
3rivate 6esales 4utside 6ule 1::)
For private resales of restricted securities tat fall outside 6ule 1::)" (= :(1G2) te seller
must structure te transaction so tat te seller is not 1) not an underwriter; and 2) cannot
*e made an underwriter *! actions of te purcaser$
o 3ersons migt meet tese re/uirements *! onl! selling to persons wo can meet
re/uirements of purcasing in a private transaction (small num*er of purcasers"
((
ig /ualifications" access to information" and restrictions on resale)" *ut no%
action letters sow some fle2i*ilit! wit tis$
In te case of control securities" te seller must insure tat te purcaser is not an
underwriter$
Class 1$,The Role of the Un'er;riter,Section 11 an' Section 1$6a96$9
<iailit0
&ection ==: Ci"il <iailities for Aalse Registration State4ent$ (@ia*ilit! for untrueGomitted
material fact)
%= 11 creates a civil remed! for purcasers in a registered offering if te! can point to a material
misrepresentation or omission in te registration state4ent $ Loint and several lia*ilit! falls on
te issuer and oter specified defendants associated wit te distri*ution" su*?ect to
noncupla*ilit! (Cdue diligenceD) defenses for nonissuer defendants" a limited reliance defense" a
Cnegative causationD defense" and a special rule of proportionate lia*ilit! for unwitting outside
directors$
3laintiff does not need to sow reliance (=11 re/uire onl! tat te plaintiff sow a
material misstatement or omission E witout aving to sow scienter" reliance" or
causation$ Instead" culpa*ilit!" reliance" and causation *ecome defenses tat must *e
esta*lised *! te defendants)$
) purcaser ma#es out a prima facie case simpl! *! sowing eiter material untruts or
omissions of material facts in te registration statement$ ,ilence is not a defense in a =11
action$ =11 lia*ilit! arises from misinformation in te registration statement at te time it
*ecame effective$ &is generall! means tat lia*ilit! attaces to te final prospectus (or
prospectus supplement) and not te preliminar! prospectus$
;o faces lia*ilit!:
(:
o 1ver! underwriter wit respect to suc securit!
o 1ver! person wo" wit is consent" is named in te registration statement as
*eing or a*out to *ecome a director of (or person performing similar functions)
or partner in" te issuer at te time of te filing of te part of te registration
statement wit respect to wic is lia*ilit! is inserted$
o 1ver!one tat signed te registration statement (=11(a)(1))
o /irector/partner in te issuer at time of filing (=11(a)(2))
o )ccountants" engineers" appraisers tat prepare/certify part of te statement
o 'ssuer (strict lia*ilit!) (*) (&e issuer as no defense and is strictl! lia*le
regardless of its #nowledge or negligence)
%=11 defendants need not *e (and often are not) in privit! wit te purcasing investor and need
not ave actuall! created or disseminated te callenged misinformation$
%Benerall!" lia*ilit! under =11 for eac defendant is ?oint and several$ &ere are two e2ceptions$
First" underwriters lia*ilit! is limited to te amount of teir participation in te offering" e2cept
for te managing underwriter (=11(e)$ ,econd" for outside directors" te directors lia*ilit! is
proportionate to te damages e caused" unless te trier of fact determines te director #nowingl!
violated te securities laws$ =11(f)(2)())$ )@,4" oter reasons for stoc# dropsOOO negative
causation
%=11 places on nonissuer defendants te *urden to sow teir noncupa*ilit! E te Cdue diligence
defensesD$
%.ue diligence is te investigation *! potential =11 defendants of information contained in te
registration statement and prospectus$ &e level of due diligence depends on weter te
defendant is an e2pert and weter te alleged misinformation as *een e"pertise$
5H)6& 4F &H1 .1F1A.)A&, .>1 .I@IB1A51 .1F1A,1,
*5pertise' !nfor4ation: &e portions of te registration statement prepared or certified *! an
e2pert E suc as financial information audited *! an accounting firm or legal opinions given *! a
law!er (as to *e ver! specific and not general" li#e a patent law!er) E are referred to as
Ce"pertised$D )s to e2pertise portions" te responsi*le e2pert as a iger standard of diligence
tan none2perts$ &e e2pert must sow e conducted a reasona*le investigation and ad
reasona*le grounds to *elieve (and did *elieve) tat te e2pertise portions were true and not
misleadingFignorance is no e2cuse$ =11(*)(()(B)
*5pertise' Portion >one5pertise' Portion
*5pert )ctuall! and reasona*l!
*elieves" after reasona*le
investigation" tat information
is true (ignorance is no
e2cuse)
Ao @ia*ilit! for 12perts on
none2pertised portion$
>one5pert Ao reason to *elieve tat
information is false (ignorance
is e2cuse)
)ctuall! and reasona*l!
*elieves" after reasona*le
investigation" tat information
is true (ignorance is no
e2cuse)
(9
%Aone2perts" owever" ma#e out teir defense as to e2pertise portions if te! can sow
tat te! ad no reasona*le grounds to *elieve (and did not *elieve) tat te e2pertised disclosure
was not true or misleading E good fait" reasona*le ignorance is an e2cuse$ =11(*)(()(5)
>one5pertise' !nfor4ation: &ose portions of te registration statement not prepared or
reviewed *! an e2pert (usuall! most of it) are referred to as Cnone"pertisedD$ )s to
none2pertised portions" te stated standard is te same for all none2perts$ &o esta*lis a due
diligence defense" te none2pert defendant must sow tat e conducted a reasona*le
investigation and ad reasona*le grounds to *elieve (and did *elieve) tat te none2pertised
portions were true and not misleading E ignorance is no e2cuse$ =11(*)(()())$ 12perts are onl!
lia*le wit respect to te portions of te registration statement te! e2pertise" and tus are not
lia*le for none2pertised information$
Reasonaleness: 6easona*leness is tat Cre/uired of a prudent man in te management of is
own propert!$D =11(c)$ &e ,15" *! rule" e2plains tat reasona*leness is a sliding scale tat
depends on Crelevant circumstancesD tat relate to te defendants access to te contest
information$ Rule 12/$ (5ircumstances include t!pe of issuer and securit!" defendants
*ac#ground and relationsip to te issuer" office eld wen person is an officer" defendants
responsi*ilit! for information in te registration statement" etc$) ,ee Rule 12/# Circu4stances
Affecting the .eter4ination of (hat Constitutes Reasonale !n"estigation an' Reasonale
=roun's for ?elief Un'er Section 11 of the Securities Act$
.efense if meet *urden of proof of:
o Resignation" and advised commission and issuer of no responsi*ilit! for
statement
o Public notice tat registration statement ad *ecome effective witout is
#nowledge
o Reasonable ground to *elieve and did *elieve at effective date tat statements
were trueGno omissions" and
6easona*leness standard 0 prudent man managing is own propert!$
Aotes:
o If a person ac/uired suc securit! after te issuer as made generall! availa*le an
earnings statement covering =: months *eginning after te effective date" ten
proof is re/uired tat te person ac/uired te securit! rel!ing on te untrue
statement (*ut does not ave to prove reading te registration statement)$ (a)(9)
o >nderwriter still lia*le even if e *ecomes an underwriter after effective date (d)
o Aegative causation defense: 3laintiff cannot recover damages if defendant proves
tat loss did not result from te misleading registration statement$
o @imits to damages (cannot get more tan te issue price)$
o =11 purpose is to protect investors$ (Barchris)
Section 1$$ @ia*ilities in 5onnection wit Prospectuses and 5ommunications
o Ma! sue in law or e(uity (rescission)
o 5an sue for an! offer or sale tat violates section 9 (doesnt re/uire untrue
statement)$
o 4r" can sue for material untrue statementGomission from prospectus$
o @ia*ilit! for free writing prospectuses$
?archris
(I
&e court wipes out ever! one of tese defendants" no one met teir due diligence
defenses$
o 6usso (514)Fe #new all relevant facts" te compan! was entering into
*an#ruptc!" so e didnt ave an! defense$
o Kitolo and 3ugliese (Business Founders)Fte fact tat te! are of limited
education and migt not ave *een a*le to read te prospectus is not a defense"
and its li#el! tat te! #new a*out some of te pro*lems$
o <ircer (5F4)Fcourt said e ad te full picture of te financial affairs" e ad
to #now tat te prospectus was untrue$
o &rilling (anoter insider)Fsimilar$
o Birn*aum (Bar5ris ouse counsel" director)Fpro*a*l! did not #now of
inaccuracies" *ut made no investigation and relied on oters too" and e ad an
o*ligation to$
o )uslander (4utside .irector)FHe didnt ma#e ade/uate investigation$
o Brant:
o UnderwritersFte court sa!s !ou cant ?ust sa! its te compan!s prospectus;
investors rel! on te reputation of te underwriters; underwriters cannot rel! on
wat te issuer sa!s (issuer as an interest in not *eing candid)$
Its not sufficient to as# /uestions witout verif!ing te answers troug
a furter investigation$ Sou ave to verif! wat te compan! is telling
!ou in oter wa!s$ >nderwriters do tis now (going to tal# to lending
*an#s" suppliers" to investigate te compan!)$
Rule 109FFor te purposes or 12(a)(2) onl!" information conve!ed to te purcaser after te
time of sale will not *e ta#en into account in determining weter prospectusGstatement was
materiall! untrueGmisleading$
6elevant data at time of sale can include preliminar! prospectus" plus an! written or oral
update to it$ (@ia*ilit! for misstatement at tis time is under ,ection 12(a)(2) p :9%90 53
Rule 12$Fo*ligation to deliver a final = 10(a) prospectus is fulfilled *! filing a final version
wit te ,15$
Class 1+,Responsiilit0 of <a;0ers
So44er (1'8:)
In securities matters" attorne! will ave to function in a manner more a#in to auditor tan
to tat of te advocate$ &is means more independence" responsi*ilit! to te pu*lic"
ealt! s#epticism$ Ma! call for resignation in certain circumstances$
Ai'ing an' Aetting: (elements)
1) )noter person as committed a securities law violation$
2) )ider ad general awareness tat is role was part of an overall activit! tat is
improper or illegal (does not include someone wo acts in efforts of ?udgment"
carelessness" or good fait)
() %nowingly and substantially assisted te violation$
S*C "# >ational Stu'ent Marketing Corp 6192-9
Beneral awareness is esta*lised *! te presence at te meeting$ )ttorne!s silence was
a *reac of te dut! to spea#" and in addition lent te appearance of legitimac! to te
closing" wic provides su*stantial assistance to te closing$
In?unctive relief not granted er were ,15 as not demonstrated tat teres a
reasona*le li#eliood of future illegal conduct$
(8
!n Re Carter 619-19
Rule 17$6e96196iii9F,15 man! den!" temporar! or permanentl!" te privilege of
appearing or practicing *efore it to an! person found to ave willfull! violated or aided
and a*etted te violation of federal securities laws" rules" or regulations$
) law!er must ma#e all efforts witin reason to persuade is client to avoid or terminate
proposed illegal action$ ,uc efforts could include" were appropriate" notification to te
*oard of directors of a corporate client$
@aw!er owes a dut! to te entit!" not te management or an! individual of te entit!$
5ounseling accurate disclosure is sufficient initiall!; ten law!er must ta#e furter
affirmative steps and prompt action (ma! resign" or approac *oard of directors" *ut need
not report out)$
Section 372 of Saranes,&5le1 Act 6Ta 1$9
6e/uires law!ers te report evidence of material violation of securities laws or *reac of
fiduciar! dut! or similar violation to issuers cief legal offer andGor 514$ 5ief legal
officer tan as a dut! to investigate$ (&a* p$ 29()
If teres no appropriate response" law!er must report evidence to te audit committee"
anoter committee of independent directors" or to te full *oard of directors$
,15 doesnt re/uire a nois! witdrawal an!more$ (p$ II0)$ (&a*" p$ 292)
6emem*er: ,4V onl! applies to issuers$
Mo'el Rules of Professional Con'uct
6ule 1$I$ 5onfidentialit! of InformationF@aw!er ma! reveal information to
prevent/rectify substantial in>ury to financial interest or propert! of anoter if
reasonably certain to ave resulted from clients commission of a crime or fraud of
wic client as used law!ers services$
Rule 1#13# &rganiFation As Client# (p$ II1)
@aw!er sall proceed as reasona*l! necessar! in te *est interest or te organiMation$
>nless not in *est interest of organiMation" sall refer matter to iger autorit! in te
organiMation" including te igest autorit! tat can act on *eavior of te organiMation$
If teres a failure to act" or law!er *elieves violation is reasona*l! certain to result in
su*stantial in?ur! to corporation" te law!er ma! reveal information relating to te
representation weter or not 6ule 1$I permits suc disclosure" *ut onl! to te e2tent
necessar! to prevent su*stantial arm$
(J