SECURITIES REGULATION OUTLINE

Prof. Henry Hu Spring 1999

This ou!ine is e-mailware" #hi!e here is no $os for using he ou!ine% you &us 'rop &e ( !ine (
dfalgoust@alumni.utexas.net o e!! &e )h( you hin*% if i he!pe' you% e$.+ i,' (!so -e ni$e if you
'roppe' -y &y )e- p(ge ( http://www.geocities.com/NapaValley/3578/ (n' signe' &y gues -oo*.
.ee! free o re'isri-ue his ou!ine unmodified o (nyone )ho &(y fin' i usefu!. This ou!ine is pro/i'e'
0(s is1 (n' I &(*e no pro&ises (s o is ($$ur($y 2i )or*e' for &e% your &i!e(ge &(y /(ry3. Goo' Lu$*
on e4(&s"
5(&ien .(!gous
Uni/ersiy of Te4(s S$hoo! of L()
I. Inro'u$ion
A. The e4 for his $ourse is he 6ennings% 7(rsh% Coffee (n' Se!ig&(n $(se-oo* on
se$uriies regu!(ion (n' s(uory supp!e&en% p!us so&e proprie(ry &(eri(!s
-y Prof. Hu.
A. A--re/i(ions (n' $on/enions use'
1. HH Henry Hu
8. U9# un'er)rier+ s9h sh(reho!'er
:. PSLRA Pri/(e Se$uriies Liig(ion Refor& A$ of 199;
<. SEC Se$uriies E4$h(nge Co&&ission
;. A!! s(uory referen$es (re o he 19:: Se$uriies A$ 2(s (&en'e'3 (n' not
o he 19:< E4$h(nge A$ 2or oher ($3 un!ess oher)ise noe'
=. >ey Ter&s
1. Pri&(ry /s. Se$on'(ry &(r*es pri&(ry is he 0origin(! issue%1 )here he
se$uriy is so!' -y he issuing $o&p(ny o he pu-!i$+ se$on'(ry refers o
su-se?uen r(ns($ions -e)een in/esors.
C. Gener(! .r(&e)or* of C(pi(! 7(r*es @ Se$uriies Regu!(ion
1. The Se$uriies A$s
(3 The 19:: Se$uriies A$ re?uires h( se$uriies -e registered 2)ih
so&e e4$epions3 -efore hey $(n -e so!'.
213 Ru!es (re su-ses of regu!(ions+ h( is% regu!(ions (re 0!i-r(ries1
of ru!es. They in$!u'eA
2(3 Gener(! ru!es (n' regu!(ions 21BBs% 81;% 8:C3
2-3 Reg. A 2for s&(!! issues3 28;1D8C:3
2$3 Reg. C 2go/erning regisr(ion% <BBs3
2'3 Reg. 5 2!i&ie' offer9s(!e )ihou regisr(ion% ;BBs3
2e3 Reg. S 2offer9s(!e ousi'e U.S. )ihou regisr(ion% 9BBs3
1 of <<
2f3 Reg. SD= 2inegr(e' 'is$!osure for s&(!! -usiness3
2g3 Reg. SD> 2insru$ions for for&s for -oh ,:: (n' ,:< A$s3
2h3 Reg. SDT 2go/erning e!e$roni$ fi!ing3
2i3 .or&s 2SD1% SD8% SD:3
283 Ru!es pro&u!g(e' un'er he ,:: A$ (re 'eno&in(e' -y hreeD
'igi nu&-ers% e.g.% R. <:B+ if i isn, in ( )oD'igi regu!(ion 2i.e.%
SD>3% hen no regu!(ion is noe'. Noe ru!es un'er )oD'igi
regu!(ions (re 2&os!y3 er&e' 0Ie&s1 inse(' of 0Ru!es.1
-3 The 19:< E4$h(nge A$ regu!(es $on'u$ on pu-!i$ se$on'(ry
&(r*es% in$!u'ing perio'i$ reporing re?uire&ens. Cre(e' he SEC.
213 Ru!es pro&u!g(e' un'er he ,:< A$ (re n(&e' (fer heir se$ion%
e.g.% 1B-D; is he fifh ru!e pro&u!g(e' un'er E 1B2-3.
283 E4$epion o he (-o/eA Reg. 7 is 'eno&in(e' in hreeD'igi
nu&-ers. A!so noe ,:< A$ for&s% &os no(-!y 1BD> (n' 1BDF.
8. Un'er)riing (n' he pri&(ry &(r*e
(3 Un'er)riers 2U9#3 (re he iner&e'i(ries h( -ring ( ne) offering o
he pu-!i$.
213 The un'er)rier% in (''iion o ($u(!!y &(r*eing he se$uriy%
('/ises he issuing $o&p(ny on issues su$h (s he ype of se$uriy
o offer% he er&s of he se$uriy% e$. They h(/e so&e inpu ino
'r(fing he 'o$u&ens (s )e!!% hough h( is &os!y he !()yer,s
Go-.
283 There (re% gener(!!y spe(*ing% hree ypes of un'er)riing h( (*e
p!($eA
2(3 .ir& $o&&i&en U9# ($u(!!y -uys (n' rese!!s he se$uriy
on he open &(r*e. Thus% he U9# (*es &os of he ris*.
2-3 0S(n'D-y1 se$uriies on!y offere' o e4ising s9h+ U9#
0s(n's -y1 o -uy (ny unpur$h(se' sh(res.
2$3 0=es effors1 U9# on!y ($s (s (n agent of he issuing
$o&p(ny+ he U9# Gus he!ps he $o&p(ny &(r*e is se$uriies
2using is 0-es effors13. Ris* re&(ins )ih he issuing
$o&p(ny.
2i3 Noe h( pri$ing is si!! i&por(n e/en for 0-es effors1
in spie of he !o) &one(ry ris*% -e$(use he U9#,s
repu(ion is ( s(*e.
2'3 There (re oher% 0inD-e)een1 f!(/ors (s )e!!% su$h (s 0(!! or
nohing1 (n' 0&inD&(41 un'er)riings.
2:3 Ho) $(n he U9# re'u$e his ris* on ( fir& $o&&i&enH Choi$es
in$!u'eA
8 of <<
2(3 Negoi(ing ( 'is$oun on he offering pri$e 2hus i&pro/ing
he $h(n$es h( (!! sh(res )i!! -e so!'3.
2-3 Spre('ing he ris* -y (*ing on (''iion(! U9# 2fir& in $h(rge
is he 0&(n(ging U9#13.
2$3 #(iing uni! he !(s possi-!e &o&en o se he fin(! pri$e.
2'3 Puing 0&(r*e ous1 ino he un'er)riing (gree&en.
2<3 Regu!(ion of U9#
2(3 N(,! Asso$. of Se$uriies 5e(!ers 2NAS53 is ( se!fDregu!(ory
-o'y h( resri$s he $on'u$ of U9#.
2-3 SEC r('ing ru!es 2!i*e Reg. 7% resri$ing U9# (-i!iy o reD
-uy issue' sh(res o in$re(se pri$e in he se$on'(ry &(r*e
I-u s(-i!iJing ( f(!! is O>K3.
2$3 R. 1B; $(n, go shor (n' su-s$ri-e ( he s(&e i&e.
:. The se$on'(ry &(r*e
(3 A se$on'(ry &(r*e is i&por(n -e$(use i insures he /i(!iy of he
pri&(ry &(r*eA (n in/esor is un!i*e!y o pur$h(se sh(res fro& (
$o&p(ny if here is no &(r*e for hi& o rese!! hose sh(res ( ( !(er
'(e.
-3 There (re )o -ro(' ypes of se$on'(ry &(r*esA r('iion(! e4$h(nges
2personifie' -y he NLSE3 (n' o/er he $ouner 2OTC3 &(r*es
2personifie' -y NAS5AF3.
213 Tr('iion(! e4$h(nge so&e)h( -ure(u$r(i$+ 0spe$i(!iss1 -rings
ogeher -uyers (n' se!!ers% -uys9se!!s on his o)n ($$oun o
&o'er(e se/ere pri$e s)ings 2M!e(ning (g(ins he )in',3.
283 OTC No ( 0p!($e%1 -u ( series of !in*e' $o&puers. E($h so$*
is represene' -y (n in/es&en -(n* inse(' of ( spe$i(!is.
5. A fe) )or's on he 19NO $r(sh
1. Ho) 'o )e *no) i h(ppene'H Indexes fe!!. In'e4es (re ( 0-(s*e1 of
represen(i/e so$*s. The 5o) 6ones is ( s&(!! -(s*e+ he S@P ;BB is (
!(rger -(s*e+ he Russe!! 1BBB is !(rger si!!.
8. #hy $(re (-ou he $r(shH =e$(use of he 0)e(!h effe$1 )hen he
&(r*e is up% $onsu&er $onfi'en$e gener(!!y is up% oo+ hus% he p(per
e$ono&y i&p($s he re(! e$ono&y. A!so% $r(shes $re(e ( &(r*e for
(*eo/ers.
II. Regu!(ion of he 5isri-uion of Se$uriies
A. O/er/ie) he -(si$ sru$ure of he ,:: A$.
1. The -(si$ go(!s of he A$ (re )ofo!'A o pro/i'e infor&(ion o in/esors%
(n' o prohi-i fr(u'u!en s(!es.
8. There (re hree *ey hings o 19:: A$ $o&p!i(n$eA
: of <<
(3 5o$u&ens in/o!/e'
213 Gener(!!y% ( prospectus 2see E 82(321B 'efiniion -e!o)3. There (re
)o ypesA
2(3 A preliminary prospectus% use' 'uring he )(iing perio'+ i
$on(ins no pri$e infor&(ion
2-3 A final prospectus% use' 'uring he posDeffe$i/e perio'.
-3 Regisr(ion re?uire&ens
213 >eys (re EE C% O% Reg. C for gener(! ru!es% (n' Reg. SD> for he
nonDfin(n$i(! porions.
$3 Ti&ing resri$ions 2i.e.% )h( you $(n 'o (n' )hen3
213 There (re hree perio'sA preDfi!ing% he )(iing perio'% (n' he posD
effe$i/e perio'. Always -e(r in &in' )h( perio' you (re in"
:. 5 " #he $ost %mportant &ection'
(3 Su&&(ry of E ; pro/isionsA
213 E ;2(3 $(n, se!! ( se$uriy 2or 'e!i/er se$uriy for s(!e3 un!ess (
regisr(ion s(e&en h(s -een pu in effect 2i.e.% post-effective
date3.
283 E ;2-3
2(3 213 $(n, use ( prospe$us 2see E 82(321B3 -e!o)3 o se!! un!ess
he prospe$us &ees E 1B re?uire&ens+
2-3 283 $(n, 'e!i/er se$uriy (fer s(!e un!ess preceded -y ( E 1B
prospe$us.
2:3 E ;2$3 prohi-is offers to sell prior o he filing of he regisr(ion
s(e&en 2or if su-Ge$ o SEC sop or'er3.
-3 >eys o (pp!i$(ion of E ;A
213 The hing so!' &us -e ( 0se$uriy1 2'is$usse' infr(3
283 6uris'i$ion(! &e(ns 2use of &(i!s or iners(e $o&&er$e3
gener(!!y very easy o &ee 2in f($% i,s h(r' not o &ee i3.
2:3 E : !iss e4e&pe' securities 2'is$usse' infr(% &os no(-!y
go/ern&en se$uriies3
2(3 Noe his se$ion e4e&ps he !ise' se$uriies from the entire
act.
2<3 E < !iss e4e&pe' transactions 2&os no(-!y E< 213 !i&iing E ; o
r(ns($ions -y 0issuers% U9#% (n' 'e(!ers%1 (n' he E <283
e4e&pion for r(ns($ions 0no in/o!/ing ( pu-!i$ offering13
2(3 Noe his se$ion only e4e&ps r(ns($ions fro& E ;+ i does
not e4e&p he& fro& (ny oher re?uire&ens 2i.e.% (nifr(u'
ru!es3.
< of <<
<. Oher *ey pro/isionsA
(3 E 82(3213 'efiniion of se$uriy 2'is$usse' infr(3
-3 E 82(321B3 'efiniion of 0prospe$us1 -(si$(!!y% anything 2in$!u'ing
$ir$u!(rs% ('/erise&ens% !eers% (n' $o&&uni$(ions3 h( offers a
security for sale.
213 E4$epionA if sen posDeffe$i/e '(e (n' E 1B prospe$us )(s sen
o he -uyer -efore or ( he s(&e i&e% hen i isn, ( prospe$us.
283 E4$epionA ( noi$e9$ir$u!(r9('9e$. is no ( prospe$us if i
i'enifies ho) ( E 1B prospe$us $(n -e o-(ine' and on!y i'enifies
he se$uriy (n' is pri$e (n' oher infor&(ion 'ee&e' (ppropri(e
-y he SEC.
2:3 E 1B prospe$us is -(si$(!!y ( prospe$us h( h(s (!! of he s(&e
infor&(ion (s he regisr(ion s(e&en 2see E 1B2(33.
$3 E 82(32N3 'efines 0regisr(ion s(e&en1 (s ( E C regisr(ion s(e&en+
E C ses ou he re?uire&ens for regisering 2fees% e$.3
'3 E 82(32113 0un'er)rier1 is (nyone )ho pur$h(ses from the issuer
)ih ( /ie) o 'isri-ue 2or in'ire$!y p(ri$ip(es in su$h ( U9#3
e3 E 192(3 SEC h(s (uhoriy o &(*e ru!es o $(rry ou he A$.
=. The PreDfi!ing Perio' 20GunD6u&ping13
1. Re$(!! h( E ;2$3 &(*es i un!()fu! for (ny person o offer o buy or sell (
se$uriy preDfi!ing.
(3 E 82(32:3 'efines 0offer o se!!1 (s (ny ($i/iy re(son(-!y $(!$u!(e' o
so!i$i or gener(e ( -uying ineres.
-3 Loe-% Rho('es -igDhype press re!e(se is 'ee&e' (n offer o se!!.
213 SEC s(ys h( i,s O> o &(*e (nnoun$e&ens in he nor&(!
$on'u$ of -usiness% hough.
$3 R. 1:; e4e&ps $er(in ypes of press re!e(ses fro& he gunDGu&ping
prohi-iion if hey $on(in no more h(n he !ise' infor&(ion. 2no(-!yA
no pri$e info% (n' no n(&ing he U9#+ you h(/e o s(e h( he ($u(!
offering )i!! -y /i( prospe$us3
213 FuesionA is his ( 0s(fe h(r-or1 or (n e4$!usi/e !isH 2i.e.% $(n oher
ie&s no !ise' in R.1:; also -e e4e&pH3
'3 Re!e(se ;1NB $(n pu-!i$iJe facts only 'uring he preDfi!ing perio'+ i.e.%
no fore$(ss% e$.+ (ns)ering unso!i$ie' in?uiries fro& he press%
(n(!yss% (n' ohers is en$our(ge'.
8. Pro-!e&s
(3 CEO of $o&p(ny 'oes iner/ie) for !o$(! p(per )here he s(ys 0In'usry
is $onsi'ere' ( P:B=9yr in'usry (n' )i!! gro)+ Co&p(ny )(ns o -e (
!e('er in is in'usry% (n' o 'o so )e (re p!(nning o Mgo pu-!i$, in he
ne(r fuure.1
; of <<
213 >eyA 'oes his 0(rouse pu-!i$ ineres1H 2Re$(!! E 82(32:3% Loe-%
Rho('es3. Thus% his &(y -e ( E ;2$3 /io!(ion.
283 Ho)e/er% he CEO 'i' no so!i$i he iner/ie) Re!. ;1NB )or*s
in his f(/or 'ue o his f($. A!so% sin$e his is ( !o$(! p(per% i is
!ess !i*e!y o i&p($ he )i'er &(r*e.
2(3 =u proGe$ion of in'usry gro)h &(y (*e i ou of Re!. ;1NB
-e$(use i &(y -e $onsi'ere' ( fore$(s.
2:3 Noe h( pu-!i$!yDhe!' $o&p(nies ypi$(!!y ge &ore !ee)(y h(n
'o pri/(e!y he!' $o&p(nies 'ue o he nee' o *eep sh(reho!'ers
infor&e'.
-3 CEO $on($s 'e(!er (-ou offer% )ho $on($s U9#+ CEO (n' U9#
infor&(!!y (gree o offer 17 sh(res o he U9# ( P1B9sh.% o -e reso!'
o he pu-!i$ ( P119sh. They sign !eer of inen o h( effe$.
213 E 82(32:3 excludes fro& he 'efiniion of 0offer1 (ny 0pre!i&in(ry
negoi(ions or (gree&ens1 -e)een issuer (n' U9#.
283 Thus% his is pro-(-!y O>. On!y re(! ?uesion is if 0pre!i&in(ry1
&o'ifies 0(gree&ens1 or no 2i.e.% is (n enfor$e(-!e (gree&en
e4$!u'e' fro& he e4$epionH3
$3 U9# prep(res press re!e(se (nnoun$ing he offering
213 Pro-(-!y O> un'er R. 1:;% )ih fo!!o)ing pro/isosA &us -e from
the company 2no he U9#3+ i cannot name the U/W+ (n' &us
s(e ($u(! offering )i!! -e &('e /i( prospe$us.
'3 U9# e!ephones (n' )ries o se$uriies 'e(!ers n(ion)i'e o in/ie
he& o Goin he U9# syn'i$(e.
213 O> un'er E82(32:3% )hi$h excludes fro& he 'efiniion of offer
$on($ 0(&ong U9# )ho (re or (re o -e in pri/iy of $onr($
)ih he issuer.1
e3 U9# $on($s se$uriies 'e(!ers )ih !(rge re(i! se!!ing org(niJ(ions%
(s*s if hey )ou!' !i*e o pur$h(se ( ( ;BQ 'is$oun for res(!e.
213 This is pro-(-!y ( /io!(ion 2H3
f3 U9# &(i!s ou o prospe$i/e U9#% 'e(!ers% (n' is o)n $uso&ers (n
inern(! su'y s(ying he $o&p(ny,s in'usry is ( gro)h in'usry. I
'oes no &enion he $o&p(ny spe$ifi$(!!y.
213 R. 1:O almost &(*es his O> i &(*es his *in' of repor O> for
( public 2i.e.% one h( is su-Ge$ o ,:< A$ reporing3 $o&p(ny if
h( *in' of repor is gi/en ou o/er he nor&(! $ourse of he
'e(!er,s -usiness% (n' 'e(!er re$ei/es no $o&pens(ion fro& he
regisr(n. I &(*es i O> -y re&o/ing he reporing p(ry fro& he
E 82(32113 'efiniion of 0U9#.1
C of <<
2(3 Pro-!e& is h( he 'e(!er issuing he repor &us no -e (
p(ri$ip(n 2or propose o -e ( p(ri$ip(n3 in he 'isri-uion
of he se$uriy.
283 R. 1:9 is -(si$(!!y he s(&e ru!e% -u i is &ore !(4 ( 'e(!er can
p(ri$ip(e in he 'isri-uion (n' si!! &(*e re$o&&en'(ions ifA
2(3 The issuer is (n SD: $o&p(ny 2ypi$(!!y ( -ig% )i'e!yDfo!!o)e'
$o&p(ny3 p!us &ees M&ini&u& f!o(9in/es&en gr('e,
re?uire&ens 2$o&&on e?uiy RPO;797oo'y,s r(ing3% or
2-3 The re$o&&en'(ion is of ( *in' 'isri-ue' )ih reasonable
regularity% is (n industry-wide report or is a comprehensive
list of recommended securities% he issuer is gi/en no greater
prominence h(n (nyone e!se% (n' he opinion is no more
favorable h(n in he !(s pu-!i$(ion.
g3 Re(i!er of $o&p(ny,s pro'u$s he(rs of propose' offering fro& CEO%
phones 'e(!er (n' offers o -uy ;BB sh(res. 5e(!er s(ys he )i!! se (si'e
he sh(res if he $(n% hen phones U9# (n' offers o -uy 1%BBB sh(res.
213 Noe E <213 !i&is (pp!i$(ion of E; o (n 0issuer% U9#% or dealer1+
furher noe h( i 'oes not in$!u'e he retailer.
283 5oes h( &(*e senseH The r(ion(!e is h( if he offer o -uy isn,
prohi-ie'% hen he 'e(!er (n' U9# )i!! Gus 'e(! )ih e($h oher in
roun'(-ou f(shion% ren'ering he !() &e(ning!ess.
:. The Ro!e of he Aorney
(3 On$e he 'e(! is 'one% he *ey person -e$o&es he issuer,s $ounse!. He
h(s o 'o he fo!!o)ingA
213 5ue 'i!igen$e 2$o/ere' in 'e(i! infr(3+ he -(si$ ru!e is h(
everything ('/erse &us -e 'is$!ose'.
283 A he priner% prep(ring four p($*(ges% e($h respe$i/e!y going oA
2(3 SEC he ($u(! regisr(ion s(e&en% e$. Reg. C h(s he
&os 0i$*yD($*y1 ru!es h( $(n rip you up. 2See R. <B8%
<B: on ho) he s(e&en &us -e -oun'% e$. for (n e4(&p!e3
2-3 S(e regu!(ors his use' o -e &ore i&por(n+ re$en
(&en'&ens h(/e $h(nge' h(.
2$3 NAS5 h(s heir o)n re?uire&ens
2'3 The U9# syn'i$(e in (''iion o ( $opy of he regisr(ion
&(eri(!s% (!so sen' insru$ions on )h( hey $(n (n' $(nno
s(y9'o for -oh s(e (n' fe'er(! !() purposes.
C. The #(iing Perio'
1. On$e he regisr(ion s(e&en h(s -een fi!e'% he issuer &us ()(i SEC
(ppro/(! 2hen he s(e&en is 0effe$i/e13. This ypi$(!!y (*es (ny)here
fro& one o hree &onhs. This is ?uie -ur'enso&e% )hi$h is )hy shelf
registration 2$o/ere' infr(3 h(s -e$o&e ?uie popu!(r.
O of <<
8. Re$(!! h( E ;2(3213 prohi-is actual sales fro& (*ing p!($e uni! he
regisr(ion s(e&en is (ppro/e'+ furher noe h( hus oral offers (re
per&ie' so long as the sale is not consummated 2or e!se hey,' run (fou! of
E ;2-33.
:. 7(*ing (n un(uhoriJe' )rien offer 'uring he )(iing perio' is $(!!e'
0free )riing.1
<. Pre!i&in(ry Prospe$uses
(3 E ;2-3213 per&is ( E 1B prospe$us o -e use' o offer ( se$uriy for
s(!e.
213 E 1B2-3 gr(ns he SEC (uhoriy o issue ru!es for preliminary
prospectuses for E ;2-3213 purposes.
283 R. <:B 'oes Gus h(. =(si$(!!y% he pre!i&in(ry prospe$us &us
h(/e (!! he infor&(ion of he fin(! prospe$us except price.
2(3 Noe h( uni! he 199Bs% he pr($i$e )(s o )(i uni! he
nigh -efore he SEC )(s o 'e$!(re he s(e&en effe$i/e
(n' hen fi!e ( 0pri$ing (&en'&en.1 Then he SEC ('ope'
R. <:BA% )hi$h per&is ( regisr(ion o -e 'e$!(re' effe$i/e
)ihou pri$ing '((+ h( infor&(ion &us -e 'is$!ose' -y
fi!ing ( re/ise' prospe$us o he SEC 1; '(ys (fer he
effe$i/e '(e% or -y &(*ing ( for&(! posDeffe$i/e
(&en'&en.
-3 Noe h( he pre!i&in(ry prospe$us does not s(isfy he E1B2(3
re?uire&ens of he final prospe$us% (n' hus $(n on!y -e use' o &(*e
offers% no o 'e!i/er he se$uriy ise!f.
;. Su&&(ry Prospe$uses
(3 Un'er he s(&e gr(n of (uhoriy in E 1B2-3% he SEC (!!o)s summary
prospectuses for $er(in $o&p(nies.
-3 R. <:1 per&is $er(in $o&p(nies 2gener(!!y spe(*ing% 'o&esi$
$o&p(nies using for&s SD: or SD8 )ho h(/e -een su-Ge$ o he ,:<
A$ reporing re?uire&ens for hree ye(rs or &ore3 o use su&&(ry
prospe$uses.
$3 Ag(in% his prospe$us 'oes not s(isfy he E 1B2(3 re?uire&ens for (
fin(! prospe$us.
C. To&-sone A's
(3 To&-sone ('s (re per&ie' /i( he E 82(321B32-3 'efiniion of (
prospe$us+ i e4$!u'es fro& he 'efiniion ('s h(A
213 S(e fro& )here ( E 1B prospe$us $(n -e o-(ine'% (n'
283 5o no &ore h(n i'enify he se$uriy% is pri$e% (n' )ho )i!!
e4e$ue he or'ers.
-3 Noe h( (!hough ( o&-sone (' is no ( prospe$us% i is si!! (n
0offer1 (n' hus f(!!s )ihin E ;2$3% (n' hus $(nno -e use' in he preD
N of <<
fi!ing perio' 2i.e.% $(n on!y -e use' in he )(iing or posDeffe$i/e
perio's3.
O. I'enifying S(e&en
(3 Li*e he o&-sone ('% -u )ih &ore infor&(ion. E 82(321B32-3
per&is he SEC o 0e4p(n'1 he (/(i!(-!e $onen of he o&-sone.
-3 R. 1:< (n' 1:<( 'o Gus h(. They !is he per&issi-!e $onen of he
i'enifying s(e&en. 2E4.A They per&i ( gener(! 'es$ripion of he
-usiness% (n' infor&(ion (-ou senior se$uriies% e$.3
N. A''iion(! Issues
(3 R. 1;$8DN re?uires ( 'e(!er o &(*e his or her -es effors o 'isri-ue
prospe$uses upon re?ues 2noe his ru!e is pro&u!g(e' un'er he ,:<
A$3.
-3 Noe he 'iffi$u!y $(use' -y he inerne (n' eD&(i! 2is eD&(i! )rien or
or(!% in su-s(n$eH #h( (-ou )e- p(ges $(n one hyper!in* o
&(eri(!s no in he prospe$usH3
$3 Re!e(se <9CN% R. <CB &us &(*e goo' f(ih effor o 'isri-ue (
re(son(-!y nu&-er of $opies of he regisr(ion s(e&en o 'e(!ers in
or'er for he SEC o ($$e!er(e he effe$i/e '(e.
9. Pro-!e&s 2s(&e f($s (s pre/ious se3
(3 U9# $(!!s 'e(!er% offers o reser/e 8%BBB sh(res for hi&. 5e(!er
($$eps.
213 The offer is O> -e$(use i is oral. The E ;2$3 pros$ripion on
offers on!y (pp!ies 'uring preDfi!ing.
283 Ho)e/er% he acceptance is not O>. E ;2(3213 prohi-is preD
(ppro/(! s(!es.
2:3 Pro-!e&A U9# h(s o -e (-!e o &(r*e he sh(res in or'er o
($$ur(e!y pri$e he offering. The so!uion is pro-(-!y o s(y o he
'e(!er e4p!i$i!y h( 0his is no (n offer1 2-(si$ $onr($ !()A if
here,s no (n offer% here $(n, -e (n ($$ep(n$e3.
-3 U9# )(ns o pu-!ish (n (' in he #(!! Sree 6ourn(!% 'es$ri-ing he
n(ure of he -usiness (n' ho) he offering,s pro$ee's )i!! -e use'% p!us
(n in/i(ion o su-s$ri-e ( P119sh(re.
213 Pro-!e&A E ;2-3213 re?uires h( he prospe$us $onfor& o E 1B.
283 R. 1:< (n' 1:<( e4$!u'es i'enifying s(e&ens. Noe he re?uire'
'is$!(i&er !(ngu(ge in R. 1:<2-3213. 25oes 'es$ripion of ho)
pro$ee's )i!! -e use' *i!! hisH3
$3 U9# &(i!s o he res of he U9# syn'i$(e (n' o se!e$e' 'e(!ers
$opies of ( pre!i&in(ry prospe$us )hi$h )(s in$!u'e' in he
regisr(ion s(e&en 2no pri$e infor&(ion3. A!so in$!u'e' is ( !eer
s(ying he U9# hin*s his is (n (r($i/e in/es&en% ( ;Dye(r e(rnings
9 of <<
proGe$ion% (n' (n in/i(ion for e($h 'e(!er o in'i$(e he nu&-er of
sh(res hey (re inerese' in.
213 Prospe$usA >ey $on$ern is E ;2-3213 $(n, 'e!i/er ( nonDE 1B
prospe$us+ re$(!! E 1B2-3 (uhoriJes 0!esser1 prospe$us /i( SEC
regu!(ion.
2(3 Pre!i&in(ry prospe$us R. <:B 2&us h(/e e/eryhing -u
pri$e3. Noe Reg. SD> I. ;B121B3 0&(gi$ !(ngu(ge1 h( &us
($$o&p(ny su$h ( prospe$us.
2-3 Su&&(ry prospe$us R. <:1 (!&os ne/er use' -e$(use i,s
use!ess 2in/esors )(n &ore infor&(ion h(n i pro/i'es3.
A!so noe -oh pre!i&in(ry (n' su&&(ry prospe$uses $(n on!y
$(n -e use' for E ;2-3213% no 2-3283.
283 LeerA This is ( /io!(ion. I is (n offer o se!! (n' 'oes no f(!!
)ihin he e4$epions.
2(3 I is pro-(-!y O> for he !eers sen o he U/W% hough
-e$(use E 82(32:3 e4$!u'es 'e(!ings -e)een U9#,s fro& he
'efiniion of 0se!!.1
2-3 5oes R. 1:< he!pH No% -e$(use of he proGe$ion of e(rnings
(n' he s(e&en h( he in/es&en is (r($i/e. Neiher (re
!ise' in R. 1:< (s per&issi-!e.
2i3 Noe h( e/en hough he R. 1:<2-3 re?uire' !(ngu(ge
pro-(-!y isn, here% his (!one )ou!'n, ren'er i i&proper
-e$(use un'er R. 1:<2$3 you nee' no in$!u'e i if he
prospe$us is in$!u'e'.
2$3 A$u(! $(seA ( guy s(p!es his -usiness $(r' o prospe$us )ih
h(n')rien 0p!e(se $(!! ASAP1+ he!' ( /io!(ion (s (n offer o
se!!.
'3 5e(!er )ries o $uso&er so!i$iing (n offer o -uy ( P119sh(re% -u
'oes no in$!u'e ( pre!i&in(ry prospe$us sin$e he *no)s $uso&er h(s
(!re('y re$ei/e' one fro& (noher sour$e.
213 If his )(s (n oral offer% he,' pro-(-!y -e fine% sin$e E ;2$3 on!y
(pp!ies o he preDfi!ing perio'% (n' E ;2-3 on!y (pp!ies o )riings.
283 =e$(use i,s ( !eer% ho)e/er% i runs ino he s(&e pro-!e&s (s he
pro-!e& (-o/e.
e3 Co&p(ny )(ns ($$e!er(ion of he effe$i/e '(e of he regisr(ion
s(e&en+ i h(s fi!e' one (&en'&en (fer re$ei/ing SEC $o&&en on
is inii(! fi!ing 2)hi$h su-s(ni(!!y $h(nge' he pre!i&in(ry prospe$us3+
To )ho& &us he re/ision -e supp!ie'H
213 The SEC h(s no s(uory (uhoriy o re?uire 'isri-uion of (
pre!i&in(ry prospe$us.
283 Thus% hey use R. <CB (n' <C1.
1B of <<
2(3 <CB per&is SEC o (*e ino ($$oun if issuer h(s (*en
re(son(-!e seps o &(*e ('e?u(e infor&(ion 2(n' $opies of
he regisr(ion s(e&en3 (/(i!(-!e.
2-3 <C1 uses ($$e!er(ion (s ( 0$(rro1 o insure pro&p
'isri-uion of (&en'&ens. This is e4p!i$i in R. <C12-3283.
f3 5e(!er $(!!s $uso&er% offers o se!! 2)hen issue'3 ( P119sh. No
pre!i&in(ry prospe$us is sen.
213 R. 1;$8DN (ssu&es fr(u' is presen if here is no prospe$us
'e!i/ere'.
2(3 Noe his is ( ,:< A$ ru!e i uses SEC po)er o regu!(e
-ro*ers (n' 'e(!ers.
2-3 Noe su-p(r 2$3% re?uiring ( 'e(!er o (*e re(son(-!e seps o
fu!fi!! (ny )rien re?uess for he pre!i&in(ry prospe$us% (n'
su-p(r 2g3% re?uiring he &(n(ging U9# o furnish $opies of
s(&e o (!! p(ri$ip(ing -ro*ers or 'e(!ers.
283 .or his pro-!e&% noe su-p(r 2-3% re?uiring 'e!i/ery of pre!i&in(ry
prospe$us o (ny person re?uesing i ( !e(s <N hours -efore he
effe$i/e '(e if he issue is (n IPO.
g3 Rese(r$h 'ep(r&en of ( 'e(!er h(/ing no $onne$ion o he offering
'e$i'es in'epen'en!y h( he $o&p(ny is ( goo' in/es&en% (n' s(ys
so in is )ee*!y ne)s!eer.
213 .irs ?uesionA is his (n 0offer1H I &igh -e+ i $ou!' -e seen (s
0$on'iioning he &(r*e.1 If i is (n offer% i (!so &ees he
'efiniion of prospe$us% so )e (re possi-!y f($e' )ih ( E;2-3213
pro-!e&.
283 E <213 2!i&iing E; o he issuer% U9#% (n' 'e(!ers3 'oes not he!p
-e$(use he is ( 0'e(!er1+ neiher 'oes E <2:3 2e4e&ping 'e(!er,s
r(ns($ions after fi!ing -u prior o <B '(ys (fer he effe$i/e '(e3
'ue o he i&ing 2sipu!(e' -y HH3.
2:3 Thus% )e urn o R. 1:OD1:9 2$o/ering re$o&&en'(ions -y
-ro*er9'e(!ers3.
2(3 R. 1:O 'oes no he!p -e$(use i on!y $o/ers issues su-Ge$ o
he ,:< A$ reporing re?uire&ens 2i.e.% no (n IPO3. R. 1:N is
spe$ifi$ o $er(in ypes of offerings no (pp!i$(-!e here.
.in(!!y% 1:9 'oesn, he!p -e$(use i oo on!y re!(es o pu-!i$
$o&p(nies 2(n' hen on!y o SD: $o&p(nies or in'usryD)i'e
repors gi/ing he issuer no e4r( pro&inen$e3.
2-3 Noe if his was ( $o&p(ny (!re('y su-Ge$ o he ,:< A$%
R. 1:O )ou!' per&i he spe$ifi$ re$o&&en'(ion so !ong (s
he 'e(!er )(s no ( 0p(ri$ip(n o he 'isri-uion%1 i.e.% 'i'
no re$ei/e $o&pens(ion fro& he 'isri-uion.
5. The PosDeffe$i/e Perio'
11 of <<
1. Three $o&ponens o 0going effe$i/e1A
(3 S(uory re?uire&ens
213 Re$(!! E ;2(3 s(ys you $(nno se!! uni! ( regisr(ion s(e&en is in
effe$.
283 A!so re$(!! h( E ;2-3213 &(*es i ( /io!(ion o r(ns&i (ny
nonDE 1B prospe$us even after the effective date% (ut E 82(321B32(3
&(*es i O> o sen' ( nonDE 1B prospe$us after the effective date
if ( E 1B prospe$us h(s (!re('y -een sen o he re$ipien.
-3 8B 5(y ru!e E N2(3 s(ys ( s(e&en goes effe$i/e 8B '(ys (fer fi!ing
if here is no SEC ($ion. I $(n -e f(ser /i( ($$e!er(ion 2(!so
per&ie' -y E N2(33 or s!o)er if he SEC i&p!e&ens ( E N2-3 refus(!
or'er.
213 The origin(! i'e( -ehin' his ru!e )(s h( i )(s 0'o(-!e1+ o'(y%
i,s ( -ure(u$r(i$ nigh&(re. Ho) o ge &ore i&eH R. <O:
per&is 0'e!(ying (&en'&ens1 he resu! is h( he SEC ges (!!
he i&e i )(ns+ he s(e&en ne/er -e$o&es effe$i/e (fer 8B
'(ys"
$3 Pr($i$(! &(ers The (&oun of re/ie) gi/en 'epen's on he
$o&p(ny. E/en hough e$hni$(!!y he SEC is inerese' on!y in fu!!
'is$!osure% hey )i!! go o/er un*no)n or ris*y -usinesses &ore $(refu!!y
h(n s(-!e% es(-!ishe' issuers. Thus ( .orune ;BB $o&p(ny &(y no
h(/e is prospe$us re/ie)e' ( (!!% )hi!e (n IPO or $o&p(ny in (
rou-!e' in'usry 2!i*e he S@L,s in he !(e NBs3 )i!! ge ( fu!! re/ie).
213 The SEC )i!! (!so 'o 0r(n'o& fu!! re/ie)s1 Gus o *eep peop!e on
heir oes+ so&ei&es% hey go ino e4$ru$i(ing 'e(i! o/er (n
es(-!ishe' $o&p(ny Gus o &(*e ( poin o he se$uriies )or!'
(-ou so&e spe$ifi$ 'is$!osure issue.
283 The 75@A (n' SD> :B: se$ions usu(!!y ge he -u!* of he SEC,s
fo$us.
2:3 The SEC $(n *i!! (n offering /i( E N2'3 sop or'ers -e$(use E N2e3
per&is he& o e4(&ine -oo*s% e$. for ( 2'3 'eer&in(ion% (n'
f(i!ure o $ooper(e is groun's o issue he or'er. A sop or'er
suspen's effe$i/eness of he regisr(ion s(e&en% hus -ringing
he E ;2$3 prohi-iion (g(ins offering se$uriies su-Ge$ o ( sop
or'er o -e(r. Thus E N2'3 gi/es he SEC ( lot of po)er"
8. E!e$roni$ 5is$!osures
(3 Re!e(se O8:: he *eys o per&issi-!e e!e$roni$ 'e!i/ery of 'o$u&ens
(re 13 noi$e 2i.e.% in/esor shou!' *no) (-ou i h(/e o e!! he& 0i,s
on &y )e- sie13+ 83 ($$ess 2re$ipiens &us h(/e he (-i!iy o re/ie)
he 'o$u&ens3+ (n' :3 e/i'en$e of 'e!i/ery 2possi-!y in$!u'ing
infor&e' $onsen of re$ipien3
18 of <<
:. Noe h( ( 0goo'1 'e(! in he posDeffe$i/e perio' )i!! no s(/e you fro&
/io!(ions in he pre/ious perio'.
(3 5is*in /. Lo&(nsney @ Co. =ro*er sen's !eer 2i.e.% ( )riing3 'uring
)(iing perio' offering o $o&&i sh(res o $uso&er% -u sen's no
pre!i&in(ry prospe$us. Cuso&er re$ei/es E 1B prospe$us -efore he
'e(! is $onsu&&(e'. He!'A he !eer $onsiues ( E ;2-3213 /io!(ion
2p!(iniff re$o/ers un'er E 18213% pro/i'ing $i/i! !i(-i!iy for E ;
/io!(ions3.
<. Noe h( E ;2-3 si!! &(*es i ( /io!(ion o sen' ( nonDE 1B prospe$us or o
'e!i/er ( se$uriy for s(!e (-sen ( E 1B prospe$us% e/en in he posDeffe$i/e
perio'.
(3 =yrnes /. .(u!*ner% 5()*ins @ Su!!i/(n )rien $onfir&(ion of s(!e
is ( 0prospe$us1 un'er E 82(321B3% (n' hus /io!(es E ;2-3 -e$(use i
'oes no $onfor& o E 1B.
-3 Ho)e/er% un'er he E 82(321B32(3 'efiniion% you can 0free )rie1 if ( E
1B prospe$us h(s (!re('y -een sen if you (re in he posDeffe$i/e
perio'
;. A!so noe h( R. 1B-D; 2,:< A$ (nifr(u' ru!e3 &(y re?uire 'is$!osure of
su-se?uen 'e/e!op&ens e/en (fer he effe$i/e '(e. SEC /. 7(nor
Nursing Ho&es 2(!so noe R. <8<2-3 0si$*ering13
C. #hen $(n ( 'e(!er 2not (n U9# or 'e(!er si!! ($ing (s (n U9#3 r(ns($ in (
se$uriy )ihou )orrying (-ou E ; 2espe$i(!!y re?uire&en o sen' ( E 1B
prospe$us3H
(3 There is no i&ing !i&i in E ; ise!f+ hus% )e urn o E <2:3. Su-p(r
2A3 on!y (pp!ies o nonDfi!e' se$uriies 2H3+ 2C3 on!y (pp!ies o unso!'
(!!o&ens.
-3 Thus% )e (re !ef )ih E <2:32=3% e4e&ping r(ns($ions <B '(ys (fer
effe$i/e '(e or prior o <B '(ys (fer he firs 0-on( fi'e offer1 of he
se$uriy.
213 HHA pro-(-!y -es o inerpre 0-on( fi'e offer1 (s (n offer )hen
you can se!!% o (/oi' surp!us(ge pro-!e&.
$3 )owe*er% noe he !(s p(r(gr(ph in E<2:3 he SEC $(n &o'ify he
i&e !i&is /i( ru!e. They h(/e 'one so in R. 1O<. The fo!!o)ing
s$he&e ensuesA
213 No re?uire&en o 'e!i/er prospe$us ( (!! if i,s ( ,:< A$ 2EE 1:%
1;2'33 $o&p(ny -efore fi!ing 2i.e.% G73. R. 1O<2-3% 2$3 INonDIPOK
283 8; '(ys (fer offering '(e 2!(er of effe$i/e or -on( fi'e offer
'(e3 if no ,:< A$ $o&p(ny% -u is on (n e4$h(nge 2i.e.% Gener(!
7(gi$3 R. 1O<2'3 IIPOK
2:3 9B '(ys (fer offer for 0-!(n* $he$* $o&p(ny1 2i.e.% /ery s&(!!
offers% !i*e Peer!ess3 R. 1O<2g3 IIPOK
1: of <<
2<3 <B '(ys $o&p(nies se!!ing 'ire$!y Ireporing $o&p(nies )ih no
prior regisr(ion ( r(re $(seK
O. Pro-!e&s 2s(&e f($ p(ern (s (-o/e% e4$ep in posDeffe$i/e perio'3
(3 7us ( 'e(!er sen' ( E 1B prospe$us )ihA
213 Leer o $uso&er offering so$*H If E 1B prospe$us )(s
pre/ious!y sen% hen no% sin$e E 82(321B3 e4$!u'es his fro& he
'efiniion of 0prospe$us1 sin$e i is posDeffe$i/e. Oher)ise% yes.
283 A so$* $erifi$(e &(i!e' o $uso&er )ho ($$epe' or(! offer o
-uyH Les+ E ;2-3283 re?uires ( E 1B prospe$us o ($$o&p(ny
'e!i/ery.
2:3 S(&e (s (-o/e% -u $erifi$(e is 'e!i/ere' ( 'e(!er,s offi$eH
A!&os $er(in!y yes. The on!y (rgu&en is ( Guris'i$ion(! &e(ns
one 2i.e.% no using he &(i!s or iners(e $o&&er$e3. Cours )i!!
pro-(-!y s(y h( so&e)here% ( so&e i&e% one of he &e(ns )(s
use'.
2(3 Noe his $(n -e pro-!e&(i$ )hen foreign $ounries (re
in/o!/e'% ho)e/er.
2<3 S(&e (s 283 (-o/e% -u $uso&er re$ei/e' E 1B prospe$us 'uring
he )(iing perio'H Les. E ;2-3283 (g(in. No e4$epion for
delivery for ( person )ho (!re('y h(s ( prospe$us+ ( E 1B
prospe$us must ($$o&p(ny or pre$e'e 'e!i/ery.
2;3 A $onfir&(ion of s(!e )here ($$ep(n$e )(s o (n or(! e!ephone
offerH Les. E ;2-3213% E 82(321B3 he $onfir&(ion is pro-(-!y (
0prospe$us1 -u of $ourse 'oes no $onfor& o E 1B. On!y )(y o
(*e i ou of E 82(321B3 'efiniion of 0prospe$us1 is o sen' ( E 1B
prospe$us )ih i.
2C3 Afer $onfir&ing s(!e -y e!ephone o $uso&er )ho &('e offer o
-uy /i( e!ephoneH No. =e$(use i is or(!% he $onfir&(ion is no (
0prospe$us1 un'er E 82(321B3% so here is no E ;2-3213 pro-!e&.
2Of $ourse% you si!! h(/e o sen' ( prospe$us )hen he se$uriies
(re 'e!i/ere'3.
2(3 A!so noe h( R. 1B-D1B re?uires -ro*ers o gi/e heir
$uso&ers )rien $onfir&(ions.
-3 C(n ( -ro*er $onfir& (n or(! s(!e )ih ( $opy of he fin(! E 1B
prospe$usH Les. No E ;2-3 pro-!e&s here.
$3 5e(!er &(i!s ( -ro$hure opi&isi$(!!y 'es$ri-ing $o&p(ny (!ong )ih
he E1B s(uory prospe$us. =ro$hure ne/er fi!e' )ih SEC.
Sio!(ionH
213 No% sin$e he E 1B prospe$us is ($$o&p(nying i% he -ro$hure isn,
( 0prospe$us1 un'er E 82(321B3. Nor&(!!y su$h -ro$hures 'o no
nee' (ppro/(! 2here (re ( fe) e4$epions% no(-!y for &uu(!
fun's3.
1< of <<
283 Ho)e/er% here &(y -e !i(-i!iy un'er he (nifr(u' pro/isions of
-oh A$s 2i.e.% poeni(! for &isrepresen(ions (n' o&issions+ fe(r
of !i(-i!iy ypi$(!!y pre/ens issuers fro& using su$h -ro$hures3.
'3 8 &onhs (fer he effe$i/e '(e% &us he 'e(!er sen' ( E 1B prospe$us
o $uso&ers -uying he so$* on he open &(r*eH Les+ see 'es$ripion
of E <2:32(3 (n' R. 1O< (-o/e+ his offer f(!!s ino he <B 2or 9BH3 '(y
IPO r(nge.
e3 One ye(r (fer effe$i/e '(e% 'e(!er si!! h(s so&e so$* fro& his
origin(! pur$h(se fro& he U9#+ &us he 2or $(n he3 'e!i/er ( E 1B
prospe$us o $uso&ers o )ho& he rese!!s he so$*H E <2:32$3
e4e&ps unso!' (!!o&ens fro& E;+ R. 1O<2f3 $onfir&s his.
213 =e)(re% ho)e/er% E 1B2(32:3 9 &onhs posDeffe$i/e% (
prospe$us $(n, -e o/er 1C &onhs o!' o ?u(!ify (s ( E 1B
prospe$us.
f3 T)o ye(rs (fer effe$i/e '(e% (n' one ye(r (fer he offer )(s
$o&p!ee'% he $o&p(ny is !ise' on he NLSE. S(&e U9# )i!! h(n'!e
( ne) issue. C(n he U9# upgr('e he $o&p(ny in is ne)s!eerH
213 Ag(in% )e reurn o R. 1:OD1:9. R. 1:O $(nno -e use' -e$(use
he U9# is 0p(ri$ip(ing in he offering.1
283 Thus% )e !oo* o R. 1:9. I per&is ( p(ri$ip(n o spe$ifi$(!!y
re$o&&en' ( se$uriy if he $o&p(ny bothA
2(3 Is (n SD: $o&p(ny. The .or& !iss he re?uire&ens% -u
gener(!!y i refers o $o&p(nies su-Ge$ o ,:< A$ 'is$!osure
for o/er ( ye(r% )ih no 'ef(u!s% e$.% e$.+ (n'
2-3 7ees ( 0&ini&u& f!o(1 re?uire&en 2$o&&on e?uiy /(!ue is
R PO;73 or 0in/es&en gr('e1 re?uire&en 2-on's r(e' (
$er(in gr('e -y 7oo'y,s% e$.3
2:3 A!ern(i/e!y% he re$o&&en'(ion is per&ie' un'er R. 1:9 ifA
2(3 The re$o&&en'(ion is of ( *in' 'isri-ue' )ih re(son(-!e
regu!(riy% (n'
2-3 Is (n in'usryD)i'e repor or is ( $o&prehensi/e !is of
re$o&&en'e' se$uriies% (n'
2$3 The issuer is gi/en no gre(er pro&inen$e h(n (ny oher
se$uriy% (n'
2'3 The opinion is no &ore f(/or(-!e h(n in he !(s pu-!i$(ion%
g3 Ten &onhs (fer he se$on' offering 'es$ri-e' (-o/e% he $o&p(ny fi!es
( regisr(ion s(e&en reg(r'ing ( ne) $!(ss of preferre' so$* using
s(&e U9#. Shor!y here(fer% he $o&p(ny (nnoun$es (-o/eD
proGe$ion e(rnings. C(n U9# re$o&&en' ( 0-uy1 no) in is
ne)s!eerH
1; of <<
213 R. 1:N if ( .or& SD8 or SD: $o&p(ny% -ro*er $(n re$o&&en' if
issue is non$on/eri-!e% nonp(ri$ip(ing preferre' so$*.
283 >ey o .or& SD8 e!igi-i!iy &us h(/e -een su-Ge$ o ,:< A$
reporing for :C &onhs prior o regisr(ion. I,s ( $!ose $(!! in his
$(se 2i 'epen's on ho) !ong he se$on' offering oo*3.
III. The Regisr(ion Pro$ess
A. The Inegr(e' 5is$!osure Syse&
1. I use' o -e h( ,:: A$ (n' ,:< A$ 'is$!osures )ere o(!!y sep(r(e.
Reg. SD> 219OO3)(s he firs sep o)(r's inegr(ion% (n' !(er re/isions
fo!!o)e' 2e.g.% .or& 1BD>% R. 1<(D:% Reg. SDT3.
8. .or&s SD1% SD8% (n' SD: ('op ( hreeDier syse& for &os regisr(ions
2fro& he !onges o he &os (--re/i(e' regisr(ions3.
:. A -rief )or' on Effi$ien C(pi(! 7(r*e Hypohesis 2EC7H3
(3 This is -(si$(!!y ( heory h( (!! infor&(ion (-ou ( se$uriy is
$on(ine' in is pri$e.
213 EC7H h(s hree for&sA srong% se&iDsrong% (n' )e(*. Srong
s(ys (!! infor&(ion% e/en insi'er infor&(ion% is $on(ine' in he
pri$e+ se&iDsrong s(ys he pri$e in$!u'es (!! pu-!i$ infor&(ion+ (n'
)e(* s(ys h( (!! p(s '(( is in$orpor(e' in he pri$e.
283 SEC regu!(ion is pre&ise' &os!y on he se&iDsrong hypohesis of
EC7H. This is p(ri(!!y )hy he e&ph(sis is on disclosure. This is
p(ri$u!(r!y e/i'en )ih .or& SD: 2for )e!!Des(-!ishe'
$o&p(nies3+ he presu&pion is h( hese $o&p(nies (re fo!!o)e'
$!ose!y -y he &(r*e so 'e(i!e' 'is$!osure for e/ery offering is
unne$ess(ry.
<. T)o *ey $on$eps for he 'is$!osure syse&A
(3 7e$h(ni$(!!y% ho) 'o you 'is$!oseH
213 The 0oo!*i1A Reg. C gi/es you &e$h(ni$s 2fons% e$.3+ SD> 'e(!s
)ih nonD($$ouning 'is$!osures+ SDT 'e(!s )ih ($$ouning
s(n'(r's.
283 The -igges p(in is SD> I. :B:% 7(n(ge&en 5is$ussion (n'
An(!ysis 275@A3. 7(ny ( $orpor(e (sso$i(e goes -!in' !oo*ing
o/er his suff"
-3 Ho) 'o )e !ighen ,:: A$ -ur'ens in !igh of EC7HH
213 7os!y% reporing re?uire&ens (re ie' $!ose!y o pro4y s(e&en
'e!i/ery (n' ,:< A$ 'is$!osures% he r(ion(!e -eing h( in (n
effi$ien &(r*e one 'is$!osure is enough.
;. 5is$!osure Aspe$s of Perio'i$ Reporing Re?uire&ens
1C of <<
(3 E 182(3 of ,:< A$ -ro*er $(n, r(ns($ in ( se$uriy on ( n(ion(!
e4$h(nge un!ess here is (n e4$h(nge regisr(ion s(e&en in effe$
2not ( ,:: A$ regisr(ion"3
213 Is i possi-!e o regiser for ,:< A$ -u no for ,::H Les if
se$uriy is !ise' on e4$h(nge -u is e4e&p fro& ,:: A$ for so&e
re(son.
283 5e(i!s of regisr(ion (re in ,:< A$ E 182-3
-3 E 1:2(3 if regisere' un'er E 18% you &us perio'i$(!!y repor.
213 Pro-!e&A E 182(3 is in$o&p!ee 2on!y ges n(ion(! e4$h(nges3+
E 182g3213 (n' R. 18gD1 pu!!s in $o&p(nies )ih P17 (sses (n'
o/er O;B sh(reho!'ers.
283 #h( if ( $o&p(ny issues nohing -u -on's 2(n' h(s fe) or no
sh(reho!'ers3H There is no E 182g3 (n(!og% -u E 1;2'3 (n' is
regu!(ions pu!! in so&e.
$3 5is$!osure re?uire&ens un'er he ,:< A$
213 R. 1:(D1 re?uire&ens of (n (nnu(! repor+ .or& 1BD> is usu(!!y
use'% i pi$*s up ( !o fro& Reg. SD>+ 1:(D11 re?uires .or& ND> for
unusu(! e/ens.
283 R. 1<( reg(r'ing pro4y so!i$i(ion is ( *ey ru!e i re?uires
S$he'u!e 1<A% )hi$h (!so (ps Reg. SD>
2:3 Ne) 0p!(in eng!ish1 ru!es 2R. <813 &e(ns you )in' up h(/ing% in
effe$% 0)o1 prospe$uses% one for he or'in(ry in/esor (n' one
for insiuion(! in/esor.
=. The Regisr(ion S(e&en
1. 5is$!osure
(3 Fu(!i(i/e 5is$!osure
213 The SEC re?uires ?u(!i(i/e infor&(ion (s )e!! (s ?u(ni(i/e
'(( so h( in/esors $(n e/(!u(e he $h(r($er% inegriy% (n'
(-i!iy of &(n(ge&en.
283 In he 7(er of .r(n$h(r' Corp. &(Goriy sh(reho!'er &(*es
se/er(! ?uesion(-!e !o(ns o hi&se!f. He!'A hese &us -e 'is$!ose'
e/en hough hey (re no re?uire' -y (ny for& -e$(use hey (re
material o he in/esing pu-!i$.
2(3 The 0*(!ei'os$opi$ /(riey of e$ono&i$ !ife1 pre$!u'es
enu&er(ion of e/eryhing h( &us -e 'is$!ose'.
2-3 Noe R. <BN i -(si$(!!y ('ops his !ine of hin*ing% s(ying
you h(/e o in$!u'e in he regisr(ion s(e&en (ny &(eri(!
infor&(ion e/en if no spe$ifi$(!!y enu&er(e'.
2:3 Noe h( SD> I. <BBs 'i$(e inegriy 'is$!osures% )hi$h (''ress
&(ny of he $on$erns in .r(n$h(r'. 7os no(-!e is I. <B12f3.
1O of <<
2<3 .urher noe SD> I. <B8 2&(n'(ing 'is$!osure of offi$er
$o&pens(ion3 (n' I. 1B: 2&(eri(! pen'ing !eg(! &(ers%
espe$i(!!y en/iron&en(! suis3.
-3 Ne) Appro($hes o 5is$!osure
213 0Sof1 infor&(ion 2i.e.% for)(r'D!oo*ing s(e&ens3
2(3 These use' o -e for-i''en. They )ere en$our(ge' -y he
('opion of R.1O; (n' R. :-DC% )hi$h &(*es su$h s(e&ens
no fr(u'u!en so !ong (s hey h(/e ( reasona(le (asis (n' (re
'is$!ose' in good faith.
2i3 #ei!gos /. Co&&on)e(!h E'ison he O
h
Cir. 'e$i'es
h( goo'Df(ih for)(r' !oo*ing s(e&ens $(n yie!'
su&&(ry Gu'g&en for 'efen'(ns -(se' on R. 1O;.
2-3 Re!e(se CO11 The 75@A se$ion 2SD> I. :B:3 must
'is$!ose 0*no)n ren's1 (n' heir i&p($ on he $o&p(ny.
2i3 75@A goes on he 1BD> (n' 1BDF
2ii3 One $(nno sue pri/(e!y for 'ep(rures fro& he
re?uire&ens of I. :B: on!y he SEC $(n enfor$e i 2-u
possi-!y $(n )ih (nifr(u' pro/isions% e$. for o&issions%
e$.3
2$3 Re!e(se CN:; 7us 'is$!ose fuure un$er(inies )ih (
poeni(! &(eri(! i&p($
2'3 PSLRA in 199;% refor& (''e' +7, o he ,:: A$ (n'
+-. o he ,:< A$. =oh pro/i'e 0s(fe h(r-ors1 for
for)(r'D!oo*ing e(rnings proGe$ions if ( 0&e(ningfu!
$(uion(ry s(e&en1 is in$!u'e'. See 'is$ussion infr(.
283 0P!(in Eng!ish1 ru!es R. <81 )en ino effe$ in O$o-er 199N
re?uiring e(sierDoDre(' !(ngu(ge in fi!ings. See (-o/e for
'is$ussion.
$3 Pro-!e&s SD1 regisr(ion+ )h( 'is$!osures (re re?uire' in e($h of he
fo!!o)ingH #h( is per&ie'H
213 L(s ; ye(rs profis )ere !o)er h(n he ; ye(rs pre/ious.
2(3 .or& SD1% I. 112f3 'ire$s us o SD> :B1
2-3 SD> I. :B12(3 re?uires fin(n$i(! '(( fro& he pre/ious ;
ye(rs+ :B12-3 re?uires (ny (''iion(! ye(rs nee'e' o *eep he
infor&(ion fro& -eing 0&is!e('ing.1
2$3 So he ?uesion isA is o&iing he 'rop 0&is!e('ing1H Cou!'
-e ( re(! 'e$!ine% -u hen (g(in $ou!' -e in'usryD)i'e 'e$!ine
or ($$ouning $h(nge. In/esors )i!! )(n o *no) his (n'
)i!! )(n o *no) )hy.
1N of <<
2'3 Noe I. :B1 Insru$ions% U8% V 8 for &(eri(! fuure
un$er(inies or hings h( (ffe$ $o&p(r(-i!iy of fin(n$i(!
'(( 2!i*e ($$ouning $h(nges3% you &us 'is$!ose.
2e3 A!so noe I. :B: 2pi$*e' up -y SD1 I. 112h33% he 75@A
se$ion. I e$!ipses &u$h of he (-o/e+ -(si$(!!y% you,/e go o
'is$!ose e/eryhing h( has or could &(eri(!!y (ffe$ he
$o&p(ny.
283 Issuer rens -ui!'ing fro& p(rnership. CEO,s )ife is ( p(rner in
h( p(rnership.
2(3 5o )e nee' o 'es$ri-e he -ui!'ingH SD> I. 1B8 2pi$*e' up
-y SD1 I. 112-33 re?uires 'is$!osure of &(eri(! or prin$ip(!
properies. The (ns)er is un$!e(r on hese !i&ie' f($s.
2-3 SD> I. <B<2(3 2pi$*e' up -y SD1 I. 112n33 re?uires
'is$!osure of r(ns($ions in e4$ess of PCB* in )hi$h ( 'ire$or%
e4e$ui/e offi$er% R;W sh(reho!'er% or 2un'er su-p(r 2(32<33 (
&e&-er of he i&&e'i(e f(&i!y of one of he !ise' persons.
2i3 Ho) o $oun he PCB*H Insru$ion : e!!s us o in$!u'e
(!! perio'i$ ins(!!&ens+ hus% )e ('' up he !e(se
p(y&ens.
2ii3 #h( is (n 0e4e$ui/e offi$er1H R. <B; 'efines i+ i is he
presi'en% (ny SDP in $h(rge of ( prin$ip(! -usiness uni%
or (nyone )ho perfor&s ( 0po!i$y &(*ing fun$ion.1
2iii3 Noe Insru$ion N2C3 if she is Gus ( limited p(rner 2not
( gener(! p(rner3
2$3 A!so noe SD> I. CB1 2pi$*e' up -y SD1 I. 1C3 re?uiring
e4hi-is% in$!u'ing &(eri(! $onr($s for .or& SD1 2see (-!e3.
CB12-321B3 'efines 0&(eri(! $onr($+1 i in$!u'es or'in(ry
$onr($s )ih 'ire$ors (n' offi$ers+ !ogi$(!!y% his &us (!so
in$!u'e heir f(&i!y o (/oi' e(sy 0en'Druns.1
2:3 Issuer is $on'u$ing high!y $onfi'eni(! negoi(ions for he
($?uisiion of (noher $o&p(ny.
2(3 SD> I. :B: 275@A% pi$*e' up -y SD1 I. 112h33 re?uires
'is$!osure of un$er(inies h( )i!! h(/e ( &(eri(! i&p($+ he
pro-!e& here is h( 'is$!osure )ou!' !i*e!y *i!! he 'e(!.
2-3 R. <BC pro/i'es ( possi-!e so!uion+ i per&is ( $o&p(ny o
re?ues h( $er(in infor&(ion fi!e' )ih he SEC -e *ep
$onfi'eni(! 2hough his is &ore $o&&on!y use' for r('e
se$res3.
2$3 Re!e(se ::DCN:; SEC s(ys you 'on, h(/e o 'is$!ose if i
)ou!' Geop(r'iJe he r(ns($ion and the only reason for
disclosure is S-K It !"!.
19 of <<
2i3 Noe re?uire&en is h( i would Geop(r'iJe he
r(ns($ion no h( i could.
2<3 Issuer h(s -orro)e' fro& insur(n$e $o&p(ny+ (gree&en re?uires
he $o&p(ny o *eep ( $er(in (sseDoD!i(-i!iy r(io.
2(3 SD> I. 8B1 2pi$*e' up -y SD1 I. 112'33+ 8B12$3213 re?uires
'is$!osure of (ny resri$ions h( $ou!' &(eri(!!y !i&i he
regisr(n,s (-i!iy o p(y 'i/i'en's.
2-3 A!so% SD> :B: 275@A3 $ou!' re?uire his.
2;3 One SDP &(*es ( su-s(ni(!!y higher s(!(ry h(n he oher SDP,s+
'is$!osure )ou!' serious!y i&p(ir re!(ions -e)een he&.
2(3 SD> I. <B82(32:3 2pi$*e' up -y SD1 I. 112l33 re?uires
'is$!osure of he CEO p!us he highesDp(i' oher e4e$ui/e
offi$ers.
2i3 Re$(!! h( R. <B; 'efines (n 0e4e$ui/e offi$er1 in p(r (s
(nyone perfor&ing ( 0po!i$y&(*ing fun$ion.1
2-3 Cou!' ry o use R. <BC $onfi'eni(!iy (pp!i$(ion% -u i,s
un!i*e!y o -e (ppro/e'.
2C3 CEO re$en!y so!' ( -un$h of sh(res ($?uire' )o ye(rs (go /i( he
e4er$ise of so$* opions.
2(3 SD> I. <B82-3 is on!y ge(re' o)(r' $o&pens(ion p(i' in he
p(s ye(r+ ho)e/er% )o ye(rs (go% sh(res )ere unregisere'+
SD1 I. 1; pi$*s up SD> I. OB1% re?uiring 'is$!osure of (!! s(!es
of unregisere' se$uriies in he p(s hree ye(rs.
2-3 5oes he CEO h(/e o 'is$!ose he nu&-er of sh(res he ho!'sH
SD1 I. 112&3 pi$*s up SD> I. <B:% re?uiring 'is$!osure of
se$uriy o)nership of -enefi$i(! o)ners (n' &(n(ge&en.
2$3 If CEO only he!' opions% )ou!' h( h(/e o -e 'is$!ose'H
Les% -e$(use SD> I. <B: *i$*s you o R. 1:'D:2'32132i32A3%
)hi$h &(*es (n opion ho!'er ( 0-enefi$i(! o)ner.1
2'3 A!so noe insi'er r('ing ru!es &(*e i (n (uo&(i$ /io!(ion
if ( 'ire$or or offi$er se!!s )ihin C &onhs of -uying+
enfor$e&en herefore re?uires 'is$!osure of when hey -uy (n'
se!!.
2O3 Co&p(ny h(s -een -ri-ing foreign offi$i(! o ge ( $onr($.
2(3 The .oreign Corrup Pr($i$es A$ 2.CPA3 prohi-is !(rge
gifs+ if !iig(ion ensues% SD1 I. 112$3 *i$*s in SD> I. 1B:%
re?uiring 'is$!osure of !eg(! pro$ee'ings.
2-3 A!so noe SD> I. <B12f3 2*i$*e' in -y SD1 I. 112*33 re?uires
'is$!osure of !eg(! pro$ee'ings in he p(s fi/e ye(rs -e(ring on
he inegriy or (-i!iy of ( 'ire$or or oher e4e$ui/e offi$er.
8B of <<
2$3 If here is no !iig(ion% hen here is no ru!e on poin hough
he SEC &igh -ring ( .r(n$h(r'Dype sui.
8. 7(eri(!iy
(3 7(eri(!iy is everything. .(i!ure o 'is$!ose is on!y ( pro-!e& if he
'is$!osure )ou!' -e &(eri(!.
-3 =(si$ /. Le/inson Supre&e Cour s(ys 0&(eri(!1 &e(ns he
pro-(-i!iy 4 &(gniu'e of (n e/en 'eer&ines &(eri(!iy for
$oningen or spe$u!(i/e e/ens+ i is ( f($Dspe$ifi$ in?uiry (n' here is
no -righ !ine ru!e 2fro& Te4(s Gu!f Su!phurH3
213 =(si$ is &ore i&por(n in h( i ('ops he 0fr(u' on he &(r*e1
heory i.e.% ( p!(iniff 'oesn, h(/e o pro/e ($u(! re!i(n$e on (
&iss(e&en or o&ission 2re!i(n$e is presu&e'% (n' he 'efen'(n
&us re-u i3.
$3 The 0&ighD)ou!'1 'e-(e 'oes ( f($ nee' o -e certain o i&p($ (n
in/esor,s $hoi$e% or nee' i on!y might i&p($ s(&eH
213 Supre&e Cour s(ys neiher hey s(y 2in =(si$3 ( 0su-s(ni(!
!i*e!ihoo'1 is )h( is re?uire' 2)hi$h isn, /ery he!pfu!3.
'3 =(si$ $our s(ys in foonoe 1O h( Mno $o&&en, )i!! suffi$e (s no
&is!e('ing if no disclosure is mandated. This is pro-!e&(i$ -e$(useA
213 Corpor(ion ypi$(!!y h(s no 'uy o $orre$ ( ru&or un!ess i $(&e
fro& (n insi'er+ poeni(! !i(-i!iy for$es $orpor(ions o on!y
$orre$ f(!se ru&ors% )hi$h *i!!s he effe$i/eness of ( Mno
$o&&en.,
283 E4$h(nges 2!i*e NLSE3 ofen re?uire 'is$!osure.
2:3 Co&p(ny &(y h(/e ( 'uy o 'is$!ose if e/ens h(/e $(use' prior
s(e&ens o -e$o&e &is!e('ing.
2<3 If ( $o&p(ny is -uying or se!!ing is o)n se$uriies hey h(/e o
'is$!ose (!! &(eri(! infor&(ion o pre/en insi'er r('ing.
2;3 Insi'er Tr('ing (n' Se$uriies .r(u' A$ of 19NN s(ys ( $o&p(ny
$(n, *no)ing!y or re$*!ess!y f(i! o (*e 0(ppropri(e seps1 o -e
sure insi'ers (ren, r('ing on insi'e infor&(ion )hi$h ypi$(!!y
&e(ns 'is$!osure.
e3 Pro-!e&s
213 6usi$e 5ep. sen's !eer o regisr(n reg(r'ing possi-!e (nirus
/io!(ions.
2(3 SD> I. 1B: 2pi$*e' up -y SD1 I. 112$33% !(s senen$e &us
'is$!ose !iig(ion 0*no)n o -e $one&p!(e'1 -y he
go/ern&en. Thus% you nee' &ore f($s 'oes his ype of
!eer nor&(!!y &e(n ( !()sui is $o&ingH
2-3 R. <B9 'e(!s )ih un*no)n infor&(ion -(si$(!!y% you shou!'
'is$!ose h( you 'on, *no) 2(n' $(n, *no)3.
81 of <<
2$3 Ho) 'oes his (ffe$ 75@AH T)o p(r (n(!ysis+ firs% figure
ou if his is !i*e!y o o$$ur+ if you $(n, figure h(% (s* )h(
he poeni(! i&p($ )ou!' -e if i 'oes o$$ur.
283 EPA or'ers $o&p(ny o sop 'is$h(rge fro& is p!(n.
2(3 Insru$ion ; of SD1 *i$*s you o SD> I. 1B12$321324ii3
en/iron&en(! $!(i&s (re h(n'!e' sep(r(e!y.
:. Re'u$ing 'is$!osure ris*s 2esp. for)(r'D!oo*ing s(e&ens3
(3 In Re #or!'s of #on'er 2#O#3 Se$. Li. 9
h
Cir. (nnoun$es he
/(espea0s caution1 'o$rine h( is% ( for)(r'D!oo*ing s(e&en in
he prospe$us is per&issi-!e if ($$o&p(nie' -y ( &e(ningfu! $(uion(ry
s(e&en.
213 The s(e&en $(n, -e ( 0-!(n*e )(rning1 2i.e.% 0(!! se$uriies (re
ris*y1 ype s(e&en3+ i &us -e (i!ore' o spe$ifi$ ris*s. The
)(rnings (!so nee' o -e pro&inen (n' shou!' 'is$!ose (ny
(ssu&pions re!ie' upon.
283 The !e/e! of proe$ion (ffor'e' /(ries (&ong Cir$uis 28
n'
gi/es
&ore proe$ion h(n ;
h
+ so&e $ir$uis% !i*e <
h
% reGe$ ourigh3.
-3 Congression(! response he 2&34,
213 P(r of he 0Ne) re/o!uion%1 he PSLRA is ( pie$e of ,9<
!egis!(ion &(*ing i&por(n $h(nges for 'is$!osure !i(-i!iy. I )(s
p(sse' o/er Pres. C!inon,s /eo. I represens ( signifi$(n $uing
-($* of se$uriies regu!(ion.
283 New +-. 5633 ,ct7 and +7, 5638 ,ct7 /&afe )ar(or1 is he
&os i&por(n (''iion.
2(3 This is ( s(uory ('opion of he #O# 0-espe(*s $(uion1
'o$rine.
2-3 The ne) se$ions (pp!y o $o&p(nies su-Ge$ o ,:< A$
EE 1:2(3 (n' 1;2'3 2i.e.% reporing $o&p(nies3% persons ($ing
on hose $o&p(nies, -eh(!f% ousi'e re/ie)ers% (n' U9#.
2$3 These ne) se$ions pro/i'e ( 0s(fe h(r-or1 for for)(r'D
!oo*ing s(e&ens. There (re )o (!ern(i/es.
2i3 A!ern(i/e U1A To ?u(!ify% he s(e&ens &usA
2(3 =e i'enifie' (s for)(r'D!oo*ing%
2-3 =e ($$o&p(nie' -y ( 0&e(ningfu! $(uion(ry
s(e&en%1
2$3 The $(uion(ry s(e&en &us i'enify f($ors )hi$h
$ou!' $(use &(eri(! 'e/i(ion fro& he proGe$ions.
2ii3 A!ern(i/e U8A p!(iniff &us sho) h( s(e&ens )ere
&('e )ih actual #nowledge of heir f(!siy.
88 of <<
2'3 There is (!so ( s(fe h(r-or for oral statements+ i is !i&ie' o
he issuer (n' 0persons ($ing on -eh(!f of he issuer1+ he
0s(fe h(r-or1 is -(si$(!!y he s(&e% )ih he (''iion h( he
)(rnings $(n -e in ( 'o$u&en in$orpor(e' -y he or(!
s(e&en.
2e3 There (re (!so 0-(' -oy1 e4$epions e4$!u'ing he 0s(fe
h(r-or1 fro& persons $on/i$e' of ( fe!ony in he p(s hree
ye(rs% issuers of penny so$*s% IPOs% e$.
2:3 Heighene' p!e('ing s(n'(r's
2(3 The PSLRA in$re(se' he !e/e! of 'e(i! h( &us -e in$!u'e'
in ( p!(iniff,s p!e('ings.
2-3 Re$(!! fro& =usiness Asso$i(ions h(% un'er Erns @ Erns /.
Ho$hfe!'er% o (sser ( /(!i' 1B-D; (nifr(u' pro/ision% you
&us (!!ege s$iener.
2i3 Prior o he PSLRA% he /(rious $ir$uis h(' /(rying
p!e('ing s(n'(r's for s$iener 2i.e.% 8
n'
re?uire' high
p(ri$u!(riy% 9
h
)(s ?uie !(4 (-ou p(ri$u!(riy3.
2ii3 The PSLRA ('ope' ne) E 8152-321D83% )hi$h re?uires (
p!(iniff o p!e('A
2(3 .or !iig(ion on &is!e('ing s(e&ens% e4($!y )hy
he s(e&en is &is!e('ing
2-3 .or !iig(ion )ih ( s$iener re?uire&en 2i.e.% 1B-D;3%
particular facts h( gi/e rise o ( strong inference
h( he 'efen'(n ($e' )ih he re?uisie s(e of
&in'.
2i3 Typi$(!!y% his &e(ns eiher es(-!ishing ( motive
and opportunity o $o&&i fr(u'% or rec#lessness
in he 'efen'(n,s $ons$ious -eh(/ior.
2iii3 Noe h( his is ($u(!!y ( higher s(n'(r' h(n h(
e&p!oye' -y e/en he 8
n'
Cir.
2<3 Oher $h(ngesA (!er(ion of ru!es for n(&e p!(iniff in se$uriies
$!(ss ($ions% (!er(ion of he !i(-i!iy sru$ure 2&os!y for ousi'e
'ire$ors3.
$3 HHA Pr($i$e noeA The PSLRA h(sn, !e' o (n (/(!(n$he of for)(r'D
!oo*ing s(e&ens% pro-(-!y -e$(use no one )(ns o -e ( guine( pig+
i,s pro-(-!y -es o e!! $!iens no o (*e i oo !ier(!!y 2i.e.% for or(!
s(e&ens% &(*e he $(uion(ry s(e&ens or(!!y r(her h(n re!ying on
in$orpor(ing so&e )rien 'o$u&en3.
<. E/(!u(ion of he 'is$!osure syse&.
(3 Re$(!! h( he se&iDsrong /ersion of EC7H 'o&in(es he r(ion(!e
-ehin' go/ern&enD$o&pe!!e' 'is$!osure.
8: of <<
-3 There (re% ho)e/er% (rgu&ens (g(ins re?uiring 'is$!osureA
213 In/esors )i!! 'e&(n' infor&(ion% espe$i(!!y insiuion(! in/esors
)ho h(/e &ore $!ou. This is espe$i(!!y rue for IPOs.
283 A $o&p(ny,s repu(ion on #(!! Sree &(ers $o&p(nies h(
pro/i'e &ore infor&(ion o'(y )i!! -e re(e' -eer )hen hey
offer ( ne) se$uriy o&orro). A!so% $o&p(nies use 'is$!osure (s
( sign(!ing 'e/i$e o he &(r*e (-ou he $o&p(ny,s he(!h.
2:3 NLSE% NAS5% e$. se!fDregu!(e no one )i!! ris* -eing osse' off
(n e4$h(nge% so hey )i!! 'is$!ose.
2<3 An U9# is 0rening1 his repu(ion )hen he &(*es (n offering+ he
)i!! re?uire he $o&p(ny o 'is$!ose -e$(use he )on, )or* for
he& if hey $ou!' ge hi& ino rou-!e.
$3 Of $ourse% here (re p!eny (rgu&ens in f(/or of &(n'(ory 'is$!osureA
213 There (re srong in$eni/es o hi'e neg(i/e infor&(ion+ (-sen
&(n'(ory 'is$!osure% on!y posii/e infor&(ion )ou!' -e 'is$!ose'
?ui$*!y.
283 Co&p(ny &(y )(n o hi'e $o&peii/e ('/(n(ges (s !ong (s
possi-!e.
2:3 7(n(ge&en &(y fro& i&e o i&e )(n he so$* pri$e o -e low%
su$h (s in prep(r(ion for ( L=O or so&e so$* opion p!(ns )hi$h
ie he opion pri$e o he &(r*e pri$e.
2<3 Insi'er r('ing is e(sier if here is no 'is$!osure re?uire&en
insi'ers $(n -uy (n' hen 'is$!ose.
'3 A prin$ip(! (rgu&en re/o!/es (roun' he $oss of geing infor&(ion.
213 #ihou &(n'(ory 'is$!osure% hous(n's of (n(!yss (n' in/esors
(re 'up!i$(ing e($h oher,s effors o ge he s(&e infor&(ion%
)hi$h is /ery ineffi$ien.
283 There,s (!so ( 0free ri'er1 pro-!e& on$e ( 'is$o/ery is &('e% he
pu-!i$ )i!! ?ui$*!y (-sor- i )hen i !e(*s. The (n(!ys )ho &('e
he 'is$o/ery 'oesn, -enefi fu!!y fro& i% so his in$eni/e o
'ogge'!y rese(r$h is 'i&inishe'.
;. Ci/i! Li(-i!iy @ 5ue 5i!igen$e
(3 >ey sour$es of $i/i! !i(-i!iyA
213 ,:: A$ E 11 &(*es designated persons !i(-!e for material
&is!e('ing s(e&ens or o&issions in the registration statement
un!ess ( 'ue 'i!igen$e 'efense is (/(i!(-!e.
283 >eys (re &(eri(!iy (n' he s(e&en &us -e in he regisr(ion
s(e&en.
2:3 ,:: A$ E 182(3213 !i(-i!iy for ( s(!e h( /io!(es E ;.
8< of <<
2<3 ,:: A$ E 182(3283 &(*es misleading statements/omissions in
$onne$ion )ih ( sale/offer to sell a security -y &e(ns of
prospectus or oral communication.
2(3 >ey is h( ( 0se$uriy1 &us -e so!'% (n' h( he se$uriy is
no (n e4e&p one un'er E :2(3283 Igo/ern&en se$uriiesK.
Noe h( or(! s(e&ens $(n gi/e rise o !i(-i!iy here.
2-3 A!soA (ffir&(i/e 'efense of 0re(son(-!e $(re.1
2;3 ,:< A$ E 92e3 (nyone 0)i!!fu!!y p(ri$ip(ing1 in (n ($ h(
/io!(es E 9 I&(nipu!(ion of se$uriy pri$esK.
2(3 This se$ion is ri''!e' )ih e4$epions% so p!(iniffs 'on, !i*e
i. Noe he s(ue of !i&i(ionsA )ihin one ye(r of 'is$o/ery
and hree ye(rs of he /io!(ion.
2-3 A!so noe he M)i!!fu!ness, re?uire&en% (s )e!! (s he f($ h(
i 'oes no (pp!y o he OTC &(r*e 21B-D; is e(sier on his3.
2C3 ,:< A$ E 1N $i/i! !i(-i!iy for (ny f(!se or &is!e('ing s(e&en in
( ,:< A$ fi!ing.
2(3 >eysA p!(iniff &us h(/e pur$h(se' or so!' he se$uriy% he
pri$e &us h(/e -een (ffe$e'% he p!(iniff re!ie' on he
s(e&en% (n' he 'efen'(n $(nno pro/e ( 0goo' f(ih1
'efense.
2O3 ,:< A$ E 1<2'3% 2e3 (nifr(u' pro/isions for en'er offers.
2N3 1B-D; he -(si$ (nifr(u' pro/ision.
2(3 I is 0un!()fu! for (ny person IXK 213 o e&p!oy ( 'e/i$e%
s$he&e% or (rifi$e o 'efr(u'% 283 o &(*e (ny unrue
s(e&en of &(eri(! f($ or o o&i o s(e ( &(eri(! f($
ne$ess(ry in or'er o &(*e he s(e&en &('e% in he !igh of
he $ir$u&s(n$es un'er )hi$h hey )ere &('e% no
&is!e('ing% or 2:3 o eng(ge in (ny ($% pr($i$e% or $ourse of
-usiness )hi$h oper(es or )ou!' oper(e (s ( fr(u' or 'e$ei
on (ny person% in $onne$ion )ih he pur$h(se or s(!e of (ny
se$uriy.1
2-3 >(r'on /. N(ion(! Gypsu& $re(es (n i&p!ie' $(use of ($ion
un'er his ru!e+ sin$e hen% here h(s -een ( huge (&oun of
Gurispru'en$e inerpreing s(&e.
2$3 This ru!e is use' so &u$h h( (&ong he se$uriies -(r i is
si&p!y $(!!e' 0he ru!e.1
-3 Ci/i! Li(-i!iy un'er E 11 of he ,:: A$
213 >ey Fuesions 2(!! $o/ere' in 'e(i!% infr(3A
2(3 #ho &(y sueH
2-3 #ho &(y -e sue'H
8; of <<
2$3 Ho) o &e(sure '(&(gesH
2'3 #h( &us he p!(iniff pro/eH
2e3 Is here ( 'ue 'i!igen$e 'efense (/(i!(-!eH
283 #ho &(y sueH
2(3 Anyone )ho pur$h(ses ( se$uriy in eiher he pri&(ry or
se$on'(ry &(r*e 2-oh se$ions3.
2i3 =(rnes /. Osofs*y p!(iniff &us trace his sh(res o he
spe$ifi$ offering $h(!!enge'. #hyH =e$(use he se$uriy
&us -e re!(e' o he regisr(ion s(e&en 2(rgu(-!e
inerpre(ion3.
2-3 Noe E 1: pro/i'es ( s(ue of !i&i(ions for E 11 (n' E 182(3
283 : ye(rs (fer he offering (n' one ye(r fro& 'is$o/ery.
2$3 E 1: (!so pro/i'es ( !i&i for E182(3213 ($ions one ye(r (fer
he /io!(ion.
2:3 #ho &(y -e sue'H
2(3 E 112(3 !iss hose )ho $(n -e sue'A
2i3 E/eryone signing he regisr(ion s(e&en+
2(3 Noe his (uo&(i$(!!y in$!u'es he regisr(n 2i.e.%
issuer3 -e$(use Insru$ion 1 o .or& SD1 re?uires i.
2ii3 5ire$ors 2(n' hose (-ou o -e 'ire$ors3 (n'9or persons
perfor&ing 'ire$orD!i*e fun$ions+
2iii3 The U9#s+
2i/3 E4pers 2($$oun(ns% e$.3 to the extent of the portion
certified by the expert.
2-3 A!so noe he E 1; 07r. =ig1 e4$epion ( person e4er$ising
$onro! 2/i( (gree&en or so$* o)nership3 o/er (noher is
!i(-!e Goin!y (n' se/er(!!y o he s(&e e4en (s he $onro!!e'
person.
2$3 Noe here is no su$h !is for E 18.
2<3 Ho) o &e(sure '(&(gesH
2(3 Noe E 112f32832A3 I!i(-i!iy of ousi'e 'ire$orsK re/ision i
refers o E :N of he ,:< A$% -u E :N 'oes no e4is" They
pro-(-!y &e(n E 812'3.
2i3 If h( is $orre$% hen Goin (n' se/er(! !i(-i!iy is on!y
(/(i!(-!e if he p!(iniff pro/es ( #nowing /io!(ion of he
se$uriies !()s+ (!so% per$en(ge f(u! is o -e 'eer&ine'
-y per$en(ge $(us(ion+ here (re so&e e4$epions% oo.
2-3 A!so noe E 112e3 pro/isos% no(-!y h( U9# is on!y !i(-!e o
he e4en of his proporion(e ineres in he un'er)riing.
8C of <<
2$3 E 11 ( firs -!ush soun's !i*e i uses res$issionDype '(&(ges
-u pro/iso in E 112e3 &(*es i &ore !i*e ouDofDpo$*e $oss%
)hi$h is &ore in !ine )ih $o&&on !() fr(u'.
2'3 .in(!!y% noe h( '(&(ges &us -e re'u$e' o he e4en h(
he defendant pro/es h( he p!(iniff,s !oss )(s fro&
so&ehing oher h(n he &iss(e&en9o&ission. E 112e3.
2i3 This is soD$(!!e' 0neg(i/e $(us(ion%1 h( is% he
'efen'(ns &us pro/e hey didn$t $(use he h(r&.
2ii3 A*er&(n /. Ory4 Co&&uni$(ions 'efen'(n &e
0neg(i/e $(us(ion1 -ur'en -y sho)ing h( he pu-!i$ 'i'
no re($ ('/erse!y o 'is$!osure of ( &iss(e&en+ in f($%
he pri$e of he so$* rose. 5efen'(n is no !i(-!e for preD
pu-!i$ 'is$!osure 'e$!ine.
2(3 P!(iniff $ounersA he re!e/(n 'is$!osure '(e should
-e '(e of 'is$!osure o he SEC% no he pu-!i$%
-e$(use insi'er r('ing h(' for$e' he pri$e 'o)n (n'
U9# use' /(rious e$hni?ues o prop he pri$e up
here(fer. Cour ignores -e$(use p!(iniff $(n,
pro/e.
2-3 The $our is unusu(!!y proD'efen'(n in his $(se+ i is
pro-(-!y (n ou!ier #O# is &ore !i*e!y o -e
fo!!o)e'.
2;3 #h( &us he p!(iniff pro/eH
2(3 E 112(3 he &us on!y pro/e (n unrue s(e&en or o&ission
of &(eri(! f($. There is no reliance re%uirement.
2i3 Re$(!! he =(si$ 0fr(u' on he &(r*e1 heory.
2ii3 9ut NoteA E 112(3% !(s p(r(gr(ph re!e(se of e(rnings
s(e&en $o/ering ( perio' of twelve months (fer he
effe$i/e '(e re?uires he p!(iniff o pro/e $(us(ion.
2iii3 There is (!so no s$iener re?uire&en (s here is )ih
R. 1B-D;.
2i/3 Noe h( here is ( &(eri(!iy re?uire&en% ho)e/er.
2-3 Re$(!! =(rnes /. Osofs*y re?uires p!(iniff o pro/e his sh(res
$(&e fro& he spe$ifi$ offering he regisr(ion s(e&en
re!(e' o.
$3 5ue 5i!igen$e 5efenses un'er E 11
213 E 112-3 !iss 0'ue 'i!igen$e1 (ffir&(i/e 'efenses (/(i!(-!e o
'efen'(ns.
2(3 Noe h( he issuer is a(solutely (arred fro& (ssering ( 'ue
'i!igen$e 'efense -y E 112-3.
8O of <<
2-3 The res of he se$ion 'es$ri-es )hen e4pers (n' none4pers
)i!! -e he!' !i(-!e for he 0e4perise'1 (n' 0nonDe4perise'1
porions of he regisr(ion s(e&en% respe$i/e!y. Noe he
$h(r ( he en' of he ou!ine )hi$h su&&(riJes hese
pro/isions.
2$3 E4pers
2i3 Are no !i(-!e at all for nonDe4perise' porions ( (!!.
E 112(32<3. Thus% hey don6t ha*e to esta(lish a defense
for hese porions.
2ii3 Are !i(-!e for he e4perise' porions un!ess hey $(n sho)
( 0re(son(-!e groun'1 for heir -e!ief (fer ( re(son(-!e
in/esig(ion. E 112-32:32=3.
2'3 NonDE4pers
2i3 Are !i(-!e for nonDe4perise' porions un!ess hey $(n
sho) ( 0re(son(-!e groun'1 for heir -e!ief (fer (
re(son(-!e in/esig(ion. E 112-32:32A3.
2ii3 Are no !i(-!e for he e4perise' porions unless plaintiffs
$(n sho) no 0re(son(-!e groun'1 for heir -e!ief (fer (
re(son(-!e in/esig(ion. E 112-32:32C3.
283 Noe R. 1OC% 'efining )h( is ( 0re(son(-!e in/esig(ion1
-(si$(!!y% i 'epen's on )ho he person is (n' )h( heir
re!(ionship o he $o&p(ny is.
2:3 Es$o /. =(rChris $!(rifies )h( /(rious ypes of 'efen'(ns &us
sho) o es(-!ish ( 0re(son(-!e in/esig(ion1 for ( 'ue 'i!igen$e
'efense.
2(3 Offi$ers 2C.O >ir$her3 e4re&e!y high s(n'(r'% sin$e hey
(re in ( posiion o *no) )h( is going on. Tough o es(-!ish
( 'efense for eiher e4perise' or nonDe4perise'.
2-3 Insi'e 5ire$ors 2young !()yer =irn-(u&3 $ou!' re!y on
e4per,s figures% -u $ou!' no re!y on ousi'e $ounse!,s
porions 2-e$(use h( is $onsi'ere' 0une4periJe'13. He &us
&(*e his o)n in/esig(ion.
2$3 Insi'e 5ire$ors 2o!' !()yer Gr(n3 $our is h(rsher )ih hi&
h(n )ih =irn-(u& -e$(use he,s -een here !onger (n' hus
h(s gre(er ($$ess o infor&(ion.
2'3 Ousi'e 5ire$ors 2Aus!(n'er3 he $ou!' re!y on he e4per,s
figures% -u is on he hoo* for he none4perise' porions. He
$(n, Gus re!y on he offi$er,s s(e&ens 2h(' o ( !e(s re('
he prospe$us"3 >eyA you can delegate: (ut you are lia(le
for your delegate6s in*estigation.
2e3 Un'er)riers 2Co!e&(n3 on!y !i(-!e for none4perise'
porion% -u &us -e thorough in in/esig(ing 2i.e.% here% he
8N of <<
on!y 0&(Gor $onr($1 !oo*e' ( )(s (n insur(n$e $onr($
h(,s $er(in!y no enough"3. A!so% U9# $(n re!y on (gen% -u
is !i(-!e for (gen,s in/esig(ion.
2f3 E4pers 2Pe(% 7(r)i$*3 !i(-!e on e4perise' porion 'ue o
insuffi$ien in/esig(ion 'uring he (u'i.
2<3 Is here ( 'ifferen$e -e)een he E 11 'ue 'i!igen$e 'efenses (n'
he E 182(3283 0re(son(-!e $(re1 'efensesH So&e s(y no. So&e
2!i*e 6. Po)e!!3 s(y h( 'ue 'i!igen$e is ( 'uy o in/esig(e r(her
h(n one of $(re. The SEC s(ys h( E 18 is ( !o)er s(n'(r' 2see
R. 1OC3.
2;3 Noe he pro-!e& of re$or's reenionA on he one h(n'% i $(n he!p
sho) ( /(!i' 'ue 'i!igen$e effor% -u on he oher h(n' i per&is
p!(iniff,s !()yers o !oo* ( &e&os% e$.% )ih he -enefi of
hin'sigh inno$uous 'o$u&ens $ou!' pro/e '(&(ging !(er.
'3 Ci/i! Li(-i!iy un'er E 18 of he ,:: A$
213 E 182(3213 re$(!! i &(*es ( s(!e in /io!(ion of E ; ($ion(-!e.
2(3 7ore spe$ifi$(!!y% ( p!(iniff nee's o sho)A
2i3 The 'efen'(n )(s ( 0se!!er%1
2ii3 6uris'i$ion(! &e(ns )(s s(isfie' 2iners(e
$o&&er$e9&(i!s3%
2iii3 5efen'(n f(i!e' o $o&p!y )ih E ; 2usu(!!y (n
unregisere' offer or s(!e or f(i!ure o i&e!y 'e!i/er (
prospe$us3%
2i/3 A$ion is no -(rre' -y s(ue of !i&i(ions 2E 1:3
2/3 A'e?u(e en'er of he se$uriy is &('e )hen p!(iniff
see*s res$ission inse(' of '(&(ges.
2-3 Re$(!! E ; re?uires registration 2un!ess you (re e4e&p3+ hus%
E 182(3213 ($ions esseni(!!y $h(rge h( 0you shou!' h(/e
regisere'1 inse(' of f(!se9&is!e('ing s(e&ens9o&issions.
2$3 =y is o)n er&s% E 182(3213 (ppe(rs o h(/e ( sri$ pri/iy
re?uire&en+ h( is% on!y he person )ho he -uyer pur$h(se'
he se$uriy fro& is !i(-!e. Ho)e/er% $(ses &(*e $!e(r h( i!e
p(ss(ge is no he on!y hing h( $(n gi/e rise o !i(-i!iy.
2'3 Piner /. 5(h! =(si$ issue is 0)h( is ( Mse!!er, for E 182(3
purposesH He!'A one is ( se!!er if one ma#es active
solicitations for the purchase.
2i3 The Supre&e Cour hus reGe$s he -ro('er ;
h
Cir.
0su-s(ni(! f($or in he s(!e1 es.
2ii3 A!so noeA he $our s(ys ( 0so!i$i(ion1 &us -e for the
personal gain of the solicitor% i.e.% gr(uious urging o
pur$h(se ( se$uriy is no 0so!i$i(ion.1
89 of <<
2e3 E 182(3213 '(&(ges (re !i&ie' o res$ission if he p!(iniff si!!
o)ns he se$uriy+ he $(n on!y pursue '(&(ges if he no !onger
o)ns i.
283 E 182(3283 re$(!! i i&poses !i(-i!iy for misleading
statements/omissions in $onne$ion )ih ( sale/offer to sell a
security -y &e(ns of prospectus or oral communication.
2(3 >ey (ffir&(i/e 'efensesA 13 &negative causation'( Iin
su-se$ion 2-3K (n' 83 &reasonable care1 Iin 2(3283 ise!fK
2i3 Re(son(-!e $(re is &u$h !i*e 'ue 'i!igen$e+ see poeni(!
'ifferen$es 'is$usse' supr( here% ho)e/er% he 'efense
(!so (ppe(rs (/(i!(-!e o (n issuer.
2-3 Gus(fson /. A!!oy' A 0prospe$us1 is only ( 'o$u&en use'
in ( pu-!i$ offering for E 182(3283 purposes+ hus% E 182(3283
$(nno -e use' o sue o/er ( se$on'(ryD&(r*e r(ns($ion.
2i3 Noe his !i&is he usefu!ness of E 182(3283 -e$(use he
issuer r(re!y 'e(!s 'ire$!y )ih he pur$h(ser% hus
e!i&in(ing Piner pri/iy. An' he U9# is no !i(-!e )here
he pur$h(ser 'e(! )ih 'e(!er for he s(&e re(son.
2ii3 7os $o&&en(ors s(y his is ( poor 'e$ision 2(n' i
re/erse' ( !o of !o)erD$our pre$e'en3. The $our uses
E 1B (s ( 0'efiniion1 se$ion inse(' of referring o E 8
!i*e hey pro-(-!y ough o.
2$3 Noe here is no 0e4perise'1 'efense here !i*e here is un'er
E 112'3 you h(/e o sho) re(son(-!e $(re (n' $(n, Gus re!y
on e4pers.
C. In'e&nifi$(ion% Conri-uion% (n' 6oin @ Se/er(! Li(-i!iy
(3 In'e&nifi$(ion shifing !osses o oher 'efen'(ns
213 Gener(!!y% s(e !() 'eer&ines )hen ( 'ire$or9offi$er $(n ge
in'e&nifi$(ion for se$uriies ($ions -rough (g(ins he&.
2(3 So&e h(/e 05@O in'e&nifi$(ion1 s(ues ypi$(!!y% hey
(!!o) in'e&nifi$(ion in goo' f(ih.
283 Offi$i(! SEC posiion is h( in'e&nifi$(ion is (g(ins pu-!i$ po!i$y.
2(3 SD> I. OB8% ;1B% ;18 he s(ue is si!en+ SEC re?uires
'is$!osure of effe$ of in'e&nifi$(ion 2OB83 (n' s(e&en of
SEC,s opinion of in'e&nifi$(ion 2;1B3 o ge ($$e!er(ion.
A!so h(/e o (gree o !iig(e is (ppropri(eness un'er I.
;182h3 o ge ($$e!er(ion.
2-3 G!o-us /. L() Rese(r$h Ser/i$e $our refuses o honor
in'e&niy (gree&en (s (g(ins pu-!i$ po!i$y+ he fe(r is h(
U9# )ou!' -e $(re!ess if in'e&niy )(s (!!o)e' in (!!
$ir$u&s(n$es.
:B of <<
-3 Conri-uion Sh(ring of '(&(ges (&ong orfe(sors
213 ,:: A$ E 112f3 per&is re$o/ery for $onri-uion 0(s in $onr($.1
$3 6oin @ Se/er(! Li(-i!iy
213 PSLRA (''s ,:< A$ E 8152g32832A3 *i!!s Goin @ se/er(! !i(-i!iy
un!ess he /io!(ion is #nowing. I is -rough in o ,:: A$ E 11 -y
E 112f32832A3 for outside directors on!y.
O. Pro-!e&s .($sA offering on 1191B9N1 ( P1B+ on :91B9N8 (n' N:% i
re!e(se' (nnu(! repors for ye(rs N1 (n' N8% respe$i/e!y. On C98B9N:%
$o&p(ny goes -(n*rup+ sh(res -e$o&e )orh!ess.
(3 C(n pur$h(ser of so$* re$o/er un'er E 11 2(n' )h( &us he pro/e3 if
he -ough he so$*A
213 On 119189N1 fro& U9# 2(n' re$ei/e' prospe$us3H On!y nee's o
sho) &iss(e&en or o&ission. No re!i(n$e re?uire&en for E 11.
283 On 1891;9N1 fro& 'e(!er )ho pur$h(se' in he se$on'(ry &(r*e
2(n' )ho sen ( prospe$us o &ee E <2:3 re?uire&ens3H
2(3 If here,s no r($ing pro-!e& 2(s in =(rnes3% hen here is no
pro-!e& sue $o&p(ny% e$.
2-3 If here,s ( r($ing pro-!e&% $ou!' ry E 182(3283 -u -e$(use
of Piner pri/iy you,re !i&ie' o suing he 'e(!er. An' he h(s
( 0re(son(-!e $(re1 (n' 0neg(i/e $(us(ion1 'efenses he
for&er )ou!' !i*e!y s(/e hi&.
2:3 On C91;9N8 fro& 'e(!er )ho pur$h(se' in se$on'(ry &(r*e% -u
'i' no gi/e -uyer ( prospe$usH 5oesn, &(er+ (ns)er is s(&e (s
(-o/e. E 182(3283 )ou!' -e (/(i!(-!e% -u sin$e E < e4e&ps 'e(!ers
if is re?uire&ens (re &e 2(n' his r(ns($ion is !ong enough (fer
he offering o fi hose re?uire&ens3% here is no E ; /io!(ion o
use.
2<3 On C91;9N:% fro& 'e(!er )ho pur$h(se' in se$on'(ry &(r*e ye
'i' no gi/e hi& ( prospe$us.
2(3 >eyA E 112(3% !(s p(r(gr(ph re!e(se of e(rnings s(e&en
$o/ering ( perio' of twelve months after the effecti*e date
re?uires he p!(iniff o prove causation.
2i3 The 0(fer he effe$i/e '(e1 pro/ision is )hy i 'i' no
(pp!y o he pre/ious pro-!e&.
2ii3 Noe his $re(es ( huge in$eni/e o ge e(rnings ou in (
hurry" R. 1;N 'es$ri-es (n e(rnings s(e&en h(
s(isfies his se$ion.
-3 #h( is he !(es possi-!e '(e for ( p!(iniff o sueH E 1: : ye(rs
(fer he -on( fi'e pu-!i$ offering 2ypi$(!!y% he effe$i/e '(e3 for E 11
(n' 182(3213 ($ions% i.e.% 1191B9N<.
$3 #h( )ou!' he '(&(ges per sh(re -e ifA
:1 of <<
213 =ough ( P1B% so!' ( P18H )ero" E 112e3 2'ifferen$e -e)een
(&oun p(i' (n' /(!ue ( i&e of sui9pri$e so!' (3. Here% you
si&p!y s(y 0h(n* you.1
283 =ough ( P1;% so!' ( P;H P;% -e$(use offer pri$e )(s P1B.
2E 112e3 re?uires h( he pur$h(se pri$e $(nno e4$ee' he offering
pri$e for '(&(ge $o&pu(ion purposes3.
2:3 =ough ( PN (n' he!'H PN 2S(!ue ( i&e of sui is Jero3.
'3 #h( 'efenses (re (/(i!(-!e o all 'efen'(nsH E 112e3 neg(i/e
$(us(ion% !($* of re!i(n$e 2ough o sho)3% i&&(eri(!iy.
C. She!f Regisr(ion
1. Pro-!e&A Regisr(ion% e$.% is ( -ig% $u&-erso&e pro$ess+ i )ou!' -e ( !o
e(sier if $o&p(nies $ou!' Gus regiser on$e (n' hen pu!! se$uriies 0off he
she!f.1
8. R. <1; !es you 'o Gus h(+ se$uriies $(n -e 0preDregisere'1 for up o
rough!y two years.
(3 R. <1;2(3213243 !i&is his o SD: $o&p(nies 2he res of 2(3213 !iss oher
spe$i(! $(ses )here i is per&ie'3.
-3 R. <1; 2(3283 re?uires h( su$h regisr(ions -e 0re(son(-!y e4pe$e'1
o -e offere' (n' so!' )ihin )o ye(rs.
:. The 'o)nsi'e o she!f regisr(ion 'ue 'i!igen$e ?u(!iy en's o 'e$!ine.
(3 This is -e$(use he she!f is fast (n issue $(n go fro& i'e( o $!osing in
rough!y hree '(ys.
-3 Ho) o h(n'!e his pro-!e&H Co&p(nies en' o use he s(&e U9#%
)ho in urn *eeps he s(&e !() fir& on re(iner. They 'o 'ue 'i!igen$e
on ( regu!(r% ongoing -(sis. The $o&p(ny )i!! (!so h(/e ( 'ue 'i!igen$e
$o&&iee h( &ees regu!(r!y. .re?uen!y% he !() fir& )i!! (ssign one
or )o !()yers )ho )or* )ih he $o&p(ny on ( regu!(r -(sis so hey
(re up o spee' on ongoing 'e/e!op&ens.
$3 Re$(!! h( R. 1OC 'efines 0re(son(-!e in/esig(ion1 for 'ue 'i!igen$e
(s 'epen'ing on &(ny f($ors% in$!u'ing he 0ype of se$uriy.1 This
&(y pro/i'e so&e !ee)(y for ( she!f regisr(ion,s $o&presse' i&e.
5. S(e Se$uriies Regu!(ion 20=!ue S*y1 !()s3
1. Prior o 199;99C% (n issuer no on!y nee'e' SEC $!e(r(n$e% -u he $!e(r(n$e
of e($h s(e )here he se$uriy )ou!' -e so!'.
(3 #hi!e &(ny s(es ('ope' SECDsy!e 'is$!osureDon!y re/ie)% &(ny
ohers 2in$!u'ing Te4(s3 h(' &eri re/ie) hey )ou!' re/ie) (
se$uriy o see if i )(s ( 0goo' 'e(!.1
8. These !()s (re no) &os!y pree&pe' -y fe'er(! !()% h(n*s o he C(pi(!
7(r*e Effi$ien$y A$ of ,9C 2p(r of he N(ion(! C(pi(! 7(r*e
I&pro/e&en A$ of ,9C3
:8 of <<
(3 I (''s ne) E 1N o he ,:: A$.
-3 E 1N prohi-is s(es fro& regu!(ing 0$o/ere' se$uriies+1 hey in$!u'eA
213 Se$uriies so!' on n(ion(! e4$h(nges 2in$!u'ing seg&ens of su$h
e4$h(nges3 )ih !ising s(n'(r's% spe$ifi$(!!y in$!u'ing he NLSE%
A7ET% (n' NAS5AF.
283 0Fu(!ifie' pur$h(sers%1 ypi$(!!y sophisi$(e' in/esors.
2:3 Insiuion(! in/es&en /ehi$!es% prin$ip(!!y &uu(! fun's.
:. So )h( $(n he s(es si!! regu!(eH
(3 The A$ e4p!i$i!y preser/es heir (uhoriy o 'e(! )ih fr(u' (n'
'e$ei.
-3 I (!so preser/es heir (-i!iy o re?uire fi!ing of SECDre?uire'
'o$u&ens% (s )e!! (s heir (-i!iy o $o!!e$ regisr(ion fees.
$3 The &os $o&&on ype of se$uriy f(!!ing ousi'e E 1N,s pree&pion (re
s&(!! 0penny so$*s1 r('e' on !o$(! &(r*es.
IS. S$ope of Se$uriies Regu!(ion
A. 5efiniion of 0Se$uriy1
1. #hy is his i&por(nH =e$(use E ; (!*s (-ou offers o se!! 0( se$uriy.1
Thus% if so&ehing so!' isn, ( se$uriy i is -eyon' he pur/ie) of E ;. This
is usu(!!y &u$h e(sier o (rgue h(n o (rgue i isn, ( 0s(!e1 or Guris'i$ion(!
&e(ns.
(3 HHA .or ( 'isgrun!e' in/esor% he (-i!iy o $!(ssify so&ehing (s (
0se$uriy1 is he pro&ise' !(n'% per&iing hi& o sue.
8. S(uory 'efiniion in ,:: A$ E 82(3213 (n' ,:< A$ E :2(321B3A *ey er&s
(re 0(ny noe% so$*% re(sury so$*% -on'% 'e-enure% IXK in/es&en
$onr($% IXK or% in gener(!% (ny insru&en $o&&on!y *no)n (s (
Mse$uriy.,1
(3 Ho)e/er% noe he $h(pe(uA 0un!ess he $one4 oher)ise re?uires.1
This &e(ns h( so&ei&es hings )hi$h $(rry one of he enu&er(e'
!(-e!s &(y no -e ( se$uriy for purposes of se$uriies regu!(ion.
-3 Noe hen h( here (re )o ess in su$$essionA ( spe$ifi$ es% hen (
gener(! es. The for&er (s*s 0is i on he !isH1 (n' he !(er (s*s 0is i
( se$uriy in su-s(n$eH1
:. In/es&en Conr($sA The Ho)ey Tes
(3 SEC /. #.6. Ho)ey A issue (re or(nge gro/es+ he 'e(! g(/e
in/esors )o $onr($s% one for he !(n' 2i.e.% you o)n ( -un$h of
or(nge rees3 (n' one for ser/i$e 2i.e.% Ho)ey )ou!' en' o gro)ing
(n' h(r/esing he or(nges3. There )(s no regisr(ion s(e&en fi!e'.
-3 The $our 'e/e!ope' )h( is no) *no)n (s he )owey #est o
'eer&ine )heher (n in/es&en $onr($ is ( 0se$uriy.1 I,s e!e&ensA
:: of <<
213 An investment of money
283 In ( common enterprise
2:3 #ih (n expectation of profits
2<3 Solely from the wor# of others.
2(3 Noe his !(s e!e&en h(s -een refine' -y !(er $(ses o &e(n
0predominantly fro& he )or* of ohers.1
$3 Thus% for e4(&p!e% ( fr(n$hise (gree&en is never ( se$uriy -e$(use he
effors re?uire' -y he in/esor (re oo gre(.
'3 Co&&on enerprise ho) &u$h $o&&on(!iy is re?uire'H
213 HoriJon(! $o&&on(!iy 2i.e.% poo!ing of in/es&en (&ong &u!ip!e
in/esors3
2(3 This is ($$epe' -y /iru(!!y all $ours. Noe h( for $ours
h( on!y ($$ep his 'efiniion% he Ho)ey es $(n on!y -e &e
-y in/es&en s$he&es )ih &ore h(n one in/esor.
283 Seri$(! $o&&on(!iy 2i.e.% in/esorDpro&oer3. Cours )hi$h
per&i /eri$(! $o&&on(!iy o s(isfy Ho)ey (*e )o possi-!e
/ie)sA
2(3 Sri$ /ie) ( pro&oer (n' in/esor,s forunes &us -e
$!ose!y ie' ogeher.
2i3 Thus% in SEC /. >os$o Inerp!(ne(ry% ( $os&ei$s
A&)(yD!i*e pyr(&i' s$he&e s(isfies sri$ /eri$(!
$o&&on(!iy -e$(use he in/esor,s forunes (re $!ose!y
ie' o hose of he pro&oer,s re$rui&en s$he&e% )hi$h
(!so (ffe$s he pro&oer,s su$$ess in he enerprise.
2-3 =ro(' /ie) in/esor,s forunes nee' on!y -e !in*e' o
pro&oer,s effors.
2:3 Pro-!e& IID1 Res(ur(eur se!!s 1BW of his profis e($h o hree
!i&ie' p(rners. They (!so ge 1BW o)nership e($h% p!us he righ
o ('/ise he res(ur(eur. They &ee (!! he oher e!e&ens of he
Ho)ey es% so is here $o&&on(!iy hereH
2(3 Pro-(-!y yes. There is ( pooling of funds (&ong in/esors% so
his &ees horiJon(! $o&&on(!iy.
2-3 The *ey here is h( $o&&on(!iy is $onsi'ere' ( ough
s(n'(r' o &ee+ i is he &os sringen of he Ho)ey
e!e&ens.
e3 #h( is &e(n -y 0e4pe$(ion of profi.1H
213 Unie' Housing /. .or&(n A issue (re sh(res in ( nonprofi
housing $oDop. The sh(res $(nno -e r(nsferre' or p!e'ge' for
!o(ns. They $(n 'es$en' on!y o he ho!'er,s spouse. CoDop /oing
is not on ( perDsh(re -(sis.
:< of <<
2(3 He!'A /.conomic 4eality1 go/erns )heher his is ( se$uriy
or no here% he $our (pp!ies he Ho)ey es.
2-3 Here% here is no e4pe$(ion of profi sin$e he sh(res $(nno
-e r(nsferre'% e$.% so he sh(res (re no 0se$uriies.1
2$3 Gren(e'er 2in noes fo!!o)ing $(se3 if (ny profi &oi/e is
pure!y in$i'en(!% i is si!! no ( 0se$uriy1 2so e/en if hey
could -e r(nsferre'% hey &(y no -e 0se$uriies%1 hough his
is ( $!oser $(!!3.
283 A!so see 'is$ussion of 0so$*1 (n' L(n'reh% infr(.
2(3 IE'.A A pure!y ($('e&i$ ?uesion 'oes his &e(n h(
e$ono&i$ re(!iy9L(n'reh 'eer&ines )heher his is ( 0so$*1
2)hi$h is ( !ise' ie& in E 83 (n' Ho)ey 'eer&ines if i is (n
0in/es&en $onr($1 2(noher !ise' ie&3% or 'oes Ho)ey
'eer&ine -ohHK
f3 #h( is &e(n -y 0in/es&en of &oney1H
213 Inern(ion(! =roherhoo' of Te(&sers /. 5(nie! A issue is (
non$onri-uory% $o&pu!sory pension p!(n.
2(3 He!'A his is no (n 0in/es&en of &oney1 -e$(use he porion
of his p(y$he$* use' o fun' he pension is no sep(r(e' fro&
his gener(! $o&pens(ion 2sin$e his is ( 'efine'D-enefi r(her
h(n ( 'efine'D$onri-uion p!(n3. A!so% here is no re!(ionship
-e)een ho) &u$h he p(ys in (n' ho) &u$h he re$ei/es fro&
he p!(n.
2-3 Noe foonoe 18 (n 0in/es&en of &oney1 nee' no -e
$(sh+ goo's (n' ser/i$es $oun% oo.
2$3 A!so noe h( he $our suggess h( ERISA regu!(ion of
pensions )ou!' &(*e SEC $o/er(ge re'un'(n. This see&s o
-e (n (ferhough% -u i is i&por(n !(er 2!i*e #e(/er%
s(ying h( .5IC regu!(ion pree&ps he use of se$uriies !()s
in so&e $(ses3.
283 SEC Re!e(se C1NN SEC (*es posiion h( /o!un(ry%
$onri-uory pension p!(ns (re 0se$uriies.1
<. So$*
(3 L(n'reh Ti&-er /. L(n'reh s(!e of !u&-er $o&p(ny+ )ou!' no &ee
Ho)ey -e$(use in/esor )ou!' $onri-ue signifi$(n effors.
213 He!'A 0so$*1 is spe$i(!. The n(&e 'oes not $onro!% -u so$* is
presu&pi/e!y ( se$uriy. Es(-!ishes *ey e!e&ens of 0so$*1 (s (
se$uriy. 2Is his 0e$ono&i$ re(!iy1 (s use' in .or&(nH3
283 Thus% i 'oesn, &(er if he in/es&en is no ( p(ssi/e one if he
se$uriy in ?uesion is 0so$*.1
-3 L(n'reh e!e&ens of so$*A
:; of <<
213 Righ o re$ei/e 'i/i'en's )hen 'e$!(re'
283 Negoi(-i!iy
2:3 P!e'ge(-i!iy
2<3 Proporion(! /oing righs
2;3 Poeni(! for (ppre$i(ion in /(!ue
;. Noes
(3 Re/es /. Erns @ Loung A issueA ( f(r& $oDop 'e&(n' noe.
213 A noe )ih Y 9 &onhs is spe$ifi$(!!y e4e&p un'er he 'efiniion
of se$uriy in he ,:< A$ (n' -y he E : e4$epions in he ,:: A$.
2(3 FuesionA ( 'e&(n' noe $ou!' f(!! )ihin or )ihou he
e4$epion% 'epen'ing on )hen ( 'e&(n' for p(y&en )(s
&('e. Is i e4e&p on his -(sisH Cour s(ys no -e$(use i
$ou!' -e $(she' ye(rs fro& no) 2hough 'issen 'is(grees3.
283 The $our s(ys a note is not li0e stoc0 here is no L(n'rehD!i*e
srong presu&pion in f(/or of i -eing ( 0se$uriy.1 A!so% Ho)ey
shou!' only -e use' o 'eer&ine if so&ehing is (n 0in/es&en
$onr($%1 not o 'eer&ine if i is ( 0noe.1
2:3 The $our ('ops he 8
n'
Cir$ui,s 0family resemblance1 es 2no)
he Re/es es3.
-3 #he 4e*es /family resem(lance1 test A noe is presu&e' ( se$uriy%
-u h( presu&pion $(n -e re-ue' -y he fo!!o)ingA
213 .irs% refer o he 8
n'
Cir$ui,s !is of noes h( (re no se$uriies.
283 If no on he !is% use he fo!!o)ing four f($orsA
2(3 Seller$s motive i.e.% is i o r(ise &oney 2( se$uriy3 or o
f($i!i(e se!!ing ( &inor (sse or $onsu&er goo' 2no (
se$uriy3H
2-3 *lan of distribution i.e.% is here spe$u!(i/e r('ing in he
insru&enH #i!! he insru&en gi/e rise o spe$u!(i/e r('ing
-y he gener(! pu-!i$H If so% i &igh -e ( se$uriy.
2i3 The *ey here is ho) &(ny of he insru&en (re offered%
no sold.
2$3 +easonable expectations of the investing public i.e.% if his is
so&ehing he in/esing pu-!i$ )ou!' -e!ie/e o -e $o/ere' -y
he se$uriies !()s% i &igh -e ( se$uriy.
2'3 ,oes another regulatory scheme preemptH Typi$(!!y ERISA%
.5IC% or -(n*ing !()s+ if pree&pe'% i &igh not -e (
se$uriy.
:C of <<
C. HH,s ('/i$e in 'eer&ining if so&ehing is ( se$uriy always !oo* o he
gener(! purpose of he se$uriies !()s 2pre/ening fr(u' (n' 'is$!osure of
infor&(ion o he in/esing pu-!i$3.
=. E4e&pe' Se$uriies
O. E :2(328DN3 of he ,:: A$ e4e&ps $er(in se$uriies fro& ,:: A$
re?uire&ens. =ro('!y spe(*ing% hey (reA
(3 283 Se$uriies issue' -y or gu(r(nee' -y he fe'er(! or ( s(e9!o$(!
go/ern&en% or -y ( n(ion(!9s(e -(n*.
-3 2:3 Shor er& noes 2Y 9 &onhs3 use' in ( $urren r(ns($ion.
$3 2<3 Re!igious or nonprofi issuers
'3 2;3 Cer(in s(/ings (n' !o(ns (n' f(r& $oDops
e3 2C3 R(i!ro(' e?uip&en russ
f3 2O3 Cerifi$(es issue' -y ( re$ei/er or -y he rusee9'e-or in
possession in ( -(n*rup$y $(se.
g3 2N3 Insur(n$e po!i$ies (n' (nnuiy $onr($s.
N. Noe h( Gus -e$(use you (re e4e&p fro& regu!(ion 'oes not e4e&p you
fro& (nifr(u' ru!es.
II. Ne) .in(n$i(! Pro'u$s 25eri/(i/es3
A. HHA T)o /isions of ne) fin(n$i(! pro'u$s &oi/(e he 'e-(e o/er heir
re(&enA
9. 06ur(ssi$ P(r*1 fin(n$i(! s$ieniss in*ering )ih re(!iy $re(e $h(os h(
)i!! 'esroy he& (n' hur he )or!' e$ono&y.
1B. 0Or'er I&pose' on Ch(os1 ne) pro'u$s re'u$e ris*.
=. Ter&ino!ogy
11. OpionA he (-i!iy o pur$h(se or se!! ( ( se pri$e in he fuure. 2A 0pu1 is
(n opion o se!!% ( 0$(!!1 is (n opion o -uy3
18. 0Sri*e pri$e1 is he pri$e he opion is pur$h(se' for+ he 0e4er$ise pri$e1 is
he pri$e he opion $(n -e e4er$ise' (.
1:. .uures Conr($A ( $onr($u(! o-!ig(ion o -uy or se!! ( ( fi4e' pri$e in
he fuure.
1<. S)(pA sophisi$(e' &e$h(nis& use' o re'u$e ris* 2'es$ri-e' -e!o)3
1;. 0Noion(! A&oun1 fi$ion(! prin$ip(! (&oun use' o $(!$u!(e p(y&en
o-!ig(ions in ( s)(p r(ns($ion.
C. There (re )o si'es o he 'e-(eA pro'u$ (n' pro$ess.
5. Pro'u$A Ineres R(e S)(ps
1C. =(si$ gis A h(s fi4e'Dr(e inf!o)s (n' /(ri(-!eDr(e ouf!o)s+ = h(s he
opposie. They $(n -oh he'ge (g(ins heir respe$i/e ris*s 2for A% ineres
:O of <<
r(es rising% for = ineres r(es f(!!ing3 -y 0s)(pping1 heir ineres
p(y&ens.
1O. This r(ns($ion $(n -es -e f($i!i(e' -y (n iner&e'i(ry su$h (s ( -(n*.
This is so for se/er(! re(sonsA
(3 The -(n* $(n ($ (s ( matchma#er% sin$e he se(r$h $oss for ( fir& o
fin' (noher fir& )ih opposing -u $o&p!i&en(ry ris* )ou!' -e
prohi-ii/e.
-3 The )o p(ries &(y -e )(ry of e($h oher,s $re'i)orhiness+ he -(n*
(s iner&e'i(ry $(n so!/e his pro-!e&.
$3 Noion(! (&oun &(y -e 'ifferen -e$(use of 'iffering siJes of he
enerprises on e($h si'e of he r(ns($ion+ -(n* $(n Gus se up &u!ip!e
r(ns($ions )ih s&(!! p(ries o s(isfy nee's of ( !(rge p(ry.
'3 The (&oun of i&e he he'ge is nee'e' &(y no &($h% eiher+ he -(n*
$(n ($ (s ( 0so!/en1 o h(n'!e his pro-!e& 2noe in his s$en(rio% he
-(n* ($u(!!y (*es so&e ineres r(e ris*3.
E. Pro$essA Pri$ing 7o'e!s
1N. =e$(use fin'ing physi$(! $ounerp(rs is e4pensi/e% he -(n* $(n se up (
model o 'eer&ine )h( o -uy 2!i*e ineres r(e fuures3 h( &($hes
ineres r(e &o/e&ens so he -(n* $(n &(*e f!o(ing r(e p(y&ens.
(3 7os $o&&on su$h &o'e! is he =!($*DS$ho!es Opion Pri$ing 7o'e!+
hough no) !(rge!y ou of f(/or% i ho!'s 2)ih so&e heroi$
(ssu&pions3 h( you on!y nee' o *no) /o!(i!iy% he i&e perio'% (n'
he e4er$ise pri$e o pri$e (n opion.
213 If he e4er$ise pri$e is !o)% hen he opion pri$e is high 2-e$(use
he possi-i!iy of e4er$ising )hen he &(r*e is (-o/e he e4er$ise
pri$e is gre(er3.
283 If he /o!(i!iy is high% hen he opion pri$e is high 2-e$(use you
'on, have o se!!% you 'on, h(/e o )orry (-ou -ig 'rops+ hus%
high /o!(i!iy &e(ns here is ( gre(er $h(n$e for (-o/eD(/er(ge
profi on e4er$ise -e$(use i &e(ns -eer o''s on -ig pri$e Gu&ps3.
213 If he i&e perio' is !ong% he opion pri$e is high 2-e$(use here is
&ore i&e for he &(r*e pri$e o poeni(!!y rise3.
III. S(uory E4e&pions
A. Noe ( he ouse h( e($h of hese e4e&pions only e4e&p ( se$uriy fro& E ;+
hey 'o not e4e&p one fro& he (nifr(u' ru!es.
=. E <213 NonDIssuer E4e&pion
8. Noe h( E <213 e4e&ps fro& E ; e/eryone -u 0issuers% U9#% (n'
'e(!ers.1 Fuesion herefore is 0)h( is (n issuerH1
:. E 82(32<3 0issuer1 is e/ery person )ho issues or proposes o issue (
se$uriy+ e4$epions for C5s% /oingDrus $erifi$(es% e$.
:N of <<
<. SEC /. 7urphy person org(niJing 2in his $(se% !i&ie' p(rnerships3 (n'
pri&(ri!y responsi-!e for he /enure,s su$$ess or f(i!ure is (n issuer.
A. E <283 Pri/(e Offerings
;. E <283 e4e&ps fro& E ; r(ns($ions 0no in/o!/ing (ny pu-!i$ offering.1
C. The -ur'en is on he issuer o sho) h( (n offering is no pu-!i$.
O. A popu!(r e(r!y /ie) (&ong pr($iioners )(s h( if he nu&-er of in/esors
)(s 8; 2so&ei&es 1BB3% hen he offer )(s no $onsi'ere' pu-!i$.
N. To'(y% Regu!(ion 5 2$o/ere' infr(3 pi$*s up &os pri/(e offerings. Thus%
E <283 is ( !iig(ion 'e/i$e use' )hen $o&p!i(n$e )ih Reg. 5 h(s -een
s$re)e' up.
A. Is use (s ( p!(nning 'e/i$e is gener(!!y !i&ie' o s&(!! offers o insiuion(!
in/esors.
=. >ey e!e&ens for E <283 (re he (/(i!(-i!iy of infor&(ion% ($$ess o infor&(ion%
he n(ure of he offerees 2i.e.% (re hey sophisi$(e'H3% he &(nner of he offer%
(n' he (-i!iy o rese!! one,s pur$h(se.
9. A$$ess o Infor&(ion (n' E <283
A. A s(!e of so$* o (!! or &os e&p!oyees is not ( pri/(e offering. SEC /.
R(!sonDPurin(. The *ey is ($$ess o infor&(ion for all offerees.
=. E($h offeree &us h(/e considerable -usiness e4perien$e. Li/e!y /. Hir$hfe!'.
C. E($h offeree &us h(/e (!! he infor&(ion h( )ou!' oher)ise -e in$!u'e' in (
prospe$us. Hi!! Lor* Co. /. AI.. A!so noe he *ey is ($u(! offerees% not
($u(! pur$h(sers.
5. Ho) &u$h infor&(ion is nee'e' -eyon' h( )hi$h )ou!' -e in he prospe$usH
213 ;
h
Cir. see&e' o in'i$(e in Coninen(! To-($$o h( (n offeree
&us (!so h(/e he righ o inspe$ he -oo*s. This see&e' o
in'i$(e he nee' for ( pree4ising re!(ionship -e)een he offeror
(n' he offeree.
283 In 5or(n /. Pero!eu& 7(n(ge&en Corp.% hey &o/e ()(y fro&
his ru!e% in'i$(ing h( ($$ess o infor&(ion h( )ou!' -e
pro/i'e' in he regisr(ion s(e&en &(y enough 'epen'ing on
)ho he offeree is (n' his re!(ionship o he issuer.
2:3 5or(n $ies four f($orsA
2(3 The nu&-er of offerees 2no pur$h(sers3 (n' heir re!(ionship
o he issuer (n' o e($h oher. #his is most critical.
2i3 Insiders 'o no nee' prospe$usD!i*e 'is$!osure. They $(n
re!y on access o s(isfy heir infor&(ion nee's.
2(3 Noe he insi'er &us -e (n insi'er with respect to the
securities issued. 2foonoe 1N of 5or(n3.
:9 of <<
2ii3 -on-insiders nee' disclosure of he infor&(ion h(
)ou!' -e in he regisr(ion s(e&en.
2(3 Noe h( so&e $ours )ou!' 'is(gree% &(y re?uire
'iffering !e/e!s of 'is$!osure.
2iii3 A!so noe he sophisi$(ion of he offerees (re ( issue
(n' all he offerees &us -e 'ee&e' sophisi$(e' with
regards to the securities. 2Here% *no)!e'ge (-ou oi! )e!!s
'oes no e?u(e o sophisi$(ion (-ou ineress in hose
)e!!s3.
2-3 The nu&-er of unis offere'
2$3 The siJe of he offer 2i.e.% he fin(n$i(! s(*es ( ris*3
2'3 The &(nner of he offer. 2i.e.% o he gener(! pu-!i$H
('/erisingH Ch(n$es for re'isri-uionH% e$.3
2<3 A!ern(i/e !is of f($orsA
2(3 Sophisi$(ion (n' )e(!h of offerees
2-3 7(nner of offer
2$3 Possi-i!iy of re'isri-uion
2'3 Nu&-er of in/esors
1B. Inegr(ion (n' E <283
A. An offering )hi$h is p(r of ( !(rger series of offerings $(n -e 'ee&e'
0inegr(e'1 ino h( offering -y he SEC% (n' hus he pri/(e offer e4e&pion
)i!! -e un(/(i!(-!e.
=. R. 1<O% pre!i&in(ry noe : ses ou fi/e f($ors for inegr(ionA
213 Are he offerings p(r of ( sing!e p!(n of fin(n$ingH
283 5o he offerings in/o!/e he issu(n$e of he s(&e $!(ss of se$uriyH
2:3 Are he offerings &('e ( or (-ou he s(&e i&eH
2<3 Is he s(&e ype of $onsi'er(ion o -e re$ei/e'H
2;3 Are he offerings &('e for he s(&e gener(! purposeH
11. R. 1;8 A su-se?uen 'e$ision o fi!e 'oes no preGu'i$e ( prior $!(i& h( (
se$uriy is ( pri/(e offering.
18. Pro-!e& Se on E <283
A. .($sA H@H p!(ns on -ui!'ing $on/(!es$en ho&es% e($h se up (s ( su-si'i(ry
$orpor(ion. 1BD8B 'o$ors )i!! $hip in o r(ise $(pi(! un'er he p!(n for ( 8;W
(ggreg(e ineres. 5o$ors (re on $o&&iee h( runs ho&es. Su-s $onr($
)ih H@H for &(n(ge&en ser/i$es 2er&in(-!e )ih one ye(r,s noi$e3. 5o$ors
e4pe$ ( p(r of (ny profis% -u (re pri&(ri!y inerese' in &(*ing he f($i!iy
(/(i!(-!e. Sipu!(e h( he ineress (re 0se$uriies.1
<B of <<
=. Sophisi$(ionH NO he 'o$ors *no) ( !o (-ou &e'i$ine% -u nohing
in'i$(es hey *no) (nyhing (-ou -usiness.
213 The *ey is he (-i!iy o (ssess ris*s. Lou h(/e o !oo* o he
0Ho&er Si&pson1 of he group he !e(s $o&&on 'eno&in(or
$onro!s for sophisi$(ion purposes.
283 Noe here is (n uns(e' presu&pion )e(!hy persons (re &ore
sophisi$(e' h(n poor persons. Thus% ( 'o$or )ho is Gus ou of
&e'i$(! s$hoo! (n' $rushe' )ih 'e- is &ore !i*e!y o -e 'ee&e'
unsophisi$(e' h(n (n es(-!ishe' surgeon. The *ey here is he
ability to absorb ris#.
2:3 As ( -usiness !()yer% ho) 'o you (/oi' his pro-!e&H =es (ns)er
is o $ir$u!(e ?uesionn(ires 2before he offer &e&o"3 o poeni(!
offerees% (s*ing (-ou heir pre/ious -usiness e4perien$e (n'
in/es&en e4perien$e% espe$i(!!y on oher si&i!(r pri/(e 'e(!s
2sin$e h( )ou!' &e(n oher !() fir&s (re $o&for(-!e )ih his
sophisi$(ion3.
C. Infor&(ionH Lou 'on, )(n o re!y on (n ($$ess (rgu&en+ he 'o$ors (re no
in ( srong -(rg(ining posiion% so hey,re un!i*e!y o -e (-!e o 'e&(n'
infor&(ion. Thus% i,s -es o 'is$!ose% Gus (s you )ou!' in ( regisr(ion
s(e&en.
5. A-i!iy o Re'isri-ueH Gener(!!y% his is !ess of ( pro-!e& h(n he oher f($ors+
i,s &os!y ( pro-!e& )here he res(!e )ou!' -e immediate 2i.e.% using he firs
s(!e (s ( $on'ui o he se$on'3. To (/oi' pro-!e&s% pu !i&is on r(nsfer(-i!iy.
E. Nu&-er of OffereesH The &(gi$ nu&-er is pro-(-!y 8BD8;% so )e,re fine !o$(!!y.
=ig ?uesion is hisA H@H is -ui!'ing ho&es n(ion)i'e% so 'o )e inegr(e (!!
hose r(ns($ionsH
213 Un'er 7urphy 2&u!ip!e $(-!e TS syse&s3 (n' R. 1<O% you
pro-(-!y )ou!' inegr(e here.
.. E <2C3 S&(!! =usiness E4e&pion
1:. E <2C3 e4e&ps r(ns($ions )ih accredited investors )hi$h (re !ess h(n he
(&ouns spe$ifie' in E :2-3 2(ggreg(e (&oun of P;73% (n' here is no
('/erising perfor&e' for he issue.
1<. E 8 2(321;3 (n' R. ;B12(3 'efine 0($$re'ie' in/esor1 see infr(.
A. Regu!(ion 5 2R. ;B1D;BC3 S&(!! Offering E4e&pions
1;. Regu!(ion 5 ses up spe$ifi$ gui'e!ines )here (n issuer $(n -e $er(in he is
)ihin he pri/(e offering e4e&pion.
1C. R. ;B1D;B: $on(in gener(! pro/isions
A. R. ;B12(3 'efines 0($$re'ie' in/esor1 2E 82(321;3 per&is i o3. There (re eigh
$(egoriesA
213 %nstitutional %n*estors 2re('A -(n*s% &uu(! fun's3.
283 Pri/(e -usiness 'e/e!op&en $orpor(ions.
<1 of <<
2:3 T(4 e4e&p org(niJ(ions.
2<3 5ire$ors% e4e$ui/e offi$ers% (n' gener(! p(rners of he issuer.
2;3 Natural persons )ih ( ne )orh ;<-$.
2C3 Natural persons )ih in$o&e of <+==0 if fi!ing sing!e or <3==0 if
fi!ing Goin!y for in$o&e (4es for he past two years.
2O3 Truss )ih (sses Y P;7 2un!ess i is (n ($?uisiion /ehi$!e3 if
pur$h(se is 'ire$e' -y ( sophisi$(e' person.
2N3 An eniy )here 1BBW of he e?uiy is he!' -y (n ($$re'ie'
in/esor.
=. R. ;B12e3 go/erns he $(!$u!(ion of he nu&-er of pur$h(sers 2noe you e4$!u'e
spouses (n' re!(i/es% (s )e!! (s accredited investors3.
C. R. ;B12h3 'efines 0purchaser representati*es.1 >ey is h( he issuer on!y
nee's o reasonably believe h( he represen(i/e s(isfies (!! he $on'iions
!ise'.
5. R. ;B82(3 go/erns inegr(ion. Gener(!!yA 0s(fe h(r-or1 if offers (re &('e
ousi'e of si4 &onhs fro& e($h oher 2i.e.% ( si4D&onh 0g(p1 $(n s(/e you3.
E. R. ;B82-3 es(-!ishes 'is$!osure re?uire&ens 2&us on!y -e gi/en o
non($$re'ie' in/esors3. I is extremely 'e(i!e'.
.. R. ;B82$3 -(ns 0gener(! so!i$i(ions1 2un!ess i $o&p!ies )ih R. 1:;$3
G. R. ;B82'3 re?uires 0re(son(-!e $(re1 o (ssure he se$uriies (re no reso!' 2(n'
pro/i'es e4(&p!es of su$h $(re3.
1O. R. ;BC is he most important ru!e in Reg. 5.
A. I is he -(si$ 0s(fe h(r-or1 for E <283. Ho) 'o )e *no) hisH =e$(use i s(ys
so su- 2(3 s(ys offers $o&p!ying )ih his ru!e 0sh(!! -e 'ee&e'1 o &ee E
<283.
=. Re?uire&ensA
213 Lou &us &ee R. ;B1 (n' ;B8 2R. ;BC2-32133.
2(3 The &os i&por(n ones in pr($i$e (re ;B82(3 inegr(ion% 2-3
infor&(ion re?uire'% 2$3 !i&i on gener(! ('s% (n' 2'3
re?uire&en o !i&i res(!e.
283 Nu&-er of Pur$h(sers $(nno -e > 35 2R. ;BC2-32832i33.
2(3 Issuer &us 0re(son(-!y -e!ie/e1 here (re no &ore h(n :;
2(n' re$(!! ($$re'ie' in/esors 'on, $oun3.
2:3 Sophisi$(ion of In/esors 2R. ;BC2-32832ii33
2(3 Non($$re'ie' in/esors 2)ho 'on, h(/e ($$re'ie' pur$h(ser
represen(i/es3 h(/e enough fin(n$i(! e4perien$e o e/(!u(e
he ris*s.
2<3 There is no dollar limit on R. ;BC.
<8 of <<
C. Pro-!e& Se 2s(&e f($s $on/(!es$en ho&es3
213 Inegr(ionH R. ;B82(3 pro/i'es ( CD&onh s(fe h(r-or% so you $(n
sru$ure hese 'e(!s o &ee i. If no% you,re -($* o he fi/eD
f($ors of R. 1<O.
283 Infor&(ionH If you,re on!y se!!ing o ($$re'ie' in/esors% no nee'
o pro/i'e (ny un'er R. ;B82-3. If here,s ( &i4% i,s -es o
pro/i'e i o e/ery-o'y.
2:3 Nu&-er of offereesH E(si!y un'er he :; &(r*. An' here,s e/en
fe)er h(n h( un'er R. ;B12e32132i/3 you 'on, $oun ($$re'ie'
in/esors. P!us% re&e&-er h( he issuer nee' on!y 0re(son(-!y
-e!ie/e1 here (re fe)er h(n :;.
2<3 7(nnerH Re&e&-er% no gener(! so!i$i(ions. Nee' &ore f($s.
5. >ey poins on 'efiniion of 0($$re'ie' in/esor1 The =e/er!y Hi!!-i!!ies"
213 Noe h( 6e' C!(&pe is (n ($$re'ie' in/esor no -e$(use he,s
s&(r% -u -e$(use he,s ri$h 2i.e.% ne )orh or in$o&e ess3. This
is )h( HH $(!!s he 0Re(g(n presu&pion1 of sophisi$(ion.
283 6ehro isn, (n ($$re'ie' in/esor -u he &(y ?u(!ify (ny)(y
-e$(use he h(s ( pur$h(ser represen(i/e% n(&e!y 7r. 5rys'(!e.
1N. R. ;B< (n' R. ;B;
A. R. ;B<A issuer $(nno -e su-Ge$ o ,:< A$ reporing 2or (n in/es&en $o&p(ny%
or ( 0-!(n* $he$*1 $o&p(ny3% (ggreg(e of no &ore h(n P17 issue' in ( 18D
&onh perio'+ (ny nu&-er of in/esors.
=. R. ;B;A issuer $(n se!! up o P;7 per ye(r o up o :; pur$h(sers 2re$(!! h(
($$re'ie' in/esors (re e4$!u'e' fro& he 'efiniion of 0pur$h(ser%1 so you $(n
se!! o (ny nu&-er of ($$re'ie' in/esors3. 7us &ee ;B1 (n' ;B8
re?uire&ens.
19. Oher issues in Reg. 5
A. 7(r* /. .SC Se$. Corp. in 'eer&ining sophisi$(ion% you &us re!y on &ore
h(n he in/esor,s represen(ions.
=. 0=(' =oy1 'is?u(!ifiers R. ;B;2-32832iii3 pre/ens so&eone 'es$ri-e' in R. 8C8
fro& using R. ;B; 2-u no ;B< or ;BC3. R. 8C8 -(si$(!!y s(ys (nyone $onne$e'
)ih fr(u'% $on/i$e' of ( fe!ony% su-Ge$ o ( sop or'er or refus(! or'er% e$.
C. R. ;BO $(n, use R. ;B<D;BC if ( $our h(s e/er enGoine' you fro& using he&
-efore for f(i!ing o &ee R. ;B:.
5. R. ;BN Insignifi$(n 5e/i(ions 0s(fe h(r-or1 no !os if ( f(i!ure o $o&p!y
)(s insignifi$(n (n' ( goo' f(ih effor )(s &('e o $o&p!y.
<: of <<
?ig. -: @ue @iligence @efenses
.xpertised 2ortion Non-.xpertised 2ortion
.xperts E 112-32:32=3
0re(son(-!e groun's1 for -e!ief
(fer re(son(-!e in/esig(ion.
E 112(32<3
No !i(-!e
Non-.xperts E 112-32:32C3
0no re(son(-!e groun's o -e!ie/e
he s(e&ens )ere f(!se.1
E 112-32:32A3
0re(son(-!e groun's1 for -e!ief
(fer re(son(-!e in/esig(ion.
<< of <<