ReachofRegulation

STATUTORYSCHEME[WHATISA"SECURITY"?] 1.
2(a)(1) >"security"meansanynote,stock,treasurystock,bond,debenture, evidenceof
indebtedness,certificateofinterestorparticipationinanyprofitsharingagreement,...investment
contract ...or,ingeneral,anyinterestorinstrumentcommonlyknownasa'security'..."

G: SCOTUSsays'33and'34definitionisthesamebutreallyitsnot,butassumeitisfornow
PatternofAnalysis
CALLED"STOCK"? 2.
[i] righttoreceivedividendscontingentonapportionmentofprofits
[ii] negotiability
[iii] abilitytobepledged
[iv] confersproportionatevotingrights
[v] capacitytoappreciateinvalue
"Stock": labelalone isinsufficient tomakeita"security"under2(a)(1),mustalso (name not
dispositive,butalsonotirrelevant) lookateconomicrealities toseeiftheinstrumenthasthe5usual
characteristicsofstock (inadditiontoname)[Forman]:

CALLED"NOTE"? 3.
Policy>requiringregistrationofcommercialpaperwouldtotallydestroythemainpurposeof
commercialpaper(freetransferabilitysameascurrency)

Howey +MarineBank +Edwards =Reeves presumption

BeforeReeves,courtsclassifiedbypurpose>commercial (notsecurities)v.investment(aresecurities)
[1] ALLpresumed securities
[i] ListofNONSecurities:
[2] unlessrebutted by"familyresemblance"test >[i] notebearsstrongresemblanceto
instruments listed(orshouldbelisted) as NONsecurities [G: mostlyshitforcommercial
purposes];[ii] using4factors(notallneeded)todeterminethenote's"family"

PromissoryNotes:Reeves
FINALOUTLINE
Page 1
Consumerfinancingnotes
Notessecuredbyhomemortgage
Shorttermnotessecuredbylienonasmallbusiness
"Character"loannotes
Shorttermnotessecuredbyaccountsreceivable
Notesformalizingopenaccountdebt
Commercialbankloannotes
A"security" ifseller'spurposeistoraisemoneyforbusinessandbuyeris
primarilyinterestedintheexpectedprofitthenote

Notlikelya"security"ifnoteisforminorassetorconsumergood,tocorrect
seller'scashflowdifficulties

Motivations ofbuyer&seller:
Asecurity if"commontradingforspeculationorinvestment"
Planofdistribution:
Asecurity ifheldouttopublicassecurity(i.e.byanadvertisement)
Reasonableperceptions/expectations ofpurchaser(s)&theinvestingpublic:
Risk reducingfactors (i.e.anotherregulatoryscheme,collateral)thatmakesit
unnecessarytoapplytheAct,see MarineBank,Daniels

[ii] 4Factors:
Shorttermcommercialpaperisstillsubjecttoantifraud
Shortterm"investments"aresubjecttoregistration
LongtermcommercialpaperISsubjecttoregistration
'33Act3(a)(3): shorttermcommercialpaper exempt* fromregistration
'34Act3(a)(10): definitionof"securities"excludes notes<9months
IMPORTANT: ifNOTasecurityperReeves,noneedtolookat*exemptsecurities
INVESTMENTCONTRACT? 4.
Cash/noncashconsideration,notconsumablecommodity/service/labor:Daniel
Gaveconsiderationwithhopeoffinancialreturn:Foreman
[1] investmentofmoney
Horizontal(majority) >betweeninvestors
Vertical (minority) > linking fortunes(strict)ORefforts(broad)
[2] inacommonenterprise:Koscot
Fixedorvariablereturn:SECv.Edwards
Return[notspeculative/substantial] ismotivationforinvestment,notuse:Foreman
Returnisfromanticipatedearnings,notadditionalcontributions:Foreman
[3] with an expectationofprofits
Entrepreneurialormanagerial(notministerial):Forman;Daniel
Postpurchase:LifePartners
[4] solely[primarily]from effortsofothers
Case: SECv.W.J.HoweyCo. (SCOTUS1946)>saleof10yearKtopoolmoney/landandshare
profitsinorangegrowingbusinessthatwasrunonlybyaservicecompanywasan"investment
contract"Howeycouldbeheldliableforviolating5

"InvestmentContract" >Howey;Foreman ("HoweyTest"appliedinlightofthe"economicrealities")

Planisnoncontributoryandcompulsory
Existenceofanotherfed.regulatoryscheme(i.e.pensionplansunderERISA)
G: notewearetestingwhetherthe interestintheplan isasecurity(obviouslythestocksin
Case: Teamstersv.Daniel (SCOTUS1979)>notinvestmentKwhereemployersmade
contributionstoemployees'retirementplanunderacollectivebargainingagreementb/cthe
employeewassellinglabortoobtainalivelihood,notmakinganinvestment

[1]investmentofmoney > cashornoncashconsideration,see Foreman ("money"canbecapital

appreciationandparticipatinginearningsvs.use orconsume), withahopeoffinancialreturn,see
Teamstersv.Daniel (notmakinganinvestmentb/cnohopeoffinancialreturn;employeeisonlyselling
labortoobtainalivelihood),notaconsumablecommodityorservice

Page 2
theplan/fundaresecurities)
Taxdeduction fromataxshelterismightbe"money"ifpurelyforgettingthat$
G: emphasisinForeman istolookatprimarymotive >i.e.aplacetolive,notforprofiting
fromrent,usingastaxshelter,etc

2mostimportantthings: proportionality +marketingemphasis

Case: Foreman ("money"isanythingthatwouldconstituteconsideration;canbecapital
appreciationandparticipatinginearningsvs.use orconsume)

Horizontalcommonality>interrelatedinterestsbetweenmultipleinvestors whopoolfunds
together

G: lookathowthepromoterispaid>i.e.isyourstockbrokergetting$pertradeorishe
linkingyourprofittohisown?

Note weareaskingiftheserviceherendersisa"security"nottheactualsecuritiesheis
trading

Verticalcommonality> linking fortunes(strict) OR fortuneofinvestordependantoneffortsof

promoter(broad,see,e.g., Koscot)betweenpromoterandinvestor

[2]commonenterprise >horizontalcommonalityOKinallcourts,vertical(minority)
Notnecessarilybasedonthedegreeofrisk,but"reasonableexpectation"fromperspective
ofreasonableinvestor,notasubjective

Case: UnitedHousingv.Forman (SCOTUS1975)>"toospeculativeandinsubstantial"tobelieve

therewasanexpectationofprofits[fromchargingrent]whencoophousingownerscouldonly
reselltheirinterestsfortheoriginalprice

G: allacourtneedsis"put$intoblackbox,get$backout,don'tcarehowitworks"
Case: SECv.Edwards (SCOTUS2004)>expectationofprofitsregardlessiffixedreturn(vs.
variable)

[3]expectationofprofits >fixed orvariable return [SECv.Edwards]mustbeprinciplemotivationfor

investment,Foreman (cannotbe "toospeculativeorinsubstantial"),andthereturnmustbefrom
anticipatedearnings,notmerelyfromadditionalcontributions

G: courtslookatwhatinvestors[Koscot]orpromoters[LifePartners ]didafterthepurchase
5thCir.joined9thCir.inconcluding"solely"NOTreadliterally andeffortshadtobe
"undeniablysignificantones...essentialmanagerialeffortswhichaffectfailureorsuccess
ofenterprise"

Policyagainstliteralreading>tooeasytoevadesecuritylawsbypeoplesimplyrequiring
investorstodoaminimumamountofeffort

Compare SECv.Koscot (5thCir.1974)>pyramidscheme required"investors"torecruitnew

"investors">asignificantrole,NOT primarily fromeffortsofothers

Courtdifferentiatesmortgagebackedsecurities(bundledthensoldliketheinsurance
policiesthiscase)

MBS>abunchofshitstillneedstobedonebythepromoterafterthepurchase (servicing,
collecting,etc)

Insurancepoliciesinthiscase>promoter'seffortsonlyprepurchase (doesnotcount),just
waitedforpeopletodietocollect

With SECv.LifePartners,Inc. (DCCir.1996)>poolofinsurancepolicies =/=investmentcontract

(NOTasecurity)b/cprofitsdidnotcomefrompostpurchaseefforts ofothers

OwnershipofBusinessInterests >areinvestmentcontracts (b/cprofitsprimarilyfromeffortsof

others)ifapartner/investorshowsshehad nolegalcontrol/nocapacitytocontrol/nopractical
control,basedon"economicrealities" oftheparties:USv.Leonard

OwnershipInterestIn: Security NotaSecurity

Corporation common&preferredshares
GeneralPartnership onlyIFpassive partner Default>
[4]"solely"[primarily]fromeffortsofothers >"touchstoneisthatprofitsare...tobederivedfrom
theentrepreneurialormanagerial effortsofothers"[postpurchase,LifePartners],notjustministerial:
Forman (SCOTUS endorsedbutfn.saystheCourtexpressednoviewwhether'solely'readliterally);see
also Daniel (SCOTUSdiscussingmanagerialeffortsofapensionfund'strustees)

Page 3
LLP(limitedliability
partnership)

JointVenture
interests activepartnerinterests
coventureinterests
LimitedPartnership
LLLP(limitedliability
limitedpartnership)

onlylimitedpartnerinterests Default>generalpartnerinterest
LLC passivememberinterests(in
managermanagedLLC)
activememberinterests(in
managermanagedLLC)

membermanagedLLCmembers,
butsee USv.Leonard

ReallylooksliketheLLCwasdependanton"effortsofeveryone"(investorswere"required"
tovoteandserveoncommittees,andbindtheentitybytheirownacts)

Buteconomicreality >NOTactiveinvestors
Case: USv.Leonard (2ndCir.2008)>profitsfrominterestinanLLC was"solelyfromeffortsof
others"b/ceventhoughinvestorshad a legalrighttocontrol,"theymaybesolackinginrequisite
expertise[nocapacitycontrol],sonumerous,orsodispersedthattheybecomeutterlydependant
oncentralizedmanagement[nopracticalcontrol], counteractingalegalrighttocontrol")

EVIDENCEOFINDEBTEDNESS? 5.
Case: InreTuckerCorp. (SEC1947)>franchiseagreementsestablishedanobligation torepay
deposits received >stillcountsasevidenceofindebtedness(and"securities")

2A > amendedafterProcter&Gamble toexclude individuallynegotiated"swaps"from'33

Actrequirements

Case: Procter&Gamble (D.Ct.Ohio1996)>a"swap" (agreementtoexchangecashflowsovera

periodoftime)NOT evidenceofindebtednessb/cswapagreementsonlypromisetopayfuture
interest,vs.debtinstrumentsthatinvolvepayment/repayment oftheprincipal

EvidenceofIndebtedness >instruments(i.e.promissorynotes)that ontheirfaceestablisha primary

obligation topay(orrepay [Tucker]principalonly [ProcterGamble])holdersmoney,see USv.Jones
(thoughairlineticketredeemableforcash,doesnotonitsface establishaprimaryobligationtopay)

UNLESSCONTEXTREQUIRESOTHERWISE? 6.
'33Actand'34Actdefinitionsectionsbegin"Whenusedinthistitle,unlessthecontextotherwise
requires ..."

See MarineBank (SCOTUS1982)>thoughcertificateofdeposits mightotherwisebeena

security,itwasn'tinthiscontext[duetobeingfederallyinsuredandheavilyregulated]

[1] alternativeregulatoryscheme >canpreemptUSsecuritiesregs.(ifschemebig+important)

See LandrethTimberCo. (stillasecurity when100%ofstockinafamilyownedtimber
companywasprivatelysold,b/cHowey testN/Atoshitclearlylabeledas"stock",evenif
100%saleofbusiness)

"Contextdidn't requireotherwise"b/cunlikeunusualinstrumentsnoteasilycharacterized,
thiswasstockundertheplainmeaning oftheAct,sodon'tneedtolookatcharacteristicsof
instrument("economicrealities")toseeiftheActapplied

[2] saleofbusinessdoctrine [BADLAW](whensaleofamajorityinterestgivescompletecontrol

tothepurchaser,makingthatpersonanowner,andnotaninvestor)>inapplicable,treatedas
security,when[i] called"stock";and[ii] hadallcharacteristicsofstock

ContextRequiresOtherwise>arguedin3situations,perhapsduetothe"economicrealities"per
Daniel (Howey testforinvestmentKstobeappliedinlightof"economicrealities")

Page 4
RegistrationProcess&Disclosure
STATUTORYFRAMEWORK 1.
Mayregisterbyfiling RS("proposedtoofferinnearfuture"):6(a)
WhomustsignRS:6(a)
RSfilingfeeformula:6(b)
Howtopay:6(c)
AllinfoinRSmadepublic(unlesspetitionforconfidential):6(d)
6 >howto registersecurities
ReferencetoitemsonScheduleAaspracticalstartingpoint
AlsomustfollowrulesSECisallowedtomake(i.e.,FormS1,S3,Reg.SK)
7 >contents oftheRS
Investigation
Acceleration
Enforcement(refusaland/orstoporders)
8 >effectiveness ofRS
DRAFTINGAREGISTRATIONSTATEMENT 2.
Amassinfoaboutissuer
LawyerbeginsdraftingRS
Draftscirculatedtomanagingunderwriter,itscounsel,officers,andperhapsdirectorsofissue>may
givecomments

"Duediligenceexamination"bymanagingunderwriteranditscounseltoensurethattheRSiscompletely
accurateandcontainsnomaterialomission

FinancialprintersetsRSintype
BlueSkyqualificationsperstatelaw
FileRS
UnderwriterspurchasesecuritiesonlyonthemorningtheRSistobedeclaredeffectivebytheSEC
(bindingbutconditionalagreements)

DISCLOSUREREQUIREMENTS&REGISTRATIONSTATEMENTFORMS 3.
Formsjustlistwhichonesmustbecompliedwithforspecificsituations
Scaleddownrequirementsforsmallbusinesses
ItemsOKtoincorporatebyreferenceinFormS1,S3
Reg.SK >centralrepositoryofdisclosurerequirements
Reg.C >catchallgeneralfilingrequirementsthatdon'tfitintoReg.SK
<$75Mpublicfloat
If$0publicfloat,thenOKfor<$50Mannualrevenue
Reg.SKSpecial >"alacarte"forsmallerreportingcompanies with:
Reg.ST >mustfile RSelectronically throughEDGAR
Regulations:
AND
[ii] filedannualreportunderExchangeActformostrecentyear
[iii] prospectususedmuststatewheretofindinfoincorporatedbyreferenceand
issuerwilldeliverinfouponrequest

Incorporationbyreference OKfor[i] reportingcompanies thathave:

FormS1 >forcompaniesthatdonoqualifytouseFormS3 (nonreporting orunseasoned
issuers)defaultwithmostdetailedrequirements

OR
[i] registeringnonconvertibleinvestmentgradedebt
[ii] issuingcommonstockforcash,IFcompany's"publicfloat"(outstandingvotingandnon
votingcommonequityheldbynonaffiliates)hasvalue>$75M(i.e. seasonedissuer / WKSI)

FormS3 >lessstrictformforExchangeActreportingcompanies foratleast12months,AND:

RegistrationStatementForms:
Page 5
OR
[iii] issuerswith<$75Mpublicfloat,classofcommonequity listedonnationalexchange,
offeringcommonequity>1/3ofcompany'sfloatina12monthperiod

See InreUniversalCameraCorp. (SEC1945)>speculativefeatures ofofferinghadtobe

disclosed intheregistrationstatementandprospectussoclearly thatplainlyevidenttothe
ordinaryinvestor

Rule421(d) >frontandbackcoverpages,summary,andriskfactorsectionoftheprospectus
mustbein"plainEnglish"

Material >whenthereisasubstantiallikelihoodthatareasonableinvestorwouldfindinfo
importantindeterminingwhethertopurchasethesecurity:Rule405

CompanyPresidentwasanonconvicted childmolester
Executive'sridiculousamountsofcompensation(likelyirrelevant)
NOTrequired >shitthatistooirrelevant andtooattenuated,forexample:
Rule408 >inadditiontoexpresslyrequiredinfo,needtodisclose ALLmaterialinfo thatis
requiredtomakestatementsnotmisleading inlightofthecircumstances

OtherRSDisclosureRequirements:
Avoidvaguenessandtoomuchoptimism
Mustbeabletoprovidesupportforeveryassertion
AntiSpeculation:
Disclosureneedstobeplainlyunderstandabletotheordinaryinvestor,notjustexperts
ToneofDisclosure:
Mustspelloutfullimplicationsincludingdilution(dilutionmaynotbeadealkillerb/cfuture
earningsmayjustifypayingmore)

DilutionofStockValue:
Examples ofpossibleinfotodisclose:InreUniversalCameraCorp.
PROCEDURESATTHESEC 4.
Rule473 >allowsparagraphoncoverofRSthatstipulates"continuousamendment"
Rule460 >preliminaryprospectusdistribution required asconditionof acceleration
Typicallygrantedproforma (asamatterofform)
SECcommentsignored,see PhoenixSteel (SECrefusedaccelerationb/cissuerrefused
toincludeinRSanundertakingtosubmittocourttestbeforepayinganyindemnity)

SECisinvestigatingtheissuer,underwriter(s),etc,thenproblematic
Riskdenialif:
Rule461 >howtorequestacceleration (whenSECsatisfied,theissuerandunderwriteragreeon
terms,bothrequestdayandtime)

Rule462 >WKSIregistrationeffectiveautomaticallywhenfiled(easilyamendedlater)
[1] Effectiveness >registrationautomaticallyeffective20daysafterfilingORanyamendment,unless
SEC acceleratesit:8(a)

[i] securitiesofferedforcash,AND
[ii] undertakingsin512(i)done,AND
[iii] remove"redherringlanguage"(e.g."subjecttocompletion"),AND
[iv] Rule424(b)latersatisfied(mailfinalprospectusw/blanksfilledinwithin2ndbusiness
dayofearlierofdeterminingofferingpriceORfirstuse)

Rule430A >ifnobigchanges,registrationcanbeeffectivewithoutfiling priceandunderwriter

info,solongas:

Rule424 >mustfilefinalprospectus shortlyafterusingRule430Bandanyaddedinfois

deemedpartoftheRS

Rule430B >shelfregistrations (under415 SEEBELOW)canbeeffectiveevenwhenmissing

"unknownornotreasonablyavailableinfo"

Rule430C >substantivechanges/newinfoinprospectusesfiledaftereffectivenessisalso
deemedpartoftheRS

[2] SECReview>
[3] SECOversight >
Page 6
ViolationsofSecuritiesAct5:PrefilingtoPosteffective
Smallercompanieshavemorerequirementsb/cpolicyisthatthemoreinfopublicallyavailable,
thelesscompanyisrequiredtodisclose(markethasawayofprotectingitself)

TYPESOFISSUERS 1.
[1] nonreportingissuers> neithervoluntarilynorrequiredtoregisterunderthe'34Act
Securityisexchangetraded
Requiredtoregisterunder'34Actif:
[2] unseasonedissuers> voluntarilyorrequiredtoregisterunderthe'34Act(reportingcompany),but
"unseasoned"(notexplicitlydefined>issuersineligible touse FormS3)

Cannot beissued>10daysafterfilingRS
Rarelyusedb/cSECprefersstoporder (requirementseasier)
8(b) >SECcanissuerefusalorders for"incompleteorinaccurateinanymaterialrespect"
Onlyfor egregious conduct,see,e.g. InreTexasGlassMfg.Corp. (SEC1958)(stoporder
issueddueto materiallymisleading infointheprospectusthatclaimedpriorsalesof
securitieswereexempt,thenfailingtodisclosecompany'scontingentliabilityfromselling
unregisteredsecurities)

Canbeissuedanytime,evenifstatementbecomes untrueaftereffectivenessand/or
securitiesalreadysold

8(d) >SECcanissue stoporders,suspendingRSeffectivenessforanuntruestatementof

materialfactoromission

But neededtoallegefactsshowingthattheSEC'sdelaywasunreasonable
Compare LasVegasHawaiianDevelopmentCo.v.SEC (D.Ct.Hawaii1979)(OKtosuspend
effectivenessduringSECexamperiodandD.Ct.cancompelSECtomakethedetermination
inareasonabletime,butNOTsimplycompelSECtomakethedetermination)

With PhoenixSteelCorp. (PhoenixSteeldidNOTcomply withaSEC"undertaking"butalso

didn'trequestaccelerationandb/cSECdidn'tinstitutestoporderorexamwithin20daysof
filing,theregistrationstatementbecame effectiveanywaysthrough"lapseoftime"

8(e) > beforeoraftereffectiveness,SECcanstartadministrativeinvestigation

Effectivenessautosuspendedduringexamperiod(nooffers):8(c)
Nooffers duringSECinvestigation OR ifstoporderinplace:5(c)
Consequencesofrefusal/stoporders&SECinvestigation:
Muchmorecommonthenanyoftheabove
Rule477: voluntarywithdrawal autoeffectiveuponfilingwithdrawalapplication,unlessSEC
objectswithin15days

SHELFREGISTRATION 5.
Problemofregisteringsecuritieswhensalenotin"proximatefuture"(orindefinite),dueto6(a)last
sentencerequiringregisteredsecuritiestobe"proposedtobeoffered"

Rule462 >WKSIshelfregistrationsbecomeeffectiveautomaticallywhenfiled,then
easilyamended/supplemented/incorporatedbyreferencelater

[i] ANYofferingby issuerseligibletouse FormS3 (seasoned/WKSI)

[ii] ifineligibletouseFormS3,ONLYofferingsforpreexistingobligations(secondary
distributions,warrants,etc)

Availablefor:
415 > allowsregistrationstatementtobecomeeffectiveevenwhentheprospectusismissingTBD
informationotherwiserequired,solongasthemissinginfoislateraddedbyamendment OR aRule424
process (thatallowsExchangeActreportingcompanies toincorporatebyreferenceorfilea
supplementalprospectus)andtheinfodeemedpartofRS

Continuousbasisofferings >exampleiscommonstockofferedinemployeestockpurchaseplan
whereemployeescanbuywhenevertheywant

Delayedofferings >exampleisacompanyinthebusinessofacquisitionsneedingtohave
registeredsecurities"ontheshelf"forimmediateuse[asconsiderationtobuycompanies]

Shelfregistrationusedfor:
Page 7
Assets>$10M+ holdersofasingleclassofequitysecurity>499
Haveregisteredsecuritiesunder'33Actwithinpastyear
Haveregisteredsecuritiesunder'33Actwith>300holders
AND
ExchangeActreportingcompanyfor>past12months
Float (commonequityinthehandsofnonaffiliates)>$75M,OR offeringinvestmentgrade
nonconvertibledebt

EligibletouseFormS3if:
[3] seasonedissuers> issuerseligibletouse FormS3:Rule433(b)
OR
Float>$700Mfloat
Issuingnonconvertiblesecuritiesotherthancommonequity(i.e.,debt)andissuing>$1Bofsaid
securitiesinlast3years

[4] wellknownseasonedissuers(WKSI)>definedinRule405(supp.p.119)
5(a) > nosale/deliveryw/oeffectiveRS
5(c) > nooffersbeforefilingRS
Prefilingperiod
5(a) > nosale/deliveryw/oeffectiveRS
5(b)(1) > no"prospectus"unless10
Waitingperiod beforeregistrationstatementbecomeseffective
5(b)(1) > continuestoapplybutwithnewexceptions
5(b)(2) > nodeliveryunlessw/10(a)prospectus
Posteffectiveperiod (conceptuallycontinuesforever)
OverviewofTimePeriodsinanOffering
SummaryofRequired&PermittedCommunications
Page 8
G: conceptually,ifyoudonotfilearegistrationstatement,andyouarenotexempt,youarealways
intheprefilingperiod>5(a)&5(c)prohibitionsalwayswillapply

G: 5technicallydoesn'tprohibitfacetofaceoffersorhanddeliverywithinastate,butalmost
impossibletoescapejurisdiction

PREFILINGPERIOD LIABILITYUNDER5(a)[NOSALES]&5(c)[NOOFFERS] 2.
Lessconcernedaboutsalesduringprefiling b/cyoumustviolate5(c)beforeevengetting
toasale,mostlyanissueduringwaitingperiod

WasTherea"Sale"?
Offer+acceptance >Kforsale,see InreFranklin >brokeracceptedordersby
keeping/cashingcustomer'schecks;(ii)sellingcustomer'ssecurities[SEEBELOW]

Tenderoffers >asalewhenplansarepresentedtoSHsforapprovalandSHaccept:
Rule145[SEEM&ASECTIONBELOW]

[i] everyKforsale
Spinoff >asaleb/ccompanydistributingsharesofitsspinofftoitsSHsqualifiesasa
"dispositionofasecurityforvalue"

Valuetothecompanyisthetradingmarketthatinevitablydevelopsfromthe
distributedshares

[ii] dispositionofsecurity[SEEM&ASECTIONBELOW]
Pledge [ofstockascollateralforaloan]>saleb/can"interestinsecurity"is
transferred(justlessthanfullinterest)

[iii] dispositionofinterestinsecurity
Giftsarenotsales
"Free"stockofferings >saleb/cissuersaregettingvaluebycreatingpublicmarket
fortheirstock,generatinginterestandpublicity,etc

[iv] forvalue
"Sale":2(a)(3)
5(a) >nosale/deliveryw/oeffectiveRS
[1]WasTherean"Offer"?
ANYattempttodispose isverybroad
Indirectoffers >includingbusinesscard,email,writtenpublicityabouttheissuerorits
industrythatconditionsthemarket)

See InreCarlLoebRhodes (underwriters"conditioningthemarket"byissuingpress

releases aboutrealestatedevelopmentplansqualifiedas anoffer)

"Conditioning/primepumping/gunjumping"activities qualifyasanattempttodispose,
evenwhennothingclosetoanofferunderKlaw,

Solicitation ofanoffertobuy >offertosell

"Offer" >"anyattemptoroffertodisposeof,orsolicitationofanoffertobuyasecurity,or
interestinasecurityforvalue":2(a)(3)

"Initiateapublicsalescampaign"
Pressreleasesandbrochuresthatpromotecompanybyprospectiveunderwriters(b/cthis
wasfirststepinsalescampaign)

Publicationofmeeting/speechnotes(butpriorplannedspeechaloneisOK)
Examples ofwhatqualifiesasan offer:SECReleaseNo.3844
Advertiseproducts/services perusual
Sendoutnormalperiodicreports/dividendnotices toSH
Publishproxystatements
Makepressreleasesonfactualbusinessnews
[i] publicityeffortsthatare"businessasusual",i.e.continuingto:
[ii] respondingtoinquires:"issuersandtheirrepresentativesshouldnotinitiatepublicity
wheninregistration,butshouldrespondtolegitimate[unsolicited]inquiriesforfactualinfo
oncompany'sfinancialconditionandbusinessoperations"fromSHs,analysts,press

Examples ofwhat is notan offer:SECReleaseNo.5180

InternetRules:SECReleaseNo.7856
5(c) >nooffersbeforefilingRS
Page 9
Communication/infoonanissuer'swebsite ORa3rdparty'swebsitethatthe issuerhas
hyperlinked to>offer

HistoricalissuerinfoonseparatesectionofwebsiteOK:Rule433
[2]DoesanExceptionorSafeHarborApply?
2(a)(3)PrivityException >"preliminarynegotiations oragreementsbetweenanissuerandany
underwriter OR amongunderwritersinprivityofKwithissuer"NOToffers(butn/atodealers)

Newspaper/press didn'tmakeanoffer b/ctheyaresellingnews,notsecurities

Underwriters madeanoffer b/c5(c)appliesevenifinfohassomevalueas"news"
NewsException:InreCarlLoebRhodes
[i] byANYissuer (+sellingSHs,thoseactingonbehalf)
[ii] withdisclaimer
[iii] verylimitedinfo(type,amount,timing,purpose)
[iv] doesnotnameunderwritersorprice
Rule135 (supp.p.53)>notice/pressreleaseannouncingaproposed offering
[i] by ANY issuer ORonbehalf of (otherthanprospectiveunderwritersordealers)
[ii] made >30dayspriortooffering
[iii] thatdoesnotmention theproposedoffering
[iv] andtheissuertakes"reasonablesteps"topreventfurtherdisseminationofinfo
Rule163A (supp.p.86)>priorcommunications
*continue inconsistencewithpast>can'tincreaseamountofadvertising
[i] ONLYbynonreportingissuers
[ii] topeopleotherthan investors/potentialinvestors
Rule169 (supp.p.91)>*regularly releasedfactualbusinessinfo
[i] ONLYby'34Actreportingissuers
[ii] regardlessofrecipient
Rule168 > regularly released factual+forwardlookinginfo
[i] madePRIORtofilingRS
[ii] oralOR written
Theseofferscalledfreewritingprospectuses [SEEBELOW]
[iii] writtenoffersmusthavelegend(wheretogetprospectus),beretained3years,filed
withRS

Rule163 >offersby[ONLY]WKSIs
WAITINGPERIODLIABILITY UNDER5(a)[NOSALES]&5(b)(1)[NOPROSPECTUSES] 3.
Firmsoftenwillmakeconditionaloraloffersthatcannotbeaccepted("indicationsofinterest")
5(c)>N/AoraloffersOK
Oraloffer OKbutifaccepted (evenaccidently)>Kmade 5(a)violation
(i)keeping/cashingcheckscustomerssent(eventhoughtheydidn'taskforit)b/cgave
customerstheimpressionaKwasformed

(ii)sellingthecustomer'sothersecuritiesinanticipationofmakingthesale
See InreFranklin >brokerdealersalesdudesviolated5(b)b/ctheyacceptedorders duringthe
waitingperiodby:

5(a) >nosale/deliveryw/oeffectiveRS
OR
[1] NOTa2(a)(10)prospectus
[2] ISa10prospectus
noliabilityunder5(b)(1) byeithershowing:
[1]DoestheCommunicationQualifyasa2(a)(10)"Prospectus"?
Includes"graphiccommunications"suchasradio,TV,internet,emails,websitepostings,
blastvoicemailmessages;butNOTrealtimecommunications toliveaudiences:Rule405

2(a)(10) >"prospectus"definedasany"communication,writtenorbyradioortelevision,which
*offers anysecurityforsaleorconfirmsthesaleofanysecurity"

*IMPORTANT: wasthereanoffer?
5(b)(1) >no"prospectus",unless 10prospectus
Page 10
NO offer> can'tbea "prospectus"
2(a)(3)>privityexception
Rule135>safeharborforannouncinganoffering
Rule168 >safeharborforregularcommunications[byreportingissuers]
Rule169 >safeharborforregularcommunications[bynonreportingissuers]
Whatqualifiesasan"offer">sameasinprefilingperiod,butlessexceptions
2(a)(10)(a) > posteffectiveexception(n/aduringwaitingperiod)
[i] thesecurity,price,whocanexecuteorders,howtoget10prospectus
[ii] infoSECdeemsasNOTprospectuses
(a)canbedoneif(b)isdone,but(b)doesnothavetobedoneifeither(c)(i)or
(c)(ii)isdone,or(d)canbedonealoneifitsrequirementsarefollowed

[SEEE&EPG.157]
Rule134 >exceptionfor"tombstonead"identifyingstatements,when:
2(a)(10)(b) >limitedinfocommunicationscontaining:
NOT 2(a)(10)"prospectus":
[2]Ifa"Prospectus",10Prospectus?
10(a) >N/Aduringwaitingperiod
[i] mustbefiledwithRS
[ii] legendinredinkthatRSnotyeteffective
[iii] containsinfofoundinfinalprospectusexceptfor priceandunderwriting
Rule430 >preliminaryprospectus:
Uncommon
Rule431 >summaryprospectus:
[i] mayincludeanyinfoexcept infoconflictingwithRSorotherincorporated
filings

[ii] mustbe filed withSEConorbefore1stdayused

[iii] legend(advisinginvestorstoreadpreliminaryprospectusandhowtogeta
copy)

[iv] acc.orpre. bypreliminaryprospectus,unless seasoned/WKSIissuer (not

required tobeacc.orpre.byANYprospectus)

[v] cancure immaterialorunintentionalfailurestolegendorfile,aslongas

therewasgoodfaithefforttocomply+correctiveactiontakenasap

Mediacompaniesexemptfrominfo/legend/filingrequirements
Issuerneedstofilethemediastorywithin4daysofbecomingawareofit
MediaStories (i.e.interviewwithissuer)>qualifyasFWPs:Rule433(f)
Requiresfilingunless roadshowmaterialsareavailableelectronicallytopublic
RoadShowMaterials (i.e.handouts,PowerPoint,etc)>qualifyasFWPs:Rule433(d)
Rule433+Rule164 >freewritingprospectus:
10(b) >prospectusesthatareallowedbytheSEC,OKtoomitorsummarizesinfootherwise
requiredby10(a)

[3]PreliminaryProspectusDelivered?
[i] "acceleration" ofRSeffectivedatewillnotbegrantedunlesspreliminaryprospectuses
aremadeavailabletoallunderwritersanddealers:Rule460

Electronicdelivery> OKifrecipientgivesconsent,andconsentcanbegivenover
phoneifrecordofcalliskept:SECReleaseNo.7856

Failuretodeliver >deceptiveactunderExchangeAct15(c)(2)
[ii] preliminaryprospectus mustbedeliveredbyunderwritersanddealers to:(i) people
whoask;(ii) salespersonnel;(iii)andfornonreportingissuers,anypersongetting
confirmationofsale,48hourspriortosendingconfirmation:'34ActRule15c28

PreliminaryProspectusDistribution: allowed buttechnically notrequired duringwaitingperiod,a

shortcomingthattheSECaddressesin2ways:

Page 11
POSTEFFECTIVEPERIOD LIABILITYUNDER5(b)(1)[NOPROSPECTUS]+5(b)(2)[NODELIVERY] 4.
5(c)>N/AoraloffersOK
5(a)>N/AsalesOK
Writtenofferisa10final prospectus
[SEEWAITINGPERIOD]
2(a)(10)(b) >limitedinfocommunications
[SEEWAITINGPERIOD]
Rule134 > "tombstonead"identifyingstatements
Communicationacc./pre.byafinal10(a)prospectusisdeemedNOTtobea2(a)(10)
"prospectus"

2(a)(10)(a) >freewriting
Mustbeacc./pre.byafinal10(a)prospectus
Rule431 > summaryprospectus
Fornonreporting andunseasonedissuers,FWPmustbeacc.bythefinal10(a)prospectus
[orhyperlink]

Forseasoned andWKSI,nosuchrequirement
Rule433 >freewritingprospectus:
Forcashofferingsmissingpriceandofferingrelatedinfo
Butinfomustbefiledwithin15daysofeffectiveness
Rule430A >"notyetfinal"prospectus
Rule430B >shelfregistrationprospectus
Fornoncashofferings
Rule430C >"notyetfinal"prospectus
RSeffective> "accessequalsdelivery"
10(a)prospectusfiled orwillbeassoonaspracticable
NopendingSECproceedingsagainstoffering/participants
Rule173noticeonlyifissuer/underwriter/participating dealersubjectto4(3)
Acc./pre.byafinal10(a)prospectus>deemeddelivered if:
Limitedtoinfonecessarytocomplywith'34ActRule10b10
Rule172(a) >writtenconfirmationofsale
5(b)(1) > no"prospectus"unless10,writtenofferOK if:
OR
[i] finalprospectus
[ii] notice (salewasmadepursuanttoRSORthatRule172applies)
Rule173 >within2days ofcompletingsale,issuers/underwriters/participating dealers(thatcan't
takeadvantageof4(3)orRule174)mustsendbuyerseither:

RSbecomeseffective> "accessequalsdelivery"
10(a)prospectusfiled orwillbeassoonaspracticable
NopendingSECproceedingsagainstoffering/participants
Rule172(b) >finalprospectusdeemeddelivered [satisfying5(b)(2)],when:
4(1) >5(b)(2)finalprospectusdeliveryrequirementsonlyappliesto transactionsby
issuer/underwriter/dealers[NOTgeneralpublic]

90daysforfirsttimeissuers
40daysforallotherissuers
25daysifissuerisanexchangetradedcompany
0days ifissuerisareportingcompany
4(3) >5(b)(2)finalprospectusdeliveryrequirementsonlyapplytoparticipating
dealers >thosesellingsecuritiesregisteredinthepast:

Exceptions[Delivery/Rule173NoticeNOT Required]
'34ActRule15c28: similartopreliminaryprospectusesduringthewaitingperiod, alsorequires
underwriters anddealers todistributecopiesoffinalprospectus to:[i] peoplewhoask;[ii] sales
personnel

5(b)(2) >nodelivery ofsecuritiesunlessacc./pre. byafinal10(a)prospectus

Page 12
5(b)(2)LIABILITYFORDEFECTIVEFINALPROSPECTUS? 5.
Compare SECv.ManorNursingCenters (2ndCir.1972)>dudesviolated5(b)(2)bydelivering
securitieswithoutorprecededbyaprospectusthatmetrequirementsof10b/ctheinforequired
ontheprospectusper10wasmateriallyfalseand/ormisleading

With Gustafson (5thCir.)>disagrees/criticizesManorNursing b/cfalseormisleadingstatements

onprospectusisprotectedbyaseparateantifraudprovisionwithspecificdefenses>thisdecision
makesthosedefensesnull(notfairtos)

DefectiveFinalProspectus duetomateriallyfalseormisleadinginfoaneffective10(a)finalprospectus
Page 13
Exemptions
STATUTORYSCHEME 1.
ExemptfromALLActsections unless "expresslyprovided">17and12(a)(2)
3(a) >alllisted(i.e.issuedbygov.religious,education,charitableorgs)
ExemptedSecurities
4(1) >bypublic
Nonpublic
Transaction [ONLY]
Byissuer [ONLY]
Exemptfrom5[ONLY]
Rule506 [Reg.D]>unlimited $
4(2) >privateplacements
3(a)(11) >intrastateofferings:Rule147
Rule504 >$1M
Rule505 >$5M
Reg.A >shortform
Reg.CE >California
Rule701 >pensionplans
28usedmore(nolimits)
3(b) >othersperSECdiscretion[$5Mmax]:
ExemptedTransactions
Publicinterest>must considerefficiency,competition,capitalformation
28>SECallowedto"exemptanyperson,security,ortransaction"ifnecessaryforpublicinterest
ExemptionsforPublicInterest
TRANSACTIONEXEMPTIONGENERALRULES[ReleaseNo.4552] 2.
Primary offeringsbyissuers [ONLY]
PartyseekingexemptionhasBoP
[i] separateofferingspartofasinglefinanceplan
[ii] separateofferingsissuingsameclass ofsecurity
[iii] separateofferingsmadearoundsametime
[iv] sametypeofconsideration istobereceived
[v] separateofferingsmadeforsamegeneralpurpose
6monthsafeharbor >salesseparatedby6monthsconsideredseparateofferings(notsubjectto
integration):Rule502(a)[Reg.D];Rule147(b)(2)[intrastate]

Integration > SECconsiders5factorstoseeifseparateofferingsshouldbeintegrated(reallyone

transaction):

Legendindicatingrestrictionsoncertificates
Stoptransferorder
Covenantsnottoredistribute
ComingtoRest >offeringnotoveruntilsecuritiescometorest inhandspeoplewhoarenotconduits
forwiderdistribution,sellersmust:

Examples: 1outofstatepurchaser,1unsophisticatedperson,etc
Practicallyissuercanonlyabandontheofferingandstartnewoneafterintegrationperiodisup
BadAppleDoctrine >asinglenonconforming offer (evenifnonqualifyingdoesn'tbuy) ORsale
destroysexemption fortheentireoffering

Aggregation >generallybackwardslooking(justaddshitinthepast6months)
Page 14
3. EXEMPTPRIVATEOFFERING>4(2)?

Exemptfrom5[ONLY]
Privateoffer>meetfactors[1][4]([1]+[2]from RalstonPurina)
Transaction [ONLY]
Byissuer [ONLY]

*4(2)canstillprotectevenwhennotqualifiedforRule506safeharbor
[SEERULE506SAFEHARBOR* INCHARTBELOW]
4(2) >"5 shallnotapplytotransactions byanissuer notinvolvinganypublic offering"

Classofpersons >issuerhasBoP toshowoffereesableto"fendforthemselves"(have

access tothe"kindofinfothatwouldbeavailable[onaRS]")

Wealth
Sophistication
Relationship

Riskbearingability
Offeree'srepresentative(sophisticationmaybeimputedtoanofferee)
Mannerofdisclosure
Economicbargainingpower
Other
[1]offereequalification [whocan"fendforthemselves"RalstonPurina]>possibleonseveral
independent bases:
[2] availabilityofinformation ["haveaccesstokindofinfo...":RalstonPurina]

Nosolicitation("allformsofadvertisingandmediacirculationshouldbeavoided")
OffermadedirectlytooffereesORtheirreps
[3] mannerofoffering
[4] noresale >must"cometorest"inhandsofinitialinvestors
"Publicv.PrivateOffering" >turnson"whetherthe[1] particular classofpersons affected [2] needs
theprotection oftheAct":RalstonPurina (keyfactors: [1]sophistication +[2]accesstoinformation)
SECConsiderations >relationshipbetweenoffereesandissuer,nature,scope,size,type,andmanner
ofoffering:SECReleaseNo.4552
4. EXEMPTLIMITEDOFFERING>REG.D?

Mustaggregate all3(b)offer/sales
Rule504andRule505arerulesunder3(b)[$5Mmax]

4(2)canstillprotectevenwhennotqualifiedforRule506safeharbor
Rule506isasafeharbor under4(2)
Rule504 under3(b) Rule505 under3(b) Rule506 under4(2)
Issuer
Qualifications
no'34Actreporting
co.,"blankcheck"co.,
orinvestmentco.
noinvestmentco.,bad
boyissuersDQ'dunder
Reg.A
none
Aggregate$$
Limit
$1M/year(all3(b)
offer/sales)
$5M/year(all3(b)
offer/sales)
nolimit
#of
Purchasers*
unlimited 35maxnonaccredited+
unlimitedaccredited**
35maxnonaccredited+
unlimitedaccredited**
Investor
Qualification
none nonaccreditedmustget
writtendisclosure+
opportunitytoaskissuer
questions:Rule502(b)
nonaccredited(aloneorwith
rep.)mustbesophisticated (or
issuerreasonablybelievesso)

accreditedpresumedtobe
qualified

Beliefof
Offeror/Seller
none reasonablebeliefasto#
ofpurchasers,butNOTas
towhetherqualified
reasonablebeliefasto#of
purchasersAND purchaserwas
qualified
Page 15
***theserequirementscanbeliftedif[i] issuerregistersunderstatelawrequiring
filing/disclosure;or[ii] offeringexemptunderstatelawthatallowssalesonlytoaccredited
investors:Rule504(b)(1)
Mannerof
Offering
usuallynogeneral
solicitation***
nogeneralsolicitation:
Rule502(c)
nogeneralsolicitation:Rule
502(c)
Resale usuallyrestricted*** restrictedperRule144
[SEERESALE]:Rule502(d)
(reasonablecareto
preventresale)
restricted:Rule144[SEE
RESALE]:Rule502(d)
(reasonablecaretoprevent
resale)
NoticeofSales fileFormDwithin15
daysof1stsale(but
notconditionof
exemption):Rule503
fileFormDwithin15days
of1stsale(butnot
conditionofexemption):
Rule503
fileFormDwithin15daysof1st
sale(butnotconditionof
exemption):Rule503
InfoRequired
tobeGivento
Purchasers/
Offerees
none ifpurchasedby:
solelyaccredited>none
nonaccredited>infoas
specified****

ifpurchasedby:
solelyaccredited>none
nonaccredited>infoas
specified****

IntegrationSafe
Harbor
6months:Rule
502(a)
6months:Rule502(a) 6months:Rule502(a)

Example: partnershipwith10people,5unaccredited>onepurchaserandissuer not

obligated to considersophisticationofEACHindividualpartner
Businessentities countas1purchaser:Rule501(e)(2)
*Purchasers >excludes familyandaccreditedinvestorsincountingpurchasers:Rule501(e)

Personsw/networth>$1M(w/ocountinghome)OR 2mostrecentnetincome>
$200K($300Kw/spouse)
Institutionalinvestors(i.e.banks)
Corp./org.with>$5Minassets
Keyinsidersofissuer
VCfirms
Trust>$5Massets+sophisticatedmanager
Accreditedownedentity(allequityownersareaccredited)
Whenaccredited>lookattimeofsale ofsecuritiestothatperson:SECReleaseNo.6455
**Accreditedinvestors:Rule501(a)
Nonaccreditedpurchasers mustbesophisticated >"haveknowledgeandexperiencetoevaluate
theinvestment"
Rule501: definitions

No generalsolicitation:Rule502(c)

Discloseresalerestrictions
Legendsecuritiesasrestricted
Havepurchaserssignletterofintent[nottoresell]
SecuritiessoldunderRules504/505/506>all "restrictedsecurities"(cannotberesoldwithout
registration),andtheissuer musttake"reasonablecare"topreventresale:Rule502(d)

Nonreportingcompanies > furnishsamekind ofinfoasinregisteredoffering

Reportingcompanies >furnishspecified'34Actdocs,orinfofrommostrecentspecified'34
Actreportor'33ActRS
Issuers >exhibits,writteninfogiventoaccreditedinvestors,Q&Aavailablepriortosale
Issuers >advicepurchasersofresalelimitations
Disclosureobligations**** if purchasedbynonaccredited:Rule502(b)(2)
Rule502: conditionsforestablishingexemption
Rule503: filingnoticesofsales perFormD
Rule507: Reg.Dnotavailableifissuersubjectto injunction forfailingtofileFormD
Rule508: fuckupsnobiggieifgoodfaithreasonableattempttocomply
Page 16
5. EXEMPTINTRASTATEOFFERING>3(a)(11)?

AND
[i] offered andsold onlytopersonsresidentwithinasingleState
[ii] theissuerisapersonOR businessentity thatisaresident+doingbusinesswithinState
Rule147 >definitionsandsafeharborforintrastateofferings
3(a)(11) >exempts intrastateofferings foranysecuritywhichispartofanissue:
issuer "resident"requirement> PersonIssuer
domicile
BusinessIssuer
corps.>incorporation
noncorps.>organized
unorganized>principalbusiness
issuer "doingbusinesswithinstate"
requirement>
principaloffice,80%grossrevenues,80%assets,80%useof
offering'sproceedsinstate:Rule147(c)(1)
offeree/purchasers>
*badappleapplies(exemptionlostif
anyoffer or salemadetooutof
stateresident)
Person
domicile:3(a)(11)
actualprincipleresidence:Rule147(d)(2)
Business
principleoffice:Rule147(d)(3)
integration safeharbor> >6monthsbefore/afteroffering:Rule147(e)
resale restrictions> "cometorest"safeharbor>9months:Rule147(e)
useofproceeds > predominantly(80%)usedinstate
6. EXEMPTSMALLISSUES("SHORTFORM"REGISTRATIONS)>REG.A?

Allowsissuersto"testthewaters"bymakingoralandwrittencommunicationstopotentialbuyers
andgaugeinterest:Rule254
Reg.A >exemptssmallissues ifissuerusesanofferingcircularandcomplieswithfiling/delivery
requirements:ShortForm 1A
Rule/Regulation: Reg.ASmallIssues("ShortForm"Registrations):Rules251 263
AffiliatedStatute: 3(b)
Offeror/seller: no'34Actreportingco.,badboyissuers,investmentco.,blankcheckco.+
residence&principleplaceofbusinessinUS/Canada:Rule251(a)+262
$limitoffered/sold: <$5Maggregateofall3(b)offers/saleswithin12months
Useofproceeds: fileperiodicform2A
NoticetoSEC: offeringstatement+reportonsalesanduseofproceedsevery6months
andwithin30daysofsalecompletion:Rule256+257
Failuretogivenotice: notconditionofexemption,SECcouldsuspendexemption:Rule258+260
Mannerofoffering: testingwatersOK>preliminaryofferingcircularduringwaitingperiod,
oraloffersafterfiling

nosalesuntilForm1Aisqualified:Rule251(d)
Requiredinfotobegiven
topurchasers/offerees:
nosaleunlessofferingcirculargiventopurchaser:Rule252 255
Integrationsafeharbor: notintegratedwith:[i]prioroffers/salesor[ii]lateroffers/salesregistered
under5A,SA,R.701,Reg.S,ormade>6monthsafterReg.Aoffer
completed:Rule251(c)
Page 17
7. EXEMPTOFFERINGFORACCREDITEDINVESTORS>4(6)?

OR
Networth(you+spouse)>$1M
Netincome>$200K($300Kifspouse)for2mostrecentyears
Naturalpeople:Rule215(e),(f)
Accreditedinvestors >includesatonofshit(institutions,people,business):2(a)(15);Rule215
4(6) >exemptsofferings>$5Mper3(b),made[i] onlyto accreditedinvestors,IF:[ii] issuerfiles
notice+[iii] noadvertising/publicsolicitation
8. EXEMPTOFFERINGFORCOMPENSATORYEMPLOYEEBENEFITPLAN>RULE701?
Rule701 >exemptsofferingsforsecuritiesgivenbyanissuertoitsemployees(orsimilarrelationship)
aspartofcompensation
Rule/Regulation CompensatoryBenefitPlans&Ks:Rule701
AffiliatedStatute: 28
Offeror/seller: no'34Actreportingco.,investmentco.:Rule701(b)
Purchasersand/orofferees: employees,directors,generalpartners,trustees...:Rule701(c)
Offeror/seller'sintent: compensatorypurpose,nottoraisecapital
accordingtoawrittenKforbenefits
$limitoffered/sold: greaterof$1M,15%assetsofissuer,15%ofoutstanding
securities...:Rule701(d)
Useofproceeds: noproceeds(compensatory)
Mannerofoffering: bywrittenKforbenefits
Restrictionsonresale: "restrictedsecurities"perRule144
Requiredinfotobegivento
purchasers/offerees:
infoon:benefitplan,ERISArequirements,risk...:Rule701(e)(1)(6)
Integrationsafeharbor: nointegration
9. EXEMPTOFFERINGPERCACORP.CODE>REG.CE?
Reg.CE >exemptsofferingsthatsatisfy25102(n)ofCACorporationsCode
Rule/Regulation Reg.CE>Rule1001
AffiliatedStatute: 3(b)
Offeror/seller: CAissuer OR nonCAissuerw/>50%property&payroll&salesinCA
+>50%heldbySHsw/CAaddresses
Purchasersand/orofferees: affiliatesofissuer/relatives/whoqualifyb/c
$limitoffered/sold: <$5Mtotal peroffering(cannotuseanotherexemptiontocover>$5M)
Restrictionsonresale: "restrictedsecurities"perRule144
Requiredinfotobegivento
purchasers/offerees:
asunderCACode
Other: securitiesmustsatisfyCACorp.Code25102(n)
10. EXEMPTOFFERINGFORLARGEACCREDITEDINVESTORS>PROPOSEDRULE507?
Rule/Regulation LargeAccreditedInvestors:ProposedRule507
AffiliatedStatute: 28
Purchasersand/or
offerees:
largeaccreditedinvestors
individualsw/$2.5Mininvestmentsor$400Kincome/yr($600Kw/spouse)
Page 18
entitiesw/$10Mininvestments+financialinstitutionsw/o$thresholds
directors,executiveofficers,generalpartnersoftheissuer
Offeror/seller'sintent: reasonablebelief>largeaccreditedinvestor(s)
Mannerofoffering: nogeneralsolicitation
Restrictionsonresale: onlytoaccredited
Requiredinfotobegiven
topurchasers/offerees:
"predominantlystates"soldonlytolargeaccreditedinvestor,no$solicited
oraccepted,notregisteredw/SEC
Integrationsafeharbor: 6monthsperRule502(a)
ResaleRestrictions
STATUTORYSCHEME 1.
"Underwriter" >"anypersonwhohaspurchasedfromanissuerwithaviewto,oroffersorsellsforanissuerinconnectionwith,the
distributionofanysecurity,orhasadirectorindirectparticipation...theterm'issuer'shallinclude...anypersondirectlyorindirectly
controllingorcontrolledbytheissuer,oranypersonunderdirectorindirectcommoncontrolwiththeissuer.":2(a)(11)

4(1) >5onlyappliestotransactionsbyanissuer,underwriter,ordealer(N/Atogeneralpublic)
Defactosellers(i.e.,investmentbanker)OK
[1]agentforissuer >whooffersorsellsforanissuerinconnectionwithdistributionofasecurity
Violatesthebanon resalesofrestrictedsecurities
[2]purchaser"withaviewtodistribute" >
Violatesthebanon resalesofcontrolsecurities
[3]underwriterfora"controlperson" >thosewhooffersorsellsfora"controlperson"
Thus3categoriesofunderwriters[3waystoincur5liabilityasanunderwriter]:
Rule144 >safeharbor toavoid "underwriter"designationunder[2] or [3]
ARETHESECONTROLORRESTRICTEDSECURITIES? 2.
[badacti]resaletothepublicof"restrictedsecurities" >thoseacquireddirectlyorindirectly
fromissuer[oranaffiliate]inaprivateoffering:Rule144(a)(3)

[badactii]resaleof"controlsecurities" > thoseownedbyanaffiliate oftheissuer

SecondaryDistributions >Act onlyregulates resales of[i] restricted OR[ii] controlsecurities [badacts
ifwithoutregistrationoranotherexemption]

Unexercisedpowertocontrolisstillcontrol(i.e.majoritySH)
Memberofcontrol"group"alsohascontrol(i.e.familyofcontrolperson,corporateofficersofa
controlgroup)

Affiliate (aka"controlperson")>isanypersonthat,directlyorindirectly,controlstheissuer:Rule405
("control"definedasthepower,evenifunexercised,todirectmanagementandpoliciesoftheissuer,
whetherthroughstockownership,position,contract,etc)

SAFEHARBORFORRESALESOFCONTROL&RESTRICTEDSECURITIES>RULE144? 3.
"Person" [sellingsecurities]>includesrelatives,etc
(a)definitions
Nonaffiliates >mustcomplywithcurrentpublicinfo+holdingperiodrequirements
Affiliates >mustcomplywithALLconditions
(b)conditionsthatmustbecompliedwith
(c)currentpublicinfomustbeavailable
6monthsfor'34Actrecordingcompaniesthatarecurrentinitsreports
1yearifnot
(d)holdingperiods forrestricted securities
(e)limitsonvolumeofcontrolsecuritiessold
Rule144 >safeharbor [ONLY](forpersonslistedin[1][2][3] below)thatdeemspeoplenottobe
engagedinadistribution, avoiding"underwriter"designation,OKtoresalesecuritiesunder4(1)

Page 19
Generallyrequiringa"broker'stransaction"
(f)mannerofsaleforcontrolsecurities
(g)defines"broker'stransaction"
(h)mustgiveSECnoticeofsaleofcontrolsecurities
(i)disqualifications fromusingRule144
Transactions+PersonsCoveredbyRule144:
[1]noncontrol* persons
sellingrestrictedstock
*cannot havebeenan
affiliateduringthe3months
beforesale
[2]controlpersonsselling
restrictedstock
[3]controlpersonsselling
nonrestrictedstock
(throughbrokers)
Holding
Period
securityof'34Actreporting
company>6months**

securityofnonreporting
company>12months

securityof'34Actreporting
company>6months

securityofnonreporting
company>12months

none
Sale
Method
N/A broker'stransactionsafter
filingForm144

N/Atoresaleofdebt
securities

broker'stransactionsafter
filingForm144

N/Atoresaleofdebt
securities

Info **publicallyavailableinfofor
reportingissuersfor12
monthsbeforeresale
**publicallyavailableinfo
aboutissuer
**publicallyavailableinfo
aboutissuer
SECFiling N/A disclosureonForm144if
selling>5KsharesOR>$50K
disclosureonForm144if
selling>5KsharesOR>
$50K
**mustbecurrenton'34Actperiodicfilings
***mustbepublicinfocomparabletoinfoon'34Actreports>reportingcompaniessubjectand
currenton'34Actperiodicfilingsautomaticallysatisfypubicinforequirement

Page 20
PRIVATERESALESOFCONTROL&RESTRICTEDSECURITIES>RULE144A? 4.
Rule144A: safeharbor for[1] privateresalesofsecuritiesto"qualifiedinstitutionalbuyers"(must
have>$100Minvestedinnonaffiliates)orsomeonesellerreasonablybelievestobe;[2] securityisnon
fungible(nonexchangeable)withthosetradedonanexchangeorpubliclyautotraded;and[3] must
providebuyerwithnoticesellermightuseRule144Aexemptionandotherinfoifselleris'34Act
company

Isthepersonan
affiliate/saleon
behalfofaffiliate?
YES
NO aretheyholding
restrictedsecurities
perRule144(d)?
NO noissuesw/resale[thus
likelytheycanrelyon4(1)
asapersonwhojustbought
somesecuritiesandare
entitledtoresellthem]
mustcomplywith
publicinfoand
holdingperiod
requirementsper
Rule144(c)+(d)
YES
'34Actrecording
company+current
initsreports?
minholdingperiodof
1year:Rule144(c)
YES NO arethey'34Act
reportingcompany
+currentinits
reports?
NO
YES
restricted
securities?
musthavebeenheldfor>6
months+saleisstillsubject
tovolume,mannerofsale,
andnoticerequirements
salestillsubjectto
volume,mannerofsale,
andnoticerequirements
YES
NO
isadequate
information
otherwisepublicly
available?
affiliateisshitoutofluck(which
isonereasonswhycompanies
sometimesvolunteertoregister
under'34Act)
NO
YES
minholdingperiodof
6months:Rule144(c)
Page 21
CorporateReorganizations
STATUTORYFRAMEWORK 1.
2(a)(3) >"sale"definedas"every Kforsaleordispositionofasecurityorinterestinsecurityforvalue"
UNLESS exempt >OKtorelyon4(2)privateofferingexemptioninsteadofregistering;
Rule145doesn'taffectotherstatutoryexemptions:SECReleaseNo.5463

Access=deliveryN/AtoRule145
Registration required forsecuritiesissuedinconnectiontomergers,consolidations,ortransfersof
assetsb/cRule145deemsthesetransactionsaretoinvolveofferstosell:SECReleaseNo.5316

Rule145 >saleoccurswhenacquisitionplanspresentedtoSH("offer")andSHvotes("acceptance")
Rule165 > offertoSHsw/r/tatransactioncoveredbyRule145isNOT a"prospectus"under2(a)(10)
definitionORan"offertosell"for5purposes,after 1stpublicannouncement

Takereasonablesteps topreventfurtherdisseminationuntilannouncementorRSfiled
Rule166 >communications before apublicannouncementnotoffers,IF:
TENDEROFFER? 2.
No sale b/c isnotsellingasecurity[per2(a)(3)] (offeringcash)
Cashtender > offersB'sSHscashfortheirstockinB
Sale b/cbothpartiesenterintoK[per2(a)(3)]
Stockforstocktender > offersownshares toB'sSHsinexchangefortenderingBshares
CONSOLIDATION? 3.
Saleb/c bothpartiesgottovote,thusbothenteredintoK[per2(a)(3)]
Consolidations>IF SHsof andBvoteto, mergeswithB,creatingnewC
MERGERORSTOCKFORASSETSACQUISITION? 4.
Targetactslikemiddleman,whoisdeemed anunderwriter [only]ifoneofthepartiesisashell
company:Rule145(c)

IF deemedanunderwriter,Targetsubjecttounderwriterliabilityunder11andTarget'saffiliates
subjecttoresellrestrictions

Merger&stockforassetsacquisitions >Target'sSHsgetsecuritiesissuedbyAcquirer,butunlike
tenderoffers,Target'sSHsdonotvote ondecision(issue >nosale onitsface)

SPINOFF? 5.
[i] gotvalue fromtheinevitabletradingmarketthatdevelopsforthepreviouslyprivateand
illiquidsharesthat kept,thusa"dispositionofasecurityforvalue",see SECv.Datronics

Registrationrequirementsfor
Prospectusdeliveryrequirements in4(3)for and 'sdealers
[ii] becomesa statutoryunderwriter[SEERESALERESTRICTIONS]:SECReleaseNo.4982
Spinoffisproratatotheparent'sSHs
Peoplereceivingspunoffsecuritiesgavenoconsiderationforthem
ParentgivesitsSHsandthepublicadequateinformationspinoff+companybeingspunoff
ParenthasavalidbusinesspurposeforthespinoffAND spinsoff"restrictedsecurities"it
hasheldfor2+years

Parent restrictsresale ofsecurities

5gardenvarietyspinoffs NOTrequiringregistration:[SEECASEBOOK182]
Spinoff > iswhen distributesstockitownsinBto'sSHsasaspecialdividend(issue b/cdividends
notconsidereda"dispositionforvalue");2waysaroundissue:

Page 22
LiabilityforSecuritiesActViolations
'33ACTSTATUTORYOVERVIEW 1.
5>violationofregistrationrequirements
17>antifraudprovision
24>criminalpenaltiesforviolating5or17
8A>civilenforcementcease&desist
20>injunction
21>civilmonetarypenalties
21(d)>equitablereliefforviolationsof'33or'34Act
Penalties:
GovernmentActions
11>misrepresentationsinRS
12(a)(1)>violationsof5
12(a)(2)>misrepresentationsinprospectus
13>SoLfor11+12
14>nowaiverofrightsunder8,11,12
15>controlpersonliability
RelatedProvisions:
ExpressPrivateRights
GOV.CRIMINAL(DOJ)&CIVIL(SEC)ACTIONS? 2.
5violationofregistrationrequirements: "unlessaregistrationstatementisineffectastoasecurity,it
shallbeunlawfulforanyperson,directlyorindirectly ..."

ONLY17(a)(1)requiressomesortofscienter(recklessnessisnotenough),asopposedtoactions
under17(a)(2)or17(a)(3)

17antifraudprovision: "itshallbeunlawfulforanypersonintheofferorsaleofanysecurities..."
"Willful" >personcanviolateevenifhedidn'tknowSECruleexistedorthatthethingbeing
offered/soldwasa"security"[subjecttoSECregulation]:see USv.Brown (governmentonly
requiredtoprovespecificintentastobadconductandthingusedwasinfactasecurity,butno
needtoprove'sknowledge thatthethingwasasecurity)

24criminalpenalties: "anypersonwhowillfully violatesanyoftheprovisions..."

Page 23
3. PRIVATERIGHTOFACTION?
Summaryof11,12(a)(1),12(a)(2)Violations
11>MISREPRESENT.IN
REG.STATEMENT
12(a)(1)>
VIOLATIONOF5
12(a)(2)>MISREPRESENT.
INPROSPECTUS
Reqs. tracing actualpurchaserfrom actualpurchaserfrom
Reqs. signersofRS+issuer titlepassers+solicitors,
Pinterv.Dahl
titlepassers+solicitors,
Pinterv.Dahl
'S
CASE/o
BadAct materialmisrepresentation
oromissioninRS

N/Atoexempt,unlessbad
apple

strictlyliabilityfor
offers/salesviolating5
reg.reqs.(eveniflater
fixed,Diskinv.
Lomasney)

N/Atoexempt,unless
badapple

materialmisstatementor
omissioninprospectusor
oralcommunications

ONLYpublicofferings,but
includesotherwiseexempt
(i.e.exemptperReg.Aor
intrastate)

Culpability notrequired,exceptfor
outsidedirectors

but canprovelackof per

theduediligencedefense

notrequired notrequired
but canprovelackof per
the reasonablecare
defense

Transaction
Causation
[reliance]notrequired,
unless>1year

but canrebutbyshowing
knewofuntruth/omission

notrequired [reliance]notrequired
but canrebutby
showing knewof
untruth/omission

Loss
Causation
notrequired
but canrebutbyshowing
noactualloss

notrequired notrequired
but canrebutw/lackof
losscausation:12(b)

Damages performulain11(e)
but'sotoshowthe
degreethey didn'tcause's
damages

recession/rescissory
damages
recession/rescissory
damages

but canreduce%
damagesbydegree

DEFENSES
SoL/rebutmainargument SoL/rebutmainargument SoL/rebutmainargument
"bespeakscaution"
noboilerplate
uncleanhands/other
equitabledefense
"bespeakscaution"
noboilerplate
27A>safeharborONLYfor
[i]forwardlooking[ii]by'34
Actcompanies
27A>safeharborONLY
for[i]forwardlooking[ii]by
'34Actcompanies
Rule175>safeharborfor
forwardlookinginRSOR '34
Actfiling
Rule175>safeharborfor
forwardlookinginRSOR '34
Actfiling
"resignandsqueal"
Page 24
4. MISREPRESENTATIONINREG.STATEMENT>11?

[1] =purchaser'sonlyrequirements:[i] tracing toregisteredoffering+ [ii] withinSoL:11(a)

No>joint&severelyliable:11(f)

Yes,joint&severelyliablesameasinsidedirectors
No,liabilitybasedon%ofresponsibility:'34Act21D(f)
Yes>"knowingly"per'34Act21D(f)(10)?
Outsidedirectors?
[2] = anyonewhosigned theRS(issuer,principalexecutiveofficers&majorityofdirectorsmust
sign);everypersonnamedinreg.stat.asabouttobecomeadirector;everyexpertnamedinreg.stat.ashavingpreparedorcertified
anypartofthestatement,orashavingpreparedanyreportorvaluationusedinconnectionwiththestatement;everyunderwriterof
thesecurity:11(a)(1)(5)

Boilerplatedisclaimers donotsaves:Trump (NOT boilerplatedisclaimersb/c

"tailoredpreciselytoaddresstheuncertainty[that iscomplainingabout]")
"Bespeakscautiondoctrine" >usuallylimitedto"softinfo"thatisnoteasilyverifiable,i.e.
forwardlookingstatements per27A:27A+Rule175[safeharbor]
27A> safeharbor for[i] futurelookingstatements only;[ii] notavailableforIPOs;[iii]
onlyavailablefor'34Actcompanies

Yes> safe

No> safe

Yes> safe
No> liable
Yes>meaningfulcautionarylanguage?
No>has shown actualknowledge?
Immaterial?
FlowchartforRule175:
Rule175> oldsafeharbor [G: notreallyimportantafter27A]forforwardlooking
statementsinregistrationstatementor'34Actfiling,notactionableunlessnoreasonable
basisormadeinotherthangoodfaith

Omissionoffacts >materialonlyifsubstantiallikelihoodareasonableinvestorwould
viewitas significantly alteringthe"totalmix"ofpublicallyavailableinfo(thisrule
makesG uncomfortable):InreAdams;Kapps

Couldjusthavebeenleakedearlierandmarketsalreadyadjusted
Case: InreAdamsGolfSec.Lit. (3rdCir.2004)> doesnotneedtoaddressloss
causationatmotiontodismissstage,whethernewsismaterialb/cmarketdidNOT
reacttonewsdependsonwhetherwebelieveinefficientmarkethypothesis
Case: Kappsv.TorchOffshore (5thCir.2004)>notmateriallymisleadingfor
prospectustodisclosethatpast16monthsthepriceofnaturalgashadincreased
133%butnotdisclosethatinpast5monthspricesdown60%
"Material" >factswherethereisasubstantiallikelihoodthatareasonablyprudent
investorwouldconsiderimportant
[3] BadAct =RSwith "untruestatementofamaterial fact ORomittedtostateamaterial fact
requiredtobestatedthereinornecessarytomakethestatementsthereinnotmisleading ..."

Thecloserinvolvementorhigherposition>themoreacourtexpects
Thoseconductingduediligencemustlookforfacts,notjustaskcorporateofficersQs
Underwriters>canrelyonagents,
Auditors>nohigherthanindustrystandard(i.e.,GAAP)
"Duediligencedefense" > canshowlackofculpability,afterreasonableinvestigation,
reasonablegroundtobelieveanddidbelieve...thatthestatementsweretrueandthere
wasnoomissionofmaterialfact[11(b)(3)]:see,e.g., Escottv.BarChris
"Resignandsqueal" defense
[4] Culpability =none

G: Congressthough"marketisnotrelyingonolddatab/cpresumedthatthemarketwould
[5] TransactionCausation =none,unlesstransactioninreliance>12mo.afterearningsstatement
11misrepresentationsinregistrationstatement (n/a toexemptofferings)> mustshow:
Page 25
havenewdata[andadjusteditself]within12months")

canrebutbyshowing noactualloss
[6] LossCausation =none

canrebutbyshowing knew ofuntruthoromission

sliablefordegreeoffaultandso toshowthedegreetheirconductdidnotcause's
damages
[7] Damages =formulain11(e)
DueDiligence
Defense:
LiabilityofNonExperts LiabilityofExperts
Preparedby
NonExperts
Notliableif[i] reasonableinvestigation+[ii]
affirmativebelief(noreasonablegroundsto
doubt)thestatementsaretrue(youhaveto
gooutanddoactualduediligence)+[iii] no
actualknowledge

Hereyouhavetoshowyouwentanddidsome
shitandreallyhadreasontobelieve
misstatementwastrue

Notliableif:
[i] violationisw/r/tshitthe
experthadnothingtodo
withormaterialstheydidn't
prepare

[ii] companydidn'tusethe
expertmaterialandinstead
altereditorsomething

Preparedby
Experts
Notliableif(willmeetyourdefense)youhad
[i] noreasonablegroundstobelieve+[ii] no
actualknowledgestatementsweremisleading

Hereallyouhavetoshowthatthereareno
redflags

Sameastopleftbox
5. VIOLATIONOF5REGISTRATIONREQUIREMENT>12(a)(1)?

[1] Proper >purchaser,see Fullerv.Dilbert (S.D.N.Y.1965)>notaproper b/chedidn't

actuallybuythesecurities

Musthavedirectlinktoissuerorseller,butbroaddefinitionof"seller"coversmorethan
personswho[i] passtitle tosecurities,see Pinterv.Dahl (US1988)(includespeoplewho
"successfully[ii] solicits thepurchase,motivatedatleastinpartbyadesiretoservehisown
financialinterestsorthoseofthesecuritiesowner")
[2] Proper > titlepassersandsolicitors:
[3]'scase> offers/salesinviolationof5

[i] SoL
[ii] rebutmainargument
[iii] uncleanhandsoranotherequitabledefense,see Fullerv.Dilbert
[4] 'srebuttal>

See Diskinv.Lomasney (2ndCir.1971)>evenafterdudesamendedregistrationstatement,

itwasstillanofferunder12,thusthebuyer couldstillgetrecession
[5] remedy >recessionorrescissorydamagesifyounolongerownsecurity
12(a)(1)violationof5registrationreqs.: strictlyliability for offeringorselling securitiesinviolation
of registrationrequirements of5(n/a toexemptofferings)
6. MISREPRESENTATIONINPROSPECTUS>12(a)(2)?

[1]Proper >actualpurchaser

Actioncanbeagainstthesellinggroup inregisteredoffering
[2]Proper >titlepassersandsolicitors,sameas12(a)(1)

Communicationsinclude>
Badact>materialmisstatement/omissioninprospectus(writingthatoffers)+oral
communications
[3]'scase >
12(a)(2)misrepresentationsinprospectus: liabilityfora materialmisstatement/omission in
prospectus/oralcommunications
Page 26
Freewritingprospectus
Exemptsecurities(i.e.exemptunderReg.AorIntrastateofferings)
G: possiblyotherwrittencommunicationsthatviolate5

See Gustafson (US1995)>liabilityonlyattacheswhenthereisanobligationto

provideaprospectus;andif escapesliabilityunderspecificprovisionsof11,
shouldalsoescapeliabilityunderthemoregeneralprovisionsof12(a)(2)
Butappliesonlyto publicofferings (includingotherwiseexempt publicofferings)byan
issuerorcontrollingSHs(limitedsecondaryofferings)
'sactualknowledgeifforwardlooking,otherwisenothingonculpability

knewofuntruthoromission
SoL: within1yearafterdiscoveryofuntruth/omissionoraftershouldhavebeen
discovered butmax3years aftersale
Uncleanhands
Meaningfulcautionarylanguageifforwardlookingstatements:Rule175[safeharbor]
Lackoflosscausation
Reasonablecaredefense > [i] didnotknow,and[ii] usingreasonablecarecouldnothave
knownaboutthematerialmisstatementoromission(~duediligencedefense):Escott;
Sanders (~duediligencedefensein11essentiallysamein12)
Case: Sandersv.JohnNuveen (7thCir.1980)>
[4]'srebuttal>
[5]Remedy >rescission (orcomparableremediesif nolongerownssecurities,i.e.recessionary
damages)

Losscausationn/ato12(a)(1) violations
12(b)losscausation: damages for12(a)(2) violations canbereduced bytheamountofloss proves
wascausedbyreasonsotherthanthemisrepresentation
7. CONTROLPERSONLIABILITY?

Control >broadmeaninghere,easilyincludesdirectors,officers,dominantSHs
o >somecourtsrequirestoshowculpable,othersrequirestoprovelackofculpability
15controlpersonliability: anyonecontrollingapersonliableunder11or12is jointlyandseverable
liable tosameextentasthecontrolledperson,unless thecontrollerhadnoknowledge or reasonable
groundstobelieve thefactsthatledtocontrolledperson'sliability
8. CONTRIBUTIONORINDEMNIFICATION
11(f)contribution: isavailablefor11SecuritiesActsuits,except whenpersonseekingcontributionis
guiltyandotherpersonisnot,andliabilityofoutsidedirectors under11issubjecttoproportional
requirements of11(f)(2)andExchangeAct21D(f);alsoavailableinprivate17(a)suits,see Globus

Case: Globusv.LawResearchService (2ndCir.1969)>againstpublicpolicytoallowissuertogive

indemnificationtounderwriterswhentheunderwriterhadactualknowledgeofmisstatements
leadingtoSecuritiesActliability,butcourtemphasizedthiswasONLYwhen"theunderwriter
committedasingraverthanordinarynegligence"
Indemnification: SECthinksthisisagainstpublicpolicyandsaysanyprovisiongrantingindemnification
isunenforceable,see Globus
9. ANTIFRAUDPRIVATEACTION>17(a)

17(a)iscriminalprovision,butwascopiedverbatimfrom10b5(17onlycoversfraudinsales,
but10b5alsocoverspurchases),whichhasprivaterightofaction
SCOTUSheldscienterwasrequiredin10b5criminalandprivateactions,butscienterwasonly
requiredfor17(a)(1)actions,NOT17(a)(2)or17(a)(3)actions(negligenceOK)
privatesstartedtryingtofile17(a)(2)or17(a)(3)actionsb/ctheywereeasiertoprovethan
10b5actions
17(a)antifraudprivateaction: mostcourtsholdnoprivaterightofactionunder17(a)
Page 27
TheExchangeAct
SEC'SGENERALEXEMPTIVEAUTHORITY 1.
'34Act36: SECcanexemptshit,except15C(governmentsecuritiesbrokersanddealers)if"necessary
orappropriateinthepublicinterest,andconsistentwiththeprotectionofinvestors"

EXCHANGEACTREGISTRATIONREQUIREMENTS 2.
[1] securitiesaretobetradedonanationalsecuritiesexchange:12(a)+(b)
AND
Classofequitysecurities(exceptforexemptedspecialorgovernment)thatareheldby500
peopleormore

Issuerhastotalassets>$10M
[2] issuermeets#SHsandamountofassetstest:12(g)(1);Rule12g1
'34Act12: requiresregisteringsecuritieswhen:
Form10 >generaldisclosureform
Form8A >simpleformforalreadyrecordingcompaniesdueto15(d)
EXCHANGEACTREPORTINGREQUIREMENTS 3.
Byregisteringunder12,issuerbecomesa"reportingcompany"subjecttoreportingunder13
'34Act15(d)issuers:alreadyregisteredundertheSecuritiesActalsosubjectto13reporting
requirements

Form10Kforannualreports
Form10Qforquarterlyreports
Form8Kforanyinfoaftercertainmateriallyimportantevents
Reg.13A: filingsrequiredper13
'34ActViolation '33ActViolation
Mustprove actedwillfullyandknowingly,
including knowingabouttheexistenceofthe
ruleviolated
Mustprove knowinglycommittedawrongful
act,butNOT knowledgeoftheexistenceofthe
ruleviolated
canavoidimprisonment(butnotafine)by
provinglackofknowledgeoftheviolatedrule
Lackofknowledgenotadefense
ThusExchangeActliabilityhardertoprove
'34Act32criminalliability:
Reliance> mustshowtheyreliedondefectivefilinginpurchasingorsellingsecurities
Damages> mustprovethepricewasaffectedbydefectivefiling
Defense> canescapeliabilityifprovesgoodfaithandwithoutknowledgefilingwasdefective
Fees>courtcanmakeanypartypayotherparty'sfeesandcosts
21D+21E protections >[i] losscausation,[ii]limitationsondamages,[iii]proportionate
liability,[iv]safeharborforforwardlookingstatements+"bespeaksdoctrine"

'34Act18civilliability: expressremedyforfalseormisleadingstatementsinExchangeActfilings,but
10b5usedmoreoften(easiertoprove)

13(b)(2)recordkeeping> everyExchangeActreportingcompanymustkeepbooks,records,
internalsystemofaccounting,etc

13(b)(3)recordkeepingexemption>exemptsissuerswhenworkingwithUSgov.on"matters
concerningthenationalsecurityofU.S."

'34Act13ForeignCorruptPracticesAct:
Page 28
SARBANESOXLEYREQUIREMENTS 4.
Certifyreport"fullycomplieswiththerequirementsofExchangeActandallinfoinreportfairly
presents,inallmaterialaspects,thefinancialconditionandresultsofoperationsoftheissuer"

Criminalliabilityifreportnotincompliance
SO302/906certification> ExchangeActreportingcompanyCEOs+CFOsmustcertifyreportsper
Rules13a14+15d14

Butnoprivaterightofaction
SO303fraudulentlyinfluenceaudits> unlawfultofraudulentlyinfluenceauditsforthepurposeof
makingfinancialstatementsmateriallymisleading

Allcorrectingadjustmentsidentifiedbyauditorsmustbeincludedinfinancialstatements:'34Act
13(i)

Mustdisclosecertainoffbalancesheettransactions:'34Act13(j)
SO401disclosuresinreports>
SO402extendingcredit/loans> unlawfulforanyissuertogivecredit/loanstodirectorsorexecutive
officers:'34Act13(k)

SO404/406/407internalcontrols/auditing> internalcontrols,codesofethicsforfinancialofficers,
anddisclosuresoffinancialexpertsonauditcommittees

SO409realtimeissuerdisclosures> increasedtheshitrequiredtobereportedonform8K(for
certainmateriallyimportantevents)andshortenedthetimereportmustbefiled:'34Act13(l)

Page 29
14ProxyRegulations
STATUTORYFRAMEWORK 1.
Like10(b),14(a)isnotselfenforcing,butreliesonSECrulestoprovideitwithcontent
14(a)appliesonlytoregisteredsecurities
'34Act14(a): "Itshallbeunlawfulforanyperson...incontraventionofsuchrulesandregulationsas
theCommissionmayprescribe...tosolicitortopermittheuseofhisnametosolicitanyproxyor
consentorauthorizationinrespectofanysecurity(otherthananexemptedsecurity)registered
pursuanttosection12."

Mustsendproxymaterialstobeneficialowners:Rule14a13;14b1;14b2
'34Act14(b): unlawfulforsecuritiesfirms,banks,andothersexercisingfiduciarypowerstoviolate
proxyrulesthatarebeneficially"owned"byacustomerbuttechnicallyownedbythefirms

PROXYSOLICITATION? 2.
PubliccommunicationsbySHsashowtheygoingtovote=/=solicitation:Rule14a1
Nonmanagementsolicitationsupto10people:Rule14a2
Activitiesthatwouldqualifyassolicitationsif:[i] peoplenotaffiliatedwithmanagement,[ii]
havenoindividualinterestinproposal,[iii] donotseekproxyauthority,forms,orconsents
tovoting:Rule14a2

ElectronicSHforums<60daysbeforecompany'sannualorspecialmeeting;if<60days,2
dayexemption:Rule14a2(a)(6)

Exemptfromproxyrules:
Proxyrulescoverproxystatementsand"anyothercommunicationtosecurityholdersunder
circumstancesreasonablycalculatedtoresultintheprocurement,withholding,orrevocationofaproxy"

Rule14a101> inforequiredinproxystatement
Rule14a6> proxystatementmustbefiledwithSEC
SHAREHOLDERPROPOSAL? 3.
SHeligibleonlyifholdsatleast$2,000inmarketvalueor1%interestforoveryear
Matterrelatestoordinarybusinessoperations
Relatedtoelectionsorprocedureforelections
PersonalgrievanceofSH/somethingnotsignificantlyrelatedtocorporatebusiness
Relatedtospecificdividends
Relatedtosubstantiallysameproposalthathadbeenrejectedinpast5years
Companycanexcludetheproposal on13grounds,forexample:
Rule14a8> allowseligibleSHs toputaproposalbeforeotherSHsandhaveproxiessolicitedonthe
company'sproxystatement

CASE: Lovenheimv.IroquoisBrands corp.cannotexcludetheSH'sproposalas"notrelatedto

corporatebusiness"b/cthiswasareallyimportantethicalissuethatcouldhaveimpactsoncorp.

PROXYVIOLATION? 4.
[1] misleadingstatementoromission
See Millsv.ElectricAutoLiteCo. (notdisclosing conflictofinterest inproxystatementwas
verymaterial)

Butsee VirginiaBankshares (whenmajoritySHhasenoughvotestopass,evenmaterial

defect=/= casualnecessity)

Seealso Seinfeldv.Bartz (omissionofBlackScholesvaluationsofoptiongrantsontheproxy

statementisnotmaterialasamatteroflawb/cnotrequiredbySECregulations)

[2] infoismaterial ifthereisasubstantiallikelihoodthatareasonableshareholderwouldconsider

theinfoimportantwhenvotingorgivingproxyvotes

[3] causation provedifcanshowdefectwasmaterialandthe"proxystatementitself,ratherthan

theparticular[defect],wasanessentiallinkintheaccomplishmentofthetransaction"

Mergersetasideonly ifequitable
Monetaryrelief ifpossibletoquantifyofproxydefect
[4] damages isdeterminedbybestinterestsofSHasawhole
Rule14a9ProxyViolation:
Page 30
TenderOfferRegulations
STATUTORYFRAMEWORK 1.
WilliamsAct:added13(d),13(e),14(d),14(e),14(f)toExchangeAct
Anyoneacquiremorethan5%ofaclassofequityregisteredundertheExchangeActmustfilea
disclosurewithin10daysofpurchase

#ofsharesowned
Sourceoffundsusedtopurchase
Ifpurposeistoacquirecontrolofissuercompany,plans onwhattheygoingtodowiththe
issuercompany

Providedisclosure(Schedule13D)toissuer,SEC,theexchangewherethesecurityistraded:
Regulation13DG

Amendmentsrequirediftherearematerialchanges
ExchangeAct13(d): disclosure reqs.forbuying>5%
MaindisclosurelikeSchedule13D+documentsusedtosolicitoradvertisefortenders
Mustfilemaindisclosurebeforeannouncingtenderofferandallotherdocumentsbefore
used

MustsendcopiesofalldocumentstoissuerbeforetheyarepublishedorsenttoSHs
Unlawfultomaketenderofferformorethan5%ofaclassofequityregisteredunderthe
ExchangeActunlesscertainfilingsmade

Tenderscanbewithdrawn entireperiodoftenderoffer:14(d)(5)+Rule14d7
Iftenderofferisforlessthanall,mustpurchaseprorata forentiretenderofferperiod:Rule
14d8

Iftenderofferpriceincreases, mustpayalltendershigherprice (eventhosealreadytendered):

14(d)(7)+Rule14d10(bestpricerule)

ExchangeAct14(d): reqs.fortenderoffers>5%
"Itshallbeunlawful...tomakeanyuntrue[statementoromission]ortoengageinany
fraudulent,deceptiveormanipulativeacts...inconnectionwithanytenderoffer ...The
Commissionshall[promulgaterulestofillprohibitionwithcontent]"

Appliestoanykindofsecurity,even"minitenderoffers"for<5%ofclassofsecurity
Rule14e1 >mustholdopenfor20days
Rule14e3 >notradingonmaterialinforelatingtoenderofferifacquiredfromthetarget
orprospectiveacquirer

Ruleson insidertrading w/r/ttenderoffers:

ExchangeAct14(e): antifraudprovision
WHATISATENDEROFFER? 2.
activewidespreadsolicitationofpublicSHs
solicitationforsubstantial$ofissuer'sstock
offerabovemarket$
termsofofferarefirm
offercontingentonfixed#shares
offeropenonlylimitedtime
offereespressuredtosell
publicannouncementsofpurchasingprogrambeforerapidaccumulation
Wellman factors characterizingtenderoffers,see HansonTrustPLC (2ndCir.1985)(factorsrelevantbut
nota"litmustest">dependsontotalityofcircumstancesandifthereisasubstantialriskthatSHswill
lacktheinfoneededtomakeaninformeddecision):

[1] apublicannouncement bypurchaserofaplantobuyasubstantialblock oftargetcompany

forpurposeofacquiringcontrol

[2] asubsequentrapidacquisition oflargeblocksofthetargetcompany'sstockthroughopen

marketandprivatenegotiations

SGSecuritiesv.Fuqua test >atenderofferwhen,butsee CarterHawleyHale (9thCir.1985)(rejecting

thetestas"toovagueanddifficulttoapply"):

G: SCOTUSundecided,butopendefinitionallowsSECtoexpanddefinitionifneededtoconfrontabuse
Page 31
WHOMAYBRINGSUIT&FORWHAT? 3.
SEC canseekan injunction indistrictcourtOR issueceaseanddesist orderonitsownper21C
DOJ canbringcriminalcharges whenbreachinvolveswillfulness
Government:
Memberofclassintendedtobeprotected
Intenttocreateordeny
Consistentwithlegislativescheme
Traditionalstatelaw?
RequirementsperCort.v.Ash
13(d) disclosure requirementsforbuying>5% >majorityruleinCoAisOKforanissuertobring
privaterightofaction under13(d)whenseekinginjunction,butnotdamages,see Indiana
NationalCorp.v.Rich

14(e) antifraudprovision >targetcorporationscansuetenderofferorsfor injunctiverelief,see

Piperv.ChrisCraftIndustries (SCOTUSsayssolepurposeofWilliamsActisprotectionofinvestors,
notdamagesforcompetingofferors>butendorsesinjunctiverelief),andprobably SHsoftarget
corp. OKtoo;see Schreiberv.BurlingtonNorthern (SCOTUSdidn'taddressissuebutacceptedthe
caseforreview,whichwasanactionunder14(e)thatwasbroughtbySHsofthetargetcorp.)

PrivateActions:
10b5ViolationsforSecuritiesFraud&InsiderTrading
STATUTORYOVERVIEW 1.
10(b)appliestoregistered&unregisteredsecurities
10(b)isnotselfexecuting>SECmadeRule10b5
ExchangeAct10(b): "Itshallbeunlawfulforanyperson...incontraventionofsuchrulesand
regulationsastheCommissionmayprescribe...."

SECURITIESFRAUDINVIOLATIONOFRULE10B5? 2.
G: "directlyorindirectly"doesnotcoveraidersandabettors,notschemeparticipants
(a) toemployanydevice,scheme,orartificetodefraud,
(b) tomakeanyuntruestatementofa materialfact ortoomit tostateamaterialfact
necessaryinordertomakethestatementsmade,inthelightofthecircumstancesunder
whichtheyweremade,notmisleading,or

(c) toengageinanyact, practice,orcourseofbusinesswhichoperatesorwouldoperateas

a fraudordeceit uponanyperson,

G: "touch"testfor"inconnection"
...inconnection withthe purchaseorsaleofanysecurity."
Rule10b5: "Itshallbeunlawfulforanyperson,directlyorindirectly,bytheuseofanymeansor
instrumentalityofinterstatecommerce,orofthemailsorofanyfacilityofanynationalsecurities
exchange,

Insidertrading
Tipping
Acorporationissuesmisleadinginfo topublicorkeepssilentwhendutytodisclose
Apersonmismanagesacorporation inawayconnectedtopurchase/saleofsecurities
CommonUsesforRule10b5:
[1] JurisdictionalNexus>mustinvolveinterstatecommerce
I.e.,GEissuesamisstatement,youcan'tsueGEfordecidingNOTtobuyorsellbasedonthe
misstatement

[2] TransactionalNexus> Pmusthaveactuallyboughtorsold securities

SlidingScaleTest foruncertainevents:[i] probability thattheeventwilloccur(i.e.,the
[3] Materiality>"factismaterialifthereisasubstantiallikelihoodthatareasonableSHwould
consideritimportantindecidinghowtovote"

ElementsofRule10b5Violation:
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mergerwouldhappen);and [ii] themagnitude ofthepossibleevent,see Basic,Inc.v.
Levinson
Rebutwithnorelianceb/c:everyoneknewCEOwaslying;Pwouldhavesoldregardlessdue
tohimbeingbroke;misstatementwascorrected

[4] Reliance>fraudonthemarkettheory essentially eliminatesthereliancerequirement

Transactioncausation>basicallysameasreliance(presumedbycourts)
Losscausation >howmuchdidyouloseduetoyourreliance(provideevidencemarket
believedmisrepresentation)

[5] Causation
Intenttodeceive/defraudisenough
Somecourtsalsoacceptrecklessdisregardforthetruthofastatement
[6] Scienter>stateofmindofthepersonmakingmaterialmisrepresentation
Insidertradingisconsideredanomissionofamaterialfact(theinsideinformation)inconnection
withapurchaseorsaleofasecurity>thusviolatingRule10b5

INSIDERTRADINGINVIOLATIONOFRULE10B5? 3.
Statutoryinsiders> directors,officers,10%SHs
Temporaryinsiders> forfiduciarydutytobeimposed(treatastipper,nottippee),outsider
must[i] begivennonpublicmaterialinfofromissuer;[ii] withexpectationofconfidentiality;and
[iii] relationshipimpliesdutyofconfidentiality

[i]Secristwasnotatipperb/chedidn'tbreachhisdutyforhispersonalbenefit,and
notipper=notippee

[ii]DirksknewSecrist'smotivationwastoexposefraud,notpersonalbenefit
Tippee cannotinherit derivativeliabilityUNLESSthetipper breachedhisduty,see Dirksv.
SEC (SECcomesafterDirksbutDirksisNOTaninsidersonoderivativeliability)

Derivativeliability >whena tippertradesORpasseson atip[i] inbreachofhis fiduciaryduty by

disclosing thetipfora personalbenefit;and[ii] the tippeeknowsorhasreasontoknowofthe
breachoffiduciaryduty

Rule10b5[traditionaltheory]: Rule10b5isviolatedwhenthereisapurchaseorsaleofasecurity...
onthebasis(awarenessisOK)of materialnonpublicinformation aboutthatsecurity,inbreachofa
dutytodisclose [ortoabstainfromtrading],see Chiarellav.U.S. (Chiarelladidnotviolate10b5b/che
wasnotaninsider ofthecompanywhosestockhebought hewasjustajanitoratBusinessWeek;
misappropriationnotconsidered)

See USv.O'Hagan O'Haganguiltyforinsidertradingundermisappropriationtheorywhen

hedefraudedhislawfirmandfirm'sclientbyusingmaterialnonpublicinfoaboutthetender
offertopersonallyprofit

Requirements>[1] materialnonpublicinformation;[2] undiscloseduseofinformation;[3]

belongingtoprinciple;[4] forpersonalgain

[i] personagreestomaintain infoinconfidence;or

[ii] whenthetwopeoplehaveahistoryorpracticeofsharingconfidences,suchthatthe
recipientoftheinfoknowsorreasonablyshouldknow thecommunicatorexpectsthe
recipientto maintainconfidentiality;or

[iii] info obtainedfrom aspouse,parent,childorsibling,UNLESSrecipientshowsthat

historyorpracticeindicatesnoexpectationofconfidentiality

Rule10b52: nonexclusivelist ofwhenapersonhasa dutyoftrustorconfidence forthe

purposesofmisappropriation:

Rule10b5[misappropriationtheory]: Rule10b5isviolatedwhenapersonmisappropriates
confidentialinfoforsecuritiestradingpurposes,inbreachofadutyofconfidentiality owedtothe
sourceoftheinfo

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