Securities

Tuesday, June 26, 2018 12:07 AM

Securities Act
• General
○ Regulates the offer and sale of securities.
○ Issuer of securities must register any offer or sale unless exempted.
○ What it mandates:
▪ Registration requirements for issuer to offer securities:
□ A registration statement containing required SEC disclosures; AND
 Statement may include a Prospectus.
□ SEC approval of the registration statement ("waiting period").
▪ Fraud Prevention for deceptive practices in offer/sales.
▪ Full Disclosure of all material facts related to a company prior to offering securities for sale.
• Liability
○ Section 11
▪ Provides cause of action for buyer of securities against issuers, officers/directors, underwriters, and
experts regarding the registration statement.
▪ Plaintiff must show a material fact required to be state or necessary for the registration statement to
not be misleading either by omission or misrepresentation.
▪ Issuer suffers strict liability for material misstatements, regardless of the degree of care exercised.
□ BUT remaining defendants can be insulated from liability by showing they acted with due
diligence.
○ Section 12
▪ Generally, covers
▪ 12(a)(2): Covers misstatements and omissions regarding the prospectus.
• Due Diligence Defense to Liability
○ Non-Experts
▪ Regarding expertised portion, defense applies where there was a reasonable ground to believe and
the person did not believe the statements were untrue or contained a material omission. § 11(b)(3)
(C)
▪ Regarding non-expertised portion, defense applies after reasonable investigation, had reasonable
ground to believe and did believe the statements were true and contained no material omission. §
11(b)(3)(A).
○ Experts
▪ Regarding expertised portion, defense applies after reasonable investigation, had reasonable
ground to believe and did believe the statements were true and contained no material omission. §
11(b)(3)(B).
▪ Regarding non-expertised portion, no liability. § 11(a)(4).
Exchange Act
• General
○ Regulates:
▪ Reporting obligations of public companies, AND
▪ Trading of securities on securities exchanges.
□ Establishes framework for governing national securities exchanges, brokers, dealers, securities
analysts, and credit rating agencies. (via commerce clause)
○ Under Rule 10b-5, it is a violation of the Act to make an untrue statement of material fact or omit a
material fact necessary to make the statements made not misleading.
• Registration of Securities and Proxy Rules

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 • Registration of Securities and Proxy Rules
○ When may Registration be Required Under Section 12?
▪ If the security is to be traded on a national securities exchange.
▪ If a class of its equity securities is
□ Held of record by either 2,000 persons OR 500 person who are not accredited investors; AND
□ The issuer has total assets exceeding $10m.
○ Section 14 Proxy and Tender Offer Rules
▪ Issuer is subject to Section 14 if registration is required
▪ Proxy rules govern how solicitations for any security may be made and what information must be
contained in proxy materials.
▪ Tender offer rules govern the nature, timing and method of disclosure required to be sent to
stockholders in the context of an acquisition.
○ Section 13 Reporting Obligations
▪ Issuer is subject to Section 13 if registration is required.
▪ Issuer also subject where non-reporting and sells securities not listed on an exchange in an SEC-
registered public offering.
▪ Requires issuer to file comprehensive disclosure documents, such as:
□ Form 10-K.
□ Form 10-Q; and
□ Form 8-K.
• Stockholder Obligations
○ Where an investor holder more than 5% of any class of an issuer's securities:
▪ Active investors must file Schedule 13D, and
▪ Passive investors must file Schedule 13G.
○ Directors, officers, and >10% stockholders are insiders subject to Section 16 reporting.
▪ See Forms 3, 4, and 5.

Sarbanes-Oxley Act
• Regulates corporate responsibility, financial disclosures, and corporate/accounting fraud.
• Principal provisions:
○ Requires certification on accuracy/completeness of a company's periodic reports by principal
executives/officers.
○ Prohibits personal loans by company to its executives.
○ Requires assessment of a company's internal control procedures for financial reporting.
○ Imposes criminal sanctions for fraud.
○ Requires rotation of audit partners (every five years).
○ Restricts non-audit services by accounting firms that serve as auditors of an issuer.
○ Creates reporting obligations for attorneys in the event of material violations of securities laws.

Other Statutes
• Trust Indenture Act - regulating debt securities, such as bonds, debentures, and notes that are offered for
investment to the public.
• Investment Company Act - regulating companies that engage primarily in investing and trading securities of
other companies, and that then offer their own securities for investment to the public (e.g., mutual funds).
• Investment Advisers Act - regulating persons who receive compensation for advising others on investing in,
purchasing, or selling securities.
○ Antifraud provisions apply to all persons who meet the statute's definition of investment adviser.
• "Blue Sky Laws" - name for state laws addressing offer/sale of securities.

Case Law
• Doran

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 • Doran
• Basic
○ Rules:
▪ An investor's reliance on any public material misrepresentations may be presumed for a Rule 10b-5
action because most publicly available information is reflected in market price.
▪ Stock price automatically
• West v. Prudential Securities, 282 F.3d 935 (7th Circ. 2002)
○ Facts: A stockbroker lied to clients, telling them non-public information about a future acquisition.
○ Holding: The ruling in Basic does not apply to non-public, oral information because there is not a similar
mechanism by which non-public information could affect price.

Rule 10b-5
• Basic Elements
○ Material misinformation
▪ Affirmative disclosure; or
▪ Omission
○ Scienter
▪ Knew disclosure or omission was false or misleading (or acted regarding trth of disclosure

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