Securities Regulation Outline Bancroft Fall 2011

8/12/2019 Securities Regulation Outline Bancroft Fall 2011

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Securities RegulationMargaret Bancroft

(Fall 2011)

Class 1The Role of the Securities Act of 1933:Making the Capital Markets in the US Safe foru!lic "n#estors$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

Class % re&'ffering erio( in a u!lic 'ffering an(Con(itioning the Market$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$Class 3The )aiting erio(* The ost&'fferingerio($$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

Class ,The Registration rocess: Section + an(Acceleration* rinciples of -isclosure$$$$$$$$$$$$$$$$$$13Class .-isclosure hilosoph/$$$$$$$$$$$$$$$$$$$$$$$$$$$$1.Class 0Materialit/$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$Class )hat is a Securit/2$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$Class + ri#ate lace ent 45e ption$$$$$$$$$$$$$$$%6

Class 9Regulation - 7Rules .6,8 .6.8 .60 $$$$$$$%%Class 16Resales of Restricte( Securities$$$$$$$$$$%.Class 11Reg S Rule 1,,A$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

Class 1%The Role of the Un(er;riterSection 11an( Section 1%7a 7%


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Class 1The Role of the Securities Act of 1933: Making the Capital Markets in theUS Safe for u!lic "n#estors$

=oals of 1933 Act : Investors need for information; consumer protection w ere t ere is no realrelations ip wit compan!" spur investment w ere t ere is ris#" economic efficienc!$ % e && 'ct is a outstri#ing a alance w providing access to capital and protecting pu lic investors$

-ra;!acks of artnerships : cannot e a passive investor; capital wit draw w en partner leaves; nolimited lia ilit!$

Corporate Structure : *uited for usinesses t at need to raise great amounts of capital from sourcesoutside of management$ +ont re,uire *-s to #now eac ot er" permits investment w out ris# of personallia ilit! (t e most !ou can lose is t e mone! !ou ave invested)" provides stead! ase of capital t atcannot e wit drawn$

, Ma>or i(eas of the 1933 act ;a/s it controls1$ ./ of t e 1 && 'ct an(ates (isclosure $2$ ./ prevents conditioning priming of t e mar#et outside of disclosures

&$ ..11" 12 sta lis statutor! wa!s for investors to recover$ 3ot ever! offering as to e registered ( 4emptions: . (2)" -eg +" -eg *" etc$)

%66. u!lic 'ffering Refor s i(entif/ four categories of issuers$1$ ?on&reporting "ssuers : companies t at ave not !et een re,uired to file under t e 4c ange

'ct (suc as issuers going pu lic in an I56)$2$ Unseasone( reporting issuers : 7ompanies t at are re,uired to file 4c ange 'ct reports" ut not

eligi le for Form *8&$&$ Seasone( Reporting issuers : -eporting companies t at are eligi le for Form *8& (more t an one

!ear since going pu lic and a 9 / million pu lic float)$$ )ell&kno;n Seasone( Reporting "ssuers (


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Class % re&'ffering erio( in a u!lic 'ffering an( Con(itioning the MarketThree erio(s : 1) 5re8filing (../(a)" (c))" 2) aiting (../(a)" ( )(1)" &) 5ost8effective (./( ))$

1933 Act ./(a) =nless a registration statement is in effect as to a securit!" it is unlawful to:

o 1) sell a security t roug a prospectus or ot erwise t roug transportation or communicationo 2) carry a security for t e purpose of a sale or for deliver! after sale t roug mail or interstate

commerceo (7ant egin * >>I3? until registration is effective)

./(c) Unlawful to offer to sell or offer to buy t roug t e use of an! prospectus or otherwise an!securit! t roug transportation or communication" unless t e registration statement as een filed as tosuc securit!" or w ile t e registration statement is t e su @ect of a refusal order or stop order$

o (7ant egin 6FF -I3? until registration is filed)

-efinitions : .2(a)(10) rospectus Aan! prospectus" notice" circular" advertisement" letter" or communication" written

or ! radio or television" w ic offers an! securit! for sale or confirms t e sale of an! securit!; 45ceptthat (see .2 (a)(10))$

o 36% : 5rospectus vs prospectus: 5 forms part of registration statement" p is an!t ingelse under 2(a)(10)

Filing ffectivere&filing perio(

'fter t e compan! is inregistration"C ut efore t eregistration statement is filed$

)aiting erio('fter t e registrationstatement is filed" ut efore it

ecomes effective$

ost&effecti#e perio('fter t e registration statement

ecomes effective" until t edistri ution ends and t e issueris no longer in registrationC

./(a)(1) D no salesC ./(a)(2) D no deliveriesC E7'3 * >>E

./ ( )(1) D no prospectusC unless it complies wit .10./( )(2) D no deliver!" unlessaccompanied ! .10(a)

prospectus./(c) D no offersC( 4ceptions: -ules 1&/" 1 &"1 &'" 1 G" 1 )

E7'3 6FF -E

&&

&&


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.2(a)(&)o Sale or Sell A ever! < of sale or disposition of a securit! or interest in a securit! for valueo 'ffer to Sell A ( road def) ever! attempt or offer to dispose of" or solicitation of an offer to u!"

a securit! or interest in t e securit!" or value$+oes not include preliminar! negotiations or agreements etween an issuer and an!underwriter or among underwriters w o are to e in privit! of < wit an issuer$

% is e4ception is limited to underwriters and t erefore does not cover dealers $

*pecial situations (p$ /2): ' securit! given as a bonus counts as part of t e offer sale$ 'n underl!ing securit! does not need to e registered until it can e converted or

e4ercised ( convertible security or option )$

S4C Rules Rule 13. $?otice of ropose( Registere( 'fferings H7an e used ! issuer or underwriter

o 3otice will not be deemed an offer if notice:1) includes a statement t at it does not constitute an offer; and2) notice includes no more t an t e following: i) name of issuer; ii) title" amount and

asic terms; iii) amount of offering; iv) anticipated timing; v) rief statement of manner

and purpose; vii) w et er directed to particular class; viii) (note ot er specifics a outot er t!pes of offerings)o 74@4

Rule 13.: offering announce ents 'llows notice of pu lic offering (e4empted from definition of offer) 7an onl! contain limited info (issuer" securit!" amount offered" timing" manner

and purpose) 'pplica le onl! to issuer; cannot name underwriter or e4pected offering price

Rule 103 $ 45e ption fro Section .7c of the Act for Certain Co unications !/ or on ehalf of)ell&Bno;n Seasone( "ssuers 7)BS"s

o 5rovides fle4i ilit! for WKSIs $ % e! ma! ma#e oral or written offers at an! time" includingduring t e pre8filing period$ ritten offers must ear a legend (w ere to get a prospectus" alongw admonition to read it)" e retained for & !ears" and e filed w t e * 7$ ritten offers !


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Rule 103A reregistration Co unications 5ermits communications &0K da!s efore filing t e -eg *tatement; 7'336%

reference offering and must prevent furt er distri ution 7reates safe ar ors for issuers" B=% 36% underwriters" ro#ers or ot er

participants$

Rule 10+ $45e ption ro Sections %7a 716 an( .7c of the Act for Certain Co unications of

Regularl/ Release( actual usiness "nfor ation an( or;ar(&


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o 'ffer is defined broadly ; not limited to communications w ic constitute an offer in t e 7> =+ 5-I7 -'3? M'S R *P'- *)$ -eg*8< /01( )(&)

o If F 5 is electronic" t e preliminar! prospectus can e !perlin#ed$&&(f)$

o 3o prospectus accompaniment re, for seasoned issuers and


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o (=nless info$ in stor! as previousl! een filed; permitting t e filingre, to e satisfied ! filing t e transcript of interviewsC given to t emedia source)$

o Issuer is under no dut! to correct a misstatement in t e stor!(caveat)" ut ma! c oose to include additional information in itsfiling to correct t e stor!$ -ule &&(f)(2)(ii)$

o ) an( roa( sho;s

-oad s ows and t eir live transmission are usuall! oral communications$ Rule ,6. % us" t e! are not F 5s and do not re,uire filing legending" etc$55 5resentations visuals used at road s ow and not distri uted are oral (%a &)

ritten material used at a road s ow (suc as a andout) is treated as F 5 and mustcompl! w all re,s e5cept filing $ -ule &&(d)(G)$ Hsee elow'n! recorded road s ow is considered a grap ic communicationC and also mustcompl! w all aspects of t e F 5 e5cept filing $

iling$ 3ot re,uired ! reporting issuers$ -e,uired for non8reporting issuers in e,uit! offerings unless t e latest

version of t e ona fideC road s ow (ie w management presentations)is posted on t e issuers e site$

Rule ,06 +istri ution of 5reliminar! 5rospectus$o * 7 ma! use acceleration clause to encourage mailing 5reliminar! 5rospectus to

underwriters and dealers reasona l! li#el! to e e4pected to purc ase t e securities (not lesst an G ours prior to mailing confirmations)$ (-elease 3o$ G) (p$ )

-elease 3o$ G A% e 7ommission as declared its polic! in -ule 0 t at it will not acceleratethe effective date of a registration statement unless t e preliminar! prospectus contained in t eregistration statement is distri uted to underwriters and dealers w o it is reasonably anticipated will

e invited to participate in t e distri ution of t e securit! to e offered or sold$ -ule 0 (conditionfor acceleration)

In e ranklin$ !eyer & .arnett o Found t at salesmen" despite initiall! inviting indications of interest" accepted pa!ments for

stoc# during t e pre8effective period in t e form of c ec#s and t e proceeds of a sale of ot ersecurities owned ! t e customers" and t ere ! went e!ond t e permissi le scope of t e'ct$ In addition" t e usiness card enclosed wit t e preliminar! prospectus and cover lettersolicited an offer to u! and was t erefore a prospectus wit in t e meaning of .2(a)(10)$

3ote: t is pus es t e definition of sale past t e meaning of < law$

To !stone A(s : .2(a)(10) e4cepts from t e definition of prospectusC advertisements (t!picall!made in t e financial press using a tom stone8li#e order) t at state from w om a .10 prospectusma! e o tained and t en do no more t an identif! t e securit!" state its price" and name t e

underwriters w o will e4ecute t e order$o 36% : % is is t e onl! t!pe of advertising allowed during t e waiting period

"(entif/ing State ents : -ule 1& allows for e4panded communications$o * 7 ca@oles issuer to ensure t at preliminar! prospectuses ave een made availa le to all

participating underwriters and dealers$ -ule 0 (condition for acceleration)$o * 7 re,uires participating underwriters and dealers to furnis copies of preliminar!

prospectuses to t eir salespeople" as well as an! investor w o ma#es a written re,uest for acop!$ (1 & 4c ange 'ct" -ule 1/c28G(c)" (e))

1010

1010


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ost&4ffecti#e erio( 7after the registration state ent !eco es effecti#e D.7! 71 continues to appl! during post8effective period (pro i iting use of an! prospectus unless it

satisfies re,uirements of .10)$o 3ew e+ception applies: .2(a)(10)Acommunication is not deemed a prospectus w en it is

accompanied or proceeded ! an prospectus t at meets t e re,uirements of .10(a)$ . .7! 7% now applies: securit! ma! not e delivered to a u!er unless t e u!er simultaneousl!

received" or as received" a cop! of t e final prospectus$o Rule 1 %7! 8 final prospectus is usuall! deemed to e delivered w en t e registrationstatement ecomes effective final version is filed wit * 7$ 'llows sending of written

confirmation of sale (access Q deliver! model)" and transfer of the security $o Rule 1 3 re,uires providing purc asers eit er final or a prescri ed form of notice w in 2

usiness da!s of completing t e sale t at it was made pursuant to a -*$?'T4: Rules 1 % an( 1 3 (o a;a/ ; the nee( to actuall/ (eli#er finalprospectuses$

'ral offers ma! e made" since ./(c) does not appl! during t is period$ Written offers ma! e made ! means of a final prospectus (./( )(1))$ 'ther offers ma! continue to e made under e4ception ( ) to .2(a)(10) (.10 prospectus alread!

given) *easoned (including


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Class +The Registration rocess: Section , an( Acceleration* rinciples of-isclosure

DD08 8 +contain statutor! sc eme for registration process$o . A+eals wit filing and feeso . A at a registration statement must containo .GA ffectiveness of registration statement

2 recent c anges:o 1) * 7 dela!s effectiveness in order to Re#ie; @ Co ent $

-*s of first8time issuers are given a t oroug review" statements filed ! second andlater8time issuers are reviewed selectivel!$B c of -T7" stop and refusal orders are rarel! used ! * 7

o 2) -*s of WKSIs ecome effective immediately (-ule 1/ 8 s elf registrationC) %6&(a/ automatic effectiveness under (.G) can e avoided (and almost alwa!s is) at discretion of * 7

(-ule 1)o Rule , 3 A+ela!ing 'mendments$ Issuer ma! include a paragrap on t e cover of t e

registration statement t at effects its continuing amendment$ Must specificall! state it will ecome effective upon t e filing of a furt er amendment or on a date suc as t e * 7 ma!

determine$ en t e issuer pulls t e paragrap off" statement is read! to go$ Rule ,06 +istri ution of 5reliminar! 5rospectus$o * 7 ma! use acceleration clause to encourage distri ution of 5reliminar! 5rospectus to

underwriters and dealers reasona l! li#el! to participate in distri ution of t e securities$Must e sent not less t an G ours prior to mailing sale confirmations$ (-elease 3o$

G)6f sufficient R of copies of 55 to reasona l! ensure ade,uate distri ution

Rule ,01 A allows issuer and underwriter to re,uest acceleration " specif!ing t e da! and timet e! desire -* to ecome effective$ >ists ot er factors to consider in acceleration re,uests (i$e$"w et er prospectus is concise" reada le" inade,uate preliminar! prospectus as een recirculated witcorrections" * 7 isnt currentl! investigating issuer" etc$)$

o *ome ot er reasons * 7 mig t not declare registration statement effective:If certain parts arent in plain nglis (-ule 21(d); if preliminar! prospectus

was materiall! inaccurate and t ere was no recirculation" if under currentinvestigation" etc$)" underwriters eing paid too muc " etc$

o 36% : * 7 uses threat of acceleration denial to force actions not re,uired ! t estatute$ 7ontroversialU

D+$ Taking 4ffect of Registration State ents an( A en( ents Theretoo .G(a) 208da! automatic effectiveness after filing" su @ect to accelerationo .G( ) * 7 - I : 'fter filing" * 7 as 10 da!s to review t e -* for incomplete or

misleading disclosure (ie material deficienc!C) and give notice of its intention to issue arefusal order t at #eeps t e registration statement from ecoming effective$

o .G(d) 'fter t e -* is effective" t e * 7 can issue a stop order if it notices a defect in

disclosure$ -e,uires notice" earing" issue stop order (*>6 process)$o .G(e) Before or after effectiveness" * 7 can egin an e4amination to determine w et er astop order s ould e issued (Eprovision t e * 7 normall! usesE)

FF 7%: ./(c)$ 3o offering activities are permitted w en a refusal or stop orderis outstanding or the S) is investigating a registration statement $

Regulation S&B Aserves as * 7s general repositor! of disclosure re,uirements for I56s and foralread!8pu lic companies (108


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polic!" w ere it will li#el! e t rown out (* 7 using acceleration as a tool against t ese sortsof indemnification provisions)$

Contro#ersial J ut no ot er conduct8influencing policies ave een enacted (hoeni+ Q attle over t is issue (* 7 wins)

#as 1egas 2awaiian o -* was poorl! done" ut > wanted to ecome effective an!wa!$o ./(c) sa!s t at if t e * 7 as roug t a proceeding under .G" t at stops ever!t ing in its

trac#s$ Pere" t e * 7 started earing under .G(e)" and t en relied on ./(c) and wanted issuerto cease and desist offering t ese securities$o 3ote: .G( ) as a 108da! limitation$ .G(d) can e issued an!time (was issued after

registration was declared effective in Universal Camera )$ 7an e4amine wit out issuing astop order under .G(e) D as t e same effect of preventing sale of securities$

Universal amera AHInvolved a dilution arrangement $o -* did not disclose prospective investors relative interest in t e assets" earnings" or

voting power of t e compan!; did not give a clear description of proposed usiness activities$% e +ilution arrangement was not plainl! evident" and onl! an e4perienced securit! anal!stcould understand it; disclosure s ould e plainly understandable to t e ordinar! investor$*ee *8< Item /0 $

?'T4: A#oi(ing -ela/s in rocessing Registration State ents : *ecurities laws aim too tain full and fair disclosure$ *ecurities laws view t e prospectus as a lia ilit! document and not aselling document$ =nfavora le data must e disclosed as well as favora le$

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Class .-isclosure hilosoph/

Rule ,6+ ('dditional Information)AIn addition to information e+pressly re uired " t ere s all e addedsuc further material information " as ma! e necessar! to ma#e t e re,uired statements" in lig t ofcircumstances under w ic t e! are made" not misleading $

H?e;H Rule 1.9 D 12(a)(2) lia ilit! for misstatements or omissions at t e time of sale$ Pas to do w info"not final version of prospectus$ *aleC includes an! < or sale$ %imeC Q time w en investor commits to u!$ Idea is to ma#e sure final prospectus doesnt surprise investors$ % e! must ave all info at t e

moment t e! commit to u! over t e p one" etc$

or S&1 D w at a prospectus must contain$

Selecte( S&B -isclosure "te s 7 an(ator/ : Item 10( )$ 5olic! on 5ro@ections (mgmt must ave reasona le asis for pro@ections)$ Item 11(e)$ 'udited Financial *tatements$ Item 10&$ Material >itigation 5ending >egal 5roceedings$ Item 201(c)$ *tatement on +ividends$ Item 202$ +escription of *ecurities$ Item &0&$ Managements +iscussion 'nal!sis of Financial 7ondition$ Item &0/$ Vuantitative and Vualitative +isclosures a out Mar#et -is#$ Item 01$ +irectors and 6fficers$

o (7overs identification of directors" famil! relations ips" involvement in certain legal proceedings wit in t e past 10 !ears (e4cluding traffic violations and ot er minoroffenses)" or an! violation of Federal or *tate securities laws)

Item 02$ 4ecutive 7ompensation Item 0&$ *ecurit! 6wners ip of 7ertain Beneficial 6wners and Management$ Item 0 $ %ransactions it -elated 5erson" 5romoters" and 7ertain 7ontrol 5ersons

o (7ertain -elations ips wit 6fficers and Business +irectors) Item 0/$ 7ompliance wit *ection 1 (a) of t e 4c ange 'ct D were e4ecs tard! filersJ Item 0 $ 7ode of t ics$

o +isclose w et er t e registrant as a code of et ics t at applies to e4ecutive offers" and ifit doesnt" e4plain w !$

Item /01$ ( (1)" (2)" (&)" (&)(/))$ ( at a 10( ) prospectus must contain)o 7over page info: 3ame" R of *ecurities" 6ffering 5rice (or 5rice -ange)" 7ross8-eference

to ris# factors" Mar#et (3'*+'V or 3L* )" =nderwriting" *u @ect to 7ompletion$C Item /02$ %a le of 7ontents$ +eliver! 6 ligations Item /0&$ 5rospectus *ummar!$

o (c) must ave a section of -is# FactorsC after *ummar! (ordered from ig est tolowest)$ If no summar!" ave to put it first$

Item /0 $ =se of 5roceeds$ Item /0/$ +etermination of 6ffering 5rice$ Item /0 $ +ilution$ Item /12( )$ Indemnification$

o In order to re,uest acceleration" must disclosure indemnification of officers and include astatement agreeing to ta#e indemnification provision to court in order to determinew et er suc a polic! is against pu lic polic! (w ere it will li#el! e t rown out)

1/1/

1/1/


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Class 0Materialit/?enerall!:

Investors ma! ring claim under D11 for material misstatement in registration statement$ ' misrepresentation or omission is material if t ere is a substantial likelihood t at t e

disclosure of t e omitted fact would ave een viewed ! t e reasonable investor as avingsignificantly altered t e total mi+ of available information $ ( Basic v. Levinson )

o Total Mi5 Test C: 'n omission is not material (even if t e info is important to investors)if reasona le investors alread! #now or can infer t e omitted info from ot er disclosure$(su @ective test 8 relies on gut reaction from 7ts)

'n alleged misrepresentation can e immaterial for t e following reasons ( Gateway ):o 1) % e misrepresentation is common knowledge t at a reasona le investor can e

presumed to understand$ ( Gateway )o 2) % e misrepresentation involves insignificant data t at" in t e total mi4 of info" would

not matter to t e reasona le investor$ ( Gateway )o &)1ague and obvious hyperbole t at no reasona le investor would rel! on t em$

(Gateway )o ) If accompanied ! sufficient cautionary statements (t e bespeaks caution

doctrine C)$ =nder t e espea#s caution doctrine"C cautionar! disclosure ( e!ond oilerplate warnings) can negate t e materialit! of" or reliance on" an undul! optimistic prediction$ (Gateway )

Must e su stantive and tailored to t e specific pro@ection" estimate" or opinion$( Numerex )

3ote: D% A Aprovides & safe harbors for forward looking statements t at areaccompanied ! (1) cautionar! statements" (2) are immaterial" or (&) t ere is alac# of #nowledge t at t e statement was false (see elow)$

-ecall Rule ,6+ AIn addition to info re,uired in registration statement" must add furt er materialinfo to ma#e t e re,uired statements" in t e lig t of t e circumstances under w ic t e! are made"not misleading$

D% A: " uniKes pu!lic co panies an( their e5ecuti#es fro ci#il lia!ilit/ 7!ut not a( inistrati#elia!ilit/ for for;ar(&looking state ents that co pl/ ;ith the ActGs safe har!or pro#isions$ % e 5*>-' contains t ree separate safe ar ors$ *atisf!ing an! one of t em precludes a *-

lawsuit ased on written forward8loo#ing statements t at later turn out to e wrong$o 1 ?o actual kno;le(ge $ 5 fails to prove t at + ad actual #nowledge t at t e forward8

loo#ing statement was false$ % is safe ar or applies to oral or written forward8loo#ingstatements and immuniOes rec#less or negligent forward8loo#ing statements from privatelia ilit!$

o % " aterialit/ $ % e forward8loo#ing statement was immaterial$ % is safe ar orfocuses attention on w et er t e forward8loo#ing statement is too softC to e materialand opens t e door to t e @udicial espea#s cautionC doctrine as a separate asis forimmunit!$

o 3 Cautionar/ state ents 7ca#eats $ % e forward8loo#ing statement is identified as aforward8loo#ing statement and is accompanied ! meaningful cautionar! statementsidentif!ing important factors t at could cause actual results to differ materiall! fromt ose pro@ected in t e forward loo#ing statement$C

(arnes v" 4ateway Some matters are such common knowledge that a reasonable investor can be presumed to

understand them.

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6verstatement of assets ! 9 $G million immaterial (represented onl! 2W of ?atewa!s totalassets)$ ( lleged misrepresentations may also present or conceal such insigni!icant data that" inthe total mix o! in!ormation" it simply would not matter to a reasonable investor $)

o *tatement didnt affect total mi4C 5ro@ection of significant growt C is immaterial puffing (vague and o vious !per ole)A7ts

dont want to deter companies from ma#ing pro@ections$o 36% : uffing state ents generall! lac# materialit! c t e mar#et price of a s are is

not inflated ! vague statements predicting growt $ Vualit! and desira ilit! of products was not misrepresented in lig t of cautionar! statements

( espea#s cautionC doctrine)$ In re umere+ orporation Securities #itigation

*u stantial increaseC in profit is a fair and accurate summar!" c profits ad increasedsu stantiall!$

'n! reasona l! prudent investor reading t is prospectus would recogniOe t e ris#s in erent in acompan! t at depends upon one purc ase for almost alf of its salesAits mentioned inunam iguous" specific terms in prominent displa! on t e prospectus$

autionary language " if sufficient" can negate an! allegedl! misleading representationsconcerning plans to develop sales worldwide$

Materialit! of e+ecutive personnel changes must e gauged ! usiness circumstances of eaccase$ Pere" resignation of e4ecutive officer is not material ecause e ad onl! een witcompan! for a !ear" ad not entered into an emplo!ment agreement" and did not ring an!

particularl! valua le tec nical or usiness e4pertise to t e compan!$o Factors to e considered regarding materialit! of e4ecutive personnel c anges include (1)

time" (2) w et er or not t ere was an emplo!ment agreement" (&) w et er t e person asan! valua le e4pertise or tec nical #nowledge" and ( ) mar#et reaction$

4reenapple v" 5etroit )dison % e intended audience is e4tremel! road (includes anal!sts and la!persons)$ +isclosure must

steer a middle course; it needs to e accurate" !et accessi le to survive a claim t at its misleading ecause t e negative information is incompre ensi le$

isher v" %oss HFailed to disclose some directors were involved in a prior an#ruptc!)

=nder -egulation *8< 01(f)" !ou ave to disclose if an! directors were involved in an! criminalor legal proceedings (including an#ruptc!) if it appened w in / !ears (now rule sa!s 10 !ears)"since it was not w in last / !ears" not material$

o 3ote: it would e material if t ere were evidence of wrongdoing ! t em in t e previous an#ruptcies" or if it was related to t is compan!s financial condition or prospects at t etime of offering$

o B=% -ule 0G sa!s to include an!t ing else" a catc 8all disclosure re,uirement$ %oss v" Warner

?% c arged w violating t e F75' ( ri ing foreign officials)$ % is report made partial disclosure of F75' violation" ut t e w ole stor! was not told until it

got reported in t e 3L %imes and all *treet @ournal" at w ic point t e s are of stoc# plummeted$

Nudge sa!s it ma! e material as to integrit! of management" ut t ere are no damages since t emar#et price didnt move w en t e announcement came out$ *o" in lig t of t e minimalmaterialit! and no loss of value in s ares" no damages$

Pad mar#et price moved" would ave ad damages D must ave measurable loss $

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Class )hat is a Securit/2&& 'ct .2(a) defines security A Unless the context otherwise re#uires " an! note" stoc#" ond" evidence o!indebtednes s" certificate of interest" investment contract " an! put" call" option$

' swap (agrmt to e4c ange cas flows over period of time) is not a securit!$

"n#est ent Contract S) v" W6 2owey (1 )

o Investment contractC means a contract$ transaction or scheme w ere ! a person1) invests mone! in a2) common enterprise and is&) led to e+pect profits solel! from t e

) efforts of a promoter or a 3rd party$ it eing immaterial w et er t e s ares int e enterprise are evidenced ! formal certificates or ! nominal interests in t e

p !sical assets emplo!ed in t e enterprise$o 7itrus opportunit! was an investment


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Unless the Conte5t 'ther;ise ReEuires ' certificate of deposit C issued ! a national an# is not a securit!" ecause an#s are su @ect to

compre ensive regulation designed to protect investors and it is federall! insured$ !arine .ank (1 G2)$

o 7ts generall! defers in cases involving compre ensive regulator! sc emes$ #andreth /imber v" #andreth (1 G/) (*toc# is so ,uintessentiall! a securit! as to foreclose

furt er anal!sis)o Sale of all the stock of a compan! does fall under t e meaning of securit!$ (% is stoc#carries t e rig t to dividends contingent on profits$)

%orman was uni,ue (t is is clearl! stoc# D as all traditional indicia of corporatestoc#: 1) dividend rig ts" 2) li,uidit! rig ts" &) proportional voting powers" and

) appreciation potential$)$+oesnt matter w at !ou t oug t !ou were doing D it matters w at t e nature oft e instrument is$Pere" t is was a securit! sale and failure to include registration statement Qviolation of && 'ct ./ (remed! Q all mone! ac# to investors)$

7onsider t at t e purc asers t oug t t e! were u!ing stoc# and would e covered ! *ecurities laws

o 7t also points out t at t ere would e line8drawing issues in ac,uisitions of X100W of acorporations stoc# or w en a purc aser arranged to ave t e seller sta! on to managet e usiness" as ad appened in Landreth $

%eves v" )rnst & 7oung (1 0)o a il/ rese !lance test : % ere is a re utta le presumption t at ever! note is a

securit!$ % at presumption ma! e re utted onl! ! a s owing t at t e note ears astrong famil! resem lance (in terms of t e factors elow) to one of t e enumeratedcategories of nonsecurities (suc as note in consumer financing" note secured ! amortgage" s orter8term note securit! ! lien on small usiness accounts receiva le" etc$)$

o Four factors to determine t e famil!C into w ic t e note fits:1) Moti#ation of seller an( !u/er$ If t e issuer of t e note uses t e proceeds forgeneral usiness purposes" it is more li#el! a securit!$ If t e issuer gives t e noteto u! consumer goods or for commercialC purposes" it is li#el! not a securit!$2) lan of (istri!ution $ If t e notes are widel! offered and traded" it is moreli#el! a securit!$ If t e note is given in a face8to8face negotiation to a limitedgroup of sop isticated investors" it is more li#el! not a securit!$&)Reasona!le e5pectations of in#esting pu!lic$ If investors generall! view t et!pe of notes to e investments" it is more li#el! a securit!$

) 'ther factors re(uce risk$ If t e note is not collateraliOed and not su @ect tononsecurities regulator! sc eme" it is more li#el! a securit!$ If t e note issecured or ot erwise regulated" it is more li#el! not a securit!$

o % e 7o86p notes ere are securities: t e! were sold to raise capital for general usinessoperations" and purc asers oug t t em in order to earn a profit in t e form of interest$

11

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Class , ri#ate lace ent 45e ptionD3 A 4empted *ecurities:

&(a)(2)Agov$ securities (fed" state" municipal)" securities issued or guaranteed ! an#s &(a)(&)Aver! s ort8term de t (X mos) &(a)( )Asecurities ! religious" educational" or c arita le organiOations$ &(a)(G)AInsurance endowment polic!" or annuit! contract issued ! a corporation and su @ect to

supervision of t e insurance commissioner" an# commissioner" or an! ot er agenc!$ H% ise4empts guarantees as well$

&(a)( )Asecurities e4c anged ! an issuer wit its e4isting securit! olders He4empt transaction &(a)(11)Aintrastate securities He4empt transaction D t is is almost impossi le; no od! does

usiness purel! intrastateD,71 -egistration re,uirements of ./ not re,uired for transactions ! any person other t an an issuer"underwriter" or dealer$D,7% -egistration re,uirements of ./ not re,uired for transactions ! an issuer not involving a publicoffering (ie private placement)

-ationale for private placement e4ception: seasoned sop isticated investors can fend fort emselves (will as# for pertinent info$ efore investing)$

% e private placement e4emption e4ists in two forms:o 1) Statutor/ e5e ption$ % e . (2) statutor! e4emption completel! e4empts issuers fromall *ecurities 'ct disclosure and regulation re,uirements$

o 2) Safe Lar!or Rule$ ' regulator! safe ar or e4emption (-ule /0 of -egulation +) provides clear guidance for issuers" alt oug it mandates disclosure to certain investors$

36% : . (2) is a fall ac# w en -ule /0 fails to e a safe ar or$

S) v" %alston (urina 5rivate placement e4emption s ould turn on w et er t e particular class of persons affected

needs the protection of t e 'ct$ 7t eld t at t e . (2) e4emption applies w en offerees andinvestors" regardless of t eir num er" are a le to fend for t emselves$C (ie an offeringinvolving t ose w o can fend for t emselves is a transaction t at does not involve a pu lic

offering$) *ome emplo!ee offerings ma! e e4empt (e$g$" one made to e4ecutives w o ecause of t eir

position ave access to the same kind o! in!ormation that the ct would make available in aregistration statement )$ 6t erwise" owever" emplo!ees are mem ers of t e pu lic$

o 5ro lem: w ere to draw line w e4ecs w access and lower level emplo!eesJ

-elease 3o$ //2 5u lic private offering distinction necessitates consideration of all surrounding circumstances :

relations ip w offeree and issuer; t e nature" scope" siOe" t!pe and manner of t e offering$o 4eneral solicitations (advertising) are inconsistent wit private offerings$o *ale to promoters t at initiate founding organiOation come w in e4emptiono 'll offerees matter (not @ust t e ones t at u!)$

% e person claiming t e . (2) e4emption must s ow t at eac purc aser andofferee (even ones w o dont purc ase) meets t e sliding scale test$ 6t erwise"e4emption lost for transaction$

o Si8e of t e offering ma! raise ,uestions a out w et er t ere is a re,uisite association$o 5urc asers s ould not e merel! conduits for wider distribution $o Must consider w et er t e offering s ould e regarded as part of a larger offering made

(Integration of 6fferings)$o 5recautions against reselling are effective (i$e$ restrictive legends)" ut not re,d$

-elevant Factors from case law: (from earl! opinion ! * 7 ?eneral 7ounsel)

2020

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3um er of offerees t eir relations ip to eac ot er and issuer 3um er of units offered *iOe of t e offering Manner of t e offering *op istication of purc asers -elations ip wit t e issuer

'B' 5osition 5aper our attri utes:

o 1) 6fferee Vualification*op istication (a ilit! to understand ris#)" wealt (a ilit! to ear ris#)" personalrelations ip (famil!" friends" emplo!ment" usiness)$

o 2) 'vaila ilit! of info(3eed not e as e4tensive as info in *c edule ') Its pro a l! ade,uate to give

asic info covering financial conditions" results of operations" etc$ If t e! cannot understand ris#" t e! can ire a rep advise t em$

o &) Manner of offering6ffering s ould e made t roug direct communication (general

solicitation advertising not 6


22/33

Class 9Regulation - 6Rules .7+8 .7.8 .70

Reg - D -eg + provides detailed guidance on w en an offering ,ualifies for t e . (2) private placemente4emption (-ule /0 ) and creates additional e4emptions for small offeringsC as aut oriOed ! .&( )(-ules /0 and /0/)$ '?< ANA"


23/33

36% : 5u lic offering at t e same time as a . (2) e4empt private placement would not cause t ee4emption to e unavaila leAsee -eg + 5roposed -evisions)

*ecurities 'ct -elease 3o$ // (p$ 211) ' person must e an accredited investor C at t e time of sale " regardless of c anges t at occur

after t e sale$ 'n e4ecutive officer of t e parent issuer t at performs a polic! ma#ing function for its su sidiar!

is an e+ecutive officer of the subsidiary $ 5isclosure can e in multiple installments" so long as all info is delivered prior to sale$ =nder -ule /0/ and /0 " !ou can ave unlimited accredited investors $ Lou can also e4clude a

relative w o as same principle residence wit t e purc aser$ (artnership*entity is counted as one investor under -ule /0&(e)(2); issuer is not o ligated to

consider sop istication of individual partners$

Regulation - 45e ptions 7p$ %16

Rule .6, Rule .6. Rule .60ggregate &!!ering 'rice

Limitation91M (12 mos$ ac#) 9/M (12 mos$ ac#) =nlimited

Number o! (nvestors =nlimited &/ plus unlimited accredited ( mos$)(nvestor )uali!ication 3one re,uired Must e sophisticated ( )(2)(ii)

(alone or w representative )A accredited presumed to e

,ualifiedSales Commissions 5ermittedLimitations on *anner o!&!!ering

=suall! no generalsolicitation permitted(e4cept for offerings 6aw!er owes a dut! to t e entit!" not t e management or an! individual of t e entit!$o 7ounseling accurate disclosure is sufficient initiall!; t en law!er must ta#e furt er

affirmative steps and prompt action (ma! go up to 7 6" approac Bd of directors" orresign" ut nee( not report out to S4C authorities )$

Section 36 of Sar!anes'5le/ Act 7Ta! 1% 5assed in response to nron scandal$ D %6. 8 -e,uires law!ers to report evidence of material violation of securities laws or reac of

fiduciar! dut! or similar violation to issuers c ief legal officer and or 7 6 ( up8t e8ladderC)$7 ief legal officer t en as a dut! to investigate$ (%a 12)o *u ordinate attorne!s @ust ave to report to t eir supervisors superiors

If t eres no appropriate response" law!er must report evidence to t e audit committee" anot ercommittee of independent directors" or to t e full Bd of directors$

* 7 doesnt re,uire a nois! wit drawal an!more$ (%a 12)$ 36% : *6S onl! applies to issuers $ Rule 16%7e 71 7iii A* 7 man! den!" temporar! or permanentl!" t e privilege of appearing or

practicing efore it to an! person found to ave willfull! violated or aided and a etted t eviolation of federal securities laws" rules" or regulations (including *6S) D must report upCU

Mo(el Rules of rofessional Con(uct 7%663 up(ate -ule 1$ $ 7onfidentialit! of InformationA>aw!er ma! reveal info$ to prevent*rectify substantial

in?ury to financial interest or propert! of anot er if reasonably certain to ave resulted fromclients commission of a crime or fraud of w ic client as used law!ers services$

Rule 1$13$ 'rganiKation As Client$ (p$ 1) >aw!er s all proceed as reasona l! necessar! in t e est interest of t e organiOation$ =nless not in est interest of organiOation" s all refer matter to ig er aut orit! in t e

organiOation" including t e ig est aut orit! t at can act on e avior of t e organiOation$

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If t eres a failure to act" or law!er elieves violation is reasona l! certain to result in su stantialin@ur! to corporation" t e law!er ma! reveal info relating to t e representation w et er or not-ule 1$ permits suc disclosure" ut onl! to t e e4tent necessar! to prevent su stantial arm$

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Documents

Securities Regulation Outline Bancroft Fall 2011