UNDERSTANDINGSECURITIES LAWSIXTH EDITION

LexisNexis Law School PublishingAdvisory Board

Paul Caron

Professor of Law

Pepperdine University School of Law

Herzog Summer Visiting Professor in Taxation

University of San Diego School of Law

Bridgette Carr

Clinical Professor of Law

University of Michigan Law School

Olympia Duhart

Professor of Law and Director of Lawyering Skills & Values Program

Nova Southeastern University, Shepard Broad Law School

Samuel Estreicher

Dwight D. Opperman Professor of Law

Director, Center for Labor and Employment Law

NYU School of Law

Steven I. Friedland

Professor of Law and Senior Scholar

Elon University School of Law

Carole Goldberg

Jonathan D. Varat Distinguished Professor of Law

UCLA School of Law

Oliver Goodenough

Professor of Law

Vermont Law School

Paul Marcus

Haynes Professor of Law

William and Mary Law School

John Sprankling

Distinguished Professor of Law

McGeorge School of Law

UNDERSTANDINGSECURITIES LAW

SIXTH EDITION

Marc I. SteinbergRadford Professor of LawSchool of LawSouthern Methodist University

ISBN: 9781422482223

e-Book ISBN: 9780769891248

Library of Congress Cataloging-in-Publication Data

Steinberg, Marc I., author.

Understanding securities law / Marc I. Steinberg, Radford Professor of Law, School of Law, Southern

Methodist University. -- Sixth Edition.

pages cm

ISBN 978-1-4224-8222-3

1. Securities--United States. 2. United States. Sarbanes-Oxley Act of 2002 3. United States. Dodd-Frank

Wall Street Reform and Consumer Protection Act. I. Title.

KF1440.S74 2014

346.73’0666--dc23

2014002285

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Acknowledgments — First Edition

I wish to thank a number of individuals for their help regarding this project. In

particular, my thanks to Professors Alan Bromberg, Dennis Honabach, and Mark Sargent

for their comments. I thank Ralph Ferrara, Robin Goldman, Sam Gruenbaum, Will

Kaulbach, Joe Kempler and Richard Starr, all of whom were my coauthors for certain

publications, portions of which appear herein. My thanks also to Callaghan & Co.,

publishers of my treatise on Securities Practice: Federal and State Enforcement (1985)

(updated annually) (coauthored with Ralph Ferrara), and to Law Journal Seminars-Press,

publisher of my treatise on Securities Regulation: Liabilities and Remedies (1984)

(updated annually) for granting their permission for me to use excerpts from the

respective treatises. I also thank several law reviews in which I authored articles for

granting their permission to use certain portions thereof herein, including the Cornell

Law Review (67 Cornell L. Rev. 557 (1982), 66 Cornell L. Rev. 27 (1980)) and Fred B.

Rothman & Co., the Emory Law Journal (30 Emory L.J. 169 (1981)), the Journal of

Corporation Law (11 J. Corp. L. 1 (1985)), the Loyola of Los Angeles Law Review (13

Loyola Univ. (L.A.) L. Rev. 247 (1980) (coauthored with Samuel Gruenbaum), the

University of Maryland Law Review (46 Md. L. Rev. 923 (1987)) (coauthored with

Robin Goldman), the University of Pennsylvania Law Review (129 U. Pa. L. Rev. 263

(1980)) (coauthored with Ralph Ferrara) and Fred B. Rothman & Co., and the Vanderbilt

Law Review (40 Vand. L. Rev. 489 (1987)) (coauthored with Will Kaulbach).

From the University of Maryland Law School, I thank Bob Krusen for his research

assistance, Anne Rollins for her comments, and LuAnn Marshall, Gwen Davis, and

Eileen Gretes for their expert secretarial help. This book was written while I was a

member of two faculties, the faculties of the University of Maryland Law School and the

Southern Methodist University School of Law. I thank both institutions and their

respective deans, Mike Kelly at Maryland and Paul Rogers at SMU, for their support of

this project.

I wish to dedicate this book to my friends at The University of Maryland School of

Law. I’ve been fortunate to teach during the past six years at this superb institution with

wonderful colleagues and students. As I enthusiastically join the SMU Law faculty on a

more permanent basis, I will miss my friends at the Maryland Law School.

June 1989

iii

Acknowledgments — Second Edition

The Second Edition to this reference text comes during my seventh year at SMU. It has

been a fine seven years and I thank the university and my colleagues.

This project was funded by summer research grants (including the William Hawley

Atwell Fund) from SMU Law School. I thank Dean Paul Rogers and the Atwell Fund for

their support.

I owe many thanks to several individuals for helping this project become reality. I

certainly thank the contribution of all those mentioned in the acknowledgments to the

First Edition as well as the publishers who granted permission for me to use excerpts

from my other books and articles.

For the Second Edition, I thank my secretary, Ms. Kathleen Vaughan, for her

significant assistance. I also thank Professor Alan Bromberg, Mr. Ralph Janvey, Mr.

Daryl Lansdale, Mr. Bruce Mendelsohn, Mr. Chris Olive and Mr. Buddy Reece as well as

my research assistants, Mr. Cory Farley, Ms. Julie Herzog, and Mr. Cliff Murray, for

their meaningful input. My thanks as well to The International Lawyer granting

permission for me to use excerpts from my article that appeared in 29 Int’l Law. 43

(1995). I again thank Law Journal Seminars-Press for granting permission for me to use

excerpts from my treatise, Securities Regulation: Liabilities and Remedies.

I dedicate this Second Edition to my good friend and colleague Professor Alan R.

Bromberg. Professor Bromberg truly is the preeminent scholar in the United States in the

areas of the law relating to securities fraud and partnership law. He also is a wonderful

and generous individual. His help and guidance through my years at the University of

Maryland and here at SMU have meant so very much to me. I thank you Alan.

August 1995

v

Acknowledgments — Third Edition

Fifteen years have elapsed since the publication of the First Edition of Understanding

Securities Law. As this reference text undergoes modification due to securities law

developments and the author’s prerogative, I thank the contribution of all those

mentioned in the acknowledgments to the First and Second Editions as well as the

publishers who have granted permission for me to use excerpts from my other books and

articles.

This project was funded by summer research grants from the SMU School of Law. I

thank Dean John Attanasio and the Law School for their generous support.

For the Third Edition, I thank my secretary, Ms. Judy Parsley, for her significant

assistance. I also thank my research assistants Mr. Jeff Brown, Mr. Noah Hansford, Mr.

Barrett Howell, and Mr. Jason Myers for their meaningful input.

I dedicate this Third Edition to my parents Gerald and Phyllis Steinberg in honor of

their fifty-ninth wedding anniversary. I am a lucky man to have two wonderful and loving

parents. Mom and Dad, thanks so very much for your love, support, and guidance.

September 2000

vii

Acknowledgments — Fourth Edition

Twenty years have elapsed since the publication of the First Edition of Understanding

Securities Law. As this reference text undergoes modification due to securities law

developments and the author’s prerogative, I thank the contribution of all those

mentioned in the acknowledgments to the First, Second and Third Editions as well as the

publishers who have granted permission for me to use excerpts from my other books and

articles.

This project was funded by a summer research grant from the SMU Dedman School of

Law. I thank Dean John Attanasio and the Law School for their generous support.

For the Fourth Edition, I particularly thank my administrative assistant, Ms. Jan Spann,

for her significant contribution. I also express my gratitude to Ms. Michele Oswald and

Ms. Carolyn Yates for their secretarial assistance.

I thank Mr. Gregory Ivy, Associate Director of the Underwood Law Library, for his

contribution of “Selected Securities Law Research Sources” contained in Chapter 1 of the

book. My thanks also to my research assistants, a number of whom are now practicing

lawyers — Mr. Chris Claasen, Ms. Karen Crenshaw, Ms. Shanna Nugent, Ms. Andrea

Petersen and Mr. Tabor Pittman – for their meaningful input.

I dedicate this Fourth Edition to my wonderful family — my wife Laurie, my daughter

Alexandra (Alex), and my sons Avram (Avi) and Phillip (Bear)— with all my love.

November 2006

ix

Acknowledgments — Fifth Edition

This project was funded by a summer research grant from the SMU Dedman School of

Law. I thank Dean John B. Attanasio and the Law School for their generous support. I

also thank my research assistants Mr. Dustin Appel and Mr. Ignacio Hirigoyen as well as

my administrative assistant Ms. Jan Spann for their assistance. In addition, I wish to

extend my appreciation to those persons mentioned in the acknowledgments to the First,

Second, Third and Fourth Editions as well as the publishers who have granted permission

for me to use excerpts from my other books and articles.

I dedicate this Fifth Edition to my terrific aunt and uncle, Frances and Fred

Marblestone. Aunt Frances and Uncle Fred — this is a “small” way for me to say thank

you for being so wonderful to my Mom and Dad, my sister Nancy, and me.

December 2008

xi

Acknowledgments — Sixth Edition

This project was funded by a summer research grant (the Michael C. and Jacqueline M.

Barrett Endowed Faculty Research Fund) from the SMU Dedman School of Law. I thank

former Dean John B. Attanasio, Interim Dean Julie Forester and the Law School for their

generous support. I also thank Ms. Jan Spann for her excellent administrative assistance.

In addition, I wish to extend my appreciation to those persons mentioned in the

acknowledgments in the first five editions of this text as well as the publishers who have

granted permission for me to use excerpts from my other books and articles.

The Sixth Edition is dedicated to two “personalities” who have brought much joy to

our family — our wonderful dogs, Popeye and Patsi.

xiii

TABLE OF CONTENTS

Chapter 1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

§ 1.01 PURPOSE OF TEXT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

§ 1.02 OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

§ 1.03 SELECTED SECURITIES LAW RESEARCH SOURCES . . . . . . . . . . . . 4

APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Chapter 2 DEFINITION OF A “SECURITY” . . . . . . . . . . . . . . . . . . 27

§ 2.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

§ 2.02 OVERVIEW OF KEY U.S. SUPREME COURT DECISIONS . . . . . . . . 28

§ 2.03 KEY ISSUES FOR “INVESTMENT CONTRACT” ANALYSIS . . . . . . . 34

[A] “Solely from the Efforts of Others” . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

[B] “Expectation of Profits” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

[C] The “Common Enterprise” Requirement . . . . . . . . . . . . . . . . . . . . . . . 37

§ 2.04 APPLICATION OF THE HOWEY TEST TO SPECIFIC VENTURES . . . 38

[A] Limited Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

[B] General Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

[C] Limited Liability Partnerships (LLPs) . . . . . . . . . . . . . . . . . . . . . . . . . 41

[D] Limited Liability Companies (LLCs) . . . . . . . . . . . . . . . . . . . . . . . . . 41

[E] Property Interests Combined with Service Contracts . . . . . . . . . . . . . . 42

[F] Franchises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

§ 2.05 THE RISK CAPITAL TEST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

§ 2.06 DEBT SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

[A] Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

[B] Certificates of Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Chapter 3 ISSUER EXEMPTIONS FROM REGISTRATION . . . . . . 55

§ 3.01 EXEMPT SECURITIES FROM REGISTRATION . . . . . . . . . . . . . . . . . 55

§ 3.02 WHY PERFECT A TRANSACTIONAL EXEMPTION? . . . . . . . . . . . . 55

§ 3.03 TRANSACTIONAL EXEMPTIONS — INTRODUCTORY POINTS . . . 58

§ 3.04 THE BURDEN OF PROOF FILE, SEC STAFF NO-ACTION LETTERS,

AND RESCISSION OFFERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

[A] Burden of Proof File . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

[B] SEC Staff No-Action Letters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

[C] Rescission Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

§ 3.05 THE SECTION 4(a)(2) PRIVATE OFFERING EXEMPTION . . . . . . . . 61

§ 3.06 RULE 506 OF REGULATION D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

[A] Historical Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

xv

[B] Traditional Rule 506 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

[C] JOBS Act — Rule 506 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

[D] “Bad Actor” Disqualifiers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

§ 3.07 RULES 507 AND 508 — SUBSTANTIAL COMPLIANCE STANDARD

AND FILING OF FORM D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

§ 3.08 THE MEANING OF “GENERAL SOLICITATION” . . . . . . . . . . . . . . . 72

§ 3.09 THE LIMITED OFFERING EXEMPTIONS . . . . . . . . . . . . . . . . . . . . . 78

[A] The Section 4(a)(5) Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

[B] The Section 3(b) Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

[1] Rule 504 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

[2] Rule 505 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

[3] Rule 701 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

[4] Regulation A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

[5] The Section 3(b)(2) Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

§ 3.10 COMPARATIVE CHART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

§ 3.11 RULE 1001 — THE “CALIFORNIA” EXEMPTION . . . . . . . . . . . . . . . 88

§ 3.12 THE FEDERAL CROWDFUNDING EXEMPTION . . . . . . . . . . . . . . . 89

§ 3.13 INTRASTATE OFFERINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

[A] The Section 3(a)(11) Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

[B] The Rule 147 Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

[C] ALI Federal Securities Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

§ 3.14 THE SECTION 3(a)(9) AND 3(a)(10) EXEMPTIONS . . . . . . . . . . . . . . 94

§ 3.15 INTEGRATION OF OFFERINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

§ 3.16 STATE “BLUE SKY” LAW EXEMPTIONS . . . . . . . . . . . . . . . . . . . . . 98

§ 3.17 EXTRATERRITORIAL APPLICATION — REGULATION S . . . . . . . 101

[A] General Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

[B] Issuer Safe Harbor — Rule 903 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

[C] Resale Safe Harbor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

[D] The Regulation S Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

[E] Facilitating Global Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

Chapter 4 THE REGISTRATION PROCESS . . . . . . . . . . . . . . . . . 125

§ 4.01 OVERVIEW OF THE REGISTRATION PROCESS . . . . . . . . . . . . . . . 125

§ 4.02 FRAMEWORK OF SECTION 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

[A] Issuer Classifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

[B] The Pre-Filing Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

[1] Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

[2] Conditioning the Market (“Gun-Jumping”) . . . . . . . . . . . . . . . . . . 130

[3] Rules 163 and 163A and Emerging Growth Companies . . . . . . . . . . 132

[4] Effect of Rule 135 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

TABLE OF CONTENTS

xvi

[5] Transactions Between Market Professionals . . . . . . . . . . . . . . . . . . 134

[6] Rules 137, 138, and 139 and Emerging Growth Companies . . . . . . . 135

[C] The Waiting Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

[1] Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

[2] Free Writing Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

[3] Confidential SEC Review of IPO Registration Statements Filed by

Emerging Growth Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140

[4] Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140

[5] The Rule 134 Public Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

[6] Roadshows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

[7] SEC’s Power of Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

[D] The Post-Effective Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

[1] Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

[2] Access Equals Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

[E] Chart of Time Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

§ 4.03 THE “MISLEADING” PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . 147

§ 4.04 “GOING PUBLIC” — PROS AND CONS . . . . . . . . . . . . . . . . . . . . . . 149

§ 4.05 A BRIEF LOOK AT THE PROCESS OF A PUBLIC OFFERING . . . . . 150

§ 4.06 STATE “BLUE SKY” LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152

Chapter 5 DISCLOSURE, MATERIALITY, AND THE SARBANES-

OXLEY AND DODD-FRANK ACTS . . . . . . . . . . . . . . . . 155

§ 5.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

§ 5.02 THE INTEGRATED DISCLOSURE FRAMEWORK . . . . . . . . . . . . . . 155

[A] Securities Act Registration Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

[B] Ways That a Company Becomes Subject to the Exchange Act’s Reporting

Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

[C] Reduced Disclosure Requirements for Certain Issuers . . . . . . . . . . . . 159

[1] Emerging Growth Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

[2] Smaller Publicly-Held Companies . . . . . . . . . . . . . . . . . . . . . . . . . 160

[D] Shelf Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

§ 5.03 THE MANDATORY DISCLOSURE SYSTEM DEBATE . . . . . . . . . . 163

§ 5.04 “PLAIN ENGLISH” DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . 165

§ 5.05 DISCLOSURE OF “FORWARD-LOOKING” INFORMATION . . . . . . 166

[A] Rule 175 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

[B] The PSLRA Safe Harbor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

[C] Management Discussion and Analysis (“MD&A”) . . . . . . . . . . . . . . . 168

§ 5.06 DISCLOSURE OF INFORMATION FOCUSING ON DIRECTOR/OFFICER

INTEGRITY OR COMPETENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

§ 5.07 QUALITATIVE ECONOMIC MATERIALITY . . . . . . . . . . . . . . . . . . 170

§ 5.08 THE SARBANES-OXLEY ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

TABLE OF CONTENTS

xvii

[A] Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

[B] CEO and CFO Certifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

[C] Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

[1] Audit Committee Independence . . . . . . . . . . . . . . . . . . . . . . . . . . 176

[2] Audit Committee Financial Expert . . . . . . . . . . . . . . . . . . . . . . . . 176

[D] Improper Influence on Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

[E] Forfeiture of Bonuses and Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

[F] Officer and Director Bars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

[G] Insider Trading During Blackout Periods . . . . . . . . . . . . . . . . . . . . . . 178

[H] Disclosure of Off-Balance Sheet Transactions . . . . . . . . . . . . . . . . . . 179

[I] Prohibition of Loans to Directors and Officers . . . . . . . . . . . . . . . . . . 179

[J] Reporting of Insider Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 179

[K] Management Assessment of Internal Controls . . . . . . . . . . . . . . . . . . 180

[L] Senior Financial Officer Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . 181

[M] Real-Time Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

[N] Accounting Oversight Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

[O] Auditor Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182

[1] Non-Audit Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182

[2] Audit Committee Pre-Approval of Permitted Non-Audit Services . . . 183

[3] Audit Partner Rotation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

[4] Report to the Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

[5] Cooling-Off Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

[P] Attorney Professional Responsibility . . . . . . . . . . . . . . . . . . . . . . . . 184

[1] “Up-the-Ladder” Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184

[2] Qualified Legal Compliance Committee . . . . . . . . . . . . . . . . . . . . . 184

[Q] Financial Analysts’ Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . 185

[R] Remedies and Criminal Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

[1] Statute of Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

[2] Whistleblower Civil Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

[3] Insider Trading During Blackouts — Disgorgement of Profits . . . . . 186

[4] No Discharge of Securities Fraud Debts in Bankruptcy . . . . . . . . . . 186

[5] Court Order Freezing Certain Extraordinary Payments . . . . . . . . . . 187

[6] Fair Funds Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

[7] SEC Equitable Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

[8] Criminal Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188

§ 5.09 THE DODD-FRANK ACT — CORPORATE GOVERNANCE . . . . . . . 188

Chapter 6 RESALES AND REORGANIZATIONS . . . . . . . . . . . . . 191

§ 6.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

§ 6.02 THE CONCEPT OF “UNDERWRITER” . . . . . . . . . . . . . . . . . . . . . . . 191

[A] The Presumptive Underwriter Doctrine . . . . . . . . . . . . . . . . . . . . . . . 193

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[B] Participating in the Underwriting Effort . . . . . . . . . . . . . . . . . . . . . . 194

§ 6.03 DISTRIBUTIONS BY CONTROLLING PERSONS OR AFFILIATES . 194

[A] Effecting a “Distribution” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

[B] Contractual Agreements to Sell . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196

[C] PIPEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198

§ 6.04 PURCHASING FROM AN ISSUER WITH A VIEW TOWARDS

DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

[A] Holding Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

[B] Restrictive Legends — Change in Circumstances . . . . . . . . . . . . . . . . 200

[C] Sales by Pledgees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

§ 6.05 RULE 144 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202

[A] Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202

[B] Provisions of the Rule — Overview . . . . . . . . . . . . . . . . . . . . . . . . . 203

[C] Certain Sales by Non-Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

[1] Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

[2] Nonrestricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

[D] Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

§ 6.06 THE SECTION “4(1½)” EXEMPTION . . . . . . . . . . . . . . . . . . . . . . . . 211

§ 6.07 RULE 144A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

[A] Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

[B] Criticism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215

§ 6.08 CORPORATE REORGANIZATIONS . . . . . . . . . . . . . . . . . . . . . . . . 216

[A] In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216

[B] Rule 145 — Ramifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216

[C] “Downstream Sales” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

[D] “Spin-Offs” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218

Chapter 7 DUE DILIGENCE AND SECURITIES ACT

LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

§ 7.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

§ 7.02 THE REGISTERED OFFERING — FRAMEWORK OF SECTION 11 . 222

[A] Persons Subject to Section 11 Liability . . . . . . . . . . . . . . . . . . . . . . . 222

[B] Elements of the Section 11 Right of Action . . . . . . . . . . . . . . . . . . . . 223

[C] Defenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225

[1] General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225

[2] Due Diligence — Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225

[3] Due Diligence Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226

§ 7.03 CONTRIBUTION AND INDEMNIFICATION . . . . . . . . . . . . . . . . . . 227

§ 7.04 DUE DILIGENCE IN THE REGISTERED OFFERING CONTEXT . . . 229

[A] Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

[B] Signatories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231

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[C] Attorneys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231

[D] Delegation of Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

[E] Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

[F] Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234

§ 7.05 IMPACT OF THE INTEGRATED DISCLOSURE SYSTEM . . . . . . . . 236

§ 7.06 DIRECTOR SIGNING OF FORM 10-K . . . . . . . . . . . . . . . . . . . . . . . 240

§ 7.07 SHELF REGISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

§ 7.08 SECTION 12(a)(1) OF THE SECURITIES ACT . . . . . . . . . . . . . . . . . 242

§ 7.09 SECTION 12(a)(2) OF THE SECURITIES ACT . . . . . . . . . . . . . . . . . 243

[A] Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

[B] The Meaning of “Seller” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245

[C] Secondary Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247

[D] Limited to Public Offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247

[E] The Reasonable Care Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248

[F] Indemnification and Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

[G] Affirmative Defense of Section 12(b) . . . . . . . . . . . . . . . . . . . . . . . . 252

§ 7.10 SECTION 4A(c) — THE “CROWDFUNDING” REMEDY . . . . . . . . . 252

APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254

Chapter 8 SECTION 10(b) AND RELATED ISSUES . . . . . . . . . . . . 261

§ 8.01 OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261

§ 8.02 STANDING: THE PURCHASER-SELLER REQUIREMENT . . . . . . . 265

§ 8.03 REQUISITE CULPABILITY LEVEL . . . . . . . . . . . . . . . . . . . . . . . . . 266

[A] Private Damages Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266

[B] SEC Actions for Injunctive Relief . . . . . . . . . . . . . . . . . . . . . . . . . . 267

[C] “Recklessness” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268

[D] State Court Reaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268

§ 8.04 PLEADING REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269

§ 8.05 THE “MANIPULATION” OR “DECEPTION” REQUIREMENT . . . . . 272

[A] Breach of Fiduciary Duty Not Sufficient . . . . . . . . . . . . . . . . . . . . . . 272

[B] Federal Claims Premised on Breach of Fiduciary Duty . . . . . . . . . . . . 273

[1] Post-Santa Fe State Court Decisions . . . . . . . . . . . . . . . . . . . . . . . 274

[2] Post-Santa Fe Federal Court Decisions . . . . . . . . . . . . . . . . . . . . . 274

[3] Caveats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275

[4] Summation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276

[C] Manipulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277

§ 8.06 THE RELIANCE REQUIREMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 278

[A] Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278

[B] The “Fraud on the Market” Theory . . . . . . . . . . . . . . . . . . . . . . . . . . 279

[1] Characteristics of an “Efficient” Market . . . . . . . . . . . . . . . . . . . . . 283

[2] Rebutting the Fraud on the Market Presumption of Reliance . . . . . . 284

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[C] The “Fraud to Enter the Market” Theory . . . . . . . . . . . . . . . . . . . . . . 285

[D] Plaintiff Due Diligence (Justifiable Reliance) . . . . . . . . . . . . . . . . . . . 286

[1] The “Bespeaks Caution” Doctrine . . . . . . . . . . . . . . . . . . . . . . . . . 287

[2] Reliance on Oral Statements Inconsistent with Written Offering

Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288

§ 8.07 CUMULATIVE REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289

§ 8.08 STATUTE OF LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291

§ 8.09 MEASURE OF DAMAGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293

§ 8.10 IN PARI DELICTO DEFENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294

§ 8.11 CONTRIBUTION, PROPORTIONATE LIABILITY, AND RELATED

ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296

§ 8.12 THE PRIVATE SECURITIES LITIGATION REFORM ACT (PSLRA):

CLASS ACTION REFORM AND RELATED ISSUES . . . . . . . . . . . . . 299

[A] Class Action Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299

[B] Sanctions for Abusive Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . 301

[C] Stay of Discovery and Preservation of Evidence . . . . . . . . . . . . . . . . 301

[D] Auditor Disclosure of Corporate Fraud . . . . . . . . . . . . . . . . . . . . . . . 301

§ 8.13 EXTRATERRITORIAL REACH OF SECTION 10(b) . . . . . . . . . . . . . 302

[A] Transnational Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303

[1] Prior to Morrison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303

[2] Morrison v. National Australia Bank . . . . . . . . . . . . . . . . . . . . . . . 304

[3] SEC Extraterritorial Reach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305

[4] Invocation of Other Provisions — Extraterritorial Reach . . . . . . . . . 306

[B] Securities Act Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306

[C] Tender Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306

Chapter 9 ALTERNATIVE REMEDIES . . . . . . . . . . . . . . . . . . . . . 309

§ 9.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309

§ 9.02 IMPLIED RIGHTS OF ACTION — IN GENERAL . . . . . . . . . . . . . . . 309

[A] Pre-1975 Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309

[B] The Cort Formulation and Its Apparent Demise . . . . . . . . . . . . . . . . . 310

§ 9.03 AVAILABILITY OF IMPLIED RIGHTS OF ACTION UNDER SELECT

STATUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312

§ 9.04 SECTION 17(a) OF THE SECURITIES ACT . . . . . . . . . . . . . . . . . . . 313

[A] Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313

[B] Supreme Court Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314

[C] Availability of Implied Right of Action . . . . . . . . . . . . . . . . . . . . . . . 315

§ 9.05 SECTION 14(a) OF THE EXCHANGE ACT . . . . . . . . . . . . . . . . . . . . 315

[A] Elements of Private Right of Action . . . . . . . . . . . . . . . . . . . . . . . . . 316

[B] A Look at Virginia Bankshares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318

[C] Contexts Where Proxy Provisions Apply . . . . . . . . . . . . . . . . . . . . . . 320

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§ 9.06 SECTION 29(b) OF THE EXCHANGE ACT . . . . . . . . . . . . . . . . . . . . 321

§ 9.07 SECTION 18 OF THE EXCHANGE ACT . . . . . . . . . . . . . . . . . . . . . . 322

§ 9.08 THE RACKETEER INFLUENCED AND CORRUPT

ORGANIZATIONS ACT (RICO) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323

§ 9.09 STATE SECURITIES AND COMMON LAW REMEDIES . . . . . . . . . 324

[A] Obstacles to State Law Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324

[1] Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324

[2] The Securities Litigation Uniform Standards Act (SLUSA) . . . . . . . 325

[B] Advantages of State Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328

Chapter 10 SECONDARY LIABILITY . . . . . . . . . . . . . . . . . . . . . . . 335

§ 10.01 AIDING AND ABETTING LIABILITY . . . . . . . . . . . . . . . . . . . . . . . 335

§ 10.02 APPLICATION OF CENTRAL BANK OF DENVER TO THE SEC . . . . 337

§ 10.03 DISTINGUISHING PRIMARY FROM SECONDARY CONDUCT . . . 338

[A] Central Bank of Denver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338

[B] Rejection of Broad “Scheme” Liability . . . . . . . . . . . . . . . . . . . . . . 339

[C] Janus Capital and Its Ramifications . . . . . . . . . . . . . . . . . . . . . . . . . 340

§ 10.04 CONTROLLING PERSON LIABILITY . . . . . . . . . . . . . . . . . . . . . . . 342

§ 10.05 RESPONDEAT SUPERIOR LIABILITY . . . . . . . . . . . . . . . . . . . . . . 345

Chapter 11 ISSUER AFFIRMATIVE DISCLOSURE

OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349

§ 11.01 OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349

§ 11.02 IMPACT OF THE “MD&A” REQUIREMENTS . . . . . . . . . . . . . . . . . 351

§ 11.03 RUMORS AND THIRD PARTY STATEMENTS . . . . . . . . . . . . . . . . 352

§ 11.04 DISCLOSURE OF MERGER NEGOTIATIONS . . . . . . . . . . . . . . . . . 353

§ 11.05 DISCLOSURE OF “SOFT” INFORMATION . . . . . . . . . . . . . . . . . . . 356

[A] Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356

[B] Application to “Merger” Context . . . . . . . . . . . . . . . . . . . . . . . . . . . 357

[C] The “Bespeaks Caution” Doctrine . . . . . . . . . . . . . . . . . . . . . . . . . . 360

[D] The Private Securities Litigation Reform Act (PSLRA) — Safe Harbor for

Certain Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . 361

§ 11.06 DUTY TO UPDATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366

§ 11.07 REAL-TIME DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367

[A] Sarbanes-Oxley Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367

[B] Form 8-K Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368

[C] Critique of Form 8-K Amendments . . . . . . . . . . . . . . . . . . . . . . . . . 371

§ 11.08 REGULATION FD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372

[A] Purposes of Regulation FD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373

[B] Scope of Regulation FD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374

[C] Meaning of “Material” and “Nonpublic” . . . . . . . . . . . . . . . . . . . . . . 375

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[D] Intentional or Non-Intentional Selective Disclosure . . . . . . . . . . . . . . 375

[E] Methods for Making Public Disclosure . . . . . . . . . . . . . . . . . . . . . . . 376

[F] Exclusions for Registered Offerings . . . . . . . . . . . . . . . . . . . . . . . . . 377

[G] Application to Company Web Sites and Social Media Channels . . . . . 378

[H] SEC Enforcement, No Private Remedy . . . . . . . . . . . . . . . . . . . . . . . 380

§ 11.09 RESPONDING TO AUDITOR REQUESTS . . . . . . . . . . . . . . . . . . . . 381

Chapter 12 INSIDER TRADING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383

§ 12.01 OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383

§ 12.02 SUPREME COURT DECISIONS OF THE EARLY 1980s —

CHIARELLA & DIRKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385

§ 12.03 THE MISAPPROPRIATION THEORY . . . . . . . . . . . . . . . . . . . . . . . . 388

[A] United States v. O’Hagan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388

[B] Family and Other Personal Relationships and Rule 10b5-2 . . . . . . . . . 389

§ 12.04 “POSSESSION” vs. “USE” AND RULE 10b5-1 . . . . . . . . . . . . . . . . . 390

§ 12.05 RIGHT OF ACTION FOR CONTEMPORANEOUS TRADERS . . . . . . 393

§ 12.06 DAMAGES AND PENALTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394

[A] Damages — Section 10(b) Actions . . . . . . . . . . . . . . . . . . . . . . . . . . 394

[B] Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396

§ 12.07 RULE 14e-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397

§ 12.08 THE MAIL AND WIRE FRAUD STATUTES . . . . . . . . . . . . . . . . . . . 398

§ 12.09 BLACKOUT PERIODS — INSIDER TRADING PROHIBITIONS . . . . 398

§ 12.10 THE STOCK ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399

§ 12.11 SECTION 16 — “SHORT-SWING” TRADING . . . . . . . . . . . . . . . . . . 400

[A] Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400

[B] Relevant Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402

[1] Beneficial Ownership and the Concept of Attribution . . . . . . . . . . . 402

[2] Directors — “Deputization” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403

[3] Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403

[4] 10% Beneficial Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404

[5] Objective Approach vs. Pragmatic Approach . . . . . . . . . . . . . . . . . 404

Chapter 13 BROKER-DEALER REGULATION . . . . . . . . . . . . . . . . 407

§ 13.01 OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407

§ 13.02 ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410

[A] Key Supreme Court Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410

[B] Aftermath of McMahon and Rodriguez . . . . . . . . . . . . . . . . . . . . . . . 412

[C] Arbitration Today . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413

§ 13.03 SPECIAL CONCEPTS OF FRAUD FOR BROKER-DEALERS . . . . . . 415

§ 13.04 CONFLICTS AND SCREENING PROCEDURES . . . . . . . . . . . . . . . . 417

[A] In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418

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[B] The Need for Reinforcement Measures . . . . . . . . . . . . . . . . . . . . . . . 419

[C] Regulatory Treatment of Chinese Walls . . . . . . . . . . . . . . . . . . . . . . 420

[D] SEC Global Research Analyst Settlement . . . . . . . . . . . . . . . . . . . . . 421

[E] Sarbanes-Oxley Act Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422

[F] Impact of the JOBS Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423

§ 13.05 SECONDARY LIABILITY — FAILURE TO SUPERVISE . . . . . . . . . 425

Chapter 14 CORPORATE CONTROL ACQUISITIONS AND

CONTESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427

§ 14.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427

§ 14.02 GOING-PRIVATE TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . 427

[A] State Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428

[B] Federal Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429

§ 14.03 PROXY CONTESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430

§ 14.04 A PRIMER ON THE WILLIAMS ACT . . . . . . . . . . . . . . . . . . . . . . . . 432

[A] Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432

[B] Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433

[C] Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436

§ 14.05 DEFINITION OF TENDER OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . 437

§ 14.06 CONSTITUTIONALITY OF STATE TAKEOVER STATUTES . . . . . . 439

[A] The CTS Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440

[B] The “Third Generation” Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441

[C] Need for Federal Preemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443

§ 14.07 DISCLOSURE OF BENEFICIAL OWNERSHIP INTEREST . . . . . . . . 444

§ 14.08 SEC TENDER OFFER RULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446

§ 14.09 SUBSTANTIVE REGULATION OF DEFENSIVE TACTICS . . . . . . . 448

[A] Federal Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448

[B] State Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450

Chapter 15 SEC ENFORCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 455

§ 15.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455

§ 15.02 SEC SUBPOENA POWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456

[A] Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456

[B] Supreme Court Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457

[C] Notice to Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458

§ 15.03 PARALLEL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459

§ 15.04 SEC ADMINISTRATIVE ENFORCEMENT REMEDIES . . . . . . . . . . 461

[A] Cease and Desist Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461

[B] Money Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462

[C] Refusal and Stop Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462

[D] Summarily Suspending Trading in a Security . . . . . . . . . . . . . . . . . . 462

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[E] Broker-Dealer Disciplinary Sanctions . . . . . . . . . . . . . . . . . . . . . . . . 463

[F] Section 15(c)(4) Disciplinary Proceedings . . . . . . . . . . . . . . . . . . . . . 463

[G] Section 21(a) Reports of Investigation . . . . . . . . . . . . . . . . . . . . . . . 464

§ 15.05 SEC INJUNCTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464

[A] Standards for Injunctive Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464

[B] Implications of Central Bank of Denver . . . . . . . . . . . . . . . . . . . . . . 466

[C] Collateral Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467

[D] Other Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468

[E] Modification or Dissolution of SEC Injunctions . . . . . . . . . . . . . . . . . 469

§ 15.06 OFFICER AND DIRECTOR BARS . . . . . . . . . . . . . . . . . . . . . . . . . . 471

§ 15.07 MONEY PENALTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471

§ 15.08 STATUTES OF LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 472

§ 15.09 PROFESSIONAL RESPONSIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . 473

[A] Rule 102(e) [formerly Rule 2(e)] . . . . . . . . . . . . . . . . . . . . . . . . . . . 473

[B] SEC Standards of Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 476

§ 15.10 SARBANES-OXLEY ACT AND DODD-FRANK ACT ENHANCED

ENFORCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478

APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480

GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483

TABLE OF CASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TC-1

TABLE OF STATUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TS-1

INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1

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