Securities Regulation - Gabaldon - Spring 2000

8/12/2019 Securities Regulation - Gabaldon - Spring 2000

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Securities RegulationProfessor Gabaldon

Spring 2000

I. IntroductionA. Securities Act of 1933(Distribution Process)

1. To require that investors are provided with material info concerning securities offeredfor public sale; and

. To Prevent misrepresentation deceit! and other fraud in the same of securities". Accomplished via disclosure primaril# in registration statement

$egistration intended to provide adequate and accurate disclosure of material

facts concerning the compan# and the securities it proposes to sell

%. Securities Excange Act of 193!(&rder and Disclosure in After'aret)

1. *ffect *+tended the disclosure doctrine of investor protection to securities listed and

registered for public trading on national securities e+changes

Also applies to over the counter maret if compan# has more than ,1- in assets

and more than -- investors. /orporate $eporting

ust file a registration statement with the e+change and the 0*/

". Pro+# 0olicitations

overns soliciting pro+ies

0olicitations whether b# management or shareholder groups must disclose all

material facts concerning matters on which holders are ased to vote 2olders must be given an opportunit# to vote 3#es4 or 3no4 on each item

5. Tender &ffer 0olicitations

$eporting and disclosure provisions e+tended to situations where control of a

compan# is sought through a tender offer or other planned stoc acquisition ofover 6 of a compan#7s equit# securit#

. 8nsider Trading

Prohibitions are designed to curb misuse of material confidential information not

available to the general public9. $egulation of broers and dealers

". State #lue S$% &a's1. Analogous to the 7"" and 7"5 Act. Preempted b# federal legislation (sometimes)

(. Sources of )ederal Securities &a'

1. 0tatutes at :arge (more legit than 0/) but most people rel# on %


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5. 0taff :egal %ulletins. 8nterpretive and orm sole proprietorship! partnerships (general! limited! limited liabilit#)!limited liabilit# corporationb. nique contractual relationshipsc. ethods b# which securities get to public and trade in aftermaret

(1) Distribution process in which capital is raised b# issuer throughplacement of securit#

() Aftermaret secondar# maret where not capital is raised for thecorporation

. Public=:arge *ntities

a. >orm some are limited partnerships! but most are corporationsb. 0tandard contractual relationships

c. ethods to get securities to public and trade in after'maret(1) Distribution

8ssuers approached b# a 3lead4 underwriter (lie bans) who would

act as an agent for an underwriting group! t#picall# a leadunderwriter will approach issuer and then assemble the group

:ead underwriter interfaces between issuer and underwriting group

All members of underwriter group are responsible for contacting

dealers

nderwriters sell to dealers who in turn sell to the public

() After'aret public trading securities among itself (price does notdirectl# effect compan# but effects price at which the# can later sell topublic)

). "ontext of 1933 Act Registration

1. nderwriters

a. eneral Definition function of helping a compan# or one or more of its ma?orshareholders! sell securities to the public through an offering registered under the0ecurities Act

b. >irm /ommitment nderwriting underwriter purchases securities from acompan# at an agreed price and then attempts to sell to public for a profit (ris onunderwriter)

c. %est *fforts nderwriting underwriter agrees to use its best efforts to sell anagreed amount of securities to the public! ris remains with issuer! done primaril#with small underwriters

d. 0tandb# nderwriting used in 3rights offerings4! compan# directl# offers itse+isting securit# holders the right to purchase additional securities at a given priceand the uw agrees to purchase from the compan# an# securities that are offered tothe securit# holders but not purchased b# them

. Dealers


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$efers to a firm when it bu#s and sells securities for its own account (taes and

gives title)". %roers

$efers to a firm when it bu#s or sells as an intermediar# for a customer rather than

taing or giving title itself

5. 8nvestment %aning suall# handles the underwriting business

/omparison with commercial baners who mae loans and hold depositor7s funds

because lass'0tegall Act revoed! commercial bans can not have affiliateswho underwrite (but are not suppose to use depositors funds)

>unctions@

a. assisting companies in the sale of securities! almost alwa#s in large amounts toprivate purchasers such as insurance companies

b. finding acquisition partners for companies that wish to acquire or be acquiredb# others

c. giving financial advice of various sorts. 0econdar# aret

a. Process for getting securities on e+changes

(1) :ist will contact desired e+changes and sell them on the e+change


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b. $egulation sub?ect to rigorous regulation b# 0*/ pursuant to 1E"5 Actc. Process

%u#er goes to broerage broerage will communicate that desire to a

floor trader member or floor trader will go to a specialist post

0eller will contact her broer about purchasing seller7s broer will

communicate to a floor trader the# will go to specialist post and hopefull#transaction taes place

0pecialists perform matching function

E. &ver'The'/ounter

a. >orm ever#thing e+cept selling=bu#ing of securities not listed on an e+change

Pin 0heets advertisements; now we have electronic bulletin boards

aret aer regularl# advertised self as willing to bu# or sell +

securit# and usuall# lots of mm7s per securit#b. Process

%u#er goes to broer and broer goes to mm

0eller goes to broer and broer goes to mm m lacs the matching function! do the transaction with themGGGGGG

1-. 0tate %lue 0# $egulationa. T#pes of $egulations

(1) erit'%ased requires state officials to read info and determine its suitabilit#of securities


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a. Hhen

/ompan#7s earning and financial performance

0ie of compan#

b. 0election factors for agent underwriter

$eputation and abilit# to distribute

Abilit# to advise Abilit# to provide financial services following the offering

After maret performance of the securit#

*+perience in the compan#7s industr#

1". 0ituation a. 0cenario

Product specialied computers with specialied software

/orporation has two shareholders

Hant to raise capital

b. 8nterests 0ie of compan# ' ,1- million I ultimate sales price

2ow much do #ou want to raise ' ,1-

&nl# want to sell 6 of the compan#

:ogical price is . b=c not is liel# to pa# ,1- for 6 control

of something that is worth ,1-

Decide the# are willing to sell ,"."

,1- is value of corp.

giving up ""6 of compan#

c. 0ie of Deal for nderwriters

%ig nderwriters',I deals onl# $egional underwriters will tae smaller dals

I. 1933 Act RegistrationA. General ,ocabular% and Applicable Statutes

1. Pre'>iling Period (%asic $ule no offers! no sales)a. Definition

Period before registration statement is filed

b. $elevant Provisions

JJ(a)!(c)

. Haiting Perioda. Definition

Period after registration statement has been filed but has not become

effectiveb. $elevant Provisions

JJ(a)!(b)(1)

". Post *ffective Perioda. Definition


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Period after registration statement becomes effective

b. $elevant Provisions

J(b)

#. Pre-)iling Period Proibitions

1. J(a) no salesa. 0tatutor# :anguage

Unless a registration statement is in effectas to a securit#! it shall be

unlawful for an#person! directl# or indirectl#

To sell such securit# through the use or medium of an# prospectus

or otherwise; or

To carr# an# such securit# for the purpose of sale or for deliver#

after saleb. %asic eaning

Prohibits the sale of securities unless a registration statement has become

effective (at the end of the waiting period) and no sale or deliver# forpurposes of sale before the effective date

c. $elated 8ssues

Hhat is a sale J(a)(")

. J(c) no offersa. 0tatutor# :anguage

8t shall be unlawful for an# person . . . to offer to sell or offer to bu#

through the use or medium of an# prospectus or otherwise an# securit#!unless a registration statement has been filed as to such securit# . . .

c. %asic eaning

/annot offer before filing a registration statementd. $elated 8ssues

Hhat is an offer J(a)(")

$ule 1" safe harbor from definition of 3offer

0*/ releases "F55 and 1F-

". Hhat is an &fferGa. 0ection (a)(")a (1) 0tatutor# :anguage

The term 3offer to sell4! 3offer for sale4! or 3offer4 shall include every

attempt or offer to dispose of, or solicitation of an offer to buy, a security

or interest in security, for value


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Definition read broadl# and includes things that ma# not have been

considered an offer at common law including conditioning the maret forthe securities to be sold

d. /onditioning the aret(1) enerall#

8n the pre'filing period! it is not legall# possible to begin a publicoffering or initiate a public sales campaign

() 0ecurities Act $elease


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0uch release and publicit# was of a character calculated! b#

arousing and stimulating investor and dealer interest in thesecurities . . .! to set in motion the process of distribution

(5) 0ecurities Act $elease actual information should be provided

$esponses involving predictions! forecasts! pro?ections! and

opinions! concerning value are not acceptable(c) enerall#


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*+ception is limited to underwriters does not cover dealers

/ompan# can find an underwriter in pre'filing period

anaging underwriter can tal to other securities firms to gauge

their interest in ?oining underwriting s#ndicate

anaging underwriter cannot begin to assemble the dealer group at

all

() $ule 1" or purposes of J! a notice given b# an issuer that is proposes to

mae a public offering of securities to be registered under the Actshall not be deemed to offer an# securities for sale if@

(1) notice sa#s that offering will be made onl# b# means of aprospectus; and

() /ontains no more than the following additional language@


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An# use of the telephone satisfies the requirement

8f offer at the countr# club! probabl# not satisfied! but if friend then

telephones for more info probabl# have the ?urisdictional means b=c offerorreasonabl# could have foreseen the use of the telephone b# the offeree

". aiting Period1. J(a) no sales or deliveries

a. Prohibits no sales and no deliveriesb. Defining a 0ale

(1) 0tatutor# Definition (J(a)(")) (not complete definition)

3the term Nsale7 or Nsell7 shall include every contract of sale or

disposition of a security or interest in a security for value4

read liberall#

() 0ignificance of 8ncluding 3contract of sale4

8n the waiting period! certain offers ma# be made. Hhen an offer is

accepted a contracts is created and J(b)(1) is violated b=c a sale hasoccurred

/ure offerors should condition their offers in such a wa# that

the# cannot be accepted until the registration statement is effective(") 8n $e >ranlin! e#er L %arnett

(a) %acground

0alesmen accepted checs sent b# customers in pa#ment for offered

shares

0ales sold other securities for customers and held the proceeds for

application against the purchase price of the offered shares(b) 2olding

0alesmen accepted orders for stoc during the waiting period Although the# initiall# invited indications of interest in the form of

checs and the proceeds of the sale of other securities! the# wentbe#ond the permissible scope of the Act.

!f take money in anticipation for subsequent sale, this is a sale

ithin definition and ill be a violationshould return mone#promptl# or sa# do not intend to appl# to sale of stoc until someeven and the# don7t get an# priorit# then possibl# oa#

. J(b)(1) no prospectus unless a J1- prospectusa. statutor# language

Unlafulfor an# person . . . to carry or transmit any prospectusrelating

to an# securit# with respect to which a registration statement has been filedunder this title! unless such prospectus meets the requirements of section"#$

b. Prospectus Definition (J(a)(1-))(1) 0tatutor# :anguage

1-


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3An# prospectus! notice! circular! advertisement! letter! or

communication! written or b# radio or television! which offers an#securit# for sale or confirms the sale of an# securit#4

%asicall# a ritten offer or a confirmation of sale(but because

J(a) prohibits sales during the waiting period! not concerned with

affirmations of sales)() &ffers

8f something is not an offer (use anal#sis from above) then it is not

a prospectus and will not violate J(b)(1)

$emember $ule 1" which deems something to not be an offer

(") 3Hritten or %# $adio or Television4(a) Definition of Hrite (J(a)(E))

Printed! lithographed! or an# means of graphic communication

(b) &ral Announcement b# President that if in writing would be a Prospectus

Hhen a reporter incorporates the announcement in an article! the

president has made an offer that is written

President caused the writing and that is enough to mae the offer

one that is b# means of a prospectus(c) Answers to Press 8nquiries(d) /alling /ustomer with &ffer(e) 0*/ 3no action4 responses

0*/ has taen 3no action4 positions with respect to certain

transmissions b# various broadcast mechanisms (including satellite!telephone or cable when the request was ?ustified in terms of therestricted character of the recipients and the limitations on theirabilit# to record and retransmit the information received

(f) *mail /onstitutes a writing


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contain other info as 0*/ deemed necessar# in the public interestand for the protection of investors

() $ule 1"5 /ommunications deemed not a prospectus(1) %asic 8dea

8f communication complies with this rule then it will not be a

prospectus() %asic 0tructure

(a) can be done if (b) is done! but (b) does not have to be done if

either (c)(8) or (c)(ii) is done! and if its terms are followed! (d) canbe done

(a) ma# include and will not be a prospectus

(b) is stuff included in (a) must put the stuff in (b)

ust include disclosures in (b) unless have (c)(i) or (c)(ii)

(9) $ule 1"5a

2ighl# specialied rule providing that certain written material

relating to standardied option are not deemed a prospectus

(C) $ule 1" (detailed in pre'filing period)(a) 0tatutor# :anguage

/ertain notices 3b# an issuer that it proposes to mae a public

offering of securities to be registered under the Act shall not bedeemed to offer an# securities for sale4

(b) Possible Application

Thrust of rule is toward the pre'filing period

3proposes to mae a public offering4 once file a registration

statement #ou reall# are no longer proposing a public offering

3to be registered4 technicall# securities are still to be registeredduring the waiting period but term ma# be used in a somewhat losersense

suall# it does not matter because can use $ule 1"5

(F) Possible 8mpact of ustafson v. Allo#d (0ee chapter F)

Defines a prospectus as a document used in a public offering to sell

a securit# b# an issuer or controlling shareholder

c. 0ection 1- Prospectus(1) 0ection 1-(a) Prospectus

(a) prospectus %shall contain the information contained in the registration

statement,& ith some e'ceptions(b) a prospectus does not compl# with this when it contains blans where

required information is to be added b# amendment(c) it ma# be possible for the prospectus as originall# filed to compl# with

0ection 1-(a)! but usuall# certain information is unnown (so usuall#0ection 1-(a) prospectus is not available in the waiting period)

() 0ection 1-(b) Prospectus

1


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(a) ives 0*/ authorit# to permit the use of a prospectus that omits orsummaries information required b# 0ection 1-(a).

(b) Done through $ules 5"- and 5"1

(c) $ule 5"- Preliminar# Prospectus(i) %asic 8dea

Allows the use during the waiting period of a preliminar#prospectus

(ii) $equirements

Hill meet the requirements of "# for purposes only of

5(b)(")if contains substantiall# the information required b#J1-(a) e+cept does not have to include information onoffering price! underwriting discounts=commissions! dealerdiscounts=commissions! amount of proceeds! conversionrates! call prices! or other matters dependent upon theoffering price

(d) $ule 5"10ummar# Prospectus

(1) %asic 8dea Allows the use of 3summar# prospectuses4 in waiting period

8f prepared and filed with registration statement it is deemed

to be a prospectus permitted under section 1-(b)() $equirements

Page 19 of 0upplement

d. Preliminar# Prospectus Deliver# $equirements $ule 59- and Acceleration

(1)


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receive a confirmation of sale at least 5F hours prior to themailing of such confirmation

$equired underwriters and dealers to tae reasonable steps to

furnish copies of the preliminar# to an# person who maes awritten request for a cop#. nderwriter must furnish enough

copies to dealers to get them to customers. $equires underwriters and dealers to furnish copies to salesmen

(") Posting on website

Hhile this provides access! the rules require an affirmative act on

part of issuer to get it in the hands of underwriters! dealers etc.

/an do if customer agrees to this in advance and it will count as

sending preliminar# prospectus

(. Post-Effecti/e Period

1. 0ection (b)(1) no prospectus unless J1- prospectusa. 0tatutor# :anguage

/annot use a prospectus unless it is a 0ection 1- prospectus

suall# onl# a final prospectus called for b# 0ection 1- will satisf#

b. Hhat is a prospectusG

0ee Haiting Period anal#sis

8f something is considered a prospectus it must also meet the requirements

of 0ection 1-.c. Hhat prospectus must be usedG

(1) 8n the post effective period the onl# prospectus that satisfies the requirementsof 0ection 1- is the final prospectus call for b# 0ection 1-(a).

() Hhen can #ou use 0ummar# ProspectusG $ule 5"1

/an never be used as a J1-(a) prospectus for purposes of J(b)()

d. *+ception Hhen a communication is not a prospectus

communication is not deemed a prospectus hen it is accompanied or

preceded by a ection "#(a) prospectus

%*ree Writing&term used to describe communications allowed b# this

e+ception

. 0ection (b)() no sales unless accompanied or preceded b# J1-(a) prospectusa. 0tatutor# :anguage

8t is unlawful for an# person . . . to carry. . .such securityfor the purpose

of sale or for deliver# after sale! unless accompanied or preceded by aection "#(a) (final) prospectus$

0ummar# prospectus can never fulfill this requirement

b. Hhat is a deliver#G(1) Hhat is meant b# securit#G

0ecurit# vs. certificate representing securit#

8n securit# definition! referring to actual securit# and not

evidence of interest in a securit#

15


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() 0o even though cannot actuall# deliver a securit# must still send prospectuswhen send certificate representing securit# (pg. C)

". Hhat can now be doneGa. &ral offers can be made (J(c) does not appl# an#more) e+cept in the case of a

registration statement that is the sub?ect of a stop order or of a public proceedinginstituted before the effective dateb. Hritten offers ma# be made b# means of the final prospectusc. Hritten offers can be made b# free writing! when accompanied or preceded b# a

final prospectusd. &ffers ma# continue to be made under e+ception (b) to section (a)(1-) and under

$ules 1"5 and 1"5a.e. 0ales ma# be made ((a)(1) no longer applies)f. 0ecurities and confirmations of sale can be delivered if accompanied or preceded

b# a final prospectus.

5. 0ection (b) and Defective Prospectusesa. eneral 8nformation

0ection (b)(1) allows the use of a prospectus that meets the requirements

of 0ection 1-

0ection (b)() requires that a 0ection 1-(a) prospectus accompan# or

precede the deliver# of a securit#b. 0*/ v. anor


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(1) final prospectus7 are to be furnished to sales personnel and to other persons onwritten request! and if not the# are considered a fraudulent etc.

d$ +ealers ection (-)

(1) eneral $ule

ust deliver final prospectus when the# sell securities that have beenregistered within the previous fort# or ninet# da#s regardless of how ma#time the securities have changed hands in the trading marets

() 0pecific Times

5- da#s applies when the issuer of securit# has previousl# registers

other securities under the 0ecurities Act (baseline rule)

da#s ($ule 1C5) if securit# will be authoried to trade on


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$efusals are rarel# used b=c requirements are tougher than stop order and

stop orders ma# be used in the place of refusal orders

e. :as Begas 2awaiian v. 0*/ (1ECE)(1) %acground

0*/ initiates a JF(e) investigation prior to effectiveness and ?ust sits on it $egistration statement becomes effective! but cannot mae an# offers

During this period :B cannot mae an# offers

8ssue whether JF(e) can be utilied b# 0*/ to dela# indefinitel# the sale

of securities under an effective registration statement.() 2olding

court may compel the ./ to make a determination ithin a

reasonable time hether to notice a hearing on the issuance of a

stop order under section 0(d)where the 0*/ has ordered ane+amination under section F(e) prior to the effective date of aregistration and the determination whether a stop order should issuehas unreasonabl# dela#ed

8f unreasonable time /ourt can order 0*/ to hold hearing and

decide whether the issue a stop order

5. Dela#ing :anguage and Acceleration Process

a. 0ection F(a)Hhen $eg. 0tmt. %ecomes *ffective

$egistration statements are effective twent# da#s after filed or earlier if

0*/ allows

8f issuer files an amendment! the twent# da# waiting period starts over

again

b. Hh# Acceleration is


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%ecause issuer wants to accelerate and 0*/ has power to do or not

to grant it! is uses the threat of denial to force actions not requiredb# the statute

() $ule 591 ndertaings(a) eneral *ffect

/ontains a list of factors 0*/ will consider in deciding accelerationrequests

0ome are required generall# while others are price of registration

(b) /onsiderations

Hhether a preliminar# prospectus was delivered during the waiting

period

8ndemnification 0*/ disfavors officers! directors and other

controlling the issuer being indemnified b# the issuer for liabilit#(sa#s against public polic# and therefore unenforceable)

Hhether the 0*/ is maing an investigation of the issuer etc

pursuant to and Acts administered b# 0*/(") Phoeni+ 0teel

ndertaings are onl# required if want acceleration

8f willing to wait twent# da#s! onl# have to compl# with the statute

and 0*/ cannot force #ou to do undertaings

. $egistration 0tatement >ormsa. >orm 0'1

eneral! catch all form that is used when no other form authoried or

prescribed

ost e+tensive disclosure

b. >orm 0' To use must meet certain tests (issuer must have filed *+change Act reports

for a specified number of months (have some 7"5 Act reporting histor#)!and its most recent histor# must be free of defaults on indebtedness andmissed preferred stoc dividends)

$egistration statement will be a combo of spelled out disclosures and

incorporation b# reference of information from *+change Act sourcesc. >orm 0'"


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+isclosure should be plainly understandable to the ordinary investor

(even if enough information there for e+pert to figure something out! this isnot enough)

1ust spell out full implications of offering including dilution(dilution

ma# not be a deal iller b=c future earnings ma# ?ustif# pa#ing more)

. 8n $e Te+as lass anufacturing /orp. (1EF)a. 8ssue

Determine whether a stop order should issue material factG

b. 2olding

tandard of 1ateriality0*/ does list some things but does not tal

about crimes previousl# committed. 8f not listed follow generic materialit#standard (would a reasonable investor find it important in deciding whetherto bu#)

1anagement !ntegrity and honestygenerall# courts sa# investors don7t

care and therefore not material

Hhen dealing with ris factor disclosure! consider what public wants to

now and possible impact of dilution when list too much.

". Hh# have disclosure requirement v. merit regulationa. 8ssues of Paternalismb. *+istence of other wa#s to regulate merits (state blue s# laws)c. 0pecial 8nterest :egislation (lobb#ing effects /ongress)

d. *nforcement /osts ver# time consuming and ma#be less effective

e. overnment competence someone is 0*/ rather than /ongress ma# prevent anindustr# from getting started b=c feel too ris#

5. Hh# require disclosureGa. ore efficient wa# of providing informationb. 8f do not require it! those who want it will have to get it with separate negotiation

and bargaining if mae mandator# it is available with e+tra costs and bargainingc. Hho then uses itG

>or the small investor! hard to understand. *ven if can understand! b# the

time the# do ever#one else has read it and maret alread# reflects actualworth. 0mall investor cannot beat the maret.

8nstitutional investors use it but do not solel# rel# on it! also call co.

Prospectus is superficial and does not give info on future plans that willeffect future value.

2ard to produce something that is useful b# big investors but good also forsmall investors.

d. Hh# have it at all thenG

2ard to get rid of

8nvestor confidence people thin 0*/ is encouraging truthful and

complete disclosure

. *fficient /apital aret 2#pothesis

1


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a. Hea >orm

3random wal theor#4 the price of a securit# #esterda# does not sa#

an#thing about the price of the securit# toda# or tomorrow (maret willreact to new information)

b. 0emi'0trong >orm

aret immediatel# reacts and incorporates all publicl# availableinformation

aret price of a securit# at an# time has been affected b# all of the

publicl# available information

0mall investors! therefore! cannot beat the maret

c. 0trong >orm

aret immediatel# reacts to all information! public or private

Price of securit# affected b# public and inside information so that even

insiders cannot mae mone# with their inside information

*ven insider trading effects maret price putting securit# in right direction

II. (efinition of a Securit%

A. Statutor% (efinition(0ection (a)) 8s it specificall# listedG

nless the conte+t otherwise requires@

The term securit# means an# note! stoc! treasur# stoc! bond! debenture! evidence

of indebtedness! certificate of interest . . . investment contract! voting'trustcertificate . . . or in general an# interest or instrument commonl# nown as asecurit# or an# certificate of interest or participation in . . . an# of the foregoing.

2. In/estent "ontract

1. 0*/ v. H.M. 2owe# /o. (1E59)

a. %acground &range groves were divided and sold in rows of trees sold land and service

contract

/ompan# set up trees and harvested etc.

Hhen bu# land! F6 enter into service contract with a sibling compan#

(relationship between land and service co. is irrelevant)

Hhen bu# land! could not use as #ou please! had to grow trees

b. 2olding

This is an investment contract therefore! a securit#

In/estent "ontract estwhether the scheme involves an investment

of mone# in a common enterprise with profits to come solel# from theefforts of others

>our *lements

(1) investment of mone#() common enterprise(") e+pectation of profit(5) solel# from the efforts of others

Ouoted $ationale


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The# are offering an opportunit# to contribute mone# and to share in

the profits of a large citrus fruit enterprise managed and partl# ownedb# respondent. . . . The offered tracts gain utilit# as citrus groves onl#when cultivated and developed as component parts of a larger area. Acommon enterprise managed b# respondents or third parties with

adequate personnel and equipment is therefore essential if the investorsare to achieve their paramount aim of return on their investments

/t held that the s sold b# 2owe# were securities b=c it was part of

common scheme b=c each tract had no individual purpose! purchased w=e+pectation of profit (not in anticipation of moving to >:)! primaril#from efforts of others b=c out of state purchasers could not waterthemselves.

c. Distinguished from selling entire farm coupled with management services

Power of investor ma# be a distinguishing factor

Hhen bu# entire farm more control (can fire manager or build on land)

Page 1"-

d. Diamond 0eller 2#pothetical(1) %acground

%u# diamond and diamond dealer eeps them

Dealer sa#s diamonds will go up in value

() Anal#sis

orman)

a. %acground People in need of housing were offered shares of stoc entitling them to state

subsidied nonprofit housing

0toc nontransferable and when sold bac bought at original offer price

Pro?ect leased commercial space to third parties with an# income derived to be

used to reduce the rent on the housing units

b. /ourt7s Decision


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*+pectation of Profit

1eans either capital appreciation resulting from the development

of the initial investment or a participation in earnings resulting

from the use of investor3s funds (investor attracted solel# b# theprospects of a return on his investment)

Hhen purchaser is motivated b# desire to use or consume! not asecurit#

This does not mean #ou can get around securities laws b#

pa#ing out in things in ind (if pa# in oranges ma# still be init for a profit and will still be a securit#)

Two additional arguments b# plaintiff

(1) Deductibilit# for ta+ purposes

$e?ected b=c 3no basis in law for the view that the pa#ment

of interest with deduction constitutes income or profits4

An# homeowner can do this

Deductions from ta+ shelters ma# be considered profit inlower courts() Discounted $ental /harge

%enefit cannot be liquidated into cash

Does not result from managerial efforts of others but rather

state subsidies that could not be liquidated into cash profits and efforts of others are to be lined

Dissent argued that economists sa# reduction in e+penditure

is not an# different from pa#ment(") $ent $eduction >rom :easing 0pace

8f there is an# income derived from this! it is far too

speculative and insubstantial to bring the entire transactionwithin the 0ecurities :aws


25/103

*conomic realit# dictated he was woring for his livelihood

and not to mae an investment

/ourt re?ected argument that emplo#er contributions constituted his

investment


26/103

(") /ommon *nterprise

(efinitionone in which the fortunes of the investor are

interwoven with and dependent upon the efforts and success ofthose seeing the investment or of third parties

/ritical >actor not the similtude or coincidence of investor input!

but rather the uniformit# of impact of the promoter7s efforts ,erticalintermingling of investor and promoter interests; the

single investor7s funds must be related to the funds or efforts of thepromoter

Strictrequires that fortunes of the investor be lined to

the fortunes of some other part# (lie profit sharing)

#roadrequires onl# that the fortunes of the investor be

lied to the efforts of another part# (promoters effort musthave an effect on investor7s fortune)

*oriontalintermingling of fortunes of multiple investors

(interests must be similarl# effected b# scheme)

8ndividual Discretionar# Account investor puts mone# on

account and allows broer discretion in trading

2oriontal unctional rather than literal approach

%hether the efforts made by those other than the investor are the

undeniably significant ones, those essential managerial efforts hichaffect the failure or success of the enterprise& test goes from solely

from the efforts of other to %from the essential managerial or

entrepreneurial efforts of others&

Test satisfied b=c role of investors at these meetings were little more

than a perfunctor# one

Act of consummating sale is ministerial! not managerial

9


27/103

Polic# rationale was to avoid promoters avoidance of securities

laws b# requiring menial efforts on part of investor

2olding limited to those schemes in which promoters retain immediate

control over the essential managerial conduct of an enterprise and wherethe investor7s realiation of profits is ine+tricabl# tied to the success of the

promotional scheme

c. Distinguishing aFranchise

A franchisee is a person who invests in a restaurant and pa#s for the right to

use the name

8f the franchisee (investor) has a lot of control not a securit#

%ut some arrangements are so restrictive that investor has no managerial

control and these would be a securit#

ust loo to individual contracts discretion over operations

d. Limited Partners in a Limited Partnership

A limited partner has limited liabilit# because he refrains from managerial

control

8t will pass as a securit# as a matter of law b=c no managing on part of

investor and relies on efforts of general partner to mae mone#

Passes on investment of mone# b=c have to bu# into partnership

e. General Partner in a General Partnership

T#picall# not a securit# b=c partners as investors will put in a lot of effort

%ut if agreement sa#s #ou have no control and this is realit#! ma# be a

securit#

/ircuit 0plit some sa# not a securit# (but did not consider whenagreement restricts control) and some loo at reasonable e+pectation ofparties with respect to realistic participation (protecting those who have alegal right to participate but chose not to)

f. General partners interest in a limited liability partnership

0till will turn on abilit# to participate and control

Hill probabl# have control and therefore not a securit#

g. Member is a limited liability company

2ave characteristics of both partnership and corporation

h. &ther e+amples in notes

. :ife Partnersa. %acground

:P in viatical settlement industr#

arets fractional interests in insurance policies on the lives of the terminall#

ill

C


28/103

$esponsible for screening the insureds and for collecting and disbursing

insurance proceedsb. /ourt7s Decision


29/103

!. 7nless te "ontext 6ter'ise Re8uired

1. dditional *ederal 7egulatory cheme(arine %an)a. %acground

Hhether a certificate of deposit issued b# a national ban was a securit#

b. 2olding


30/103

8ssued promissor# notes pa#able on demand that were uncollateraled and

uninsured but paid a variable rate

areted as a investment program

Hhen went banrupt! holder sued auditors

b. 2olding


31/103

Does not closel# resemble an# of the famil# resemblance e+amples

(") Appl#ing four factors! not a securit#

otivation is an investment in a business enterprise rather than a

purel# commercial or consumer transaction

Hhile not traded on an e+change! the# are offered and sold to broad

segment of public (all that is needed to establish 3common trading4) 0ecurit# fundamental essence is being an investment and notes here

were advertised as a great investment opportunit# (publice+pectations)


32/103

0ale shall include ever# contract of sale or disposition of a securit# for

value. Balue Aspect

ift is not a sale (not ind of value contemplated b# definition

Pledges are t#picall# a sale (pledges to secure a loan)

%. Acquisitions1. eneral

Acquisition b# means of a stoc for stoc tender offer is a sale

0ale occurs when parties become bound b# the contract

. Applicable $ules and 0tatutesa. $ule 15 (a)

The submission to a vote of securit# holders of a proposal for certain

reclassification of securities! merger! consolidations! or transfers of assetsis deemed to involve a sale of purposes of transaction

*ffect is to require registration of the securities to be issued unless

e+emption

b. $ule 1"a Definition of 3precede b# a prospectus4

2ave to deliver a prospectus before shareholders vote on the combination

(before used in conte+t that have to deliver before a sale)

c. $ule 15(b) /ommunications not deemed to be a prospectus

$ule 15(b)(1) lists those things that can be in a written communication

without it being a prospectus and therefore not an offer for sale involved inJ

3. ender 6ffersa. /ash for 0toc

/ompan# A goes directl# to /ompan# %7s shareholders and offers them cash

for their shares

Hhen A offers cash for stoc A is not selling a securit# b=c the# are offering

cash (not a securit#)

Do not have to register

b. 0toc for 0toc

/ompan# A offers own shares in e+change for shares from %7s shareholders


33/103

ergers or /onsolidations securities of one corporation will become or

be e+changed for securities of an# other person (unless done to changeissuers domicile)

%ecause both vote! sale

4. +erger

a. echanics After a vote on merger! /ompan# % is out of e+istence and their

shareholders now hold shares in /ompan# Ab. 2olding

/ompan# A7s shareholders do not vote so there is not sale as to them (per

3such shareholder4 language in rule)

%ut there is a sale as to shareholders of /ompan# %

:. Sale of Substantiall% All Assets

a. $ule 15(a)(")(A)

echanics

/ompan# % transfers all assets to /ompan# A and A issues shares to

/ompan# %

/ompan# A is now partl# owned b# /ompan# %

/ompan# % then liquidates and onl# /ompan# A e+ists with

shareholders of itself and /ompan# %

2olding

$esult is same as when merger

This is a sale $ule 15(a)(")(A) sale when transfer of assets of

such corporation in consideration of the issuance of securities of suchother person if 3such plan or agreement provides for dissolution of the

corporation whose securit# holders are voting or consentingb. $ule 15(a)(")(%)

echanics

/ompan# % transfers all assets to /ompan# A and A issues shares

to /ompan# %

/ompan# A is now partl# owned b# /ompan# %

/ompan# % does not dissolve but distributes A7s shares as

dividends

2olding

This is a sale

c. $ule 15(a)(")(c) Transfer of assets is still a sale even if shareholders can7t vote on plan with

results above! but within one #ear board votes to do it an#wa#d. $ule 15(a)(")(D)

Transfer of assets is a sale if transfer is part of a pre'e+isting plan for

distribution that is not disclosed to shareholders (even if done #ears laterstill a sale if part of pre'e+isting plan)

""


34/103

". Spin-6ffs

1. eneral

8n a spin'off a corporation taes stoc that it owns in another corporation

and distributes this stoc to its shareholders as a dividend

Hhen the corporation engaging in a spin'off is publicl# held! the spun'off

corporation becomes publicl# held also 0ome shareholders will want to sell their shares! and a trading maret

will develop

Those who purchase will not have benefit of registration disclosure

. 0ecurities Act $elease or Balue4 $equirementa. Definition of sale

Disposition of a securit# for value

b. Hhere is value in a spin'offG

1arket for the stock is created by its transfer from shareholders ofacquiring co$ to general public

%ecause of creation in maret! value goes up and acquiring compan# can

then sell the shares it retains for a higher value

5. 0taff %ulletina.


35/103

0pin'off is pro rata to the parent compan#7s shareholders

The recipients of the spun'off securities provide no consideration

The parent provides to its shareholders and the public adequate information

about the spin'off and about the compan# being spun'off

The parent has a valid business purpose for the spin'off

8f the parent spins off 3restricted securities4 it has held the securities for atleast two #ears

5. Free !toc" #ffers

a. 8s a saleb. >orm of value in agreement

I,. ;33 Act ExeptionsA. Statutor% Scee

1. 0ection 5 *+empted Transactionsa. eaning

0pecific t#pes of transactions are e+empted

Hhen purchaser of securit# here wants to resell have to find own e+emption

b. *+empted from what

$egistration requirements of section do not appl# to the transactions covered

All other sections of the 0ecurities Act do appl#

. 0ection " *+empted 0ecuritiesa. eaning

The provisions of 3this title4 do not appl# to certain inds of securities

$egardless of whose hands the# fall into and the frequenc# of sale! never have

to be registeredb. *+empted >rom Hhat

Provision of the 0ecurities Act do not appl# to the securities enumerated

3e+cept as e+pressl# provided4

0ection 1C and 0ection 1(a)() still appl#

c. 0ecurities *+empted

overnment securities

0ecurities issued b# religious! educational or charitable organiation

8nterests in a railroad equipment trust

d. Three 8mportant e+empt transactions@

(1) 0ecurities e+changed with e+isting securit# holders() 0ecurities issued under a plan of e+change approved b# a court or other

governmental authorit#(") 0ecurities issued in an intrastate transaction

e. 0ection "(b)(1) :anguage

0*/ ma# add an# other securities to those e+empted b# 0ection " when it

finds that registration is not necessar# in the public interest and for the

"


36/103

protection of investors b# reason of the small amount involved or thelimited character of the public offering

These will be transaction e+emptions onl#

() Dollar :imit ,(") andator# /onsiderations

Hhenever 0*/ has to determine whether an action is necessar# orappropriate in the public interest! it must also consider in addition to theprotection of investors! whether the action will promote efficienc#competition! and capital formation

(5) $ules and $egulations Promulgated nder

$egulation A

$ule -5

$ule -

$ule C-1 (emplo#ee benefit plans)

$ule /* (issuers in /alifornia)

". *+empted 0ecurities v. *+empted Transactionsa. *+empted 0ecurities

8t does not matter how often the# are traded! or b# whom! the# never have to

be registeredb. *+empted Transactions

The# are onl# e+empt from registering for that specific transaction

8f a bu#er in an e+empted transaction wishes to resell! he must find another

transaction e+emption or the securities have to be registered

$ ection ;0 General .'emptive uthority

a. :anguage 0*/ has power to 3e+empt an# person! securit#! or transaction! or an# class or

classes of person from an# provision of the Act so long as the e+emptionsnecessar# or appropriate in the public interest and is consistent with theprotection of investors4

$emember additional J(b) considerations

b. &ther powers

Allows the 0*/ to raise the dollar limit of e+emptive rules previousl# adopted

under 0ection "(b)

%. Pri/ate Placeent ExeptionJ5() (&nl# the initial transaction e+empted)1. :anguage

The provisions of 0ection shall not appl# to transactions b# an issuer not

involving an# public offering

&nl# available to issuers

. Defining a Private Placement $alston Purina /o.a. %acground

0old stoc to emplo#ees without registering

"9


37/103


38/103

0*/ considers the offering to continue until the offered securities have

come to rest in the hands of persons who are not 3merel# conduits for awider distribution4

8f the purchasers do in fact acquire the securities with a view to public

distribution! the seller assumes the ris of possible violation of registration

requirements ere acceptance of them telling #ou won7t sell it is not enough

Put legend on securit# and issue stop'transfer orders ma# wor

8f sell to someone nown to bu# and sell quicl# rather than for investment!

liel# violationd$ !ntegration of =fferings

(1) 8ssue whether what purports to be a single offering should be combinedwith one of more other purportedl# separate offerings

() *ffect when offerings are integrated in that wa#! the larger offering! viewedas a whole! must meet the requirements of an e+emption or all the securitiesmust be registered

35 )actors

(a) different offerings are part of a single plan of financing(b) the offerings involve issuance of the same class of securit#(c) offerings are made at or about the same time(d) same t#pe of consideration is to be received(e) offerings are made for the same general purpose

5. Defining a Private Placement /ircuit /ourts (page 1F1)

. Defining a Private Placement A%A Position Paper

a. &fferee Oualification /an be qualified in several wa#s@

(1) Abilit# to understand the ris sophistication

() Abilit# to assume the investment ris wealth %ut if completel# no nowledge about business matters! should

have a representative(") Personal relationship to issuer or promotion

>amil# ties! friendship! emplo#ment relationship! pre'e+isting

business relationship(5) anner of Disclosure

The more careful! painstaing and detailed the disclosure is! the

more readil# one ma# find that a particular offeree is able tounderstand the ris

() *conomic %argaining Power

/oncept that is essentiall# shorthand for describing institutional andsome other t#pes of professional investors

(9) &fferee representative principle

8dea is that sophistication ma# be imputed to an offeree

b. Availabilit# of information

Adequate to give basic information concerning the issuers financial

condition! results of operations! business! propert# and management

"F


39/103

c. anner of offering2ow to locate the qualified people@

&ffering should be made through direct communications with qualified

offerees or their representatives

All forms of general advertising and mass media circulation should be

avoided

d. Absence of redistribution 1sttier purchasers should not immediatel# redistribute the shares or it would

turn it inot a public offering

A legend is not required although it would be helpful. The absence of one

does not mae the e+emption unavailable

e. &ne %ad Apple Hhat happens when one offeree is not qualified@

A%A sa#s in some situations one bad apple will not ruin the availabilit# of

the e+emption

/ourts re?ect this and sa# will alwa#s ruin e+emption

f. Advertising

All forms of general advertising and mass media circulation should beavoidedg. 0ignificance of >actors

These are onl# minimum standards used to help predict a court decision

Hhen planning should set standards higher

h. allbac when other e+emptions tried and failed

0ometimes no doubt about private nature and don7t need the safe harbor

$equirements more easil# satisfied b# chance

". Intrastate 6fferings


40/103


41/103

*+emption should not be used for series of corporations organied in

different states where there is in fact and purpose a single businessenterprise or financial venture

d$ 7esidence

ere presence is not sufficient 0*/ at one time construed it to mean domicile in the conflict of laws sense

(:ouis :oss article)

e. $e'sales

An# offers or sales to a nonresident in connection with the distribution of

the issue would destro# the e+emption as to all securities which are part ofthat issue (including those sold to residents and regardless of whether salesare made directl# to nonresidents or sold to them b# residents)

0ecurities ma# be sold to nonresidents when the securities had in fact come

to rest in the hands of resident investors

f$ Use of *acilities of !nterstate /ommerce

*+emption is not dependent upon the absence of use of these

g$ .ffect of .'emption 8eing >ost

0*/ threatens in?unction if offering continued without registration

$egistration statement disclose a contingent liabilit# under J1(1) of shares

alread# sold

8nsists issuer offer rescission to persons who alread# bought

5. %usch v. /arpenter (1EFC)a. %acground

After an offer and sale to the public (all residents) a ma?orit# of the proceeds

were shifted to a different state because of the mergerb. 2olding

(1) /oming to $est (she sa#s this confuses the issue)

3if an issuer maes a prima facie showing that securities initiall# were sold

onl# to state residents! if can get summar# ?udgment on the coming to restissue! regardless of the purchasers7 holding period! unless the other part#produces some evidence to the contrar#4

The initial seller of the securities has the burden of showing that the sales

were made to residents onl# The plaintiff then has the burden of producing some contrar# evidence

eneral 0tandard for /oming to $est

Person must be purchasing for investment and not with a view to

further distribution or for purposes of resale() Doing %usiness

$efers to income producing activit#

51


42/103

!ssuer must conduct a predominant amount of that activity ithin his

home state

eans more than maintaining an office! boos! and records in one state

When a corporation is being set up and it intends to use proceeds in one

state, but then intentions are genuinely changed and proceeds go

elsehere, may still qualify for e'emption 8f compan# is being set up! the intent to invest proceeds elsewhere ma#

suffice to defeat a claim of e+emption

. Doing %usiness 8nterpretation 0ecurities $elease 5-

Principal or predominant business must be conducted in the state

0ubstantiall# all of the proceeds must be used in the local area

". Rule 1!= Safe *arbor for Intrastate 6fferings

1. 8ntegration

8ssue does not include offers or sales made more than si+ months before ormore than si+ months after an# offers or sales made under the rule

Two offerings will not be considered one if the# are si+ months apart

. Doing %usiness

F-6 of the revenues and assets of the compan# are located within the state

F-6 of the proceeds from the offering are to be used in the state

". $esidence

Principal residence (can be a resident of more than one state! but principal

residence is where #ou spend more time)

8f a corporation! residence is where its principal office is

5. /oming to $est

0hares have come to rest when the# have been held b# initial purchaser for

nine months

After this the resident can sell to a nonresident

. Technical /ompliance a#


43/103

b.


44/103

$estrictions on resale under $ule 155

$ule 155 is not applicable here

g. 8ssuer Oualifications

*+change Act reporting companies ma# use it

orm D must be filed with 0*/ within 1 da#s after the first

sale

>ailure to file will not cause the issuer to lose the e+emption but ma#

?eopardie the chance of using a future $egulation D e+emptioni. 8nformation $equirements

8f purchased solel# b# accredited investors! no information required

8f purchased b# non'accredited investors 0ee /hart

?. 8ntegration 0afe 2arbor

8f offer is more than 9 months before or after! 0*/ won7t integrate

". Rule 40:(nder J5())a. Aggregate &ffering Price

nlimited b=c under J5()

b.


45/103

>ailure to file will not cause the issuer to lose the e+emption but ma#

?eopardie the chance of using a future $egulation D e+emptioni. 8nformation $equirements

8f purchased solel# b# accredited investors! no information required

8f purchased b# non'accredited investors 0ee /hart

?. 8ntegration 0afe 2arbor 8f offer is more than 9 months before or after! 0*/ won7t integrate

5. $ule -F

!n certain circumstances, an insignificant deviation from requirements

ill not result in the loss of e'emption if there is a good faith and

reasonable attempt by the issuer to comply ith the 7ule

. 8nterpretation 0ecurities $elease 95

a. Accredited In/estors$ule -1(a)

An investor is accredited if he falls into one of the enumerated categories at

the time of the sale of securities to that person

>or a compan# to be an accredited investor! all of the equit# owners must

also be an accredited investor

*+ecutive officer the e+ecutive officer of a parent of the $egulation D

issuer that performs a polic# maing function for the subsidiar# is ane+ecutive officer of the subsidiar#

b. (isclosure to potential in/estors

An issuer ma# provide a summar# of information followed up b# a

complete disclosure document if does not obscure material information

Hhen rel#ing on $ule - if initiall# plan to onl# sell to accreditedinvestors! mae sales to them! and then decide to sell to non'accreditedinvestors issuer must deliver a complete disclosure document to all

investors and agree to return the funds of those who have alread# bought if do this will not lose e+emption

c. "ounting Purcasers Rule 401e5

8f an accredited purchaser lives with his cousin and both are bu#ing both

are e+cluded

Partnership shall count as one purchaser and issuer does not have to

consider the sophistication of each individual partner

9. Aggregation and 8ntegration Problemsa. eneral $ules

&fferings under J"(b) ($ules -5 and -) have to be aggregated if within

a twelve month period to mae sure fall within dollar limitation

8ntegration safe harbor is si+ months before and after

5


46/103

b. C months since public offering and $ule -9 safe harbor is used to mae a privateoffering

aggregation is not a problem

8ntegration these are si+ months apart so deemed to not be integrated

c. " months since public offering and $ule -9 safe harbor is used to mae a private

offering Problem with integration. 0*/ might find that the public and private

offering are part of the same offering and require that the ndbe registeredalso

2ave to loo at factors to determine if the# will be integrated

d. C months since public offering and $ule - is used to mae the ndoffering

$ule - has a , aggregate limit.

8ut, only other -(b) e'emptions get aggregated(so do not have to

aggregate public and private offerings)e. se - to mae ndoffering and C months later use $ule -5 to mae another

offer

Aggregation is a problem

>or $ule -5 onl# get ,1 less an# other J"(b) e+emptions within prior 1

months

*. Regulation A(0ection "(b) e+emption so , amount can change)1. *ffect

*+emption from registration requirements of the securities act

ini registration with offering statement that must be filed

sed less frequentl# now due to simplified registration forms

. Dollar :imit

&nl# , of securities ma# be sold in a 1 month period! and ,1. ofthat ma# be sold b# securit# holders

". Hho /annot se

7"5 Act reporting companies cannot use

when e+empt securities from registration do so to help small

businesses

7"5 act companies are not intended beneficiaries

must be a 0 or /anadian compan#

cann have run afoul of specified laws in the past

5. Testing the Haters Allowed

8ssuer ma# test the waters before filing of an offering statement! b# oraland written communications to potential bu#ers that are designed to gaugeinterest in the offering

). Section !:5

1. 0tatutor# :anguage

6he provisions of section 5 shall not apply to transactions involving

offers or sales by an issuer solely to one or more accredited investors

59


47/103

. :imitations

one# raised is limited to amount specified in J"(b) (,)

$ssuer must file the required notice %ith the !&'

(. )ccredited $nvestor

8ncludes certain institutions! such as bans and insurance companies and

an# person who on the basis of such factors as financial sophistication! networth! nowledge! and e+perience in financial matters or amount of assetsunder management qualifies under rules

$ule 1 for natural persons if net worth with one7s spouse of more than

,1 or net income of more than ,--!--- in each of the two most recent#ears (or ,"--!--- ?ointl# with ones spouse)

G. Regulation "E

1. /alifornia *+emption. , /eiling on amount raised". :imited to /alifornia 8ssuers

:imited to /A issuers and non'/A issuers that have more than -6 of theirpropert#! pa#roll! and sales in that state! so long as more than -6 of thenon'/A issuer7s voting securities are hold of record b# persons havingaddresses in /alifornia

5. ust satisf# requirement of 1- of /A code

*. Rule =01

1. or companies who wish to sell stoc to their emplo#ees". Dollar limit (that can be changed b# 0*/)

*nacted under power of J"(b) so dollar limit can be ad?usted b# 0*/

,. Regulation of Resales of SecuritiesA. 8ntroduction

1. Biolation of 0ection

Applicable in the conte+t of re'sales

nless a registration statement is in effect or there is an e+ception for the

securit#! an# resales or deliver# after re'sale of such securit# would be aviolation of J

. &nl# 8ssuer a# $egister

0ecurit# holders can! however! bargain for registration rights (right tocompel the issuer to register for purpose of resale) or Pigg# %ac $ights (ifissuer registers some securities the# will also register their securities forresale)

". Hhen 0hares


48/103

5. 0ection 5(1)a. 0tatutor# :anguage

The provisions of section shall not appl# to transactions b# an# person

other than an issuer! underwriter! or dealerb. 8ssuer

*ver# person who issues or proposes to issue an# securit#c. Dealer

An# person who engages either for all or part of his time! directl# or

indirectl# as an agent! broer! or principal! in the business of offering!bu#ing! selling! or otherwise dealing or trading in securities issued b#another person

d. nderwriter(1) enerall#

An# person who purchased from an issuer with a view to distribution

An# person who offers or sells for an issuer in connection with a

distribution

() Definition of 8ssuer 8ncludes control persons

0o someone who bu#s from a control person with a view to distribution

is an underwriter

#. "ontrol and Restricted Securities

1. /ontrola. /ontrol 0ecurities

0ecurities owned b# a person who is an affiliate of the issuer

Affiliate

Person that directl# or indirectl# through one or more intermediariescontrols or is controlled b# or is under common control with theperson specified

b. /ontrol Person

Term control means the possession! direct or indirect! of the power to direct

or cause the direction of management and policies of a person whetherthrough the ownership of securities

c. Amount of 0ecurities


49/103

/overs a securit# that at one point were sold b# the issuer under a J5()

non public offering e+emption

/overs a securit# sold under J5(9) (sale to onl# accredited investors)

b. 0ecurities acquired from an issuer that are sub?ect to the resale limitations of $ule-(d) under $eg. D or rule C-1(c)

8ncludes securities purchased directl# from an issuer in a n# transactionunder rule - and -9

c. >ungibilit#

8f a person owns both restricted and non'restricted securities of the same

class and from the same issuer! the non'restricted securities tae on thetaint of the restricted status

". Sales of "ontrol Securities

1. (efinition of 7nder'riter

An# person who has purchased from an issuer or an affiliate of the issuer

with a view to distribution

An# person who offers or sells for an issuer or an affiliate of the issuer in

connection with a distribution

8ssuer includes control persons

. *ffect

!f you buy from a control person ith a vie to distribution you are

an underriter and cannot claim the (") e'emption

!f you sell shares of a control person in connection ith a distribution

you are an underriter and cannot claim the (") e'emption

8f a securities firm handles the sale as a dealer (bu#s the securities

themselves with the idea of reselling them) ma# be considered to have

3purchased from an issuer with a view to distribution4 maes them anunderwriter

". eaning of+istribution

0#non#mous withpublic offering

!. Exeptions

nderwriter


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b. 2olding(1) Has the %roer an nderwriterG Qes

nderwriter An# person who offers or sells for an issuer or an affiliate of

the issuer in connection with a distribution

2ere the broer sold for an issuer (control persons are issuers) in

connection with a distribution DistributionG Qes

0*/ is willing to allow control securities to tricle into the maret!

but it will not allow a flood

A distribution comprises the entire process b# which in the course

of a public offering the bloc of securities is dispersed andultimatel# comes to rest

() /an the %roer avail himself the J5(5) %roer7s e+emptionG


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Those who offer or sell for control persons are underwriters unless

the# do so unnowingl#

8f what is going on is not a distribution! then #ou will be oa# b=c no one is an

underwriter and then control persons are not selling through an underwriter

c. 0ummar# /ontrol persons can cause problems for broers

/ontrol persons can cause problems for themselves b# selling through

underwriters

(. Sale of Restricted Securities

1. eneral

$estricted securities should be sold under $ule 155

%ut the# do not have to be and ma# be re'sold outside the rule b# going naed

under J5(1)

Hhen doing this 0*/ interpretations are important

0mall unrelated purchaser of 16 of the stoc /an the# turn around the ne+t da#

after bu#ing and resell in a private offering securit#G

Problem view towards distribution

person ho purchases securities in a private placement and then

resells in a public trading market is an underriter if she purchased ith

a vie to distribution(as an underwriter the# cannot use J5(1))

8ssuers often place resale restrictions on privatel# places securities to avoid

having the issuance converted into a public distribution sub?ect toregistration

ain 8ssue Hhat is meant b# purchasing with a view to distributionG

2ow long a holding period is required to avoid the problemG


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a. Argument planned to hold for investment but due to a change in circumstanceshad to sell b=c needed the mone#

b. 0*/ loos ver# diml# on this and won7t accept! but some courts endorse and allowit to save someone who did not register

/ourts will allow it to shorten the acceptable holding period

5. Putting :egends &n 0toca. when purchase from issuer the issuer wants to establish not involved in a

distribution so it will restrict the sale of the stocb. also for purchasers benefit b=c if the# tae the securit# with legend it should the#

planned on holding them for investment

this means no view to distribution and therefore not an underwriter when

eventuall# resell

E. Rule 1!! Persons (eeed >ot to #e Engaged in a (istribution and erefore >ot

7nder'riters

1. eneral Ha# for holders of restricted securities or control persons to sell their shares

compliance with the $ule secures a J5(a) e+emption

The rule defines what is not a distribution and therefore when a person is not an

underwriter

All sales must follow the amount! manner and notice requirements below

2. "ategories of Re8uireents

a. /urrent Public 8nformation

ust be publicl# available specified current information concerning the issuer

7"5 Act compan# has sufficient information available to satisf# man# companies will therefore register voluntaril# so can use this rule

ma# also increase price due to liquidit# b=c there will be enough

information to use this ruleb. 2olding Period for $estricted 0ecurities

&ne #ear

>or a non'affiliate a two #ear holding period means #ou are home free

c. :imitation on amount of securities sold

reater of

16 of the class of securities outstanding; or

average weel# trading volume of the class of securities during the

preceding four weesd. anner of 0ale

ust be sold in a broer7s transaction or directl# to a maret maer


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". ae >low /hart

). Pri/ate Re-sales Rule 1!!A

1. $equirements for safe harbor (155A)

a. Available onl# for re'sale (not for issuers)b. Purchaser must be a 3Oualified 8nstitutional %u#er4

eans certain entities (insurance compan#! investment compan#! emplo#ee

benefit plan! trust fund) owning and investing on a discretionar# basis atleast ,1-- illion in securities of issuers that are not affiliated with theentit#

c. 0ecurit# must be non'fungible with a publicl# traded maret (whatever thatmeansGGGG)

d. odest information required to be delivered to purchasers

8ssuer ma# have to provide information through contract with purchaser

/reation of after maret for securit# that will not get bac to the public

f.


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Purchaser must agree to contractual restriction restricting the sale

. 0taff :etter (page "C)

2. Deemed nderwriter under $ule 15 (A0)

a. $ule 15(c) Persons and Parties Deemed to be nderwriters

b. $ule 15(d) $esale Provisions for Persons and Parties Deemed nderwriters8. $ewor 0ituation C

,I. ;33 Act &iabilit%

A. 8ntroduction1. /riminal :iabilit#

J 3nless a registration statement is in effect as to a securit#! it shall be

unlawful4

J1C broad anti'fraud provision

J5 willful violation of the act is punishable b# imprisonment and ,1-!--- fine

. /ivil Actions %rought b# overnment

a. 0ection FA issue cease and desist orders

b. 0ection -(d) as a district court to imposed a penalt#c. 0*/ no authorit# to bring aiding and abetting actions under the 0ecurities act or its

rules

nder the *+change Act can bring aiding and abetting actions for

violations of those rules (0ection -)". /ivil :iabilit# to private parties

J11 private right of action for damages based on a material misrepresentation in

a registration statement J1(a)(1) private right of action to rescind deal that had violation of J

J1(a)() private right of action to rescind for material misrepresentation from

prospectus (J1C)

#. "riinal and 6ter Go/ernental Actions

1. eaning of Hillful under J5a. 0*/ Administrative Action

Does not require a finding of intention to violate the law

ufficient that registrants be shon to have knon hat they ere doing

b. nited 0tates v. %rown (Eth/ir. 1ECF) Government is required to prove specific intent only as it relates to the action

constitution the fraudulent, misleading, or deceitful conduct, but not as to

the knoledge that the instrument used is a security

Do not have to show D new of J1C! or what he was doing is legall# 3fraud4 or

new the# were selling a securit#

5


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Must have to that he was aware that what he was sa#ing was untrue or

fraudulent in the general sense

. *ffect of Murisdictional eans

*ach separate use of these means is a separate violation

". 0*/ Power over /riminal and /ivil Biolationsa. 0*/ does not have the power to bring criminal actions

J- 0*/ can formall# investigate

J-(a) can bring action seeing in?unctive relief

J-(b) transmit evidence to attorne# general who ma# then institute the

necessar# criminal proceedings

b. /ivil Actions

JFA can bring actions seeing civil penalties and to issue cease and desist

orders

J-(d) power to see civil penalties

penalt# varies with culpabilit# and ris to public of violations

,!--',11-!--- for individual

,!---',-!--- for others

but penalt# can be as high as gain to violator as a result of the

violation

$ule E can reduce amount for small entities

0*/ can bring aiding and abetting action under *+change Act for violation of

its rules! but not under the 0ecurities Actc. /ourt7s Power

J-(e) prohibit a person who has violated J1C(a)(1) from acting as an

officer or director of a compan# that has securities registered under J1

". "i/il &iabilit% Section 11

1. 0tatutor# :anguage

8f part of the registration statementwhen it became effective contained an untrue

statement of a material fact or omitsto state a material fact required to be statedtherein or necessar# to mae the statements no therein misleading . . . may sue.

. eneral 8ssuesa. Plaintiff7s /ase

Proper plaintiff Proper defendant

aterial isrepresentation of omission

a# have to show reliance (1 month earning statement available)

b. Defenses Available

/ulpabilit# ' Due diligence defense

$esign and squeal


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:ac of loss causation to reduce damages ' J11(e)

%espeas caution doctrine

0tatute of limitations J1"

P new about omission or misstatement

$ebut part of P7s case

JCA and $ule 1C safe harbor for forward looing statements

b. Damages

/alculated under J11(e)

Moint and several liabilit# J11(f)

Proportionate liabilit# for outside directors ' J1D(f)

". /ommon :aw of isrepresentationa. aterial isrepresentationb. /ulpabilit#

Baries b# ?urisdiction

c. /ausation Transaction general causation (reliance)

:oss causation prove that but for the D7s wrong P would not have incurred

the in?ur#d. Damages

5. Proper Plaintiffa$ purchaser of a registered security may sue under "" irrespective of hether he

or she purchased the security in the registered offering or later in the trading

markets

b. 0ection 1" must bring suit before statute of limitations run

&ne #ear after discover# of untrue statement or one #ear after discover#

should have been made b# the e+ercise of reasonable diligence

. Proper Defendant 0ection 11(a)a. *ver# Person who 0igned the $egistration statement

8ncludes the issuer! /*&! />&! H

b. *ver# director at the time of filingc. *ver# underwriter with respect to such securit#d. Accountants and people whose profession allow them to put their name on the

registration statement as having prepared it or certified part of it

8f prepare! but name does not appear in it as having written a portion! then noliabilit#

8f named and part attributed to #ou! ma# be liable (but onl# responsible for part

#ou prepared and certified)

8f law firm named! firm liable but not specificall# an individual attorne#

9. aterial isrepresentationa. aterial

9


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0ubstantial lielihood that a reasonable investor would attach importance in

determining whether the purchase the securit# registeredb. &b?ective 0tandard

>or number figures 1-6 is a good ball par figure (if assets misstated b# 1-6)

C. %espeas /aution Doctrine (Ta? ahal :itigation)a. eneral Doctrine

8nclusion of sufficient cautionar# statements in a prospectus renders

misrepresentations and omissions contained therein immaterial

8f D7s mae the ris adequatel# clear! and hedge the statement with cautionar#

language! then something that would ordinaril# be material is immaterial


58/103

%ecause aware of all relevant facts cannot believe there were no untrue

statements or material omissions


59/103

Damages are calculated b# the difference between the offering price in the

registered offering and the value of the securities at the time of the suit (or theprice at which the P disposed of them earlier)

b. nderwriter


60/103

the intermediate seller can then turn around and sue the seller that

the# bought from() Pinter v. Dahl (1EFF)

Definite liabilit# for person who passes title (privit#)

3seller4 also e+tends to person who successfull# solicits the purchase!

motivated at least in part b# a desire to serve his own financial interest orthose of the securities owner4

important to protect investors at solicitation stage

willing to put liabilit# on agent of real seller b=c the# usuall# do the

bad act

construed the same for purposes of J1(a)()

". D has offered or sold in violation of Ja. *ffect

P does not have to show cause! damages! or culpabilit#

0trict liabilit# provision to discourage violations of registration provisionsb. nclean 2ands Defense (>uller)

8f can show person tr#ing to rescind is ?ust as guilt# as D court will have

s#mpath#

0o even though a technical violation there is a possible unclean hands

defensec. 0tatute of :imitations is a Defense

d. /uring occurrence of bad act (Disin)

D sent an illegal written offer (sent offer without prospectus) and later sent

a proper final prospectus after registration statement became effective

0trict :iabilit# Provision with no opportunit# to cure b# sendingprospectus later

&nce D messes up under J! purchaser can get out of the deal

Advice once mess up stop the deal! allow for a cooling off

period and start all over again

Also! one bad apple will ruin all offers in the entire offering so will

have to stop all offers

E. "i/il &iabilit%


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5. Proper Defendant

0ame as in J1(a)(1)

*ither transferor of title or solicitor with a financial interest (Pinter)

. Definition of the %ad Act (ustafson)a. enerall#

aterial misrepresentation in a prospectus or in an oral communicationrelating to a prospectus

b. Defining Prospectus(1) 8ssue

Hhether the right to rescission e+tends to a private! secondar# transaction

on the theor# that recitations in the purchase agreement are part of aprospectus.

() >acts

0ole shareholders or Allo#d sold their stoc to an investor group

roup claimed that in the contract for sale! there was a misrepresentation of

companies financial position and want rescission(") 2olding

Hord 3prospectus4 is a term of art referring to a document that describes a

public offering of securities b# an issuer or controlling shareholder.

The contract of sale! and its recitations were not held out to the

public and were not a prospectus as the term is used in the 7"" Act

%ecause the communication (contract for sale) was not a prospectus! J1(a)

() is not activated

8ntent of /ongress and design of statute require that J1(a)() liabilit# be

limited to public offerings

/ontract for sale is not a prospectus b=c was not the prospectus described in

J1- and filed in a registered public offering(5) Dissent

:ooed at definition of prospectus in J(a)(1-) and determined that a

contract for sale fit() *ffect of


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C. 0tatute of :imitations J1"

&ne #ear of discover# of misstatement or omission or after its discover# should

have been made b# the e+ercise of reasonable diligence &$

Three #ears after sale

F. Defenses for Defendanta. nowledge

(1) %ut D can defeat a claim b# showing that he did not now! and in the e+erciseof reasonable care could not have nown of the material misstatement oromission

() 0imilarit# with Due Diligence Defense (


63/103

*+ception controlling person had not nowledge of or reasonable grounds to

believe in the e+istence of fact b# reason of which the liabilit# of the controlledperson is alleged to e+ist

. $equirements for D to fall under e+ception

8f new or reasonable should have nown #ou are liable

0ome courts sa# if don7t tr# to monitor! will charge #ou with nowledge #ouwould have had if the# had done reasonable investigation

". Hho is a control personGa. 3ever# person who! b# or through stoc ownership! agenc#! or otherwise! or in

connection with an agreement has these things controls an# person liable underJ11 or J1

b. *asil# includes ma?or shareholders! directors! and officersc. 0tadia &il v. Hhellis (1-th/ir. 1EC)

Term given a broad definition

/ontrol organier of compan#! B.P.! one of three directors! signed stoc

certificates! presided over board meetings where sale discussed

/ontrol will be determined b# looing at characteristics from other cases that

found control

/autionar# tale do not have to own E-6 of stoc to be a control person

5. $ole of /ulpabilit#a. 0ome courts require a showing of culpabilit# b# the Pb. &thers require a lac of culpabilit# to be raised b# the defendant as an affirmative

defense

G. Section 1=a5 and Iplied Pri/ate Rigts of Action

1. 0tatutor# :anguage nlawful in the offer or sale of an# securities

a. to emplo# an# device! scheme! or artifice to defraud! orb. to obtain mone# or propert# b# means of untrue statement of a material fact or an#omission

c. to engage in an# transaction! practice! or course of business which operates orwould operate as a fraud or deceit upon the purchaser

. /ort >actors (implied right of action)a. 8s the plaintiff of the class for whose especial benefit the statute was enactedGb. 8s there an# indication of legislative intent to give a private right of actionGc. 8s it consistent with the underl#ing purpose of the legislative scheme to impl# a

remed# for the PGd. 8s this sub?ect matter traditionall# relegated to state law! in an area basicall# the

concern of the statesG". Hashington Public Power 0uppl# 0#stem (1EFC)

a. %acground

/ompan# defaulted on bonds bought b# the P7s

/ould not sue under J11 b=c were not required to be register and can7t sue

under J1(a)() b=c does not appl# to government securitiesb. 8ssue

!s there a private right of action under "?(a)< 9=

9"


64/103

c. 2olding

/ourt applied the /ort factors

4 must establish that /ongress intended to imply a private right or at least

that it is consistent ith the legislative scheme

>ailure to satisf# these two factors is determinative even if show

#ou were in class meant to be benefited /ourt will not find a private right of action if /ongress did not intend one even

if P is the intended beneficiar# and not state law implication

/ongress did not intend a private right of action under J1C(a)

d. Arguments to be made(1) Hhen /ongress wanted a private damages remed#! it new how to do it and it

did so e+pressl# (J11 and J1)

8f it new how to do it and did not do it here! must not have wanted

one() Prevailing :egal /onte+t

8f provision is construed consistentl# in one wa# and /ongress

amends statute and leaves it alone seen as an affirmation thatthe# intended that interpretation

/annot infer this when the views among the courts is split

(") Hho was intended to benefit from the statuteG

*nacted to protect investors or issuers or whoG

(5) $emed# at 0tate :aw

8f there is a remed# at state law! this cuts against a finding of a

private remed# in federal law() :egislative 8ntent

:oo to legislative histor# and committee reports

(9) /onsistent with :egislative 0cheme The presence of e+press civil remedies within the same statute

militates against a finding of /ongressional intent to impl# furtherremedies

*+press private rights have bells and whistles that would not be

present in implied private right (get out of procedural limitationslie statute of limitations (J1")

Hould impl#ing a private right be superfluousG

Presumption that a remed# was deliberatel# omitted from a statute

is strongest wen /ongress has enacted a comprehensive legislative

scheme including an integrated s#stem of procedures forenforcement5. /onte+t

a. ost courts have concluded that there is not a private right of action under J1Cb. %ut! ripe for review after ustafson

/ase cut bac drasticall# on coverage of J1(a)()! J11 (onl# appl# in public

offerings)

95


65/103

0o not as much overlap as court ma# have thought b=c J1C onl# applies in

private offerings

*. Indenification and "ontribution

1. Difference

a. /ontribution when one person is held liable and others who are guilt# are notinitiall# sued! the person who is sued and required to pa# under ?oint and severalliabilit# will go to other wrongdoers and get mone# for their part in violation

b. 8ndemnification one part# agrees to hold the other part# harmless and pa# an#damages the# must pa#

. /ontribution J11(f)a. 0tatutor# :anguage

rants right of contribution to an# person liable under the section if the

person the# are seeing contribution from would have been liable to maethe same pa#ment

/annot see contribution under this section from person who is not guilt#of fraudulent misrepresentation

b. :iabilit# of &utside Directors

Proportionate liabilit# of section 1D(g) appl#

c. Also available under J1C(a) and J1 and *+change Act $ule 1-b'

". 8ndemnificationa. 0*/ Position

8ndemnification is against public polic#

An# provision granting indemnification is unenforceable

b. lobus v. :aw $esearch 0ervices (Ct

Securities Regulation - Gabaldon - Spring 2000

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Transcript of Securities Regulation - Gabaldon - Spring 2000