Security Supplement

8/18/2019 Security Supplement

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Securities Regulation Yadav

Spring 2014

I. Introductiona. Regulatory Rationales

i. Investor Protection1. If you can’t tell who is honest and who isn’t, investors will

discount the whole market or leave the market entirely(a)Stated goal, key rational for securities regulation

ii. Information Asymmetries1. Curing information asymmetries2. Information levels are not uniform, insiders have etter

access to information

iii.Collective Action Prolemsiv. !"cient and #air $ar%ets

1. !e "resume investors are rational, ut they aren’t so weneed rules to control investor fren#ies(a)Control fren#ies y slowing down the "rocess, "roviding

info, and making sure "eo"le are aware of it.$. International %ers"ective

(a)&S seen as the "remier venue to trade securities, moremoney comes in and com"anies get a oost fromtrading on well regulated and e'cient markets

v. Corporate &overnance

1. Reduces agency costs and encourages good cor"orategovernance

. '(at is a Security)i. Securities Act of 1*++ ,2-a-1 !hen used in this title,

unless the contet otherwise re*uires+he term securitymeans any note, stoc% , treasury stock, security future,security-ased swa", ond, deenture, evidence ofindetedness, certicate of interest/ investmentcontract/ 01. oundational *uestion+if not a security, the Sec Reg

Framework does not apply $. 2ey "hrases in this denition3 investment contract0 and

unless the contet otherwise re*uires0(a)4ust determine if the instrument in *uestion is3

(i) 5n the list(ii)Could e considered an investment contract(iii) 5r if this is an area the securities laws should

e a""lied (unless the contet otherwise re*uires0)


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ii. /Investment Contract1. Catch-all "rovision3 intended to "rovide 6eiility to the

framework$. 7uris"rudence has struggled to "rovide an eact denition

+must make arguments

8. SEC v. Howey 3 91 out of staters w: no citrus knowledge aresold orange, most of them have 1; year service contracts!:o cancellation. he oranges are "ooled, and function asa singular farm.


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a "ension= 5r was it rather an attenuatedrelationshi"=01. Aaniel was working for his livelihood, not making

an investment.


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%rivilege com"anies guaranteed 1;K return, which were"aid for y new "layers coming in and contriutingmoney. Looks like a "on#i scheme.(i) Court nds hori#ontal commonality, "ooling and

sharing

1. 5utcome orientated udgment ased onmani"ulative "on#i and "yramid scheme$. Counter argument, no "ooling :c investors get

di@erent returns(ii)!rongly decided=

1. Like in Aaniel, consum"tion:entertainment valueof the game was the real reason for "laying, notan investment

+. ed to e5pect pro6ts(a))nited Housing Foundation v. Forman3 Large housing co-

o" is o"erated y non-"rot organi#ation &. In orderto raise money for e"enses, & issues stock andmakes its "urchase a necessary "rere*uisite to owning ahousing unit. Stock is recoverale, non-transferale,and has not voting rights. enants sue when monthlycosts go u".(i) Court looks at sustance and nds not a security

echange, sim"ly calling it a stock not enough-ii Pro6ts re8uire capital appreciation or

participation in earnings9 real money1. Bo real way for tenants to make money, income

from "arking s"aces or laundry too s"eculativeand insustantial, ta and low rent enets aren’t"rot.

(iii) Shares were "urchased to use or consume, notfor nancial reasons1. Inducement was low cost housing, not "rots.

Can’t even sell shares for "rot()SEC v. Edwards3 GS sells "ay "hones w: ed return.

Investors ought and leased ack to "romoter who"romised MN$ "er month.(i) Court 6nds investment contracts can (ave

65ed returns9 no distinction from varialereturns.1. %romises of ed, low risk returns may "rove

"articularly attractive for vulnerale, lessso"histicated investors who may e most in needof the "rotections of the securities laws.


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$. Aoesn’t t "erfectly w: hori#ontal commonality,ut has een reconciled as a discrete return yunit.

(ii) *ar'eld v. +lani 3 Charitale gift annuity "romiseslifetime stream of income and then remaining

"rinci"le is donated to a charity of choice. hescheme colla"ses w: little to no charitale "ayments. O argues "eo"le weren’t investing money, never hadan e"ectation of "rot :c they were charitaledonations.1. Court loo%s to (at investor ere promised9

loo%s at t(e promotional materials9 (ic(emp(asi:ed investment and long;termincome production.a. 4arketed as an investment, "resented as an

o""ortunity for nancial gain

.


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8. So de"endent on uni*ue aility to "romoter thathe cannot e re"laced, no "ractical control.a.


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a. Court re?ects distinction of manageriale7orts efore and after t(e purc(ase9investors dependent on t(e manageriale7orts of t(e promoter efore t(eirpurc(ase.

. Ae"arture from the AC Cir. in SEC v. #ife5artners, where court distinguished "re-"urchase e@orts, the value of which hadalready een im"ounded into the "romotersfees or "urchase "rice, from "ost "[email protected]. If neither the "romoter nor anyone else is

e"ected to make further e@orts that willa@ect the outcome of the investment, thenthe need for federal securities regulation isgreatly diminished.0

ii. Stoc% 1. &nlike investment contract, looking to see if instrument is

"ro"erly laeled.2. #andreth !im$er Company v. #andreth3 P uys all the stock

in a timer com"any from Landreth, kee"s Landreth on asa consultant, sells for a loss, sues under ’88 and ’8Q


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’88


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$.


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(a)Boninding terms tw issuer and underwriter thatallows them to egin writing the underwritingagreement

$. &nderwriting


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$. Introduces crowdfundingii. Crowdfunding

1. Aonation 4odel+funders giving w: no e"ectation of return(a)G. Jloal giving

$. %erks 4odel+contriute to venture in return for a small

reward like merchandise(a)Is this a security=(i) Bo e"ectation of "rot

()G. 2IF


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(i) as undertaken a "ulic o@ering, ut is unale to useorm S-8, meaning that it has a 6oat of V MW94 andeen in the market V 1 year.

-c Seasoned issuer(i) %ulic com"any that is ale to use orm S-8, a 6oat

of X MW94 and een in the market X 1 year.-d 'HSI -'ell;Hnon Seasoned Issuer(i) as a "ulic 6oat of more than MW;;4, or issued

M1Eil aggregate "rinci"le amount of non-convertilesecurities, lots of leeway and "erks :c of "ulic info.

-e !merging grot( company(i) Bew from 75ES


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9(a)($) 9(a)($)


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manner which raises a serious *uestion, whether the"ulicity is not in fact "art of the selling e@ort.

Q. SEC Release 30923 #orecasts9 pro?ections9 orpredictions relating ut not limited to revenues, income,or earnings "er share. pinions concerning concerning

values.(a)If advertising is the same as the ordinary course ofusiness, then it is usually ok. &ncharacteristic silence isad.

B. '(at %ind of information conditions t(e mar%et)(a)iming is im"ortant, "oints to motivation()4ention of the underwriter(c) !ritten information is "articular trouling(d)4ass distriution is ad(e)Soft and forward looking information

iv. Safe harors

1. Rule 1T8< - all issuers have a right-line e5ception forcommunications made more t(an +0 days efore6ling a registration statement.(a) Caveats

(i) Cannot mention or refer to the o@ering(ii)4ust e made y the issuer or those working on

ehalf of the issuer, not the underwriter or dealer(iii) Issuer must take reasonale ste"s to "revent

further distriution or "ulication of thecommunication during the 8;-day "eriod "recedingthe ling of the registration statement.

$. Rule 1T8 - 'HSIs can engage in unlimited oral andritten o7ers efore a registration statement is6led.(a) Caveats

(i) 4ust e made y the issuer or those working onehalf of the issuer, not the underwriter or dealer.

(ii)4ust treat any treat any 1T8 communication as freewriting "ros"ectus and le it with the SGC "rom"tlyu"on ling the registrations statement.

(iii) !ritten communications must include a legend,re*uired y susection ()(1) of Rule 1T8, informing

investors aout the formal statutory "ros"ectus andhow to otain it.

(iv) 5vershadowed y shelf registration8. Rule 189 D 3omstone Safe aror, allows for short

factual notices of a "ro"osed registered o@ering, canmention the issuer, the amount, and asic terms. G. witter’s tweet. Gce"tion to $(a)(8).(a) Caveats


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(i) 5nly makes the communication not an o@er,0 doesnot change whether it might e in the form of a"ros"ectus.

(ii)Cannot mention underwriter(iii) 4aking a Rule 189 statement alerts the SGC

and class action attorneys aout your ling, "uts the"ressure on.Q. Rule 1T D non;reporting issuers can disclose factual

usiness information9 ut not forard loo%ingstatements9 and only if t(e intended audience is notinvestors9 ut ot(er parties li%e customers andsuppliers.(a) Caveats

(i) Rule 1T() denes factual usiness information1. Rule 1T()(1)(ii) includes advertising as factual

usiness information

(ii)Aoesn’t eem"t forward looking information,information aout the o@ering (although it may eallowed under Rules 189).

(iii) Rule 1T(d)($) time, manner, and form in whichinformation is released must e consistent w: "astreleases

(iv) Rule 1TT(d)(8) Can only release information tocustomers and su""liers, not investors or in theirca"acity as investors

(v)5nly a""lies to statements y or on ehalf of issuers.9. Rule 1TN - !5ception for reporting companies t(at

allos t(em to continue to release factual usinessinformation and forard;loo%ing statements. Includes"eriodic re"orts like 1;-2.(a) Caveats

(i) 5nly a""lies to statements y or on ehalf of issuers.(ii)1TN(d)($) time, manner, and form in which

information is released must e consistent w: "astreleases

(iii) G"ressly ecludes any information aout theregistered o@ering itself (although it may e allowedunder Rules 189).

T. 9(d) of Securities


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(i) !ritten materials cannot esca"e from the meetings+could e in violation of 9(c)

(ii)Can’t agree to any sales or deals, and you have tole any "romotional material with the SGC.

(iii)


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(d)hese "ros"ectuses must contain a legend that this it isnot a nal "ros"ectus and have a ca"tion saying%reliminary %ros"ectus.0

Q. Rule QW83 Gtension of time for registration statementiii.Safe arors

1. 5rdinary course of usiness safe harors, Rules 1TN Z 1Tstill a""ly, can e used to argue there is no o@er, so no"ros"ectus. Rule 18T< no longer a""lies. Rule 189 stilla""lies, ut Rule 18Q is roader.

$. Rule 18Q D ecludes communications from the denitions of a "ros"ectus and a free writing "ros"ectus that violate9()(1). roader tomstone safe (aror. Permits 22items including, disclosure of issuer’s identity andusiness location, amount and ty"e of security eingo@ered, usiness of the issuer, "rice of the security,address, "hone numer and email address of the issuer’s

"rinci"al o'ces, geogra"hic areas where it conductsusiness, names of all the underwriters, etc.(a)Caveats

(i) Rule 18Q() mandates the disclosure of certaininformation, including a oiler"late legend indicatingthat securities may not e sold "rior to theregistration ecomes e@ective.


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()Gnder Rule 1F49 a free riting prospectus t(atmeets t(e re8uirements of Rule 4++ is treated asa ,10- prospectus for t(e purpose of ,B--1.(i) Rule Q88()($) non-re"orting and unseasoned

issuers’ free writing "ros"ectus must e

accompanied or proceeded y statutory orpreliminary prospectus t(at satis6es ,10.(ii)Rule Q88(c)($) legend re8uirements (asically a

disclaimer)1. Legend goes where it can e seen most clearly.

5n to" of "age(iii) Rule Q88(c)(1) consistency re8uirement, no

information inconsistent w: led statutory "ros"ectusor registration statement

(iv) Rule Q88(d) must 6le free writing "ros"ectusw: SGC

(v)Rule Q88(g) issuers and o@ering "artici"ants mustretain free riting prospectus t(ey (ave usedfor + years.

(vi) Rule Q88(d)(N) 5nline Roadshows1. Can "ost one internet roadshow online w:o ling

with the SGC, ut any "ower "oint or "itch ookthat is included with must e a free writing"ros"ectus.

(vii) Rule Q88(f) allows use of mass media1. Rule Q88(f)(1)(i) Can’t "ay to "lay, no "ayment or

consideration, cannot initiate

$. Rule Q88(f)(1)(ii) 4ust le communication ortranscri"t with SGC

(viii) Rule Q88(e) 4akes wesite into a free writing"ros"ectus y hy"erlinking to registration statement

9. 1;T 75ES


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(c) inali#e and signing syndicate agreement(d)Set listing

$. &nder N(a), a registration statement is su""osed toecome e@ective $; days after ling, ut issuers don’twant their registrations to ecome e@ectively

automatically.(a)Rule QW8 delays e7ectiveness until t(e issuer isready

()5nce the issuer and underwriter are ready, they le anacceleration re*uest w: the SGC at least two days "riorto the o@erings desired e@ective date.

(c) Rule QT1 outlines the factors the SGC weighs in decidingwhether to grant the acceleration re8uest.

8. !hat ha""ens in the "ost e@ective "eriod(a)9(a) nolonger a""lies, underwriters and dealers selling

shares

()Aissemination of information(c) SGC wants material information distriuted to kee"

fren#y downii. Rules

1. 9()($) nal 1; "ros"ectus must accom"any or "roceedany sale

$. 9()(1) still a""lies, every written o@er needs to e a 1;"ros"ectus, including use of Q88, Q8;


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T. In order to meet Q(8), a dealer+"retty much anyoneworking as a "rofessional "rinci"al in securities+has towait until Q; days after the later of either (1) registrationstatement’s ecoming e@ective, or ($) security’s eingo@ered to the "ulic. or an I%5, the "eriod is ninety days

from the latest trigger.iv. Gce"tions to section 9()($)’s delivery re*uirement1. Rule 1W$(a) allows written conrmations of sales to not e

considered "ros"ectuses under 9()(1). Bow a roker canconrm a sale or inform an investor of the eact numer of shares they will e allocated in a distriuted securitywithout having to "rovide the investor with a nal"ros"ectus.

$. Rule 1W$() relaes the delivery re*uirements of 9()($)y "roviding that the oligation is satised at the time ofdelivery if the issuer has led a 1;(a) "ros"ectus with the

SGC and the issuer is not under investigation.8. Rule 1W8 re*uires issuers, underwriters, and dealers not

ling under an ece"tion in Q(8) or Rule 1WQ to le eithernotice that the sale was made "ursuant to a registrationstatement or a co"y of the nal "ros"ectus within $ days of delivery.

Q. Aealer’s Gce"tions(a)Section Q(Q)3 < dealer who is acting as an agent for a

uyer is a roker and eem"ted under section Q(Q).()4ust e unsolicited(c) Section Q(8)3 < dealer can always e ece"ted from

com"liance with 9()($) if it falls under one of thesection Q(8) ece"tions.

(d)Rule 1WQ3


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9. ree writings are still valid under Rules Q88 and 1TQ.

e. 'HSIs and S(elf Registrationi. Jenerally

1. he maor develo"ment in recent years has een allowing

com"anies that issue "eriodic re"orts under the ’8Q


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that the registrant has to u"date its nancial statementsannually.(i) Item 91$(a)(1)(i) also re*uires disclosure of any

event re"resenting a fundamental change0 to theinformation "resented in the registration statement

through means of a "ost-e@ective amendment.()he second "art of Rule Q19 goes further. S-8 re"ortingcom"anies (!2SIs) are now "ermitted to registersecurities with minimal limitations (name and class) solong as they e"ect to sell them within two years.


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(ii)Ey connecting the 1;(a) re*uirement that a"ros"ectus contain the information in theregistration statement0 with the court’s holding in4anor Bursing, the SGC has e@ectively created ana'rmative duty for those involved in the o@er to

constantly assess whether the "ros"ectus used in thedistriution must e u"dated or otherwise changedso as not to e materially misleading.

(iii) Rule Q$Q(a) sets out the rule that if the"ros"ectus used to sell the security+which will"resumaly e u"dated to avoid anti-fraud charges+has a sustantive change or addition,0 then the"arty has an a'rmative duty to add an amendmentto the led registration statement.

(iv) Rule Q$Q()(8)-(9) allows a milder remedy if theinformation is not a sustantive change or addition+

such information is added y adding a sticker to thecover "age of the "ros"ectus. his is not consideredan amendment of the registration statement.Stickering0 is also used after a seller has led anamendment to the registration statement under RuleQ$Q(a) and is waiting a""roval y the SGC.

(v)he maor im"act of the amendment rule is to resetthe clock for 11 liaility. !hen a "ost-e@ectiveamendment is declared e@ective, the entireregistration statement is considered to e u"dated asof the day of the amendment. If there are "rovisions

that are no longer accurate (even if they were notsustantive enough y themselves to need anamendment), they now can e grounds for 11liaility. urthermore, the statute of limitations for 11 runs from this day.

(vi) Section 1;(a)(8)3 if a seller uses a "ros"ectusto sell a security more than nine months after theregistration statement ecame e@ective, theinformation may not e more than 1T months old.&"dating a "ros"ectus to include more recentinformation does not need to e led as an

amendment to the registration statement.()Su""lementing Information that Is %ermitted to Ee

5mitted %rior to G@ectiveness(i) Rules Q8;


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(ii)Rule Q$Q()($) re*uires the "ricing amendment to eled within QN hours of the rst use.0

(iii) hese rules can have odd e@ects. Su""ose aseasoned com"any led a registration statement in 7anuary and then led notice of sales and "rice in

Se"temer. Su""ose further that etween 7anuaryand Se"temer, there was a material change thatshould have een re"orted in the registrationstatement, ut was not. Ey ling in Se"temer, thecom"any has o"ened itself u" to 11 liailityecause the registration statement is not correct onthat date. Bote that this only a""lies to the "ortionsof the registration statement relevant to theamendment.

. &ndertakings to &"date3(a)Rule Q19 shelf registration re*uires ling "ost-e@ective

amendments to the registration statement when(i) < "ros"ectus is re*uired y 1;(a)(ii)here has een a fundamental change in the

registration statement’s information(iii) Information aout the "lan of distriution has

undergone a material change or was omitted in therst "ros"ectus.

()


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1$(a)($) as well as 1;-9 if they commit fraudulentactions

iv. Ealance etween investor "rotection and issuer 6eiility1. !e want the &S market to e the most ada"tale and

6eile to attract com"anies to its markets

(a)!e trust "rivate analysts and auditors more than thecumersome SGC.(i) hus, when the risk of investor fraud is low+we "ut

more faith in ack end liaility rules to kee" issuershonest

()!ith unknown com"anies+need SGC :c only "layerale to evaluate new market entrants

v. 4ust rememer that SGC and securities regulation doesn’teist in a vacuum+where the "rivate market can regulateitself, the SGC should let it1. !here it can’t, the SGC needs to take control+hence the

ifurcated "rocess to the gun um"ing rules.

I.Private Placementsa. Q($) eem"ts transactions y an issuer not involving any "ulic

[email protected]. !hat is a "rivate o@ering=

i. Securities


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()he more discretely you can do it, the less likely it wille "ulic0

ii. SEC v. Ralston 5urina3 are %urina’s treasury stock o@erings tokey em"loyees "ulic= Bo, court nds the o@ering is pulic=c t(e o7erees aren>t t(e %ind of people (o can fend

for t(emselves.0. Court leaves o"en what *ualies someone as eing ale tofend for themselves, ut gives the eam"le of eecutive w:access to insider info

1. !hat is so"histication=/a4Circuits are s"ilt on what it is and if it matters.()"oran v. 5etroleum -anagement Corp. /3th Cir. 08


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$. Safe aror to the Q($) eem"tion, far more "redictalethan Q($) eem"tions

ii. Rule B041.


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(a)9;1(a)(1)D(8) an%s9 investment companies9 andot(er 6nancial institutions

()9;1(a)(Q) D Director9 e5ecute o"cer9 or generalpartner of the issuer(i) 9;1(f) D Gecutive o'cers "erform a "olicy making

functions(ii) Insiders(c)9;1(a)(9) D People = individual or ?oint net ort(

of = spouse t(at e5ceeds K1 million(i) 9;1(a)(9)(i)(


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viii. Determining Aggregate 7ering imits Gnder RuleB04 and B0B1. Rules 9;Q and 9;9 have limits on the aggregate o@ering

"rice-a Issuers must reduce t(e o7ering price ceiling

y t(e amount of securities sold in t(e previous12 mont(s under a ,+- e5emption -includingrules B04 and B0B or a violation of ,B.

()Rule 9;1(c) denes the aggregate o@ering "rice as thesum of all value the issuer receives for the security.Shares o@ered as consideration are calculated at theirsales value.

i5.Integration1. %revents issuers from undertaking re"eat o@erings under

di@erent headings of Reg A y characteri#ing o@ers

strategically.$.

(a)G. Aoing two 9;T o@erings w: 89 non-accreditedinvestors each, would make the rule irrelevant.

8. Securities t9 t(e try to 6t in under,4-29 if e can>t9 t(en e>ve violated ,B(i) 9 "enalty D "urchasers can sue for rescission


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(ii)Reg. A "enalty - aggregate o@ering "rice ceilingreduced

F. Re-salesa. Secondary market transactions are made "ossile y eem"tions

to 9i. Q(1) eem"ts transactions from 9 as long as no /issuerunderriter9 or dealer is present in t(e transaction .

ii. $(a)(11) denes underwriter as any "erson who purc(asesfrom an issuer it( a vie to distriution or o@ers orsells for an issuer in connection with a distriution1. Aisunctive analysis, have to do oth to e an underwriter

(a)view to0 Intent(i) ow do we estalish intent=

1. ime reduces intenta. s c(ange in

circumstances matter9 not t(e issuer>s.iii.


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. Control Person Resalesi. &nder $(a)(11) control "ersons are issuers for the "ur"oses

of dening underwriters1. < "erson "urchasing from a control "erson, selling for a

control "erson, or otherwise working with a control "erson

is an underwriter for the "ur"ose of the securities laws.$. he e@ect is that dealers and rokers who hel" control"ersons of an issuer get rid of stock are underwriters underthe securities laws, and thus create distriutions.

ii. Rule Q;9 denes control, "ower to control or direct mgmt. and"olicies, essentially a controlling shareholder.

iii. )nited States v. *olfson3 O owned Q;K of Continental for 1;years, not registered. e tries to sell securities throughrokers to the "ulic. Court holds that as a control person9(e is an issuer it(in t(e meaning of ,2-a-119 soro%ers are underriters not entitled to ,4-1

e5emption.iv. In real life everyone uses Rule 1QQ, whether you’re a control

"erson or notc. Rule 144 Resale Safe aror

i. If you com"ly w: Rule 1QQ you’re not an underwriter under$(a)(11)

ii. Ae"ends on the "resence of an a'liate or non-a'liate, andthe "resences of restricted or unrestricted securities.1. Rule 1QQ(a) a"liate is a "erson who controls or is

controlled y the issuer, a conventional control "erson2. Rule 1QQ(a)(8) restricted security is one that is not

registered, not ac*uired through a "ulic [email protected] 1QQ two "rongs

1. Is there enough info in the market=-a Gasy in*uire for re"orting com"anies making regular

lings- or non-re"orting, disclose the info you were given-c


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A"liate or one(alf of anA"liate

@on;A"liate

RestrictedSecurities ofReporting Issuers

During F mont((olding period D noresales "ermittedunder 1QQ

After F mont((olding period D

may resell inaccordance w: all 1QQre*uirementsincluding3

• Current "ulicinfo

• Folume limits

• 4anner of sale

re*uirements

• iling form 1QQ

During F mont((olding period D noresales "ermittedunder 1QQ

After F mont((olding period ut

efore one year Dunlimited "ulicresales under 1QQ,current "ulic infore*uirement stilla""lies.

After 1 year (oldingperiod - unlimited"ulic resales under1QQ, no need to

com"ly w: any other1QQ re*uirements

RestrictedSecurities of @on;Reporting Issuers

During 1 year(olding period D noresales "ermittedunder 1QQ

After 1 year (oldingperiod D may resell inaccordance w: all 1QQre*uirements

including3• Current "ulic

info

• Folume limits

• 4anner of sale

re*uirements

• iling form 1QQ

During 1 year(olding period D noresales "ermittedunder 1QQ

After 1 year (oldingperiod - unlimited"ulic resales under1QQ, no need to

com"ly w: any other1QQ re*uirements


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I. iaility Rulesa. Section 11

i. $aterial misstatements and omissions in registration

statementsii. Bo reliance, causation, scienter re*uirementiii. 4aor limiting factor is the standing re*uirement

1. 3racing Re8uirement(a)P must show that the s"ecific shares they "urchased

were sold as "art of the "ulic o@ering under theregistration statement that contained the allegedmisstatement.(i) Aue to the ease of "roving the cause of action+make

the "rocedural re*uirements of standing much moredi'cult. In "ractical terms, the standing re*uirement

"uts the rakes on this e"ansive "rovision.1.


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(c) If the P sold shares after filing, ut efore udgment, thevalue at which the P dis"osed of the shares if greaterthan their value of the ling

8. '(at is t(e value=(a)Bot the same as market "rice, contestale claim

(i) O will argue the value is higher than the market "riceand the P will argue the value is lower than themarket "rice1. eecher v. +$le3 P claimed that the value of the

stock at the time of suit was lower than marketvalue :c the market didn’t know all the ad stu@. O claimed that the value was higher than themarket "rice :c the market was de"ressed y"anic selling.a. Court nds that overall value was aove what

the market "rice was on the day of the suit.

v. Defenses1. 18 im"oses statute of limitations of one year from

discovery and 8 years from sale.$. 11(a) "rovides a defense for Os who can show P had

actual knowledge of the alleged fraud at the time of the"urchase.

8. 11()(1) may e a defense for O who resigns and notiesthe SGC.

Q. 11(e) Loss Causation Aefense - O can reduce damages yshowing that the loss in value0 was due to eternalcircumstances, not due to the misstatement in the

registration statement.9. 11() Aue Ailigence Aefense

(a)Individual Os can argue the due diligence defense

Bon-G"ertisedSection

G"ertised Section

G"ert Bo liaility 11(a)(Q) Reasonaleinvestigation,reasonale ground forelieving, and didelieve 11()(8)(E)

Bon-G"ert Reasonaleinvestigation,reasonale ground forelieving, and didelieve 11()(8)(


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1. Bo defense availale, SL(ii)Gvery "erson who signed the registration statement

11(a)(1)(iii) Airectors 11(a)($)Z(8)(iv)


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1. Short-term and shelf registration do not rela thedue diligence re*uirements for underwriters

(e)Rule 1WT attem"ts to clarify what constitutes areasonale investigation and reasonale grounds forelief under 11().

(i) he rule codies the sliding scale a""roach ofarChris

. Section 1$(a)(1)i. Private cause of action for violations of ,B gun;?umping

rules, such as selling unregistered securities or making anunintended o@er. Bothing to do with antifraud.

ii. Bo reliance, causation, scienter re*uirement SLiii. 5nly need to show a 9 violation involving a security they

"urchased and they can seek rescission.iv. Limited y standing,


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commerce were involved (urisdictional means) and (d) actionhas een rought w:n time stated in the SoLs found in 18.1. Shifts the urden3 If %lainti@ shows the elements aove,

that shifts the urden of "roof onto the defendant toestalish the availaility of an eem"tion from 9.

c. Section 1$(a)($)i. Private rig(t of action for misstatements or omissions

in t(e prospectus or oral communicationii. 5nly those who "urchased the security have standing to sue,

courts have a""lied 1$(a)(1) analysis from %rinter1. %rivity re*uirement

(a)Can only ring claim if you’re in initial distriution$. Can ring suit against seller and solicitor8. Rule 19(a) makes issuer liale for any 1$(a)($) violation,

making it slightly roader than 1$(a)(1)

iii.!hat is a "ros"ectus for "ur"oses of 1$(a)($)=-a (ustafson v. +lloyd3 Court starts w: 1;, which sets

forth the re*uirements of a "ros"ectus, and then read$(a)(1;) consistently w: 1;.-i ,12-a-2 only applies to pulic o7erings, not

"rivate transactions.-ii nly applies to oral communications t(at

relate to t(e prospectus-iii Includes Rule 4++A #ree 'riting

Prospectusiv. 4ost litigation comes from misleading advertising in the form

of reewriting %ros"ectusesv. Aefenses

1. 18 im"oses statute of limitations of one year fromdiscovery and 8 years from sale.

2. Aefense for Os who can show P had actual knowledge ofthe alleged fraud in the "ros"ectus at the time of the"urchase.

+. he due diligence defense for 1$(a)($) doesn’t include aninvestigation element like 11-a N escapes liaility if t(ey prove t(ey didn>t

%no of untrut( or omission9 and couldn>t (ave

%non in t(e e5ercise of reasonale care.4. 1$() Loss Causation - O can reduce liaility y showing

the dro" in "rice was due to factors unrelated to the fraud.vi. Aamages are rescission

1. %urchaser may rescind the transaction and get his moneyack with interest or recover rescissionary damages if hehas resold his stock


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d. Rule 1;-9i.


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(ii)


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1. Bot an a'rmative defense like in 11 or 1$, "art of thecase the P has to make

$. ave to show P’s loss was actually caused y O’s materialmisstatement or omission

8. "ura 5harmaceuticals, Inc. v. roudo3 Beed to "rove that

the loss is in fact caused y the misstatement, show "ricewas in fact de"ressed as a result of the fraud. %olicy

1. wo asic goals of 1;-93 Aeterrence and Com"ensation(a)Com"ensation3

(i) Investors only get ack an average of $\ of any M1lost

(ii) Investors with a diversied "ortfolio end u" as awash+invested in Ps and Os.

(iii) P’s attorney’s fees range from 1WK to 8;K$. Aeterrence3

(i) 5'cers committing o@ence often are indemnied yAZ5 Insurance+not "ersonally liale for fraud

(ii)%roceeds from the "rot may eceed the "enaltyim"osed+money making "ro"osition

8. !ho is harmed y fraud=(a)Gisting investors+have to sell as a discount()5ther com"anies+folks think they are also committing

fraud (not ust those who uy from a com"any)(c) Lenders+"otentially losing out on risk ca"ital(d)owever, only "eo"le who can recover are those who

"urchased or sold during fraud "eriod.

Security Supplement

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