07nash sec reg exam outline

8/12/2019 07Nash Sec Reg Exam Outline

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1933 Securities Act

Overview

Central Objective: preparation of a registration statement for securities offered to the public Act protects offereesin public distributions 5 is crucial component makes it illegal to

sell or offer to sell or

offer to buy without a valid registration statement on file

REGISTRATIO STATE!ETS

Infor"ation Re#uiredin Registration Statement see Sc$edule A Includes:

i! Info About Re%istrant S"# re$uires details on registrant%s business& property& management 'inancial Statements re$uired by Reg S"(

)*+A forces management to identify trends and developments Item ,-,! .igger companies can integrate using S"/ or S", below!

ii! Info about distribution and use of proceeds 01 must disclose terms of agreement and compensation Registrant must disclose

23pected net proceeds 23pected 0S2 of those proceeds

iii! &escription of Securitiesof Registrant Rights& 4rivileges of securities offered an 4rice and uantity offered )0S6 I7890*2 any provision that would subordinate rights to other security holders& dividend restrictions

iv! E'$ibits and (nderta)in%s

)ust include Articles of incorp& bylaws Attorney%s opinion as to legality of securities offered

Any #-" or #-" incorporated by reference ITEGRATE& &isclosure

*urpose: to eli"inate overlappin%and unnecessary disclosure Allows certain reportin% co"paniesto incorporate prior disclosures e;g; in #-"! into registration statements

T$ree +asic ,or"s

S-3 9arge reporting companies that have .een reporting for #/ months under #/ or #5d! A7* 5) in market cap held by non-affiliates

S-. Reporting 8ompanies not $ualified for S",

S-1 everyone else &ut/ to (pdate

If using shelf registration& must update by filing posteffective amendments

Review of Re%0 State"ents

0nder ?a! reg; statement becomes effective /- days after filing in reality& may take )08< longer SEC Review

,or"al process if statement deficient S28 can issue a Refusal @rder ?b!

Stop @rder ?d! etter of Co""ent !et$od all found more helpful if S28 issued letter commentingB on deficiencies

7ash Sec Reg 23am @utline 4age # of C?


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A &ela/in% A"end"ent keeps the reg statement from becoming effective until the S28 has no morecomments for the issuer

*elaying amendment is a 92D27* on the reg statement pursuant to rule 23 Acts as though issuer updated reg statement Eust before /- days passes to continually reset the clock

Selective Review S28 reviews all first time issuers

S28 Selectively reviews seasoned issuers Acceleration of Effectiveness Rule CF#

1hen reg; statement amended to S28 satisfaction& issuer will re$uest and S28 grant an acceleration don%thave to wait the /- days

*ricin% A"end"ent Denerally:

01 won%t sign contracts until reg statement ok%d by S28 Rule 234A allows

i! offerings of securities for cash to become effective w5out price infor"ation 4rice info must be given wGin #5 days after becoming effective

ii! Reductionin amount of Securities being offered so long as 7@6 )A62RIA9 /-H reduction considered not material

4roblems: i! Cannot ICREASE nu"berof shares without filing new reg statement Rule C#,!

ii! If "iss 16-da/ windowfor price information& $ave to refile *anger: posteffective amendments reset clock for Section ## liability if any info in reg; statement

changed& could be material omission or misstatement +lan) C$ec) Offerin%s Rule C#J Special rules apply for corps w5out specified business plan

!one/raised $eld in escrow 1hen issuer decides what to do with ?-H& issuer must

disclose plan to investors

Investors have option to get their money back 8annot escrow money for more than #? )onths after effective date of initial reg; statement

*lain En%lis$*isclosure Rule C/# Registrants re$uired to use plain englishB in reg statement and prospectus

Two t/pes of offerin%s

i! *ri"ar/ from an issuerB to the market ii! Secondar/ " the trading of securities btw investors on the markets e;g; 7KS2!

*ri"ar/ Offerin%s Generall/

*arties involvedin 4rimary @fferings i! (nderwritin% S/ndicate

9ead 0nderwriter ii! Sellin% Group the people that sell the securities iii! Investors those buying the securities

Consistent (nderpricin%

6rue in late J-%s and before 7o one really knows why Suggestions:

a! Dood publicity b! Reduces liability to underwriters

if price goes up& unlikely that investors will sue c! Reduce risk to 0nderwriter 8apital

01 often have money on table if overpriced they will lose money I' underpriced will have enough demand to fill subscription: won%t hold the bag

I4@ Shares 8@7SIS62769K 07*2R42R'@R) the market

7ash Sec Reg 23am @utline 4age / of C?


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(nderwriters

&efinitionof 0nderwriter 7.011 (nderwriterB means any person who has purc$asedfro" an issuerwith a view to& or offers or sells for an issuer

in connection wit$& the distributionof any security& or participates or has direct or indirect participation in any suchundertakingL but such term shall OT includea person whose interest is li"ited to a co""issionfrom an

underwriter or dealer not in e3cess of the usual and customary distributor%s or sellers% commission; As used in thisparagraph the term issuerB s$all include& in addition to an issuer& any person directly or indirectly controllin%orcontrolled by the issuer& or any person under direct or indirect control with the issuer

1


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Denerally: one or more I".ank firms buys the securities if they don%t sell them& they%re stuck with them

0nderwriting Ris) i"ited iabilit/ ##e! limits liability of each underwriter to the total priceat which securities underwrittenb/ $i"and

distributed the public were offered to the public Anti-,lippin%

i;e; selling I4@ shares $uickly onto market to make a $uick profit 01 agreements often impose penalties on flipped shares if traced to an 01%s allotment

!ar)et Out Clauses in firm commitment conte3t& allow 01 to back out of deal prior to public offering orsettlement date as a result of some catastrophic event

Inde"nification

01%s will often make issuers indemnify them against liability for omissions or misstatements of material facts Recall ## *02 *I9ID2782 *2'27S2 allows 01%s to escape liability if after reasonable investigation& had

reasonable ground to believe or did believeB that Reg Statement not misleading .ut e3pensive& so prefer indemnity

Co"fort etters

Contribution Clauses

+ou%$t &eals 1hen large reporting companies that are able to incorporate registration info by reference on form S"/or S",; Reduces need for preregistration consultation and preparation so underwriters .I* 8@)426IQ29K for theoffered securities 'act that institutional investors buy huge blocks helps drive these bought dealsB

&utc$ Auctions bids made for amount and price& arranged in order from highest to lowest all bids irrevocable

;$/ $ave (nderwriterM


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Traditional Re%istration

Deneral 6imeline:

'ile 8omment 9etters )ake 8hanges repeat Accelerate CF# .ecomes 2ffective

,ilin% of Re%istration State"ent

>

Effective &ate of Re%istration State"ent

>


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Gun u"pin%

5c! and *re-,ilin% *eriod Section 5;c pro$ibits

offers to S299 offers to .0K

before a registration statement is filed or ii! if the S28 has issued a Stop @rder or Refusal

OfferB *efinition Q2RK .R@A* two key phrases i! Conditionin% t$e public "indB ii! arousin% public interestB 7ote:

*on%t have to mention that selling securities at all @nly applies if in registrationB otherwise any advertisement would be violation

@ne month before invitation to underwrite clearly violation /& ,& C& months Eudgment call

#- years definitely not Release 3B22clarified "eanin%of offerB two key phrases above and

23amples 7o; # +roc$ure*iscussing issuer%s line of business distributed by underwriter violation of 5 7o; F Speec$ OT in conte"plation of offerin%

Speech okay *on%t distribute copies bGc would reach too wide an audience

7o; > Speec$ in conte"plation of offerin% Qiolation of 5 Re$uired prospectus be delivered with speech

7o; J &istributionof annual report 7@6 a violation if was of character and content normally published

E'e"ptions to Offerin%D &an%ers

i: Rule 136 Issuer Announcements " 4ress Release 8heck list 4ermits in registration issuers to release certain information @:

Intention to have public offering

.asic terms of offering 6ime of offering 7ame of issuer

4rohibited: 7ame of prospective underwriters @ffering 4rice QaluationB See 8hris"8raft held valued at =?- or moreB went beyond allowed infor

Rationale: 4ublic companies need to release information bGc

i! they may have duties to disclose info

ii! delays increase risk of insider trading charges see e;g; Reg '*!

ii: Rule 13 7on"4articipant Recommendations 4ermits non"participating brokerGdealers to publish or distribute

Information @pinions Recommendations

Regarding an issuer in registration I7 6


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#, #5d!

*efines who is 7@6 and 07*2R1RI62R

iii: Rule 13B Recommendations of 7on"@ffered Securities i;e; different class! for S"/ and S",! Allows brokerGdealers to publish recommendations or opinions for a companies securities *I''2R276 from that

being offered Re$uirements

I' issuing 8ommon Stock 8an write about nonconvertible preferred stock or nonconvertible debt

I' issuing nonconvert preferred or debt 8an write about common stock

8ompany must meet S"/ or S", re$uirements Rationale:

)arkets for the different securites are separate

iv: Rule 139 9imited 4articipant Recommendations for S",! 4ermits brokerGdealers& whether participating or not to publish opinionsGrecommendations for in registrationB

companies Re#uire"ents

i! Reportin%8ompany under #, or #5;d ii! )ust meet S-3 Re#uire"ents=>5) in market cap by non"affiliates! iii! Recommendation& etc; must

a! be in a publication that appearswith reasonable re%ularit/

b! not "ore favorablethan the last previous recommendation before becoming a participant Rationale:

of C?


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T$e ;AITIG *ERIO&

Denerally .egins A'62R filing Reg; Statement ends when becomes effective

7@ SA92S 5;a still bars sales until reg statement is effective

S299I7D A86IQI6K S6AR6S 5;c prohibitions on offersB ends 5;b regulation of selling activity begins

*er"itted Sellin% Activit/" 5;b i! ORAcommunications that are offers to sell

ii! To"bstone Adsmeeting re$uirements of Rule #,C /;a;#- e3cepts from definition of prospectusB announcements that state

states from whom a #- prospectus may be obtained *oes 7@ )@R2 than Identify the security State its price

7ame the underwriters who will e3ecute orders

iii! Identif/in% State"ents Rule #,C e3pands 6ombstone ad pursuant to /;a;#-!

Allows you to give "ore detailsthan 6ombstone I' E'plainw$ois selling and w$ereto obtain preli"inar/prospectus

.06 don%t have to e3plain if #! include only info in tombstone ad @R /! you send the preliminary prospectus along with more info

@R Can solicitinterest in the offering wit$ a return cardI' 132d! Send preli"prospectus with card 23plain no co""it"entto buy later

iv! *rospectusthat meets re$uirements of Rule C,- *reli"inar/ *rospectus Rule C,# Su""ar/ *rospectus

v! Road S$ows

4resentations attended by underwriters& officers of issuer& analysts& sec professionals& institutional investors 7@6 attended by R26AI9 investors

@ if only @RA9 and only prelim prospectus delivered S28 has approved use of electronic media

@: Audio video tapes distributed to specified individuals Qideo 8onferencing 4assword protected access to website to view SubEect to caveat that cannot be downloaded and distributed to un$ualified persons

8harles Schwab 7o Action allowing access to individuals with significantB trading e3perience /C tradesannually or e$uity position =5--! high water mark

vi! T$e R(ESfrom Above still okay 136 Issuer Announcements 13 7on"4articipating Recs; Reporting 8os only! 13B *ifferent Securities Recs; S"/ or S",!

7ash Sec Reg 23am @utline 4age ? of C?


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139 9imited Recommendations for 4articipants S", only!

*RO@I+ITE&Selling Activity " 5;b Any of the following that does not $ualify as a 4R29I) or S0))ARK 4rospectus

Any written communication that offers Any Radio or 6Q ad that offers

*reli" *rospectus Rule C,- *efines document that meets re$uirements of 5;b;# 8ontains substantially the same information as will appear in 'I7A9 4rospectus .06 may 2(890*2

offering price underwriter rates dealer compensation amount of proceeds conversion rates call prices A7* @6


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16c.-B 32 Act: a! *eceptive act for a 0nderwriter or member of selling group to participate in distribution and 7@6 meet

the re$uirements b g below b! I' 7@6 a reporting company under #,a or #5d! then )0S6 *eliver 4relim 4rospectus at least C? hours prior to sending confirmation of sale

c! )ust take reasonable steps to deliver prelim prospectus if re$uested in writing d! Reasonable steps to deliver 'I7A9 prospectus if re$uested in writing e! f! )ust make available prelim and final prospectus and amendments available to all soliciting

customer%s orders g! )anging 01 has to get sufficient P of prospectuses to all participating brokerGdealers

Rule 24 *istribution of 4reliminary 4rospectus %,, Act! Allows commission to condition A88292RA6I@7 on the reasonableB efforts of issuer to make reg;

statement info available to the public through the 01!

1ays to Avoid 5;b Qiolation " MMMM complete this @utside of definition prospectusB: *efined as e3empt from prospectusB )eets re$uirements of #-;a final! )eets all re$uirements of #-;b 4reliminary or Summary! Safe


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i! *eliveries of Sold Securities ii! 8onfirmations of Sales

Confir"ations are considered a prospectusunder /;a;#- and t$us ille%alunder 5;b;# (nless acco"paniedby a #-;a final! prospectus .rokerG*ealers re$uired to send confirmations under #-;b;#-

Ti"in% *roble" 'inal 4rospectus Settlement *ates amended to 6 T , three days after trade

)akes it difficult for 0nderwriters to compile& print and send confirmations Rule C,C;a 6erm Sheet @ption solves problem

Rule 232 Ter" S$eet Option .asically allows fra%"entin%of final prospectus for delivery at different times under certain circumstances

7o need to deliverself-contained#-;a prospectus General Re#uire"ents

Rule C,C available @79K I': i! cas$ offerin% ii! fir" co""it"entunderwriting iii! invest"ent %radesecurities

*IS6I7D0IS


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*articipatin% (&ER;RITERSand *2A92RS 4ursuant to C;,;c

)ust deliver prospectus as long as their allotment or subscription in distribution is unsold 8A77@6 avail self of C;, e3emption if participating in distribution

on-*articipatin% &EAERSor 0nderwriters who have sold allotment! Still must deliver prospectus under certain circumstances

'our 4eriods time period after later of reg; effectiveness or first sale that prospectus must be delivered! - *ays if the issuer was a reporting company prior to registration Rule #>C 8ontraction of C;,! /5 *ays if not reporting but security is listed on e3change or 7AS*A Rule #>C 8ontraction of C;,! C- *ays Deneral rule for non"participating brokerGdealers J- *ays if issuer never before sold securities through a registered offering Rule #>C 23pansion of C;,!

on-Solicited +ro)er Sales

4ursuant to C;C 23empt from prospectus delivery re$uirements if client%s interest 7@6 solicited by the broker

SEC ? ECO(RAGIGD *rospectus &eliver/

*roble": *uring waiting period there is a! I7627S2 oral selling efforts .06 b! no re$uirement that prelimn prospectus be send to those solicited

Solution: S28 developed two rules to I7S0R2 investors get preliminary prospectus .2'@R2 they buy

16c.-B 32 Act: a! *eceptive act for a 0nderwriter or member of selling group to participate in distribution and 7@6 meet the

re$uirements b g below b! I' 7@6 a reporting company under #,a or #5d! then !(ST &eliver *reli" *rospectus at least 2B $ours prior to sendin% confir"ation of sale

c! )ust take reasonable steps to deliver prelim prospectus if re$uested in writing d! Reasonable steps to deliver 'I7A9 prospectus if re$uested in writing e! f! )ust make available prelim and final prospectus and amendments available to all soliciting customer%s

orders g! )anging 01 has to get sufficient P of prospectuses to all participating brokerGdealers

Rule 24 *istribution of 4reliminary 4rospectus %,, Act! Allows commission to condition A88292RA6I@7 on the reasonableB efforts of issuer to make reg; statement

info available to the public through the 01!

;a/s SEC can stop re%istrationeffectiveness: i! Rule 2 dela/in% a"end"ent

Informal

Dood for minor revisions to filed reg; statement& pre"effectiveness ii! ?b! Refusal Order

'ormal seldom 0sed 6he weakest 1eaponB

Reaches only 4A6276 )isstatements must be clear on its face! )ust be issued .2'@R2 Reg; Statement becomes effective S28 must give notice of hearing in #- days from filing and hearing with #- more days S28 cannot act that

fact! iii! ?;d Stop Order

'ormal more fle3ible than refusal order Standard: if it appearsB at anytime that reg; statement contains a untrue statement of a material factB )ust be untrue A6 6I)2 of R2DIS6RA6I@7 e3 post changes cannot bring a stop order Important informational tool

S28 can issue stop order A'62R all securities sold tips off public to problem iv! ?;A 8ease + *esist or /- 'ederal 8ourt @rders

7ash Sec Reg 23am @utline 4age #/ of C?


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4roblem: other section ? powers don%t reach reg; statements that become misleading due to 4@S6"2''286IQ2date

S28 can use ?A or /- to prevent violation of any provision of the Act e;g; #>;a Antifraud!

(pdate or A"end *ealing with post-effective c$an%es Two Optionsfor fi3ing untrueGmisleading statements due to post"effectiveness events

#! Stic)erin% literally stickeringB new info to the prospectus 4ursuant to Rule C/C;b;,"5 *oes 7@6 count as amendment to the Registration Statement

/! *ost-Effective A"end"ents

Amend post"effectiveness to fi3 i! )isstates as of effective date ii! 6o fi3 )aterial 8hangesB in the post"effective world that make the reg; statement misleading

@oo)

S28 uses the language of #-;a a prospectus s$all contain t$e infor"ation in t$e re%istrationstate"entB to create dut/to update

!ateriall/ &eficient *rospectusleads to 71.0a0.9iability A7* 32 Actanti-fraudprovisions see )anor 7ursing!

Standard: !aterial c$an%e "erits a post-effective a"end"entB

1hich @ption R2A99K )A662RS Stic)erin% not amendment to reg; statement

9iable only under anti"fraud #/;a! 7@6 ##

*ost-Effective A"end"ent amendment to reg; statement Amendment becomes effective with S28 staff approval 1hen declared effective is REA,,IR!S A STATE!ETSin the reg; statement Entire re%0 state"ent spea)s as of t$at date

Results: iable under 711 for all state"ents


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ITEGRATE& &ISCOS(RE

%,, Act and %,C Act have different %oals ,, protects offerees ,C protects the secondar/ "ar)et

Also had *I''2R276 *IS89@S0R2 re$uirements 40S< to integrate when people started buying the 2) *rivate *lace"entsC;/ S"all@fferings ,;b Re%0&implementations of ,;b and C;/! Issuer E'c$an%es,;a;J

&efinition of Invest"ent ContractD

@owe/ Test means a contract& transaction or scheme whereby

i! person invests "one/ ii! in a co""on enterprise iii! is led to e'pect profits iv! solel/from the efforts of others

v! absence of other re%ulator/ sc$e"eM added in *aniel! 7ote: leaves open possibility that circumvention if investors nominally participate closed by 'orman!

'oreman Reformulation 6ouchstone is the presence of investment in a common venture premised on a reasonable e3pectation of profits to

be derived from the entrepreneurial or managerial efforts of othersB See also 6urner and oscot finding I8 even with investor participation

Co""onalit/ Re#uire"ents

8ourts Split on *efinition of 8ommon 2nterpriseB Two T/pes

i! @oriontal pooling of investment funds& shared profits& shared losses i;e; all investors in the same boatB aka Interdepenence among investors 2conomies of scale may U


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Co""onalit/ concerned wit$ AGEC COSTS

S28 concerned about investors who& bGc pooled together suffer agency costs:

i! 8ollective action problems if pooled with others ii! 8ontrol if they have no control over the decisions made for them i! Suffer AD278K 8@S6S

E'a"ples: ES Invest"ent Contracts:

Strips of land where W tended under [optionalB service contract OT Invest"ent Contracts

ShareB enabling purchase of apartment not like stock! Interest in viatical settlements W only ministerial& pre"purchase efforts!

&iscretionar/ Tradin% Accountsas Investment 8ontracts i! 4ooled assets& fee tied to performance U security ii! 4ooled assets& flat fee U maybe not

the fi3ed fee makes less of a common enterpriseB iii! @ne investor& fee tied to performance U probably not

no horiOontal commonality yes vertical .06 does not have any agency cost issues

iv! @ne investor& flat fee U probably not

;a/s outof .eing 8alled an Investment 8ontract i! !inisterial Actions onl/

Idea: not deriving profit from the activities of othersB ii! *re-*urc$ase Activities onl/

Idea: If the value of the promoter%s efforts has already been impounded into the promoter%s fees or into thepurchase price& and if neither the promoter nor anyone else is e3pected to make further efforts that will affect theoutcome of the investment& thenNthe need for federal securities regulation is greatly diminishedB

iii! I"personal !ar)et if profits dependent on market then 7@6 relying on the efforts of others

iv! Consu"ption not Invest"ent see 'oreman

v! *rivate arran%e"ent face to face: not co""onl/ considered a securit/D see e;g )arine .ank

vi! A lot of investor participation


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bulletin& try to sue under #>;a and #-;b;5 @eld: 7ot a security; Appellation notdispositive& no dividends& pledgibility& voting& appreciation& and they wanted to consumeBnot investB4roblem: 1hether investmentB might depend on how look at the deal

ife *artners W arranges to sell interests in viatical settlements to retail customers @eld: 'ractionalinterests 7@6 securities bGc profits did not derive from effort of other parties7ote: purely pre"purchase or ministerial services not efforts of othersB

;alls v0 ,o' @ills &evelop V buys week 5 in time share& but enters arrangement to swap for week in summer but notoccupy it rather rent it out to get profit; V argues it transformed from R2 deal to I8@eldH 7o I8 bGc no


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OTES as Securities

*iverging 6reatment in %,, and %,C Acts #J,, Act

/;# includes any noteB ,;a;, e3empts from registration a note that arises out of a current transaction or the proceeds of which have

been or are to be used for the current transactionB and that will mature within nine months .06 #>;c makes clear that 7@6 an e3emption from anti"fraud provisions

#J,C Act ,;a;#- includes any noteB

but same e3cludes notes with maturities of less than nine months 2''286

Short term notes are 6@6A99K e3empt from ,C Act& and e3empt from registration under the ,, act 5!& butotherwise subEect to the ,, Act Still Apply: #> #/;/

@verbreadth note that the coverage literally e3tends to include home mortgages& consumer installment purchases&and ordinary commercial financing 8ourt simply don%t apply it

REFES ,a"il/-Rese"blance Test when a noteB is a securityB 7ote: 8ourt reEects


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Co""ercial *aper E'ception

,;a;, of the %,, Act e3empts S anti"fraud provisions #/;a;/ misstatements or omissions in prospectus #-;b "

Dovernment Securities .ank Securities 8ommon 8ollective and Single 6rust 'unds ,;a;, Short 6erm 7otes

7ash Sec Reg 23am @utline 4age /F of C?


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,;a;C 7onprofit Issuers ,;a;5 Securities issued by S+9s 8ooperative .anks and Similar Institutions

,;a;? Insurance 4olicies and Annuities

Reves

.anco 2spanol de8redito v; Security4acific .ank

+oundaries of t$e 1933 Act ? ENE!*T TRASACTIOS

'ocus on the 'ollowing TRASACTIO E'e"ptions: ,;a;## Intrastate 23emption ,;b Small @ffering 23emption 7@62: e3emption from 6his 6itleB

Recall 4revious C;# Section 5 does not apply to transactions by any person other than ISS02R& 07*2R1RI62R or *2A92R

C;/ Section 5 not apply to transactions by an issuer 7@6 involving a 40.9I8 @''2RI7D 7@62: these only e3empt from 5

ITRASTATE ENE!*TIO - 730a011

An/ securit/which is a part of an issue offered and sold onl/ to persons resident wit$in a sin%le Stateor6erritory& w$ere t$e issuerof such security is a person residentand doin% businesswithin or& if a corporation&incorporatedby and doing business within& such State or 6erritory;B

Re#uire"entsfor 23emption i! Sold only to residents of sin%le state

Release CC,C an offer to a nonresident which is considered part of the intrastate issue will render thee3emption unavailable to the entire offeringB

ii! *erson or Corporation: sellin% !(ST a! be a residentincorporated! of same state b! be doin% businessB there

T;O Optionsfor 8laiming this e3emption i! 'all underRule 12 S28 Safeharbor S28%s definition of what is e3empt! ii! 'all under Statutor/ E'e"ptionif fail to satisfy Rule #C>

!ajor Issues in Intrastate Offerin%

i!Issue 1hole issueB has to be offered and sold and come to rest! with residents Integration Analysis Applies

Single plan of financing Same class of security

At or about the same time Same type of consideration )ade for same general purpose

ii!&oin% +usinessin a State

Satisfied only if perform substantial operational activitiesB in the state of incorporation 8hapman re$uired predominantB

iii! 'unds for O(T O, STATE *rojects If using intrastate for funds to use in another state *@7%6 rely on ,;a;##

iv! Residence wit$in a State

7ash Sec Reg 23am @utline 4age /> of C?


28/48

)ere presence 7@6 enough e;g; military personnel! @ to use out of state underwritersGdealers as long as A99 come to rest with R2SI*276S

v! ar%e Offerin%sIncrease Risk that 7ot Available vi! Resales

Securities have to come to restB before resale to out of state residents Rule of 6humb: # year

vii! Solicitations S28 allows broad advertising but must make clear offer is only available to R2SI*276S

e;g; 9egend on all solicitations reading @ffer Available only to )A ResidentsB

Rule 12 Safe @arbor

Rationale: many issuers sought clarification of the ,;a;## e3emption bGc uncertainties could e3pose to too muchliability rescission by 2Q2RK@72 in the issue!

;f!

Issuer S


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preliminary negotiations with large P e$uals public offering not more than /5 is presumably private

ii! 7umber of 0nits @ffered large numberGsmall denominations gives hint that future involves public trading small numberGlarge denominations evidence that really a private placement

iii! SiOe of the @ffering

intended to apply to small offerings iv! )anner of the @ffering

direct negotiations look private advertising& public solicitation& etc; look public

RASTO *(RIA Anal/sis is there a 40.9I8 @''2RI7D i! 'ocus on @''2R22S not purchasers! ii! If able to fend for t$e"selvesB then not a public offering

8an fend for themselvesB if a! @ave ACCESSto the information e;g; insiders! b! @AFE t$e infor"atione;g; provided to them! 7ote: sophistication is relevant but 7@6 sufficient for meeting re$uirements of A882SS e;g; if not

sophisticated then cannot read financials& so no access!

General otesabout Ralston i! +urden is on Offerorto establish accessGsophistication

As P of offerees increases the


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REG(ATIO &

Rule 642 Rule 646 Rule 64Stat0

Aut$orit/

,;b S28 *iscretionary ,;b S28 *iscretionary C;/ 4rivate 4lacement

!a' Offerin% =#) =5) 7o )a3

U of*urc$asers

7o 9imit 7o more than ,5e3cluding AI!

7o more than ,5e3cluding AI!

&isclosure

Re#0

7one Kes& if non"AI involved Kes& if non"AI involved

Investor

Sop$0

Standards

7one 7one Kes non"AI and reps; mustmeet sophistication re$;

!anner of

Sale

0sually 7o Den; Solictitationssee pg; C#/ for e3ceptions!

7o Deneral Solicitations4ublic 8o can disclose fact of 44

Rule #,5;c!

7o Deneral Solicitations4ublic 8o can disclose fact of 44

Rule #,5;c!

Resale

Restrict

Kes Restricted Kes Restricted Kes Restricted

Ot$er .ad .oy *is$ualifier

Overview of Re%0 &

8rucial for RETAI Transactionse;g; those involving non"AI! @therwise C;/ is good enough

*esigned to reduce burdenon s"all issuers Re"e"ber Gustafson

Dinsberg%s reading that , e3emptions still subEect to #/;a;/ liability S@ could sue under #/;a;/ in 5-5 Could OT sue under 1.0a0. in a 64 offerin% ? t$e statutor/ basis is different not 73 but 720.:

E'c$an%e Act Cos CAOT use 642

Rationale:

e3change act co is alread/ disclosin% less burdensome for them to meet re$uirements of 5 bGc can Eustincorporate in form S"# or S"/

It is the non"disclosing& non"reporting cos that need the e3emption ,or" &

Rule 643says have to file 'orm * no later t$an 16 da/safter first sale under 5-CG5-5G5-F 'ailure to do so does not wreck e3emption .06

4ursuant to Rule 5-> may preclude use of Reg; * in the future

General Solicitation Restrictions ? 64.0c

Denerally General SolicitationsB are OT per"ittedin Reg; * @fferings 7ote: can be tougher than under Ralston bGc 5-/;c is a complete bar if no pre"e3isting relationship

64.0c Applies to i! Issuersand ii! 6hose actin% on be$alfB of Issuers

*efinition of on behalfB If issuer pa/in% definitely

If "an/contacts wit$ issuer likely If interviewe;g; analyst! likely

E'ceptions

i! Rule 1360c public companies can disclose fact of Reg; *; offerings to comply with duties to disclose ii! *re-E'istin% Relations$ips

It is 7@6 gen solic to contact persons with whom have established relationships

7ash Sec Reg 23am @utline 4age ,- of C?


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iii! I*O et *re-Screenin% S28 7o Action 9etter @%s 1eb Site 4rocedure if

a! Initial solicitation has 7@ infoGreference to any offerings b! If $ualified by Registered .rokerG*ealer then would get password for info about Reg; * offerings c! *elay btw $ualification and offerings they could invest in d! ualificaion might go stale have to be updated

If want to solicit have to follow I4@ 7et 8arefully Self"Accreditation 1I99 7@6 $ualify must use broker dealer!

E'a"ple FIOATIOS

)ass "ailin%s 4osting information on website ewslettersby ,rdparties paid for by issuers containing info prepared by issuers Cold callsby .roker *ealers

23amples that are OT Fiolations I*O et Sc$e"e

Investment *atabase where network matched investors and entrepenuers but not paid for by fees! .roker *ealer solicitations of clients for Reg; * offerings that provide for screening& delay and do not initially

provide info about the offerings *roble"s wit$ 64.0c

8reates barto usefulnessof Reg; *

9imits scope of investors ecessit/ of 64.0c

ecessar/ for 64

bGc based on C;/& have to be limited to offerings that are not publicB ot ecessar/ for 6425646

bGc based on ,;b not re$uired

Accredited Investor ualifications

1hy Important: i! AI do not count to ma3; purchasers under 5-5 and 5-F ii! If all are AI no affirmative disclosure re$uirements iii! In 5-F conte3t

AI are presumed sophisticated 7on"AI must be demonstrated sophisticated difficult and risky to prove!

&efinition of AI ? Rule 6410a

Accredited Investors: ,inancial Institutionsbanks& registered brokerGdealers& insurance& etc;! *ension4lans

Fenture Capital'irms 8orporationsG4artnershipsG@rganiOations with assets V J6! Issuer ISI&ERS

*irectors

23ecutive @fficers 4res;& Q4 in charge of principal business unit& Anyone engaged in 4@9I8K making capacity

Deneral 4artners atural persons w$ose

a! 7et worth e'ceeds J1! b! Annual inco"e e'ceeds J.448for each of last two years and likely not to change =,-- if married

2ntities owned by AI ;$/ does wealt$ "atterM In Ralston& investors needed to be smart& but now only need to be RI8A& #J Self Regulatory @rganiOations SR@! Rules

/#A to /#8 2nforcement 4rovisions Antifraud *rovisions

#- #-;b;5 located here #5;c Special .roker"*ealer Rules J Anti")anipulation #? 9iability for )isstatements

Re#uire"ents for *ublic Co"panies

#/ Registration Re$uirements #/;a for 23change"9isted Securities

079A1'09 for .roker"*ealers to effect transaction unless securities are registered

Applies to both debt and e$uity #/;g for public @68 issuers

4ublicB if =#-) in Assets A7* )ore than 5-- shareholder of a class of equitysecurity

6ermination of obligations I' *rop below ,-- shh 'ile deregistration forms

#, Reporting Re$uirements S28 authoriOed to re$uire reports

Annual Report #-"! uarterly Report #-"! 4eriodic Reports ?"! for special events like bankruptcy& fire accountant& etc;

#C 4ro3y and 6ender @ffer Rules

#5;d 'or 4ublic @fferings #F Short Swing 4rofit Rules 'iling Re$uirement

I' #-H Shareholder or *irectorG@fficer of registered company must file reports regarding transactionsinvolving e$uity securities

Short Swing 4rofit Rule Any profits made within any period less than F months have to be disgorged to the company

8rucial 4rovisions /;a;, ,;a;J Rule #C5

&efinitionof SAEB T$e ,or FalueD Re#uire"ent

/;a;, 6he term ^sale% or ^sell% shall include every contract of sale or disposition of a security or interest in asecurity& for value;B

Sales Regular e3chages for value Stock 4ledges see e;g; Duild 'ilms but generally e3empt under C;#! Immediately 8onvertible Stock the underlying sec; has to be registered!

7@6 Sales: Stock *ividends not a saleB bGc no consideration Stock Splits not a saleB bGc no consideration

7ash Sec Reg 23am @utline 4age C# of C?


42/48

8hoice btw 8ash or Stock *ividend 7ot Immediately 8onvertible @ptions

Re%ulation of Spinoffs ? &atronics

4roblem 8ompanies were using the for valueB loophole to end"run registration re$uirements; 6he scheme: 4rivately held company issues unregistered securities in merger with public company; 4ublic

8ompany issues unregistered securities to its shareholders as a dividend; Qoila private co has gone publicB as amarket in their shares ensues; 7o saleB in the merger 7o saleB in dividend

And the individuals are e3empt from 5 under C;# 8ourt put an end to this in *atronics 8ourt considered *atronics a

8o"IssuerB and an 0nderwriterB

4roblem is Eustifying this outcome really no logic to it& Eust a 4@9I8K A44R@A8< 8ourt%s attempts are analytically unsound:

i! 'or Qalue Re$uirement met 8ourt argues that for valueB met bGc of the value of the shares created in the market& odd bGc the value is not in e3changeB for the stock

ii! *atronics is s /;C Issuer simply strains the te3t& A7* still need a /;a;, offerGsale

iii! *atronics is /;## 0nderwriter .ut only part of a distributionB if there is a saleB

61@ Additional R2D09A6I@7S of S4I7@''S #! S28 7o"Action 9etters 4osition

a! Info Statements

b! Resale Restrictions /! Rule #5c/"## prohibition on .roker"*ealer uotations unless stock of

Issuers with recent %,, Act 'ilings Issuers subEect to #5;d or #,

E'c$an%es Offers - 730a09 E'e"ption

Denerally ,;a;J is a transactional e3emption allowing issuers to e3change securities with current shareholders provided

there is no commission or other remuneration for soliciting the e3change; 23ample:

Issuer wants to issue its bondholders stock in e3change; Is it a saleMB K2S bGc the current bondholders give upBthe value of their bonds for stock

Re$uirements for ,;a;J 23emption i! wGe3isting security holders e3clusively ii! no paid solicitation

Amendments Rule #CJ security holders can be re$uired to make cash payments when necessary to effect an e$uitable

adEustmentB in the dividends or interest for the e3changed securities as btw security holders accepting thee3change

Rule #5- allows additional consideration to pass from the issuerto the e3isting shh *+@ can urge S


43/48

1933 Act and Corporate Control Transactions6ender @ffers& )ergers& 4urchaseGAssumption!

Rule 126 An ^offer&% ^offer to sell&% offer for sale&% or ^sale% shall be deemed to be involved& within the meaning of/;, of the Act& so far as the security holders of a corporation or other person are concerned where& pursuant to _statecorporate law` or otherwise& there is submitted for the vote or consent of such security holders a plan or agreementfor #! Reclassification& /! )erger or consolidation or ,! 6ransfer of AssetsNB


44/48

!ATERIAIT

6he Appearances of )aterialB Rule #-b;5 It shall be unlawful for any personN/! to make any untrue statement of material fact or omit to state

a material factNB ## contained an untrue statement of material fact or omitted to state a material factNB Rule C-?

Item ,-,;a;, of Reg; S #/;a;/

*istinguish )ateriality and *uty to *isclose

Info might be materialB i;e; something investors would want to know& but 7@6 [email protected] if no duty todisclose

Source of *uties i! S28 'iling @bligations ii! *uty to be


45/48

I' 'orward"looking might the market have assess probability correctly e3 anteM e;g; 1ieglos power plant! *oes 7@6 apply for disclosures in 4ro3y Statements

iv! ess stron% versionof iii! investorsnot stupid& would not believe statements note: don%t need 2)< or know whether impounded

v! )ere sales puffer/B is not actionablesee e;g; 2isenstadt! vi! +espea)s Caution &octrine

,orward oo)in% Infor"ation

*istinguish i! Soft Infor"ation things that will occur in the future

I' Soft Statutory Safe 5 and 49SRA! apply

ii! @istorical &ata reports on things that have happened I'


46/48

ii! plaintiff fails to prove that forward"looking statement was made with A860A9 7@192*D2 that it wasmisleading

7ote possibility: V might not recover for knowingly false statement if W includes cautionary language Application to ORA State"ents

/>;a applies to both oral and written statements I' @ral& cautionary statements can either

i! be saidL @R ii! tell audience where to find additional info in a readily available written document

I' @06SI*2 apply common law bespeaks caution doctrine

awsuitsK &iscover/ and *leadin%

.espeaks 8aution easy to stop litigation at 492A*I7D all depends on details Rule #>5 has to go to discovery refers to reasonable basisB and good faithB

.reach of &ut/ of Careor &ut/ of o/alt/ In re 'ranchard W fails to disclose self"dealing with by controlling S


47/48

,raud in Connection wit$ t$e *urc$ase or Sale of a Securit/

Rule 14b-6

Denerally principal tool for promoting informational integrity of securities transactions proscribes anymanipulative or deceptive device or contrivanceB in connection with the purchase or sale of a security note: not Eustof public companies!;

6he rule bars use of instrumentality of interstate commerce:

#! to employ any device& scheme or artifice to defraud& /! to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make

the statements made& in light of the circumstances under which they were made& not misleading& or ,! to engage in any act& practice or course of business which operates or would operate as a fraud or deceit upon

any person;B ey 2lements of #-b"5 Action i! in connection withB ii! standing iii! scienter iv! circumstances under which nondisclosure is fraudulent

i! In 8onnection 1ithB

.asically the fraud has to be in connection withB the purchase or sale of a security 6e3as Dulf Sulphur lead case:

*irector issues press release claiming reports e3aggerated operations at drill site& a matter of routine testing;Statements were untrue;


48/48

ii! specify reason or reasons why statement is misleading iii! state with particularity all facts on which belief is formed

)ust be able to 7A)2 your source /d 8ir;! Dreeble two important aspects

i! Strong showing of )otive and @pportunity to defraud will satisfy pleading re$uirements ii! *efined recklessnessB

7@62: S28 can sue under #> which only re$uires showing of 72D9ID2782

R29IA782 and 8A0SA6I@7 in #-b"5 suits R29IA782 Specific reliance 7@6 necessary can rely on 'raud on the )arket

2ffect: makes class actions possible 9@SS 8A0SA6I@7 1hat it is:

X must allege and prove that .06 '@R the defendant%s wrongdoing& the V would not have been harmed Rationale:

*on%t want #-b"5 to make insurers of defraudersB 4roving 9oss 8ausation

8an be difficult Re$uires some causal ne3usB between improper conduct and the losses

*amages 6wo @ptions i! @ut of 4ocket

awards to a V buyer the difference btw the amount paid and its actual value at the time of the transaction ignores post"transaction events calculation of actual value at timeB is obviously problematic: have to guess hypothetical value wGdisclosure

ii! Rescissionary

Remedy: get either purchase price or security )easure of *amages: If fraudulently ac$uired securities already sold& the difference between purchase price

and value upon disposition 1hat to do with 1I7*'A99S In Rowe used out of pocket damages& so huge windfall stayed with defendant If using Rescissionary measure of damages& might recoup if captured in sale price Restitution some courts apply Eust calculate windfall and give it to the V

7ote: which you get may vary by court

/#*g! 4roportionate 9iability

07nash sec reg exam outline

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