securities reg outline

8/7/2019 Securities Reg Outline

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Securities Regulation

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

1. To require that investors are provided with material info concerning

securities offered for public sale; and2. To Prevent misrepresentation deceit, and other fraud in the same ofsecurities

3. Accomplished via disclosure primarily in registration statement

Registration intended to provide adequate and accuratedisclosure of material facts concerning the company and thesecurities it proposes to sell

B. Securities Exchange Act of 1934 (Order and Disclosure in After-Market)1. Effect

Extended the disclosure doctrine of investor protection to

securities listed and registered for public trading on nationalsecurities exchanges

Also applies to over the counter market if company has morethan $10M in assets and more than 500 investors

2. Corporate Reporting

Must file a registration statement with the exchange and theSEC

3. Proxy Solicitations

Governs soliciting proxies

Solicitations whether by management or shareholder groupsmust disclose all material facts concerning matters on whichholders are asked to vote

Holders must be given an opportunity to vote yes or no oneach item

4. Tender Offer Solicitations

Reporting and disclosure provisions extended to situationswhere control of a company is sought through a tender offer orother planned stock acquisition of over 5% of a companys equitysecurity

5. Insider Trading

Prohibitions are designed to curb misuse of material

confidential information not available to the general public6. Regulation of brokers and dealers

C. State Blue Sky Laws1. Analogous to the 33 and 34 Act2. Preempted by federal legislation (sometimes)

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D. Sources of Federal Securities Law1. Statutes at Large (more legit than USC) but most people rely on BNA,

CCH etc.2. SEC rules and other pronouncements3. Policy and interpretative releases4. Staff Legal Bulletins

5. Interpretive and No-Action Letters

E. How Securities Are Marketed and Sold1. Private/Small Entities

a. Form sole proprietorship, partnerships (general, limited, limitedliability), limited liability corporation

b. Unique contractual relationshipsc. Methods by which securities get to public and trade in aftermarket

(1) Distribution process in which capital is raised by issuerthrough placement of security

(2) Aftermarket secondary market where not capital is raised

for the corporation2. Public/Large Entities

a. Form some are limited partnerships, but most are corporationsb. Standard contractual relationshipsc. Methods to get securities to public and trade in after-market

(1) Distribution

Issuers approached by a lead underwriter (likebanks) who would act as an agent for an underwritinggroup, typically a lead underwriter will approach issuerand then assemble the group

Lead underwriter interfaces between issuer andunderwriting group

All members of underwriter group are responsiblefor contacting dealers

Underwriters sell to dealers who in turn sell to thepublic

(2) After-Market public trading securities among itself (pricedoes not directly effect company but effects price at whichthey can later sell to public)

F. Context of 1933 Act Registration

1. Underwritersa. General Definition function of helping a company or one or more

of its major shareholders, sell securities to the public through anoffering registered under the Securities Act

b. Firm Commitment Underwriting underwriter purchasessecurities from a company at an agreed price and then attempts tosell to public for a profit (risk on underwriter)

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c. Best Efforts Underwriting underwriter agrees to use its bestefforts to sell an agreed amount of securities to the public, riskremains with issuer, done primarily with small underwriters

d. Standby Underwriting used in rights offerings, companydirectly offers its existing security holders the right to purchaseadditional securities at a given price and the uw agrees to

purchase from the company any securities that are offered to thesecurity holders but not purchased by them

2. Dealers

Refers to a firm when it buys and sells securities for its ownaccount (takes and gives title)

3. Brokers

Refers to a firm when it buys or sells as an intermediary for acustomer rather than taking or giving title itself

4. Investment Banking

Usually handles the underwriting business Comparison with commercial bankers who make loans and hold

depositors funds because Glass-Stegall Act revoked,commercial banks can not have affiliates who underwrite (but arenot suppose to use depositors funds)

Functions:a. assisting companies in the sale of securities, almost always in

large amounts to private purchasers such as insurancecompanies

b. finding acquisition partners for companies that wish to acquireor be acquired by others

c. giving financial advice of various sorts5. Secondary Market

a. Process for getting securities on exchanges

(1) List will contact desired exchanges and sell them on theexchange

Need to satisfy certain requirements disclosure

Very stringent/rigorous requirements, the moreprestigious the exchange is

(2) Once list privileges are granted, can contact members of theexchange

(3) Function if willing buyer and seller, can contact members ofthe exchange

6. Exchange Vocabularya. Specialist Post if want to sale a security that is specialists;

subject to certain exchanges regulations, subject to SEC approval,need to maintain an orderly market

Function matching unless an unorderly market thenspecialist may be required to purchase/sell

7. Over the Counter Vocabulary

a. Market Maker dealer than functions in the trading market bymaintaining an inventory of a particular companys securities and

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holding itself open, on a continuing basis, as willing to buy and sellthose securities

b. Broker agent who acts on their clients accountc. Self Regulated Organization

Both market makers and brokers are regulated under the1934 Act and are required to be members of an SRO

Has rules and regulations regarding conduct of brokersand deals that are subject to SEC approval

Self-funded

NASD is an SRO8. Exchange

a. Form physical location

b. Regulation subject to rigorous regulation by SEC pursuant to1934 Act

c. Process

Buyer goes to brokerage brokerage will communicatethat desire to a floor trader member or floor trader will goto a specialist post

Seller will contact her broker about purchasing sellersbroker will communicate to a floor trader they will go tospecialist post and hopefully transaction takes place

Specialists perform matching function9. Over-The-Counter

a. Form everything except selling/buying of securities not listed onan exchange

Pink Sheets advertisements; now we have electronicbulletin boards

Market Maker regularly advertised self as willing to buyor sell x security and usually lots of mms per security

b. Process

Buyer goes to broker and broker goes to mm

Seller goes to broker and broker goes to mm

Mm lacks the matching function, do the transaction withthem??????

10. State Blue Sky Regulationa. Types of Regulations

(1) Merit-Based requires state officials to read info anddetermine its suitability of securities

Not used much anymore except for in problemmarkets

(2) Disclosure-Based will require filing of basic businessinformation (federal securities laws)

(3) Notice-Based just need to send notice that will sell or trade

b. Preemption Law of 1988 forced state regulation into a noticebased system for most areas

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c. Typically done by a specialist in a law firm in a large financialcenter

11. Reasons for Going Publica. Advantages

New capital

Obtain negotiability acquisition of companies, employee

incentives, liquidity for present S/H, shares may have greatervalue

Future capital on more favorable terms

Prestigeb. Disadvantages

Expense of going public (underwriters fees 7-10% ofpublic offering price, legal fees, accounting fees, printingcosts, registration and Blue Sky fees, registrar fees,indemnity insurance)

Additional obligations of public companies

Market expectations

Loss of control

Higher estate tax valuation12. Timing of Going Public and selection of underwriter

a. When

Companys earning and financial performance

Size of companyb. Selection factors for agent underwriter

Reputation and ability to distribute

Ability to advise

Ability to provide financial services following the offering

After market performance of the security Experience in the companys industry

13. Situation 2a. Scenario

Product specialized computers with specializedsoftware

Corporation has two shareholders

Want to raise capitalb. Interests

Size of company - $10 million + ultimate sales price How much do you want to raise - $10M

Only want to sell 25% of the company

Logical price is 2.5M b/c not is likely to pay $10M for25% control of something that is worth $10M

Decide they are willing to sell $3.3M

$10M is value of corp.

giving up 33% of companyc. Size of Deal for Underwriters

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Big Underwriters-$5M+ deals only

Regional underwriters will take smaller dals

I. 1933 Act RegistrationA. General Vocabulary and Applicable Statutes

1. Pre-Filing Period (Basic Rule no offers, no sales)

a. Definition Period before registration statement is filed

b. Relevant Provisions

5(a),(c)2. Waiting Period

a. Definition

Period after registration statement has been filed but hasnot become effective

b. Relevant Provisions

5(a),(b)(1)3. Post Effective Period

a. Definition

Period after registration statement becomes effectiveb. Relevant Provisions

5(b)

B. Pre-Filing Period Prohibitions

1. 5(a) no salesa. Statutory Language

Unless a registration statement is in effectas to asecurity, it shall be unlawful for any person, directly or

indirectly To sell such security through the use or medium ofany prospectus or otherwise; or

To carry any such security for the purpose of sale orfor delivery after sale

b. Basic Meaning

Prohibits the sale of securities unless a registrationstatement has become effective (at the end of the waitingperiod) and no sale or delivery for purposes of sale beforethe effective date

c. Related Issues

What is a sale 2(a)(3)

2. 5(c) no offersa. Statutory Language

It shall be unlawful for any person . . . to offer to sell oroffer to buy through the use or medium of any prospectus orotherwise any security, unless a registration statement hasbeen filed as to such security . . .

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c. Basic Meaning

Cannot offer before filing a registration statementd. Related Issues

What is an offer 2(a)(3)

Rule 135 safe harbor from definition of offer

SEC releases 3844 and 5180

3. What is an Offer?a. Section 2(a)(3)

a (1) Statutory Language The term offer to sell, offer for sale, or offer shallinclude every attempt or offer to dispose of, orsolicitation of an offer to buy, a security or interest insecurity, for value

Not a complete definition b/c says shall includeb. Offer to buy

The solicitation of an offer to buy is considered an offer to

sell. As a result, it is not possible to avoid the no offer tosell prohibition of 5 by phrasing an offer in terms of asolicitation of an offer to buy

c. General Interpretation

Definition read broadly and includes things that may nothave been considered an offer at common law includingconditioning the market for the securities to be sold

d. Conditioning the Market(1)Generally

In the pre-filing period, it is not legally possible to

begin a public offering or initiate a public salescampaign

(2)Securities Act Release No. 3844

A public sales campaign is only unlawful when itinvolves an offer as defined in the Act

General attempts to stir up market interestcan be an offer even if do not mention actualoffer before filing

priming the pump

gun jumping

Example 1 underwriter sent brochure describingin glowing possibilities of market; no reference toissuer, security or particular financing; contained nameof underwriter

Intent was to stimulate interest, clearly wasthe first step in a sales campaign to effect a

public sale of a security violation

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Example 4 underwriter distributed to NASDmembers company info, issuer and prospects, but info

was misleading violation

Example 6 President at co. was asked a year inadvance to give a speech about company andindustry; decided to give into to interested customers

etc; then the company began filing out a registrationstatement

Scheduling of speech had not been arrangedin contemplation of a public offering

No violation but printed copies should not bereceived by a wider audience or given out atspeech

(3) In Re Carl M Loeb, Rhoades & Co. (1959)(a)Background

Underwriters put out press release before reg. stmt.

filed Described the property involved, related thecompanys development plans in general, outlined theproposed securities offering, and mentioned the namesof the two managing underwriters

Did not directly offer to sell any securities(b)Holding

Publicity of this type and in this situation must bepresumed to set in motion or to be a part of thedistribution process and therefore involved an offer to

sell or a solicitation of a n offer to buy Such release and publicity was of a charactercalculated, by arousing and stimulating investor anddealer interest in the securities . . ., to set in motionthe process of distribution

(4)Securities Act Release No. 5180 (1971)(a)Publicity

While a publicly held company may not legallyinitiate publicity that is for the purpose of facilitatingthe sale of securities a business as usual general

publicity effort probably does not run afoul of5(c)

(b) When information is requested byshareholders

Factual information should be provided

Responses involving predictions, forecasts,projections, and opinions, concerning value are notacceptable

(c)Generally

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New advertising campaign might raise questionsespecially when it is presented in media that seemcalculated to reach investors rather than merelycustomers

Lawyer needs to focus on the real reason for aparticular action

(5)Interpretive Letter Request and Response(a) Companies Activities

Initiate and maintain periodic meetings withsecurities analysts, brokers, etc.

Want to know if should stop this when startregistration stmt.

(b)SEC Response

During the period that an issuer is in registration,issuer need not stop activities

Activities desirable b/c have eventual effect of

conveying useful information to investing public Type of information should still conform with No.5180

Activities may give rise to priming the marketargument especially when issuer starts them rightbefore registration process begins (these issuersshould stop), but issuers who have a history of doingthis would generally seem to have a sound basis forrefuting a gun-jumping inference

e. Exceptions to Definition of Offer(1)2(a)(3)(a)Statutory Language

Offer shall not include preliminary negotiationsor agreements between and issuer (or agent)and any underwriteror among underwriters who areor are to be in privity of contract with an issuer

(b)Effect

Exception is limited to underwriters does notcover dealers

Company can find an underwriter in pre-filing period

Managing underwriter can talk to other securitiesfirms to gauge their interest in joining underwritingsyndicate

Managing underwriter cannot begin to assemble thedealer group at all

(2) Rule 135 Notice of Certain Proposed Offerings(a)Statutory Language

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For purposes of 5, a notice given by an issuer thatis proposes to make a public offering of securities to beregistered under the Act shall not be deemed to offerany securities for sale if:

(1)notice says that offering will be made only bymeans of a prospectus; and

(2)Contains no more than the following additionallanguage:

Name of issuer

Title, amount, and basic terms of thesecurities, amount of offering, anticipatedtime of offering, brief statement of themanner and purpose of the offeringwithout naming the underwriters

f. Special Situations(1) 2(a)(3)

Any security given or delivered with, or as a bonus onaccount of, any purchase of securities or any other thing,shall be conclusively presumed to constitute a part of thesubject of such purchase and to have been offered and soldfor value

(2)Options

Options/convertible securities/warrants shall not bedeemed to be an offer or sale; but the issue or transfer uponthe exercise of such right shall be deemed a sale of thesecurity

The underlying security does not have to be registeredoriginally when the conversion or exercise cannot occurimmediately, but rather can only tae place at some point inthe future

At the time the conversion or exercise can occur, an offerexists, and the filing of a registration statement or theavailability of a registration exemption is required

g. Jurisdictional Means

Language in 5(a) and 5(c)

means or instruments of transportation or

communication in interstate commerce or of the mails Interpretation

Very broad

Any use of the telephone satisfies the requirement

If offer at the country club, probably not satisfied, but iffriend then telephones for more info probably have thejurisdictional means b/c offeror reasonably could haveforeseen the use of the telephone by the offeree

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C. Waiting Period

1. 5(a) no sales or deliveries

a. Prohibits no sales and no deliveriesb. Defining a Sale

(1) Statutory Definition (2(a)(3)) (not complete definition) the term sale or sell shall include every

contract of sale or disposition of a security orinterest in a security for value

read liberally(2) Significance of Including contract of sale

In the waiting period, certain offers may be made.When an offer is accepted a contracts is created and5(b)(1) is violated b/c a sale has occurred

Cure offerors should condition their offers in sucha way that they cannot be accepted until theregistration statement is effective

(3) In Re Franklin, Meyer & Barnett

(a)Background Salesmen accepted checks sent by customers inpayment for offered shares

Sales sold other securities for customers and heldthe proceeds for application against the purchase priceof the offered shares

(b)Holding

Salesmen accepted orders for stock during thewaiting period

Although they initially invited indications of interest

in the form of checks and the proceeds of the sale ofother securities, they went beyond the permissiblescope of the Act. If take money in anticipation for subsequentsale, this is a sale within definition and will be a

violation should return money promptly or say donot intend to apply to sale of stock until some evenand they dont get any priority then possibly okay

2. 5(b)(1) no prospectus unless a 10 prospectusa. statutory language

Unlawfulfor any person . . . to carry or transmit any

prospectus relating to any security with respect to which aregistration statement has been filed under this title, unlesssuch prospectus meets the requirements of section10.

b. Prospectus Definition (2(a)(10))(1) Statutory Language

Any prospectus, notice, circular, advertisement,letter, or communication, written or by radio or

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television, which offers any security for sale orconfirms the sale of any security Basically a written offer or a confirmation ofsale (but because 5(a) prohibits sales during thewaiting period, not concerned with affirmations ofsales)

(2)Offers If something is not an offer (use analysis fromabove) then it is not a prospectus and will not violate5(b)(1)

Remember Rule 135 which deems something to notbe an offer

(3) Written or By Radio or Television(a)Definition of Write (2(a)(9))

Printed, lithographed, or any means of graphiccommunication

(b)Oral Announcement by President that if in writing would be a

Prospectus When a reporter incorporates the announcement inan article, the president has made an offer that iswritten

President caused the writing and that is enough tomake the offer one that is by means of a prospectus

(c)Answers to Press Inquiries(d)Calling Customer with Offer(e)SEC no action responses

SEC has taken no action positions with respect tocertain transmissions by various broadcastmechanisms (including satellite, telephone or cablewhen the request was justified in terms of therestricted character of the recipients and thelimitations on their ability to record and retransmit theinformation received

(f) Email

Constitutes a writing

Notion is that if it is a graphic thing it could bebroadly disseminated to those who do not directlycommunicate with offeror (therefore cannot tell his

credibility) If cannot be saved or printed, SEC regards as anoral communication

(g)Voicemail

There is a danger that it will be written down anddisseminated, but same danger when talking live thatsomeone will transcribe

If transcription instigated by offeror writing

If instigated by oferee not writing

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(4) Exceptions (2(a)(10)(b))

Things above will not be a prospectus if it states (1)from whom a written prospectus meeting therequirements of section 10 may be obtained; and doesnot more than (2) identify the security (3) state theprice thereof (4) state by whom orders will be

executed (5) contain other info as SEC deemednecessary in the public interest and for the protectionof investors

(5) Rule 134 Communications deemed not a prospectus(1) Basic Idea

If communication complies with this rule then it willnot be a prospectus

(2) Basic Structure

(a) can be done if (b) is done, but (b) does not haveto be done if either (c)(I) or (c)(ii) is done, and if itsterms are followed, (d) can be done

(a) may include and will not be a prospectus (b) is stuff included in (a) must put the stuff in (b)

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

(6) Rule 134a

Highly specialized rule providing that certain writtenmaterial relating to standardized option are notdeemed a prospectus

(7) Rule 135 (detailed in pre-filing period)

(a)Statutory Language Certain notices by an issuer that it proposes tomake a public offering of securities to be registeredunder the Act shall not be deemed to offer anysecurities for sale

(b)Possible Application

Thrust of rule is toward the pre-filing period

proposes to make a public offering once file aregistration statement you really are no longerproposing a public offering

to be registered technically securities are still to

be registered during the waiting period but term maybe used in a somewhat loser sense

Usually it does not matter because can use Rule134

(8) Possible Impact of Gustafson v. Alloyd (See chapter 8)

Defines a prospectus as a document used in apublic offering to sell a security by an issuer orcontrolling shareholder

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c. Section 10 Prospectus(1)Section 10(a) Prospectus

(a) prospectus shall contain the information contained inthe registration statement, with some exceptions

(b)a prospectus does not comply with this when it containsblanks where required information is to be added by

amendment(c) it may be possible for the prospectus as originally filed tocomply with Section 10(a), but usually certain information isunknown (so usually Section 10(a) prospectus is notavailable in the waiting period)

(2)Section 10(b) Prospectus(a)Gives SEC authority to permit the use of a prospectus that

omits or summarizes information required by Section 10(a).(b)Done through Rules 430 and 431

(c) Rule 430 Preliminary Prospectus(i) Basic Idea

Allows the use during the waiting period of apreliminary prospectus

(ii) Requirements Will meet the requirements of 10 forpurposes only of 5(b)(1) if containssubstantially the information required by 10(a)except does not have to include information onoffering price, underwritingdiscounts/commissions, dealerdiscounts/commissions, amount of proceeds,conversion rates, call prices, or other matters

dependent upon the offering price(d) Rule 431 Summary Prospectus

(1)Basic Idea

Allows the use of summary prospectuses inwaiting period

If prepared and filed with registrationstatement it is deemed to be a prospectuspermitted under section 10(b)

(2)Requirements

Page 126 of Supplement

d. Preliminary Prospectus Delivery Requirements Rule 460 andAcceleration

(1) Needed in order to accelerate Sec. Act. Rel. No. 4968

Why acceleration needed Act provides that aregistration statement becomes effective twenty daysafter filing, or after the filing of any amendment, butSEC will accelerate.

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Under Rule 460 will not accelerate the effectivedate of a registration statement unless distributed tounderwriters and dealers who it is reasonablyanticipated will be invited to participate in thedistribution

If issuer is not s.t. reporting requirements of 13 or

15(d) of 34 Act SEC will consider whether they havetaken reasonable steps to furnish them to thosepersons who may reasonably be expected to bepurchasers of securities

If it is inaccurate or inadequate acceleration will bedeferred until SEC assured correcting material hasbeen distributed

(2) Rule 15c2-8

If do not do these things it constitutes a deceptiveact or practice under Exchange Act Section 15(c)(2)

When offerings made by issuers that are not

subject to the reporting requirements of ExchangeAct, requires underwriters and dealers to delivercopy to any person who is expected to receive aconfirmation of sale at least 48 hours prior to themailing of such confirmation

Required underwriters and dealers to takereasonable steps to furnish copies of thepreliminary to any person who makes a writtenrequest for a copy. Underwriter must furnishenough copies to dealers to get them to customers.

Requires underwriters and dealers to furnishcopies to salesmen

(3) Posting on website

While this provides access, the rules require anaffirmative act on part of issuer to get it in the handsof underwriters, dealers etc.

Can do if customer agrees to this in advance and itwill count as sending preliminary prospectus

D. Post-Effective Period

1. Section 5(b)(1) no prospectus unless 10 prospectus

a. Statutory Language Cannot use a prospectus unless it is a Section 10prospectus

Usually only a final prospectus called for by Section 10will satisfy

b. What is a prospectus?

See Waiting Period analysis

If something is considered a prospectus it must also meetthe requirements of Section 10.

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c. What prospectus must be used?(1) In the post effective period the only prospectus that satisfies

the requirements of Section 10 is the final prospectus call for bySection 10(a).

(2) When can you use Summary Prospectus? Rule 431

Can never be used as a 10(a) prospectus for purposes of

5(b)(2)d. Exception When a communication is not a prospectus

A communication is not deemed a prospectus whenit is accompanied or preceded by a Section 10(a)prospectus

Free Writing term used to describecommunications allowed by this exception

2. Section 5(b)(2) no sales unless accompanied or preceded by 10(a)prospectusa. Statutory Language

It is unlawful for any person . . . to carry. . .suchsecurityfor the purpose of sale or for delivery after sale,unless accompanied or preceded by a Section 10(a)(final) prospectus.

Summary prospectus can never fulfill this requirementb. What is a delivery?

(1) What is meant by security?

Security vs. certificate representing security

In security definition, referring to actualsecurity and not evidence of interest in a

security(2) So even though cannot actually deliver a security must stillsend prospectus when send certificate representing security(pg. 75)

3. What can now be done?a. Oral offers can be made (5(c) does not apply anymore) except in

the case of a registration statement that is the subject of a stoporder or of a public proceeding instituted before the effective date

b. Written offers may be made by means of the final prospectusc. Written offers can be made by free writing, when accompanied or

preceded by a final prospectusd. Offers may continue to be made under exception (b) to section2(a)(10) and under Rules 134 and 134a.

e. Sales may be made (5(a)(1) no longer applies)f. Securities and confirmations of sale can be delivered if

accompanied or preceded by a final prospectus.

4. Section 5(b) and Defective Prospectusesa. General Information

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Section 5(b)(1) allows the use of a prospectus that meetsthe requirements of Section 10

Section 5(b)(2) requires that a Section 10(a) prospectusaccompany or precede the delivery of a security

b. SEC v. Manor Nursing Centers (1972) (also applies in waitingperiod)

A prospectus does not meet the requirements of10(a) if the information required to be disclosed ismaterially false or misleading.

Therefore, because the prospectus was not a 10(a)prospectus they violated 5(b)(2) b/c delivered securities forsale accompanied by a prospectus, which did not meet therequirements.

5. Final Prospectus Delivery Requirements

a. 5(b)(2) requires prospectus be delivered with a security(1)What is meant by security?

Security vs. certificate representing security In security definition, referring to actualsecurity and not evidence of interest in asecurity

(2)So even though cannot actually deliver a security must stillsend prospectus when send certificate representing security(pg. 75)

b. Confirmations of Sale(1)underwriters and dealers usually deliver to customer written

confirmations of sale when agree to buy(2)2(a)(10) defines a written confirmation as a prospectus(3)Because this is a prospectus it must meet the requirements of

10

c. Rule 15c2-8(1) final prospectus are to be furnished to sales personnel and to

other persons on written request, and if not they areconsidered a fraudulent etc.

d. Dealers Section 4(3)(1)General Rule

Must deliver final prospectus when they sell securitiesthat have been registered within the previous forty or ninetydays regardless of how may time the securities havechanged hands in the trading markets

(2)Specific Times

40 days applies when the issuer of security haspreviously registers other securities under the Securities Act(baseline rule)

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25 days (Rule 174) if security will be authorized totrade on NASDAQ immediately upon issuance (automatedquotation system)

90 days if securities of the issuer have not previouslybeen sold pursuant to an earlier effective registrationstatement (1st public offering)

No delivery requirement if security issued by co. s.t.reporting requirements of Exchange Act prior to the filing ofthe registration statement to which the prospectus relates

When must always deliver If dealer decides to holdonto some shares and sells a few months later at marketprice, still has to deliver prospectus (Rule 174)

6. When Prospectus Defective or False or Misleading 2 Ways toCorrecta. issuer may file a post-effective amendment (amended prospectus

or supplement to prospectusb. under Rule 424(b) send or file ten copies of the new form of

prospectus with SEC before it is used (when small corrections)

7. SEC General Exemptive Authority (28) SEC mayconditionally or unconditionally exempt anyperson, security, or transaction . . . from any provision . . . tothe extent that such exemption is necessary or appropriatein the public interest, and is consistent with theprotection of investors

E. Registration Process1. How to Register (Section 6)

a. Security may be registered by filing a registration statement (intriplicate) with the SEC

b. Signers of Registration Statement

Each issuer, the principal executive officer, principalfinancial officer, comptroller or principal accounting officer,majority of board of directors or persons performing similarfunction

Everyone who signs is subject to liability under 11 for

any material misstatement or omissionc. Effectiveness

Registration statement is only effective for thosesecurities proposed to be offered in the statement

d. When Effective - 6(c)

Filing takes place when it is received

But, wont take place unless sent with certified bankcheck or cash for fee

e. Made Public - 6(d)

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e. Las Vegas Hawaiian v. SEC (1979)(1)Background

SEC initiates a 8(e) investigation prior to effectivenessand just sits on it

Registration statement becomes effective, but cannot

make any offers During this period LV cannot make any offers

Issue whether 8(e) can be utilized by SEC to delayindefinitely the sale of securities under an effectiveregistration statement.

(2)Holding A court may compel the SEC to make adetermination within a reasonable time whetherto notice a hearing on the issuance of a stoporder under section 8(d) where the SEC has orderedan examination under section 8(e) prior to the

effective date of a registration and the determinationwhether a stop order should issue has unreasonablydelayed

If unreasonable time Court can order SEC to holdhearing and decide whether the issue a stop order

4. Delaying Language and Acceleration Process

a. Section 8(a) When Reg. Stmt. Becomes Effective

Registration statements are effective twenty days afterfiled or earlier if SEC allows

If issuer files an amendment, the twenty day waitingperiod starts over againb. Why Acceleration is Needed

Usually registration statement needs to have added to ininformation that cannot be determined twenty days inadvance (when amend start 20 days all over again)

In addition, issuers and underwriters want to control dateof effectiveness to get most beneficial date

Therefore, getting around automatic effectiveness and 20day waiting period after amendment is a necessity

c. Avoiding Automatic Effectiveness

(1)Must amend registration statement before twenty day periodruns

(2)Rule 473

Issuer may include a paragraph on cover ofregistration statement that effects its continuingamendment

Keeps 20 days constantly starting over again until itis removed (after removed acceleration is requested)

d. Acceleration

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(1) General SEC Power

Because issuer wants to accelerate and SEC haspower to do or not to grant it, is uses the threat ofdenial to force actions not required by the statute

(2) Rule 461 Undertakings(a)General Effect

Contains a list of factors SEC will consider indeciding acceleration requests

Some are required generally while others are priceof registration

(b)Considerations

Whether a preliminary prospectus was deliveredduring the waiting period

Indemnification SEC disfavors officers, directorsand other controlling the issuer being indemnified bythe issuer for liability (says against public policy andtherefore unenforceable)

Whether the SEC is making an investigation of theissuer etc pursuant to and Acts administered by SEC

(3) Phoenix Steel

Undertakings are only required if want acceleration

If willing to wait twenty days, only have to complywith the statute and SEC cannot force you to doundertakings

5. Registration Statement Formsa. Form S-1

General, catch all form that is used when no other formauthorized or prescribed

Most extensive disclosureb. Form S-2

To use must meet certain tests (issuer must have filedExchange Act reports for a specified number of months(have some 34 Act reporting history), and its most recenthistory must be free of defaults on indebtedness and missedpreferred stock dividends)

Registration statement will be a combo of spelled outdisclosures and incorporation by reference of information

from Exchange Act sourcesc. Form S-3

Need 34 Act history and public float of certain amount(certain amount of equity security in non-affiliates - $75M)

d. Form SB-1 and SB-2

Easier forms for smaller issuers

Requirements of financial statements are more easily met

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SB-2 available for offering of securities for cash by asmall buiness issuer which is a co. other than aninvestment co. that has annual revenues of less than $25M

SB-1 available for small business issuers for offerings upto $10M for cash within 12 months

6. Shelf Registrationa. General Rule

Securities may generally not be registered unless there isan intention to offer them in the proximate future (6(a))

b. Rule 415 Shelf Registration

Allows the registration of securities that are to be offeredon a continuous or delayed basis

Companies that meet the requirements for use of Form S-3 are essentially allowed to use this as they please

34 Act company can do and others can also do in specifictransactions

7. Integrated Disclosurea. Meaning

If can use S-2 or S-3 can incorporate by referenceinformation contained in their 34 Act disclosure

b. Effect

Make registration statements more simplistic and lesstime consuming

Shelf Registration allows issuer to incorporate 34 Actdisclosure by those already filed but also those that they willfile in the future (SR would be almost impossible without it)

8. Rules, Regulations, and Industry Guidesa. Regulation S-K

General repository of disclosure requirements (S-B forsmall businesses)

b. Regulation C Rule 408

in addition in info expressly required . . there shall beadded such further material information as necessary tomake required statements not misleading

basically anything material must be disclosed9. Plain English Requirement Rule 421(d)

Issuers must prepare the front and back cover pages of

prospectuses, as well as the summary and risk factorssections, in plain english

Must comply with six basic plain english principles (shortsentences, definite concrete everyday words, active voice,bullet lists for complex material, no legal jargon etc., nomultiple negatives

F. Disclosure Requirements (Chapter 4B and 4C)1. In Re Universal Camera Corp. (1945)

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a. Background

Omitted facts regarding the financial structure of deal(transfer of money from old investors to new investors)

Touched only lightly on competitive conditionsb. Holding

Must be able to provide support for every assertion

Avoid vagueness and too much optimism Disclosure should be plainly understandable to theordinary investor(even if enough information there forexpert to figure something out, this is not enough) Must spell out full implications of offering includingdilution (dilution may not be a deal killer b/c future earningsmay justify paying more)

2. In Re Texas Glass Manufacturing Corp. (1958)a. Issue

Determine whether a stop order should issue materialfact?

b. Holding Standard of Materiality SEC does list some thingsbut does not talk about crimes previously committed. If notlisted follow generic materiality standard (would areasonable investor find it important in deciding whether tobuy)

Management Integrity and honesty generallycourts say investors dont care and therefore not material

When dealing with risk factor disclosure, consider whatpublic wants to know and possible impact of dilution when

list too much.

3. Why have disclosure requirement v. merit regulationa. Issues of Paternalismb. Existence of other ways to regulate merits (state blue sky laws)c. Special Interest Legislation (lobbying effects Congress)

d. Enforcement Costs very time consuming and maybe lesseffective

e. Government competence someone is SEC rather than Congressmay prevent an industry from getting started b/c feel too risky

4. Why require disclosure?a. More efficient way of providing informationb. If do not require it, those who want it will have to get it with

separate negotiation and bargaining if make mandatory it isavailable with extra costs and bargaining

c. Who then uses it?

For the small investor, hard to understand. Even if canunderstand, by the time they do everyone else has read it

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and market already reflects actual worth. Small investorcannot beat the market.

Institutional investors use it but do not solely rely on it,also call co. Prospectus is superficial and does not give infoon future plans that will effect future value.

Hard to produce something that is useful by big investors

but good also for small investors.d. Why have it at all then?

Hard to get rid of

Investor confidence people think SEC is encouragingtruthful and complete disclosure

5. Efficient Capital Market Hypothesisa. Weak Form

random walk theory the price of a security yesterdaydoes not say anything about the price of the security todayor tomorrow (market will react to new information)

b. Semi-Strong Form Market immediately reacts and incorporates all publiclyavailable information

Market price of a security at any time has been affectedby all of the publicly available information

Small investors, therefore, cannot beat the marketc. Strong Form

Market immediately reacts to all information, public orprivate

Price of security affected by public and inside information

so that even insiders cannot make money with their insideinformation

Even insider trading effects market price putting securityin right direction

II. Definition of a Security

A. Statutory Definition (Section 2(a)) Is it specifically listed?

Unless the context otherwise requires:

The term security means any note, stock, treasury stock, bond,debenture, evidence of indebtedness, certificate of interest . . .investment contract, voting-trust certificate . . . or in general any

interest or instrument commonly known as a security or anycertificate of interest or participation in . . . any of the foregoing.

2. Investment Contract1. SEC v. W.J. Howey Co. (1946)

a. Background

Orange groves were divided and sold in rows of trees sold land and service contract

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Company set up trees and harvested etc.

When buy land, 85% enter into service contract with asibling company (relationship between land and service co. isirrelevant)

When buy land, could not use as you please, had to growtrees

b. Holding This is an investment contract therefore, a security

Investment Contract Test whether the schemeinvolves an investment of money in a common enterprisewith profits to come solely from the efforts of others

Four Elements(1) investment of money(2) common enterprise(3) expectation of profit(4) solely from the efforts of others

Quoted Rationale

They are offering an opportunity to contributemoney and to share in the profits of a large citrus fruitenterprise managed and partly owned by respondent. . . .The offered tracts gain utility as citrus groves only whencultivated and developed as component parts of a largerarea. A common enterprise managed by respondents orthird parties with adequate personnel and equipment istherefore essential if the investors are to achieve theirparamount aim of return on their investments

Ct held that the Ks sold by Howey were securities

b/c it was part of common scheme b/c each tract had noindividual purpose, purchased w/ expectation of profit(not in anticipation of moving to FL), primarily from effortsof others b/c out of state purchasers could not waterthemselves.

c. Distinguished from selling entire farm coupled with managementservices

Power of investor may be a distinguishing factor

When buy entire farm more control (can fire manager orbuild on land)

Page 130

d. Diamond Seller Hypothetical(1) Background

Buy diamond and diamond dealer keeps them

Dealer says diamonds will go up in value(2)Analysis

Not an investment contract

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Even though investing money with expectation of profit,the dealer is not putting in effort. The rise in price is due topurely market forces.

2. Expectation of Profit (Forman)a. Background

People in need of housing were offered shares of stockentitling them to state subsidized nonprofit housing

Stock nontransferable and when sold back bought atoriginal offer price

Project leased commercial space to third parties with anyincome derived to be used to reduce the rent on the housingunits

b. Courts Decision Not a security

Use of name stock was not determinative form should be disregarded for substance and theemphasis should be on economic reality

Does is have the characteristics congress intendedfor a security?

If the item is specifically listed, as is it what itsname implies?

Characteristics of a security/stock

Dividends contingent upon an apportionment ofprofits

Negotiable

Can be pledged or hypothecated

Confer voting rights in proportion to the number

owned Can appreciate in value

Expectation of Profit Means either capital appreciation resultingfrom the development of the initial investmentor a participation in earnings resulting from theuse of investors funds (investor attracted solely bythe prospects of a return on his investment)

When purchaser is motivated by desire to use orconsume, not a security

This does not mean you can get aroundsecurities laws by paying out in things in kind (ifpay in oranges may still be in it for a profit andwill still be a security)

Two additional arguments by plaintiff(1) Deductibility for tax purposes

Rejected b/c no basis in law for the view thatthe payment of interest with deductionconstitutes income or profits

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Any homeowner can do this

Deductions from tax shelters may beconsidered profit in lower courts

(2) Discounted Rental Charge

Benefit cannot be liquidated into cash Does not result from managerial efforts of

others but rather state subsidies that could notbe liquidated into cash profits and efforts ofothers are to be linked

Dissent argued that economists say reductionin expenditure is not any different from payment

(3) Rent Reduction From Leasing Space

If there is any income derived from this, it isfar too speculative and insubstantial to bring theentire transaction within the Securities Laws

Not primary motivation for entering co-op

3. Expectation of Profit (Daniel)a. Background

Truck driver thought he had pension plan but did not b/cdid not have 20 years of continuous service

Employer contributed into the fund, not employee

b. Courts Decision Not a security

Investment of Money

Requires some volition on part of person making theinvestment

To constitute a security must give up some tangible

and definable consideration in return for an interestthat had substantially the characteristics of a security

Pension plan was an insignificant part of hiscompensation package and could not besegregated from non-investment interests

Economic reality dictated he was working forhis livelihood and not to make an investment

Court rejected argument that employercontributions constituted his investment

No relationship between contributions to thefund and employees potential benefits

Those who work 20 years get same as thosewho work 40

Does not have to be actual money, but does have tobe valuable consideration

Expectation of Profit from Common Enterprise

Expectation of profit must stem from use ofinvestors funds

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Profit must be substantial and non-

speculative if highly speculative or insubstantialthen not profit

Primary source of pension payments was fromemployers contribution rather than someonesmanagerial efforts

Vesting of pension depended on how long heworked not on financial health of the plan

c. Three Incidental Points(1) Nature of Plan

Here, plan was involuntary noncontributory plan

If characteristics change may be a security

If plan were contributory there may be the specificallocation necessary for investment of money

If higher percentage of fund came from the goodmanagement of the pool of funds rather than employerthan may be a security

(2) Alternative Regulatory Scheme

If one exists may resolve doubts against coverageby federal securities laws

(3) Ask about third point from class

4. Common Enterprise (Koscot)a. Background

Classic pyramid scheme that emphasizes attractingadditional advisors and supervisors while existing participantstake commissions on what new members pay to move up the

pyramid. Fist tier sells cosmetics, second tier invests money, getshigher discount to sell to tier one or public, third tier has ahigher investment/distributorship

b. Courts Decision(1)Koscot satisfies common enterprise prong b/c the investors

fortunes are linked to promoters efforts and fortunes in thecommon scheme

(2)Investment of Money

While first tier does not invest money they have thepotential to move up and 2/3 in scheme do invest

money(3)Common Enterprise

Definition one in which the fortunes of theinvestor are interwoven with and dependent upon theefforts and success of those seeking the investment orof third parties

Critical Factor not the similtude or coincidence ofinvestor input, but rather the uniformity of impact ofthe promoters efforts

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Vertical intermingling of investor and promoterinterests; the single investors funds must be related tothe funds or efforts of the promoter

Strict requires that fortunes of the investorbe linked to the fortunes of some other party(like profit sharing)

Broad requires only that the fortunes ofthe investor be liked to the efforts of anotherwsdparty (promoters effort must have an effecton investors fortune)

Horizontal intermingling of fortunes of multipleinvestors (interests must be similarly effected byscheme)

Individual Discretionary Account investor putsmoney on account and allows broker discretion intrading

Horizontal No multiple investors, fortune

not related to other investors Vertical Broad giving broker discretion ontrading so his efforts will effect the investorsfortune (whether he picks good stocks)

Criticism merely reiterates solelyfrom efforts of others requirement b/ccompensation of broker not tied to howinvestor is doing???

Vertical Strict depends on thecompensation scheme, if paid a flat fee not met

b/c fortunes of investor and promoter are notintermingled, but if % of profit met(4)Which Definition of Common Enterprise is accepted by courts?

(a)all take horizontal

(b) if take broad vertical will accept all

(c) if take strict will also take horizontal but not broad vertical(5) Solely From Efforts of Others

Functional rather than literal approach whether the efforts made by those other than theinvestor are the undeniably significant ones, thoseessential managerial efforts which affect the failure

or success of the enterprise test goes from solelyfrom the efforts of other to from the essentialmanagerial or entrepreneurial efforts of others

Test satisfied b/c role of investors at these meetingswere little more than a perfunctory one

Act of consummating sale is ministerial, notmanagerial

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5. Life Partnersa. Background

LP in viatical settlement industry

Markets fractional interests in insurance policies on thelives of the terminally ill

Responsible for screening the insureds and for collecting

and disbursing insurance proceedsb. Courts Decision

Not a security does not meet solely from efforts ofothers prong

Efforts have to at least occur after purchase ofinvestment

Efforts before investment are not irrelevant but bythemselves will not suffice

Possible different outcome if get money frominvestors and then find terminally ill people to doscreening

Absent one entrpreneurial post purchase service, theresimply is not on-going common enterprise involved when profitdepends entirely upon the death of insured, which requires noeffort on part of promoter

3. Evidence of Indebedness1. United States v. Jones (1971)

a. Background

D is forging airline tickets

Got tickets belonging to someone else, and validated

tickets to be used by third partiesb. Courts Decision

Not a security

Evidence of indebtedness does not encompass all writingswhich represent an obligation on part of the writer to dosomething for the holder

It embraces only such documents as promissorynotes which on their fact establish a primary obligationto pay the holders thereof a sum of money

2. In Re Tucker Corp. (1947)a. Background

Tucker sold car franchises requiring $25 deposit per carb. Courts Decision

Since agreements provided for the repayment ofdeposits received they were securities

c. Consistency b/w Jones and Tucker: can be established by lookingat protecting investors. Buyers of airline tickets wouldnt beworried about repayment b/c they expect to use their ticketwhereas franchise buyers may be more aware of repayment

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Policy opposite rule would make it very difficult tofigure out if something is a security (parties will not knowahead of time whether the register)

c. Stock issued pursuant to alternative regulatory scheme (ERISA)

This is a clear case of a security

People expect security laws to apply Fact that it is governed also by ERISA will not change itsclassification as a security

Argument concerning alternative regulatoryschemes more applies to catch all phrases (investmentK, evidence of indebtedness)

3. Promissory Notes (Reves)a. Background

Issued promissory notes payable on demand that wereuncollateralzed and uninsured but paid a variable rate

Marketed as a investment program

When went bankrupt, holder sued auditorsb. Holding

Not bound by legal formality, can take into account theeconomies of the transaction

Lamberth does not apply to notes b/c note is abroad term

General Test Note is presumed to be a security

Presumption may be rebutted only be a showing

that a note bears a strong resemblance (in terms offour identified factors) to one of the enumeratedcategories on list (things on list are not securities)

If not sufficiently similar to an item on the list, thedecision whether another category should be added isto be made by examining the same four factors

Categories Listed as not being securities

Commercial type things

Note delivered in consumer financing

Note secured by a mortgage on a home

Note evidencing a character loan to a bankcustomer

Factors(1)Assess motivations that would prompt a reasonable seller

and buyer to enter into the transaction If sellers purpose is to raise money for generalbusiness use or finance substantial project and buyer

interested in note primarily for profit security

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If note exchanged to facilitate purchase and sale ofminor asset or consumer good, to correct cash flowdifficulties, or advance commercial or consumer

purpose not a security(2)Examine plan of distribution to determine if there is a

common trading for speculation or investment

If traded, more likely you need protection and morelikely a security

(3)Examine Reasonable expectations of the investing public

May be considered a security if investing publicbelieves that it is even if not a security under theanalytical framework

(4)Examine whether some factor significantly reduces the riskof the instrument making Securities Acts unnecessary

Another regulatory scheme

c. Application of Test to Demand Note Is a security

(1)Called a note so it is presumed to be one(2)This presumption not rebutted

Does not closely resemble any of the familyresemblance examples

(3)Applying four factors, not a security

Motivation is an investment in a business enterpriserather than a purely commercial or consumertransaction

While not traded on an exchange, they are offeredand sold to broad segment of public (all that is needed

to establish common trading) Security fundamental essence is being aninvestment and notes here were advertised as a greatinvestment opportunity (public expectations)

No risk reducing factor would escape federalregulation if act does not apply

Court rejected argument that instant liquiditymakes them not a security

Stock on exchange just as liquid

Liquidity does not eliminate risk altogether

What is a security? FLOW CHART

Is it specifically named? Yes is it the investment securitysecurity

the name suggests? yes

NO NO

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Is it an investment contract? HOWEY1. invest $ (specific allocation for

valuable consid) - Daniel2. common enterprise (horiz or

strict/broad vert commonality andLife Partners entrepreneurialoperation)

3. expectation of profit Forman4. solely from efforts of others (solely

means primarily Koscotand LifePartners ltd must be post-saleeffort)

is it an evidence of indebtedness?1. SEC literal interp2. Judicial at minimum, a primary obligation to repay

3. See also NOTES

NO

Not a securityIF DEEMED A SECURITY, MAKE SURE THE CONTEXT DOES NOT NEGATEIII. Definition of a Sale

A. General1. Statutory Language

Sale shall include every contract of sale or disposition of a

security for value2. Value Aspect

Gift is not a sale (not kind of value contemplated bydefinition

Pledges are typically a sale (pledges to secure a loan)

B. Acquisitions1. General

Acquisition by means of a stock for stock tender offer is a sale

Sale occurs when parties become bound by the contract2. Applicable Rules and Statutes

a. Rule 145 (a)

The submission to a vote of security holders of a proposalfor certain reclassification of securities, merger,consolidations, or transfers of assets is deemed to involve asale of purposes of transaction

Effect is to require registration of the securities to beissued unless exemption

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b. Rule 153a Definition of precede by a prospectus

Have to deliver a prospectus before shareholders vote onthe combination (before used in context that have to deliverbefore a sale)

c. Rule 145(b) Communications not deemed to be a prospectus

Rule 145(b)(1) lists those things that can be in a written

communication without it being a prospectus and thereforenot an offer for sale involved in 5

3. Tender Offersa. Cash for Stock

Company A goes directly to Company Bs shareholdersand offers them cash for their shares

When A offers cash for stock A is not selling a security b/cthey are offering cash (not a security)

Do not have to registerb. Stock for Stock

Company A offers own shares in exchange for shares fromBs shareholders

Now A is selling a security and will have to register

Nothing in Rule 145 tells you this b/c SEC never held theposition that it was not a sale

4. Consolidations

a. Voting by Shareholders When two companies consolidate, needa vote by both sets of shareholders resulting in merged company

b. Rule 145(a)(2) Sale occurs when there is submitted for the vote

or consent of such security holders a plan or agreement for Mergers or Consolidations securities of one corporationwill become or be exchanged for securities of any otherperson (unless done to change issuers domicile)

Because both vote, sale5. Merger

a. Mechanics

After a vote on merger, Company B is out of existenceand their shareholders now hold shares in Company A

b. Holding

Company As shareholders do not vote so there is not saleas to them (per such shareholder language in rule)

But there is a sale as to shareholders of Company B

6. Sale of Substantially All Assetsa. Rule 145(a)(3)(A)

Mechanics

Company B transfers all assets to Company A and Aissues shares to Company B

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Company A is now partly owned by Company B

Company B then liquidates and only Company Aexists with shareholders of itself and Company B

Holding

Result is same as when merger

This is a sale Rule 145(a)(3)(A) sale when

transfer of assets of such corporation in consideration ofthe issuance of securities of such other person if suchplan or agreement provides for dissolution of thecorporation whose security holders are voting orconsenting

b. Rule 145(a)(3)(B)

Mechanics

Company B transfers all assets to Company A and Aissues shares to Company B

Company A is now partly owned by Company B

Company B does not dissolve but distributes Asshares as dividends

Holding

This is a salec. Rule 145(a)(3)(c)

Transfer of assets is still a sale even if shareholders cantvote on plan with results above, but within one year boardvotes to do it anyway

d. Rule 145(a)(3)(D)

Transfer of assets is a sale if transfer is part of a pre-existing plan for distribution that is not disclosed to

shareholders (even if done years later still a sale if part ofpre-existing plan)

C. Spin-Offs1. General

In a spin-off a corporation takes stock that it owns inanother corporation and distributes this stock to itsshareholders as a dividend

When the corporation engaging in a spin-off is publiclyheld, the spun-off corporation becomes publicly held also

Some shareholders will want to sell their shares,and a trading market will develop

Those who purchase will not have benefit ofregistration disclosure

2. Securities Act Release No. 4982 (1969)a. Permutation of a spin-off

Publicly help co. acquires partial ownership of private co.for minimal consideration and then distributes some of thoseshares to its own shareholders

Those shareholders will begin to sell in open market

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No business purpose except for benefit of spin-offb. Benefits

Private co. takes company public with little cash outlayand retains ownership

Public co. will keep shares and later sell for profit

Public co. gets something for nothing

c. Costs Losers are those who buy share w/o benefit of disclosure

d. SEC Position

This type of spin-off cannot be done without registration

Spin-off is a sale

When the shares are issued to the publicly owned oracquiring co. a sale takes place and if shares are thendistributed to shareholders of acquiring co. that co. may bean underwriter as a person who purchased from an issuerwith a view to distribution of a security

Because involves an underwriter must be registered

3. SEC v. Datronics Engineers (1973) For Value Requirementa. Definition of sale

Disposition of a security for valueb. Where is value in a spin-off?

Market for the stock is created by its transfer fromshareholders of acquiring co. to general public

Because of creation in market, value goes up andacquiring company can then sell the shares it retains for ahigher value

4. Staff Bulletina. Not all spin-offs are salesb. Registration not necessary if all of the following are met:

Spin-off is pro rata to the parent companys shareholders

The recipients of the spun-off securities provide noconsideration

The parent provides to its shareholders and the publicadequate information about the spin-off and about thecompany being spun-off

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

If the parent spins off restricted securities it has heldthe securities for at least two years

5. Free Stock Offersa. Is a saleb. Form of value in agreement

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IV. 33 Act ExemptionsA. Statutory Scheme

1. Section 4 Exempted Transactionsa. Meaning

Specific types of transactions are exempted

When purchaser of security here wants to resell have to

find own exemptionb. Exempted from what

Registration requirements of section 5 do not apply to thetransactions covered

All other sections of the Securities Act do apply

2. Section 3 Exempted Securitiesa. Meaning

The provisions of this title do not apply to certain kindsof securities

Regardless of whose hands they fall into and thefrequency of sale, never have to be registered

b. Exempted From What

Provision of the Securities Act do not apply to thesecurities enumerated except as expressly provided

Section 17 and Section 12(a)(2) still applyc. Securities Exempted

Government securities

Securities issued by religious, educational or charitableorganization

Interests in a railroad equipment trust

d. Three Important exempt transactions:(1)Securities exchanged with existing security holders(2)Securities issued under a plan of exchange approved by a court

or other governmental authority(3)Securities issued in an intrastate transaction

e. Section 3(b)(1)Language

SEC may add any other securities to those exempted bySection 3 when it finds that registration is not necessary inthe public interest and for the protection of investors byreason of the small amount involved or the limited character

of the public offering These will be transaction exemptions only

(2) Dollar Limit $5M(3) Mandatory Considerations

Whenever SEC has to determine whether an action isnecessary or appropriate in the public interest, it must alsoconsider in addition to the protection of investors, whether

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the action will promote efficiency competition, and capitalformation

(4) Rules and Regulations Promulgated Under

Regulation A

Rule 504

Rule 505

Rule 701 (employee benefit plans) Rule CE (issuers in California)

3. Exempted Securities v. Exempted Transactionsa. Exempted Securities

It does not matter how often they are traded, or by whom,they never have to be registered

b. Exempted Transactions

They are only exempt from registering for that specifictransaction

If a buyer in an exempted transaction wishes to resell, hemust find another transaction exemption or the securities haveto be registered

4. Section 28 General Exemptive Authoritya. Language

SEC has power to exempt any person, security, ortransaction, or any class or classes of person from any provisionof the Act so long as the exemptions necessary or appropriatein the public interest and is consistent with the protection ofinvestors

Remember additional 2(b) considerations

b. Other powers

Allows the SEC to raise the dollar limit of exemptive rulespreviously adopted under Section 3(b)

B. Private Placement Exemption 4(2) (Only the initial transactionexempted)1. Language

The provisions of Section 5 shall not apply to transactions by anissuer not involving any public offering

Only available to issuers

2. Defining a Private Placement Ralston Purina Co.a. Background

Sold stock to employees without registering

Employees had to initiate sale

Wide variety of people in varying positions bought stock

Claimed only sold to key employees for sale to all woulddefinitely be public

b. Issue

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Whether the sale to employees is a public offering orprivate placement.

c. Holding Public Offering

Burden of Proof

Burden of proof is on the person who wants theprotection of an exemption

There is no bright line numbers test the statute would seem to apply to a publicoffering whether to a few or many Numbers still relevant b/c have to show test is met

to each offered the more there are the harder it is toshow

The Test

Applicability of the exemption should turn onwhether the particular class of persons affectedneeds the protection of the Act

Can the offerees fend for themselves? Do they know the questions to ask and smartenough to know what to do with the information

Did the offerees have access to the kind ofinformation which registration would disclose?

Do not have to have access to theinformation that would be available in aregistered offering

An offering to only executive officers would be entitled tothe exemption

3. Defining a Private Placement Securities Release 4552a. Focus on Offerees as well as purchasers

Focus is on the offerees of securities rather thanpurchaser

b. One Bad Apple Doctrine

Inclusion of one offeree that does not meet the test (fendfor themselves and access to kind of info) ruins the existenceof the exemption

Not available even if caught early and does not buy

Example sell to four executives and one janitor

c. Public Advertising Inconsistent with private placement

Do not know who offerees are and whether they haveinformation and can fend for themselves

d. Number of offerees is not conclusive

Number of offerees is relevant only to the questionwhether they have the requisite association with andknowledge of the issuer which make the exemption available

e. Coming to Rest

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SEC considers the offering to continue until the offeredsecurities have come to rest in the hands of persons who arenot merely conduits for a wider distribution

If the purchasers do in fact acquire the securities with aview to public distribution, the seller assumes the risk ofpossible violation of registration requirements

Mere acceptance of them telling you wont sell it is notenough

Put legend on security and issue stop-transfer orders maywork

If sell to someone known to buy and sell quickly ratherthan for investment, likely violation

d. Integration of Offerings

(1) Issue whether what purports to be a single offeringshould be combined with one of more other purportedlyseparate offerings

(2) Effect when offerings are integrated in that way, thelarger offering, viewed as a whole, must meet the requirementsof an exemption or all the securities must be registered(3) Factors

(a)different offerings are part of a single plan of financing(b)the offerings involve issuance of the same class of

security(c) offerings are made at or about the same time(d)same type of consideration is to be received(e)offerings are made for the same general purpose

4. Defining a Private Placement Circuit Courts (page 181)

5. Defining a Private Placement ABA Position Papera. Offeree Qualification Can be qualified in several ways:

(1) Ability to understand the risk sophistication

(2) Ability to assume the investment risk wealth

But if completely no knowledge about businessmatters, should have a representative

(3)Personal relationship to issuer or promotion

Family ties, friendship, employment relationship,pre-existing business relationship

(4)Manner of Disclosure

The more careful, painstaking and detailed the

disclosure is, the more readily one may find that aparticular offeree is able to understand the risk

(5)Economic Bargaining Power

Concept that is essentially shorthand for describinginstitutional and some other types of professionalinvestors

(6)Offeree representative principle

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Idea is that sophistication may be imputed to anofferee

b. Availability of information

Adequate to give basic information concerning theissuers financial condition, results of operations,business, property and management

c. Manner of offering How to locate the qualified people: Offering should be made through direct communicationswith qualified offerees or their representatives

All forms of general advertising and mass mediacirculation should be avoided

d. Absence of redistribution 1st tier purchasers should not immediately redistribute theshares or it would turn it inot a public offering

A legend is not required although it would be helpful. Theabsence of one does not make the exemption unavailable

e. One Bad Apple What happens when one offeree is not qualified:

ABA says in some situations one bad apple will not ruinthe availability of the exemption

Courts reject this and say will always ruin exemptionf. Advertising

All forms of general advertising and mass mediacirculation should be avoided

g. Significance of Factors

These are only minimum standards used to help predict acourt decision

When planning should set standards higher

h. Number of Offerees Always has been some relationship between the numberof offerees considered acceptable and the level of theofferees sophistication

But they feel counsel should feel comfortable if selling toall institutional investors even if 100 of them

6. Safe Harbor Rule 506 Safe harbor under 4(2)

But still can go naked under the statute and statute remainsimportant

Fallback when other exemptions tried and failed

Sometimes no doubt about private nature and dont needthe safe harbor

Requirements more easily satisfied by chance

C. Intrastate Offerings 3(a)(11)1. Statutory Language

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Any securitywhich is a part of an issue offered and sold onlyto persons resident within a single State or Territory, wherethe issuer of such security is a person resident and doingbusiness within, or if a corporation is incorporated by and doingbusiness within such State or Territory

2. General Considerations

Only exempt purely local offerings those by in-stateissuers to in-state residents from registration requirements

Good for local business

No concern with the recipients ability to understandanything and fend for himself

Interpreted narrowly and strictly

Must look to both offerees and purchasers canteven offer to one non-resident

No $ limit on amount that may be raised

3. Interpretation Securities Release 4434a. Issue Concept

Entire issue of securities must be offered and soldexclusively to residents of the state in question

One Bad Apple an offer to a single non-residentwhich is considered part of the intrastate issue willrender the exemption unavailable to the entire offering

Integration

Whether an offering is part of an issue isdetermined by integration principles trying todetermine if issue in question is part of an offeringpreviously made or proposed to be made

What constitutes an issue Question of integration Are the offerings part of a single plan of financing

Do the offerings involve issuance of the same classof security

Are the offerings made at or about the same time

Is the same type of consideration to be received

Are the offerings made for the same generalpurpose

b. Coming to Rest

The shares must come to rest with residents for theexemption to be available

Issuer, underwriters and dealers must help ensure thereare no resales to non-residents

How long must residents hold them until they have beendeemed to come to rest with them?

Ask to determine the purchasers intentions of theshares to make sure they are being bought forinvestment purposes

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(1) Coming to Rest (she says this confuses the issue)

if an issuer makes a prima facie showing that securitiesinitially were sold only to state residents, if can get summaryjudgment on the coming to rest issue, regardless of thepurchasers holding period, unless the other party producessome evidence to the contrary

The initial seller of the securities has the burden ofshowing that the sales were made to residents only

The plaintiff then has the burden of producing somecontrary evidence

General Standard for Coming to Rest

Person must be purchasing for investment and notwith a view to further distribution or for purposes ofresale

(2) Doing Business

Refers to income producing activity

Issuer must conduct a predominant amount of thatactivity within his home state

Means more than maintaining an office, books, andrecords in one state

When a corporation is being set up and it intendsto use proceeds in one state, but then intentions aregenuinely changed and proceeds go elsewhere, maystill qualify for exemption

If company is being set up, the intent to invest proceedselsewhere may suffice to defeat a claim of exemption

5. Doing Business Interpretation Securities Release 5450 Principal or predominant business must be conducted inthe state

Substantially all of the proceeds must be used in the localarea

C. Rule 147 Safe Harbor for Intrastate Offerings1. Integration

Issue does not include offers or sales made more than sixmonths before or more than six months after any offers orsales made under the rule

Two offerings will not be considered one if they are sixmonths apart

2. Doing Business

80% of the revenues and assets of the company arelocated within the state

80% of the proceeds from the offering are to be used inthe state

3. Residence

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Principal residence (can be a resident of more than onestate, but principal residence is where you spend more time)

If a corporation, residence is where its principal office is4. Coming to Rest

Shares have come to rest when they have been held byinitial purchaser for nine months

After this the resident can sell to a nonresident5. Technical Compliance May Not Be Enough

If in technical compliance with rule but offering is part of aplan or scheme by such person to make interstate offers orsales of securities then exemption not available

Any plan or scheme that involves a series of offerings byaffiliated organizations in various states, even if in technicalcompliance, may be outside the parameters of the rule andof 3(a)(11) if what is being financed is in effect a singlebusiness enterprise

D. Regulation D1. Rule 504 (Under 3(b) power)

a. Aggregate Offering Price

Limited to $1M in a twelve month period

All 3(b) exempt offerings within the prior 12 months areaggregated together

b. Number of Investors/Purchasers

Unlimitedc. Investor Qualifications

None required

d. Sales Commissions Permitted

e. Limitations on Manner of Offering

Nonef. Limitations on Resale

No restrictions

Rule 144 is not applicable hereg. Issuer Qualifications

No Exchange Act reporting companies

No blank-check or investment companiesh. Notice of Sales

Five copies of Form D must be filed with SEC within 15days after the first sale

Failure to file will not cause the issuer to lose theexemption but may jeopardize the chance of using a futureRegulation D exemption

i. Information Requirements

Nonej. Integration Safe Harbor

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If offer is more than 6 months before or after, SEC wontintegrate

2. Rule 505 (Under 3(b) power)a. Aggregate Offering Price

Limited to $5M in a twelve month period

All 3(b) exempt offerings within the prior 12 months areaggregated together

b. Number of Investors/Purchasers

Can sell to 35 purchasers plus an unlimited number ofaccredited investors

Focus on purchasers, not offerees

Accredited Investor any bank, savings and loan,Investment Company, director executive officer or generalpartner of the issuer, natural person with net worth of $1M,natural person with net income of $200,000 or joint incomeof $300,000 in two most recent years, trust with assets of

more than $5Mc. Investor Qualifications

None requiredd. Sales Commissions

Permittede. Limitations on Manner of Offering

No General Solicitations Permittedf. Limitations on Resale

Restrictions on resale under Rule 144

Rule 144 is not applicable here

g. Issuer Qualifications Exchange Act reporting companies may use it

No investment companies or issuers disqualified underRegulation A

h. Notice of Sales

Five copies of Form D must be filed with SEC within 15days after the first sale

Failure to file will not cause the issuer to lose theexemption but may jeopardize the chance of using a futureRegulation D exemption


If purchased solely by accredited investors, noinformation required

If purchased by non-accredited investors See Chartj. Integration Safe Harbor


3. Rule 506 (Under 4(2))

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a. Aggregate Offering Price

Unlimited b/c under 4(2)b. Number of Investors/Purchasers

Can sell to 35 purchasers plus an unlimited number ofaccredited investors

Focus on purchasers, not offerees

Accredited Investor any bank, savings and loan,Investment Company, director executive officer or generalpartner of the issuer, natural person with net worth of $1M,natural person with net income of $200,000 or joint incomeof $300,000 in two most recent years, trust with assets ofmore than $5M

c. Investor Qualifications

Purchaser must be sophisticated (alone or withrepresentative)

Accredited investors are presumed to be sophisticatedd. Sales Commissions

Permittede. Limitations on Manner of Offering

No General Solicitations Permittedf. Limitations on Resale

Restrictions on resale under Rule 144

Rule 144 is not applicable hereg. Issuer Qualifications

Noneh. Notice of Sales

Five copies of Form D must be filed with SEC within 15

days after the first sale Failure to file will not cause the issuer to lose theexemption but may jeopardize the chance of using a futureRegulation D exemption


If purchased solely by accredited investors, noinformation required

If purchased by non-accredited investors See Chartj. Integration Safe Harbor


4. Rule 508

In certain circumstances, an insignificant deviationfrom requirements will not result in the loss ofexemption if there is a good faith and reasonableattempt by the issuer to comply with the Rule

5. Interpretation Securities Release 6455

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a. Accredited Investors Rule 501(a)

An investor is accredited if he falls into one of theenumerated categories at the time of the sale of securities tothat person

For a company to be an accredited investor, all of theequity owners must also be an accredited investor

Executive officer the executive officer of a parent ofthe Regulation D issuer that performs a policy makingfunction for the subsidiary is an executive officer of thesubsidiary

b. Disclosure to potential investors

An issuer may provide a summary of information followedup by a complete disclosure document if does not obscurematerial information When relying on Rule 505 if initially plan to only sell toaccredited investors, make sales to them, and then decide to

sell to non-accredited investors issuer must deliver acomplete disclosure document to all investors and agree to

return the funds of those who have already bought if dothis will not lose exemption

c. Counting Purchasers Rule 501(e) If an accredited purchaser lives with his cousin and both

are buying both are excluded

Partnership shall count as one purchaser and issuer doesnot have to consider the sophistication of each individual

partner

6. Aggregation and Integration Problemsa. General Rules

Offerings under 3(b) (Rules 504 and 505) have to beaggregated if within a twelve month period to make sure fallwithin dollar limitation

Integration safe harbor is six months before and afterb. 7 months since public offering and Rule 506 safe harbor is used to

make a private offering

aggregation is not a problem

Integration these are six months apart so deemed tonot be integrated

c. 3 months since public offering and Rule 506 safe harbor is used tomake a private offering

Problem with integration. SEC might find that the publicand private offering are part of the same offering and requirethat the 2nd be registered also

Have to look at factors to determine if they will beintegrated

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d. 7 months since public offering and Rule 505 is used to make the2nd offe

securities reg outline

Documents