· web viewwhat is security?2. howey test2. stock and notes4. public offering4. underwriter4....

Securities Regulation (Law & Business), Curtis, Spring 2015

What is Security?.....................................................................................................................2Howey Test............................................................................................................................................................. 2

Stock and Notes..................................................................................................................................................... 4

Public Offering.........................................................................................................................4Underwriter.............................................................................................................................................................................4

Disclosure in IPO................................................................................................................................................................... 5

Issuer Categories...................................................................................................................................................................5

The Gun Jumping Rule........................................................................................................................................ 5

Pre-filing Period §5(c).........................................................................................................................................................6

Waiting Period........................................................................................................................................................................ 8

Post-Effective Period.........................................................................................................................................................10

Exempted Offerings...............................................................................................................10Exempted Primary Transactions (from issuer)......................................................................................10

§4(a)(2) Private Placement...........................................................................................................................................10

Reg D Offering..................................................................................................................................................... 12

JOBS Act................................................................................................................................................................. 16

Crowdfunding/§ 4(a)(6).................................................................................................................................................16

Intrastate Offerings........................................................................................................................................... 17

R147 Safe Harbor............................................................................................................................................................... 17

Reg S....................................................................................................................................................................... 18

Secondary Sales.....................................................................................................................18Factors to Consider for Exemption.............................................................................................................................19

Rule 144 Safe Harbor:...................................................................................................................................................... 21

Civil Liability Under the ’33 Securities Act..............................................................................23§ 11 Liability........................................................................................................................................................ 23

Standing.................................................................................................................................................................................. 23

C/A: Material Misstatements.........................................................................................................................................24

Defendants – Who can be sued?...................................................................................................................................24

Defenses..................................................................................................................................................................................24

DD Defense for Non-Issuer.............................................................................................................................................25

Damages.................................................................................................................................................................................. 26

§ 12(a)(1) Liability............................................................................................................................................ 27

Ds = Sellers............................................................................................................................................................................ 27

Damages.................................................................................................................................................................................. 27

§ 12(a)(2) Liability: Material Misstatement in Prospectus/Oral Communication......................27

Scope........................................................................................................................................................................................ 27

Possible Defense................................................................................................................................................................. 28

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Materiality............................................................................................................................................................ 28

Disclosure............................................................................................................................................................. 30

Public Company Status: triggered by RS filing w/ the SEC..............................................................................30

Forms 10-K and 10-Q........................................................................................................................................................31

Form 8-K.................................................................................................................................................................................31

Reg FD......................................................................................................................................................................................32

10b-5.....................................................................................................................................33Misstatement of a Material Fact....................................................................................................................34

Duty to Update and Correct............................................................................................................................................35

Forward-Looking Statements.......................................................................................................................................36

Scienter................................................................................................................................................................. 37

Reliance................................................................................................................................................................. 37

Loss Causation § 21D(b)(4)............................................................................................................................ 38

10b-5 Defendants.............................................................................................................................................. 39

Damages................................................................................................................................................................ 40

Open market dmg...............................................................................................................................................................40

Face-to-Face Dmgs.............................................................................................................................................................41

Proportional Liability....................................................................................................................................................... 41

The Lead P in a Class Action (PSLRA)........................................................................................................................41

WHAT IS SECURITY? § 2(a)(1) of the Securities Act of ‘33The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing Very broad including “any note, stock… investment K…, or, in general, any interest or

instrument commonly known as a ‘security’…”

Howey Test

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Howey sells land w/ citrus trees to tourists [vulnerable investors], and offered voluntary mgt/service Ks (85%). Buyers can lease land back and receive profits from harvesting citrus plots]: the land sale + offering of mgt K collectively = investment K – led to expect profits.

Investment of money: the consideration does not actually have to be money. o Teamsters [compulsory, non-contributory (not earmarked for ees) pension plan, 20yr

continuous service is the only req’t]: ee is selling labor primarily to obtain a livelihood, not making an investment; no expectation of profits either. Plans of voluntary and w/ ee contributions = securities, but generally exempted from the registration req’ts.

In a common enterprise: investors are involved together w/ the central mgt team Expectation of profits/inducement of investment: Is led to expect profitso Forman [affordable housing; sell shares merely for moving into the co-op, no voting

rights, no transfer, has to sell back at ori $ if moving out; later raised rent to cover overrun; Ps sued for misrepresented risks]: personal use apt; not for profits. A tran’n labeled a stock ≠ security unless it (1) provides the right to dividends dependent on receipt of profits, (2) confers voting rights and (3) is negotiable. Possible profits from leasing parking spaces and washing machines was too

uncertain. Purpose is to provide amenities, not for co-op citizens to make profits.o Warfield [Charitable gift annuities w/ sig returns, second-life annuitants are often kids;

ends up being a ponzi scheme; D argues this is charitable, and PV of the payout on this annuity < the current value of that money]: objective stan’d: what the purchasers were offered / promised (its promotional /marketing materials): purported it to be an inv’t to attract fitting inv’rs and invoke their exp’ns for returns

The profit arising primarily from the efforts of other people.o Edwards [sold pay tel and leased them back for a fixed monthly fee. SEC sees tel to be

inv’t on the part of the buyers]: received a fixed $ that was guaranteed by K and thus not dependent on Edwards' success.

o Profits = capital appreciation resulting from the dev’t of the initial inv’t, or a parti’n in earnings resulting from the use of inv’rs $. Fixed returns can also be investment K, e.g., bonds are fixed returns, key is be exposed to perf of the busi in an equity sense

o Less like a security: Pick one orange Pick for a week rely on managers w/ nominal control participate in managerial decision making w/o control actively manage w/ control (actually run the enterprise) A franchise can / cannot be a security: who hires ees, set the price, manage the store Private equity fund: fund (general partner) manage things for inv’rs (limited partners)

o LPs are presumed to share securities w/ 3 rebuttable factors: Williamson [sold interests in 28 limited liability PS to 485 persons; actual duties is checking a box on ballots w/ little info; only one candidate; can only be removed for cause; box checked before PS formed; unreturned and unvoted ballots were voted in favor of mgt; PNs included a

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railroad retiree, a housewife, and a nurse; D was the sole Managing GPN; 100% of the PNs chose Merchant as their MGP]. 1) Whether an PS K leaves so little power in PN’s hands as would a limited PS; 2) Whether the PN is so inexperienced and unknowledgeable in busi affairs that he is

incapable of intelligently exercising his PS powers; 3) Whether the PN is so dependent on some unique entrepreneurial or managerial

ability of the promoter or manager that he cannot replace the manager or otherwise exercise meaningful PS powers.

o PS agreement can call them GPNs, but are actually limited PNs. Merchant Capital Alternative regulatory schemeo If another Act/law has filled a “reg void,” there is no need of securities laws. Teamsters

[we have ERISA already protected ee interests in pension fund]; Marine Bank [certificate of deposit is issued by a federally regulated bank] ≠ security; reg’d by compre banking law. State regulation carries little weight in the Howey test.

Stock and Notes All investments labeled as stock that bear out the characteristics of stock are securitieso The right to receive dividends.o Negotiability.o The ability to be pledged or hypothecatedo Voting rights in proportion to the number of shares ownedo Ability to appreciate in value.

Notes: a specified interest rate, principal amount, maturity termo Presumption that any note w/ a term of more than 9mon is a “security.”o Family resemblance test: issuer can rebut the presumption that a note is a security by

showing that the note in Q “bears a strong family resemblance” to an item on the judicially drafted list of exceptions, or convinces the ct to add a new instrument to the list (1) the motivations behind the transaction; (2) the plan of distribution; (3) the

reasonable exp’ns of the investing public; and (4) the existence of another regulatory scheme to reduce the risk of the instruments.

o Investment versus commercial test: note issued in an investment context (which are “securities”) from notes issued in a commercial or consumer context (which are not)

o You can also apply the Howey test

PUBLIC OFFERING

Underwriter

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§ 2(a)(11) The term “underwriter” means any person who has purchased from an issuer w/ a view to, or offers or sells for an issuer in connection w/, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking.o A CP is an issuer for § 4(2) purposes, but not an issuer for § 4(1) purposes.

§ 11 In case any part of the RS … contained an untrue statement or a material fact … any person acquiring such security … may sue …[a full list of people, including] o (5) Every UW wrt such security

The actual dmgs in these suits are limited to the price at which the shares IPO-ed, distinguished from the price at which the inv’rs bringing the suit paid for the shares.

Disclosure in IPO Integrated Disclosure: one set of items that you need to disclose per Plain English Req’t Companies need to make periodic filings w/ the SECo Pre-IPO/registration statement (’33 Act)

Form S-1, S-3o Annual report

Form 10-K, 10-Qo Annual SH voting and solicit proxies

Schedule 14A (proxy statement)

Issuer Categories Non-reporting issuers: b/c there is relatively less info available to the market concerning

these issuers, they are permitted no shortcuts. The rules apply to them in the strictest manner possible.

Unseasoned issuers: reporting periodically, but not eligible for S-3 to register offerings of securities

Seasoned issuers: S-3 eligibility for primary offerings (12 months reporting) WISIs – well-known seasoned issuerso Issuers that meet the most stringent set of req’ts – and therefore get the most leeway,

and the largest number of exceptions, from regulation under §5.

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The Gun Jumping Rule

§5(A) unless a RS is in effect as to a security, it shall be unlawful for any person, directly or indirectlyo (1) to sell a security through the use or medium of any prospectus or otherwise; or o (2) to carry in interstate commerce any security for the purpose of sale or for delivery

after sale. §5(B) it shall be unlawful for any person o (1) to transmit any prospectus relating to any security wrt which a RS has been filed

under this title [the waiting period], unless such prospectus meets the req’ts of §10; oro (2) to carry any such security for the purpose of sale or for delivery after sale, unless

accompanied or preceded by a prospectus that meets the req’ts of §10(a) FP.

Pre-filing Period §5(c) §5(C) it’s unlawful for issuers, UWs, and/or dealers to buy or offer to buy or to sell or offer

to sell the issuer’s securities (by any means of interstate commerce), unless a RS has been filed as to such security.

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General rule: no offers, no sales. But § 2(a)(3) UW’s comm is allowed; NOT include dealers. Indicators of “in registration”/contemplating of issuing: sign the letter of intent to the UW §2(A)(3) The term ‘‘offer’’ shall include every attempt or offer to … solicitation of an offer to

buy, a security…(designed to interest investors in a particular security = “any attempt”)o Conditioning the market: any type of info promoting the co. when the co. is considering

IPO could potentially be an offer. Concern: balance w/ ord busi operation/SH inquiry Motivation of the comm – timing matters [CEO’s speech to analysts including

forward looking info, scheduled before offering was planned, but speech given in registration]: “before plan” suggests the speech is about the ordinary course of business of the co., not about the specific IPO. SEC Release No. 3844

Type of info: soft/projections vs. hard-counting data that is objectively verifiable. SEC Release No. 5180

Form of distribution: broadly to reach potential investors (written info that can be easily reproduced and spread) vs. disclose narrowly to SHs/analysts on the phone

Who is distributing? UW (presumably taken as conditioning the market) vs. issuer SEC Release No. 3844 [UW distributing brochure promoting the general industry,

no reference to any particular issuer or any security, nor to any particular financing]: SEC deems it the first step in a sales campaign to affect a public sale.

o Research reports by offering participants (unless they’ve been publishing the same kind regularly). EXCEPTION: can public for EGC (annual gross revenue < $1B). §2(a)(3)

Safe Harbor for Pre-Filing Communication o 30-day communication Rule 163A: Communications that

Cannot reference the offering + made by or on behalf of the issuer > 30 days before filing, AND R163A(c): CANNOT be made by an “offering participant” such as UW.

The issuer takes reasonably steps to prevent further distribution or publication w/in the 30-day period.

o Notice of offering Rule 135: issuer can make a public statement to state the fact that it plans to sell securities – can only contain very limited information. Type, amount, anticipated timing; cannot name UW or contain pricing info. Exclusive: have to obey!

o Reporting Issuers: Factual Info + Ads Rule 168 + certain forward-looking info (forecasts or discussions of future business plan) R168(b)(2). §168(c) cannot reference the offering. §168(b)(3): not for UW or dealer participating in offering §168(d)(1): previous released/ordinary course of business §168(d)(2): consistent time, manner, form

o IPO/Non-reporting issuer: Regularly released factual business info is exempted if §169(c): May not reference the offering.

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169(b): Factual info about the issuer, its business or financial developments OR ad about the issuer's services or products (to customers rather than investors)

169(b)(2) not for UW or dealer participating in offering 169(d)(1) The issuer has previously released or disseminated this type of info in

ordinary course of business 169(d)(2): The timing, manner and form have to be consistent w/ past practice.

If you used to advertise in the local area, don’t start doing it nationally 169(d)(3): intended use by persons OTHER THAN in their capacities as (potential)

investors – non-investor recipients/issuer’s As historically provided such info. o Non-exclusive safe harbor rule: if you don’t obey, doesn’t mean you violated the statute. o WKSIs are exempt from §5(c)!

Rule 163. WKSIs can engage in solicitation activity even before filing RS. BUT any written solicitation that they engage in constitutes a FWP has to:

163(b)(1) Contain a legend informing investors about availability of future RS. 163(b)(2) Be filed as FWP after filing RS 163(c) Cannot be made by UW or dealer participating in offering. §2(a)(10)(a) accompanied or preceded by a FP after effectiveness.

EGC can solicit institutional investors freely before filing RS. §5(d)o Have to prevent the info from being distributed to retail investors (cover letter, etc.).o §2(a)(19): EGC = annual gross revenue < $1B. Can remain as EGC for 5 years.

Waiting Period §5(b) It shall be unlawful for any persono (1) to transmit any prospectus relating to any security wrt which a RS has been filed [in

the waiting period], unless such prospectus meets the req’ts of §10 [FP or PP]; or o (2) to carry any such security for the purpose of sale …, unless accompanied or preceded

by a prospectus that meets the req’ts of §10(a) [FP]. Prospectus = any written offer or offer by radio or TV (not live /conference call) or confirms

the sale of any security §2(a)(10), and any prospectus must meet §10 req’t for transmission. o Offer = any solicitation or attempt to solicit (very broad)o If it’s not a written offer (all the pre-filing things and oral offers) NOT a prospectuso FWP is treated as a § 10(b) prospectus and satisfies § 5(b)(1) for the purpose of transmit

Excluded by § 2(a)(10) prospectus definitiono Road show: oral offer in face-to-face discussions w/ institutional investors nationwide

All electronic media are now included as written communication under Rule 405 – you can use PowerPoint slides, but don’t print it off or distribute it!

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o “Tombstone Ads” Rule 134 (1) The name of the issuer of the security; (2) The title of the security … and the amount … being offered; (3) A brief indication of the general type of business of the issuer... (10) The names of the UWs; (11) The anticipated schedule for the offering and a description of marketing events

o Notice of proposed offering, Rule 135 if Legend: a statement ... that the notice does not constitute an offer of any securities

for sale; and Limited notice content: includes no more than the following info:

The name of the issuer; The title, amount and basic terms of the securities offered; ... The anticipated timing of the offering; A brief statement of the manner and the purpose of the offering, w/o naming the

UWs Free Writingo Traditional Free Writing: §2(a)(10)(a) excludes from the definition of prospectus any

communication during the effective period which is accompanied by a § 10(a) FP.

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o Free Writing Prospectus: any written comm that offers to sell or solicits an offer to buy security that is or will be subject to a RS and that does not meet the req’ts of a §10 statutory FP or PP or a §2(a)(10)(a) form of traditional free writing. Include Graphic comm: “all forms of electronic media,” such as emails, websites, CD-

ROMS, videotapes, and substantially similar message widely distributed over a variety of electronic communication networks. Real-time comm excluded

Indirect comm through media: for a FWP from a media source not affiliated w/ nor paid by the issuer or other offering participant, the statutory prospectus is NOT required to precede or accompany the media FWP. Rule 433(b)(2)(i) Issuers or those acting on its behalf prepare, pay, or give consideration for

preparation = non-independent = FWP subject to R433o A FWP that meets the req’ts of Rule 433 (req’t for issuers) is treated as §10(b)

prospectus for purposes of §5(b)(1). Must be accompanied or preceded by the most recent §10 statutory prospectus (PP) No information inconsistent w/ the RS or FP (but info can go beyond RS) Must include a legend indicating the availability of RS (a hyperlink is fine) R433(c)(2)(i) FWP must usually be filed w/ the SEC and retained by the issuer

Post-Effective Period 20 day review period, after which RS becomes automatically effective. §8(a) Acceleration: issuers can waive 20-day review period and wait for SEC approval. Rule 473

EXEMPTED OFFERINGS Exempted Primary Transactions (from issuer) Only exempts certain transactions, NOT the securities forever. Only exempt §5 registration requirements, not anti-fraud provisions.

§4(a)(2) Private Placement Exempts transactions by an issuer not involving any “public offering”. Factors for “public offering” so as to subject to §5 (1935 General Counsel Opinion)o Number of offerees: double digits; NOT just purchaserso Rel’p of offerees to each other and to the issuer

Offerees to issuer: offerees can protect themselves by engaging in the business (sitting around the table, discuss about incorporating the org, etc)

Offerees to each other: sanction issue – if they are families and relatives, you probably won’t want to disappoint them. We can rely less on RS to increase

Doran : when there is no RS-like disclosure, there need available access to relevant info, which is relationship b/w issuers and offerees such as employment, family, or economic bargaining power that enables the offeree effectively to obtain such info.

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o Number of units offered If you have small units, it’s easy for issuers to allocate them to more offerees The more units there are, the easier it is to break up the purchase to resell to other

peopleo Manner of offering: face to face vs. mass communication

How it is marketed? General solicitation vs. narrowly targeting Proxy to the relationship of offerees and issuers Avoid people being constantly bombarded w/ invitation to buy the security.

Cultural impact of opening the door of constant public solicitation o Offeree’s sophistication: able to “fend for themselves” or have to rely on § 5 regis req’t.

Ralston Purina [issuer sold §2M of common stock to about 500 “key” ees. EEs must take initiative to inquire about the purchase]: relative small number of offerees w/ capacity to fend for themselves and analyze whether this is a worthwhile investment Issuer should carefully prequalify offerees and consider facts including whether they

Can evaluate the nature/riskiness of the investments and Are represented by a financial expert.

o Offeree’s information access that comes in various forms – equivalent to that provided in a RS. Doran v. Petroleum Management (5th Cir. 1977, p.543) [after P buys the investment, the wells closed for almost a year and was never as profitable as presented to D]: each offeree need be furnished info about the issuer that a RS would have disclosed or that each offeree had effective access to such info. Require

Insider status, direct provision of informational circulars; OR Promise of access and realistic expectation that the offeree is going to take

advantage of the information The mere fact that highly sophisticated purchasers can ask and get information

might give them access to information is insufficient If the offerees had a close relationship w/ the issuer, or the issuer gave the offerees

the same type of info that would be contained in a RS, the exemption is more likely to apply.

o Resale limitation: so that resales do not retroactively invalidate the protection of the §4(a)(2) exemption (if the securities are resold w/in a short time, the exemption can be destroyed). Have to take steps to reasonably ensure that the 1st round of purchasers are buying

w/ investment intent (holding on to them): the securities need to “come to rest” before being resold.

In practice: Purchasers sign statements about their investment (rather than distribution)

intent

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Transfer restrictions are legended on the stock certificates Transfer agent of the issuer would not register any transfers unless instructed by

the companyo Other factors

If the offering involves millions of $ The securities are readily marketable The offerees are a diverse group, Ralston Purina The offering is made through public ad

Reg D Offering R501(a): Accredited investors (AI)o R501(a)(1): Institutional investors.o R501(a)(3): any organization w/ assets > $5Mo R501(a)(4): Directors & officers CP + Restricted securitieso R501(a)(5): Individuals w/ net worth > $1M.

But (a)(5)(i)(A): primary residence is NOT included as an asset. A million-dollar house is not enough to make you sophisticated.

o R501(a)(6): Individuals annual income > $200K or couple > $300Ko R501(a)(8): Entity in which all of the equity owners are AIs (partnership formed by high-

level individuals).o R501(h): Non-AIs can still fend for themselves if they are represented by someone who’s

highly sophisticated AND is acting in their best interest. R501(e)(1)(iv): Counting 35 purchasers (for R505 & 506) o AIs or relatives sharing the same principal residence w/ an AI or a majority-owned

entity by an AI and his relatives are not counted in calculating the total number of purchasers in a reg D offering.

o Looking-through . Entities formed by non-AIs will be looked-through. R502(a): Integrationo Multiple offerings of securities may be deemed by the SEC to be a single offering

(devastating for the issuer b/c it usually means that § 5 was violated). Single plan of financing Same class of securities Same time period Same type of consideration Same general purpose, SEC Release 33-4552

o “All sales that are part of the same Reg. D offering must meet all of the terms and conditions of Reg. D”: If an issuer simultaneously has an offering type that has less restrictive conditions and another offering type with more restrictive conditions you have to comply w/ the more restrictive conditions.

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o Safe harbor: all offers and sales that take place at least 6 months before the start of, or 6 months after the termination of, the regD offering, as long as there are no offers and sales (excluding those to ee benefit plans) of securities of the same or similar class w/in either of these 6-month periods.

NOTE: the amount of the first investment is still calculated under the aggregated offering price!

R502(b): Info req’t for non-AIo Information equivalent to RS should be provided to any non-accredited investor.

If sells to AI, the disclosure is gov’d by the market, not this regulationo National treatment. Information provided to AI should also be provided to non-AI.

R502(b)(2)(iv). R502(c): General solicitationo No mass media: any communication through mass media or seminar/meeting resulting

therefrom. BUT R135c: reporting companies can make a simple notice of unregistered offering

publicly (can’t name UW or condition the market) R135e journalist access: US journalists may be provided with access to press

conferences on truly global offerings (i.e., not a Reg D offering limited to US investors). AND

o There must be pre-existing relationship between the offeree (NOT just purchaser!) and issuer OR those acting on behalf of the issuer. Mailing of a written offer to up to 330 persons having a pre-existing relationship w/

the general partner of the issuer would not exceed the terms of Rule 502(c). BUT 600 persons who are existing clients of an officer who is an insurance broker is

not allowed when the letter fails to establish that the issuer is aware of the financial circumstances or sophistication of the persons w/ whom the relationship exists or that otherwise are some substance and duration (more like a costumer-salesperson relationship). The concerns of frenzy or unsophistication are not met by this relationship.

3rd party websites accepting unsolicited clients or soliciting clients through B&Ds using their pre-existing relationship.

B&Ds may solicit clients after a cooling-off period (e.g., 45 days) following setting up the a/c for a new client; No action letters: EF Hunton; Batman;

R502(d): Resale Limitation

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o Issuer must take reasonable care to assure the purchasers are not for distribution purpose Reasonable inquiry, Written disclosure about resale restrictions and Legend the certificates.

o Purchasers can’t be UW = Anyone who buys from issuer w/ the purpose of reselling. UW is defined broadly. Can NOT sell to IB and then sell to public BUT IB can act as placement consultants

(never buy but help issuers sell: have to be disclosed on Form D). R503: Filing requirement = Form D w/in 15 days of first sale. R505: Aggregate Offering Priceo The aggregate offering price for an offering of securities under this rule 505, as defined in

paragraph 501(c), shall not exceed $5M, less the aggregate offering price for all securities sold w/in the 12 months before the start of and during the offering of securities under this section in reliance on any exemption under § 3(b) of the Act or in violation of section 5(a) of the Act.

o Subtract from the $5M securities sold under §3(b) for past 12 months. If you sold illegally securities under §5(a), that also counts as part of the $5M.

R506: additional req’t of sophistication o Vague principle : the purchaser has knowledge and expertise in financial and business

matters so that he is capable of evaluating the merits and risks of the investment. Old option: NO unsophisticated purchasers/rep: even non-AI has to have “such

knowledge and experience in financial and business matters.” R506(b)(ii) New option: Issuer has to take “reasonable steps to verify” the investors are all AIs.

R506(c)(2)(ii)o Practice . Merely being AI or asking questions is not enough. FSC Securities.o No $ limit b/c of its origin under §4(2) rather than §3(b) and the corresponding emphasis

on the nonpublic nature of the offering rather than its dollar amount. R508: Substantial compliance o Small deviations may be remedied if not intended to directly protect the particular

investor and remedied in good faith Key: Good faith & reasonable attempt to comply.

o Significant and non-remediable: Dollar ceilings, Numerical purchaser limits, No general solicitation.

Rule 504 §3(b) Rule 505 §3(b) Rule 506 §4(a)(2)Aggregate offering $1M sale in previous 12 $5M sale in previous No $ limit

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price (cap) months 12mon, including any §3(b) sell or §5(a) violation sell

# of purchaser limit R501(e)(1)

No, but offerings made to large # of purchasers may violate General Solicitation prohibition.

35 non-AIs (reasonable belief stan’d)Unlimited AI – reasonable belief stan’d (BUT information disclosure!)

35 unaccredited but sophisticated inv’rs (RB stan’d)Unlimited AI – reasonable belief stan’d (BUT information disclosure!)

Investor qualification

Issuer has to take “reasonable steps to verify” the investors are all AIs. R506(c)(2)(ii)

Issuer Nature Not available for reporting, investment company, or blank check company

CANNOT be investment company. R505(a) Use R506(b).Not available to §262 issuers: Reg A “unworthy offering” disqualification

None

Summary Exempted If it’s done exclusively

under blue sky law filing OR

If it’s done “exclusively according to state law exemptions from registration only to AI.”

Has to comply w/ ALL of R502 conditions

2 options: No general solicitation (GS) +

Allows sophisticated non-AI, OR

GS + Only AI (have to verify)

Integration R502(a)

Yes Yes Yes

Disclosure R502(b)

Yes when required by state law. Rule 502(b)(1)

Yes for non-AI. R502(b)(2) Yes for non-AI. R502(b)(2)

General Solicitation R502(c)

Allowed if offered under state law. R504(b)

Not allowed Old option: Not allowedNew option: JOBS Act allows if all AIs

Resale Limitation R502(d)

No if offered under state law. R504(b)

Yes Yes

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JOBS Act Emerging growth companies (EGC): company has less than $1B in annual gross revenue;

ends when the company has more, or its securities are 5yrs old. §2(a)(19)o Test the waters provision: § 5(d) exception to oral and written offers to institutional

investors before the RS is filed o Broker dealer, even if participants, can issue research reports during waiting period o Non-public review §6(e) – get feedback on S-1 from the SEC confidentiallyo 2yr as oppose to 3yr audited financial statemento Exemption from Say-on-pay, say-on-frequency D-F votes

Crowdfunding/§ 4(a)(6) Unlike § (4)(a)(2) or Reg D private placement exemptions, the JOBS Act does not restrict the

types of investors who may participate in Crowdfunding, but limits the quantity that both issuers can sell and investors can buy.

Issuer: no more than $1M during any 12mon period. § 4(a)(6)(A)o Not integrated w/ other exempt offerings (Reg D)o Crowdfunding SHs don’t count toward Exchange Act reporting req’ts (2000 SHs)o Form C disclosure req’t

<100K offering: tax return and financial statements B/w $100K and $500K:fFinancial statements reviewed by independent accountant >$500K: audited financial statements

Investor: In any 12mon period, not to exceed

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o The greater of $2,000 or 5% of income or net worth, if either income or net worth is less than $100K, and

o 10% of income or net worth, not to exceed $100K, if either income or net worth is equal to or more than $100K

o If your annual income is more than $100K but your net worth is less than $100K, take the higher of the two limits

o The limit is aggregated for all issuers using the §4(a)(6) Crowdfunding exemption.o The limit does not distinguish b/w retail and institutional investors.

Funding Portal: a registered intermediary for Crowdfunding offerings. Cannot o Offer investment advice or recommendationso Solicit purchases, sales, or offers to buy securities offered or displayed on its website or

portal Have any financial interest in the issuer (cannot solicit; just present the info)

o Compensation ees, As, or other persons for such solicitation or based on the dale of securities

o Hold, manage, possess, or otherwise handle investor funds or securities Must, under 4A(a)o Ensure that investors receive and affirm that they have reviewed investor education

information o Enforce investment limitso Ensure that offering proceeds are provided to issuer when project is “funded”o Comply with other SEC ruleso Maintain communication channels b/w issuer and investoro Make issuer form C disclosures publicly availableo Reasonable belief that issuer is not a bad actor and is in compliance w/ regulations and

conduct background checks

Intrastate Offerings

R147 Safe Harbor

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Reg S R901(a) for he purposes only of § 5 of the Act, the terms “offer,” “offer to sell,” “sell,”

“sale,” and “offer to buy” shall be deemed to include offers and sales that occur within the United States and shall be deemed not to include offers and sales that occur outside the United States.o Removes certain “offshore” offers and sales from the definition of offers and sales for

purposes of §5. o Frees the issuers from the gun-jumping rules and the heightened pubic offering

antifraud provisions of §§11 and 12(a)(2), but does not exempt the issuer from Rule 10b-5 antifraud liability.

R903(a) An offer or sale of securities … shall be deemed to occur outside the US (R901) if:o 1. The offer or sale is made in an offshore transaction;

(1) the buyer is a person not in the U.S. (i.e., physically outside the U.S.) at the time the buy order is originated; or

(2) the transaction is executed in a “designated offshore securities market.” R902(h). o 2. No directed selling efforts are made in the US; and

No activities that are intended to, or could reasonably be expected to, result in conditioning the market in the US, particularly through a US publication

o 3. The conditions of paragraph (b) of this section, as applicable, are satisfied. No substantial US market interest – substantial amount of US trading in the security. R902(j)

Type Who Conditions

Category 1 Foreign issuers w/ no substantial US market interest Directed Offeringo Foreign issuer single countryo Non-convertible foreign-currency-denominated

debt

Basic req’ts

Category 2 U.S. reporting companies offering debt securities No sales to a U.S.

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Foreign issuers offering debt securities Foreign issuers that are reporting companies offering

equity securities

person

Category 3 Foreign offerings w/ substantial risk of entering US markets (catchall)

Extensive restrictions on transactions and mode of offering

SECONDARY SALES § 4(a): § 5 shall not apply to—o (1) tran’ns by any person other than an issuer, UW, or dealer.o (2) tran’ns by an issuer not involving any public offering = distribution in the §2(a)(11)

UW definition .o (4) brokers’ tran’ns executed upon customers’ orders on any exchange or in the over-

the-counter market but not the solicitation of such orders. But the broker can be deemed an UW if he meets the def of § 2(a)(11)

The 4(1) exemption requires a safe harbor to ensure that secondary sales of 4(2) offerings are not § 5 violations. R144 defines the req’ts that satisfy 4(1):o Holding periodo Information requiremento Minimize disruption in the secondary market

R 144A o Buyers must be Qualified Institutional Buyerso 144A securities can trade among QIBso Can sometimes be converted or swapped for registered securities

Factors to Consider for Exemption Is it a Distribution = public offering in § 4(a)(2) as defined by Ralston Purina. Gilligan [the

stipulation expressly states that the purchasers “were not supplied w/ material info of the scope and character contemplated by the Securities Act nor were the purchasers in such a relation to the issuer as to have access to such info concerning the company and its affairs].o Buyers either actually have such info as a registration would have disclosed, or have

access to such info – fend for themselves/vulnerability of investors. o Selling to an individual is fine, but trading on public exchange (including over the counter

market) is distribution. National exchange will always trigger reporting company status that requires you to register w/ the SEC.

Purchase w/ a view to distribute

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o Holding period: 2 years rebuttable presumption = “come to rest;” 3 years = the presumption of investment intent becomes conclusive, but CP is different! If the seller only wants to sell in a private tran’n, might be okay to sell w/in 2yr

(didn’t buy “w/ a view to distribution”) if the purchaser is an institutional investor (sophisticated investor), but it’s best to wait 2 years if selling to an individual.

o Unexpected change of circumstances in the purchaser's financial circumstances. Gilligan [bought private securities, 10mon later, ads in CC magazines was not increasing, converted debentures into common stock on AMEX]: Bad investment is NOT a legitimate excuse. The intention to retain the debentures only if CC continued to operate profitably [conditional intent] was equivalent to a purchase w/ a view to distribution. SAR No. 5223: The “change in circumstances” concept should no longer be considered

as one of the factors in determining whether a person is an UW. The circumstances of the seller are unrelated to the need of investors for the protections afforded by registration” Rarely accepted by the SEC; the R 144 safe harbor is more clear-cut

Offers or sells FOR an issuer: anyone in any way assisting the issuer getting money from the public = UWo No req’t of compensation & can be entirely voluntary, not necessarily direct “sale” for

issuers. CCBA [CCBA fundraised to buy bonds issued by the Chinese gov’t w/o approval and no pay; CCBA didn’t register w/ the SEC]: although CCBA didn’t engage in the sale, it collected and transmitted money b/w seller and buyer = UW (w/o the actions of CCBA, the sale would not have transpired), regardless of whether it is compensated or approved by the issuer. Outmost scope for UW: continual solicitation (CCBA) is different from one-time

auditoria (Dissenting’s WSJ “mere solicitation” article ex.)

o To avoid being an UW, Y does not himself sell to the public and effectively prevents

his purchaser Z from reselling to the public w/o an exemption. Y could require his purchasers to agree to contractual provisions limiting resales,

place legends on the security certificates noting that the securities cannot be resold w/o registration or an exemption, give stop transfer instructions to the issuers’ transfer agent, and so on.

CPs are issuers only for purpose of determining who’s an UW under § 2(a)(11) anyone who sells for a CP = sells for an issuer.

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o Control : possession, direct or indirect, of the power to direct or cause the direction of the mgt and policies of a person, whether through the ownership of voting securities, by K, or otherwise. Power to control, not exercise of the power (i.e., 90% creditor not actively participates in the mgt = CP), is what makes someone a CP.

§ 4 (1 1/2) exemption: if the CP is selling to an investor w/ the ability to fend for himself, there is no “distribution” w/in the meaning of § 2(a)(11), and therefore no UW in the CP’s tran’n. The § 4(1) exemption is therefore available to the CP. o Restricted Offering : avoid becoming an UW by selling to the public, and to avoid selling

to an UW (by selling to someone who in turn sells to the public) Solution: get a broker to sell on behalf of CP w/ no solicitation b/c the broker is not

an UW if he’s not selling w/ a view to a distribution and thus satisfies § 4(a)(1) – no issuer, dealer or UW involved (CPs are not issuers for 4(1) purposes).

o Public offering : after a tran’n is registered, further tran’ns are presumptively exempt under §4(a)(1) (not involving an issuer, UW, or broker), except for CP – if the CP uses any intermediary (i.e., a broker) to distribute her shares, the intermediary becomes an UW and thus the tran’n does not satisfy § 4(a)(1)! The CP is not concerned w/ her personal UW status b/c the securities were not

acquired from the issuer or an affiliate (the securities are not restricted). However, if a purchaser from the CP sells to the public in a nonexempt tran’n, the purchaser will be deemed to have acquired the securities from an affiliate of the issuer w/ a view to a distribution (UW).

o Brokers assisting CP in unregistered security distribution could probably fit in §4(a)(4) exemption to avoid personal liability if the broker doesn’t know. Wolfson

o If a non-CP purchased in a private offering under §4(a)(2) and he desires to resell some of these restricted securities. He cannot appeal to §4(a)(2) b/c this section applies only to issuers. If he is also not an UW or dealer, he presumably can resell under §4(a)(1).

Restricting further resales o You could require purchasers to agree to contractual provisions limiting resaleso Place legends on the security certificates noting that the securities cannot be resold w/o

registration or an exemption o Give stop transfer instructions to the issuers’ transfer agent, and so on.

Rule 144 Safe Harbor R144 does not apply to sales by persons who o Are not affiliates of the issuero Have not been affiliates for the last 3 months, and o Have held the securities for at least 2yrs before selling themo For the rest of the persons, 5 principal restrictions on resale [not just distribution] for

restricted securities by anyone, and on the resale of any securities by CP of the issuer

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Adequate Public Info about the issuer. R144(c) o (c)(1): Reporting companies satisfy the req’t if they have been required to report for at

least 90 days before the R144 sale, and have actually filed all req’d reports, under § 13 or 15(d).

o (c)(2): Other companies can choose to report voluntarily in order to make R144 available to their security holders. They also can make publicly available the info req’d under the ’34 Act to permit brokers to quote an over-the-counter security.

Reporting Company Non-Reporting CompanyAffiliates 144(c)(1) info req’ts apply 144(c)(2) info req’ts applyNon-Affiliate Must be current on reports if securities

are sold w/in 1yr 144(b)(1)(i)No info req’ts 144 (b)(1)(ii), but check restricted holding period!

Holding period 6mon for reporting co. and 1yr for non-reporting co. NONE for non-restricted securities. R144(d)(1)o Clocks run when you receive it from the issuer or the affiliate, and don’t end until the

distribution (there can be transfer b/w individuals). o Restricted Securities:

Affiliates Non-AffiliatesReporting Issuer Non-Reporting Reporting Issuer Non-Reporting

< 6mon No Resale (holding period)6-12mon 502(c)(1) no GS No resale (HP) 502(c)(1) applies No resale (HP)12+ mon 502(c)(1) applies No info req’t

We only worry about affiliates in restricted securities b/c unrestricted securities can just rely on § 4(a)(1) exemptions.

Volume Limit for CP: whether restricted or not, the amount of securities sold, together w/ all sales of securities of the same class sold for the account of such person w/in the preceding 3mon, shall not exceed the greatest ofo 1% of the shares of the outstanding class of security as shown by the most recent report

or statement published by the issuer, oro The average weekly reported volume of trading in such securities reported through the

consolidated tran’n reporting system. R144(e)(1) Manner of Sale: be sold in "brokers' tran’ns" w/in the meaning of § 4(a)(4). R144(f), and for

the purposes of this rule, such broker o Does no more than execute the order or orders to sell the securities as A for the person

for whose account the securities are sold;o Receives no more than the usual and customary broker's commission;o Neither solicits nor arranges for the solicitation of customers' orders to buy the

securities in anticipation of or in connection w/ the tran’n. R144(g) The person selling the securities may not

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o Solicit orders to buy the securities; or o Make any payment in connection w/ the tran’n to anyone other than the broker.

CIVIL LIABILITY UNDER THE ’33 SECURITIES ACT

§ 11 § 12(a)(1) § 12(a)(2) R 10b-5Misstatement

Yes No Yes Yes

Materiality Yes No Yes YesState of mind SL for issuer; (DD) Strict liability (Reasonable care) ScienterReliance Tracing req’t No No Fraud on the

marketCausation (Loss causation) No (Loss causation) YesDamage Offering price Rescission Recession Actual

§ 11 Liability Standing

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RS filed or not?

Public - CP?

CP: R144 satisfied?

No? view to distribution?

4(1 1/2)

holding period

small in size

manner: GS or unsolicited broker

sophisitication of investor/info accessYes

Non-CP: good to resell 4(1)

Private - CP?

Non-CP, R144?

Yes

No, selling for a CP/being UW?

noholding period

distribution?

Yesdistribute?

holding period

CP, R144

No?

himself an UW?

Holding period

view to disribution?

Use ANY intermediary?

distribution?

unsolicited broker transaction?Yes


§ 11(a) In case any part of the RS, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) during the 1 year period may … sue. o The “such security” language is the base for the tracing req’t. o Standing is available only for purchasers who can physically “trace” their shares back to

the faulty RS. Krim [statistical method shows at least one share of the Ps’ shares comes from the IPO]: such indirect proof would “impermissibly expand” the statute b/c almost every aftermarket purchaser could bring a § 11 claim, contrary to Congress’s intent.

§ 11(g) In no case shall the amount recoverable under this section exceed the price at which the security was offered to the public.

C/A: Material Misstatements RS is a snapshot – things that subsequently changed are not subject to §11 liability o “When such part became effective:” Is it true or false at effective date?

Material: a substantial likelihood that a reasonable investor making investment decision will consider the fact significanto Gross overstatements of sales, profits, and customer orders; understatements of

liabilities; and the failure to disclose officer loans, customer delinquencies, and application of proceeds (they said for expansion, but actually to pay back debts) constituted material matters. BarChris

Misstatements: Untrue; Omitting facts required to be stated (by the SEC forms); Omitting facts to make the statement not misleading (note the good but not the bad)

No causation, reliance, or issuer’s scienter needed to be est by the Ps, but Ds can defense.

Defendants – Who can be sued? Parties Liable under § 11(a)o (1) Every person who signed the RS

§ 6(a): a RS shall be signed by each issuer, CEO, CFO, comptroller or accounting officer, and the majority of its board of directors …

o (2) every person who was a director of ... the issuer at the time of the filing of the part of the RS wrt which his liability is asserted;

o (3) every person who, w/ his consent, is named in the RS as being or about to become a director ... ;

o (4) every accountant, engineer, or appraiser, or any person ... who has w/ his consent been named as having prepared or certified any part of the RS ... ; [experts]

o (5) every UW wrt such security. o CPs of any of the above § 15

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Defenses No intent/scienter is required; issuer is strictly liable UNLESS can proveo Misstatement

P knew the info was false at the time of purchase Some benefit to disclosing to correct the misinformation

o Reliance If the issuer has provided full 12mon of earning statements after the effective date—

shifts burden for reliance to Po Loss Causation. § 11(e)

D show a lack of causation: the damages is attributable to other factors The market went down as a whole Something wrong w/ the co. that has nothing to do w/ the misstatement in the RS.

DD Defense for Non-IssuerExpertised Non-expertised

Experts Reasonable investigation + reasonable and actual belief in statements 11(b)(3)(B)

No liability 11(a)(4)

Non-experts

No investigation req’d + no reason to and did not believe untrue 11(b)(3)(C) (lesser)

Reasonable investigation + reasonable and actual belief in statement 11(b)(3)(A)

Expertised portion: audited F/S, e.g., Facebook S-1 filing in their IPO, legal opinions for corporate matters, geological reports, etc.

Experts: lack of actual knowledge is only halfway; you must show DD and reasonable!o High-level insiders (CEOs and CFOs) will have hard time making out a DD defense.o Mere reliance upon others’ statements is not DD. BarChris [F/S in RS was materially

fault. Accountants ask managements Qs and accept their answers at their face value]: you need to do doc review: look at underlying business documents.

o Personal expertise in addition to the expertise needed by this position is also considered. BarChris [Grant (a director and a counsel) is sued not for malpractice (not the co. general counsel), but for signing the RS. He got oral affirmation from the auditing company that this info was true]: not liable for expertised part; liable for non-expertised part b/c there were errors and omissions which could have been detected w/o an audit.

o Outside directors joined at a relatively late date re the offering is conserved a non-expert although he signed the RS; still liable for non-expertised portion. BarChris

o UW: not liable for expertised part, but liable for non-expertised portion. BarChriso Accountant: liable for expertised part, but not liable for non-expertised portion. BarChris

UW’s defenseo DD defense : RI + reasonable and actual belief in statement. 11(b)(3)(A)

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o Reliance defense : No RI req’d + no reason and did not believe untrue 11(b)(3)(C) (lesser) Red flag: even if it’s expertised portion, a non-issuer’s reliance cannot be blind: RB.

WorldCom [Shelf registration, expense/revenue ratio in F/S way lower than main competitors, especially its revenue was falling. UWs rely on audited 1999 F/S and comfort letter re the unaudited 2001 1st quarter data].o Red flag: “any info that strips a D of his confidence in the accuracy of those portions of a

RS premised on audited F/S,” including accounting fraud or audit failure. UW Ds had downgraded their internal credit rating for WorldCom and taken steps to

hedge or otherwise limit their credit exposure to WorldCom, due to their respective assessments of WorldCom’s deteriorating financial condition.

There were two instances in which an UW or UWs’ counsel identified potential issues that were not raised w/ WorldCom for fear of eliciting a negative reaction from senior management.

The sheer size of the two bond offerings in question, particularly in light of the general deterioration in WorldCom’s financial situation and the general downturn in the telecommunications industry

[Even if they think the market has overvalued the WorldCom stock, § 11 doesn’t so prohibit any UW from underwriting for WorldCom, but the affirmative actions that these UWs have taken demonstrated their concerns about WorldCom’s financial condition, which makes it problematic that they didn’t engage in further reasonable investigation in order to reasonably rely on the reports. Just b/c you should be more careful b/c of those red flags doesn’t mean that you should not sign on the RS – but you should do more investigation for the reasonable reliance before you sign the RS.]

o Auditors are not experts wrt unaudited F/S. Comfort letters are NOT certificates unaudited F/S remains unexpertised UW must est RI. WorldCom

o The consideration of competitive timing and pressures is expressly excluded re UW’s RI. DD obligation has to continue until the effectiveness of RS.

Damages Actual damage = price paid (offering price) – price/value you got from the three conditionso P sold her shares prior to the filing of suit resale price o P sold her shares after the filing of the suit (but before jmt) higher of resale price and

value at suit filing. o P still owns her shares at the end of the suit the value of the shares at the time of

filing of the § 11 lawsuit. Stock price is not necessarily dispositive of value. Beecher [P claims issuer has undisclosed

financial crisis; D claims temporary price depression by panic selling b/c of the release of disappointing 3rd quarter earnings results]: 1 the financial troubles are temporary rather than terminal, and it was not very desperate or life-threatening: the substantial backlog of

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unfilled orders as well as the banks' continued extension of credit suggested a RB in recovery. 2 Trading data and expert testimony show that following the 3rd quarter results the market price dropped off and continued to decline at a rate in excess of the pre-revelation rate. 3 Potential merger b/w McDonnell and Douglas: still equivocal at the time of suit, and the merger reflects more of McDonnell's unique needs than Douglas' intrinsic value, the ct does not rely on the merger or the price McDonnell was willing to pay

In no case shall the amount recoverable exceed the offering price to the public. § 11(g) Ds are jointly and severally liable § 11(f), buto UWs’ liability is capped at the total price underwritten and distributed. § 11(e)o Outside directors are proportionately liable if they did not know of violation. § 11(f)(2)

§ 12(a)(1) Liability Any person who – (1) offers or sells a security in violation of § 5 ... Shall be liable to the

person purchasing such security from him ... to recover the consideration paid for such security w/ interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.

Ds = Sellers Liability extends only to the person who successfully solicits the purchase, motivated at

least in part by a desire to serve his own financial interests or those of the securities owner. Pinter v. Dahl

Damages Rescission: if the buyer still holds the security Damages if sold = purchase price – sale price – income from the security No defenses

§ 12(a)(2) Liability: Material Misstatement in Prospectus/Oral Communication Provides a private c/a for misstatements in the prospectus for public offerings w/o regist:

private placement + secondary market (purchasers who cannot trace their shares back to the IPO).

If you update the prospectus (you don’t need to update the RS) and the updated prospectus contains misstatement, it could be a § 12(a)(2) action even if it’s not a § 11 claim.

Scope Potential Ds = people who help distribute the securities, UWs, selling As, broker-dealers… The term prospectus is only referring to documents relating to public offerings. Gustafson

[SHs of Alloyd sold all their shares to the acquirer of the co. through a K]: §10(1): documents containing the info from the RS (public offering). Acquirers can pursue under stan’d K dmgs for breach of warranties, rather than fed securities law to recover a right of recession. o "Public offering" is determined by the Ralston Purina test under §4(a)(2). So § 12(a)(2)

liability does not cover 4(a)(1) resale or 4(a)(2) private placement exemptions

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Qualified Ps: § 12(a)(2) requires only that a P have purchased a publicly offered security (not necessarily during the initial distribution), from a seller, by means of a false prospectus. Feiner [IPO w/ §§ 11 and 12(2) claims; some class members bought directly in the IPO; some bought on secondary market, but subject to a prospectus delivery req’t]: All that necessary is the delivery of a prospectus has been req’d under the statutory and regulatory framework. § 12(a)(2) limits misrepresentations in connection w/ the sale of a security “by means of a prospectus,” not “in a public offering.”

Purchasers do not need to read the prospectus or know the misstatement; just a business notion that they have to satisfy the “by means of” req’t. Concern is market distortion.

No reliance, causation, scienter req’d. Dmg is recession or recovery similar to § 11 except the loss causation defense. Possible Defense P had knowledge D had no knowledge and could not have obtained knowledge w/ reasonable careo No freestanding duty to investigate (vs. § 11) absent red flags. Ds are people who help

sales, and their parti in assembling the prospectus is more remote than the insiders Loss Causation : the revelation of that misstatement is not closely related to the drop of

price of the security immediately; est indep reasons. Miller [Stock for stock merger, prospectus indicates Thane will be listed on the NASDAQ, but actually NASDAQ OTC Bulletin Board. Subsequent sharp price decline while trading on the NASDAQ]: share prices did not fall below the offering price, for 19 days. The investors’ own expert testified that listing on the OTCBB instead of the NMS would not necessarily reduce Thane’s stock price.

Materiality Info is material if there is a “substantial likelihood that the disclosure … would have been

viewed by the reasonable investor as having significantly altered the “total mix” of info made available. TSC Industries (Sup Ct) [but what is significantly?]

Materiality will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.” Texas Gulf (2rd Cir.) Probability * magnitude

The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item. FASB Statement of Financial Accounting Concepts No. 2

SA Rule 408 and SEA Rule 12b-20o “In addition to the info expressly req’d to be included in a statement or report, there

shall be added such further material info, if any, as may be necessary to make the req’d statements, in the light of the circ under which they are made not misleading.”

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REG S-K Integrated Disclosureo Item 103: “Describe briefly any material legal proceedings, other than ordinary routine

litigation incidental to the busi, to which the registrant or its subsidiaries is a party or of which any of their property is the subject.”

o Item 303(a)(3)(ii): “Describe any known trends or uncertainties that ... the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations….”

o Google’s 10-K ex: 1) explain your revenue numbers/data in a context so as investors know that ads revenues are the most imp revenue. If there’s any negative event w/ the ads revenue, it’s more likely to be considered material under SAB 99. 2) If there is anything that could lead to future disclosure problem, disclose it in your 10-K at the very beginning, e.g., antitrust investigation, litigation, etc. if it’s small, no one cares anyway.

Rule of thumb: treat misstatements and omissions that account for less than 5% of earnings as presumptively immaterial [but not absolute determinative] for purposes of a motion to dismiss. SAB 99. Financial mgt and auditor must consider both quantitative and qualitative factors [i.e,. you know the deviation beforehand] in assessing an item's materiality.o Capable of precise measurement vs. estimate w/ a degree of imprecision inherent o Masks a change in earnings or other trends. Blackstone [the revenue of a portfolio co. of

one of Blackstone’s funds declined by $122.2M; known future trend impact: 3.9% of total revenue; 0.4% of AUM]: hiding material adverse effect on future revenues (key). It doesn’t matter that if the disclosure had been made, investors couldn’t have benefited.

o Hides a failure to meet analysts' consensus expectations for the enterpriseo Changes a loss into income or vice versao Plays a significant role in the registrant's operations or profitability. Blackstone [trend of

only one segment]: altho investment (in this one co. portfolio of one of its funds) was small compared to this yr’s operation scope, it’s private equity group/segment plays an imp role in its busi & provides value to all other asset mgt and financial advisory services

o Affects the registrant's compliance w/ reg req’ts, loan covenants or contractual req’tso Has an effect of increasing management's compensation. Blackstoneo Involves concealment of an unlawful tran’n

Stock price drop doesn’t necessarily mean material misstatement. Merek [Medco recognizes co-payments as revenue, but did not disclose this such method in 10-K; later disclosed it (but no amount) in sub’s IPO S-1 filing; not much impact on Merek’s price. WSJ disclosure, price dropped sig-ly]: we are unable to disentangle all the factors.o Merek made the corrective disclosure quietly in S-1 and no one really noticed it – favors

P b/c it suggests that when the market really realizes the issue, it affects the stock price. o The market isn’t as efficient as we think – it took a while to process the info and it

needs the help of the mass media to make the public to understand the magnitude.

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o The info is not material b/c it’s not affecting the profits. But when the WSJ hits the market, it creates a scandal (which investors react really drastically) – not actionable. Food Lion [huge price drop after ABC broadcasting/national TV – customer based co.]

o WSJ article creates potential various litigations a/ the co that affects the co’s stock price.o You can argue that it’s material info even if it doesn’t affect the stock price much, b/c

reasonable investors do need such info, and the fact that it’s conflated w/ the other info so you don’t see the effect doesn’t mean it’s not material.

Truth on the market defense: 1) everyone already knew the truth; 2) The market price already accounts for the info and if stock price drops when info officially announced, it was merely overpriced stock for unfraudulent reasons. o Q is whether the reason for price drop is the revelation of new info that makes some

previous statements of Food Lion materially false. Food Lion [food safety and labor conditions; union filed complained w/ DoL on 09/11/91, settled for $16.2M; ABD program aired on 11/5/92, huge price drop; SHs sued for 10b-5 securities fraud]: food issue: ABC observation of one or two food handling practices doesn’t suggest wide spread misconduct that would make Food Lion’s statements in its annual filing false; Labor issue: 1992 10-Q already disclosed its lawsuit w/ DoL – market already knows; trivial settlement amount compared to annual earnings (impaired thumb rule); price drop: almost entirely due to the impact of that report on its customer base as oppose to investors’ updating of their assessment of Food Lion’s public statement in its SEC filings

o Allegations based on either fairly vague disclosure or disclosures probably made in good faith at the time they were made regarding the lawsuits are very week.

Disclosure

Public Company Status: triggered by RS filing w/ the SECSection Trigger Req’t Termination§ 12(a) Listing on a

national exchangePeriodic filings: 10-K, 10-QProxy rules + annual reportTO rulesInsider stock tran’ns § 16

Delisting & either <300 SHs or <500 SHs + <10$10M in

assets for 3yrs§ 12(g) over the counter stocks

> 2000 SHs or 500 non-AI SHs + >$10M in assets

Periodic filingsProxy rules + annual reportTO rulesInsider stock tran’ns § 16

Either <300 SHs or < 500 SHs + < $10M in

assets for 3yrs§ 15(d) filing a RS under the SA

Registered public offering

Periodic filings, but not subject to proxy solicitation, TO, or short-swing profit provisions

<300 holders + no earlier than next fiscal year after offering (1yr after offering)

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of the EASarbanes Oxley Act

[suspended unless terminated for a foreign private issuer under R12h-6]

Integrated disclosure: companies need to make periodic filings w/ the SECo Pre-IPO/registration statement (’33 Act)

Form S-1, S-3o Annual report

Form 10-K (audited annual report), 10-Q (unaudited quarterly report) 8-K: “current report” to announce major events that SHs should know about. In addition to these forms, there is no free-standing duty to disclose additional info.

o Annual SH voting and solicit proxies Schedule 14A (proxy statement)

Forms 10-K and 10-Q Both forms must be certified by the CEO and CFO of the registrant. § 302 of the SOA

requires that these officers personally certify that o They have reviewed the report based on the officer’s knowledge, the report does not

contain material misstatement or omissions o Based on the officer’s knowledge, the financial statements “fairly present in all material

respects” the issuer’s results and financial condition If an issuer is req’d to prepare an accounting restatement due to the material

noncompliance of the issuer, as a result of misconduct, w/ any financial reporting req’t under the securities laws, the CEO and CFO of the issuer shall reimburse the issuer. § 304

The annual report shall contain an internal control report and the CEO and CFO are responsible for having designed and maintained those controls. SOA § 404o Wrt the internal control assessment …, each registered public accounting firm that

prepares or issues the audit report for the issuer shall attest to, and report on, the assessment made by the mgt of the issuer. An attestation made under this subsection shall be made in accordance w/ stan’ds for attestation engagements issued or adopted by the Board. Any such attestation shall not be the subject of a separate engagement.

Form 8-K

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Req’t companies to disclose “on a rapid and current basis” material info regarding changes in a company’s financial condition or operations.

That this is the primary means of mandatory disclosure b/w quarterly filings Must be disclosed w/in 4 business days of the specified event

Exchange Act 21Co SEC has power to commence cease and desist proceedings a/ violatorso Can include disgorgement and bar on serving as a director or officer

Item 5.02(a)(1). If a director has resigned or refuses to stand for re-election to the BoDs since the date of the last annual meeting of SHs b/c of a disagreement w/ the registrant, known to an executive officer of the registrant … on any matter relating to the registrant’s operations, policies or practices, or if a director has been removed for cause from the BoDs, disclose the following information … a brief description of the circ’s rep the disagreement that the registrant believes caused, in whole or in part, the director’s resignation, refusal to stand for re-election or removal. o Interestingly, if executives resign, they don’t need to disclosure – internal executive

disputes may not be that fundamental as director disputes, especially that directors are elected by SHs.

o Item 5.02 (a)(1) doesn’t only req’ the reason of resignation, but also gives the resigned director a chance to respond.

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Reg FD Prevent reporting co. and those working on behalf of them from disclosing market-moving

info (tips) to individuals and entities likely to trade on the information (broker-dealers, securities analysts, investment advisors, institutional investors) prior to its dissemination to the investing public, so as to level the playing field b/w analysts and ord investors.o Siebel System [CEO’s public forward looking talk is pessimistic; CFO’s later private talk in

present sense to analysts is far more optimistic]: you can’t read verbal comm so closely. o [The SEC can certainly make a case that the info disclosed is inconsistent; but the ct is just

hostile to Reg FD as a policy reason of ord info flow: declined to a broad reading. The info disclosed matter too.] Firms are obliged to update their projections when it comes true.

Expressly excluding persons owing “a duty of trust or confidence to the issuer:” atty, investment banker, or accountant, and persons agreeing to maintain the info in confidence.o Insider trading concern: w/o trust or confidence rel’p, you can trade on those info.

Distinguishes intentional from inadvertent disclosure, if inadvertent, the company must o Promptly disclose the info to the market w/in 24 hours of the selective disclosure or by

the time trading commences on the NYSE, which ever is later. o The corrective disclosure can be made by filing a Form 8-K w/ the disclosed info. o Alternatively, a press releases, if “reasonably designed to provide broad, non-

exclusionary distribution of the info to the public,” will also suffice.

10B-5 Common law fraud

§ 11 § 12(a)(1) § 12(a)(2) R 10b-5

Misstatement Yes Yes No Yes YesMateriality Yes Yes No Yes YesState of mind Scienter (Due

diligence)Strict liability (Reasonable

care)Scienter

Reliance Yes Tracing req’t No No Fraud on the market

Causation Yes (Loss causation)

No (Loss causation)

Yes

Damage Actual Offering price Rescission Recession Actual Cts usually use the common law fraud to interpret the 10b-5 fraud for liability b/c 10b-5 uses

the word “fraud.”

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R10b-5: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchangeo To employ any device, scheme, or artifice to defraud,o 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 the light of the circumstances under which they were made, not misleading, or

o To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

o In connection w/ the purchase or sale of any security. 10b-5 put teeth in the periodic filing req’t and allows private c/a. Elements of the c/a: Ps bear the burden of showingo A material misstatement o Scienter o Reliance o Loss causation

Misstatement of a Material Fact R 10b-5 prohibits “any device, scheme, or artifice to defraud” as well as “any act, practice, or

course of business which operates or would operate as a fraud or deceit upon ay person.”

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Rule 10b-5 prohibit conduct involving manipulation or deception, but are not so expansive as to govern incidences of fiduciary breach. Sante Fe [short-term merger, 95% SH offers $150/share after Morgan Stanley’s $125 evaluation; but assets were valued $640/share; minority SHs say bank’s evaluation fraudulent, claiming breach of fiduciary duty violated 10b-5]: § 10(b) refers to manipulation and deception and disclosure: has to be a misstatement or breach of your duty to disclose accurate info. o By the time this case ends up in the SCt, Ps have lost on their core claim that Santa Fe

secretly agreed that the co was worth more – the appraisal is a sham/genuine fraud, so they turned to the transaction as fraud argument that co going private for lower prices than the price if they IPOed by buying back shares from minority SHs and deprive minority SHs of their future profits in IPO and thus breached fiduciary duties. Outside the context of market manipulation, we will not call tran’n itself fraudulent.

o DE allows minority SHs to petition in state ct if they believe the payout is unfair, but P brought an action under fed law.

An opinion may be a false factual statement if it’s false, disbelieved by its maker (evi or substantial evi), and related to a matter of fact which can be verified by objective evidence (asset, operation, market value, etc). Virginia Bankshares [minority SH was awarded dmgs following a freeze-out merger. Altho not req’d under state law, directors solicited voting proxies at annual meeting by stating that the bd and directors had approved the merger b/c of the “high” value given for the stock. Minority SHs challenged this solicitation under SEC Rule 14a-9, claiming this was a materially false or misleading statement]: misstatement established, but causation missed (not enough vote even though the proxy is false). o Omnicare : the person who made the opinion subjectively does not hold the opinion, or

the opinion could mislead inv’rs to believe that you have undertaken certain kind of investig’n but in fact you haven’t done so.

Duty to Update and Correct Silence in a tran’n is not a basis for fraud unless there is duty to discloseo Duty to disclose if trading in securitieso Duty to correct (all circuits) if statements were misleading at time they were made (8-K)o Duty to avoid “half-truths:” no misleading omissions in light of your disclosure. § 10(b) o Periodic disclosure req’ts impose additional disclosures for specified categories

Duty to update varies in circuitso 7nd Cir: no duty to update. Period. 10-K, like RS, is snapshot. Gallagher [D’s diagnostic

division didn’t meet the FDA’s satisfaction; a series of press release, settlement, civil fines, and price drop; D filed periodic filings on time and correctly w/ up-to-date info; SHs sue for deferring public revelation; 10-Q is predate the FDA letter]: periodic disclosure ≠ continuous disclosure = no duty to update unless positive law creates a

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duty to disclose (10-Q quarterly update); duty to correct only if it was incorrect when made Note! You can argue Reg S-K known trend’s impact on revenue, tho not in this case.

o Note! If you are issuing stocks, a RS (at the time of filing) and prospectus (at the time of delivery) must be accurate. But this does not imply changes in a 10-K annual report, instead, the issuer must file and distribute an addendum to that document bringing matters up to date, but duty owed only to buyers.

o Other Cir: when a clear, factual and forward looking statement containing some continuing rep to inv’rs becomes misleading in light of later events. E.g., if you initially announced seeking to acquire a co. by the end of 2014 and no longer pursue it later, the change of an ongoing plan may = duty to update. There needs some “live” factor.

o 3rd Cir. The initial statement that was “reasonable at the time made” must contain “an implicit factual rep that remained ‘alive’ in the minds of inv’rs as a continuing rep.” Also, the duty has only been plausible in cases where the initial statement concerns “funda change” in the nature of the co (merger, liquidation, or takeover attempt) and when subsequent events produce an “extreme” or “radical change” in the continuing validity of that initial statement. Schiff

o 2nd Cir Time Warner [When pursuing a busi goal, co announces that goal as well as an intended approach for reaching it, other approaches to reaching that goal where those approaches are under active and serious consideration = duty to disclose.] Duty to alert the market if a major negotiation agreement falls apart; things that affect the future of the co greatly. Authenditate [fail metrics in K w/ USPS]

o Relevant to forward-looking stat’t: accompanied by meaningful cautionary language?

Forward-Looking Statements Private Securities Litigation Reform Act of 1995 (PSLRA) § 21E(c)(1) Safe Harbor precludes

civil liability for material misstatements or omissions in such statements ifo (A) the forward-looking statement is

(i)…. accompanied by meaningful cautionary statements [identify imp factors]…, or (ii) immaterial, or

o (B) the plaintiff fails to prove that the forward-looking statement . . . (i) was made w/ actual knowledge by that person that the statement was false or

misleading. o Even if the P satisfies scienter by showing “recklessness,” as long as they cannot show

“knowledge,” you are fine w/ the safe harbor and can win the motion to dismiss. Baxter [sales and profits failed to match its financial projections]: the major risks Baxter

knew when it made its forecasts were exactly those that came to pass, yet the cautionary statement mentioned none of them and remained fixed even as the risks changed (closed 2 of its principal plants; had a mft failure relating to one of its major medical products)

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o Materially misleading projections could not be dismissed at the pleading stage, notwithstanding the presence of cautionary language, absent further discovery.

o You need to disclose the risk that may cause the projection inconsistent, but no need of specific risk. How much disclosure is enough – Google has a 30-page disclosure in 10-K.

Scienter Intent req’t is based on § 10 itself. Ernst & Ernst [Mail Rule; broker firm President asked

investors to write checks directly to him; the entire firm is a fraud; auditing firm failed to realize it]: auditor not liable for the negligent nonfeasance. Recklessness: so highly unreasonably and such an extreme departure from the stan’d of ord care as to present a danger of misleading the P to the extent … obvious that the D must have been aware of it.

PSLRA heightened pleading req’ts:o False statements plead w/ particularity, § 21D(b)(1)

Identify each misleading statement; reasons for it; all facts on which a belief is formed; and specify facts giving rise to a strong inference of D’s scienter.

o Must create a “strong inference” of scienter § 21D(b)(2) Determined by a RP to be clear and as persuasive as any contrasting implication of

non-fraudulent intent (more than simply reasonable or permissible). Direct personal financial gain is not always req’d, and claims must be considered in its entirety, not just the particularized complaint. Tellabs [false stat’ts re strong product demand; D’s interest is simply by delaying the bad news and not suffering any loss from it].

Pleading Req’t: all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss. § 21D(b)(3)(B)

Dual goals of limiting thoughtless, lawyer-driven litigation, and at the same time conserving investors' aptitude to recover on meritorious claims.

Options to show scienter o Insider trading (particularly if unusual volume, profits and timing)o Divergence b/w internal reports and external statements on same subject o Closeness in time of an allegedly fraudulent statement or omission and the later

disclosure of inconsistent infoo Evidence of bribery of a top company official o Existence of an SEC enforcement action o Accounting restatement [red flags assumed altho not necessary involving fraud]o Sheer magnitude of a misstatement (how could a mistake so large occur w/o scienter)o Benefited in a concrete and personal way from the purported fraud o Engaged in deliberately illegal behavioro Knew facts or had access to info suggesting that public statements were not accurate; o Failed to check info that they had a duty to monitor

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Reliance D’s misrep/omission induced the P to make an inv’t he otherwise would not have made. Omission of a material fact by a party w/ a duty to disclose: materiality = reliance + loss

causation. Affiliated Ute [first refusal rule; bank managers/stock transfer A buy from tribe members (w/ fiduciary duty to disclose arising from busi rel’p/commissions) for less than fair value and resell b/w whites; the bank was aware of ees’ misconduct but takes no action]o Fiduciary duty only attaches to face-to-face transactions (no efficient market to provide

info at all) w/ pre-existing relationship Fraud on the market doctrine: (1) the alleged misreps were publicly known, (2) material, (3)

the stock was traded in an efficient market, and (4) the P traded in the stock in the relevant period, namely b/w when the misrep were made and when the truth was revealed. Levinson [misreps in an efficient mkt are incorporated into the price: integrity of mkt price].

You don’t need to show individual reliance (this specific event of price drop) to certify a class; all you need is to show efficient market. Halliburton Io A large weekly trading volume o The existence of a sig number of reports by security analystso The existence of market makers and arbitrageurs in the security o The issuer’s eligibility to file an S-3 RS under the ’33 Act o A history of immediate movement in the price of the security in response to unexpected

corporate events or financial development. During the class certification stage, Ds can also present evidence showing the inefficiency of

market or otherwise sever the link b/w fraud and the price drop. Halliburton IIo Market is inefficient where the price does NOT reflect the info. o P knew the truth and didn’t rely. o Any showing that severs the link b/w the alleged misrepresentation and either the price

received (or paid) by the P [did not actually affect the market price], or his decision to trade at a fair market price [P would have bought or sold the stock even had he been aware that the stock’s price was tainted by fraud], will be sufficient to rebut the presumption of reliance. Halliburton II

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affirmative misrep or omission?

misrep

face-to-face: P must show he actually believed the misrep and that the belief

cause dhim to enter into the tran'n

Open market: reliance rebuttable presumed under the "fraud on the market" theory

omission Reliance presumed but can be rebutted by showing that P did not rely


Loss Causation § 21D(b)(4) Loss causation (and reliance) is presumed when material facts are withheld in violation of an

obligation to disclose them. Affiliated Ute [tribe securities] An inflated purchase price did not by itself prove "loss causation"/merely “touches upon.”

Dura [SHs alleged the co's misleading statements steered the investors to buy its securities at an artificially exaggerated $ and later dropped sharply]: If your claim is based on the fraud on the market theory, you need to show at the time the truth reached the market, there was decline in the price that caused the dmg to the Ps.

Rebuttable by showing o Independent reasons causing $ drop. Food Lion, Merek, Beecher [panic selling, § 11 c/a]o The drop at t2 was a market wide event not a company specific event (horizontal

comparative abnormal returns w/ S&P 500 index stock returns) [data analysis in Merek]o The drop is just everyday noise, not big enough in relation to the company’s typical

fluctuation (comparison of the co.’s ord abnormal return in correlation w/ the market)

10b-5 Defendants Secondary liability: no aiding & abetting liability. Central Bank [Central Bank is the

indenture trustee of a $26M bond, secured by land. CB allowed PBA to use an old appraisal, despite knowing it was likely too high, and thus was sued for aiding in the misrep]: no liability w/o engaging in deception (simply aiding). The SCt cut back on private right of aiding and abetting claims a/ lawyers, accountants, and other professionals (recall Ernst & Ernst), but the SEC has the authority to go after recklessly aiding and abetting. Dodd Frank

A third-party customer/supplier of a company is not a primary participant, even if it acted actively w/ scienter as part of a scheme to defraud investors, where investors wishing to bring the action have not relied on the T's acts, for purposes of a private § 10(b) c/a. Stoneridge [issuer gave supplier above-normal payments for TV set-top boxes and the vendor gave back the extra $ as advertising fees. Issuer then fraudulently accounted the returned payments as revenue]: supplier had not participated in issuer's fraudulent

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accounting practices, and had made no false public statements (no free standing duty to disclose), and thus no reliance from investors. The SCt rejects “scheme liability” argument. o Merely but for is insufficient; these are two normal busi tran’ns, it’s issuer’s decision of

how to account for it = fraud. Cf. secondary actors can be considered violators of § 10(b) if they engage in deceptive conduct along w/ the primary actor. Central Bank

Ultimate Control Test: only the person/entity w/ ultimate authority over the statement can “make” (≠ write/assembly) it. o Officers who knowingly/recklessly makes a false statement through a media that will

predictively reach D + Company itself is liable. Texas Gulf: no privity req’t o Investment advisors to a mutual fund cannot be sued for false statements made by the

fund they advised. Janus [D is a financial advisor to JIF fund. All of JIF’s officers are D’s officers. D wrote JIF’s prospectus]: D did NOT “make” the pros even tho substantively wrote it. JIF is a legally independent entity (even tho it was created to benefit D) and has the ultimate control of and owes statutory obligation to the prospectus. Ct refused to extend the implicit private c/a to individuals or entities that exert control over the entity that issued the prospectus. speech writer vs. speaker

CP Liability: liable if he is the CP of the primary violator, unless the CP acted in good faith and did not directly or indirectly induce the act constituting the violation or c/a. § 20(a)o All the circuits req’ that Ps seeking to make a § 20(a) claim first est that the primary

violator violated a the EA, including most importantly § 10(b) and R10b-5.o The circuits are split on the add’l req’ts for § 20(a) CP liability.o Potential Control Test (majority). Req’ Ps to est that the alleged CP actual controls over

the primary violator and potential control over the specific fraud (no need to parti in the fraud). Could put someone who actually has no knowledge liable. D bears the burden of showing good faith and no inducement. Metge v. Baehler A broker-dealer can be liable as a CP if its registered rep is involved in a Ponzi scam

even if channeled thr a separate entity. Lustgraaf [broker of sub and general A of parent co., takes client’s funds for his own uses through his own co.]: parent liable

o Culpable Participant Test (2nd, 3rd, 4th Cir): a P must show (1) control of the primary violator by the D, and (2) that the alleged CP was a culpable participant in the fraud. Harder to square w/ § 20(a): it is unclear how a CP who is found to be culpable

participant can demonstrate good faith.

Damages

Open market dmg Out-of-pocket dmg: difference b/w the K price paid and the true value (more about

transactional causation) of the security at the time of the purchase.

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o Ps would argue that once the fraud started, lines are parallel over the period, while Ds would argue at the initial stage, the difference b/w the K $ and the true value was small.

o Not to exceed the difference b/w the K price and the mean trading price during the 90-day period beginning on the date of revelation of misrep or omission. § 21D(e)

o Total Liability of the D-issuers = Per share damage * Number of purchaserso Only people who bought and not sold during the time of class period are potential Ps.

Face-to-Face Dmgs Not limited to out-of-pocket, both restitution and rescission (or recessionary dmgs). Restitution (disgorgement): D gives the P whatever profit she made from the

securities tran’n at issue in the R10b-5 claim. Recession: Ps are put back as close as possible to the position they would have been

in had the tran’n never taken place, i.e., the P returns the securities and receives her purchase price back (w/ adjustments for any income the P earned while owing the securities as well as the oppo cost of the P’s money while tied up in the securities); if seller defrauded the P, return of the purchase price or the difference b/w the ori sale $ and the subsequent sale by the Do Garnatz [broker misrep junk bond as low risk bond to unsophisticated inv’rs and induced

them to buy]: Ps took losses b/c the market went down but P's aversion to risk would have prevented parti in a risky inv’t – merely b/c false rep; no difference b/w what inv’r paid and the true value (out-of-pocket doesn’t work): give their $ back. We don’t worry about violator’s loss.

Benefit of the Bargain Damages: difference b/w the value received and the value promised, when the value promised can be shown w/ certainty

Proportional Liability The PSRLA replaces traditional rule w/ proportionate liability wrt reckless violation of 10b-5

while retaining joint and several liability for knowing violation of 10b-5. After Jenus it might not be that important b/c you probably won’t be held a primary violator. Jury must determine percentage of responsibility (based on conduct as well as causal rel’p

to dmgs) for each wrongdoer as well as whether was knowing. 21D(f)(3)

The Lead P in a Class Action (PSLRA) § 21D(a)(3)(A) – Early notice to the class (opportunity to challenge for lead P) § 21D(a)(3)(B)(iii)(I) – Rebuttable presumption of lead P for “person or group of persons”o Who wants to be lead P (either filed the complaint or made a motion)o Satisfies Rule 23 of the Federal Rules of Civil Procedureo And has the largest stake

§ 21D(a)(3)(B)(v) – Lead P selects lead counsel (subject to ct approval) § 21D(a)(3)(B)(vi) – Restriction on professional Ps

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§ 21D(a)(6) – Ct review for “reasonable” attorney fees Cendant o Largest on-going stake is a conflict of interest as oppose to hose who have already sold

their shares. The Ct acknowledges that but the Congress is aware of this when it adopted the scheme, and the ct doesn’t want to override the legislation.

o Another argument: this group of public fund cannot represent the plaintiffs’ group. Allegations of pay-to-play: the pension funds have huge portfolios in P’s Bar, which

will in turn contribute to political campaigns, and the politicians will choose the pension fund to be the leading P.

o PSRLA says we let the leading P pick counsel (explicit rule). It’s no basis to believe that they are not bargaining at arm’s length or they lack the capability to negotiate and choose a good counsel. Absent some concrete defect in the process, the ct should not intervene. But in this case it makes no difference b/c the lowest bid is also the counsel that the leading P chose.

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