printed- sec. reg. outline - gw prof. gabaldon 2012 - text soderquist & gabaldon

Reach of RegulationSTATUTORY SCHEME [WHAT IS A "SECURITY"?]1.§2(a)(1) ‐> "security" means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit‐sharing agreement, . . . investment contract . . . or, in general, any interest or instrument commonly known as a 'security' . . ."

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G: SCOTUS says '33 and '34 definition is the same but really its not, but assume it is for now•Pattern of Analysis•

CALLED "STOCK"?2.

[i] right to receive dividends contingent on apportionment of profits○[ii] negotiability○[iii] ability to be pledged○[iv] confers proportionate voting rights○[v] capacity to appreciate in value○

"Stock": label alone is insufficient to make it a "security" under §2(a)(1), must also (name not dispositive, but also not irrelevant) look at economic realities to see if the instrument has the 5 usual characteristics of stock (in addition to name) [Forman]:

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CALLED "NOTE"?3.

Policy ‐> requiring registration of commercial paper would totally destroy the main purpose of commercial paper (free transferability same as currency)

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Howey + Marine Bank + Edwards = Reeves ‐ presumption○

Before Reeves, courts classified by purpose ‐> commercial (not securities) v. investment (are securities) •

[1] ALL presumed securities○

[i] List of NON‐Securities:

[2] unless rebutted by "family resemblance" test ‐> [i] note bears strong resemblance to instruments listed (or should be listed) as NON‐securities [G:mostly shit for commercial purposes]; [ii] using 4 factors (not all needed) to determine the note's "family"

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Promissory Notes: Reeves•

FINAL OUTLINE

Consumer financing notes□Notes secured by home mortgage □Short‐term notes secured by lien on a small business□"Character" loan notes□Short‐term notes secured by accounts receivable□Notes formalizing open‐account debt□Commercial bank loan notes □

A "security" if seller's purpose is to raise money for business and buyer is primarily interested in the expected profit the note

Not likely a "security" if note is for minor asset or consumer good, to correct seller's cash‐flow difficulties

Motivations of buyer & seller:□

A security if "common trading for speculation or investment"Plan of distribution: □

A security if held out to public as security (i.e. by an advertisement)Reasonable perceptions/expectations of purchaser(s) & the investing public:□

Risk reducing factors (i.e. another regulatory scheme, collateral) that makes it unnecessary to apply the Act, seeMarine Bank, Daniels

□

[ii] 4 Factors:

Short term commercial paper is still subject to antifraudShort term "investments" are subject to registrationLong‐term commercial paper IS subject to registration

'33 Act §3(a)(3): short‐term commercial paper exempt* from registration○

'34 Act §3(a)(10): definition of "securities" excludes notes < 9 months○

IMPORTANT: if NOT a security per Reeves, no need to look at *exempt securities•

INVESTMENT CONTRACT?4.

Cash/non‐cash consideration, not consumable commodity/service/labor: Daniel□Gave consideration with hope of financial return: Foreman□

[1] investment of money

Horizontal (majority) ‐> between investors □Vertical (minority) ‐> linking fortunes (strict) OR efforts (broad)□

[2] in a common enterprise: Koscot

Fixed or variable return: SEC v. Edwards□Return [not speculative/substantial] is motivation for investment, not use: Foreman□Return is from anticipated earnings, not additional contributions: Foreman□

[3] with an expectation of profits

Entrepreneurial or managerial (not ministerial): Forman; Daniel□Post‐purchase: Life Partners□

[4] solely [primarily] from efforts of others

Case: SEC v. W.J. Howey Co. (SCOTUS 1946) ‐> sale of 10‐year K to pool money/land and share profits in orange growing business that was run only by a service company was an "investment

contract" Howey could be held liable for violating §5

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"Investment Contract" ‐> Howey; Foreman ("Howey Test" applied in light of the "economic realities")•

Plan is non‐contributory and compulsoryExistence of another fed. regulatory scheme (i.e. pension plans under ERISA) G: note we are testing whether the interest in the plan is a security (obviously the stocks in

Case: Teamsters v. Daniel (SCOTUS 1979) ‐> not investment K where employers made contributions to employees' retirement plan under a collective bargaining agreement b/c the employee was selling labor to obtain a livelihood, not making an investment

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[1] investment of money ‐> cash or non‐cash consideration, see Foreman ("money" can be capital appreciation and participating in earnings vs. use or consume), with a hope of financial return, seeTeamsters v. Daniel (not making an investment b/c no hope of financial return; employee is only selling labor to obtain a livelihood), not a consumable commodity or service

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the plan/fund are securities)

Tax deduction from a tax shelter is might be "money" if purely for getting that $G: emphasis in Foreman is to look at primary motive ‐> i.e. a place to live, not for profiting from rent, using as tax shelter, etc

2 most important things: proportionality + marketing emphasis

Case: Foreman ("money" is anything that would constitute consideration; can be capital appreciation and participating in earnings vs. use or consume)

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Horizontal commonality ‐> interrelated interests between multiple investors who pool funds together

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G: look at how the promoter is paid ‐> i.e. is your stock broker getting $ per trade or is he linking your profit to his own?

Note we are asking if the service he renders is a "security" not the actual securities he is trading

Vertical commonality ‐> linking fortunes (strict) ‐ OR ‐ fortune of investor dependant on efforts of promoter (broad, see, e.g., Koscot) between promoter and investor

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[2] common enterprise ‐> horizontal commonality OK in all courts, vertical (minority)•

Not necessarily based on the degree of risk, but "reasonable expectation" from perspective of reasonable investor, not a subjective

Case: United Housing v. Forman (SCOTUS 1975) ‐> "too speculative and insubstantial" to believe there was an expectation of profits [from charging rent] when co‐op housing owners could only resell their interests for the original price

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G: all a court needs is "put $ into black box, get $ back out, don't care how it works"

Case: SEC v. Edwards (SCOTUS 2004) ‐> expectation of profits regardless if fixed return (vs. variable)

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[3] expectation of profits ‐> fixed or variable return [SEC v. Edwards] must be principle motivation for investment, Foreman (cannot be "too speculative or insubstantial"), and the return must be from anticipated earnings, not merely from additional contributions

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G: courts look at what investors [Koscot] or promoters [Life Partners ] did after the purchase ○

5th Cir. joined 9th Cir. in concluding "solely" NOT read literally and efforts had to be "undeniably significant ones . . . essential managerial efforts which affect failure or success of enterprise"

Policy against literal reading ‐> too easy to evade security laws by people simply requiring investors to do a minimum amount of effort

Compare SEC v. Koscot (5th Cir. 1974) ‐> pyramid scheme required "investors" to recruit new

"investors" ‐> a significant role, NOT primarily from efforts of others

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Court differentiates mortgage backed securities (bundled then sold like the insurance policies this case)

MBS ‐> a bunch of shit still needs to be done by the promoter after the purchase (servicing, collecting, etc)

Insurance policies in this case ‐> promoter's efforts only pre‐purchase (does not count), just waited for people to die to collect

With SEC v. Life Partners, Inc. (DC Cir. 1996) ‐> pool of insurance policies =/= investment contract

( NOT a security) b/c profits did not come from post‐purchase efforts of others

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Ownership of Business Interests ‐> are investment contracts (b/c profits primarily from efforts of others) if a partner/investor shows she had no legal control/no capacity to control/no practical control, based on "economic realities" of the parties: US v. Leonard

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Ownership Interest In: Security Not a Security

Corporation common & preferred shares

General Partnership • only IF passive partner Default ‐>

[4] "solely" [primarily] from efforts of others ‐> "touchstone is that profits are . . . to be derived from the entrepreneurial or managerial efforts of others" [post‐purchase, Life Partners], not just ministerial: Forman (SCOTUS endorsed but fn. says the Court expressed no view whether 'solely' read literally); see also Daniel (SCOTUS discussing managerial efforts of a pension fund's trustees)

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LLP (limited liability partnership)

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Joint Venture•

interests active partner interests○co‐venture interests○

Limited Partnership•LLLP (limited liability limited partnership)

•only limited partner interests Default ‐> general partner interest

LLC passive member interests (in manager‐managed LLC)

active member interests (in manager‐managed LLC)

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member‐managed LLC members, but see US v. Leonard

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Really looks like the LLC was dependant on "efforts of everyone" (investors were "required" to vote and serve on committees, and bind the entity by their own acts)

But economic reality ‐> NOT active investors

Case: US v. Leonard (2nd Cir. 2008) ‐> profits from interest in an LLC was "solely from efforts of others" b/c even though investors had a legal right to control, "they may be so lacking in requisite expertise [no capacity control], so numerous, or so dispersed that they become utterly dependant on centralized management [no practical control], counteracting a legal right to control")

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EVIDENCE OF INDEBTEDNESS?5.

Case: In re Tucker Corp. (SEC 1947) ‐> franchise agreements established an obligation to repay deposits received ‐> still counts as evidence of indebtedness (and "securities")

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§2A ‐> amended after Procter & Gamble to exclude individually negotiated "swaps" from '33 Act requirements

Case: Procter & Gamble (D.Ct. Ohio 1996) ‐> a "swap" (agreement to exchange cash flows over a period of time) NOT evidence of indebtedness b/c swap agreements only promise to pay future interest, vs. debt instruments that involve payment/repayment of the principal

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Evidence of Indebtedness ‐> instruments (i.e. promissory notes) that on their face establish a primary obligation to pay (or repay [Tucker] principal only [Procter Gamble]) holders money, see US v. Jones(though airline ticket redeemable for cash, does not on its face establish a primary obligation to pay)

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UNLESS CONTEXT REQUIRES OTHERWISE?6.'33 Act and '34 Act definition sections begin "When used in this title, unless the context otherwise requires . . . "

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SeeMarine Bank (SCOTUS 1982) ‐> though certificate of deposits might otherwise been a security, it wasn't in this context [due to being federally insured and heavily regulated]

[1] alternative regulatory scheme ‐> can preempt US securities regs. (if scheme big + important) ○

See Landreth Timber Co. (still a security when 100% of stock in a family‐owned timber company was privately sold, b/c Howey test N/A to shit clearly labeled as "stock", even if 100% sale‐of‐business)

"Context didn't require otherwise" b/c unlike unusual instruments not easily characterized, this was stock under the plain meaning of the Act, so don't need to look at characteristics of instrument ("economic realities") to see if the Act applied

[2] sale‐of‐business doctrine [BAD LAW] (when sale of a majority interest gives complete control

to the purchaser, making that person an owner, and not an investor) ‐> inapplicable, treated as security, when [i] called "stock"; and [ii] had all characteristics of stock

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Context Requires Otherwise ‐> argued in 3 situations, perhaps due to the "economic realities" per Daniel (Howey test for investment Ks to be applied in light of "economic realities")

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Registration Process & DisclosureSTATUTORY FRAMEWORK1.

May register by filing RS ("proposed to offer in near future"): §6(a)○Who must sign RS: §6(a)○RS filing fee formula: §6(b)○How to pay: §6(c)○All info in RS made public (unless petition for confidential): §6(d)○

§6 ‐> how to register securities•

Reference to items on Schedule A as practical starting point○Also must follow rules SEC is allowed to make (i.e., Form S‐1, S‐3, Reg. S‐K)○

§7 ‐> contents of the RS•

Investigation○Acceleration○Enforcement (refusal and/or stop orders)○

§8 ‐> effectiveness of RS•

DRAFTING A REGISTRATION STATEMENT 2.Amass info about issuer•Lawyer begins drafting RS•Drafts circulated to managing underwriter, its counsel, officers, and perhaps directors of issue ‐> may give comments

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"Due diligence examination" by managing underwriter and its counsel to ensure that the RS is completely accurate and contains no material omission

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Financial printer sets RS in type•Blue Sky qualifications per state law•File RS•Underwriters purchase securities only on the morning the RS is to be declared effective by the SEC (binding but conditional agreements)

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DISCLOSURE REQUIREMENTS & REGISTRATION STATEMENT FORMS3.

Forms just list which ones must be complied with for specific situationsScaled‐down requirements for small businesses Items OK to incorporate by reference in Form S‐1, S‐3

Reg. S‐K ‐> central repository of disclosure requirements○

Reg. C ‐> catchall general filing requirements that don't fit into Reg. S‐K○

< $75M public floatIf $0 public float, then OK for < $50M annual revenue

Reg. S‐K Special ‐> "a la carte" for smaller reporting companies with:○

Reg. S‐T ‐> must file RS electronically through EDGAR○

Regulations:•

‐ AND ‐[ii] filed annual report under Exchange Act for most recent year□

[iii] prospectus used must state where to find info incorporated by reference and issuer will deliver info upon request

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Incorporation by reference OK for [i] reporting companies that have:

Form S‐1 ‐> for companies that do no qualify to use Form S‐3 (non‐reporting or unseasonedissuers)default with most detailed requirements

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‐ OR ‐[i] registering non‐convertible investment grade debt

[ii] issuing common stock for cash, IF company's "public float" (outstanding voting and non‐voting common equity held by non‐affiliates) has value > $75M (i.e. seasoned issuer /WKSI)

Form S‐3 ‐> less strict form for Exchange Act reporting companies for at least 12 months, AND:○

Registration Statement Forms:•

‐ OR ‐[iii] issuers with < $75M public float, class of common equity listed on national exchange, offering common equity > 1/3 of company's float in a 12 month period

See In re Universal Camera Corp. (SEC 1945) ‐> speculative features of offering had to be disclosed in the registration statement and prospectus so clearly that plainly evident to the ordinary investor

Rule 421(d) ‐> front and back cover pages, summary, and risk factor section of the prospectus must be in "plain English"

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Material ‐> when there is a substantial likelihood that a reasonable investor would find info important in determining whether to purchase the security: Rule 405

Company President was a non‐convicted child molester□Executive's ridiculous amounts of compensation (likely irrelevant)□

NOT required ‐> shit that is too irrelevant and too attenuated, for example:

Rule 408 ‐> in addition to expressly required info, need to disclose ALL material info that is required to make statements not misleading in light of the circumstances

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Other RS Disclosure Requirements:•

Avoid vagueness and too much optimismMust be able to provide support for every assertion

Anti‐Speculation: ○

Disclosure needs to be plainly understandable to the ordinary investor, not just expertsTone of Disclosure:○

Must spell out full implications including dilution (dilution may not be a deal killer b/c future earnings may justify paying more)

Dilution of Stock Value: ○

Examples of possible info to disclose: In re Universal Camera Corp.•

PROCEDURES AT THE SEC4.

Rule 473 ‐> allows paragraph on cover of RS that stipulates "continuous amendment" ○Rule 460 ‐> preliminary prospectus distribution required as condition of acceleration○

Typically granted pro forma (as a matter of form)

SEC comments ignored, see Phoenix Steel (SEC refused acceleration b/c issuer refused to include in RS an undertaking to submit to court test before paying any indemnity)

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SEC is investigating the issuer, underwriter(s), etc, then problematic□

Risk denial if:

Rule 461 ‐> how to request acceleration (when SEC satisfied, the issuer and underwriter agree on terms, both request day and time)

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Rule 462 ‐> WKSI registration effective automatically when filed (easily amended later)○

[1] Effectiveness ‐> registration automatically effective 20 days after filing OR any amendment, unlessSEC accelerates it: §8(a)

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[i] securities offered for cash, AND[ii] undertakings in 512(i) done, AND[iii] remove "red herring language" (e.g. "subject to completion"), AND[iv] Rule 424(b) later satisfied (mail final prospectus w/ blanks filled in within 2nd business day of earlier of determining offering price OR first use)

Rule 430A ‐> if no big changes, registration can be effective without filing price and underwriter info, so long as:

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Rule 424 ‐> must file final prospectus shortly after using Rule 430B and any added info is deemed part of the RS

Rule 430B ‐> shelf registrations (under §415 ‐ SEE BELOW) can be effective even when missing "unknown or not reasonably available info"

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Rule 430C ‐> substantive changes/new info in prospectuses filed after effectiveness is also deemed part of the RS

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[2] SEC Review ‐> •

[3] SEC Oversight ‐> •

Violations of Securities Act §5: Pre‐filing to Post‐effective

Smaller companies have more requirements b/c policy is that the more info publically available, the less company is required to disclose (market has a way of protecting itself)

○TYPES OF ISSUERS1.

[1] non‐reporting issuers ‐> neither voluntarily nor required to register under the '34 Act•

Security is exchange‐tradedRequired to register under '34 Act if:○

[2] unseasoned issuers ‐> voluntarily or required to register under the '34 Act (reporting company), but "unseasoned" (not explicitly defined ‐> issuers ineligible to use Form S‐3)

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Cannot be issued > 10 days after filing RSRarely used b/c SEC prefers stop order (requirements easier)

§8(b) ‐> SEC can issue refusal orders for "incomplete or inaccurate in any material respect" ○

Only for egregious conduct, see, e.g. In re Texas Glass Mfg. Corp. (SEC 1958) (stop order issued due tomaterially misleading info in the prospectus that claimed prior sales of securities were exempt, then failing to disclose company's contingent liability from selling unregistered securities)

Can be issued any time, even if statement becomes untrue after effectiveness and/or securities already sold

§8(d) ‐> SEC can issue stop orders, suspending RS effectiveness for an untrue statement of material fact or omission

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But Π needed to allege facts showing that the SEC's delay was unreasonable□

Compare Las Vegas Hawaiian Development Co. v. SEC (D.Ct. Hawaii 1979) (OK to suspend effectiveness during SEC exam period and D. Ct. can compel SEC to make the determination in a reasonable time, but NOT simply compel SEC to make the determination)

With Phoenix Steel Corp. (Phoenix Steel did NOT comply with a SEC "undertaking" but also didn't request acceleration and b/c SEC didn't institute stop order or exam within 20 days of filing, the registration statement became effective anyways through "lapse of time"

§8(e) ‐> before or after effectiveness, SEC can start administrative investigation○

Effectiveness auto‐suspended during exam period (no offers): §8(c)No offers during SEC investigation OR if stop order in place: §5(c)

Consequences of refusal/stop orders & SEC investigation:○

Much more common then any of the above

Rule 477: voluntary withdrawal auto effective upon filing withdrawal application, unless SEC objects within 15 days

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SHELF REGISTRATION5.Problem of registering securities when sale not in "proximate future" (or indefinite), due to §6(a) last sentence requiring registered securities to be "proposed to be offered"

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Rule 462 ‐> WKSI shelf registrations become effective automatically when filed, then easily amended/supplemented/incorporated by reference later

□[i] ANY offering by issuers eligible to use Form S‐3 (seasoned/WKSI)

[ii] if ineligible to use Form S‐3, ONLY offerings for preexisting obligations (secondary distributions, warrants, etc)

Available for: ○

§415 ‐> allows registration statement to become effective even when the prospectus is missing TBD information otherwise required, so long as the missing info is later added by amendment OR a Rule 424 process (that allows Exchange Act reporting companies to incorporate by reference or file a supplemental prospectus) and the info deemed part of RS

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Continuous basis offerings ‐> example is common stock offered in employee stock purchase plan where employees can buy whenever they want

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Delayed offerings ‐> example is a company in the business of acquisitions needing to have registered securities "on the shelf" for immediate use [as consideration to buy companies]

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Shelf registration used for:•

Assets > $10M + holders of a single class of equity security > 499 Have registered securities under '33 Act within past yearHave registered securities under '33 Act with > 300 holders

‐ AND ‐Exchange Act reporting company for > past 12 months

Float (common equity in the hands of non‐affiliates) > $75M, OR offering investment grade non‐convertible debt

Eligible to use Form S‐3 if: ○[3] seasoned issuers ‐> issuers eligible to use Form S‐3: Rule 433(b)•

‐ OR ‐

Float > $700M float○

Issuing non‐convertible securities other than common equity (i.e., debt) and issuing > $1B of said securities in last 3 years

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[4] well‐known seasoned issuers (WKSI) ‐> defined in Rule 405 (supp. p. 119)•

§5(a) ‐> no sale/delivery w/o effective RS§5(c) ‐> no offers before filing RS

Pre‐filing period○

§5(a) ‐> no sale/delivery w/o effective RS§5(b)(1) ‐> no "prospectus" unless §10

Waiting period before registration statement becomes effective○

§5(b)(1) ‐> continues to apply but with new exceptions §5(b)(2) ‐> no delivery unless w/ §10(a) prospectus

Post‐effective period (conceptually continues forever)○

Overview of Time Periods in an Offering•

Summary of Required & Permitted Communications•

G: conceptually, if you do not file a registration statement, and you are not exempt, you are always

in the pre‐filing period ‐> §5(a) & §5(c) prohibitions always will apply

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G: §5 technically doesn't prohibit face‐to‐face offers or hand delivery within a state, but almost impossible to escape jurisdiction

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PRE‐FILING PERIOD LIABILITY UNDER §5(a) [NO SALES] & §5(c) [NO OFFERS]2.

Less concerned about sales during pre‐filing b/c you must violate §5(c) before even getting

to a sale,mostly an issue during waiting period

Was There a "Sale"?

Offer + acceptance ‐> K for sale, see In re Franklin ‐> broker accepted orders by keeping/cashing customer's checks; (ii) selling customer's securities [SEE BELOW]

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Tender offers ‐> a sale when plans are presented to SHs for approval and SH accept: Rule 145 [SEE M&A SECTION BELOW]

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[i] every K for sale

Spin‐off ‐> a sale b/c company distributing shares of its spin‐off to its SHs qualifies as a "disposition of a security for value"

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Value to the company is the trading market that inevitably develops from the distributed shares

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[ii] disposition of security [SEE M&A SECTION BELOW]

Pledge [of stock as collateral for a loan] ‐> sale b/c an "interest in security" is transferred (just less than full interest)

□[iii] disposition of interest in security

Gifts are not sales□"Free" stock offerings ‐> sale b/c issuers are getting value by creating public market for their stock, generating interest and publicity, etc

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[iv] for value

"Sale": §2(a)(3) ○

§5(a) ‐> no sale/delivery w/o effective RS•

[1] Was There an "Offer"?

ANY attempt to dispose is very broadIndirect offers ‐> including business card, email, written publicity about the issuer or its industry that conditions the market)

See In re Carl Loeb Rhodes (underwriters "conditioning the market" by issuing press releases about real estate development plans qualified as an offer)

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"Conditioning/prime‐pumping/gun jumping" activities qualify as an attempt to dispose,even when nothing close to an offer under K law,

Solicitation of an offer to buy ‐> offer to sell

"Offer" ‐> "any attempt or offer to dispose of, or solicitation of an offer to buy a security, or interest in a security for value": §2(a)(3)

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"Initiate a public sales campaign"Press releases and brochures that promote company by prospective underwriters (b/c this was first step in sales campaign)

Publication of meeting/speech notes (but prior‐planned speech alone is OK)

Examples of what qualifies as an offer: SEC Release No. 3844○

Advertise products/services per usual□Send out normal periodic reports/dividend notices to SH□Publish proxy statements□Make press releases on factual business news□

[i] publicity efforts that are "business as usual", i.e. continuing to :

[ii] responding to inquires: "issuers and their representatives should not initiate publicity when in registration, but should respond to legitimate [unsolicited] inquiries for factual infoon company's financial condition and business operations" from SHs, analysts, press

Examples of what is not an offer: SEC Release No. 5180○

Internet Rules: SEC Release No. 7856○

§5(c) ‐> no offers before filing RS•

Communication/info on an issuer's website OR a 3rd party's website that the issuer has hyperlinked to ‐> offer

Historical issuer info on separate section of website OK: Rule 433[2] Does an Exception or Safe Harbor Apply?§2(a)(3) Privity Exception ‐> "preliminary negotiations or agreements between an issuer and any underwriter OR among underwriters in privity of K with issuer" NOT offers (but n/a to dealers)

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Newspaper/press didn't make an offer b/c they are selling news, not securitiesUnderwritersmade an offer b/c §5(c) applies even if info has some value as "news"

News Exception: In re Carl Loeb Rhodes○

[i] by ANY issuer (+ selling SHs, those acting on behalf) [ii] with disclaimer[iii] very limited info (type, amount, timing, purpose)[iv] does not name underwriters or price

Rule 135 (supp. p. 53) ‐> notice/press release announcing a proposed offering○

[i] by ANY issuer OR on behalf of (other than prospective underwriters or dealers) [ii] made > 30 days prior to offering[iii] that does not mention the proposed offering[iv] and the issuer takes "reasonable steps" to prevent further dissemination of info

Rule 163A (supp. p. 86) ‐> prior communications ○

*continue in consistence with past ‐> can't increase amount of advertising□[i] ONLY by non‐reporting issuers[ii] to people other than investors/potential investors

Rule 169 (supp. p. 91) ‐> *regularly released factual business info○

[i] ONLY by '34 Act reporting issuers[ii] regardless of recipient

Rule 168 ‐> regularly released factual + forward looking info○

[i] made PRIOR to filing RS[ii] oral OR written

These offers called free writing prospectuses [SEE BELOW]□

[iii] written offers must have legend (where to get prospectus), be retained 3 years, filed with RS

Rule 163 ‐> offers by [ONLY] WKSIs○

WAITING PERIOD LIABILITY UNDER §5(a) [NO SALES] & §5(b)(1) [NO PROSPECTUSES]3.

Firms often will make conditional oral offers that cannot be accepted ("indications of interest")○§5(c) ‐> N/A oral offers OK•

Oral offer OK but if accepted (even accidently) ‐> K made§5(a) violation○

(i) keeping/cashing checks customers sent (even though they didn't ask for it) b/c gave customers the impression a K was formed

(ii) selling the customer's other securities in anticipation of making the sale

See In re Franklin ‐> broker dealer sales dudes violated 5(b) b/c they accepted orders during the waiting period by:

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§5(a) ‐> no sale/delivery w/o effective RS•

‐ OR ‐[1] NOT a §2(a)(10) prospectus

[2] IS a §10 prospectus

no liability under §5(b)(1) by either showing:○

[1] Does the Communication Qualify as a §2(a)(10) "Prospectus"?

Includes "graphic communications" such as radio, TV, internet, emails, website postings, blast voicemail messages; but NOT real time communications to live audiences: Rule 405

§2(a)(10) ‐> "prospectus" defined as any "communication, written or by radio or television, which *offers any security for sale or confirms the sale of any security"

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*IMPORTANT: was there an offer? ○

§5(b)(1) ‐> no "prospectus", unless §10 prospectus•

NO offer ‐> can't be a "prospectus"

§2(a)(3) ‐> privity exception□Rule 135 ‐> safe harbor for announcing an offering□Rule 168 ‐> safe harbor for regular communications [by reporting issuers]□Rule 169 ‐> safe harbor for regular communications [by non‐reporting issuers]□

What qualifies as an "offer" ‐> same as in pre‐filing period, but less exceptions

§2(a)(10)(a) ‐> post‐effective exception (n/a during waiting period)

[i] the security, price, who can execute orders, how to get §10 prospectus[ii] info SEC deems as NOT prospectuses

(a) can be done if (b) is done, but (b) does not have to be done if either (c)(i) or (c)(ii) is done, or (d) can be done alone if its requirements are followed

[SEE E&E PG. 157]

Rule 134 ‐> exception for "tombstone ad" identifying statements, when:□

§2(a)(10)(b) ‐> limited info communications containing:

NOT §2(a)(10) "prospectus":○

[2] If a "Prospectus", §10 Prospectus?§10(a) ‐> N/A during waiting period○

[i] must be filed with RS□[ii] legend in red ink that RS not yet effective□[iii] contains info found in final prospectus except for price and underwriting□

Rule 430 ‐> preliminary prospectus:

Uncommon□Rule 431 ‐> summary prospectus:

[i] may include any info except info conflicting with RS or other incorporated filings

[ii] must be filed with SEC on or before 1st day used[iii] legend (advising investors to read preliminary prospectus and how to get a copy)

[iv] acc. or pre. by preliminary prospectus, unless seasoned/WKSI issuer (not required to be acc. or pre. by ANY prospectus)

[v] can cure immaterial or unintentional failures to legend or file, as long as there was good faith effort to comply + corrective action taken asap

Media companies exempt from info/legend/filing requirementsIssuer needs to file the media story within 4 days of becoming aware of it

Media Stories (i.e. interview with issuer) ‐> qualify as FWPs: Rule 433(f)□

Requires filing unless road show materials are available electronically to public Road Show Materials (i.e. handouts, PowerPoint, etc) ‐> qualify as FWPs: Rule 433(d)□

Rule 433 + Rule 164 ‐> free writing prospectus:

§10(b) ‐> prospectuses that are allowed by the SEC, OK to omit or summarizes info otherwise required by §10(a)

○

[3] Preliminary Prospectus Delivered?

[i] "acceleration" of RS effective date will not be granted unless preliminary prospectuses are made available to all underwriters and dealers: Rule 460

Electronic delivery ‐> OK if recipient gives consent, and consent can be given over phone if record of call is kept: SEC Release No. 7856

□

Failure to deliver ‐> deceptive act under Exchange Act 15(c)(2)□

[ii] preliminary prospectusmust be delivered by underwriters and dealers to: (i) people who ask; (ii) sales personnel; (iii) and for non‐reporting issuers, any person getting confirmation of sale, 48 hours prior to sending confirmation: '34 Act Rule 15c2‐8

Preliminary Prospectus Distribution: allowed but technically not required during waiting period, a shortcoming that the SEC addresses in 2 ways:

○

POST‐EFFECTIVE PERIOD LIABILITY UNDER §5(b)(1) [NO PROSPECTUS] + §5(b)(2) [NO DELIVERY] 4.

§5(c) ‐> N/A oral offers OK•

§5(a) ‐> N/A sales OK•

Written offer is a §10 final prospectus○

[SEE WAITING PERIOD]§2(a)(10)(b) ‐> limited info communications○

[SEE WAITING PERIOD]Rule 134 ‐> "tombstone ad" identifying statements○

Communication acc./pre. by a final §10(a) prospectus is deemed NOT to be a §2(a)(10) "prospectus"

§2(a)(10)(a) ‐> free writing○

Must be acc./pre. by a final §10(a) prospectusRule 431 ‐> summary prospectus○

For non‐reporting and unseasoned issuers, FWP must be acc. by the final §10(a) prospectus [or hyperlink]

For seasoned and WKSI, no such requirement

Rule 433 ‐> free writing prospectus:○

For cash offerings missing price and offering related infoBut info must be filed within 15 days of effectiveness

Rule 430A ‐> "not‐yet‐final" prospectus○

Rule 430B ‐> shelf registration prospectus○

For non‐cash offeringsRule 430C ‐> "not‐yet‐final" prospectus○

RS effective ‐> "access equals delivery"□§10(a) prospectus filed or will be as soon as practicable□No pending SEC proceedings against offering/participants□Rule 173 notice only if issuer/underwriter/participating dealer subject to §4(3)□

Acc./pre. by a final §10(a) prospectus ‐> deemed delivered if:

Limited to info necessary to comply with '34 Act Rule 10b‐10

Rule 172(a) ‐> written confirmation of sale○

§5(b)(1) ‐> no "prospectus" unless §10,written offer OK if: •

‐ OR ‐[i] final prospectus □

[ii] notice (sale was made pursuant to RS OR that Rule 172 applies) □

Rule 173 ‐> within 2 days of completing sale, issuers/underwriters/participating dealers (that can't take advantage of §4(3) or Rule 174) must send buyers either:

○

RS becomes effective ‐> "access equals delivery"□§10(a) prospectus filed or will be as soon as practicable□No pending SEC proceedings against offering/participants□

Rule 172(b) ‐> final prospectus deemed delivered [satisfying §5(b)(2)], when:

§4(1) ‐> §5(b)(2) final prospectus delivery requirements only applies to transactions by issuer/underwriter/dealers [NOT general public]

90 days for first‐time issuers40 days for all other issuers25 days if issuer is an exchange traded company0 days if issuer is a reporting company

§4(3) ‐> §5(b)(2) final prospectus delivery requirements only apply to participatingdealers ‐> those selling securities registered in the past:

Exceptions [Delivery/Rule 173 Notice NOT Required]○

'34 Act Rule 15c2‐8: similar to preliminary prospectuses during the waiting period, also requires underwriters and dealers to distribute copies of final prospectus to: [i] people who ask; [ii] sales personnel

○

§5(b)(2) ‐> no delivery of securities unless acc./pre. by a final §10(a) prospectus•

§5(b)(2) LIABILITY FOR DEFECTIVE FINAL PROSPECTUS?5.

Compare SEC v. Manor Nursing Centers (2nd Cir. 1972) ‐> dudes violated §5(b)(2) by delivering securities without or preceded by a prospectus that met requirements of §10 b/c the info required on the prospectus per §10 was materially false and /or misleading

○

With Gustafson (5th Cir.) ‐> disagrees/criticizes Manor Nursing b/c false or misleading statements on prospectus is protected by a separate antifraud provision with specific defenses ‐> this decision makes those defenses null (not fair to Δs)

○

Defective Final Prospectus due to materially false or misleading info an effective §10(a) final prospectus•

ExemptionsSTATUTORY SCHEME1.

Exempt from ALL Act sections unless "expressly provided" ‐> §17 and §12(a)(2)§3(a) ‐> all listed (i.e. issued by gov. religious, education, charitable orgs) ○

Exempted Securities•

§4(1) ‐> by public ○

Non‐publicTransaction [ONLY]By issuer [ONLY]Exempt from §5 [ONLY]Rule 506 [Reg. D] ‐> unlimited $

§4(2) ‐> private placements○

§3(a)(11) ‐> intrastate offerings: Rule 147○

Rule 504 ‐> $1M □Rule 505 ‐> $5M□Reg. A ‐> short form□Reg. CE ‐> California□Rule 701 ‐> pension plans□

§28 used more (no limits)

§3(b) ‐> others per SEC discretion [$5M max]:○

Exempted Transactions•

Public interest ‐> must consider efficiency, competition, capital formation§28‐> SEC allowed to "exempt any person, security, or transaction" if necessary for public interest○

Exemptions for Public Interest•

TRANSACTION EXEMPTION GENERAL RULES [Release No. 4552]2.Primary offerings by issuers [ONLY] •Party seeking exemption has BoP•

[i] separate offerings part of a single finance plan[ii] separate offerings issuing same class of security[iii] separate offerings made around same time[iv] same type of consideration is to be received[v] separate offerings made for same general purpose

6 month safe harbor ‐> sales separated by 6 months considered separate offerings (not subject to integration): Rule 502(a) [Reg. D]; Rule 147(b)(2) [intrastate]

○

Integration ‐> SEC considers 5 factors to see if separate offerings should be integrated (really one transaction):

•

Legend indicating restrictions on certificates○Stop transfer order○Covenants not to redistribute○

Coming to Rest ‐> offering not over until securities come to rest in hands people who are not conduits

for wider distribution, sellers must:

•

Examples: 1 out‐of‐state purchaser, 1 unsophisticated person, etc○Practically issuer can only abandon the offering and start new one after integration period is up○

Bad Apple Doctrine ‐> a single non‐conforming offer (even if non‐qualifying doesn't buy) OR saledestroys exemption for the entire offering

•

Aggregation ‐> generally backwards looking (just add shit in the past 6 months)•

3. EXEMPT PRIVATE OFFERING ‐> §4(2)?•

○ Exempt from §5 [ONLY]

○ Private offer ‐> meet factors [1]‐[4] ([1] + [2] from Ralston Purina)

○ Transaction [ONLY]

○ By issuer [ONLY]○

*§4(2) can still protect even when not qualified for Rule 506 safe harbor

[SEE RULE 506 SAFE HARBOR* IN CHART BELOW]

§4(2) ‐> "§5 shall not apply to transactions by an issuer not involving any public offering"

•

Class of persons ‐> issuer has BoP to show offerees able to "fend for themselves" (have access to the "kind of info that would be available [on a RS]")

○

Wealth Sophistication Relationship

□ Risk‐bearing ability□ Offeree's representative (sophistication may be imputed to an offeree)□ Manner of disclosure □ Economic bargaining power

Other

[1] offeree qualification [who can "fend for themselves" Ralston Purina] ‐> possible on several independent bases:

○ [2] availability of information ["have access to kind of info . . .": Ralston Purina]○

No solicitation ("all forms of advertising and media circulation should be avoided") Offer made directly to offerees OR their reps

[3] manner of offering

○ [4] no resale ‐> must "come to rest" in hands of initial investors

"Public v. Private Offering" ‐> turns on "whether the [1] particular class of persons affected [2] needs the protection of the Act": Ralston Purina (key factors: [1] sophistication + [2] access to information)

• SEC Considerations ‐> relationship between offerees and issuer, nature, scope, size, type, and manner of offering: SEC Release No. 4552

4. EXEMPT LIMITED OFFERING ‐> REG. D?•

○ Must aggregate all §3(b) offer/salesRule 504 and Rule 505 are rules under §3(b) [$5M max]

•○ §4(2) can still protect even when not qualified for Rule 506 safe harbor

Rule 506 is a safe harbor under §4(2)

Rule 504 under §3(b) Rule 505 under §3(b) Rule 506 under §4(2)

Issuer Qualifications

no '34 Act reporting co., "blank check" co., or investment co.

no investment co., bad boy issuers DQ'd under Reg. A

none

Aggregate $$ Limit

$1M/year (all §3(b) offer/sales)

$5M/year (all §3(b) offer/sales)

no limit

# of Purchasers*

unlimited 35 max nonaccredited + unlimited accredited**

35 max nonaccredited + unlimited accredited**

Investor Qualification

none nonaccredited must get written disclosure + opportunity to ask issuer questions: Rule 502(b)

nonaccredited (alone or with rep.) must be sophisticated (or issuer reasonably believes so)

•

accredited presumed to be qualified

•

Belief of Offeror/Seller

none reasonable belief as to # of purchasers, but NOT as to whether qualified

reasonable belief as to # of purchasers AND purchaser was qualified

○ ***these requirements can be lifted if [i] issuer registers under state law requiring filing/disclosure; or [ii] offering exempt under state law that allows sales only to accredited investors: Rule 504(b)(1)

Manner of Offering

usually no general solicitation***

no general solicitation: Rule 502(c)

no general solicitation: Rule 502(c)

Resale usually restricted*** restricted per Rule 144 [SEE RESALE]: Rule 502(d)(reasonable care to prevent resale)

restricted: Rule 144 [SEE RESALE]: Rule 502(d) (reasonable care to prevent resale)

Notice of Sales file Form D within 15 days of 1st sale (but not condition of exemption): Rule 503

file Form D within 15 days of 1st sale (but not condition of exemption): Rule 503

file Form D within 15 days of 1st sale (but not condition of exemption): Rule 503

Info Required to be Given to Purchasers / Offerees

none if purchased by:solely accredited ‐> none •nonaccredited ‐> info as specified****

•

if purchased by:solely accredited ‐> none •nonaccredited ‐> info as specified****

•

Integration Safe Harbor

6 months: Rule 502(a)

6 months: Rule 502(a) 6 months: Rule 502(a)

•○

□ Example: partnership with 10 people, 5 unaccredited ‐> one purchaser and issuer not

obligated to consider sophistication of EACH individual partner

Business entities count as 1 purchaser: Rule 501(e)(2)

*Purchasers ‐> excludes family and accredited investors in counting purchasers: Rule 501(e)

○□ Persons w/net worth > $1M (w/o counting home) ‐OR‐ 2 most recent net income >

$200K ($300K w/spouse)□ Institutional investors (i.e. banks)□ Corp./org. with > $5M in assets □ Key insiders of issuer□ VC firms□ Trust > $5M assets + sophisticated manager□ Accredited‐owned entity (all equity owners are accredited)

When accredited ‐> look at time of sale of securities to that person: SEC Release No. 6455

**Accredited investors: Rule 501(a)

○ Nonaccredited purchasers must be sophisticated ‐> "have knowledge and experience to evaluate the investment"

Rule 501: definitions

•○ No general solicitation: Rule 502(c)

○

Disclose resale restrictions Legend securities as restricted Have purchasers sign letter of intent [not to resell]

Securities sold under Rules 504/505/506 ‐> all "restricted securities" (cannot be resold without registration), and the issuermust take "reasonable care" to prevent resale: Rule 502(d)

○ Non‐reporting companies ‐> furnish same kind of info as in registered offering Reporting companies ‐> furnish specified '34 Act docs, or info from most recent specified '34

Act report or '33 Act RS Issuers ‐> exhibits, written info given to accredited investors, Q&A available prior to sale Issuers ‐> advice purchasers of resale limitations

Disclosure obligations**** if purchased by nonaccredited: Rule 502(b)(2)

Rule 502: conditions for establishing exemption

• Rule 503: filing notices of sales per Form D• Rule 507: Reg. D not available if issuer subject to injunction for failing to file Form D• Rule 508: fuck ups no biggie if good faith reasonable attempt to comply

5. EXEMPT INTRASTATE OFFERING ‐> §3(a)(11)?•

‐ AND ‐

[i] offered and sold only to persons resident within a single State

[ii] the issuer is a person OR business entity that is a resident + doing business within State○ Rule 147 ‐> definitions and safe harbor for intrastate offerings

§3(a)(11) ‐> exempts intrastate offerings for any security which is part of an issue:

issuer "resident" requirement ‐> Person Issuerdomicile•Business Issuercorps. ‐> incorporation•non‐corps. ‐> organized•unorganized ‐> principal business•

issuer "doing business within state" requirement ‐>

principal office, 80% gross revenues, 80% assets, 80% use of offering's proceeds in‐state: Rule 147(c)(1)

offeree/purchasers ‐>*bad apple applies (exemption lost if any offer or sale made to out‐of‐state resident)

Persondomicile: §3(a)(11)•actual principle residence: Rule 147(d)(2)•Businessprinciple office: Rule 147(d)(3)•

integration safe harbor ‐> > 6 months before/after offering: Rule 147(e)

resale restrictions ‐> "come to rest" safe harbor ‐> 9 months: Rule 147(e)

use of proceeds ‐> predominantly (80%) used in‐state

6. EXEMPT SMALL ISSUES ("SHORT FORM" REGISTRATIONS) ‐> REG. A?•

○ Allows issuers to "test the waters" by making oral and written communications to potential buyers and gauge interest: Rule 254

Reg. A ‐> exempts small issues if issuer uses an offering circular and complies with filing/delivery requirements: Short Form 1‐A

Rule / Regulation: Reg. A Small Issues ("Short Form" Registrations): Rules 251 ‐ 263

Affiliated Statute: §3(b)

Offeror/seller: no '34 Act reporting co., bad boy issuers, investment co., blank check co. + residence & principle place of business in US/Canada: Rule 251(a) + 262

$ limit offered/sold: < $5M aggregate of all §3(b) offers/sales within 12 months

Use of proceeds: file periodic form 2‐A

Notice to SEC: offering statement + report on sales and use of proceeds every 6 months and within 30 days of sale completion: Rule 256 + 257

Failure to give notice: not condition of exemption, SEC could suspend exemption: Rule 258 + 260

Manner of offering: testing waters OK ‐> preliminary offering circular during waiting period, oral offers after filing

•

no sales until Form 1‐A is qualified: Rule 251(d)•

Required info to be given to purchasers/offerees:

no sale unless offering circular given to purchaser: Rule 252 ‐ 255

Integration safe harbor: not integrated with: [i] prior offers/sales or [ii] later offers/sales registered under 5A, SA, R. 701, Reg. S, or made > 6 months after Reg. A offer completed: Rule 251(c)

7. EXEMPT OFFERING FOR ACCREDITED INVESTORS ‐> §4(6)?•

○

□‐ OR ‐

Net worth (you + spouse) > $1M

□ Net income > $200K ($300K if spouse) for 2 most recent years

Natural people: Rule 215(e),(f)

Accredited investors ‐> includes a ton of shit (institutions, people, business): §2(a)(15); Rule 215

§4(6) ‐> exempts offerings > $5M per §3(b), made [i] only to accredited investors, IF: [ii] issuer files notice + [iii] no advertising/public solicitation

8. EXEMPT OFFERING FOR COMPENSATORY EMPLOYEE BENEFIT PLAN ‐> RULE 701?• Rule 701 ‐> exempts offerings for securities given by an issuer to its employees (or similar relationship)

as part of compensation

Rule / Regulation Compensatory Benefit Plans & Ks: Rule 701

Affiliated Statute: §28

Offeror/seller: no '34 Act reporting co., investment co.: Rule 701(b)

Purchasers and/or offerees: employees, directors, general partners, trustees . . . : Rule 701(c)

Offeror/seller's intent: compensatory purpose, not to raise capital•according to a written K for benefits •

$ limit offered/sold: greater of $1M, 15% assets of issuer, 15% of outstanding securities. . .: Rule 701(d)

Use of proceeds: no proceeds (compensatory)

Manner of offering: by written K for benefits

Restrictions on resale: "restricted securities" per Rule 144


info on: benefit plan, ERISA requirements, risk . . .: Rule 701(e)(1)‐(6)

Integration safe harbor: no integration

9. EXEMPT OFFERING PER CA CORP. CODE ‐> REG. CE?• Reg. CE ‐> exempts offerings that satisfy 25102(n) of CA Corporations Code

Rule / Regulation Reg. CE ‐> Rule 1001

Affiliated Statute: §3(b)

Offeror/seller: CA issuer ‐ OR ‐ non‐CA issuer w/ > 50% property & payroll & sales in CA + > 50% held by SHs w/CA addresses

Purchasers and/or offerees: affiliates of issuer/relatives/who qualify b/c

$ limit offered/sold: < $5M total per offering (cannot use another exemption to cover > $5M)

Restrictions on resale: "restricted securities" per Rule 144


as under CA Code

Other: securities must satisfy CA Corp. Code §25102(n)

10. EXEMPT OFFERING FOR LARGE ACCREDITED INVESTORS ‐> PROPOSED RULE 507?

Rule / Regulation Large Accredited Investors: Proposed Rule 507

Affiliated Statute: §28

Purchasers and/or offerees:

large accredited investorsindividuals w/$2.5M in investments or $400K income/yr ($600K w/spouse)•

entities w/$10M in investments + financial institutions w/o $ thresholds•directors, executive officers, general partners of the issuer •

Offeror/seller's intent: reasonable belief ‐> large accredited investor(s)

Manner of offering: no general solicitation

Restrictions on resale: only to accredited


"predominantly states" sold only to large accredited investor, no $ solicited or accepted, not registered w/SEC

Integration safe harbor: 6 months per Rule 502(a)

Resale RestrictionsSTATUTORY SCHEME1.

"Underwriter" ‐> "any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or has a direct or indirect participation . . . the term 'issuer' shall include . . . any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer.": §2(a)(11)

○§4(1) ‐> §5 only applies to transactions by an issuer, underwriter, or dealer (N/A to general public)•

De facto sellers (i.e., investment banker) OK[1] agent for issuer ‐> who offers or sells for an issuer in connection with distribution of a security ○

Violates the ban on resales of restricted securities[2] purchaser "with a view to distribute" ‐> ○

Violates the ban on resales of control securities[3] underwriter for a "control person" ‐> those who offers or sells for a "control person" ○

Thus 3 categories of underwriters [3 ways to incur §5 liability as an underwriter]:•

Rule 144 ‐> safe harbor to avoid "underwriter" designation under [2] or [3]•

ARE THESE CONTROL OR RESTRICTED SECURITIES?2.

[bad act i] resale to the public of "restricted securities" ‐> those acquired directly or indirectlyfrom issuer [or an affiliate] in a private offering: Rule 144(a)(3)

○

[bad act ii] resale of "control securities" ‐> those owned by an affiliate of the issuer ○

Secondary Distributions ‐> Act only regulates resales of [i] restricted OR [ii] control securities [bad actsif without registration or another exemption]

•

Unexercised power to control is still control (i.e. majority SH)○Member of control "group" also has control (i.e. family of control person, corporate officers of a control group)

○

Affiliate (aka "control person") ‐> is any person that, directly or indirectly, controls the issuer: Rule 405 ("control" defined as the power, even if unexercised, to direct management and policies of the issuer, whether through stock ownership, position, contract, etc)

•

SAFE HARBOR FOR RESALES OF CONTROL & RESTRICTED SECURITIES ‐> RULE 144?3.

"Person" [selling securities] ‐> includes relatives, etc (a) definitions○

Nonaffiliates ‐> must comply with current public info + holding period requirementsAffiliates ‐> must comply with ALL conditions

(b) conditions that must be complied with○

(c) current public info must be available○

6 months for '34 Act recording companies that are current in its reports1 year if not

(d) holding periods for restricted securities○

(e) limits on volume of control securities sold ○

Rule 144 ‐> safe harbor [ONLY] (for persons listed in [1][2][3] below) that deems people not to be

engaged in a distribution, avoiding "underwriter" designation, OK to resale securities under §4(1)

•

Generally requiring a "broker's transaction"(f) manner of sale for control securities○

(g) defines "broker's transaction"○(h) must give SEC notice of sale of control securities○(i) disqualifications from using Rule 144○

Transactions + Persons Covered by Rule 144:•

[1] non‐control* persons selling restricted stock*cannot have been an affiliate during the 3 months before sale

[2] control persons selling restricted stock

[3] control persons selling nonrestricted stock (through brokers)

Holding Period

security of '34 Act reporting company ‐> 6 months**

•

security of non‐reporting company ‐> 12 months

•

security of '34 Act reporting company ‐> 6 months

•

security of non‐reporting company ‐> 12 months

•

none

Sale Method

N/A broker's transactions after filing Form 144

•

N/A to resale of debt securities

•

broker's transactions after filing Form 144

•

N/A to resale of debt securities

•

Info **publically available info for reporting issuers for 12 months before resale

**publically available info about issuer

**publically available info about issuer

SEC Filing N/A disclosure on Form 144 if selling > 5K shares OR > $50K

disclosure on Form 144 if selling > 5K shares OR > $50K

**must be current on '34 Act periodic filings•***must be public info comparable to info on '34 Act reports ‐> reporting companies subject and current on '34 Act periodic filings automatically satisfy pubic info requirement

•

PRIVATE RESALES OF CONTROL & RESTRICTED SECURITIES ‐> RULE 144A?4.Rule 144A: safe harbor for [1] private resales of securities to "qualified institutional buyers" (must have > $100M invested in non‐affiliates) or someone seller reasonably believes to be; [2] security is non‐fungible (non‐exchangeable) with those traded on an exchange or publicly auto‐traded; and [3]must provide buyer with notice seller might use Rule 144A exemption and other info if seller is '34 Act company

•

Is the person an affiliate/sale on behalf of affiliate?

YES

NO are they holding restricted securities per Rule 144(d)?

NO no issues w/resale [thus likely they can rely on §4(1) as a person who just bought some securities and are entitled to resell them]

must comply with public info and holding period requirements per Rule 144 (c) + (d)

YES

'34 Act recording company + current in its reports?

min holding period of 1 year: Rule 144(c)

YESNO are they '34 Act reporting company + current in its reports?

NO

YES

restricted securities?

must have been held for > 6 months + sale is still subject to volume, manner of sale, and notice requirements

sale still subject to volume, manner of sale, and notice requirements

YES

NO

is adequate information otherwise publicly available?

affiliate is shit out of luck (which is one reasons why companies sometimes volunteer to register under '34 Act)

NO

YES

min holding period of 6 months: Rule 144(c)

Corporate ReorganizationsSTATUTORY FRAMEWORK1.§2(a)(3) ‐> "sale" defined as "every K for sale or disposition of a security or interest in security for value"•

UNLESS exempt ‐> OK to rely on §4(2) private offering exemption instead of registering; Rule 145 doesn't affect other statutory exemptions: SEC Release No. 5463

Access = delivery N/A to Rule 145

Registration required for securities issued in connection to mergers, consolidations, or transfers of assets b/c Rule 145 deems these transactions are to involve offers to sell: SEC Release No. 5316

○Rule 145 ‐> sale occurs when acquisition plans presented to SH ("offer") and SH votes ("acceptance")•

Rule 165 ‐> offer to SHs w/r/t a transaction covered by Rule 145 is NOT a "prospectus" under §2(a)(10) definition OR an "offer to sell" for §5 purposes, after 1st public announcement

•

Take reasonable steps to prevent further dissemination until announcement or RS filed○Rule 166 ‐> communications before a public announcement not offers, IF:•

TENDER OFFER?2.

No sale b/c Ѧ is not selling a security [per §2(a)(3)] (offering cash)○Cash tender ‐> Ѧ offers B's SHs cash for their stock in B •

Sale b/c both parties enter into K [per §2(a)(3)]○Stock‐for‐stock tender ‐> Ѧ offers own shares to B's SHs in exchange for tendering B shares•

CONSOLIDATION?3.

Sale b/c both parties got to vote, thus both entered into K [per §2(a)(3)]○Consolidations ‐> IF SHs of Ѧ and B vote to, Ѧmerges with B, creating new C•

MERGER OR STOCK‐FOR‐ASSETS ACQUISITION?4.

Target acts like middleman, who is deemed an underwriter [only] if one of the parties is a shell company: Rule 145(c)

○

IF deemed an underwriter, Target subject to underwriter liability under §11 and Target's affiliates subject to resell restrictions

○

Merger & stock‐for‐assets acquisitions ‐> Target's SHs get securities issued by Acquirer, but unlike tender offers, Target's SHs do not vote on decision (issue ‐> no sale on its face)

•

SPIN‐OFF?5.

[i] Ѧ got value from the inevitable trading market that develops for the previously private and illiquid shares that Ѧ kept, thus a "disposition of a security for value", see SEC v. Datronics

○

Registration requirements for ѦProspectus delivery requirements in §4(3) for Ѧ and Ѧ's dealers

[ii] Ѧ becomes a statutory underwriter [SEE RESALE RESTRICTIONS]: SEC Release No. 4982○

Spin‐off is pro‐rata to the parent's SHsPeople receiving spun‐off securities gave no consideration for themParent gives its SHs and the public adequate information spin‐off + company being spun‐offParent has a valid business purpose for the spin‐off AND spins‐off "restricted securities" it has held for 2+ years

Parent restricts resale of securities

5 garden variety spin‐offs NOT requiring registration: [SEE CASEBOOK 182]○

Spin‐off ‐> is when Ѧ distributes stock it owns in B to Ѧ's SHs as a special dividend (issue b/c dividends not considered a "disposition for value"); 2 ways around issue:

•

Liability for Securities Act Violations'33 ACT STATUTORY OVERVIEW1.

§5 ‐> violation of registration requirements§17 ‐> antifraud provision§24 ‐> criminal penalties for violating §5 or §17

§8A ‐> civil enforcement cease & desist §20 ‐> injunction§21 ‐> civil monetary penalties§21(d) ‐> equitable relief for violations of '33 or '34 Act

Penalties:○

Government Actions•

§11 ‐> misrepresentations in RS§12(a)(1) ‐> violations of §5§12(a)(2) ‐> misrepresentations in prospectus

§13 ‐> SoL for §11 + §12§14 ‐> no waiver of rights under §8, §11, §12§15 ‐> control person liability

Related Provisions:○

Express Private Rights•

GOV. CRIMINAL (DOJ) & CIVIL (SEC) ACTIONS?2.§5 violation of registration requirements: "unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly . . ."

•

ONLY §17(a)(1) requires some sort of scienter (recklessness is not enough), as opposed to actions under §17(a)(2) or §17(a)(3)

○§17 antifraud provision: "it shall be unlawful for any person in the offer or sale of any securities . . ."•

"Willful" ‐> person can violate even if he didn't know SEC rule existed or that the thing being offered/sold was a "security" [subject to SEC regulation]: see US v. Brown (government only required to prove specific intent as to bad conduct and thing used was in fact a security, but no need to prove Δ's knowledge that the thing was a security)

○§24 criminal penalties: "any person who willfully violates any of the provisions . . ."•

3. PRIVATE RIGHT OF ACTION?Summary of §11, §12(a)(1), §12(a)(2) Violations

§11 ‐> MISREPRESENT. IN REG. STATEMENT

§12(a)(1) ‐> VIOLATION OF §5

§12(a)(2) ‐> MISREPRESENT. IN PROSPECTUS

Π Reqs. tracing actual purchaser from Δ actual purchaser from Δ

Δ Reqs. signers of RS + issuer title passers + solicitors, Pinter v. Dahl

title passers + solicitors, Pinter v. Dahl

Π'S CASE/ßoǷ

Bad Act material misrepresentation or omission in RS

•

N/A to exempt, unless bad apple

•

strictly liability for offers/sales violating §5 reg. reqs. (even if later fixed, Diskin v. Lomasney)

•

N/A to exempt, unless bad apple

•

material misstatement or omission in prospectus or oral communications

•

ONLY public offerings, but includes otherwise exempt(i.e. exempt per Reg. A or intrastate)

•

Culpability not required, except for outside directors

•

but Δ can prove lack of per the due diligence defense

•

not required not required•but Δ can prove lack of per the reasonable care defense

•

Transaction Causation

[reliance] not required, unless > 1 year

•

but Δ can rebut by showing Π knew of untruth/omission

•

not required [reliance] not required•but Δ can rebut by showing Π knew of untruth/omission

•

Loss Causation

not required•but Δ can rebut by showing no actual loss

•not required not required•

but Δ can rebut w/lack of loss causation: §12(b)

•

Damages per formula in §11(e)•but Δ's ßoǷ to show the degree they didn't cause Π's damages

•recession/rescissory damages

recession/rescissory damages

•

but Δ can reduce % damages by degree

•

DEFENSES

SoL / rebut main argument SoL / rebut main argument SoL / rebut main argument

"bespeaks caution"•no boilerplate •

unclean hands/other equitable defense

"bespeaks caution"•no boilerplate •

§27A ‐> safe harbor ONLY for [i] forward looking [ii] by '34 Act companies

§27A ‐> safe harbor ONLY for [i] forward looking [ii] by '34 Act companies

Rule 175 ‐> safe harbor for forward looking in RS OR '34 Act filing

Rule 175 ‐> safe harbor for forward looking in RS OR '34 Act filing

"resign and squeal"

4. MISREPRESENTATION IN REG. STATEMENT ‐> §11?•

○ [1] Π = purchaser's only requirements: [i] tracing to registered offering + [ii] within SoL: §11(a)○

□ No ‐> joint & severely liable: §11(f)□

Yes, joint & severely liable same as inside directors No, liability based on % of responsibility: '34 Act §21D(f)

Yes ‐> "knowingly " per '34 Act §21D(f)(10)?

Outside directors?

[2] Δ = anyone who signed the RS (issuer, principal executive officers & majority of directors must sign); every person named in reg. stat. as about to become a director; every expert named in reg. stat. as having prepared or certified

any part of the statement, or as having prepared any report or valuation used in connection with the statement; every underwriter of

the security: §11(a)(1)‐(5)

○

□ Boilerplate disclaimers do not save Δs: Trump (NOT boilerplate disclaimers b/c "tailored precisely to address the uncertainty [that Π is complaining about]")

"Bespeaks caution doctrine" ‐> usually limited to "soft info" that is not easily verifiable, i.e. forward‐looking statements per §27A: §27A + Rule 175 [safe harbor]

§27A ‐> safe harbor for [i] future looking statements only; [ii] not available for IPOs; [iii]only available for '34 Act companies

□

◊ Yes ‐> Δ safe

◊► No ‐> Δ safe►

Yes ‐> Δ safe No ‐> Δ liable

Yes ‐> meaningful cautionary language?

No ‐> has Π shown Δ actual knowledge?

Immaterial?Flowchart for Rule 175:

Rule 175 ‐> old safe harbor [G: not really important after §27A] for forward‐looking statements in registration statement or '34 Act filing, not actionable unless no reasonable basis or made in other than good faith

□ Omission of facts ‐> material only if substantial likelihood a reasonable investor would view it as significantly altering the "total mix" of publically available info (this rule makes G uncomfortable): In re Adams; Kapps

□

Could just have been leaked earlier and markets already adjusted

Case: In re Adams Golf Sec. Lit. (3rd Cir. 2004) ‐> Π does not need to address loss causation at motion to dismiss stage, whether news is material b/c market did NOT react to news depends on whether we believe in efficient market hypothesis

□ Case: Kapps v. Torch Offshore (5th Cir. 2004) ‐> not materially misleading for prospectus to disclose that past 16 months the price of natural gas had increased 133% but not disclose that in past 5 months prices down 60%

"Material" ‐> facts where there is a substantial likelihood that a reasonably prudent investor would consider important

[3] Bad Act = RS with "untrue statement of a material fact OR omitted to state a material factrequired to be stated therein or necessary to make the statements therein not misleading . . . "

○

□ The closer involvement or higher position ‐> the more a court expects □ Those conducting due diligence must look for facts, not just ask corporate officers Qs□ Underwriters ‐> can rely on agents,□ Auditors ‐> no higher than industry standard (i.e., GAAP)

"Due diligence defense" ‐> Δ can show lack of culpability, after reasonable investigation, reasonable ground to believe and did believe . . . that the statements were true and there was no omission of material fact [§11(b)(3)]: see, e.g., Escott v. BarChris

"Resign and squeal" defense

[4] Culpability = none

○ G: Congress though "market is not relying on old data b/c presumed that the market would

[5] Transaction Causation = none, unless transaction in reliance > 12 mo. after earnings statement

§11 misrepresentations in registration statement (n/a to exempt offerings) ‐> Πmust show:

have new data [and adjusted itself] within 12 months") ○

Δ can rebut by showing no actual loss

[6] Loss Causation = none

○ Δ can rebut by showing Π knew of untruth or omission Δs liable for degree of fault and Δs ßoǷ to show the degree their conduct did not cause Π's

damages

[7] Damages = formula in §11(e)

Due Diligence Defense:

Liability of Non‐Experts Liability of Experts

Prepared by Non‐Experts

Not liable if [i] reasonable investigation + [ii]affirmative belief (no reasonable grounds to doubt) the statements are true (you have to go out and do actual due diligence) + [iii] no actual knowledge

•

Here you have to show you went and did some shit and really had reason to believe misstatement was true

•

Not liable if: [i] violation is w/r/t shit the expert had nothing to do with or materials they didn't prepare

•

[ii] company didn't use the expert material and instead altered it or something

•

Prepared by Experts

Not liable if (will meet your defense) you had [i] no reasonable grounds to believe + [ii] no actual knowledge statements were misleading

•

Here all you have to show that there are no red flags

•

Same as top left box

5. VIOLATION OF §5 REGISTRATION REQUIREMENT ‐> §12(a)(1)? •

○ [1] Proper Π ‐> purchaser, see Fuller v. Dilbert (S.D.N.Y. 1965) ‐> not a proper Π b/c he didn't actually buy the securities

○ Must have direct link to issuer or seller, but broad definition of "seller" covers more than

persons who [i] pass title to securities, see Pinter v. Dahl (US 1988) (includes people who "successfully [ii] solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner")

[2] Proper Δ ‐> title passers and solicitors:

○ [3] Π's case ‐> offers/sales in violation of §5

○ [i] SoL [ii] rebut main argument [iii] unclean hands or another equitable defense, see Fuller v. Dilbert

[4] Δ's rebuttal ‐>

○ See Diskin v. Lomasney (2nd Cir. 1971) ‐> even after dudes amended registration statement,

it was still an offer under §12, thus the buyer Π could still get recession

[5] remedy ‐> recession or rescissory damages if you no longer own security

§12(a)(1) violation of §5 registration reqs.: strictly liability for offering or selling securities in violation of registration requirements of §5 (n/a to exempt offerings)

6. MISREPRESENTATION IN PROSPECTUS‐> §12(a)(2)? •

○ [1] Proper Π ‐> actual purchaser

○ Action can be against the selling group in registered offering

[2] Proper Δ ‐> title passers and solicitors, same as §12(a)(1)

○

□ Communications include ‐>

Bad act ‐> material misstatement/omission in prospectus (writing that offers) + oral communications

[3] Π's case ‐>

§12(a)(2) misrepresentations in prospectus: liability for a material misstatement/omission inprospectus/oral communications

Free writing prospectus Exempt securities (i.e. exempt under Reg. A or Intrastate offerings) G: possibly other written communications that violate §5

□

See Gustafson (US 1995) ‐> liability only attaches when there is an obligation to provide a prospectus; and if Δ escapes liability under specific provisions of §11, should also escape liability under the more general provisions of §12(a)(2)

But applies only to public offerings (including otherwise exempt public offerings) by an issuer or controlling SHs (limited secondary offerings)

Δ's actual knowledge if forward‐looking, otherwise nothing on culpability○

Π knew of untruth or omission SoL: within 1 year after discovery of untruth/omission or after should have been

discovered ‐ but max 3 years after sale Unclean hands Meaningful cautionary language if forward‐looking statements: Rule 175 [safe harbor] Lack of loss causation Reasonable care defense ‐> [i] Δ did not know, and [ii] using reasonable care could not have

known about the material misstatement or omission (~due diligence defense): Escott; Sanders (~due diligence defense in §11 essentially same in §12)

Case: Sanders v. John Nuveen (7th Cir. 1980) ‐>

[4] Δ's rebuttal ‐>

○ [5] Remedy ‐> rescission (or comparable remedies if Π no longer owns securities, i.e. recessionary damages)

•

○ Loss causation n/a to §12(a)(1) violations

§12(b) loss causation: damages for §12(a)(2) violations can be reduced by the amount of loss Δ proves was caused by reasons other than the misrepresentation

7. CONTROL PERSON LIABILITY? •

○ Control ‐> broad meaning here, easily includes directors, officers, dominant SHs

○ ßoǷ ‐> some courts require Πs to show culpable Δ, others require Δs to prove lack of culpability

§15 control person liability: anyone controlling a person liable under §11 or §12 is jointly and severable liable to same extent as the controlled person, unless the controller had no knowledge or reasonable grounds to believe the facts that led to controlled person's liability

8. CONTRIBUTION OR INDEMNIFICATION• §11(f) contribution: is available for §11 Securities Act suits, except when person seeking contribution is

guilty and other person is not, and liability of outside directors under §11 is subject to proportional requirements of §11(f)(2) and Exchange Act §21D(f); also available in private §17(a) suits, see Globus

•

○ Case: Globus v. Law Research Service (2nd Cir. 1969) ‐> against public policy to allow issuer to give indemnification to underwriters when the underwriter had actual knowledge of misstatementsleading to Securities Act liability, but court emphasized this was ONLY when "the underwriter committed a sin graver than ordinary negligence"

Indemnification: SEC thinks this is against public policy and says any provision granting indemnification is unenforceable, see Globus

9. ANTIFRAUD PRIVATE ACTION ‐> 17(a)•

○ §17(a) is criminal provision, but was copied verbatim from 10b‐5 (§17 only covers fraud in sales, but 10b‐5 also covers purchases), which has private right of action

○ SCOTUS held scienter was required in 10b‐5 criminal and private actions, but scienter was only required for §17(a)(1) actions, NOT §17(a)(2) or §17(a)(3) actions (negligence OK)

○ private Πs started trying to file §17(a)(2) or §17(a)(3) actions b/c they were easier to prove than 10b‐5 actions

§17(a) antifraud private action:most courts hold no private right of action under §17(a)

The Exchange ActSEC'S GENERAL EXEMPTIVE AUTHORITY1.'34 Act §36: SEC can exempt shit, except §15C (government securities brokers and dealers) if "necessary or appropriate in the public interest, and consistent with the protection of investors"

•

EXCHANGE ACT REGISTRATION REQUIREMENTS2.

[1] securities are to be traded on a national securities exchange: §12(a) + (b)○

‐ AND ‐

Class of equity securities (except for exempted special or government) that are held by 500 people or more

Issuer has total assets > $10M

[2] issuer meets # SHs and amount of assets test: §12(g)(1); Rule 12g‐1○

'34 Act §12: requires registering securities when: •

Form 10 ‐> general disclosure form •Form 8‐A ‐> simple form for already recording companies due to §15(d)•

EXCHANGE ACT REPORTING REQUIREMENTS3.By registering under §12, issuer becomes a "reporting company" subject to reporting under §13•'34 Act §15(d) issuers: already registered under the Securities Act also subject to §13 reporting requirements

•

Form 10‐K for annual reports○Form 10‐Q for quarterly reports○Form 8‐K for any info after certain materially important events○

Reg. 13A: filings required per §13•

'34 Act Violation '33 Act Violation

Must prove Δ acted willfully and knowingly, including Δ knowing about the existence of the rule violated

Must prove Δ knowingly committed a wrongful act, but NOT knowledge of the existence of the rule violated

Δ can avoid imprisonment (but not a fine) by proving lack of knowledge of the violated rule

Lack of knowledge not a defense

Thus Exchange Act liability harder to prove○

'34 Act §32 criminal liability:•

Reliance ‐> Πmust show they relied on defective filing in purchasing or selling securities○Damages ‐> Πmust prove the price was affected by defective filing○Defense ‐> Δ can escape liability if proves good faith and without knowledge filing was defective○Fees ‐> court can make any party pay other party's fees and costs○§21D + §21E Δ protections ‐> [i] loss causation, [ii] limitations on damages, [iii] proportionate liability, [iv] safe harbor for forward‐looking statements + "bespeaks doctrine"

○

'34 Act §18 civil liability: express remedy for false or misleading statements in Exchange Act filings, but 10b‐5 used more often (easier to prove)

•

§13(b)(2) record‐keeping ‐> every Exchange Act reporting company must keep books, records, internal system of accounting, etc

○

§13(b)(3) record‐keeping exemption ‐> exempts issuers when working with US gov. on "matters concerning the national security of U.S."

○

'34 Act §13 Foreign Corrupt Practices Act:•

SARBANES‐OXLEY REQUIREMENTS4.

Certify report "fully complies with the requirements of Exchange Act and all info in report fairly presents, in all material aspects, the financial condition and results of operations of the issuer"

○

Criminal liability if report not in compliance○

S‐O 302 / 906 certification ‐> Exchange Act reporting company CEOs + CFOs must certify reports per Rules 13a‐14 + 15d‐14

•

But no private right of action○

S‐O 303 fraudulently influence audits ‐> unlawful to fraudulently influence audits for the purpose of making financial statements materially misleading

•

All correcting adjustments identified by auditors must be included in financial statements: '34 Act §13(i)

○

Must disclose certain off‐balance sheet transactions: '34 Act §13(j)○

S‐O 401 disclosures in reports ‐>•

S‐O 402 extending credit/loans ‐> unlawful for any issuer to give credit/loans to directors or executive officers: '34 Act §13(k)

•

S‐O 404/406/407 internal controls/auditing‐> internal controls, codes of ethics for financial officers, and disclosures of financial experts on audit committees

•

S‐O 409 real time issuer disclosures ‐> increased the shit required to be reported on form 8‐K (for certain materially important events) and shortened the time report must be filed: '34 Act §13(l)

•

§14 Proxy RegulationsSTATUTORY FRAMEWORK1.

Like §10(b), §14(a) is not self‐enforcing, but relies on SEC rules to provide it with content○§14(a) applies only to registered securities○

'34 Act §14(a): "It shall be unlawful for any person . . . in contravention of such rules and regulations as the Commission may prescribe. . . to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security (other than an exempted security) registered pursuant to section 12."

•

Must send proxy materials to beneficial owners: Rule 14a‐13; 14b‐1; 14b‐2○

'34 Act §14(b): unlawful for securities firms, banks, and others exercising fiduciary powers to violate proxy rules that are beneficially "owned" by a customer but technically owned by the firms

•

PROXY SOLICITATION?2.

Public communications by SHs as how they going to vote =/= solicitation: Rule 14a‐1 Non‐management solicitations up to 10 people: Rule 14a‐2 Activities that would qualify as solicitations if: [i] people not affiliated with management, [ii]have no individual interest in proposal, [iii] do not seek proxy authority, forms, or consents to voting: Rule 14a‐2

Electronic SH forums < 60 days before company's annual or special meeting; if < 60 days, 2 day exemption: Rule 14a‐2(a)(6)

Exempt from proxy rules:○

Proxy rules cover proxy statements and "any other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding, or revocation of a proxy"

•

Rule 14a‐101 ‐> info required in proxy statement•Rule 14a‐6 ‐> proxy statement must be filed with SEC•SHAREHOLDER PROPOSAL?3.

SH eligible only if holds at least $2,000 in market value or 1% interest for over year○

Matter relates to ordinary business operationsRelated to elections or procedure for electionsPersonal grievance of SH / something not significantly related to corporate businessRelated to specific dividendsRelated to substantially same proposal that had been rejected in past 5 years

Company can exclude the proposal on 13 grounds, for example:○

Rule 14a‐8 ‐> allows eligible SHs to put a proposal before other SHs and have proxies solicited on the company's proxy statement

•

CASE: Lovenheim v. Iroquois Brands ‐ corp. cannot exclude the SH's proposal as "not related to corporate business" b/c this was a really important ethical issue that could have impacts on corp.

•

PROXY VIOLATION?4.

[1] misleading statement or omission○

SeeMills v. Electric Auto‐Lite Co. (not disclosing conflict of interest in proxy statement was very material)

But see Virginia Bankshares (when majority SH has enough votes to pass, even material defect =/= casual necessity)

See also Seinfeld v. Bartz (omission of Black‐Scholes valuations of option grants on the proxy statement is not material as a matter of law b/c not required by SEC regulations)

[2] info is material if there is a substantial likelihood that a reasonable shareholder would consider the info important when voting or giving proxy votes

○

[3] causation proved if can show defect was material and the "proxy statement itself, rather than the particular [defect], was an essential link in the accomplishment of the transaction"

○

Merger set aside only if equitableMonetary relief if possible to quantify of proxy defect

[4] damages is determined by best interests of SH as a whole○

Rule 14a‐9 Proxy Violation:•

Tender Offer RegulationsSTATUTORY FRAMEWORK1.Williams Act: added §13(d), §13(e), §14(d), §14(e), §14(f) to Exchange Act•

Anyone acquire more than 5% of a class of equity registered under the Exchange Act must file a disclosure within 10 days of purchase

○

# of shares ownedSource of funds used to purchaseIf purpose is to acquire control of issuer company, plans on what they going to do with the issuer company

Provide disclosure (Schedule 13D) to issuer, SEC, the exchange where the security is traded: Regulation 13D‐G

○

Amendments required if there are material changes○

Exchange Act §13(d): disclosure reqs. for buying > 5%•

Main disclosure like Schedule 13D + documents used to solicit or advertise for tenders Must file main disclosure before announcing tender offer and all other documents before used

Must send copies of all documents to issuer before they are published or sent to SHs

Unlawful to make tender offer for more than 5% of a class of equity registered under the Exchange Act unless certain filings made

○

Tenders can be withdrawn entire period of tender offer: 14(d)(5) + Rule 14d‐7○If tender offer is for less than all, must purchase pro rata for entire tender offer period: Rule 14d‐8

○

If tender offer price increases, must pay all tenders higher price (even those already tendered): 14(d)(7) + Rule 14d‐10 (best price rule)

○

Exchange Act §14(d): reqs. for tender offers > 5%•

"It shall be unlawful . . . to make any untrue [statement or omission] or to engage in any fraudulent, deceptive or manipulative acts . . . in connection with any tender offer . . . The Commission shall [promulgate rules to fill prohibition with content]"

○

Applies to any kind of security, even "mini tender offers" for < 5% of class of security○

Rule 14e‐1 ‐> must hold open for 20 daysRule 14e‐3 ‐> no trading on material info relating to ender offer if acquired from the target or prospective acquirer

Rules on insider trading w/r/t tender offers:○

Exchange Act §14(e): antifraud provision•

WHAT IS A TENDER OFFER?2.

active widespread solicitation of public SHs○solicitation for substantial $ of issuer's stock○offer above market $○terms of offer are firm○offer contingent on fixed # shares○offer open only limited time○offerees pressured to sell○public announcements of purchasing program before rapid accumulation○

Wellman factors characterizing tender offers, see Hanson Trust PLC (2nd Cir. 1985) (factors relevant but not a "litmus test" ‐> depends on totality of circumstances and if there is a substantial risk that SHs will lack the info needed to make an informed decision):

•

[1] a public announcement by purchaser of a plan to buy a substantial block of target company for purpose of acquiring control

○

[2] a subsequent rapid acquisition of large blocks of the target company's stock through open market and private negotiations

○

S‐G Securities v. Fuqua test ‐> a tender offer when, but see Carter Hawley Hale (9th Cir. 1985) (rejecting the test as "too vague and difficult to apply"):

•

G: SCOTUS undecided, but open definition allows SEC to expand definition if needed to confront abuse•

WHO MAY BRING SUIT & FOR WHAT?3.

SEC can seek an injunction in district court OR issue cease‐and‐desist order on its own per §21C○DOJ can bring criminal charges when breach involves willfulness○

Government:•

Member of class intended to be protected□Intent to create or deny□Consistent with legislative scheme□Traditional state law?□

Requirements per Cort. v. Ash

§13(d) disclosure requirements for buying > 5% ‐> majority rule in CoA is OK for an issuer to bring private right of action under §13(d) when seeking injunction, but not damages, see Indiana National Corp. v. Rich

○

§14(e) antifraud provision ‐> target corporations can sue tender offerors for injunctive relief, seePiper v. Chris‐Craft Industries (SCOTUS says sole purpose of Williams Act is protection of investors, not damages for competing offerors ‐> but endorses injunctive relief), and probably SHs of target corp. OK too; see Schreiber v. Burlington Northern (SCOTUS didn't address issue but accepted the case for review, which was an action under §14(e) that was brought by SHs of the target corp.)

○

Private Actions:•

10b‐5 Violations for Securities Fraud & Insider Trading STATUTORY OVERVIEW1.

§10(b) applies to registered & unregistered securities○§10(b) is not self‐executing ‐> SEC made Rule 10b‐5○

Exchange Act §10(b): "It shall be unlawful for any person . . . in contravention of such rules and regulations as the Commission may prescribe . . . ."

•

SECURITIES FRAUD IN VIOLATION OF RULE 10B‐5?2.

G: "directly or indirectly" does not cover aiders and abettors, not scheme participants□(a) to employ any device, scheme, or artifice to defraud,(b) to make any untrue statement of amaterial 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

(c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

G: "touch" test for "in connection "□. . . in connection with the purchase or sale of any security."

Rule 10b‐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 exchange,

•

Insider trading○Tipping○A corporation issues misleading info to public or keeps silent when duty to disclose○A person mismanages a corporation in a way connected to purchase/sale of securities○

Common Uses for Rule 10b‐5:•

[1] Jurisdictional Nexus ‐> must involve interstate commerce ○

I.e., GE issues a misstatement, you can't sue GE for deciding NOT to buy or sell based on the misstatement

[2] Transactional Nexus ‐> P must have actually bought or sold securities○

Sliding Scale Test for uncertain events: [i] probability that the event will occur (i.e., the

[3] Materiality ‐> "fact is material if there is a substantial likelihood that a reasonable SH would consider it important in deciding how to vote"

○

Elements of Rule 10b‐5 Violation:•

merger would happen); and [ii] the magnitude of the possible event, see Basic, Inc. v. Levinson

Rebut with no reliance b/c: everyone knew CEO was lying; P would have sold regardless due to him being broke; misstatement was corrected

[4] Reliance ‐> fraud on the market theory essentially eliminates the reliance requirement○

Transaction causation ‐> basically same as reliance (presumed by courts)Loss causation ‐> how much did you lose due to your reliance (provide evidence market believed misrepresentation)

[5] Causation○

Intent to deceive / defraud is enoughSome courts also accept reckless disregard for the truth of a statement

[6] Scienter ‐> state of mind of the person making material misrepresentation○

Insider trading is considered an omission of a material fact (the inside information) in connection with a purchase or sale of a security ‐> thus violating Rule 10b‐5

○INSIDER TRADING IN VIOLATION OF RULE 10B‐5?3.

Statutory insiders ‐> directors, officers, 10% SHs○Temporary insiders ‐> for fiduciary duty to be imposed ( treat as tipper, not tippee), outsider must [i] be given nonpublic material info from issuer; [ii] with expectation of confidentiality; and [iii] relationship implies duty of confidentiality

○

[i] Secrist was not a tipper b/c he didn't breach his duty for his personal benefit, and no tipper = no tippee

□

[ii] Dirks knew Secrist's motivation was to expose fraud, not personal benefit□

Tippee cannot inherit derivative liability UNLESS the tipper breached his duty, see Dirks v. SEC (SEC comes after Dirks but Dirks is NOT an insider so no derivative liability)

Derivative liability ‐> when a tipper trades OR passes on a tip [i] in breach of his fiduciary duty by disclosing the tip for a personal benefit; and [ii] the tippee knows or has reason to know of the breach of fiduciary duty

○

Rule 10b‐5 [traditional theory]: Rule 10b‐5 is violated when there is a purchase or sale of a security . . . on the basis (awareness is OK) ofmaterial nonpublic information about that security, in breach of aduty to disclose [or to abstain from trading], see Chiarella v. U.S. (Chiarella did not violate 10b‐5 b/c he was not an insider of the company whose stock he bought ‐ he was just a janitor at Business Week; misappropriation not considered)

•

See US v. O'Hagan ‐ O'Hagan guilty for insider trading under misappropriation theory when he defrauded his law firm and firm's client by using material nonpublic info about the tender offer to personally profit

Requirements ‐> [1]material nonpublic information; [2] undisclosed use of information; [3]belonging to principle; [4] for personal gain

○

[i] person agrees to maintain info in confidence; or[ii] when the two people have a history or practice of sharing confidences, such that the recipient of the info knows or reasonably should know the communicator expects the recipient tomaintain confidentiality; or

[iii] info obtained from a spouse, parent, child or sibling, UNLESS recipient shows that history or practice indicates no expectation of confidentiality

Rule 10b5‐2: non‐exclusive list of when a person has a duty of trust or confidence for the purposes of misappropriation:

○

Rule 10b‐5 [misappropriation theory]: Rule 10b‐5 is violated when a person misappropriatesconfidential info for securities trading purposes, in breach of a duty of confidentiality owed to thesource of the info

•

printed- sec. reg. outline - gw prof. gabaldon 2012 - text soderquist & gabaldon

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