Outline - Spring 2006 - Sec Reg Issue Spotter - Choi

7/27/2019 Outline - Spring 2006 - Sec Reg Issue Spotter - Choi

1/43

Topic I: Introductory Material

I. Securities Act of 1933 primary market transactionsII. Securities Exchange Act of 1934secondary market transactions

III. Sec reg is unique because:a. Centrality of capital ar!et to the econoy.b. Magnitude of purchase;c. Intangi"le nature of securities

d. In#estor rationality$o" entalityinvestor frenzye. Collecti#e actions pro"les aongst in#estors:

IV. ifferent types of securities come !it" different bund#es of rig"tsa. Coon stoc! residua# and discretionary dividend$ residua# cas" f#o!$

voting rig"ts

b. %referred Stoc! % fi&ed and discretionary dividends$ medium #iquidation$contingent voting rig"ts

c. &onds % fi&ed certain interest payment$ "ig"est #iquidation rig"ts$ no votingrig"ts 'debt rat"er t"an equity(

'( %riary #s( secondary ar!ets

a. )rimary marketsvarious !ays of se##ing to investors

b. Secondarytrading bet!een s"are"o#ders; * purposes:i( )i*uidity

ii( Transparency

)age + of ,-


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Topic II: Materiality

I. Materiality standard TSC Industries'SS/ /ase(states it !it" , factorsa( Su"stantial li!elihood

"( That a reasona"le in#estor

c( +ould find inforation significantd( ,i#en the total ix of inforation

I. -or.ard )oo!ing Inforation Basic v. Levinson( Supree Court&alancing Test :0ateria#ity !i## depend at any give time upon a ba#ancingof bot":a. t"e indicatedprobability t"e event !i## occur andb. anticipated magnitudeof t"e event in #ig"t of tota#ity of company activity

II( /istorical -acts Ganino v. Citizens Utilities Co.

a( Court cannot disiss unless the inforation is 0so o"#iously

uniportant to a reasona"le in#estor that reasona"le inds could notdiffer on the *uestion of their iportance

b. 12 3 ru#e of t"umb

III( E#ents studies

a( date .hen ne. inforation re#ealing past farud is ade pu"lic

"( E#en .indo. 213 days constructed calculate expected return of

copany gi#en o#erall ar!et o#eent

c( Su"stract expected return fro actual return to calculate a"noral

return

d( /ar!en energy ,(+( "ush sold stoc! prior to release of

inforation( %rice reco#ered soon thereafter5 defense ar!et

reaction .as irrational

IV. 6pinions and Materiality: Virginia Banksares v. Sandberga. Statements are distinguis"ab#e by presence of ob4ective evidence t"at can

verify t"em

b. nonactiona"le opinionst"ings t"at you can5t verify t"roug" ob4ectivefactua# information

V. The 0Total MixLongman v. !ood Lion

a( Truth on the Mar!et 7efense If the ar!et has the sae

inforation8 then failure to disclose is 6T aterial( Issues:

i( Is it the sae inforation;

ii( has the inforation pereated the ar!et;

b. ECM/if company trades in #iquid market$ t"e trut" !i## beincorporated into t"e price of t"e stock.

c. %ufferyIt5s a#ready in t"e tota# mi& of information t"at t"is is not true$so nobody !ou#d ever reasonab#y re#y on t"is

)age * of ,-


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Topic III: +hat is a Security

I( In ,eneral

a( < 2a21 definitional pro#isioni. 6aundry #ist of standard equity and debt interests: 1otes$ stocks$

bonds$ debenturesii. /atc" 7## category: in#estent contracts'!"at are t"ey8(

b. ontal coonality

d( 6TE: la. #aries across circuits

i( ?thand ndCir hori>ontal

ii( 9

th

includes #ertical coonality

V. Expectation of %rofitsexclude consuption

a. United %ousing !oundation v. !ormanSupreme /ourt /ase

i. Stoc!#abe# is 12 dispositive

ii. 6T In#estent Contractt"ere is no e&pectation of profits int"is contract

)age - of ,-


4/43

iii( %eople .ere "uying to li#e in apartents8 nothing to li#e in(

ot all ar!ets are capital ar!ets

b. S"C v. "d&ardsfixed returns count as profits'payp"one case('I( Solely on the )a"or of 6thers

a. *avanna Tra&lers v. Tompson Tra&lers',t"

/ir. +9(%artnershipcarries presuption against secutirty

i. /ourt #ooks at A"ility to engage in control as a a@orityii. /ontro# is usua##y a proxy for inforation

iii. /ontro# cou#d be a proxy for po.er to negotiate.

iv. /ontro# cou#d be a proxy for sophisticationmoresop"isticated investors are t"e ones !"o seek contro#

b. #illiams'ig"er priority in #iquidationiii. 1o voting rig"tsiv. =i&ed maturity datev. repayment of principa# on maturity date

b. )oans:Technically8 Consuer 2"orro.er is the issuer and &an!2lender is the in#estor

c(


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d. *eves v. "rnst , -oung In#estent #s( Coercial Test6ooksat motivation of issuer of t"e debt 'borro!er(

i. esire for investment vs. esire for consumptionii. /ommercia# 'sma##er business purc"ase$ need for cas" f#o!(

iii. -aily rese"lance test 'Second /ircuit(

+. 1ote !it" period of more t"an 9 mont"s is a security*. 16?SS It resemb#es a certain type of debt instrument

'mortgage$ etc.(

iv. Court faily rese"lance presuption plus 4 factors forne. things'ba#ancing test(

1( Moti#ation of seller and "uyer of note

( %lan of distri"ution

3( Beasona"le expectations of in#esting pu"lic

,. %resence of alternati#e regulatory regie 2EBISA8-7IC

I( 3 part doctrinea. %o&ieTest sti## important for many types of instruments and

securitization transactions 'may be beneficia# to poo# investments to

diversify riske.g.$ student #oans(b. )a"el of 0stoc!is pretty muc" dispositive 'especia##y if it5s a

corporation(c. otes are different than stoc!s'#abe# is not dispositive; seeReves(

)age < of ,-


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Topic I': 7isclosure and Accuracy

I( 6#er#ie.

a( Beasons for andatory disclosure

i. Standardi>ation of inforation

ii( Beduces Agency Costs .$in firiii. 6#ercoes externality pro"les for firs disclosing inforation

"y -orcing negati#e disclosuresiv. Besearch Costs: cuts do!n on dup#icative researc"

"( Mar!et arguents against andatory disclosure

i. 0arket !ou#d standardize information disc#osure on its o!nii. /onsumers !ou#d discount price of securities for si#ence about

negative informationc( Iplications of andatory disclosure

i. S?/ must determine !"at information is to be disc#osedii. Someone needs to determine if disc#osed information is trut"fu#

II( %u"lic Copanies Su"@ect to 7isclosure Be*uireents

a( 3 .ays to "e pu"lic under 1934 Exchange Act

i.


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c. -or 14A %roxy stateent

d. -or 1=Gbusiness$ property$ #ega# proceedings$ etc.

e. 1=H#ike +E%F$ but does not contain audited financia# statements

f. -or G)eriodic disc#osures for significant events.g. In te 0atter o' #.*. Grace , Co.: If you !no. the follo.ing you need to

do ore and as! *uestions: Grace$ Hr. got stuff8 Stuff !asn5t on formi. Bed -lags:6arge in magnitude$ abnorma# practice for retiring /?2s$

Grace "as a pattern for mis#eading corporation

Begulation -7

I( Bationale for -7

a( 6#ercoe inforation asyetries

b. Analyst accounta"ility cures conf#icts of interest

c. Enforceent pro"les S?/ can5t !atc" everybody

II( &asic %ro#isions

a( Bule 1== no selecti#e disclosure "y issuers

i( Intentional selecti#e disclosure ust "e ade pu"lic

siultaneously

ii. Lnintentionalpu"lic disclosuremust be made prompt#y '!it"in *,"ours or opening of 1@S?(

"( Bule 1=1 definitions

i( 1=12a 0intentional

ii( 1=12" Issuer foreign copanies are a &I, exception

iii. 1=12d proptlyt"elaterof t"e fo##o!ing:*, "ours or 1@S?opening 'casebook error "ere(

i#( 1=12e 0pu"lic disclosure

+. fi#ing an %F +E+'e('+(J or*. disseminating information in a manner reasonab#y designed

to provide broad non%e&c#usionary distribution ofinformation to pub#ic +E+'e('*(J

c. Bule 1= o effect on antifraud )ia"ility; 1o private cause of action

d( Bule 1=3 o effect on exchange act reporting status

i. S%- is required to be current in e&c"ange act fi#ingii. vio#ations of = does 12 affect status as current in reporting

iii. 1o co##atera# consequences on abi#ity to do pub#ic offering

II( %ractical perspecti#e 2eleents

a. 7isclosure "y issueror person acting on be"a#f of issuer"( Material nonpu"lic inforation

c. 7isclosure to 4 parties:brokers and dea#ers$ Investment advisor$ Investmentcompanies$ Securities "o#der reasonab#y #ike#y to trade based on information

d( Exceptions

)age K of ,-


8/43

i. %erson .ho o.es duty of confidence: +EE'b('*('i(ii. )erson !"o signs confidentia#ity arrangement: +EE'b('*('ii(

iii. certain communications for most registered offerings +EE'b('*('ii(

e. IntentB+E+'a( kno!s or is reck#ess in not kno!ingf. S"C v. Siebel Systems1disclosure to conference of == analysts is 6T

pu"lic %u"lic disclosure re*uires: form %F; 2L met"od's( reasonab#ydesigned to make broad%based$ non%e&c#usive distribution to t"e pub#ic

)age of ,-


9/43

Bule 1=" )ia"ility

I. 1=" la.suits class actionson be"a#f of s"are"o#ders !"o #ost money(

a. Moti#es to settle Lisk averse8 attorneys5 fees8 distraction of management8pub#icity costs of being$ discovery 'depositions(

b. )#aintiffs5 attorneys attempts to e&tort sett#ements 'may take advantage ofc#asss(

II( %S)BA 7e#ices

a. Lequirement to plead .ith particularityt"at M "ad required #eve# of sceinter'kno!#edge of fraud$ or reck#essness(

b. Stay on disco#eryunti# after motion to dismiss.c( Early class notice

d. )ead %laintiff presuption make #argest stock "o#der #ead p#aintiff;ensure po!er to negotiate !it" attorney

e( Court re#ie. of reasona"le attorneys fees

f. -or.ard loo!ing inforation safe har"or

g. %roportionate )ia"ility Safeguard deep pockets

III( The )ead %laintiff

a( %S)BA


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*. =ee sca#e revie!ed under c#ear#y e&cessive standard; feemet"od doesn5t matter

IV. Ourisdictional exus =raud must "ave affected instrumenta#ity of interstate

commerce 'p"one$ mai#(

V. Transactional exusin connection !it" purc"ase or sa#e of security

a. Blue Cip Stamps v. 0anor )rug Storesust "e actual purchaser orseller to "ring an action

b. S"C v. 2an'ord: Proker took funds from proceeds of stock sa#e for "imse#f.-raud coincides .ith securities transaction. If t"ere is a necessary steptocomp#eting fraud$ t"en t"ere is a connection

c( Siple "utfor causation is 6T enough

d( -oreseea"ility foreseea"le to person coitting fraud that in#estors

.ould trade on fraud

e( Intrinsic #alue lying a"out the #alue of copany is fraudf( Context coincides .ith a securities transaction

g( Contractual pri#ity al.ays counts

'I( Misstateent of Material -act

a. 7eceptionSanta !e Industries v. Green( &reach of fiduciary duty is6T 1=" case( Pou need a deception(

b. 6issions Gallager v. bbot Labs: ?asterbrooko duty to update8"ut there is a duty to correct( uty to update means t"at you !ou#d berep#acing system of periodic disc#osure !it" continuous disc#osure

i. 7uty to correct 2all circuits(information t"at !as incorrect at timeof disc#osure

ii. 7uty to update 2soe circuitsinformation t"at !as true$ but "asbecome incorrect

+. Kt"/ir says no duty*. *ndcir says duty in some #imited instances

c. -or.ard)oo!ing stateent Safe /ar"or


11/43

iv. 2f stay of discovery during motion to dismiss

v. 2i definitionsfinancia# pro4ections$ p#ans and ob4ectives ofmanagement for future operations$ statements of future economicperformances$ statements or assumptions under#ying statement

d. ser v. Ba3ter International EASTEB&B66G: Must disclose

0principal ris!s in#ol#ed( 0ore t"an 4ust materia# risks( If you can5tdetermine princip#e risks unti# after discovery$ safe "arbor !i## become ameans of e&torting sett#ements.

'II( Scienter Bec!lessness is the standard

a. "rnst , "rnst v. %oc'eldero action "ased on negligence

i. Statutory arguent#anguage deceive$ manipu#ate imp#iesintention

ii. Bec!lessnesscourt reserves 4udgment about t"is standard; doesn5tgo so far as to e#iminate it

b. rec!lessness is a proxy for actual !no.ledge"ig"#y unreasonab#e for

/?2 not to kno! interna# pro4ectionsc( Supree Court hasnt ruled on rec!lessness8 "ut all circuits accept it(

Bec!elssness is the standard

'III( %leading re*uireents

a. ?&c"ange Act 172"21(: 0ust identify eac" statement and !"y it5smis#eading

b. '"2 ust allege particular state of ind: facts gi#ing rise to a stronginference that the Q acted .ith the re*uired state of ind Rrec!lessness

c. !L State Bd. o' dmin v.Green Tree !inancial Corp. heightened oti#ere*uireent: 7## companies "ave motive and opportunity 0ust be distinctcircumstances to company 'in t"is case$ compensation incentives(

d( Coon .ays to eet pleading re*uireents

i( Insider trading

ii( 7i#ergence "et.een internal reports and external reports

iii( E#idence of "ri"ery

i#( Accounting restateents

#( Sheer agnitude of isstateent

#i( Existence of SEC Action

I( Beliance

a( 6nly place you ha#e to sho. reliance is affirati#e isrepresentation inface to face transaction

b. ''iliated UT" citizens o' Uta v. US face%to%face 2mission case5 do6T need to sho. reliance( Be"utta"le presuption

c. Basic v. Levenson re#iance on affirmative mis#eading statements;re"utta"le presuption in seistrong ECM/

i. Q"o !ou#d re#y on crooked craps game8

)age ++ of ,-


12/43

ii. 1arro! "o#ding: In a case of misstatement$ causation is presumedd( Be"utting the presuption 2open ar!et affirati#e isrepresentations

i. 0arket doesn5t ref#ect t"e fraud 'market makers kne! trut"(ii. Investor doesn5t be#ieve market price is correct

iii. /orrective statements issued

iv. N mig"t "ave so#d for unre#ated reasons

( Causation

a( )oss Causation )ura +armaceuticals4 Inc. v. Brudo

i. 0ust be p#eaded$ /odified in B*+'b(',(

ii. Supree Court1eed to s"o! actua# #oss 'price drop( t"at isre#ated to fraud in question$ not ot"er e&trinsic factors

b. S"o! 6oss /ausation using e&pert testimony 'remove e&trinsic factors(

c. 6oss causation is 12 materia#itystrict#y quantitative measure.

I( 7efendants +ho can you sue;

a( o aiding and a"etting lia"ility"( different rules a"out priary #iolator:

i. &right line 2ndCir follo.ed "y ost circuits no lia"ilityunless stateent attri"uted to defendant 2#rigt v. "rnst , -oung

auditor not #iab#e for private approva# of financia# statement(

ii. su"stantial participation 29thCir( primary #iabi#ity is a##o!ed ifyou "ad a significant ro#e in re#easing t"e statement 'Central Bank(

c. 6TE: Congress re#i#ed aiding and a"etting in arvard(i( In face to face you can argue for disgorgeent if Q "enefited fro

fraud on

i( o disgorgeent if Q too! soe extra or special effort in order to

achie#e profit 2e*uita"le doctrine

)age +* of ,-


13/43

d. Garnatz c. Sti'el4 /icolause , Co M convinces N to invest in fund buying

on t"e margin. Lescission measureGet back money invested. fraud is inentering into t"e transaction 'not fraud about t"e market price of securities(

e. %roportionate )ia"ility


14/43

%u"lic 6fferings

I. Lnder.riter


15/43

iv. +GSI +ell Gno.n Seasoned 6fferer 2p( 14 S%- e##igi#e8KEE mi##ion in equity 8 2r + bi##ion in debt offerings over #ast t"reeyears

)age +< of ,-


16/43

%re-iling %eriod

I( %art Analysis:

a. Is it an offer 'under *'a('-(;"( If it could "e an offer8 is there a safe har"or;

II( 7eterining an offer

a( Shift in strategy$ change in "eha#ior as e#idence of 0conditioning the

ar!et

b. In re 0atter o' Carl 0. Loeb *oades , Co pu"licity "y under.riter!it" respect to an issuer or its securities presumab#y invo#ves an offer

c. Securities Act Belease o( 344 2pg( 4? exaplesof conditioning t"epub#ic mind or arousing t"e pub#ic interest in t"e issuer

d. Securities Act Belease o( 1= 2p( 43=: advises issuers 12 to initiatepub#icity !"i#e in registration

i. )ist of things a copany should do:respond to #egit inquires for

factua# information about company5 financia# condition and businessoperations.

ii. A'6I7forecasts$ pro4ection$ or predictions of revenue$ income$earnings per s"are$ pub#is"ing opinions concerning v#aue

e( Suspicious atters

i( -or.ard loo!ing disclosures

ii. S!itc"ing medium of communication is suspectiii. escription of offeringiv. Preadt" of communication

f. Lnder.riter exceptioncan ta#k to under!riter or under!riter5s ageint

III( Safe /ar"orsa. Bule 13can make certain statements about offeror; #ists a##o!ab#e

categories.i( 132a 6T an offer if:

1( 21 legend

( 2 )iited content:

a( 2i nae of issuer5

"( 2ii title8 aount8 "asic ters of securities offered5 2

c( 2i# anticipated tiing5

d. 2# 6 AMI, L7EB+BITEBS 2manner andpurpose of offering(

ii. 132" may issue a notice t"at contains no more information t"an isnecessary to correct inaccuracies pub#is"ed about proposed offering

b. 1J3A more t"an -E days prior to registration dates'may not reference t"eoffering(; Leg = app#ies; gives time for peop#e to t"ink before offer

i. 0ust take reasonab#e steps to prevent furt"er distributionOpub#icationof info during -E%day quiet period

ii. oesn5t app#y to penny stock issuers$ s"e##s$ combination transactions

c( 1J reporting issuer safe har"or

)age +D of ,-


17/43

i. factua# and for!ard #ooking information not re#ated to t"e offeringii( 0pre#iously releases sae type of info in the 0ordinary course of

its "usiness

d. Bule1J9non%pub#ic company issuer safe "arbor 'I)2s(i. factua# information and ads t"at are not part of offering process

ii. nder!riters or dea#ers can 12 take advantage of t"ese ru#ese( 1J and 1J9 also get you out of 2a21= prospectus definition8


18/43

+aiting %eriodI( In*uiry

a( Is it a prospectus;

"( If so8 are you in a safe har"or$exeptions

II. Chain B2a23 Roffer 2a21= Rprospectus 2"21 Rno prospectusunless it eets < 1= re*uireents

a. 7ftre =i#ing Se##ing efforts may commence 'road s"o!( but no sales


19/43

'( -ree +riting %rospectuses 1J4$433 2e. for ==2p( 1=

a. -+% deeed a 1=2" prospectus for purpose of 2"21 212 e&emptionfrom *'a('+E($ gets you in to B+E'b((

b. onreporting issuers and unseasoned issuers5 -+%must be accompanied

or preceded by B+E statutory prospectus ',--'b((i( can use hyperlin! to prospectus if you eail a pdf of -+%

c. Seasoned issuers$+GSIsmust "ave fi#ed statutory prospectus !it" S?/;1o need to precede or accompany your communications ',--('b(

d( 4332c inforation re*uireentsi. 4332c21: consistent disclosures: may not conf#ict !it" previous

disc#osures

ii. 4332c2 "oilerplate legend'issuer "as fi#ed reg statement(e( 4332d filing re*uireent

i. Issuers ust file!Oin as s"ort time 'usua##y + day( of first useii( 6ffering %articipant -+% 2Lnder.riter8 dealer

+. issuer inforation ,--'"('*( % issuer must fi#e t"is*. "road unrestricted disseination 4332d212ii( must fi#e

a. P does not inc#ude sending to past customers 'evenif t"ere are mi##ions of t"em(

f. 4332f Media -+%If no compensation to media$ issuer has 4 days tofile52t"er!ise

i. Intervie! !O under!riter must be fi#ed by under!riterii. Intervie! !O issuer must be fi#ed by issuer

g. 4332g Becord retentionif not required to fi#e$ must retain for - years

". Electronic Boadsho.sreal tie #s( notU

i. Beal tie Boadsho.s treated as ora# communication and t"erefore

12 prospectusii( ot Beal tie Is it an e*uity offering "y a nonreporting co(;

+. 6 1o fi#ing requirement

( PES Is a "ona fide electronic road sho. generally

a#aila"le to e#eryone 24332h2;

a( PES o filing re*uireent

b. 6 fi#ing requirement ,--'d('(

%rocess of ,oing Effecti#e

I(


20/43

The post Effecti#e %eriod

I( 2a Rprohti"ition on sales disappears

II( 2"

a( 2"2 include prospectus .hen transitting securities for sale"( 2"21 include prospectus .ith confiration of sale

c. 12?: no natura# stopping point for


21/43

Lpdating Be*uireents

I( Lpdating of the %rospectus

a. )rospectus is deemed to be spea!ing as of date it is issued

"( Lpdate to a#oid antifraud lia"ilityc. 0anor /ursing'*d /ir(if you use a prospectus that is aterially

.rong8 then its not e#en a


22/43

Shelf BegistrationsI. Situations in !"ic" you !ou#d !ant to se## for more t"an -E days

a. Con#erti"le "ond$con#erti"le securities situation 'start ups do t"is; makessecurity safer(

b. Legister once and don5t "ave to fi#e more

c. =or QFSI$ you are permanent#y registeredd. on5t "ave to go t"roug" gun 4umping again; Hust do a s"e#f takedo!n

II( Bule 41 Shelf Begistration

a. 412a21 various categories of s"e#f registrationi. 'i( offered or sold solely"y or on "ehalf of person other than

registrant

ii. 'iv(sold upon con#ersionof

iii. 'viii("usiness co"ination transactions

iv. 'i&( coence right a.ay "ut ay ta!e o#er 3= days

v. '&(S3 issuer sold securities on an iediate8 delayed orcontinuous "asis "y or on "ehalf of issuer

b. 412a2for mergers and over -E days t"at are non%S-$ may on#y registeramount reasonably e3pectedto be offered and so#d .ithin years

c. 412a23registrant must furnis" undertakings required by12a and SG

Ite 12a21 3 ain updating re*uireents for prospectus

i( 12a212A ust file posteffecti#e aendent that:

+. 2iInc#udes a +E'a('-( prospectus 'f#ip side of regu#ar updateprospectus requirement(

*. 2ii)rospectus must inc#ude fundaental changes-. 2iii0ust inc#ude aterial inforation!it" respect to plan of

distri"utionnot previous#y disc#osed

ii. 12a212& S3 issuers ay incorporate the a"o#e inforation"y reference

iii. Stic!ering !it" s"e#f registration$ abi#ity to sticker is reduced+. if its 6T pre#iously oitted inforation 'rat"er c"anged

information(that is aterial "ut not su"stanti#e 'e.g.$ /?2deve#ops "eart condition then you can stic!er in shelf context

d. 412a24 0at the ar!et offerings of e*uity securities must come !Oin#imitations of 'a('+('&(

i( S3 onlyii( E*uity securities into existing ar!et

iii( At other than fixed price

iv. %6)ICP: "loc!s I%6 issuer fro using shelf offering to sell e*uity.idely to pu"lic.

e. 412a2 3 year reregistration re*uireent for soe offerings'inc#uding 'a('+('&((

)age ** of ,-


23/43

f. 412a2Jcarry for!ard offers and fi#ing fees into to ne! registrationstatement

g. Initial -iling includes standard inforation:Pusiness$ )roperties 6ega#proceeding$ )rincipa# s"are"o#der$ 0anagement $ irectors$ etc.

". Shelf ta!edo.n filing includes financial details of offering: )rice8 )#an of

distribution8 nder!riters8 Secondary se##ers8 nder!riter discounti. Bule 43=&2a Issuers may omit information t"at is unkno!n or not

reasonab#y avai#ab#e for initia# statutory prospectus and initia# registrationstatement

i. If you are filing autoatic shelf registration stateent$ you mayomit various information$ ot"er t"an basic c#ass of securities

III. Bule 4= Autoatic Shelf Begistrationmeans a registration statement fi#edon =orm S%- by a QFSIa. %ractical effects: QFSIs "ave to fi#e every - years$ but it5s rea##y 4ust a

matter of "ousekeeping. 7s of today$ a## QFSIs 'over KEE mi##ion market

cap( are taking advantage of universa# s"e#f(b. 43=&2acan omit various kno!n information about p#an of distribution:

i( %riary offering or on "ehalf of persons other than issuer

ii( %lan of distri"utions

iii( 7escription of securities other than idenitifying class

c. /an inc#ude ne! c#asses of securities at any time$ and it !i## be automatica##yeffective

d. - year re%registration requirement 'but re%registration is immediate#y effective!Oo !aiting period(

e. 2n#y pay fi#ing fees as t"ey se## securities

)age *- of ,-


24/43

Ci#il )ia"ility .ith Bespect to %u"lic 6fferings

Section 11 )ia"ility

I( Section 11 2p. +-(a. Begistration stateent )ia"ility: !"en suc" part became effective$

contained an untrue fact$ or a omitted to state a fact"( Lnder ed sections++'a(',(i#( Lnder.riters 112a2

"( factors:

i( Expert 2auditor Q #s( non expert 2officer8 director

ii. Experti>ed #s( nonexperti>ed sections of stateentc( 7ue diligence and 112"23:

i( Issuer is excluded fro due diligence defense

ii. onexperts 2under!riterOofficerOdirector8 nonexperti>ed section2112"232A

+. reasonab#e investigation*. reasonab#e 'ob4ective( be#ief8actua# 'sub4ective( be#ief in trut"

iii. Expert and experti>ed sectionB112"232&(+. reasonab#e investigation as to t"e trut"*. reasonab#e 'ob4ective( be#ief$ actua# 'sub4ective(be#ief in trut"

iv. onexperts .$ respect to experti>ed stateents 20Beliance

7efenseunder!riter !O respect to audited financia# statements2


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+. reasonab#e be#ief in trut"$ sub4ective actua# be#ief*. 12 I1V?SIG7I21

v. Experts .$ respect of nonexperti>ed section'#ega# proceedings$unaudited financia# statements$ description of properties$ managementbiograp"ies ed section: comfort #etter is 12 t"e same as an audit

iii( 7ue diligence -orulaic *uestion and ans.er is not enough

I'(


26/43

g( 112f2 outside directors proportionately lia"ile if they didnt !no. of

#iolation

)age *D of ,-


27/43

Section 1 )ia"ility

'( ere$ t"e contract of sa#e$ and its recitations$ !eren5t "e#d outto t"e pub#ic and !eren5t a prospectus as t"e term is used in t"e 5-- 7ct

)age *K of ,-


28/43

i( Ca"ins 12a2 to pu"lic offerings(

ii( %ri#ate placeents8 secondary ar!et transactions are excluded(

iii( So .ritten and "roadcast offers can "e prospectus 6)P I- part

of pu"lic offering

". In re Valence Tecnology Securities Litigation )ia"ility under


29/43

Exept Transactions

I( The &asics

a. B,2 offerings are exept fro e of the offering

#( Manner of the offering

d. 7ifficulty Q"at "appens !"en t"e factors point in different directions88

e. 1ot many cases on B,'*(fe! c"oose to test t"e !aters

f( S"C v. *alston +urina eeds of in#estors: 0access to inforation and

0fend for thesel#es

i( ain idea eed to gi#e access to inforation siilar to a

registration stateent

ii. %ost Balston Q"o$ besides insiders$ can count as a person e#igib#efor private p#acement

g( )oran v. +etroleum management Corp. Sophistication8 a#aila"ility of

inforation through disclosure or access

i. Inforation coponent * !ays to get information1 access anddiscosure

ii. Sophistication coponent takes on added importance if you5retrying to go t"e access route to information

iii( 6TE: If anyof offerees needed protection8 there is


30/43

Begulation 7 %ri#ate %laceents

I( Types of pri#ate placeents

a( )arge de"t offerings to institutional in#estors

"( Saller copanies .ith no li*uid ar!et8 trying to raise capital fro

sall N of in#estorsc. Safe /ar"orsdesigned to provide re#ative 'not comp#ete( certainty about

!"et"er issuers can se## securities !Oo being sub4ect to Bed exeptions

a. Bule 14? intrastate offering exeption: a## securities offered in "ome state

b. Begulation A mini%pub#ic offeringi. < mi##ion or #ess

ii. 1on%reporting companies

c( Begulation S Bules 9=19=J

i. 2fferings outside t"e .S

ii. .S. may sti## try to app#y regu#ations

III( Begulation 7 %ri#ate %laceent Safe /ar"ors:

a. Bule =4 under -'b(i. 7ggregate offering price /apped at + mi##ion; =42"2

ii. 1o #imit on number of purc"asers

"( Bule = under 32"

i. aggregate offering price of < mi##ion:=2"212iii. /an on#y be up to -< purc"asers: =2"22i

c. Bule =J %roulgated under


31/43

iii( 7esigned to stop D1 ill on Oan 18 D1 illion on -e"( 18 etc(

c. 6TE: Instruction to


32/43

c. =2d resale liitations: restricted securities may not be free#yreso#d in genera# secondary market p#ace

d( =2a integration safe har"or

e( = excuses

f. 12?: nder Lu#e


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c( %olicy for liitations: exception .ould s.allo. up the rule

'III( Integration

a. a#!ays "ave to be concerned about "o! one pp interacts !it" ot"er offeringsb. aggregate offering price ceiling is reduced "ased on32" offeringsand B

#iolationsin prior 1 onths

c. -ocus on Tie: more time "as passed$ #ess !orried about same offeringd. Integrationt!o offerings become t"e same offering for purposes of

i. 1umber of aggregate purc"asersii. Sop"istication

iii. So#icitationiv. Information and resa#e #imitations

e( SEC Belases 334 ultifactor test

i. Same p#an of financingii. Same c#ass of securities

iii. Same time periodiv. Same type of consideration

v. Same genera# purpose broader t"an first; same motivating idea'bui#d a ne! factory$ make a ne! product(

f( =2a Safe /ar"or fro integration

i. 6ook back D mont"s before t"e start date of private p#acementii. 6ook for!ard D mont"s after t"e end of private p#acement

iii. "ere may be a time period in t"e midd#e !"en offering is going on '*!eeks$ one mont"$ *%- mont"s(

iv. outside t"e !indo! 'D mont"s before$ D mont"s after( is 12

g( =2a Three Steps

i( I7 .indo.

ii( Geep offering out of .indo.

iii( If in .indo.8 deterine if its 0of the sae or siilar class asthose offered or sold under Begulation 7

I( Aggregation

a. narro!er in scopefocuses 4ust on price #imitiation$

"( &roader in tie goes "ac! a full year

( Bule = Innocent and Insignificant Mista!e: -ailure to coply .ith Beg(

7 .ill not result in loss of exception( Conditions:

a( Must 6T "e soething directly intended to protect particular

indi#idual .ho is "ringing the coplain

"( Must "e 0insignificant( The follo.ing are al.ays significant

i( =2c general solicitation

ii( =42"22i aggregated offering ceiling

iii.


34/43

i. >edge fund !"o a#so didn5t get information packet can5t sue

ii. Insignificant to offering as a .holeassume it got #ost in t"e mai#

)age -, of ,-


35/43

Secondary Mar!et Transactions

I( Theory


36/43

i. ?ven if t"ey !eren5t an under!riterXt"ey !ou#d sti## be in vio#ationbecause t"ey are connected to t"e transaction

g( Three types of sale scenarios for under.riters:

i( -ully infored party uninfored "uyer(

+. insiderinvestor on t"e open market.*. c#assic scenario t"at t"e securities #a!s are meant to address

ii. -ully infored party fully infored "uyer.+. secondary market investor se##s at market price to anot"er

secondary market investor in t"e open market.*. 1o prob#em !it" t"is scenario

iii( Lninfored party uninfored "uyer(

+. 1o information asymmetry bet!een parties.*. one party cou#d pretend t"ey are informed$ and t"e ot"er party

!ou#dn5t kno! t"e difference

-. peop#e cou#d spend becoming informedt"is is inefficient$

reinventing t"e !"ee#

III( Control %ersons Besale %olicy

a. Inforational ad#antage of seller may !orry t"at t"is investor may "o#da temporary 'outside investor( or enduring 'contro# person( informationa#advantage ; most troub#esome is informed investor trading !it" uninformed

b. /ard Selling Tacticsin pub#ic offeringsIf investor is c#ose to issuer$ maybe used by issuer to se## to #arger market t"an forma##y permitted 'broadofferings disguised as private p#acements(

c. Lninfored In#estors S?/ !orries about uninformed marketp#ace;

doesn5t #ike c"anged circumstances testtest doesn5t s"o! t"at consumers

are no! !e##%informedd. Mar!et 7isruptiontoo many securities dumped into marketp#ace may

cause price to fa## rapid#y

I'( Control %ersons Besales

a(


37/43

ii. B,',( is an e&emption for t"e PL2F?L; contro# persons must findt"eir o!n e&emption. Proker can c#aim ,',( !"en "e is una!are t"at"is customer5s part in transaction is 12 e&empt

iii( < 12a21: no good faith defense strict lia"ility

e.


38/43

i. "ave been reporting issuer for 9E daysii. be current for #ast +* mont"s

iii. may re#y on issuer5s representation on current fi#ingsiv. non%reporting issuers must make sure t"at basic information is

avai#ab#e '+


39/43

k. 6TE: 7istinction "et.een restricted and unrestricted securities for

Bule 144 contro# person is free to re%se## s"ares "e boug"t on open market;4ust not restricted s"ares.

'( Bule 144 A resale Exeption to HI& of shares not pu"licly tradeda. In con4unction !it"


40/43

i. ,ood storyInvestment bank mig"t be a gate keeper to protectunsop"isticated investors$ or protect #arge institutiona# investors fromt"emse#ves

ii. &ad storyc"anne#s offerings t"roug" Qa## Street$ creates incomefor #a! firms

k. +,,7 creates a 0Superar!et for Securitesa restricted securitiesmarket for AIPs on#y

i. unqua#ified individua# investors need to find a c"aperone to entert"is market$ i.e$ buy s"ares of fide#ity fund

ii. 6TE: HI&takes a s#ice of money from individua# investors

#. In practicei. securities are restricted to Super%market for on#y + year 'and #ess

restricted after * years(+. Issuer uses Lu#e e&emption to se## to C. C 'uses +,,7( se##s to

=ide#ity(

*. 7fter * years$ =ide#ity se## to Steve /"oi under +,,'k(-. 6TE: Py contract$ C !ou#d "ave rig"t to demand t"at issuer

provide information to =ide#ityii( Issuer has to .orry a"out HI& reselling to un*ualified in#estor:

+. If =ide#ity tries to +,,7 to /"oi$ t"e !"o#e t"ing co##apses

*. Contract around the pro"les C and =ide#ity promise toindemnify t"e issuer for any prob#ems 20su"scriptionagreeent

SEE Chart for resale transaction flo.UU

)age ,E of ,-


41/43

Topic : Shareholder 'oting

I. 2ver past fe! decides$ S securities #a! "as been moving into rea#m ofregu#ating substantive structure of po!er a##ocation; beyond disc#osures 'S2C(

II. Shareholder #oting Befora##o! s"are"o#ders direct access to nominatet"eir o!n directors on management5s pro&y statement

III( 'oting %rocess

a. ypica##y takes p#ace in Spring at annua# s"are"o#der meetingb. Instead of going to meeting$ s"are"o#ders !i## give vote to pro&yc. /ompany !i## send out pro&y statement$ asking for pro&yd. S"are"o#der voting matters

i. e#ection of directors.ii. approva# of certain mergers

iii. ratification of certain conf#ict of interest transactions

iv. amendments to corporate c"ardere. Collecti#e Action %ro"les 'ery expensi#e to push for.ard a

shareholder #oting issuer:i. Identify s"are"o#ders

ii. Send out pro&y so#icitation 'risk #iabi#ity(iii. Qine and dine ma4or s"are"o#dersi#( Besult is Bational Apathy:

+. Investment is often not !ort" t"e time*. ?ven if you care$ #itt#e c"ance t"at your s"ares !i## be pivota#

f( In su8 proxy is sent out "y anageent using corporate funds8 and it

fa#ors interests of anageent

g( %roxy regulationsi( Mandatory disclosure

ii( Antifraud lia"ility under Bule14a9

iii( %u"licly fielding proxies re#eals identity

". %olicy *uestion:s"ou#d t"e S?/ do anyt"ing given t"e imba#ance of po!erfavoring mangemnt

IV. 14a a##o!s s"are"o#ders to put t"eir issue proposa#s onto t"e pro&y.a. S"are"o#ders !"o meet requirements are a##o!ed to make use of

management5s o!n pro&y"( %olicy Huestions:

i( +hat are the rules that alter the "alance of po.er;ii( Is this a good thing;

iii( Should .e expand this to allo. shareholders to noinate

directors;

c. =ear of s"are"o#der contro# of company pro&y:

i. ,oodo!ners taking contro# of !"at t"ey o!n

ii. &ad7##o!s a fe! s"are"o#ders to take over t"e mac"inery andpropose somet"ing t"at is not for t"e greater good

)age ,+ of ,-


42/43

d( issues:

i( Bogue shareholders

ii( %roposals are non"inding any.ayUU

e. &LTproposa#s may be a !arning sign to management t"at t"e s"are"o#dersare un"appy. If t"ey don5t do !"at s"are"o#ders !ant$ t"ey risk a pro&y fig"t

for e#ectionf. Institutional Shareholder Ser#ices 2ISSte##s c#ients "o! to vote certainissues. 7s a resu#t many proposa#s are no! doing very !e##

'( Bule 14a

a. 6anguage of t"e ru#e !as !ritten for t"e #ay investors

"( 14a2": Eligi"ility

i. must o!n at #east1W of the outstanding shares or D8=== .orthii. entit#ed to vote for at #east one year prior to date of proposa#

iii. must continue to "o#d securities unti# date of s"are"o#ders5 meeting

c( 14a2c only one proposal per eeting

d. 14a2d == .ord liit: s"ort statements in t"e back of t"e packete( 14a2e Su"it 1= days prior to corresponding date copany sent

proxy stateent for pre#ious years eetin

f. 14a2hSponsors'or t"eir representatives( of proposa#sust appearatt"e meeting

g. +,a%'m(/ompanies may inc#ude a statement of opposition; must send acopy of opposing statement to sponsor no #ater t"an -E days before it fi#esdefinitive copies of por&y statement

h( Exclusions

i. 14a2i21proposa#s t"at are improper under state #a!

+. Proads"are"o#ders may notdemandt"at board of directors

do somet"ing*. 'state #a! gives board day%to%day contro#(; can5t attempt to

usurp t"eir po!er

-. 1ot so importantphrase proposals as re*uests

ii. 14a2i2rele#ance; no proposa#s t"at re#ate to activities t"ataccount for less than Wof

+. ota# assets*. 1et earnings-. Gross sa#es

2r is not ot"er!ise significant#y re#ated to t"e business

iii. 14a2i2?(ordinary business operations

iv. 14a2i24(no persona# grievances

v. 14a2i2Jproposa#s !"ere t"e corporation #acks t"e po!er oraut"ority to imp#ement t"e proposa# 'can5t make Pi## Gates president(

vi. 14a=2i29 proposa# !ou#d vio#ate federa#$ state or foreign #a! toq"ic" it is sub4ect$ or conf#icts !it" pro&y ru#es in +,a%9

vii. 14a2i21=proposa#s a#ready substantia##y imp#emented

)age ,* of ,-


43/43

viii. 14a2i211(su"stantially duplicati#e of anot"er proposa# a#readyin t"e pro&y statement

i&. 14a2i21(no re%submitted proposa#s. 1o substantia##y simi#arproposa#s in -%year time !indo!

+. 16?SS eac" proposa# passed t"res"o#d #ast time it !as on t"e

tab#e*. Z -3 if proposed once !Oin preceding < years-. Z D3 if proposed t!ice in #ast < years,. X+E3 if proposed t"ree or more times !Oin #st < years

'I( le#els of copany response to shareholder proosals

a. /ompany receives proposa# and decides if it "as to go in at a##i. 1otify s"are"o#der of e&c#usion

ii. S"are"o#der can respond$ can seek in4unction in courtb. If company can5t e&c#ude$ company can put out o!n statement of opposition

c. )ole !oodssaid t"at "ea#t" care benefits !ere part of ordinary business

operations. S?/ said t"at proposa#s !it" socia# and et"ica# significance cansurvive ob4ections

d. Loveniem v. Iro:uois Brands N o!ns *EE s"ares$ opposes =oi Grasbusiness. =ood business '+,+m annua# revenue$ D mi# annua# profits$ Kmi# in assets(( =oie Gras business !as sma## part 'K

Documents

Outline - Spring 2006 - Sec Reg Issue Spotter - Choi