PRINTED- Mahoney SecReg Fall 2013

8/12/2019 PRINTED- Mahoney SecReg Fall 2013

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SECURITIES REGULATION

FALL 2013

All transactionshave to be registered (I) or exempted(II).

I. Public Offering Process1. Gun jumping = violation of 5

a. Selling unregisteredsecurities that are not exemptedb. Making an offer before filingRS.c. Sell securities before effectivenessd. Prospectus not in conformitywith R433 conditionse. Send prospectus(written solicitation) w/o accompanying PPf. Didnt deliversecurities

2. Prefiling Period 5(c)a. Forms: S-1for IPO and S-3for reporting issuers

i. S-3 vs. S-1 registration:1) Most info about the issuer incorporated by references to past andfutureperiodic

reports;2) SEC does not review all S-3 RS (only auditing them).

ii. S-3 Reporting companies eligibility1) Registrant:

a) a reporting company for 12 monthsthat areb) current in reports.

2) Transaction:a) Any cash primary offerings by an issuer with a public float ( common

equity held bynon-affiliates) of $75 million or more;b) Primary debt offerings if having issued $1 billion debts in the past 60 days

orc) Having outstanding debt securities worth $750 millioniii. WKSI= S-3 issuers with a public float of$700 million. Rule 405

b. Regulations: Reg S-K for non-financial info, S-X for financial info. i. Reg S-K Item 10(b): Forward-looking statementsare encouraged and shielded from

fraud claims if made with good faith and reasonable basis and presented in proper

format (i.e., avoiding half-truths)..

ii. Reg S-K Item 303:MD&A!risk analysis: discussing liquidity, capital resources, resultsof operations, OBSarrangements/risksand tabular disclosure of contractualobligations covering full fiscal years and discussing material changes in financial

condition and results of operations in quarterly reports.

c. IPO: No offerto sell or offer to buy any security in the prefiling period. 5(c)i. 4(a)(1)exemptseveryone exceptan issuer, UW, or dealer.ii. Offerincludes 2(a)(3)

1) Solicitation: preliminary negotiation/agreement.a) Anything thats designed tointerestinvestors in a particular security:

any attempt = offer

b) Conditioning the market: Any type of information promoting thecompanywhen the company is considering IPO could potentially bedeemed as an offer. SEC Release 3844(p.156, 1957)


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c) Trying to balance restriction on releasing information to the public vs.companys need to continue business as usual.

2) Research reportsby offering participants(unlesstheyve been publishing thesame kind regularly).

a) EXCEPTION: can public research reports for EGC. 2(a)(3)iii. EXCEPTIONS of offer

1) 5(d): EGCcan solicitinstitutional investorsfreely before filing RS.a) BUThas to take steps to preventthe information being distributed to retail

investors(cover letter, etc.).

i) 2(a)(19): EGC= annual gross revenue < $1B. Can remain as EGC for5 years.

b) 6(e): an EGC prior to IPO may confidentiallysubmit a draft of RSfornon-public review.i) YuMe: Wanted to find out what SEC thinks of the adjusted EBITDA

number.2) 2(a)(3)UWs communication: preliminary negotiations or agreement between

anissuer and any UWOR among UW.

a) Does NOTinclude dealers.!Can start assembly UW syndicate, but NOTdealer group.

3) Rule 135 Notice of offering: issuer can make a public statementtostate thefactthat it plans to sell securities:

a) The notice can only contain very limitedinformation.i) Type, amount, anticipated timing of securities.

ii) Can NOTname UWiii) Can NOTcontain pricinginfo.

b) Exclusivesafe harbor rule: have to obey4) Rule 163A 30 day communication: Communications that

a) Do NOT referencethe offeringb) Take place > 30 daysbefore filing.c) Made by or on behalfof the issuerAND

i) R163A(c): can NOTbe made by an offering participant such asUW.

d) The issuer takes reasonably steps to preventfurther distribution orpublication within the 30day period.

5) Rule 169: Regularly released factual business informationby non-reportingissuer is exempted if

a) 169(3)(b): Itsi) Factual informationabout the issuer, its business or financial

developments or other aspects of its business OR

ii) Advertisementsabout the issuer's services or products.b) 169(3)(d)(1)The issuer has previously releasedor disseminated this type

of information in ordinary course of business

c) 169(3)(d)(2): The timing, manner and form have to be consistent with pastpractice.i) If you use to advertise in the local area, dont start doing it nationally

d) 169(3)(d)(3): The information is for intended useby persons OTHER THANin their capacities as (potential) investors.

e) Non-exclusivesafe harbor rule: if you dont obey, doesnt mean youviolated the statute.

d. WKSIis exemptfrom 5(c)i. Rule 163 They can engage in solicitationactivity even beforefilingRS.


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1) BUTany written solicitationthat they engage in constitutes a FWP!has to:a) R163(b)(1)Contain a legendinforming investors about availability of RS in

the future.

b) R163(b)(2)Be Filedafter filing RSc) 2(a)(10)(a) Accompanied or precededby a FP after effectiveness.

ii. Rule 168 Can publishfactual-business information (R169 for IPO)ANDforward-looking information.

1) FW-looking information: forecastsor discussions of future business plans.2) Extends to other reporting issuerstoo BUT can NOT referencethe offering.

3. Waiting Period 5(a), (b)(1)a. 5(a) No saleor carrying of security for sale before effectiveness.

i. Effective dateof registration is 20th dayafter filingOR earlier if SEC is okay withthat (accelerate). 8(a).

b. 5(b)(1) No prospectus EXCEPTprospectus permittedunder 10.i. Prospectus = anywritten offeror offer by radio or TV 2(a)(10)

1) Offer= any solicitation2(a)(3). Very broad.ii. EXAM Alert!: If its not an offer"NOT a prospectus

1) R135:Notice of offering: not an offer2) R163A 30 day communication3) R169: Regularly released business factual information: not an offer

c. Communication allowed:i. Oral communication. See 2(a)(10), 5(b)(1)

1) BUT written is interpreted broadly to include all electronicmedia except forreal-time communicationto a live audience. Rule 405"GraphicCommunication"

ii. 2(a)(10) Exemptions: exempts communication with respect to a security if1) 2(a)(10)(b) Tombstone ad(p.166): communication states from whom a written

prospectus (meeting the requirements of 10) may be obtained, and only ID thesecurity, state the price, and state by whom orders will be executed.

2) Rule 134 Identifying statements:a) Permissible info:

i) Information on the mechanicsof the offering and basic businessinformation may be provided.

ii) Rule 134(d): can send out written communication to any investorasking to express interestby completing a card or form = bookbuilding

1. Must be accompanied or preceded by PP2. Must contain statement that no offer to buycan be acceptedand

that no payment can be received until registration statement iseffective

3. Have to inform customer that offer can be withdrawn anytimebefore acceptance is given

b) Legend: make available the effective RSc) Not useful tool if company is not already well-known

iii. Rule 430Preliminary prospectus: statutory prospectus w/o pricing/UW-relatedinformation is allowed under 10(b).

1) Need to be filed with SECbut not deemed not part of the RS.2) Any prospectus with substantive changes from the filed prospectus need to be

filed at the same time of the first use under Rule 424(a).


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iv. Rule 431 Summary prospectus:1) Issuer must be reporting companyfor 36 months2) Contents of summary prospectus are set forth in the end of Form S-1.

v. Rule 164 FWP meetingRule 433 conditions.1) Rule 163WKSI can issueFWP (written communication) anytimeBUThas to

a) Contains a legendinforming investors about availability of RS in the future.R163(b)(1)

b) Filethe FWP after filing RS R163(b)(2)c) Accompany or precede FWPby a FP after effectiveness. 2(a)(10)(a).

2) Rule 164(a): FWP complies with 10(b)(and therefore 5(b)(1)) as long as itsatisfies Rule 433conditions:

a) Has to contain a legendnotifying where RS is available. R433(c)(2)(i)b) Filing conditions:

i) Rule 433(d)(1)(i): Issuerhas to file(1) issuer fwp; (2) issuerinformation in fwp used by other offering participant; (3) description offinal terms.1. Any supplementary material describing final terms must be filed

by issuer within 2 days, even if issuer did not prepare this

information BUT issuers and offering participants have to retainany free writing prospectuses for 3 years

ii) Rule 433(d)(1)(ii): Offering participanthas to fileany fwp distributedin a manner "reasonably designed to lead to its broad unrestricted

dissemination"1. E.g., underwriter's internal briefings if broadly disseminated to

clientsiii) Bona fide electronic road show exception: one version made available

to any person (if not entirely oral and thus not a prospectus at all).

iv) Other exceptions: (1) no material change from previously filed fwp; (2)issuer info filing obligation is not applicable if the info is in previously

filed fwps.

c) Needs to be accompanied or preceded by themost recently filedPPcontaining a price range. Rule 433(b)(2)

i) Requirement for unseasoned/non-reportingissuers only.ii) Silent filing is not going to have price range"have to wait for SEC

commentsiii) Delivery: Can physicallyhand it over OR send a hyperlink to the most

recent preliminary prospectus.iv) Information: can contain information beyond RS BUT can NOT

conflictwith RS or any reports incorporated in the RS

3) Special types of FWPa) Road show

i) Rule 433(d)(8): if deemed a graphic communication, then road showis a form of FWP1. Rule 405: Graphic communication does NOT include

transmission of real-time presentationto a live audiencethat

does not originate from a recorded form"NOT FWPa. Includes PPTpresentations

2. FWP Include:a. Written communications (including ones used in road show)?b. Broadcast that is NOT in real-time

ii) Requirements for FWP


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1. Must include legend+ accompany w/ PP2. There isNO filing requirementif by

a. A reportingcompanyb. a non-reportingcompany issuing non-equitysecuritiesc. Bona-fideelectronicroad show available to public

b) Info or hyperlink from an issuer's websitei) Rule 433(e): linked information is an offer"FWPsubject to the filing

requirementsof Rule 433(d)

ii) Rule 433(e)(2): historical informationabout issuer that is identifiedand appears in separate sectionis not considered to be an offering ofsecurity"exempted

1. P.4-31 (p.188): its okay to be prepared by a brokerage companybut its pushing the boundary of what constitutes historical issuer

informationc) Media publication:

i) Rule 433(f): 3rdparty "independent"(unpaid) communication basedon issuer provided info: the issuer or other offering participant does

NOThave todeliverstatutory prospectus, only have to filecopy of

story w/in 4 business daysafter becoming aware of the publication.ii) BUT the issuer or those acting on its behalf have a FWPsubject to Rule

433 if they prepare, pay, or give consideration forpreparation of

communication in mediad. Research Reports by UW

i. Research Reports: creation and dissemination of financial/investment information insecurities markets

1) Participant in distribution is not defineda) Covers issuer, underwriters, members of selling groupb) Does not cover brokers who receive compensation from customers and not

underwriter

ii. 2(a)(3): Research reportabout an EGC deemed NOT to constitute an offer!Not a prospectus!Does NOT have to file

1) Prob 4-17 (p.173): okay if Omega is an EGC.iii. IPO: the only way is through FWPR433

1) Has to accompany w/a PPthat has a price range.2) Has to contain a legend3) Filing requirement: R433(d)(1)(ii): Has to file if its used for broad

unrestricted dissemination(because its by UW not issuer)a) Prob 4-17 (p.173): Not an issuer FWP. The UW will send it to other dealers,

etc.!probably safer to file.

4) Once its effective, can always send out any information as long asaccompany/precede w/ a FP. 2(a)(10)(A).

iv. Rule 137: nonparticipating dealerscan publishor distribute research reports1) Does NOT applyif broker or dealer receives compensationor has special

arrangementwith issuer, selling security holder, or any participantindistribution for that research report

2) Applies to all issuersv. Rule 138: All UW & dealer may publish opinions or recommendations for the typeof

securities NOT issued.

1) Reporting issuers only: No IPO2) Exmpl: UW working on distribution of non-convertible preferred stock/debt

security can publish about the issuers common stock and vice versa.


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3) Rationale: little danger of creating investor interest in a senior non-convertiblesecurity by promoting common stock

4) Condition: broker/dealer must have previously published or distributed in regularcourse of business, research reports on similar types of securities

vi. Rule 139: broker or dealer (whether or not participating) can publish opinions andrecommendations focused solelyon the issuer or the industry

1) Reporting issuers only: No IPO2) Issuer-specific reports:

a) S-3 eligiblereporting issuers only.b) Broker/dealer must have previously distributedor published a report in

the regular course of businessthat does not represent the initiation or re-

initiation after discontinuance of a report about issuer

3) Extends to industry reportsa) Must contain similar information with respect to substantial number of

other issuersin issuers industry OR include comprehensive list ofsecurities currently recommended by broker/dealer

b) Issuer cannot be given greater prominencein publication of industryreports analysis

c) Report must be issued in regular course of business4. Post effective Period 5(b)

a. Getting readyfor post-effectiveness: once amend PP, can request for acceleration.i. R460:can grant acceleration request if there was sufficient circulationof preliminary

prospectus (after filing and before effective) among underwriters anddealers AND

there was adequacy of informationii. R461: can grant if prospectus was reasonably concise and readable

b. 5(b)(1): written communications would have to be accompanied by final prospectusi. BUT R172(a)(1): Confirmations of salescontaining info limited to Rule 10b-10 can

be sent W/O FP;1) BUT R15c2-8(b): UW have to deliver a PPto buyers at least 48 hours before

sending confirmation of sale.

ii. 2(a)(10)(A): any communication accompanied or preceded by a FPis NOTprospectus:

1) Can send anything they want w/o satisfying FWP requirements(filing, legend) aslong as they send FP.

c. How to get an effective RS w/o pricing the deali. Rule 430ASEC permits offering price-related infoto be omittedfrom the final

amendto RS if a later Rule 424(b)filingis undertaken1) Made to deal with UW' concern about committing to a price before making sure a

deal could done (i.e., getting an effective RS).

ii. Rule 424(b): FP(with Rule 430Ainfo) must be filedby the EARLIER of1) 2 businessdaysafter pricing the deal by underwriters R424(b)(1), OR.2) 15 businessdaysafterRS effectiveness. R430A

d. 5(b)(2)FP delivery requirement: securitydelivered to buyers has to be accompanied orprecededby FP

i. Alternative methods to really delivering a final prospectus1) Rule 172(b)Access equals delivery:FilingFP = delivered.2) BUT Rule 173: Should send FP or give a notice of registrationto the purchaser

within 2 business daysof the sale.!Could violate 5 if doesnt satisfy the

conditions but can still enjoy R172exemption.


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ii. How long does the delivery obligation last?1) Issuer: continuing obligationif it sellsthe securities directly. 4(a)(1)2) UW: alwayssubject to delivery req. No exemption. 4(a)(3)(C). Hypo A

a) If sold allthe allotment"no longeran UWbut can act as a dealer.3) Dealer= solicit investors interest

a) If its a selected dealer(have K with UW syndicate): always subjecttodelivery req until the unsold allotmentis gone. 4(a)(3)(C). Hypo B.

b) Other dealers:i) 0 daysif

1. The issuer was a reporting company(R174) or2. Has securities trading on an exchangealready (R153).

ii) 25 daysif its an IPOto be listedon an exchange/NASDAQ R174(d).iii) 40 daysif the issuer has made other registered offering. 4(a)(3)(B).iv) 90 daysif its an IPO not to be listedon an exchange. 4(a)(3)

c) Dealer has this obligation regardless wherehegotthe securities.i) Hypo E: dealer (bought frominvestor and sold to another investor)

still has to deliverif the transaction happened in a certain time period

ii) Hypo C&D: dealer has a delivery obligation w/in the 40 day time period,BUT NOT afterwards b/c it doesnt qualify for the exemption..

4) Broker acting on investors behalf: exempt entirely. 4(a)(4). Hypo D Broker[contacted the D on Investors command].

5) Investor: NO obligation. 4(a). Hypo E [Investor A selling to Dealer].a) BUT is it an UW?

5. Shelf Registrationa. Rule 415allows shelf registration by reporting companies

i. Permits a RS to become effectiveeven though the prospectusit contains omitsinformation that is not yet known but which otherwise would be required.

1) R415(a)(1)(x): securities registered on form S-3 can be offered and sold on acontinuous or delayed basis.

ii. S-3reportingcompanies may file a shelf RSfor future offerings.iii. WKSI: Shelf RS automaticallybecomes effective upon filing.

b. Information flow in a shelf registration and takedowni. Rule 430B(a) Base prospectusmay omitinformation

1) Unknownor not reasonably availableto the issuer..a) WKSI's base prospectus: may omitamounts of different specified types of

securities.i) Can amend to add types of securities.

b) S-3 reporting issuers: identity of UW.ii. Rule 424(b)(2) Has tofile prospectus supplementwithin 2 business daysof pricing

(and usually using it to complete the deal at the same time)

1) Must incorporate material changesfrom previously filedRS and material inforelated to the distribution. Item 512(a) of Reg S-K.

6. Integrated disclosurea. Reg. S-K (nonfinancial information) and Reg. S-X (accounting information) list certain

items that both 33 and 34 Act filing refer to.

7. Summary: Supp. P. 66!!!


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II. Registration Exemptions1. Exempted securities 3

a.

What's exempt?i. Only sec. 5 registrationrequirements, not anti-fraudprovisions.ii. Some 3only exempt transactions"resalesare NOT exempted.

b. Exempt securitiesi. 3(a)(2): 4 categories

1) Government securities,a) Domestic govt only.b) US govt: Treasury

i) Nothing is required on the Treasury.c) State & local govt: municipal securities

i) SEC regulatesmunicipal securities byrequiring broker/dealertoobtain disclosure documents(official statement) from the issuer andmake them available on request from prospective investors. Rule 15c2-12.

ii) Dolphin and Bradbury (p.444): an UW who uses the untrue officialstatement to its customers will be at risk of liability "UW will check?

d) US/local govt sponsored entities: student loan, port authority of new York,etc.

2) Industrial bondformally issued by state govt:a) Interest is tax exempted but backed by a non-govt entity (airport, stadium,

etc.)

3) Bank issued or guaranteed securities:a) In asset-backed/mortgage-backed securities, the issuer is NOT the bank, but

the SPV.

b) Includes domestic branchesof foreign banks.c) BUTsecurities of BHCs(who own the banks) are NOT exempt

4) Common/Collective Trust funds:a) Bank-maintained common trust funds orb) Collective trust funds for employee benefit.

ii. 3(a)(3): ST notes (Commercial Papers Exemption)1) The security has to be

a) Prime qualitynotes,b) The debt arises out of current transaction, or the proceeds are used in

current operations,

i) The debt usually arises out of the timing difference between selling anasset and getting paid.

ii) Can only use the proceeds to invest in assets easily convertibleiii) In practice CP issuers rely on 4(a)(2) private placement exemption (at

least partly) to do away with "current operation" requirement altogether(so dont have to track what the money is used for).

AND

c) < 9 monthsmaturity2) Manner of issuing: not ordinarilypurchased by the general public

a) Among merchants/institutions.iii. 3(a)(4): Non-profit organizations' securities.


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iv. 3(a)(5): S&Ls and other cooperatives.v. 3(a)(8): Insurance and annuity products: policies? (other than variable insurance

products).

vi. 3(a)(9): security exchange offer. Exempt only transactions.c. Exempted transactions:

i. 3(b)(1): Small issuer offerings($5 millionmax)1) Reg A

a) Now allow SEC to exempt up to $50M. 3(b)(2).2) Rules 504and 505of Reg D, and3) Rule 701.

ii. No resale exemptions!2. Exempted Primary Transactions (from issuer)

a. NOTE:i. Only exempts certain transactions, NOT the securitiesforever.

ii. Only exempt 5 registrationrequirements, not anti-fraudprovisions.b. 4(a)(2) Private placement

i. Exempts transactionsby an issuer not involving any public offering.1) Self-executing: if you satisfy, you are exempted.

ii. Factors for public offering/distribution(p.263, 1985, Supp. 85!)1) Number ofofferees: double digits

a) NOT just purchasers2) Number of units offered

a) The more units there are, the easier it is to break up the purchase to resell toother people

3) Manner of offering: face to face vs. mass communication4) Offerees sophistication: able to fend for themselves Ralston Purina(p.264,

1953) [wanted to make stock options to key employees.]a) Issuer should carefully prequalifyoffereesand consider facts including

whether they

i) Can evaluate the nature/riskinessof the investments andii) Are representedby a financial expert.

b) Kenton Capital(p.270, broker called investors from hotel): the informationasked does NOT indicate investors are sophisticated. Need to askforcomplete information on background and experience.

5) Offerees information accessthat comes in various forms - equivalent to thatprovided in a RS. 5th Cir.cases (p.269)

a) requirei) Insider status, Direct provision of informational circulars; OR

ii) Promise of access and realistic expectationthat the offereeis going totake advantage of the information

b) The mere fact highly sophisticated purchasers can ask and get informationmight give them access to information

6) Resale limitation: so that resales do not retroactively invalidatethe protectionof the 4(a)(2) exemption

a) Have to take stepsto reasonably ensure that the 1st round of purchasers arebuying w/ investment intent(holding on to them): the securities need to

come to restbefore being resold.b) In practice:


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i) Purchasers sign statementsabout their investment(rather thandistribution) intent

ii) Transfer restrictions are legendedon the stock certificatesiii) Transfer agent of the issuer would not register any transfers unless

instructed by the company

c. Regulation D(p.278, Supp. 91)i. EXAM Alert: if doesnt satisfy Reg D, does it satisfy 4(a)(2)??

Rule 504 Rule 505 Rule 506Aggregate offering

pricep.297# $1Msale in previous 12

mon

# $5Msale inprevious 12 mon

# No $ limitSummary # Exempted

o If its doneexclusively underblue sky lawfiling

OR

o If its doneexclusively

according to state

law exemptionsfromregistration only

to AI.

# Has to comply withALL of R502

conditions

# 2 options:o No GS+ Allows

sophisticated non-AIOR

o GS + Only AI (have toverify)

Issuer Nature # Nota reporting orinvestmentcompany

# Can NOTbeinvestment

company. R505(a)

o Use R506(b).

# None

IntegrationR502(a) # Yes # Yes # Yes# of purchaserlimit

R501(e)(1)# No # 35:

o Does NOTinclude AI.

(BUT

informationdisclosure!)

# 35:o Does NOT include AI.

(BUT information

disclosure!)

Investor qualification # Old option:o NO unsophisticated

purchasers/rep: evennon-AIhas to have

such knowledge and

experiencein financialand business matters.

R506(b)(ii)

# New option:o Issuer has to take

reasonable steps to

verify the investorsare all AI.R506(c)(2)(ii)

Information

disclosureR502(b)

# No # Yesfor non-AI. # Yesfor non-AI.General solicitation?R502(c)

# Allowedifoffered understate law. R504(b)

# Not allowed # Old option: Not allowed# New option: Allowed

Resale Limitation

R502(d)

# Noifoffered under statelaw. R504(b)

# Yes # Yes


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ii. Key concepts1) R501(a): Accredited investors (AI)

a) Types:i) R501(a)(1): Institutionalinvestors.

ii) R501(a)(3): any organization w/ assets >$5Miii) R501(a)(4): Directors & officers Control + Restricted securitiesiv) R501(a)(5): Individuals w/net worth> $1M.

1. (a)(5)(i)(A): BUT primary residenceis NOTincludedas anasset. A million-dollar house is not enough to make yousophisticated.

v) R501(a)(6): Individuals annual income> $200Kor couple > $300Kvi) R501(a)(8): Entity in which all of the equity owners are accredited

investors (partnership formed by high-level individuals).b) R501(h):Non-accreditedinvestors can still fend for themselves if they are

represented bysomeone whos highly sophisticatedAND is acting intheir best interest.

2) R501(e)(1)(iv): Counting 35 purchasers(for R505 & 506)a) Does NOT include accredited investorsor relatives sharing the same

principal residence with an accredited investor or a majority-owned entityby an accredited investor and his relatives.

b) Looking-through. Entities formed by non-accredited investors will belooked-through.

3) R502(a): Integrationa) All sales that are part of the same Reg. D offeringmust meet all of the

terms and conditions of Reg. D: If an issuer simultaneouslyhas anoffering type that has less restrictiveconditions and another offering type

with more restrictiveconditions you have to comply with the more

restrictiveconditions.b) Safe harbor: 6 monthsbefore and after.

4) R502(b): Information requirementfor non-AIa) Information equivalent to RSshould be provided to any non-accreditedinvestor.i) If sells to AI, the disclosure is govd by the market not this regulation

b) National treatment.Information provided to AIshould also be providedto non-AI. R502(b)(2)(iv).

5) R502(c): General solicitationa) No mass media: any communication through mass media or

seminar/meeting resulting therefrom.i) BUT R135c: reporting companies can make asimple notice of

unregistered offering publicly (cant name UW or condition themarket)

ii) R135ejournalist access: US journalists may be provided with access topress conferences on truly global offerings (i.e., not a Reg D offeringlimited to US investors).

AND

b) There must be pre-existing relationshipbetween the offeree(NOT justpurchaser!) and issuer OR those acting on behalfof the issuer.

i) 3rdparty websites accepting unsolicited clients or solicitingclientsthrough B&Dsusing their pre-existing relationship.


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

6) R502(d): Resale Limitation:a) Issuer must take reasonable careto assure the purchasers are not for

distribution purpose

i) Reasonable inquiry,ii) Written disclosureabout resale restrictions and

iii) Legendthe certificates.b) Purchasers cant be UW=Anyone who buys from issuer w/ the purpose of

reselling.

i) UW is defined broadly.ii) Can NOT sell to IB and then sell to public BUT IB can actas

placement consultants(never buy but help issuers sell: have to bedisclosed on Form D).

7) R503: Filing requirement= Form D w/in 15 days of first sale.8) Sophistication under R506:

a) Vague principle. the purchaser has knowledge and expertise in financial andbusiness matters so that he is capable of evaluating the merits and risks ofthe investment.

b) Practice. Merely asking questions is not enough.FSC Securities.9) R508: Substantial compliance

a) Small deviationsmay be remediedif not intendedto directly protect theparticular investor and remedied in good faith

i) Key: Good faith & reasonable attempt to comply.b) Significant and non-remediable:

i) Dollar ceilings,ii) Numerical purchaser limits,

iii) No general solicitation.iii. Who are using Reg D?

1) Startups selling equity to angel investors (high level individuals)2) Domestic issuers for debt financing

a) Reg D equity financing not often because 12(g) reporting obligations attachonce you reach 500 investor and $10 million assets

3) Foreign issuersfor both equity and debt financinga) B/c 12g3-2(b) exemptionb) Hedge fund financing

d. Regulation A/Crowdfunding(p.309-313, 318- 332)i. Limitation

1) Issuer has to be non-reporting companies.2) Mini-registration:

a) procedurallylike IPOi) SEC has to qualifythe offering statement before sale. R251(d)

ii) Final offering circular has to be deliveredw/ the confirmation of sale.R251(c)

3) $5Ma) 3(b)(2): authorizes up to $50M

ii. Advantage:1) Testing the water: permitsofferor to engage in public solicitationpriorto file F-

A. R254


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a) much like pre-filing fwps used by WKSIsb) R254(d): Its okay to abandon Reg Aand go directly to IPO if testing the

market turned out well: 30 daycooling period BUT doesnt applyif only

solicited AI.2) Doesnt need to provide audited F/Sor comply with Reg. S-X3) Not limited to AI

iii. R251(c): Intergradation: See below!iv. Crowd-funding portals:

1) 4(a)(6) & 4A: internet portals for small business in offerings up to 1M BUTlimitations

e. Integrationi. Same Offering? Rule 502(a)

1) Part of a single plan of financing2) Issuance of the same class of securities3) Made at or about the same time4) Same type of considerationreceived5) Made for the same general purpose

ii. Safe harbors HYPO!!!1) Rule 251(c)Successful Reg A offeringswill NOTbe integrated with

a) Any priorofferingsi) BUTprior Reg Dmight be integrated with Reg. Aoffering if its w/in

6 months! 502(a)1. R505"Reg A: Okay because there was no public solicitation

anyway but might taint R505?2. Reg A"R505: not okay b/c it might taint R505

ii) !Wait 6 monthsOR go through multi-factor test to argue that shouldnot be integrated

b) Any private offerings 6 months later.c) Any subsequent registeredor Reg S offerings

2) Rule 254(d) Abandoned Reg A offeringswill NOTbe integrated witha) Any subsequent publicoffering if a bona fideabandonment of a Reg A

offering and after 30-day cooling offperiod..b) If decide to go with Reg D offering, have to follow R502(a)"best to wait

6 months3) Rule 502(a) Successful Reg D offeringswill NOTbe integrated with

a) Any prior same Reg. D offerings6 months beforeb) Any subsequent Reg. D offerings 6 months later..

4) Rule 152 Successful 4(a)(2) offeringswill NOTbe integrated witha) Anysubsequent publicofferings, even if the planning activities begin

5) Rule 155: Includes offerings exempt under Sec. 4(2), 4(6) and Rule 506a) Abandoned privateoffering will NOTbe integrated with

i) A subsequent public offering if1. the private offering does not sell any securities;2. all offering activities terminated;3. statutory prospectus discloses the abandoned deal;4. RS is not filed until 30 days after termination of offering activities

unless the private offering's solicitation is limited to accredited and

sophisticated investors.

b) Abandoned public offeringwill NOTbe integrated withi) A subsequent privateoffering if

1. No sales in the public offering


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2. Withdrawal of the RS3. No private offering activity until 30 days after the withdrawal4. Notifies offeree in private offering about the nature and risks of

the private offering and the abandoned deal5. Any disclosure doc in private offering should disclose any

material changes since the filing of RS.

3. Exempted secondary transactions (resale)a. NOTE: purchasers canpurchase in private transactions and resell ifits in a registered

transaction! (All sales must be registered or exempted!)

i. PIPE(private investment in public equity) = Privately-placed stocks w/ the view ofselling it publicly later.

b. Safe harbor 1: Rule 144 exemptions (p.367)i. EXAM Alert:

1) Does the sale satisfy 4(1-1/2)??2) Non-affiliate purchasers can argue they are not UW!!

ii. Types of securitiescovered by Rule 1441) Restricted securitiesRule 144(a)(3)

a) Include:i) 4(a)(2) private placement,

ii) Reg Dthat are subject to R502(d) resalelimitation= R505, 5061. Even ifthe issuer messed up, still applies because only says

subject to resale limitation2. Reg D issuer is supposed to put legendon the securities. Once

sold through a valid R144way can remove the legend.iii) Rule 144Aresalesiv) Domestic equity issuersunder Reg Sv) Rule 801 rights offerings

b) NOT restricted securities:i) Rule 144: A valid saleof R144 washes awayits restrictedstatus.

ii) Reg Aiii) Reg S non-US issuers & US issuers of debt

2) Control securities sold by affiliates or someone selling on behalf ofaffiliates(UW)

a) Affiliates/Control persons: control or common control relationship of theseller with the issueri) "Control" is a fact-specific inquiry and SEC only sets forth a vague

standard - "the power to influence the policyof the issuer".ii) "Person" also includes his spouse, relative or spouse's relativeif

residing in the same homeas the person and any trust or entity 10%beneficially owned by them.

b) Rationale: due to control person's inherent informational advantage, theirresales of the issuer's securities have to be registeredOR under R144control

3) If its neither(resale of publicly offered securities by non-affiliates, etc.), itsfreely tradable.


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iii. 3 types of transactions(p.367)1) Non-affiliate resales ofrestricted securities

Non-Affiliate +Restricted

Reporting issuer

R144(b)(1)(i)

Non-reporting issuer

R144(b)(1)(ii)

Definition # Reporting C for at least90days before

Resale

Requirement

# 6 monthw/ publicinformation req in144(c)(1).

# 1 yearw/ no restriction # 1 yearw/ no restrictiona) Can add on previous purchaserstime:

i) Issuer"A (Reg. D. transaction)"B 3months later: B gets credit forthe 3 month A had: B only had to hold 3 more months.

2) Control unrestricted securities resalesa) No holding periodreq:b) Public information available

i) Reporting issuers: current in reports; R144(c)(1)ii) Non-reporting issuers: public information available under Rule 15c2-11.

R144(c)(2)

c) Limitation on disposable amount R144(e)(1)i) Volume of current resale + sales within prior 3 months


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1) Domestic issuers: debt offerings using Reg D(to i-banks)"144A(toinstitutional investors by i-banks)

2) Foreign issuers: equity/debt offerings using Reg S(to i-banks)"144A(toinstitutional investors by i-banks)

iv. End result: restricted securities freely transferable among QIBs but remainingrestricted!The restriction only goes awayafterthe QIB sells the securities under

R144after the holding period

d. Other transactions: The reseller is not an UW.i. If a person is an UW, then his sale is NOT exempted under 4(a)(1)"register OR find

an exemption.

1) 4(a)(1)exemption really depends onthe transaction/registration historya) If issuer files RS for transactions (issuer"UW"public), after that

further transactions are presumptively exemptunder 4(a)(1).i) EXCEPTcontrolledsecurities*!

b) vs. Private transactions(Reg D: Issuer"AI, etc.) the purchasers canNOT resell w/o registering: the securities are restricted (sold in private

transactions), selling to publicis a distributionand therefore has to be

made through registered public offering.2) UW= 2(a)(11):

a) Defined broadly: prevent broadsecondary market in unregisteredsecurities unless theres broad spread of informationi) Resales of registered(publicly offered) securities by non-affiliatesof

the issuer never a problem

ii. Option 1: Purchasers didnt:1) Purchase with a view to distribution

a) EXAM Alert: Dont forget about distribution!!"4(1-1/2)b) Factors(Pre-R144)

i) Time lapsed: usually 2 years= come to restii) Reasons for selling: bona fide resalew/in 2 years due to genuine

changeof circumstancesin the purchaser's financial circumstances isOK.

1. Bad investmentis NOT a legitimateexcuse. Gilligan(p.349)[bought securities and realized its a bad investment. Tried to

pawned off to the public. Not okay.]2. NOT used in R144!!not really important anymore

iii) Distribution:1. Size2. Manner

OR

2) Offers or sells for an issuerin connection with a distributiona) EXAM Alert: Dont forget about distribution!!"4(1-1/2)b) "For an issuer"does NOT require compensation& can be entirelyvoluntary.Chinese Consolidated Benevolent Association(2nd Cir., p.340)

i) !Anyone in any way assisting the issuer getting money from thepublic = UW

ii) Would have been okay if the bonds were registered.c) CP = issuerfor the purposeof determining whos an UW. 2(a)(11)

i) Anyone who sells for CP is always an underwriterifthe sale is adistributionWolfson(p.357, READ AGAIN!!) [broke the

transactions up.]


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1. Register, or2. Seek safe harborsunder Rule 144.

ii) Even ifthe CP acquiredthe securities through public offering!!iii) Wolfson (p.357): Brokers could prob fit in 4(a)(4) exemption if the

broker doesnt know, but maybe the broker should make inquiries

iii. 4(1-1/2)Exemption: Private resalesare not distributionand such resellers are notunderwriters.

1) Scope:a) Private resales of restricted securitiesby non-affiliates before Rule 144

provides protection - e.g., w/in 6 months of the purchase;b) Private resalesof control securitiesby affiliates when Rule 144 does not

provide protection or cannot accommodate the size of the deal w/in 6months in case of restricted securities or exceeding trading/size limitations

in Rule 144 (Ackerberg,p.384).2) How to qualify for the exemption: Ackerberg (p.384) [sophistication CPs

purchaser signed a statement saying that he had experience and knowledge inbuying, knows the securities are restricted.] The sale to him is not a distribution

a) The resale itself isnotdistributioni) = public offeringfor issuers under4(a)(2). Ralston Purina

1. Large in sizeor2. Accompanied through forms of public solicitation: manner.3. Sophistication of investor4. Information access.

ii) Trying to separate purchasers for distribution vs. ordinary secondarytransaction (doesnt have to be registered)

b) Cannotbe purchased with a view to distribution = securities need tocome to rest= 2 years

i) Prof: this is different from 4(1-1/2)!!ii) If the seller only wantsto sell in a private transaction, might be okay

to sell w/in 2 years(because he didnt buy with a view to

distribution) if the purchaser is an institutionalinvestor, but its bestto wait 2 yearsif to an individual. Ackerberg (p.384); Prob 6-3 (p.390)

iii) Solution: get a broker to sell on behalf of CPbecause the broker is notan UW because hes notselling w/ connection to a distribution.

3) Practice: a chain of contractual agreementsbetween rounds of purchasers onkeeping the resales from going public.

a) the seller may have purchased initially with the intention of selling toanother sophisticated purchaser which is NOT a distribution"did NOT

purchase with a view to distribution


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4. Reg S Offshore Offering

a. The purpose and usage of Reg Si. Allow US domestic issuers to tap foreign capital markets w/o 33 Act concerns

ii. Allow FPIs tap foreign markets w/o 33 Act concernsiii. Actual use:1) US issuers do Eurodollar debt offerings under category 2 rules;2) US issuers do global offerings with 33 Act registration only for US portion (plus a

10% buffer);3) FPIs do simultaneous Reg S (overseas)/Rule 144A(after private placement in

US)offerings w/o US registration.

b. Definitionsi. SUSMI (substantial US market interest): foreign issuers only


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1) Equity: (1) US trading market the largest single trading market for the issuer; OR(2) 20% US trading and less than 55% trading in any single foreign market

2) Debt: (1) 300 US person investors of record; (2) $1 billion held by US persons;and (3) 20% of the outstanding principal held by US persons.

ii. Overseas directed offering R903(b)(1)(ii)1) Foreign issuer: offering directed into a single foreign countryand made in

accordance with local rules2) Domestic issuer: debt offerings directed into a single foreign country and made in

accordance with local rulesc. Conditions for the 3 Categories

i. Category 1- General conditionsonly1) R903(a)(1)The offer/sale is an offshore transaction R902(h)

a) The offer is NOT made to a person in the US, andb) The buyeris outside the USORtransaction is executed overseas

2) R903(a)(2)No "directed selling efforts"in the USR902(c)a) Activity intended or reasonably expected to condition the US market

(attract investors in US) for the security (various exceptions for regular or

necessary US communication)

ii. Category 2- General conditions+ Restrictionsduring 40-day compliance period1) R903(b)(2)(i) Offering restrictions(R902(g))

a) Each distributorpromises in writingto comply with Reg S & not toengage in hedging transactions of a domestic issuer's equity securities, and

b) Offering materials are legendedregarding US law restrictions.AND

2) R903(b)(2)(ii):Seller has to make surethe buyer is not US person(regardless oflocation)

AND

3) R903(b)(2)(iii): Distributorhas to notifies the buyerthey are subject to thesame category 2 restrictions.

a) EXAM Alert: these areNOT restricted securities"can beresold in USunder 4(a)(1) exemptionafter the compliance period if not a distribution

iii. Category 3- General conditions+ Restrictionsduring the 40-day (debt)or 1 year/6months (equity; non-reporting/reporting) compliance period

1) R903(b)(3)(ii) Offering restrictions, anda) Distribution agrees in writingto comply and no hedgingb) Legendon US law restrictions.

2) R903(b)(3)(ii) Debt: securities represented by a temporary global security is notexchangeable until the later of

a) 40-day period's expiration orb) In the case of non-distributor buyer, a certification of non-US person status

or an exemption available (e.g., Rule 144A).3) R903(b)(3)(iii) Equity:

a) Non-distributor buyer certification of non-US person status or an exemptionavailable;

b) Buyer promise to sell pursuant to Reg S/registration/exemption;c) Securities are properly legended regarding US law restrictions;d) Issuer made sure no violating transfer could occur.

d. Rule 905 Equity securities of US issuers sold overseas arerestricted securities 4(a)(1)is NOT available unless selling underR144, etc.

i. But none of the other securities are restricted "Category 2 can resell


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e. Rule 904 Offshore resales(outside US)i. General conditions as primary offerings

ii. For resalesby dealers/brokers W/Inthecompliance period:1) Make sure the buyer is not US personand2) Notify the purchaser of US law restrictions

iii. For resales by senior officers:1) Make sure resales through brokers involve only normal commissions (no

additional selling efforts).

III. Disclosure in Reorganization, Reacquisition, and Acquisition(p.395-425)1. What issale:disposition for value. 2(a)(3).2. Typical transactions:

a.New debt securities in debt restructuringsb. Holding company incorporated and issuing shares in exchange for shares of the operating

company

c. Acquiring company issuing new shares in stock-for-stock acquisitionsd. A company forming a subsidiary to spin off certain business lines and distributing the shares

of the subsidiary to the company's shareholders

3. Spin-offsa. Mechanics:

i. Create wholly owned subsidiary: transfer assets to newly formed company (all stockowned by original corporation)

1) Separates incompatible operations; comply with local/federal antitrust laws;segregate hazardous activities; settle s/h disputes

ii. Distribute subsidiarys stock pro rata amongst parent corps s/hiii. Subsidiary is public if parent is public

b. Spin-offs are generally considered sales "for value" and need to be registered. Datronics(p.402)

i. Has to register under 34 Act, andii. Immediately provide RS to SH.

4. Stock giveaways = salebecause theres value to the insidersa. Private companies can NOT give away its stocks w/o registration

5. M&A Rule 145a. Covered transactions:

i. All types of stock-for-stock mergers(tender offer) and sales of assets for stocksii. EXCEPTif the company is just trying to change its domicile. R145(a)(2).

b. Consequences:i. 5 registrationduty attaches to the acquirer.

1) Form S-4: proxy stmt + prospectus/F-4;ii. Communication restrictionsbefore filing S-4.

1) This is NOT an offer"NOT gun-jumping. R165(a)a) BUTwritten communications must be filedas a prospectusunder

R425(b). R165(b). (much like Rule 163FWP by WKSIs): have to tell SHabout this plan.

2) Rule 135 bare bones notice: filed before first use under R425(a).c. Rule 144 resale restrictions (notwithstanding the registered status of the securities acquired)

if any shell company (other than a business combination related shell company) is involved

apply to the acquired securities. Rule 145(c) &(d).6. Debt Restructuring (Exchange one security for another)

a. Exchange of one security for another constitutes sale. R145(a)(1).


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i. There is an exchangeif theres a material changein a security's economic or rights.SEC No-Action Ltrs.

1) Bond for stocks: Exchange2) Different maturity dates for the same security: Exchange3) Change in charter/bylaws where the board is changed to a staggered board: NOT

exchangebecause this is not a new kind of security.

b. BUTthe exchange could beexemptedi. Under3(a)(9) if:

1) The exchange is between securities of the same issuer: no other party may beinvolved;

2) Only old holderscan be the new holders;3) No new consideration(other than the old securities) may be given bythe old

(new) security holders.

a) BUT the issuer can give new considerationto the security holders4) "Nocommission for solicitation": the issuer may not hire 3rdparties(broker,

etc.) to solicitthe acceptance of the exchange offera) Makes it uncommon for company to do this because they usually hire

someone.

ii. This is just a transactionexemption: if the D security outstanding were issued in aprivate placement (4a2/Reg D), the issuer exchanges some stocks for the bond, thestocks become restricted security just like the bonds were.

c. A/B Exchange(Exxon Capital)i. Company does private placement of debt to institutions (restricted security); institutions

get registration rights (to ask Co. to file RS). Company registers another set of identical

securities and exchange them with the ones the institutions have because Companywants to do this on their own timeline

IV. 33 Act Civil Liability1. 13: SOL

a. 1 year from time of discoveryfor misstatements or sellingviolating securities (12(a)(1))and

b. 3-yearas an absolute bar2. 11 Misstatement in RS

a. Elements of the cause of actioni. "Whensuch part became effective": is it true or false @ effective date?

1) Shelf registration(base prospectus + prospectus supplement): supplement isdeemed to have been included in the base prospectus and the supplement dateis

a new effective date. Rule 430B(f).

ii. Material misstatements1) Material: a substantial likelihoodthat a reasonable investormaking

investment decision will considerthe fact significant2) "Misstatements":

a) Untrue;b) Omitting facts required to be stated (by the SEC forms);c) Omitting facts to make the statement not misleading: cant present a one-

sided view of a topic (only note the good but not the bad, etc.).


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b. Who can sue?i. Anyone who purchasedthe securities

ii. No privityis required - any purchaser(from IPO or in secondary market) during the 1year period may sue

1) Tracing problem for seasoned issuers: plaintiffs other than direct purchasers inan offering will have difficulty establishing he purchased securities offered last

time rather than years ago, because courts require them to prove tracing.iii. No relianceis required

1) Theoretically, issuer may defendby proving the purchaser knew the truth. Hardto prove.

2) P doesnt even need to show that hes aware of the misstatement.3) BUTneed to show relianceif the issuer has provided full 12 months of earning

statements.

iv. No causationis required1) BUTD can defendby showing a lack of causation: the damages is attributable to

other factorsc. Who can be sued?

i. No intent/scienteris requiredii. Issuer is strictly liableUNLESScan prove

1) Purchaser knewthe truth2) The decline in value was caused by something other than the misstatement.

iii. Non-issuer: Due-diligence defenses1) Defendants: BarChrissuggests different levels of responsibilityfor different

groups?

a) Company insiders (executives) >= Directors > UW/Auditor?b) Accountants and other experts named in the RS (for expertised portion only),

and

c) UW (liability limited to their distributed amount unless they are speciallycompensated than other underwriters)

2) DD duties for different parties: BarChris (p.491)a) Experts

i) Expertised portion 11(b)(3)(B): Audited financial statements, legalopinions for corporate matters, geological reports, etc.1. DD +2. Reasonable groundto believe in the truthfulness +3. Actual belief

ii) Non-expertised portion:1. NO duty

b) Non-expertsi) Expertised portion11(b)(3)(C)

1. Reasonable belief +2. Actual belief

ii) Non-expertised portion: 11(b)(3)(A)1. DD+2. Reasonable belief +3. Actual belief.

iii) NOTE:1. Includes outside directorsthat havejust started working.

BarChris.


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2. Outside counsels comfort letters are NOT a certificate, but onlyintended to help UW to demonstrate that they have performedtheir DD.

c) Reasonable investigation (DD):i) UW/Accountants must do reasonable follow-up work beyond merely

askingthe managementquestions and accepting answersat their

face value. BarChris(p.502).1. Including look at underlying business documents(doc review).

ii) Court might consider the directors own expertise: BarChris (p.498)held that Grant (a director but also a lawyer) should have undertakenseveral kinds of investigation.

iii) DD obligation has to continueuntil the effectiveness of RS.d) Reasonable ground to believe:

i) When theres a red flag, even iftheres no DD obligation, a non-issuer might NOT be ableto demonstrate that his belief is reasonable.

WorldCrom(p.504) [Shelf registration. Their expense/revenue ratioon the audited F/S is very out of linew/ the rest of the industry.]

ii) Reduced DD duty for shelf-takedowns? Rule 176 seems to suggest asliding scale test, while the WorldCom court flatly rejected any reducedduty. Prof doesnt think R176 is very helpful..

e) Shelf registration: hire an UW who hires counsel to do an ongoing DD forshelf takedown.

d. Damages:actual damagesi. = Purchased price (but capped@ public offering price) value@ time of

suit/dispositionbefore suit decreasein value due to something else.1) Negative causationanalysis to show lack of causation, e.g., using statistical

models. Akerman(p.515): when the misstatement was announced, the share price

didnt drop but went up.

ii. Liability is joint & several BUT UWs damage is limited to their distribution %.3. 12(a)(2): Material misstatements in prospectus/oral communication

a. Only materials in a "public offering"by the issuerare covered. Gustafson(p.528) [SH isnot the issuer"His K w/ the purchaser is not covered under 12(a)(2).]

i. "Public offering"is determined by the Ralston Purinatest under 4(a)(2).1) Lower courts will try to include issuers actionunder 12(a)(2) by declaring it

as a public offeringand hence doesnt qualify for exemption. Hyer(p534)

[investors in real estate development projects (claim solicited by oral and writtencommunications) never received ownership interests and proceeds of their

investment were distributed to other investors]: this could be a public offering.

ii. 12(a)(2) does NOT include1) 4(a)(1) resaleexemption2) 4(a)(2) private placementexemptions3) Unresolved issues:a) Do Reg D offerings automatically get exemption? Maybe yes.

b) Do exempted primary offerings (CPs, Reg A and Reg S) that are "public"in naturestill have to be covered? Maybe yes.

b. Elements of the cause of actioni. Defendants = "Seller"under 12(a)(1).

ii. Plaintiffs: original purchasers fromthe "sellers"iii. Misstatements

1) Communications covered.


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a) Statutory prospectus, preliminary prospectus, summary prospectusb) FWP filed with SEC is public and could be the basis for liability

irrespective of its actual distribution method given that it's filed. Rule

433(a).c) Post-sale(after the contract of sale) information is NOTa basis for 12(a)(2)

liability. Rule 159.

2) Untrue or omissionsof facts necessary to make the statements not misleadingiv. No reliance reqd

1) BUTD may prove P knewthe truthv. No causation reqd

1) BUT D may conduct negative causationanalysisvi. DD defense: no actual knowledge and could not know even by exercising reasonable

care

c. Damages:recession4. 12(a)(1): Violation of 5

a. Anyone offers or sellsa security in violation of 5.i. Unregistered, non-conforming prospectus, gun jumping rules, defective exemption sales

(Reg D/144), etc.ii. Strict liability: offer or sell in violation of 5 "liable to anyone who purchasedsuch

security from you.

1) No defenses.2) Liabeven ifthe other party knew of/agreed to this violation.

b. "Seller": defined broadly.i. Anyone who solicitsto not merelyserve the interest of the buyer. Pinter v. Dahl

(p.522).1) No privity req.2) Does NOT have to be paid. !Chinese benevolent Assn3) Not a sellerif done purelyfor the buyers benefits.4) R506private placementagent: subject to 12(a)(1).

ii. Issuer is always a seller forprimary offeringRule 159A(a).1) Unless the buyer is relying on fwp not prepared by the issuer (e.g., a dealer

purchasing from an underwriter relying on the latter's independently preparedfwp).

2) UWis not responsible for sales using a fwp not prepared by him. Rule 159A(b).c. Damages: recession

i. Consequence: give buyer a 1-year put option:1) If the price goes down "asks for recession2) If the price goes up"holds the stocks

5. 15: Controlling persons(parent, etc.) of the directly liable parties(subsidiary, etc.) under11 and 12 arejointly liablefor their controlled persons' liabilities,

a. Unlessthey could provei. No knowledge of the facts or

ii. A reasonable ground to believe in any misstatements.b. Most of them already liable under 11.

6. 17 Anti-fraud for interstate transactiona. !10b-5

i. 17(a)(1: scienter req


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ii. 17(a)(2), (3): no scienter req.b.No private right of action

V. 34 Act: Regulation of Secondary Market1. General

a. Whos subject to registration requirementsi. EA 12(a): anysecurity (equity or debt) traded on an exchange.

1) This is separate from 33 registration!ii. EA 12(g): >$10 million assetsand equity securitiesheld either by 2000 ppl or 500

non-AIshareholders.

1) Exemptionsfor FPI(foreign private issuers): Rule 12g3-2a) R12g3-2(a): FPI is exempted from 12(g) if

i) it has < 300 US SHof record,ii) In addition to meeting the 500 shareholder/10 million asset requirements.

b) R12g3-2(b): FPI is exempted from 12(g) if:i) Not required to report

ii) Exchanges in a "foreign primary trading market": average dailytrading volume reaches (i) 55% in a single foreign country or (ii) 55%in two foreign countries, one of which is larger than that in the US.

iii) Made availableall public informationdisclosed in foreign marketsavailable to US investorsin English.

c) Example: ADRi) Sell to US IB (Reg D)"Sell to QIB under R144A; pay IB to set up an

ADR + Does an ongoing obligation under 2(b) in English

ii) But if they ever decide to register under 33 Act"becomes subjectunder 15(d).

2) Deregistration under 12(g): have fewer than 300 record shareholders.iii. EA 15(d): any security(equity or debt) that files RS under 33 Act but not otherwise

required to register under 34 Act:

1) Issues debt securities to the public but its equity is not public traded b/c debtsecurity is usually not on an exchange.

2) Sells equity, but after the sale, has


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c) To any credit rating agency.3) Limited sanctions: not relevant for 10b-5 anti-fraud determination or "current

public information" analysis under Rule 144 if there is a failure to comply with

Reg FD.c. Internal Controls on disclosures:

i. Keep a reasonably good books and recordssystem and an internal control system overaccounting practices. Sec. 13(b) and World-Wide Coin System.

ii. Requirements on auditors1) Whistleblowing duty following audit. The audit must include procedure providing

reasonable assurance of detecting illegal acts and report on such discoveries. Sec.10A(a) & (b).

2) Avoiding conflicts of interest. CEO or CFO or CAO of an issuer may not beemployed by its auditor in the preceding year.

iii. Internal controlcertifications by management and auditor. SOX Sec. 4041) Management shall state its responsibility and make an assessment of its ICFR and

its auditor shall independently evaluate the assessment as well.2) Related regs and standards: SEC Release 33-8810, PCAOB AS No. 5, COSO

(private initiative).

iv. Weak clawbacks for financial restatements. SOX Sec. 3041) CEO and CFO shall reimburse the issuer for any bonus or incentive-based

compensation received during 12-month period following the misstated financial

statements and any profits realized from selling the issuer's securities during thatperiod.

d. Market manipulation:i. Sec. 9 expressly lists trading practices the Congress viewed as concerns for market

integrity, e.g., wash trading, rumoring and short sales, margin lending (through FedReg), etc.

2. Proxy & Corporate Governancea. SH voting and proxy regulation: Regulation 14A

i. Anypersonsoliciting proxiesfrom SH must first make proper disclosureon a filedproxy stmt (Schedule 14A). R14a-3.

1) "Proxy": every proxy, consent or authorization, including failure to object ordissent. R14a-1(f).

2) "Solicitation": R14a-1(l)a) Actual requestfor, to execute, or revoke, a proxy + Any communication

"under circumstances reasonably calculated to result inthe procurement,

withholding or revocation of a proxy".

b) EXCEPTIONS:i) R14a-1(l)(2)(iv) SH can make public announcementof voting

position& reasonsfor the positions:

1. Through mass media or2. Directed to one's beneficial owners (e.g., a BD as a record holder).

ii) R14a-2(a) Solicitation exempted fromentire Reg. 14A:1. Broker (recordholder) asks beneficial owners how they want to

vote, or2. Beneficial owner when directs broker how to vote

iii) R14a-2(b): Solicitation exemptedfrom proxy stmtreq BUTstillsubject to anti-fraud:1. The SH or involved party is not affiliatedwith management


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2. Do nothave an individual interestin the proposal to which thesolicitation relates, and

3. Do NOT seekactual proxy authority.4. Research reports, etc.

iv) R14a-12 Solicitations that donot actuallyrequestproxyw/o proxystatementis allowed if

1. The communication is filed with SECbefore use,2. Has a proper legend, and3. The actual proxy form (when later sent) is accompanied by a

proxy statement.v) R14a-1(l)(2)(i)Reply to unsolicited requestfor a proxy.

3) Filing of proxy statements R14a-6.a) Preliminaryone must be filed 10 days beforefirst use of the definitive one,

unless it's an uncontested annual meeting regarding routine matters.b) File definitive proxystatement on the date of use.

4) Requirements of proxy form. R14a-4.a) Who is doing soliciting; date of execution; matter or group of matters

intended to be acted upon at meeting in question

ii. Proxy fraud. R14a-9.1) No false or misleadingstatements or omissions regarding material factsin the

solicitation.

2) Impliedprivate right of actionexists. Borak(p. 972).a) But reliance(presumed if material) and causationstill need to be proved.

Sandberg(p.972): the minority SH didnt prove they were misled by the

misstatements; the majority could have gone forward with the mergeranyway (majority only asked minority SH to vote because they wanted 100%approval).

b. Shareholder Proposals.R14a-8.i. Eligible SHR14a-8(b):

1) 1% or $2,000 worth of stocks continuously held for 1 year before submittingproposal and through the meeting.ii. Exclusions R14a-8(i):

1) R14a-8(i)(1): Improper subject for shareholder action under state law;2) R14a-8(i)(7): The proposal relates to ordinary business operations;3) R14a-8(i)(8): Proposals that seek to affect the outcome of the upcoming election

of directors

c. Board Committee Structure & Executive Compensationi. Mandatory proxy accessfor certain SH director nomineesunder proposed Rule 14a-

11 is stricken downby DC Circuit in Business Roundtable(p.960, D.C. Cir.)

1) Get your own proxy stmt?ii. EA 10A(m)(3): members of audit committeemust be independent from the issuer

and deal with the issuer's auditor directly.iii. EA 10C(a)(2)- members of compensation committeemust be independentfrom the

issuer and potential conflicts of compensation consultant must be dealt with carefullyand disclosed properly

iv. EA 14A(a)(1)- non-binding "say on pay"(at least every 3 years), "say on frequencyof say on pay" (at least every 6 years) and "say on golden parachute" (in any proxy

solicitation regarding a business combination subject to shareholders' approval).v. EA 14B- issuers must analyze why they have or don't have separation of chairman

and CEO.


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a) Publish the offer document in the newspaper. Almost never done. too long.R14d-4(a)(1)

b) Summary publication in newspaper. R14d-4(a)(2)c) Theoretically, target company has to turn over its shareholder list to you

under R14d-5, but it will sue you for sure for fraud. R14d-4(a)(3)

4) Target C communicationsa) Similar disclosure regime by filing under cover of Schedule 14D-9. R14d-9.b) Stop-look-and-listen statement exempt from filing. The target company may

issue such a communication to urge shareholders to delay their decisionuntil the target company responds.

5) Mandatory T company announcement of position. Within 10 business daysofthe tender offer, T should issue a statement regarding its position on the tenderoffer. R14e-2.

iv. Substantive regulation1) R14e-1(a): Have to keep the offer open for 20 business days.

a) 10 morebusiness days if you change price/amountof securities. R14e-1(b). Very common when a 3rdP comes in and starts a bidding war.

2) R14d-7:Tendered securities may be withdrawnfreely during the entire TOopenperiod.

3) R14d-8: If the TO is for


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i) Still subject to anti-fraudand insider trading rules of 14(e) and Reg.14E.

b) R14d-1(c)(1): US SHhave to be given the same dealsas the other SH.c) R14d-1(c)(2):Ifonly non-cash consideration is paid, there is 33 Act

registration exemptionunder Rule 802if the following conditions are met

i) US holders have 10% or less ownership in the issuerii) US holders are given equal treatment.

iii) US holders are given equal information, which should be legendedproperly.

2) R14d-1(d): Tier II = 10% - 40%a) Exempt from certain requirements conflicting with foreign laws.

e. R14e-3: anyonein possession of NPMI can NOT tradeon it.4. Regulation of Broker/Dealers

a. SEC general regulation:i. EA 15(a): BD have to registerto enter the business

1) Can register as a firmii. EA 15(b)(4)(D) & (E): SEC can sanction BD when they

1) Willfully violateor aid & abetviolation of securities lawOR2) Failed to reasonably to supervise another who violated the securities law.

John Gutfreund(p.1025) [Salomon Brothers BD submitted false bids. Seniorofficials knew but did nothing. The BD committed 2 other violations]

a) Even though the firm GC didnt directly supervisethe BDs work, henevertheless becomes a supervisoronce he learned the BDs violationbecause he has the requisite degree of responsibility, ability or authorityto affect conduct of employee whose conduct is at issue.

b) Should have taken affirmative steps to detect and prevent futureviolations.

iii. 15(b)(6): Anyone whos associated with BD(employee) can be sanctionedforviolating the securities law.

b. Twin peaks of BD regulationi. Safety and soundness

1) R15c-1: regulates custody of C securitiesa) Physical segregationor electronic recordkeepingto make it clear which

securities it owns vs. securities its holding for C2) R15c-3: capital requirement

ii. Conduction of business: fairness to C1) 4 business rules

a) Best execution: when BD is acting as an agent, BD should get the bestprice availablefor the customersi) How long is BD supposed to wait for the best price?

ii) Regardless of NBBO, it's always possible to trade within the spread andit's unclear how much efforts a BD should put into in searching for abetter deal for his client.

b) Know your security: If BD recommends a security, has to a duty toinvestigate the security and canNOT give one-sided information to C

i) Hanly(p.1033, 2nd Cir): not only does BD have to be informed aboutthe security, but also cant make half-truth (only tells the good not thebad).


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c) Suitability: before BD makes a personalized recommendation, he shouldinquire with the C about Cs basic needs & risk toleranceand shouldtailor his recommendationto the needs and risk tolerance

i) Allowed some discretiond) No churning: no excessive tradingfor the purpose of gaining

commissions

2) FINRA regulates substantive fairness to clients3) SECdoesnt regulate substantive fairness BUT sanctions fraud/material

misrepresentationthrough R10b-5.a) Majority courts: BDs business conduct rulescan be regulated under 10b-

5

b) Some courts(p.1031) there is an implied general representationbyholding oneself out as BDthat he will treat C fairly

i) Import FINRA rules into 10b-5.5. Securities Fraud Litigation

a. Scope of R10b-5i. In connectionwith the sale or purchaseof any security

b. Who can be Pi. Only someone who actually purchased/soldsecurities during relevant periodhas

standing to sue. Blue Chip Stamps (p.703)

1) = Anyone who bought the securities @ price thats too highbecause of the falsestatement

2) T1: misstatement/omission; T2: truth comes out. Relevant period = T1 T2.c. Who can be D:

i. Officerswho knowingly/recklessly makes a false statement through a media that willpredictively reach D+ Companyitself. Texas Gulf(p.597)

1) No privity reqii. Outsiders:only ifthey are a primary violatorby making a misstatement. Janus

(p.733, 2011) [D is a financial advisor to JIF. All of JIFs officers are Ds officers. D

wrote JIFs prospectus.]1) Onlythe person/entity with ultimate authorityover the statement can makeit.

a) D did NOT makethe prospectus even thoughsubstantively it wrote it.b) JIFhas the ultimate controlof and owes statutory obligationto the

prospectus. This is the relationship between a speechwriter and a speaker.c) P: JIF wouldnt have be ableto make the misstatements but forDs help.

Court: not enough.

2) No aiding & abetting liability. Central Bank of Denver.d. Elements of the cause of action

i. Standard of care:1) Scienter- intent to defraud or recklessness. Ernst & Ernst(p.707)

a) Why?Sec. 10(b) requires "manipulative or deceptive device". Thus 10b-5(b)'s misstatement language, though seemingly negligence-based, still hasto incorporate a scienter requirement.

b) EA 21D(b)(2)requires state of mindto pleaded with particularitygivinga "strong inference"about the intent.i) The pleaded facts must be at least as likelythat D is lying as opposing

inference(the mistake is negligent/innocent).

1. Tellabs on remand (p.716): Importanceof the products whoserevenues are misstated + senior status of Dmakes the fraud

inference much more likelyto be fraud than an innocent mistake.


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ii) Other ways to prove scienter.1. Direct personal financial gain

a. Not always required. Tellabs on remand(p.717): Dsinterest is simply by delaying the bad news and not sufferingany loss from it.

2. deliberately engaging in illegal activities;3. D knew or had access to information contradicting public

statements;

4. Failure to check information they are obligated to monitor.Novak.2) Recklessis enough in most courts3) Negligenceis NOT enough. Ernst & Ernst.

a) EXAM Alert: check SA 11(RS misstatement) strict liability!ii. Untrue/misleading statementsORomission of material facts

1) Omission: In general, no duty to disclosematerial events unless required(public offering, 10-K, 10-Q, merger negotiation on 8-K) BUT

a) No half-truths- if you choose to speak, all material information related tothe subject matter has to be disclosed properly.

b) There is duty to correct- when prior announcements are found to be wrongwhen made

c) Court spliton duty to update: statement was true when madebut laterbecame misleadingbecause of subsequent development.

i) Gallagher(p.724): There is no such duty.ii) Time Warner(p.721) There is a duty but its limitedto cases where

theres a defined projection or prediction

1. Time Warner: there was no duty to disclose failing strategicalliance because D only stated that there was a hope.

d) Fiduciary duty exists between the "concealing party" and the party seekingremedy - go back to common law

iii. Reliance1) Misstatement: reliance is assumedon a fraud-on-the-market theory. Basic

Levinson.a) When a security is traded onan efficient market(price reflects material

information), investors presumably relyon the integrity of the market.b) How to rebut:

i) Market is inefficient where the price does NOT reflect the information.ii) Depose all the P and show that they didnt rely (impractical in class

action).

2) Omissions: no relianceis reqdbecause it involves the failure to carry out a duty.Affiliated Ute Citizens(p.738, 1972)

a) Courts have limited to complete omission. Some dont allow it for halftruths.

iv. Causation: fact intensive analysis1) Damages = purchase price true value(value right after t2)a) Have to purchase between t1 and t2.

b) If purchased before!11, 12(a)(2)2) Misstatement: Had the truth come out promptly, would the value of the

securities have fallen right away? If yes, then causation A&F life insurance

(p.752) [Debt securities. D certified F/S and provided negative assurances to SH

even though D knew that the F/S werent in compliance.]


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a) J. Jacobs: no because the company at the time of the incorrect F/S was stillgenerating enough cash to pay off the bonds, so the stocks would have fallenbut the bonds would have been okay.

b) J. Winter: yes because anyone who found out about the truth would alsohave figured out that the mgmt was interested in expanding their empire

than paying back their creditors so price of debt securities would have fallen.

c) J. Oaks: had D done their job correctly, would company have been able tomade these statements and still wouldnt have gone under

i) Mahoney doesnt think this one is right.3) Omission:

a) The delay in disclosure of omission delayed the price dropso anyone whopurchased in the class period(t1 t2) should get the difference

b) Ds defensei) the drop @ t2 was unrelated so even if the information was disclosed @

t1 when it should have been there wouldnt have been a drop

ii) The drop was @ t2 was a market wide event not a company specificevent so theres no causation.

iii) The drop is just everyday noise, not big enough in relation to thecompanys typical fluctuation. Estee lauder

e. Extraterritorial purchasei. There is no 10b-5 actionfor transactions that occurred outside US. Morrison

ii. SEC can enforce10b-5 based on extraterritorial activities if theres substantialconduct/effect in US.

1) Just no private cause of action.f. Safe harbors for forward-looking statements in a reporting company's regular business. Sec.

27 of 33 Act and 21E of 34 Act.

6. Insider Tradinga. TO: R14e-3

i. Equal Access theory:anypersonmust not tradeon MNPIrelated to a TOif heknows or should have known the info comes from any party involved in the transaction.

b. Classic insider theoryi. Corporate insiders(D&O) or temporary insiders have a fiduciary dutyto the

companys SHand thus have a duty to disclose or abstain. Chiarella(p.907, 1980).ii. EA 16: applies to insiders

1) 16(a): anyone who is an D&O w/ registered securities OR who owns > 10% ofoutstanding shares must report to the SEC all of their purchases/sales of thatequity.

2) 16(b): Statutory insiders must disgorgeany profitson purchases and sales w/inany 6 monthperiod.

c. Misappropriation theory: Fraud on the sourcei. If the trading personowes a duty of trust or confidenceto the sourceof the

informationthen he has duty to abstain or disclose. O'Hagan(p.915, 1997) [lawyersfirm (Dorsey & Whitney) represented Bidder in a tender offer. L didnt work on thedeal himself. L buys stocks from the Target.]

ii. R10b5-2Duty of trust/confidence arises when:1) Express agreement: a person agrees to maintain information in confidence, or

a) Has to be agreement! Unilateral expression is not enough.OR


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2) History: two people have a history, pattern, or practice of sharing confidencessuch that the recipient of MNPI knows or reasonably should know that the personcommunicating the information expects that the recipient will maintain its

confidentiality;a) This can be rebuttedby showing that the source expressly allowedthe

agent to act on it. Martha Stewart.

OR3) Immediate family member: a person receives or obtains MNPI from a spouse,

parent, child, or sibling UNLESS the recipient can demonstratethat, under thefacts and circumstances of that family relationship, no duty of trust orconfidenceexisted.

a) Creates presumption that there is a fiduciary relationship so long as provesource of info was a relative, BUT presumption can be rebutted (he told me

the information so I could trade on it).b) Wife told financial analyst: violation;c) Wife told hairdresser: no violation.

d. Tipper/Tippee Dirks(p.925, 1983) [stock broker interviews insiders and then tipscustomers that a company is engaging in financial fraud.]

i. Tippeehas derivative liabilityif1) The tipperknowingly breacheshis duty by the disclosure

a) The tipping has to be motivatedby a desire of personal gain. Dirks: thecorporate insiders didnt tip for personal gain "no derivative liability for

Dirks.2) The tippee knows or should have knownthe breach.

a) R10b5-1: in breach of a dutyof trust or confidence that is owed derivately to the source of information.

e. R10b5-1(b) Scienter: Trade is on the basis of MNPI if the person trading was aware ofthe information at the time of the trade

i. UNLESSthe person can demonstrate that the trading is according to a pre-existing10b5-1 plan. R10b5-1(c)

f. New development: what if the trading person actively seeks, illegally, inside information?Fraud could be the manner in which the information is obtained - e.g., hacking.Dorozhko.

Documents

PRINTED- Mahoney SecReg Fall 2013