Securities Regulation

Professor Gabaldon
Spring 2000
I. Introduction
A. Securities Act of 1933 (Distribution Process)
1. To require that investors are provided with material info concerning securities offered
for public sale; and
. To Prevent misrepresentation deceit! and other fraud in the same of securities
". Accomplished via disclosure primaril# in registration statement
$egistration intended to provide adequate and accurate disclosure of material
facts concerning the compan# and the securities it proposes to sell
%. Securities Excange Act of 193! (&rder and Disclosure in After'(ar)et)
1. *ffect
*+tended the disclosure doctrine of investor protection to securities listed and
registered for public trading on national securities e+changes
Also applies to over the counter mar)et if compan# has more than ,1-( in assets
and more than .-- investors
. /orporate $eporting
(ust file a registration statement with the e+change and the 0*/
". Pro+# 0olicitations
1overns soliciting pro+ies
0olicitations whether b# management or shareholder groups must disclose all
material facts concerning matters on which holders are as)ed to vote
2olders must be given an opportunit# to vote 3#es4 or 3no4 on each item
5. Tender &ffer 0olicitations
$eporting and disclosure provisions e+tended to situations where control of a
compan# is sought through a tender offer or other planned stoc) acquisition of
over .6 of a compan#7s equit# securit#
.. 8nsider Trading
Prohibitions are designed to curb misuse of material confidential information not
available to the general public
9. $egulation of bro)ers and dealers
". State #lue S$% &a's
1. Analogous to the 7"" and 7"5 Act
. Preempted b# federal legislation (sometimes)
(. Sources of )ederal Securities &a'
1. 0tatutes at :arge (more legit than ;0/) but most people rel# on %<A! //2 etc.
. 0*/ rules and other pronouncements
". Polic# and interpretative releases
1
5. 0taff :egal %ulletins
.. 8nterpretive and <o'Action :etters
E. *o' Securities Are +ar$eted and Sold
1. Private=0mall *ntities
a. >orm sole proprietorship! partnerships (general! limited! limited liabilit#)!
limited liabilit# corporation
b. ;nique contractual relationships
c. (ethods b# which securities get to public and trade in aftermar)et
(1) Distribution process in which capital is raised b# issuer through
placement of securit#
() Aftermar)et secondar# mar)et where not capital is raised for the
corporation
. Public=:arge *ntities
a. >orm some are limited partnerships! but most are corporations
b. 0tandard contractual relationships
c. (ethods to get securities to public and trade in after'mar)et
(1) Distribution
8ssuers approached b# a 3lead4 underwriter (li)e ban)s) who would
act as an agent for an underwriting group! t#picall# a lead
underwriter will approach issuer and then assemble the group
:ead underwriter interfaces between issuer and underwriting group
All members of underwriter group are responsible for contacting
dealers
;nderwriters sell to dealers who in turn sell to the public
() After'(ar)et public trading securities among itself (price does not
directl# effect compan# but effects price at which the# can later sell to
public)
). "ontext of 1933 Act Registration
1. ;nderwriters
a. 1eneral Definition function of helping a compan# or one or more of its ma?or
shareholders! sell securities to the public through an offering registered under the
0ecurities Act
b. >irm /ommitment ;nderwriting underwriter purchases securities from a
compan# at an agreed price and then attempts to sell to public for a profit (ris) on
underwriter)
c. %est *fforts ;nderwriting underwriter agrees to use its best efforts to sell an
agreed amount of securities to the public! ris) remains with issuer! done primaril#
with small underwriters
d. 0tandb# ;nderwriting used in 3rights offerings4! compan# directl# offers its
e+isting securit# holders the right to purchase additional securities at a given price
and the uw agrees to purchase from the compan# an# securities that are offered to
the securit# holders but not purchased b# them
. Dealers

$efers to a firm when it bu#s and sells securities for its own account (ta)es and
gives title)
". %ro)ers
$efers to a firm when it bu#s or sells as an intermediar# for a customer rather than
ta)ing or giving title itself
5. 8nvestment %an)ing
;suall# handles the underwriting business
/omparison with commercial ban)ers who ma)e loans and hold depositor7s funds
because 1lass'0tegall Act revo)ed! commercial ban)s can not have affiliates
who underwrite (but are not suppose to use depositors funds)
>unctions@
a. assisting companies in the sale of securities! almost alwa#s in large amounts to
private purchasers such as insurance companies
b. finding acquisition partners for companies that wish to acquire or be acquired
b# others
c. giving financial advice of various sorts
.. 0econdar# (ar)et
a. Process for getting securities on e+changes
(1) :ist will contact desired e+changes and sell them on the e+change
<eed to satisf# certain requirements A disclosure
Ber# stringent=rigorous requirements! the more prestigious the
e+change is
() &nce list privileges are granted! can contact members of the e+change
(") >unction if willing bu#er and seller! can contact members of the e+change
9. *+change Bocabular#
a. 0pecialist Post A if want to sale a securit# that is specialists; sub?ect to certain
e+changes7 regulations! sub?ect to 0*/ approval! need to maintain an orderl#
mar)et
>unction matching unless an unorderl# mar)et A then specialist ma# be
required to purchase=sell
C. &ver the /ounter Bocabular#
a. (ar)et (a)er dealer than functions in the trading mar)et b# maintaining an
inventor# of a particular compan#7s securities and holding itself open! on a
continuing basis! as willing to bu# and sell those securities
b. %ro)er agent who acts on their client7s account
c. 0elf $egulated &rganiDation
%oth mar)et ma)ers and bro)ers are regulated under the 1E"5 Act and are
required to be members of an 0$&
2as rules and regulations regarding conduct of bro)ers and deals that are
sub?ect to 0*/ approval
0elf'funded
<A0D is an 0$&
F. *+change
a. >orm ph#sical location
"
b. $egulation sub?ect to rigorous regulation b# 0*/ pursuant to 1E"5 Act
c. Process
%u#er goes to bro)erage A bro)erage will communicate that desire to a
floor trader A member or floor trader will go to a specialist post
0eller will contact her bro)er about purchasing A seller7s bro)er will
communicate to a floor trader A the# will go to specialist post and hopefull#
transaction ta)es place
0pecialists perform matching function
E. &ver'The'/ounter
a. >orm ever#thing e+cept selling=bu#ing of securities not listed on an e+change
Pin) 0heets advertisements; now we have electronic bulletin boards
(ar)et (a)er regularl# advertised self as willing to bu# or sell +
securit# and usuall# lots of mm7s per securit#
b. Process
%u#er goes to bro)er and bro)er goes to mm
0eller goes to bro)er and bro)er goes to mm
(m lac)s the matching function! do the transaction with themGGGGGG
1-. 0tate %lue 0)# $egulation
a. T#pes of $egulations
(1) (erit'%ased requires state officials to read info and determine its suitabilit#
of securities
<ot used much an#more e+cept for in 3problem mar)ets4
() Disclosure'%ased will require filing of basic business information (federal
securities laws)
(") <otice'%ased ?ust need to send notice that will sell or trade
b. Preemption :aw of 1EFF forced state regulation into a notice based s#stem for
most areas
c. T#picall# done b# a specialist in a law firm in a large financial center
11. $easons for 1oing Public
a. Advantages
<ew capital
&btain negotiabilit# A acquisition of companies! emplo#ee incentives!
liquidit# for present 0=2! shares ma# have greater value
>uture capital on more favorable terms
Prestige
b. Disadvantages
*+pense of going public (underwriter7s fees A C'1-6 of public offering
price! legal fees! accounting fees! printing costs! registration and %lue 0)#
fees! registrar fees! indemnit# insurance)
Additional obligations of public companies
(ar)et e+pectations
:oss of control
2igher estate ta+ valuation
1. Timing of 1oing Public and selection of underwriter
5
a. Hhen
/ompan#7s earning and financial performance
0iDe of compan#
b. 0election factors for agent underwriter
$eputation and abilit# to distribute
Abilit# to advise
Abilit# to provide financial services following the offering
After mar)et performance of the securit#
*+perience in the compan#7s industr#
1". 0ituation
a. 0cenario
Product specialiDed computers with specialiDed software
/orporation has two shareholders
Hant to raise capital
b. 8nterests
0iDe of compan# ' ,1- million I ultimate sales price
2ow much do #ou want to raise ' ,1-(
&nl# want to sell .6 of the compan#
:ogical price is ..( b=c not is li)el# to pa# ,1-( for .6 control
of something that is worth ,1-(
Decide the# are willing to sell ,"."(
,1-( is value of corp.
giving up ""6 of compan#
c. 0iDe of Deal for ;nderwriters
%ig ;nderwriters',.(I deals onl#
$egional underwriters will ta)e smaller dals
I. 1933 Act Registration
A. General ,ocabular% and Applicable Statutes
1. Pre'>iling Period (%asic $ule no offers! no sales)
a. Definition
Period before registration statement is filed
b. $elevant Provisions
JJ.(a)!(c)
. Haiting Period
a. Definition
Period after registration statement has been filed but has not become
effective
b. $elevant Provisions
JJ.(a)!(b)(1)
". Post *ffective Period
a. Definition
.
Period after registration statement becomes effective
b. $elevant Provisions
J.(b)
#. Pre-)iling Period Proibitions
1. J.(a) no sales
a. 0tatutor# :anguage
Unless a registration statement is in effect as to a securit#! it shall be
unlawful for an# person! directl# or indirectl# A
To sell such securit# through the use or medium of an# prospectus
or otherwise; or
To carr# an# such securit# for the purpose of sale or for deliver#
after sale
b. %asic (eaning
Prohibits the sale of securities unless a registration statement has become
effective (at the end of the waiting period) and no sale or deliver# for
purposes of sale before the effective date
c. $elated 8ssues
Hhat is a sale J(a)(")
. J.(c) no offers
a. 0tatutor# :anguage
8t shall be unlawful for an# person . . . to offer to sell or offer to bu#
through the use or medium of an# prospectus or otherwise an# securit#!
unless a registration statement has been filed as to such securit# . . .
c. %asic (eaning
/annot offer before filing a registration statement
d. $elated 8ssues
Hhat is an offer J(a)(")
$ule 1". safe harbor from definition of 3offer
0*/ releases "F55 and .1F-
". Hhat is an &fferG
a. 0ection (a)(")
a (1) 0tatutor# :anguage
The term 3offer to sell4! 3offer for sale4! or 3offer4 shall include every
attempt or offer to dispose of, or solicitation of an offer to buy, a security
or interest in security, for value
<ot a complete definition b=c sa#s 3shall include4
b. &ffer to bu#
The solicitation of an offer to bu# is considered an offer to sell. As a result!
it is not possible to avoid the 3no offer to sell4 prohibition of J.K b#
phrasing an offer in terms of a solicitation of an offer to bu#
c. 1eneral 8nterpretation
9
Definition read broadl# and includes things that ma# not have been
considered an offer at common law including conditioning the mar)et for
the securities to be sold
d. /onditioning the (ar)et
(1) 1enerall#
8n the pre'filing period! it is not legall# possible to begin a public
offering or initiate a public sales campaign
() 0ecurities Act $elease <o. "F55
A public sales campaign is onl# unlawful when it involves an offer
as defined in the Act
General attempts to stir up market interest can be an offer even if
do not mention actual offer before filing
3priming the pump4
3gun ?umping4
*+ample 1 underwriter sent brochure describing in glowing
possibilities of mar)et; no reference to issuer! securit# or particular
financing; contained name of underwriter
8ntent was to stimulate interest! clearl# was the first step in a
sales campaign to effect a public sale of a securit#
violation
*+ample 5 underwriter distributed to <A0D members compan#
info! issuer and prospects! but info was misleading violation
*+ample 9 President at co. was as)ed a #ear in advance to give a
speech about compan# and industr#; decided to give into to
interested customers etc; then the compan# began filing out a
registration statement
0cheduling of speech had not been arranged in
contemplation of a public offering
<o violation but printed copies should not be received b# a
wider audience or given out at speech
(") 8n $e /arl ( :oeb! $hoades L /o. (1E.E)
(a) %ac)ground
;nderwriters put out press release before reg. stmt. filed
Described the propert# involved! related the compan#7s
development plans in general! outlined the proposed securities
offering! and mentioned the names of the two managing
underwriters
Did not directl# offer to sell an# securities
(b) 2olding
Publicit# of this t#pe and in this situation must be presumed to set
in motion or to be a part of the distribution process and therefore
involved an offer to sell or a solicitation of a n offer to bu#
C
0uch release and publicit# was of a character calculated! b#
arousing and stimulating investor and dealer interest in the
securities . . .! to set in motion the process of distribution
(5) 0ecurities Act $elease <o. .1F- (1EC1)
(a) Publicit#
Hhile a publicl# held compan# ma# not legall# initiate publicit#
that is for the purpose of facilitating the sale of securities a business
as usual general publicity effort probably does not run afoul of
5(c)
(b) When information is requested by shareholders
>actual information should be provided
$esponses involving predictions! forecasts! pro?ections! and
opinions! concerning value are not acceptable
(c) 1enerall#
<ew advertising campaign might raise questions especiall# when it
is presented in media that seem calculated to reach investors rather
than merel# customers
:aw#er needs to focus on the real reason for a particular action
(.) 8nterpretive :etter $equest and $esponse
(a) /ompanies Activities
8nitiate and maintain periodic meetings with securities anal#sts!
bro)ers! etc.
Hant to )now if should stop this when start registration stmt.
(b) 0*/ $esponse
During the period that an issuer is in registration! issuer need not
stop activities
Activities desirable b=c have eventual effect of conve#ing useful
information to investing public
T#pe of information should still conform with <o. .1F-
Activities ma# give rise to 3priming the mar)et4 argument
especiall# when issuer starts them right before registration process
begins (these issuers should stop)! but issuers who have a histor# of
doing this would generall# seem to have a sound basis for refuting a
3gun'?umping4 inference
e. *+ceptions to Definition of 3&ffer4
(1) J(a)(")
(a) 0tatutor# :anguage
&ffer shall not include preliminary negotiations or agreements
beteen and issuer (or agent) and any underriter or among
underwriters who are or are to be in privit# of contract with an
issuer
(b) *ffect
F
*+ception is limited to underwriters A does not cover dealers
/ompan# can find an underwriter in pre'filing period
(anaging underwriter can tal) to other securities firms to gauge
their interest in ?oining underwriting s#ndicate
(anaging underwriter cannot begin to assemble the dealer group at
all
() $ule 1". <otice of /ertain Proposed &fferings
(a) 0tatutor# :anguage
>or purposes of J.! a notice given b# an issuer that is proposes to
ma)e a public offering of securities to be registered under the Act
shall not be deemed to offer an# securities for sale if@
(1) notice sa#s that offering will be made onl# b# means of a
prospectus; and
() /ontains no more than the following additional language@
<ame of issuer
Title! amount! and basic terms of the securities!
amount of offering! anticipated time of offering!
brief statement of the manner and purpose of the
offering without naming the underwriters
f. 0pecial 0ituations
(1) J(a)(")
An# securit# given or delivered with! or as a bonus on account of! an#
purchase of securities or an# other thing! shall be conclusivel# presumed to
constitute a part of the sub?ect of such purchase and to have been offered
and sold for value
() &ptions
&ptions=convertible securities=warrants shall not be deemed to be an offer
or sale; but the issue or transfer upon the e+ercise of such right shall be
deemed a sale of the securit#
The underl#ing securit# does not have to be registered originall# when the
conversion or e+ercise cannot occur immediatel#! but rather can onl# tae
place at some point in the future
At the time the conversion or e+ercise can occur! an offer e+ists! and the
filing of a registration statement or the availabilit# of a registration
e+emption is required

g. Murisdictional (eans
:anguage in J.(a) and J.(c)
3means or instruments of transportation or communication in interstate
commerce or of the mails4
8nterpretation
Ber# broad
E
An# use of the telephone satisfies the requirement
8f offer at the countr# club! probabl# not satisfied! but if friend then
telephones for more info probabl# have the ?urisdictional means b=c offeror
reasonabl# could have foreseen the use of the telephone b# the offeree
". .aiting Period
1. J.(a) no sales or deliveries
a. Prohibits no sales and no deliveries
b. Defining a 0ale
(1) 0tatutor# Definition (J(a)(")) (not complete definition)
3the term Nsale7 or Nsell7 shall include every contract of sale or
disposition of a security or interest in a security for value4
read liberall#
() 0ignificance of 8ncluding 3contract of sale4
8n the waiting period! certain offers ma# be made. Hhen an offer is
accepted a contracts is created and J.(b)(1) is violated b=c a sale has
occurred
/ure offerors should condition their offers in such a wa# that
the# cannot be accepted until the registration statement is effective
(") 8n $e >ran)lin! (e#er L %arnett
(a) %ac)ground
0alesmen accepted chec)s sent b# customers in pa#ment for offered
shares
0ales sold other securities for customers and held the proceeds for
application against the purchase price of the offered shares
(b) 2olding
0alesmen accepted orders for stoc) during the waiting period
Although the# initiall# invited indications of interest in the form of
chec)s and the proceeds of the sale of other securities! the# went
be#ond the permissible scope of the Act.
!f take money in anticipation for subsequent sale, this is a sale
ithin definition and ill be a violation should return mone#
promptl# or sa# do not intend to appl# to sale of stoc) until some
even and the# don7t get an# priorit# then possibl# o)a#
. J.(b)(1) no prospectus unless a J1- prospectus
a. statutor# language
Unlaful for an# person . . . to carry or transmit any prospectus relating
to an# securit# with respect to which a registration statement has been filed
under this title! unless such prospectus meets the requirements of section
"#$
b. Prospectus Definition (J(a)(1-))
(1) 0tatutor# :anguage
1-
3An# prospectus! notice! circular! advertisement! letter! or
communication! written or b# radio or television! which offers an#
securit# for sale or confirms the sale of an# securit#4
%asicall# a ritten offer or a confirmation of sale (but because
J.(a) prohibits sales during the waiting period! not concerned with
affirmations of sales)
() &ffers
8f something is not an offer (use anal#sis from above) then it is not
a prospectus and will not violate J.(b)(1)
$emember $ule 1". which deems something to not be an offer
(") 3Hritten or %# $adio or Television4
(a) Definition of Hrite (J(a)(E))
Printed! lithographed! or an# means of graphic communication
(b) &ral Announcement b# President that if in writing would be a Prospectus
Hhen a reporter incorporates the announcement in an article! the
president has made an offer that is written
President caused the writing and that is enough to ma)e the offer
one that is b# means of a prospectus
(c) Answers to Press 8nquiries
(d) /alling /ustomer with &ffer
(e) 0*/ 3no action4 responses
0*/ has ta)en 3no action4 positions with respect to certain
transmissions b# various broadcast mechanisms (including satellite!
telephone or cable when the request was ?ustified in terms of the
restricted character of the recipients and the limitations on their
abilit# to record and retransmit the information received
(f) *mail
/onstitutes a writing
<otion is that if it is a graphic thing it could be broadl#
disseminated to those who do not directl# communicate with offeror
(therefore cannot tell his credibilit#)
8f cannot be saved or printed! 0*/ regards as an oral
communication
(g) Boicemail
There is a danger that it will be written down and disseminated! but
same danger when tal)ing live that someone will transcribe
8f transcription instigated b# offeror writing
8f instigated b# oferee not writing
(5) *+ceptions (J(a)(1-)(b))
Things above will not be a prospectus if it states (1) from whom a
written prospectus meeting the requirements of section 1- ma# be
obtained; and does not more than () identif# the securit# (") state
the price thereof (5) state b# whom orders will be e+ecuted (.)
11
contain other info as 0*/ deemed necessar# in the public interest
and for the protection of investors
(.) $ule 1"5 /ommunications deemed not a prospectus
(1) %asic 8dea
8f communication complies with this rule then it will not be a
prospectus
() %asic 0tructure
(a) can be done if (b) is done! but (b) does not have to be done if
either (c)(8) or (c)(ii) is done! and if its terms are followed! (d) can
be done
(a) ma# include and will not be a prospectus
(b) is stuff included in (a) must put the stuff in (b)
(ust include disclosures in (b) unless have (c)(i) or (c)(ii)
(9) $ule 1"5a
2ighl# specialiDed rule providing that certain written material
relating to standardiDed option are not deemed a prospectus
(C) $ule 1". (detailed in pre'filing period)
(a) 0tatutor# :anguage
/ertain notices 3b# an issuer that it proposes to ma)e a public
offering of securities to be registered under the Act shall not be
deemed to offer an# securities for sale4
(b) Possible Application
Thrust of rule is toward the pre'filing period
3proposes to ma)e a public offering4 once file a registration
statement #ou reall# are no longer proposing a public offering
3to be registered4 technicall# securities are still to be registered
during the waiting period but term ma# be used in a somewhat loser
sense
;suall# it does not matter because can use $ule 1"5
(F) Possible 8mpact of 1ustafson v. Allo#d (0ee chapter F)
Defines a prospectus as a document used in a public offering to sell
a securit# b# an issuer or controlling shareholder
c. 0ection 1- Prospectus
(1) 0ection 1-(a) Prospectus
(a) prospectus %shall contain the information contained in the registration
statement,& ith some e'ceptions
(b) a prospectus does not compl# with this when it contains blan)s where
required information is to be added b# amendment
(c) it ma# be possible for the prospectus as originall# filed to compl# with
0ection 1-(a)! but usuall# certain information is un)nown (so usuall#
0ection 1-(a) prospectus is not available in the waiting period)
() 0ection 1-(b) Prospectus
1
(a) 1ives 0*/ authorit# to permit the use of a prospectus that omits or
summariDes information required b# 0ection 1-(a).
(b) Done through $ules 5"- and 5"1
(c) $ule 5"- Preliminar# Prospectus
(i) %asic 8dea
Allows the use during the waiting period of a preliminar#
prospectus
(ii) $equirements
Hill meet the requirements of "# for purposes only of
5(b)(") if contains substantiall# the information required b#
J1-(a) e+cept does not have to include information on
offering price! underwriting discounts=commissions! dealer
discounts=commissions! amount of proceeds! conversion
rates! call prices! or other matters dependent upon the
offering price
(d) $ule 5"1 0ummar# Prospectus
(1) %asic 8dea
Allows the use of 3summar# prospectuses4 in waiting period
8f prepared and filed with registration statement it is deemed
to be a prospectus permitted under section 1-(b)
() $equirements
Page 19 of 0upplement
d. Preliminar# Prospectus Deliver# $equirements $ule 59- and Acceleration
(1) <eeded in order to 3accelerate4 0ec. Act. $el. <o. 5E9F
Hh# acceleration needed Act provides that a registration
statement becomes effective twent# da#s after filing! or after the
filing of an# amendment! but 0*/ will accelerate.
;nder $ule 59- will not accelerate the effective date of a
registration statement unless distributed to underwriters and dealers
who it is reasonabl# anticipated will be invited to participate in the
distribution
8f issuer is not s.t. reporting requirements of J1" or J1.(d) of 7"5
Act 0*/ will consider whether the# have ta)en reasonable steps to
furnish them to those persons who ma# reasonabl# be e+pected to
be purchasers of securities
8f it is inaccurate or inadequate acceleration will be deferred until
0*/ assured correcting material has been distributed
() $ule 1.c'F
8f do not do these things it constitutes a deceptive act or practice
under *+change Act 0ection 1.(c)()
Hhen offerings made b# issuers that are not sub?ect to the
reporting requirements of *+change Act! requires underwriters
and dealers to deliver cop# to an# person who is e+pected to
1"
receive a confirmation of sale at least 5F hours prior to the
mailing of such confirmation
$equired underwriters and dealers to ta)e reasonable steps to
furnish copies of the preliminar# to an# person who ma)es a
written request for a cop#. ;nderwriter must furnish enough
copies to dealers to get them to customers.
$equires underwriters and dealers to furnish copies to salesmen
(") Posting on website
Hhile this provides access! the rules require an affirmative act on
part of issuer to get it in the hands of underwriters! dealers etc.
/an do if customer agrees to this in advance and it will count as
sending preliminar# prospectus
(. Post-Effecti/e Period
1. 0ection .(b)(1) no prospectus unless J1- prospectus
a. 0tatutor# :anguage
/annot use a prospectus unless it is a 0ection 1- prospectus
;suall# onl# a final prospectus called for b# 0ection 1- will satisf#
b. Hhat is a prospectusG
0ee Haiting Period anal#sis
8f something is considered a prospectus it must also meet the requirements
of 0ection 1-.
c. Hhat prospectus must be usedG
(1) 8n the post effective period the onl# prospectus that satisfies the requirements
of 0ection 1- is the final prospectus call for b# 0ection 1-(a).
() Hhen can #ou use 0ummar# ProspectusG $ule 5"1
/an never be used as a J1-(a) prospectus for purposes of J.(b)()
d. *+ception Hhen a communication is not a prospectus
( communication is not deemed a prospectus hen it is accompanied or
preceded by a )ection "#(a) prospectus
%*ree Writing& term used to describe communications allowed b# this
e+ception
. 0ection .(b)() no sales unless accompanied or preceded b# J1-(a) prospectus
a. 0tatutor# :anguage
8t is unlawful for an# person . . . to carry . . .such security for the purpose
of sale or for deliver# after sale! unless accompanied or preceded by a
)ection "#(a) (final) prospectus$
0ummar# prospectus can never fulfill this requirement
b. Hhat is a deliver#G
(1) Hhat is meant b# securit#G
0ecurit# vs. certificate representing securit#
8n securit# definition! referring to actual securit# and not
evidence of interest in a securit#
15
() 0o even though cannot actuall# deliver a securit# must still send prospectus
when send certificate representing securit# (pg. C.)
". Hhat can now be doneG
a. &ral offers can be made (J.(c) does not appl# an#more) e+cept in the case of a
registration statement that is the sub?ect of a stop order or of a public proceeding
instituted before the effective date
b. Hritten offers ma# be made b# means of the final prospectus
c. Hritten offers can be made b# free writing! when accompanied or preceded b# a
final prospectus
d. &ffers ma# continue to be made under e+ception (b) to section (a)(1-) and under
$ules 1"5 and 1"5a.
e. 0ales ma# be made (.(a)(1) no longer applies)
f. 0ecurities and confirmations of sale can be delivered if accompanied or preceded
b# a final prospectus.
5. 0ection .(b) and Defective Prospectuses
a. 1eneral 8nformation
0ection .(b)(1) allows the use of a prospectus that meets the requirements
of 0ection 1-
0ection .(b)() requires that a 0ection 1-(a) prospectus accompan# or
precede the deliver# of a securit#
b. 0*/ v. (anor <ursing /enters (1EC) (also applies in waiting period)
( prospectus does not meet the requirements of "#(a) if the information
required to be disclosed is materially false or misleading$
Therefore! because the prospectus was not a J1-(a) prospectus the#
violated J.(b)() b=c delivered securities for sale accompanied b# a
prospectus! which did not meet the requirements.
5. Final Prospectus Delivery Requirements
a. J.(b)() requires prospectus be delivered with a securit#
(1) Hhat is meant b# securit#G
0ecurit# vs. certificate representing securit#
8n securit# definition! referring to actual securit# and not
evidence of interest in a securit#
() 0o even though cannot actuall# deliver a securit# must still send prospectus
when send certificate representing securit# (pg. C.)
b. /onfirmations of 0ale
(1) underwriters and dealers usuall# deliver to customer written confirmations of
sale when agree to bu#
() J(a)(1-) defines a written confirmation as a prospectus
(") %ecause this is a prospectus it must meet the requirements of J1-
c. $ule 1.c'F
1.
(1) final prospectus7 are to be furnished to sales personnel and to other persons on
written request! and if not the# are considered a fraudulent etc.
d$ +ealers )ection ,(-)
(1) 1eneral $ule
(ust deliver final prospectus when the# sell securities that have been
registered within the previous fort# or ninet# da#s regardless of how ma#
time the securities have changed hands in the trading mar)ets
() 0pecific Times
5- da#s applies when the issuer of securit# has previousl# registers
other securities under the 0ecurities Act (baseline rule)
. da#s ($ule 1C5) if securit# will be authoriDed to trade on <A0DAO
immediatel# upon issuance (automated quotation s#stem)
E- da#s if securities of the issuer have not previousl# been sold pursuant
to an earlier effective registration statement (1
st
public offering)
<o deliver# requirement if securit# issued b# co. s.t. reporting
requirements of *+change Act prior to the filing of the registration
statement to which the prospectus relates
Hhen must alwa#s deliver 8f dealer decides to hold onto some shares
and sells a few months later at mar)et price! still has to deliver prospectus
($ule 1C5)
9. Hhen Prospectus Defective or >alse or (isleading Ha#s to /orrect
a. issuer ma# file a post'effective amendment (amended prospectus or supplement to
prospectus
b. under $ule 55(b) send or file ten copies of the new form of prospectus with 0*/
before it is used (when small corrections)
C. 0*/ 1eneral *+emptive Authorit# (JF)
)./ may conditionall# or unconditionall# e'empt any person! securit#! or
transaction . . . from an# provision . . . to the e+tent that such e+emption is
necessar# or appropriate in the public interest! and is consistent ith the
protection of investors
E. Registration Process
1. 2ow to $egister (0ection 9)
a. 0ecurit# ma# be registered b# filing a registration statement (in triplicate) with the
0*/
b. 0igners of $egistration 0tatement
*ach issuer! the principal e+ecutive officer! principal financial officer!
comptroller or principal accounting officer! ma?orit# of board of directors
or persons performing similar function
*ver#one who signs is sub?ect to liabilit# under J11 for an# material
misstatement or omission
19
c. *ffectiveness
$egistration statement is onl# effective for those securities proposed to be
offered in the statement
d. Hhen *ffective ' J9(c)
>iling ta)es place when it is received
%ut! won7t ta)e place unless sent with certified ban) chec) or cash for fee
e. (ade Public ' J9(d)
8nformation in statement is made public (ver# hard to )eep it confidential)
. 8nformation required in registration statement ' JC
a. 0chedule A
(ust contain info requested in this form and accompan#ing documents
b. /hanges
0*/ has authorit# to add or subtract information requirements
c. >orms
". 0*/ Powers in $egistration Process
a. Power to 8nvestigate ' JF(e)
(1) 0*/ has power to e+amine it order to determine whether a stop order
should be issued
() *ffect ;nder J.(c) ma)es it unlawful to offer to sell securities while the
statement is under e+amination under this section (also unlawful when
sub?ect to a stop or refusal order)
(") 8f 0*/ begins the e+amination after effectiveness! can still ma)e offers
(unless effectiveness is suspended)
b. Power to 8ssue 0top &rder ' JF(d)
(1) 0*/ has power to issue a stop order suspending the effectiveness of the
registration statement
/an be issued before or after the effectiveness and ma# even be
issued long after all securities covered b# statement have been sold
() 0tandard
8f statement includes an# untrue statements of a material fact or
omits to state an# material fact required to be stated or necessar# to
ma)e the statements alread# in it not misleading
c. Power to 8ssue $efusal &rder ' JF(b)
(1) 0*/ can issue an order prior to the effective date of registration refusing to
permit the statement to become effective until it is amended
() 0tandard
/an issue when on its face incomplete or inaccurate in an# material
respect
d. 0top &rder v. $efusal &rder
1C
$efusals are rarel# used b=c requirements are tougher than stop order and
stop orders ma# be used in the place of refusal orders
e. :as Begas 2awaiian v. 0*/ (1ECE)
(1) %ac)ground
0*/ initiates a JF(e) investigation prior to effectiveness and ?ust sits on it
$egistration statement becomes effective! but cannot ma)e an# offers
During this period :B cannot ma)e an# offers
8ssue whether JF(e) can be utiliDed b# 0*/ to dela# indefinitel# the sale
of securities under an effective registration statement.
() 2olding
( court may compel the )./ to make a determination ithin a
reasonable time hether to notice a hearing on the issuance of a
stop order under section 0(d) where the 0*/ has ordered an
e+amination under section F(e) prior to the effective date of a
registration and the determination whether a stop order should issue
has unreasonabl# dela#ed
8f unreasonable time /ourt can order 0*/ to hold hearing and
decide whether the issue a stop order
5. Dela#ing :anguage and Acceleration Process
a. 0ection F(a) Hhen $eg. 0tmt. %ecomes *ffective
$egistration statements are effective twent# da#s after filed or earlier if
0*/ allows
8f issuer files an amendment! the twent# da# waiting period starts over
again
b. Hh# Acceleration is <eeded
;suall# registration statement needs to have added to in information that
cannot be determined twent# da#s in advance (when amend start - da#s
all over again)
8n addition! issuers and underwriters want to control date of effectiveness
to get most beneficial date
Therefore! getting around automatic effectiveness and - da# waiting
period after amendment is a necessit#
c. Avoiding Automatic *ffectiveness
(1) (ust amend registration statement before twent# da# period runs
() $ule 5C"
8ssuer ma# include a paragraph on cover of registration statement
that effects its continuing amendment
Peeps - da#s constantl# starting over again until it is removed
(after removed acceleration is requested)
d. Acceleration
(1) 1eneral 0*/ Power
1F
%ecause issuer wants to accelerate and 0*/ has power to do or not
to grant it! is uses the threat of denial to force actions not required
b# the statute
() $ule 591 ;nderta)ings
(a) 1eneral *ffect
/ontains a list of factors 0*/ will consider in deciding acceleration
requests
0ome are required generall# while others are price of registration
(b) /onsiderations
Hhether a preliminar# prospectus was delivered during the waiting
period
8ndemnification 0*/ disfavors officers! directors and other
controlling the issuer being indemnified b# the issuer for liabilit#
(sa#s against public polic# and therefore unenforceable)
Hhether the 0*/ is ma)ing an investigation of the issuer etc
pursuant to and Acts administered b# 0*/
(") Phoeni+ 0teel
;nderta)ings are onl# required if want acceleration
8f willing to wait twent# da#s! onl# have to compl# with the statute
and 0*/ cannot force #ou to do underta)ings
.. $egistration 0tatement >orms
a. >orm 0'1
1eneral! catch all form that is used when no other form authoriDed or
prescribed
(ost e+tensive disclosure
b. >orm 0'
To use must meet certain tests (issuer must have filed *+change Act reports
for a specified number of months (have some 7"5 Act reporting histor#)!
and its most recent histor# must be free of defaults on indebtedness and
missed preferred stoc) dividends)
$egistration statement will be a combo of spelled out disclosures and
incorporation b# reference of information from *+change Act sources
c. >orm 0'"
<eed 7"5 Act histor# and public float of certain amount (certain amount of
equit# securit# in non'affiliates ' ,C.()
d. >orm 0%'1 and 0%'
*asier forms for smaller issuers
$equirements of financial statements are more easil# met
0%' available for offering of securities for cash b# a 3small buiness
issuer4 which is a co. other than an investment co. that has annual revenues
of less than ,.(
0%'1 available for small business issuers for offerings up to ,1-( for cash
within 1 months
1E
9. 0helf $egistration
a. 1eneral $ule
0ecurities ma# generall# not be registered unless there is an intention to
offer them in the pro+imate future (J9(a))
b. $ule 51. 0helf $egistration
Allows the registration of securities that are to be offered on a continuous
or dela#ed basis
/ompanies that meet the requirements for use of >orm 0'" are essentiall#
allowed to use this as the# please
7"5 Act compan# can do and others can also do in specific transactions
C. 8ntegrated Disclosure
a. (eaning
8f can use 0' or 0'" can incorporate b# reference information contained in
their 7"5 Act disclosure
b. *ffect
(a)e registration statements more simplistic and less time consuming
0helf $egistration allows issuer to incorporate 7"5 Act disclosure b#
those alread# filed but also those that the# will file in the future (0$ would
be almost impossible without it)
F. $ules! $egulations! and 8ndustr# 1uides
a. $egulation 0'P
1eneral repositor# of disclosure requirements (0'% for small businesses)
b. $egulation / A $ule 5-F
3in addition in info e+pressl# required . . there shall be added such further
material information as necessar# to ma)e required statements not
misleading4
basicall# an#thing material must be disclosed
E. Plain *nglish $equirement A $ule 51(d)
8ssuers must prepare the front and bac) cover pages of prospectuses! as
well as the summar# and ris) factors sections! in plain english
(ust compl# with si+ basic plain english principles (short sentences!
definite concrete ever#da# words! active voice! bullet lists for comple+
material! no legal ?argon etc.! no multiple negatives
>. Disclosure $equirements (/hapter 5% and 5/)
1. 8n $e ;niversal /amera /orp. (1E5.)
a. %ac)ground
&mitted facts regarding the financial structure of deal (transfer of mone#
from old investors to new investors)
Touched onl# lightl# on competitive conditions
b. 2olding
1ust be able to provide support for every assertion
(void vagueness and too much optimism
-
+isclosure should be plainly understandable to the ordinary investor
(even if enough information there for e+pert to figure something out! this is
not enough)
1ust spell out full implications of offering including dilution (dilution
ma# not be a deal )iller b=c future earnings ma# ?ustif# pa#ing more)
. 8n $e Te+as 1lass (anufacturing /orp. (1E.F)
a. 8ssue
Determine whether a stop order should issue material factG
b. 2olding
)tandard of 1ateriality 0*/ does list some things but does not tal)
about crimes previousl# committed. 8f not listed follow generic materialit#
standard (would a reasonable investor find it important in deciding whether
to bu#)
1anagement !ntegrity and honesty generall# courts sa# investors don7t
care and therefore not material
Hhen dealing with ris) factor disclosure! consider what public wants to
)now and possible impact of dilution when list too much.
". Hh# have disclosure requirement v. merit regulation
a. 8ssues of Paternalism
b. *+istence of other wa#s to regulate merits (state blue s)# laws)
c. 0pecial 8nterest :egislation (lobb#ing effects /ongress)
d. *nforcement /osts ver# time consuming and ma#be less effective
e. 1overnment competence someone is 0*/ rather than /ongress ma# prevent an
industr# from getting started b=c feel too ris)#
5. Hh# require disclosureG
a. (ore efficient wa# of providing information
b. 8f do not require it! those who want it will have to get it with separate negotiation
and bargaining if ma)e mandator# it is available with e+tra costs and bargaining
c. Hho then uses itG
>or the small investor! hard to understand. *ven if can understand! b# the
time the# do ever#one else has read it and mar)et alread# reflects actual
worth. 0mall investor cannot beat the mar)et.
8nstitutional investors use it but do not solel# rel# on it! also call co.
Prospectus is superficial and does not give info on future plans that will
effect future value.
2ard to produce something that is useful b# big investors but good also for
small investors.
d. Hh# have it at all thenG
2ard to get rid of
8nvestor confidence people thin) 0*/ is encouraging truthful and
complete disclosure
.. *fficient /apital (ar)et 2#pothesis
1
a. Hea) >orm
3random wal) theor#4 the price of a securit# #esterda# does not sa#
an#thing about the price of the securit# toda# or tomorrow (mar)et will
react to new information)
b. 0emi'0trong >orm
(ar)et immediatel# reacts and incorporates all publicl# available
information
(ar)et price of a securit# at an# time has been affected b# all of the
publicl# available information
0mall investors! therefore! cannot beat the mar)et
c. 0trong >orm
(ar)et immediatel# reacts to all information! public or private
Price of securit# affected b# public and inside information so that even
insiders cannot ma)e mone# with their inside information
*ven insider trading effects mar)et price putting securit# in right direction
II. (efinition of a Securit%
A. Statutor% (efinition (0ection (a)) 8s it specificall# listedG
;nless the conte+t otherwise requires@
The term securit# means an# note! stoc)! treasur# stoc)! bond! debenture! evidence
of indebtedness! certificate of interest . . . investment contract! voting'trust
certificate . . . or in general an# interest or instrument commonl# )nown as a
securit# or an# certificate of interest or participation in . . . an# of the foregoing.
2. In/est0ent "ontract
1. 0*/ v. H.M. 2owe# /o. (1E59)
a. %ac)ground
&range groves were divided and sold in rows of trees A sold land and service
contract
/ompan# set up trees and harvested etc.
Hhen bu# land! F.6 enter into service contract with a sibling compan#
(relationship between land and service co. is irrelevant)
Hhen bu# land! could not use as #ou please! had to grow trees
b. 2olding
This is an investment contract therefore! a securit#
In/est0ent "ontract 1est whether the scheme involves an investment
of mone# in a common enterprise with profits to come solel# from the
efforts of others
>our *lements
(1) investment of mone#
() common enterprise
(") e+pectation of profit
(5) solel# from the efforts of others
Ouoted $ationale

The# are offering an opportunit# to contribute mone# and to share in

the profits of a large citrus fruit enterprise managed and partl# owned
b# respondent. . . . The offered tracts gain utilit# as citrus groves onl#
when cultivated and developed as component parts of a larger area. A
common enterprise managed b# respondents or third parties with
adequate personnel and equipment is therefore essential if the investors
are to achieve their paramount aim of return on their investments
/t held that the Ps sold b# 2owe# were securities b=c it was part of
common scheme b=c each tract had no individual purpose! purchased w=
e+pectation of profit (not in anticipation of moving to >:)! primaril#
from efforts of others b=c out of state purchasers could not water
themselves.
c. Distinguished from selling entire farm coupled with management services
Power of investor ma# be a distinguishing factor
Hhen bu# entire farm more control (can fire manager or build on land)
Page 1"-
d. Diamond 0eller 2#pothetical
(1) %ac)ground
%u# diamond and diamond dealer )eeps them
Dealer sa#s diamonds will go up in value
() Anal#sis
<ot an investment contract
*ven though investing mone# with e+pectation of profit! the dealer is not
putting in effort. The rise in price is due to purel# mar)et forces.
. Expectation of Profit (>orman)
a. %ac)ground
People in need of housing were offered shares of stoc) entitling them to state
subsidiDed nonprofit housing
0toc) nontransferable and when sold bac) bought at original offer price
Pro?ect leased commercial space to third parties with an# income derived to be
used to reduce the rent on the housing units
b. /ourt7s Decision <ot a securit#
Use of name %stock& as not determinative %form should be disregarded
for substance and the emphasis should be on economic reality&
Does is have the characteristics congress intended for a securit#G
8f the item is specificall# listed! as is it what its name impliesG
/haracteristics of a security2stock
Dividends contingent upon an apportionment of profits
<egotiable
/an be pledged or h#pothecated
/onfer voting rights in proportion to the number owned
/an appreciate in value
"
*+pectation of Profit
1eans either capital appreciation resulting from the development
of the initial investment or a participation in earnings resulting
from the use of investor3s funds (investor attracted solel# b# the
prospects of a return on his investment)
Hhen purchaser is motivated b# desire to use or consume! not a
securit#
This does not mean #ou can get around securities laws b#
pa#ing out in things in )ind (if pa# in oranges ma# still be in
it for a profit and will still be a securit#)
Two additional arguments b# plaintiff
(1) Deductibilit# for ta+ purposes
$e?ected b=c 3no basis in law for the view that the pa#ment
of interest with deduction constitutes income or profits4
An# homeowner can do this
Deductions from ta+ shelters ma# be considered profit in
lower courts
() Discounted $ental /harge
%enefit cannot be liquidated into cash
Does not result from managerial efforts of others but rather
state subsidies that could not be liquidated into cash
profits and efforts of others are to be lin)ed
Dissent argued that economists sa# reduction in e+penditure
is not an# different from pa#ment
(") $ent $eduction >rom :easing 0pace
8f there is an# income derived from this! it is far too
speculative and insubstantial to bring the entire transaction
within the 0ecurities :aws
<ot primar# motivation for entering co'op
". Expectation of Profit (Daniel)
a. %ac)ground
Truc) driver thought he had pension plan but did not b=c did not have - #ears
of continuous service
*mplo#er contributed into the fund! not emplo#ee
b. /ourt7s Decision <ot a securit#
In/est0ent of +one%
$equires some volition on part of person ma)ing the investment
To constitute a securit# must give up some tangible and definable
consideration in return for an interest that had substantiall# the
characteristics of a securit#
Pension plan was an insignificant part of his compensation
pac)age and could not be segregated from non'investment
interests
5
*conomic realit# dictated he was wor)ing for his livelihood
and not to ma)e an investment
/ourt re?ected argument that emplo#er contributions constituted his
investment
<o relationship between contributions to the fund and
emplo#ee7s potential benefits
Those who wor) - #ears get same as those who wor) 5-
Does not have to be actual mone#! but does have to be valuable
consideration
Expectation of Profit fro0 "o00on Enterprise
.'pectation of profit must stem from use of investor3s funds
4rofit must be substantial and non5speculative if highl#
speculative or insubstantial then not profit
Primar# source of pension pa#ments was from emplo#er7s
contribution rather than someone7s managerial efforts
Besting of pension depended on how long he wor)ed not on
financial health of the plan
c. Three 8ncidental Points
(1) <ature of Plan
2ere! plan was involuntar# noncontributor# plan
8f characteristics change ma# be a securit#
8f plan were contributor# there ma# be the specific allocation
necessar# for investment of mone#
8f higher percentage of fund came from the good management of
the pool of funds rather than emplo#er than ma# be a securit#
() Alternative $egulator# 0cheme
8f one e+ists ma# resolve doubts against coverage b# federal
securities laws
(") As) about third point from class
5. "o00on Enterprise (Poscot)
a. %ac)ground
/lassic p#ramid scheme that emphasiDes attracting additional advisors and
supervisors while e+isting participants ta)e commissions on what new
members pa# to move up the p#ramid.
>ist tier sells cosmetics! second tier invests mone#! gets higher discount to sell
to tier one or public! third tier has a higher investment=distributorship
b. /ourt7s Decision
(1) Poscot satisfies common enterprise prong b=c the investors fortunes are lin)ed
to promoter7s efforts and fortunes in the common scheme
() 8nvestment of (one#
Hhile first tier does not invest mone# the# have the potential to
move up and =" in scheme do invest mone#
.
(") /ommon *nterprise
(efinition one in which the fortunes of the investor are
interwoven with and dependent upon the efforts and success of
those see)ing the investment or of third parties
/ritical >actor not the similtude or coincidence of investor input!
but rather the uniformit# of impact of the promoter7s efforts
,ertical intermingling of investor and promoter interests; the
single investor7s funds must be related to the funds or efforts of the
promoter
Strict requires that fortunes of the investor be lin)ed to
the fortunes of some other part# (li)e profit sharing)
#road requires onl# that the fortunes of the investor be
li)ed to the efforts of another part# (promoters effort must
have an effect on investor7s fortune)
*ori2ontal intermingling of fortunes of multiple investors
(interests must be similarl# effected b# scheme)
8ndividual Discretionar# Account investor puts mone# on
account and allows bro)er discretion in trading
2oriDontal <o multiple investors! fortune not related to
other investors
Bertical %road giving bro)er discretion on trading so his
efforts will effect the investor7s fortune (whether he pic)s
good stoc)s)
/riticism merel# reiterates solel# from efforts of
others requirement b=c compensation of bro)er not
tied to how investor is doingGGG
Bertical 0trict depends on the compensation scheme! if
paid a flat fee not met b=c fortunes of investor and promoter
are not intermingled! but if 6 of profit met
(5) Hhich Definition of /ommon *nterprise is accepted b# courtsG
(a) all ta)e horiDontal
(b) if ta)e broad vertical will accept all
(c) if ta)e strict will also ta)e horiDontal but not broad vertical
345 Solel% )ro0 Efforts of 6ters
>unctional rather than literal approach
%hether the efforts made by those other than the investor are the
undeniably significant ones, those essential managerial efforts hich
affect the failure or success of the enterprise& test goes from solely
from the efforts of other to %from the essential managerial or
entrepreneurial efforts of others&
Test satisfied b=c role of investors at these meetings were little more
than a perfunctor# one
Act of consummating sale is ministerial! not managerial
9
Polic# rationale was to avoid promoters avoidance of securities
laws b# requiring menial efforts on part of investor
2olding limited to those schemes in which promoters retain immediate
control over the essential managerial conduct of an enterprise and where
the investor7s realiDation of profits is ine+tricabl# tied to the success of the
promotional scheme
c. Distinguishing a Franchise
A franchisee is a person who invests in a restaurant and pa#s for the right to
use the name
8f the franchisee (investor) has a lot of control not a securit#
%ut some arrangements are so restrictive that investor has no managerial
control and these would be a securit#
(ust loo) to individual contracts discretion over operations
d. Limited Partners in a Limited Partnership
A limited partner has limited liabilit# because he refrains from managerial
control
8t will pass as a securit# as a matter of law b=c no managing on part of
investor and relies on efforts of general partner to ma)e mone#
Passes on investment of mone# b=c have to bu# into partnership
e. General Partner in a General Partnership
T#picall# not a securit# b=c partners as investors will put in a lot of effort
%ut if agreement sa#s #ou have no control and this is realit#! ma# be a
securit#
/ircuit 0plit some sa# not a securit# (but did not consider when
agreement restricts control) and some loo) at reasonable e+pectation of
parties with respect to realistic participation (protecting those who have a
legal right to participate but chose not to)
f. General partners interest in a limited liability partnership
0till will turn on abilit# to participate and control
Hill probabl# have control and therefore not a securit#
g. Member is a limited liability company
2ave characteristics of both partnership and corporation
h. &ther e+amples in notes
.. :ife Partners
a. %ac)ground
:P in viatical settlement industr#
(ar)ets fractional interests in insurance policies on the lives of the terminall#
ill
C
$esponsible for screening the insureds and for collecting and disbursing
insurance proceeds
b. /ourt7s Decision
<ot a securit# does not meet solel# from efforts of others prong
.fforts have to at least occur after purchase of investment
*fforts before investment are not irrelevant but b# themselves will
not suffice
Possible different outcome if get mone# from investors and then
find terminall# ill people to do screening
Absent one entrpreneurial post purchase service! there simpl# is not on'going
common enterprise involved when profit depends entirel# upon the death of
insured! which requires no effort on part of promoter
3. E/idence of Indebedness
1. ;nited 0tates v. Mones (1EC1)
a. %ac)ground
D is forging airline tic)ets
1ot tic)ets belonging to someone else! and validated tic)ets to be used b# third
parties
b. /ourt7s Decision
<ot a securit#
*vidence of indebtedness does not encompass all writings which represent an
obligation on part of the writer to do something for the holder
!t embraces only such documents as promissory notes hich on their fact
establish a primary obligation to pay the holders thereof a sum of money
. 8n $e Tuc)er /orp. (1E5C)
a. %ac)ground
Tuc)er sold car franchises requiring ,. deposit per car
b. /ourt7s Decision
)ince agreements provided for the repayment of deposits received they ere
securities
c. /onsistenc# b=w Mones and Tuc)er@ can be established b# loo)ing at protecting
investors. %u#ers of airline tic)ets wouldn7t be worried about repa#ment b=c the#
e+pect to use their tic)et whereas franchise bu#ers ma# be more aware of
repa#ment obligations. Tuc)er did not require primar# obligation to repa# on face.
". Procter L 1amble v. %an)ers Trust (1EE9)
a. %ac)ground
8nterest rate swap
b. /ourt7s Decision
6est hether an instrument is an evidence of indebtedness is essentially the
same as hether an instrument is a promissory note
F
!. 7nless te "ontext 6ter'ise Re8uired
1. (dditional *ederal 7egulatory )cheme ((arine %an))
a. %ac)ground
Hhether a certificate of deposit issued b# a national ban) was a securit#
b. 2olding <ot a securit#
/&D of a national ban) is issued b# an institution that is well regulated and is
federall# insured
<ot a securit# b=c of conte+tual factors
%=c it is regulated elsewhere! do not need protection of securities
laws also
8f foreign regulator# scheme! not a securit#
8f state regulator# scheme! will still be a securit#
. )ale of a 8usiness (:andreth)
a. %ac)ground
Hhether the sale of all of the stoc) of a compan# is a sale of securities.
b. 2olding re?ects sale of business doctrine (is a securit#)
8f something is called stoc) and possesses all of the characteristics! it will be
deemed a securit#
<ot need to loo) be#ond the characteristics of the instrument to the
economic realit# of 2owe# test
/ases following economic realit# involved instruments difficult to
characteriDe as a securit#
2ere have stoc)! plainl# within the statutor# definition
2owe# test is used to determine if something is an investment contract not
whether it fits within an# e+amples in statute
0toc) is a specific categor# of a securit# provable b# its characteristics! not
economic realit#
2olding does not e+tend to other categories specificall# named (i.e.
notes)
Polic# opposite rule would ma)e it ver# difficult to figure out if something
is a securit# (parties will not )now ahead of time whether the register)
c. 0toc) issued pursuant to alternative regulator# scheme (*$80A)
This is a clear case of a securit#
People e+pect securit# laws to appl#
>act that it is governed also b# *$80A will not change its classification as a
securit#
Argument concerning alternative regulator# schemes more applies
to catch all phrases (investment P! evidence of indebtedness)
". 4romissory 9otes ($eves)
a. %ac)ground
E
8ssued promissor# notes pa#able on demand that were uncollateralDed and
uninsured but paid a variable rate
(ar)eted as a investment program
Hhen went ban)rupt! holder sued auditors
b. 2olding
<ot bound b# legal formalit#! can ta)e into account the economies of the
transaction
:amberth does not appl# to notes b=c note is a broad term
General 1est
<ote is presumed to be a securit#
Presumption ma# be rebutted onl# be a showing that a note bears a
strong resemblance (in terms of four identified factors) to one of the
enumerated categories on list (things on list are not securities)
8f not sufficientl# similar to an item on the list! the decision whether
another categor# should be added is to be made b# e+amining the
same four factors
/ategories :isted as not being securities
/ommercial t#pe things
<ote delivered in consumer financing
<ote secured b# a mortgage on a home
<ote evidencing a character loan to a ban) customer
>actors
(1) Assess motivations that would prompt a reasonable seller and bu#er to
enter into the transaction
8f seller7s purpose is to raise mone# for general business use or
finance substantial pro?ect and bu#er interested in note primaril# for
profit securit#
8f note e+changed to facilitate purchase and sale of minor asset or
consumer good! to correct cash flow difficulties! or advance
commercial or consumer purpose not a securit#
() *+amine 3plan of distribution4 to determine if there is a common trading
for speculation or investment
8f traded! more li)el# #ou need protection and more li)el# a securit#
(") *+amine $easonable e+pectations of the investing public
(a# be considered a securit# if investing public believes that it is
even if not a securit# under the anal#tical framewor)
(5) *+amine whether some factor significantl# reduces the ris) of the
instrument ma)ing 0ecurities Acts unnecessar#
Another regulator# scheme
c. Application of Test to Demand <ote 8s a securit#
(1) /alled a note so it is presumed to be one
() This presumption not rebutted
"-
Does not closel# resemble an# of the famil# resemblance e+amples
(") Appl#ing four factors! not a securit#
(otivation is an investment in a business enterprise rather than a
purel# commercial or consumer transaction
Hhile not traded on an e+change! the# are offered and sold to broad
segment of public (all that is needed to establish 3common trading4)
0ecurit# fundamental essence is being an investment and notes here
were advertised as a great investment opportunit# (public
e+pectations)
<o ris) reducing factor A would escape federal regulation if act
does not appl#
/ourt re?ected argument that instant liquidit# ma)es them
not a securit#
0toc) on e+change ?ust as liquid
:iquidit# does not eliminate ris) altogether
.at is a securit%9 )&6. "*AR1
8s it specificall# namedG Qes is it the investment securit# securit#
the name suggestsG #es
<& <&
8s it an investment contractG 2&H*Q
1. invest , (specific allocation for valuable consid) '
Daniel
. common enterprise (horiD or strict=broad vert
commonalit# and Life Partners A entrepreneurial
operation)
". e+pectation of profit A Forman
5. solel# from efforts of others (solel# means primaril# A
oscot and Life Partners ltd A must be post'sale
effort)
is it an evidence of indebtednessG
1. 0*/ literal interp
. Mudicial A at minimum! a primar# obligation to repa#
". 0ee also <&T*0
<&
<ot a securit#
8> D**(*D A 0*/;$8TQ! (AP* 0;$* T2* /&<T*RT D&*0 <&T <*1AT*
III. (efinition of a Sale
A. 1eneral
1. 0tatutor# :anguage
"1
<&
0ale shall include ever# contract of sale or disposition of a securit# for
value
. Balue Aspect
1ift is not a sale (not )ind of value contemplated b# definition
Pledges are t#picall# a sale (pledges to secure a loan)
%. Acquisitions
1. 1eneral
Acquisition b# means of a stoc) for stoc) tender offer is a sale
0ale occurs when parties become bound b# the contract
. Applicable $ules and 0tatutes
a. $ule 15. (a)
The submission to a vote of securit# holders of a proposal for certain
reclassification of securities! merger! consolidations! or transfers of assets
is deemed to involve a sale of purposes of transaction
*ffect is to require registration of the securities to be issued unless
e+emption
b. $ule 1."a Definition of 3precede b# a prospectus4
2ave to deliver a prospectus before shareholders vote on the combination
(before used in conte+t that have to deliver before a sale)
c. $ule 15.(b) /ommunications not deemed to be a prospectus
$ule 15.(b)(1) lists those things that can be in a written communication
without it being a prospectus and therefore not an offer for sale involved in
J.
3. 1ender 6ffers
a. /ash for 0toc)
/ompan# A goes directl# to /ompan# %7s shareholders and offers them cash
for their shares
Hhen A offers cash for stoc) A is not selling a securit# b=c the# are offering
cash (not a securit#)
Do not have to register
b. 0toc) for 0toc)
/ompan# A offers own shares in e+change for shares from %7s shareholders
<ow A is selling a securit# and will have to register
<othing in $ule 15. tells #ou this b=c 0*/ never held the position that it was
not a sale
!. "onsolidations
a. Boting b# 0hareholders Hhen two companies consolidate! need a vote b# both
sets of shareholders resulting in merged compan#
b. $ule 15.(a)() 0ale occurs when there is submitted for the vote or consent of
such securit# holders a plan or agreement for
"
(ergers or /onsolidations securities of one corporation will become or
be e+changed for securities of an# other person (unless done to change
issuers domicile)
%ecause both vote! sale
4. +erger
a. (echanics
After a vote on merger! /ompan# % is out of e+istence and their
shareholders now hold shares in /ompan# A
b. 2olding
/ompan# A7s shareholders do not vote so there is not sale as to them (per
3such shareholder4 language in rule)
%ut there is a sale as to shareholders of /ompan# %
:. Sale of Substantiall% All Assets
a. $ule 15.(a)(")(A)
(echanics
/ompan# % transfers all assets to /ompan# A and A issues shares to
/ompan# %
/ompan# A is now partl# owned b# /ompan# %
/ompan# % then liquidates and onl# /ompan# A e+ists with
shareholders of itself and /ompan# %
2olding
$esult is same as when merger
This is a sale $ule 15.(a)(")(A) sale when transfer of assets of
such corporation in consideration of the issuance of securities of such
other person if 3such plan or agreement provides for dissolution of the
corporation whose securit# holders are voting or consenting
b. $ule 15.(a)(")(%)
(echanics
/ompan# % transfers all assets to /ompan# A and A issues shares
to /ompan# %
/ompan# A is now partl# owned b# /ompan# %
/ompan# % does not dissolve but distributes A7s shares as
dividends
2olding
This is a sale
c. $ule 15.(a)(")(c)
Transfer of assets is still a sale even if shareholders can7t vote on plan with
results above! but within one #ear board votes to do it an#wa#
d. $ule 15.(a)(")(D)
Transfer of assets is a sale if transfer is part of a pre'e+isting plan for
distribution that is not disclosed to shareholders (even if done #ears later
still a sale if part of pre'e+isting plan)
""
". Spin-6ffs
1. 1eneral
8n a spin'off a corporation ta)es stoc) that it owns in another corporation
and distributes this stoc) to its shareholders as a dividend
Hhen the corporation engaging in a spin'off is publicl# held! the spun'off
corporation becomes publicl# held also
0ome shareholders will want to sell their shares! and a trading mar)et
will develop
Those who purchase will not have benefit of registration disclosure
. 0ecurities Act $elease <o. 5EF (1E9E)
a. Permutation of a spin'off
Publicl# help co. acquires partial ownership of private co. for minimal
consideration and then distributes some of those shares to its own
shareholders
Those shareholders will begin to sell in open mar)et
<o business purpose e+cept for benefit of spin'off
b. %enefits
Private co. ta)es compan# public with little cash outla# and retains
ownership
Public co. will )eep shares and later sell for profit
Public co. gets something for nothing
c. /osts
:osers are those who bu# share w=o benefit of disclosure
d. 0*/ Position
This t#pe of spin'off cannot be done without registration
0pin'off is a sale
3Hhen the shares are issued to the publicl# owned or acquiring co. a sale
ta)es place and if shares are then distributed to shareholders of acquiring
co. that co. ma# be an underwriter as a person 3who purchased from an
issuer with a view to distribution of a securit#4
%ecause involves an underwriter must be registered
". 0*/ v. Datronics *ngineers (1EC") 3>or Balue4 $equirement
a. Definition of sale
Disposition of a securit# for value
b. Hhere is value in a spin'offG
1arket for the stock is created by its transfer from shareholders of
acquiring co$ to general public
%ecause of creation in mar)et! value goes up and acquiring compan# can
then sell the shares it retains for a higher value
5. 0taff %ulletin
a. <ot all spin'offs are sales
b$ 7egistration not necessary if all of the folloing are met:
"5
0pin'off is pro rata to the parent compan#7s shareholders
The recipients of the spun'off securities provide no consideration
The parent provides to its shareholders and the public adequate information
about the spin'off and about the compan# being spun'off
The parent has a valid business purpose for the spin'off
8f the parent spins off 3restricted securities4 it has held the securities for at
least two #ears
5. Free !toc" #ffers
a. 8s a sale
b. >orm of value in agreement
I,. ;33 Act Exe0ptions
A. Statutor% Sce0e
1. 0ection 5 *+empted Transactions
a. (eaning
0pecific t#pes of transactions are e+empted
Hhen purchaser of securit# here wants to resell have to find own e+emption
b. *+empted from what
$egistration requirements of section . do not appl# to the transactions covered
All other sections of the 0ecurities Act do appl#
. 0ection " *+empted 0ecurities
a. (eaning
The provisions of 3this title4 do not appl# to certain )inds of securities
$egardless of whose hands the# fall into and the frequenc# of sale! never have
to be registered
b. *+empted >rom Hhat
Provision of the 0ecurities Act do not appl# to the securities enumerated
3e+cept as e+pressl# provided4
0ection 1C and 0ection 1(a)() still appl#
c. 0ecurities *+empted
1overnment securities
0ecurities issued b# religious! educational or charitable organiDation
8nterests in a railroad equipment trust
d. Three 8mportant e+empt transactions@
(1) 0ecurities e+changed with e+isting securit# holders
() 0ecurities issued under a plan of e+change approved b# a court or other
governmental authorit#
(") 0ecurities issued in an intrastate transaction
e. 0ection "(b)
(1) :anguage
0*/ ma# add an# other securities to those e+empted b# 0ection " when it
finds that registration is not necessar# in the public interest and for the
".
protection of investors b# reason of the small amount involved or the
limited character of the public offering
These will be transaction e+emptions onl#
() Dollar :imit ,.(
(") (andator# /onsiderations
Hhenever 0*/ has to determine whether an action is necessar# or
appropriate in the public interest! it must also consider in addition to the
protection of investors! whether the action will promote efficienc#
competition! and capital formation
(5) $ules and $egulations Promulgated ;nder
$egulation A
$ule .-5
$ule .-.
$ule C-1 (emplo#ee benefit plans)
$ule /* (issuers in /alifornia)
". *+empted 0ecurities v. *+empted Transactions
a. *+empted 0ecurities
8t does not matter how often the# are traded! or b# whom! the# never have to
be registered
b. *+empted Transactions
The# are onl# e+empt from registering for that specific transaction
8f a bu#er in an e+empted transaction wishes to resell! he must find another
transaction e+emption or the securities have to be registered
,$ )ection ;0 General .'emptive (uthority
a. :anguage
0*/ has power to 3e+empt an# person! securit#! or transaction! or an# class or
classes of person from an# provision of the Act so long as the e+emptions
necessar# or appropriate in the public interest and is consistent with the
protection of investors4
$emember additional J(b) considerations
b. &ther powers
Allows the 0*/ to raise the dollar limit of e+emptive rules previousl# adopted
under 0ection "(b)
%. Pri/ate Place0ent Exe0ption J5() (&nl# the initial transaction e+empted)
1. :anguage
The provisions of 0ection . shall not appl# to transactions b# an issuer not
involving an# public offering
&nl# available to issuers
. Defining a Private Placement $alston Purina /o.
a. %ac)ground
0old stoc) to emplo#ees without registering
"9
*mplo#ees had to initiate sale
Hide variet# of people in var#ing positions bought stoc)
/laimed onl# sold to )e# emplo#ees for sale to all would definitel# be public
b. 8ssue
Hhether the sale to emplo#ees is a public offering or private placement.
c. 2olding Public &ffering
8urden of 4roof
%urden of proof is on the person who wants the protection of an
e+emption
6here is no bright line numbers test
3the statute would seem to appl# to a public offering whether to a
few or man#4
<umbers still relevant b=c have to show test is met to each offered
the more there are the harder it is to show
6he 6est
(pplicability of the e'emption should turn on hether the
particular class of persons affected needs the protection of the (ct
/an the offerees fend for themselves<
Do the# )now the questions to as) and smart enough to
)now what to do with the information
Did the offerees have access to the )ind of information which
registration would discloseG
Do not have to have access to 3the4 information that would
be available in a registered offering
An offering to onl# e+ecutive officers would be entitled to the e+emption
". Defining a Private Placement 0ecurities $elease 5..
a$ *ocus on =fferees as ell as purchasers
>ocus is on the offerees of securities rather than purchaser
b$ =ne 8ad (pple +octrine
8nclusion of one offeree that does not meet the test (fend for themselves
and access to )ind of info) ruins the e+istence of the e+emption
<ot available even if caught earl# and does not bu#
*+ample sell to four e+ecutives and one ?anitor
c$ 4ublic (dvertising
8nconsistent with private placement
Do not )now who offerees are and whether the# have information and can
fend for themselves
d$ 9umber of offerees is not conclusive
<umber of offerees is relevant onl# to the question whether the# have the
requisite association with and )nowledge of the issuer which ma)e the
e+emption available
e$ %/oming to 7est&
"C
0*/ considers the offering to continue until the offered securities have
come to rest in the hands of persons who are not 3merel# conduits for a
wider distribution4
8f the purchasers do in fact acquire the securities with a view to public
distribution! the seller assumes the ris) of possible violation of registration
requirements
(ere acceptance of them telling #ou won7t sell it is not enough
Put legend on securit# and issue stop'transfer orders ma# wor)
8f sell to someone )nown to bu# and sell quic)l# rather than for investment!
li)el# violation
d$ !ntegration of =fferings
(1) 8ssue whether what purports to be a single offering should be combined
with one of more other purportedl# separate offerings
() *ffect when offerings are integrated in that wa#! the larger offering! viewed
as a whole! must meet the requirements of an e+emption or all the securities
must be registered
335 )actors
(a) different offerings are part of a single plan of financing
(b) the offerings involve issuance of the same class of securit#
(c) offerings are made at or about the same time
(d) same t#pe of consideration is to be received
(e) offerings are made for the same general purpose
5. Defining a Private Placement /ircuit /ourts (page 1F1)
.. Defining a Private Placement A%A Position Paper
a. &fferee Oualification /an be qualified in several wa#s@
(1) Abilit# to understand the ris) sophistication
() Abilit# to assume the investment ris) wealth
%ut if completel# no )nowledge about business matters! should
have a representative
(") Personal relationship to issuer or promotion
>amil# ties! friendship! emplo#ment relationship! pre'e+isting
business relationship
(5) (anner of Disclosure
The more careful! painsta)ing and detailed the disclosure is! the
more readil# one ma# find that a particular offeree is able to
understand the ris)
(.) *conomic %argaining Power
/oncept that is essentiall# shorthand for describing institutional and
some other t#pes of professional investors
(9) &fferee representative principle
8dea is that sophistication ma# be imputed to an offeree
b. Availabilit# of information
Adequate to give basic information concerning the issuers financial
condition! results of operations! business! propert# and management
"F
c. (anner of offering 2ow to locate the qualified people@
&ffering should be made through direct communications with qualified
offerees or their representatives
All forms of general advertising and mass media circulation should be
avoided
d. Absence of redistribution
1
st
tier purchasers should not immediatel# redistribute the shares or it would
turn it inot a public offering
A legend is not required although it would be helpful. The absence of one
does not ma)e the e+emption unavailable
e. &ne %ad Apple Hhat happens when one offeree is not qualified@
A%A sa#s in some situations one bad apple will not ruin the availabilit# of
the e+emption
/ourts re?ect this and sa# will alwa#s ruin e+emption
f. Advertising
All forms of general advertising and mass media circulation should be
avoided
g. 0ignificance of >actors
These are onl# minimum standards used to help predict a court decision
Hhen planning should set standards higher
h. <umber of &fferees
Alwa#s has been some relationship between the number of offerees
considered acceptable and the level of the offerees sophistication
%ut the# feel counsel should feel comfortable if selling to all institutional
investors even if 1-- of them
:. Safe *arbor Rule 40:
0afe harbor under J5()
%ut still can go na)ed under the statute and statute remains important
>allbac) when other e+emptions tried and failed
0ometimes no doubt about private nature and don7t need the safe harbor
$equirements more easil# satisfied b# chance
". Intrastate 6fferings <33a53115
1. 0tatutor# :anguage
(ny security which is a part of an issue offered and sold only to persons resident
ithin a single 0tate or Territor#! where the issuer of such security is a person
resident and doing business within! or if a corporation is incorporated b# and
doing business within such 0tate or Territor#
. 1eneral /onsiderations
&nl# e+empt purel# local offerings those b# in'state issuers to in'state
residents from registration requirements
1ood for local business
"E
<o concern with the recipients abilit# to understand an#thing and fend for
himself
8nterpreted narrowl# and strictl#
1ust look to both offerees and purchasers can7t even offer to one non'
resident
<o , limit on amount that ma# be raised
". 8nterpretation 0ecurities $elease 55"5
a$ %!ssue& /oncept
*ntire issue of securities must be offered and sold e+clusivel# to residents
of the state in question
&ne %ad Apple an offer to a single non'resident which is
considered part of the intrastate issue will render the e+emption
unavailable to the entire offering
8ntegration
Hhether an offering is 3part of an issue4 is determined b#
integration principles tr#ing to determine if issue in question is part
of an offering previousl# made or proposed to be made
Hhat constitutes an issue Ouestion of integration
Are the offerings part of a single plan of financing
Do the offerings involve issuance of the same class of securit#
Are the offerings made at or about the same time
8s the same t#pe of consideration to be received
Are the offerings made for the same general purpose
b$ /oming to 7est
The shares must come to rest with residents for the e+emption to be
available
8ssuer! underwriters and dealers must help ensure there are no resales to
non'residents
2ow long must residents hold them until the# have been deemed to come
to rest with themG
As) to determine the purchasers intentions of the shares to ma)e
sure the# are being bought for investment purposes
Place limits on transfer of shares sub?ect to an attorne# sa#ing that
the# can sell and e+emption will remain intact
c$ +oing 8usiness Within the )tate
8ssuer must have substantial operational activities in the state of
incorporation
<ot met b# having onl# boo))eeping! records etc. in state
0ubstantial amount of the proceeds from the offering must be used in state
5-
*+emption should not be used for series of corporations organiDed in
different states where there is in fact and purpose a single business
enterprise or financial venture
d$ 7esidence
(ere presence is not sufficient
0*/ at one time construed it to mean domicile in the conflict of laws sense
(:ouis :oss article)
e. $e'sales
An# offers or sales to a nonresident in connection with the distribution of
the issue would destro# the e+emption as to all securities which are part of
that issue (including those sold to residents and regardless of whether sales
are made directl# to nonresidents or sold to them b# residents)
0ecurities ma# be sold to nonresidents when the securities had in fact come
to rest in the hands of resident investors
f$ Use of *acilities of !nterstate /ommerce
*+emption is not dependent upon the absence of use of these
g$ .ffect of .'emption 8eing >ost
0*/ threatens in?unction if offering continued without registration
$egistration statement disclose a contingent liabilit# under J1(1) of shares
alread# sold
8nsists issuer offer rescission to persons who alread# bought
5. %usch v. /arpenter (1EFC)
a. %ac)ground
After an offer and sale to the public (all residents) a ma?orit# of the proceeds
were shifted to a different state because of the merger
b. 2olding
(1) /oming to $est (she sa#s this confuses the issue)
3if an issuer ma)es a prima facie showing that securities initiall# were sold
onl# to state residents! if can get summar# ?udgment on the coming to rest
issue! regardless of the purchasers7 holding period! unless the other part#
produces some evidence to the contrar#4
The initial seller of the securities has the burden of showing that the sales
were made to residents onl#
The plaintiff then has the burden of producing some contrar# evidence
1eneral 0tandard for /oming to $est
Person must be purchasing for investment and not with a view to
further distribution or for purposes of resale
() Doing %usiness
$efers to income producing activit#
51
!ssuer must conduct a predominant amount of that activity ithin his
home state
(eans more than maintaining an office! boo)s! and records in one state
When a corporation is being set up and it intends to use proceeds in one
state, but then intentions are genuinely changed and proceeds go
elsehere, may still qualify for e'emption
8f compan# is being set up! the intent to invest proceeds elsewhere ma#
suffice to defeat a claim of e+emption
.. Doing %usiness 8nterpretation 0ecurities $elease .5.-
Principal or predominant business must be conducted in the state
0ubstantiall# all of the proceeds must be used in the local area
". Rule 1!= Safe *arbor for Intrastate 6fferings
1. 8ntegration
8ssue does not include offers or sales made more than si+ months before or
more than si+ months after an# offers or sales made under the rule
Two offerings will not be considered one if the# are si+ months apart
. Doing %usiness
F-6 of the revenues and assets of the compan# are located within the state
F-6 of the proceeds from the offering are to be used in the state
". $esidence
Principal residence (can be a resident of more than one state! but principal
residence is where #ou spend more time)
8f a corporation! residence is where its principal office is
5. /oming to $est
0hares have come to rest when the# have been held b# initial purchaser for
nine months
After this the resident can sell to a nonresident
.. Technical /ompliance (a# <ot %e *nough
8f in technical compliance with rule but offering is part of a plan or scheme
b# such person to ma)e interstate offers or sales of securities then
e+emption not available
An# plan or scheme that involves a series of offerings b# affiliated
organiDations in various states! even if in technical compliance! ma# be
outside the parameters of the rule and of J"(a)(11) if what is being financed
is in effect a single business enterprise
(. Regulation (
1. Rule 40! (;nder J"(b) power)
a. Aggregate &ffering Price
:imited to ,1( in a twelve month period
All J"(b) e+empt offerings within the prior 1 months are aggregated
together
5
b. <umber of 8nvestors=Purchasers
;nlimited
c. 8nvestor Oualifications
<one required
d. 0ales /ommissions
Permitted
e. :imitations on (anner of &ffering
<one
f. :imitations on $esale
<o restrictions
$ule 155 is not applicable here
g. 8ssuer Oualifications
<o *+change Act reporting companies
<o blan)'chec) or investment companies
h. <otice of 0ales
>ive copies of >orm D must be filed with 0*/ within 1. da#s after the first
sale
>ailure to file will not cause the issuer to lose the e+emption but ma#
?eopardiDe the chance of using a future $egulation D e+emption
i. 8nformation $equirements
<one
?. 8ntegration 0afe 2arbor
8f offer is more than 9 months before or after! 0*/ won7t integrate
. Rule 404 (;nder J"(b) power)
a. Aggregate &ffering Price
:imited to ,.( in a twelve month period
All J"(b) e+empt offerings within the prior 1 months are aggregated
together
b. <umber of 8nvestors=Purchasers
/an sell to ". purchasers plus an unlimited number of accredited investors
>ocus on purchasers! not offerees
Accredited 8nvestor an# ban)! savings and loan! 8nvestment /ompan#!
director e+ecutive officer or general partner of the issuer! natural person
with net worth of ,1(! natural person with net income of ,--!--- or ?oint
income of ,"--!--- in two most recent #ears! trust with assets of more than
,.(
c. 8nvestor Oualifications
<one required
d. 0ales /ommissions
Permitted
e. :imitations on (anner of &ffering
<o 1eneral 0olicitations Permitted
f. :imitations on $esale
5"
$estrictions on resale under $ule 155
$ule 155 is not applicable here
g. 8ssuer Oualifications
*+change Act reporting companies ma# use it
<o investment companies or issuers disqualified under $egulation A
h. <otice of 0ales
>ive copies of >orm D must be filed with 0*/ within 1. da#s after the first
sale
>ailure to file will not cause the issuer to lose the e+emption but ma#
?eopardiDe the chance of using a future $egulation D e+emption
i. 8nformation $equirements
8f purchased solel# b# accredited investors! no information required
8f purchased b# non'accredited investors 0ee /hart
?. 8ntegration 0afe 2arbor
8f offer is more than 9 months before or after! 0*/ won7t integrate
". Rule 40: (;nder J5())
a. Aggregate &ffering Price
;nlimited b=c under J5()
b. <umber of 8nvestors=Purchasers
/an sell to ". purchasers plus an unlimited number of accredited investors
>ocus on purchasers! not offerees
Accredited 8nvestor an# ban)! savings and loan! 8nvestment /ompan#!
director e+ecutive officer or general partner of the issuer! natural person
with net worth of ,1(! natural person with net income of ,--!--- or ?oint
income of ,"--!--- in two most recent #ears! trust with assets of more than
,.(
c. 8nvestor Oualifications
Purchaser must be sophisticated (alone or with representative)
Accredited investors are presumed to be sophisticated
d. 0ales /ommissions
Permitted
e. :imitations on (anner of &ffering
<o 1eneral 0olicitations Permitted
f. :imitations on $esale
$estrictions on resale under $ule 155
$ule 155 is not applicable here
g. 8ssuer Oualifications
<one
h. <otice of 0ales
>ive copies of >orm D must be filed with 0*/ within 1. da#s after the first
sale
55
>ailure to file will not cause the issuer to lose the e+emption but ma#
?eopardiDe the chance of using a future $egulation D e+emption
i. 8nformation $equirements
8f purchased solel# b# accredited investors! no information required
8f purchased b# non'accredited investors 0ee /hart
?. 8ntegration 0afe 2arbor
8f offer is more than 9 months before or after! 0*/ won7t integrate
5. $ule .-F
!n certain circumstances, an insignificant deviation from requirements
ill not result in the loss of e'emption if there is a good faith and
reasonable attempt by the issuer to comply ith the 7ule
.. 8nterpretation 0ecurities $elease 95..
a. Accredited In/estors $ule .-1(a)
An investor is accredited if he falls into one of the enumerated categories at
the time of the sale of securities to that person
>or a compan# to be an accredited investor! all of the equit# owners must
also be an accredited investor
*+ecutive officer the e+ecutive officer of a parent of the $egulation D
issuer that performs a polic# ma)ing function for the subsidiar# is an
e+ecutive officer of the subsidiar#
b. (isclosure to potential in/estors
An issuer ma# provide a summar# of information followed up b# a
complete disclosure document if does not obscure material information
Hhen rel#ing on $ule .-. if initiall# plan to onl# sell to accredited
investors! ma)e sales to them! and then decide to sell to non'accredited
investors issuer must deliver a complete disclosure document to all
investors and agree to return the funds of those who have alread# bought
if do this will not lose e+emption
c. "ounting Purcasers Rule 4013e5
8f an accredited purchaser lives with his cousin and both are bu#ing both
are e+cluded
Partnership shall count as one purchaser and issuer does not have to
consider the sophistication of each individual partner
9. Aggregation and 8ntegration Problems
a. 1eneral $ules
&fferings under J"(b) ($ules .-5 and .-.) have to be aggregated if within
a twelve month period to ma)e sure fall within dollar limitation
8ntegration safe harbor is si+ months before and after
5.
b. C months since public offering and $ule .-9 safe harbor is used to ma)e a private
offering
aggregation is not a problem
8ntegration these are si+ months apart so deemed to not be integrated
c. " months since public offering and $ule .-9 safe harbor is used to ma)e a private
offering
Problem with integration. 0*/ might find that the public and private
offering are part of the same offering and require that the
nd
be registered
also
2ave to loo) at factors to determine if the# will be integrated
d. C months since public offering and $ule .-. is used to ma)e the
nd
offering
$ule .-. has a ,.( aggregate limit.
8ut, only other -(b) e'emptions get aggregated (so do not have to
aggregate public and private offerings)
e. ;se .-. to ma)e
nd
offering and C months later use $ule .-5 to ma)e another
offer
Aggregation is a problem
>or $ule .-5 onl# get ,1( less an# other J"(b) e+emptions within prior 1
months
*. Regulation A (0ection "(b) e+emption so , amount can change)
1. *ffect
*+emption from registration requirements of the securities act
(ini registration with offering statement that must be filed
;sed less frequentl# now due to simplified registration forms
. Dollar :imit
&nl# ,.( of securities ma# be sold in a 1 month period! and ,1..( of
that ma# be sold b# securit# holders
". Hho /annot ;se
7"5 Act reporting companies cannot use
when e+empt securities from registration do so to help small
businesses
7"5 act companies are not intended beneficiaries
must be a ;0 or /anadian compan#
cann have run afoul of specified laws in the past
5. Testing the Haters Allowed
8ssuer ma# test the waters before filing of an offering statement! b# oral
and written communications to potential bu#ers that are designed to gauge
interest in the offering
). Section !3:5
1. 0tatutor# :anguage
6he provisions of section 5 shall not apply to transactions involving
offers or sales by an issuer solely to one or more accredited investors
59
. :imitations
(one# raised is limited to amount specified in J"(b) (,.()
$ssuer must file the required notice %ith the !&'
(. )ccredited $nvestor
8ncludes certain institutions! such as ban)s and insurance companies and
an# person who on the basis of such factors as financial sophistication! net
worth! )nowledge! and e+perience in financial matters or amount of assets
under management qualifies under rules
$ule 1. for natural persons if net worth with one7s spouse of more than
,1( or net income of more than ,--!--- in each of the two most recent
#ears (or ,"--!--- ?ointl# with ones spouse)
G. Regulation "E
1. /alifornia *+emption
. ,.( /eiling on amount raised
". :imited to /alifornia 8ssuers
:imited to /A issuers and non'/A issuers that have more than .-6 of their
propert#! pa#roll! and sales in that state! so long as more than .-6 of the
non'/A issuer7s voting securities are hold of record b# persons having
addresses in /alifornia
5. (ust satisf# requirement of .1- of /A code
*. Rule =01
1. <ot available to *+change Act reporting companies or investment companies
. >or companies who wish to sell stoc) to their emplo#ees
". Dollar limit (that can be changed b# 0*/)
*nacted under power of J"(b) so dollar limit can be ad?usted b# 0*/
,. Regulation of Resales of Securities
A. 8ntroduction
1. Biolation of 0ection .
Applicable in the conte+t of re'sales
;nless a registration statement is in effect or there is an e+ception for the
securit#! an# resales or deliver# after re'sale of such securit# would be a
violation of J.
. &nl# 8ssuer (a# $egister
0ecurit# holders can! however! bargain for registration rights (right to
compel the issuer to register for purpose of resale) or Pigg# %ac) $ights (if
issuer registers some securities the# will also register their securities for
resale)
". Hhen 0hares <ever $egistered
Purchaser must find an e+emption to re'sell their shares
J"(a)(11) is available for use for re'sales (intrastate offering)
$ule 15C is onl# available for use b# the issuer
5C
5. 0ection 5(1)
a. 0tatutor# :anguage
The provisions of section . shall not appl# to transactions b# an# person
other than an issuer! underwriter! or dealer
b. 8ssuer
*ver# person who issues or proposes to issue an# securit#
c. Dealer
An# person who engages either for all or part of his time! directl# or
indirectl# as an agent! bro)er! or principal! in the business of offering!
bu#ing! selling! or otherwise dealing or trading in securities issued b#
another person
d. ;nderwriter
(1) 1enerall#
An# person who purchased from an issuer with a view to distribution
An# person who offers or sells for an issuer in connection with a
distribution
() Definition of 8ssuer
8ncludes control persons
0o someone who bu#s from a control person with a view to distribution
is an underwriter
#. "ontrol and Restricted Securities
1. /ontrol
a. /ontrol 0ecurities
0ecurities owned b# a person who is an affiliate of the issuer
Affiliate
Person that directl# or indirectl# through one or more intermediaries
controls or is controlled b# or is under common control with the
person specified
b. /ontrol Person
Term control means the possession! direct or indirect! of the power to direct
or cause the direction of management and policies of a person whether
through the ownership of securities
c. Amount of 0ecurities <eeded
1-6 equit# is a good rule of thumb
will be considered an affiliate
d. Hhat /ontrol /an %e
;ne+ercised abilit# to control is control
/ontrol 1roup #ou are a control person if #ou are a member of a group
that controls
. $estricted 0ecurities
a. 0ecurities acquired directl# or indirectl# from the issuer or from an affiliate of an
issuer! in a transaction or chain of transactions not involving an# public offering
5F
/overs a securit# that at one point were sold b# the issuer under a J5()
non public offering e+emption
/overs a securit# sold under J5(9) (sale to onl# accredited investors)
b. 0ecurities acquired from an issuer that are sub?ect to the resale limitations of $ule
.-(d) under $eg. D or rule C-1(c)
8ncludes securities purchased directl# from an issuer in a n# transaction
under rule .-. and .-9
c. >ungibilit#
8f a person owns both restricted and non'restricted securities of the same
class and from the same issuer! the non'restricted securities ta)e on the
taint of the restricted status
". Sales of "ontrol Securities
1. (efinition of 7nder'riter
An# person who has purchased from an issuer or an affiliate of the issuer
with a view to distribution
An# person who offers or sells for an issuer or an affiliate of the issuer in
connection with a distribution
8ssuer includes control persons
. *ffect
!f you buy from a control person ith a vie to distribution you are
an underriter and cannot claim the ,(") e'emption
!f you sell shares of a control person in connection ith a distribution
you are an underriter and cannot claim the ,(") e'emption
8f a securities firm handles the sale as a dealer (bu#s the securities
themselves with the idea of reselling them) ma# be considered to have
3purchased from an issuer with a view to distribution4 ma)es them an
underwriter
". (eaning of +istribution
0#non#mous with public offering
!. Exe0ptions
;nderwriter <o e+emptions
Dealer The provisions of 0ection . do not appl# to transactions b# a
dealer who is not longer acting as an underwriter with some e+ception
&rdinar# investor can sell their shares through a dealer
%ro)er The provisions of 0ection . do not appl# to bro)ers7 transactions
e+ecuted upon customers7 orders on an# e+change or in the over'the'
counter mar)et but not the solicitations of such orders and not if bro)ers is
also acting as an underwriter
.. 8n $e 8ra 2aupt L /o. (1E59)
a. %ac)ground
A bro)er sold on behalf of a ma?or shareholder (control person) a
substantial number of shares over the course of a few months
5E
b. 2olding
(1) Has the %ro)er an ;nderwriterG Qes
;nderwriter An# person who offers or sells for an issuer or an affiliate of
the issuer in connection with a distribution
2ere the bro)er sold for an issuer (control persons are issuers) in
connection with a distribution
DistributionG Qes
0*/ is willing to allow control securities to tric)le into the mar)et!
but it will not allow a flood
A distribution comprises the entire process b# which in the course
of a public offering the bloc) of securities is dispersed and
ultimatel# comes to rest
() /an the %ro)er avail himself the J5(5) %ro)er7s e+emptionG <o
*+emption allows a person bro)ering that does not actuall# solicit from the
other side to get an e+emption
%ecause he is also an underwriter! J5(1) is not available and cannot rel# on
J5(5) when also an underwriter
<ot available here because public distributions b# controlling persons!
through underwriters! are intended to be sub?ect to registration
/annot get around this when going through a bro)er
9. ;nited 0tates v. Holfson (1E9F)
a. %ac)ground
/ontrol persons sold large amounts of stoc) through bro)ers without telling
bro)ers what the# were doing
b. 2olding
6he brokers provided outlets for the stock of issuers (control persons) ith a
vie to distribution (large amounts of stock) and thus ere underriters and
,(") not available
/ontrolling persons tried to argue that the# fall into the J5(1) e+emption b=c
the# are not issuers! underwriters or dealers and if bro)ers can do this that the#
should be able to do it also
&ne! the bro)ers did not )now the# were doing this
Two! even though control persons not in plain language of statute
can still be liable
J5(1) is available for transactions not distributions
The bro)ers were underwriters. Therefore! the control
persons were engaging in a transaction b# an underwriter
and were also captured b# the rule.
/ontrol persons ho sell or offer to sell through underriters can3t get ,(")
e'emption
%ro)ers allowed to have J5(5) e+emption b=c there were unaware that their
customer7s part of the transaction is not e+empt
.-
Those who offer or sell for control persons are underwriters unless
the# do so un)nowingl#
8f what is going on is not a distribution! then #ou will be o)a# b=c no one is an
underwriter and then control persons are not selling through an underwriter
c. 0ummar#
/ontrol persons can cause problems for bro)ers
/ontrol persons can cause problems for themselves b# selling through
underwriters
(. Sale of Restricted Securities
1. 1eneral
$estricted securities should be sold under $ule 155
%ut the# do not have to be and ma# be re'sold outside the rule b# going na)ed
under J5(1)
Hhen doing this 0*/ interpretations are important
0mall unrelated purchaser of 16 of the stoc) /an the# turn around the ne+t da#
after bu#ing and resell in a private offering securit#G
Problem view towards distribution
( person ho purchases securities in a private placement and then
resells in a public trading market is an underriter if she purchased ith
a vie to distribution (as an underwriter the# cannot use J5(1))
8ssuers often place resale restrictions on privatel# places securities to avoid
having the issuance converted into a public distribution sub?ect to
registration
(ain 8ssue Hhat is meant b# purchasing with a view to distributionG
2ow long a holding period is required to avoid the problemG
<o holding period removes the taint of an underwriter status from someone
who has purchased with a distribution in mind.
. 2olding Period ;nited 0tates v. 0herwood
a$ !n determining hether someone purchased ith a vie to distribution the
purchaser ill ant to sho bought for investment hich can be indicated by
the holding period before resale
b$ When purchase directly from the issuer if hold for to years then bought ith
no vie to distribution unless other evidence to the contrary
Two #ears became the standard minimum safe holding period
c. 0*/ seems to indicate in no'action letters that a three #ear holding period would
be better
0taff freel# granted no'action letters when restricted securities were held
for three #ears! but not as li)el# to do so when onl# held for two
". /hange in /ircumstances Doctrine
.1
a. Argument planned to hold for investment but due to a change in circumstances
had to sell b=c needed the mone#
b. 0*/ loo)s ver# diml# on this and won7t accept! but some courts endorse and allow
it to save someone who did not register
/ourts will allow it to shorten the acceptable holding period
5. Putting :egends &n 0toc)
a. when purchase from issuer the issuer wants to establish not involved in a
distribution so it will restrict the sale of the stoc)
b. also for purchasers benefit b=c if the# ta)e the securit# with legend it should the#
planned on holding them for investment
this means no view to distribution and therefore not an underwriter when
eventuall# resell
E. Rule 1!! Persons (ee0ed >ot to #e Engaged in a (istribution and 1erefore >ot
7nder'riters
1. 1eneral
Ha# for holders of restricted securities or control persons to sell their shares
compliance with the $ule secures a J5(a) e+emption
The rule defines what is not a distribution and therefore when a person is not an
underwriter
All sales must follow the amount! manner and notice requirements below
2. "ategories of Re8uire0ents
a. /urrent Public 8nformation
(ust be publicl# available specified current information concerning the issuer
7"5 Act compan# has sufficient information available to satisf#
man# companies will therefore register voluntaril# so can use this rule
ma# also increase price due to liquidit# b=c there will be enough
information to use this rule
b. 2olding Period for $estricted 0ecurities
&ne #ear
>or a non'affiliate a two #ear holding period means #ou are home free
c. :imitation on amount of securities sold
1reater of
16 of the class of securities outstanding; or
average wee)l# trading volume of the class of securities during the
preceding four wee)s
d. (anner of 0ale
(ust be sold in a bro)er7s transaction or directl# to a mar)et ma)er
<ot face to face transactions
e. <otice of sale
0eller must file a notice of sale with the 0*/ unless sales during a three month
period do not e+ceed .-- shares or a total sales price of ,1-!--
.
". (a)e >low /hart
). Pri/ate Re-sales Rule 1!!A
1. $equirements for safe harbor (155A)
a. Available onl# for re'sale (not for issuers)
b. Purchaser must be a 3Oualified 8nstitutional %u#er4
(eans certain entities (insurance compan#! investment compan#! emplo#ee
benefit plan! trust fund) owning and investing on a discretionar# basis at
least ,1-- (illion in securities of issuers that are not affiliated with the
entit#
c. 0ecurit# must be non'fungible with a publicl# traded mar)et (whatever that
meansGGGG)
d. (odest information required to be delivered to purchasers
8ssuer ma# have to provide information through contract with purchaser
/reation of after mar)et for securit# that will not get bac) to the public
f. <ot available for the resale of securities
That at the time of their issuance! were of the same class of securities listed
on a national securities or <A0DAO
That were issued b# one of the enumerated t#pes of companies that are or
are required to be registered under the 8nvestment /ompan# Act
1. 1oing na)ed under 0ection 5 S Private $e'sales
1. 1enerall#
8f #ou are not an underwriter and #ou resell a securit# #ou will be e+empt under
J5(1); one wa# to not be an underwriter is to bu# w=o a view to distribution; since
distribution is same as public offering! when #ou sell in a private resale there is not
distribution! #ou are not an underwriter and #ou get e+empted under J5(1)
The e+emption has the character of a J5() e+emption but is a J5(1) e+emption b=c
b# definition it involves no transaction b# an underwriter
&ffers and sales are not made in a public offering A <o distribution A <o
underwriter A no registration
(ust be sure that seller did not originall# purchase with a view to a distribution
and is not acting for an issuer (b=c then will be an underwriter)
. 8f satisf# rules #ou are deemed not to be engaged in a distribution the therefore will
not be underwriters
". Tr#ing to ma)e the sale not a public offering! so it will not be a distribution! so no one
will be an underwriter (and get J5(1) e+emption)
5. 0tructure to ensure
0eller is not an underwriter; and
/annot be made an underwriter b# actions of the purchaser
This means selling onl# to those who can meet the requirements for
purchasing in a private placement
(a)e sure purchasers can7t resell in a non'e+empt transaction b=c
that would destro# e+emption that supported earlier sales
."
Purchaser must agree to contractual restriction restricting the sale
.. 0taff :etter (page "C)
2. Deemed ;nderwriter under $ule 15. (A0P)
a. $ule 15.(c) Persons and Parties Deemed to be ;nderwriters
b. $ule 15.(d) $esale Provisions for Persons and Parties Deemed ;nderwriters
8. $ewor) 0ituation C
,I. ;33 Act &iabilit%
A. 8ntroduction
1. /riminal :iabilit#
J. 3;nless a registration statement is in effect as to a securit#! it shall be
unlawful4
J1C broad anti'fraud provision
J5 willful violation of the act is punishable b# imprisonment and ,1-!--- fine
. /ivil Actions %rought b# 1overnment
a. 0ection FA issue cease and desist orders
b. 0ection -(d) as) a district court to imposed a penalt#
c. 0*/ no authorit# to bring aiding and abetting actions under the 0ecurities act or its
rules
;nder the *+change Act can bring aiding and abetting actions for
violations of those rules (0ection -)
". /ivil :iabilit# to private parties
J11 private right of action for damages based on a material misrepresentation in
a registration statement
J1(a)(1) private right of action to rescind deal that had violation of J.
J1(a)() private right of action to rescind for material misrepresentation from
prospectus (J1C)
#. "ri0inal and 6ter Go/ern0ental Actions
1. (eaning of Hillful under J5
a. 0*/ Administrative Action
Does not require a finding of intention to violate the law
)ufficient that registrants be shon to have knon hat they ere doing
b. ;nited 0tates v. %rown (E
th
/ir. 1ECF)
Government is required to prove specific intent only as it relates to the action
constitution the fraudulent, misleading, or deceitful conduct, but not as to
the knoledge that the instrument used is a security
Do not have to show D )new of J1C! or what he was doing is legall# 3fraud4 or
)new the# were selling a securit#
.5
Must have to that he was aware that what he was sa#ing was untrue or
fraudulent in the general sense
. *ffect of Murisdictional (eans
*ach separate use of these means is a separate violation
". 0*/ Power over /riminal and /ivil Biolations
a. 0*/ does not have the power to bring criminal actions
J- 0*/ can formall# investigate
J-(a) can bring action see)ing in?unctive relief
J-(b) transmit evidence to attorne# general who ma# then institute the
necessar# criminal proceedings
b. /ivil Actions
JFA can bring actions see)ing civil penalties and to issue cease and desist
orders
J-(d) power to see) civil penalties
penalt# varies with culpabilit# and ris) to public of violations
,.!.--',11-!--- for individual
,..!---',..-!--- for others
but penalt# can be as high as gain to violator as a result of the
violation
$ule E can reduce amount for small entities
0*/ can bring aiding and abetting action under *+change Act for violation of
its rules! but not under the 0ecurities Act
c. /ourt7s Power
J-(e) prohibit a person who has violated J1C(a)(1) from acting as an
officer or director of a compan# that has securities registered under J1
". "i/il &iabilit% Section 11
1. 0tatutor# :anguage
8f part of the registration statement when it became effective contained an untrue
statement of a material fact or omits to state a material fact required to be stated
therein or necessar# to ma)e the statements no therein misleading . . . may sue.
. 1eneral 8ssues
a. Plaintiff7s /ase
Proper plaintiff
Proper defendant
(aterial (isrepresentation of omission
(a# have to show reliance (1 month earning statement available)
b. Defenses Available
/ulpabilit# ' Due diligence defense
$esign and squeal
..
:ac) of loss causation to reduce damages ' J11(e)
%espea)s caution doctrine
0tatute of limitations J1"
P )new about omission or misstatement
$ebut part of P7s case
JCA and $ule 1C. safe harbor for forward loo)ing statements
b. Damages
/alculated under J11(e)
Moint and several liabilit# J11(f)
Proportionate liabilit# for outside directors ' J1D(f)
". /ommon :aw of (isrepresentation
a. (aterial (isrepresentation
b. /ulpabilit#
Baries b# ?urisdiction
c. /ausation
Transaction general causation (reliance)
:oss causation prove that but for the D7s wrong P would not have incurred
the in?ur#
d. Damages
5. Proper Plaintiff
a$ purchaser of a registered security may sue under "" irrespective of hether he
or she purchased the security in the registered offering or later in the trading
markets
b. 0ection 1" must bring suit before statute of limitations run
&ne #ear after discover# of untrue statement or one #ear after discover#
should have been made b# the e+ercise of reasonable diligence
.. Proper Defendant 0ection 11(a)
a. *ver# Person who 0igned the $egistration statement
8ncludes the issuer! /*&! />&! ;H
b. *ver# director at the time of filing
c. *ver# underwriter with respect to such securit#
d. Accountants and people whose profession allow them to put their name on the
registration statement as having prepared it or certified part of it
8f prepare! but name does not appear in it as having written a portion! then no
liabilit#
8f named and part attributed to #ou! ma# be liable (but onl# responsible for part
#ou prepared and certified)
8f law firm named! firm liable but not specificall# an individual attorne#
9. (aterial (isrepresentation
a. (aterial
.9
0ubstantial li)elihood that a reasonable investor would attach importance in
determining whether the purchase the securit# registered
b. &b?ective 0tandard
>or number figures 1-6 is a good ball par) figure (if assets misstated b# 1-6)
C. %espea)s /aution Doctrine (Ta? (ahal :itigation)
a. 1eneral Doctrine
8nclusion of sufficient cautionar# statements in a prospectus renders
misrepresentations and omissions contained therein immaterial
8f D7s ma)e the ris) adequatel# clear! and hedge the statement with cautionar#
language! then something that would ordinaril# be material is immaterial
<eed to be abundant and meaningful
b. *ffect
%ecause the statement is not material! there is no liabilit#
c. Bague and %lan)et Disclaimers do not suffice
d. :imitations on ;se
Due diligence is required for historical facts (can7t ma)e an assertion and then
sa# might be wrong
0ome courts have limited doctrine to forward loo)ing statements
e. 0afe 2arbor JCA
0afe harbor for certain forward loo)ing statements that are accompanied b#
cautionar# statements meeting the section7s requirements
F. Due Diligence Defense (%ar/hris)
a. 1enerall#
P does not have to prove culpabilit#
%ut D can show lac) of culpabilit# as a defense to liabilit#
<ot available to the issuer
Expert >on-Expert
3*+pertised4 Portion D after reasonable investigation had
reasonable grounds to believe! and
in fact did believe that statement
was true
:east $equired
8gnorance is sufficient
<o reasonable ground to believe!
and did not believe that statement
untrue
<on *+pertiesd Portion D had no reason to believe the#
were not true
D after reasonable investigation
had reasonable grounds to believe
and in fact did believe that
statement was true
b. Hhat is a reasonable investigation
(1) D7s position is a factor in determining what is a reasonable investigation
() /*&
.C
%ecause aware of all relevant facts cannot believe there were no untrue
statements or material omissions
<o due diligence defense
(") &utside Directors
<ot a reasonable investigation to not read the registration statement and
not )now what the# were signing
(5) ;nderwriters
0hould have verified an# claims made b# managers
(.) Auditors
<o liabilit# for the non'e+pertiDed portions
>or the e+pertiDed part the# prepared! have to do a reasonable investigation
and ma)e sure that the numbers the# are using are correct
(9) Audited Portion
<on'e+perts can rel# on e+perts
*+perts must show the# reasonabl# investigated where numbers came from
(C) <on'*+pertiDed Portion
*ver#one (but the auditors) should have verified claims b# the managers
/annot rel# on management7s statements of how things are
c. Heinberger v. Mac)son
/ourt permitted outside director to rel# on reasonable representations of
management provided his own conduct was reasonable under the
circumstances
Director was familiar with operations! attended meetings! reviewed
financials! involved in decision! review si+ drafts of registration statement
and saw nothing suspicious with the )nowledge he had
<o dut# to ma)e specific inquiries of compan#7s management as long as
prospectus consistent with his )nowledge which he had reasonable
acquired as a director. Also given comfort b=c info was reviewed b#
underwriters! counsel! and accountants
Due Diligence established
d. Things 8ssuer7s /ounsel and ;nderwriter7s /ounsel 0hould Do
8nformation is the registration statement should be verified
8ssuer and affairs must be e+amined to tr# and uncover what must be added
to the statement to prevent it from containing a material omission
8f question arises as to the adequac# of disclosure! an independent chec) of
the facts is required
e. J11(b)(1) $esign and 0queal Defense
&nce D finds out about the misrepresentation! he resigns and tells the 0*/ all
before the registration statement becomes effective
E. Damages
a. 0ection 11 (e)
.F
Damages are calculated b# the difference between the offering price in the
registered offering and the value of the securities at the time of the suit (or the
price at which the P disposed of them earlier)
b. ;nderwriter
<o underwriter can be held responsible for damages in e+cess of the aggregate
public offering price of the securities underwritten b# it
c. 0ection 11(f)
Proper Defendants are ?ointl# and severall# liable
8f a D is held liable he can get contribution from an# person who would have
been held liable if sued
&utside Directors
:iabilit# determined b# J1D(f)
/an onl# hold outside directors ?ointl# and severall# liable if prove
the# )nowingl# committed a violation of the securities laws
8f cannot show this strict liabilit# still applies but the# will onl#
have proportionate liabilit# liable solel# for the portion of the
?udgment that corresponds to the percentage of responsibilit# of that
covered person
0how how much he contributed to the damage
1-. /ausation
a. :oss /ausation
P does not have to prove loss causation (?ust purchased the stoc) under untrue
registration statement)
After time P ma# have to show reliance on untrue statement
8f purchase after issuer publishes an earnings statement covering 1
after registration statement effective! must show reliance on untrue
statement
Defense D is entitled to show lac) of loss causation as a defense
0how loss in value due to something other than the material
misrepresentation
(. "i/il &iabilit% <123a5315
1. 0tatutor# :anguage
3An# person who offers or sells a securit# in violation of J. shall be liable to the
person purchasing such securit# from him Tand get recission of the saleU4
liabilit# flows when unregistered securities are offered or sold without an available
e+emption
. Plaintiffs /ase
a. Plaintiff must be an A/T;A: purchaser
b. Proper Defendant
(1) purchaser ma# not recover from an issuer or an# other seller unless there is a
direct lin) between the purchaser and the seller
if bu# from an intermediate seller! must sue that seller and not the
issuer
.E
the intermediate seller can then turn around and sue the seller that
the# bought from
() Pinter v. Dahl (1EFF)
Definite liabilit# for person who passes title (privit#)
3seller4 also e+tends to person who successfull# solicits the purchase!
motivated at least in part b# a desire to serve his own financial interest or
those of the securities owner4
important to protect investors at solicitation stage
willing to put liabilit# on agent of real seller b=c the# usuall# do the
bad act
construed the same for purposes of J1(a)()
". D has offered or sold in violation of J.
a. *ffect
P does not have to show cause! damages! or culpabilit#
0trict liabilit# provision to discourage violations of registration provisions
b. ;nclean 2ands Defense (>uller)
8f can show person tr#ing to rescind is ?ust as guilt# as D court will have
s#mpath#
0o even though a technical violation there is a possible unclean hands
defense
c. 0tatute of :imitations is a Defense
d. /uring occurrence of bad act (Dis)in)
D sent an illegal written offer (sent offer without prospectus) and later sent
a proper final prospectus after registration statement became effective
0trict :iabilit# Provision with no opportunit# to cure b# sending
prospectus later
&nce D messes up under J.! purchaser can get out of the deal
Advice once mess up stop the deal! allow for a cooling off
period and start all over again
Also! one bad apple will ruin all offers in the entire offering so will
have to stop all offers
E. "i/il &iabilit% <123a5325
1. 0tatutor# :anguage
An# person who offers or sells a securit# b# means of a prospectus or oral
communication which includes a untrue statement of a material fact or omits to
state a fact (the purchaser not )nowing of such untruth or omission) . . . and who
shall not sustain the burden of proof that he did not )now! and in the e+ercise of
reasonable care could not have )nown is liable4
. 1overnment 0ecurities are *+empt
". Proper Plaintiff
0omeone who purchased the securities (can7t be a mere offeree)
9-
5. Proper Defendant
0ame as in J1(a)(1)
*ither transferor of title or solicitor with a financial interest (Pinter)
.. Definition of the %ad Act (1ustafson)
a. 1enerall#
(aterial misrepresentation in a prospectus or in an oral communication
relating to a prospectus
b. Defining Prospectus
(1) 8ssue
Hhether the right to rescission e+tends to a private! secondar# transaction
on the theor# that recitations in the purchase agreement are part of a
prospectus.
() >acts
0ole shareholders or Allo#d sold their stoc) to an investor group
1roup claimed that in the contract for sale! there was a misrepresentation of
companies financial position and want rescission
(") 2olding
Hord 3prospectus4 is a term of art referring to a document that describes a
public offering of securities b# an issuer or controlling shareholder.
The contract of sale! and its recitations were not held out to the
public and were not a prospectus as the term is used in the 7"" Act
%ecause the communication (contract for sale) was not a prospectus! J1(a)
() is not activated
8ntent of /ongress and design of statute require that J1(a)() liabilit# be
limited to public offerings
/ontract for sale is not a prospectus b=c was not the prospectus described in
J1- and filed in a registered public offering
(5) Dissent
:oo)ed at definition of prospectus in J(a)(1-) and determined that a
contract for sale fit
(.) *ffect of <arrow /onstruction
$estricts the scope of J. and allows more activit# in the waiting period
which prohibits prospectus unless it is a J1- prospectus
c. J. Prospectus Post'1ustafson
seems that onl# formal offers associated with public offerings come under
the definition
that would mean that those offering letters and circulars that were
previousl# held to be prospectuses are not prospectuses
9. P can7t win if )new of misstatement of omissionG
P bears the burden of pleading and proving that the# did not )now about
the misrepresentation or omission (not sure about this)
P can7t win if he )new about them
91
C. 0tatute of :imitations J1"
&ne #ear of discover# of misstatement or omission or after its discover# should
have been made b# the e+ercise of reasonable diligence A &$
Three #ears after sale
F. Defenses for Defendant
a. Pnowledge
(1) %ut D can defeat a claim b# showing that he did not )now! and in the e+ercise
of reasonable care could not have )nown of the material misstatement or
omission
() 0imilarit# with Due Diligence Defense (<uveen)
*+ercise of reasonable care equated with due diligence and reasonable
investigation under J11
There should be no liabilit# under J1(a)() when a D could escape
liabilit# under J11
0omeone who falls under the specificall# tailored liabilit# provisions of
J11 should not be sub?ected to different rules under more general liabilit#
provision
b. :oss /ausation
D can reduce damages if can show the loss in value is due to something
other than his material misstatement or omission
This onl# applies to J1(a)() and not J1(a)(1)
c. 0tatute of limitations ' J1"
d. ;nclean 2ands
e. D can rebut P7s case
f. %espea)s caution
g. JCA safe harbor for forward loo)ing statements
E. %ac) to (anor <ursing
a. 2olding of (anor <ursing 8f prospectus has a mista)e or misstatement then it
cannot be a J1- prospectus
%ecause it is not a J1- prospectus the# violate J.
b. 8f #ou violate J.! #ou are liable to those #ou purchase from #ou under J1(a)(1)
c. %ut under J1(a)() a misrepresentation is sub?ect to some defenses
Defense of reasonable care
/ongress intended this to be a defense to a misstatement in the prospectus!
but the bootstrapping logic of (anor <ursing ma)es someone liable for a
misstatement under J1(a)(1) with no defense
). Section 14
1. 0tatutor# :anguage
An#one who controls a person liable under J11 or 1 is ?ointl# and severall# liable
to the same e+tent as the controlled person (e+press private right of action)
9
*+ception controlling person had not )nowledge of or reasonable grounds to
believe in the e+istence of fact b# reason of which the liabilit# of the controlled
person is alleged to e+ist
. $equirements for D to fall under e+ception
8f )new or reasonable should have )nown #ou are liable
0ome courts sa# if don7t tr# to monitor! will charge #ou with )nowledge #ou
would have had if the# had done reasonable investigation
". Hho is a control personG
a. 3ever# person who! b# or through stoc) ownership! agenc#! or otherwise! or in
connection with an agreement has these things controls an# person liable under
J11 or J1
b. *asil# includes ma?or shareholders! directors! and officers
c. 0tadia &il v. Hhellis (1-
th
/ir. 1E.C)
Term given a broad definition
/ontrol organiDer of compan#! B.P.! one of three directors! signed stoc)
certificates! presided over board meetings where sale discussed
/ontrol will be determined b# loo)ing at characteristics from other cases that
found control
/autionar# tale do not have to own E-6 of stoc) to be a control person
5. $ole of /ulpabilit#
a. 0ome courts require a showing of culpabilit# b# the P
b. &thers require a lac) of culpabilit# to be raised b# the defendant as an affirmative
defense
G. Section 1=3a5 and I0plied Pri/ate Rigts of Action
1. 0tatutor# :anguage ;nlawful in the offer or sale of an# securities
a. to emplo# an# device! scheme! or artifice to defraud! or
b. to obtain mone# or propert# b# means of untrue statement of a material fact or an#
omission
c. to engage in an# transaction! practice! or course of business which operates or
would operate as a fraud or deceit upon the purchaser
. /ort >actors (implied right of action)
a. 8s the plaintiff of the class for whose especial benefit the statute was enactedG
b. 8s there an# indication of legislative intent to give a private right of actionG
c. 8s it consistent with the underl#ing purpose of the legislative scheme to impl# a
remed# for the PG
d. 8s this sub?ect matter traditionall# relegated to state law! in an area basicall# the
concern of the statesG
". Hashington Public Power 0uppl# 0#stem (1EFC)
a. %ac)ground
/ompan# defaulted on bonds bought b# the P7s
/ould not sue under J11 b=c were not required to be register and can7t sue
under J1(a)() b=c does not appl# to government securities
b. 8ssue
!s there a private right of action under "?(a)< 9=
9"
c. 2olding
/ourt applied the /ort factors
4 must establish that /ongress intended to imply a private right or at least
that it is consistent ith the legislative scheme
>ailure to satisf# these two factors is determinative even if show
#ou were in class meant to be benefited
/ourt will not find a private right of action if /ongress did not intend one even
if P is the intended beneficiar# and not state law implication
/ongress did not intend a private right of action under J1C(a)
d. Arguments to be made
(1) Hhen /ongress wanted a private damages remed#! it )new how to do it and it
did so e+pressl# (J11 and J1)
8f it )new how to do it and did not do it here! must not have wanted
one
() Prevailing :egal /onte+t
8f provision is construed consistentl# in one wa# and /ongress
amends statute and leaves it alone seen as an affirmation that
the# intended that interpretation
/annot infer this when the views among the courts is split
(") Hho was intended to benefit from the statuteG
*nacted to protect investors or issuers or whoG
(5) $emed# at 0tate :aw
8f there is a remed# at state law! this cuts against a finding of a
private remed# in federal law
(.) :egislative 8ntent
:oo) to legislative histor# and committee reports
(9) /onsistent with :egislative 0cheme
The presence of e+press civil remedies within the same statute
militates against a finding of /ongressional intent to impl# further
remedies
*+press private rights have bells and whistles that would not be
present in implied private right (get out of procedural limitations
li)e statute of limitations (J1")
Hould impl#ing a private right be superfluousG
Presumption that a remed# was deliberatel# omitted from a statute
is strongest wen /ongress has enacted a comprehensive legislative
scheme including an integrated s#stem of procedures for
enforcement
5. /onte+t
a. (ost courts have concluded that there is not a private right of action under J1C
b. %ut! ripe for review after 1ustafson
/ase cut bac) drasticall# on coverage of J1(a)()! J11 (onl# appl# in public
offerings)
95
0o not as much overlap as court ma# have thought b=c J1C onl# applies in
private offerings
*. Inde0nification and "ontribution
1. Difference
a. /ontribution when one person is held liable and others who are guilt# are not
initiall# sued! the person who is sued and required to pa# under ?oint and several
liabilit# will go to other wrongdoers and get mone# for their part in violation
b. 8ndemnification one part# agrees to hold the other part# harmless and pa# an#
damages the# must pa#
. /ontribution J11(f)
a. 0tatutor# :anguage
1rants right of contribution to an# person liable under the section if the
person the# are see)ing contribution from would have been liable to ma)e
the same pa#ment
/annot see) contribution under this section from person who is not guilt#
of fraudulent misrepresentation
b. :iabilit# of &utside Directors
Proportionate liabilit# of section 1D(g) appl#
c. Also available under J1C(a) and J1 and *+change Act $ule 1-b'.
". 8ndemnification
a. 0*/ Position
8ndemnification is against public polic#
An# provision granting indemnification is unenforceable
b. 1lobus v. :aw $esearch 0ervices (C
th
/ir. 1E9E)
(1) 8ssue
Hhether an underwriter ma# be indemnified b# an issuer for liabilities
arising out of misstatements in an offering circular of which the
underwriter had actual )nowledge.
() 2olding underwriter cannot be indemnified
/ourt emphasiDes that this is a situation when underwriter has committed a
sin graver than ordinar# negligence
%ut must remember that 0*/ alwa#s thin)s it is against PP and
court cites to 0*/ as one of its reasons for not allowing it here
To tolerate indemnit# would encourage flouting the polic# of act A well
established that one cannot insure himself against his own rec)less! willful!
or criminal misconduct
0*/ views indemnification as against public polic#
:iabilities are there to promote enforcement and deter negligence
indemnification cuts against this polic#
(") 0ome courts refuse to enforce indemnification irrespective of culpabilit#
9.
:aw#ers are cautious to include them
0ome courts also hold that there is no private right of action for
indemnification under either Act
,II. Registration under ;3! Act and Reporting Re8uire0ents
A. "o00ission;s General Exe0pti/e Autorit% ' J"9
1. 0tatutor# :anguage
0*/ ma# conditionall# or unconditionall# e+empt an# person! securit#! or
transaction from an# provision or provisions of this title or of an# rule or
regulations thereunder
. /aveats
An# e+emption must be necessar# and appropriate in the public interest!
and consistent with the protection of investors
Authorit# of the 0*/ does not e+tend to *+change Act J1./ which relates
to government securities bro)ers and dealers
". J"(f) A relevant factors in rulema)ing and regulations
when the 0*/ must consider whether the action will promote efficienc#!
competition! and capital formation at an# time it is required to consider or
determine whether an action is necessar# or appropriate in the public
interest
#. Registration and Periodic Reporting
1. Hho must register ' J1 ($egistration $equirements for 0ecurities)
a$ (n issuer must register hen the securities are to be traded on a stock e'change
J1(a) 8t is unlawful for an# bro)er etc. to effect an# transaction on a
national securities e+change unless the a registration is effective
b. 1ust register is meet certain tests J1(g)
(1) *quit# securities are held b# at least .--'C.- people; and
() 8ssuer has total assets e+ceeding ,1-(
$ule 1g'1 raised amount using authorit# under J1(h)
(") 8ssuer must ma)e filing required within 1- da#s after end of first fiscal #ear
on the last da# of which it meets these requirements but remember J1.(d)
c. <asdaq
<A0D requires securities traded on <asdaq to be registered under 0ection 1
(0*/ considers this voluntar# registration)
. Boluntar# $egistration ' J1(g)
Act contemplates voluntar# registration
Hh# voluntaril# registerG
8nterlin)s with 7"" and 7"5
(a)e dealer prospectus deliver# requirements easier
Ta)e advantage of abbreviated filing form (start 7"5 histor#)
". Terminating $egistration
a. J1(g)(5)
99
to de'register have to have fewer than "-- record holders (even if #ou
voluntaril# registered)
b. $ule 1g'5 (liberaliDed standard)
To de'register need less than "-- holders or have less than .-- A<D total
assets have not e+ceeded ,1-( on last da# of three most recent #ears
5. Determining 2ow (an# 0hareholders Qou 2ave
a. J1(g)(5)
2ave requisite assets and 3a class of equit# securit# held of record b# five
hundred . . . 3
b. Definition of 3class4 ' J1(g)(.)
/lass shall include all securities of an issuer which are of substantiall#
similar character and holders of which en?o# substantiall# similar rights
and privileges
c. 2#pothetical V1
8ssuer has requisite assets and 5-- common 0=2 and -- preferred 0=2 A
do the# have to registerG <&
/ommon and preferred stoc) have different characteristics and will not be
considered to be in the same class.
Do not have to add 5-- and -- together so do not have a equit# class of
more than .-- holders
d. 2#pothetical V
,1-( is assets with 9-- common 0=2 and "-- preferred
<ow have to register
%ut! onl# have to register the class that fits the test (i.e. register the
common but not the preferred)
Hhat difference does it ma)eG
$eporting of shareholders is tied to certain classes and onl#
shareholders of certain classes have to report
0ome shareholders do not want to have to register (and will force
co. to sell them stoc) that does not have to be registered A wh# see
multiple classes of preferred stoc))
". )or0s to Register
1. >orm 1-
Different from 7"" Act forms so registration under 7"5 Act does not also
constitute registration under the 7"" Act
. >orm 1-'0%
>or small business issuers
*asier financial statements
". $egulation 0'P
Adopted under both acts (so form 1- will sa# 3provide the information
called for in line + of $eg. 0'P)
9C
(. Reporting
1. J1"(a) two t#pes of filings required
a. filings of such information and documents as the 0*/ requires to )eep current the
information provided at the time of registration
b. filings of such annual and quarterl# reports as the 0*/ requires irrespective of the
updating requirement
. >orm 1-'P (annual report)
0ame information as 0'1 in 7"" Act for most part
8ncorporated b# reference in 0' and 0'"
". >orm 1-'O (quarterl# report)
/ontains non'audited financial statements
5. >orm F'P
*vents that are important! if happen! ma# require filing this form
immediatel# and not waiting until ne+t quarterl# report
/hanges in who controls compan#! changes in auditors! resignation of a
director over certain t#pes of agreements
E. 1i0ing of )ilings and <143d5
1. *+planation from class
8f file registration statement under the 7"" Act have to file >orm 1-'P! 1-'
O! and F'P
Hhile most people who file under 7"" Act will fall under J1(g) of 7"5 Act
and have to file them an#wa#! J1.(d) was enacted as a timing issue
J1.(d) will require earlier compliance with filings than normal
under the 7"5 Act
periodic reporting must begin immediatel# upon the effectiveness
of a 7"" Act registration statement
. &ther *+planation
a. $egistering is not the onl# wa# to become sub?ect to *+change Act reporting
requirements
b. J1.(d) requires that a compan# that has registered securities under the 7"" Act is
sub?ect to J1" reporting
these are the companies that t#picall# meet J1(g)7s requirement to register
but the# then have 1- da#s to register and start reporting
this forces then to star registering immediatel# upon the effectiveness of the
registration statement (even if have not registered under J1 of *+change
Act #et)
if a compan# is reporting onl# because of J1.(d) (i.e. it does not meet the
requirements of J1(g)) and has fewer than "-- shareholders it ma#
discontinue reporting after 1 #ear)
>. Record-?eeping J1"(b)()'(")
1. $equirements J1"(b)()
a. maintain financial records in 3reasonable detail4 to reflect accuratel# compan#
transactions! and
9F
b. put into place internal accounting controls sufficient to provide 3reasonable
assurances4 of internal accountabilit# and proper accounting
. *+emptions J1"(b)(")
*+empted from these requirements when act in cooperation with certain federal
officials in connection with matters concerning national securit# A provide cover
for clandestine operations
". Problems under J1"(b)()
a. *nacted under the >oreign /orrupt Practices Act in response to 3corporate
Hatergate corporations ma)ing questionable pa#ments
b. &pen ended nature made provisions ver# controversial and brought fears of
administrative overreaching
c. 0*/ said that inadvertent record )eeping mista)es will not give rise to
enforcement proceedings and to be sub?ect to enforcement the compan# has to be
aware or reasonabl# have )nown about the mista)es
d. Act now reads 3reasonable assurances4 and 3reasonable detail4 mean such level
of detail and degree of assurance as would satisf# prudent officials in the conduct
of their own affairs
1. Section 32 (Penalties)
1. 0tatutor# language
An# person who illfully and knoingly ma)es a statement . . . Tin a filed
documentU . . . which was false or misleading with respect to an# material
fact . . . but no person shall be sub?ect to imprisonment under this section
for the violation if he proves that he had no knoledge of such rule or
regulation
. Hillful did it on purpose
". Pnowing )new there was a rule that made it illegal to do that the# did
*. Pri/ate Rigt of Actions under <12 and <13
1. /ramer v. 1eneral Telephone (1ECC)
a. %ac)ground
8s there an implied right of action under J1 for misrepresentation and
omissions of material factsG
b. 2olding
9o implied private right of action under ";, but there is an e'press
private right of action under "0
There is a case that holds private right of action under J1 when issuer
does not register at all
. 8n $e Penn /entral 0ecurities :itigation (1EC5)
a. 8ssue
8f there an implied private right of action under J1"G
b. 2olding
9o private right of action under "-
43s are avoiding "0 b2c not attractive
(1) no one succeeds in court under it
9E
() purchaser=seller requirement (cannot argue would have purchased)
(") reliance requirement
3e#eball reliance4 had to have actuall# read report
#ourself rather than ?ust rel#ing on information or advice
(5) loss causation
misrepresentation cause the diminution in value to the
investor
(.) D has a good faith and no )nowledge defense
0o if negligent! not liable as long as in good faith
(9) /osts and attorne#s fees can be assessed against either part#
,III. Prox% Regulation
A. $egulator# 0cheme
1. Hho /overed
0ecurities that are registered under J1(b)!(g)
Does not cover purel# J1.(d) filers
. Pro+# statements and cards
Pro+# statement what is voted on
Pro+# card instrument emplo#ed to vote on statement
". 0ection 15 (a)
1ives the 0*/ the power to pass rules
1ives rules passed the force of law
5. 0ection 15(b)
a. 0tatutor# :anguage
;nlawful for securities firms! ban)s and other e+ercising fiduciar# powers to
violate the 0*/7s pro+# rules in respect of registered and certain other
securities that are carried for the account of a customer
b. *ffect
(a)es sure beneficial owners get pro+ies and decide what action to ta)e
.. 0ection 15(c)
a. :anguage
8f management does not solicit pro+ies! consents or other authoriDations in
connection with a meeting! the /ompan# still must file equivalent materials
with the 0*/ and send them to the shareholders to )eep the shareholders
informed
b. *ffect
/ompanies that do not need to solicit pro+ies must still provide
shareholders with adequate disclosure
9. $egulation 15A
8nstructions for the preparation! filing and provision to securit# holders of
pro+# materials
0chedule 15A details information that must be included
C-
C. Distribution of Pro+# 0tatement $ule 15a'9
a. $equirements
(1) Hhen compan# is having mundane annual meeting
Pro+# statement and form of pro+# must be filed with or mailed for
filing to 0*/ not later than the date the# are first used
() 8f not a mundane meeting
Pro+# statement and pro+# card must be filed with 0*/ ten da#s
before the# are used
b. 8f pro+# statement sent b# management in connection with an annual meeting!
must be preceded or accompanied b# an annual report
F. Hhat /ommunications are governed b# Pro+# $ules An# 0olicitation
a. Pro+# 0tatement
b. Pro+# >orms
c. An# other communications to securit# holders under circumstances reasonable
calculated to result in procurement! withholding or revocation of a pro+#
Ber# broad definition
E. Hhat /ommunications are *+cluded b# the Pro+# $ules <ot a 0olicitation@
a. Public communications b# shareholders as to how the# intend to vote and their
reasons for their decision
Allows shareholders to discuss corporate matters among themselves
*speciall# helpful for institutional investors
b. Activities that would constitute solicitations! so long as the shareholders or other
people involved@
Are not affiliated with management
Do not have an individual interest in the proposal to which the solicitation
relates
Do not see) pro+# authorit#
Do not provide an#one pro+# or other forms! such as consents! relating to
voting
c. De (inimis *+ception
A shareholder can solicit less than ten shareholders and not be sub?ect to
pro+# rules
1-. Hho is sub?ect to pro+# rules
a. *ver#one who see)s pro+# authorit#
b. 0olicitation conducted b# management
8f in connection with an annual meeting! pro+# must be accompanied or
preceded b# an annual report
Also must follow filing requirements from above
c. 0olicitations of shareholders b# shareholders $ule 15a'F
Too e+pensive for the securit# holder to do alone unless big institutional
investor
C1
$ule 15a'F
$equires management to include in its pro+# statement proposals
made b# securit# holders! along with supporting statements (up to
.-- words) when certain conditions are met
$equirements for shareholder timeliness! amount of securities
held! sub?ect of proposal (can7t violate law! can7t be about ordinar#
business operations of the issuer! can7t relate to an election of an
office)
8f management wants to e+clude! it must ma)e a filing with 0*/
stating its reasons for not including it (no'action letter)
#. )alse or +isleading State0ents
1. 0tatutor# :anguage $ule 15a'E
<o solicitation . . . shall be made b# means of an# pro+# statement . . . that is false
or misleading with respect to an# material fact! or which omits to state an#
material fact.
J15 gives the 0*/ power to ma)e rules dealing with pro+ies and gives those rules
the power of law (but the statute itself does not prohibit fraud)
. Potential Problems
a. /riminal :iabilit# J"
(1) 0tatutor# :anguage
An# person who willfull# violates an# provision of this title or an# rule or
regulation thereunder . . . or an# person who willfull# and )nowingl#
ma)es an# statement in an# application or document required to be
filed . . . which statement was false or misleading with respect to an#
material fact . . . can get prison or fine
%ut no person shall be sub?ect to imprisonment for the violation of an# rule
or regulation if he proves that he had no )nowledge of such rule or
regulation
() 0tandard of >ault
(isrepresentations in filings willful and )nowing
Pnowing must )now of statute or rule accused of violating
All other sections onl# have to show willful
<o imprisonment if can show lac) of )nowledge
b. 0*/ enforcement
c. *+press Private $ights of action under J1F for filed documents
d. 8mplied Private rights of action
Available for solicited shareholders
;suall# not available for pro+# contestants
All others appl# /ort
". Proper Plaintiff
a. 0hareholder whose vote was solicited
C
Hill be a proper plaintiff (%ora))
(ean to be protected b# statute and rule
b. Possible /ompetitor ("
rd
part#) claiming merging cos. Are being misleading
<ot a proper plaintiff
3Hhen a plaintiff7s claim arises from its role as a pro+# contestant! it does not
have standing to sue4 ($o#al %usiness 1roup)
c. &ther potential plaintiffs
Probabl# none must determine if the# were the intended beneficiar# of
statute
5. 1eneral 8ssues
a. P must prove
Proper P
Proper D
(aterial misrepresentation
/ausation (essential lin) doctrine)
Degree of fault (varies depending on circuit)
:oss causation
b. Defenses Available
$ebut P7s case
0afe harbor for forward loo)ing statements J1*
%espea)s caution
c. Damages
:imitations ' J1D(e)
Proportionate :iabilit# ' J1D(f)
P must prove them
.. Proper Defendant
a. An#one who does the bad act
3one who send a pro+# solicitation that contains a material misrepresentation
or omission of a material fact4
b. An#one engaging in solicitation sub?ect to J15(a) rule! but remember some are
e+empted
c. 8f the# do no solicit! did not do %ad Act! and not a proper D
9. The %ad Act (aterial (isrepresentation or &mission
a. 1eneral %ac)ground
0tatement must be material
There is an e+plicit dut# to correct statements which ma# become misleading
b. Definition of (aterialit# (T0/ 8ndustries)
1aterial substantial likelihood that a reasonable shareholder ould
consider it important in deciding ho to vote
C"
0howing that fact would have assumed actual significance in the
deliberations of the reasonable shareholder! not that it would have
changed their vote
>act significantl# altered the total mi+ of information available
$ationale for 0tandard purpose of the rule is to ensure disclosures b#
corporate manage in order to enable shareholders to ma)e an informed choice
c. 0tatements of %elief (Birginia %an)shares)
=pinions of directors are material here they suggest something about the
underlying sub@ect matter
3we do not substantiall# narrow the cause of action b# requiring a
plaintiff to demonstrate something false or misleading in what the
statement e+pressl# or impliedl# declared about its sub?ect4
8f the# do not mislead as to underl#ing sub?ect matter not actionable
Disbelief or undisclosed motivation standing alone is insufficient to satisf# the
element of fact that must be established under J15(a)
A misstatement of opinion is hardd to prove
d. Additional /onsiderations
8espeaks /aution +octrine (pplies
/an render statement immaterial if in document with sufficient
cautionar# language
)afe Aarbor ;".
>orward loo)ing pro+# statements in pro+# materials are covered
b# this if follow requirements and not e+cluded
C. /ausation $equired ((ills v. *lectric Auto':ite)
a. *stablishing /ausation
Hhere there has been a finding of materialit# a shareholder has made a
sufficient showing of causal relationship between the violation and the in?ur#
for which he see)s to redress if he proves that the pro'y solicitation itself,
rather than the particular defect in the solicitation materials, as an
essential link in the accomplishment of the transaction
b. $ationale for 0tandard
8f D could defend b# showing the merger was fair! a ?udicial appraisal for the
merger7s merits could be substituted for the actual and informed vote of the
stoc)holders
This test will avoid the impracticalities of determining of how ma# votes were
affected
P does not have to show reliance
c. /ausation Hhen (anagement 2as *nough 0hares Hithout 0hareholders (/ole)
8ssue Hhether causation could be shown where the management controls a
sufficient number of shares to approve the transaction without an# votes from
the minorit#
2olding
C5
0olicitation of pro+ies was not required b# an# law (A0P A%&;T
T280 A<D D80T8</T8< H=BA)
Plaintiffs had three options see) appraisal rights! threaten to see)
them to force D to improve its offer! see) to en?oin the merger
%in vie of these three alternatives to accepting the offer, pro'y
solicitation as an essential link&
%# lulling shareholders into thin)ing this was a good merger! D
avoided have to deal with shareholders e+ercising one of those
options
These alternatives are not available for all P7s in this situation
d. /ausation Hhen (anagement 2as *nough 0hares (Birginia %an)shares)
(1) 8ssue
Hhether causation can be demonstrated b# a member of a class of minorit#
shareholders whose votes are not required b# law or corporate b#law to
authoriDe the transaction giving rise to the claim
() 2olding
P argues lin) e+isted and was essential b=c vote need for public relations
and good will
/ourt re?ects ma?orit# had enough votes to push merger through
(this was not an essential reason to solicit pro+ies)
Theor# would e+pand the class of plaintiffs who can bring suit
(/ongress did not intend this)
;nder %lue /hips! did not want to turn statute into questions of
h#pothetical causes of action issues would be haD#! reliable
evidence would seldom e+ist
P argues shareholder vote resulted in loss of self dealing cause of action
/ourt does not decide question b=c no indication that pro+#
solicitation resulted in an# such loss
8f information not adequatel# disclosed favorable minorit# vote
induced b# the solicitation would not suffice to render the merger
invulnerable to later attac) on the ground of conflict (must have
informed voting to protect merger from later attac))
(") $emains of /ole
/ole not overridden b=c there vote was required b# law (not sure)
2ere not b#law or law required the vote of shareholders and pro+#
solicitation involved
1abaldon speculates that if /ole had to deal with loss of state right!
0upreme /ourt would not endorse state rightGGGGG
e. T#pe of /ausation 8nvolved in These /ases Transaction /ausation
8f show statement material and an essential lin)! do not have to
show reliance on the misstatements
F. :oss /ausation (not much case law b=c cases come up at in?unction stage)
C.
a. T#picall# required under $ule 15a'E
b. Hhat is itG
*orms the link beteen the rong complained of and the fact that the
plaintiff has been damaged by the rong
Plaintiff must show that he suffered a loss because of the pro+# solicitation
c. J1D(b)(5)
%!n any private action arising under the .'change (ct the plaintiff shall
have the burden of proving that the act or omission of the defendant
alleged to violate the (ct caused the loss for hich the plaintiff seeks to
recover&
E. :imitations on Damages J1D(e)
a. Applies To@
Private actions where the plaintiff see)s to establish damages b# reference
to the mar)et price of a securit#
b. :imit
+amages cannot e'ceed the difference beteen the plaintiff3s purchase
or sale price and the mean trading price
1ean 6rading 4rice price during the E- da# period beginning on the
da# on which the information correcting the misstatement or omission that
is the basis for the action is disseminated to the mar)et
". (egree of )ault Re8uired
1. 1eneral %ac)ground
<ever decided b# the 0upreme /ourt
/ourts have gone both wa#s some sa# negligence is enough while
others require scienter (strict liabilit# has not been decided
$ule is ver# plaintiff friendl# people who do this should be liable! but
1abaldon sa#s if appl# strict /ort factors ma# come out a different wa#
/ourts are inclined to be more permissive with outsiders (directors and
accountants) then with insiders (issuer and directors)
. Two Possible Degrees of >ault
<egligence P is not required to establish an# evil motive or rec)less
disregard of the facts b# D (ver# broad standard of fault)
0cienter P must show a )nowing misrepresentation of rec)less disregard
of the truth (ver# hard standard of fault to prove)
". 1erstle v. 1amble 0)ogmo (<egligence is sufficient)
(1) %ac)ground
(inorit# shareholders are bringing suit
Pro+# sent to them contained an inadequate disclosure of profits from sale
of advertising plants and plans to sell the plants
() 2olding
Hhere the plaintiffs represent the ver# class who were as)ed to approve a
merger on the basis of a misleading pro+# statement and are see)ing
C9
compensation from the beneficiar# who is responsible for the preparation
of the statement! the# are not required to establish an# evil motive or even
rec)less disregard of the facts negligence sufficient
$ationale
$ule 15a'E is distinguishable from $ule 1-b'.
1-b'. requires scienter but legislative mandate is to regulate
manipulative and deceptive devices
here more concerned with protection of outsider whose pro+# is
being solicited (consistent with legislative scheme)
$ule 1-b'. tries to encourage companies to release information
if can be liable on lower negligence standard ma# not do it
2ere! the disclosures are mandator#
;nder tort liabilit#! negligence is sufficient for person who supplies
false information to another with intent to influence transaction
/ourt did not have to decide if strict liabilit# should be imposed
2ere the D was at least negligent so court does not have to decide if
liable without an# culpabilit#
5. Adams v. 0tandard Pnitting (ills ((ust show scienter)
(1) %ac)ground
&utside accounting firm made a negligent error in failing to point out in
pro+# statement sent to shareholders that restrictions on dividends applied
to preferred as well as common stoc)
() 2olding
0tandard is scienter have to )now of misstatement was false=misleading
or have a rec)less indifference to the truth
$ationale for higher standard
Accountant will not benefit form the misrepresentation (lac) of
motive)
Accountants prepare financial statements dail# and the potential
liabilit# for relativel# minor mista)es would be huge under a
negligence standard
(. (a0ages
"$ 4 can get damages or an in@unction
P t#picall# see)s an in?unction courts often inquire into the fairness of a
completed transaction on which shareholders voted and impose damages
the effectivel# reformulate the terms of the transaction
Hhen see)ing damages P must prove damages have to show both
transaction and loss causation (discussed above)
. J1D(g) Private Actions ;nder the *+change Act
+ generally is liable solely for the portion of a @udgment that corresponds
to the percentage of responsibility of that +, as determined under ;"+
CC
D is liable for damages ?ointl# and severall# onl# when the trier of fact
specificall# determines that the D )nowingl# committed a violation of the
securities laws (can onl# be liable for ever#thing if )new committing
violation)
D has a right of contribution based on proportionate liabilit#
I@. 1ender 6ffer Regulation
A. /onte+t Two T#pes of Tender &ffers
1. 0toc) Tender &ffers
Acquiring compan# offers its securities in e+change for shares in the target
Hilliams Act applies
Alwa#s been sub?ect to registration requirements of 7"" Act b=c offering stoc)
Do not have to worr# about $ule 15. (onl# applies to collective decision ma)ing)
. /ash Tender &ffers
Target7s shareholders are offered cash in e+change for their shares
Hilliams Act applies
7"" Act does not appl# b=c not offering stoc)
$ule 15. of 7"" Act does not appl#
%. Hilliams Act
1. Purpose of Act
8ntended to level the pla#ing field for the target and the acquirer
Prevent shareholders from giving up their shares without adequate
disclosure
. 0ection 1"(d)
a. $equirement
A person who owns beneficiall# more than five percent of a class of
equity security registered under the .'change (ct to provide certain
information to the issuer! 0*/! and each e+change on which the securit# is
traded ithin "# days after the acquisition of securities that trigger
reporting requirement
b. 0cope
<ot limited to tender offers an#one who gets .6 must file
&nl# applies to equit# securities! not debt
c. $eporting $equirements
J1"(d) contains a list of what must be disclosed
%ut 0*/ has added to the list
$egulation 1"D'1 details the disclosure requirements
0chedule 1"D
Dut# to file amendments
(ust file upon the occurrence of material changes in the disclosed
information
8nformation that must be disclosed
CF
Designed to give mgt. basic information concerning potential tender
offerors
<umber of shares beneficiall# owned
0ource of funds used to purchase the shares
8f purpose of the purchase of shares is to acquire control
An# plans to liquidate the issuer! to sell its assets! to engage in a
merger! or to effect an# other ma?or change in its structure
". 0ection 1"(e)
0*/ has power to regulate repurchases b# issuers of their own equit#
securities
5. 0ection 15(d)
a. 0tatutor# :anguage
8t is unlaful for an# person to make a tender offer for and *+change Act
registered equity security if success in the offer would result in ownership
of more than five percent of the class unless certain filings are made
b. Timing of Disclosure
(ain disclosure document must be filed with the 0*/ not later than the
time the tender offer is announced
All other documents must be filed b# the time the# are first used
/opies of all filings must be sent to the issuer not later than the time the#
are first published or sent to shareholders
c. 0ubstantive $egulation regulate terms of T& b# disclosure
*+, -ithdra%al Right
$ule 15d'C securities deposited in response to a tender offer can be
withdrawn at an# time during the entire period of the T&
*as# rescission for securit# holders who change their minds
Protection against having securities tied up indefinitel# while a
tender offeror waits to receive desired number of shares
Actual statute onl# provides for withdrawal within seven da#s after original
tender offer! and after si+t# da#s have elapsed following this date
*., Pro Rata Purchasing
$ule 15d'F when a tender offer is for less than all the securities of a
class! a tender offeror must purchase tendered securities pro rata according
to the number of securities tendered at an# time during the period of the
tender offer
2elps avoid pressure securit# holders ma# feel to tender quic)l#
and without adequate thought
Protects small holders from being ignored
Actual statute onl# requires pro rata purchasing from those tendering
during the first ten da#s the offer is open
*(, /est Price Rule
CE
Hhen a tender offeror increases the tender offer price after some holders
have tendered! statute requires that all tendering securit# holders must be
paid the higher price
.. 0ection 15(e) Anti'>raud Provision
a. 0tatutor# :anguage
38t shall be unlaful for an# person to ma)e an# untrue statement of
material fact or omit to state any material fact . . . or to engage in an#
fraudulent! deceptive! or manipulative acts or practices in connection ith
any tender offer . . . .4
3The 0*/ shall for purposes of this subsection! b# rules and regulations
define! and prescribe means reasonabl# designed to prevent! such acts and
practices as are fraudulent! deceptive or manipulative4
This is how 0*/ had power to pass substantive regulations above
(withdrawal! pro rata and best price)
b. Application
Applies to tender offers for an# securit# (not ?ust registered equit#
securities)
9. 0ection 15(f)
a. Disclosures required when@
1a@ority of directors are to be filled, otherise than at a meeting of
security holders, folloing an acquisition of securities that is sub@ect to
the requirements of "-(d) or ",(d)
Disclose to 0*/ and securit# holders
b. Trigger
>illing of vacant directorships b# sitting directors
After an acquisition sub?ect to regulation under Hilliams Act
". .at is a 1ender 6ffer
1. <ot defined b# statute or 0*/ regulation or rule
0*/ wants to maintain fle+ibilit#
/ourts have own formulations factors used overlap and ma# not matter
which approach #ou appl#
. Hellman v. Dic)inson (0.D.<.Q. 1ECE)
a. *ight >actors suggested b# 0*/ as characteristic of a Tender &ffer
(1) active and widespread solicitation of public shareholders for the shares of
an issuer
() solicitation made for a substantial percentage of the issuer7s stoc)
(") offer to purchase made at a premium over the prevailing mar)et price
(5) terms of the offer are firm rather than negotiable
(.) offer contingent on the tender of a fi+ed number of share! often sub?ect ot a
fi+ed ma+imum number to be purchased
(9) offer open onl# a limited period of time
(C) offeree sub?ect to pressure to sell his stoc)
F-
(F) public announcements of a purchasing program concerning the target
compan# precede or accompan# rapid accumulation of large amounts of
the target compan#7s securities
b. 0*/ v. /arter 2awle# 2ale 0tores (E
th
/ir. 1EF.)
All eight of the Hellman factors do not have to be present in a particular
situation before it is recogniDed as a tender offer
$ather! the provide some guidance as to the traditional indicia of a tender
offer
". 0'1 0ecurities v. >uqua 8nvestment (D. (ass. 1ECF)
a. Tender offer e+ists when there is@
(1) a publicl# announced intention b# the purchaser to acquire a substantial
bloc) of stoc) of the target compan# for purposes of acquiring control
thereof! A<D
() a subsequent rapid acquisition b# the purchaser of large bloc)s of stoc)
through open mar)et and privatel# negotiated purchases
b. :imitations on Test
&nl# relates to specialiDed situations that do not fit the mold of classic tender
offers
c. $e?ected b# <inth /ircuit
Test is vague and difficult to appl#
&ffers little guidance to the issuer as to when his conduct will come within the
ambit of a 0*/ rule
5. 2anson Trust P:/ v. 0/( /orp. (
nd
/ir. 1EF.
a. %ac)ground
/ash tender offer b# 2T A counter proposal b# 0/( A 2T then increased price
A 0/( increased price and added a crown ?ewel
2T then terminated tender offer and made private purchases
b. 2olding <ot a tender offer
(1) $e?ected Hellman F factor test
Although man# of the factors are relevant! court does not want to have a
mandator# litmus test
/ourt said that a solicitation ma# constitute a tender offer even though
some of the F factors are missing &$ ma# not be a T& even though man#
of the factors are present
() Test :oo) to statutor# purpose
Tender &ffer 8f viewing the transaction in light of the totalit# of
circumstances! there appears to be a likelihood that unless the pre5
acquisition filing strictures of that statute are folloed there ill be a
substantial risk that solicitees ill lack information needed to make a
carefully considered appraisal of the proposal put before them
F1
:oo)s at whether the purpose of the T& regulations would be furthered if
applied would the offerees lac) information needed to ma)e a careful
appraisal of the proposal without the pre'acquisition filings
(") Application of Test <ot a tender offer
>ew number of sellers
All bu#ers were sophisticated
<o pressure to sell e+cept b# forces of the mar)et place
<o widespread advance publicit#
<ot at a substantial premium
&ffers not made contingent on getting certain number of shares
<o time limit within which he would onl# ma)e the purchases
D. 0ection 1"(d) Hho (a# %ring 0uit
1. 0*/
a. 0ection 1
/an bring an enforcement action in a district court see)ing an in?unction
b. 0ection 1/
/an issue a cease and desist order
. Mustice Department
/an see) a criminal indictment when it believes willfulness was involved
in a breach
". Private Plaintiff
a. /onte+t
(a?or issue is whether an issuer can sue a shareholder who have violated
disclosure requirements b# failing to file 0chedule 1"D or filed a defective one
b. 8ndiana <ational /orp. v. $ich (C
th
/ir. 1EF")
(1) 8ssue
Hhether there is an implied private right of action for an issuer
corporation to seek in@unctive relief under J1"(d) of 7"5 Act
() 2olding implied right of action e+ists
/ort >actors Anal#sis
/ongressional intent is particularly important
Hhen /ongress does a significant amendment and leaves intact
provision where federal courts have implied a private cause of
action! evidence was that /ongress had affirmativel# intended to
preserve that remed#
Application /ongress intended a private right
0tatute on which this was modeled had a private right of action
Act has been amended twice and /ongress did not overturn
precedent holding a private right of action
0/ had assumed one was available to issuer corporations
&nl# holding that can ma)e disclosure requirements effective
filing is onl# sent to 0*/ and issuer
F
c. &ther 2oldings
(1) 0ome district courts and one circuit court sa# no private right
() :ibert# <ational 8nsurance v. /harter (11
th
/ir.)
Plaintiff sought divestiture of its shares that were owned b# D
2eld /ongress did not intend a private right of action
1
st
amendment to statute too soon after passage to affirm precedent

nd
amendment did not permit an unambiguous inference of
legislative intent to preserve a ?udiciall# recogniDed issuer right of
action
(") >lorida /ommercial %an)s v. /ulverhouse (11
th
/ir. 1EF.)
2eld a target company does have standing to sue when see)ing corrective
disclosure rather than divestiture
*. Proper D under J1"(d)
1. An#one who violates J1"(d)
. The acquiring person or group who own more than .6 and don7t file or ma)e
defective filings
). Substanti/e Section 133d5 Issues
1. 1roup Acquiring (ore Than .6 1A> /orp. v. (ilstein
a. %ac)ground
The (ilsteins7s owned more than .6 of 1A>7s preferred stoc) and some time
after the effective date of the Hilliams Act the# agreed to act as a s#ndicate to
seiDe control of 1A>
>iled a 0chedule 1"D and each time denied an intention to accumulate
additional shares but continued to acquire 1A>7s common stoc)
b. 2olding
)ection "-(d)(-) hen to or more persons act as a partnership or other
group for the purpose of acquiring, holding, or disposing or securities of an
issuer, such syndicate or group shall be deemed a %person& for the purposes
of "-(d)
The (ilsteins separatel# held more than .6 but the onl# question is whether
the s#ndicate acquired those shares after the effective date of the Hilliams Act
Boting control of stoc) is the onl# relevant element of beneficial
ownership
The s#ndicate gained beneficial control of the stoc) after its
formation which was after the effective date of the Act
8ndividuals acquired stoc) before effective date of Act then
groups formed representing more than .6 of stoc) with an e#e
towards control after the effective date this constitutes acquiring
stoc)s under J1"(d)
2ouse and 0enate reports support this group is deemed to have
become the beneficial owners of more than .6 at the time the#
agreed to wor) together
F"
0hould have filed a 0chedule 1"D within 1- da#s of forming the
s#ndicate and 3acquiring4 the shares
c. %road $eading of 0tatute
8f a group collectivel# owns more than .6 of stoc) and tal) about the future!
the are a group
(ere conversations are not enough
%e#ond that to forming a plan will place #ou under J1"(d)
8f form group with not enough shares! do not have to file
. 8rreparable 2arm $ondeau v. (osinee Paper /orp.
a. %ac)ground
D bought more than .6 of stoc) and did not file 1"D because was unaware of
requirement
After getting a letter from compan#! consulted an attorne# and immediatel#
filed one
2is bought stoc) b=c though it was a good investment and ma# gain control
and change management
b. 8ssue
Hhether a showing of irreparable harm is necessar# for a private litigant to
obtain in?unctive relief in a suit under J1"(d).
c. 2olding
/ourt does not address issue of standing! but a target almost alwa#s has
standing (but ma# be dependent on remed# sought)
!n order to get an in@unction under "-(d) a plaintiff must prove irreparable
harm
Hhile issuer will have standing not ever# little violation will give
rise to an in?unction
8n?unctive relief is a remed# based on having irreparable harm and inadequac#
of legal remedies
An action for damages is better! but if damages not adequate equit#
will tr# to ma)e #ou whole
+anger of recurrence<
<ot li)el# that he will do it again
4ersons ho allegedly sold at an unfairly depressed price have an adequate
remedy by ay of action for damages, thus negating the basis for equitable
relief
<o irreparable harm found
2as enough shares! but has not launched an assault or an# tender
offer in the wor)s
d. 0cope of 2olding
<ot necessaril# binding under J15(e) equitable considerations ma# be
different and have different purposes for the statute
F5
G. Section 1!3e5 .o 0a% sue9 Proper P9
1. 1enerall#
0hareholders can sue
Target corporations can sue tender offerors when the# see) an in?unction
Potential acquirer in suit for damages in <&T a proper P
>or all others argue b# analog#
. Application
J15(e) applies to tender offers for an# securit# not ?ust registered equit#
securities
". Piper v. /hris'/raft 8ndustries (0/ 1ECC)
a. 8ssue
8s an unsuccessful tender offeror a proper P to sue the target compan# or a
competing offeror for damagesG <o
b. 2olding
(") 6ender offeror suing in its capacity as a takeover bidder does not have
standing to sue for damages under ",(e)
() $ationale
Purpose of the Hilliams Act is to insure that public shareholders who are
confronted b# a cash tender offer for their stoc) will not be required to
respond without adequate information
<othing in legislative histor# suggests /ongress contemplated a private
cause of action for damages b# one of several contending offerors against a
successful bidder
Application of /ort >actors
Act was passed for benefit of shareholders
8nconsistent with legislative scheme to allow unsuccessful bidder to
get damages
<o legislative intent
0tate cause of action present
*ven though 0*/ has practical constraints recogniDed in other cases!
institutional limitations alone do not lead to the conclusion that an#
interested part# in a tender offer should have a cause of action for damages
against a competing bidder
5. :ibert# <ational 8nsurance v. /harter (11
th
/ir. 1EF5)
Aeld target does not have right to bring an in@unction under ",(e)
Anal#Des /ort! but slips lightl# over question of legislative intent
:imited precedential value
.. >lorida /ommercial %an)s v. /ulverhouse (11
th
/ir. 1EF.)
6arget company has standing to sue under ",(e) hen seeking
corrective disclosures rather than divestiture of stoc) in the plaintiff owned
b# the defendant
9. *lectronic 0pecialt# v. 8nternational /ontrols /orp. (
nd
/ir. 1E9E)
F.
Target corporation can sue tender offerors when the# see) an in?unction
0hareholders of the target also have the right to sue tender offerors when
the# see) an in?unciton
Hilliams Act was intended to protect shareholders confronted with
a tender offer
/learl# the# have standing
C. :ewis v. (c1raw (
nd
/ir. 1EF-)
a. 8ssue
Hhether shareholders ma# maintain a cause of action for damaged under the
Hilliams Act where the# concede that no tender offer has been made to them.
b. 2olding <o 8mplied $ight of Action
P7s concede that no tender offer too) place and no shareholder was in a
position to tender his shares at the stated price
0tatements must be made 3in connection with a tender offer4 as
required b# J15(e)
Purpose of J15(e)
Protect investors
*nsure won7t be required to respond without adequate information
&ne element of a cause of action is a showing that there was a
misrepresentation upon which the target corporation7s shareholders relied
6here cannot be any reliance here b2c no opportunity to tender
shares
0hareholders have no cause of action b=c the# could not have relied
on the statements made because the# were not made 3in connection
with a tender offer4
<o reliance was even possible so to presume reliance (as do in other
sections of the Act) would be illogical
0cope of 2olding
0tatements made on eve of tender offer b# target or offeror ma# be
covered
8f offer becomes effective and reliance demonstrated or presumed!
such statements ma# be made 3in connection with a tender offer4 as
required b# J15(e)
*. "onduct Proscribed b% Section 1!3e5
1. 0tatutor# :anguage
38t shall be unlawful for an# person to ma)e an# untrue statement of a
material fact or omit to state an# fact . . . or to engage in any fraudulent,
deceptive or manipulative acts in connection ith a tender offer4
3The 0*/ shall b# rules and regulations define and prescribe means
reasonabl# designed to prevent! such acts and practices as are fraudulent!
deceptive! or manipulative4
. *arl# /ase :aw
F9
0i+th /ircuit had found that a defendant could be held liable for conduct
that was manipulative even when the conduct did not contain an element of
misstatement or nondisclosure
0econd! Third! and *ighth /ircuits had issued opinions with the opposite
conclusions
". 0chreiber v. %urlington 8nc. (1EF.)
a. %ac)ground
P reads the phrase 3fraudulent! deceptive! or manipulative acts or practices4 to
include acts which! although full# disclosed! artificiall# affect the price of the
ta)eover target7s stoc)
P believes can have a violation of J15(e) without an# allegation of
nondisclosure (i.e. no untrue statement or omission)
D made one tender offer and then withdrew
0ubstituted with new tender offer at same price but reduced number of shares
and a golden parachute
P claims this was manipulative b=c stirred up interest through first tender offer
and then withdrew
b. 2olding
%manipulative& acts under ",(e) require misrepresentation or
nondisclosure
(anipulative connotes 3conduct designed to deceive or defraud
investors b# controlling or artificiall# affecting the price of
securities4
Hithout misrepresentation of nondisclosure! J15(e) has not been
violated
/ongress relied primaril# on disclosure to implement the purpose of
the Hilliams Act
/ourt is not interested in fairness and substance this is a disclosure
statute
(ust have a disclosure related effect
<owhere in the legislative histor# is there the slightest suggestion
that this serves an# purpose other than disclosure
:ac) of disclosure in
nd
tender offer regarding golden parachute
The nondisclosure must have a causal relationship to plaintiff7s
alleged in?uries
Plaintiff is complaining that she was in?ured b# first tender offer!
and the nondisclosure too) place during the second tender offer
Must because a technical violation ma# not lead to recover#
(ust have misrepresentation=nondisclosure and ?ust because there is a violation
does not mean #ou have a private right need cause and suing for the right
remed#
8. $ule 15e'"
FC
1. $ule7s :anguage
3it shall constitute a fraudulent! deceptive! or manipulative act or practice
within the meaning of J15(e) for an# person who is in possession of
material information relating to such tender offer which information he
)nows or has reason to )now is non'public and which his )nows or has
reason to )now has been acquired directl# or indirectl# form certain
people . . . to purchase or sell or cause to be purchased or sold an# of such
securities4
also illegal for insiders to tip others with material information about tender
offers
. 2ow Biolated
/an be violated without the e+istence of a related violation of a fiduciar# or
other such dut#! as is required in a $ule 1-b'. case
". 0*/7s Power to *nact ;0 v. &72agan
a. %ac)ground
0traightforward misappropriation of information case involving a law#er
who wor)ed for a law firm that represented a bidder
b. 2olding
;nder J15(e)! 0*/ ma# prohibit acts! not themselves fraudulent under the
common law or J1-(b)! if the prohibition is reasonabl# designed to prevent
acts and practices that are fraudulent
As applied to this t#pe of case! this qualifies under J15(e) as a means
reasonabl# designed to prevent fraudulent trading on material! nonpublic
information in the tender offer conte+t
@. )raud in te Purcase or Sale of Securities <103b5 and Rule 10b-4
A. &verview
1. $ule 1-b'.
a. :anguage
8t shall be unlawful for an# person! directl# or indirectl# to
(a) to emplo# an# device! scheme! or artifice to defraud
(b) to ma)e an# untrue statement of a material fact or to omit to state a
material fact necessar# to ma)e that which was said not misleading
(c) to engage in an# act! practice! or course of business which operates to
would operate as a fraud or deceit upon an# person in connection with
the purchase or sale of an# securit#
b. &rigin
Drafted b# combining numbered subdivision of 0ecurities Act J1C(a) together
with *+change Act J1-(b)
c. Hh# <eededG
0ection 1-(b) onl# ma)es it unlawful to use an# manipulative or deceptive
device in contravention of such rules and regulations as the 0*/ ma# prescribe
as necessar# or appropriate
FF
0tatute does not ma)e an# acts unlawful! it ?ust allows the 0*/ to ma)e rules
that! if violated! will be unlawful
d. /lassifications of Biolations
(1) (isleading 0tatement (including statements which require a spea)er to sa#
more to ma)e it not misleading)
$ule 1-b'.(b)
() 8nsider Trading 8ncluding Tippers and Tipees
$ule 1-b'.(a) L (c)
(") (ar)et and &ther (anipulation
$ule 1-b'.(a) L (c)
;suall# done b# mar)et professionals
e. &rganiDation of /ases
(isleading 8nsider Trading
%asic Definition Te+as 1ulf 0ulfur
0uperintendent of 8nsurance
%rown v. 8vie
*rnst=Aaron
/ad#
Te+as 1ulf 0ulfur
/hiarella
Private Plaintiff %asic (in mar)et trans.)
%lue /hips
Affiliate ;te (face to face)
0hapiro (presume reliance in
open mar)et)
. 8n $e /ad# $oberts L /o. (1E91)
a. 8ssue
Hhat are the duties of a bro)er after receiving non'public information as to
a compan#7s dividend polic# from a director who is emplo#ed b# the same
bro)erage firmG
b. 2olding (8nsider Trading Tipper=Tipee
(1) &bligation
(n insider ith non5public material information has (a) a duty to
disclose the information or (b) refrain from trading
() Hho is under this obligationG
6raditional corporate insiders officers! directors! controlling
stoc)holders
3An# person4 who (a) has access! directl# or indirectl#! to
information intended to be available onl# for a corporate purpose
and not for the personal benefit of an#one! and (b) the inherent
unfairness involved where a part# ta)es advantage of such
information )nowing it is unavailable to those with whom he is
dealing
(") $ationale for $ule
Purpose of the law is to give equal access to info
FE
Biolates notion of equal access and unfair if have intended for
corporate affairs to be used to gain an advantage in the mar)et
This is wh# trading on insider information is fraud or deceit
". 0*/ v. Te+as 1ulf 0ulphur /o. (1E9F)
a. %ac)ground
D was mining for minerals and found stuff it )new was good but downpla#ed
importance of finding
D did not want to increase the stoc) price and wanted to figure out other land
to bu# (but court is interested in what the# were doing not motivation for doing
it)
/oncern is not over silence but rather the downpla#ing of the importance of the
discover# (misleading)
b. 2olding
(1) 8ntroduction
$ule 1-b'. is based in polic# on the ?ustifiable e+pectation of the securities
mar)etplace that all investors trading on impersonal e+changes have
relativel# equal access to material information
*ssence of $ule is that an#one who! trading for his own account in the
securities of a corporation has access! directl# or indirectl#! to information
intended to be available onl# for a corporate purpose and not for the
personal benefit of an#one ma# not ta)e advantage of such information
)nowing it is unavailable to those with whom he is dealing
People who come up with own theories on compan# can trade on that
information if developed for own purpose
325 +aterial Inside Infor0ation
Hhether facts are material within $ule 1-b'. when the facts relate to a
particular even and are undisclosed b# those persons who are
)nowledgeable thereof ill depend at any given time upon a balancing of
both the indicated probability that the event ill occur and the
anticipated magnitude of the event in light of the totality of company
activity
Ta)e both into account so if don7t )now if something will
happen will not alwa#s have to disclose
335 .en +a% Insiders Act9
8efore insiders may act upon material information, such information
must have been effectively disclosed in a manner sufficient to insure its
availability to the investing public
(ust have effective dissemination
(ere pres reliease does not mean have this
Hhere a formal announcement to the entire financial news media had been
promised in a prior official release )nown to the media! all insider activit#
must await dissemination of the promised official announcement
(5) (a# 8nsiders Accept 0toc) &ptions Hithout Disclosing (aterial 8nformation
to the 8ssuerG
E-
%ecause top managers were under a dut# before accepting stoc) options to
disclose an# material information to the %oard issuing the options
:ower tier insiders assumed superiors had told board issue of their
liabilit# undecided (ma# or ma# not have to disclose
$ationale %oard did not have material information that insiders had
when issued options and therefore the insiders were trading at information
disadvantage
345 In "onnection .it Re8uire0ent
Argument D relies on holding below that release produced no unusual
mar)et action and in absence of intent to affect the mar)et it was not issued
in connection with the purchase or sale of an# securit#
General 7ule speaker of misrepresentation does not have to purchase
of sell @ust reasonably e'pected that it ill be relied upon by a
reasonable investor to be %in connection ith the purchase or sale of a
security&
Phrase 3in connection with the purchase or sale of an# securit#4 intended
onl# that the device emplo#ed be of a sort that would cause reasonable
investors to rel# thereon and in so rel#ing cause them to purchase or sell a
corporation7s securities.
/orporations or persons responsible for the issuance of the misleading
statement does not have to engage in related securities transactions to
violate the law
Dut# to Avoid (isleading 0tatements applies to an# person whose
statement ma# be relied upon b# a reasonable investor (person ma)ing the
statement does not have to bu# and sell in connection with W)
Do not have to be bu#ing or selling a securit# to be liable if a
reasonable investor would rel# on what #ou said
#. AIn "onnection .itB Re8uire0ent
1. 1enerall#
To be sub?ect to $ule 1-b'.! the conduct prohibited b# the rule must be 3in
connection with the purchase or sale of a securit#4
. 0uperintendent of 8nsurance v. %an)ers :ife L /asualt# /o. (1EC1)
a. T#pe of /ase
*lement of the bad act (not private P)
(isleading case (not insider trading)
b. %ac)ground
8nsurance compan# sold the stoc) of one of its subsidiaries to D
Through a series of transactions D raised funds to pa# for the stoc) b#
causing the corporation the# purchased to sell bonds it owned and b#
misappropriating the proceeds from the sale of the bonds
The board of directors thought is was replacing Treasur# bonds with /D7s
and still had that mone#
c. 2olding
E1
(1) 0ection 1-(b) outlaws the use 3in connection with the purchase or sale4 of
an# securit# of 3an# manipulative or deceptive device or contrivance4
() /ompan# was in?ured as an investor thought a deceptive device which
deprived it of an# compensation for the sale of it valuable bloc) of
securities.
(") /ongress b# J1-(b) did not see) to regulate transactions which constitute
no more than internal corporate mismanagement
(5) /ompan# suffered an in?ur# as a result of deceptive practices touching its
sale of securities as an investor
345 1ouc 1est deceptive practices touched sale of security, not
necessarily caused sale of security
". %rown v. 8vie (.
th
/ir. 1EF1)
a. %ac)ground
%rown! 8vie and :ightse# were the onl# three shareholders in a close
corporation
8n 7C9 entered into a bu#'sell agreement that required shareholders to sell stoc)
bac) at boo) value
This agreement was unenforceable
8vie and :ightse# wanted to get rid of %rown so the# had him sign another
agreement telling him that it was necessar# to effectuate a change in insurance
companies
0even da#s later the# fired %rown
b. $ules
A necessar# element of $ule1-b'. offense is that the fraud or deceit be in
connection with the sale of a securit#
/oncept is fle+ibl# applied but requires that there be a ne+us between the fraud
and the securities sale
Plaintiff need not establish a direct or close relationship between the fraudulent
transaction and the purchase or sale! but onl# that the transaction involving the
sale touch the transaction involving the defendant7s fraud
c. Petchum v. 1reen ("
rd
/ir. 1ECC)
(1) %ac)ground
P alleged ousted from corporation due to D7s misrepresentations
P had to sell his stoc) bac) at less than fair value due to stoc) retirement
agreement
() 2olding
38n /onnection Hith4 requirement is not met fraud too remote to the
sale of the securit#
D did not as an integral part of their scheme induce P to enter into the
agreement
&b?ective of D7s fraud was to e+pel P from corporation in order to gain
control resulting sale of securit# was an indirect consequence of P7s
e+pulsion
E
Agreement had been in place over seven #ears prior to the alleged fraud
d. 2olding
38n /onnection Hith4 requirement was met more direct causal
connection between fraud and sale of securit#
D7s could oust P at an# time but had to lie to him to get him to sign the
agreement to sell his stoc) bac) at termination of emplo#ment
D7s fraud caused P to sign agreement sa#ing he would sell stoc) bac) at
termination terminated seven da#s later sale of stoc) required due to
agreement that was fraudulentl# obtained
5. AIn "onnection .itB and "orporate +is0anage0ent 0anta >e v. 1reen
(1ECC)
a. %ac)ground
0anta >e controlled E.6 of Pirb#7s stoc)
Hanted to merge with Pirb# doing a short form merger requiring vote of
parent7s board and pa#ment to minorit# shareholders
(inorit# stoc)holders do not have to approve but have appraisal rights (did not
e+ercise these rights)
Appraisal b# 0anta >e priced the stoc) at ,1.=share and minorit# shareholders
were given ,1.-=share minorit# sa#s worth ,CC=share and offering price
was misleading
b. 2olding <o Biolation
!n order to have a violation of 7ule "#b55 must be an allegation of fraud,
deceit of manipulation that is meant to mislead investors
(anipulation is a term of art when used in connection with
securities mar)ets refers to practices that are intended to mislead
investors b# artificiall# affecting mar)et activit#
"#(b) did not seek to regulate transactions hich constitute not more than
internal corporate mismanagement
shareholders onl# alleged that the# were treated unfairl# not that the# were
mislead
had all the relevant information
also element of causation misrepresentation did not cause alleged in?ur# b=c
did not see) appraisal rights
/. >ault $equired
1. *rnst L *rnst v. 2ochfelder (1EC9)
a. %ac)ground
Accounting firm prepared annual reports of >irst 0ecurities
P invested with >0 and their mone# directl# transferred to president of firm
rather than to escrow accounts as he had promised
b. 2olding (private P case)
(") )cienter is required to be liable under "#(b) and 7ule "#b55
(ere negligence is insufficient
E"
(ust show intentional conduct or lower courts also sa# rec)lessness
Applies to all sections of $ule 1-b'. even though it seems some can
be violated with negligence must be read in light of J1-(b) and
not J1C of 7"" Act
() $ationale
Hords 3manipulative or deceptive4 used in con?unction with
3device or contrivance4 strongl# suggest that section was intended
to proscribe )nowing or intentional misconduct
. Aaron v. 0*/ (1EF-)
a$ !s scienter required to be proved in an enforcement action by the )./<
Qes
b$ !s recklessness sufficient by itself to constitute scienter<
(ost courts have found that rec)lessness constitutes scienter! but the stor#
is a changing one
". Possible /omplication for Private Plaintiff 0ection 1D
a. 0tatutor# :anguage
/ongress changed the pleading requirements for private P7s and it is
unclear whether the# meant to change the degree of fault required
3private P must state with particularit# facts giving rise to a strong
inference that the defendant acted with the required state of mind4
b. /ourt 8nterpretation
(ost courts sa# that ?ust changing the pleading requirement
%ut perhaps /ongress was tr#ing to re?ect
nd
/ircuits rec)less standard
D. Persons 0ub?ect to Trading /onstraints
1. /hiarella v. ;0 (1EF-) Tipee Dut#
a. %ac)ground
*mplo#ee of a financial printing compan# that printed documents relating
to planned tender offers purchased shares in target companies before the
tender offers were announced publicl#
0old shares at a profit after announcements cause the mar)et price to rise
Acquirer

Printer 0hareholders

/hiarella. Target
b. 2olding not liable
&ne who fails to disclose material information prior to the consummation
of a transaction commits fraud onl# when he is under a dut# to do so
+uty arises only hen one party has information that the other party is
entitled to kno because of a fiduciary or similar relation of trust and
confidence beteen them
E5
<ot a corporate insider (for target) got no confidential info from target!
no info on earning power
Dut# arises from access is re?ected now it is access plus
/hiarella would have a dut# to the acquirer as a temporar# insider
c. Announced (isappropriation Theor#
D breached a dut# to a acquiring corporation when he acted upon
information that he obtained b# virtue of his position as an emplo#ee of a
printer emplo#ed b# the corporation
The breach of this dut# is said to support a conviction under J1-(b) for
fraud perpetrated upon both the acquiring corporation and the sellers
d. 0*/ response $ule 15e'"
8t shall constitute a fraudulent! deceptive! or manipulative act for an# other
person who is in possession of material information relating to such tender
offer which information he )nows or has reason to )now is nonpublic
which he )nows or has reason to )now has been acquired directl# or
indirectl# from (1) offering person () issuer of securities sought b# such
tender offer or (") an# officer! director! partner or emplo#ee . . . to purchase
of sell securities . . unless information publicl# disclosed
(a)es trading on non'public information from acquirer! issuer or
emplo#ees illegal
/ontroversial because puts liabilit# on people who supreme court refused
to hold responsible
&n facts of &72agan 0*/ had power to do this
. ;nited 0tates v. &72agan (1EEC) >iduciar# Dut# to Acquirer
a. %ac)ground
D is partner in a law firm representing 1rand (et in a tender offer for Pillsbur#
D bought shares and sold after tender offer announced
Acquirer (1rand (et) 0hareholders

:aw >irm Target (Pillsbur#)

D Partner
b. 2olding D :iable
(1) /lassical Theor#
/orporate insider who owes a fiduciar# dut# to the shareholders trades
with those shareholders with confidential information b# reason of their
position with corporation
Applies to not onl# to officers etc. but also to attorne#s! accountants etc.
and others who temporaril# become fiduciaries of a corporation
Does not appl# here b=c D does not owe the shareholders of the target
(people he bought shares from) an# fiduciar# dut#
() (isappropriation Theor#
E.
=utlas trading on the basis of nonpublic information by a corporate
%outsider& in breach of a duty oned not to a trading party, but to the
source of the information
>iduciar#7s undisclosed! self'serving use of a principal7s
information to purchase or sell securities in breach of a dut# of
lo#alt# and confidentialit# defrauds the principal of the e+clusive
use of that information
*ffect of Disclosure to the Principal
>ull disclosure forecloses liabilit# under this theor#
8ecause deception involve feigning fidelity to the source of info, if
he discloses to the source that he plans to trade on the nonpublic
info no violation (may be duty of loyalty violation)
38n connection with the purchase or sale of a securit#4 $equirement
fraud ta)es place not when he gets information but when he uses it
to bu# or sell securities
theor# does not appl# when defraud ban) into giving #ou a loan and
then use proceeds to bu# a securit#
proceeds have value apart form their use in a securities
transaction
fraud complete as soon as mone# obtained
c. Application to a Thief
0nea) thieves are not covered under misappropriation theor#
&nl# those who owe a fiduciar# dut# to target or acquirer are covered
". Dir)s v. 0*/ (1EF") Tipee :iabilit#
a. %ac)ground
8nsider gave D information tr#ing to e+pose fraud
D interviewed emplo#ees and tried to get Hall 0treet Mournal to e+pose fraud
D tal)ed with others about fraud and these people sold their shares
b. 2olding 2ow tippee acquires the dut# to refrain from trading on inside
information
(") + is only in breach of duty if info passed to him as in breach of insider3s
duty
(;) Whether a disclosure is a breach of duty hether the insider ill
personally benefit, directly or indirectly, from the disclosure
(-) =verall test absent some personal gain by the insider, there has been no
breach of duty to the stockholders, and absent a breach by the insider there
is no derivative breach
(5) Determining whether someone benefits
>ocus on ob?ective criteria
Pecuniar# gain or reputational gain that will translate into future
earnings
E9
$elationship between the insider and the recipient that suggests a
quid pro quo from the recipient or an intention to benefit the
particular recipient
8nsider ma)es a gift of confidential information to a trading relative
or friend resembles trading b# insider himself followed b# a gift
of the profits to the recipient
.. 8ssuer7s Dut# to Disclose
1. 1eneral %ac)ground
0o long as a publicl# held compan# is not trading in its own securities there is not
general dut# that requires it to disclose material inside information
8n the absence of an e+plicit mandate in a given situation! or some special
circumstance a compan# ma# disclose material information or not as suits its
purposes
Hhat circumstances trigger a disclosure requirement
. %asic 8nc. v. :evinson (1EFF)
a. %ac)ground
/ompan# was in pre'merger negotiations and over a course of two #ears
denied this three times
b. 2olding
+uty to disclose is not absolute and depends on materiality
(aterial an omitted fact is material if there is a substantial li)elihood that a
reasonable stoc)holder would consider it important in deciding how to vote
Under circumstances ith respect to contingent or speculative
information or events, materiality ill depend at any given time
upon a balancing of both the indicated probability that the even
ill occur and the anticipated magnitude of the even in light of
the totality of company activity
Probabilit# need to loo) to indicia of interest in the transaction at
the highest corporate levels
/ourts have found pre'merger negotiations material before but court will
not hold as a matter of law the# are material
0ilence
Hhenever an issuer responds to an inquir# concerning rumors!
unusual mar)et activit#! possible corporate developments! or an#
other matter! the statement must be materiall# accurate and
complete
8f an issue wishes to avoid disclosure it can do so b# responding
3<o /omment4
(ust be sure silence is what it is communicating if issuer alwa#s
denies rumors that are false but sa#s 3<o /omment4 when rumors
are true then this is not silence and compan# cannot be misleading
/orporation can be silent even if something is material
EC
:. Aiding and Abetting
1. 0ection - :iabilities of /ontrolling Persons and Persons who Aid and Abet
/ontrolling persons are ?ointl# and severall# liable for an# violation of the
*+change Act or its rules committed b# the compan# or other person the# control!
unless the controlling person acted in good faith and did not directl# or indirectl#
induce the act or acts constituting the violation or cause of action
. <o aiding and abetting liabilit# in private actions (>irst 8nterstate %an) of Denver)
<ot a bad act when private P involved under J1-(b)
/ourt7s reasoning was broad enough to cover 0*/ actions as well
". 0ection - Aiding and Abetting
An# uncertaint# as to whether 0*/ could bring aiding and abetting action was
cleared up when congress passed
0aid 0*/ and D&M has authorit# to bring actions for aiding and abetting the
violation of an# *+change Act or an# of its rules and regulations
=. Pri/ate Plaintiffs +ust So'
1. 1enerall#
0tanding purchaser=seller requirement
$eliance and transaction causation
:oss /ausation
&bligation to show damages
Private right does e+ist
Degree of fault required and 0ection 1D ma# change for private P
2. 1ransaction "ausation
a. 1enerall# (from review)
<on'disclosure cases
>ace to face transaction ;te presumption
&pen mar)et 0hapiro=>redrich split
(isleading cases
Public arena %asic presumption of fraud on the mar)et
>ace to >act no presumption and P must prove reliance
b. Affiliated ;te v. ;0 (1EC) nondisclosure
(1) %ac)ground
>ace to face dealings between officers of a ban) who engaged in stoc)
transactions with members of the ;T* tribe
Allegations were about the failure of the ban) officers to disclose material
information
() 2olding
EF
4laintiff has a rebuttable presumption of reliance if allegation is of
material nondisclosure in a face to face transaction
c. 0hapiro v. (erril :#nch (
nd
/ir. 1EC5) nondisclosure
(1) %ac)ground
Allegations of insider trading b# persons in the open mar)et
<ondisclosure in the open mar)et
People who did not sell their shares bought suit alleging that the# would
have sold at a higher price had the# )nown the information (that earnings
were going down)
() 2olding D liable
.'tends (ffiliated Ute presumption to nondisclosure on the open market
All the plaintiff has to show is D engaged in bad act of nondisclosure! and
court will presume reliance and causation
D owned a dut# not onl# to the purchasers of the actual shares sold b# D
but to all person who during the same period purchased stoc) in the open
mar)et without )nowledge of the material inside information which was in
the possession of defendants
$equisite element of causation in fact has been established b# the admitted
withholding b# defendants of material insider information which the# were
under an obligation to disclose reasonable investor might have
considered it important in ma)ing their decision to purchase stoc)
d. >ridrich v. %radford (9
th
/ir. 1EC9) nondisclosure
(1) %ac)ground
D bought shares on tip and sold for profit
/ase is about nondisclosure in the open mar)et
P did not bu# or sell from D! but claimed D did the bad act and the# should
be able to recover
P did not even bu# on same da# or month
() 2olding
D7s conduct caused no in?ur# to plaintiffs
+isagree ith )hapiro saying that it is the act of trading ithout
disclosing material inside information hich causes plaintiffs3 in@ury
%ad act onl# occurs when trade is made if D does not disclose but he
also does not trade then no bad act
(ust share their trade caused #our harm or effected the mar)et
$eliance does not necessaril# mean causation #ou can rel# on
the fact that mar)et reflects all public information and those who
are trading are not at an informational advantage! but #ou must also
show how their acts caused #our in?ur#
(") /reated /ircuit 0plit
0hapiro presumes reliance and causation from D ma)ing trades in the open
mar)et without disclosing material inside information
EE
>ridrich sa#s #ou must show that their trade caused #our harm or harm on
the mar)et
A0P A%&;T T280
e. %lac)ie v. %arrac) (E
th
/ir. 1EC.) misstatements
*raud on the market theory presumption of reliance arises in a
misstatement case even in the absence of any proof that a plaintiff relied
individually on a defendant3s misstatement
Theor# rationale purchaser relies generall# on the supposition that the
mar)et is validl# set and that no unsuspected manipulation has artificiall#
inflated the price! and thus indirectl# on the truth of the representations
underl#ing the stoc) price A whether he is aware of it or not! the price he
pa#s reflects material misrepresentations
f. %asic 8nc. v. :evinson (1EFF) misstatements
(1) %ac)ground
%asic made three public statements over a two #ear period den#ing that it
was engaged in merger negotiations
This was untrue
:ater it then said it had been approaches b# another compan# about a
possible merger
P is a former shareholder who sold their stoc) after %asic7s first public
statement and before trading was stopped on account of the merger
P does not claim that the# read or heard the denials! but rather that the
denials effected the mar)et price and the# sold at that lower mar)et price
() 2olding
(dopts the fraud on the market theory presume that + relied on stock
being properly priced in the market on truthful information
Accept presumption that people who trade shares relied on the
integrity of the price set by the mar"et and because D0s material
misrepresentations that the price had been fraudulently depressed
Presumption can be rebutted show that this reliance did not cause the
in?ur#
P would have sold stoc) an#wa# (i.e. to pa# ta+es)
(ar)et ma)ers were priv# to the truth about the merger discussions
(mar)et price would not be affected b# D7s misrepresentations
". :oss /ausation J1D(b)(5)
3in an# private action arising under the *+change Act! the plaintiff shall
have the burden of proving that the act or omission of the defendant alleged
to violate the Act caused the loss for which the plaintiff see)s to recover
damages4
5. 0tanding and 3Purchaser'0eller4 $equirement %lue /hips (1EC.)
1--
a. 1eneral $ule
J1-(b) and $ule 1-b'. on proscribe fraud 3in connection with the purchase
or sale of securities4
the plaintiffs class in a 7ule "#b55 action is limited to actual purchasers
and sellers
b. Potential Plaintiffs who are barred under this rule
(1) Potential purchasers and sellers
These people will allege that the# decided not to purchase because of an
undul# gloom# representation or the omission of favorable material which
made the issuer appear to be a less favorable investment
%urden on D would be too great if a P can sit on the sidelines and waits to
see what will happen and then decide to sue if favorable to him will ?ust
sa# if onl# 8 would have )nown 8 would have purchased
() Actual shareholders who allege that the# decided not to sell because of an
undul# ros# representation or a failure to disclose unfavorable material
(") 0hareholders! creditors and perhaps others related to an issuer who suffered
loss in the value of their investment due to corporate or insider activities in
connection with purchase or sale
c. *ffect of this case
Put brea)s on $ule 1-b'. litigation
d. Application to the 0*/
0*/ does not have to prove an#one bought or sold
All the# have to show is whether there is a misrepresentation or the bad act
@I. Excange Act Section 1:
A. 0tatutor# :anguage
1. 0ection 19(a)
$equires beneficial owners of more than 1-6 of an# class of equit# securit# that is
registered under the *+change Act! and officers and directors of issuers of such
securities! to file reports with the 0*/ and relevant securities e+changes
&wners of e+actl# ten percent are not sub?ect to the section
2ave 1- da#s to file a report
<ot criminal provision
. 0ection 19(b)
(a) an# profit (b) b# an# person sub?ect to the reporting requirements of J19(a); (c)
realiDed on an# purchase and sale! or sale and purchase (d) within an# period of
less than si+ months; (e) of an# none+empt securit# of an issuer that has an equit#
securit# registered under the *+change Act
shall inure to and be recoverable b# the issuer
". Defining 3within less than si+ months4
8nterpreted literall#
8f purchase and then sell e+actl# 9 months later not covered b# J19(b)
1-1
1=1=-- A C=1=-- not covered
8f purchase and then sell within 9 months not covered b# J19(b)
1=1-- A 9="-=-- not covered
8f purchase and then sell within less than 9 months covered b# J19(b)
1=1=-- A 9=E=-- covered and must disgorge
5. *+ception
Hhen the securit# was purchased in good faith in connection with a debt
previousl# contracted (not covered)
.. Derivatives
1rant of a derivative securit# is deemed to be a purchase of the underl#ing equit#
securit#! thus triggering J19(b) short swing trading liabilit# if the purchase can be
matched with an appropriate sale within less than 9 months
#. Persons &iable
1. Titles
a. Definition of Director J"(a)(C)
An# director of a corporation or an# person performing similar functions with
respect to an# organiDation whether incorporated or unincorporated
b. Definition of &fficer $ule 19a'1(f)
Page .-9 of boo)
. DeputiDation
a. Defined
:egal concept that can be used to bring within coverage of J19(b) a person or
firm who although not a director! officer or greater than 1-6 holder has his
interest in a corporation represented b# a person who sits on the board of
directors
". 1i0ing of Purcases and Sales
1. Provision on 8ssue of Timing
3This subsection shall not be construed to cover an# transaction where a
1-6 plus beneficial owner was not such both at the time of the purchase
and sale! or the sale and purchase4
. 8ssue in Provident 0ecurities
Hhether a person purchasing securities that put his holdings above the 1-6
level is a beneficial owner at the time of the purchase so that he must
account for profits realiDed on a sale of those securities with si+ months
Purchase that increase ownership above 1-6 do not count for section 19(b)
purposes
". 8ssue in $eliance *lectric /o.
a. %ac)ground
&wner of 1".6 of stoc) sold all stoc) in two transactions! each within si+
months of original purchase
1-
>irst sale reduced the owner7s interest to E.E96 and second he sold out
entirel#
b. 2olding
6rade that takes you under "#B does count (so must disgorge profit from
first sale)
2owever! when he sold the second batch he did not own more than 1-6
was not a beneficial owner of more than 1-6 at the time of purchase and
the time of sale he can )eep profits
>ook at onership at time transaction initiated that is hen you ill
have information others may not have
5. Problems for /larification
a. 1EE- bu# 1--- shares for ,.-=share
1=1=-- bu# 1--- shares for ,1-=share
"=1=-- sell 1--- shares for ,-=share
even if #ou can prove the shares #ou sold in march of --- were the shares #ou
purchased in 1EE- #ou still have to give compan# profits
securities are fungible
an# bu# and sell within si+ months must disgorge profits ,1-!---
b. 1EE- bu# 1--- shares for ,.-=share
1=1=-- sell 1--- shares for ,1-=share
"=1=-- bu# 1--- shares for ,-=share
order in which #ou bu# and sell is irrelevant
because #ou bought and sold within si+ months must disgorge profits
,1-!---
1-"