“Securities for the Non-Securities
Lawyer”
Association of Corporate Counsel – America
August 3, 2006
Presented by: Kurt L. Kicklighter
Luce, Forward, Hamilton & Scripps LLP
Why Should You Care About
Securities Law?
• In house counsel concerns in the private
company or division of a public company
• Pledges of securities?
• Promissory notes?
• Owner shares?
• Securities brokerage/dealers?
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How Do You Know You Have a
Securities Issue?
• Stocks, bonds . . . . And
• Any “investment contract” or “risk capital”
arrangement
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–
–
–
–
–
Promissory notes
Condominium rental pool
Investment Club Memberships
Tenants in Common Interests?
Joint Venture profit participation by non-managing partner?
General partnership interest of a partner who does not
actually participate in management
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What laws regulate securities?
• Federal law
– “Disclosure” model
–
–
–
–
Securities Act of 1933
Securities Exchange Act of 1934
Exemptions – but not exemption from fraud claims
Website for all Federal securities statutes and
rules: Securities Lawyer’s Deskbook at University
of Cincinnati - http://www.law.uc.edu/CCL/xyz/sldtoc.html
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What laws regulate securities?
(continued)
• California law
– “Substantive fairness” model
– Corporate Securities Law of 1968, Corporations
Code Sections 25000 through 25707
– Exemptions
– Website for California statute:
http://www.leginfo.ca.gov/cal.html; regulations (Title 10:
http://www.calregs.com/linkedslice/default.asp?SP=CCR1000&Action=Welcome); Guide to CA Securities Law Practice,
The Corporations Committee of the Business Law Section of
The State Bar of California (2003).
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What laws regulate securities?
(continued)
• Blue Sky laws of other states – primarily
“disclosure” obligations, not “substantive
fairness.”
• Foreign securities laws – apply to sales to
nationals and in those other jurisdictions.
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Which laws apply to any particular
securities transaction?
• Federal registration requirements: U.S.,
unless intrastate or foreign
• State law jurisdiction: Any state that touches
a transaction
• AIM Stock Exchange
– http://www.londonstockexchange.com/engb/products/companyservices/ourmarkets/aim/
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Which laws apply to any particular
securities transaction? (continued)
• Sarbanes-Oxley Act of 2002
• Securities Act Section 18 limited pre-emption
of state laws
• Stock Exchanges. See
http://www.nasdaq.com/about/MarketPlaceRules.stm
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Private Placements
(Note that none of these exemptions exempt the transaction from the
securities fraud regulations.)
• Securities Act Section 4(2) – “transactions by an
issuer not involving any public offering”
• Regulation D – Clear guidance, safe harbor from
registrations requirements of the Securities Act if
certain requirements are met and filing is made
– Accredited Investor definition: Individuals with $200,000
annual income ($300,000 jointly) or $1 million net worth;
entities with $5 million; banks and other institutions;
executive officers and directors of the issuer
– Practice Note: If even one non-accredited investor is
included in an offering a detailed private placement memo
will have to be prepared for all
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Private Placements (continued)
(Note that none of these exemptions exempt the transaction from the
securities fraud regulations.)
• California exemptions
– 25102(f): Sales to 35 plus accredited
– 25102(h): Sales of voting common stock in a corporation
where there will be only 35 shareholders after the sale
– 25102(i): Sales to institutional investors – banks, pension
plans, insurance companies
– 25102(n): Sales to “qualified” investors (similar to accredited
investors) unlimited in number, by California corporation or
corporation subject to Section 2115
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Securities Regulation of “brokers.”
• Federal definition of broker: any person
engaged in the business of effecting
transactions in securities for the account of
others
– Guide to Broker-Dealer Registration, Division of
Market Regulation, U.S. Securities and Exchange
Commission, December 2005
http://www.sec.gov/divisions/marketreg/bdguide.htm#II
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Securities Regulation of “brokers.”
(continued)
• California definition of broker/dealer:
Corporation Code Sections 25120 and
25230(a)
• California licensing of real estate agents as
business brokers
• Federal and California “finder” exception
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Becoming “publicly” traded
• Securities Exchange Act Section 12(g)
• The 500 shareholder threshold (the in-bound
regulation)
• The 300 shareholder threshold (the outbound regulation)
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Securities as “security” under the UCC
• What is a “security” under the UCC?
• How is an interest perfected?
• How can a creditor realize on the security?
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Giving employees “securities”
• Stock options, California Corporations Code
25102(o), SEC Rule 701
– See Guide to California Securities Law Practice by
The Corporations Committee of the Business Law
Section of the State Bar of California (June 2004
printing) § 4.1 (for 25102(f)) and § 4.4 (for
25102(o))
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Giving employees “securities”
(continued)
•
•
•
•
Restricted Stock
Performance Stock
Phantom Stock (Stock Appreciation Rights)
Other compensation schemes? (See definition of
“securities” discussion above.)
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Securities Arising in the M&A Context
•
•
•
•
•
•
Issuance of promissory notes
Hold back provisions
Earn-out provisions
Issuance of stock to number of owners
Consider purchase of assets alternative
Acceleration of stock options
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Securities arising in the Joint
Venture/Investment Context
• Interests in joint venture are securities
• Registration Rights
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–
–
–
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Demand Rights
Piggyback Rights
Supremacy Clauses
“Drag Along” Rights
“Tag Along” Rights
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Securities Issues in the
IPO Context
• SEC will review prior issuances of securities
to see if appropriate exemptions apply
• Employee plans may have to be reviewed to
determine effect of IPO on their securities
• Disputed employee stock options/stock rights
and economic “blackmail”
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Biggest Trouble Spots for
Private Companies
• Undocumented or misdocumented stock
options
• Change of Control bonus arrangements
• Deferred compensation arrangements
permitting issuance of stock
• Unclear agreements among owners
regarding stock transfer restrictions, buy-outs,
registration rights
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Biggest Trouble Spots for Private
Companies(continued)
• Too many “private” offerings in short time
periods
• Allowing non-“accredited” investors to
purchase securities
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“Securities for the Non-Securities
Lawyer”
Association of Corporate Counsel – America
August 3, 2006
Presented by: Kurt L. Kicklighter
Luce, Forward, Hamilton & Scripps LLP