SECURITIES REGULATION SHORT OUTLINE
I. Background:
 3 approaches used for regulation:
o After the fact fraud can be detected and
filed.
o Want full disclosure in advance through
registration
o Merit regulation—government decides when
an issue is in the public interest.
 Focus is disclosure and anti-fraud
 34 Act
o Regulates trading markets and secondary
stock
o Anti fraud regulation



Forman – when the stock determines the
quality of your apartment you are getting a sales
contract. Not a security
Edwards – investment in payphones where
you expect profits is a security
Life Partner – when invest in life insurance of
AIDs patients you are not relying on the
managerial efforts of others.
B. Associational Formalities
Stock—explicitly listed in statute – but that’s not
dispositive.
 Landreth – doesn’t matter that fails Howey. It is
in the plain language of the statute.
o Looks for: transferable, voting rights,
dividends
o Right to recover divs contingent on
apportionment of profits negotiability
o Ability to pledged or hypothecated
o Conferring of voting rights in proportion to
the number of shares owned
 Purchase all the shares of stock  sale of security
 Purchase all the assets  not a sale of security
o Apply Landreth and then Howey
Partnerships – use Howey
 General – practical control issues; normally not a
security unless (Williams):
o PA eliminates investor control
o Inexperienced have no idea what is going on
o Promoter has unique skills
 Limited – usually a security
o BUT Steinhardt – when P had veto power
gave him control. Thus fails Howey.
o Sophistication of the investor.
LLCs
 Manager-managed  less control; more like a
security
 Member-managed  control; probably a security
II. WHAT IS A SECURITY
 33 Act: § 2(a)(1)
 34 Act: § 3(a)(10)
How to apply:
 Look first to the statute to see if it falls within
the list:
o Note, stock, bond, investment contract,
any interest or instrument commonly
known as a security.
 “Unless the context otherwise requires”
A. Stock/Investment Contracts
Risk Capital test: see how risky the investment is. If
risky  security
Four Part Howey test. (speculation immaterial)
 Investing Money
o $ or any form of bargained form of
consideration
 Common Enterprise
o Horizontal—when there are investors
investing with you (pooling)
o Vertical
 Broad: promoter increases the
value of the investor’s money
 Strict: promoter must share in
the financial risk. His interests
are tied to the investors
 Expectation of Profit
o Reasonable expectation on the front
end.
 Solely (mainly) from the profit of others
o Investor can participate but, results are
tied to the expectations of the investors
efforts
o Profit is not gleaned from society as a
whole (gold example)
Applications of Howey
 Marine Bank—when you have use of the land
not a security – here there was a unique deal
between consumer and investor
C. Real Estate as Security
General Rule  NOT A SECURITY
 Investing Money?
 Common Enterprise?
o Horizontal – rental pool?
o Strict vertical – you and rental agent
split proceeds of renting out condo
o Broad vertical – rental agent helps
despite compensation
 Expectation of Profit?
o Buying RE as investment or for
consumption
 From the profit of others?
o By the efforts of others or are you
managing?
o Buying land and managing contract 
may be a security
Hocking – go though Howey test and Williams test.
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SECURITIES REGULATION SHORT OUTLINE
Franchise is not a security  that’s from your efforts not
others.
How to read the market:
 Weak Efficient Market Theory – cannot predict
future by past prices
 Semi-Strong Efficient Market Theory – market
prices reflect public information
 Strong Efficient Market Theory – market prices
reflect ALL information.
Lessons on market efficiency:
 Markets have no memory
 Trust mkt prices.
TAKEAWAY: securities laws are based on the
assumption that disclosure of information is a good
thing. Information is the best way to protect an investor.
D. Notes as Securities
1. Family Resemblance Test
a. Presumption that all Notes are Securties but
can be rebutted by:
b. Does it look like those that have been held to
NOT be a security, i.e. is this an investment
or a transaction:
i. Consumer financing
ii. Mortgage on home
iii. Short-term note secured by lien
iv. Character loan to bank customer
v. Short-term note secured by an
assigned of recievables
vi. Open account debt
c. Not on list  Family Resemblance Test – [if
you pass the test then you are a security]
i. Motivation for Transaction
1. purpose of investment to
raise money
ii. Plan of distribution of the
instrument
1. trading on a secondary
market or broad
distribution?
iii. Reasonable expectations of the
investing public
iv. Risk reducing factors?
1. i.e. collateral; regulatory
agency, etc.
2. 9 month exemption?
a. Any note with a maturity of less than 9
months
b. Usually only held to apply to commercial
paper
i. High quality instruments to fund
current operations and sold only to
highly sophisticated investors.
3. Some circuits use the Risk capital test
4. Test applied
a. Reves – Security if (1) sold in an effort to
raise capital; (2) offered notes to a broad
distribution; (3) public reasonable perceives
the notes as securities; (4) notes are
uncollateralized and uninsured.
b. Wallenbrock – when provide money to
buy into the accounts recievables it is a
security when the object is to make money
with a broad distribution and there is no
secured rate
i. Financial derivatives are seen as
high risk.
III. THE PUBLIC OFFERING
A. Forms and Issuers
o S-1 is for an unseasoned issuer. Requires
most info
o S-3 for seasoned issuers – have you been
reporting for 12 months and are you up to
date AND:
 companies that are largely held with
a lot of outstanding stock already
 Offer must be for cash
 Stock is already in the hands
of non-affiliates in excess of
$75 million
 OR primary offerings of nonconvertible investment grade
securities
 OR Transactions involving
secondary offerings on big exchange
 OR if you’re a WKSI
 Have 1 million in debt float
and 700 million in equity
 Regulation S-K – describes disclosures on forms S-1
and S-3
o Have to give terms. Item 501(c)
o Identify risk factors. Item 503 (c)
o Must be in plain English. Rule 421(d)
o Need to disclosure financial statements and
balance sheets. Item 301 and 302
o Trends and developments. Item 303.
B. SEC Actions
 Timing: Registration is effective 20 days after filing.
o Clock starts over after any amendment
o SEC determines acceleration (Rule 460)
o § 8 (a) says that the security is effective
whenever SEC signs off.
 Enforcement
o Refusal order (8b) – material submitted on
its face is insufficient
o Stop order (8d) – material appears to be
false
o SEC can investigate and that suspends the
effectiveness of the amendment (8e)
II. MARKETS AND THEIR EFFICIENCY
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SECURITIES REGULATION SHORT OUTLINE

o
o
What you get from SEC
o “bed bug” letter
o Customary review
o Cursory review
o

C. TIMING REQUIREMENTS
§ 5 – prohibits the use of the mails, wires, or other
means of interstate commerce to sell or to offer to sell
unregistered securities – registered with effective.
1. Quiet Period.
 § 5(a) no sales
Step one: § 5(c) unlawful to make an “offer to sell”
unless registration statement is filed; does not include:
o sale between underwriter and issuer
o discussions between lead underwriter and
syndicate
o §4(1) transactions
o Face to Face intrastate transactions
Step Two: Safe Harbors for Permissible
Communication
 Rule 135 – can disclose intent to make public
offering – the amount, type of security, manner and
purpose of offering.
o Bare bones statement.
o Publicity that is within the normal conduct
of business.
o Can continue with 10K, and needed financial
disclosures
o Cannot name underwriters or security price
o May post on website if within the ordinary
course of business
o Loeb – publicity may constitute an offer to
sell. MUST be publicity that is within the
normal conduct of business.
1. CAN’T CONDITION THE MKT.
 Rule 163A – 30-Day Brightline Exclusion
o Applies to all issuers. Not UW or dealers.
o Can’t mention issue directly.
o Try to prevent repeats of communication.
 Rule 163 – WKSIs can engage in unrestricted
oral and written offers before the registration
statement is filed.
o Only for issuers
o Written offers must be filed and there must
be a legend
 Rule 168 – announcements by reporting issuers
engaged in regular release of factual business info –
that is forward looking
o Only issuers
o Must have released this sort of info before
o No detail about the offer unless permitted
under 134 or 135.
 Rule 169 –non-reporting issuers
o Can report factual but NOT forward looking
info.
No info about the offer
Customers and suppliers (non-investors)
must be intended audience.
Must have released this information before.
Research Reports – Third Party Information
o Rule 137 – non participating-brokers can
issue a report
1. can’t participate in distribution
2. can’t be paid by
broker/dealer/UW/issuer
3. reports are in the regular course
4. can’t issue and then participate.
o Rule 138 – talking about debt, common or
preferred or nonconvertible stock
1. Broker or dealer must have
previously publish/distribute in reg.
course of business
2. Must be reporting issuer
o Rule 139 – (non)/participating broker or
dealer can publish recommendations
regarding
1. must be on S-3 or F-3 companies
2. has other earlier regular reports
 Focus report:
o regular research
program
 Industry report:
o with no special
prominence
o no more favorable
than a previous
recommendation
Step Three: Traditional approach – if you fail the safe
harbor, ask:
 in registration?
 Condition the market?
2. Waiting Period -- § 5(b)
General Rule: No sales efforts unless there is a
prospectus and the registration is filed.
o only prospectuses complying with § 10 [final
prospectus] qualify
 BUT §10(b) allows the SEC to come
up with rules for documents that
will satisfy §5(b)
 Red herring – need to put red
disclaimer that says document is not
an offer.
Permitted Communications
 Rules 168, 169, 135, 137, 138, 139 still apply
 Can make sales ORALLY
o Road Shows 433(d)(8)
 Videotapes –
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SECURITIES REGULATION SHORT OUTLINE
Indicate where
prospectus is
available
o 433(d) Filing requirements—when you
must file:
 FWP reflects information provided
by the issuer
 Supplementary material prepared
by non-issuer dependant on the
breadth of circulation
 Describe final terms of securities
o 433(e)(1) – website = FWP
 Reporting or non-reporting co
 Hyperlinks—envelope theory
 Exception: not FWP if
historical info about the
issuer in sep. section of
website.
o 433(f) – Media
 Press conference okay
 File resulting news stories
w/SEC w/in 4 bus. days.
 If issuer prepares, pays, or gives
consideration for preparation of
communication this is FWP and
must satisfy Rule 433.
3. Post-Effective Period
Two ways for RS to become effective:
 Traditional: issuer submit a pricing
amendment, and request approval
 Rule 480(B): can go effective without pricing,
and have that added in 15 days.





o
not a FWP if it’s a real-time
presentation to a live
audience
o Can use visual
aides.
 FWP if prerecorded – need
specific legends
o [file if offering
equity security;
non-reporting co;
and has not made at
least one version of
the rd show publicly
available]
Can do anything that is in the normal course of
business and continued filings (10Q, 10K)
Preliminary Prospectus—Rule 430
o Same information as the final prospectus
except omits: offering price, UW, dealer
compensation, amount of proceeds,
conversion rates, call prices, and other
matters dependant on offering price.
Rule 134—Tombstone and Identifying statements
o Tombstone Ad: if it states from whom a
written prospectus meeting the
requirements of section 10 may be obtained
and, in addition, does no more than identify
the security, state the price thereof and state
by whom orders can be executed.
o 134(d) Identifying Statements – expand
tombstone.
 can distribute a customer card that
must be distributed with a
preliminary prospectus – need
disclaimers (book buildings)
Free Writing per Rule 433
o Def: information circulating that is not
contained in the registration statement
o Prospectuses that satisfy requirements of
section 10, and therefore requirements of
5(b)
o Must include legend
o WKSI and seasoned issuers
 File registration  no preliminary
prospectus required to be delivered.
 Just notify recipient of URL for SEC
website
o Non-Seasoned issuers
 File registration statement and
preliminary prospectus
 Need disclaimers and legends
 Need security price range
 Must distribute prelim. Prospectus
 Can be satisfied via
hyperlink – 433(e)(2)
o Include legend
Delivery Obligations
 Rule 172(a) for brokers/dealers/UW:
o written confirmations and allocation notices
don’t need to be accompanied or preceded
by final prospectus.
 Final prospectus = term sheet plus
preliminary prospectus
o Only requirement is file with SEC
o Applies until allotments are sold
o HOWEVER For UWs:
 Rule 15(c)2-8 – deliver prelim
prospectus to buyers at least 48 hrs
before sending confirmation of sale.
 Rule 172(b) When securities are delivered
o NO obligation to forward final
prospectus if file with SEC
 Rule 173 – file a notice of registration indicating
that RS has been filed and final PS would be sent
absent an excuse
o 173(e) this is NOT FWP.
o Should be submitted within 2 days of the
completion of the offering
Communications / Writings
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SECURITIES REGULATION SHORT OUTLINE
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

FW Exception -- § 2(a)(10)
o Broader than during waiting period
o Can write what you want if you accompany
with legend and filing requirement
o If non-reporting iss. Must be proceeded by
or accompanied by a final prospectus (or
hyperlink)
Secondary Markets
o § 4(3)A-B Have to deliver final prospectus
when:
 (a) resale within 40 days of when
sales began or
 (b) re-sale within 40 days – 90 days
of registration statement effective
 (c) transactions that are part of an
unsold allotment
o Rule 174 exception to 4(3) requirement.
 Do not have to deliver prospectus
within the 40 or 90 day period if the
issuer was a reporting company
 For non-reporting co
 No prospectus delivery
requirement by dealers
beginning 25 days after
offering date if security is
listed on nat’l exchange
o Broker dealer exceptions:
 4(4) – exempts brokers who
undergo a transaction on an
exchange ordered by a customer.
No prospectus requirements.
o Rule 153
 Excuses dealer from delivering
prospectus in a dealer to dealer
transaction on an exchange or
trading facility
Have to register the amount reasonably expected to
sell within 2 years
 Have to issue within 3 years
o Have to file with SEC within 2 days after you
take down.
 Available for all kinds of companies, but
requirements are more stringent the less you report.
 Promise or Undertaking to update shelf registration
so RS not stale (Rule 415 (a)(3)(Item 512a of
Regulation S-K)
o Have to update RS for fundamental changes
 Can use a prospectus for 9 months.
o Amend for material changes.
o Have to update registration after 3 years
 WKSI
o Can register unspecified amounts of
different specified types of securities
o Can add additional classes
o Everything becomes automatic and effective
immediately.
o Base RS will just be incorporated by
reference to ’34 act filing.
Issues with shelf registration is that UW still have to
perform due diligence.
V. UPDATING/CORRECTING R.S.
 Rule 430 B authorizes omission
 Prospectus does not meet the requirements of §
10(a) if information disclosed is false/misleading
(Manor) and thus violates § 5.
 12(a)(2) if prospectus is misleading, buyers have a
claim to get their money back
Post-Effective Amendments
 RULE: must amend when there is a MATERIAL
change
o Apply a sticker when there is an addition
o Amend RS when information has
substituted.
 SEC can then take action; refusal order; stop order;
cease and desist order; §5 investigation.
o SEC must determine within a reasonable
time whether it will issue a stop order (Las
Vegas Development Co.)
o Can disregard amendments made after stop
order is issued (Columbia General)
 Withdrawal
o Rule 477  need SEC’s permission
Duration of Section 5’s requirements
 Issuer
o As long as offering security to public
 UW or dealer
o Prospectus requirements as long as their
allotment or subscription in the distribution
is unsold.
IV. SHELF REGISTRATION
Rule 415 (a)(1)(x) – Requirements:
 Must list on the registration statement what you will
be offering and then amend if there are any changes.
 Who can offer:
o S-1 companies – can offer pursuant to
415(a)(i)(ix)
o S-3 companies – can offer pursuant to
415(a)(x)
o WKSI – pursuant to instruction on From S3.
Trading Practice Rules
 Rule 102 and 101 M prohibit trading during the
“restricted period” which would result in an unfair
manipulation of the price.
o Large Companies (average daily trading
value > 100k, and equal to or > 25 M in
float)
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SECURITIES REGULATION SHORT OUTLINE
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
Non-reporting company:
 Not with SafeHarbor, but
under Regulation S:
o “directed selling
efforts” does not
include information
that is printed in a
foreign country that
might reach the US
in a limited way
Website?
 Okay as long as you put a prominent
disclaimer to ensure no US res AND
password protect the information.

Can’t buy or sell one business day
before the person becomes a
participant OR before the security’s
price is determined
 Period ends at the end of
participation.
o Small Companies
 Begins 5 days before they become a
participant or before $ is
determined
o Huge companies (average daily trading
value 1 million and float of 150 million
 No requirements
Exceptions
o Unsolicited orders – Rule 101(b)(5)
o Purchasers from UW syndicate
o De minimus purchases
o Stabilization – Rule 104 of Reguation M
 Can purchase during the offering to
keep price at the market level
 Can’t bid higher than the lower of
the issue price or the last
independent price of the mkt before
issuance. (if issue at 25, but the last
trade before you priced it was at 22,
you can only stabilize up to 22).
o
Step One: To Register in U.S. have to belong to one of
the following category. Start with 1 and then move
down. The higher the category, the more hoops, the
more danger of flow back to the U.S.
 Category 1 -- 903(b)(1)
o Qualifications:
 Foreign issue with no “Substantial
US Market Interest” OR
 Equity – if greater than 20%
of trading in US and no
foreign country has more
than 55% of trading market
 Debt – not satisfied if more
than 300 US owners and
more than $1B held by US
owners AND > 20% of debt
is held by US owners
 Foreign issuer offers Debt of Equity
in ONE foreign country OR
 US issuer offers Debt (not stock)
directed at only ONE foreign
country
 Issues backed by full faith and credit
of foreign gov.
 Employee benefit plan in another
country
 Restrictions – just General 903 restrictions
 Transaction restrictions
o None – can sell to US citizens so long as
outside of US
VI. INTERNATIONAL PUBLIC OFFERINGS
Regulation S
 Rule 901
o No need to register offers and sales that
occur outside of US
o Offshore offerings don’t apply the 33 Act.
o Antifraud provisions do apply.
 Rule 902 – definitions
Rule 903
General:
 Needs to be an offshore transaction
o The buyer is outside of the US or the security
is on a foreign exchange
o Look to residence of buy
 No directed selling efforts in the US
o Can’t condition US market
 Press Conferences?
o Rule 135(e) – Free press, if you a foreign
issuer and press conference is in a foreign
country, and any materials have disclaimers
and security offering will not occur solely in
US
 Only foreign issuer reports allowed
o Notice published in U.S.
 Rule 135(c)
 Only tombstones and only if
a reporting issuer
 Can have a tombstone ad in
a U.S. publication if the
circulation 20% in the U.S.
Category 2 – 903(b)(2)
 Qualifications
o Debt offering by non-reporting foreign
issuer
o Equity offering by Reporting foreign issuer
[Basically all reporting companies, except for
domestic foreign companies offering equity –
are in Category 2 if subst. US mkt interest and
directed to more than one foreign country]
 Restrictions – same as general 903
 Transaction Restrictions
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SECURITIES REGULATION SHORT OUTLINE
o
o
Can’t sell to US person for 40 days after the
start of the offering in primary distribution
Various offering restrictions:
 Representations that you will not
sell to US people AND
 Disclaimers about not selling to US
people AND
 Confirmations sent to buyers saying
that you cannot resell to US people
Effects the total mix of info., i.e. effects
market price of the securities.
Issuer’s Defense: Truth on the Market
o If the company’s stock price already reflects
all information on the mkt, a lie will not be
able to affect the total mix of information.
o Even if false statements are made  truth
may still be found in the mkt. Only
protecting reasonable investor not naïve
invest (Wielgos)
Puffery -- Typically not material unless they are
opining on something they know to be false
(Eisenstadt)
Forward Looking Statements:
o Companies must do projected under the
MD&A
o P must show that predictions lack
reasonable basis
o D can protect themselves by making specific,
meaningful, substantive, and tailored
cautionary statements in their
registration statement.
 Can’t be boilerplate
Statutory Safe Harbor – PSLRA (§27A of ’33 Act; §
21E of ’34 Act).
o Applies to:
 Forward looking statements –
written or oral.
 Reporting companies only
 Not okay for major events like IPO,
tender offers, going private
o Safe Harbor Provisions –
 Forward looking statement that’s
accompanied by meaningful
cautionary language
 Immaterial or puffing
 Liars -- Plaintiff doesn’t have to
prove you knew it was false if there
was meaningful language
 Disjunctive rule.
o Asher -- if you don’t update your
cautionary statements then its going to look
more boilerplate.
Duty to Disclose
o Common law fraud: no duty
o Securities Law
 Must refrain from false statements
 You MUST disclose things that
would make previous statements not
misleading
o Disclose if material – Rule 408—catch all
for material facts.
 Must disclose present events/facts if
contrary to what is out there now.
 Disclose something that would alter
the perception of health of the
company.
o


Category 3 – 903(b)(3)
 Qualifications:
o Everything not in 1 or 2, i.e –
o All equity by domestic non/reporting US
issuers
o Debt offering by non-reporting nondomestic issuers (unless direct at a single
country other than US)
o Equity offerings by non-reporting foreign
issuers (unless direct at one foreign country
or no substantial US market/interest)
 Same general 903 Restrictions
 Transaction Restrictions:
o Debt : Same as Category 1 and 2, plus use
temp certificate until they can verify they are
not US persons
o Equity:
 can’t resell for one year.
 Purchaser must cert non-US person


Step Two: Offerings Falling outside of Regulation S
(Banque)
 Conduct and effect test
o Conduct resulted in shares directed at US
interest
 violating normal background rules of a foreign issue
and buyer
VII. MATERIALITY
 Substantial likelihood test: substantially likely that a
reasonable, objective person would have found it
important – Elements:
o Just needs to alter the “total mix of
information”
 Can’t bury facts.
o Objective person can be sophisticated or not.
o Reliance on the information
o Duty to disclose
 Anti-fraud law
 Changes in the RS
 Test for Speculative Information (Basic)
o Magnitude + Probability = Disclosure
Required
o Still has to pass substantial likelihood test
 Market Test –
o Reasonable investor would find it important

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SECURITIES REGULATION SHORT OUTLINE
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


CEO’s misconduct is material –
integrity of management should be
disclose (Franchard)
 Item 401 requirements for
disclosure of management’s
integrity and experience
 Should disclose if directors
are just rubber stamping
(W.R.Grace)
Can’t be a bad citizen
 Money loss not important –
integrity is what counts
(Schlitz Brewing)
S-K 406 must disclose if not
company code of ethics
Pending lawsuits should be
disclosed (Item 103)
 if a big deal
o doesn’t matter if
judgment reached
 lawsuits against officers and
directors (401(f))
o criminal  disclose
if pending
o civil  disclose if
comes to judgment.



required unless reasonable ground
to know something’s up.
Experts on their own expertized
material  Have to do your own
investigation and get information
 Have a due diligence
requirement PLUS reason
to believe in truth
Experts on other experts’ expertized
materials  reasonable reliance is a
defense
Who’s an expert?
 Sliding scale – the more of a
background the more likely
you’ll be an expert.
 Or look for certified work.
IX. EXEMPT TRANSACTIONS
 Must find an exemption at each stage of the sale
 watch the resale
 Exempt from filing requirements of § 5
 Not exempt from fraud
A. Intrastate offerings §3(a)(11)
 Elements:
o ISSUE
o Sold to a resident within a single state AND
o By someone who resides in the same state
VIII. LIABILITY
Under 33 act: § 11
Under 34 act: 10b-5
Step TWO: Common Law
Issue
 Scope: Integration problem (common law)
[note: WANT them to integrate]
o Part of a single plan of financing
o Issuance of the same class of securities
o Made at or about the same time (rule of
thumb within 1 year)
o Same type of consideration received
o Made for the same general purpose
Resident of single state or territory
 All the people offered the security must be in the
same state.
 If you advertise out of state you have to have
disclaimers.
 Residency = domicile
Come to rest in the State
 No clear time in the common low – can just flip
them about of state.
Issuer has to be a resident of that state
 Person: domiciled in the state
 Corporation: incorporated AND doing business in
that same state
o Structure of transaction that matters
o Mail order catalogue that ships out of state
is still doing business in the state where it
receives orders.
Section 11
 Standing
o Anyone that purchased the securities
pursuant to registration
o Liability created by material false statements
or omissions of fact
o No reliance (causation) necessary – unless
more than a year has passed.
 Damages
o Difference between price paid and the price
sold at now.
 Who’s liable?
o Everyone who signed the registration
statement found in § 6(a)
 Defenses
o Everyone – if the plaintiff knew at the time
the statements were false and bought
anyway
 issuer’s only defense.
o Due Diligence
 Non-experts on non-expertized
material  no liability if after
reasonable investigation there were
reasonable grounds to believe and
did believe it was true.
 Non-experts on expertized
material no due diligence
8
SECURITIES REGULATION SHORT OUTLINE
(IF you Intrastate you must Integrate (except for
certain occasions with Reg A)
Step ONE: Rule 147 Safe Harbor
 No substantial compliance
 Integration
o Cannot offer another issue before or after 6
months (integrates with all other types of
offers—Reg D, except for Reg A)
o Watch out can integrate with 506
 Issuer
o Need to be incorporated in the state
o 80% of gross revenue from state
o 80% of assets in the state AND
o 80% of proceeds need to be used in that
state.
o [Note: can round up between the
percentages]
 Residence of purchasers/offerees
o Person  principal residence
o Corporation  principal office
 Advertising – should have disclaimers.
 Came to rest in the state
o When not resold out of state within 9
months of the completion of the issue.
 Limit re-sales with legends; stop
transfer instructions, etc.
o Can resell in the state
o Reoffers do not destroy the exemption.

No civic limitations on resale  just keep within the
exemption.
3. Integration (155 Safe Harbor)
 You can shift a private offering to a registered
offering by waiting 30 days (if you have not sold a
security)
 Under 155(b) – you don’t have to wait the 30 days if
you offered was only to accredited or sophisticated
investors
 Under 155(c) – you can shift from registered offering
to private after 30 days from withdrawal, as long as
you described the unregistered nature of the offering
and any material changes that occurred after the RS
was filed
Otherwise do the 5 factor test; 152 additional safe
harbor between private placement subsequent registered
offering
C. Reg D Offerings (Not an Exclusive Election)
RULE
504
505
506
Max Size
$1 Million
$5 Million $No Limit
Max # of
Unlimited
35 +
35 +
Purchase
unlimited unlimited
rs
Accredite
Accredited
d
Disclosur No, except if
Yes, if
Yes, if
e
state
nonnonObligations regulations
accredited accredited
investors
investors
are
are
involved
involved
WHO CAN
USE:
Do
No
No
Yes, for
investors
However
nonhave to be
if you
accredited
Sophistic
want to
investors ated
qualify for May have
an
a
accredited representa
investor
tive.
 there
are
requireme
nts.
Can
No
Yes
Yes
reporting
companies
use?
Restriction Sometimes-Yes
Yes
on Resale
many times it
depends on the
State
requirementu
sually yes
Restriction Sometimesus Strong
Strong
on General ually yes
B. Private Offerings § 4(2)
Exempts “transactions by an issuer not involving any
public offering”
No substantial compliance defense.
Rule 506 offering is a private offering
1. Private
 Burden is on the issuer to show:
o Number of offerees and their relationship to
each other and to the issuer
 No bright line number
o The number of units offered
 Smaller is more likely to be private
o The size of the offering ($$$)
o The manner of the offering
 Face to face v. general advertising
 Personal contacts v. initiated by an
investor
2. Sophisticated (Ralston)
 Need both Access to Information
o Information that would be in the
registration statement
 & (some 5th Cir. courts say OR) Sophistication
o Investment professionals; experienced
business people; assisted by lawyers and
accountants
o Not just high education and no business
experience
 Sliding scale (Doran)
9
SECURITIES REGULATION SHORT OUTLINE
Advertising
and
Solicitation
s
Limited to
worthy
people?
(Bad Boy)
Add’l,
stricter
State
Regulation
s
permitted?







No
Yes
No
Yes
Yes
No
o
DisclosuresFile Reg D form
o Who has to disclose:
 504  not necessary
 505, 506  if sell to non-accredited
investors.
o Requirements:
 Reporting company  information
by incorporation
 Information to be furnished per rule
502(b)
 Based on size of offering.
 Anything over 7.5 mil must
be in registration form.
o Filing requirement
 Need to file Reg D statement w/in 15
days of start of offer.
Integration – Rule 502(a) – applies to ALL 3
o If ANY SECURITY IS OFFERED within 6
months BEFORE OR AFTER offering 
integration
o If within 6 months: five factor test
o 506 gets integrated but not aggregated
o (EVERYTHING INCLUDING MONEY)
Aggregation
o 504/505
 Look 12 MONTHS BEFORE and is a
rolling clock
 Reg A and securities that violate § 5
can aggregate
o 506  no limit
o Limited by price of the offering
 Cash
 Property (fair mkt value)
o ONLY MONEY is Aggregated
Accredited Investors – 501(a)
o Under 505, 506 can have infinite number of
accredited invests.
 If someone lies  they’re estopped
 Anyone who is, or the issuer
reasonably believes is (Dumb luck is
okay):
 Financial institution
10
Pension plans
Venture capital firms
Corporations with $ 5 M in
Assets and other
organizations
 Insiders of issuer
(officer/director- policy
maker not policy follower)
 Natural person with net
worth in excess of $1 million
Limited to 35 non-accredited.
 Must be sophisticated – have to
have a reasonable believe which
means checking into each person:
 Level of education
 Jobs or positions they had
 Training in finance or
business
 Prior investments
 Investment portfolio
 Purchaser representatives – Rule
501(h)
 (1) can use a rep to say
you’re sophisticated, but
cannot be:
o Affiliate, director,
officer, or employee
of issuer, or
beneficial owner of
10% or more of any
closs of equity
securities, UNLESS
 Relative by
blood,
marriage,
adoption
 (2) need to acknowledge in
writing
 (3) must disclose any
relationship with the issuer.
 Corporation can hire a purchasing
agent for you  careful because
investor can later argue that their
interests were not represented; must
disclose relationship
 Limited number (35) -- Don’t count
501 (e):
 Family or relatives that live
in same house
 Your company that you and
family in same house that
have combined ownership
of more than 50%
 PS/Corp. count as one –
unless formed specifically to
buy shares
SECURITIES REGULATION SHORT OUTLINE








If all corp.’s SHers are
accredited investors.
Substantial Compliance – Rule 508
o Exemption not lost if: (0 non-accredited
originally, no-disclosures given, but 1 person
claiming to be accredited lied)
1. The failure did not pertain to a
protection for the other people
2. Was insignificant with respect to the
offering as a whole
a. Significant would be:
general solicitations; going
over the maximum amount;
having more than 35
unaccredited investors
purchase a 505, 506; forget
to file form
3. Good faith reasonable attempt to
comply with rules
Limits
o Resale – 502(d) – can’t resell unless they are
registered.
 Do investigation on buyers
 Written disclaimer to each
purchaser
 Place notice on certificates
o No General Solicitations – must have
previously existing relationship No Matter
whether they are accredited(Kenman
Corp)
 Can use investment banks that prequalify people
 BUT then have to wait 45
days
 No newsletters 502(c) – have to see
how involved issuer is (paying for it;
giving information)
 Internet – okay, but protect the
information
o Duty to Disclose – Should still follow. OK if
you follow Rule 135(c) or are completing
10Q
Injunction: If there is an injunction, 507(a) says you
must go back to §4(2)
Aggregation Problems only when: 504 and 505, Reg
A and Reg A’s, Reg A then Reg D 12 months



D. Regulation A Offerings
 Mini-Registration offering  only for non-reporting
small companies
 Only for U.S. and Candadian
 No bad boys
o Exemption fails if: those involved in the
issuance w/in the last 5 years did securities
fraud or w/in last 10 years were convicted of
crime.
o BUT can get a waiver from the SEC


11
Not restricted  resell immediately
General Solicitations okay.
Different terms
o Registration statement = offering statement
 No sale until offering statement is
qualified.
o Prospectus = offering circular
Aggregation Rules (only with other Reg A
offerings)
o Cannot exceed $5 million in 12 months.
 i.e. looking for another Regulation A
offering in the previous 12 months.
o Secondary offerings  officers also want to
sell some of their stock in the offering
 Limited to $1.5 million and counts
toward total.
Integration – 251(c)
o Safe Harbor: offerings and sale made in
reliance with regulation A will not be
integrated with:
 Any prior offerings or sales
(including Reg D) OR
 Subsequent offers or sales that are:
 Registered
 made in reliance of rule 701
(EE plans)
 part of employee benefit
plan
 reliance of Regulation S
 made more than six months
after the completion of a
regulation A offering
 6 month time period after
o if fail safe harbor  5 factors
Test the Waters
o Before filing can make a solicitation
o Can be by ads or broadcasts
o Need legends and disclaimers saying not an
offer to sell; must file with SEC prior to
soliciting if-- substantive or material
changes (if y ou fail to submit does not give
money back, but does give SEC the right to
suspend)
o Failure to submit ads/broadcast to SEC
could result in stop order
o Can switch to a registered offering
 Rule 254(d) –
 Intention must be bona fide
 Must wait 30 days
o Abandoning the offering – 254(d)
 Abandon if you want -- Can do full
offering after 30 days
 If you want to do a Reg D should
probably wait 6 months to make
sure it won’t integrate.
After Filing: you cannot test the water.
Substantial Compliance
SECURITIES REGULATION SHORT OUTLINE
o
Rule 260 – no loss in exemption if:
 Issuer acted in good faith
 Deviation was insignificant in
relation to the offering as a whole
 Requirement not observed was not
intended to protect the purchaser

If resale is consistent with
original exemption
o Applies to affiliates
and nonaffiliates
 Control person purchases
registered securities can
resell to Ralston people
(4½ exemption).
UW #1 -- Helper of issuer/control person +
distribution
o Control persons are not protected by their
investment intent.
 Care about purchasers investment
intent
o Going to re-issue shares, they need to
register them or find an exemption
o Chinese Consolidated (deemed to help
the issuer and there was a distribution—even
though not agents or formally related to the
Chinese government)
o Wolfson
o If buyer purchases from you, they become
UW #3.
X. SECONDARY DISTRIBUTIONS
At each stage you need to either register or you need to
find an exemption.
 Broad categories:
o Distributions  registration is needed
o Mkt Trading  does not need to be
registered
 If you buy on the open mkt and want to resell –
you’re fine without registering.
A. Common Law Interpretations
Step one: find an exemption or register
Step two—potential exemption/problem:
 §4(1) says a transaction by anyone other than an
issuer, underwriter, or dealer are exempt from §5.
Step three – are you an underwriter:
o Part one:
 Helpers for the issuer or control
person OR
 Purchase from issuer or control with
intent to resell OR
 If you have investment
intent you are not an UW
 Participate directly or indirectly in
purchasing them
o AND Part two:
 Part of a distribution.
 Control person?
o Control of policies, officers, power to control
company
o Authority to compel people to sign a
registration statement.
o 10% holding in most companies, but can be
as little as 2%
o What can a control person do:
 Resell through original exemption
 4 ½ exemption – looks like Ralston
 Sell yourself to people on street
corner
 Use 144 Safe harbor!
 Distribution?
o Not a distribution:
 Resale by nonaffiliated/non-control
person of stock purchased in a
registered offering
 If unregistered:
 Not a control person and
securities come to rest
UW #2 – Purchase from Issuer or C.P with intent
to resell
 What constitutes intent?
o CL unsure – time is an indicator
o There is a change in circumstances
defense – however this has to be
convincing and specific.
 Lenders who use shares as collateral:
o Depends on the likeliness of default
o Will make the lender an indirect
participant, i.e. UW #3.
o What can lender do:
 Can sell to a sophisticated
person with access and not
violate 4(2)
 Don’t sell at all.
UW #3 – indirectly or directly participate in #1
or #2
DO FIRST Rule 144 SAFE HARBOR
General safe harbor that says not a distribution IF:
 Make disclosures
 Sell in broker transaction
 Honor volume limits
 Honor holding period
 Qualify for non-affiliate 1 year exception.
Does not honor change in circumstances theory.
Covered Security? 144(a)(3)
 Non-public offering
 Reg D
 Reg S
12
SECURITIES REGULATION SHORT OUTLINE
[Note intra-state securities are not covered]
o OR has to be an Affiliate
Covered company? 144(c)
 Reporting company for 90 days and current reports
[rationale: want lots of information about company
to make this less risky]
 Non-reporting company that has disclosed
information akin to that of a reporting company.
144(2)
Transactions that fall under safe harbor:
 Sales by non-control person of restricted stock
 Sales by control persons and their brokers of
restricted stock
 Sales by control persons (through brokers) of
unrestricted stock
Holding Period for Restricted Securities for reporting
issuers
 Required holding period  6 months.
o From the original issuance – when you got
from the issuer or the affiliate.
 Affiliate = someone the issuer has
control over.
 Non affiliate = 6 months w/
information requirements, or just
wait 1 year with no requirements
Holding Period for Restricted Securities for NON
reporting issuers
 Required holding period  ONE YEAR.
For Unrestricted Securities
 No Holding period, but all other restrictions apply
 For affiliate, be aware of 16b
 Special issues:
o If you borrow money to purchase:
 Starts when you pay it off, OR
 Time relates back to when you
purchased the stock IF:
1. Full recourse loan AND
2. with collateral other than
the security, AND
3. the debt is fully paid before
the resale.
 Rationale: want to have the original
purchaser to have assumed all the
risk.
o Stock split – deemed to hold all stock from
the original date.
o Pledged securities
 If pledgor is nonaffiliated – when
pledgor defaults, the bank has to
wait 1 yr after pledgor got securities
from issuer or affiliate.
 If pledgor is affiliate/control
person, bank can tack on time that
pledgor held securities
1. No tacking if pledged
without recourse
o Gifts


From Non-affiliate – go back to
when it initially purchased
If affiliate – unclear
1. Can tack on the time the
donor held it.
2. Still subject to volume
limitations
Volume Limits:
 Greater of:
o 1% of outstanding shares OR
o Average weekly trading in any three month
period.
 Aggregation limits:
o Add in pledges by sellers (i.e. pledges to a
bank)
o Gifts
 Exception: Non-affiliate has no volume limits
Manner of Sale:
 Must be done in Broker transactions
o Can only execute transactions of unsolicited
orders
o Allowed to contact other brokers to find
customers for the sale.
o Duty to make sure this is not stock dumping.
 Can give quote to other intra dealers
144(j) – not the only way you can resell securities but
that this is what SEC prefers.
13
144 safe
harbor
Affiliate or behalf
of one
Non-affiliate (and
has not been one
for the previous
three months)
Restricted
securities of
Reporting
issuers
>6 months holding
w/ information,
volume , manner of
sale for equity
securities
restrictions and
filing of form 144
>6 months
holding,
information
requirement
>1 year, no
requirements
Restricted
Securities of
Non-Reporting
Issuers
>1 year holding w/ >1 year holding,
information,
no requirements
volume , manner of
sale for equity
securities
restrictions and
filing of form 144
Unrestricted
securities
No holding
requirements w/
information,
volume , manner of
sale for equity
SECURITIES REGULATION SHORT OUTLINE
securities and filing
144
If an affiliate wants to sell, he may sell to:
1. QIB: 144A
2. Ralston People: 4 ½ but must otherwise be
unrestricted
3. Open Market: 144
The affiliate does not violate 4(1) if:
1. Street Corner
2. Pursuant to the Exemption through which they
obtained the security
QIB Requirements
o Financial Institutions with 100M plus assets
plus $25 audited net worth in their latest
published annual financial statement
o Broker-Dealers just have to have more than 10M
in assets
o Corporations or Partnerships with 100M
o Resale of a Security to a QIB,
o Inform buyer they are being sold pursuant to
144A,
o Can’t be the same class of security as on the
national exchange (normally debt securities, not
equity),
o Seller and Buyer have to be able to get specific
info from buyer, and
o Seller can’t be the original issuer
4(1½) Exemption
 Step 1: See if the securities is restricted for a
reason other than being owned by a control
person
 Step 2: Sell to a Ralston person (sophisticated
w/access)
 If you can’t sell through4(1½), try 144 or 144A
14