I. INTRODUCTION
A) Why is this system in place
B) 2 goals of securities laws (disclosure and prohibition against fraud).
C) SEC has been loosening up on disclosure requirements in the last 20 years
II. WHAT IS A SECURITY?
A) Rule
B) Investment contracts
1. Investment of money
2. Common enterprise (horizontal and vertical)
3. Expectation of profits
4. Solely from the efforts of others
C) Partnership interests as a security
D) Notes as securities
1. Different definitions in ’33 and ’34 acts
2. Step 1: is the note short term
3. Step 2: family resemblance test (Reeves)
E) Loan participation as securities (Banco v. Security Pacific)
III. MATERIALITY
A) Disclosure requirements (1933 and 1934 Act requirements)
B) Key rule: TSC v. Northway. Substantial likelihood that reasonable
shareholder would consider it important in deciding how to vote.
C) Speculative information: Basic Inc. v. Levinson
1. Probability/Magnitude Test
D) Total Mix and Market Efficiency (truth on the market)
1. Focus on what the market already knows and how that factors into
materiality analysis (Wielgos)
2. Puffery: Have a general statement that won’t constitute fraud
E) Forward looking statements
1. Were prohibited, now allowed.
2. Bespeaks caution doctrine: When cautionary language in the offering
documents negates the materiality of an alleged misrepresentation or omission.
Allows companies to come forward and make predictions without being fearful
of fraud suits.
3. Steps to getting protection under Rule 175 (liability for certain statements
by issuers)
4. Statutory safe harbor: §27A (codification of BSD)
IV. MANAGEMENT INTEGITY
1. MD&A: narrative of how the company looks to management
2. Trends: present trends, not forward looking statements
3. Context is key
4. Greater the impact on financial materiality, more relevant it will be
5. Violations of federal and state law and management integrity
V. PUBLIC OFFERING
A) Pros and cons of going public
B) Basic structure
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1. 3 periods: prefiling, waiting, and post effective
2. §5 roughly divided into 3, but doesn’t conform to periods.
3. Must satisfy jurisdictional means for each offense.
C) Step 1: pre-filing period
1. §5(c) prohibits offers to buy or sell prior to filing.
2. Broad definition of what is an offer that includes every attempt to offer or
dispose of security, or interest in, for value.
3. Pre-filing, “in registration,” means at least from the time issuer reaches
understanding with the B/D,
4. Rule 135 allows for the release, if follow rigid restrictions, of certain info to
keep shareholders informed.
5. Rule 137: (59s) Nonparticipatting brokers and dealers can publish opinions
without violating §5 if meet certain conditions.
6. Rule 138: (60s) allows participating broker or dealer to publish opinion if
its about nonconvertible peferred stock or debt security if its in a different
market.
7. Rule 139: (61s) applies tot participants in distribution of a reporting
company.
D) Step 2—Waiting period (§5(b)(1))
1. Registration statement has been filed, so selling efforts can start, but can
only take certain authorized forms, §5(b)(1)
2. §2(10) offers a broad definition of a prospectus
3. 5 key types of prospectuses (+ solicitation from 134(d) + roadshow)
4. Overview of 3 types of PPS in §5
E) Step 3—Post effective period
1. §5(b)(1) still applies.
2. Supplemental selling literature (ssl) ok in post-effective
3. Full §10(a) PPS must accompany delivery of security or confirmation
4. §5(b)(2) now also applies, requires a full §10(a) PPS
5.
6. Length of time obligated to fulfill pps delivery requirements
7. A fraudulent pps may not be a pps at all—SEC v. Manor Nursing Home
8. Internet offerings: Wit Capital
F) Shelf Registration
1. §6(a) “A registration stmnt shall be deemed effective only as to the
securities specified therein as proposed to be offered.”
2. Traditional exceptions to shelf registration contained in R415(limited to S-3)
G) International public offering
VI. EXEMPTIONS FROM SECURITIES ACT REGISTRATION
REQUIREMENTS
A) Introduction
1. Exempt securities v. exempt transactions (from regis, not fraud)
2. Keys
3. 3 General non-legal categories of exemptions (organizational)
B) Intrastate Exemption--§3(a)(11) and Rule 147
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1. General: entire issue must be offered and sold to residents of 1 state
2. Requirements for Rule 147
3. Busch v. Carpenter
4. Integration of offerings: if have stocks and notes treated as one (can lose
intrastate exemption).
C) Private offering exemption, §4(2): fend for themselves and access to info
(Ralston Purina).
D) Regulation D
1. 3 rules: 504, 505, and 506
2. Rule 504
3. Rule 505
4. Rule 506
5. Accredited investors
6. Substantial compliance (+ integration)
7. Summary chart
E) Regulation A
1. Generally
2. Integration issues
F) Integration for transactions (review)
1. 5 part test for Intrastate, Reg D, and Reg A
2. 5 part test
3. Don’t have to meet all 5 factors
G) How to approach a problem of whether there is an exemption to cover an
already issued security (review)
1. Does intrastate apply (§3(a)(11) or Rule 147)
2. Does Reg A apply (can’t use it after the fact)
3. Does private offering apply
4. Does Reg D apply?
VII. LIABILITY
A) §11 misrepresentations in the prospectus
1. Allows sit to be brought against a list of people
2. First element—after market issue
3. Second element—tracing
4. Third element—materiality
5. Causation
6. Safeguards (undertaking)
7. Categories of s
8. Defenses
9. Due diligence (issuer strictly liable, all others have defenses)
B) Fraud or misrepresentation in interstate sales where SEC registration is
required (§12(a)((1))
1. Apply §12(a)(1) when:
2. Liability
3. Who is an appropriate ? Pinter v. Dahl
C) Fraud or misrepresentation in interstate sales in general (regardless of
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whether SEC registration is required)
1. Generally
2. Reaches misstatements or omissions in prospectus: Gustafson v. Alloyd
VIII. SECONDARY DISTRIBUTIONS
A) Defining underwriter
1. Roles that can qualify someone as an underwriter
2. Amateurs can be underwriters (can accidentally become one)—SEC v.
Chinese Benevolent.
B) Purchase from an issuer (test for whether there is a secondary distribution).
1. Acquiring with investment intent (length of time, change in purchaser’s
circumstances).
2. If maintain an exemption, then no distribution
C) Control person
1. 2 definitions (legislative and SEC)
2. Control person can at times be on same footing as non-control person.
3. If control person and don’t have an exemption, then these rules kick in
whether or not it’s a registered or unregistered offering.
D) Rule 144 (aka hold and dribble)
1. 2 categories of people that can rely on Rule 144
2. 6 conditions
3. Rules for control people
4. Other
E) 4 (1 ½) Exemptions
1. SEC made this blend of 4(1) and 4(2), creates more flexibility
2. Ackerberrg v. Johnson:
3, If found liable as na underwriter in issuer’s distribution, then 4 (1 ½) won’t
help.
F) Broker/Dealer Exemptions
1. 4(4) Broker transactions
2. 4(3) Dealer transactions
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