securities regulation - gabaldon - spring 2006

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    SECURITIES REGULATION OUTLINESpring, 2006, Professor Gabaldon

    I Con!e"! of Se#$ri!ies Reg$la!ion% A. Taking a Company Public.............................................................................................................. .......... 3B. Functions of Securities Firms...................................................................................................................3

    II &'a! is a Se#$ri!()* A. Summary.......................................................................................................................................... ....... 4B. Is security specifically named in !"a#$................................................................................................ ..%C. Is it stock or a note$................................................................................................................................. %&. In'estment Contract................................................................................................................................. (). )'idence of Indebtedness........................................................................................................................*F. +nless t,e Conte-t t,er/ise 0e1uires.................................................................................................. *

    III &'a! is a Sale) + A. Traditional &efinition. !"a#"3#.................................................................................................................2B. 0eclassifications ergers Consolidations Ac1uisitions. 0ule 54%.........................................................2C. Spin6offs.................................................................................................................................................57&. Free stock offerings................................................................................................................................55

    I Offers and Sales- Pre./iling !o Pos!.effe#!ie 11 A. Pre6Filing Period "t/inkle to filing#..........................................................................................................55B. 8aiting Period "post6filing pre6effecti'eness#........................................................................................53C. Post6)ffecti'e Period............................................................................................................................. 5%

    o3 !o Regis!er 16 A. 0egistration Statement Preparation and Processing........................................................................... ..5(B. S)C &isclosure 0e1uirements...............................................................................................................5*

    I E"e4p!ions SA Regis!ra!ion 1+ A. Summary..................................................................................................................................... .......... 52B. 3. Specifically )-empt Securities..................................................................................................... ..52C. Intrastate fferings. 3"a#"55#............................................................................................................... !7

    &. Pri'ate Placements 4"!#......................................................................................................................!7). 4"(#. 9 :% to accredited in'estors.....................................................................................................!!F. 0egulation & )-emptions................................................................................................................... ... !!;.S,ort Form 0egistration. 0eg. A...........................................................................................................!%

    II Resales of Se#$ri!ies 25 A. Sales by persons ot,er t,an an issuer u8 or &)A). Sarbanes6-ley Act of !77!.................................................................................................................. 3>

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    7 Pro"( Reg$la!ion %8 A. 0egulatory Sc,eme.............................................................................................................................. . 3>B. False or isleading Statements.............................................................................................................3*

    7I TEN9ER O//ER REGULATION%+ A. IS it a tender$.........................................................................................................................................32B. T)nder ffer 0e1uirements................................................................................................................... 47

    7II RULE 10b.5 and SAR:ANES.O7LE; ACT*1

     A. 'er'ie/................................................................................................................................................ 45B. Bad Acts................................................................................................................................................. 43C. ?In Connection 8it,@ 0e1uirement.........................................................................................................44&. 0eliance................................................................................................................................................. 4%). Standing Purc,aser or Seller................................................................................................................ 4(F. Scienter..................................................................................................................................................4(;.&amages and Penalties.........................................................................................................................4(. Sarbanes6-ley Act............................................................................................................................... 4>

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    .I CONTEXT OF SECURITIES REGULATION

    .A TAKING A COMPANY PUBLIC1 P'ases-

    a. 9is!rib$!ion pro#ess  issuer places s,ares in t,e ,ands of public for purpose of raising capitai. Transfer of securities issuer  lead under/riter for under/riting group  selling group  publicii. regulated primarily by

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    4. c,emistry bH/ under/riter and company management%. mi- of retailHinstitutional customers

    a. institutions prone to ?,erd@ instinct may not ,old s,ares as long as retailcustomers

    b. retail more stable ,old stocks longer (. post6offering market support>. 1uality of analysts*. additional capital2. continuing ad'ice

    2 A#!ing as 9ealer, :ro>er, and ?ar>e! ?a>er .a broker agent /,o acts on be,alf of someone elseE firm buysHsells for an intermediary instead of takingtitle for itself "confusing bHc included in !"a#"5!# definition of dealer#.b dealer principal /,o acts on ,isH,er o/n be,alf "i.e. market maker may act of o/n be,alf#E refers to firm/,o buysHsells for its o/n account takes title /,en buys and gi'es title /,en sells.c broker6dealer acts as eac, but depends upon situation in /,ic, /orking.d market maker a dealer t,at functions in trading market by maintaining an in'entory of a particularcompany=s securities and ,olding itself open on a continuing basis as /illing to buy and sell t,ese securities

    % Ines!4en! :an>ing.a Assist companies in t,e sale of securities almost al/ays in large amounts to pri'ate purc,asers suc, asinsurance companies.b Find ac1uisition partners for companies t,at /is, to ac1uirer or be ac1uired by ot,ers

    .c ;i'e financial ad'ice of 'arious sorts to client companies

    .IIWHAT IS A SECURITY?

    .A SUMMARY

    Specifically

    named$

    Called stock

    or a note$

    In'estmentcontract$

    )'idence ofindebtednes

    s$

    Kes

    o

    o

    Kes I! is a se#$ri!(

    Kes

    o/ey Test5# In'estment of oney :!# Common enterprise

    ",oriD. 'ert.GstrictHbroad#3# )-pectation of profit4# Soley or primarily from

    efforts of ot,ers$

    Kes

    o

    No! a se#$ri!(

    &oesconte-t

    ot,er/isere1uire$

    Kes

    o

    Stock  Forman

    oteHBond  0ee'es

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    .B IS SECURITY SPECIFICALLY NAMED IN § 2(A)?

    0emember to look at economic reality not Just formal name. Forman.E@$i!(• Stock

    • Securityfuture

    • Certificate of&eposit

    9eb!• &ebenture.

    • Bond

    • )'. of indebtedness.See below 

    ?is#ellaneo$s• In'estment Contract. See below 

    •  Anyt,ing commonly kno/n assecurity.

    • Profit s,aring agreement.

    • Inde- of securities

    • +ndi'ided interest in oil gas orot,er mineral rig,ts

    • Currency

    • Loting trust certificate

    .C IS IT STOCK OR A NOTE?

    1 0ebuttable presumption Somet,ing is /,at it is called. Rees Erns! ;o$ng.a B 2aD1D in#l$des-

    .i Stock

    .ii Security future

    .iii Bond

    .i' &ebenture

    .' ote

    2 0ebutting Presumption for stock and notes..a S!o#>- E#ono4i# Reali!( Tes!. Uni!ed o$sing /o$nda!ion /or4an. "stock in coop not ?stock@#

    .i Use of !er4 s!o#>F no! de!er4ina!ie ?form s,ould be disregarded for substance and t,eemp,asis s,ould be on economic [email protected] /ACTORS

    "#5 0ig,t to recei'e ?di'idends contingent upon an apportionment of profits@"#!egotiable"#3 Ability to be pledged of ,ypot,ecated"#4 Loting rig,ts in proportion to t,e number of s,ares o/ned

    "#% Ability to appreciate in 'alue.b :onds and No!es.i S'or!.!er4 no!e E"e4p!ion B%aD%D. )-empts notes arising out of a current transaction/it, a maturity of less t,an 2 mont,s.

    "#5 E"a4ples are #o44er#ial paper "But IS co'ered by S)A#.ii ote t,at SA anti6fraud pro'isions nonet,eless apply.iii /a4il( rese4blan#e !es! Rees Erns! ;o$ng 

    /- Lariable rate demand notes "promissory notes payable on demand# issued by coopuncollateraliDed and uninsured.

    otes are securities bHc t,ey did not bear a sufficient family resemblance to t,e notes t,eCourt ,ad pre'iously determined not to be securities

    R- Four factors to determine /,at family ne/ types of ?note@ transactions fit"#5 ?o!ia!ion- seller to raise capitalHbuyer for profit

    Seller /ants to raise money buyer /ants to make profit. If to facilitate purc,ase of minor assetHgood likely not a security.

    "#! Plan of 9is!rib$!ion- e-tended period of time offered to broad segment of public If /idely offered and traded  likely a security If  gi'en in face6to6face negotiation to a limited group of sop,isticated

    in'estors  likely not a security

    "#3 Reasonable per#ep!ions of general p$bli# If public /ould t,ink of asin'estment more likely to be security.

    No!e- Public need not t,ink it=s a ?bond@ or ?note@ in'estment enoug,"#4 Ris> red$#ing fa#!ors suc, as collateral or alternati'e regulatory sc,eme. ere

    uncollateraliDed uninsured and no alternate regulatory sc,eme.

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    .D INVESTMENT CONTRACT

    1 S$44ar(- o3e( !es! for ines!4en! #on!ra#!-.a Ines!4en! of 4one(

    .i Can be in'estment of cas, e1ui'alent but probably not labor. &aniel.b E"pe#!a!ion of profi!s 

    .i )it,er capital appreciation resulting from de'elopment of in'estment or participation inearnings resulting from use of in'estor=s funds. Forman..ii Primary benefit s,ouldn=t be use. Forman.

    .iii Benefit s,ouldn=t result primarily from in'estor=s efforts. &anielE Cf. o/ey..i' 0eturn can be fi-ed or 'ariable. )d/ards "o'erruling 55t, Cir.#..c Co44on en!erprise

    .i oriDontal. All courts accept.

    .ii Lertical. Strict and broad..d Solel( fro4 !'e effor!s of o!'ers

    .i eed not be solely can be primarily. Moscot.

    .ii )fforts s,ould be managerial or entrepreneurial not Just ministerial. Moscot.• &.C. Cir. 8ere managerial efforts post-purchase$ Pre6purc,ase may lead to finding

    no security.

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    • To constitute a security must gi'e up some tangible and definable considerationin return for an interest t,at ,ad substantially t,e c,aracteristics of a security

    "#3 ?)-pectation of profit@ ain determinant of profit are ,is efforts "i.e. continuedemployment#."#4 Alternati'e regulatory sc,eme )0ISA

    5 Co44on En!erprise and Solel( fro4 !'e Effor!s of O!'ers.a orion!al #o44onali!( "all courts#. umerous in'estors pool t,eir resources by t,eir in'estment. T,eirfortunes rise and fall toget,er.

    .b er!i#al #o44onali!( "some courts# In'estors fortunes rise and fall /it, t,ose of companyHpromoter..i :road- Fortunes of in'estor are affected by and linked to efforts of promoter or t,ird party."#5 In ot,er /ords some t,ings ot,er t,an promoterHcompany can affect 'alue.

    .ii S!ri#!- t,e fortunes of t,e in'estor are ?ine-tricably linked@ to t,e fortunes of t,e promoter orsome t,ird party.

    .c SEC Jos#o! In!erplane!ar( In#  "%t, Cir.#

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    • Li4i!ed par!ner in!eres! K se#$ri!(

    • General par!ner in!eres! K no! se#$ri!("#3 General partnership 8,ere e1ual in'ol'ement t,is is not a security

    • Typically not a security bHc partners as in'estors /ill put in a lot of effort

    • But if agreement says you ,a'e no control and t,is is reality may be a security

    • Circuit Split. Some say not a security "but did not consider /,en agreementrestricts control# and some look at reasonable e-pectation of parties /it, respectto realistic participation "protecting t,ose /,o ,a'e a legal rig,t to participate butc,ose not to#

    • Par!ner in!eres! = #o.en!$rer in!eres!s K no! se#$ri!("#4 #. Tucker sold car franc,ises /,ereby people paid :!% per car for t,e rig,t topurc,ase a car. 8,en dealers purc,ased car :!% /ould be returned.

    .i Since agreements pro'ided for repayment of deposits recei'ed t,ey /ere securities

    .ii Probably not in'estment contract because profit not primarily t,roug, efforts of ot,ers.

    .iii Consistency bH/ Oones and Tucker Importance of protecting in'estors. Buyers of airlinetickets /ouldn=t be /orried about repayment bHc t,ey e-pect to use t,eir ticket /,ereas franc,isebuyers may be more a/are of repayment obligations. Tucker did not re1uire primary obligation torepay on face

    .d Pro#!or Ga4ble :an>ers Tr$s! Co4pan( "522(#. S/ap agreements one /it, fi-ed rate one /it,'ariable rate /,ic, you agree to s/ap and compare at end of period

    .i S/ap agreement not a security bHc in s/ap agreement you do not repay principal /,ic, is anessential element of debt.ii ot e'idence of indebtedness because no primary obligation to pay some amount of

     principal , interest tags along .iii NO& B2A e-cludes indi'idually negotiated s/ap transaction from =33 Act co'erage.

    .F UNLESS THE CONTEXT OTHERWISE REQUIRES

    1 E"is!en#e of al!erna!ie reg$la!or( s#'e4e ?arine :an> &eaer rarel( #i!edD/- arine Bank issued a C& to 8ea'ersE 8ea'ers pledged C& back to bank to secure a loan /it, a 3 rd 

    partyE 3rd party agreed to t/o t,ings "5# you can use my barn "!# you can ,a'e a s,are of my farm profits

     issue is /,et,er t,e C& is a security- F&IC already insured C&s so not necessary to add on protections of federal securities la/.• 0arely cited. Integrity of ruling undermining by fact SC completely ignored o/ey.

    2 Sale of a :$siness 9o#!rine No! good la3.a 8,en t,e sale of a maJority interest passes complete control to t,e purc,aser making t,at person ano/ner6entrepreneur and not an in'estor..b La$ndre!' Ti4ber Co La$ndre!'.

    .i /- Sold all of t,e stock of t,e companyE Ps argue t,at it does not fall /it,in t,e sale ofbusiness doctrine and t,at it constitutes a sale of security.ii 0eJects sale of business doctrine

    *

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    "#5 if somet,ing is specifically named "stock# and possesses all of t,e c,aracteristics of asecurity t,en it /ill be deemed to be a security

    Court reJects economic reality argument because it is clearest case t,at t,isis a stock and t,us a security A& stock is specific category and not definableby economic reality

    "#! Policy don=t /ant t,e opposite to be true because t,en people /ill not kno/ /,atconstitutes a security

    .iii 8,at about stock issued pursuant to alternati'e regulatory sc,eme ")0ISA#$$"#5 Oust because go'erned by )0ISA does not mean t,at it /ill c,ange its classificationas security"#! Alternati'e regulatory argument goes to catc,6all p,rases "in'estment contracte'idence of indebtedness etc.#

    .III WHAT IS A SALE?

    .A TRADITIONAL DEFINITION. §2(A)().a )'ery contract of sale 0.b &isposition of security 0

    .i Pledges are sales.

    .c &isposition of interest in security.d For 'alue.i ;ifts are not sales.

    .B RECLASSIFICATIONS! MERGERS! CONSOLIDATIONS! ACQUISITIONS. RULE

    "#$NOTE- /OR ALL /OLLO&ING SALES OCCURS /OR &ATEER CO &OSE S= 4$s! o!e $nlessra!ified b( :d 3=in 1 (r

    1 General Re@$ire4en!s for R$le 1*5 !ransa#!ions.a :UT R$le 1*5bD Communications in connection /it, abo'e are permissible IF fall under.

    .i R$le 1%5 Safe arbor for certain legended statements. See p. 5!.b R$le 15%a 0e1uires deli'ery of prospectus to SH before t,ey 'ote on 0ule transaction

    .i +

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    .b :e#a$se bo!' o!e, sale

    * ?erger=A#@$isi!ion "A merges into B A no longer e-ists#.a B=s SHs do not 'ote so t,ere is not sale as to t,em.b A=s SHs 'ote so t,ere is a sale as to A=s SHs.

    5 Sale of S$bs!an!iall( All Asse!s 0ule 54%"a#"3#..a In#l$des

    .i &issolution

    .ii Pro rata or similar dissolution

    .iii Bd. adopted resolutions

    .i' Transfer of assets part of pre6e-isting plan of distribution.b If end $p as 'olding #o4pan( typically not a distribution.c T3o 3a(s !o be a R$le 1*5 !ransa#!ion-

    .i if t,ere is a dissolution end up /it, A being ,eld by AHB s,are,olders

    .ii if T li'es on no dissolution and distributes s,ares of A to Ss as di'idend

    .iii if neit,er not a 0ule 54% transaction.d 9issol$!ion  0ule 54%"a#"3#"A#

    .i ec,anics"#5 Company B transfers all assets to company A and A issues s,ares to B"#! A is no/ partly o/ned by B"#3 B t,en li1uidates and only A e-ists /it, s,are,olders of A and B

    .ii olding

    "#5T,is is a sale  0ule 54%"a#"3#"A#  sale /,en transfer of assets of suc, corporationin consideration of t,e issuance of securities of suc, ot,er person ?of suc, plan oragreement pro'ides for dissolution of t,e corporation /,ose security ,olders are 'otingor consenting@

    .e Asse! for s!o#> Trade 0ule 54%"a#"3#"B#.i ec,anics

    "#5 B transfers all assets to A and A issues s,ares to B"#! A is no/ partly o/ned by B"#3 B does not dissol'e but distributes A=s s,ares as di'idends

    .ii T,is is a sale.f Bd. ratifies actions /it, same effects as "a#"5#6"3#"B#. 0ule 54%"a#"3#"C#

    .i Transfer of assets is still a sale e'en if s,are,olders can=t 'ote on plan /it, results abo'e but/it,in one year board 'otes to do it any/ay

    .g Transfer pursuant to pre6e-isting plan. 0ule 54%"a#"3#".i transfer of assets is a sale if transfer is part of a pre6e-isting plan for distribution t,at is notdisclosed to Ss "e'en if done years later still a sale if part of pre6e-isting plan#

    6 Resales of se#$ri!ies.a Anyone ot,er t,an issuer including affiliates participating in abo'e transactions /,o offers stock publiclyis an +8. 0ule 54%"c#.

    .i UNLESS R$le 1*5dD"#5 Sold under 544 or "#! Current public information e-ists under 544"c#."#3 Amount

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    .c Se#$ri!ies A#! Release No *+2 "52(2#.i &esigned to close loop,ole of pri'ate cos going public by spinoffs Public co. ac1uires pri'ateco spins off pri'ate co. as s,. to its SH. T,ose s,ares t,en get sold to public /it, noinformation..ii T,is spin off is counts as a sale bHc public. co. is an +8 insofar as it purc,ased from anissuer /it, t,e 'ie/ to distribution.

    .d SEC 9a!roni#s Engineers  ?For 'alue@ re1uirement.i /- &atronics takes companies public by ac1uiring t,em t,en spinning t,em off..ii Iss$e- o/ do you include t,is as a sale /,en t,ere is seemingly no 'alue gi'en by SH fordi'idend distribution$.iii - Spinoffs possess ?'alue@ bHc t,ey create a public market for pre'iously pri'ate and illi1uids,ares /,ic, /ere ,eld by originally public co.. T,erefore you ,a'e disposition of security for'alue and spinoffs count as ?sales@

    "#5 S)C uses ?under/riter@ t,eory  t,e entity in position of &atronics is acting in afas,ion t,at constitutes it as an under/riter for purposes of =33 Act

    .e SO?E spin.offs are not sales. For e-ample.i Spin6off is pro6rata to t,e parent company=s SHs.ii 0ecipients of t,e spun6off securities pro'ide no consideration..iii Parent pro'ides to its Ss and t,e public ade1uate information about t,e spin6off and aboutt,e company being spun6off..i' Parent ,as a 'alid business purpose for t,e spin6off and

    "#5 Parent spins6off ?restricted securities@ it ,as ,eld for at least t/o years.' Parent restricts resale of securities.

    .D FREE STOCK OFFERINGSe.g. internet offerings of free stock

    .a Constitutes a sale

    .b Lalue in form of agreement

    .IV OFFERS AND SALES& PRE%FILING TO POST%EFFECTIVE

    .A PRE%FILING PERIOD (TWINKLE TO FILING)

    1 S!a!$!or( S#'e4ea. :egins /,en securities become ?a t/inkle in t,e eye of t,e issuer.@b. B5#D. o offers to sell or buy unless 0S filed.

    i. ?directly or indirectly.@ See “What is an Offer,” below.ii. ?t,roug, t,e use of medium of any prospectus or ot,er/ise@iii. ?means or instruments of transportation or communication in interstate commerce or of t,e mails@

      urisdictional means  includes telep,one mail etc.i!. Te"!- ?it s,all be unla/ful for any person . . . to offer to sell or offer to buy . . . any security . . .

    unless a 0S ,as been filed as to suc, security . . .@c. B5aD. o sales or ?carrying@ of security

    .i %"a#"5#. o sale. &efinition of sale !"a#"3#. See p. "# , What is a “Sale”? 

    .ii %"a#"!#. o deli'ery /it,out effecti'e 0S.

    2 Is i! an offer)a 9efini!ion, B 2aD%D  Any ?attempt to offer to dispose or solicitation of an offer to buy . . . for 'alue@

    !"a#"3#.i. S)C=s broad interpretation. Any acti'ity reasonably calculated to solicit or generate a buying

    interest.ii. Indirect offers included "/ritten publicity concerning t,e issuer or its industry t,at conditions t,e

    market business card email#.iii. ffers of con'ertible securities.i'. Solicitation of an offer to buy is considered an offer to sell "can=t a'oid no offer to sell pro,ibition

    by p,rasing it as a solicitation of an offer to buy#.

    55

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    b In#l$des ?ar>e! Condi!ioning i. Release No %**  in t,e pre6filing period it is not legally possible to begin a public offering or  

    ?initiate a public sales campaign@1 p$bli#a!ion of infor4a!ion and s!a!e4en!s, and p$bli#i!( effor!s in adan#e of

    proposed finan#ing 4a( #ondi!ion !'e 4ar>e! or aro$se p$bli# in!eres!F!. )-amples

    a. Press releases describing acti'ities of company proposed program ofde'elopment estimates of ore reser'es and plans for processing plant.

    b. &istribution by prospecti'e +8 of broc,ure describing future possibilities andprofit potential. Liolates $ #  bHc first step in sales campaign e!en without name of!enture or security on brochure.

    c. Speec, on company plans record and problems does not !iolate $ #  bHcsc,eduling of speec, ,ad not been arranged in contemplation of public offeringor about t,e time of its deli'eryE but suggested not to distribute printed copies ofspeec,

    d. Speec, ! /ks before filing 0S along /it, copies of speec,E speec, sc,eduledmont,s in ad'ance S)C denied acceleration of 0S and re1uested copies offinal prospectus to t,ose /,o recei'ed copies of speec,

    ii. In re Carl ? Loeb, R'oades "press release#/- Press releases described property of real estate de'elopment co. co. plans proposedoffering and mentioned names of t/o managing +8 but no e-plicit offer to sell.- P0s 'iolated !"a#"3#. Publicity of t,at type ?presumed to set in motion or to be a part of t,edistribution process and t,erefore in'ol'e an offer to sell or a solicitation of an offer to buy

    securities@• Oust because t,e press release constitutes ?ne/s@ does not e-clude in from %

    • ?i!iga!ing fa#!ors may persuade S)C to not re'oke or suspend registration. 0eputation ne'er before subJect of disciplinary proceedings acted of good fait,

    of counsel no re'ocation of registration H no suspensioniii. Release No 856  )lectronic communications

    5. Info sites ,yperlinked on issuers= site attributable to issuer for purposes of %!. ay maintain communication during registration as long as communication limited to

    ordinary6course business and financial information may include press announcements3. in#l$des non6reporting issuers t,at are preparing to offer securities to t,e public for t,e

    first time  must pay more attention to content of /ebsite

    % 9oes an e"#ep!ion appl().a B2aD%D Under3ri!ers #$rren!l( or !o be in prii!(

    .i

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    "#% ans/er unsolicited telep,one in1uiries concerning factual information"#( obser'e ?open door@ policy"#> ,old stock,older meetings

    .iii I4per4issible-"#5 Forecasts proJections or predictions relating but not limited to re'enues income orearnings."#! Publis, opinions concerning 'alues

    .d Georgeson Co In!erpre!ie Le!!er .i eetings /it, analysts brokers etc. may be considered ?priming t,e market@ but if t,e issuer,as a usual practice of doing t,ese t,ings t,ey /ill ,a'e sound basis to refute a ?gun Jumping@inferenceE facts of indi'idual case matters

    .e R 16% E"#ep!ion for 3ell.>no3n seasoned iss$ersF.i Companies /it, :>77 public float 0 :5B in non6common non6con'ertible e1uity..ii ral offers M..iii 8ritten offers must include

    "#5

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    But S)C mig,t use 5%c!6* and 4(7 to get you."#! B 2aD10DbD ot a !"a#"57# prospectus if communication states no more t,an?from /,om a /ritten prospectus meeting re1uirements of 57 may be obtained . . .identify t,e security state t,e price t,ereof state by /,om orders /ill be e-ecuted andcontain suc, ot,er info as S)C may permit@"#3 R$le 1%* To4bs!ones and Legended S!a!e4en!s

    aD ?a( gie spe#ified infor4a!ion "tombstone# about t,e issuer and t,e offering"see rule# I/

    Co. info "name contact ticker# etc . . .

    Info on security "title amount price type# Brief indication of type of business "e.g. /,at it manufactures# Intended use of proceeds "brief# +8s "name contact info#

    Type of under/riting Sc,edule of offering Ta- status of offering

    bD Legend #on!aining Stmnt t,at reg. filed but not effecti'e and no sales until it becomes

    effecti'e A& Contact info for obtaining prospectus

    #D :UT don

    .b If i! is a B 2aD10D prospe#!$s, i! 4$s! be a B 10 prospe#!$s.i B10aD1D- includes all information t,at you /ould include in a 0S

    "#5 Applies to post6effecti'e period..ii B10bD /,ere you look to get instructions to prepare a document you can actually use  

    S)C may permit use of prospectus t,at summariDes or omits info from prospectus under "a#. Add=l prospectuses permissible by regulation under t,is section are

    "#5 R$le *%0. Preli4inar( prospe#!$s• ust be filed as part of t,e 0S.

    • *egended in red ink t,at 0S not yet effecti'e.

    • Contains information found in final prospectus B+T omits information on t,eoffering price and t,e under/riting.

    "#! R *%% /ree &ri!ing Prospe#!$s. ust• Be filed /it, S)C

    • Bear legend

    • Be Accompanied or preceded by preliminary prospectus."#3 R$le *%1 S$44ar( prospe#!$s "uncommon#

    .iii ?anor N$rsing.  A defecti'e prospectus is not an effecti'e prospectus for purposes of 57.%t, Cir. disagrees.i. G$s!afson Allo(d "see c,apter *#

    5. term prospectus ?refers to documents of /ide dissemination@!. court could not ?accept t,e conclusion t,at t,e term means one t,ing in one section of t,e

     Act and somet,ing 1uite different in anot,er@

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    % &'a! is a SaleF).a B2aD%D  ?term sale= or sell= s,all include e'ery contract of sale or disposition of a security or interest ina security for '[email protected] ;i'en t,is definition /,en an offer is accepted and contract made %"a#"5# ,as been 'iolated bHc a saleis made B+T may structure t,e transaction as ?indication of interest@ or make offers in suc, a /ay t,at t,eymay not be accepted until t,e 0S becomes effecti'e.c E"pansie reading of term ?sale.@ In re /ran>lin, ?e(er :arne!!. &uring t,e /aiting period t/osalesmen in a securities firm performed t/o acts t,at mig,t be considered to be consummating sales.

    .i Accepted c,ecks sent by customers in payment for offered s,ares deposited into clientaccounts and no funds remo'ed under after effecti'eness.ii sold ot,er securities for customers and ,eld t,e proceeds for application against t,epurc,ase price of t,e offered s,ares.iii court ,eld accepted orders prior to effecti'eness H accepted payments for stock H businesscard constituted an offer to buy and /as t,us a prospectus under !"a#"57# t,at did not meet t,ere1uirements of preliminary prospectus under rule 433

    .d B2aD%D )-ception ?preliminary negotiations or agreements@ bet/een an issuer and under/riters oramong under/riters.

    .i ote interpreted t,at preliminary modifies negotiations

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    2 /inal Prospe#!$s 9elier( Re@$ire4en!s.a B5bD2D  0e1uires t,at a final prospectus be deli'ered along /it, t,e security purc,ased unless t,esecurity accompaniedHpreceded by a copy of t,is prospectus

    .i R$le 18%  ust pro'ide"#5 Final prospectus /it,in ! days of completion of sale 0"#! otice t,at sale /as made pursuant to 0S 0 t,at 5>! applies.

    .b E7CEPTIONS-.i R$le 182 9ee4ed delier( of prospe#!$s for CON/IR?ATIONS and 9ELIERIES byissuer +8 and dealers  Prospectus deemed deli'ered I/

    "#5 0S effecti'e A&"#! o prior bad acts by issuer +8 or participating dealer A&"#3 57"a# prospectus filed or /ill be as soon as practicable A&"#4 If confirmation contains no more info /,at 57b657 permits A&"#% otify purc,aser 

    • Transaction /ould re1uire prospectus under 5>!. 0. 5>3

    • o/ to obtain final prospectus from confirmerHseller. Id..ii R$le *%0A allo/s use of prospectus /,ic, omits certain info IF

    "#5 Securities offered for cas, A&"#! +ndertakings in %5!"i# done A&"#3 0emo'e ?red ,erring language@ "e.g. ?subJect to completion# A&"#4 4!4"b# satisfied  Prospectus /H blanks filled in mailed /Hin !d business day of earlierof determining offering price 0 first use.

    .iii B *%D R$le 18* Non.par!i#ipa!ing dealers or U&s not selling unsold allotment oforiginal offering must deli'er final prospectus IF

    "#5 First time registrants A& offering 9 27 days"#! All ot,er registrants and offering 9 47 days."#3 !% days for e-c,ange traded companies "KS) or AS&A#. 0. 5>4"d#."#4 o deli'ery re1uirement for =34 Act companies. 0. 5>4"d#."#% UUUUUote 5>! still appliesUUUUU

    .i' B*1D. &eli'ery re1=t inapplicable to transactions by someone ot,er t,an issuer under/riteror dealer .' B*2D. &eli'ery re1=t inapplicable transactions by issuer not in'ol'ed in public offering.

    .c 9$!( !o #orre#! defe#!s )'ents t,at make prospectus materially misleading 0 defects found +ST becorrected

    .i File a post6effecti'e amendment to t,e 0S containing t,e correction

    .ii Amend or supplement t,e final prospectus /it,out filing a post6effecti'e amendment.

    .V HOW TO REGISTER 

    .A REGISTRATION STATEMENT PREPARATION AND PROCESSING

    1 General Proisions.a B 6. Te#'ni#al Proisions

    .i B6aD 0eference to registering securities only ?as proposed to offer@ must be proposed tooffer in near futureE signing of 0S.ii B6bD Fee for registration formula.iii B6#D- /,en you pay you pay /it, a certified c,eck T a cas,ier=s c,eck filing deemedto ,a'e taken place upon receipt of 0S by S)C.i' B6dD- all information in 0S s,all be made a'ailable to public "possible to petition S)C tomake part of registration material confidential#

    .b B 8 Re@

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    2 Reie3 and Co44en! Pro#ed$re.a 0S of first time issuers are gi'en a t,oroug, re'ie/ A& statements by second and later time issuers arere'ie/ed selecti'ely.b Securities la/yers must comply /it, comments and any suggested c,anges

    .i 8,en c,anges e-tensi'e amendment is filed and a re'ised preliminary prospectus is re6circulated.ii 8,en c,anges minor clearance gi'en for no filing of amendment  price amendment filed

     Just before effecti'eness to make final corrections and c,anges and to add ne/ info.c R$le *%0A allo/s use of prospectus /,ic, omits certain info IF

    .i Securities offered for cas, A&

    .ii +ndertakings in %5!"i# done A&

    .iii 0emo'e ?red ,erring language@ "e.g. ?subJect to completion# A&

    .i' 4!4"b# satisfied  Prospectus /H blanks filled in mailed /Hin !d business day of earlier ofdetermining offering price 0 first use.

    % Effe#!ieness and a##elera!ion.a BaD  0S becomes effecti'e automatically !7 days after filing unless t,e S)C accelerates itE

    .i An amendment starts t,e !7 day period o'er 

    .ii In practice S)C uses acceleration to coerce use of delaying amendment. R$le *8%..b R$le *61 After S)C staff satisfied /it, t,at 0S ready to become effecti'e issuerHmanaging under/ritereac, re1uest acceleration specifying t,e dayHtime t,ey desire statement to become effecti'e S)C /ill grant..c A##elera!ion

    .i If you ignore comments risk acceleration denial

    .ii Inde4nifi#a!ion proisions pre'ent acceleration. 8,en issuer seeks acceleration S)Cre1uires issuer include undertaking to submit to court test before paying any indemnity. 

    "#5 P'oeni" S!eel Corpora!ion. S)C refused acceleration /,en co. refused to submitindemn. pro'ision to court.

    .iii R$le *60. n distribution of preliminary prospectuses

    * Ref$sal Orders, S!op Orders, and &i!'dra3al of Regis!ra!ion S!a!e4en!s.a BbD  Ref$sal orders  S)C empo/ered to issue refusal orders for statements t,at are ?incomplete orinaccurate in any material respect.@

    .i :UT 4a( no! be issued V 57 days after filing of 0S.

    .ii 0arely used bHc S)C prefers stop orders..b BdD  S!op orders  S)C may suspend effecti'eness for 0S including ?untrue statement of material factWor omission of material factX.@

    .i Onl( /,en case is egregious /ill S)C consider stop order or e-amination

    .ii Stop orders can be issued at any time statement becomes untrue e'en after securities ,a'ebeen sold.

    .c BeD Ines!iga!ions preparatory to issuing stop orders..i Las egas a3aiian SEC   S)C can start an in'estigation but must do so based on?reasonableness@E S+ has substantial authority, but it is constrained by reasonableness

    .d ol$n!ar( 3i!'dra3al under R$le *88 is muc, more likely

    5 &or>ing T'ro$g' !'e Regis!ra!ion Pro#ess.a Regis!ra!ion S!a!e4en! /or4s

    .i R$les 1%0=*01 gi'e t,e forms force of la/ making t,e re1uirements of t,e forms mandatory

    .ii /or4 S.1. Basic default form a'ailable to anybody and re1uires disclosure of most amount ofinformation

    .iii /or4 S.2. A'ailable to cos. t,at ,a'e been reporting under =34 Act for for 3( mont,sEincorporate by reference to S)A filing "most recent ,istory must be free of defaults onindebtedness and missed preferred stock di'idends#.i' /or4 S.%. A'ailable to cos. reporting under S)A for 5! mont,s A& ,a'e ?float@ of :>%million "securities in ,ands of non6affiliates#E incorporate by reference A& not deli'er filings.' /or4 S:.1=S:.2 ,eld out small companies /,o can=t burden t,e re1uirements of Form S65Euse ;AAP instead of S)C re1uired principles under 0egulation S6Y to prepare t,e financialstatements

    .b Con!en!s and a4end4en!s !o RS.i Reg$la!ion C.  ;eneral filing instructions

    "#5 R$le *0. ust disclose all material information.

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    "#! R$le *21dD. Issuers must prepare t,e frontHback co'er pages of prospectuses as/ell as summary and risk factors sections in ?plain )nglis,@"#3 R$le *2*. Instructions on filing pricing information "use red marked up 'ersion#."#4 R$le *%0A. 0ed markup 'ersion not re1=d if e6mail pricing information to S)C. 0Seffecti'e upon reception of pricing info.

    .ii R$le *15. S'elf regis!ra!ions "securities to be offered on a continuous or delayed basis#.• Re@$ire4en!s. Issuer must

    0easonably e-pect to take securities ?off t,e s,elf@ /it,in ! years Be large seasoned company

    +ndertake to update publicly a'ailable info /,en t,e securities are ?taken offt,e s,elf@• 0ule necessary to circum'ent ("a# /,ic, S)C interpreted ("a# to mean t,at

    securities generally may not be registered unless t,ere is an intention to offer t,em int,e ?pro-imate future@

    • +sed on sale of corporate debt securities suc, as bonds..iii Reg$la!ion S.J. Specific items incorporated by reference to S65 S6! S63.i' Reg$la!ion S.:. SpecialiDed disclosure re1uirements relating to small business issuers.' Reg$la!ion S.7. Accounting.'i Reg$la!ion S.T. )-plains ,o/ to do electronic filings

    .c Preparing and /iling Regis!ra!ion S!a!e4en!s.i Regis!ra!ion S!a!e4en! 9raf!ing and /iling 3i!' !'e Co44ission

    "#5 amass info about issuer 

    "#! la/yer begins drafting 0S"#3 drafts circulated to managing under/riter its counsel officers and per,aps directorsof issue may gi'e comments"#4 managing under/riter and its counsel do a ?due diligence e-amination@ designed toensure t,at t,e 0S is completely accurate and contains no material omission"#% financial printer sets 0S in type"#( lue S(y ualifications and /0S1 learance  securities of a company going publicmust be 1ualified under t,e ?blue sky@ la/s of eac, state in /,ic, t,ey are intended to beoffered unless t,ere is an e-emption from 1ualification a'ailable under state la/. AS&clearance to determine if under/riting agreements are fair and reasonable

    .d P$r#'ase of Se#$ri!ies b( Under3ri!ers  a binding legal agreements bH/ under/riters and companyonly occur on morning of t,e date t,e 0S is to be declared effecti'e by t,e S)CE agreements are usuallyconditional

    .B SEC DISCLOSURE REQUIREMENTS

    1 I4por!an#e of di#lsos$re.a In re Uniersal Ca4era Corp/- Prospectus omitted facts regarding t,e financial structure of t,e deal and touc,ed only lig,tly on t,e

    competiti'e conditions- "5# &isclosure needs to be plainly understandable to t,e ordinary in'estor not Just e-perts.

    "!# ust be able to pro'ide support for e'ery assertion"3# A'oid 'agueness and too muc, optimism"4# ust spell out full implications including dilution "dilution may not be a deal killer bHc future earnings

    may Justify paying more#.b In re Te"as Glass ?fg Corp/- Proceedings under *"d# to determine /,et,er a stop order s,ould be issued suspending t,e

    effecti'eness of a 0S-  SEC re@$ires dis#los$re of >no3n liabili!ies 6 deficiency in 0S e-ists in failure to disclose t,at t,ey ,ad

    sold unregistered securitiesE found it materially misleading to state t,at prior sales /ere pursuant to ane-emption.

    2 Perspe#!ies on SEC 9is#los$re Re@$ire4en!s.a 9is#los$re ?eri!

    .i anti6paternalism go'ernment s,ouldn=t decide /,at risks people s,ould take

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    .ii different tastes for risk go'ernment may not be competent bHc indi'iduals assess personalrisks at different le'els.iii lobbying.i' enforcement costs e-pensi'e to gear up for go'ernment program to determine merit.' some merit regulation already e-isted.'i disclosure can affect merit

    .b &'( re@$ire dis#los$re).i ore efficient less duplicati'e to ,a'e mandatory disclosure to ,elp t,e in'estor /,o /antt,e kno/ledge to ,a'e it.ii negati'e tone of prospectuses le'el of detail re1uired seems not useful to in'estors

    .c Effi#ien! Capi!al ?ar>e! (po!'esis.i idea t,at market /ill discern appropriate price gi'en information a'ailable in t,e market.ii semi6strong form price of securities reflect public information.iii strong form price reflects all information bot, publicHpri'ate.i' integrated disclosure reflects an endorsement of )C bHc t,e S)C seems to feel t,atinformation is a'ailable and t,e public already kno/s about a senior company /,ic, ,as issuedin past.

    .VI EXEMPTIONS SA REGISTRATION

    NOTE E7E?PTION /RO? REGISTRATION REUIRE?ENTS 9OES NOT E7E?PT ;OU /RO? ANTI./RAU9

    PROISIONS

    .A SUMMARY

    1 E"#ep!ions.a B %  Spe#ifi#all( e"e4p! se#$ri!ies.b B %aD11D  In!ras!a!e Offering

    .i Issuer and purc,aser in same state..c B *1D Transa#!ions by someone ot,er t,an issuer +8 or &lr..d B *2D  Pria!e Pla#e4en!s

    .i nly a'ailable to issuers.

    .ii Go na>ed.

    .iii R$le 506.

    .i' Reg 9."#5 R$le 50* " 3b#.  :5 aggregated 3"b# offerings in 5! mont,s"#! R$le 505 " 3b#. 9 :% in 5! mont,s 9 3% non6accredited in'estors "can beunsop,isticated#."#3 R$le 506 9 3% non6accredited in'estors "must be sop,isticated#."#4 ote %7!"a# safe ,arbor.

    .e B *6D Q5? fro4 a##redi!ed ines!ors.i ?Accredited@ means :5 net /ort, or :!77k a'g. income in last t/o years#.

    .f  Reg CE  California )-emption

    .g R$le 801 " 3b#.  Pension Plans

    ., Reg$la!ion A " 3b#. S,ort form.i 9 :% aggregate under rule in 5! mont,s

    .ii nce e'ery si- mont,s.

    2 I4por!an! Info.a B%bD )-emptions include %74 %7% 0eg. A C) >75.b E"e4p!ed fro4 all proisions of SA ?e-cept as e-pressly pro'ided@

    .i 5> and 5!"a#"!# still apply..c B2 General E"e4p!ie A$!'ori!(

    .i 8,en determining /,at is in t,e public interest for purposes of creating a ne/ e-emption t,eS)C must also consider /,et,er a rulemaking action ?/ill promote efficiency competition andcapital formation@

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    .d If applicable c,eck for integration.

    .B § . SPECIFICALLY EXEMPT SECURITIES.a ;o'ernment securities. 3"a#"!#..b )leemosynary securities. 3"a#"4#.c Interests in a railroad e1uipment trust..d )-c,anged /it, e-isting security ,olders.e Issued under a plan of e-c,ange appro'ed by a court or ot,er go'ernmental aut,ority.

    .f  Iss$ed in an in!ras!a!e !ransa#!ion 3"a#"55#.i R$le 1*8 creates a non6e-clusi'e safe ,arbor "can still go naked up 3"a#"55##.

    .C INTRASTATE OFFERINGS. § (A)("")

    1 Te"!.a Any security /,ic, is part of an issue.b ffered and sold only to persons resident /it,in a single State or Territory WA&X.c 8,ere t,e issuer of suc, security is a person

    .i 2esident  and

    .ii 1oing business within or if a corporation incorporate by and doing business /it,in suc,State or Territory@

    2 Re@$ire4en!s.a Iss$er Lo#a!ion R$le 1*8

    .i 9oing b$siness. #D2D. State /,ere"#5 Principal office"#! *7N of gross re'enues"#3*7N of proceeds /ill be used.

    But purc,asing out of state goods or paying off out of state debts M."#4 *7N of assets. Id.

    .ii Residen#e. #D1D State /,ere"#5 Incorporated or organiDed and"#! Principal office is located

    .b Se#$ri!ies 4$s! #o4e !o res! 3i!'in sa4e s!a!e

    .i If issuer s,o/s all purc,asers /ere in state P bears burden of s,o/ing stock didn=t= come torest. Busc,..ii o resales may be made to non6residents /it,in 2 mont,s of issue. 0ule 54>"e#.

    .c E"e4p!ion los! if an( re#ipien! is o$! of s!a!e 0elease o. 4434..i Issuer bears responsibility of ensuring in same state.

    .d If e"e4p!ion los!-.i S)C seeks inJunction if continued /it,out offering contingent liability under 5!"5# and issuermust offer rescission to t,ose persons on t,e basis of a statutory prospectus

    .e 9o3ns!rea4 sales b( p$r#'asers 4$s! ob!ain !'eir o3n e"e4p!ion

    .f  In!egra!ion Safe arbor R$le 1*8bD2D.i fferings more t,an si- mont,s apart /ill not be integrated.

    % Going Na>ed :$s#' Carpen!er 10!' Cir 1+8D

    /-  After an offer and sale to residents a maJority of proceeds /ere s,ifted out of state as a result of merger.- ;IF e-ists on intrastate issue. SO denied for &.1D 9id !'e se#$ri!ies #o4e !o res! in s!a!e)

    • :$rden

    Seller bears burden of s,o/ing all securities sold only to people in state. Ps ,a'e burden of s,o/ing e'idence t,at t,e stock ,ad not come to rest

    • 0esales do not suggest on e'idence gi'en t,at t,ere /as intent to e'ade t,e federalsecurities la/s no e'idence t,at t,e original purc,asers did not purc,ase for in'estmentpurposesRR

    2D &as iss$er doing b$siness 3i!'in U!a')

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    • 3ssuer must conduct a “predominant amount” of “income-producing acti!ity” within its home

    state

    • 8,en corp. intends to use proceeds in one state but t,en intentions genuinely c,ange andproceeds go else/,ere may still 1ualify for e-emption

    • If company is being set up t,e intent to in'est proceeds else/,ere may suffice to defeat aclaim of e-emption

    .D PRIVATE PLACEMENTS § #(2)ONL; AAILA:LE TO ISSUERS

    • People selling same securities do/nstream need o/n e-emption. 

    1 Re@$ire4en!s and Te"!.a Te"!- ?T,e pro'isions of % s,all not apply to . . . transactions by an issuer not in'ol'ing any [email protected] Re@$ire4en!s

    .i In'estor sop,istication and access to information.

    .ii o public ad'ertising.

    .iii Securities must come to rest in initial in'estors ,ands.

    .i' C,eck for integration.

    2 P$rpose and :enefi!s of B *2D e"e4p!ion

    .a P$rpose To e-empt from registration /,en it is t,oug,t to be unnecessary based on in'estorsop,istication and a'ailable information.b :enefi!s 

    .i 0ule %7(.

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    "#5 ne non6conforming offer destroys t,e offering e-emption for t,e entirety of t,eoffering.

    • So if 22 people ,ad access and sop,istication and 5 didn=t no e-emption."#! )'en if non61ualify indi'idual does not end up buying t,e security"#3 ust suspectHabandon offering so t,at /,en you start it up again S)C feels it is a ne/offering

    .i' In!egra!ion.  8,et,er an offering s,ould be regarded as a part of a larger offering made or tobe made can5t separate parts of a series of related transactions if sum total is really onetransaction

    "#5 6 4on!' safe 'arbor R$le 502aD  Sales separated by si- mont,s consideredseparate offerings not subJect to integration.D2 /ACTORS-

    • fferings part of a single plan of financing

    • fferings in'ol'e issuance of t,e sa4e #lass of security

    • fferings are 4ade a! or abo$! !'e sa4e !i4e

    • Same !(pe of #onsidera!ion is to be recei'ed

    • fferings are made for t,e sa4e general p$rpose

    .c B*2D and S!a!$!or( La3 Case la/ ,as subse1uently establis,ed four factors.i Offeree $alifi#a!ion  8,o can ?fend for t,emsel'es@

    "#5 &eal!' People /it, money ,as access to kno/ledge e'en if t,ey don=t ,a'e itt,emsel'es ability to assume risk

    • :UT 8ealt, insufficient if no sop,istication or kno/ledge"#! Sop'is!i#a!ion 8,et,er in'estor can understand and e'aluate t,e nature of t,e riskbased upon t,e information supplied to ,im"#3 Rela!ions'ip fficers,ipHpersonal "family ties friends,ip employment relations,ipor a pre6e-isting business relations,ip#D*O!'er fa#!ors

    d. 2is( bearing ability e. Offeree representati!e principle  a person ot,er t,an an offeree may be able to

    ad'ise an offeree or ot,er/ise protect t,e offeree=s interest so as to 1ualify t,eofferee  sop,istication may be imputed to an offeree "note r$le 506D

    f. 6anner of disclosure  more careful painstaking and detailed disclosure is t,emore likely one may understand risk

    g. +conomic bargaining power   an offeree is presumed to ,a'e t,is attribute if

    a'ailable resources financial e-perience and ,istory as an in'estor .ii Aailabili!( of infor4a!ion  Ade1uate to gi'e basic information concerning t,e issuer=sfinancial condition results of operations business property and management.iii ?anner of offering

    "#5 offering s,ould be made t,roug, direct communication /H 1ualified offerees 0 t,eirrepresentati'es"#! all forms of general ad'ertising and mass media circulation s,ould be a'oided  ifnot t,en difficult to s,o/ t,at all /,o recei'ed offering /ere 1ualified

    .i' Absen#e of redis!rib$!ion  /ant to restrict t,e transferability of pri'ately placed securitiesto a'oid resales to un1ualified in'estors bHc suc, resales /ill transform t,e entire offering into apublic distribution and dissol'e t,e e-emptionRR.' No!e on n$4erosi!( Al/ays ,as been some relations,ip bH/ acceptable number and le'elof offerees sop,istication

    "#5 but t,ey feel counsel s,ould feel comfortable in selling to all institutional in'estorse'en if 577"#! former ceiling !% but SC a ma7imum number /,ic, could ne'er be e7ceeded  fore-emption to be a'ailable

    .d R$le 506 Safe arbor $nder B *2D See belo/. .i ote t,at failure to 1ualify for safe ,arbor doesn=t e'en raise inference t,at 4"!# doesn=tprotect transaction.

    .E § #('). $M TO ACCREDITED INVESTORS.a )-emption for offerings up to :% million made e-clusi'ely to ?accredited in'estors@

    .i R$le 215. In'estor 1ualification re1uirements "!!

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    "#5 et /ort, of V :5 or"#! Income of more t,an :!77777 in eac, of t,e t/o most recent years.

    .b ?$s! file a notice /it, t,e S)C and cannot ad'ertise or publicly solicit

    .F REGULATION D EXEMPTIONS

    1 General Proisions.a No soli#i!a!ion or general ader!ising 0ule %7!"c#.

    .i ust be pre6e-isting relations,ip..b Li4i!a!ions on Resale  0ule %7!"d#.

    .i 0eg. & securities treated as t,ose under 4"!# t,erefore cannot be resold /it,out anindependent e-emption..ii Issuer ?s,all e-ercise reasonable care to assure t,at t,e purc,asers of t,e securities are notunder/riters Wunder !"a#"55#X.@ 0easonable care demonstrated by

    "#5 Reasonable in@$ir( to determine if t,e purc,aser is ac1uiring securities for ,imself."#! &ri!!en dis#los$res t,at securities not registered and can=t be resold unlessregistered or e-empted."#3 Legend on securities stating not registered and restrictions on subse1uenttransferability.

    .c R$le 50 Insignifi#an! deia!ions from.i 0e1uirements 0ule %74 %7% %7( /ill not result in loss of registration e-emption if 'iolation

    did not pertain to term intended to protect complaining indi'idual A&.ii Insignificant to offering as a /,ole A&.iii ;ood fait, reasonable attempt to comply /it, terms..i' B+T 'iolations of %7!"c# aggregation limits in %74 %7% %7( are significant.

    .d 9efini!ion of a##redi!ed ines!orF.i R$le 501 Person t,at is 0 /,o issuer reasonably belie'es is

    "#5 8ealt,y Indi'idual• et /ort, o'er :5 0

    • Income V :!77k in eac, of last t/o years or :377k if married."#! Any corporation /it, o'er :% in assets."#3 &irectors and officers of issuers."#4 In'estors like banks insurance companies may include LCs

    .ii Release No 6*55

    5. In'estor is accredited if ,e is director of issuer  ?at t,e time of sale of securities to t,atperson@!. For a corporation to be accredited in'estor rule %75"a#"*# re1uires ?all e1uity o/ners@ to

    be accredited director is not accredited unless ,e is director of issuer 3. If perform a policy making function t,en deemed e-ecuti'e officer 4. So long as all information deli'ered prior to sale may disclose in t/o installments%. nly deemed purc,aser if make an in'estment decision(. Partners,ip counts as one purc,aser >. ay rely upon more t,an one e-emption is one fails

    .e In!egra!ion R$le 502aD.i /ie /a#!ors

    "#5 Class Is it t,e same class of stock."#! Considera!ion Is consideration different$"#3 P$rpose  Are purposes different$"#4 Plan +nclear if it literally means ?plan@ "i.e. company planned bot, at same time#."#% Ti4e  At or around t,e same time.

    .ii Non.In!egra!ion of s$bse@$en! p$bli# offerings 3i!' prior pria!e ones R$le 152 "#5 8,en used for 0ule %7( offerings t,at /ere initially pri'ate /ill not be integrated /it,subse1uent offerings t,at are public.

    .iii Non.in!egra!ion for abandoned pria!e offerings R$le 155 "#5 If abandon pri'ate offering "i.e. no actual sales# and terminate all offering acti'ityrelated t,ereto A&"#! Subse1uently initiate a public offering for same "i.e. files 0S# T)"#3 IT);0ATI of public and pri'ate.

    .i' Safe arbor- Prior offering V ( mnt,s ago. 0. %7!"a#.

    !3

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    .f  /iling Re@$ire4en! for sales R$le 50%.i ust file Form & no later t,an 5% days after first sale..ii Subse1uent notice of sales e'ery si- mont,s after first sale.

    2 R$le 50*  Q1? #ap.a Iss$er  may not be S)A company..b ?UST CO?PL; &IT GENERAL PROISIONS,F abo'e..c N$4erosi!( o limit..d Ines!or $alifi#a!ion  one..e A4o$n! o more t,an :5 in last 5! mont,s.

    .i Aggrega!ion  Add up offerings under %74 0eg. A "mini6regs under :%#E 0ule %7% ":%cap.#E C) "Cal. e-emption#E >75 "pension plans#.

    .f  /iling Re@$ire4en! R$le 50%.i ust file Form & no later t,an 5% days after first sale..ii Subse1uent notice of sales e'ery si- mont,s after first sale.

    .g Good s!anding re@$ire4en! R$le 508.i )-emption una'ailable if issuer ,as been found to 'iolate 0ule %73 "filing re1=ts#..ii +

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    5 Reg$la!ion CE Cal E"e4p!ionD.a S)C ,as aut,ority to allo/ states to make o/n la/s so far only Cal ,as. Sales limited to 1ualifiedpurc,asers.b Filings must be made /it, California Corporations Commissioner .c All securities sold under C) are restricted securities

    6 R$le 801  Pension Plans.a For t,ose /,o offer securities to employees under stock purc,ase stock option or ot,er benefits plans.b ot a'ailable to )-c,ange Act reporting companies or in'estment companies

    8 R$les 01 and 02.a )-emptions for international transactions in'ol'ing rig,ts offerings e-c,ange offers and businesscombinations in'ol'ing foreign pri'ate issuers

    .G SHORT FORM REGISTRATION. REG. Aini6registrations under :%.)ssentially dead letter after adoption of form S65*

    .a A4o$n! 75"d#.i' ?In a transaction or c,ain of transactions meeting re1uirements of 0ule 544A@.' ?From issuer in transaction subJect to 0eg. C)@

    !%

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    .c /$ngibili!( of #on!rol and res!ri#!ed se#$ri!ies if a person o/ns bot, restricted and nonrestrictedsecurities of t,e same class and from t,e same issuer t,e nonrestricted securities take on t,e taint ofrestricted securities

    .i :UT f$ngibili!( inappli#able for 1**

    .B PUBLIC RESALES OUTSIDE RULE "##

    1 B *1D Seller is nei!'er iss$er, $nder3ri!er nor dealer 

    .a Iss$er  Any person /,o issues or proposes to issue a security. !"a#"4#.i ote doesn=t include control persons

    .b Under3ri!er B 2aD11D.i Anyone /,o

    "#5 Purc,ased from issuer or an affiliate of t,e issuer /it, a 'ie/ to or"#! ffers or sells for an issuer or an affiliate of t,e issuer in connection /it,

    .ii t,e distribution of any security.

    .iii &i!' a ie3 !o dis!rib$!ionF re@$ires in!en!"#5 Passage of t/o years bHt purc,ase and sale precludes finding ?distribution.@S,er/ood.

    • :UT #'ange in #ir#$4s!an#es may still allo/ if purc,aser needs money ",as tobe like deat, of only pro'ider in family#

    "#! 8olfson "brokers selling SHs from issuer=s control persons not +H8s bHc didn=t kno/

    /,at t,ey /ere doing and ot,er/ise complied /it, 0ule 5%4 "no/ 544#."#3 A person /,o purc,ases securities in a pri'ate placement and t,en resells in a publictrading market is an under/riter if s,e purc,ased /it, a 'ie/ to distribution "as anunder/riter t,ey cannot use 4"5##

    .c 9ealer B 2aD12D.i Any person /,o for all or part of ,is or ,er time is in t,e business of offering buying sellingor ot,er/ise dealing or trading in securities issued by ot,ers..ii ay not be functioning as +8. aupt.

    2 B *%D Non.par!i#ipa!ing dealers or U&s not selling unsold allotment of original offering must deli'er finalprospectus IF

    .a First time registrants A& offering 9 27 days

    .b All ot,er registrants and offering 9 47 daysH

    .c !% days for e-c,ange traded companies "KS) or AS&A#. 0. 5>4

    .d o deli'ery re1uirement for =34 Act companies. 0. 5>4

    % B **D Unsoli#i!ed :ro>er Transa#!ions.a R$le 1**gD

    .i Broker may not recei'e more t,an customary and usual commission.

    .ii ay not solicit purc,asers )YC)PT"#5 ay contact dealers t,at indicated interest."#! Contact customers /,o pre'iously indicated unsolicited interest."#3 Publis, bidHask info on automated 1uotation system.

    .b ot a'ailable to brokers /,o are also acting like under/riters in ot,er /ords effecting a distribution. Inre aupt Co.

    * 9ee4ed Under3ri!er R$le 1*5#D

    .a Party to any 54%"a# transaction "reclassification merger asset transfer# ot,er t,an issuer including anaffiliate /,o publicly offers or sells securities ac1uired is an +8 under !"a#"55#. So no e-emptiona'ailable.

    .C PUBLIC RESALES UNDER RULE "##

    1 R$le designed !o-a. Pro,ibit creation of public markets in securities of issuers concerning /,ic, ade1uate current information

    is not a'ailable to t,e public

    !(

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    b. 8,ere ade1uate current information concerning issuer is a'ailable to public t,e rule permits t,e publicsale in ordinary trading transactions of limited amounts of securities o/ned by persons controllingcontrolled by or under common control /it, t,e issuer and by persons /,o ,a'e ac1uired restrictedsecurities of t,e issuer 

    2 Crea!es safe 'arbor for people 3'o 3ill no! be #onsidered !o be engaged in dis!rib$!ion, and !'ereforeno! U&s $nder B *1D

    % /lo3 C'ar!

    !>

    Person anaffiliate$

     Ade1uateinfo.

    a'ail.$

    Can=t sellunder 0ule

    544

    Securitiesrestricted$

    Can sell;roup Bsatisfied$

    eld forone year$

    Kes

    Kes

    Kes

    Kes

    o

    o

    o

    eld for !years$

    o

    Try againin a year.

    Try againin ! yrs.

    Kes

    Kes

    Can=t sellunder 0ule

    544

    o

    o

    IF V 5yrand ade1.info. a'ail.

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    * Ade@$a!e Infor4a!ion sa!isfied b(.a Issuer is S)A co. A& subJect to 53 re1uirements for 27 days prior to sale A& ,as filed all reports/it,in preceding 5! mont,s 0.b Contains information states in S)A 0ule 5%c!655"a#"%#6"-i'#.

    5 Gro$p : fa#!ors-.a anner of sale  broker=s transaction.b A4o$n! res!ri#!ions. ;reater of 5N of outstanding securities or a'erage /eekly trading in any 3 mont,period.c 0e1uirement of t,e filing of a notice "subJect to de minimis e-ceptions#  disclosure on form 544 "if sell

    more t,an %77 s,ares or more t,an :57777#.

    6 Res!ri#!ed Se#$ri!ies.a Ac1uired directly or indirectly from issuer or affiliate in a c,ain of transactions not in'ol'ing a publicoffering..b SubJect to %7!"d# or 0ule >75"c#.c 544A.d 0egulation C).e *75 and *7!.

    .D PRIVATE RESALES OF CONTROL AND RESTRICTED SECURITIES

    1 *1D E"e4p!ion for 9o3ns!rea4 Sales.a Allo/s sales of restricted securities "i.e. issued under 4"!## by purc,asers to ot,er entities /,o /ould,a'e been 1ualified to purc,ase t,em directly form issuer..b f course e'en if t,is didn=t apply you could /ait a year to sell under 544 but t,is lets you circum'ent it.

    2 R$le 1**A 9o3ns!rea4 Sales !o $alified Ins!i!$!ional :$(ers.a ?ualified Institutional Buyer@ is anyone /it, more t,an :577 of securities in unaffiliated issuers or abank /it, a net 'alue of :!%..b Applies only to unlisted securities..c Ade1uate information.

    .i Co. is S)A co. 0

    .ii Purc,aser ,as rig,t to obtain from seller and issuer certain basic info about issuer including

    description of business products and ser'ices most recent balance s,eet and financialstatements for past t/o year 0ule 544A"d#"4##.d 0ule 544A is not e-clusi'e may still rely on 4"5# e-emption if sale /as not a distribution

    % Pria!e Resales O$!side R$le 1**Aa. If res!ri#!ed and not co'ered by 0ule 544A seller must structure t,e transaction so t,at seller is

    i. ot an under/riter ii. And cannot be made an under/riter by actions of t,e purc,aser 

    b. if #on!rol and not co'ered seller must ensure not an under/riter i. at minimum  obtain a representation t,at purc,aser is not purc,asing /it, 'ie/ to distribution

     A& insist on contractual restrictions and legendsc. No!e- purc,asers of restricted securities are deemed to ,a'e recei'ed restricted securities and may not

    resell t,em publicly  /it,out compliance /it, t,e registration pro'isions of t,e Act

    .VIIILIABILITY FOR SECURITIES ACT VIOLATIONS

    .A SUMMARY.a Liabili!( for non#o4plian#e 3i!' B5 5!"a#"5#

    .i 0escission.b Liabili!( for fra$d$len! RS "or prospectus filed t,erein#  55

    .i &amages

    !*

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    .c Liabili!( for o!'er fra$d  5!"a#"!#.

    .d Liabili!( for #on!rol persons  5%

    .e Goern4en! #iil enfor#e4en!  5>..i Ci'il inJunctions and penalties. !7"b#..ii Cease and desist orders. *A

    .f  Goern4en! #ri4inal enfor#e4en!  !4..i % years in prison and fines up to :57777.

    .B GOVERNMENT ENFORCEMENT1 Ciil Liabili!(

    .a B5. Any 'iolation of t,e section is ?unla/ful@

    .b B18. Antifraud Pro'isions..i Can be 'iolated by negligent conduct..ii "a#

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    .e 9a4ages.i ut of pocket.ii Conse1uential.iii Puniti'e

    2 B 11 ?a!erial ?iss!a!e4en!s or o4issions in regis!ra!ion s!a!e4en! or prospe#!$s filed !'erein.a :asi# Te"! Ci'il remedy /,ere RS containing ?an untrue statement of a material fact or omits to state amaterial fact re1uired to be stated t,erein or necessary to make t,e statement t,erein not [email protected] Ele4en!s-

    i. Proper P. Any purc,aser of a security /,et,er in registered offering or trading market.5. ust trace loss to fraudulent 0S.!. under B1%  must bring suit before statute of limitations ,as run

    a. one (ear  after disco'ery of untrue statement or one year after disco'ery s,ould,a'e been made by t,e e-ercise of reasonable diligence

    ii. Proper 9  55"a#5. Under3ri!ers

    a. :UT selling gro$p e"#l$ded from t,e definition of under/riter and do not ,a'eliability for defects in 0S but under/riters are liable#

    !. Con!rol Person Liabili!(. 5% see belo/a. )'ery director officers at t,e time of filing

    3. Signers of 0S "includes issuer CF C) +8#4. Na4ed E"per!s includes accountants and maybe la/yers for ta- opinions

    a.

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    "#5 5 year since disco'ered or s,ould ,a'e disco'ered 'iolation /,ic,e'er is sooner."#! In no case more t,an 3 years.

    .'ii If 9 o$!side dire#!or, reasonable reliance. See belo/.

    .'iii /or3ard Loo>ing S!a!e4en!s See belo/.D1 :espea>s Ca$!ionD2R$le 185"#3 B 28A

    % 9$e 9iligen#e 9efense.a Aailable !o an(one b$! NOT ISSUER.b E"per!s=o$!siders not liable unless sign..c E"per!s in#l$de- +nder/riters accountants attorneys..d E"per!ised Por!ions are prepared by independent auditors. 

    .i &oes not include la/yers..e S$44ar( #'ar!

    PersonE"per! Non.E"per!

    E"per!isedPor!ion

    • & made reasonable in'estigation

    • & ,ad reasonable grounds tobelie'e trut,

    • & belie'ed t,at statement /as true3gnorance is no e7cuse

     0dd5l 1ef8 Stmnts not represent his.

    • & ,ad no reason to belie'einformation /as false. "no duty ofin'estigation#.

    • 3gnorance is e7cuse

    Non.E"per!isedPor!ion

    o liability   • & made reasonable in'estigation

    • & ,ad reasonable grounds tobelie'e trut,

    • & belie'ed t,at statement /as true3gnorance is no e7cuse

    .f  9e!er4ining reasonablenessF.i R$le 186. 0easonableness depends on factors

    "#5 Type of issuer "#! Type of security"#3 Type of person"#4ffice ,eld.

    .ii Es#o!! :arC'ris Cons!r$#!ion Corp . &s position and access to information are factorsin determining /,at constitutes a reasonable in'estigation

    "#5 CEO o defense• Because a/are of all rele'ant facts cannot belie'e t,ere /as no untrue

    statements or material omissions• o due diligence defense

    "#! Presiden! and P o defense.• ot educated but reasonably prudent person /ouldn=t sign document t,ey do/n=

    understand.D% O$!side dire#!ors

    • o reasonable in'estigation "didn=t read t,e 0S or kno/ /,at t,ey /ere signing# A& signed statement.

    D*Under3ri!ers• S,ould 'erify any claims made by managers

    D5A$di!ors

    • o liability for t,e non6e-pertised portions

    • For t,e e-pertised part t,ey prepared ,a'e to do a reasonable in'estigation andmake sure t,at t,ey numbers being used are correct

    D6A$di!ed Por!ion• on6e-perts can rely on e-perts

    • )-perts must s,o/ t,ey reasonably in'estigated /,ere numbers came fromD8A!!orne(D Non.E"per!ised Por!ion

    • )'eryone "but auditors# s,ould ,a'e 'erified claims by t,e managers

    35

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    • Cannot rely on management=s statements of ,o/ t,ings are.g 9$e 9iligen#e E"a4ina!ion  see page !(* for list of t,ings t,at s,ould be done in a due diligencee-amination.

    * Liabili!( of O$!side 9ire#!or .a utside &irector may rely on reasonable representations by management if ,er o/n conduct /asreasonable. 8einberger '. Oackson "& familiar /it, operation attended meetings re'ie/ed financials read0Ss#

    .i o duty to make specific in1uiries of company=s management as long as prospectus

    consistent /it, ,is kno/ledge. 8einberger .b B11fD. &s are Jointly and se'erally liable.i & may reco'er contribution from ot,er directors..ii O$!side dire#!ors only Jointly and ser'erally liable if t,eir 'iolation /as kno/ing "really mean/illful7. !5&"f#

    "#5 t,er/ise only liable for t,eir percentage of fault as determined by fact finder."#! only ?kno/ing@ if ,e ,as ?actual kno/ledge@

    5 /or3ard Loo>ing Infor4a!ion.a S)C concerned /it, release of for/ard looking information before a 0S is filed so if t,ere /ereproJections or forecasts it is more likely to be 'ie/ed as an offer 

    .i &A must be contained and must identify any kno/n trends t,at mig,t cause futureresults to differ from past results

    .b :espea>s Ca$!ion 9o#!rine

    .i Ta ?a'al Li!iga!ion/- Issued bonds for raising capitalE &A section of t,e prospectus said t,at ?belie'e funds

    generated /ill be sufficient to co'er all of its debt ser'ice@E Ps argue t,is /as misleadingbHc &s possessed neit,er a genuine nor reasonable belief in trut,E Court found t,atprospectus contained bot, general /arning t,at t,ere /as no assurance of repaymentand indicted se'eral risk factors

    - :espea>s #a$!ion do#!rine ?/,en an offering document=s forecasts opinions orproJections are accompanied by meaningful cautionary statements t,e for/ard6lookingstatement /ill not form t,e basis for a securities fraud claim if t,ose statements did notaffect t,e total mi-= of information t,e document pro'ided in'estors@

    • cautionary language if sufficient renders alleged misrepresentation immaterial

    • 'ague or blanket statement usually inade1uate  s,ould be abundant andmeaningful

    • in litigation use t,is to s,o/ t,at t,ere /as no misrepresentation no culpabilityand no materiality "bHc could not ,a'e relied upon it#

    N-

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    .e NOTE- ?bespeaks caution doctrine@ !>A 0ule 5>% apply to all applicable situations arising under anysection of t,e securities act

    6 B 12aD1D iola!ions of B 5.a :asi# Te"!

    .i Any ?person /,o offers or sells a security in 'iolation of % s,all be liable to t,e personpurc,asing suc, security from ,im Wand get rescission of t,e saleX@

    .b Ele4en!s-.i Proper P  Actual purc,aser .ii Proper 9 ?Seller@

    "#5 Title Passer. Any person /,o passes title. Pinter • ust be direct pri'ity.

    • But eac, seller can in turn sue its seller.

    • Issuer only liable if actually sold to P."#! Solicitor. ?Seller@ also includes person ?/,o successfully solicits t,e purc,asemoti'ated at least in part by a desire to ser'e ,is o/n financial interest or t,ose of t,esecurities o/ner@

    :UT solicitor must ,a'e committed 'iolation itself no aiding and abetting. Includes anticipation s,are or profits 0 recei'es a brokerage commission )'en if no personal receipt interest of ot,er may be sufficient

    "#3 Con!rol Person Liabili!( 5% see belo/"#4 No aiding and abe!!ing Central Bank of &en'er.

    "#% Hoin! and seeral liabili!(  5% )YC)PT +8 limited to participation in offering utside directors limited to N fault.

    .iii :ad A#! & offered or sold to P not ot,ers in 'iolation of %. See abo'e.

    .i' C$lpabili!( one. Strict liability.

    .' Ca$sa!ion one. Strict

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    "#4 No aiding and abe!!ing action under 0ule 57b6%. Central Bank of &en'er."#% Hoin! and seeral liabili!(  5% )YC)PT

    +8 limited to participation in offering utside directors limited to N fault.

    .iii :ad A#!  aterial misrepresentation or omission of fact in "filed$$$# prospectus."#5 G$s!afson Allo(d Co  T,ere /as a circuit split as to /,et,er 5!"a#"!# /aspermitted in pri'ate secondary  transactionE

    /- Sole SHs of Alloyd sold t,eir stock to in'estor group. ;roup claimed t,at salecontract misrepresented company=s financial position. P soug,t rescission.

    -  "5# &ucks 1uestion on 5!"a#"!#."!# nly misrepresentations in filed prospectus count general !"a#"57# don=tcount.

    N- 9$rabili!( of pre#eden! @$es!ionableImpact on % 'iolations if e-tended

    • Seems t,at only formal offers associated /H public offerings come undert,e definition.

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    "#4 Control not determined by control of actual transaction.b Hoin! and Seeral Liabili!( for control persons. Anyone /,o controls a person liable under 55 or 5!is Jointly and se'erely liable to t,e same e-tent as t,e controlled person "e-press pri'ate rig,t of action#

    .i E"#ep!ion- controlling person ,ad no kno/ledge of or reasonable grounds to belie'e in t,ee-istence of fact by reason of /,ic, t,e liability of t,e controlled person is alleged to e-ist

    .c :$rden of proof on #$lpabili!(  Circuit split on /,et,er P must s,o/ 0 & to raise as defense

    + B 18aD /ra$d and ?a!erial ?iss!a!e4en!s 3'e!'er or no! regis!eredD.a Te"! +nla/ful in t,e offer or sale of any securities . . .

    "#5 To employ any de'ice sc,eme or artifice to defraud 0"#! To obtain money or property by means of untrue statement of a material fact or any omission"#3 To engage in any transaction practice or course of business /,ic, operates or /ould operate as a

    fraud or deceit upon t,e purc,aser .b 9s s!a!e of 4ind-

    .i "a#"5#. Artifices to defraud re1uires scienter

    .ii "a#"!#. isrepsHomissions negligence sufficient.

    .iii "a#"3#. Fraud negligence sufficient.

    .i' NOTE- ust s,o/ bad act 0/1 state of mind.c ?a R$le- No pria!e rig'! of action under 5>"a# e-cept for Si-t, Circuit.

    .i Cor! As' test for implied rig,t of action."#5 Is P of class intended to benefit from statute$"#! &oes legislati'e intent indicate a pri'ate rig,t of action$"#3 Is implication of a rig,t consistent /it, legislati'e sc,eme$

    "#4 Is t,is subJect matter traditionally relegated to state la/ in an area basically t,econcern of t,e states$

    .ii In re &as'ing!on P$bli# Po3er S$ppl( "2t, Cir.# Facts company defaulted on bondsboug,t by t,e PsE could not sue under 55 bHc /ere not re1uired to be registered and can=t sueunder 5!"a#"!# bHc does not apply to go'ernment securitiesE could a pri'ate rig,t of action bebroug,t under 5>"a#$ Court ,eld no pria!e rig'! of a#!ion $nder B18aD

    "#5 Court applied t,e Cort factors;)< 4 must establish that ongress intended to imply a pri!ate right or at least that it isconsistent with the legislati!e scheme"#3 -

    • 8,en Congress /anted a pri'ate rig,t it did so e-pressly "55 and 5!#

    • Congress amended t,e statute and left t,is pro'ision alone

    • If t,ere is a remedy in state la/ cuts against finding a remedy in federal la/

    • Since e-press remedies e-ist in t,e statute " 55 5!# pri'. rt. /ould rendert,ose superfluous.

    .D INDEMNIFICATION AND CONTRIBUTION

    1 Con!rib$!ion B 11fD.a Re@$ire4en!s

    .i Contribution from any person /ould ,a'e been liable to make t,e same payment.

    .ii Cannot seek contribution under t,is section from person /,o is not guilty of fraudulentmisrepresentation

    .b O$!side dire#!ors Proportionate liability. !5&"g#.

    .c Also a'ailable under 5! and 0ule 57b6% "not e-press but implied bHc rig,ts e-ists in 55 and 57"b#"%#

    2 Inde4nifi#a!ion.a S)C opposes indemnification and any pro'ision granting indemnification is unenforceable.b Glob$s La3 Resear#' Seri#e

    /- U& seeks indemnification for intentional act pursuant to standard indemnification agreement butt,is is problematic bHc under/riter ?kne/@ of t,e falsity

    - +8 can=t be indemnified bHc against public policy /ill encourage negligence.

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    .IX SECURITIES AND EXCHANGE ACT

    .A SEA V. SA- =33 Act /as focused on initial distribution of securities

    o 0egistration ,ere is so t,at securities can be sold in a particular transaction- =34 Act /as intended to apply to secondary trading 

    o 0egistration under t,is act makes you subJect to reporting re1uirements

    -B+T t,ere are e-ceptions to t,ese general rules

    .B SEC*S GENERAL EXEMPTIVE AUTHORITY.a B%6 V general e"e4p!ie a$!'ori!(

    S)C ?by rule regulation or order may conditionally or unconditionally e-empt any person security ortransaction or any class or classes of persons securities or transactions from any pro'ision orpro'isions of t,is title or of any rule or regulation t,ereunder@

    .b 0e1uirements.i )-emption must be ?necessary or appropriate in t,e public interest and consistent /it, t,eprotection of in'estors.ii Aut,ority of S)C does not e-tend to Section 5%C /,ic, relates to go'ernment securitiesbrokers and dealers

    .c B%fD  /,en engaged in rulemaking or t,e re'ie/ of a rule by a self6regulatory organiDation suc, as asecurities e-c,ange 3"f# re1uires t,e S)C to consider ?/,et,er t,e action /ill promote efficiencycompetition and capital formation@ at any time it is ?re1uired to consider or determine /,et,er an action isnecessary or appropriate in t,e public interest@

    .C REGISTRATION OF SECURITIES UNDER THE EXCHANGE ACT AND

    PERIODIC REPORTING

    1 Regis!ra!ion.a Re@$ired 3'en

    .i Se#$ri!( 3ill be !raded on na!ional e"#'ange B12aD.

    .ii Sie and N$4erosi!( B12gD and R$le 12g.1 "#5 Any single class of security ,eld by V %77 persons A&

    5!"g#"%#. ?Class@ includes all securities /,ic, are ?substantially similarc,aracter@ and ?,olders of /,ic, enJoy substantially similar rig,ts and pri'ileges.@

    Series are not different classes

    • nly e1uity securities "debenture not e1uity t,us not registered#.

    • Under 12g.1, need no! be sa4e #lass

    • Beneficial o/ners count."#! To!al asse!s e"#eed Q10? R$le 12g.1."#3 ust file /it,in 5!7 days after end of first fiscal year /,en you meet t,esere1uirements

    .b Per4i!!ed anytime someone /ants to.

    .c Pro#ess of regis!ering.i B12gD*D  notice of deregistration.ii B12bD  ,o/ to file includes details on re1uired in disclosure

    "#5 /or4 10 commonly used"#! /or4 10.S: for small businesses

    2 Repor!ing.a B 1%aD Companies registered under S)A 5! are ?reporting companies@ and must report

    .i Periodi# filings e.g. annual and 1uarterly reports as t,e S)C re1uires irrespecti'e ofupdating re1uirement "e.g. 576M 576#

    3(

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    .ii Real.!i4e dis#los$re *6M filed to alert market /,en specific designated e'ents ,a'e takenplace "i.e. auditors 1uit resignation of director#.iii Jeep filings #$rren! Filings of suc, info and documents as S)C re1uires to keep currentinformation pro'ided at time of registration

    .b B15dD and Reg$la!ion 159 0e1uire same reporting of SA registrants "regardless of siDe#.i B+T if after one year of registration 9 377 ,olders may stop reporting.

    .c B1%lD "added by SY# re1uires ?real6time disclosure@ /,ic, results in a continuing duty to discloseinside information if it concerns material c,anges in t,eir financial condition or operations  not yet effecti'ebHc S)C ,as not promulgated it yet

    % B1% Re#ord.>eepinga. B1%bD2D 

    i. aintain financial records in ?reasonable detail@ to reflect accurately company transactions andii. Implement internal controls sufficient to pro'ide ?reasonable assurances@ of internal accountability

    and proper accounting.b. B1%bD%D e"e4p!ion Companies cooperating /it, certain federal officials in connection on matters

    concerning national security.

    * Liabili!( for SEA iola!ions.a B%2.  Cri4inal liabili!( under S)A "different from !4 SA#

    .i Any /illful and kno/ing misrepresentation"#5/illful  did it on purpose"#!kno/ing  kne/ t,ere /as a rule t,at made it illegal to act"#3 TIS section probably doesn=t add muc, to t,e statute

    .ii & can a'oid imprisonment but not fine by pro'ing lack of kno/ledge of t,e rele'ant rule orregulation.

    .b B1 E"press #iil re4ed( for misrepresentations "'ery toug, to pro'e#.i Ps #ase

    "#5 Proper P  Any person /,o purc,ased or sold"#! Proper P  Any person /,o engages in bad act"#3 :ad a#!  isrepresentation or omission"#4 Relian#e  ?)yeball reliance@ ,a'e to s,o/ P actually read t,e statement."#% C$lpabili!(  ot re1uired.D6Ca$sa!ion

    a. not kno/ingb. Price at /,ic, P purc,ased affected by t,e defecti'e filing.

    "#> damages caused by relianceii. 9s CASE. ;ood fait, and no kno/ledge

    "#* ourts can re9uire an underta(ing for costs and can assess costs including attorney=sfees against any party

    .ii Re4edies"#5&amages

    iii. B1 is a dead le!!er bHc Ps ,a'e ne'er /on case is too ,ard to establis,/O=+8 Ps do not like 5* and often seek an implied rig,t of action under anot,er section "i.e.5!"b#"5# and 53"a##

    c. Probabl( no pria!e rig'! of a#!ion $nder B 1% In re Penn Cen!ral Se#$ri!ies Li!iga!ion "o pri!ateright of action under $"&> 5*"a# is t,e e-clusi'e remedy for alleged 'iolations of 53"a##.

    i. I;T apply in ?e-traordinary circumstances@ so argument is not fri'olousd. No pria!e rig'! of a#!ion $nder B 12gD1D  Cra4er General Telep'one Ele#!roni#s "no pri'. rt.

    under 5! and P=s failed to meet 5*#.

    .D FOREIGN CORRUPT PRACTICES ACT•  Added re1uirements of 53"b#"!# and "b#"3# see abo'e

    • 0e1uires reporting companies to aintain financial records in ?reasonable detail@ to reflect accurately company transaction To put into place internal accounting controls sufficient to pro'ide ?reasonable assurances@ of internal

    accountability and proper accounting 53"b#"!#

    • Passed in response to ?corporate 8atergate@

    3>

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    .E SARBANES%OXLEY ACT OF 2++25. B%02 andates t,e S)C to pass rules relating to t,e certification of annual and 1uarterly reports by C)HCF!. B+06  C)HCFs to certify /it, eac, periodic report containing financial statements t,at t,e report ?fully complies

    /it, t,e re1uirements of t,e Act@ and t,at information ?fairly presents t,e financial status@ of t,e company  penalty pro'isions included

    3. B%0%  unla/ful to influence t,e conduct of audits in order to make financial statements materially misleading4. B*01  Added subsection "i# and "J# to 53

    a. 53"i# all correcting adJustment by auditors must be included in financial statements contained nfinancial reports

    b. 53"J# mandates S)C to pass rules relating to disclosures of off6balance s,eet transactionarrangements obligation and certain ot,er relations,ips

    %. B*02  Amends 53"k# to make it unla/ful for an issuer to e-tend credit for director or officer.(. B*0*, *06, *08 0e1uire t,e S)C to issue rules relating to management=s assessment of internal controls codes

    of et,ics for financial officers and disclosures of financial e-perts on audit committees

    .X PROXY REGULATION

    .A REGULATORY SCHEME

    1 Reg$la!ion of Pro"( Soli#i!a!ions B 1*.a +nla/ful not to comply /it, S)C rules..b B 1*bD 

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    .iii Any ot,er communications to security ,olders under circumstances reasonably calculated toresult in procurement /it,,olding or re'ocation of a pro-y.

    .b Solicitation e-cludes.i Public communications by Ss as to ,o/ t,ey intend to 'ote and t,eir reasons for t,eirdecision..ii For registration purposes "fraud still applies# acti'ities t,at /ould constitute solicitations solong as speaker

    "#5 ot affiliated /it, management A&"#! &o not ,a'e an indi'idual interest in t,e proposal to /,ic, t,e solicitation relates A&"#3 &o not seek pro-y aut,ority or pro'ide to anyone pro-y or ot,er forms suc, asconsents relating to 'oting.

    .B FALSE OR MISLEADING STATEMENTS

    1 R$le 1*a.+ .a P$rpose To )nsure

    .i Transaction is fair and ade1uate

    .ii &isclosure by corporate management in order to facilitate informed SH decision..b Te"! ?o solicitationZs,all be made by means of any pro-y statementZt,at is false or misleading /it,respect to any material fact or /,ic, omits to state any material [email protected] Ele4en!s

    .i Proper P  Solicitee not contestant."#5 Pria!e rig'! of a#!ion e-ists for SH.  OI Case '. Borak."#! B+T lo/er cts. ,a'e not implied rig,t for pro7y contestants.

    .ii Proper 9 Bad Actor 

    .iii :ad A#! aterial misrepresentation or omission in pro-y solicitation."#5 T) if material info is inaccessible or difficult to assemble disclosure can bemisleading

    .i' ?a!eriali!("#5 R$le- ?substantial likeli,ood t,at t,e disclosure of omitted fact /ould ,a'e been'ie/ed by t,e reasonable in'estor as ,a'ing significantly altered t,e total mi-= ofinformation made a'ailable.@ TSC"#! isrepresentations of moti'e are only actionable if t,ey mislead /it, respect to t,eunderlying subJect matter. TSC.

    • So if &ir. says belie'es price ,ig, but /as lying and price /as ,ig, no actionlies. La. Banks,ares. "&irectors in solicitations of pro-y 'otes stated t,at t,eyappro'ed merger bHc t,ey belie'ed price /as a ?,ig, price.@ SH argues t,atdirectors didn=t belie'e it and t,at :4! isn=t obJecti'ely a ,ig, price.#.

    • Can use circumstantial proof to s,o/ kno/ledge "i.e. no reasonable personcould ,a'e belie'ed#. Id.

    "#3 o materiality if correct info could be inferred from ot,er sources. TSC..' Transa#!ion Ca$sa!ion Essen!ial lin>

    "#5 Pro-y solicitation itself rat,er t,an t,e particular defect in t,e solicitation materials/as an essential link in t,e accomplis,ment of t,e transaction. Coles."#! ust s,o/ P could ,a'e stopped merger by e-ercising 'oting po/er ot,er met,ods"appraisal inJunction# don=t count. Coles '. Sc,enley Indust=s "cosmetic 'ote /,ere Bd.,ad *(N s,.#.

    .'i Loss Ca$sa!ion P suffered economic ,arm due to misstatement."#5 B219bD*D. ?P s,all ,a'e burden of pro'ing t,at t,e act or omission of & alleged to'iolate t,e Act caused t,e loss for /,ic, P seeks to reco'er damages@

    .'ii C$lpabili!( Cir. split on negligence or scienter."#5 Negligen#e. Gers!le Ga4ble.S>og4o "!d Cir.#

    • Court discussed policy be,ind rule 57b6% encourages companies to releaseinformation

    • But compare to 55 /,ere t,e purpose is t,e same "to protect solicitees#"#! S#ien!er . Mno/ing misrepresentation or reckless disregard of t,e trut,. Ada4s S!andard Jni!!ing ?ills "(t, circuit#

    .'iii 9efenses"#5 :espea>s Ca$!ion  Sufficient disclaiming language included.

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    "#! B 21E Safe arbor  for for/ard looking statements a'ailable if • o actual kno/ledge

    • Immateriality

    • Cautionary statements.i- 9a4ages  !5&"f#

    "#5 & generally is liable solely for t,e portion of a Judgment t,at corresponds to t,e N ofresponsibility of t,at & as determined as pro'ided in !5&"#! & is liable for damages Jointly and se'erally only /,en t,e trier of fact specificallydetermines t,at & kno/ingly committed a 'iolation of t,e securities la/

    "#3 & ,as a rig,t of contribution based on proportionate liability"#4 B219eD. &amages cannot e-ceed difference bHt Ps purc,ase or sale price and t,emean trading price ?during t,e 27 day period beginning on t,e date on /,ic, t,einformation correcting t,e misstatement or omission t,at is t,e basis for t,e action isdisseminated on t,e market@

    .XI TENDER OFFER REGULATION

    .A IS IT A TENDER?

    1 In !ender offer, a#@$irer deals dire#!l( 3i!' S of !arge! #orpora!ion.a ?for your s,ares in target you /ill recei'e our s'ares@

    .i =33 Act implications

    .ii 8illiams Act implications.b ?for your s,ares in target you /ill recei'e #as'@

    .i nly 8illiams Act implications.c S makes t,e offer not t,e ac1uirer

    2 T'ree Pri4ar( Approa#'es- !o defining !ender offer a. SEC fferee pressured to tender stock"#* Public announcements precede or accompany ac1uisition of large amounts of target=sstock

    .ii Case T /,ere co. formed subsidiary and used it to buy s,. from !* largest SH. and SHgi'en only a fe/ ,ours to decide.

    b. S6; Securities '. Fu1ua ! factorsi. public announcement of intention to ac1uire large amount of target=s stock for purpose of gaining

    controlii. subse1uent rapid ac1uisition of large blocks of target=s stock

    c. andson Trust P

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    .B TENDER OFFER REQUIREMENTS

    1 &illia4s A#!.a B1%dD  :enefi#ial o3ner of 4ore !'an 5W of registered e1uity security "itself registered under S)A 5!# must file /it, S)C /it,in 57 days after  t,e ac1uisition of securities t,at triggers t,e reporting re1uirements

    .i :$! if ac1uired less t,an !N in last t/el'e mont,s %N doesn=t apply..ii Proper P-

    "#5 SEC )nforcement action " !5# and cease6and6desist action " !5C#."#! Pria!e rig'! of a#!ion e"is!s ?aD Indi