securities regulation outline bancroft fall 2010

8/12/2019 Securities Regulation Outline Bancroft Fall 2010

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Securities RegulationMargaret Bancroft

(Fall 2010)

Class 1: The Role of the Securities Act of 1933: Making the Capital

Markets in the US Safe for Pulic !n"estors##########################################$Class $: Pre%&ffering Perio' in a Pulic &ffering an' Con'itioning the

Market############################################################################################################3

Class 3: The (aiting Perio') The Post%*ffecti"e Perio'########################11

Class +,The Registration Process: Section - an' Acceleration)

Principles of .isclosure###############################################################################1/

Class 0,.isclosure Philosoph#################################################################1-

Class /,Materialit###################################################################################19

Class 2,(hat is a Securit#####################################################################$$

Class -,Pri"ate Place4ent *5e4ption####################################################$+Class 9,Regulation . 6Rules 07+8 0708 07/############################################$/

Class 17,Regulation S###############################################################################$9

Class 11Class 13,Resales of Restricte' Securities################################31

Class 1$,The Role of the Un'er;riter,Section 11 an' Section 1$6a6$


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Class 1: The Role of the Securities Act of 1933: Making the Capital Markets

in the US Safe for Pulic !n"estors#

=oals of 1933 Act: Investors need for information; consumer protection were tere is no realrelationsip wit compan!" spur investment were tere is ris#" economic efficienc!$

%&e 1' ct is a*out stri#ing a *alance *etween providing access to capital andprotecting pu*lic investors$

.ra;acks of Partnerships: cannot *e a passive investor; capital witdraw wen partner leaves;no limited lia*ilit!$ +,ee andout-

Corporate Structure: ,uited for *usinesses tat need to raise great amounts of capital fromsources outside of management$ .ont re/uire sareolders #now eac oter" permits investmentwitout ris# of personal lia*ilit!" provides stead! *ase of capital tat cannot *e witdrawn$

%&e magnificence of corporations te most !ou can lose is te mone! !ou ave

invested$

4 Major ideas of the 1933 act/ways it controls1. Section 5 of the 1933 Act mandates disclosure.2. Section 5 prevents conditioning/priming of the market outside of disclosures3. 11 1-5 sta!lishes a statutor" #a" for investors to recover$. %ot ever" offering has to !e registered &'emptions under $.2 for e'ample(

The $770 Pulic &ffering Refor4s i'entif four categories of issuers#

1$ >on%reporting !ssuers: companies tat are not re/uired to file under te cangect (suc as issuers going pu*lic in an I34)$

2# Unseasone' reporting issuers: 5ompanies tat are re/uired to file cange ctreports" *ut not eligi*le for Form ,%$$ Seasone' Reporting issuers: 6eporting companies tat are eligi*le for Form ,%(more tan one !ear since going pu*lic and a 789 million pu*lic float)$$ (ell%kno;n Seasone' Reporting !ssuers(


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Class $: Pre%&ffering Perio' in a Pulic &ffering an' Con'itioning theMarket

Three Perio's: 1) 3re%filing (== 9(a)" (c))" 2) aiting (== 9(a)" (*)(1)" ) 3ost%effective (= 9(*))$

1933 Act

= 9(a) >nless a registration statement is in effectas to a securit!" it is unlawfulto:

o 1) sell a securitytroug a prospectus or oterwise troug transportation or

communicationo 2) carry a security for te purpose of a sale or for deliver! after sale troug mail or

interstate commerce

= 9(c) Unlawfulto offer to sellor offer to buytroug te use of an!prospectus or

otherwise an! securit! troug transportation or communication" unless te registrationstatement as *eenfiledas to suc securit!" or wile te registration statement is te su*?ectof a refusal order or stop order$

FI@IA ffective

Prefiling perio'

fter te compan! is Cinregistration"D *ut *efore teregistration statement is filed$

(aiting Perio'

fter te registrationstatement is filed" *ut *efore it*ecomes effective$

Posteffecti"e perio'

fter te registration statement*ecomes effective" until tedistri*ution ends and te issueris no longer Cin registrationD

= 9(a)(1) E no CsalesD = 9(a)(2) E no CdeliveriesD

= 9 (*)(1) E no CprospectusD unless complies wit = 10

=9(*)(2) E no deliver!" unlessaccompanied *! =10(a)prospectus

= 9(c) E no CoffersD


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.efinitions:

= 2(a)(10) Prospectusan! prospectus" notice" circular" advertisement" letter" or

communication" written or *! radio or television" wic offers an! securit! for sale orconfirms te sale of an! securit!; *5cept that(see =2 (a)(10)$

= 2(a)()

o &e term sale or sellsall include ever! contract of sale or disposition of a

securit! or interest in a securit! for valueo &ffer to Sell (*road definition) ever! attempt or offer to dispose of" orsolicitation

of an offer to *u!" a securit! or interest in te securit!" or value$

.oes notinclude preliminar! negotiations or agreements *etween an issuerand an! underwriter or among underwriters wo are to *e in privit! ofcontract wit an issuer$

&is eception is limited to underwriters and terefore does not

cover dealers$

,pecial situations (p$ 92):

securit! given as a bonus counts as part of te offerGsale$

n underl!ing securit! does not ave to *e registered originall!

wen te conversion or eercise cannot occur immediatel!" *utrater can onl! ta#e place at some point in te future (convertiblesecurity or option)$

%


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S*C Rules

Rule 130$ >otice of Propose' Registere' &fferings+5an *e used *! issuer or underwriter-

o Aotice will not *e deemed an offer if notice:

1) includes a statement tat it does not constitute an offer; and

2) notice includes no more tan te following: i) name of issuer; ii) title"amount and *asic terms; iii) amount of offering; iv) anticipated timing; v)*rief statement of manner and purpose; vii) weter directed to particularclass; viii) (note oter specifics a*out oter t!pes of offerings)

E&E Rule 135: om!any "nnouncements#

-)ule 135 permits the issuer to announce its intention to make a pu!lic

offering !" stating &1( the amount and t"pe of securit" to !e offered* and &2(the timing* manner* and purpose of the offering. +he announcement muststate that the offering #ill !" prospectus !ut cannot identif" prospectiveunder#riters or the e'pected offering price.

E&E $ummary of Rule 135: offerin% announcements#

-allo#s notice of pu!lic offering &e'empted from definition of offer(

-can onl" contain limited information &issuer* securit"* amount offered* timing*manner and purpose

-applica!le onl" to issuer, cannot name under#riter or e'pected offering price

Rule 1/3# *5e4ption fro4 Section 06c of the Act for Certain Co44unications or on

?ehalf of (ell%@no;n Seasone' !ssuers 6(@S!s

Rule 1/33rovides flei*ilit! for well-known seasoned issuers$ &e! ma! ma#e oral or

written offersat an! time$ However" written offers must *ear certain legends" *e retained for !ears" and *e filed wit te 5ommission$ &ese written offers meeting tese re/uirementsare called Cfree writing prospectuses$D +,ee aiting 3eriod$-

E&E Rule 13: '($) ommunications# *!+ 14, -+he 25 u!lic ffering )eforms give a special e'emption to #ell-kno#n

seasoned reporting issuers &0Ss( for offering-related communicationsduring the pre-filing period. )ule 13 &e'empting such communications from5&c(* though still treating them as 4offers for antifraud purposes(. 6irst*0Ss ma" make an" 4oral offers during registration. Second* 0Ss canmake 40ritten offers that !ear a legend here to get a prospectus* along

#ith an admonition to read it( and are filed #ith the S7 8 that is* #hen the#ritten offer meets the criteria for a 4free #riting prospectus &60(.

-n effect* the S7 has decided that 0Ss hose securities are assumed to

trade in informationall" efficient markets( are unlikel" to !e a!le to condition

the market #ith prefiling disclosures. %onetheless* prefiling communications!" 0Ss remain su!ect to the prohi!itions against selective disclosuresunder )eg 6:.

E&E Rule 13 $ummary: -ree writin% !ros!ectus#

-permits #ritten communications* if the" contain legend here to get a cop"

of the prospectus and instructions to read it( and are filed #ith S7 after filing)S

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-availa!le onl" to 0Ss in pre-filing period, not availa!le to under#riters

&;0s( or other participants.Rule 1/3A# *5e4ption fro4 Section 06c of the Act for Certain Co44unications Ma'e

or on ?ehalf of !ssuers More than 37 .as efore a Registration State4ent is ile'#

Rule 1/3An! communication made *! or on *ealf of an issuer more tan 30 days prior

to te filing of a registration statement will not *e deemed to *e an offer if tatcommunication does not referto te offering of securities$ &e issuer must" owever" ta#ereasonable steps to controlfurter distri*ution or pu*lication of te communication witin0 da!s *efore a filing$

E&E Rule 13" .rere%istration ommunications#

+he 25 u!lic ffering )eforms create a !right-line starting point for #hen

an issuer is 4in registration 8 and thus #hen 4offers are prohi!ited.7ommunications !" issuers and those acting on their !ehalf &other thanprospective under#riters or dealers( are permitted #hen made more than 3da"s !efore the registration statement is filed* provided the proposed offeringis not mentioned. )ule 13A &e'cluding such communications from thedefinition of 4offer(. +he issuer must take reasona!le steps to ensure thesepreregistration communications are not further distri!uted or pu!lished #ithinthe 3 da"s !efore filing.

E&E Rule 13" $ummary: .rere%istration ommunications#

-permits communications 3< da"s !efore filing the )S, 7A%%+ reference

offering.

-creates safe har!ors for issuers* =;+ %+ under#riters or other participants.

Rule 1/-# *5e4ption ro4 Sections $6a617 an' 06c of the Act for Certain

Co44unications of Regularl Release' actual ?usiness !nfor4ation an' or;ar'%

* provided timing* manner* andform are similar to past releases &e'cluded from definition of offer(? @A %+reference offering

-applies to domestic reporting issuers &and seasoned reporting foreign

issuers(* !ut not under#riters or other participants.

)ule 1B Allo#s dividend information under factual !usiness information

&)ule 19 does not(


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Rule 1/93ermits non-reporting issuersto continue to communicatefactual business

information regularl! released to persons oter tan in teir capacity as investors or

potential investorsin te securities$o Aote: 1" 1J" 1' provide tat communications will not constitute offers$

However" 6ule 19 provides an eemption from ,ection 9(c) (*ut are nonetelessoffers for oter purposes of te ct)$

E&E Rule 19 Re%ularly Released )nformation#

-All issuers can continue to release factual !usiness information to their

customers* suppliers* and other non-investors.

E&E Rule 19 $ummary Re%ular ommunications# *0y new

issuers/nonre!ortin% issuers,

-ermits regularl" released factual information* !ut not for#ard-looking

information &e'cluded from definition of 4offer(, @A %+ reference offering,must !e intended %> for non-investors

-Applies to non-reporting issuers* !ut not under#riters or other participants

-% :C:%: %6)@A+% A>>0: under )ule 19 for ne#

issuers/non-reporting issuers.

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Release >o 3-++ 61902 3u*lication of Information 3rior to or after te ffective .ate of a

6egistration ,tatemento Ma! not issue apublic sales campaignprior to te filing of te registration

statement$o ample 1: >nderwriter arranging mining pu*lic financing distri*utes *rocure

descri*ing in Cglowing generalitiesD te future possi*ilities for use of specificmineral" *ut made no reference to an! issuer or securit!$ It was Cdesigned to awa#eninterest wic later would *e focused on te specific financing$D Kiolation of,ection 9$

o ample : 3rior to filing" underwriter incorporated financial information from

issuer into a *rocure and widel! distri*uted it" and te current position was mucless favora*le tan suggested *! te *rocure$ Kiolation of ,ection 9$

o ample : In ugust" 3resident accepted to give speec in Lanuar!$ In Lanuar!"

pu*lic financing *! te compan! was autoried$ Here" its clear tat sceduling ofte speec ad not *een arranged in contemplation of a pu*lic offering; tus" noo*?ection was raised$

o ample 8: (p$ 0) +&e opposite result was reaced for a similar speec$-

!n re Carl M#


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o non%reporting offeror tat as esta*lised a istor! of ordinar! course of

*usiness communications troug its we*site sould *e a*le to continue toprovide *usiness and financial information on its site$

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Su44ar Chart(p$ 89)Tpe of !ssuer Pre%iling Perio' (aiting Perio' Post%*ffecti"e Perio'

>on%

Reporting

Per4itte':

3reliminar! negotiations

and agreements wit

underwriters$ = 2(a)() 5ommunications pursuant

to 6ule 19 (Aotice)

5ommunications more tan

0 da!s in advance tat donot reference te offering(6ule 1)

6egularl! 6eleased Factual

Information (6ule 1')

Per4itte':

4ral 4ffers

3reliminar! negotiations and

agreements wit underwriters$

= 2(a)() 5ommunications pursuant to

6ule 1 (or = 2(a)(10(*))$

= 10 3rospectuses: 1)

preliminar! (= 10(*) and 6ule0)" 2) summar! (= 10(*) and6ule 1)" ) free%writing (=10(*) and 6ules 1 and ;must *e accompanied orpreceded *! a prospectus$)

Per4itte':

4ral offers

,ales

5ommunications pursuan

6ule 1 = 10 prospectuses (no lon

including preliminar!prospectus)

Free writing (= 2(a)(10)(a

must *e accompanied orpreceded *! a finalprospectus)

Unseasone' ,ame as non%reporting plus:

6egularl! released forward

loo#ing information (6ule1J)

,ame as non%reporting" ecept:

cange ct 6ule 19c2%J

compliance less demanding

,ame as non%reporting" ecep

4nl! participating dealer

are non%eempt under = and 6ule 18$

cange ct 6ule 19c2

compliance less demandi

Seasone' ,ame as unseasoned ,ame as non%reporting and>nseasoned" ecept:

Free writing prospectuses not

need *e accompanied orpreceded *! preliminar!prospectus$ (6ule )

,ame as unseasoned" plus:

Free writing prospectus

permitted; need not *eaccompanied or precededfinal prospectus (6ule (Aote tis is in addition tofree writing under = 2(a)((a)$)

(ell%@no;n

Seasone'

,ame as unseasoned" plus:

4ral offers at an! time

(6ule 1)

Free writing prospectuses at

an! time; need not *eaccompanied or preceded *!an! oter prospectus (6ule1)

Aot pplica*le ,ame as ,easoned

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Class 3: The (aiting Perio') The Post%*ffecti"e Perio'

The (aiting Perio' 6after filing8 ut efore registration state4ent eco4es effecti"e

= 9(a) still proi*its sales/transportationof securities during te waiting period$

= 9(*)(1) is now applica*le also" and doesnt permit te use of a prospectus (offer to sell)tat does not meet te re/uirements of = 10 (CInformation 6e/uired in 3rospectus)D(&ere are two #inds of prospectuses" a = 10(a) and a = 10(*)= 10(*) involves 6ule0" )$

&e proi*ition on oral offersis lifted during te waiting period$

o prospectus does not compl! wit = 10(a) wen it contains *lan#s were

re/uired information is to *e added$ In te usual case" a = 10(a) prospectus is notavaila*le in te waiting period (certain information is not #nown)$

o prospectus tat meets te re/uirements of = 10(*) is availa*le$ 6ules 0 and

1 allowspreliminary prospectusesand summary prospectuses$o 6ule allows afree writing prospectus" *ut must *e accompanied *! a

preliminary prospectusunder 6ule 0$

However" seasoned issuers are permitted to useRule 33 witout regardto weter te! are accompanied *! an! oter prospectus$

!lectronic preliminary prospectustat is !perlin#ed to a free writingprospectus is deemed to accompan! or proceed it$

!lectronic deliveryis permissi*le if recipient gives informed consent(wit a record of consent #ept)$ (p$ 8)

Rule 13+5ommunicationsnot deemed a prospectus after filing$ @ists man! eamples"

li#e factual information" indication of general t!pe of *usiness" title of securities" amount*eing offered" underwriters participating" etc$ 6e/uires a legend$ &ese facts can *eused to attract investors (p$ 81)$

Rule 1/3emption from = 9(c) for 5ertain 5ommunications *! ell%


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Rule +33Post%filing ree (riting Prospectus

% free ;riting prospectus(F3) is an! written or grapic communication *! te issueror on its *ealf (including we* postings" mass e%mails" *ut not live 3ower3ointpresentations) tat satisfies certain conditions$%Consistent infor4ation an' legen'$ &e F3 ma! include information *e!ond tat

found in te prospectus" *ut must not conflict wit information in te registrationstatement or an! oter ,5 filings incorporated *! reference$ 6ule (c)(1)$%&e F3 must also include a legend tat advises te investor to read te preliminar!prospectus and ow to o*tain a cop!$ 6ule (c)(2)$%iling$ &e F3 must *e filed wit te ,5 (and tus made availa*le on .6) onor *efore te da! first used$ 6ule (d)$ &ere are eceptions for previousl! filedinformation" non%final terms" etc$ If not filed" te issuer or offering participant mustretain te F3 for tree !ears$%Prospectus Acco4pani4ent: For offerings *! non%reporting and unseasoned issuers"te F3 must *e accompanied or preceded *! a preliminar! prospectus$ 6ule (*)(2)(A4&: I34 M>,& IA5@>. 36I5 6A)$%If te F3 is electronic" te preliminar! prospectus can *e !perlin#ed$

%&e prospectus accompaniment condition is eliminated for seasoned issuers and well%#nown seasoned issuers (nless information in stor! as previousl! *een filed; permitting te filing re/uirementto *e satisfied *! filing te Ctranscript of interviewsD given to te media source$%Issuer is under no dut! to correct a misstatement in te stor! (caveat)" *ut ma! coose toinclude additional information in its filing to correct te stor!$ 6ule (f)(2)(ii)$

o pplies to information disseminated on websites$

o vaila*le to an! offering participant (including underwriters)$

%(P an' roa' sho;s: n! written material used at a road sow" suc as a andout or3ower3oint presentation" is specificall! treated as a F3$ 6ule (d)(J)$ &e legending andprospectus%accompaniment conditions appl! to road%sow presentations" toug filing isgenerall! not re/uired$ 6ule (d)(J) (re/uiring filing of road%sow presentations onl! in e/uit!offerings *! non%reporting issuers" unless te latest version of te road sow wit management

presentations is posted on te issuers e* site)$%6oad sows posted on te issuers e* site are considered Cgrapic communicationsD *ut aretreated as a F3 if te consistenc!" legending" and prospectus%accompaniment conditions aremet$%Filing is not re/uired if te online road sow is C*ona fide"D tat is" if it contains presentations *!te issuers management$

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%&e ,5 allows non%compliant issuers and offering participants to cure Cimmaterial orunintentionalD failures to legend or file a F3$ 6ule 1(*)" (c)$ &o /ualif!" te issuer oroffering participant must originall! ave a made a Cgood fait and reasona*le effortD to compl!wit te legending and filing re/uirements" and must ta#e correction action Cas soon aspractica*leD once te failure is discovered$ 6ule 1(d) (also forgiving failures to compl! wit

record retention re/uirements" toug not re/uiring corrective action to do so$A4&: te ,5 is unforgiving wen it comes to communications tat are inconsistent wit teprospectus (or oter ,5 filings) or tat do not compl! wit te prospectus accompanimentcondition$

Rule +/7,.istri*ution of 3reliminar! 3rospectus$ ncourages mailing to underwriters

and dealersreasona*l! li#el! to *e epected to purcase te securities (not less tan Jours prior to mailing confirmations)$ (6elease Ao$ 'J) (p$ )

Sale = 2(a)()ever! contract of sale or disposition of a securit! or interest in a securit! forvalue$

4rdinar! offers cannot *e made in te waiting period" and offerors cannot condition teir

offers in suc a wa! tat te! cannot *e accepted until te registration statement is

effective (e$g$" conditional offers)$ ,olicitations of interest are te wa! to go$

In Fe Fran#lin" Me!er N Barnett

o Found tat salesmen" despite initiall! inviting indications of interest" accepted

pa!ments for stoc# during te pre%effective period in te form of cec#s and teproceeds of a sale of oter securities owned *! te customers" and tere*! went*e!ond te permissi*le scope of te ct$ In addition" te *usiness card enclosedwit te preliminar! prospectus and cover letter solicited an offer to *u! and wasterefore a prospectus witin te meaning of = 2(a)(10)$

Aote: tis puses te definition of sale past te meaning of contract law$

6elease Ao$ 'J &e 5ommission as declared its polic! in 6ule 0 tat it will notaccelerate the effective date of a registration statement unless te preliminar! prospectuscontained in te registration statement is distri*uted to underwriters and dealers wo it isreasonably anticipatedwill *e invited to particulate in te distri*ution of te securit! to*e offered or sold$ 6ule 0 (condition for acceleration)

To4stone A's: =2(a)(10) ecepts from te definition of CprospectusD advertisements (t!picall!made in te financial press using a tom*stone%li#e *orer) tat state from wom a =10 prospectusma! *e o*tained and ten do no more tan identif! te securit!" state its price" and name teunderwriters wo will eecute te order$

!'entifing State4ents: 6ule 1 allows for epanded communications$

%&e ,5 ca?oles te issuer to ensure tat preliminar! prospectuses ave *een made availa*le toall participating underwriters and delaers$ 6ule 0 (condition for acceleration)$%&e ,5 re/uires participating underwriters and dealers to furnis copies of preliminar!prospectuses to teir salespeople" as well as to an! investor wo ma#es a written re/uest for acop!$ (1' cange ct" 6ule 19c2%J(c)" (e))

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=un%u4ping Rules 6(aiting Perio' Su44ar

Rule 13+: !'entifing State4ent

%permits identif!ing information a*out issuer (eempted from definition of CprospectusD%(a) permitted: issuer info" info a*out securit!" issuers *usiness" price of securit!" use of

proceeds" identit! of sender" names of >s" scedule" and nature of offering

%(*) during waiting period: must include legend and were to o*tain preliminar!prospectus

%(c) can avoid (*)" if tom*stone ad or accompanied *! preliminar! prospectus%(d) can see# investor interest" if accompanied *! preliminar! prospectus and includes

statement tat interest is not *inding" *ut full! revoca*le%availa*le to issuer" >" or oter participants

Rule 130: &ffering Announce4ent

Rule 1/+: ree ;riting

%permits Cfree writing prospectusD (F3) (deemed to satisf! =10(*) if 6ule conditions aresatisfied)

%ecuses immaterial or unintentional failure to file or legend F3" if(1) it was good%fait attempt" (2) filing or legend appens as soon as practica*le after discover!"() properl! legended F3 is resent%availa*le to issuer" >" or oter participants%ineligi*le issuers (6ule 09)

Rule +33: Con'itions

%F3 can include info not in 6," *ut cannot conflict wit 6, or ,5 filings%F3 must include legend (read prospectus" ow to o*tain)%must accompan! F3 wit (or lin# to) preliminar!Gfinal prospectus

%non%reporting" unseasoned issuers: if *! issuer (or someone paid *! issuer) or oterparticipants

%seasoned issuers"


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aware (filing can *e *! transcript); not su*?ect to prospectus%accompaniment rules and need not*e legended if no pa!ment was made$DPost%*ffecti"e Perio' 6after the registration state4ent eco4es effecti"e

E 0661 continues to appl! during post%effective period (proscri*ing use of an!

prospectus unless it satisfies re/uirements of = 10)$o Aew e"ception applies: = 2(a)(10)communication is not deemed a prospectus

wen it is accompanied or proceeded *! an prospectus tat meets tere/uirements of = 10(a)$

=066$now applies: securit! ma! not *e delivered to a *u!er unless te *u!er

simultaneousl! received" or as received" a cop! of te final prospectus$o Rule 12$6owever provides tat for te purposes of tis section te final

prospectus is deemed" in most instances" to *e delivered wen te registrationstatement *ecomes effectiveGfinal version is filed wit ,5$ llows sending ofwritten confirmation of sale(access e/uals deliver! model)" and transfer of thesecurity$

o Rule 123re/uires providing purcasers eiter final or a prescri*ed form of notice

witin two *usiness da!s of completing te sale tat it was made pursuant to aregistration statement$

Aote: 182 and 18 did awa! wit te need to actuall! deliver finalprospectuses$

Oral offersma! *e made" since = 9(c) does not appl! during tis period$

#ritten offersma! *e made *! means of a final prospectus (= 9(*)(1))$

Other offersma! continue to *e made under eception (*) to = 2(a)(10) (=10 prospectus

alread! given)

,easoned (including well%#nown seasoned) issuers ma! continue to use free writing

prospectuses tat are not accompanied or preceded *! an! oter prospectus$

$ombstone advertisements(6ule 1)

#ritten confirmation of sale(6ule 182)$

Rule 109*u!er must ave all relevant information at time of purcase (oterwise" tere

can *e lia*ilit! under = 12(a)(2))$

,5 v$ Manor Aursing 5enters (2d 5ir$ 1'82)

Implicit in te statutor! provision tat te prospectus contain certain information is te

re/uirement tat suc information *etrue and correct$ prospectus does not meet tere/uirements of = 10(a)" terefore" if information re/uired to *e disclosed is materiall!false or misleading$

Aote tat oter circuits ave criticied tis reasoning" and *elieve tis sould *e covered

under antifraud provisions instead$

en events occur after te effectiveness of a registration statement tat ma#e te finalprospectus materiall! false or misleading" te prospectus must *e corrected (*ecause of antifraudprovisions$) &e issuer ma! 1) file apost-effective amendmentto te registration statement" or2) amend or supplement te final prospectus$

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Class +,The Registration Process: Section - an' Acceleration) Principlesof .isclosure

Sections /8 28 - contain statutor! sceme for registration process$

o = .eals wit filing and fees

o = 8at a registration statement must contain

o = Jffectiveness of registration statement

&wo recent canges:

o 1) 5ommission dela!s effectiveness in order to review and comment$

o 2) 6egistration statements of#%&'s*ecome effective immediately$

Re"ie; an' Co44ent proce'ureregistration statements of first time issuers are

given a toroug review" and statements filed *! second and later time issuers arereviewed selectivel!$

$7 'a automatic effectiveness under =J(a) can *e avoided (and almost alwa!s is)

o Rule +23.ela!ing mendments$ Issuer ma! include a paragrap on te cover

of te registration statement tat effects its continuing amendment$ Mustspecificall! state it will *ecome effective upon te filing of a furter amendmentor on a date suc as te ,5 ma! determine$

Rule +/7(3reliminar! 3rospectus),5 uses acceleration to encourage distri*ution of

te preliminar! prospectus to eac underwriter and dealer wo it is reasona*l! anticipatedwill *e invited to participate in te distri*ution of te securit!" a reasona*le time inadvance of te anticipated effective date of te registration statement" of as man! copiesof te proposed form of preliminar! prospectus permitted *! 6ule 0 as appears to *ereasona*le to secure ade/uate distri*ution of te preliminar! prospectus$

Rule +/1allows issuer and underwriter to re/uest acceleration" specif!ing te da! and

time te! desire te registration statement to *ecome effective$ @ists oter factors toconsider in acceleration re/uests (i$e$" weter prospectus is concise" reada*le" inade/uatepreliminar! prospectus" is te ,5 currentl! ma#ing an investigation against issuer" etc$)

o ,ome oter reasons ,5 migt not declare registration statement effective:

If certain parts arent in plain nglis (6ule 21(d); if preliminar!prospectus was materiall! inaccurate and tere was no recirculation" ifunder current investigation" etc$)

,5 uses threat of acceleration denialto force actions not re/uired *! te statute (e$g$"

distri*ution of preliminar! prospectuses)$

o @as Kegas Hawaiian (p$ J)

= 9(c) sa!s tat if te ,5 as *rougt a proceeding under = J" (weter astop order was necessar!) tat stops ever!ting in its trac#s$ Here" te ,5started earing under = J(e)" and ten relied on = 9(c) and wanted issuer tocease and desist offering tese securities$

Aote: = J(*) as a 10 da! limitation$ = J(d) can *e issued an!time (was

issued after registration was declared effective in >niversal 5amera)$ 5analso eamine witout issuing a stop under = J(e)$

1


17/38

Rule +10 allows for Cshelf registration$D (p$ '1) O3ermits shelf registrationsof

niversal 5amera +Involved a dilution arrangement$- ,tatement did not disclose

prospective investors relative interest in te assets" earnings" or voting power of tecompan!; did not give a clear description of proposed *usiness activities$ &e .ilutionarrangement was not plainl! evident" and onl! an eperienced securit! anal!st couldunderstand it; disclosure sould *eplainly understandableto te ordinar! investor$ ,ee,%< Item 90$

A"oi'ing .elas in Processing Registration State4ents: ,ecurities laws aim to o*tain

full and fair disclosure$ ,ecurities laws view te prospectus as a lia*ilit! document andnot as a selling document$ &e unfavora*le data must *e disclosed as well as tefavora*le$

18


18/38

Class /,.isclosure Philosoph0Rule +7-(dditional Information)In addition to information e"pressly re(uired" tere sall *eadded sucfurther material information" as ma! *e necessar! to ma#e te re/uired statements"in ligt of circumstances under wic te! are made" not misleading$

Selecte' S%@ .isclosure !te4s:

Item 10(*)$ 3olic! on 3ro?ections (mgmt as ave reasona*le *asis for pro?ections)

Item 11(e)$ udited Financial ,tatements

Item 201(c)$ ,tatement on .ividends

Item 202$ .escription of ,ecurities$

Item 0$ Managements .iscussionGnal!sis of Financial 5ondition

Item 09$ Quantitative and Qualitative .isclosures a*out Mar#et 6is#$ Item 01$ .irectors and 4fficers$ (5overs identification of directors" famil!

relationsips" involvement in certain legal proceedings witin te past 9 !ears (ecludingtraffic violations and oter minor offenses)" or an! violation of Federal or ,tate securitieslaws)

Item 02$ ecutive 5ompensation

Item 0$ ,ecurit! 4wnersip of 5ertain Beneficial 4wners and Management$

Item 0$ &ransactions it 6elated 3erson" 3romoters" and 5ertain 5ontrol 3ersons

(5ertain 6elationsips wit 4fficers and Business .irectors)

Item 09$ 5ompliance wit ,ection 1(a) of te cange ct

Item 0$ 5ode of tics$ (.isclose weter te registrant as a code of etics tat

applies to eecutive offers" and if it doesnt" eplain w!) Item 901$ (*(1)" *(2)" *()" *()(9))$ 5over page info: Aame" mount of ,ecurities"

4ffering 3rice" 5ross%6eference to ris# factors

Item 902$ &a*le of 5ontents$ .eliver! 4*ligations

Item 90$ 3rospectus ,ummar!$ 6is# Factors$

Item 90$ >se of 3roceeds$

Item 909$ .etermination of 4ffering 3rice$

Item 90$ .ilution$

Item 912()$ Indemnification$ (6e/uest for acceleration of effective date or filing of

registration statement *ecoming effective upon filing E disclose indemnification andsu*mit to a court weter suc indemnification is against pu*lic polic! as epressed in

te ct and will *e governed *! te final ad?udication of suc issue)

1J


19/38


20/38

2 !44aterialit$ &e forward%loo#ing statement was immaterial$ &is safe ar*orfocuses attention on weter te forward%loo#ing statement is too CsoftD to *e material andopens te door to te ?udicial C*espea#s cautionD doctrine as a separate *asis for immunit!$

Cautionar state4ents$ &e forward%loo#ing statement Cis identified as a forward%loo#ing statement and is accompanied *! meaningful cautionar! statements identif!ingimportant factors tat could cause actual results to differ materiall! from tose pro?ected in

te forward loo#ing statement$%Puffing state4entsgenerall! lac# materialit! *ecause te mar#et price of a sare is not inflated*! vague statements predicting growt$ (3arnes)

Parnes v* +ateway

o Some matters are such common knowledge that a reasonable investor can be

presumed to understand them$o 4verstatement of assets *! 7$J million immaterial (represented onl! 2R of

atewa!s total assets)$ (Alleged misrepresentations may also present or concealsuch insignificant data that in the total mix of information it simply would notmatter to a reasonable investor$)

o C3ro?ection of significant growtD is immaterial puffing (vague and o*vious

!per*ole)courts dont want to deter companies from ma#ing pro?ections$o Qualit! and desira*ilit! of products was not misrepresented in ligt of cautionar!

statements$

'n re ,umere" orporation &ecurities .itigation

o C,u*stantial increaseD in profit is a fair and accurate summar!" *ecause profits

ave increased su*stantiall!$o n! reasona*l! prudent investor reading tis prospectus would recognie te

ris#s inerent in a compan! tat depends upon one purcase for almost alf of itssalesits mentioned in unam*iguous" specific terms in prominent displa! on teprospectus$

o autionary language" if sufficient" can negate an! allegedl! misleading

representations concerning plans to develop sales worldwide$ (Bespea#s 5aution)o Materialit! of e"ecutive personnel changesmust *e gauged *! *usiness

circumstances of eac case$ Here" resignation of eecutive officer is not material*ecause e ad onl! *een wit compan! for a !ear" ad not entered into anemplo!ment agreement" and did not *ring and particularl! valua*le tecnical or*usiness epertise to te compan!

o Factors to *e considered regarding materialit! of eecutive personnel canges

include time" weter or not tere was an emplo!ment agreement" weter teperson as an! valua*le epertise or tecnical #nowledge" and mar#et reaction$

+reenapple v* etroit !dison

o &e intended audience will *e etremel! *road (includes anal!sts and

la!persons)$ .isclosure must steer a middle course; it needs to *e accurate" !etaccessi*le to survive a claim tat its misleading *ecause te negativeinformation is incompreensi*le$

isher v* Ross +Failed to disclose some directors were involved in a prior *an#ruptc!)

6ules (6eg ,%< Item 01) said !ou ad to release *an#ruptc! info if itappened witin 9 !ears$ .s claimed tat since te act didnt appenwitin te last 9" it was terefore immaterial$

20


21/38

Aote: ltoug not witin te previous 9 !ears" it would *e material iftere was evidence of wrongdoing *! tem in te previous *an#ruptcies"or if it was related to tis compan!s financial condition or prospects atte time of offering$

lso" remem*er 6ule 0Jsa!s to include an!ting else$

Item 01: Includes involvement in certain legal proceedings tatoccurred during te past five !ears and are material to an evaluation ofte a*ilit! of an! director$ Includes conviction of a criminal proceeding"*ut ecludes traffic violations and oter minor offenses$ &radingactivitiesGviolations are also included$

Ross v* #arner

o & as *een carged wit ma#ing improper #ic#*ac#s$ &is report made partial

disclosure of improper acts" *ut te wole stor! was not told until it got reportedin te AS &imes and all ,treet ?ournal" at wic point te sare of stoc#plummeted$

o It is material to integrit! of management" and so te ?udge loo#s at weter

plaintiffs sowed damages$ He doesnt see tat te mar#et price moved in

response$ ,o" in ligt of te minimal materialit! and te mar#ets failure to react".efendants not eld lia*le$ (&rut on te Mar#et .octrine E relies on MH)

21


22/38

Class 2,(hat is a Securit0

= 2(a) defines securityan! note" stoc#" *ond" evidence of indebtedness" certificate of interest"investment contract" an! put" call" option$

swap (agreement to ecange cas flows over period of time is not a securit!$

!n"est4ent Contracts

&! v* #1 2owey(1')

CInvestment contractD means a contract transaction or scheme were*! a person 1)

invests is mone! in a 2) common enterpriseand is ) led to e"pect profits solel! fromte ) efforts of tepromoter or a third partyit *eing immaterial weter te sares inte enterprise are evidenced *! formal certificates or *! nominal interests in te p!sicalassets emplo!ed in te enterprise$

5itrus opportunit! was an investment contract: contri*uted mone! to sare in propert!

managed *! a tird part!; investors lived in distant localities" lac# eperience ande/uipment re/uisite to cultivation; individual development would not *e economicall!feasi*le$

United 2ousing oundation v* orman(1'89)

conomic realit!: Form sould *e regarded for su*stance$ &e name given to an

instrument is not necessaril! dispositive as to weter its a securit!

&e stoc# in te low%cost ousing was not a securit!: no rigt to receivedividends from profits; not negotia*le" cannot *e pledged or !potecated" te! confer novoting rigts; cannot appreciate in value$ at distinguises a securit! transaction is aninvestment were one parts wit is mone! in te ope of receiving profits from teefforts of oters" and not were e purcases a commodit! for personal consumption orliving /uarters for personal use$

&! v* !dwards(200)

Investment contracts can ave varia*le or fied returns$

&e fact tat investors ave *argained for a return on teir investment does not mean tat

te return is not also epected to come solel! from te efforts of oters$

&! v* %oscot 'nterplanetary 'nc*(9t5ir$ 1'8) C,olel! derived from te efforts of otersD is not to *e applied literall!$ Instead" te

in/uir! is weter Cefforts made *! tose oter tan te investor are undenia*l!significant ones" tose essential managerial efforts wic affect te failure or success ofte enterprise$

&e p!ramid sceme was aninvestment contract: promoters retained immediate control

over essential managerial conduct of te enterprise" and te investors realiation ofprofits in inetrica*l! tied to te success of te promotional sceme$

22


23/38

&is does notappl! tofranchiseswerein te promoter eercises merel! remote control

over an enterprise and te investor operates largel! unfettered *! promoter mandates$

Aote: court applied vertical commonality ere$

o Kertical commonalit! focuses on communit! of interest of individual investor

and te manager of te enterprise$o Horiontal commonalit! Multiple investors ave interrelated interests in a

common sceme; concentrates on te interrelated interest of te various investorsin a particular sceme$

*"i'ence of !n'ete'ness

U& v* 1ones(1'81)

Cvidence of inde*tednessD em*races onl! suc documents as promissor! notes wic on

teir face esta*lis aprimary obligation to pa! te olders tereof a sum of mone!$+irline tic#ets do not esta*lis a primar! o*ligation to pa! mone!$-

'n re $ucker orp(1'8)

ranchise agreementstat provide for te repa!ment of deposits received wereCsecuritiesD under te ct$

Unless the Conte5t &ther;ise ReHuires

Ccertificate of depositD issued *! a national *an# is not a securit!" *ecause *an#s are

su*?ect to compreensive regulation designed to protect investors and it is federall!insured$ 4arine 5ank(1'J2)$

5ourts ave used tis reason in cases tat involve compreensive regulator! scemes$

.andreth $imber v* .andreth(1'J9) (,toc# is so /uintessentiall! a securit! as to foreclosefurter anal!sis (3rofessor @oss)

&ale of all the stock of a compan! does fall under te meaning of securit!$ (&is stoc#

carries te rigt to dividends contingent on profits$) &e 5ourt pointed out tat te stoc# in te transaction ad *ot te name and all te

traditional indicia of corporate stoc#: 1) dividend rigts" 2) li/uidit! rigts" )proportional voting powers" and ) appreciation potential$

&e 5ourt also pointed out tat tere would *e line%drawing issues in ac/uisitions of

less tan 100 percent of a corporations stoc# or wen a purcaser arranged to ave teseller sta! on to manage te *usiness" as ad appened inLandreth$

Reves v* !rnst 6 7oung(1''0)

amily resemblance test: &e Cfamil! resem*lanceD test *egins wit a re*utta*le

presumption tat ever! note is a Csecurit!D unless it falls into a categor! of instrumentstat are not securities$ CnoteD is presumed to *e a Csecurit!"D and tat presumption ma!*e re*utted onl! *! a sowing tat te note *ears a strong resem*lance (in terms of te factors *elow) to one of te enumerated categories of instruments(suc as note inconsumer financing" note secured *! a mortgage" sorter%term note securit! *! lien onsmall *usinessGaccounts receiva*le" etc$)

For new t!pes of CnoteD transactions"!evesset out four factors to determine te Cfamil!D

into wic te note fits$

2


24/38

o 1)Moti"ation of seller an' uer#If te issuer of te note uses te proceeds for

general *usiness purposes" it is more li#el! a securit!$ If te issuer gives te noteto *u! consumer goods or for CcommercialD purposes" it is li#el! not a securit!$

o 2) Plan of 'istriution$ If te notes are widel! offered and traded" it is more

li#el! a securit!$ If te note is given in a face%to Eface negation to a limitedgroup of sopisticated investors" it is more li#el! not a securit!$

o ) Reasonale e5pectations of in"esting pulic#If investors generall! view tet!pe of notes to *e investments" it is more li#el! a securit!$

o ) &ther factors re'uce risk# If te note is not collateralied and not su*?ect to

nonsecurities regulation" it is more li#el! a securit!$ If te note is secured oroterwise regulated" it is more li#el! not a securit!$

&e 5o%4p notes ere are securities: te! were soled to raise capital for general *usiness

operations" and purcasers *ougt tem in order to earn a profit in te form of interest$

Class -,Pri"ate Place4ent *5e4ption

= empted ,ecurities:

(a)(2)government securities" securitiesguaranteed*! *an#s

(a)()securities *! religious" educational" or carita*le organiations$ (a)(J)InsuranceGendowment polic!" or annuit! contract issued *! a corporation and

su*?ect to supervision of te insurance commissioner" *an# commissioner" or an! oteragenc!$ +&is eemptsguarantees as well$-

(a)(')securities ecanged *! an issuer wit its eisting securit! olders +eempt

transaction-

(a)(11)intrastate securities +eempt transaction-

= (1)6egistration re/uirements of = 9 not re/uired for transactions*! any person othertanan issuer" underwriter" or dealer$= (2)6egistration re/uirements of = 9 not re/uired for transactions*! an issuer not involvingapublic offering$

5ourts and te ,5 ave interpreted te =(2)private placement e"emptionto em*od! a

congressional ?udgment tat registration is unnecessar! wen investors on teir own aveade/uate sopistication and information to protect temselves$

&e private placement eemption eists in two forms:

1) Statutor e5e4ption#&e =(2) statutor! eemption completel! eempts issuers from

all ,ecurities ct disclosure and regulation re/uirements$

2) Safe Iaror Rule# regulator! safe ar*or eemption (6ule 90 of 6egulation .)

provides clear guidance for issuers" altoug it mandates disclosure to certain investors$

(2) is a fall*ac# wen 6ule 90 fails to *e a safe ar*or$

&! v* Ralston Purina

3rivate placement eemption sould turn on weter teparticular class of persons

affected needs the protectionof te ct$ &e 5ourt eld tat te =(2) eemptionapplies wen offerees and investors" regardless of teir num*er" are Ca*le to fend fortemselvesD$ (n offering involving tose wo can fend for temselves is a transactiontat does not involve a pu*lic offering$)

,ome emplo!ee offerings ma! *e eempt (e$g$" one made to eecutives wo *ecause of

teir position ave access to te same #ind of information tat te ct would ma#eavaila*le in a registration statement)$ 4terwise" emplo!ees are mem*ers of te pu*lic$

2


25/38

&ecurities 8ct Release ,o* 99:

3u*licGprivate offering distinction necessitates consideration of all surrounding

circumstances: relationsip *etween offeree and issuer" te nature" scope" sie" t!pe andmanner of te offering$

o +eneral solicitations(advertising) are inconsistent wit private offerings$

o ,ale topromoterstat initiate te founding te organiation come witin te

eemption$o ll offerees matter (not ?ust te ones tat *u!)$ (&e person claiming te =(2)

eemption must sow tat eac purcaser and offeree (even one wo doesntpurcase) meets te sliding scale test$ 4terwise" eemption lost for transaction$

o &i;eof te offering ma! raise /uestions a*out weter tere is a re/uisite

association$o 3urcasers sould not *e merel! conduits for wider distribution$

o Must consider weter te offering sould *e regarded as part of a larger

offeringmade (Integration of 4fferings)$o 3recautions are resellingare effective (i$e$" restrictive legends)" *ut not re/uired$

Relevant actorsfrom case law: (from earl! opinion *! ,5 eneral 5ounsel" p$ 1J)

Aum*er of offereesGteir relationsip to eac oter and issuer

Aum*er of units offered

,ie of te offering

Manner of te offering

,opistication of purcasers

6elationsip wit te issuer

B 3osition 3aper

ourattri*utes:

o 1) 4fferee Qualification

ealt (a*ilit! to *ear ris#)" personal relationsip (famil!" friends"

emplo!ment" *usiness$o 2) vaila*ilit! of information

(Aeed not *e as etensive as info in ,cedule ) Its pro*a*l! ade/uateto give *asic information covering financial conditions" results ofoperations" etc$

o ) Manner of offering

4ffering sould *e made troug directcommunication$o ) *sence of redistri*ution

Hill Sor# v$ merican

&e court denied a =(22) eemption wen sopisticated investors in a francise received

no disclosure document or oter access to information$ &e court said te eemption

re/uires tat investors (no matter ow sopisticated) ave access to information a*out teissuer$

5ourt uses te ,5 6elease to find a sale of securities to 1 sopisticated *usinessmen

and a law!er wo *ougt 79< of securities$ &e court said its a pu*lic offering" andtat te! sould *e allowed to get teir mone! *ac#$ &e court ere sa!s tesopisticated *usinessmen ere needed to ave all te information in order to put teirsopistication to good use$

29


26/38

fter tis decision comes down" ow can !ou advise anyonetat te! could do a private

placementT (Bancroft sa!s !ou wouldntU)

Aote also: &is was a p!ramid sceme" and te court was tr!ing to get to te rigt result$

nd proving tat it was a pu*lic offering is easier tan proving fraud for a plaintiff$

DResale Restriction: Investors wo purcase in a private placement cannot resell to un/ualifiedinvestors$ ,uc resales transform te wole offering into a pu*lic distri*ution and te resellinginvestors into statutor! underwriters$ For tis reason" issuers see# to restrict te transfera*ilit! ofprivatel! placed securities" #nown as Crestricted securities$D &!picall!" te purcase agreement ina private placement will contain transfer restrictions (noted on te securities certificates)" and teissuer will instruct its transfer agent (often a *an# tat #eeps records on sareolder ownersip)not to record an! transfer unless it is sown te resale is not su*?ect to te ,ecurities ctsregistration re/uirements$

Class 9,Regulation . 6Rules /7+8 /7/8 /7

E 36 allows ,5 to promulgate rules tat eempt certain offerings 6ules 90 and 909$

&e ,5 as used its =(*) autorit! to eempt small offerings up to 71 million (6ule

90) and nonpu*lic offerings up 79 million wit 9 or fewer Cnonaccredited investorsD(6ule 909)$

E +6$ eempts from registration an! offering C*! an issuer not involving an! pu*lic offerings

Aote: Issuers can fall *ac# on = (2) wen 6ule 90 fails" *ut tere is not te same =(2)

protection for 6ules 90 and 909$Aote: E +6/ eempts transactions involving sales solel! to one or more accredited investors" wit

some conditions (see rule)

Preli4inar >otes6eg . gives detailed guidance on wen an offering /ualifies for te =(2)private placement eemption (6ule 90) and creates additional eemptions for Csmall offeringsDas autoried *! =(*) (6ules 90 and 909)$Rule 071(.efinitional)

8ccredited investoris an!one te issuer as a reasonable belieffalls under te following:

o 1) Ban#s" *ro#ersGdealers" insurance companies" etc$

o 2) private *usiness development compan!;

o ) corporationGpartnersipGorganiation wit more tan 79 million assets;

o ) director" eecutive officer" or general partner of te issuer oran! of tose of a

general partner of tat issuer;o 9) net wort" wit ones spouse" of more tan 71 million"

o ) net income in eac of te two most recent !ears of more tan 7200< (or

700< wit ones spouse)$

o 8) &rust wit assets greater tan 79 million$

o J) ntit! in wic all e/uit! owners are accredited investors$

o Aote: &ese are investors tat can bear risk$

2


27/38

5alculation of number of purchasersecludes relatives wit same residence"

accredited investors" corporationsGtrustsGestates were purcaser as more tan 90Rinterest

Rule 07$(5onditions)

!ntegration: 6emoves from te possi*ilit! of integration offers and sales tat occur more

tan < months beforete start of tatRegulation offering or more tan < months afterits completion" so long as during tose monts tere are no offerings of tesame/similar class sold under 6eg .$

o 9 Factors to consider to determine weter integration is appropriate:

eter sales are part of single plan of financing

eter sales involve issuance of te same class of securities

eter sales ave *een made atGa*out te same time

eter te same t!pe of consideration is received

eter sales are made for te same general purpose

6e/uirements forfurnishing informationto investors

3roscri*esgeneral solicitations or advertisements$

,ets fort re/uirements designed to prevent illegal resales (reasonable care in avoidingsales to underwriters *! reasona*le in/uir!" disclosure tat securities cannot *e resold"legends)$

Rule 073Filing in Form .Rule 07-n insignificant deviationfrom te re/uirements of one of te 6eg . eemptionrules will not result in te loss of te registration eemption provided *! te rule (if te violationdid not involve a condition intended to protect investors" it was insignificant in te contet of teoffering as a wole" or good fait and reasona*le attempt was made)$Rule 10$.efinition of transactions not involving pu*lic offering$ (Aote tat pu*lic offering atte same as a (2) eempt private placement would not cause te eemption to *e unavaila*lesee 6eg . 3roposed 6evisions)Rule 100*andoned 4fferings

Aan'one' pri"ate offering((2)" ()" 6ule 90) followed *! registered offeringwill not *e considered part of an offering for wic te issuer later files a registrationstatement if conditionsare met (including not filing at least 30 calendar daysaftertermination of all offering activit!)$ empt for if te private offering was onl! topersons wo were accredited investors" or wo ave #nowledgeGeperience (6ule90(*)(2)(ii))$

o Aote: te result is similar for private offerings following a*andoned

registration$Regulation . *5e4ptions 6p# $17

Rule 07+ Rule 070 Rule 07/

Aggregate "ffering

#rice Limitation

71 million (12 mos$) 79 million (12 mos$) >nlimited

Number of $nvestors >nlimited 9 plus unlimitedaccredited

$nvestor %ualification Aone re/uired Must *e sophisticated(*)(2)(ii) (alone or wG

representative)accreditedpresumed

to *e /ualified

Sales &ommissions 3ermitted

Limitations on >suall! no general Ao general Ao general solicitation

28


28/38

'anner of "ffering solicitation permitted(ecept for offeringso# under state law)

solicitation permitted permitted

Limitations on !esale >suall! restricted 6estricted

$ssuer %ualifications 5annot *e cangect reporting" C*lan#%

cec#"D or investmentcompanies

5annot *e investmentcompanies" or issuers

dis/ualified under6egulation (eceptupon ,5 determ$)

Aone

Notice of sales 9 copies of Form . filed wit ,5 10 da!s after first sale (called for *!6eg ." *ut not re/uired for eemption)$

$nformation

!e(uirements

Aone 1) If purcased *! accredited investors" noinformation specified$2) If purcase *! non%accredited investors"a) nonreporting companies must furnis same#ind of info as in registered offering" *ut witless financial statement re/uirements*) reporting companies must furnis specified

cange ct documents$c) Issuers must ma#e availa*le prior to sale i)ei*its" ii) written information given toaccredited investors" iii) opportunit! to as#/uestions and receive answers" iv) advise onte limitation of resale$ +see p$ 210 of tet-

Calculation of Aggregate Price:

6ule 9071 million limit tat etends for =: months" and includes6ule 909 offerings$

6ule 90979 million limit tat etends for =: months" and includes6ule 90 offerings$

,ecurities ct 6elease Ao$ 99 (p$ 211)

person must *e an Caccredited investorD at te time of sale" regardless of canges tat

occur after te sale$

n eecutive officer of te parent issuer tat performs a polic! ma#ing function for its

su*sidiar! is an e"ecutive officer of the subsidiary$

isclosurecan *e in multiple installments" so long as all information is delivered prior to

te sale$

>nder 6ule 909 and 90" !ou can ave unlimited accredited investors$ Sou can also

eclude a relative wo as same principle residence wit te purcaser$

Partnership/partnership/entityis counted as one investor under 6ule 90(e)(2); issuer is

not o*ligated to consider sopistication of individual partners$

Reg . Refor4,

Propose' Rule 072 Aew eception for Clarge accre'ite' in"estorsD wit

significantl! iger tresolds tat accredited investors$ 3ermits li4ite' a'"ertising$

o ,ared caracteristics wit 6ule 90: >nlimited sales to unlimited investors;

focus on purcasers; non%eclusive$ ''J209

2J


29/38


30/38

Regulation S (all a*out flow*ac# concerns)

3rotects >, residents" not citi)ens$

Aote: emption onl! applies to offersGsales outside of U&; securities can onl! *e resold

in >, if anoter eemption is availa*le$E 971an offer or sale sall not *e deemed to include tose tat occur outside of the U&E 973offer sall occuroutside of U&of it was made in an offshore transactionand no directed

selling efforts are made in te >, *! te issuer (i$e$" condition te >, mar#et)$ 6e/uiresadditional conditions depending on categor!:

Categor !foreign corporations tat are ma#ing offering outside te >, were

teres no substantial U& market interest$ Ao additional conditions$

Categor !!,omewere in%*etween te two (i$e$" foreign corporation were tere

is some >, interest) 5annot ma#e offerGsale to U& person or for accountG*enefitof >, person for te first 0 days$

Categor !!!(>, issuers in e/uit! offerings) put in place procedures tat police

against an! >, person *u!ing tose e/uit! sares for 1 ear (0 da!s for de*t)$3urcasers must certif! tat te! are not a U& person or ac/uiring for a >, person;purcaser agrees to resell conditions; securities contain a legend$

o

6estrictions are too great for 5ategor! III to *e used$E 97$.efinitions$ , residents" partnersipGcorporation under >, laws" estateGtrust of >,

person" agenc!G*ranc of foreign entit! located in >,$

&ffshore Transactionoffer not made to a person in te >nited ,tates" A.:

o ) iter *u!er is or is reasonable believedto *eoutsideof >, at te time

buy order is originated" or

0


31/38

o B) &ransaction is eecuted troug p!sical trading floor of esta*lised

foreign securities e"change (6ule '0)" ortransaction eecuted trougfacilities of designated offsore securit! mar#et and seller does not #now tattransaction as *een pre%arranged wit a *u!er in te >, (6ule '0)$

But note ()(1)offers targeted at identifiable groups of >, citiens a*road (>,

armed forces) sall not*e deemed to *e offsore transactions$

.irecte' Selling *ffortsactivit! underta#en for te purpose of" or could

reasonably*e epected to condition the marketin te >,$o Includes placing ad wit general circulation in te >,$

o .oes notinclude:

ds re/uired *! law accompanied *! certain language$

5ontact wit non%>, 3ersons

5ertain tom*stone advertisements

+ few oters mentioned$-

N p$ 92'%99 as #e! carts$

Class 11Class 13,Resales of Restricte' Securities

= (1)allows sales of securities witout registration *! an! person oter tan an issuer"underwriter" or dealer$ (,ee =2 definitions of tese terms$) (p$ 221)$ .ealers ave eemptionsunder () and ()$

CissuerDincludes an! person directl! or indirectl! controlling or controlled *! te

issuer" or an! person under direct or indirect common control wit te issuer$ Cun'er;riterDan! person wo as purcased from an issuer or an affiliate of te

issuer wit a view to" or offers or sells for an issuer or an affiliate te distri*ution of an!securit!$

o (distri*ution is *asicall! s!non!mous wit pu*lic offering)

CControl securitiesDsecurities owned *! person wo is an affiliateof te issuer

CControlD possession" direct or indirect" of te power to direct or cause te direction of

te management and policies of a person" weter troug ownersip of voting securities"*! contract" or oterwise$

o 10 percent e/uit! ownersip is a rule of tum*$ (p$ 218)

In re Hira Haupt (p$ 222)

(2) permits individuals to sell teir securities troug a *ro#er witout a registrationstatement$ But teprocess of the distributionitself is su*?ect to ,ection 9$ Bu!ing froman affiliate wit a view to sale ma#es !ou an underwriter$

olfson (p$ 20)

ere brokersprovide outletsfor te stoc# of issuers" te! are considered underwriters$

1


32/38

Bro#ers can claim an e"emption were te *ro#er is not awareof circumstances

indicating tat te transactions are part of a distri*ution of securities on *ealf of isprincipal$

Rule 1++,Persons .ee4e' >ot to ?e *ngage' in a .istriution an' Therefore >ot

Un'er;riters

(a) .efinitions CAffiliateDperson tat directl!" or indirectl! troug one or more intermediaries"

controls or is controlled *!" or is under common control wit" te issuer

CPersonDwose accounts securities are sold includes is relative" is trustsGestates"

and an! corporationGorganiation were te person owns 10 percent or more of an! classof e/uit! securit! or e/uit! interest$

CRestricte' SecuritiesD

o ,ecurities ac/uired directl! or indirectl! from te issuer or issuers affiliate in a

transaction or cain of transactions not involving a pu*lic offering:o 6egulation . ,ecurities

o ,ecurities ac/uired in transaction or cain of transactions under 6ule 1

o /uit! securities ac/uired in transaction or cain of transactions under6egulation ,

( Con'itions

i)Reporting issuer" an! person wo is not an affiliate of te issuer wo sellsrestricted

securitiesof an issuer for is own account is deemed not to *e an underwriter ifconditions of (c) and (d) are met$ Aote: 6e/uirements of (c) sall not appl! if = yearaspassed since person ac/uired securities$

ii),on-reporting issuer" an! person wo is not an affiliate of te issuer wo sells

restricted securitiesof an issuer for is own account is deemed not to *e an underwriterif conditions of (d) are met$

(c)8de(uate current public informationwit respect to te issuer must *e availa*le (mentionsspecific re/uirements for reporting and non%reporting issuers$ Aon%reporting must provide some

limited information$)(d)(i)For reporting issuers"< monthsmust elapse *etween te later of te date of ac/uisition ofte unregistered securities from te issuerGaffiliate and an! resale of suc securities in reliance ontis section for te account of eiter te ac/uirer or an! su*se/uent older of tose securities$(d)(ii) For non%reporting issuers" = yearmust elapse *etween te later of te date of ac/uisition ofte securities from te issuerGaffiliate and an! resale of suc securities in reliance on tis sectionfor te account of eiter te ac/uirer or an! su*se/uent older of tose securities$(d)(iii) holding periodsall not *egin until tefull purchase priceor oter considerationis paidor given *! te person ac/uiring te securities$

3romissor! note is not deemed full pa!ment unless provides 1) full recourse against

purcaser; 2) secured *! collateral oter tan securities; ) pa!ment in full$

(e) @imitation on amount of securities sold by affiliates$ +ontrolled &ecurities- &ales by affiliateste amount of securities sold" togeter wit all sales of restricted

and other securities of the same class witin te preceding3 months sall not eceedte greater of:

o i) 1R of sares or oter units of te class outstanding

o ii) te average wee#l! reported volume of trading in suc securities on all

national securit! ecangesGautomated /uotation s!stemo iii) verage wee#l! volume of trading

2


33/38

,ales *! non%affiliates+,5 dispensed wit limitations for non%affiliates-

(f) Manner of sale$ ,ecurities sall *e sold in CrokersG transactionsD" and te person sellingsecurities sall not 1) solicit or arrange for solicitation of orders to *u! te securities" or 2) ma#ean! pa!ment in connection wit te sale oter tan to te *ro#er wo eecutes te order to sellte securities$

(g) Control te power to direct or cause te direction of management and policies"

troug ownersip of voting securities" or oterwise$ 10 percent e/uit! ownersip is arule of tum*$ (p$ 218)

$ C?rokersG transactionsD in = () will *e deemed to include transactions in wic te *ro#er:

1) .oes no more tan eecute te order as agent for te person wose account securities

are sold and receives nor more tan te usual and customar! *ro#ers commission$

2) Aeiter solicits no arranges for solicitation of customers orders to *u! te securities in

anticipation of or in connection wit te transaction; provided tat te foregoing sall notpreclude i) in/uiries *! *ro#er to oter *ro#ersGdealers wo ave indicated interest in tesecurities witin preceding 0 da!s; ii) in/uiries *! *ro#er of is customers wo aveindicated unsolicited *ona fide interest in te securities witin te preceding 10 *usiness

da!s; iii) pu*lication *! *ro#er of *id and as# /uotations for te securit! in an inter%dealer /uotation s!stem" provided tat suc /uotations are incident to te maintenance ofte *ona fide inter%dealer mar#et for te securit! for te *ro#ers own account$

) fter reasona*le in/uir! is not aware of circumstances indicating tat person is an

underwriter or tat transaction is part of a distri*ution of securities of te issuer$

Rule 1++A$ Pri"ate Resales of Securities to !nstitutions 6Ta -

sta*lises a safe ar*or for certain private resales of restricted securities *! providingtat seller will not *e deemed to *e an underwriter wen te seller is selling to a QIB$

vaila*le onl! wen *u!er is or is reasona*l! *elieved to *e a Hualifie' institutional

in"estor$

,afe Har*or is A4& availa*le for resale of securities 1) tat at time of teir issuance were

of te same class of securities listed on te national securities ecange or /uoted in a >,automated inter%dealer /uotation s!stem" or 2) tat were issued *! compan! re/uired to*e registered under Investment 5ompan! ct$

,eller must ta#e reasona*le steps to ensure tat purcaser is aware tat seller ma! rel! on

te eemption from te registration re/uirements provided *! te rule$

6ule 1 does not provide an issuer wit an eemption for registration$ n issuer must

loo# to 6eg ." 6eg ," or =(2) for an eemption$ ,ee te title %% 5an *e used *! sellers

oter tan te issuer$ (53 18)

3rivate 6esales 4utside 6ule 1

For private resales of restricted securities tat fall outside6ule 1" (= (1G2) te seller

must structure te transaction so tat te seller is not 1) not an underwriter; and 2) cannot*e made an underwriter *! actions of te purcaser$

o 3ersons migt meet tese re/uirements *! onl! selling to persons wo can meet

re/uirements of purcasing in a private transaction (small num*er of purcasers"


34/38

ig /ualifications" access to information" and restrictions on resale)" *ut no%action letters sow some flei*ilit! wit tis$

In te case of controlsecurities" te seller must insure tat te purcaser is not an

underwriter$

Class 1$,The Role of the Un'er;riter,Section 11 an' Section 1$6a6$


35/38

o ver!underwriterwit respect to suc securit!

o ver! person wo" wit is consent" is named in te registration statement as

*eing or a*out to *ecome a director of (or person performing similar functions)or partner in" te issuer at te time of te filing of te part of te registrationstatement wit respect to wic is lia*ilit! is inserted$

o ver!one tat signedte registration statement (=11(a)(1))

o irector/partnerin te issuer at time of filing (=11(a)(2))o ccountants" engineers" appraisers tatprepare/certifypart of te statement

o 'ssuer(strict lia*ilit!) (*) (&e issuer as no defense and is strictl! lia*le

regardless of its #nowledge or negligence)

%=11 defendants need not *e (and often are not) in privit! wit te purcasing investor and neednot ave actuall! created or disseminated te callenged misinformation$%enerall!" lia*ilit! under =11 for eac defendant is ?oint and several$ &ere are two eceptions$First" underwriters lia*ilit! is limited to te amount of teir participation in te offering" eceptfor te managing underwriter (=11(e)$ ,econd" for outside directors" te directors lia*ilit! isproportionate to te damages e caused" unless te trier of fact determines te director #nowingl!violated te securities laws$ =11(f)(2)()$ @,4" oter reasons for stoc# dropsOOO negative

causation

%=11 places on nonissuer defendants te *urden to sow teir noncupa*ilit! E te Cdue diligencedefensesD$%.ue diligence is te investigation *! potential =11 defendants of information contained in teregistration statement and prospectus$ &e level of due diligence depends on weter tedefendant is an epert and weter te alleged misinformation as *een e"pertise$

5H6& 4F &H .FA.A&, .> .I@IA5 .FA,,

*5pertise' !nfor4ation: &e portions of te registration statement prepared or certified *! anepert E suc as financial information audited *! an accounting firm or legal opinions given *! alaw!er (as to *e ver! specific and not general" li#e a patent law!er) E are referred to asCe"pertised$D s to epertise portions" te responsi*le epert as a iger standard of diligencetan noneperts$ &e epert must sow e conducted a reasona*le investigation and adreasona*le grounds to *elieve (and did *elieve) tat te epertise portions were true and notmisleadingignorance is no ecuse$ =11(*)()(B)

*5pertise' Portion >one5pertise' Portion

*5pert ctuall! and reasona*l!*elieves" after reasona*leinvestigation" tat information

is true (ignorance is noecuse)

Ao @ia*ilit! for perts onnonepertised portion$

>one5pert Ao reason to *elieve tatinformation is false (ignoranceis ecuse)

ctuall! and reasona*l!*elieves" after reasona*leinvestigation" tat informationis true (ignorance is noecuse)

9


36/38

%Aoneperts" owever" ma#e out teir defense as to epertise portions if te! can sowtat te! ad no reasona*le grounds to *elieve (and did not *elieve) tat te epertised disclosurewas not true or misleading E good fait" reasona*le ignorance is an ecuse$ =11(*)()(5)

>one5pertise' !nfor4ation: &ose portions of te registration statement not prepared orreviewed *! an epert (usuall! most of it) are referred to as Cnone"pertisedD$ s to

nonepertised portions" te stated standard is te same for all noneperts$ &o esta*lis a duediligence defense" te nonepert defendant must sow tat e conducted a reasona*leinvestigation and ad reasona*le grounds to *elieve (and did *elieve) tat te nonepertisedportions were true and not misleading E ignorance is no ecuse$ =11(*)()()$ perts are onl!lia*le wit respect to te portions of te registration statement te! epertise" and tus are notlia*le for nonepertised information$

Reasonaleness: 6easona*leness is tat Cre/uired of a prudent man in te management of isown propert!$D =11(c)$ &e ,5" *! rule" eplains tat reasona*leness is a sliding scale tatdepends on Crelevant circumstancesD tat relate to te defendants access to te contestinformation$ Rule 12/$ (5ircumstances include t!pe of issuer and securit!" defendants*ac#ground and relationsip to te issuer" office eld wen person is an officer" defendants

responsi*ilit! for information in te registration statement" etc$) ,ee Rule 12/# Circu4stancesAffecting the .eter4ination of (hat Constitutes Reasonale !n"estigation an' Reasonale

=roun's for ?elief Un'er Section 11 of the Securities Act$

.efense if meet *urden of proof of:

o Resignation" and advised commission and issuer of no responsi*ilit! for

statemento Public noticetat registration statement ad *ecome effective witout is

#nowledgeo Reasonable groundto *elieve and did *elieve at effective date tat statements

were trueGno omissions" and

6easona*leness standard prudent man managing is own propert!$

Aotes:

o If a person ac/uired suc securit! after te issuer as made generall! availa*le an

earnings statement covering =: months*eginning after te effective date" tenproof is re/uired tat te person ac/uired te securit! rel!ing on te untruestatement (*ut does not ave toprove readingte registration statement)$ (a)(9)

o >nderwriter still lia*le even if e *ecomes an underwriter after effective date (d)

o Aegative causation defense: 3laintiff cannot recover damages if defendant proves

tat loss did not result from te misleading registration statement$o @imits to damages (cannot get more tan te issue price)$

o =11 purpose is toprotect investors$ (Barchris)

Section 1$$ @ia*ilities in 5onnection wit Prospectusesand 5ommunications

o Ma! sue in law or e(uity(rescission)o 5an sue for an! offer or sale tat violates section 9 (doesnt re/uire untrue

statement)$o 4r" can sue for material untrue statementGomission from prospectus$

o @ia*ilit! for free writing prospectuses$

?archris


37/38

&e court wipes out ever! one of tese defendants" no one met teir due diligence

defenses$o 6usso (54)e #new all relevant facts" te compan! was entering into

*an#ruptc!" so e didnt ave an! defense$

o Kitolo and 3ugliese (Business Founders)te fact tat te! are of limited

education and migt not ave *een a*le to read te prospectus is not a defense"and its li#el! tat te! #new a*out some of te pro*lems$

o nderwriters do tis now (going to tal# to lending*an#s" suppliers" to investigate te compan!)$

Rule 109For te purposes or 12(a)(2) onl!" information conve!ed to te purcaserafter tetime of sale will not *e ta#en into account in determining weter prospectusGstatement wasmateriall! untrueGmisleading$

6elevant data at time of sale can include preliminar! prospectus" plus an! written or oral

update to it$ (@ia*ilit! for misstatement at tis time is under ,ection 12(a)(2) p 9%90 53Rule 12$o*ligation to deliver a final = 10(a) prospectus is fulfilled *! filing a final version

wit te ,5$

Class 1+,Responsiilit0 of


38/38

!n Re Carter 619-1

Rule 17$6e616iii,5 man! den!" temporar! or permanentl!" te privilege of

appearing or practicing *efore it to an! person found to ave willfull! violated or aidedand a*etted te violation of federal securities laws" rules" or regulations$

law!er must ma#e all efforts witin reason to persuade is client to avoid or terminate

proposed illegal action$ ,uc efforts could include" were appropriate" notification to te*oard of directors of a corporate client$

@aw!er owes a dut! to te entit!" not te management or an! individual of te entit!$

5ounseling accurate disclosure is sufficient initiall!; ten law!er must ta#e furter

affirmative steps and prompt action (ma! resign" or approac *oard of directors" *ut neednot report out)$

Section 372 of Saranes,&5le Act 6Ta 1$

6e/uires law!ers te reportevidence of material violationof securities laws or *reac of

fiduciar! dut! or similar violation to issuers cief legal offer andGor 54$ 5ief legalofficer tan as a dut! to investigate$ (&a* p$ 29)

If teres no appropriate response" law!er must report evidence to te audit committee"

anoter committee of independent directors" or to te full *oard of directors$

,5 doesnt re/uire a nois! witdrawal an!more$ (p$ 0)$ (&a*" p$ 292) 6emem*er: ,4V onl! applies to issuers$

Mo'el Rules of Professional Con'uct

6ule 1$$ 5onfidentialit! of Information@aw!er ma! reveal information to

prevent/rectifysubstantial in>uryto financial interest or propert! of anoter ifreasonably certainto ave resulted from clients commission of a crime or fraud ofwic client as used law!ers services$

Rule 1#13# &rganiFation As Client# (p$ 1)

@aw!er sall proceed as reasona*l! necessar! in te *est interest or te organiation$

>nless not in *est interest of organiation" sall refer matter to iger autorit! in te

organiation" including te igest autorit! tat can act on *eavior of te organiation$

If teres a failure to act" or law!er *elieves violation is reasona*l! certain to result in

su*stantial in?ur! to corporation" te law!er ma! reveal information relating to terepresentation weter or not 6ule 1$ permits suc disclosure" *ut onl! to te etentnecessar! to prevent su*stantial arm$

securities regulation outline bancroft fall 2010

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