Securities Regulation Outline

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LAW 512

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Jan 11, 2025

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Securities Regulation Outline:GENERAL PRINCIPLES OF SECURITIES LAW..............................................2MAJOR SECURITIES STATUTES:...................................................................3DEFINITION OF A SECURITY........................................................................4MATERIALITY................................................................................................7PUBLIC COMPANIES, DISCLOSURE, AND ACCURACY...............................10ENFORCEMENT OF SECURITIES LAWS.....................................................14ENFORCEMENT OF SECURITIES LAWS (CONT)........................................15PUBLIC OFFERINGS....................................................................................19EXEMPT OFFERINGS..................................................................................29SECONDARY MARKET TRANSACTIONS.....................................................33CIVIL LIABILITY UNDER FEDERAL SECURITIES LAW...............................38General Principles of Securities Law

I.Primary Purpose of Securities Lawa.The primary goal of securities regulation is to ensure investors receive accurate information to make decisionsb.Securities law attempts to discourage the speculative markets that led to the Great Depression and other economic collapsesII.What is a Security?a.A security represents an economic claim on an issuer (company, entity, government agency, etc.)b.Unlike bank accounts, securities do not hold intrinsic valuec.The issuer’s future economic performance, and thus the security’s value is always uncertaind.Most prevalent types of securities are common stock, preferred stock, and bondsIII.Rule at Liquidationa.The absolute priority rule stipulates that only after the contracted-for claims of debt holders and preferred shareholders are satisfied will common stock shareholders receive anything in liquidationIV.Net Present Valuea.With proper information, investors may predict the future performance of a securityb.The future performance allows investors to value the present security priceV.Why do some issuers fail to disclose?a.Four primary reasons that some issuers fail to disclose: i.firms not intending to issue securities may prefer not to disclose;ii.anti-fraud liability may not ensure the veracity of disclosures;iii.managers may have a self-interest in restricting disclosures (e.g., to enhance their insider trading opportunities); ANDiv.such disclosures will not include information emanating from outside the firmVI.Capital Marketsa.Capital markets are the systems that facilitate the buying and selling of securitiesVII.Efficient-Capital-Markets Hypothesisa.An efficient market is one in which all available information is reflected in the price of securities

b.The three versions of this hypothesis all assume that new information will be absorbed into markets at different rates (i.e., information will have X effect on the price of the securities)VIII.Weak Versiona.In a weakly efficient market, the price of the security reflects all information related to the security’s prior pricesb.It is called weak because prior prices cannot be used to predict future pricesIX.Semi-Strong Version:a.In a semi-strong market, the price of a security reflects all publicly available information about the security X.Strong Versiona.A strongly efficient market has securities that reflect all information relevant to the security, even if the information is not publicly availableXI.Capital Market Theory and the SECa.The most likely real-world application of this theory is the semi-strong versionb.The SEC assumes that capital markets take on the semi-strong version, and with that assumption regulates the market to ensure the prices of securities reflect the publicly available informationMajor Securities Statutes:I.Securities Act of 1933a.The Securities Act of 1933 is often just called “the Securities Act”b.The act ensures that investors have sufficient information to make informed decisions on whether or not to buy the securitiesc.Requires issuers making a public offering to file disclosure documents containing information deemed important to investors: i.Documents include registration statement and the prospectusii.The registration statement and prospectus contain information on the issuer’s business, properties, material legal proceedings, directors and officers, ownership, and financialsd.provides for an intricate public offering procedure, often referred to as the “gun-jumping” rules, designed both to ensure that the prospectus is distributed widely to investors and that the prospectus is sent to investors before they receive other (written) information.

e.Imposes heightened antifraud liability for material misstatements (and omissions creating a “half-truth”) in public offering documentsf.Controls gun-jumping which is when you issue stock you cannot promote the stock in a certain period before you file the registration stockg.Is focused on exemptions, because most securities offerings are not done in public transactionsII.Primary Marketa.The act regulates the primary market (transactions between issuers and buyers) (issuers, IPOs)III.Disclosurea.The act is not concerned with the merits/quality of securities, but in disclosure of information about the issuerb.The government will not judge whether a security is a good or bad investment. It will only ensure that investors have adequate informationIV.Registration Statementsa.The Securities Act requires issuers to file a registration statement with the SEC upon issuing securitiesV.Securities Act of 1934a.The Exchange act regulates the trading of securities after they have been issued/distributedb.Its intent is to curb unsafe, abusive, or manipulative practices in secondary securities marketsc.The Exchange Act primarily regulates secondary market transactions (between a securities buyer and another buyer) and the market professionals and institutions that facilitate such transactions. d.The Exchange Act, like the other securities laws, protects investors primarily through disclosure.e.The Exchange Act requires brokers, national securities exchanges, and municipal securities dealers, among others, to register with the SEC subjecting them to extensive regulation by the SECf.Covers 10b-5 (the anti-fraud rule) which provides for a private cause of actioni.10b-5 states that it is illegal for any person to defraud or deceive someone, including through the misrepresentation of material information, with respect to the sale or purchase of a security.g.The Exchange Act requires issuers to continually provide information to investors, beyond the issuer’s registration statementh.Exchange Act prohibits fraud in connection with securities transactionsi.Exchange Act contains regulations concerning brokerages, stock exchanges, and other forms of securities trading

Definition of a SecurityI.Generala.If the transaction does not involve a security, then neither the ’33 Act, nor the ’34 Act apply, so the first “element” in a securities law issue is to determine whether the transaction is about a securityb.Both the Securities Act and the Exchange act presume notes, stocks, bonds, debentures, investment contracts, puts, calls, and options to be securitiesc.Definition of a security was meant to be broad and encompass any instrument that might be sold as an investmentd.Securities are not limited by the instruments labeled in the Securities or Exchange Acts (if they were, then issuers could simply call their instruments by another name to avoid regulation)e.The test is whether the instrument is the sort that Congress intended to include when it adopted federal securities lawsII.Investment Contractsa.Investment contracts are the broadest category of potential securitiesb.SEC v. Howey Howey Test Defines what an Investment Contract Is:a.(1) any contract, transaction or scheme whereby a person b.(2) invests his money (risk); c.(3) in a common enterprise; AND d.(4) is led to expect profits solely from the efforts of the promoter or a third partyc.The Howey test is the most important way to determine what is/is not an investment contractd.Comments about the Test:a.SEC v. Merchant Capital While the Howeytest’s last element linguistically requires unilateral action, nominal involvement on the part of the investor does not preclude an investment from being a securityb.Ambiguity: i.The Howeytest can be used to determine whether other types of instruments qualify as securities (not just investment contracts)ii.The Howey test is only used in ambiguous cases, meaning the instrument is not labeled in federal securities lawc.Pension Plans:i.Teamsters v. Daniel A compulsory pension plan is an example of a potential security that fails the Howeytest, and thus, federal securities laws do not applyd.Horizontal and Vertical Commonality:i.The pooling of assets from multiple investors in such a manner that all investors share in the profits and risks of the enterprise—also known ashorizontal commonality—constitutes a common enterprise under the Howey Test

ii.The concept of “vertical commonality” focuses on the relationship between an investor and the promoter and requires the mutual dependence of the fortunes of the investor and the promoter. Case law states that vertical commonalityrequires the fortunes of the investor to be “interwoven with and dependent on the efforts and success of those seeking the investment or of third parties.”1.Broad Vertical Commonalityfocuses on the relationship between an investor and the promoter and requires the investor’s dependence on the promoter’s expertise to find a common enterprise.2.Strict Vertical Commonality requires that the fortunes of investors be tied to the fortunesof the promoter to find a common enterprisee.Ponzi Schemes:i.SEC v. SG Ltd. Ponzi schemes may constitute securities under the Howey testf.Expectation of Profits:i.Warfield v. Alaniz expectation of profits under the Howey Test exists even if the investor intends the profits to be donated to charityg.Housing Cooperatives:i.United Housing v. Forman:1.Stock in a cooperative that has no promise of profits is not an investment contract and securities laws do not, therefore, apply2.Even if it is called “stock” it can still fail the Howey testIII.Cryptocurrenciesa.The U.S. Securities and Exchange Commission takes the position that nearly all cryptocurrencies are securities, with bitcoin the only known exception.IV.Interests in Partnerships and LLCsa.A passive investor’s interest is more likely to be considered a securityb.If an investor takes an active role, then it is more likely that interest will not be seen as a securityV.General Partnerships and Limited Partnershipsa.Interests in general partnerships are generally not securities except in 3 situations:i.where the partners have little power in their hands;ii.the partners are inexperienced or unknowledgeable in business affairs; ANDiii.the partner cannot replace the manager of the enterprise or otherwise exercise meaningful partnership powers

b.Limited partnership interests and limited liability partnership interests are presumed to be investment contracts, and thus securities, unless the limited partners exercise effective control over the enterpriseVI.Manager-Managed LLCsa.An investment in a manager-managed limited-liability company is generally not an investment contract.VII.Stocksa.Landreth Timber:a.Traditional stock is the holding of interest in a companyb.Traditional stock is the quintessential security as defined by the Securities Act of 1933, and no further analysis is required to determine status as a securityVIII.Derivatives:a.Derivatives securities whose value rely on the value of underlying securitiesa.Include options to buy (calls), options to sell (puts), stocks & bonds, and swapsIX.Notes:a.Definition:i.A form of debt instrument, which are included in the security definitionsb.Excluded Notesi.Notes with maturities within nine months of issuance, or transactions incommercialpaper(shorttermlendingbetween companies/financial institutions) are not treated as securitiesii.Notes also exclude commercial transactions (consumer loans, personal loans, business loans, mortgage notes)c.Note Testi.Whether a note is considered a security is based on: 1.What the note is intended to finance; a.Intention as for the first factor, if the note is intended to finance minor assets, consumer goods, or to address cashflow concerns, it is less likely to be a security. If the purpose is to finance large new investments, it is more likely to be a security. 2.Whether the note is available for trading or common investment; b.Available for Trade If a note is available for trade, it is more likely to be considered a security3.Whether the public has a reasonable expectation that the note is a security;

c.Public Expectation If a reasonable investor/transactor would consider the note to be a security, then it often will be considered one4.Whether there is another body of regulation that would govern the note, making securities law irrelevantd.Other Regulation If no other regulation applies to the type of note, such as banking regulation, then it may be necessary to consider the note a security so that securities regulation can be implemented to protect investors MaterialityI.What Matters to Investors (TSC Standard):a.Whether information is material determines whether issuers must disclose that informationb.TSC Industries v. Northway:i.When is Information “Material”:1.If there is a substantial likelihood that the disclosure would have been viewed by a reasonable investor as having significantly altered the total mixof information made available2.The standard does not require that an investor would have made a different decision, only that the disclosure would have substantially changed the investor’s viewII.The Reasonable Investor (The Litvak Standard):a.United States v. Litvak:a.The standard of a “reasonable investor” an objective onei.Reasonable Investor Standard is frequently envisioned as a rational human being of average wealth and ordinary financial sophistication that invests passively for the long term.b.A misstatement in a securities transaction is materialso long as there is a substantial likelihood that a reasonable investor would find the misrepresentation important in making an investment decision.c.Sophistication:i.US v. Litvak Misstatements are material no matter who the buyer isii.Professor Sophistication shouldmatter; however, an experienced investor may not care about the misstatement as much as a public investorIII.Forward Looking Information (Basic v. Levinson Standard):a.Basic v. LevinsonStandard of Materiality is applicable to preliminary merger statements (a form of forward looking information)

a.Applying the TSC standard requires a fact-specific analysisb.The probability of a factual event occurring is multiplied by how important the information would be to a reasonable investorb.Probability/Magnitude Approach (codified by SEC v. Texas Gulf Sulphur Co):a.Facts that are certain or substantially likely usually are material due to the magnitude test b.SEC v. Texas Gulf Sulphur Co Materiality will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activityc.Mere silence is not misleading/material if there is no duty to disclosed.Forward Looking Statements: a.Statements that express expectations, estimates, projections, or assumptions about the future performance of the companyb.These can be misstatements if they were inaccurate at the time they were madee.Misleading Statements:a.If a statement is intentionally misleading, or otherwise proven false, it can be materialIV.Objective Tests of Materiality:a.Litwin v. Blackstone Group, L.P.(Qualitative v. Quantitative Standard):a.Materiality is an “inherently fact-specific finding,” that is satisfied when a plaintiff alleges “a statement or omission that a reasonable investor would have considered significant in making investment decisions”.b.Qualitative information is material if there are any known trends or uncertainties that the company reasonably expects will have a material, unfavorable impact on revenues or incomes from continuing operationc.A court must consider both qualitative and quantitative factors in assessing an items materiality, and that consideration should be undertaken in an integrative mannerb.In re Merck & Co., Inc. Securities Litigation(Stock Price Standard):a.Information is material if it affects the stock pricei.In efficient markets materiality is defined as information that alters the price of a firm’s stockb.The standard for measuring the materiality of statements in an efficient market holds that “the materiality of disclosed information may be measured post hoc by looking to the movement, in the period immediately following disclosure, of the price of the firm’s stock”. c.Matrixx Initiatives, Inc. v. Siracusano(Statistical Significance Standard):i.A lack of statistically significant information does not necessarily render information material/immaterial.i.There is something more that is needed, and the information is not limited to just information that is “statistically significant”. V.The “Total Mix” of Informationa.Longman v. Food Lion, Inc.(Total Mix and Truth on the Market Defense):

i.Total Mix:i.The total mix of available information can include information that’s already available to investors (i.e., wouldn’t need to be independently disclosed)ii.Disclosure of information is not material if the market already knew of the informationii.Truth on the Market Defense:i.An issuer may be protected from failing to disclose a material fact if that fact is widely known or available to the publiciii.Puffery, Half-Truths, and Incomplete Information:i.Statements that are literally true may still be misleading if they are half-truths or incomplete statementsii.Statements that amount to puffery (so vague and exaggerated that a reasonable person would not take it seriously) cannot be considered material, as they are too general to cause reasonable relianceiv.Kaufman v. Trump’s Castle Funding(Bespeaks Caution Doctrine):i.Forward-looking statements are rendered immaterial as a matter of law if they are accompanied by disclosure of risks that may preclude the forward-looking projection from coming to fruition.VI.Other Regulationsa.Item 404 of Regulation S-K now requires disclosure of transactions in excess of $120,000 between the issuer and directors, officers, 5% stockholders and the family members of any of those classes.b.§406 of the Sarbanes-Oxley Act (implemented by the SEC in Item 406 of Regulation S-K) requires disclosure of whether the company has a code of ethics for its CEO, CFO, and controller.a.If the company does not have such a code of ethics, it is required to explain why not.c.Disclosure is specifically required under Item 401(f)(2) of Regulation S-K if a criminal investigation has led to a formal indictment.d.Item 401(f)(5) of Regulation S-K requires disclosure if an officer or director has been found by a court or by the SEC to have violated the securities laws.Public Companies, Disclosure, and AccuracyI.Definitions of a Public Companya.The Exchange Act has three provisions that render a company public: i.§12(a) & (b), §12(g), and §15(d)b.§12(a) &(b) of the Exchange Act:i.Companies listed on a national securities exchange are public companiesc.§12(g) of the Exchange Act:i.§12(g) requires all issues having a nexus to interstate commerce to register threshold number of holders of their equity securities.

1.§12(g)(1)(A) the thresholds are set at:a.1) Companies having more than $10 million in assets;b.2) either 2,000 shareholders of record for a class of equity security, or 500 non accredited shareholders for non-bank and non-bank holding companies are considered public companiesi.Companies with greater than or equal to 2,000 shareholders and more than $10 million in assets are considered public companiesii.§12(g) allows companies to register voluntarily even if the statutory thresholds are not triggered. iii.§12(g) sweeps in companies not listed on national securities exchange into public company status.d.§15(d) of the Exchange Act:i.Companies that register to make a public offering are public companies under the Exchange Actii.§15(d) provides that issuers may suspend their public company status if they show at the beginning of a fiscal year that the company has fewer than 300 shareholders.e.Tender Offer Rules, Proxy Rules and Insider Trading:i.§§12(a) and 12(g) companies are subject to proxy rules, tender offer rules, and insider trading rules (§16 of the Exchange Act)ii.§15(d) companies are exempt from these rules, but an exclusively 15(d) company is rareII.Public Company Disclosure Requirements:a.Public companies are subject to the ongoing disclosure requirements of the Exchange Actb.The SEC, acting pursuant to authority conferred by Exchange Act §13(a), requires 3 principle disclosure documents from public companies:i.1) Form 8–K: filed on the occurrence of specified events that the SEC deems of particular importance to investors; ii.2) Form 10–K: filed annually;iii.3) Form 10–Q: filed quarterlyIII.§ 13(a) of the Exchange Acta.§13(a) of the Exchange Act requires public companies to make periodic disclosures of informationa.Authorizes the SEC to specify what type of information must be disclosedIV.Form 10-K:a.General Information and Rules:i.Public companies must file 10-K disclosures annuallyii.10-K is the most comprehensive disclosure requirediii.10-K can be combined with the required shareholder report pursuant to the proxy rules in §14 of the Exchange Act

iv.10-K is meant to give a complete picture of a company, reflecting the narrative information of the Regulation S-Kv.Financial statements in a 10-K must be audited by an independent public accountantb.Information in 10-Ki.The 10-K must include: discussion of business, properties held, legal proceedings against the company, market information re: common stock, information about its officers and directors, executive compensation of CEO, CFO, & three other highest paid executive officers (include bonuses, stock and options based compensation, and retirement benefits), securities held by directors, related party transactions, and accounting feesc.Item 303 – Management Discussion and Analysis (MD&A):a.Regulation S-K specifies that a company’s 10-K must include a discussion about their financial performance over the relevant yearb.Management is also required to discuss “trends and uncertainties” that are “reasonably expect[ed]” to affect the company in the future d.Certification:a.The 10-K must be certified by the CEO and CFO, who must confirm: i.They have reviewed the 10-K; ii.To their knowledge, the 10-K does not contain any misstatements or omissions; iii.Financial statements accurately reflect the issuer’ financial condition; AND iv.That they have reviewed the company’s financial controls, and that any weaknesses in these controls were disclosed to the company’s auditorsV.Form 10-Q:a.10-Q forms are less comprehensive and are filed quarterly (other than the quarter when the 10-K is filed)b.10-Q forms have similar certification requirements to 10-K formsc.10-Q forms do not need to be vetted by an independent accounting firmVI.Form 8-K:a.General Information:i.8-K forms supplement the larger 10-K and 10-Q forms, and must be filed within four business days of certain eventsb.Events Requiring 8-K Disclosurei.Bankruptcy requires an 8-K disclosureii.Sale or Purchase of Assets Sale or purchase of assets representing more than 10% of total assets must be disclosed in an 8-K reportiii.Delisting Shares When a company delists shares from an exchange, it must disclose this in an 8-Kiv.Change in Auditor A company must file an 8-K when it changes its auditorv.Change in Control:1.Companies that have been acquired must disclose so in an 8-K

2.New executives, directors, & officers must be disclosed in an 8-K c.Voluntary Disclosure:i.At any time, a company may disclose information to its shareholders using an 8-KVII.Regulation FD:a.What does it regulate? i.The manner by which companies disclose material informationb.Enforcement of Regulation FD SEC v. Siebel Systems, Inc.:a.Applying Regulation FD in an overly aggressive manner cannot effectively encourage full and complete public disclosure of facts reasonably deemed relevant to investment decision-making. b.It provides no clear guidance for companies to conform their conduct in compliance with Regulation FD. c.Regulation FD generally prohibits 4 things: i.1) Persons acting on behalf of1.Directors, executives, and investment relations personnel are considered actors on behalf of the company2.Low-level employees that disclose information will not violate Regulation FDii.2) Exchange Act reporting companiesfrom making1.Regulation FD only applies to public companiesiii.3) Selective disclosuresto 2.Selective disclosures are the opposite of public disclosures, which are marked by eithera.(1) 8-K form disclosures; OR b.(2) any disclosure reasonably designed to provide broad, non-exclusionary information to the publiciv.4) “covered persons”1.Covered persons include:a.broker-dealers; b.investment advisors;c.investment companies; AND d.holders of the company’s security who would reasonably trade on the information given2.Excluded Persons:a.Covered persons do not include those who owe the company a duty of trust and confidence (attorneys, accountants, and investment bankers)b.A person who has sworn to maintain the information in confidence is not a covered personc.Credit rating agencies are not covered personsd.Accidental Disclosure:i.Regulation FD allows companies to remedy a selective disclosure by making a prompt public disclosure

ii.Promptly means as soon as reasonably practicable, but no later than 24 hours or the commencement of trading on the NYSE, after an executive learns of the selective disclosureiii.Disclosures are presumed inadvertent unless there is evidence showing the person disclosing knows, or recklessly does not know, that the information is non-public and material e.Accurate Disclosurei.Requiring disclosure is not enough. The Exchange Act also requires these disclosures be fully accurateVIII.§ 13(b) of the Exchange Act:a.All company transactions must be accurately recorded, regardless of materiality to an investorb.Public companies are required to maintain accurate books and records of their assetsc.§13(b)(7) of the Exchange Act requires the accuracy to be “such a level of detail . . . as would satisfy prudent officials in the conduct of their own affairs”IX.Accounting Controlsa.The Exchange Act requires “reasonable assurances” that:i.transactions are authorized by management; ii.transactions are recorded to prepare financial statements and maintain accountability for assets; iii.access to assets is only permitted by specific authorization;iv.accounting for assets is compared with existing assets at regular intervals; AND v.discrepancies are adjusted with appropriate actionX.Enforcementa.§13(b) imposes strict liability on companies that fail to have reasonable accounting practicesb.However, shareholders cannot bring private action for §13(b) violations, and there are no criminal penalties - §13(b)(4)XI.Independent Auditors:a.External auditors may not provide consulting advice to their clients on the internal audit function - §10A(g) of the Exchange Actb.Accounting firm partners must rotate accounts once every five years - §10(j) of the Exchange Actc.If a company’s CEO, controller, CFO, or chief accounting officer was employed by the auditing firm and participated in the company’s audit, then the auditing firm may not provide accounting services for that company until a year has passed since the individual was last employed - §10A(l) of the Exchange ActXII.Whistleblowing

a.The Exchange Act encourages the reporting of disclosure inaccuracies by both lawyers and accountantsXIII.Auditorsa.Auditors must report illegal acts to management and either the audit committee or the board of directors - §10A(b) of the Exchange Actb.Once notified, the board must notify the SECXIV.Attorneysa.Lawyers are under similar obligations as auditors, but are not required to inform the SECb.Lawyers maycontact the SEC to prevent an issuer from making a material misstatement that is likely to cause substantial financial injury to the issuer or to investorsEnforcement of Securities LawsI.Role of SECa.In the United States, public enforcement of the federal securities laws is left largely to the SEC and FINRA.b.The SEC has the power to bring an enforcement action against any person, including entities, who violate the securities laws.c.Companies often discover possible securities law issues through their own internal investigations and voluntarily inform the SEC of such issues. The SEC also learns of possible securities law violations through its review of company filings, news reports, and the filing of private securities class actionsd.For judicial enforcement of an administrative subpoena, the SEC must show four things:i.(1) the investigation is for a legitimate purpose, ii.(2) the inquiry may be relevant to that purpose, iii.(3) the information sought is not already within the agency’s possession, iv.(4) and proper administrative process has been followede.The Securities Act of 1933 and the Securities Exchange Act of 1934 permit the Securities and Exchange Commission to share the fruits of its investigations with other government agencies.

Enforcement of Securities Laws (cont).II.§ 9a.§ 9 bans manipulative activities that are fraudulent, but allows, within regulated limits, certain activities that, despite being susceptible to manipulation, may be important to the efficient functioning of securities marketsb.§ 9(a)(2) prohibits manipulative activity on national securities exchanges. There are three separate elements to a cause of action under § 9(a)(2):i.Engaging in a series of transactions in any security registered on a national exchange creating actual or apparent active trading in such security, or raising or depressing the price of such securityii.Carrying out these transactions with scienteriii.Transacting for the purpose of inducing the purchase or sale of such security by others.c.Unlike § 10(b), § 9 explicitly provides both for SEC enforcement and a private right of action. Under § 9(e), the π class is limited to those who bought or sold securities on a national securities exchange at a price that was affected by market manipulation, with damages measured by the change in price.III.Rule 10b-5a.Private Cause of Actioni.Rule 10b-5 of the Exchange Act gives investors a private cause of action to seek damages resulting from securities fraud:ii.10b-5 ACTIONS REQUIRE: 1.Standing 2.A material misstatement;3.Scienter (∆'s knowledge that an act or conduct is wrongful and intent to act despite this knowledge);4.Reliance; AND5.Loss CausationIV.General Defensesa.In a 10b-5 action, common defenses include: lack of scienter (intent to deceive), lack of materiality (information not significant enough to affect investor decisions), reliance on information from others, good faith belief in the

accuracy of statements made, and using a pre-established 10b5-1 trading plan to demonstrate that trades were made without insider information; essentially arguing that the ∆ did not knowingly make a false or misleading statement that a reasonable investor would rely on to make a decision.V.Element 1 of a Rule 10b-5 Action: Standinga.General Information:i.Blue Chip Stamps v. Manor Drug Stores(Standing):i.Courts are concerned about encouraging corporate fraud lawsuits, because frivolous claims may be brought at the mere chance of enormous payout.ii.Menora Mivtachim Ins. Ltd. v. Frutarom Ind. Ltd.(Standing):i.Purchasers of a security in an acquiring company do not have standing to sue the target company for alleged misstatements made by the target company about itself prior to the merger.iii.Neither the SEC nor Justice Department need to show that an actual purchaser or seller was defrauded to bring suit for violations of Rule 10b–5.b.Who are the πs?:i.Blue Chip Stamps v. Manor Drug Stores In order to have standing, the π in a 10b-5 action must have been a purchaser or seller of securitiesii.§11(a) of the Securities Act confines the cause of action it grants to “any person acquiring such security” while the remedy granted by §12 of that act is limited to the “person purchasing such security”.iii.28 U.S.C. §1368(b) The time limit for fraud actions under the Exchange Act is the earlier of (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation.i.The 2 year statute of limitations doesn’t start running until π’s have discovered the facts constituting the violation or reasonably diligent π would’ve discovered whichever comes first. c.Who are the ∆s?i.SEC v. Zandford(Defendants to Rule 10b-5):i.Possible ∆s for a 10b-5 action must have committed fraud “in connection with the sale or purchase of securities”ii.A securities transaction need only be part of the alleged fraud for standing to be validii.As an implied private cause of action, Rule 10b–5 does not specify potential ∆s. Instead, “any person” who makes a material misstatement and meets the other requirements of the Rule 10b–5 cause of action is potentially a ∆.iii.Merck & Co. v. Reynolds:i.The “facts constituting the violation” are the facts a π needs to plead a claim of fraud including scienter.VI.Element 2 of a Rule 10b-5 Action: Material Misstatementa.πs must prove the presence of a material omission or misstatementb.Santa Fe Industries, Inc., et al. v. Green et al.(Material Misstatement Standard)

a.The statement must contain an element of deception or manipulationi.Can be satisfied through both oral and written statementsb.Abuse of shareholders isn’t material misstatement if abuse is disclosedc.Silence generally, will not be taken as a material misstatementd.Forward-Looking Statements (§21E of the Exchange Act) will not be considered misstatements if:i.the statements are immaterial; ii.the statements are made without actual knowledge that they are false; OR iii.if the statements are accompanied by meaningful cautionary statementsVII.Element 3 of a Rule 10b-5 Action: Scientera.Ernst & Ernst v. Hochfelder/Tellabs v. Major Issues & Rights Intentional act to defraud is necessary for a 10b-5 cause of action to prevail. b.Smallen v. Western Union Co. A private π is required to plead particularized facts giving rise to a strong inference of scienter on the part of a corporate ∆’s senior controlling officers in order to pursue a securities-fraud class-action claim against a corporate ∆.c.Scienter also involves recklessnessVIII.Element 4 of a Rule 10b-5 Action: Reliancea.General Rules:i.An investor must have relied on the misstatement1.The investor must have entered into the allegedly fraudulent transaction because of the misstatementii.The SEC need not plead or prove reliance, that is, it need not show that it (or any actual investor) relied on a misstatement in making an investment decisioniii.An investor may not prove reliance pursuant to § 10(b) of the Exchange Act using evidence of a public misstatement caused by the business operations of a third party.b.Reliance and Omissions:i.Affiliated Ute Citizens of Utah v. United States In cases involving a breach of duty to disclose, reliance is presumed if omitted fact is material c.Reliance and Affirmative Misstatementsi.Fraud on the Market1.Reliance is presumed in efficient markets because the misstatement is incorporated into the price – Basic v. Levinsona.To invoke this presumption πs must show:i.(1) that there was a public misrepresentation; ii.(2) the misstatement was material; iii.(3) that the securities were traded on an efficient market; ANDiv.(4) that the π purchased or sold the securities at the time of the misrepresentation

2.Since most of the elements fall into general 10b-5 elements, the key is the efficiency3.Exchanges like the NYSE are generally held to be efficient, while over the counter and debt securities markets typically are not4.Defensesa.∆s can rebut the fraud on the market presumption by showing any fact that severs the link between the misrepresentation and the share priceb.Securities fraud ∆s may attempt to rebutBasic’s presumption of reliance on the ∆ company’s statements at the class-certification stage of litigation with evidence of a lack of price impact. – Halliburtonc.∆s can also rebut the claim by showing that the π bought or sold the security for reasons other than relying on the misstatement IX.Element 5 of a Rule 10b-5 Action: Loss Causationa.Dura Pharmaceuticals Inc. v. Broudo:a.Fraud must’ve actually affected the π before they can recover damagesb.Stock Price:i.Mere inflation of a stock price due to an omission or misrepresentation is not enough to show loss causationb.Exchange Act §21D(b)(4) private π who claims securities fraud must prove that the ∆s actually caused an economic loss.c.Secondary Liabilityi.Stoneridge Investment Partners, LLC v. Scientific Atlanta, Inc.πs must show reliance on the conduct of a secondary actor themselves in order to prevail in a 10b-5 claim against themi.§10(b) private right of action doesn’t extend to aiders and abettors; it covers secondary actors who commit primary violationsii.Janus Capital Group, Inc., et al. v. First Derivative TradersAn individual cannot be held liable in a 10b-5 action if they did not control or make the misstatementiii.Lorenzo v. SECUnder Rule 10b-5, a person may hold both primary and secondary liable for knowingly disseminating false statements to investors and secondary liability for helping someone else make those false statementsd.Scheme Liabilityi.Rule 10b-5 declares that it is unlawful for any person, in connection with the sale of any security, to use interstate commerce directly or indirectly (a) to “employ any device, scheme, or artifice to defraud,” (b) to “make any untrue statement of a material fact or to omit to state a material fact,” or (c) to “engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.” § 17(a) contains three nearly identical prongs. Courts typically analyze the first and third prongs together and refer to them as “scheme liability.”

X.Damagesa.The measure for damages in a securities case is the difference between price paid and the value of the security at the time of the purchase.b.Proportionate Liability provision codified in §21D(f) of the Exchange Act ∆s who are found to be only reckless are required to pay only their proportionate share of the damages caused.i.There are two exceptions to the general rule of proportionality, however:1.∆s are jointly and severally liable to a π who is entitled to damages exceeding 10% of his net worth, if the π’s net worth is less than $200,000; AND 2.∆s also must make up any shortfall due to a co-∆’s insolvency, which comprises up to 50% of their own liabilityc.Arguments to Defeat Class Certification – Damagesi.1) ∆s can focus on the measure of damages used by the πs, typically the abnormal negative return on the alleged corrective disclosure date (or in the case of multiple days when corrective disclosure is revealed, dates).ii.2) ∆s can show that the πs have not demonstrated a methodology to adjust the inflation in the class period to account for the changing importance of widgets to the company across the class period.iii.3) even if πs can articulate how their measure of damages (the abnormal negative return on the alleged corrective disclosure date) may apply across different days in the class period, ∆s can argue that undertaking this analysis may require so many individualized determinations that common issues no longer predominate, requiring denial of class certification under Rule 23(b)(3) of the FRCP.Public OfferingsI.Public Offerings and Statutesa.Public offerings are governed by the Securities Actb.Issuersi.An issuer is any person/entity that issues or proposes to issue a securityc.The Underwriting Processi.Underwriters (financial intermediaries) help an issuer prepare for, market, and manage the offering of securitiesd.Statutory Definitions of Underwritersi.Under the Securities Act, an underwriter is any person who has purchased a security either from an issuer or from “any person directly or indirectly controlling or controlled by the issuer,” with a view of distributing the securityii.Securities Act of 1933 Underwriters also include any person who:1.“offers or sells for an issuer in connection with the distribution of a security;” OR

2.“directly or indirectly participates in any such undertaking or the underwriting of such an undertaking”e.Brokers as Underwritersi.Broker-dealers are not underwriters if they merely sell securities for the underwriter in return for a standard sales commissionf.Firm Commitment Offeringi.A firm commitment offering involves an underwriter that commits to purchase all shares being issuedii.The underwriter assumes all financial risk for any unsold sharesg.Best Effort Offeringi.In a BEO agreement, an underwriter undertakes to sell as many shares as possible, with unsold shares being returned to the issuerh.Other Types of Offeringsi.Dutch Auction - In a Dutch auction, the issuer and underwriters do not fix an offering price. Instead, investors place bids for a desired number of shares at a specified price. After all the bids are placed, the issuer then chooses the highest price that will—given the range of bids—result in the offering completely selling out. (rare)ii.Direct Public Offerings - Issuers can sell securities directly to the investing public without an underwriter (rare).i.Alternative Ways to Go Public:i.Traditional Merger - A private company and its shareholders may gain some of the benefits of going public if the company merges with an operating public companyii.Reverse Merger - Reverse mergers allow a private company to become public without raising capital, which considerably simplifies the processiii.Special Purpose Acquisition Companies - In this method of going public, sponsors raise capital through the initial public offering of a shell company commonly known as special purpose acquisition company or SPAC (also referred to as a blank check company). A SPAC is a company with no operations. It offers securities for cash. The offering proceeds are placed into a trust or escrow account to be used for a future acquisition of an operating company.iv.Direct Listing with a securities exchange - Companies may go public through a direct listing of securities with the NYSE or Nasdaq, providing a liquid secondary market on an exchange. j.Multiple Underwritersi.An underwritten offering usually involves more than one underwriterii.By having a group of underwriters, issuers are able to benefit from multiple firms marketing their securities and sharing the risk of the offering’s successk.Managing Underwritersi.Each offering has a managing underwriterii.Particularly large or complex offerings may have co-managers

iii.Managing underwriters have a coordinating role and are responsible for determining each underwriter’s allocation and how much of the offering the underwriter will be responsible for l.The Underwriting Agreementi.Before an offering, issuers and underwriters typically enter into a nonbinding letter of intent that describes the basic contours of the offering and the terms of the underwriting relationshipii.Once finalized, this letter of intent will become a binding underwriting agreementiii.Underwriters also set terms with other underwriters on a given transactionm.Underwriter Compensationi.Firm Commitment Underwriters are compensated by buying the issued securities for less than the selling priceii.Best EffortsIn best efforts offerings, underwriters receive a portion of the sales proceeds as their commissionn.Capital Structure A common misconception is that an IPO involves a company selling its entire capital stock to the public.II.Registration Requirementsa.§ 5 of the Securities Acti.Unless an exemption exists, securities cannot be sold or delivered without there being a registration statement on file with the SECii.The registration statement must be effective before the saleiii.Securities cannot even be offereduntil there is a valid registration statement – Securities Act §5(c)iv.All written offers of sale must be in connection to a prospectus – Securities Act §5(b)v.The prospectus must comply with the content requirements of the Securities Act – Securities Act §10b.Forms S-1 and S-3:i.Issuers must disclose certain information in a registration statement filed with the SEC1.transaction-related information (e.g., the offering amount, use of proceeds, underwriters, etc.), 2.company information, AND 3.exhibits and undertakings.ii.Issuers must also provide a prospectus to investorsiii.Form S-1 - basically a registration statement for a company that is usually filed in connection with an initial public offering. Available to all issuersiv.Form S-3 - SEC Form S-3 is a regulatory filing that provides simplified reporting for issuers of registered securities.1.An S-3 filing is utilized when a company wishes to raise capital, usually as a secondary offering after an initial public offering has already occurred.

2.Available to issuers that have, among other situations, been a reporting company for one year, are current in their SEC filings, and have a public float over $75 million.c.Required Disclosures – SEC Regulations S-K & S-Xi.Regulation S-X prescribes the form and content of financial statements made in registration statements or other disclosuresii.S-Kprescribes the form and content of an issuer’s nonfinancial disclosuresiii.The regulations covers disclosures about: the issuer’s business, the issuer’s securities, certain financial information, and the issuer’s management (executive compensation and major shareholders)iv.In the case of registration statements, Regulation S-K also requires a prospectus summary and additional disclosure, including information about: how the proceeds from the offering will be used, how the offering price will be determined, who the sellers are, how the securities will be distributed, and what the underwriters’ compensation will beIII.Issuers:a.General Information:i.An issuer refers to a legal entity that sells and registers securitiesto fund its operations. The meaning of an issuer denotes an individual or a company that distributes something. An issuer is defined as an entity that gives debt securities in terms of sales to investors.ii.Issuers differ from investors in the following way; An issuer is any entity that sells and creates securities, whereas investors are individuals who purchase the securities. In this light, an investor is also known as a lender of funds.b.Types of Issuers:iii.Non-Reporting Issuersmall family-owned business in the U.S.1.This issuer not required to file reports pursuant to § 13 or § 15(d) of the Exchange Act.iv.Unseasoned IssuerAn example of an unseasoned issuer would be a newly public company that has recently completed an IPO, as they haven't yet established a long enough track record of financial stability and reporting to qualify as a "seasoned" issuer1.This issuer required to file reports pursuant to § 13 or § 15(d) of the Exchange Act, but it does not satisfy the requirements of Form S–3 or Form F–3 (for foreign issuers) for a primary offering of its securities.v.Seasoned IssuerCompany A has been publicly traded for over a year and has filed all required reports with the SEC. 1.This issuer eligible to use Form S–3 or Form F–3 (for foreign issuers) to register primary offerings of securities. Primary offerings include securities to be sold by the issuer or on its behalf, on behalf of its subsidiary, or on behalf of a person of which it is the subsidiary.

vi.Well-Known Seasoned Issuers (WKSI)(“wicksees”) defined in Rule 405. Principal requirements for WKSI status are:1.Issuer is eligible to register a primary offering of its securities on Form S–3 or Form F–3 (for foreign issuers); AND2.The issuer, as of a date within 60 days of the determination date, has either:a.a minimum $700 million of common equity worldwide market value held by non-affiliates (Non-affiliates must hold restricted securities for at least six months before selling them); ORb.in the registered offering in question will register only non-convertible securities, other than common equity, or will provide full and unconditional guarantees of a subsidiary’s securities provided that the issuer previously issued $1 billion aggregate principal amount of non-convertible securities in registered offerings during the past three years. If such an issuer is eligible to register primary offering under Form S–3 because it has a float ("float security" refers to the portion of a company's shares that are readily available for trading on the public market) of at least $75 million equity in the hands of non-affiliates (Non-affiliates must hold restricted securities for at least 6 months before selling them) at the determination date, issuer can issue common equity as WKSI.3.Issuers are disqualified from WKSI status if they are:a.not current in their Exchange Act filings or late in satisfying those obligations for the preceding twelve months;b.an ineligible issuer or asset-backed issuer; orc.an investment company or business development company.IV.The Pre-Filing Perioda.§5 of the Securities Act is most relevant in the pre-filing periodi.§5(a) prohibits all sales until the registration statement becomes effective. ii.§5(c) bans all offers prior to the filing of the registration statement. b.What is an Offer to Sell?i.Any statement that “conditions the public mind” that a security may be for sale is an offerii.Offers are defined by:1.the motivation of the communication;2.the type of information;3.the breadth and form of the communication; AND4.whether the underwriter was mentionedc.Written Communicationsi.The Securities Act is particularly focused on policing written communications of securities offers during the pre-filing periodii.Written communications include graphics, writings, broadcasts, and other memorialized statements

iii.Statements made in the pre-filing period touting the successes of a company about to issue securities may be an unlawful offer to sell securities (known as gun-jumping)d.Safe Harbors for Communicationi.Rule 168 of the Securities Act: 1.Allows mostExchange Act reporting issuers (and those working on their behalf, other than underwriters and participating dealers) to continue the regular release of “factual business information” and “forward-looking information.”2.How to use Rule 168:a.The issuer must have “previously released or disseminated” the same type of information in the “ordinary course of its business” and the information must be “materially consistent in timing, manner and form” with the issuer’s similar past releases or disseminations of such information.ii.Rule 169 of the Securities Act:1.Allows non-reporting issuers (i.e., most IPO issuers) to continue to disclose only “factual business information” no forward-looking information.2.How to use Rule 169:a.The issuer must have previously released or disseminated information of the same type in the ordinary course of business and in the same “timing, manner, and form.” b.Requires that the information must have been disseminated previously to “customers and suppliers, other than in their capacities as investors or potential investors in the issuer’s securities.”iii.Securities Act Rule 135:1.Issuers may write a press release announcing the offer without the announcement itself being an unlawful offer to sell2.A Rule 135 announcement:a.must state that an offering will only be made by prospectus ANDb.may contain no more than the issuer’s name, the title/amount/terms of the securities, the amount of securities to be offered, the anticipated timing of the offering, a brief statement of purpose, or information specific to certain rights/special offeringsiv.Securities Act Rule 433(e):1.Website information will be considered historical and not an offer to sell if it is labelled as such and on a part of the website dedicated to solely historical informationv.Securities Act Rule 163A1.Under the rule, issuer communications made more than 30 days before filing are not considered offers to sell, so long as:a.1) the communications don’t reference the securities offering; AND

b.2) the issuer takes steps to prevent the communication’s redistribution.2.This rule only protects issuers, not underwriterse.Emerging Growth Companies:vi.§2(a)(19) — emerging growth company is an issuer with total annual gross revenue of less than $1 billion during its most recent fiscal year.1.Advantages:a.1) Emerging growth companies only need to report 2 years of audited financial statements in the registration statement §7(a)(2), rather than Form S-1’s standard three years.b.2) The JOBS Act provides that emerging growth companies may submit registration statements to the SEC staff on a confidential basis.c.3) The JOBS Act establishes a new “test the waters” regime for emerging growth companies. Under §5(d) an emerging growth company and those acting on its behalf can communicate with either QIBs or institutions that are accredited investors at any time during the public offering process.d.4) The JOBS Act provides that an emerging growth company may choose to comply with any provision for which the JOBS Act would otherwise provide an exemption. Some issuers voluntarily provide 3 years of audited financial statements to bolster their credibility with investors.V.The Waiting Perioda.The waiting period is the time between the filing of the registration statement, and its effectivenessb.§8(a) of Securities Act:i.Registration becomes effective 20 days after the statement or any amendments were last filedii.The SEC can issue a stop order or refusal to prevent the statement’s effectiveness iii.Two separate tasks take place during this time:1.the issuer and the underwriters attempt to gauge market interest in the offering;2.the SEC may review the registration statement before declaring it effective c.During the Waiting Period, the gun-jumping rules continue to limit issuers and their affiliates in their efforts to sell the offering, in a less intrusive fashion.d.Comments and Amendmentsi.The SEC will typically comment on the registration statement and ask for changesii.§8(a) of the Securities Act Once the changes are satisfied, the issuer may request an expedited effectiveness instead of waiting the default 20 days, which the SEC may permite.Gauging Market Sentiment

i.During the Pre-Filing Period §5(c) leaves little room to gauge market sentiment. 1.§5(c) restricts all offers prior to the filing of the registration statement. ii.With the filing of the registration statement — §5(c) no longer applies.iii.§5(b)(1) steps in during the Waiting Period to prohibit the transmission, through interstate commerce, of any “prospectus” not meeting the requirements of the statutory prospectus as set forth in §10 of the Securities Act1.NOTE — §5(a) still prohibits sales during the waiting period. iv.§5(b)(1) prohibits the transmission of prospectuses not meeting the requirements of §10, but permits both preliminary and final prospectuses.v.§2(a)(10) generally defines a prospectus to include all “prospectuses” and also includes in any “notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security.vi.§5(b) prohibits communications if they do not comply with §10. vii.§10(b) authorizes a preliminary prospectus, that complies with §5(b)(1) in the Waiting Period. viii.§10(a) defines the final prospectus that must be distributed to investors in the Post-Effective Period. f.Underwriters:i.Once the registration statement is filed, the underwriters may begin sales effortsii.Sales efforts include the delivery of statutory and free-writing prospectuses, and oral communicationsiii.Underwriters may not actually sell or deliver securities until the registration statement becomes effectiveg.Gun-Jumping:i.Issuers can make statements and communicate with potential investors during the waiting period without risking an unlawful offer to sellii.Three Broad Goals: 1.the registration process focuses on two mandatory disclosure documents: a formal registration statement and a statutory prospectus. 2.the gun-jumping rules require the distribution of the statutory prospectus to both investors in the offering and other investors (for a specified period of time) 3.the gun-jumping rules restrict information about the offering if it is not part of the registration statement or the prospectus.h.Analysts:i.The gun-jumping rules restrict “offers” of securities. For non-public companies doing an IPO, the gun-jumping rules are only an inconvenience.ii.The SEC provides safe harbors for the publication or distribution of “research reports” under Rules 137, 138 and 139:

1.Rule 137 — Safe Harbor for Broker-Dealers Not Participating in the Offering:a.If Rule 137 applies, the broker-dealer issuing a research report on a security has not made an “offer” or “participated in an offering” within the definition of an “underwriter” under §2(a)(11).b.Does not exclude broker-dealers from the definition of “dealer” under §2(a)(12)i.Broker-dealers excluded from the definition of an underwriter under Rule 137 still cannot take advantage of §4(a)(1), which exempts transactions not involving any issuer, underwriter, or dealer.iii.The availability of §4(a)(3) exemption from §5 doesn’t flow automatically from the application of Rule 137iv.Dealers can rely on §4(a)(3) if two conditions apply:1.the dealer is not an underwriter; AND2.the publication or distribution of research doesn’t take place during the prospectus delivery requirement period, which is defined in §4(a)(3) in conjunction with Rule 174.v.Rule 137 only removes the dealer from the definition of an underwritervi.Rule 137 applies only to research reports that a broker-dealer publishes or distributes “in the regular course of business”.vii.Rule 138 divides securities into two groups:1.common stock and debt and preferred securities convertible into common stock; AND2.debt and preferred securities not convertible into common stockviii.Rule 139 is a more general safe harbor for participating broker-dealers publishing research reports on Exchange Act reporting issuers.1.If the requirements of Rule 139 are met, the research reports are deemed not to constitute an “offer for sale” or “offer to sell” for purposes of §2(a)(10) and §5(c).2.Rule 139 has two prongs:a.1) issuer-specific reports; ANDi.For issuer specific reports, only certain issuers qualify for a Rule 139 exemption from §2(a)(10) and §5(c): issuers must be eligible for Form S-3 or F-3 pursuant to the $75 million minimum public float or investment grade securities provisions of the Forms (Rule 139(a)(1)(i))b.2) industry reportsi.For industry reports, the SEC allows a broker-dealer to publish or disseminate research to a broader range of issuers. Eligible issuers include all reporting issuers. Rule 139(a)(2)(i)3.The broker-dealer may not devote any “materially greater space or prominence” to the issuer compared with any other securities or companies. Rule 139(a)(2)(iv)

i.Safe Harbors1.Oral Communications:a.§ 5(b)(1) allows oral offers, and this allows issuers to conduct roadshows. Issuers may also engage in testing-the-waters communications with certain institutional investors. 2.Statutory Prospectus under §10(b) - Rules 430 and 431a.issuers may solicit investor interest through a preliminary prospectus (also referred to as a red herring), which is a prospectus that satisfies § 10. Rule 430 provides that a preliminary prospectus must contain all the information that a final prospectus would, but the issuer may include an estimated offering price range instead of including the final offering price. 3.Tombstone & Safe Harbor Statements:a.Tombstone:i.A tombstone is a written advertisement of a public offering placed by investment bankerswho are underwritingthe issue. It gives basic details about the issue and lists each of the underwriting groups involved in the deal. The tombstone provides investors with some general information and directs the prospective investors to a link where they can obtain a prospectus.a.Rule 134i.Rule 134 allows issuers to issue notice announcements of their public offeringii.The communication cannot occur before the filing of the registration statementiii.Information is limited to identity and broad aspects of the business7. Free Writing Prospectusesa.Lastly, Rule 164allows issuers to communicate to potential investors through a free writing prospectus. Under Rule 164, a free writing prospectus that satisfies the requirements of Rule 433will be considered a prospectus under § 10, and therefore an acceptable written offer. In general, to satisfy Rule 433, the free writing prospectus must contain information which is not included in the registration statement but does not conflict with the registration statement. Issuers often use a free writing prospectus when they make changes to their IPO but their roadshow has already begun. VI.The Post-Effectiveness Perioda.After a registration statement is effective, underwriters may begin to sell and deliver securities to investorsb.A registration statement for a cash offering may become effective even without pricing – Securities Act Rule 430A

c.Securities Act §5(b)(2)i.Securities may not be delivered unless they are accompanied by a final prospectusd.Securities Act Rule 172i.If the prospectus is filed with the SEC, then a prospectus need not be provided with the security and §5(b)(2) of the Securities Act does not applyExempt OfferingsI.General Principala.§5 of the Securities Act requires that all offered securities be registered or exempt from registrationII.§4(a)(2) Offerings – Exempt Securitiesa.Exempt securities are certain securities that do not need to be registered prior to salei.Factors Relating to Whether Offering is Public1.the number of offerees2.the relationship of the offerees to each other and to the issuer3.the number of units offered4.the size of the offering5.the manner of the offering.III.Government Securitiesa.Securities Act §3(a)(2) Debt securities issued by the federal government and municipal securities issued by states and local governments do not need to be registeredb.Government issuers are unlikely to deceive investors and less likely to default on their debts, thus the same protections are not necessary IV.Bank Securitiesa.Securities Act §3(a)(2) & §3(a)(5) Securities issued by banks do not need to be registered because banking regulation is sufficient to protect investorsV.Insurancea.Securities Act §3(a)(8)Insurance policies and annuity contracts that can be sold for cash do not need to be registeredVI.Commercial Papersa.Securities Act §3(a)(3) Notes with maturities under 9 months are exempt securitiesVII.Exchange Securities

a.Securities Act §3(a)(9) If an issuer exchanges one set of securities for another with existing shareholders, the new securities are exemptb.Securities Act §3(a)(9) There can be no commission payments/fees, otherwise the securities need to be registeredi.Example: A company issues preferred shareholders two shares of common stock in exchange for their preferred stock VIII.Exempt Transactions:a.Exempt transactions occur when nonexempt securities are sold under circumstances that do not require registrationb.To constitute a private offering and thus be exempt from the registration requirements of the Securities Act of 1933, the offeree in a sale must be furnished with or have access to information about the issuer that a registration statement would have disclosed. - Doran v. Petroleum Management Corp.c.Businesses need to raise capital without going through the expense of registered transactionsIX.Resale of Securities Acquired Through Exempt Transactions:a.Securities that were purchased through an exempt transaction may only be resold if they are: i.registered; OR ii.are resold in another exempt transactionb.§4(a)(2) of the Securities Act Private Offerings/Private Placementsi.Securities Act §4(a)(2) Securities sold during private offerings are exempt from §5 of the Securities Act (registration requirements)c.Sophistication of Buyeri.The exemption from registration on private sale of stock depends on the objective sophistication of the investor, not on the arbitrary label given to that buyer by the seller – SEC v. Ralston Purina Co.X.Restricted Securitiesa.Restricted securities are those that are not freely tradeable and are often acquired during private offeringsb.Restricted securities include securities acquired either from the issuer, or a person who controls or is controlled by the issuer, in a transaction not involving a public offeringXI.Securities Act Rule 504a.Rule 504 of Regulation D provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $10,000,000 of their securities in any 12-month period. Except in limited circumstances, purchasers of securities offered pursuant to Rule 504 receive "restricted" securities, meaning that the securities cannot be sold for at least six months or a year without registering them.b.Companies that comply with the requirements of Rule 504 do not have to register their offering of securities with the SEC, but they must file what is known as a

"Form D" electronically with the SEC after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s promoters, executive officers and directors, and some details about the offering, but contains little other information about the company.XII.Securities Act Rule 506a.Transactions may be exempt if they are up to $5 million AND:i.(a) up to 35 unaccredited investors; OR ii.(b) contain unlimited accredited investors b.Rule 506 of Regulation D provides two distinct exemptions from registration for companies when they offer and sell securities. Companies relying on the Rule 506 exemptions can raise an unlimited amount of money.c.Under Rule 506(b), a “safe harbor” under § 4(a)(2) of the Securities Act, a company can be assured it is within the § 4(a)(2) exemption by satisfying certain requirements, including the following:i.The company cannot use general solicitation or advertising to market the securities.ii.The company may sell its securities to an unlimited number of "accredited investors" and up to 35 other purchasers. All non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.iii.Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. This means that any information a company provides to investors must be free from false or misleading statements. Similarly, a company should not exclude any information if the omission makes what is provided to investors false or misleading. Companies must give non-accredited investors disclosure documents that are generally the same as those used in Regulation A or registered offerings, including financial statements, which in some cases may need to be certified or audited by an accountant. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well.iv.The company must be available to answer questions by prospective purchasers.d.Under Rule 506(c), a company can broadly solicit and generally advertise the offering and still be deemed to be in compliance with the exemption’s requirements if:i.The investors in the offering are all accredited investors; andii.The company takes reasonable steps to verify that the investors are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like.iii.Purchasers of securities offered pursuant to Rule 506 receive "restricted" securities, meaning that the securities cannot be sold for at least six months or a year without registering them.

iv.Companies that comply with the requirements of Rule 506(b) or (c) do not have to register their offering of securities with the SEC, but they must file what is known as a "Form D" electronically with the SEC after they first sell their securities.XIII.Regulation D Offeringsa.Regulation D under the Securities Act provides a number of exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the offering with the SEC.b.Codification of Ralston Purinac.Accredited investors include certain financial institutions, trusts, and high-wealth individualsd.These sophisticated investors do not need the same protections that §5 of the Securities Act provides via registratione.Securities sold in Regulation D offerings are restricted as they generally cannot be freely resold for at least six months or a year without registering them.XIV.Integration of Offeringsa.When will offerings be integrated?

i.In Rule 152(a), the SEC sets forth the “general principle” for when integration does not occur:ii.If the safe harbors in paragraph (b)of this § do not apply, [I]n determining whether two or more offerings are to be treated as one for the purpose of registration or qualifying for an exemption from registration under the Act, offers and sales will not be integrated if, based on the particular facts and circumstances, the issuer can establish that each offering either complies with the registration requirements of the Act, or that an exemption from registration is available for the particular offering.b.Safe Harbors Under 152(b)i.Rule 152(b)(1) A safe harbor from integration exists if Offering 1 terminates or completes 30 days or more before Offering 2 begins. However, if Offering 1 allows general solicitation, the company must reasonably believe that either:1.the company did not solicit any investor in Offering 2 via the general solicitation used in Offering 1 or2.the company established a substantive relationship with each such investor prior to Offering 2ii.Rule 152(b)(2) A safe harbor from integration exists if offerings are made in compliance with the Rule 701 for employee benefits planOR Regulation S offshore offerings.iii.Rule 152(b)(3) A safe harbor from integration exists If Offering 1:1.did not permit general solicitation2.permitted general solicitation but was only made to qualified institutional buyers (hold 1M+ in securities) or institutional accredited investors or3.was terminated or completed 30 days or more prior to Offering 2iv.Rule 152(b)(4) A safe harbor from integration exists If Offering 1 terminates or completes before Offering 2 begins and permits general solicitation.c.Rule 152(c) & 152(d):i.Rule 152(c) provides that an offering of securities will be deemed to have commencedat the time the first offer of securities in the offering is made by either the issuer or its agents. ii.Rule 152(d) provides that an offering will be deemed terminatedor completedwhen an issuer and its agents cease effortsto make further offers to sell the issuer’s securities in such offering. d.Bad-Actor Disqualificationsi.Certain issuers may not use Regulation D exemptions because of prior behaviorii.Disqualifying behavior includes prior criminal convictions, regulatory enforcement orders, suspension or expulsion from a self-regulatory bodyXV.Regulation A Offerings

a.Unlike Registration D securities, securities sold under Regulation A are not restricted and may be resold immediatelyb.Regulation A offerings are subject to the same bad-actor disqualificationsSecondary Market TransactionsI.Private Placementsa.As above, those holding securities acquired through private offerings cannot resell their restricted securities on the open market II.Transaction:a.Two steps to show the interplay between §5 and §4(a)(1) exemption:i.1) determine the scope of the transaction;1.§5 applies to a transaction, as does the §4(a)(1) exemptionii.2) determine whether an issuer, underwriter, or dealer is participating in the transaction. 1.If an issuer or underwriter participates in the transaction, then the entire transaction loses the §4(a)(1) exemption and must comply with §5. b.Any subsequent resales by the initial investors who purchased from underwriters or participating dealers are considered separate transactions. Those initial investors can resell immediately using the §4(a)(1) exemption, which facilitates a public secondary market for the securities. c.§5 applies to any transaction without reference to any prior transaction.d.§ 4(a)(1) of the Securities Act:a.§4(a)(1) of the Securities Act exempts transactions by any person other than an issuer, underwriter, or dealer from §5i.In other words, a sale between private investors does not need to be registered, but a transaction involving an underwriter and a buyer will need to comply with §5 unless there is a separate exemptionIII.What is Considered an Underwriter?a.§2(a)(11) of the Securities Act:a.1) Any person who purchases a security from an issuer with a view to distribute the security; b.2) participates or has direct or indirect participation in the any such undertaking; ORc.3) participates or has a participation in the direct or indirect underwriting of any such undertaking is considered an underwriter b.§2(a)(12) of the Securities Act Dealers include brokers. c.Gilligan v. SEC:a.If underwriter buys stock with a "view to distribute," then they will be subject to registration laws/standards when selling that security

b.Holding a security for a shorter amount of time tends to be evidence of a "view to distribute"d.SEC v. Chinese Consolidated Benevolent Association:a.An underwriter is one who purchases securities from an issuer in order to facilitate further distribution of said security on the issuer’s behalfe.Time & the View To Distribute:i.The passage of time may indicate that the investor initially held with investment intent, but has now changed her mind. ii.Courts use a two-year holding period rule of thumb in determining whether the “securities have come to rest,” and therefore the initial purchaser did not initially purchase with a “view to” the securities resale. After a three-year holding period the presumption of investment intent becomes “conclusive.”IV.Secondary Transactions Involving Control Personsa.Generallyi.Control persons of issuers face greater regulation than other investors.ii.§15 of the Securities Act Control persons can be liable for the actions of those under their control. iii.Control persons are those who have the ability to direct an issuer or those with the authority to collect signatures required on a registration statement. iv.Control persons are not generally considered issuers for §4(a)(1) purposes, only §12(a)(11)b.Control Persons as Underwritersi.United States v. Wolfson:1.If a control person serves as an underwriter (i.e. acting with a view to distribute the securities), then it cannot use a §4(1) exemption2.Control persons seeking to resell their securities will typically need to register securities3.§4(a)(4) brokers’ exemption does not apply to control persons; they must find their own exemptions. ii.If the intermediary assisting the control person in their distribution of securities is not an underwriter, and no other underwriter for the control person is present, then the control person can rely on § 4(a)(1). iii.Whenever a control person resells securities, there must be two separate analyses completed:1.Determine whether the control person is acting as an underwriter for the issuer. (§4(a)(1) is not available if the control person is found to be an underwriter)2.Second inquiry is required for control persons even when the control person is not an underwriter:a.Whether a third party is acting as an underwriter for the control person which can happen in two ways:i.An intermediary may assist the control person in the resale; OR

ii.An investor may purchase from the control person, then the investor may resell the securities to another investor. V.§4(a)(1 ½) Exemption:a.The §4(a)(1 ½) exemption is an interpretation of the §4(a)(1) exemption with its emphasis on the definition of an underwriter informed by §4(a)(2)’s distinction between public and private offerings. b.If the control person is selling to an investor with the ability to fend for himself, there is no “distribution” within the meaning of §2(a)(11), and therefore no “underwriter” in the control person’s transaction. a.The §4(a)(1) exemption would be available to the control person to sell the security. VI.Securities Act Rule 144a.Rule 144 provides control persons a safe harbor to not being considered underwritersb.Rule 144’s application varies based on two factors:a.1) the presence of an “affiliate”; ANDb.2) the presence of “restricted” or “unrestricted” securities.c.The basic requirements of Rule 144 fall into two categories:a.1) Rule 144(c) Current Public Informationb.2) Rule 144(d) Holding Period for Restricted Securitiesd.Rule 144 defines two types of scenarios that may be exempt from underwriter status, and able to engage in §4(a)(1) sales: i.non-affiliates selling restricted securities (defined as a security “acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering,” or acquired in a transaction in which § 502(d) applies (e.g., Rule 504 or Rule 506 offerings; AND ii.affiliates selling restricted and non-restricted securitiese.Rule 144 exceptions require: i.(1) the presence of adequate public information;ii.(2) a holding period; AND iii.(3) consideration of the impact the resale may have on the marketplacef.Affiliatesiv.Rule 144(a)(1) defines affiliates as any person that is directly or indirectly controlling or controlled by an issuerg.Holding Periodi.Rule 144(d) imposes a holding period for restricted securities:1.Holding period runs from the later of the acquisition of the securities from:a.1) the issuer; ORb.2) an affiliate of the issuerii.Depending on the type of issuer, type of security, and affiliate status, a potential seller must demonstrate that they held the security for a satisfactory period before sale

Chart 0 to less than 6 months6 months to less than 1 year1 year or moreNon-Affiliate and Reporting IssuerNo resalesResales allowed, but information requirement appliesNo restrictions on resaleNon-Affiliate and Non-Reporting IssuerNo resalesNo resalesNo restrictions on resaleAffiliates and Reporting IssuerNo resales of restricted securities Resale of unrestricted securities allowed, but must comply with 144 requirementsResales allowed, but must comply with all 144 requirementsResales allowed, but must comply with all 144 requirementsAffiliates and Non-Reporting IssuerNo resales of restricted securities Resale of unrestricted securities allowed, but must comply with 144 requirementsNo resales of restricted securities Resale of unrestricted securities allowed, but must comply with 144 requirementsResales allowed, but must comply with all 144 requirementsVII.Information Requirementa.The application of the information requirement of Rule 144 turns on whether an affiliate or non-affiliate seeks the exemption from §5 for the resale. b.There must be adequate public information about the issuer of the security that is to be sold for Rule 144 safe harbor to apply. c.The information requirement hinges on: i.(a) the type of issuer; ii.(b) the type of security; AND iii.(c) the holding period d.Rule 144(c)(1) Information is deemed publicly available to investors if: i.(1) the company qualified as a public company under the Exchange Act for at least 90 days preceding the sale; ANDii.(2) the company has filed all mandatory disclosures for the past 12 monthse.Non-reporting companies broker-dealers must provide sufficient information for it to be considered publicly available f.Non-affiliates selling non-public company securities have no information requirement

g.Affiliates selling non-restricted and restricted securities have an information requirementi.Rule 144(e) restricts the amount of affiliate resales of restricted and unrestricted securities that may occur in a 3 month period. ii.Rule 144(e)(1) provides that the limit is the greatest of:1.1% of the outstanding shares or units of the same class of securities2.Average weekly reported trading volume of the same class of securities during the 4 calendar weeks preceding the filing of notice of the sale with the SEC; OR3.For debt securities 10% of the principal amount of the debt tranche. iii.Rule 144(f) limits the means by which an affiliate can resell equity securities into the secondary market.h.Form 144 is required to be filed with the SEC when an affiliate resells/sells a security. Civil Liability Under Federal Securities LawI.General Principala.While Rule 10b-5 gives investors a cause of action for secondary market transactions, §§11 and 12(a)(1) and 12(a)(2) of the Securities Act supplement 10b-5 by providing two separate avenues for civil action II.§ 11 Liabilitya.§11 of the Securities Act provides investors with a cause of action for material misstatements made in a company’s registration statement during a public offeringb.§11 liability requires:

i.(1) standing; AND ii.(2) proof there was a material misstatement or omission in the registration statementc.Standing:i.Only persons who acquired securities during the public offering may sue under §11ii.Investors who purchase securities directly from the underwriters in the public offering connected to the misstated registration document will meet this “tracing requirement”d.Timing and Statute of Limitationi.§13 of the Securities Act πs must bring the §11 action within 1 year after discovery of the untrue statement or omission, or after such a discovery should have been made with reasonable diligenceii.No action can be brought more than 3 years after the security was publicly offered - §13 of the Securities Acte.∆si.Possible ∆s for §11 liability include: 1.Those that signed the registration statement (§11(a)(1));2.company directors (§11(a)(2),(3))3.experts that verified or certified the registration statement (§11(a)(4);4.underwriters (§11(a)(5); AND5.controlling persons of any of the aforementioned individuals (§15)f.Expertsi.§11(a)(4) of the Securities Act Experts are only liable for parts of the registration statement that they certifyg.Control Personsi.§15 of the Securities Act Control persons are jointly and severally liable for the misstatements of those they control - §15 of the Securities Acth.Proving the Casei.A π that has standing simply needs to prove there was a material misstatement or omissionii.§11 imposes strict liabilityiii.A π need not have read the registration statementi.Damages & Recoveryi.Recovery is limited to the offering price of the securityii.To plead a cognizable injury under § 11 of the Securities Act of 1933, a π must plead a decline in value and not an actual out-of-pocket loss.1.In other words, investors who purchase the fraudulent security at a higher price on the secondary market do not have an avenue to recover under §11iii.Damages Formula §11(e) of the Securities Act1.§11 damages equal the difference between:

a.(1) the amount paid for the security (not to exceed the offering price); ANDb.(2) either (a) the value of the security at the time of suit; (b) the price the security would have been sold for on the market before suit; OR (c) the price the security would sell for after suit, but before judgmentiv.Indemnification, Contribution and Joint and Several Liability:1.§11 starts with the presumption that all ∆s are jointly and severally liable for § 11 damages, with two statutory exceptions:a.§11(e) limits the liability of underwriters to “the total price at which the securities underwritten by him and distributed to the public were offered to the public.” b.§11(f)(2)(A) limits the liability of outside directors to their proportionate liability based on their degree of wrongdoing relative to that of other ∆s.2.Outside of the statutory modifications to joint and several liability, parties may attempt to adjust their relative exposure to liability through both contract as well as implied contribution rights under § 11. 3.Underwriters of public offerings do not have a right to indemnification under the Securities Acts of 1933 and 1934.j.Defensesi.General Defenses1.§ 11(b)(1) A ∆ who resigns and notifies the SEC of that action has a defense2.∆s may try to show actual knowledge on the part of πs of the alleged fraud in the registration statement at the time the πs purchased their securities § 11(a).3.Typically, employed after the issuer (or other party) makes a public announcement detailing and correcting the fraud. After such an announcement, ∆s may argue the entire market “knew” of the fraud, thereby foreclosing subsequent § 11 liability. Alternatively, one could argue that once the correcting information is in the “total mix” of information in the market, the prior fraud is no longer material.4.The issuer of a security may only be liable under § 11 of the Securities Act of 1933 for an untrue statement of opinion if the issuer does not honestly hold the opinion or if the opinion contains an omission that is misleading to a reasonable investor. – Omnicareii.Control Persons1.Not liable if they had no knowledge or reasonable ground to believe the misstated factsiii.Due Diligence Defense - §11(b)(3)1.A successful due diligence defense hinges on:

a.(1) whether the ∆ was expert or non-expert; ANDb.(2) whether the omission or misstatement is in an expertised or non-expertised section of the registration statement2.Generally, ∆ asserting due diligence defense must show that: a.(1) after reasonable investigation; b.(2) they had reasonable ground to believe and did believe; c.(3) that the statements were true and that there was no omission3.An underwriter may rely only upon an accountant’s audit in asserting a due diligence defense, not a comfort letter – WorldComiv.Experts1.Experts are not liable for misstatements in non-expertised sections of the registration statement2.Experts are liable for misstatements in the expertised sections and must prove all the elements above for a valid defensev.Non-Experts1.Among the class of non-experts are top executive officers of the issuer, underwriters, outside directors of the issuer with some specific role in the offering (such as an attorney-director or underwriter-director), and outside directors with no other role.2.For expertised sections, non-experts must only prove the second and third elements of the above defense3.For non-expertised sections, non-experts must also prove the reasonable investigation requirementvi.Actual Knowledge1.Lacking actual knowledge of fraud may be a defense – WorldComvii.Loss Causation Defense1.A ∆ may show that the material misstatement or omission was not the sole cause of price inflation/deflation2.If successful, the ∆ may limit the recoverable amount to that which was affected by the misstatementIII.§ 12(a)(1) Liabilitya.Generally:i.§12(a)(1) is not an antifraud provisionii.§12(a)(1) liability does not require misstatements or omissionsiii.Purpose of §12(a)(1) is to guard against circumvention of the rules of the registration process. iv.The purpose of §12(a)(1) is to provide a cause of action to hold companies to §5 gun-jumping requirementsb.Standing and ∆s

i.Any person who purchases a security in an offering where there is an alleged §5 violation has standingii.One with standing may bring suit against any statutory seller who sells or offers a security in violation of §5 of the Securities Actc.Statutory Selleri.Pinter v. Dahl A statutory seller is those who pass title of the security to the buyer or those that solicit offers to buy a securityd.Elements of the Cause of Action:i.πs only need to show a §5 violation involving a security that they purchased.ii.The π doesn’t need to prove scienter (or even negligence), causation, reliance or damages. iii.πs who show a §5 violation are entitled to recission (getting their money back in exchange for the securities).iv.πs who sold the securities may seek damages. e.Remediesi.If successful, a π may return their securities to the issuer for the sale priceii.If the π has already sold the securities, they may recover the price paid minus the sale pricef.Defenses:i.In Pari Delicto Defenseii.Recognizes the common-law principle that a π's participation in the wrongdoing may bar the π's recovery. iii.Available if:1.as a result of the π's own actions, the π is at least substantially equally responsible for the violations claimed in the π's suit, AND2.precluding the π from recovering would not significantly interfere with the ability to effectively enforce securities laws and protect investors. g.No Financial Benefit Defense:i.An individual who encourages others to invest in a corporation without receiving a financial benefit is not a seller pursuant to § 12(1) of the Securities Act.h.Exemptionsi.If the ∆ can show the offering was exempt, then there is no §12(a)(1) liabilityi.Waitingi.If the ∆ shows that it “cured” the violation by halting the offering, then it is free from liabilityIV.§ 12(a)(2) Liabilitya.Generally:i.§12(a)(2) focuses on material misstatements or omissions that relate to the offer or sale of securities by means of prospectus or oral communicationii.Purpose of §12(a)(2) is to provide an analogous civil antifraud provision for the public offering prospectus and statements relating to that prospectus. b.Standing and ∆si.Anyone who purchases a security (on the primary market) based on the misstated communication may bring suit

ii.∆s include any statutory selleriii.Rule 159A unlike 12(a)(1), πs under 12(a)(2) may sue the issuer if they purchased securities from an underwriter, directlyc.Proving the Casei.πs must show that there was fraud in the prospectus or in oral communications linked to the prospectusd.Remediesi.Successful πs may recover the purchase price for the securities minus any adjustmentse.Defensesi.Loss Causation1.∆s under 12(a)(2) can show that the misstatement in the prospectus was not the cause or sole cause of the price disparityii.Reasonable Care1.A ∆ may assert a reasonable care defense by showing that the ∆ did not know, nor could have reasonably known of the untruth or omissioniii.π’s Knowledge1.To avoid liability, ∆s may attempt to demonstrate that the πs in fact knew about the untruth or omission in the prospectus.