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This document summarizes key aspects of securities offering regulations, including:
1) It outlines 4 categories of issuers (WKSI, seasoned issuer, unseasoned issuer, non-reporting company) and their differing disclosure requirements. WKSI issuers have the most favorable disclosure standards.
2) It describes regulations around the pre-filing, waiting and post-effective periods for securities offerings. Key points include restrictions on communications during the pre-filing period, required disclosures and solicitation rules in the waiting period, and prospectus delivery requirements in the post-effective period.
3) It explains rules around free writing prospectuses, shelf registration statements, and how certain communications like confirmations are exempted
This document summarizes key aspects of securities offering regulations, including:
1) It outlines 4 categories of issuers (WKSI, seasoned issuer, unseasoned issuer, non-reporting company) and their differing disclosure requirements. WKSI issuers have the most favorable disclosure standards.
2) It describes regulations around the pre-filing, waiting and post-effective periods for securities offerings. Key points include restrictions on communications during the pre-filing period, required disclosures and solicitation rules in the waiting period, and prospectus delivery requirements in the post-effective period.
3) It explains rules around free writing prospectuses, shelf registration statements, and how certain communications like confirmations are exempted
This document summarizes key aspects of securities offering regulations, including:
1) It outlines 4 categories of issuers (WKSI, seasoned issuer, unseasoned issuer, non-reporting company) and their differing disclosure requirements. WKSI issuers have the most favorable disclosure standards.
2) It describes regulations around the pre-filing, waiting and post-effective periods for securities offerings. Key points include restrictions on communications during the pre-filing period, required disclosures and solicitation rules in the waiting period, and prospectus delivery requirements in the post-effective period.
3) It explains rules around free writing prospectuses, shelf registration statements, and how certain communications like confirmations are exempted
o WKSI (well-known seasoned issuer)- Rule 4!- "ost fa#orable category you could be in$ %o be a WKSI, "ust "eet registrant re&uire"ents of 'eneral Instructions I$( of )or" S-*$ + Is an e,c-ange act re.orting co".any, files /-k, /0, and 1k$ (* ways to beco"e e,c-ange act re.orting co".any: /) /2a- listed on a nat3l e,c-ange (45S6, (768, 4(S9(0) 2) /2g- total assets e,ceeding :/ "illion and a class of e&uity security -eld by ! or "ore -olders *) /!d- file effecti#e registration state"ent under ** (ct$ ) (49: (() -as a worldwide "arket #alue of its outstanding #oting and non-#oting co""on e&uity -eld by non-affiliates of :; "illion or "ore OR (<) (/) -as issued at least :/ billion in non-con#ertible (i$e$ not con#ertible into e&uity) securities ot-er t-an co""on e&uity, in .ri"ary offering for cas-, not e,c-ange, registered under t-e act= and (2) will register only non-con#ertible securities> unless>t-e issuer also is eligible to register a .ri"ary offering of its securities relying on 'eneral Instructions /$<$/ of )or" S-* o Seasoned Issuer - )or" S-* eligible$ %wo re&uire"ents for eligibility: /) be a re.orting co".any 2) transactional re&uire"ent- 2 ways, :;! "illion dollars in co""on e&uity (general instructions /$<$/) or in#est"ent grade non-con#ertible debt$ )or" S-* is nice because you can ?ust incor.orate ot-er S6@ filings by reference, don3t -a#e to redo t-e"$ See Rule /;A$ %-is also "akes a director3s due diligence defense re&uire"ents under B// easier to "eet, bc if "aterial "isstate"ent is in docu"ent incor. by reference .re.ared before you were on board, you couldn3t be res.onsible for it$ <eco"es closer to a reasonable care defense under /2a2$ See Rule /;4 o Cnseasoned Issuer - see slide, went by too fast$ o 4on-re.orting co".any - e#erybody else$ /$ Dre-)iling Deriod a$ @an3t offer to sell or offer to buy$ b$ Dro-ibitions a..ly to underwriters, issuers, and dealers$ c$ EEERules /*!, /A1, /AF, /A*, /A*( create e,ce.tions, last * being t-e "ost i".ortant deregulations$ i$ /*!- Issuer can gi#e notice it intends to "ake an offering$ d$ W-en does .re-filingGHin-registrationH .eriod beginI 4ot a lot of guidance$ S6@ -as said Jat least fro" t-e ti"e t-e issuer -as reac-ed an understanding wit- t-e <9 w-ic- is to act as "anaging underwriter$H e$ Rule 163A- deregulation of .re-filing .eriod for non-WKSIs$ (s long as co""unication "ore t-an 30 days .rior to filing and doesn3t reference a securities offering, you3re ok as long as you take reasonable ste.s to .re#ent furt-er distribution or .ublication during * days before filing$ (WKSIs have rule 163, t-ey are fine e#en wGin * day .eriod for Jfree writing .ros.ectusH$) f$ Rule /A1- can release factual business infor"ation OR forward-looking infor"ation$ g$ Rule 169- safe--arbor for non-re.orting co".anies for factual infor"ation (additional restrictions t-an Rule /A1 on use of factual infor"ation) i$ 7ust be: /) factual 2) ai"ed at non-in#estors *) (#ery) consistent wit- .rior releases$ 2. Waiting Period a$ <asic Dro-ibition: )or CI9s to trans"it a J.ros.ectusH wit- res.ect to w-ic- a registration state"ent -as been filed unless it contains certain infor"ation, B!(b), i$ 4ote: 4o .ro-ibition on oral co""unications b$ W-at is a Dros.ectusI <road definition of infor"ation if co""unicated in writing or by radio or tele#ision, B2(/)$ i$ 9oes not include to"bstone ads, B2(/)(b) ii$ 9oes not include so"e additional basic infor"ation about antici.ated offering, Rule /*4 iii$ 9oes not include factual infor"ation and so"e Jforward- looking infor"ationH Rules /A1 K /AF i#$ <road deregulation of waiting .eriod by allowing t-e use of Jfree-writing .ros.ectuses$H @onditions de.end on issuer status, Rules 4!, 4**, /A4$ #$ Re&uired Infor"ation for JDreli"inaryH Dros.ectus (/b, Rule 4*): (ny infor"ation in registration state"ent e,ce.t /$ 9ocu"ents referred to in (21) to (*2) of Sc-edule (, B/(a) (/) 2$ Drice and fee related infor"ation c$ Rule /!c2-1 of *4 act- "ust deli#er .ros.ectus during waiting .eriod to anyone w-o re&uests it$ (** act only says I) you deli#er a .ros.ectus during waiting .eriod, "ust be a B/ .ros.ectus$) i$ Reasonable ste.s to deli#er to CI9s antici.ated to be in#ol#ed in distribution, Rule 4A (failure will lead to denial of acceleration) d$ Rule /*4d - used co""only in waiting .eriod to guage interestGsolicit offers to buy$ @o""unication t-at includes or is .receded by a B/ .ros.ectus (but not a )WD), usually a .reli" .ros., can solicit an offer to buy$ 7ust include /*4d boiler.late (no sale of fir" co""it"ent during waiting .eriod$) 3. Post-Effetive Period a$ Section !b- affir"ati#e deli#ery re&uire"ent to include /a .ros.ectus wit- deli#ery of security in effecti#e .eriod$ b$ Dros.ectuses "ust be B/ .ros.ectuses (i$e$ !b/ still a..lies)$ c$ Once you -a#e sent out a /a .ros.ectus, no longer -a#e to worry about !b/ for any co""unication after t-at$ d$ Rule /;4 (look at in con?unction wit- B4(*)), allows us to co"e u. wit- a fra"ework for understanding w-en a /a .ros. really -as to acco".any deli#ery of security$ i$ /;4b- don3t -a#e to deli#er .ros. wG security if you are a *4 act re.orting co".any (* ways to beco"e t-is) .rior to filing, e,e".t fro" !b2 re&uire"ents$ ii$ /;4d- if not a *4 re.orting co".any, but as of offering date you are listed on a national e,c-ange (45S6, 4(S9(0, (768) "ust deli#er /a .ros. for 25 days fro" initial offering date$ iii$ /;4f- none of t-ese e,e".tions a..ly if brokerGdealer is still acting as underwriter$ e$ Section 4(*)- 4 day and F day .eriods w-ere dealers -a#e to send /a .ros.$ f$ W-en do deli#ery re&uire"ents of !b2 endI i$ 4e#er a..ly to unsolicited brokers3 transactions, B4(4) ii$ )or non-reporting co".anies: /$ )or sales by JdealersH of stock not listed on e,c-ange or 4(S9(0IIII 2$ Cnsold allot"ents by dealers - re&uire"ents ne#er end, B4(*)(c) *$ )or sold allot"ents by JdealersH: /) 4 days fro" effecti#e date for co".anies w-ose securities -a#e been sold .ursuant to .rior registration state"ent, B4(*)= 2) $ F days fro" effecti#e date for ot-ers, B4(*) 4$ )or sales by JdealersH of stock listed on e,c-ange or 4(S9(0 - 2! days fro" t-e offering date, Rule /;4(d) iii$ )or reporting co".anies - for sales by JdealersH after filing of registration state"ent, Rule /;4(b) i#$ Rule /;4(-): (ny obligation .ursuant to Section 4(*) of t-e (ct and t-is section to deli#er a .ros.ectus $ $ $ "ay be satisfied by co".liance wit- t-e .ro#isions of Rule /;2 g$ B4(4)- e,e".tion fro" B! for Jbroker3s transactions e,ecuted u.on custo"ers3 orders>but not t-e solicitation of suc- orders$H -$ In re Haupt -W-at if not solicited but broker acting &ua underwriter (i$e$ in t-e .rocess of selling an unsold allot"ent)I @ase says you are 4O% e,e".t fro" B! re&uire"ents, no 4(4) e,e".tion$ i$ Rule /;2 : i$ /;2b- any obligation under !b2 (deli#eryG/a re&uire"ent) is satisfied if /;2c conditions "et$ (So /;2 is about satisfying t-e !b2 re&uire"ents, not about being e,e".t fro" t-e" like decision tree abo#e$) Daragra.- c conditions, all we need to know is /;2c*- "ust file /a wit- t-e S6@Hdeli#ery e&uals accessH$ Lery .owerful$ ii$ we need to know /;2 and not worry about /!*$ (t-ey o#erla. a lot$) iii$ Rule /;2(b)- regulatory relief fro" !b2 if .aragra.- c conditions "et (/a filed wit- S6@)$ (ccess + deli#ery$ i#$ Rule /;2(a)- regulatory relief fro" !b/ re&uire"ent (i$e$ .ros.ectus don3t -a#e to be B/ .ros.ectuses) for confir"ations$ #$ !b/ tooM )ree Writing: Once J.ros.ectusH deli#ered, no restrictions on co""unication, B2(/)(a) .ro-ibition on !(b)(/) lifts ?$ !b2 is really a re&uire"ent on t-e <G9 bc t-ey are t-e ones actually causing t-e security to be deli#ered to t-e .urc-aser$ 4$ J)ree Writing Dros.ectusH )WD - 9efinition of )WD (defined in Rule 4!)- written co""unication, after reg state!ent filed (or before for a WKSI), t-at "##ERS to sell or S"$I%I&S an offer to 'u( seurit($ So"et-ing sent out to solicit in#estor interest after reg state"ent filed, often contains info not in reg state"ent$ a$ Written co""unication defined broadly in 4! to include electronic co""unications$ b$ (lt-oug- e,e".t fro" !b/, )WD is considered .ublic, w-ic- e,.oses you to 12a2 liability$ c$ ( confir"ation for sale would be considered a 2(/) .ros.ectus but not a )WD$ d$ 9ifferent treat"ent of WKSIGS-* co".anies #$ Cnseasoned and non- re.orting$ $atter !ust inlude )1* +ros+etus ,ith #WP. e$ /a, .reli"inary (4/), and rule 4*/ are e,cluded fro" definition of )WD$ f$ )RW includes Jgra.-ic co""unicationH- w-ic- "eans al"ost e#ery for" of electronic co""unication (e#en audio ta.es, cd-ro", etc$) g$ Rule -33 - i".ortant as.ect of t-is rule is (a)- says t-at if it3s a )WD and you "eet conditions of Rule 4**, a )WD is considered a /b .ros.ectus, ensuring co".liance wit- !b/$ It will also be dee"ed to be a .ublic .ros.ectus (in#oking /2a2 liability under 'ustafson$) i$ @onditions to use of 4**- /$ WKSI and S-* co".anies: 4**b/- all you need to do is file a B/ .ros.ectus wit- S6@$ i$e$ once you file a .reli" .ros.ectus wit- S6@ along wit- your reg state"ent, you can use a )WD in waiting .eriod offering$ 2$ 4on-re.orting and unseasoned re.orting co".anies: 4**b2- -a#e to not only file .reli" .ros.ectus wit- S6@ wit- reg state"ent, and "ust include t-is .reli" .ros.ectus along wit- any )WD sent out$ It3s sufficient to include a -y.erlink to .reli" .ros.ectus$ -$ Oral co""unications not a .ros.ectus under 2(/) !$ S-elf Registration a$ Rule 4/! lists securities offerings eligible for s-elf registration (a/(i)N a/(,))$ b$ Oi"itations on S-elf Registrations: a2-a! c$ auto"atic s-elf registration- a#ailable to WKSIs$ Reg state"ent beco"es effecti#e i""ediate u.on filing$ %-us, WKSIs can kee. a .eriodically u.dated reg state"ent (w-ic- doesn3t -a#e to contain detailed info about offering) and "ake offerings w-ene#er t-ey want$ A$ C.dating and ("ending Reg State"ent a$ %-e &uestion w-en so"et-ing c-anges to "ake your reg state"ent "isleading or inaccurate (e$g$ 7anor 4ursing) is: s-ould you a"end t-e .ros.ectus, or do you need to also file an a"end"ent to t-e registration state"entI If t-e reg state"ent contained a "aterial "isstate"ent w-en it beca"e effecti#e, you can be sued under B//$ So if you ?ust a"end t-e .ros.ectus and t-ere is still a "istake, you are only liable for t-e .ros.ectus (i$e$ no sec // liability), but if you a"end t-e reg state"ent, it beco"es effecti#e as of a"end"ent and if t-ere is still anyt-ing inaccurate in it you -a#e B// liability$ (and e#en t-oug- inaccurate now, no liability if accurate at effecti#e date$) b$ W-y would you want to a"end t-e .ros.ectus e#en if you don3t want to a"end t-e reg state"ent, w-at .rotections does t-at createI <c you don3t want to face /2a2 liability$ c$ In no action letters and guidance, S6@ -as said w-en you -a#e to a"end reg state"ent: 7aterial c-ange$ JOnly a for" of .ros.ectus t-at contains substanti#e c-anges fro" or additions to a .ros.ectus .re#iously filed wit- t-e @o""ission (see slide)H re&uires an a"end"ent to reg state"ent$ i$e$ if you are c-angingGsubstituting so"et-ing in reg state"ent rat-er t-an ?ust adding to it$ 7urky test$ d$ Ite" !/2(a) of Reg S-K : tells us w-en we -a#e an obligation to a"end registration state"ent (w-en it3s a s-elf registration$) i$ (ii) only -a#e to a"end reg state"ent for Jfunda"ental c-angesH fro" reg state"ent, or (iii) J"aterialH c-anges relating to .lan of distribution$ Liability /$ Setion 11 -(a) liability only a..lies to material "isstate"ents after t-e registration statement beco"es effecti#e$ i$ 6le"ents: /$ 6ligible : any .erson w-o ac&uires securities registered under t-e ** (ct= no reliance re&uire"ent$ (llows class action suits$ <C% -a#e traing re.uire!ent: -a#e to .ro#e your securities were issued .ursuant to t-e defecti#e RS$ 2$ Droscribed (cti#ity: a$ 7aterial b$ 7isstate"ents or o"issions in RS c$ <y .arties enu"erated in B //(a)$ %-ese include: i$ 6#ery .erson w-o signed t-e RS: B A(a) re&uires t-e issuer, .rinci.al e,ec officers, @)O, "a?ority of t-e <oard$ %-is .ro#ision swee.s t-e issuer in for liability because t-ey will always be a signatory of t-e RS$ ii$ 9irectors of t-e issuer iii$ Dersons w-o are na"ed as being or about to beco"e a director i#$ 6,.erts like accountants w-o .re.are .art of t-e RS #$ Cnderwriters #i$ Note: B /!: @ontrol .ersons -a#e B // liability unless t-ey -ad no knowledge or reasonable grounds to belie#e t-e facts on w-ic- t-e liability is .re"ised$ #ii$ %-is is an e,clusi#e list= t-ere is no aiding and abetting liability under B //= lawyers only liable if t-ey certify an e,.ertiPed .ortion, w-ic- t-ey do -a#e to do to say t-at t-e s-ares are .ro.erly issued under t-e cor.orate law of t-e state, but t-is al"ost ne#er gi#es rise to B // liability$ *$ State of "ind : Strict liability for issuer= due diligence defenses for ot-ers under B //(b) 4$ 4e,us to in?ury : affir"ati#e defense a#ailable if knew of t-e "isstate"ents or o"issions in RS for bot- issuer and ot-er 3s$ !$ 7easure of da"ages : ca..ed rescission wit- ot-er cost defense ii$ 9ue diligence defenses under B //(b) /$ Issuer -as no 99 defense 2$ If not t-e issuer, look to t-e following c-art$ If t-e error is in: E/+ert0s lia'ilit( 1on-e/+ert0s lia'ilit( E/+erti2ed +ortion (b)(*)(<) reasonable in#estigation (49 reasonable grounds to belie#e (49 did belie#e (e$g$ fraud after t-e e,.ert finis-es t-e work) (b)(*)(@) reasonable ground to belie#e and did belie#e= no in#estigation re&uire"ent= donQt -a#e to c-eck t-e work but if you gi#e accountant wrong RQs, you are liable 1on-e/+erti2ed +ortion no liability (a)(4) (b)(*)(() reasonable in#estigation (49 reasonable grounds to belie#e (49 did belie#e: Sdue diligenceS *$ BarChris: One of t-e only cases to talk about 99 wit- error in RS$ (do.ted two "ain .oints a$ Cnderwriters are in an adversarial +osition #is-T-#is t-e issuer= C3s -a#e res.onsibility to be ske.tical of t-e info .ro#ided to t-e" and a "eaningful duty of reasonable in#estigation to #erify t-is infor"ation$ b$ 7anage"ent #$ non-"anage"ent: i$ Outside directors: easier std of reasonable in#estigation for outside directors t-an inside directors$ ii$ Skill set: take into account skill set and .rior knowledge in deter"ining if satisfied reasonable in#estigation, etc re&uire"ents$ iii$ %-is results in a sliding sale of lia'ilit($ 4$ Rule 136 essentially codified ar !"ris$ It enu"erates factors to look at for w-at counts as Jreasonable in#estigationH and Jreasonable beliefH as in B //(c) for .arties ot-er t-an t-e issuer$ %-ey are: a$ %y.e of issuer, %y.e of security, %y.e of .erson, Office -eld b$ If a director, t-e .resence or absence of ot-er relations-i. wit- issuer (outside #$ inside) c$ Reasonable reliance on ot-ers w-ose duties s-ould -a#e gi#en t-e" knowledge of t-e .articular facts d$ %y.e of underwriting, a#ailability of info about I to C i$ S-elf registration C3s -a#e less ti"e to #erify all t-e info$ e$ If t-e info ca"e fro" a docu"ent incor.orated by reference, w-et-er t-e docu"ent was .re.ared by t-e $ i$ C "ig-t not -a#e -ad a role in .re.aring t-e *4 act docu"ents and t-e liability regi"e under B /1 of t-e *4 act re&uires 3s to -a#e relied on t-e info, and t-us, gi#es rise to far less liability, so .re.arers are less careful$ iii$ @ausation: #kerman, .$ 4F!, 2d$ @ir$ /$ B //(e), w-ic- says t-e burden of .roof is on to .ro#e t-at any .rice decline was t-e result of factors ot-er t-an t-e "aterial "isstate"ent 2$ 4onet-eless, t-is case -eld t-at any .rice decline .rior to disclosure to t-e .ublic t-at t-ere was an error is not reco#erable$ <urden of .roof on to establis- t-at any .rice decline .rior to t-e disclosure is due to t-e "isstate"ents$ %-is essentially switc-ed t-e < of D for .rice declines .rior to .ublic disclosure$ *$ Rationale: court "ay -a#e t-oug-t t-e "isstate"ent -ere was ?ust barely "aterial, e#en called it Jinnocent$H i#$ Uoint and Se#eral liability under B // /$ (ll .arties e,ce.t for outside directors are ?ointly and se#erally liable under B //$ 2$ Outside directors only -a#e .ro.ortional liability$ B //(f)(2)$ Outside directors rarely -a#e to .ay for securities #iolations, e,ce.t in 6nron and Worldco"$ *$ @ontribution: 3s can sue eac- ot-er to reco#er for contribution$ 4$ Inde"nification: S6@ does not like it w-en t-e cor.oration inde"nifies 9SV, directors, officers$ Ite" !/2(-) re&uires court a..ro#al for suc- agree"ents bc t-ey screw t-e SV$ #$ Dolicy of B //: 'atekee.er function$ Want t-e -a#e inter"ediaries between issuer and .ublic and gi#e t-ese inter"ediaries incenti#e to ensure t-e accuracy of t-e RS$ @f$ B /1 of t-e *4 act, w-ic- re&uires reliance$ 2$ Section /2a/ - offers or sells security in #iolation of B! a$ 6le"ents i$ 6ligible 3s: .urc-asers of securities offered or sold in #iolation of B ! ii$ Droscribed acti#ity: $inter %& 'a"l offeror or seller in #iolation of B ! iii$ State of "ind: Strict liability i#$ 4e,us to in?ury: none #$ 9a"ages: Jconsideration .aid for suc- security wit- interest t-ereon, less t-e a"ount of any inco"e recei#ed t-ereon, u.on t-e tender of suc- security, or for da"ages if s-e sold it$H %-is a"ounts to resissionar( da!ages$ #i$ Statute of li"itations b$ W-o is an offerorGseller for .ur.oses of bot- BB /2(a)(/) and (2)I $inter %& 'a"l i$ )acts: 9a-l was ent-usiastic in#estor in oil .ro.erties, -e and ot-ers ga#e : to Dinter for in#est"ents wit-out a registration state"ent on file for t-e securities$ 9a-l -ad con#inced t-ese in#estors to ?oin$ Dinter was found liable to t-ese ot-er in#estors w-en t-e #enture failed and sued 9a-l in contribution, clai"ing t-at -e was also an offerorGseller$ ii. R4$E5 &here are 2 ,a(s to 'eo!e a Pinter v. Dahl seller 1. Pass title 2. Soliit investors A16 have a +euniar( interest for either self or issuer. iii$ 7ust look at 9a-l3s "oti#ation for soliciting t-e in#estorsNwas it to benefit -i"selfGDinter or was -e ?ust being a nice guy to -is friends, t-e in#estorsI i#$ %-e .ecuniary "oti#ation re&uire"ent co"es fro" t-e B 2(*) definition of offer: t-e for %alue re&uire"entM #$ %y.ically t-e standard argu"ent t-at so"eone is a Dinter seller is t-at t-ey needed to get ot-er in#estors to .ut "oney in for t-eir own in#est"ent to be wort- anyt-ing$ #i$ Decuniary interest .rong "ust be contingent on t"e placement of securities for t-e .erson to be $inter seller$ Oawyer w-o does solicitation for client and gets .aid -ourly wage is in t-e clear$ 9on3t want to swee. in ordinary .rofessionals$ 6$g$ bond rating agencies$ *$ Setion 12a2 Wsales or offers by "aterially "isleading .ros.ectus or oral co""unication a$ 6le"ents: i$ 6ligible 3s : .urc-asers of securities in a J.ublic offering,H (ustafson$ ii$ Droscribed acti#ity : Offering or selling ($inter %& 'a"l) a security by "eans of a "aterially "isleading .ros.ectus or oral co""unication iii$ State of "ind : 9ue care defense i#$ 4e,us to in?ury : Ooss causation defense a#ailable #$ 9a"ages : rescission #i$ Statute of li"itations b& (ustafson i$ )acts: @ontrol .erson sold t-eir block to .urc-asers, using a set of disclosures t-at contained "aterial "isstate"ents$ Issue was w-et-er t-e 3s could sue under B /2(a)(2), na"ely, w-et-er t-e errors occurred Jby "eans of a .ros.ectus or oral co""unication$H ii$ 7a?ority o.inion looks at B / for definition of J.ros.ectusH rat-er t-an t-e definitions section, B 2(/)$ Says it3s not going to be a D if it need not co".ly wit- B / absent an e,e".tion$ (sk w-et-er docu"ent would -a#e to co".ly wit- B / if it didn3t -a#e to co".ly wit- an e,e".tion$ %-is is circular t-oug- bc if a docu"ent didn3t -a#e to co".ly wit- B / t-en it necessarily -as a an e,e".tion$ @ourt also says t-at D refers to Jdocu"ents of wide disse"ination$H iii$ 7ost courts -a#e inter.reted t-is case as saying 4nless it0s a dou!ent disse!inated in a 7+u'li offering89 it0s not a ) 12:a; :2; +ros+etus. /$ %-is also doesn3t "ake sense since t-e B 4(2) is li"ited to .ur.oses of B !$ 2$ (lso, B /2(a)(2) e,.licitly says B * e,e".tions are not a..licable for liability under B /2(a)(2)$ *$ 7a?ority was really worried about #ast liability in t-e secondary "arket$ <C% B /; gi#es cause of action for secondary "arket transactions$ (lso t-ere are reasonable care defenses under B /2(a)(2)$ (lso facts of t-is case were .ri#ate .lace"ent$ i#$ 1eed +u'li offering for ) 12:a;:2; lia'ilit(. Oook at R of in#estors, so.-istication, etc, as under )alston $urina$ #$ (ustafson -as essentially created 2 definitions of J.ros.ectusH, one for B !(b)(/), w-ic- includes all written offers not falling into safe -arbor and one for B /2(a)(2), w-ic- re&uires .ublic offering$ #i$ 'insburg3s dissent /$ )ootnote /: JI understand t-e @ourt3s definition of .ublic offering to enco".ass bot- transactions co#ered by B ! (49 transactions t-at would -a#e -ad to be registered -ad t-e securities not co".lied wit- B *$H 2$ %-us it is .ossible to be on t-e -ook for B /2(a)(2) e#en if you are e,e".t fro" B ! if t-e e,e".tion falls under B *$ a$ %-us, t-ere can be B /2(a)(2) liability for !4 and !! Reg 9 offerings$ b$ Since !A is by definition a .ri#ate .lace"ent, no B /2(a)(2) liability$ *$ @ourts -a#e inter.reted B /2(a)(2) using t-e sa"e J.ublic offeringH definition as used for t-e B 4(2)$ JDublic offeringH conce.t is #ery i".ortant for B 4(2), B /2(a)(2) liability and also, it -as been taken to be coe,tensi#e wit- JdistributionH and t-us t-e conce.t is key for w-o is a C$ c$ Ot-er rules for B /2(a)(2) i$ B 2 (/)(a) free writing e,e".tion fro" definition of D: )ree writing co""unications @(4 gi#e rise to B /2(a)(2) because t-e e,e".tion fro" consideration as J.ros.ectusH is for .ur.oses of B !(b)= t-ese co""unications are .ros.ectuses for B /2(a)(2)$ %-e way t-is was fit into t-e language of (ustafson is t-at B 2(/)(a) is an Je,e".tionH and but for t-is e,e".tion, t-e co""unication would -a#e -ad to co".ly wit- B /, so it3s a D$ ii$ Oral co""unications : inter.retation -as been t-at t-ese "ust be in t-e conte,t of t-e J.ublic offeringH in order to gi#e rise to B /2(a) (2) liability$ %-us if you lie orally in a .ri#ate .lace"ent, no B /2(a)(2) liability$ 4$ Section /2 flowc-art analysis a$ )or bot- B /2(a)(/) and B /2(a)(2) need $inter %& 'a"l sellerGofferor b$ If B /2(a)(2), "ust be J.ublic offeringH, (ustafson i$ 6#en wit- e,e".t transactions under B *, it is still .ossible for J.ublic offeringH ii$ )ree writing and oral co""unications can gi#e rise to B /2(a)(2) liability also= 2 different definitions of D for B ! and B /2(a)(2) c$ If B /2(a)(2), reasona'le are defense: lower std of diligence t-an for B // defense$ It3s #ery easy for an unso.-isticated in#estor to establis- B /2(a)(2) defenses$ IssuerGC -a#e "uc- -arder ti"e since t-ey s-ould know "ore info about w-et-er a D is "isleading$ !$ S6@ #$ 7anor 4ursing: after reg state"ent effecti#e, t-ere were "a?or de#iations fro" t-e .lan of distribution, "aking t-e .ros.ectus (/a) going out to t-e in#estors false$ 9id t-e <9 #iolate !b2 due to false /a$ 2 nd @irc$ @t: yes, /a so defecti#e it ga#e rise to !b2 #iolation$ (It would also gi#e rise to /2a2 liability$) a$ <y transfor"ing a "aterial "isstate"ent in /a into a !b2 #iolation, you also bring in /2a/ liability, rescission$ So 7anor @t basically transfor"ed /2a2 liability into /2a/ liability, w-ic- is "ore se#ere$ after"at- of 7anor 4ursing is t-at cts -a#e backed off of t-at decision and tried to distinguis- it as an outlier$ A$ Rule /!F( - Issuer continues to be a JsellerH regardless of underwritingGissuing "et-od used (re"o#es s-ield Dinter #$ 9a-l created for Issuers, only for /2a2)$ What is a Security S6@ #$ Uoiner Oeasing - Su.@t, /F4*$ offers and sales of s.ecific lease-old interests in oil and gas leases$ Were t-ese securitiesI B2(/) s.ecifically refers to Jfractional undi#ided interest in oil, fas, or ot-er "ineral rig-tsH, so does it not a..ly to di#ided interestsI Su.@t says no, we look at substance not for", want definition of security to be broad enoug- to ca.ture e#eryt-ing it s-ould$ Refers to in#est"ent contract language in 2(/)$ /$ <o,e( - - buy stri. of orange gro#e wG o.tional ser#ice contract for Vowey to do all of t-e work, distribution, etc$ Su.@t finds t-is was an offer and sale of securities, under in#est"ent contract language of 2(/)$ Vowey test: in#est"ent of "oney, in a co""on enter.rise, wit- an e,.ectation of .rofits, solely fro" t-e efforts of ot-ers (cts inter.ret t-is to be substantially fro" efforts of ot-ers$) a$ In#est"ent of "oney: yes, clearly$ b$ W-at is t-e co""onalityI -oriPontal$ %-e .rofits fro" t-e entire orange gro#e are co"bined and distributed .ro rata$ c$ 6,.ectations of .rofits solely fro" efforts of ot-ers$ 5es$ 9idn3t e#en -a#e rig-t to enter t-e .ro.erty$ d$ /!X of t-e .eo.le boug-t t-e gro#e s-are but not t-e ser#ice contract, but t-ere3s still a &uestion of w-et-er t-ey were still JofferedH a security, w-ic- would be illegal$ e$ @t says Jit is i""aterial w-et-er enter.rise is s.eculati#e or non- s.eculati#eH suggesting risk not a factor$ <ut so"e later cts .lace e".-asis on risk$ 2. $andreth=#or!an a$ Cnited Vousing #$ )or"an- subsidiPed -ousing coo.$ %o get a roo", -ad to buy Js-aresH according to -ow "any roo"s you wanted$ W-en you got a roo", you .aid below "arket rent$ W-en you "o#e out you sell s-ares at fi,ed .rice to coo.$ 4o #oting rig-ts$ @ost o#erruns cause coo. to increase rentlitigation$ Was t-ere offers or sales of securityI b$ Oandret- case-Su.@t$ 3 features needed in order to be stock: 1; voting rights 2; a'ilit( to transfer=sell=+ledge 3; dividends or a+ital a++reiation. c$ )or"an stock is not stock under t-is test, so @t looks to w-et-er its an in#est"ent contract under Vowey$ @t creates idea of 7#or!an onsu!+tion9, t-e "oti#e of buyers was desire for consu".tion, not e,.ectation of .rofit$ i$ Su.@t said stock finances .art of construction, bonds finance t-e great "a?ority$ <ecause no e,.ectation of .rofit fro" stock, not an in#est"ent contract$ ii$ <ut 2 nd circuit says stock .urc-asers get an a.art"ent, and t-e discount below t-e "arket rate of rent is t-e return on t-eir stock$ Oike .aying "arket rate, t-en getting "oney back$ iii$ <ot- cts descri.tions are econo"ically e&ui#alent, Su.@t ?ust c-ooses to call it consu".tion, not .rofitGreturn, for"alistic #iew$ d$ )or"an ct in dicta says Vowey test a..lies to all securities, not ?ust in#est"ent contracts, but later Su.@t -as strongly backed off t-is, says Vowey ?ust for in#est"ent contracts$ *$ 6dwards - Su.@t$ Sale and leaseback of .ay.-ones$ In#estor buys a .ay .-one and leases it to co".any to run, .ro"ise /4X annual return o#er fi#e years$ a$ (w-en so"et-ing is a .yra"idG.onPi sc-e"e like t-is, ct will try #ery -ard to find t-at it is a security$) b$ con#ersely, cts will be #ery reluctant to find t-at franc-ise arrange"ents are securities (restaurants, car dealers-i.s, etc$) c$ Su.@t finds it is a security$ Says fact t-at it was a fi,ed return irrele#ant, still e,.ectation of .rofit$ 4$ Oife Dartners - ODI sells interests in life insurance .olicies it .urc-ased fro" (I9S .atients$ 9$@$ @ir$ @t focuses on efforts of ot-ers .rong$ )inds t-at it was not a security bc all t-e efforts were done before in#estors .urc-ased t-e interests, after t-e work was de "ini"us ad"in work$ Dre-.urc-ase efforts are reflected in .rice and don3t need federal regulation$ a$ @t relies on econo"ies of scale argu"ent to find -oriPontal co""onality$ )i,ed costs re&uired large nu"ber of in#estors to "ake it .rofitable$ !$ Re"e"ber (&ua-Sonics- t-is is a situation w-ere ct did find franc-ise arrange"ent was a security, due to s.ecific facts$ Key fact was t-at in#estors -ad absolutely no background in "edical de#ice sales, #ery unlikely to take acti#e role and distribute "ac-ine in t-eir assigned area$ A$ Reves : far"ers coo. wit- 2*k "e"bers fro" general .ublic$ 7arketed .ro"issory notes .ayable on de"and$ (re t-ey JnotesH for *4 or ** actI a$ %est: i$ /$ )or"an consu".tion idea (in#est"ent #$ consu"erGco""ercial "oti#ation) ii$ 2$ Dlan of distribution (e$g$ to broad .ublic)2*k .eo.le$ 4u"bers are not deter"inati#e, but t-at see"s #ery large$ iii$ *$ Dublic e,.ectations (as to securities law .rotection)$ So"ew-at circular$ ((nd -ow likely is it t-at unso.-isticated in#estors really -a#e any e,.ectations about securities law .rotections at allI) i#$ 4$ 6,istence of (lternati#e Regulatory Structures (t-at reduce or "ini"iPe risk t-e in#estors are bearing$) @ts -a#e looked at t-ings like contractual "ec-anis"s (e$g$ collateral in <el"ont e,a".le) besides regulatory structures$ b$ Va#e to -a#e t-is test, bc a definition of note t-at is too broad would include t-ings like credit cards, "ortgages, etc$ c$ (not-er i".ortant issue in t-is case is t-at t-e notes .ayable on de"and$ Cnder *a/ of *4 (ct notes -a#ing "aturity of not "ore t-an F "ont-s e,cluded fro" definition of security$ <ut @t says t-at3s not sufficient to get an e,clusion, "ig-t be if t-e Jdesign of t-e transaction suggested t-at bot- .arties conte".lated t-at de"and would be "ade wit-in t-e statutory .eriod$H Exemptions /$ 4(/) 4ot an issuer, CW, 9ealer 2$ 4(2) 4ot a .ublic offering a$ transactions by an issuer not in#ol#ing any public offering (Ralston Durina- in#estors can fend for t-e"sel#es)$ i$ 'eneral @ounsel3s (of S6@ in *sI) factors: /) nu"ber of offerees 2) siPe of t-e offering *) "anner of t-e offering 4) nu"ber of units offered$ ii$ %-e Ralston Durina test is also used to define JdistributionH for .ur.oses of 2a//$ (EE%-is will be on e,a"EE) J(n offering to t-ose w-o are s-own to be able to fend for t-e"sel#es is a transaction Ynot in#ol#ing any .ublic offering3H$ /$ %wo key issues in Ralston Durina: /) w-o were t-e JkeyH e".loyees offered t-e stockI included #ery low le#el e".loyees in wide #ariety of .ositions 2) W-at were t-e records t-at were ke.tI 4o records were ke.t of t-ose to w-o" offers were "ade, esti"ated nu"ber !$ Oed to conclusion t-at .ublic, couldn3t fend for t-e"sel#es$ *$ Reg 9 - a$ Reg 9 is t-e key e,e".tion (all transactional e,e".tions e,ce.t intrastate offering fall under Reg 9)$ Includes Lenture @a.ital and Dri#ate Dlace"ents$ b$ Rule %rade-Offs- "ore re&uire"ents #$ -ig-er : li"its i$ Rule !A- no : li"it$ disclosure and so.-istication re&uire"ents for non-(Is$ <y definition is a 4(2) and cannot gi#e rise to /2a2 liability (under 'ustafson)$ ii$ !!- u. to :! "ill$ only disclosure re&uire"ents for non-(Is$ iii$ !!G!A- if to (Is only, no disclosure of so.-istication re&uire"ents$ i#$ !4- u. to :/"ill$ to anyone, wit- no disclosure or so.-istication re&uire"ents$ #$ Oi"itation of *! for !!G!A (*! ca. does not include (Is) c$ (ccredited In#estorI 6,ecuti#e of Issuer-Rule !/(f) (Is it a J.olicy- "akingH functionI) Wealt-y indi#iduals-!/a!, net wort- Z:/"ill at ti"e of .urc-ase$ !/a1- any entity in w-ic- all ownersGe&uity in#estors are (Is is an (I itself$ i$ Durc-aser Re.resentati#e conce.t$ (n ot-erwise unso.-isticated .urc-aser will be so.-isticated if -as so.- re.$ Rule !/(-)/ and -4$ -/- can3t be .urc-aser re. if director, officer, or ot-er e".loyee of issuer unless blood or "arriage or ado.tion relati#e of .urc-aser$ -4- re. "ust disclose any relations-i. to issuer or affiliates$ d$ Rule !2(c)- .ro-ibition on general solicitations$ Lery i".ortant$ S6@ .uts a #ery i".ortant gloss on t-is .ro-ibition, t-e J.re-e,isting relations-i.H gloss$ 7ust -a#e t-is D6R for it not to be a general solicitation, regardless of so.-istication of offerees$ %-is .ro-ibition a..lies to issuers and any .erson acting on be-alf of issuer (anyone w-o -as enoug- contacts wit- issuer is acting on t-eir be-alf$) %-is re&uire"ent can be toug-er t-an Ralston Durina, can3t always solicit e#en institutional and accredited in#estors$ i$ 9ebate &uestion is w-y t-is a..lies to !4 and !!, since t-ose are *b e,e".tions and S6@ doesn3t -a#e to re&uire t-is$ ii$ IDO4et 4o (ction Oetter$ 'eneric &uestionnaire and #erified$ Registered <9$ Dassword .rotected, cooling off .eriod$ S6@ said t-is is in co".liance wit- !2c, no .roble"s$ e$ (ggregation- i$ !!- :! "ill ca.$ (See also !/(c))$ Will count towards t-at ca. any offerings in #iolation of !a and any *b offerings wit-in /2 !onth .eriod before and t-e offer and during t-e offer$ ii$ (ggregation is not integration$ 4$ *(b) a$ *(b)- s"all offering e,e".tions (as t-e @o""ission .rescribe by regulation) u. to :! "ill, e$g$ Reg 9$ <ut rule !A of Reg 9 is .ro"ulgated .ursuant to 4(2), so it cannot gi#e rise to /2a2 liability$ @an3t "ake an argu"ent for e,e".tion based on statute directly, bc it3s not self- e,ecuting, re&uires @o""ission to "ake regs$ !$ *a// a$ *(a)// of ** (ct- intrastate offerings: i$ .art of an issue offered and sold ii$ only to residents wit-in a single state iii$ w-ere t-e issuer of suc- security is a .erson resident and doing business wit-in t-at state (and if a cor.oration, incor.orated and doing business wit-in$) i#$ Release 44*4- an offer to a single nonresident will blow t-e entire *a// e,e".tion$ #$ 44*4 also: defines Jdoing businessH as Jsubstantial o.erational acti#itiesH (co".are @-a."an J.redo"inantH)$ (lso introduces Jco"e to restH notion, "ust co"e to rest wit- residents before being resold$ #i$ %-e S6@ -as "ade clear t-at .utting a disclai"er in your ad and website t-at offer is only for residents of state, you are fine e#en if read by nonresidents$ #ii$ 5ou still -a#e to worry about t-e resale issue$ 'et around by restricting resale of stock, .urc-asers enter contract wit- you not to resale for .eriod of ti"e$ b$ )ule 1! ()or *a// e,e".tion)- i$ (a) 9e"anding standard$ 7ust "eet all t-e re&uire"ent of t-e rule to be eligible (w-ereas Reg 9 will let you off t-e -ook e#en if you screw u. in so"e areas$) ii$ <urden of Droof is on t-e issuer (true for all transactional e,e".tions$) So issuer -as to create docu"entation of w-o is recei#ing offers, "ake sure .ro.er disclai"ers are t-ere$ iii$ /4;c(2) 9oing business re&uire"ent$ 1-1-1 rule$ 1 .ercent of: gross re#enues, assets, and net .roceeds (of offer are used) are wit-in state$ i#$ /4;e and f$ Resales li"itations$ /$ (e)- no resales to out of state residents for F "ont-s after last security sold by issuer$ #$ /4;b2 safe -arbor- for integration$ Offers t-at are registered or e,e".t under B* or 4(2) done 6 !onths before or after are not integrated wit- *a// offer A$ Integration a$ S6@ > fator test to deter"ine integration: /$ Single Dlan of )inancing (t-e "ost i".ortant factor, along wit- sa"e general .ur.ose$) (Oi#ens #$ Witter- -e really t-oug-t eac- offering would be t-e last, but ke.t needing "ore$ not integrated, it3s a sub?ecti#e test$) 2$ Sa"e class of security, e&uity #$ debt *$ %i"e of t-e offering (two offerings "ore t-an A "ont-s a.art, rebuttable .resu".tion t-at distinct, /2 "ont-s a.art, al"ost certainly distinct, conclusi#e$ 4$ %y.e of @onsideration, cas- is not indicati#e, non-cas- is (not #ery -el.ful$) !$ 'eneral .ur.ose: 9ono-ue$ <ot- offerings -ad sa"e general .ur.ose, but key was commonality$ ;$ Safe Varbors fro" integration a$ Reg 9 offerings, Rule !2(a)- offerings t-at occur "ore t-an 6 !onths before or si, "ont-s after not integrated$ @ontrol Dersons and Resales /$ 2a// a$ S6@ #$ @-inese @onsolidated <ene#olent (ssociation : @-inese i""igrants in 45 got toget-er (no official connection to @-inese go#t) and solicited interest in a @-inese go#t bond offering, took "oney fro" buyers and boug-t t-e bonds, got no co""issions or anyt-ing$ @t: was not only solicitation of offers to buy, but t-e offers t-e"sel#es, t-e trans"ission of t-e offers and .urc-ase "oney to @-inese go#t$ %-ese were underwriters$ @t says e#en if not an issuer, underwriter or dealer, it was .artici.ating in a transaction wit- an issuer, t-e @-inese go#t$ %-is language of t-e ct indicates a #ery broad inter. of underwriter$ b$ Varden #$ Raffens.erger - defendant w-o .erfor"s due diligence (e#en t-oug- not in#ol#ed in any solicitation) is an underwriter$ Derfor"ing due diligence and t-en stating t-at offering was good is enoug-$ c$ <yrnes #$ )9S - sellers identified in t-e reg state"ents as .otential underwriter are co#ered by B!,$ d$ all indicated broad inter. of underwriter$ e$ Jwit- a #iew toH @o"ing to rest- need to -a#e so"e intent to actually sell t-e stock to "ore in#estors w-en you .urc-ase initially$ @o"es down to ti"e$ Oess t-an / year, #ery -ard to s-ow in#est"ent intent= /-2 years, still #ery -ard to s-ow in#est"ent intent, but can s-ow ot-erwise if t-ere was a c-ange in circu"stances, 2-* years, .resu".tion is now re#ersed, .resu"e -a#e co"e to rest, but rebuttable= Z* years- absolute cutoff, -a#e co"e to rest, not rebuttable$ f$ @-ange in circu"stances -as to be wit- in#estor, not t-e issuer$ e$g$ insol#ency of in#estor could be enoug- to rebut .resu".tion$ g$ W-at is a distributionI 'illigan, Will #$ S6@ distribution "eans .ublic offer (see slide)$ -$ Rule 4! , 9efinition of @ontrol: .ower to direct "anage"ent and .olicies of t-e co".any$ <road definition$ i$ 4(4) - if all a broker does is e,ecute a transaction on custo"ers orders, -e will not be regarded as an underwriter for t-at transaction$ ?$ In re Ira Vau.t K co $ @ontrol .ersons wanted to sell stocks in li&uor distributor, -ad ongoing agree"ent wit- broker (Ira Vau.t) to sell 2 s-ares into 45S6 e#ery ti"e stock .rice increased by 2G1$ Oater, li&uor dist decides to distribute di#idends in li&uor, stock .rice s-oots u. fastIra Vau.t suddenly selling a lot of stocks for control .ersons$ Ira V clai"s it3s not .art of distribution, clai"s 4(4) broker e,e".tion, but S6@ says Ira s-ould -a#e foreseen t-at so "any stocks would -a#e been sold, s-ould -a#e seen t-at w-at control .ersons were trying to do was a distributionIra -ad duty to in&uire$ %-at3s -olding of case$ k$ C$S$ #$ Wolfson - W and friends own 4X of @6, -e e,ercises suc- control o#er co".any t-at -e is clearly a control .erson$ Ve wanted to sell stocks into O%@ "arket$ Ve used "any brokers to sell s"all nu"bers of s-ares eac-$ Is t-ere an underwriterI )or .ur.oses of 2a// t-ere are underwriters and t-e w-ole offering needs to be registered$ <ut @t still gi#es brokers t-e 4(4) e,e".tion, none of t-e brokers could -a#e seen t-e o#erall .lan and known it was a distribution$ l$ See Slide J@ontrol Derson 9istributionsH i$ / st , e,a"ine w-et-er t-e securities -a#e co"e to rest /$ 4o, control .erson dist "ust satisfy t-e criteria of t-e issuer3s e,e".tion 2$ 5es, don3t need to satisfy$ 2. Rule 1-- a$ <ecause secondary distribution was #ague and confusing, S6@ .ressured to co"e u. wit- Rule /44$ (..lies to control .erson, affiliate, or regular .urc-aser w-o wants to sell restricted securities$ Will not be considered engaged in a distribution, and t-us not an underwriter if "eet re&uire"ents of rule$ b$ O.erati#e .ro#isions of safe -arbor Rule /44 are in (b)- if you "eet re&uire"ents of Rule /44it3s not a distribution, and get benefits of 4(/) e,e".tion$ c$ %wo ty.es of securities: Restricted and @ontrol DersonG(ffiliate$ So"et-ing could be bot-$ i$ Restricted- ac&uired t-roug- e,e".tions fro" registration$ ii$ @ontrolG(ffiliate + securities t-at are sold on be-alf of an affiliate d$ 7ain ele"ents of Rule /44: i$ Re&uire"ent for current information (c) (/2 "ont-s for re.orting issuers, ongoing for non-re.orting issuers$) 9on3t need to know t-e s.ecifics of t-is$ ii$ /44d -olding .eriod re&uire"ent /$ A "ont-s for re.orting co".anies, /2 "ont-s for non- re.orting$ iii$ Lolu"e re&uire"ents (e)- only for control .ersons /$ ("ount sold, toget-er wit- all s-ares of sa"e class wGin last * "ont-s, s-all not e,ceed t-e greater of: a$ /X of s-ares outstanding, or b$ a#erage weekly re.orted #olu"e of trading in last 4 weeks, or c$ (weekly trading a#erage "easured in s.ecialiPed way) i#$ Oi"itations on "anner of resale (f)- only for control .ersons #$ Re&uire"ents to .ro#ide info to S6@- only for control .ersons e$ /44e*(#ii)- %-e following sales of securities need not be included in deter"ining t-e a"ount of securities sold in reliance on t-is section: > securities sold in a transaction e,e".t .ursuant to Section 4 of t-e (ct and not in#ol#ing any .ublic offering$ f$ Su..ose securities fro" an issuer -a#e not co"e to rest in -ands of t-e .urc-aser, and t-e issuer relied on so"e e,e".tion fro" registration$ @an .urc-aser now engage in resaleI Va#e to ask if resales are consistent wit- initial e,e".tion issuer relied on, e$g$ if 4(2) e,e".tion, resales also -a#e to be to in#estors w-o can fend for t-e"sel#es$ 6#eryone is in t-e sa"e boat (-as to rely on sa"e e,e".tion, and if e,e".tion destroyed, destroyed for e#eryone, if resale blows e,e".tion, issuer is in trouble too$) i$ If securities -a#e co"e to rest, e#erybody on t-eir own, not in sa"e boat$ Resale does not -a#e to rely on sa"e e,e".tion$ *$ Rule /44( a$ 0I<s- 0ualified Institutional <uyers$ @ontrol .arties and initial .urc-asers often sell t-eir s-ares into 0I< "arket, 0I<s trade a"ong t-e"sel#es$ Vow do 0I<s sell t-eir /44( securities into .ublicGO%@ "arketsI Cse Rule /44, bc /44( securities are restricted securities under /44(a)*$ b$ )oreign co".anies -a#e co"e to raise t-e "a?ority of t-eir ca.ital in CS t-roug- /44( offerings to 0I<s$ c$ <enefits of /44(- i$ /$ So"e li&uidity ii$ 2$ (#oid so"e SO8 re&uire"ents iii$ *$ a#oid .eriodic disclosure i#$ 4$ 9on3t -a#e section // liability d$ (n issuer cannot use /44( (/44((b)) so t-ey use an In#est"ent <ank as inter"ediary, under Reg 9 Rule !A$ I< t-en .laces wit- 0I<s under /44($ 0I<, if t-ey want, can t-en use /44 to sell into .ublic "arkets$ e$ Key ele"ents of /44( i$ buyers li"ited to 0I<s ("uc- -ig-er t-res-old t-an (I) ii$ @ertain info "ust be "ade a#ailable iii$ li"itations on eligible securities (Janti-fungibility) can3t be fungible wit- securities t-at are already .ublicly traded$ i#$ 4o resale restrictions (i$e$ doesn3t -a#e to be resold under sa"e e,e".tion, but still -a#e to be e,e".t in so"e way or registered$) 4$ 4(/ [) a$ 4(/)/G2 co"es to .lay w-en s-ares -a#e co"e to rest wit- control .arty, w-o .laces t-e" wit- .urc-aser w-o can fend for sel#es (sono distributionno underwriter)$ b$ (kerberg : ( boug-t /2,! s-ares fro" Uo-nson, a controller$ Securities -a#e co"e to rest wit- Uo-nson$ FF .age .ri#ate .lace"ent "e"orandu", unregistered s-ares$ 9id Uo-nson -a#e duty to register securitiesI 4(2) not a#ailable bc issuer not in .icture$ 4(/)I Issuer is not in .icture bc -a#e co"e to rest$ <ut U sold t-roug- a <9, so if ( can3t fend for self, 4(/) not a#ailable, if -e can, e,e".t$ Si".le, but @t instead s.ends a lot of ti"e worrying about w-et-er U an CW$ @t s-ould -a#e focused on w-et-er <9 an CW$ i$ )ootnote 4: t-e "ere in#ol#e"ent of a broker &ua broker is insufficient to destroy 4(/) e,e".tion, e#en t-oug- <9 is a JdealerH bc t-e transaction is not by a dealer$ (<asically cts ?ust take JdealerH out of t-e statute$) 6,,on @a.tial offerings (aka (< offerings) !$ Issuer sells to I< under Rule !A Reg 9, I< sells under Rule /44( to 0I<s$ %-en, Issuer registers a bunc- of s-ares, and uses t-e" to do an e,c-ange, gi#es registered s-ares to 0I<s for t-eir /44( s-ares, 0I<s can sell s-ares into t-e O%@ "arket$ W-at S6@ said in 6,,on no action letter, was t-at e#en if e#eryone knows t-is e,c-ange is going to occur, and going to occur #ery &uickly after /44( transaction, 0I< will 4O% be considered an CW$ (lso, S6@ -as said, by fiat, t-at t-is is not an issuer transaction, issuer dee"ed to be out of .icture$ a$ W-y t-is is i".ortant: i$ 0I< doesn3t -a#e CW liability, e#en if reg state"ent contains "aterial "isre.resentation$ ii$ @an raise ca.ital faster iii$ Rela,es !b2 deli#ery re&uire"ents (don3t need to know details of t-is$) i#$ 9on3t -a#e to na"e 0I<s in reg state"ent, "aking .re. of reg state"ent easier at t-e "argins for t-e issuer$ A$ S6@ doesn3t like w-at it created wit- 6,,on @a.ital, so "ade li"itations, only eligible now for: a$ 4on-con#ertible debt (7ost -ig--yield debt in C$S$ done t-is way) b$ 6&uity of )oreign Issuers c$ (S6@ "ade : a"ount of registered offerings .art of re&uire"ent to get WKSI status) DID6s ;$ Dublic Issuer .laces stock in .ri#ate .lace"ent (e$g$ Vedge )und) wit- 4(2) e,e".tion$ If Vedge )und wants to sell securities into t-e "arket, t-e Issuer needs to file a JResale Registration State"entH w-ic- registers for sale t-e securities -eld by .ri#ate in#estors (and issuer #ery often is contractually bound to file suc- a resale reg state"ent$) a$ If you -a#e s-ares in a co".any before it goes .ublic, it "ay also use a resale reg state"ent to allow you to sell into "arket after IDO$ Revie,5 ?ustafson5 Su+%t8 ,hat is a +ros+etus for 12a2 +ur+oses@ A5 a dou!ent used in a public +lae!ent of seurities. 6oesn0t !aAe !uh sense. ?ins'urg footnote8 has had fore in iruit ourts8 sa(s a transation e/e!+t fro! )> under )38 an still give rise to 12a2 lia'ilit(. i.e. offer that is to investors ,ho an0t fend for selves8 although e/e!+t under )3. Pinter v. 6ahl anal(sis of ,ho is dee!ed to 'e 7seller9 and 7offeror9- for value B!onetar( inentive for (ourself Ae( fator in !aAing (ou an offeror. Rule 1>9A- SE% reating to its unha++iness that Pinter v. 6ahl ould insulate issuer fro! 12a2 lia'ilit( in a fir! o!!it!ent under,riting. Setion 11 due diligene issues. :re-read Car-%hris deision disussion of ,hat onstitutes a reasona'le investigation. #at-s+eifi in.uir(. Der( fe, deisions disuss this8 so Car-%hris still ver( influential.; 6ue diligene is a !ore 'urdenso!e re.uire!ent than the reasona'le are defense. )12a1 lia'ilit(- for offeror or seller that violates )>. Revie, of +refiling +eriod5 %an0t offer to sell or offer to 'u(. Prohi'itions a++l( to under,riters8 issuers8 and dealers. Rules 13>8 16E8 1698 1638 163A reate e/e+tions8 last 3 'eing the !ost i!+ortant deregulations. "ffer to 'u( does not inlude +reli!inar( negotiations and agree!ents ,ith under,riter. Waiting Period- 1933 At :FSee slide ,ith this heading;8 good su!!ar(. Revie,5 Setion >'15 an( +ros+etus !ust 'e a )1* +ros+etus. definition of +ros+etus 2:1*; )1*a- the full set of dislosures inluding +riing infor!ation8 final +ros+etus. Rule -3* +reli!inar( +ros+etus :one of the !ost o!!on 1*' +ros+etus for!s.; !ost of ,hat 1*a has ,ithout +riing info8 et. &,o !ethods SE% tries to ensure deliver( of +ros+etuses5 o Rule 1>2-E under 3- at- re.uires +ros+etus delivered to an(one ,ho !aAes ,ritten re.uest. o Rule -6*- SE% re.uires +ros+etus availa'le to +u'li for the! to !aAe (our reg state!ent effetive #ree Writing Pros+etus- o Rule -33- If (ou !eet onditions of -338 a #WP ,ill 'e dee!ed to 'e a 1*' +ros+etus. o 6efinition of #WP :defined in Rule -*>;- ,ritten o!!uniation8 after reg state!ent filed :or 'efore for a WKSI;8 that "##ERS to sell or S"$I%I&S an offer to 'u( seurit(. So!ething sent out to soliit investor interest after reg state!ent filed8 often ontains info not in reg state!ent. Written o!!uniation defined 'roadl( in -*> to inlude eletroni o!!uniations. Although e/e!+t fro! >'18 #WP is onsidered +u'li8 ,hih e/+oses (ou to 12a2 lia'ilit(. A onfir!ation for sale ,ould 'e onsidered a 2:1*; +ros+etus 'ut not a #WP. o 6ifferent treat!ent of WKSI=S-3 o!+anies v. 4nseasoned and non- re+orting. $atter !ust inlude )1* +ros+etus ,ith #WP. Rule 13-:d;- Gou an soliit interest8 sa( 7are (ou interested98 and soliit an offer to 'u(8 if ao!+anied '( a )1* +ros+etus and 'oiler+late ,hih sa(s there is no atual deal=offer not ae+ted and no !one( reeived until state!ent 'eo!es effetive. "ral o!!uniations not a +ros+etus under 2:1*; &o!'stone ad- not used as !uh toda(. Cut 2:1*; e/e!+ts suh an ad if it Hust identifies seurit( and +rie8 sa( ,here (ou an get a ,ritten +ros+etus8 et. 1ote5 as a +ratitioner8 (ou A$WAGS inlude a dela(ing a!end!ent ,ith (our reg state!ent8 so the 2* da( effetive language in )E is al!ost o!+letel( irrelevant. Waiting +eriod- 'asi +rohi'ition is for 48I86s to trans!it a 7+ros+etus9 unless it ontains ertain info8 >'. :no +rohi'ition on oral o!!uniations.; 2:1*; definition of +ros+etus5 +aragra+h :a; :#WP +rovision; sa(s that if (ou give a 1*a +ros+etus :after the effetive date;8 an(thing sent ,ith or after that is not onsidered a +ros+etus -:3;- dealer !ust send +ros+etus on sales ,ithin -* da(s of reg state!ent 'eo!ing effetive or 'eginning of offering8 ,hihever later. When do deliver( re.uire!ents of >'2 end@ See slide. Rule 132:';- regulator( relief fro! >'2 if +aragra+h onditions !et :1*a filed ,ith SE%;. Aess B deliver(. Rule 132:a;- regulator( relief fro! >'1 re.uire!ent :i.e. +ros+etus don0t have to 'e )1* +ros+etuses; for onfir!ations. SE% v. Ianor 1ursing- If +ros+etus so defetive8 gives rise not onl( to 12a2 lia'ilit( 'ut also results in >'2 re.uire!ent not 'eing satisfied :i.e. also giving rise to 12a1 lia'ilit(;. When does o'ligation to u+date=stiAer the +ros+etus in light of +ost- effetive develo+!ents also re.uire a!end!ent of reg state!ent@ If it0s a !aterial hange in the info ontained in reg state!ent :i.e. a su'stitution;8 !ust a!end reg state!ent too. IurA( test. Ite! >12:a; of Reg S-K5 ,ith res+et to shelf registrations8 ver( s+eifi re.uire!ents to a!end reg state!ent. -:3; B ating .ua under,riter8 unsold allot!ent Revie,5 6efinition of Seurities o &here ,ill 'e a <o,e( .uestion on the e/a! :i.e. should it 'e an invest!ent ontrat under test@; o In a ,a(8 this is an e/e!+tion fro! 33 At8 ' e/e!+t if not a seurit(. o 2:1;5 notes8 stoAs8 'onds8 invest!ent ontrats8 or an( instru!ent or interest o!!onl( Ano,n as a seurit(. o IaHor differene in 3- At def5 short ter! +a+er is e/luded fro! def of seurit( :in 33 At8 short ter! +a+er is a se+arate transational e/e!+tion.; o <o,e( &est5 invest!ent in !one(8 in a o!!on enter+rise :vertial or hori2ontal;8 in e/+etation of +rofits8 solel( :inter+ as largel(; fro! efforts of others. Role of risA in <o,e(8 i!!aterial8 'ut o!es into +la( in Reves. <o,e( %t ,as foused on ,hether there ,as on "ffer8 not Hust a +urhase=sale. o #or!an5 oo+ 7stoA9 not a seurit(. disusses anal(sis of stoA features in $andreth :voting rights8 transfer=+ledge8 dividends=a+ital a++reiation; #or!an 7onsu!+tion9 idea8 !otivation ,as onsu!+tion not invest!ent. &he reason the %t onluded the !otivation ,as onsu!+tion ,as ' the t did not vie, stoA as having an( finanial return :no dividends=a+ a++re;8 right to su'sidi2ed rent ,as not a finanial return as 2 nd ir. said. #or!an t said <o,e( test a++lies to all seurities8 not Hust invest!ent ontrats8 'ut su'se.uent ts have 'aAed off this. o Res+onsi'le for #or!an=$andreth stoA test. o Res+onsi'le for Reves test. Re#es : far"ers coo. wit- 2*k "e"bers fro" general .ublic$ 7arketed .ro"issory notes .ayable on de"and$ (re t-ey JnotesH for *4 or ** actI o %est: /$ )or"an consu".tion idea (in#est"ent #$ consu"erGco""ercial "oti#ation) 2$ Dlan of distribution (e$g$ to broad .ublic)2*k .eo.le$ 4u"bers are not deter"inati#e, but t-at see"s #ery large$ *$ Dublic e,.ectations (as to securities law .rotection)$ So"ew-at circular$ ((nd -ow likely is it t-at unso.-isticated in#estors really -a#e any e,.ectations about securities law .rotections at allI) 4$ 6,istence of (lternati#e Regulatory Structures (t-at reduce or "ini"iPe risk t-e in#estors are bearing$) @ts -a#e looked at t-ings like contractual "ec-anis"s (e$g$ collateral in <el"ont e,a".le) besides regulatory structures$ o Va#e to -a#e t-is test, bc a definition of note t-at is too broad would include t-ings like credit cards, "ortgages, etc$ o (not-er i".ortant issue in t-is case is t-at t-e notes .ayable on de"and$ Cnder *a/ of *4 (ct notes -a#ing "aturity of not "ore t-an F "ont-s e,cluded fro" definition of security$ <ut @t says t-at3s not sufficient to get an e,clusion, "ig-t be if t-e Jdesign of t-e transaction suggested t-at bot- .arties conte".lated t-at de"and would be "ade wit-in t-e statutory .eriod$H Re#iew: * %ests in security def arena: /$ Vowey for in#est"ent contract 2$ )or"anGOandret- for stock *$ Re#es for notes$ 9iscussed co""ercial .a.er 9iscussed Re#es @t treat"ent of de"and notes- do t-ey fall wit-in F "ont- .eriodI Re#es ct created uncertainty (Jif design of transaction conte".lated t-at de"and would be "ade wit-in F "ont- .eriod$ 9efinition of stock- Oandret- case$ %ransferGsale by sole s-are-older to buyer in e,c-ange for cas- consideration$ Issue in case was w-et-er t-is was a sale of stock$ @ircuit cts -ad said t-is would not be a sale of a security bc so"eone buying a control bloc can negotiate for w-at t-ey need, don3t need .rotections of securities laws$ (@ircuit cts also .oint out t-at buyer can set u. s-ell cor., structure transaction so as not to trigger securites laws, since econ t-e sa"e as t-is, s-ould allow t-is>I See slides) <ut Su.@t said all t-e .ro.erties of stock were .resent, so it is stock$ @o""onality: VoriPontal- interde.endence a"ong in#estors (see slide) 6fforts of ot-ers- /) i".ersonal "arket forces 2) "inisterialGad"inistrati#e *) I $See Slide$ S6@ ! factor test to deter"ine integration: o /$ Single Dlan of )inancing (t-e "ost i".ortant factor, along wit- sa"e general .ur.ose$) (Oi#ens #$ Witter- -e really t-oug-t eac- offering would be t-e last, but ke.t needing "ore$ not integrated, it3s a sub?ecti#e test$) o 2$ Sa"e class of security, e&uity #$ debt o *$ %i"e of t-e offering (two offerings "ore t-an A "ont-s a.art, rebuttable .resu".tion t-at distinct, /2 "ont-s a.art, al"ost certainly distinct, conclusi#e$ o 4$ %y.e of @onsideration, cas- is not indicati#e, non-cas- is (not #ery -el.ful$) o !$ 'eneral .ur.ose: 9ono-ue$ <ot- offerings -ad sa"e general .ur.ose, but key was co""onality$ Safe Varbors fro" integration o Reg 9 offerings, Rule !2(a)- offerings t-at occur "ore t-an A "ont-s before or si, "ont-s after not integrated$ Re#iew : o @-inese @onsolidated- unregistered @-inese bonds, no contractual or ot-er relations-i. wit- @-inese go#t and assoc in CS$ Ak bonds .urc-ased$ Was .lace"ent and solicitation in #iolation of securities actI turned on &uestion of w-et-er bene#olent assoc an CW (acting for an issuer in connection wit- a distribution) 5es, t-ey are CW, no 4(/) e,e".tion, t-ey are an integral .art of .lace"ent of t-ese bonds wit- t-e .ublic$ \doesn3t t-is conflict wit- Dinter #$ 9a-l re&uire"ent of financial stake in outco"eI] second -olding: e#en if assoc not an CW, t-ey are still in#ol#ed in a transaction wit- an issuer, so 4(/) still wouldn3t be a#ailable$ %-is o.inion .ro#ides a rat-er broad definition of an CW$ o Su..ose securities fro" an issuer -a#e not co"e to rest in -ands of t-e .urc-aser, and t-e issuer relied on so"e e,e".tion fro" registration$ @an .urc-aser now engage in resaleI Va#e to ask if resales are consistent wit- initial e,e".tion issuer relied on, e$g$ if 4(2) e,e".tion, resales also -a#e to be to in#estors w-o can fend for t-e"sel#es$ 6#eryone is in t-e sa"e boat (-as to rely on sa"e e,e".tion, and if e,e".tion destroyed, destroyed for e#eryone, if resale blows e,e".tion, issuer is in trouble too$) If securities -a#e co"e to rest, e#erybody on t-eir own, not in sa"e boat$ Resale does not -a#e to rely on sa"e e,e".tion$ o Droble": Registered offering, controller .urc-ases, -olds for / years$ @an controller engage in resalesI 7ere fact t-at t-ere was a registered .ublic offering does not get controller off t-e -ook, -a#e to ask w-et-er t-ere was a secondary distribution, w-ic- triggers registration re&uire"ents again$ If control .arty sells into t-e O%@ "arket, t-e <9 is an CW, it3s a secondary distribution, 4(/) is una#ailable, "ust be registered absent anot-er e,e".tion$ S-elf registration can be used to register control .artyGsecondary distributions$ o Restricted Securities- we are worried about resales ruining t-e e,e".tion (assu"ing t-ey -a#e not co"e to rest$) Saw t-is wit- 4(2) and wit- Rule /4; (intrastate offering$) o Secondary 9istributions- control .arties are not eligible for issuer-based e,e".tions for t-eir sales suc- as: 4(2), Reg 9, Rule /4; (all re&uire you to be an issuer$) 4(/) will be a#ailable in so"e cases ((kenberg)$ o 9efinition of restricted securities- Rule /44(a)(*)- i, ii, and iii are t-e ones we are worried about$ securities ac&uired directly fro" issuer, Reg 9 securities, /44( securities$ o O.erati#e .ro#isions of safe -arbor Rule /44 are in (b)- if you "eet re&uire"ents of Rule /44it3s not a distribution, and get benefits of 4(/) e,e".tion$ o /44c basic infor"ation re&uire"ents (don3t need to know w-at t-ey are s.ecifically, ?ust t-at t-ey are t-ere$ %-is re&uire"ent gets lifted in so"e circu"stances, w-enIII) o /44d -olding .eriod re&uire"ent o /44e #olu"e li"itation o /44f "anner of sale o /44e*(#ii)- %-e following sales of securities need not be included in deter"ining t-e a"ount of securities sold in reliance on t-is section: > securities sold in a transaction e,e".t .ursuant to Section 4 of t-e (ct an not in#ol#ing any .ublic offering$ o Droble" A-2A: Registered s-ares, .urc-ased by controller, co"e to rest, <9 sells into O%@ "arket, and controller will also, wGout <9, directly sell Ak s-ares to %o", w-o is not so.-isticated$ (re t-e sales fro" @ontroller to %o" e,e".t (%o" does not resale)I 'ood argu"ent for 4(/) e,e".tion, no CW, s-ares -a#e co"e to rest$ In order for it to be a secondary distribution, need /) a distribution and 2) an CW so not a secondary distribution -ere$ <ut t-e e,e".tion could be blown if sale to %o" integrated wit- sale to O%@ "arket$ (nd t-ey will .robably be -oriPontally integrated (sa"e ti"e, sa"e .lan of financing, etc$) So t-is &uestion co"es down to w-et-er t-ere is integration (fi#e factors)$ If integrated, all sales to %o" illegal, and 7ary can3t use rule /44 (w-ic- s-e would .resu"ably use to sell into O%@ "arket) bc /44f and g re&uire -er to use a broker$ (lso creates .roble"s wit- #olu"e li"itation$ <ecause of integration, /44e*(#ii) not a..licable bc %o" sale not a 4(/), so Ak s-ares to %o" counted toward #olu"e li"its$ <roker- (in re Vau.t) 4(4) not a#ailable if acting &ua CW (w-ic- broker is doing -ere if /44 not a#ailable), unless Wolfson e,ce.tion (so "any brokers used t-at any gi#en broker only seeing s"all .iece of .icture and didn3t realiPed .art of a distribution$) (Lolu"e "atters for 4(4), deciding if acting or s-ould reasonably know t-at acting &ua underwriter, but #olu"e doesn3t "atter for 4(/)) o If securities -a#e co"e to rest, don3t -a#e to worry w-et-er restricted securities$ (t t-at .oint only worry about /44 if you3re a control .arty$