SEC REG: Prof.

Horwich, Spring 2011

Securities law all about disclosure
y First: cover what is a security?
y Most of class: disclosure
o What is disclosure?
o When must it be provided?
o What meets the required standard / is correct?
y If done incorrectly:
o Civil liability
o SEC enforcement
o Etc.

Securities Law overview
y Statute and rule based
y Until 2002, fundamentally securities law about disclosure
y Since 2002, SOx passed - in response to scandals at Enron, Worldcom, etc.
o Brought securities law into corporate governance for first time
o Dodd-Frank has added further: federal law into corporate governance
Deals with voting, proxy statements, etc.
y IPO cornerstone of what securities act is about
y Any sale of securities must either be registered or exempt (essence of 5)
y Under what circumstances can securities be sold without registration
o Usually about institutional investors
Hedge funds
PE funds
Pension plans
Insurers
y I [primary] Public [IPO] X [secondary]
o Must comply with 5
y Materiality:
o Defined by SCOTUS for when disclosure of material info is required
o Varies depends on nature of info; and may have party protections from liability for certain
situations
y Reporting regime
o 10-K, 10-Q annually, quarterly reporting required
o Specific events that trigger filing: within 4 days after event: 8-K
o S-K: SEC picks and chooses from items for various disclosure requirements for filings
S-1: for IPO filings
S-3: for already public companies
10-K, 10-Q, 8-K, etc

Securities Acts
y Securities Act of 1933 covers basics
o Describes what must be given in a public offer mandatory disclosures / requirements
o 11 very limited right of action for false or misleading info in registration statement
y Securities Exchange Act of 1934 deals with markets for trading mostly
o Periodic reporting regime: not real-time, but through forms
o Deals with public companies
o 10b-5
y Acts have 2 different numbering schemes can tell where rule is from
o 3 digits: Securities Act of 1933
o #letter-#: Securities Exchange Act of 1934
y Now: SEC has integrated disclosure
o Can incorporate elements needed from S-K into S-3 registration doc

SEC
y 5 members, appointed by the Pres
y No more than 3 from any one party
y 1 chairman
y Formerly had to be unanimous, but no longer often division of 3-2
o Courts have occasionally invalidated SEC rules
y SEC generally thought of as good agency until Madoff debacle
o Has tarnished reputation very badly, with Congress reluctant to give them $$$ for enforcement
under Dodd-Frank (100+ new complicated rules and additional responsibilities)
o Tension over budgetary process (ongoing political issue)
y 5 divisions
o Division of corporation finance deals with most issues from this class
o Other divisions:
Trading and markets
Investment management (mutual funds, investment advisors, etc)
Civil enforcement (SEC doesnt prosecute crimes)
Risk, strategy and financial innovation (new division)
y Regional offices deal primarily with enforcement matters
y Criticism of SEC from flaws in enforcement and

SRO self-regulatory organization
y NYSE, NASDAQ, etc. registered exchanges
y Have obligation to enforce securities law
y SEC disciplines exchanges that fail to enforce the law

FINRA Financial Industry Regulatory Authority
y Enforcement arm to fulfill responsibility under securities law

CFTC Commodities Future Trading Commission
y Look a lot like securities now
y Congress has allocated lots of these to SEC and CFTC
o Both now in effort to adopt regulations under Dodd-Frank for responsibility for enforcement

What is a security?
y 2(a)(1) of 1933 Act:
y 3a-10 of 1934 Act:
y Both begin by saying unless the context otherwise requires

***
Class #2 1/4/11

SEC v. W.J. Howey Co. (1946, pg. 21): Supreme Court grappled with definition of an investment contract where
SEC asserted that marketing of land contracts to a citrus grove was an attempt to sell securities without
registering, in violation of Section 5.
y Whether or not this is an investment contract
1. Invests money
2. Common enterprise pooling of funds
Opportunity to contribute money and share in profits of large citrus fruit enterprise
managed and partly owned by Howey
3. Expect profits
4. Solely based on efforts of others
y Investment contract (one of statutory criteria from both acts)
y No consumption in Howey

5(c) bottom of p9 unlawful for any person to sell [or offer] any securityunless registration has been filed
y Violation even if no one bought, only if offered is violation

CASE: Marine Bank v. Weaver, 1982, p24 bank certificate of deposit to secure a bank loan to Columbus Packing;
in return, Weavers share in Columbus net profits
y Columbus goes bankrupt court said Weavers didnt purchase a security
o SCOTUS said securities law covered those instruments ordinarily and commonly considered to be
security
These are not those commonly thought covered by securities law
Often private offerings are not considered securities doesnt mean its not covered
court more focusing on the one-on-one nature of this transaction
y Securities are usually tradable, and these certainly are NOT
y No disclosure document
o Perhaps main motivation was for consumption
Veto right is not characteristic of security
y Do we need to extend securities law to cover this, or is this already regulatory ways to cover this?
o Factors in Marine Bank demonstrate variety of factors to tick off

Federal Law vs. State Law
y Tunnel vision in this course because only looking at federal law, even though state law may apply in many
of these transaction
y One distinction to extent money is at risk doesnt seem to be a factor federal courts take into account in
interpreting federal laws
o Versus state laws, which state courts may take into account when interpreting whether security
or not at state level

CASE: US Housing Foundation, Inc. v. Forman, 1975, p28
y Issue that use of the word stock literally automatically qualifies the element as a stock
o SCOTUS held use of the word not dispositive
y Facts of stock
o Not used in profit-making effort, but instead intended for consumption
o Issued by Riverbay, a non-profit cooperative housing corporation under UHF
o Purchased by tenants of Co-op City can only acquire if tenant, and if tenant no choice to acquire
stock (its required)
Stock amount 18 shares per room, at price of $25 per share
Ownership of shares entitled owner to tenancy (vs in Howey, ownership of stock didnt
entitle owner to right to occupy land)
y Plaintiffs complaining about anti-fraud
o Alleged deception likely claim under 10(b)-5, p384 unlawful to make any untruthful
statement in connection with the purchase or sale of any security (applies to all sections)
If no security involved, then no claim
y Issue: is this stock in question actually a security? If not, then doesnt apply under 10(b) - 5
o Stock no ordinary characteristics traditionally associated with stock: (p31 top)
Most common feature no dividends contingent upon an apportionment of profits
Not negotiable
Cannot be pledged or hypothecated non-transferrable
No voting rights in proportion to the number of shares owned
Cannot appreciate in value
o Investment Contract did put money in with common enterprise, but no motivation to get
profits
Different from Howey intended for consumption, not for profits
y when a purchaser is motivated by a desire to use or consume the item
purchased to occupy the land or to develop it themselves the securities law
doesnt apply
o One sticky point: rent reduction possible when net income from commercial facilities applied
Kind-of like profit, but didnt weigh heavily in courts view because purpose was to live in
space and not to generate profit

CASE: SEC v. Edwards, 2004, p33 rare 9-0 securities-related decision, prof doesnt quite know why SCOTUS took
it
y Issue: If fixed return, then can it be an investment contract?
o Court held doesnt matter, still a profit, whether fixed or variable return

Common Enterprise
y Easy to understand under Howey case
y But in general, raises more questions for lower courts to deal with
y Common interest what is this?
o Lower courts have generated 3 different tests of commonality
Will depend on which Appellate court you get for what the test will be
y ***3 Tests for Common Interest:
1. Broad, vertical commonality
y Whether generates profits is dependent on promoter; but promoters success and
success of investment is unrelated
2. Strict, vertical commonality
y Whether generates profits is dependent on promoter; but here promoters compensation
is variable with success of investment enterprise
3. Horizontal commonality
y Pool assets of all parties, with multiple investors, and then share profits based on results
of pooled investments in totality
y Still dependent on promoter
y Why?
o Because securities law deals with more than just public transactions applies to private too
Cant single out one factor from Weaver as dispositive
o Can have vertical commonality in almost all situations
o One other factor Howey discussed solely on efforts of others; court later watered down this 4
th

standard changed to primarily profits driven by efforts of others

Problem 2-1, p33
y Jaguar is going to develop a new car; prototype but no production until enough people willing to buy
o Request deposit, with car delivery in 3 years
o Anticipated when cars are delivered, will be worth 3 times price of down payment
y Issue: are those who put down down-payment, are they buying a security?
o What will Jaguar do with money?
Pool assets to build cars
Promoter is given money
People will have something valuable to re-sell
o Perhaps common enterprise?
o Is this an investment contract?
BUT:
y Is there any real profit for Jaguar?
o Potentially like broad vertical commonality
Is this for consumption or profit?
o After-market is where profit will come, not created by Jaguar
y Take-away: what defines a security isnt so clear profit-making schemes dependent in large measure by
promoter, then securities laws may supply (even if not conventional security)
o Driven by nature of arrangement

Class #3: 1.5.11

Problem 2-2, p40 property sold $90M in debt securities to 20 investors; needs an additional $10M entered
agreement with Handsome Trust investing $10M for right to % of net profits of properties
y Issue: is this an investment contract?
y 4 factors: on balance, looks like investment contract
o investing $
o in common enterprise?
Vertical works
y Promoter, MPI, is using assets from first 20 investors
Horizontal?
y All $ is necessary to make deal, so perhaps necessary
o Profits yes
o Handsome dependent on efforts of promoter
y Security? Looks like one
o NOTE: Promoters like to have investors do something that addresses 4
th
criteria, to say success
of deal required efforts to person who fronted money to financial outcome of enterprise, and
thus not a security

Problem 2-5, p45 Japanese fast food restaurants investment of $35K plus percentage of gross then train
franchisee, provide equipment, ads, supervise restaurants
y Issue: is this investment contract?
o NO
Investing $, common enterprise, for profits
Violates 4
th
factor: need both efforts franchisor cant get $$$ without work by
franchisee
y What if franchisee didnt have to be on-site managersdoes this change situation?
o Can become continuum as facts change and move away from franchisee involvement
o NOTE: what agreement provides versus actuality changes whether or not looks like investment
contract

Sale of Business Doctrine if you transferred entire business, even if through stock, then wouldnt function as
transferring a security
y SCOTUS disagreed in Landreth case (1985, p45) if it has what we qualify as stock from Forman case, then
its stock!
o Howey test was not relevant
Doesnt have to satisfy investment contract test if its stock
Fact that transaction was private doesnt tell whether its a security in the first place

Problem 2-6, p48 Sam buying Hillarys real estate brokerage firm Vistas; ways to structure the transaction
Hillary wants him to purchase all her stock, but Sam wants to assume all assets and liabilities
y Issue: how does transaction structure affect whether this involves security or not?

Problem 2-7, p48 have to buy shares of stock in CART to race car; transfer of shares requires approval of Board,
with failure to race may result in stock revocation; S/H are entitled to dividends, although rare
y Issue: is this a security?
o Under Forman, not security just because called it stock title isnt despositive
o Also under Forman, stocks main purpose was consumption; like here, stocks main purpose was
to allow opportunity to race
y Conclusion: NOT securities
o Gives dividends, voting rights
o BUT Not transferrable without approval

2(a)(1) (1933) or 3a-10 (1934) Defining Security
y 33 Act: Note is security a note?
o 2(a)(1) blanket statement, any note
o 3(a)(3) exempted securities (p5)
Entire 33 Act doesnt apply to any of following securities
y Maturity of which is not to exceed 9 months short-term notes are NOT
covered
y 33 Act 17, p21 unlawful to sell any security where misrepresentation is made
o But doesnt apply to short-term notes?
o But no! says exemptions to 3 do NOT apply
y 34 Act: 3a-10, p282: any notebut shall not include any short term-note, 9 months or less
o Not an exemption, just excluded all together
y Both intended to mean commercial paper of high quality
o Notes sold by business entities to finance their ongoing operations
o Courts rely on introductory language in statuteunless context otherwise requires
Have free reign about whether or not to apply that language

10b-5 who can be sued?

CASE: Reves v. E&Y, 1990, p66
y Issue: are the demand notes issued by the Farmers Coop securities?
o Court held YES
y Reasoning:
o Family resemblance test longer term note (more than 9 months) presumed to be covered by
statute, unless you can show it resembles family of notes that arent covered
List (p69) consumer finance note, mortgage note, personal loan from bank note, etc.
not covered
o 4 factors:
1. Assess motivations of reasonable seller and buyer
2. Plan of distribution whether theres a market for the notes
3. Publics reasonable perceptions
4. Risk-reducing factor
y Justice Marshall: said it could be longer than 9 months, thus not necessarily long term
y Justice Stevens joined in judgment held only intended for commercial paper, not investment securities

Problem 2-11 broker addicted to gambling; to pay off debts went to clients for loans, and gave promissory notes
with 8% interest, payable on demand
y Issue: are these securities?
o Motivations?
o No broad distribution / marketing of notes
o Does sophistication make a difference?
Court held that b/c investors werent sophisticated, court didnt put much weight on this
factor
o Risk-reducing factor?

No Action letter: lawyer uncertain what rule would be under securities law
y Can write letter to staff giving facts and ask if use exactly what is said, then SEC will not take action
y Letters are public to function almost as precedent but not binding, and essentially only Yes or No

Problem 2-12 based on SEC no-action letter; to finance homebuilding, borrows money specific to property
gives note with mature date 9 months from closing of loan with 1 renewal option; secured by deed of trust on
property; lenders not partaking in profits
y Issue: is this a security?
o Motivation? For short-term loans
o Broad distribution? Problem doesnt suggest so 25 sold per parcel
o Etc.
o SEC staff refused to give no-action response
Perhaps too broad? Is 25 too many? We dont know

Derivatives
y Regulation of derivatives big part of Dodd-Frank Act
y Derivative instrument or interest that derives its value from something else
o Ex: stock option
o Ex: credit default swap (like those AIG sold)
Agreements on part of AIG that said debt of particular company (e.g., bonds of Lehman),
if defaulted, then AIG would pay holder of swap a certain amount of $
y Value of swap would change based on credit-worthiness of underlying bond
y Value of swaps went up when Lehman more risky
o Markets were unregulated believed by those behind Dodd-Frank that these were behind
financial crisis; therefore Dodd-Frank reversed switch and now requires that derivatives be
regulated, but goal is to make them a standard fungible instrument
Formerly were unique now want them to be more like a stock, which is the same for all
Ex: no one knew how many swaps were out there for Lehman because unregulated, and
didnt require ownership of underlying stock
y $63T in existence at time of Lehman crash mostly netted out, but didnt know it!
o Law not yet adopted because rules required to be created by SEC and FCTC

Class #4 1/10/11

Secondary trading take place after company issues shares
y If publicly traded on registered exchange as exchange-traded or OTC
o Registered under the exchange act, and to regulate broker-dealers who trade on the exchange
Ex: NYSE, Nasdaq
y Formerly membership-owned exchanges
y Now, for-profit stock corporations, almost all publicly owned
y Trading formerly done on the floor
o Now, mostly electronic

OTC one broker puts in bid price, and seller asks a specific price
y System puts the two sides together

Derivatives trading in indices based on large group of stocks (like S&P 500), or trading in futures or options
y Commodity markets relating to securities

Foreign private issuers have disclosure requirements, which are more lenient than domestic companies, in
order to be listed on exchange
y Still have to comply with same fundamental disclosure needs
y Regulation S mechanism by which US and foreign companies can raise capital overseas without
registering in US

Efficient Capital Markets Hypothesis
y Weak form
o
y Semi-strong form
o All public information is reflected in the trading price
y Strong form
o All information, public or private, is reflected in the trading price

If you cant beat the market, why pay for research?
y Regulation FD fair disclosure prohibits senior management from disclosing info on a selective basis
o Has to be given to public simultaneously

Issue with EMH: How does momentum factor in to EMH?
y Emotional factors arent built in, but still can play into stock price
y EMH is a hypothesis, but its the only SEC uses in imposing disclosure requirements
y Debate in academia about whether we should even have mandatory regime of disclosure

Why disclose?
y Managers want to minimize risk have incentive to disclose more about company because investors may
be willing to pay more for less risk
o Managers may also own securities in their company, and therefore want benefits of stock price
o If bad news, then 2 options:
Dont give out the bad news but then increases risk
Absorb cost anyway and relay all info
y Company absorbs costs of disclosure
o Use good rep i-bankers to bring info to market
o May voluntarily list on exchange
y Counterarguments for disclosure (per Easterbrook and Vischal), p253:
1. May conceal bad news, lie, etc.
2. Also, dredging up information is wasteful mandatory disclosure is standardized and simplifies /
eliminates waste; but investors always want more counter is that who says Congress or SEC are
best to say what info is needed, and when is enough
y Disclosure can be heavy, expensive burden, particularly after SOx
o Thus, many companies re-privatized!
TO do so, must make additional, quite intrusive disclosures before doing so

Class #5: 1.11.11
How to Raise Capital & Comply with Law

Section 5 requirements re: registration
y 12(a)(1) allows for nullification of sale, can get $ back if fail to register per Sec. Act
o Very little burden on plaintiff only have to say no registration statement on file when purchased
security; defendant has to prove exception

Historical Background / Framework
y Issuer, 2(a)(4) entity that issues securities
y Underwriter, 2(a)(11) buy securities from issuer to sell to buyers (institutional investors, retailers, etc)
o Aka: Broker-dealer
o Structural process that fits into Sec. Act
o Role: gets involved in sale of securities, provides advice
Ex: will the market buy them, what needs to be done to make the securities attractive to
the market, etc.
y Primary or Secondary offering
o Primary initial registered offering from company
Common stock, preferred stock or bonds
o Secondary secondary market
o Can have both primary, with sales revenue to company, and secondary, with sales revenue to
those cashing out

Underwriting
y 2 types:
o Firm commitment
Eve of offering: underwriter buys securities from company, and then undertakes risk of
selling to public (capital at risk)
o Best efforts
Takes fee in exchange for best efforts to sell securities to market
y 3 types:
o Straight
o Mini-maxi
o All or none
y Dont have to have an underwriter
o Can have an auction instead; ex: Google

Broker Structure
y Managing Underwriters lead underwriters get larger commission, more shares, determine who else to
include
y Syndicate other key underwriters to support the offering
y Selling Group take some of shares and resell to public via retail for broader market availability

2(a)(3) defines terms offer and sell p2
y Negotiations between issuer and underwriter terms shall not include preliminary negotiations or those
in privity (excluded from the definition)

Over-allotment limited by industry to 15% of offering
y Ex: 90M by company, 10M internal 100M total
o But if company kept 20M shares, you may want to know if those will end up on market
Leads to lock-up agreements

Underwriter Impact
y Reputation has strong impact on offering and public view of risk in purchasing securities
o Also concerned about its own reputation want good company to underwrite, makes
underwriters more selective
y Liability
o 11 liability for anyone thats part of the offering if theres fraud or misleading information in
disclosure statute lays out who, but almost everyone can be sued

Integrated Disclosure Statement
y Allows companies to register using past filings, such as 10-K, 10-Q, 8-K
o How do underwriters protect themselves?

Underwriting Industry: very concentrated
y Ex: P124, Tombstone ad
o Top: managing underwriters
Underwriting agreement executed with the issuer
o Middle: syndicate
Selected dealer agreement establishes obligations of each member
o Bottom: major bracket more retail firms
Agreement among underwriters additional broker-dealers to assist the syndicate
o Look at how things have changed in 6 years!
Lehman = gone
JP Morgan = now JP Morgan Chase
Goldman, Morgan Stanley = now bank holding companies
y Cyclical nature of business

Timeframe
y Pre-filing period
y Filing time
y Waiting period underwriters talking to clients: gauge interest, but cant actually offer sale obtain
commitment
o Select price range for IPO; ex: $20 - $23
y Effective upon sale
o Ex: if strong interest, then maybe IPO price will go up$28
o Eventually market dictates price limited ability in underwriting group to participate in market

5: core of 33 Act
y If ever going to sell security, must register transaction with SEC or have exemption
o Registered offering = registers transaction
y Statute works from bottom-up
y 5(c) cannot offer in any way to buy or sell until registration statement filed with SEC
o Policy: why?
No offers until theres disclosure out there!
Cant condition or influence market for securities until disclosure is on file and available to
anyone who wants it
y 5(a) unless registration statement in effect, then
o Can sell now that disclosure is FINAL
y 5(b) purpose for having a prospectus
o Prospectus defined, 2(a)(10) prospectus, 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
Rule 405 deals with VM and other electronic communications
Any writing about sale must comply with SEC requirements re: what contents must be
o 5(b)(2) deals with prospectus that must be delivered with actual sale

7 provides registration statement shall contain whatever SEC says it shall contain
y Used to be listed in detail but now is just in forms S-1 (p192, p195), S-3, S-4 (used to combine
registration statement and proxy statement), etc
o Lists each item that must be included in registration statement, and prospectus is 98% of what
must be included

Lawyers & iBankers roles to dig into company to find everything necessary for SEC registration statement
y Rule 408 in addition to info required to be included in registration statement, must also add information
to demonstrate the required statements are not misleading
o Requires very intensive factual investigation
y Registration statement typically requires 3 years of audited financial statements
y Give opinion at end of day that statement is factually issued
y In-house counsel may not be of help if havent dealt with disclosure
y Lawyers draft disclosure statement, and have sr. leadership review it / gather whatever additional
information needed
o Need to conduct due diligence to avoid liability and sanction under 11
Likely not lawyers liable, but client will be!
Important lesson: verify everything

SEC in action
y If SEC suspects anything, they go out and review!
o Criminal offense to represent SEC has approved issuance of securities or contents of documents
o Provide comment letter
y 8 taking effect of registration statements
o 8(a) - once registration filed, then becomes effective 20 days after filing date
o SEC typically takes longer than 20 days for review; if SEC believes something deficient can bring
stop order proceeding (under 8(b)) to refuse to allow registration statement becomes
effective
o 8(d) can issue stop suspension order after effective date also to require statement be
amended
y Note: Didnt have rules for pre-filing period really until 2005

Amendments
y Rule 473 can delay an amendment to prevent 20 days effectiveness period and await SEC comments
o Note 24, p153 put something on front of registration statement to say this will be deemed
amended from time to time until this is a delay amendment
y Rule 461 can request acceleration from SEC to move up from 20 days of last amendment
o 461(b)(2) SEC wants satisfactory assurance that correct material is public
o Note: 48 hours desired to have prospectus in hand for prospective buyers, before registration
statement is effective
y Preliminary prospectus has red legend on it saying its prelim, subject to change (called red herring)
o Changes every time registration is amended

Notes
y Very expensive process, lawyers and ibankers to pay

Class #6: 1.12.11

Registration Statement Review:
y 8 provision dont apply here; principal exemptions under 4
o Otherwise, 5 always applies
y Exemption ex: 4(2) transactions of issue not involving any public offering
o Public offering not defined in statute so courts have told us what it is
y Reminder: 5(c) prohibits any offers or sales until registration statement filed
y 2(a)(3) brief overview of offer to buy or offer to sell, with carve-out for issuer and those in
underwriting group

5(c) limitations
y Prohibition kicked off by company going in registration
y What defines this in registration point?
o Not defined legally, so most parties are cautious
o If you overstep, SEC can stop you issue stop order but also claim you violated securities laws and
either injoin your offering or at least delay it
Can be very costly in terms of timing your offering right
y Before 2005, what you could do in pre-filing period was unclear; in 2005, new 160-series of rules that say
if you do X and dont do Y, you wont have violated 5(c)
o Safe harbor provisions follow the rule roadmap so you dont violate the law
o During waiting period: deemed to be complaint if you follow 10

Rule 163.A, p90 Exemption attempted compliance is not exclusive
y Available to all issuers, for disclosures more than 30 days prior to the filing date
y No protection for underwriter, only issuer
y Cannot refer to offering
y Prevent redistribution of document in 30 day window

WKSI well-known seasoned issuers: greater flexibility still
y More info out on company under 34 Act, so SEC gives them more flexibility

Rule 135, p50 allows issuer to announce intention to make offering prior to filing date; strictly limits what can be
disclosed
y No anticipated price
y No telling underwriters
y Legend on doc that says it doesnt constitute offer (common in words of rule)
y Only way can disclose impending offering before registration has been filed
o Exception now for WKSI companies

Rule 169, p96 mostly for non-reporting issuers; for company not reporting under 34 Act can, in pre-filing
period, release regularly timed releases in same manner and timing
y Not targeted to investors because SEC says thats just raising companys profile proceeding the filing
thats an offer and is NOT allowed

Problem 4-1, p166; Omega
y Needs $50 70M through IPO; registration statement planned for 5/1
y Issue: on 2/10, VP of marketing runs ads in Business Week; is this an offer?
o Under 163(a), have to prevent re-circulation within 30 days of filing
o Under 169, there may be a problem now that its in Business Week, looks like its targeted to
investors not allowed to allow qualification as exemption under 169(d)(3)
Also potential issue under 169(d)(2) has timing, manner or form changed?
o Change the scenario under 5(a)(2), if same ad running for years, is this an offer?
No, doesnt require business to suspend business ops

Problem 4-2, p167
y 2/14, VP Finance invites 5 ibanking firms to discuss firms interest in underwriting
y 2/15, execute draft agreement
y Issue: is this an offer?
o Under 5, not an offer
o 5(c) doesnt apply; no interstate commerce
y Issue: is Hedley an underwriter?
o Under 2(a)(11) must participate in distribution for issuer; Hedley signed up to do just this fits
the statutory definition

Problem 4-3, p167
y Head of Hedley faxes underwriting agreement to NY offices
y Issue: is this covered?
o Under 2(a)(3) no, still within underwriting firm

Problem 4-4, p167
y Letter circulate to 80 brokerage houses to participate as co-underwriters
y Issue: how do statutes apply?
o 2(a)(3) privity of contract with an issuer this communication is allowed

Problem 4-5, p167
y Communication with smaller firms not underwriting being offered commission to sell
y Issue: how do statutes apply?
o 2(a)(11) not excluded from
Soliciting others for selling, not underwriting, is NOT covered in this provision; because
NOT in privity
y Technically underwriters under this statute, but NOT in privity (from 2(a)(3))
thus not protected re: sale
y Policy: shielding early stages of process to allow for effective raising of capital, but if not in privity then
not protected not allowed to move into sale concerns

Problem 4-6, p167
y 3/15, PR team prepares brochure highlighting companys new developments also indicates intent to
make IPO and estimates of future production capacity
y Issue: is this a violation of 5(c)?
o Rule 135 No legend
o Rule 163.A cannot refer to offering
Also, how going to prevent redistribution within 30 day period
o Rule 169 - Only facts and not forward looking info
y Conclusion: clearly an offer, not protected by any of the 3 rules above

Problem 4-7, p167
y 4/5, journalists and others invited to tour and see expansion plans runs in newspapers
y Issue: is there violation?
o Rule 163.A within 30 day window, so doesnt apply
o Rule 135 ok, because no mention of proposed offering; therefore, not 135 statement
o Rule 168, p94 issuer required to file reports under exchange act not available to non-reporting
company
o Rule 169 this one applies! Cant be directed at investors, so depends on which types of mags /
journalists are invited, and to whom they write

Problem 4-8, p167
y 4/8, Hadley issues on letterhead announcement to financial wire services re: upcoming IPO through
syndicate with 4M shares; Omega posts to website
y Issue: is Hadleys action permissible under securities act?
o Under 5(c), No! This looks like an offer and thus is a violation
None of these rules give underwriter exemptions
y Policy: why dont rules give underwriter exemptions, nor under Rule 135 do the rules allow the issuer to
even tell who the underwriter is!
o Might cause interested investors to approach underwriters violates the rules

Problem 4-9, p168
y 4/27 annual report; mentions expected IPO
y Issue: is Hadleys action permissible under 5(c)?
o Safe harbor possible? Rule 163.A only applies within 30 days, this doesnt qualify
o Rule 135 discloses info not allowed under 135, doesnt apply
o No also violation under 169 like advertising offer, b/c aimed at investors; also, forward-
looking statements
Time, manner and form = upgraded the annual report manner of presentation / profile
is raised; not really presented in the same way
y Tension between need to communicate and ensuring communication is not
incomplete but doesnt cross the line addressing the offering difficult to balance

***
Class #7: 1.18.11

Problem 4-10, p168 -
y 4/28 Omega places Alices (VP of finance) presentation on website and she remarks on expected future
earnings
y Issue: is Alices action permissible under 5(c)?
o No also violation under 169 advertising offer, aimed at investors
o Invitation excepted before company in pre-registration, so this helps
o Talk about expansion but not about offering? no comment or perhaps should withdraw
acceptance of invitation like quiet period
Rules more flexible now than they once were; risky thing to do, before anything is filed, to
talk about the company, and any future plans, publicly
o Info goes well beyond a Rule 135 statement p121, bottom written communication is
anywritten, printed, radio or TV, or graphic comm. (includes anything online)

Problem 4-11, p168 -
y Late April broker writes to Hedley offering to purchase shares
y Issue: is this permissible?
o No violation under 2(a)(3) and 5(c)
5(3) prohibits offers to buy as well as offers to sell

Waiting Period
y Period after pre-filing period, now weve filed rules change significantly
y 5(c) no longer applies
y 5(b) now in charge
o 5(a) continues to bar sales after registration statement is filed
o BUT 5(b)(1) governs the start of sales efforts after registration but before IPO date
Bars any prospectus but defined broadly under 2(a)(10) no written, radio or TV
transmissions
y Oral offers ARE allowed
y Does communication constitute a prospectus?
o 5(c) prohibited any offer to buy or sell, nothing in 5(b) that prohibits oral solicitations, nor does
it require conformity to any requirements
o 12(a)(2) 33 rule on truth / material facts
o SEC enforcement provision Rule 17(a) can make offer, not flatly prohibited but focused on
written communication
y Start sending customers prospectus may wait until after SEC notes
o Important because:
Marketing shares to get people to buy
Determine supply and demand point
y SEC sets own rules for what content must be, pursuant to 10 and
o Rule 430 requirements for preliminary prospectus (doesnt require all deal related info to be
included) part I of registration statement
Part II are materials included in registration statement, but doesnt have to be in
prospectus

2(a)(10) bottom, p3 ad shall not be deemed a prospectus if it states from whom a written prospectus
meeting the requirements of section 10 may be obtained and, in addition, does no more than identify the
security, state the price thereof, state by whom orders will be executed, and contain such other information as
the Commission, by rules or regulations deemed necessary or appropriate in the public interest and for the
protection of investors, and subject to such terms and conditions as may be prescribed therein, may permit.
y 2(a)(10)(b) tombstone, NOT a prospectus

Rule 134, p47 another thing NOT deemed a prospectus
y Used primarily by underwriter for use with investors
y Can send something to customer to allow them to express if they have any interest
y Does require a legend, per 16, p134
y Rule 134(d) may solicit from the recipient of the communication an offer to buy the security or request
the recipient to indicate whether he or she might be interested in the security, if the communication
contains substantially the following statement: No offer to buy the securities can be accepted and no part
of the purchase price can be received until the registration statement has become effective, and any such
offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to
notice of its acceptance given after the effective date.
o Separate permitted communication during waiting period

Rule 405 defines free writing prospectus
y If it isnt under Rule 134, and isnt a preliminary prospectus, then its a free writing prospectus

***Prospectus Options:
y Rule 430 complies with 5(b)(1) and 10
y 2(a)(10)(b) carves out of 10
o Rule 134
y Rule 433

Rule 164 and 433 must satisfy free writing prospectus, p144
y Can say more than or cover things that arent in preliminary prospectus
o But must be consistent with preliminary prospectus
y Not part of registration statement (unless you choose to file it as part of reg statement dont do this!)
y Must contain a legend informing reader that registration statement is filed, and how they can get copy of
preliminary prospectus EDGAR website, SEC, or call toll-free # from underwriter
y Can also provide hyperlink to website of issuer or underwriter (this is something you can add), but still
have to give URL for registration statement
y Issues:
o Can create more risk for issuer
o If hyperlink other things to free writing prospectus, may be deemed to be part of it want to keep
anything else on website separate to not allow courts to see it as one
y Filing with SEC:
o Free writing: must be filed on same day as first use
o Journalistic report will be deemed free writing prospectus once it appears; doesnt have to have
legend, but has to be filed with SEC within 4 days of issuer or underwriter becoming aware of it
y Purpose: can have additional disclosures as long as not inconsistent with preliminary prospective, have a
legend, and filed same day as first use
o NOTE: If WKSI, can use free writing prospectus prior to filing of registration statement, as long as
filed on date registration is filed also

Rule 15c2-8: Free writing prospectus can only be used with people who have received preliminary prospectus
before or concurrent with free writing prospectus, if not reporting company yet
y If electronic, then can accomplish delivery requirement of prelim prospectus by having link in free writing
prospectus
y If seasoned issuer, can deliver free writing without prelim prospectus, BUT must provide that registration
statement is filed in legend (required)

P147, d(1) any offering participant other than issue shall file

Rule 164(a) In connection with a registered offering of an issuer meeting the requirements of this section, a
free writing prospectus, as defined in Rule 405, of the issuer or any other offering participant, including any
underwriter or dealer, after the filing of the registration statement will be a section 10(b) prospectus for purposes
of section 5(b)(1) of the Act provided that the conditions set forth in Rule 433 are satisfied.
y SEC complies with 5(b)(1) as complaint with 10(b) as long as you satisfy Rule 433
y Rule 164 gives some leeway if miss something (no legend, forget to file, etc), as long as in good faith and
quickly rectify, then wont lose protection of Rule 433
o Broad concept because encompasses anything thatll be linked to preliminary prospectus
Anything linked is free writing prospectus

Road Show, p150, Rule 433(h) - definitions
y When management of company and underwriters travel around to major investment centers and put on
presentations to prospective (usually only institutional) investors
o Formerly invitation only, closed
o Oral presentations are fine BUT if start handing something out, ppt slides, etchave to comply
with 10
o If record / graphic road show possible and popular, but still must follow rules
Generally need not be filed; BUT if road show is for common stock by non-reporting
company, and graphically recorded, then must be filed unless issuer makes it available for
anyone to see
y Road show = an offer that contains a presentation regarding an offering by one or more members of the
issuers management and includes discussion of one or more of the issuer, such management, and the
securities being offered
y Brokers go out, drum up interest, etc.

Rule 15c2-8: SEC will not grant acceleration until confirm everyone on interested list rules require most recent
prelim prospectus (red herring) must be distributed at least 48 hours before any confirmed sales
y Allows seller enough time to review if they want to change / sell / cancel order

Problem 4-12, p176
y Broker telephones client and strongly recommends stock he sends prelim prospectus
y Issue: does this violate any securities law?
o NO allowed because done orally; doesnt have to have prospectus first

Problem 4-13, p177
y Broker follows-up sends letter saying still good buy
y Issue: does this violate any securities law?
o YES! Should comply with securities law
Rule 433 has to be filed too extreme for this case, where the note itself has to be filed
with SEC
Rule 134 ok, could consider as not a prospectusbut cant put in personal opinion if
included, must have legend (from 134(d))
If really wants to use this document as described in problem, then need to file it with SEC
probably extreme; more likely to just rely on telephone
y More grey area: voicemails just leave name, call back re:

Class #8: 1.19.11

INSERT MISSING NOTES:

Problem 4-14, p177
y Sum:
y Issue:

Problem 4-15, p177
y Sum:
y Issue:

Problem 4-16, p177
y Sum:
y Issue:
o Covered by 2(a)(10)(b)?

Problem 4-17, p177
y Multiple underwriters prepare and distribute own sales brochures to broker and potential customers; not
shared with other underwriters in offering and not filed with SEC
y Issue:
o Free writing prospectus needs legend and to be filed
o Any writing thats not prelim prospectus thats used during waiting period has to find a lawful
home somewhere
Not tombstone beyond 2a10b
Beyond Rule 134
Only remaining lawful alternative is Rule 433 to comply with all requirements is
offering participant used in Rule and refers to underwriters
y Have to know price range has been disclosed (pre-condition for free writing
prospectus in connection with non-public company)

Problem 4-18, p177
y Omegas registration statement lists its web site address there has hyperlink to trade pub touting
Omegas more recent product
y Issue:
o Ok re: prospectus; dont have to worry about fulfilling requirements for free writing prospectus
o What about trade pub article being reproduced?
Ok to advertise current products during waiting period Rule 169 expressly includes
under 169(b)(1)-2
y BUT If on website for first time after filing, then not same time, manner or form
(169(d)(2)) becomes free writing prospectus now under Rule 433
Under Rule 433, has to be filed with SEC, includes legend, click through prospectus to get
to ad, etc. because has to show delivered concurrently or previously
y These are the risks for companies going public
y Any info that will color investors perspective on whats being offered, then need
the stop, look and listen warning
o Ex: Goldman Sachs revamped efforts over weekend to only sell to
offshore clients re: Facebook shares to avoid being non-compliant

Problem 4-19, p177
y Alice, VP Finance, undergoes interview with underwriters digitally recorded and placed on Hadleys
website and available to public
y Issue:
o This is a free writing prospectus
But open interview with journalist covered under Rule 433(f)
File within 4 days and not paid for interview with public then ok
o What if considered a road show?
Doesnt have to be filed as long as its posted online / graphic communication made
available and openly to public
y Slightly ambiguous as to how its availablejust issuers website? Underwriters
website?
o Issuers website doesnt have to be filed conventionally itll be here
o Underwriters website seems to need it to be filed
Must include issuer and not just underwriters

Problem 4-20, p177
y Alice sends email to all employees speaks optimistically about Omegas future then posted on popular
online chat room
y Issue:
o Should attach prospectus with email
o Should file with SEC same day as email
o Include legend
y What if VM?
o Not oral communication lots of VM these days distributed as attachments to emails!

Class #9: 1.24.11

5 path to registration
y Potential exempt via 4
y Pre-filing period
y Waiting period
o Prospectus
o Free writing prospectus (if any)
y (Acceleration to) Effective Date
y Post-filing period
o Final prospectus
y Later: secondary Market
o 34 Act reporting requirements

5 after Effective Date
y 5(a) - prohibits sales until effective
y Can now make sales, send bills in form of confirmation
o Now at effective point, 5(a) is gone
o 8 is also not application
Only 5 requirement left is prospectus delivery requirement from 5(b)
o Now will also distribute final prospectus

What happens in post-effective period if
y Something wrong in prospectus OR
y Facts change from what was recorded in prospectus on effective date

Rule 430(a), p138
y Caption prospectus for use prior to effective date
o But suggested final prospectus needs offering price and other details that are allowed to be
omitted from prelim prospectus
o Rules proscribe final prospectus can be created from prospectus thats missing info, but then filed
as addendum to prospectus within 15 days of effective date, and is then deemed part of the
prospectus once filed
o Final prospectus becomes selling doc

Rule 433: If use free writing prospectus after effective date:
y Legend
y Filing requirement
y Note: these 2 requirements not eliminated after effective date

Rule 2(a)(10)(a), p3
y except that (a) a communication sent or given after the effective date of the registration statement
(other than a prospectus permitted under subsection (b) of section 10) shall not be deemed a prospectus
if it is proved
y Can continue to use free writing prospectus but note, if going to use 433 prospectus, should probably
deliver final first or concurrently
o Seems silly (to Prof) to file free writing prospectus after already effective

Prospectus Requirements post-effective date
Former: Cant solicit without delivering final prospectus
Current: SEC has relaxed these rules
y Ex: Rule 172 can send a confirmation without it being a prospectus
o Also if deliver a certificate for security doesnt have to give prospectus first

4 Exemptions
y 4(1) exempts transactions NOT by issuer, underwriter, or dealer
y 4(2) exempts transactions by issuer NOT involved in IPO
y 4(3) gives complex rules for dealer acting as an underwriter
y 4(4) when customer comes to broker unsolicited and asks to buy exempt from 5 and from prospectus
delivery requirements

Rule 173
y Underwriter must deliver a final prospectus within 2 days of effective date; BUT sufficient to satisfy simply
by giving people a notice that registration made pursuant to prospectus
o Giving notice under 172(a)(1) NOT a prospectus; satisfies requirement from Rule 153
Big exception: 4(4)

Rule 153 for already public organizations
y Relaxes rules re: delivery requirements from 5(b)(2)
y Have to be already listed on exchange before effective date
o Delivery requirement then only 25 days (not 40 or 90 days as seen in 4(3)

Problem 4-21, p181
y Omegas registration with 2M shares with IPO price of $15 pps effective on July 1 after, shares will trade
on NASDAQ
y Hadley emails copies of WSJ to customers, including info not filed with SEC email contains hyperlink to
final prospectus online
y Issue:
o Covered because had hyperlink right to final prospectus satisfies deliver requirement,
concurrent is OK
Writing now evolved to encompass electronic communications

Problem 4-22, p181
y Hadley emails confirmations of sales to all customers who made offers to purchase; earlier given prelim
prospectus and most consented to ecopy; informs customers to where to find term sheet online
y Issues:
o Is confirmation a prospectus?
Under 2(a)(10) if this is a prospectus which must be accompanied by final prospectus
Exempt from delivery requirements under 5(b)(1), not a prospectus

Filing under Rule , p147
y When not part of filing requirement, under d(1)(i)

Problem 4-23, p181
y One of underwriters sold entire allotment by 7/5; on 7/10 one of brokers suggests a customer purchase a
block on NASDAQ, and he agrees; must the underwriter forward a final prospectus to client?
y Issue:

Problem 4-24, p181
y

Problem 4-25, p182
y Unsolicited transaction exempt under 4(4) from 5, and also thus exempt from delivery requirements

Problem 4-26, p182
y Hadley makes term sheet available
y 15(c)(2)(8) by Hadley providing term sheet, its requirements are fulfilled
o Brokers must have all necessary documents prelim prospectus, term sheet, etc.

Analysis Order
y 4(4) to see if any exemptions from delivery
y If delivery requirement, analyze under Rules 172, 173, and 174
y If already traded, Rule 153

Class #10: 1.25.11

Decision Tree requirement for registration:
y 5 applies equally to any seller
y Exemptions that exclude compliance with 5
o Some under 4
o Use S-1
y Route #1: non-public company (from yesterday)
y Route #2: already public company
o Still has to comply with 5 unless transaction is exempt
o Different route following cap markets hypothesis
o Use S-3 : other alternative for fundamental sales by issuer to public

Integrated disclosure system mostly S-3
y If already filing 10-K, 10-Q, and 8-K forms then can be incorporated by reference in S-3
o Means that all items that you have to respond to in S-3 can be satisfied using existing forms and
their data
o Standards in S-3 as to who can use it
Qualifications for issuer to see if they satisfy standards to qualify
Which transactions can it be used for
y Can rarely use integrated disclosure for S-1, under 7
y Missing from 3 forms that must be added in S-3:
o Elements of specifics regarding issue:
Use of proceeds
Distribution method
Price
Underwriters

Levels of Issuers
y WKSI Well Known Seasoned Issuer
o Can use S-3; doesnt take a lot to be a WKSI: $700M of market cap (# common shares outstanding
* pps)
y Seasoned Issuer
o Filing under for at least 12 months, but doesnt meet WKSI
o Can use S-3
y Unseasoned Issuer
o 34 Act company, BUT doesnt meet requirements of seasoned issuer
y Unregistered Issuer
o Fall under Rule 433(b)

Rule 163, p88 only for WKSI ISSUER
y Allows WKSI to make offer prior to registration statement (overrules 5(c) for WKSI)
y 163(a) any written communication that is an offer made in reliance on this exemption will be a free
writing prospectus as defined in Rule 405 and a prospectus under section 2(a)(10) to be covered by the
registration statement to be filed; and (b) exemption from section 5(c)
o Issuer-only rule
o Treated as free writing prospectus i.e., must be filed with SEC and have legend
Note: if legend omitted and good-faith attempt to comply, then not violation iffiled
asap after discovery that need to file

Rule 168, p ONLY FOR ISSUER
y Allows issuer to include forward-looking material, but still limited by time, manner, and form
o Also cannot refer to offering
y Still have Rule 135 available
y Brokers could also use Rule 134, at least during waiting period
y Parallel that allows company to continue to disclose info as it has done in the past, even as its embarking
on new offering

Rule 137, 138, 139 FOR BROKERS
y Acknowledge appropriateness for brokerage community to continue doing what its been doing, so long
as it doesnt attempt to condition the market
y Idea: if already public and trading, why do we care anyway?
o Answer: if brokers could hype market in any way, want to be sure those buyers have info they
need before committing themselves to buy
o Whats in S-3 (or S-1 for unseasoned issuer) will tell what companys going to do with money
SEC wants this info in registration statement and disclosed
y Apply throughout all periods
y NOTE: doesnt include 135(a) that ONLY applies to mutual funds
y 137 allows broker-dealers who arent part of offering to continue in what theyve been doing (aka
nothing to gain by hyping interest in offering)
y 138 only available when it is reporting company and CURRENT in 34 Act reporting
o Available whether or not participating in offering, but limited exception = can only comment on
securities that are NOT economic equivalent of offering
Ex: if stock offering, then can comment on debt, but NOT on stock price
y 139 allows broker, whether or not participant in underwriting, to continue what its been doing if
company qualifies for S-3 AND current in 34 Reporting AND already been commenting on company in the
same way
o Alternative: can issue a report about industry in which company is involved, as long as issuer is
reporting company and report has info on substantial # of similar companies
Substantial vague word, may be factor based on industry or court

Problem 4-27, p191
y Omega now a reporting company eligible to use S-3 but not a WKSI
y 4/15 just before filing, PR prepared a brochure highlighting companys development - indicates intent
for offering and estimates future production capacity
y Issue:
o Not a WKSI, so cant use free writing prospectus prior to filing
o Rule 135 not available
o Rule 168 available but 168(c) exclusion exists around any communication containing info
related to offering; therefore, the brochure as is stands is INVALID

Problem 4-28, p191
y Now issuer is WKSI
y Issue:
o Can use more flexible Rule 163
WKSI can publish info before registration is filed
Can function as free writing prospectus: but still need to file and have legend (combine
Rule 163 with Rule 430)

Problem 4-29, p191
y Issuer is WKSI and brochure prepared by broker; circulated it on 5/2 to institutional clients
y Issue:
o Rule 168 is ONLY for issuer, and this is an underwriter not available
o Rule 137 is ONLY for non-participating brokers not available
o Rule 138 is ONLY for not same security as issue not available
o Rule 139 issuer-specific report; could use if the below are true:
Issuer must be eligible for S-3: yes
Current in 34 Reporting: yes
Already commenting in same way: yes
o Rule 433 allows underwriter to participate in something like this after registration if free writing
prospectus requirements are met:
Legend
Filed
Etc.
NOTE: in reality, managing underwriter would KILL if this actually happened!

Problem 4-30, p191
y If issuer cant use S-3, does Problem 4-29 change?
y Issue:
o Rules 137 139 not available because 1) participating broker; 2) same as issuing security; and 3)
cant use S-3
o Rule 433 follow free writing post-registration rules and then can use this!

Problem 4-31, p191
y 5/1 after filing registration statement, issuer placed on web site a section labeled Historical
Developments with a report on Omega prepared by non-participating in offering
y Issue:
o Rule 137 protected for broker
o What about Omega / rule for issuer?
Rule 168 for reporting companies with forward-looking info, BUT has to be same time,
manner and form
y Violation!
Rule 433(e)(1) re: items on issuers website
y 433(e)(2) allows separate section of companys website to contain historical
info thats not linked to any offering materials

Problem 4-32, p191
y C-suite execs meeting with journalists just minutes before statement is effective; Omega provides
hyperlinks to some of these stories that arise
y Issue:
o Rule 168 prohibited to talk about offering
o Rule 433(f)(1)(ii) treat as free-writing prospectus
Issuer has to file within 4 days re: journalist articles
NOTE: really quit talking to press to avoid these scenarios
y Dont do this not good form

Problem 4-33, p192
y Broker made plans to send to several institutional clients as email day after filing confirming its purchase
of Omega shares
y Issue:
o Must satisfy what requirements to deliver prospectus:
Rule 174(b) reporting company, doesnt need to send prospectus
Rule 172 dont have to send prospectus with confirmation

NOTE: Free writing prospectus under Rule 433(b)(1) for WKSI and seasoned issuer dont have to deliver
prospectus as long as its filed


Class #11: 1.26.11

Rule 415 shelf registration rule
y Historical idea: Takedown take securities off the shelf and sell them
y Lots of sub-categories under this rule
y If shelf is S-3, constantly kept up-to-date by filing forms as required doesnt become stale because of
integrated disclosure system auto updates every time you file something under 34 Exchange Act
y Note: Every quarter want registration statement out there getting updated every quarter by new filings
y Delayed basis:
o When looking for market to be right
Ex: want to sell bonds, but only want to sell when market is right
y List class but not price then can list them immediately when market is better
y Have effective registration statement, then take down bonds when ready to
market with price
y Condition:
o Will have shelf continually updated by quarterly filings, so have to commit that if fundamental
change to any info, then will amend registration statement
Telling SEC: let us go effective, and then if anything fundamental well be sure to update it
y S-3 filers: will be incorporated likely by reference
y If not, have to file post-effective amendment, which wont become effective for
48 hours
y Hiccup: what is fundamental vague; more than material, but what we dont
know
y Becoming standard for most companies

Rule 415.1.b / Rule 462(b) - Automatic shelf
y For WKSIs only - As part of increased flexibility with 33 Act
y Goes effective IMMEDIATELY
y Have to file a new one every 3 years (or they expire)
y Poised to raise money on a moments notice; effective with flexibility id classes of stock without pricing
or listing volume

Rule 430.B how much can leave out of shelf registration
y When know if doing takedown, then can file remaining docs / fill in blanks and go ahead with offering
y Sets forth contents required for base prospectus thats part of registration statement not a final
prospectus, but becomes final when supply missing info
o Registration is active, but prospectus not final
o Does become part of registration statement when final deals with 11
11 civil liability options for truth / completeness in registration statement

Rule 424
y Provides mechanism and sets for how to supply missing info: pricing info, # shares, method of distribution

Problem 4-34, p199
y S-3 eligible company; common stock already trading, wants to register convertible bonds to 50 shares at
option of bond holder
y Company wants to sell bonds at 11% but market is 12% - doesnt want to sell yet, wants to wait until
interest rates drop and be ready; files self registration statement
y Issue:
o 2(a)(3) when a sale occurs, has a carve-out for ____
But really an offer of underlying security offering both bond and stock, unless terms of
conversion right are that it cant take place until some date in future after sale of bonds
o Will shelf registration be allowed for both securities?
415(a)(1)(10) securities registered on Form S-3 which are to be offered and sold on an
immediate, continuous or delayed basis by or on behalf of the registrant, a majority
owned subsidiary of the registrant or a person of which the registrant is a majority-owned
subsidiary
y Shelf registration statement to encompass 2 classes of securities (stock and bond) combined under this
rule as under 1 registration statement

Problem 4-35, p199
y Company considering raising capital, but dont know what kind of security want to issue
y Issue:
o If S-1 company, can it use shelf reg to register multiple classes of securities without committing to
what securities it will sell?
NO! Rule 430B allows for flexibility if you file an S-3
y Doesnt apply here
o If could use S-3 but is a WKSI, then use Rule 415.a.1.10
o If WKSI, can list everything without specifying
NOTE: as you go up scale from S-1 to WKSI, greater flex possible
y Efficient market theory: larger market cap of company, more amount of info
available, more flexibility available

Problem 4-36, p200
y Small unseasoned company has OTC market shares traded reporting co for less than 1 year; stockholder
wishes to sell significant amount of stock
y Issue: can she register her shares for secondary offer sale?
o Rule 415.a.1.i permits secondary offering
o Any registration statement still has to be filed by issuer and signed S/H could have contractual
right to force issuer to do sobut

Problem 4-37, p200
y WKSI that encourages employees to own stock in company; has program to buy as payroll deduction
y Issue: does this need registration statement?
o Continuous offering, so good candidate for shelf registration
o Rule 430A can leave off lots of info and supply as sales are made by filing prospectus
supplement from time to time

NOTE: Shelf is important and flexible tool for corporate financing
y Offerings that facilitate capital raising and, in some cases, employee ownership participation

TIMELINE
y Carries as long as 3 years past filing date
y Post-effective period 2 concerns:
1. Find out something wrong with registration statement on effective date: material inaccuracy
Exposes issuer to liability under 11
Must file post-effective amendment to correct info not effective until amendment is
effective therefore if any further sales made pursuant to registration statement, tried to
limit liability for sales coming after
y Most sales are immediate and therefore shouldnt make difference when
amendment occurs in practice, but still important
2. Facts change after effective date: supplementing info
Issue: secondary market or further sales after effective date
y Remember: prelim prospectus cant be circulated for offers; but final prospectus
can be
o Thus can amend registration statement but can correct sticker (p207)

Rule 424 sticker to update prospectus
y Also amend registration statement, as common practice
12(a)(2) requirement of truthfulness
Rule 10b-5 ______

Problem 4-38, p201
y Registration statement became effective 7/12, and reporting owning 900K acres; on 7/18, 350K acres lost
to forest fire
y Issue:
o No complaints because accurate on effective date
o What if surveyor error and had less than 900K acres?
Creates 11 liability because statement inaccurate on effective date
8 stop order approach?
8(b) refusal order
y Bars filed registration statement from becoming effective
y Limited use only for patent misstatements and omissions
o Notice of hearing required within 10 days of the statements filing - and then hearing occurs
within 10 days of notice
o 8(a) requires registration statement become effective within 20 days of its filing small
window for refusal order
o Rule 473 procedure for a permanent delaying amendment continuously tolls the
commencement of the 20 day period (mitigates the 20 days under 8(a))

8(d) stop order
y More frequently used than 8(b) refusal orders
y Allows SEC to stop if appears registration statement contains untrue statement(s) of material fact; used
even when the offering has been completely sold
y Serves as a notice to investors materially misleading disclosures from registration statement
o Can be used before and after effective date
o 8(e) can issue stop order solely on basis of issuer or underwriters failure to cooperate with SEC
investigation

Post-effective Period Changes to be Materially Misleading
y 8(d) Note: does NOT include changes that make truths at time of registration statement now misleading
during post-effective period
o Makes 8(d) consistent with 11 liability exists when materially misleading at effective time
y 12(a)(2) available for those who purchase security which has registration statement become misleading
after effective date
y 8A SEC can issue cease and desist order or invoke 20 to obtain federal court orders to prevent violation
of SEC Acts (for ex: under 17(a) for antifraud)

5(c) no offers to buy or sell allowed when refusal or stop order issued
y If reg statement already effective, then 5(c) bars any public proceeding or exam under 8

8(e) investigations under 8 that are NOT public

8A gives SEC power on emergency basis to enter cease and desist order administratively
y Not common, but SEC doesnt independently investigate facts; rely on company for facts

8-K form used to correct registration
y Thus market has everything available thats current
y 8.01 allows 8-K to be used for reporting any material developments
y Nothing mandates disclosure of any material event, BUT protects company from 11 liability so
companies use 8-K at their discretion

***
Trading Rules
y Covers what happens after effective date and offering as trading develops
y Trading market allows for possibility of manipulation particularly if market goes down
Desire to have liquidity; but also restraints that prevent manipulating price in period after
offering
y Regulation M out of 34 Exchange Act p801
o Act deals with secondary market and trading
o Puts limits on purchases under certain circumstances lots of definitions, but also lots of
exemptions
Ex: Research reports (from Rules 138 / 139) considered exceptions
If actively traded, then exempt
y Actively traded = >$1M traded per day, public float of $150M+
Reg M, Rule 102 prohibits ___ by issuer during this period
o Designed to allow trading after IPO, but limiting to restrain manipulation


Class #12: 1.31.11

Problem 4-40, p210
y Status as of March 12
th
on day of purchase, not yet an underwriter
y Restricted Period, 2 For all other securities, the period beginning on the later of five business days
prior to the determination of the offering price or such time that a person becomes a distribution
participant, and ending upon such person's completion of participation in the distribution
o March 15 5 = March 10
th
; distribution participant = March 15
th
(winning bid awarded) later of
two, thus March 15
th
begins restricted period
o But Hedley didnt know if theyd be accepted; dont fit test of prospective underwriter no
reason to believe they knew theyd win
o If bought on March 12
th
, then ok NO violation

Rule 100, p804 Regulation M

Rule 104 Stabilization
y What an underwriter can do during an offering pre-offering and post-offering activities, that will be
permissible and not violate Rule 101
y Rule 508(l) - Have to disclose in prospectus registration statement
y Allows underwriters to initiate and change stabilizing bids based on price in principal market
o So long as bid does NOT exceed offering price
y Only permissible to prevent or retard a decline in price cannot be used to move it up
o If offering is made at the market then cant stabilize
o CANNOT stabilize at price higher than offering price no higher than last independent price
If no market, then can stabilize no higher than offering price if stabilizing bid was made
before market developed (rare)
o Can increase stabilizing price only if someone else has moved the price up must follow market

Problem 4-41, p212
y Maintained bid at $9 prior to effective date to absorb selling interest at that price
y Last quoted price before offering - $9.25
y Last sale was $9.50; Hedley then increases bid to $9.50
o Can initiate stabilization NO HIGHER than last independent bid
o Thus this is OK (cant go above it)

International IPOs
y Foreign-private issuer non-governmental entity, organized in a foreign country, organized in the US
markets
o Use forms F-1 or F-3, parallels (but not identical) S-1 and S-3; somewhat loosening of disclosure
standards to facilitate access to US capital markets

US companies selling overseas
y Implications re: interstate commerce
y Rule903(b) under Regulation S -in effect a safe harbor; if you fit within one of categories within
Regulation S; then wont have to comply with 5
o Only outside of 5, not any other rules
o Registration exemption (NOT a fraud exemption)

Regulation S
y Little risk that securities will bounce back into US as run around 5
y Category 1: Foreign Issuers with no substantial US market interest; overseas directed offerings; securities
back by full faith and credit of foreign government; employee benefit plans
y Category 2: Reporting US issuers debt securities; foreign issuers debt securities; reporting foreign issuers
equity securities
y Category 3: all other issuers
o Greatest restrictions among 3 categories
y 2 basic requirements:
o Transaction is offshore as defined in rules
Sales made in foreign exchange trading floor
In offshore market and not pre-arranged to flow back to US
o No offers made to US persons
y NOTE: If a single offering, have to find a single exemption that covers all the sales
o If you have a valid Regulation S exemption, then there wont be integration dependent upon
Regulation S exemption being fully complied with (???)

Regulation S issues with internet
y If can access offering online from US portal, then its considered offering to US
o Therefore must assure that only qualified investors (those allowed to buy overseas) are the only
with web access to site, or use password
Based on what local law requires
y Ex: if offered in Spain, must comply with Spanish laws
o Comply with US law if comply with Regulation S then dont need
registration statement in US

Rule 135(c) allows US journalists to attend press conferences overseas, as long as press conference held
overseas and with no offering in US

Problem 4-42, p230
y Textron common stock on LSE and NYSE; of trading volume on each
y Issues:
o Regulation S?
Not Category 1 because US market
y P181 substantial US market interest defined 20%+ on NYSE, and less than
55% on single other country exchange
Rule 902(b)(1)
y (i) no because no substantial US interest in securities being offered
Category 2 YES!
y Foreign-private issuer offering securities overseas registered and reporting
under 34 Exchange Act
y Sale to US citizens overseas?
o NO because US person; Rule 902(k) any natural person resident in US
If resident overseas, then offering ok?
y Rule 902(g) offering restrictions imposed on US person
re: moving securities back to US
y Cant sell to US persons for 40 days

Problem 4-43, p230
y US citizen based in London office
o If resident in London, then not barred test isnt citizenship, its residency

Problem 4-44, p230
y If company incorporated in Delaware, what changes?
o Shifts to Category3 greater burdens imposed
Longer period for shares to be sold to US persons: 1 year, not 40 days

Problem 4-45, p230
y Can this be done without violating 5?
o Simply informing the market vs. conditioning the market
Rule 902(c)(3)(1)
Rule 135(c)

*** CHAPTER 5
Exempt Transactions
y Any sale has to comply with 5 unless exempt
y Issuer exemptions:
o Useful because such a long and complicated timeline
o Exemptions under 4
Ex: under 4(2) sell to stockholder (exempt) but if wants to resell, then has to register
resale, or find exemption for resale
y Resale also runs up against 5
o If claiming exemption sell securities without registering transaction if question is raised, then
burden ALWAYS on party making sale to demonstrate ok under exemption
If do this, buyer can rescind under 12(a)(1) only has to show no effective reg statement
covering transaction (very easy to prove)

3(a)(11) Exemptions for Local Offerings
y From 1933 made sense to exempt intrastate transactions
y Doesnt apply for interstate seems arbitrary (ex: Chicago to Kenosha, vs. downstate)
y Statute is pretty vague, from Release No. 4434 SEC gives more info
o Means entire issue must be sold to residents of 1 state
Ex: Sale to 1 person outside permitted category destroys exemption for all sales
y Then everyone can sue under 12(a)(1) and get their $$ back
o Also means only can be offered to residents of state; resale out of state would destroy exemption
unless securities had come to rest in original buyer
Interpretation up to the courts

Problem 5-1, p261
y Ad in local newspaper and on website, and direct mailing
o How to restrict only in state of Mass.?
Include legend offer only to those residing in Mass.
For physicians licensed in Mass. must check mailing addresses

Rule 147 definitions for 3(a)(11)
y If follow to the letter the elements of this rule, then complying with elements of statute; if not, then are
not complying with statute
o To satisfy 3(a)(11); then entitled to exemption one of many safe harbor exemptions

Problem 5-3, p261
y Doing business = performance of substantial operational activities in the state of incorporation
o Not fulfilled by bookkeeping, stock record and similar activities or by offering securities in state

INSERT 2.7.11 NOTES

CLASS #13
CLASS #14

CLASS #15: 2.8.11
Regulation D - Rules Governing the Limited Offer and Sale of Securities Without Registration Under the Securities
Act of 1933
3(a)(11) Any security which is a part of an issue offered and sold only to persons resident within a single State
or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation,
incorporated by and doing business within, such State or Territory.

4(2) The provisions of section 5 shall not apply to: (2) transactions by an issuer not involving any public
offering.

18: EXEMPTION FROM STATE REGULATION OF SECURITIES OFFERINGS.
(a) SCOPE OF EXEMPTION.Except as otherwise provided in this section, no law, rule, regulation, or
order, or other administrative action of any State or any political subdivision thereof
(b) COVERED SECURITIES.For purposes of this section, the following are covered securities:
(1) EXCLUSIVE FEDERAL REGISTRATION OF NATIONALLY TRADED SECURITIES.A security is a
covered security if such security is
(2) EXCLUSIVE FEDERAL REGISTRATION OF INVESTMENT COMPANIES.A security is a covered
security if such security is a security issued by an investment company that is registered, or that
has filed a registration statement, under the Investment Company Act of 1940.
(3) SALES TO QUALIFIED PURCHASERS.A security is a covered security with respect to the offer
or sale of the security to qualified purchasers, as defined by the Commission by rule. In
prescribing such rule, the Commission may define the term qualified purchaser differently with
respect to different categories of securities, consistent with the public interest and the protection
of investors.
(4) EXEMPTION IN CONNECTION WITH CERTAIN EXEMPT OFFERINGS.A security is a covered
security with respect to a transaction that is exempt from registration under this title pursuant
to
(c) PRESERVATION OF AUTHORITY.
(1) FRAUD AUTHORITY.
(2) PRESERVATION OF FILING REQUIREMENTS.
(3) ENFORCEMENT OF REQUIREMENTS.
(d) DEFINITIONS.

***
Rule 135c - Notice of Certain Proposed Unregistered Offerings
Rule 147 - "Part of an Issue," "Person Resident," and "Doing Business Within" for Purposes of Section 3(a)(11)
Rule 152 - Definition of "Transactions by an Issuer Not Involving Any Public Offering" in Section 4(2), for Certain
Transactions
y The phrase "transactions by an issuer not involving any public offering" in Section 4(2) shall be deemed to
apply to transactions not involving any public offering at the time of said transactions although
subsequently thereto the issuer decides to make a public offering and/or files a registration statement.
Rule 155 - Integration of Abandoned Offerings
Rule 477 - Withdrawal of Registration Statement or Amendment
Rule 701 - Exemption for Offers and Sales of Securities Pursuant to Certain Compensatory Benefit Plans and
Contracts Relating to Compensation

***
Securities Act Regulation D (Rules 501-508)
i
- Rules Governing the Limited Offer and Sale of Securities Without
Registration Under the Securities Act of 1933

Securities Act Regulation A (Rules 251-63) and Form 1-A Conditional Small Issues Exemption

***
Problem 5-22 Non-accredited partnership
y Issue: how many purchasers?
o Rule 501(e)(2) only 1 purchaser
A corporation, partnership or other entity shall be counted as one purchaser. If,
however, that entity is organized for the specific purpose of acquiring the securities
offered and is not an accredited investor under paragraph (a)8 of this section, then each
beneficial owner of equity securities or equity interests in the entity shall count as a
separate purchaser for all provisions of Regulation D, except to the extent provided in
paragraph (e)1 of this section.
y If organized only for purpose to get around regulation, then wont be
considered only 1 purchaser

Problem 5-23: Rule 506 purchaser is accredited
y Issue: how do we count his brother-in-law from the same residence
o True answer: prof. is unsure
o Key: look at NOTE, p___
Whether count or not, must be either accredited or sophisticated

Manner of Offering:
y To whom is offer made?
y Who can purchase?
y Rule 506 says cant offer to those accredited or sophisticated; but can only sell to those accredited or
sophisticated
o At offering stage, cannot make general solicitation

Problem 5-24, p296
y Stamped for AI only; is this a general solicitation?
y Issue: is this permissible approach?
o Rule 506 no;
Does he know all of them? If not, then general
Prolly general solicitation unless know everyone no pre-existing relationship; thus,
although the # isnt large, it also isnt trivial

Problem 5-25, p296
y Broker-dealer uses suitability questionnaire; follows no-action letter and imposes 45-day waiting period
between prequalification and offer. Client pre-qualifies on 2/1; on 7/1, firm wants of offer securities to
clientis this ok?
o Note: Using net worth test or income test
o Issue: general solicitation or permissible offer?
Classic ex of broker approaching potential investors to determine if qualify
No general solicitation bc already gathered group together idd as eligible to participate,
and has had some contact already with broker-dealer

Problem 5-26, p297
y Gather offering info from private placement memos publish monthly newsletter to sell by subscription
to tax attys and accountants; No relationship to issuers, compensation only from subscription sales
y Issue: Problems under 502(c)? General solicitation?
o Key to extent issuers are voluntarily feeding him info, then puts issuers at risk because then
part of larger general solicitation
o If issuers cooperate with publisher
Like Rule 433 if journalists write with cooperation with issuer, then creates problem; if
independent, then not an issue

Problem 5-27, p297
y If all info from public sources then NOT a general solicitation; no issue for issuer

Internet
y Creates new problems idea: password-protect, so only can be accessed by those pre-qualified for
offering

Problem 5-28, p300
y Broker has website with Reg D offerings; if attest to being AI, then can get PW and access all info on site
y Issue: is there an issue under Reg D?
o Cant pre-qualify via self-qualification someone has to review it to ensure youre actually ok

Rule 135(c) SEC says comparable to public offerings:
y Like a safe harbor if you follow road map, and stay within a(3), then not deemed an offer
y If do this, then issuer shall file any notice under section with form 8-K then public for all to see
o Restricted as to resale
o NOTE: Must disclose material fact if:
1. ____
2. If said something only partially true (10(b)(5))
3. If some fiduciary obligation to speak
2. Thus rule is not upon any material fact must disclose

Aggregation
y Issue under Rule 504 and 505
o Have to address BOTH aggregation and integration
y Deals with how many securities you can sell in a defined period
o Reduced by those sold under 3(b) exemption or under 5 (not registered and not exempt)
y Have to count to determine how much is left to be sold independent of integration

Problem 5-29
y Sold $5M from 1/1 to 4/1
y When can issuer commence another offering when using exemption under 3(b)?
o 3(b) exemptions:
Rule 504 and Rule 505 (so far)
Commission may from time to time by its rules and regulations, and subject to such
terms and conditions as may be prescribed therein, add any class of securities to the
securities exempted as provided in this section, if it finds that the enforcement of this title
with respect to such securities is not necessary in the public interest and for the
protection of investors by reason of the small amount involved or the limited character of
the public offering; but no issue of securities shall be exempted under this subsection
where the aggregate amount at which such issue is offered to the public exceeds
$5,000,000.
o Rule 502(a) integration
o Aggregation?
Rule 505(b)(2)(i) aggregate offering price for an offering of securities under this Rule
505, as defined in Rule 501(c), shall not exceed $5,000,000, less the aggregate offering
price for all securities sold within the twelve months before the start of and during the
offering of securities under this Rule 505 in reliance on any exemption under section 3(b)
of the Act or in violation of section 5(a)
y Thus must wait until APRIL 1 of next year then have $5M available also
y NO! Can do a 1-year look-back with rolling amounts of availability

Ex:
y Jan: $500K; 70 investors, 30 AI
y April: $2M; 25 AI
y So these arent offerings protected by safe harbor under Rule 502
y Can be aggregated because still have $2.5M left to sell
y However, what if integrated? Same issuance, same security, same price, etc?
o If integrated, then single offering, then need single exemption
o What exemption works???
Rule 505 no, too many AI (with 55)
3(a)(11)? All Ill. residents?
4(2)? All independent
Look for exemption that will fit integrated offer
y Note: aggregation can be issue, even if integration is not and vice versa

CLASS #16: 2.9.11
Problem 5-30, p305
y 1/1 Rule 505 offering open until 6/1 sells $4.5M
y 5/1 Rule 504 offering open for 2 months sells $750K
y Issue: aggregation?
o Overlap yes, but how?
$5M 3(b) 5(a)
Key look on a rolling basis if already sold $4.5M under 505, no room left under 504
Aggregation Rule: look back 12 months and during offering tack on; for all securities
(not just of like type different than integration)

Ex:
y 8/1 10/1 offering: under Rule 505
y 5/1 6/1 offering: under 504
y NO integration problem - because under safe harbor of 502(a) with >6 months apart
o Note: If potential integration problem, then look at 5 factors (under 502(a)(a-e)):
a) Whether the sales are part of a single plan of financing;
b) Whether the sales involve issuance of the same class of securities;
c) Whether the sales have been made at or about the same time;
d) Whether the same type of consideration is being received; and
e) Whether the sales are made for the same general purpose.
y Possible aggregation problem if SOLD amounts >$1M have to check timeline of sale

KEY: If integration, then need SINGLE exemption; If so, then ensure it doesnt fail aggregation test!

Rule 504, Note 2 If a transaction under Rule 504 fails to meet the limitation on the aggregate offering price, it
does not affect the availability of this Rule 504 for the other transactions considered in applying such limitation.
For example, if an issuer sold $1,000,000 worth of its securities on January 1, 1988 under this Rule 504 and an
additional $500,000 worth on July 1, 1988, this Rule 504 would not be available for the later sale, but would still
be applicable to the January 1, 1988 sale
y Ex: cant have $1.2M sold under exemption all elements have to meet the exemption; thus Note 2 only
applies with second offering that will push over the limit that only destroys the 2
nd
offering
y No Note 2 under Rule 505 but SEC has interpreted it there applies to both

Problem 5-31
y Sells securities under Rule 504 and determines meets std. for Rule 506
y Issue: is this ok?
o Preliminary notes: Attempted compliance with any rule in Regulation D does not act as an
exclusive election; the issuer can also claim the availability of any other applicable exemption.
Thus it is OK to switch to Rule 506
If needed, amend Form D

Disclosure
y No disclosure necessary under Reg D

Problem 5-33, p310
y Issuer doesnt file Form D gets an injunction; wants to pursue Rule 506 offering
y Issue: this ok?
o No violates Rule 507 failure to comply with Rule 503 disclosure requirement
o If havent gotten caught and proceed:
Not good under Rule 506, but 4(2) is possible
y Note: people are sloppy with Form D, but do NOT do it! Disastrous if you get enjoined, and Dodd-Frank
has included bad boy provision:
o If do something wrong and get caught, then can be excluded from exclusions in future

Problem 5-34, p313
y Issuer completes $7M placement under Rule 506 purchasers are 9 pension trusts (each as AI) and 1
individual (with no pre-existing relationship, not AI, not sophisticated, no purchase rep); Trusts want
rescinded, issuer claims substantial compliance under Rule 508
y Issue: can they rescind?

Employee Benefits Exemption
y S-8: register sales of securities
y Only under Rule 701 for non-reporting companies
o Old authority - 3(b) exemption; thus limited by statute (now $5M0
o New authority NSMIA
No longer 3(b) exemption
Allows for sale of greatest of:
y $1M
y 15% of issuers total assets
y 15% of outstanding securities of that class
NOT used to raise capital only to compensate employees
y Not integrated with anything (no aggregation / integration issues no longer
3(b))
o Only exemption from 5 (registration requirement); NOT exempt from truthfulness / liability

Problem 5-35, p318
y Issuer has 10K shares of common stock and 5K preferred stock (1-to-1 convertible); wants to establish
stock option plan under 701; nothing under 701 in past 12 months what limits?
o Can include 15% of 15K 2,250 shares option
Note: would have an impact if convertible ratio were different

Problem 5-36, p319
y INSERT

Regulation A
y Another 3(b) exemption
o Thus capped at $5M
y Called mini-registration rule
y Only to non-reporting / non-public companies (like Rule 504 and Rule 701)
y Includes bad boy rule of disqualification (Rule 262)
y Sell up to $5M every 12 months
y Have to aggregate Reg A, BUT doesnt allow anything else to count against it (ex: Rule 504 or 505)
y Limited application to existing security-holders:
o Can use Reg A up to $1.5M in 12 months; counts against $5M total under Reg
y Not integrated with any other offering, and not with subsequent registered offering or any other offering
that takes place more than 6 months after Reg A issue
o Includes disclosure requirements for everyone
Note: Reg D disclosures a lot more robust than Reg D
y Unlimited # of purchasers
y Not restricted for resale
y Can use internet to reach potential investors (not so with Reg D no general solicitations)

Rule 254(b)(2) if going to test the waters, cant make sale before offering circular has been sent; can only briefly
describe issuers business
y Sales cant be made until offering is qualified and occurs 20 days after registration statement / offering
circular is filed

CLASS #17: 2.14.11

Regulation A scaled down version of registration process
y For non-public companies

Problem 5-38, p324
y Issue?
y Rule 254(c) this is ok

Problem 5-39, p324
y Test-the-waters effort, decides to switch to Rule 506
y Why is Rule 506 better?
o No limit on amount not restricted to $5M like in Reg A
y Rule 254(d) 30 days wait for registered offering
o Does this apply and protect issuer from Reg A to Rule 506?
Rule 251(c)(2)(v) no integration if they wait 6 months
Last marketed on May 1 so have to wait until Nov. 1 to market new Rule 506 offering
full safe harbor
y Why wait 6 months?
o Because with registered offering, everyone gets all info
o But under Rule 506, not everyone gets full disclosure
o Reg A non-public companies

Problem 5-40, p324
y Treat differently if Reg A vs. Reg D offerings? Need integration?
o Reg A can be $5M nothing integrated with it
Per Rule 251(b)
o Reg D do have to aggregate anything sold under 3(b) in prior 12 months
Rule 504(b)(2) - thus have to subtract Reg A offering
y Offerings more than 6 months apart so no integration problem; covered under full safe harbor
o IF not, then have to use 5-factor test from Kuntz

Rule 152 phrase "transactions by an issuer not involving any public offering" in Section 4(2) shall be deemed to
apply to transactions not involving any public offering at the time of said transactions although subsequently
thereto the issuer decides to make a public offering and/or files a registration statement
y Doesnt destroy earlier exempt transaction; Non-public offering under Section 4(2)is not undermined by a
later public offering

Rule 155 private offering means an unregistered offering of securities that is exempt from registration under
Section 4(2) or 4(6) of the Act or Rule 506 of Regulation D.
y If start with private offering and abandon for registered offering, private offering not included if:
o No securities were sold in private offering
o All activities were terminated before registration statement filed
o And registration statement was not filed until 30 days after termination (unless offers were too all
sophisticated/accredited investors)
o Have to make some disclosures
y If start with registered offering, and can raise money without registered offering so abandon registered
offering if want to take advantage of this then have to:
o FORMALLY withdraw under Rule 477
o Cant do private offering until 30 days after withdrawal is effective
o Must notify private offerrees that dont get benefit of liability provision to those under registered
offering
o Doesnt work the other way Rule 504 or 505

Problem 5-41, p333
y 2/1 formation of company; 2/14 intrastate 3(a)(11) offering raised $4M
y 7/1 want to pursue Rule 506 offering for $5M
y Issues?
o Rule 502(a) 6 month safe harbor, not met here
o Thus have to use 5 factors:
Single plan of financing?
y Both plans include some component for working capital
Same class of securities?
y Both involve common stock
Timing?
y Shorter than 6-months, not at the longer end of the safe time period
Same consideration?
y Cash
Same general purpose?
y Likely same reason as factor 1, but clearly problematic

Problem 5-42, p333
y What about if offer in September? If 505?
o Aggregation problem? Can only sell $5M under Rule 505
Rule 505(b)(2)(1) do these need to aggregate?
What about integration? Need single exemption (wont work under Rule 505?)

Problem 5-43, p333
y Registered offering, but before filing registration statement, cancelled offer; 2 months later revive
offering under Rule 506
y Issue?
o Rule 155 have to follow all steps
Formally withdraw under Rule 477
Wait 30 days
Make necessary disclosures
y What about if conditioned the market?

***
CLASS #18: 2.14.11
CHAPTER 6

Statutory Underwriter under 2(a)(11)
y Broad includes anyone who buys from issuer in intent to distribute securities
o Any person who participates in offering, selling or underwriting process for issuer, and any
person who purchases from or sells for a control person, as part of control persons distribution
o Legislature: intended to cover anyone as conduit of getting securities into public hands
y 2(a)(11) term underwriter means any person who has purchased from an issuer with a view to, or
offers or sells for an issuer in connection with, the distribution of any security, or participates or has a
direct or indirect participation in any such undertaking, or participates or has a participation in the direct
or indirect underwriting of any such undertaking; but such term shall not include a person whose interest
is limited to a commission from an underwriter or dealer not in excess of the usual and customary
distributors or sellers commission. As used in this paragraph the term issuer shall include, in addition
to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under
direct or indirect common control with the issuer

CASE: SEC v. Chinese Consolidated Benevolent Assoc., 2
nd
Circuit, 1941
y Facts: NY corporation selling $500M in 4% China govt bonds
y If the Chinese gov't had paid for an advertisement in the NYT, saying send us your money we will send you
a bond certificate, would the NYT would have been an underwriter?
o Holding: YES
o Not considered exempt transaction because as underwriter, no 4(1) exemption
SEC sought injunction because claimed unregistered offering

Problem 6-1, p344
y Carl drafts brochure for offering, then provides emails to get offering distributed gives him 500 shares of
offering stock; is he an underwriter?
o 2(a)(11) direct or indirect participation in sale thus likely indirect participation in her
solicitation makes him an underwriter

Problem 6-2, p348
y Purchased 1K unregistered shares in private placement wants to sell shares does this violate 5?
o Change in circumstance after purchase within 2 years (bendpoint) as exception?

Problem 6-3, p348
y Pledges worthless stock for loan, giving faulty financial statements can bank now sell shares?
o NO! Shares have to be for value - 2(a)(3)
o If not issuers, then exempt transaction?
o Banks resale, because for Janices account, then no bona fide change of circumstances

Problem 6-4, p350
y Burt acquired 1K shares wants to resell; can Carol do this for him?
o NO change in circumstances cant meet investment intent
o Carol would be underwriter if sold for him

Problem 6-5, p350
y OTC market Burt wants shares sold in OTC market by Carol does this work?
o NO less than 2 years, no investment intent still

Distribution
y Not defined in Act, but key to 2(a)(11) defined by SCOTUS in SEC v. Ralston
o Distribution = sales to those who cannot fend for themselves

Problem 6-6, p350
y Burt becomes controlling person as issuer but only for purposes for 2(a)(11)
o Carol becomes underwriter

PIPE Transactions
y Company will sell security in exempt transaction (ex: 4(2)) agreement is shares sold will eventually be
registered for resale (either shares themselves or convertible shares)
o Convertible preferred converted into common then registered for secondary offering
When buy convertible preferred, restricted (because bought in exempt transactions and
sale is restricted if sold, would be underwriter)
y Shares thus sell at some discount because illiquid
o Hedge funds and others that buy PIPEs once publicly announced that company has made sale in
exempt transaction (which it must do on form 8-K), then common stock market will drop
o In anticipation of drop, hedge fund will borrow common shares from another, and sell with idea
that price will drop (i.e., sell short); buy back at lower price make money
y Would deliver converted shares SEC contended this was evasions of 5 because really distributing
common shares that they indirectly required
o Courts have ruled NO violation of 5, because shares provided were registered
y Sold shares high before disclosure by using non-public info THIS is an issue!
o SEC sued Mark Cuban for insider trading on this issue

Control Person Distributions
y 2(a)(11) As used in this paragraph the term issuer shall include, in addition to an issuer, any person
directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect
common control with the issuer
o One who purchases from, sells for, or otherwise participates, directly or indirectly, in a
distribution of control persons securities is an underwriter

CASE: US v. Wolfson, 2
nd
Circuit, 1969
y Wolfson controlling person, thus under 2(a)(11) considered issuer any sellers on his behalf were
underwriters
o Thus no exemptions available
4(4) only covers unsolicited sales
We care because want public protected by disclosure

4(4) brokers transactions executed upon customers orders on any exchange or in the over-the-counter
market but not the solicitation of such orders

Problem 6-9, p361
y Alice wants Bob to sell 1/3 of her shares; issued 4 years ago in registered public offering
y Issues?
o Alice is control person no exemption
But acquired 4 years ago without view to distribution but since CONTROL person,
functions like issuer for 2(a)(11)
Thus broker is underwriter
y Not entitled to 4(1) exemption because broker functions as underwriter

Problem 6-10, p361
y Maybe new scenario makes Alice NOT control person still sounds like need to comply with 4(1), thus
use Rule 144
o Maybe NOT control person now because no way to protect herself by causing shares to be
registered


***
2(a)(12) term dealer means any person who engages either for all or part of his time, directly or indirectly,
as agent, broker, or principal, in the business of offering, buying, selling, or otherwise dealing or trading in
securities issued by another person.
4(1) provisions of section 5 shall not apply to . . . transactions by any person other than an issuer, underwriter,
or dealer
4(3) transactions by a dealer (including an underwriter no longer acting as an underwriter in respect of the
security involved in such transaction), except
(A) transactions taking place prior to the expiration of forty days after the first date upon which the security was bona fide offered to the
public by the issuer or by or through an underwriter,
(B) transactions in a security as to which a registration statement has been filed taking place prior to the expiration of forty days after the
effective date of such registration statement or prior to the expiration of forty days after the first date upon which the security was bona
fide offered to the public by the issuer or by or through an underwriter after such effective date, whichever is later (excluding in the
computation of such forty days any time during which a stop order issued under section 8 is in effect as to the security), or such shorter
period as the Commission may specify by rules and regulations or order, and
(C) transactions as to securities constituting the whole or a part of an unsold allotment to or subscription by such dealer as a participant in
the distribution of such securities by the issuer or by or through an underwriter.
With respect to transactions referred to in clause (B), if securities of the issuer have not previously been sold pursuant to an earlier
effective registration statement the applicable period, instead of forty days, shall be ninety days, or such shorter period as the Commission
may specify by rules and regulations or order.

***
Rule 141 - Definition of "Commission from an Underwriter or Dealer Not in Excess of the Usual and Customary
Distributors' or Sellers' Commissions" in Section 2(a)(11), for Certain Transactions

***
Rule 144 - Persons Deemed Not to Be Engaged in a Distribution and Therefore Not Underwriters
y Not an exclusive safe harbor
y Purpose:
1. Provides adequate information to public
2. Requires holding period securities acquired in exempt transaction (restricted as to resale)
a. Relatively brief period, shortened over time (most recently in 2008)
b. Buyer assumes economic risk, cant immediately transfer to market
3. Limitation on # of shares to be sold within given time (no dumping)
y Pertains:
1. Affiliates selling restricted shares
2. Affiliates selling non-restricted shares
3. Affiliates selling through intermediary
Note: if no intermediary, and not restricted shares, then fit within 4(1)

Rule 144 Terms
y Affiliate = controlling person
y 144(a)(3)
i. Securities 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;
ii. Securities acquired from the issuer that are subject to the resale limitations of Rule 502(d) under
Regulation D or Rule 701(c);
iii. Securities acquired in a transaction or chain of transactions meeting the requirements of Rule 144A;
iv. Securities acquired from the issuer in a transaction subject to the conditions of Regulation CE;
v. Equity securities of domestic issuers acquired in a transaction or chain of transactions subject to the
conditions of Rule 901 or Rule 903 under Regulation S (Rules 901 through 905 and Preliminary Notes);
vi. Securities acquired in a transaction made under Rule 230.801 to the same extent and proportion that the
securities held by the security holder of the class with respect to which the rights offering was made were,
as of the record date for the rights offering, "restricted securities" within the meaning of this paragraph
(a)(3);
vii. Securities acquired in a transaction made under Rule 230.802 to the same extent and proportion that the
securities that were tendered or exchanged in the exchange offer or business combination were "restricted
securities" within the meaning of this paragraph (a)(3); and
viii. Securities acquired from the issuer in a transaction subject to an exemption under section 4(6) of the Act.

Rule 144 Preliminary Notes
y Follow the rule then NO distribution no distribution, then NO underwriter
o A person satisfying the applicable conditions of the Rule 144 safe harbor is deemed not to be engaged in a
distribution of the securities and therefore not an underwriter of the securities for purposes of Section
2(a)(11). Therefore, such a person is deemed not to be an underwriter when determining whether a sale is
eligible for the Section 4(1) exemption for "transactions by any person other than an issuer, underwriter, or
dealer."

Rule 144 Application
y Chart, p365 366
o Issuer reporting company, for at least 90 days sale by or on behalf of affiliate held for 6 months
on day of purchase can be sold if done in manner required by rule (key: sale by broker), and file
Form 144 if sale above certain threshold in $ or # of shares
If not held for 90 days then
o Sale by non-affiliate of restricted shares
Held for at least 6 months, no info disclosed except required public info
y Can be made after 1 year with NO Rule 144 requirements

INSERT DATA FROM CHART

***
CLASS #19: 2.15.11

Rule 144
y Provides safe harbor for (i.e., no underwriter creation like in 2(a)(11)) 4(1), and thus can rely on 4(1)
exemption:
o Resales on restricted securities (list from Rule 144(a)(3))
o Sale by affiliate (control securities restricted or non-restricted
y Crucial rule relied on by corporate execs who want to sell own companys stock
o Careful internal mgmt
y Conditions of sale:
o Adequate current public info
o If restricted, must hold for specified holding period before sale
o Resale within volume limits
o Resale complies with manner of sale requirements
o Seller must file From 144 if amount exceeds specific thresholds

Problem 6-12, p372
y Jeff owns 10K unregistered Apex common shares that purchased in private offering wants to sell
y Issue?
o Rule 144(a)(3)(i) - Securities acquired in a transaction not involving any public offering
o If reporting company, must wait 6 months - 144(d)(1)(i)
o If non-reporting, wait 1 year - 144(d)(1)(ii)
o Not enough info to determine if sale could be made array of questions

Problem 6-13, p372
y If above was intrastate offering, then Rule 144 doesnt apply
o Security not restricted (under Rule 144(a)(3))
o Thus have to rely on 4(1) elsewhere

Problem 6-14, p372
y 18 months ago Zeta issued 2M common stock under Rule 505; attorney failed to track # of purchasers,
and had 47 non-accredited purchases in offer; Susan, unaccredited, now wants to sell
o Rule 144(a)(3)(ii) includes Reg D offerings
o Also not valid Rule 505 47 non-accredited, only allowed for 35 within rule
If valid 505, hold max 1 year (if non-reporting company)
If not valid 505, should hold for 3 years (safe point) irrebutable presumption that she
bought with investment intent
o Reasonable action: treat as if valid Rule 505, then sell in 6 months or 1 year (if reporting / non-
reporting)

Problem 6-15, p372
y Bill, control person for Omega, negotiating to sell control block to Alice
o If no qualification as restricted under Rule 144(a)(3), then no holding period
o What are his other options?
Still under 4(1)
Just a SALE, not a distribution simply a sale by a controlling person to another; no
underwriter

Problem 6-16, p372
y Bill hires broker through NYSE
o Rule 144(b)(2) affiliates who sell restricted securities are not deemed underwriters within
2(a)(11)

Problem 6-17, p373
y Alpha 5 months late in filing 10-Q; Carla owns Alpha restricted stock 7 months ago but wants to resell
o Rule 144(d)(1)(i) 6 months for reporting company, but only if reporting in compliance within 90
days before sale!
o Thus must rely on Rule 144(d)(1)(ii) 12 months for non-reporting company

Problem 6-18, p373
y Beta small public co with 150 stockholders but not subject to SEC reporting; just mailed holders most
recent financial statements; Dave has owned restricted Beta common stock for 11 months and wants to
resell
o Wait 1 year
o If an affiliate, still have to wait 1 year
o Info requirements:

Problem 6-19
y CEO wants to sell 10K shares from 5 months ago
o Affiliate (because CEO) must deal under Rule 144(e) volume restriction and public info
Non-restricted so no holding period
o Limits on ability to sell using broker?
Cannot use 4(1), but 144 says if you follow the roadmap then there is no distribution and
therefore 4(1) doesn't come into play

Problem 6-20, p373
y John acquired stock in private offering common stock in exchange for personal note full recourse note
due on demand 9% interest / year; options to sell
o Must meet Rule 144(d)(2) requirements
Must have to pledge collateral equal to the purchase price other than the securities
Also did not fulfill third requirement which says that you must pay off the note first;
holding period does not begin until it is paid of
Delivery of the promissory note here does not start the time period running
o Reason: Purchaser must assume the economic risk; he has assumed the risk to the extent that it is
a full recourse note but not by actually paying the money

Problem 6-21, p373
y 17 months ago John pledged shares using loan proceeds to pay for shares now defaulted bank wants
to sell the shares
o Rule 144(d)(3)(iv) pledged securities - deemed when acquired by pledgor

CLASS # 20: 2.16.11

Problem 6-22, p373
y Mary is control person of Theta, acquiring shares in registered IPO; listed on NYSE average weekly
trading volume is 150K, with 18M outstanding; during first 3 months of year, Mary sold 150K of her Theta
shares, 50K each month. How many can she sell in April?
o Shares are not restricted, but Mary is a control person and therefore an affiliate, as a result her
shares are going to be subject to the volume limits
o She was capped at 180,000 shares (1% of 18 million, which was the higher number), and she can
sell that in any 3 month period which is a rolling 3-month period, so can sell 80,000 in April (50k in
Feb, 50k in March, 80k in April)

Volume Notes
y Notes on volume test:
o Actually day by day for rolling 90 days
o Rule requires a bona fide intent to sell when you file form stating how many shares youll sell
Dont have to file until first sale day
o If volume of stock goes up, can file an amended form and claim a larger amount
Hitch is that you can't use your own volume during that measuring period in order to
calculate the average weekly volume
If number goes down as you move through the 3-month period covered on your form,
that does not reduce your ability to sell (not adversely impacted if the market volume
declines)

Problem 6-23, p373
y Now before sale, Mary gives Cornell 120K shares when can Cornell sell these?
o Quite common that when people donate shares, the recipient will sell them right away as a
matter of course
o Rule 144(e)(3)(iii): Together, Cornell and Mary are subject to Mary's maximum; if Cornell is going
to sell 120k shares in a 3-month period within 6-months of the donation then during that same 3-
month period Mary can only sell 60k
This does not allow Mary to circumvent the volume limits that constrain volume sales by
giving it to a donee and then having a donee sell the shares into the market

Problem 6-25, p374
y Theta common shares are traded OTC; Mary has retained a broker to dispose of her shares over time.
Mary entered into a similar arrangement with a dozen other brokers, unknown to them
o Rule 144(g)(4)(ii): Lays out the reasonable inquiry requirements for brokers' transactions,
including to make reasonable inquiry whether she is intending to sell additional securities, or
whether such person has solicited or made any arrangement for the solicitation of buy orders in
connection with the proposed sale of securities

Problem 6-26, p374
y Mary will sell shares through broker in OTC market; also tells broker shes selling 60K shares privately to
Tom; Tom is not sophisticated, but he and Mary negotiated directly
o Rule 144(e)(3)(vii): Includes what types of securities need not be included in determining the
amount of securities to be sold in reliance upon this section
Rule 144(e)(3)(vii)(C): Should exempt this transaction from being included as it is exempt
under 4(1) given that even if Mary is an issuer, only for purposes of 2(a)(11), due to her
control person status, she is not using an intermediary and therefore no underwriter

Rule 144A - Private Resales of Securities to Institutions
y Facilitates transactions by issuers w/o registration, but where issuer may not have capacity to carry out
transaction on its own
y Issuers to iBank resale to QIB (qualified investment buyers)
o Initial sale to iBank has to be exempt: either 4(2) or Rule 506
o Resale yes, looks like distribution but Rule 144A allows for this secondary exemption

Problem 6-27, p380
y FMACo. Needs to raise $70M by issuing 5 year bonds w/8% interest; shares are traded on NASDAQ
o Options:
1. Marge, CFO, will solicit 200 institutions (each with $100M+ portfolio size) to buy
unregistered bonds
2. Place all bonds with iBank first, and have them sell them
o Issue?
Rule 506 does NOT work only exemption for issuer
Need Rule 144A to use bank as intermediary

Class # 21: 2.21.11

Class #22: 2.22.11

Problem 7-9, p416

Problem 7-10, p416
y Rule 165(a) as long as file written communication, can then make oral offers
o Before registration statement is filed, so long as what is in writing gets filed on a timely basis

Problem 7-11, p416
y Alex acquires 10K shares after March 1 proxy vote solicitation acquired on March 15, and rule is must
hold for 30 days prior
o Rule 153(a) prospectus must be delivered to those who are entitled to vote only
As defined under 5(b)(2) for purposes for 145A

Problem 7-12, p416

3(a)(9) transactional exemption that exempts transactions only by issuer from registration requirements, even
though there is a sale for value in exchange for other securities for the issuer
y For issuer exchanging with existing securities holders ONLY, with no commission or other payments made
o Unsolicited exchange
y May be exempt from 5 thus no registration
o If solicited $, then wouldnt apply cannot have sale for value

Problem 7-14, p421
y Charter business: Smith leaves shares to Irene and to Carl, all common stock; Jones is other s/h
o Irene and Carl prefer not to be involved in mgmt; want preferred stock with dividend instead; are
NOT sophisticated
o Issue?
Someone else is being paid to solicit the shareholders, which arguably crosses the line and
obliterates the 3(a)(9) exemption

Problem 7-15, p421
y Ventures charter provides quarterly dividends for preferred shares; exchange on 11/15, instead of 10/1
as planned; because preferred shares not owned for full quarter when next dividend paid, agree to pay
$5K

Problem 7/16, p422
y Albert wants to raise $3M by issuing $4 non-redeemable preferred stock funds to expand ops, issued
about same time as exchange offer
o Issue?
Rule 506 perhaps?
Look to be issuing the same security, for cash, at the same time they are seeking the
exchange
Does it matter that for one group shares are being delivered to the company, while the
other group will be providing cash to the issuer (different consideration)?
y Still integrated

Problem 7/17, p422
y Irene sold 100 preferred shares through exchange to Ray; Rays interest piqued by Irenes stockbroker
Sara, who pushed for sale in return for commission
o Issue?
Defeats 3(a)(9)?
If Irene were affiliate, then issuer for 2(a)(11), then Sara is underwriter may not be
exempt

***
Chapter 8: EXEMPT SECURITIES

3(a)(11) and 3(a)(9) types of transaction exemptions

33 & 34 Acts relate to disclosure
y In 1933, Congress deemed that certain issuers are ones that we do not have to worry about in terms of
the '33 Act, i.e. the government
o Other provisions in the '34 Act and changes in Dodd-Frank which will change the regulatory
scheme in terms of municipal securities
y Some of the other exemptions are driven by the fact that the securities in question are covered by other
regulators (i.e. state insurance regulators)
y Need to just be aware that this bundle of exemptions exist
y Section 3 is not complete protection from the provisions of the '33 Act

Materiality
y SCOTUS has defined materiality under the 34 Exchange Act
o TSC Indus. (most important case)
An omitted fact is material if there is substantial likelihood that a reasonable s/h would
consider it relevant in deciding how to vote
Same idea applies in deciding whether to buy or sell securities
o Definition not very precise
o Plaintiff does not have to show that had the truth been disclosed your judgment would have been
different; does not have to show that the fact was outcome-determinative but merely that it
would have been considered important in deciding how to vote or whether or not to buy the
securities
y Alternatives:
o Fact would have had actual significance in the deliberations of the shareholder
o Would have been viewed by the reasonable shareholder as having significantly altered the total
mix of the information available
Assess it in the context of what was already known and publicly available
Objective test (reasonable shareholder) and try to figure out what the likelihood is that
the reasonable shareholder would have found it important
y In foresight, when client approaches asking whether some facts are material under Section 12(b)(20)?
o Must inform yourself fully on the company and relevant facts in order to help make that judgment
o The lore and learning in the area comes from what went wrong in the cases brought by the SEC
and private plaintiffs who claim they were misled
o Sometimes facts are found to be material even if the market does not move, question as to
whether market movement is dispositive
y Materiality questions are questions of FACT
o Not disposable on a motion to dismiss so if the question is materiality it will go to the jury


Class #23: 2.23.11

Rule 10b-5
y It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of
interstate commerce, or of the mails or of any facility of any national securities exchange,
1. To employ any device, scheme, or artifice to defraud,
2. To make any untrue statement of a material fact or to omit to state a material fact necessary in
order to make the statements made, in the light of the circumstances under which they were
made, not misleading, or
3. To engage in any act, practice, or course of business which operates or would operate as a
fraud or deceit upon any person, in connection with the purchase or sale of any security.

CASE: Basic Inc. v. Levinson, 485 US 224, 1988, p590
y Facts:
o People sold shares in Basic because it had denied that it was involved in merger negotiations;
Basic was in on-going merger negotiations; Denied 3 times that there was anything
additional that was material
Shareholders complained that they were misled by denials
o Private claim for damages under Rule 10b-5
y Issue: Materiality question and Rule 10b-5
o Silence: FN 17, Absent a duty to disclose, silence is not wrongful
Important because a lot of people have the idea that if a material event occurs in the life
of a company that it is legally obligated to disclose that
o If you've made some statements, but by leaving something out you've created a material "half-
truth" then you can be in trouble
o Does not impose the obligation to affirmatively speak when you are otherwise silent and there
is no independent duty
y Rationale: How do we know when a misstatement or half-truth is material?
o Probability Magnitude Test: Magnitude of the event if it were to occur plus the probability of it
occurring
This occurs over a time-line, at any given time the probability-magnitude might be
changing
o Court rejects option to simply disclose once agreed in principal to terms of deal; ease of
application alone is not enough to justify ignoring the purposes and rationale of the disclosure
requirements
Agreement in principal ignores standard of materiality
y Problem arose here because Basic chose to substantively respond to inquiries when it did not necessarily
have to
o Can Basic use confidentiality to justify their deception?
Court: Has nothing to do with materiality; confidentiality may be valuable in this setting
but Basic blew its right to confidentiality or its opportunity to maintain confidentiality
once it chose to substantively respond to the inquiries
y Policy: This is a paternalistic regime in some respects in that information in the mandatory disclosure
scheme is dumped on investors, but do not protect investors from other information that might either
overwhelm them or cause them to make foolish choices
y What should Basic have done when they got these inquiries?
o If have always responded with no comment and consistently adhered to that, then would likely
have been ok

Problem 11-2: Company has a 10-K annual report due in a week, usual practice is to take last year's report, prior
disclosures had said that its one and only plant had been owned in fee simple, but now Alice, in charge of
disclosures, has learned that some years back there was an error in the property survey and in fact the plant is on
the adjacent land owner's property, who is a competitor, but adverse possession will kick in in 3 months; on the
other hand if competitor were to raise an issue it would render their one and only plant unusable for a year while
they knocked down the part that encroaches and refit the equipment on the interior. If Alice files the 10-K, due in
a week, that says the property is owned in fee simple, is that a material misstatement?
y Section S-K requires you to describe any major encumberance of some personal property
y Tough evaluation on probability-magnitude scale with extremely small probability but tremendous
magnitude

CASE: Weilgos v. Commonwealth Edison, 892 F2d 509, 1989, p600
y ComEd was sued because it included estimates of its construction costs in its S-3 for a shelf-registration
for bonds they were selling, and turns out their projection was wrong
y Issue: Was their erroneous projection materially false?
o Court: No, a reasonable investor would have known that the estimates and projections were not
reliable, and would not have relied on them
Projections were NOT material to their investment decision
Court is dealing with the "total mix" argument: Did the projects alter the "total mix" of
information?
y Easterbrook: Part of the total mix is that everyone always knew that these
projections ALWAYS turned out to be wrong
y P.603 604, truth on the market doctrine mentioned by court

Voting:
y Different presumption, fraud on the market hypothesis does not hold because you are not operating in a
market
y When you are voting you are not influenced or impacted by anyone else's voting
o May be impacted by some other information that is not in the proxy statement, but not by other
people's transactions (votes) so there the total mix theory works but concept of fraud on the
market does not work in the same way

Puffery
y When the statement that is challenged as materially misleading by the plaintiff, if the statement is so
vague and general so as not to be the kind of thing that anyone would rely on, those are held not material
o One area where courts can and do grant summary judgment for defendants

Subjective Statement of Opinion
y We believe
y Will not usually support a claim that it was material, even if it was falsely held, in part because courts
likely do not want to get into the area of judging good faith and beliefs
y Only to the extent that the subjective opinion conveys some objective fact underlying the opinion, then it
can be the basis for a claim

Staff Accounting Bulletin (SAB 99)
y There is no absolute rule of thumb that tells you when something is material or not
y SEC: Lists reasons why small amounts of earnings, if misstated, could be material
o Can be material if it masks a change in a trend of earnings
o Effects the registrant's compliance with a regulatory requirement
o Effects the registrant's compliance with some contractual requirement
y NOTE 17: A known misstatement may result in a significant positive/negative market reaction and that
expected market reaction should be taken into account in determining whether that known misstatement
is material
o Converse is not true

Rule 12(b)(2)
y What else do we have to say so that what we do say isnt a half-truth?
o Inside and outside lawyers spend a great deal of time wrestling with this problem

Projections
y Soft vs. Hard Info
o Most typically earnings projections and other matters relating to the future of the company
Called "soft information"
"Hard information" are the facts and historical information that are certain
y Securities laws seem premised on the ECMH; if there is soft information out there, the market does
reflect that
o Investors: Soft information (projections) is much more important than historical information
y Where soft information does not come true, companies often get sued
o In 1995 Congress raised the bar in maintaining the type of lawsuit in Basic because companies got
sued so many times when their projections were wrong

Info Safe Harbors
y SEC first tried to deal with this liability issue by adopting two rules, which were intended to be safe
harbors with respect to statements related to the future
y Rule 175 of 33 Act
y Rule 3b-6 of 34 Exchange Act
o Statement within the coverage of paragraph (b) (forward-looking statement, term of art) shall be
deemed not to be a fraudulent statement unless it is shown that the statement was made or
reaffirmed without a reasonable basis or was disclosed other than in good faith
Problem in the real world is that if a company was sued for making such a statement,
there would be no way on the fact of the complaint that was filed that the company could
get a dismissal
When these allegations come up, often look to whether the forward-looking statement
was misleading
y More recently: statutory interpretation / safe harbors