Section 5

4 categories of issuers, Offerings by:

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