53 A. The Pubic Offering purchasers have the option of retaining their investment in the blank check ‘company or receiving their share of the funds in the escrow account. On after these steps are taken can the registrant access the funds remaining the escrow account to engage in the proposed purchase of a business or assets In no case can the blank stock registrant retain escrow funds for longer than 18 months after the effective date of the initial registration statement 9. The Bihics of Taking Stock When PC vendor VA Linux went publ 1999, the law firm that guided its IPO had special cause to celebrate the 698, percent price increase during the first day of trading: the 102,584 VA Linux shares owned by the law firm were then worth $24.5 n unusual for law firms (© own stock in their clients, Indeed, representing VA Linux held stock in 83 of the 53 companies it took publ in 1999. Sor Baker, Who Wants to Be a Mi 8 ABA. J. 86, 97 (Feb, 2000). Such ownership is not prohibited by profe standards. Se ABA Bthics Opinion 00.418 (July 17, 2000). Model Rule of Profestior 2002, requires that the lawyer's dealings by fall disclosure, and ‘writing (0 transactions aft counsel for eq jot contemplated by drafters of professional standards? Com ‘Piece of the Action: Should Lawyers Be Allowed to Glient’s Stock?, 47 UCLA L. Rev. 549 reat among the lawyei courage attorney overreaching), Lawyer Independence: Lavyer Equity Investments in 405 (2002) (listing many concerns posed by equity ownership by attorneys) E. Gun Jumping Concerns for the IPO ‘The linchpin of the Seew begins before the regist through the period betveen th registration statement and the time when the registration statement becomes elective, and extends even afier the registation statement is effective. ‘The materials in section closely examine Section 5's regulatory demands ol three stages, more commonly referred to as the prefiing period, the waiting pord, and the post-efective priad. By way of & quick overview, Section B(0) prohibits any offer sell ot offer to buy prior to the filing of a registra Statement. Under Section 5(a), no sales or deliveries of registered securities can occur until the registration statement is effective. After the registra statement is fled and even alter itis elfective, Setion 5(b)(1) requires that all written offers te sell be in connection witha prospects that compli with Section 10 of the Act. This provision is designed to assure a wide dist tion via the prospectus of the most silient portions of the registra Gun Jumping Concer for the HO 15018 statement so that investors have rel purchase of the registered secu ‘must accompany any transportation of the ‘The jurisdictional reach of each of the py samme, namely, the use of any means or instruments of transportation or ce oF the mails, Cert provisions of Section 5 applies if all activities ate with no use of the mail, phone, or other commer ‘or carry out the sale, At the same time, if the mor the purch: nailed by the buyer to the seller or the security is mailed by the seller to buyer after all negotiations accu the jis tional requirements of the statute are met. This is the import of tly OF indirectly” language of each provision. At the same. ti there is cause to doubt that the language reaches purely intrastate act where the mails ate not used. On this point, consider the definition of tertate commerce in Section %(a)(7), and contrast the manner in which phone call constitutes the “use of interstate commerce.” below see othe subamal q 3s and specific ansactions are, a8 dcussed In lter pers, exemp. I either the security exempt o action qual for an exemption, the reglatory demands of Section 5 do not app Fer pres important exemption spears in Section isacions by everyone other than Each of these nonevempe partes is ed in Section 2(a (4), the tern under ly defined in Section 2a) (11), and tetris defined in Section th itis important to understa and a "prospe harbors are examined in the ms reforms, see Morrissey, Rhetoric and Real Securities Regulation Reform of 2008, 56 related safe 1c of the 2005, Investor Protection and the th, U. L. Rev, 561 (2007.21 160 4. The Pali ering Dg. Gum Jumping Concerns forthe IPO 1. The PreFiling Period ie made in advance of a proposed fina fn terms of an express offer, may in fact co ‘mind or arousing the issuer or in the se Under Section Bc), it is untawl security unless a registration statem¢ Even after a regis 1 of an offer meaning of “offer (3) because atomic research and power. While prepar- n statement for a public offering, the tinderwriter-promoter ‘of a brochure which described in glow ‘of the mineral and the profit 1 growth prospects of a new to an issuer oF any sceuriey nor ations may under the dreamstances eo tential to investors who ! | fades The brochure made “arouse public interest in the isuer and its securities as a prelude to under he following excerpt reflects this historical prohi Bxaurix No. 6 regulatory issues nonethe- ry term affr is construed, Securities Act Release No. 3844 ‘concerning the company, Securities and Exchange Commission (Oct. 8, 1957) 8 ‘pany, speech had been prepared together data, all of which was designed to give a fairly comprehensive industry in which it operates and vatious factors affecting, for future Ques with respect to th of Section 5. ‘guidance. |" and “offer for sale” are broadly ms have been ib- “ole to history of the dion statement was begun and negotiation wit inderwrters was commenced. It soon appeared that the coming meeting J) F analysts, scheduled many months earlier, would be at or about the time tion statement was to be filed. This presented the question whether, in the circumstances, delivery and disttibution of the speech1 102 4. The Pubic Offering Gun Jumping Concerns for the PO 18 0 persons mentioned above would ies Act ‘Scheduling of the’ speech had not been ‘offering by the issuer at or about de to the major portion of Me. Davis’ property and gram for the orderly development of the land, “taunch a The release aeranged in conterpla the time of its delivery. In delivery of the speech 2 received by wide a the speech and the supporting data not be made ransmitted to other persons. opi He at the meeting nor bi conducted through a nationwide group of investment ba healed by Carl M. Loeb, Rhoades & ‘of New York.” It announced th; being prepared. Thi Exqurts No.7 ‘Two weeks prior to the filing of a regis red, before a societ 's reasoning in the next eno excerpts, do you get the impression its concerns extend beyond mere conditioning of the market? bute copies ofits fi hal received a copy of the speech... ‘A fow years after issuing Release No. 3844, 38 SEC. 843 (195% should be revoked, bership in the NASD, ‘Arthur Vining Davis entered into an arranger and Dominick for financing the development of i 38 SHG. at 851-852, Comparison of the September pu trxtes the wisdom of the congresi for he would begin developing new communi and recreational areas on his holdings. The release further a the vehicle for these activities would be Arvida Corporation, which would material to any informed investment decision, ‘The great acreage owned by1164 4. The Poble Offering Aida was suesied 1d, at 854, The regulatory concerns of whether a communi market arise when the isuer is "in registration,” Th been precisely defined by the SEC, which rather broadly has stated that being “in registration ... mean(s} the entire process of registration, at least from the time the issuer reaches an understanding with the broker- dealer, which is to act as a managing und ihe completion of the offering and the period of 40 or 90 days h dealers: must deliver a prospectus.” Securities Act Release No. 5008, n4 (Oct. 7, 1969). Ax you review the following material, observe that the SEC has created impor tant safe harbors for certain (ypes of communications; however, a commu nication that falls outside the safe harbor must still be assessed by the tiple considerations of whether the communication was by someone other than fan “issuer, underwriter or dealer,” “conditioned the market,” and was made when the issuer was “in registration.” Consider the ironies of Sec the overall operation of the securities lava. Many provisions and regulations of the securities laws have ir goal encouraging the release of information. As will be seen in thapter 11, Congress has even enacted safe harbors for the release of the purpose of encouraging corporat to mote frequently make voluntary disclosure larly of internal generated predictions, appraisals, and forecasts, the Management Discussion and Analysis sc tion statement isan atte to elicit more information from manageme faruze prospects and challenges. In Chapter 1, we saw Josure provisions of the Exchange Act are designe! flow of information to trading markets, reliable, oF broadly available across pul Exchange Act. Against these aspi the anomalous result of discouragi 8 8 visa concerning the company's W the continuows fo assure a steady ow that was not so steady, iely traded firms before the ‘of many types of highly in registration. Does this make sense? ss outstanding ing the market ‘ket? Pondering these the reasoning of the SEC’s 2005 reform efforts, reviewed below, identifying communications that can occur during the offering process, un Jumping Concerns forthe 1PO 151 1b. Safe Harbors for Permissible Communications Capital markets are not alone in their insatiable dhlrst for information. customers, suppliers, and employees are eager for information about a rns operations, prospects, products, and the like. Because much of th information sought by these groups’ is relevant to investors as well, a company “in registration” frequently finds itself corn between legitimate commercial necds (0 release information about itself and the command of Section 5(c) not to condition the market. As you review the following protective safe harbors, consider how successful the SEC lias been in bal: fncing these conflicting forces. 40.Day BrightLine Breton. Rule 168A provides all issuers a bright time period, ending 90 days prior to the is protection is not he communication must be made “by or on behalf of tions by other distribution participants are not made more than 80 days prior to the filing of statement. Second, the communication cannot make any reference to the ihout important ink check offerings or business combinations (the later are subject safe harbor provisions discussed in Chapter 7) Rule 135. Role 135 issuer (a8 well as those securities if the mation about nner and purpose of the offer ie identification of the prosp in the predfiling release. What identity in the release? How likely is it discovered by a Clo Crap Industries, Ine. v 70) (en banc), rev'd on other grounds, 430 US. 1 (1977), held that Rule 135 is thea1 166 4. The Publi Offering {5 Guo Jumping Concerns forthe TPO er Section 5 was violated because disclosing the value of the securities went beyond the information permitted by Rule 135. 42 On February 14th, Alice, Omega’s vice president of finance, invites 42 | (resenatives of San Francisco investment banking firms to meet with € rePrsspore each firm's posible interest in underwriting Omega’ forth- ths a result of these discussions, she asks one of the firms, ve to serve as Omega’s underwriter. On February 16th, f draft agreement calling for Hedley, Hadley to head a firm they Ctanent underwriting syndicate for 4 million Omega shares to be coor approximately $16 per share, All discussions were conducted In ok prancheo solely with Hedley, Hadley's California-based stall. Factual hyormation. Nor-reporting iswuers enjoy a limited safe harbor in Rate 169 for their communication of “cegularly released" “factual business information.” However, this type of communication by a non-reporting company is protected he intended audience is not investors but fthers, such as customers Arrangements With and Among Underwriters of Hedley, Hadi San France office, on Febiay {eruriting agreement to his supervisors in New York City, Wiue the agecement is signed there on bebalf of Hedley, Hadley Section 2(a) (8) excludes from the defi ser to buy” both the negotiations and the agreements that the is ih its underwriter, as well a8 the negotiations and agreements among the Wlerwrters, prowded they are or will become parties to the underwriting Kecrment with the inser. Just what negotiations and agreements are so pro- tected depends on whether the person is an snderorte, a term defined in ‘Jay(1i) so as to exclude those “whose interest is limited to a Commission fom the underuriter notin excess of the waual and customary dis {iibutors’ or sellers’ commission.” The parties obviously excluded by this tan- fBuage are members ofthe selling group who absorb none of the offering’ risk ‘t4 From its San Francisco offices, Hedley, Hadley circulates a letter ‘+ ing 80 national and regional brokerage houses to participate as under. the upeoming Omega offering, 45, A few of the smaller firms invited by Hedley, Hadley to join in the 45, camrting have stated that they are not in a position to underwrite any wat ot the Omega offering. Hedley, Haley esponded with an offer to pay ar their umal commission rate for any shares they sold in the Omega PROBLEMS prepared a brochure products for ‘Omega Company manufactures fiberoptic switches and is located in muted to law Cuperting, California, just south of San Francisco, Omega was formed about. seven years ago and now desperately needs to expand its manufacturing capacity 3s poss i needs to raise about $51 public offering of common shares contem ing the offering led May Ist. For each of the pro ims that follow, consider jon 5 of the Securities Act has been violated. Omega is not a ‘company and has not previously engaged in a public offering of its security fare production capacity as a result of the forthcoming offer. thers to tour its produe- jon is made oe canis the frst prototypes of some unusual new products. Articles in the {pre begin to appear and are picked up by some wie services. The business venom ef a number of newspapers around the country print stories about f pardeulary intriguing produet that Omega highlighted. Does resolving ink problem depend on what kind of journalists Omega invited to join its tour? 4cl. On February 10th, Bob, O: ‘an advertisement (0 appear in ‘advertisement previ puter trade magazi ‘manufactured by “Omega is the ‘of fiber-optic switches. "s vice president of marketing, places ng issues of Business Weet. The fy had run for several months in Tech World, a com ting the fall range of products mit carried a quote from a trade magazine that ig industry leader in the development and design ‘48, In late April, Hedley, Hadley issues on its letterhead an announce ear tnat is caried over the various financial wire services disclosing that ‘Omega wil soon undertake a public offering through a syndicate of under Writes: of about 4 million common shares. The announcement further dis- feds of the offering will be used to expand Omega's production caps sn its research base. Omega Sbisins 2 copy of the announcement and posts it to its web site. inrtion satement hat not yet bee (pe 24, 198). “Se Enchange Act Release No. 14009