Securities Regulation Outline

1. Materiality
a. Definition of Material
i. Test: The Substantial Likelihood Test
1. Information is material if there would be a substantial likelihood
that a reasonable investor would consider the information
important in deciding whether to buy or sell the security, because
the information significantly alters the total mix of information
available that is relevant to that decision. Basic v. Levinson (1988).
ii. The Reasonable Investor
1. Rule: The standard is objective. The reasonable investor in a
market in which many individual investors trade will be deemed
less schooled and sophisticated than a market containing only
experienced traders and institutions using complex computer
algorithms. United States v. Litvak (2d Cir. 2018).
a. Litvak (holding that the standard applies to the reasonable
investor in a particular market, not all markets; therefore,
testimony that purchaser’s representative believe Litvak
was acting as purchaser’s agent was not objectively
reasonable in the residential-mortgage backed securities
market)
b. Analyzing the Materiality Test
i. Courts use a variety of analyses and tests to analyze Basic’s rule for
materiality:
ii. The Probability/Magnitude Test: Speculative Information
1. Exclusive for M&As
2. Under the probability/magnitude test, materiality depends “upon a
balancing of both the indicated probability that the event will occur
and the anticipated magnitude of the even in light of the totality of
the company activity.” Basic v. Levinson
a. Basic’s Facts:
i. Basic made a series of statements about a merger.
The merger info leaked. Basic said to the news that
no negotiations were ongoing several times. A few
weeks later, Basic announced that a takeover was
imminent. Plaintiff sued under 10b-5. Court held
that using the probability/magnitude test, such
actions were material and basic committed a
misstatement even though securities law prevented
them from disclosing the acquisition.
 b. Probability in the M&A context depends on an “indicia of
interest in the transaction at the highest corporate levels.”
i. Board Resolutions
ii. High-level participation in negotiations
iii. Retention of investment bankers
iv. Specificity of deal—e.g., form of transaction, price,
identity of surviving company, distribution of
officer positions
v. Possible regulatory roadblocks—e.g., antitrust,
banking regs.
c. Magnitude depends on whether we are considered the
acquiror or target.
i. Always high for the target
ii. Size of acquirer can make a deal a small magnitude
for acquirer, but this can be important if the small
target produces a product that the acquiring
company needs to complete its product line or enter
a new market
iii. Premium over market is also relevant
iii. Quantitative Analysis
1. Note: Must be comparing apples to apples (revenue to revenue),
not revenue to profit.
2. Step 1: If the error of omission is less than 5% than the error or
omission is likely not material.
3. Step 2: Using the SAB 99 Factors, determine whether the error or
omission is material?
a. SAB 99 Factors include:
b. Whether the misstatement arises from an item capable of
precise measurement or whether it arises from an estimate
and, if so, the degree of imprecision inherent in the
estimate.
c. Whether the misstatement masks a change in earnings or
other trends.
d. Whether the misstatement hides a failure to meet analysts’
consensus expectations for the enterprise.
e. Whether the misstatement changes a loss into income or
vice versa.
f. Whether the misstatement concerns a segment or other
portion of the registrant’s business that has been identified
as playing a significant role in the registrant’s operations or
profitability.
g. Whether the misstatement affects the registrant’s
compliance with regulatory requirements.
 h. Whether the misstatement affects the registrant’s
compliance with loan covenants or other contractual
requirements.
i. Whether the misstatement has the effect of increasing
management’s compensation—for example, by satisfying
requirements for the award of bonuses or other forms of
incentive compensation.
j. Whether the misstatement involves concealment of an
unlawful transaction.
iv. Stock Price Movement: Historical Data
1. Rule: When the stock of an issuer is traded in an efficient market,
“the materiality of disclosed information may be measured post
hoc by looking to the movement, in the period immediately
following disclosure, of the price of the firm’s stock.” In re Merck
& Co. (3rd Cir. 2005)
2. Note:
a. A fact may be material if disclosure causes the price of the
relevant stock to move up or down in a statistically
significant way. This test is objective and persuasive at
trial; however, stock prices move for many reasons.
b. When analyzing whether the information changed the stock
price, analyze whether nonpublic information changed the
stock price or some other information or event affected that
price.
c. Stock price must be immediate—within one day—after the
release of nonpublic information.
v. Qualitative Analysis: Historical Information & Management Integrity
(Non-Financial Numbers)
1. Covers:
a. Wrongdoings by directors and top management
b. Managerial and business ability of directors and top
management
c. Wrongdoing
i. Lying by mgmt. about matters other than the
operation of the issuer may or may not be important
ii. Wrongdoing is presumptively material if its consists
of actions by top management to benefit themselves
at the expense of the company or shareholders
iii. May implicate quantitative analysis—e.g., where
wrongdoing is a violation of the law which, if
discovered, threatens business; removes a
 competitive advantage; or runs the risk of a fine or
civil liability.
d. Management ability and control of the company
i. Management wrongdoing may cast doubt on ability
to manage.
1. Franchard, where unauthorized withdrawals
from business were prompted by the decline
of Glickman’s other enterprises, which in
turn suggested that he might not have the
magic touch that the Glickman Corporation
touted as the reason for buying that
company’s stock
ii. Facts about directors or top management may be
material in a particular case even if SEC rules do
not require disclosure of the particular experience
e. Puffing—general optimistic statements by an issuer, or
general self-congratulatory statements, that market
participants would not use in valuing the company—is not
material
2. Franchard’s Importance:
a. Facts showing
i. misuse of corporate assets for personal benefit of
top officers or directors or
ii. self-dealing by top officers or directors at the
corporation’s expense
iii. are very likely to be material
c. The Context: “Total Mix” Defenses
i. Rule/Test: Under Basic, the information is only material if it affects the
“total mix” of information available
ii. Multiple Variations of the “Total Mix” Test
1. “Truth on the Market” Defense: The truth on the market defense
asserts that a misrepresentation is immaterial if the information is
already known to the market because the misrepresentation cannot
then defraud the market. Longman v. Food Lion, Inc.
a. If information is already in the market, repeating it does not
change the total mix, so the information, when repeated, is
not material.
b. Longman (holding that Defendants did not have a securities
cause of action for Defendant’s unsafe and illegal
employment and labor practices because it was known to
the market during the time in question and when the
information was disclosed during DoL settlement
discussions, the stock price was relatively unchanged.
 Further, D’s sanitation issues were mere puffery and Ps
evidence of quantiatively small samples was unavailing as
to the business as a whole (quantitative analysis))
2. Bespeaks Caution: Under this defense, forward-looking
statements are rendered immaterial as a matter of law if they are
accompanied by disclosure of risks—not boilerplate information--
that may preclude the forward-looking projection from coming to
fruition. Kaufman v. Trump’s Castle Funding (3rd Cir. 1993). The
PLSRA codifies this at Securities Act § 27A; Exchange Act § 21E.

2. Definition of a Security
a. Opening Rule Statement
i. In drafting securities laws, Congress enacted statutes to compel full and
fair disclosure to the issuance of “many types of instruments that in our
commercial world would fall within the ordinary concept of [the definition
of] a security.” Landreth Timber Co. (1985). The definition of the word
“security” includes, “unless the context otherwise requires,” any note,
stock, and investment contract. Sec. Act. Section 2(a)(1); Exchange Act
Section 3(a)(10). If the financial product or instrument falls within the
scope of a financial product under the definition of the word security, then
securities laws apply “unless the context otherwise requires” that it falls
outside its scope. Id. In searching for the scope and meaning of any
particular word under the definition of security, “form should be
disregarded for substance and the emphasis should be on economic
reality.” United Housing Fdn., Inc. v. Forman (1975).
b. Investment Contract
i. Opening
1. The term “security” includes the words “investment contract.” Sec.
Act. Section 2(a)(1); Exchange Act Section 3(a)(10). Investment
contract is a catch-all provision and is broad. Under Howey, an
investment contract means a “contract, transaction or scheme” that
satisfies four elements. SEC v. W.J. Howey Co. (1946).
ii. First, a person must invest. Howey.
1. To invest means to give specific consideration in return for a
separable financial interest with the characteristics of a security.
Int’l Brotherhood of Teamsters v. Daniel (1979). The investment
must be voluntary by the investor and for investment purpose (i.e.
a financial/monetary reteurn). The investment may be monetary or
in-kind. Id. In Daniel, the Court found the involuntary donation to
an employee’s pension fund as not a security because the employee
was compelled to be in the plan and the employee was providing
 labor (thereby allowing them to obtain the contribution) for their
livelihood—not investment purposes.
iii. Second, there must be a common enterprise. SEC v. SG Ltd. (1st Cir.
2001)
1. Circuit Split
2. Horizontal Commonality involves the pooling of assets from
multiple investors so that all share in the profits and risk of the
enterprise.
a. Two elements: (1) Pooling of assets, and (2) share in profit
and risks
3. Broad Vertical Commonality requires that the well-being of all
individual investors be dependent upon the promotor’s efforts and
expertise (even if no pooling of funds or pro rata distribution of
profits). Under this commonality, investors owning the same
percentage of ownership may receive differing returns, and the
promoter does not necessarily share the risk with investors.
4. Narrow Vertical Commonality requires that the investors’
fortunes be interwoven with and dependent upon the efforts and
success of the promoters. Essentially, this is broad vertical with
the promoter assuming some risk along with the investors.
iv. Third, the investor is led to expect profits. United Housing Fdn. v.
Forman (1975).
1. Rule: Led to expect profits means that the investor is attracted to
the investment solely by the prospect of a return on his investment.
When a purchaser is motivated by a desire to use or consume the
item, the securities laws do not apply. United Housing Fdn., Inc. v.
Forman (1975)
a. Forman (finding this element lacking when a purchaser-
investor was motivated to invest by a desire to use or
consume—“to occupy the land or to develop it”)
2. Mixed Consumption and Return: An expectation of profits
under Howey may exists even if the investor intends the profits to
go towards charity or person consumption. Warfield v. Alaniz (9th
Cir. 2009) (finding annuities were investment contracts and the
fact that proceeds went to charity did not diminish this
expectation).
3. Finding: To determine whether the investor expects profit, the
court may look to the promotion materials or oral presentations to
see whether they pitched return as a reason for buying.
 v. Fourth, profits must be derived solely from the efforts of the promoter or a
third party. Howey.
1. More Control  Not a security; Less control Investment
contract
2. Rule: The test is whether the investors, considering actual and the
practical exercise of their powers, had a sufficient influence over
factors that would determine the success or failure of the business.
3. LLP/LLC: There is a rebuttable presumption that limited interests
are securities and general partnership interests are not securities
because limited partners do not exercise significant participation in
the business while general partners do; however, if the Williamson
factors are all present, either interest is a security.
a. Regardless of management powers in the organizing
documents, the question is whether the investors practically
exercised management functions. Williamson Factors:
i. (1) Limited Power: “An agreement among the
parties leaves so little power in the hands of the
partner or venture that the arrangement in fact
distributes power as would a limited partnership”
ii. (2) Inexperience and Unknowledgable: “The
partner or venture is so inexperienced and
unknowledgeable in business affairs that he is
incapable of intelligently exercising his partnership
or venture powers,”; or
iii. (3) Dependency: The partner or venture is so
dependent on some unique entrepreneurial or
managerial ability of the promoter or manager that
he cannot replace the manager of the enterprise or
otherwise exercise meaningful partnership or
venture power.”
4. LLC/LPs: Generally, there is a rebuttable presumption that
member-managed LLCs are not securities and manager-managed
may be a security because in a member-managed the members
exercise significant control and in a manger-managed, they do not.
a. In Avenue Capital Mgmt v. Schaden, the 10th Cir (2016)
asserted that the court considers several factors including:
“contribution of time and effort to the success of the
enterprise, their contractual powers, their access to
information, the adequacy of financing, the level of
speculation, and the nature of the business risks.”
c. Stock
i. Rule: If an economic interest is called a “stock” and bears the
characteristics generally associated with stock, the court will find that it a
 stock under the definition of “security” and subject to securities laws.
Landreth Timber Co. v. Landreth (1985).
ii. Characteristics of (Common) Stock:
1. Right to receive dividends upon an apportionment of profits;
2. Negotiability;
3. Ability to pledge or hypothecate;
4. Voting rights in proportion to shares owned; and
5. Capacity to appreciate in value.
iii. Note: Same test for passive and active investors and an economic interest
may not be a security if the economic reality shows that the interest was
not sold for the purpose of raising capital for a profit-making enterprise
(Forman).
d. Notes
i. There is a rebuttable presumption that notes are securities subject to
securities law and that presumption may be rebutted by application of the
Reves Test.
ii. First, under securities laws, if the economic interest falls within the nine-
month-or-less commercial paper (an unsecured obligation issued by a
corporation or bank, with a high credit rating, to finance short-term credit
needs) exception, then it is not a note within the definition of the word
“security.” Securities Act sec. 3(a)(3); Exchange Act sec. 3(a)(10).
iii. Second, if the economic interest bears a strong resemblance to one of the
enumerated categories of instruments exempted from securities laws then
it is not a security:
1. Securities laws do not apply to certain notes including:
a. Notes delivered in consumer financing;
b. Notes secured by a mortgage;
c. Short-term notes secured by a lien on a small business or
some of its assets;
d. Notes evidencing a character loan to a bank customer;
e. Short-term notes secured by an assignment of accounts
receivable;
f. Notes formalizing an open-account debt incurred in the
ordinary course of business; and
g. Notes evidencing loans by commercial banks for current
operations.
iv. Finally, if the economic interest is not one of the enumerated financial
instruments exempted from securities law, the court must determine
whether the instrument should be added to the list of notes by a showing
of four factors:
1. Motivation: If the seller’s purpose is to raise capital for general
use, and the buyer is interested in profit, then the instrument is
likely a security; however, if the note is exchanged to facilitate
 minor purchases, correct cash-flow difficulties, or advance some
other commercial or consumer purposes, then this factor weighs
against being a security.
2. Plan of Distribution: The larger number of offerees and lower
their sophistication, the more likely it is a security; however, the
fewer offerees and greater the sophistication, the less likely it is a
security.
3. Public Expectations: If the public expects the interest to be sold
as an “investment” then the factor weighs in favor of being a
security.
4. Presence or Absence of Risk Reducing Factors: If another
regulatory scheme significantly reduces the risk of the instrument,
application of the securities laws may be unnecessary. These risk-
reducing factors include alternate regulatory regimes or the
presence of collateral.
v. REMEMBER THE PRESUMPTION OF A SECURITY.

3. Public Company Disclosure

a. Public Company Status
i. Summary Table

SECTION TRIGGER REQUIREMENTS TERMINATION

(Going Dark)
§12 (a), (b) Exchange Listing  Periodic Filings Rule 12d2-2
under the Exchange  Proxy rules + annual  Delisting
Rule 12d2-2 Act by filing a report (including
registration statement  Tender offer rules filing Form 25
 Insider stock w/ SEC) and
transactions (§16) either:
 (a) Less than
300
shareholders
or
 (b)less than
500
shareholders
and $10 m in
assets for 3
years

§12(g) Threshold under the  Periodic Filings

JOBS Act: Total  Proxy rules + annual Rule 12h-3
12g-4 assets greater than report Either
 $10 million on the  Tender offer rules  (a) Less than
last day of the  Insider stock 300
company’s fiscal transactions (§16) shareholders
year; and either or
2,000 shareholders of  (b)less than
record of a class of 500
equity (other than shareholders
exempted securities) of record and
or 500 shareholders $10 m in
of record of such a assets for 3
security who are not years
accredited investors
When either
condition is
satisfied, the
company files a
Form 15 so
certifying, and the
issuer’s duty to file
reports required by
Section 13(a) “shall
be suspended
immediately. Rule
12g-4(b).
§15(d) Filing of a  Periodic Filings
registration statement o 10K (Rule 12h-3)
Rule 12h-3 under the 33 Act, o 10Q
which has become o 8K Either
effective. o NOT Proxy  Less than 300
Statements shareholders
and no earlier
than next
fiscal year
after offering
or
 Less than 500
shareholders
of record and
less than $10
m in assets for
3 years

The duty to file

disclosure reports is
only suspended for
that fiscal year in
 which one is met
and begins again in
any fiscal year for
which, on the first
day of that year, the
conditions are not
met. Rule 12h-3

ii. Terminating Status (Going Dark)

1. The company must delist;
2. The company must ensure it is not a public company under §
12(g);
3. If the company has filed a prior effective registration statement
with the SEC, the company must meet the requirements to suspend
public company status.
iii. “Held of Record” – Rule 12g5-1
1. Applicable to 12(g) and 15(d).
2. Securities held in a custodial capacity for a single trust or estate are
counted by each trust, estate, or account as a distinct holder of
record. Rule 12g5-1(a)(3).
3. Institutional custodians are not single holders of record for
purposes of the Exchange Act's registration and periodic reporting
provisions. Instead, each of the depository's accounts for which the
securities are held is a single record holder.
4. Securities held in street name by a broker-dealer are held of record
under the rule only by the broker-dealer.
5. The JOBS Act, signed in 2012, provides that holders of record will
not include “persons who received the securities pursuant to an
employee compensation plan in transactions exempted from the
registration requirements of section 5 of the Securities Act of
1933.” 15 U.S.C. § 78l(g)(5). And persons who acquire securities
in exempt crowdfunding offerings will not be counted as holders of
record. 15 U.S.C. § 78l(g)(6).
iv. Emerging Growth Companies
1. “Emerging growth company” is an issuer with total annual gross
revenues of less than $1 billion during it most recent fiscal year.
2. A company loses EGC status at the earliest of: [Sec. Act Sec. 2(a)
(19)]
a. Revenue exceeds $1 billion on the last day of the fiscal
year;
 b. The last day of the fiscal year following the fifth
anniversary of the date of the first sale of common equity in
a registered public offering;
c. The date on which the company has issued more than $1
billion in non-convertible debt aggregated over the
previous three-year period; or
d. The date on which the company is deemed to be a “large
accelerated filer” (Rule 12b-2)
i. Rule 12b-2 defines large accelerate file as
companies with over $700 million of worldwide
equity float in the hands of non-affiliates among
other requirements
3. Benefits: Exempt from the following:
a. “Say on Pay” requirement that shareholders have the ability
to vote on executive compensation. Ex. Act. Sec. 14A.
b. CEO pay disparity disclosures
c. Certain disclosures under Items 301 (selected financial
data) and Item 303 (management’s discussion and analysis)
of S-K
d. Requirement of an external auditor attesting to the internal
controls under §404 of Sarbanes Oxley
e. Rule promulgated by the PCAOB requiring mandatory
audit firm rotation
b. Periodic Disclosure
i. Generally – Securities Act Sec. 13(a).
1. Under Sec. 13(a), the SEC requires three principal disclosure
documents from public companies:
a. Annual Report: Form 10-K
i. Rule 13a-1
b. Quarterly Report: Form 10-Q
i. Rule 13a-13
c. Special Reports: Form 8-K
i. Rule 13a-11
2. Certification of Periodic Reports: Under SEC rules, the CEO and
CFO must each certify, using the form set out in Reg S-K Item
601(b)(31), the periodic reports, based on their knowledge, that (1)
it does not contain material statements that are false or misleading,
and (2) that it fairly presents the financial condition and results of
operation of the company. Exchange Act Rule 13a-14, 15d-14.
ii. Form 10-K, 10-Q: Periodic Reports
1. Filing: Reporting companies must file within 90 days of the close
of the fiscal year, an annual report containing certain information.
 Under Item 7 of Form 10-K, the company must disclosure
information according to Item 303(a) of Reg S-K.
2. Item 303(a)(3)(ii) of Reg S-K requires disclosure of “any known
trend or uncertainties that have had or that the registrant reasonably
expects will have a material favorable or unfavorable impact on net
sales or revenues or income from continuing operations.”
a. Accordingly, a “trend” occurs when something happens
over time and continues. An “uncertainty” is an event in the
future that is not the result of some continual development.
b. According to an SEC Release in 1989, companies must
take two steps in determining whether a trend or
uncertainty requires disclosure:
i. First, the company must determine whether it is
reasonably likely that the trend of uncertainty will
continue as to affect net sales, revenue, or income.
If it will not continue as to affect the company’s
financials, then no disclosure is required.
ii. Second, if management cannot make that
determination, management must objectively
evaluate the consequences of the trend or
uncertainty on the assumption that it will continue.
Then, disclosure is required unless management
determines that the impact is not reasonably likely
to be material.
c. Note: The trend or uncertainty must be known.
iii. Form 8-K: Current or Special Reports
1. Must be filed within four business days of triggering event.
2. Events requiring disclosure:
a. Section 1: Operational events:
i. Entry into (or termination of) definitive material
agreements outside the ordinary course;
ii. Bankruptcy or receivership
iii. Loss of significant customer
b. Section 2: Financial events:
i. Acquisition or disposition of assets constituting
more than 10% of total assets
ii. Results of operations and financial condition
iii. Costs associated with exit or disposal activities,
including termination benefits for employees,
contract termination costs, and other associated
costs
iv. Material impairments to assets such as goodwill
c. Section 3: Securities-Related events:
 i. Delisting
ii. Unregistered sales of equity securities
iii. Changes in debt rating
iv. Material modifications to rights of securities holders
d. Section 4: Financial Integrity events:
i. Item 4.01. Changes in certifying accountant
ii. Item 4.02. Notice that previously issued financial
statement or audit reports should no longer be relied
upon.
e. Section 5: Governance events
i. Changes in corporate control
ii. Item 5.02. Changes in directors and principal
officers
1. In Re Hewlett-Packard Co. (2007)
a. Item 5.02 requires that if a director
resigns because of a disagreement
with the registrant on a matter of
registrant’s operations, the registrant
must disclose a brief description of
the circumstances representing the
disagreement that the registrant
believes caused, in whole or in part,
the director’s resignation
b. Additionally, registrant must provide
resigning director with a company of
the disclosure, give the resigning
director an opportunity to respond
stating whether they agree with the
8-K, and if they receive a response,
the letter must be filed by registrant
as an amendment to the 8-K within 2
business days
iii. Amendments to corporate documents
iv. Amendment or waiver of company’s code of ethics
v. Matters submitted to a vote of the company’s
shareholders
f. Section 6: Asset-Backed Securities
g. Section 7: Regulation FD: Any disclosure the issuer elects
to disclosure through Form 8-K to comply with Reg FD
h. Section 8: Other Events: anything the issuer, at its options,
think would be important to its security holders
 3. Penalties: Failure to file a form 8-K or a deficient 8-K is a
violation of Section 13(a) and related rule (Rule 13a-11). SEC does
not need to show scienter.
c. Books and Records Disclosure
i. Keep Records: Companies are required to “make and keep books,
records, and account, which, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the issuer.” Section
13(b)(2)(A).
1. Notes:
a. No scienter—strict liability
b. No materiality requirement
c. No private right of action to enforce §13(b)(2)—only SEC
and, in extreme cases, the Department of Justice
ii. Internal Controls: Companies are also required to devise and maintain a
system of internal account controls sufficient to provide reasonable
assurances that—(i) transactions are executed in accordance with
mangement’s authorization; (ii) transactions are recorded as necessary;
(iii) access to assets is permitted only with management’s authorization;
and (iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken for the
differences. Section 13(b)(2)(B).
iii. In Sum:
1. Subpart (A) requires good records.
2. Subpart (B) requires systems to produce good records
iv. Qualifiers:
1. “Reasonable detail” and “reasonable assurances” means “such
level of detail and degree of assurance as would satisfy prudent
officials in the conduct of their own affairs.” Section 13(b)(7).
v. Actors:
1. Company is primary violator
2. Officials in the company can be aiders and abettors or control
person
a. Aiding and abetting violation requires
i. (1) an independent primary violation,
ii. (2) actual knowledge by the alleged aider and
abettor of the primary violation, or reckless
ignorance of that violation, and actual knowledge
by the alleged aider and abettor of his or her own
role in furthering it, or reckless ignorance of that
role, and
iii. (3) substantial assistance by the aider and abettor in
the commission of the primary violation
 b. Individuals within a company can be pursued as control
persons under section 20(a)3
3. In re BHP Billington Ltd. (2015)
vi. Rules relating to 13(b):
1. Rule 13b2-1: Prohibits directly or indirectly falsifying books and
records subject to 13(b)(2)(A).
a. No materiality qualifier.
b. No scienter
d. Executive Compensation
i. Dodd-Frank requires companies to disclose the compensation of their
CEO, CFO, and the next three highest paid executive officers.
ii. Amount includes bonuses, stocks, options, and retirement benefits. Equity
must be disclosed at FMV.
e. Regulation FD: Selective Disclosure
i. Prevent selective disclosure by mandating disclosure through Form 8-K.
ii. Applies when an issuer, or someone acting on its behalf, discloses material
nonpublic information to:
1. “a broker or dealer, or a person associated with a broker or dealer,”
FD 100(b)(1)(i)
2. “an investment adviser . . . an institutional investment manager”
FD 100(b)(1)(ii)
3. “an investment company” or “affiliated person” of an investment
company” FD 100(b)(1)(iii); or
4. “a holder of the issuer’s securities, under circumstances in which it
is reasonably foreseeable that the person will purchase or sell the
issuer’s securities on the basis of the information.” FD 100(b)(1)
(iv).
iii. Reg FD does not apply to disclosure to:
1. a person who owes a duty of trust or confidence to the issuer; FD
100(b)(2)(i)
2. a person who expressly agrees to maintain the disclosed
information in confidence; FD 100(b)(2)(ii)
3. disclosures in connection with certain securities offerings. FD
100(b)(2)(iii)
iv. If the regulation does apply, the company must:
1. Disclose the information simultaneously to the public if disclosure
was intentional; FD 100(a)(1)
2. Disclose the information “promptly” to the public if disclosure was
not intentional; FD 100(a)(2)
a. Promptly means “as soon as reasonably practicable” but in
no event after the later of 24 hours or the commencement
of the next day’s trading on the NYSE after a senior official
 of the issuer learns that there has been a non-intentional
disclosure or is reckless in not knowing.
v. SEC identified seven cateogries of information that are material and
subject to disclosure under Reg FD, note that these are still subject to the
materiality qualifier and are not dispositive as material:
1. Earnings information;
2. M&As, joint ventures, or changes in assets;
3. New products or discoveries, or developments regarding customers
or supplies
4. Changes in control or in management;
5. Changes in auditors or auditor notification that the issuer may no
longer rely on an auditor’s audit report;
6. Events regarding the issuer’s securities—e.g. defaults on strict
securities, calls of securities for redemption, repurchase plans,
stock splits or changes in dividends, changes to rights of security
holders, public or private sales of additional securities, and
7. Bankruptcy or receivership.
8. SEC v. Seibel Systems., Inc. (SDNY 2005).
vi. Public disclosure may be made by:
1. Filing an 8-K; FD 101(e)(1)
2. “another method (or combination of methods) of disclosure that is
reasonably designed to provide broad, non-exclusionary
distribution of the information to the public” FD 101(e)(2)
a. E.g. Press release
b. May also do both.
vii. Actionability: No Private Right of Action; SEC only

4. Rule 10b-5 Antifraud

a. The Statute/Regulation
i. Exchange Act Section 10(b) declares it is “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. (b) To use or employ, in connection with the purchase or sale of
any security . . . any manipulative or deceptive device or
contrivance in contravention of such rules and regulations . . . .”
ii. Rule 10b-5 also declares that
1. “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:
a. (a) To employ any device, scheme, or artifice to defraud;
b. (b) 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 light of the circumstances under which
they were made, not misleading, or
c. (c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon
any person,
2. In connection with the purchase or sale of any security.
b. Generally
i. Cause of Action
1. Private cause implied; the statute does not create an express private
cause of action. See Kardon v. Nat’l Gympsum Co. (E.D. Pa. 1946)
2. SEC can bring
a. A suit in federal court based upon a 10b-5 violation
b. An administrative enforcement action before an ALJ
3. DOJ may bring criminal prosecution for violation of Rule 10b-5
ii. PSLRA
1. Imposes a rebuttable presumption that the lead plaintiff in a class
action is the shareholder with the largest financial interest in the
class;
2. Requires plaintiffs plead with particulatity facts leading to a strong
inference of scienter;
3. Imposes a stay on discovery until after the MtD is decided;
4. Provides a safe harbor for forward looking statements;
5. Limits the liability of defendants not engaged in intentional fraud
to their proportionate share of the harm.
iii. Time Limits: 28 U.S.C. §1658(b).
1. Statute of Limitations: 2 years. Does not begin to run until
plaintiffs discovers the facts constituting the violation or when a
reasonably diligent plaintiff should have become aware of the
violation—whichever is first.
2. Statute of Repose: 5 years. Cut off without exception.
c. Jurisdictional Hook
i. Requires “the use of any means or instrumentality of interstate commerce
or of the mails, or of any facility of any national securities exchange.”
Rule 10b-5. The jurisdictional hook, however, is usually easily satisfied as
an intrastate telephone call, intrastate mailing, internet use, or otherwise
will satisfy this element.
d. Proper Defendants
i. Generally
1. In a private Rule 10b-5 action, all defendants must either be
a. Primary Violators of the rule; or
b. Control person defendant
 2. In an SEC action, defendants may be either:
a. Primary violators of the rule;
b. Control person defendants; or
c. Aiders and Abettors
i. Limited to SEC actions. Central Bank v. First
Interstate Bank of Denver
ii. Primary and Secondary Violators
1. A natural person who
a. “makes” a misstatement in the sense that they have control
over the misstatement’s content and dissemination or to
whom the misstatement is attributed. Janus Capital Grp. V.
First Derivative Traders (2011)—proper under 10b-5(b).
b. Fails to disclose a material fact when under a duty to
disclose.
c. Acting with scienter, disseminates a misstatement, even
though they did not “make” the statement and the act is
proximately related to the misstatement. Lorenzo (proper
under 10b-5(a),(c))
2. Note:
a. Stonebridge controls Rule 10b-5(a), (c)
b. Janus controls Rule 10b-5(b): Requirement of “to make”
the statement
i. Rule: “[T]he maker of a statement is the entity with
authority over the content of the statement and
whether and how to communicate it. Without such
authority, it is not ‘necessary or inevitable’ that any
falsehood will be contained in the statement.”
Janus.
3. If a natural person spoke or wrote on behalf of a company, then the
company is also a proper defendant—through agency principles—
and the company is a proper defendant if they issued a statement.
4. Other defendants are proper if plaintiff can prove reliance because:
a. They had a duty to disclose a material fact and they did not;
or
b. Their deceptive act—under Rule 10b-5(a), (c)—had a
proximate or immediate relationship to a false or
misleading statement by a defendant listed above
i. Not a proper defendant if their deceptive act and the
statement were remote. Stoneridge.
ii. Are proper if their deceptive acts made the
statement “necessary or inevitable” Stoneridge.
iii. Control Person Liability: “Potential” Control Test (8th Cir)
1. Exchange Act Sec. 20(a) states that “Every person who, directly or
indirectly, controls any person liable . . . shall also be liable jointly
and severally with and to the same extent as such controlled person
. . . unless the controlling person acted in good faith and did not
directly or indirectly induce the act.”
2. Control person means “the possession, direct or indirect, of the
power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting
securities, by contract, or otherwise.” Rule 12b-2.
3. The Test: The 8th Circuit requires:
a. (1) The primary violator to violate federal securities laws.
i. Note: FRCP 9 heightens the pleading
requirements.
b. (2) The defendant exercised actual general control over the
controlled person or entity and
i. No heightened pleading requirement.
ii. IE: He had the power to exercise control in
general
c. (3) The defendant “possessed the power to control the
specific transaction or activity upon which the primary
violation is predicated, but he need not prove that this latter
power was [actually] exercised.”
i. IE: He had the potential to control the particular
transaction, it does not matter that they did or
did not.
d. Lustgraaf v. Behrens (8th Cir. 2010)
4. Defense: Defendant bears the burden to show they acted in good
faith and did not directly or indirectly induce the act or acts
constituting the violation or cause.
iv. Aider or Abettor Liability – Exchange Act 20(e)
1. Not applicable in private causes of action; only SEC enforcement.
2. PLSRA expressly grants the SEC the power to bring an action
against aider and abettors of a 10b-5 violation by knowingly giving
substantial assistance to the primary violation. Exchange Act 20(e).
3. The SEC must show:
a. An independent primary violator;
b. Actual knowledge, or reckless ignorance, by the alleged
aider and abettor of the primary violation, and actual
knowledge, or reckless ignorance, of their role in furthering
the primary violation, and
c. Substantial assistance by the aider and abettor in the
commission of the primary violation.
e. Elements- All
i. Deception or manipulation by primary violator.
1. Deception
a. The rule does not provide relief where plaintiff simply
alleges a breach of fiduciary duty and no deception occurs.
Santa Fe (1977) (asserting that minority’s 10b-5 claim
failed simply because they did not follow proper protocol
to dispute value of their shares—the officers did not
deceive them)
b. Note: The rule does apply where such breach entails a
misstatement of a material fact or an omission of a
material fact when the defendant had a duty to disclose as
this amounts to deception. Santa Fe.
2. Misstatement of Material Fact
a. Materiality  Material Portion of Outline
b. If an issuer misstates a material fact, the misstatement may
be actionable; however, context can play a role in
determining whether the statement is materially false and
“true statements may discredit the [misleading] one[s] so
obviously that the risk of real deception drops to nil.” Va.
Bankshares.
3. Opinions: Generally
a. Facts v. Opinion (Omnicare)
i. A fact is “a thing done or existing” or “an actual
happening.”
ii. “An opinion is ‘a belief, a view’ or a ‘sentiment
which the mind forms of persons or things.’’”
b. To show falsity of an opinion, a plaintiff must show:
i. Speaker or writer did not believe the opinion at the
time it was spoken or written;
ii. Opinion contained a non-opinion embedded fact
that was false; or
iii. The speaker did not disclosure “particular (and
material) facts going to the basis for the issuers
opinion” including
1. “Facts about the inquiry the issuer did or did
not conduct or [Facts underlying the
opinion]
2. The knowledge it did or did not have—
whose omission makes the opinion . . .
misleading to a reasonable person reading
the statement fairly and in context.” [Facts
 throwing the opinion into doubt if
revealed to a reasonable investor]
c. Omnicare:
i. Words such as “we believe” and “we think” do not
nullify a whole statement, and even these words
make the statements capable of misleading
investors.
4. Opinions: Forward Looking Statements
a. Rule: Forward-looking statements—including statements
of business plans, projections of earnings, and historical
facts regarding issuer’s earning for a quarter on which the
company’s books are closed—is analyzed in a manner
similar to falsity of other opinions (above). Omnicare; Ind.
Pub. Retirement Sys. v. SAIC, Inc. (2d Cir. 2016)
b. Protections under the PLSRA
i. APPLIES ONLY IN PRIVATE ACTIONS. Section
21E(c)(1).
ii. Available only to:
1. Issuers (public companies); Section 21E(a)
(1);
2. “a person acting on behalf of such issuer”
Section 21E(a)(2)
3. An underwriter, with respect to information
derived from an issuer. Section 21E(a)(3)
4. An outside reviewer retained by such issuer
making a statement on behalf of such issuer.
Section 21E(a)(4).
iii. Not available for:
1. Statements made “in connection with an
initial public offering.” Exchange Act
21E(b)(2)(D).
2. Statements “included in a financial
statement prepared in accordance with
[GAAP].” Exchange Act 21E(b)(2)(A).
3. Statement made with respect to an issuer
that—in the three years prior to the
statement being made—“has been made the
subject of a judicial or administrative decree
or order arising out of a government action
that—
a. Prohibits future violations of the
antifraud provisions of the securities
laws;
 b. Requires that the issuer cease and
desist from violating the antifraud
provisions of the securities laws; or
c. Determines that the issuer violated
the antifraud provisions of the
securities laws.”
d. Exchange Act 21E(b)(1)(A).
iv. Protection 1: Exchange Act 21E(c)(1)(A)(ii)
1. Immateriality. Statements must be material
to be actionable.
v. Protection 2: Exchange Act 21E(c)(1)(A)(i)
1. Forward looking statements are protected if
the statement, when made, is accompanied
by meaningful cautionary language that
identifies important risk factors that could
alter the results. Sec. 21E(c)(1)(A)(i).
“Meaningful cautionary statement” cannot
be boilerplate and should include language
tying risks to the issuer’s business. As risks
change, the language should change.
vi. Protection 3: Exchange Act 21E(c)(1)(B)
1. The plaintiff must prove that when the
statement was made, the maker of the
statement, or its officers or directors, had
actual knowledge that the forward-looking
statement was false or misleading. Sec.
21E(c)(1)(B).
c. Bespeaks Caution Doctrine (Judicially-Created)
i. Forward-looking statements are protected if when
made, the forward-looking statements were coupled
with cautionary language that identified the risks
that eventually matured and frustrated the
realization of the statement.
1. NO Boilerplate
2. Add information from PLSRA protection
2
d. Other Notes:
i. Asher v. Baxter Intern. Inc., (7th Cir. 2004) (“As
long as the firm reveals the principal risks, the fact
that some other event caused problems cannot be
dispositive.”)
5. Omissions
a. No liability for omissions unless under a duty to disclose.
 b. Such duties arise if:
i. The defendant has a positive legal duty to disclose
imposed by statute or regulation—e.g. Items in 8-K
or 303(a)(3) disclosures.
ii. Defendant makes a statement that misleads absent
disclosure of the omitted fact
iii. Defendant is trading under conditions that impose a
duty to disclose or abstain (e.g. issuer is buying or
selling its own stock)
6. Duty to Correct/Update
a. Rule: Duty to correct arises when the maker of a statement
discovers, after making the statement, that the statement
was false when they made it. This duty continues so long as
the maker “knows or should know that potential investors
are relying on” the false statement. The duty does not
extend to statements made by third parties. Gallagher v.
Abbott Labs.
b. Rule: Duty to update arises when the make of a statement
—which was true when made but later became untrue—has
a duty to disclose the effect of the later events on the
subject of the statement. Gallagher v. Abbott Labs.
i. Outside of explicit, specified events under
Regulation S-K, a company does not need to
provide continuous disclosure of all events.
c. Gallagher v. Abbott Labs. (holding that Defendant did not
need to continuously update/correct their prior statements
on litigation since they were not incorrect when made and
the 8-K was proper when they filed it to account for the
event).
ii. Scienter
1. Rule: To succeed in a 10b-5 action, the plaintiff must adequately
prove that the defendant had the requisite scienter or “a mental
state embracing an intent to deceive, manipulate, or defraud.”
Ernst & Ernst v. Hochfelder (1976) (finding that the statute of 10b
imposes a scienter requirement from the words “manipulative,”
“deceptive,” and “contrivance” meaning “intention or willful
conduct”).
a. Extreme recklessness, such as “a highly unreasonable
omission” beyond simple or even inexcusable negligence,
which “presents a danger of misleading buyers or sellers
that is either known to the defendant or is so obvious that
 the actor must have been aware of it” satisfies the scienter
requirement of 10b-5 actions.
2. Scienter is imputed to a company when the corporate official who
makes or issues the statement has scienter. Southland.
a. Scienter is imputed by the executive official to the entity if:
i. The executive wrote or reviewed the statement;
ii. The statement was attributed to the executive with
the executive’s permission
iii. The executive signed the document containing the
statement
3. Special Rules for Pleading Scienter in PRIVATE SUITS:
PLSRA
a. The complaint must, with respect to each act or omission,
state “with particularity facts giving rise to a strong
inference that the defendant acted with the required state of
mind. Section 21D(b)(2)(A); FRCP 9.
i. Forward-looking statements protected by 21E must
be pled with facts raising a strong inference that the
statement was made with actual knowledge that it
was false or misleading. Section 21 E(c)(1)(B).
b. Tellabs test for “strong inference”:
i. First, when faced with a 12b6 motion under a 10(b)
action, courts must accept all factual allegations in
the complaint as true.
ii. Second, courts must consider the complaint in its
entirety, as well as other sources such as documents
incorporated by reference and matters taken on
judicial notice.
iii. Third, the reviewing court must determine whether
the alleged facts raise such a “strong inference” and
the court, in doing so, “must consider plausible
nonculpable explanations for the defendant’s
conduct, as well as inference favoring the plaintiff.”
iv. In sum, the reviewing court conducts a comparative
analysis and must ask: when the allegations are
accepted as true and taken collectively, would a
reasonable person deem the inference of scienter at
least as strong as any opposing inference. Section
21D(b)(2)(A); FRCP 9; Tellabs, Inc. v. Makor
Issues & Rights, Ltd. (2007).
 iii. “in connection with” requirement
1. Rule: The “in connection with” requirement of 10b is satisfied
when deception occurs within one of Rule 10b-5’s three subparts
and occurs with the purchase or sale of a security. Zanford.
2. An SEC filing or a press release by the company—or even an
advertisement—can satisfy this element if causes the investor to
purchase or sale securities in the capital markets. Zanford.
3. In private actions to satisfy the requirement:
a. In a misrepresentation case, the plaintiff must have
bought or sold the security after the defendant
misrepresented the material fact (and, in order to rely on
that fact and to prove loss, before the truth was disclosed)
b. In an omissions case, the plaintiff must have bought or
sold the security after the defendant was under a duty to
disclose the omitted fact but failed to do so (and, in order to
rely on the omission and to prove loss, before the omitted
fact was disclosed)
f. Elements– Private Only
i. Standing
1. Rule: Only actual purchasers or sellers (and the SEC) may recover
damages under Rule 10b-5. Blue Chip Stamps v. Maynard Drug
Stores (1975). The rule does not cover offers to sell, but only
actual sales and purchases. Id.
2. Birnbaum bars three classes of potential plaintiffs:
a. Potential purchasers of shares who allege that they decided
not to purchase because of representations or omissions by
issuer
b. Actual shareholders in the issue who allege that they
decided not to sell their shares because of representations
of omissions
c. Shareholders, creditors, and others who suffered loss in the
value of their investment due to insider activities in
connection with the the purchase or sale of securities.
3. In a misrepresentation case, the plaintiff must have bought or
sold the security after the defendant misrepresented the material
fact (and, in order to rely on that fact and to prove loss, before the
truth was disclosed)
4. In an omissions case, the plaintiff must have bought or sold the
security after the defendant was under a duty to disclose the
omitted fact but failed to do so (and, in order to rely on the
omission and to prove loss, before the omitted fact was disclosed)
ii. Reliance
1. In a private action, the plaintiff must prove reliance, which can
be satisfied by:
a. Actual reliance whereby the plaintiff relies on a
misstatement of the defendant and, as a result, buys or sells
the security;
i. Applies only to missrepresentations.
b. Fraud-on-the-market reliance whereby the plaintiff is
granted a presumption that they relied on a material
misstatement to purchase or sell the security in an efficient
market because the misstatement distorted stock prices—
inducing the plaintiff to buy or sell. Basic v. Levinson.
i. Defense: The defendant may rebut this
presumption by showing (1) the challenged
misrepresentation in fact did not change the stock
price, or (2)the particular plaintiff would have
traded regardless of the misrepresentation. Basic v.
Levinson.
ii. Note: To invoke the presumption:
1. The misstatement must be publicly known;
2. The misstatement must be material;
3. The stock must be traded in an efficient
market; and
4. The plaintiff must have traded the stock
between the time when the misstatement
was made and when the truth was revealed.
5. Halliburton Co.
c. In Omission Cases, the plaintiff presumptively relies on an
omission of a material fact if the defendant had a duty to
disclose; however, this presumption may be defeated by
showing the disclosure of material information would not
have affected plaintiff’s trading decision. Affiliated Ute
(1972) (holding omissions of material fact are granted
presumptive reliance).
i. Notes:
1. Plaintiff presumptively relies on omissions
of material information.
2. For half-truths, courts are split with some
courts requiring reliance the half-truth (5th
Cir.) and other granting presumptive
reliance (2d Cir).
 3. Presumption does not apply in markets that
lack information efficiency—excludes small
companies in thinly traded markets.
iii. Loss Causation
1. Rule: Plaintiffs in private actions bear the burden of proving that
the act or omission of the defendant caused the loss for which the
plaintiff seeks to recover. Exchange Act 21D(b)(4). To prove loss
causation, the plaintiff must show that the defendant’s omission or
misstatement caused, when controlling for outside factors, a
change in the price of the stock after the truth or disclosure of
omitted facts was revealed. Dura Pharms.
iv. Damages—Exchange Act 21D(e)
1. Out-of-Pocket Damages: (Presumptive Measure of Damages).
The plaintiff may recover the difference between the purchase
price and value of the security at the time of sale (or vice versa for
purchases).
a. Must control to remove other factors contributing to price
fluctuations
b. Compensation equals the plaintiff’s losses.
2. Punitive Damages: Not allowed.
a. PLSRA Section 21D(f) limits damages to actual
damages.
3. Rescissory Damages: Arises when the fraud consists of inducing
the purchase of securities that were fairly priced at the time of
purchase but were riskier than represented. This measure restores
the plaintiff to their original position had the event not happened.
a. If plaintiff sold, he gets his stock back; if he purchased, he
returns the stock and the seller refunds the purchase price.
b. Only suited to face-to-face transaction
4. Disgorgement: Arises when the defrauder received more from
than the fraud than the defendant loses
a. Only available when there is no break in the casual chain
between the fraud and the defrauder’s profits.
b. Measure is the defrauder’s profit.
5. Cover Damages: Difference between the price at which the
plaintiff transacted and the price at which the plaintiff could have
transacted once the fraud was revealed. Section 21D(f)
6. Proportionate Liability
a. All defendants who knowingly violate securities laws are
jointly and severally liable for the entire judgment.
b. Defendants found merely to be reckless are required to pay
only their proportionate share of the damages caused.
 PLSRA 21D(f). The jury will determine their responsibility
and the defendant will only pay their proportionate share
unless other defendant’s are unable to pay.

5. Insider Trading under Rule 10b-5

a. Classical Insider Trading: Chiarella
i. Insider or Temporary Insider
1. Chiarella v. United States (1980) (finding no violation of insider
trading because the prohibition does not arise from mere
possession of nonpublic information but an affirmative duty to
the corporation)
ii. Acquires (i.e. has actual knowledge) material, nonpublic information
iii. As a result of being an insider
iv. Intended to be available only for corporate purposes and not for personal
gain
v. Has scienter because he or she knows or is reckless in not knowing that
1. The information is nonpublic
2. The information is material
3. He or she has a duty not to use it for personal benefit by trading on
it
vi. Trades on the basis of that information in the common or preferred stock
of the insider’s company
1. “on the basis of” means anyone who is aware of material
nonpublic information at the time that he or she purchases or sells
a security
vii. Without disclosing the information to opposite side trader
1. In an open market, this is the world.
b. Classical Tipper Liability - Dirks
i. Insider or temporary insider
ii. Acquires (i.e., has actual knowledge) material nonpublic info
iii. As a result of being an insider
iv. Intended to be available only for corporate purposes and not for personal
gain
v. Deliberately passes the information to another in violation of that duty
vi. For personal benefit, and
1. Under Dirks, a personal benefit includes:
a. A pecuniary gain or reputational benefit that will translate
to future earnings;
b. A relationship between the insider and the recipients that
suggests a quid pro quo
c. A gift of confidential information to a trading relative or
friend because the tip follows a gift of profit
 d. Salman v. U.S. (finding 10b-5 “personal gain” through
gratification of helping a sibling through a nonmonetary
way).
2. Question of fact
vii. Has scienter because he or she knows or is reckless in not knowing that
1. The information is nonpublic
2. The information is material
3. He or she has a duty not to use it for personal benefit by obtaining
a personal benefit by passing it to others
viii. While knowing or reckless in not knowing that the passing the information
on is reasonably likely to result in trading on the information
c. Classical Tippee Liability: Dirks
i. Insider or temporary insider
1. Acquires (i.e., has actual knowledge) material nonpublic info
2. as a result of being an insider
3. Intended to be available only for corporate purposes and not for
personal gain
a. Salman v. U.S. (finding 10b-5 “personal gain” through
gratification of helping a sibling through a nonmonetary
way).
4. Deliberately passes the information to another in violation of that
duty
5. For personal benefit
ii. Tippee
1. knows or should know that the insider tipper has violated his or her
duty by providing the information, which includes knowing or
negligent ignorance that the tipper received a personal benefit from
the tip
2. has scienter because he or she knows or is reckless in not knowing
that
a. The information is nonpublic
b. The information is material
c. trades on the basis of that information in the common or
preferred stock of the insider’s company
3. Without disclosing the information to opposite side traders
d. Misappropriation Theory: O’Hagan
i. Misappropriation Insider Trading
1. Anyone, regardless of whether he or she is an insider at any
company or not
2. Acquires (i.e., has actual knowledge) material nonpublic info from
a source to which the defendant owes a duty of trust or confidence
under Rule 10b5-2, or otherwise owes a traditional fiduciary duty
 3. Has scienter because he or she knows or is reckless in not knowing
that
a. The information is nonpublic
b. The information is material
c. He or she has a duty not to use it for personal benefit by
trading on it
4. Trades on the basis of that information in any security issued by
any company
5. Without disclosing to the source of the information—before
trading—that he or she is going to trade
ii. Misappropriation Tipper Liability
1. Anyone, regardless of whether he or she is an insider at any
company or not
2. Acquires (i.e., has actual knowledge) material nonpublic info
3. from a source to which the defendant owes a duty of trust or
confidence under Rule 10b5-2 or otherwise owes a traditional
fiduciary duty
4. Deliberately passes the information to another in violation of that
duty
5. For personal benefit
6. Without disclosing to the source of the information—before
passing on the information—that he or she is going to pass on that
information
7. While knowing or reckless in not knowing that the passing the
information on is reasonably likely to result in trading on the
information
8. Has scienter because he or she knows or is reckless in not knowing
that
a. The information is nonpublic
b. The information is material
c. He or she has a duty not to violate the duty of trust or
confidence by passing on the information
iii. Misappropriation Tippee Liability
1. Anyone, regardless of whether he or she is an insider at any
company or not
a. Acquires (i.e., has actual knowledge) material nonpublic
info
b. From a source to which the defendant owes a duty of trust
or confidence under Rule 10b5-2 or otherwise owes a
traditional fiduciary duty
c. Deliberately passes the information to another in violation
of that duty
d. For personal benefit
 2. Tippee
a. Knows or should know that the tipper has violated his or
her duty by providing the information
i. Note that this is a negligence rather than a
recklessness standard
b. Which includes knowing or negligent ignorance that the
tipper received a personal benefit from the tip
c. Has scienter because he or she knows or is reckless in not
knowing that
i. the information is nonpublic
ii. the information is material
d. Trades on the basis of that information in any security
issued by any company
e. Without disclosing to the source of the information—
before trading—that he or she is going to trade
iv. O’Hagan: Misappropriation Theory
1. The theory arises from the fiduciary’s duty and prohibits corporate
“outsiders” from using information in breach of a duty, not owed
to a trading party, but to the source of the information.
2. It is a defense that the person receiving or obtaining the
information has no duty of trust or confidence with respect to
the information by establishing that he or she neither knew nor
reasonably should have known that the person whom they
received it from had a fiduciary relationship with the
corporation or such person know or should have known that
the person would not keep the information secret based on the
person’s history, pattern, or past practices. O’Hagan.
a. There is a presumptive duty of trust or confidence
among family members.
3.
e. Notes on Insider Trading
i. Insiders include
1. Directors and officers;
2. Controlling shareholders (10%+)
3. Employees;
4. The Corporation itself;
5. Temporary insiders if “they have entered into a special confidential
relationship in the conduct of the business of the enterprise and are
given access to information for corporate purposes.” The
corporation must “expect the outsider to keep the disclosed
nonpublic information confidential, and the relationship at least
must imply such a duty.” Chiarella.
6. Chiarella
 ii. The liability of the tipper and tippee are not interrelated; one may be
convicted.
1. There is no requirement that the insider know or be reckless in not
knowing that he or she has violated there duty under tippee
liability. Hence, it is possible for a tippee to violate Rule 10b-5
even though the tipper does not. U.S. v. Evans.

6. Public Offerings
a. Forms
i. Form S-1
1. Available to all issuers
2. Used for IPOs
3. Items in Form S-1 are keyed to the items in Regulation S-K and
Regulation S-X
4. Prospectus under S-1 contains both company information and
transaction-related information
5. Form S-1 issuers that are Exchange Act reporting issuers and
current in their filings for the past 12 months may incorporate
company-related info by reference to their prior SEC filings
ii. Form S-3
1. Issuer Requirements
a. Organized under US law
b. Principal Place of Business in the US
c. Public Company under 12(g) or 15(d) of the Exchange Act
d. Had been the subject to 34 Act filing requirements for at
least 12 months before registration statement and has been
timely on those filings.
e. Disqualification for certain financial events occur since end
of last fiscal year, like
i. Failure to pay dividend on preferred stock or
ii. Default on indebtedness in a material amount
2. Transaction Requirements
a. Where the issuer is selling securities for cash, the
“aggregate value of the voting and non-voting common
equity held by non-affiliates . . . is $75 million or more” or
i. An affiliate under Rule 405 is a person or entity that
controls the issuer, is controlled by the issuer, is
under common control as the issuer,
b. Where the issuer is selling securities for cash and “the
aggregate market value of the securities sold by or on
behalf of the [issuer] . . . during the period of 12 calendar
 months immediately prior to, and including, the sale is no
more than one-third of the aggregate market value of the
voting and non-voting common equity held by non-
affiliates of the registrant” and
i. Issuer is not a shell company and
ii. Issuer has at least one class of common equity
securities listed and registered on a national
securities exchange
iii. The Prospectus
1. SEC mandates that the prospectus contain language drafted in a
“clear, concise and understandable manner.” In other words, in
“plain English.” The prospectus must use “short sentences,”
“active voice,” and avoid “legal and highly technical business
terminology.” Rule 421.
b. Key Terms (Types of Issuers)
i. Non-Reporting Issuer: Issuer not required to file reports under the
Exchange Act.
ii. Unseasoned Issuer—issuer required to file reports under the Exchange
Act, but is not eligible to use Form S-3 for a primary offering of its
securities
iii. Seasoned Issuer: a public company that is filing reports under the
Exchange Act and is eligible to use Form S-3 to register primary offerings
of securities
iv. Well Known Seasoned Issuer (WKSI): Rule 405. A public company that
1. Meets the issuer qualifications to use Form S-3 and
2. As of a date within 60 days of the determination date, has either:
a. A minimum $700 million of common equity worldwide
market value held by non-affiliates; or
b. Has issued in the last three years at least $1 billion
aggregate principal amount of non-convertible securities
and is offering “only non-convertible securities, other than
common equity,” or will register a common equity issuance
under Form S-3 and has outstanding voting and non-voting
common equity held by non-affiliates of $75 million or
more; and
3. Is not an “ineligible issuer”
v. Ineligible Issuer: Rule 405. Includes, but is not limited to, an issuer that
1. Not current in their Exchange Act filings or late in satisfying those
obligations for the preceding twelve months
2. Is a shell company
3. Within the past three years, the issuer or a subsidiary was the
subject of a judicial or administrative decree arising from action
 that: prohibitions certain conduct or activities regarding the anti-
fraud provisions of the securities laws, requiring the person to
cease and desist from violating the anti-fraud provisions, or
determines that the person violated the anti-fraud provisions.
vi. Emerging Growth Companies: an issuer with total annual gross
revenues of less than $1 billion during it most recent fiscal year.
1. A company loses EGC status at the earliest of: [Sec. Act Sec. 2(a)
(19)]
a. Revenue exceeds $1 billion on the last day of the fiscal
year;
b. The last day of the fiscal year following the fifth
anniversary of the date of the first sale of common equity in
a registered public offering;
c. The date on which the company has issued more than $1
billion in non-convertible debt aggregated over the
previous three-year period; or
d. The date on which the company is deemed to be a “large
accelerated filer” (Rule 12b-2)
i. Rule 12b-2 defines large accelerate file as
companies with over $700 million of worldwide
equity float in the hands of non-affiliates among
other requirements
c. Gun-Jumping (Generally)
i. Penalties for gun-jumping. Section 12(a)(1)
1. Rescission or Rescission damages
2. SEC will delay the offering causing:
a. Disruption of the issuer’s schedule on using the funds in the
future;
3. Section 12(a)(1)
ii.
d. Prefiling Period
i. Generally
1. The prefiling period begins “once a company decides to take
concrete steps toward a public offering” and continues until the
issuer files a registration statement.
ii. No Offers: Section 5(c)
1. Rule: Securities Act Section 5(c) makes it unlawful for an issuer to
make an offer before the filing of a registration statement. Sec.
Act. Section 5(c). The definition of “offer” is broad meaning
“every attempt or offer to dispose of, or solicitation of an offer to
buy, a security or interest in a security, for value,” Securities Act
 2(a)(3), and includes written and oral offers as well as
prospectuses. Section 2(a)(10). Any communication or publicity
that may “contribute to conditioning the public mind or arousing
public interest” is an offer. Securities Act Release No. 3844
(1957).
2. In Securities Act Release no. 5180 (1971), the SEC identified
four factors that contribute to a communication constituting an
offer including: (1) whether the issuer or underwriter instigated
publicity, (2) whether the statement was for the purpose of selling
the security in a public offering, (3) whether the statement was
distributed to investors, and (4) whether the statement includes
projections and estimates of future performance or opinions
concerning value.
3. The following are not offers:
a. Preliminary negotiations or agreements between an issuer
and underwriter or among underwriters who are in privity
of contract with an issuer. Securities Act 2(a)(3).
b. Securities Act Release No. 5180 (1971):
i. Continuing to advertise products or services;
ii. Continuing to release periodic reports to existing
shareholders;
iii. Continuing to make press announcements
concerning business facts;
iv. Answering unsolicited inquires from shareholders
or analyst;
v. Holding stockholder meetings and answering
questions
iii. No Sales: Section 5(a)(1)
1. Rule: Until a registration statement becomes effective, the issuer
may not sell securities. Sec. Act. 5(a)(1).
iv. No Deliveries: Section 5(a)(2)
1. Rule: Until a registration statement becomes effective, the issuer
may not deliver securities. Sec. Act. 5(a)(1).
v. (Offer) Safe Harbor Rules During the Pre-Filing Period
1. Preliminary Negotiations: 33 Act §2(a)(3)
a. Excludes preliminary negotiation and agreements between
the issuer and the underwriters and among the underwriters
who will be in privity with the issuer from the definition of
“offer”
2. Rule 163: Free Writing Prospectuses (only for WKSI)
a. Availability: Only to WKSI. Rule 163(a).
b. Exempts offers from 5(c) prohibitions
c. Communication must be “by or on behalf of an issuer”
which means that “the issuer or an agent or representative
of the issuer, other than an offering participant who is an
underwriter or dealer, authorizes or approves . . . release or
dissemination before it is made.”
d. Oral offers permitted
e. Written offers are free writing prospectuses, subject to
legend and failing requirements of Rule 163(b).
i. Legend Rule 163(b)(1).
1. Must include specific words as stated in the
rule.
2. Immaterial or unintentional failure to
provide a legend not a violation if:
a. Good faith and reasonable attempt
was made to comply with legend
requirement and
b. Written offers that are free writing
prospectuses are
i. retransmitted, with legend,
“as soon as practicable after
discovery of the omitted or
incorrect legend”
ii. “by substantially the same
means as, and directed to
substantially the same
prospective purchasers to
whom, the free writing
prospectus was originally
transmitted.”
ii. Filing Rule 163(b)(2)
1. If offer made before filing of registration
statement or filing of amendment covering
the securities as to which the offer was
made, then the free writing prospectus must
be filed “promptly upon” the filing of the
registration statement or the amendment
2. Exceptions to filing
a. “any communication that has
previously been filed with, or
furnished to, the Commission” or
b. any communication “that the issuer
would not be required to file with the
 Commission pursuant to the
conditions of Rule 433 if the
communication was a free writing
prospectus used after the filing of the
registration statement.”
3. Immaterial or unintentional failure to timely
file not a violation of 5(c) if
a. Good faith and reasonable attempt
was made to comply with filing
requirement and
b. Free writing prospectus filed “as
soon as practicable after discovery of
the failure to file”
3. Rule 163A: Preregistration Communications
a. Available to any issuer not underwriters or other
participants
b. Protects communications made “more than 30 days
before” filing registration statement
c. Does not cover a communication that “reference[s] a
securities offering”
d. Effect is that communication is not an offer under 5(c)
4. Rule 168: Regular Communications by reporting issuers
a. Available to issuers who are domestic reporting issuers, but
not underwriters or other participants
b. Communication is limited to the “regular release or
dissemination” of “factual business communication or
forward-looking information”
i. Factual information about the issuer, its business or
financial developments, or other aspects of its
business
ii. Advertisements of, or other information about, the
issuer’s products or services; and
iii. Projections of the issuer’s revenues, income (loss),
earnings (loss) per share, capital expenditures,
dividends, capital structure, or other financial items
iv. Statements about the issuer management's plans and
objectives for future operations, including plans or
objectives relating to the products or services of the
issuer;
v. Statements about the issuer's future economic
performance, including statements of the type
contemplated by the management's discussion and
 analysis of financial condition and results of
operation described in Item 303 of Regulation . . .
S-K . . ; and
vi. Assumptions underlying or relating to any of the
information described in 4–6 above
c. Does not cover “a communication containing
information about the registered offering.”
d. “The timing, manner, and form in which the information is
released or disseminated is consistent in material respects
with similar past releases or disseminations”
e. Effect is that for purposes of 2(a)(10) and 5(c) covered
communication is not an offer
5. Rule 169: Regular Communications by new issuers
a. Available to any issuer (most importantly, to issuers that
are not, before registration being considered, 34 Act public
companies). Not available to underwriters.
b. Communication is limited to “factual business
information”
i. Factual information about the issuer, its business or
financial developments, or other aspects of its
business
ii. Advertisements of, or other information about, the
issuer’s products or services; and
iii. Unlike 168, no projections as these are not
factual business information.
c. Does not cover “a communication containing
information about the registered offering.”
d. “The timing, manner, and form in which the information is
released or disseminated is consistent in material respects
with similar past releases or disseminations”
e. Effect is that for purposes of 2(a)(10) and 5(c) covered
communication is not an offer
f. NOTE: The information must be “for intended use by
persons, such as customers and supplies . . . by the
issuer’s employees or agents who historically have
provided such information” not by potential investors.
6. Rule 135: Offering Notice
a. Available to any issuer or “any person acting on behalf of
either of them” whom “publishes through any medium a
notice of a proposed offering to be registered.”
i. Not available to underwriters because it cannot
name underwriters.
 b. Notice is limited to:
i. Name of issuer
ii. Title, amount and basic terms of securities offered;
iii. The amount of the offering, if any, to be made by
selling security holders;
iv. The anticipated time of the offering;
v. A brief statement of the manner and the purpose of
the offering, without naming the underwriters;
vi. Whether the issuer is directing its offering to only a
particular class of purchasers
c. Effect is that notice “will not be deemed to offer . . .
securities for sale”
d. Must include a legend state that notice “does not constitute
an offer of any securities for sale.”
7. Sec. Act §5(d): Emerging Growth Companies
a. EGC may make offers during the pre-filing period to
“qualified institutional buyers” under Rule 144A and
“accredited investors” under Rule 501(a)
i. Does not apply to offers made to individuals.
b. PC 2.1  Defines “qualified institutional buyers” and
“accredited investors”
c. Test Issue: Careful of Reg FD and selective disclosures
—Unclear whether they conflict.

e. The Waiting Period

i. Generally
1. The Waiting Period begins upon the filing of the registration
statement and runs until the registration statement becomes
effective. During this period, section 5(a)’s prohibition on sale and
deliveries remain in effect; however, section 5(c)’s prohibition on
offers is lifted. Section 5(b)(1)’s restriction are now imposed
prohibiting the issuer from distributing a prospectus unless it
complies with Section 10 of the Securities Act.
ii. Permitted Offers: §5(c) Prohibition Lifted
1. Oral offers
a. Including road shows
b. Graphics presented real time at road shows but not
distributed in hard copy
2. Offers by a prospectus that complies with Section 10
 a. Preliminary Propspectus
b. Free Writing Prospectuses under rule 164 and 433

iii. Written Offers: Permissible, but Prospectus must comply with 10(b): §5(b)
(1)
1. While §5(c) prohibition on offers is lifted, the issuer may not
distribute a prospectus unless it complies with Section 10. Section
5(b)(1). A prospectus is any communication “written or by radio or
television, which offers any security for sale;” therefore, a written
offer is usually a prospectus, but an oral offer is not. Sec. Act.
Section 2(a)(10).
a. NOTE: FIRST CHECK TO SEE IF IT IS AN OFFER.
NOT AN OFFERNOT A PROSPECTUS
2. Section 10(b) prospectuses that may be used include: the
preliminary statutory prospectus under Rule 430 and free writing
prospectuses under Rule 164/433.
iv. No Sales: Section 5(a)(1)
1. Rule: Until a registration statement becomes effective, the issuer
may not sell securities. Sec. Act. 5(a)(1).
v. No Deliveries: Section 5(a)(2)
1. Rule: Until a registration statement becomes effective, the issuer
may not deliver securities. Sec. Act. 5(a)(1).
vi. Safe Harbor Rules During the Waiting Period
1. Rule 134: Identifying Statements
a. Available to issuer, UW and other participants
b. Requires
i. Communication to be limited to certain information
about the issuer and security, Rule 134(a)
ii. A legend, Rule 134(b)(1),
iii. Can avoid legend if accompanied by or preceding
the statement with the preliminary prospectus, Rule
134(c)(2) or limiting the communication to a
tombstone, or basic advertisement, Rule 134(c)
c. Solicitation of Interest
i. If a preliminary prospectus accompanies or
precedes a rule 134 communication, the
communication may solicit an offer to buy or a less
formal indication of interest so long as a mandatory
boilerplate legend advising the investor of his or her
right to revoke the offer to buy prior to acceptance
 and that indications of interest involve no legal
obligation are included. Rule 134(d).
2. Rule 135: Offering Notice
a. Available to any issuer or “any person acting on behalf of
either of them” whom “publishes through any medium a
notice of a proposed offering to be registered.”
i. Not available to underwriters because it cannot
name underwriters.
b. Notice is limited to:
i. Name of issuer
ii. Title, amount and basic terms of securities offered;
iii. The amount of the offering, if any, to be made by
selling security holders;
iv. The anticipated time of the offering;
v. A brief statement of the manner and the purpose of
the offering, without naming the underwriters;
vi. Whether the issuer is directing its offering to only a
particular class of purchasers
c. Effect is that notice “will not be deemed to offer . . .
securities for sale”
d. Must include a legend state that notice “does not constitute
an offer of any securities for sale.”
3. Rule 164/433: Free Writing Prospectuses
a. Available to issuer, underwriter or other participant
b. A free writing prospectus is any written communication to
offer a security that is or will be subject to a registration
statement and that does not meet the requirements a Section
10 statutory final or preliminary prospectus and include
written, printed, broadcast, and graphic communications.
c. For a issuer to seek 164/433 protection, the following
conditions under rule 433 must be satisfied:
i. FWP must include a legend
ii. FWP must be accompanied by (or linked to) the
preliminary/final prospectus
1. Does not apply to seasoned issuers/WKSIs
iii. Must file the FWP with the SEC on the date of first
use
1. Must retain FWP for three years, if not filed
with the SEC
d. Other Notes:
i. Rule 433(c)(1) allows inclusion in the protected
FWP of “information the substance of which is not
 included in the registration statement” provided that
this information does not conflict with the
registration statement or information incorporated
into the registration by reference.
4. Rule 168: Regular Communications by reporting issuers
a. Available to issuers who are domestic reporting issuers, but
not underwriters or other participants
b. Communication is limited to the “regular release or
dissemination” of “factual business communication or
forward-looking information”
i. Factual information about the issuer, its business or
financial developments, or other aspects of its
business
ii. Advertisements of, or other information about, the
issuer’s products or services; and
iii. Projections of the issuer’s revenues, income (loss),
earnings (loss) per share, capital expenditures,
dividends, capital structure, or other financial items
iv. Statements about the issuer management's plans and
objectives for future operations, including plans or
objectives relating to the products or services of the
issuer;
v. Statements about the issuer's future economic
performance, including statements of the type
contemplated by the management's discussion and
analysis of financial condition and results of
operation described in Item 303 of Regulation . . .
S-K . . ; and
vi. Assumptions underlying or relating to any of the
information described in 4–6 above
c. Does not cover “a communication containing
information about the registered offering.”
d. “The timing, manner, and form in which the information is
released or disseminated is consistent in material respects
with similar past releases or disseminations”
e. Effect is that for purposes of 2(a)(10) and 5(c) covered
communication is not an offer
5. Rule 169: Regular Communications by new issuers
a. Available to any issuer (most importantly, to issuers that
are not, before registration being considered, 34 Act public
companies). Not available to underwriters.
 b. Communication is limited to “factual business
information”
i. Factual information about the issuer, its business or
financial developments, or other aspects of its
business
ii. Advertisements of, or other information about, the
issuer’s products or services; and
iii. Unlike 168, no projections as these are not
factual business information.
c. Does not cover “a communication containing
information about the registered offering.”
d. “The timing, manner, and form in which the information is
released or disseminated is consistent in material respects
with similar past releases or disseminations”
e. Effect is that for purposes of 2(a)(10) and 5(c) covered
communication is not an offer
f. NOTE: The information must be “for intended use by
persons, such as customers and supplies . . . by the
issuer’s employees or agents who historically have
provided such information” not by potential investors.
6. Rule 405/433: Road Shows
7. Rule 433: Press Interviews
a. The company can turn the press interview into a free
writing prospectus under rules 164/433. To do so the
company must:
i. File a copy of the transcript or
ii. File a copy of an article
b. With the SEC within four days of the date the company
became aware of the publication. Rule 433(f)(1)(ii), (2)(iii).
c. Further, the filing should contain the Rule 433(c)(2)(i)
legend, and the interviewer does not pay for the interview
through direct payment or a promise of future
advertising, rule 433(f)(1)(i),(ii), and
d. The issuer, underwriter, and other participants are not
affiliated with the media company, rule 433(f), the
company will be excused from taking the following steps
that would be needed to turn the public into a free writing
prospectus:
i. Accompany or precede each copy of the writing
with the most recent preliminary prospectus, rule
433(c)(2)
 ii. Place a legend on each copy of the interview, rule
433(c)(2)(i), and
iii. File the article no later than the first date of its
distribution (which is now impossible). Rule 433(f).
8. Sec. Act §5(d): Emerging Growth Companies
a. EGC may make offers during the pre-filing period to
“qualified institutional buyers” under Rule 144A and
“accredited investors” under Rule 501(a)
i. Does not apply to offers made to individuals.
b. PC 2.1  Defines “qualified institutional buyers” and
“accredited investors”
c. Test Issue: Careful of Reg FD and selective disclosures
—Unclear whether they conflict.
f. Post-Effective Period
i. No prospectus unless complies with §10: Section 5(b)(1) continues
ii. No deliveries unless accompanied by final prospectus. Section 5(b)(2)

7. Exempt Offerings (Private Offerings)

a. Penalties
i. An offering must either be registered or meet the requirements for an
exemption, otherwise the sale violates section 5(a). If offering is sold in
violation of 5(a), then the SEC may bring an enforcement action seeking
rescission under section 12(a)(1). The elements of a 12(a)(1) actions are
simply: plaintiff is a purchaser, defendant is a seller, and the offering is
sold without registration.
b. Section 4(a)(2) Offerings
i. Rule: Section 4(a)(2) states that Section 5 shall not apply transaction by an
issuer not involving any public offering.
1. Issuer is defined by Section 2(a)(4).
ii. Under Section 4(a)(2), the issuer turns on whether an offering is public
and such determination turns on “whether the particular class of persons
affected need the protection of the Act.” SEC v. Ralston (1953) (finding
that some employees need the protection of the Act and other may not).
iii. In Securities Act Release no. 285 (1935), the SEC released several factors
that determine whether an offering is “public” as the word is used in
section 4(a)(2), including
1. The number of offerees;
a. THE INQUIRY IS NOT ON THE NUMBER OF
PURCAHSERS. Doran.
 b. More offerees  leans public
c. Less offerees, or few sophisticated  leans private
2. The relationship of the offerees to each other and the issuer;
a. Under this rule, for it to weigh in favor of the exemption,
courts utilize the disclosure or access rule (Doran) to
ensure the offerees have adequate information and
protection. This rule requires that the
b. Issuer must provide, as to all offerees, either
i. Disclosure, which requires that the issuer in fact
provides information that a registration statement
would have provided and offerees perhaps must
have sophistication with which to evaluate the
information, OR
ii. Access, which requires that offerees have access (by
executive position at issuer, family ties, bargaining
power, agreement, or otherwise) to the records of
the company that contain relevant information
(sufficiently similar to a registration statement in
public offerings) and offerees are sufficiently
sophisticated that they could obtain the necessary
information and evaluate the risks and merits of the
investment
1. High standard of sophistication for access
than disclosure.
3. Number of units offered;
a. More units  Leans public
b. Less units  Leans private
4. Size of offering (total dollar amount)
a. Greater amount  leans public
b. Less amount  leans private
5. Manner of offering
a. Cannot include a general solicitation
b. General solicitation  Public
iv. Issuer must at lease show:
1. Disclosure or Access (Factor 2)
2. No general solicitation (Factor 5)
c. Regulation D (When a company complies with 4(a)(2))
i. Rule 504
1. Aggregate Price: $5 Million. Rule 504(b)(2).
2. Purchaser Limit: No limit
3. General Solicitations: Maybe
 a. Generally, rule 502(c) bans “any form of general
solicitations or general advertisements;” however, rule
504(b)(1) exempts the issuer from this ban if the issuer
registers such and delivers a “substantive disclosure
document” to purchasers in accordance with state law.
4. Disclosure: Not required to give disclosure to accredited or non-
accredited.
5. Resales: Securities under regulation D cannot be resold , 502(d),
unless the resale complies with state law restrictions under ruel
504(b)(1)
ii. Rule 506(b)
1. Aggregate Price: No limit.
2. Purchaser Limit: Accredited investors plus up to 35 non-
accredited investors that meet rule 506(b)(2)(ii) sophistication
requirements.
a. Excludes from the 35 investor limit:
i. Accredited investors under rule 501(a), see rule
501(e)(1)(iv),
ii. Any family member of the purchaser who has the
same primary residence as the purchaser, rule
501(e)(1)(i).
b. Sophistication Requirements for non-accredited
investors
i. Under rule 506(b), all non-accredited investors—
either alone or with a purchaser representative
ii. —must have “such knowledge and experience in
financial and business matters that he is capable of
evaluating the merits and risks of the prospective
investment.” Rule 506(b)(2)(ii).
iii. Issuer must reasonably believe, immediately prior
or at the time of sale, that each purchaser meets the
definition of accredited investor. A self-verification
by purchaser (e.g. a statement that they have a net
worth greater than $1 million) is sufficient to effect
a reasonable belief, provided that the issuer does not
facts that call the statement into question.
3. General Solicitations: Rule 502(c) bans “any form of general
solicitations or general advertisements;” therefore, under Rule
506(b) offerings, general solicitations are banned.
4. Disclosures:
a. Accredited Investors: No disclosures required.
b. Non-Accredited Investors: Disclosure Required. Rule
502(b).
 i. Prior to the sale, the issuer must furnisher to a non-
accreditor investor “a brief description in writing of
any material written information concernin the
offering . . . upon [the investor’s] written request” in
a easonable time. Rule 502(b)(2)(iv).
ii. Prior to sale, issuer must make available to each
purchaser at a reasonable time prior to purchase, an
opportunity to ask questions and receive answers
concerning the terms and conditions of the
offering.” Rule 502(b)(2)(v).
iii. Prior to sale, investor must advise the purchase of
the limitations on resale. Rule 502(b)(2)(vii).
5. Resales: Resales under rule 506 are prohibited by rule 502(d).
Rule 502(d) imposes a requirement on the issuer to take reasonable
care to discourage investors from reselling the securities including
disclosing in writing the unregistered status of the securities and
placing a legend on those securities. Rule 502(d).
iii. Rule 506(c)
1. Aggregate Price: No limit.
2. Purchaser Limit: Only to accredited investors
a. Issuer must reasonably believe, immediately prior or at the
time of sale, that each purchaser meets the definition of
accredited investor. A self-verification by purchaser (e.g. a
statement that they have a net worth greater than $1
million) is sufficient to effect a reasonable belief, provided
that the issuer does not facts that call the statement into
question. Rule 506(c)(2)(ii).
i. Net worth requires verification through the
individuals financial statements. Rule 502(c)(2)(ii)
(B).
3. General Solicitations: Generally, rule 502(c) bans “any form of
general solicitations or general advertisements;” however, rule
506(c)(1) requires that offering companies under 506(c) comply
with rule 502(a), (d), not (c) and therefore companies under rule
502(c) are not banned from general solicitations (though, they may
only sale and offer securities to accredited investors under 506(c)
(2)(i)).
4. Disclosure: Not required because 506(c) only has accredited
investors.
5. Resales: Resales under rule 506 are prohibited by rule 502(d).
Rule 502(d) imposes a requirement on the issuer to take reasonable
care to discourage investors from reselling the securities including
 disclosing in writing the unregistered status of the securities and
placing a legend on those securities. Rule 502(d).
6.
iv. Defined: Accredited Investors. Rule 501(a).
1. “Any director, executive officer, or general partner of the issuer.”
Rule 501(a)(4).
2. Any natural person with a net worth of $1 million exclusive of
their primary residence. Rule 501(a)(5).
3. Any natural person who received $200,000 in come (or $300,000
with a spouse) during each of the last two years and have a
reasonable expectation of receiving that much in the current year.
Rule 501(a)(6).
4. Any partnership or corporation with more than $5 million in assets,
provided that it was not formed for the specific purpose of
acquiring the securities in the offering. Rule 501(a)(3).
v. Defined: Purchaser Representative. Rule 501(i). [For 506(b) usage]
1. Under 501(i), to qualify as a purchaser representative:
a. The representative cannot be an officer, director, employee,
or major shareholder of the issuer except where the
representative is a close relative of the purchaser, rule
501(i)(1),
b. The representative must have such knowledge and
experience in financial and business matters that hey are
capable of evaluating the merits and riks of the prospective
investment, rule 501(i)(2),
c. The purchaser must acknowledge in writing that the
representative is their representative for evaluating the
particular offer, rule 501(i)(3),
d. The representative must disclose to the purchase any
material relationship between them and any affiliates or the
issuer, rule 501(i)(4).
vi. General Solicitations – 502(c) Prohibition
1. Rule 502(c) bans general solicitaitons
2. Under each offering:
a. 504: Allowed if meeting certain requirements
b. 506(b): Banned
c. 506(c): Allowed only to accredited investors.
3. Whether a solicitation is a general solicitation is fact specific and
depends on the whether the issuer and offeree have a preexisting
relationship of the sort that allows the offeror to assess
sophistication. SEC Release No. 6825 (1989).
 4. Targeted solicitation of very sophisticated purchasers may not
constitute general solicitation even if the issuer does not have a
pre-existing relationship. SEC Release No. 6825 (1989).
vii. Resales – 502(d) Prohibition
1. Resales are prohibited under Rule 502(d).
2. Rule 504: Prohibit unless complies with 504(b)(1).
3. Rule 506: Resales under rule 506 are prohibited by rule 502(d),
which imposes a requirement on the issuer to take reasonable care
to discourage investors from reselling the securities including
disclosing in writing the unregistered status of the securities and
placing a legend on those securities. Rule 502(d).
viii. Integration – Rule 502(a)
1. Integration prevents an issuer from dividing an offering into pieces
claiming exemption from registration for each piece when the
offering, considered as a whole, would not satisfy the criteria for
any exemption.
2. Five Factor Test for Integration
a. Whether the sales are part of a single plan of financing—
look to timing of financing plan and manner of sale (also
planned use of proceeds; same facts here may also be
useful for factor five)
b. Whether the sales involve issuance of the same class of
securities
c. Whether the sales are made at or about the same time from
Registration
d. Whether the issuer receives the same type of consideration
—not too important if consideration is cash, as the great
majority of securities sales are for cash
e. Whether the sales are made for the same general purpose—
look to plan for and actual use of proceeds
i. Factors 1, 5 are most important but no factor is
dispositive.
3. Integration Safe Harbors under 502(a).
a. An offering that ends more than 6 months before the Reg D
offering begins will not be integrated into that Reg D
offering;
b. An offering that begins more than 6 months after a Reg D
offering ends will not be integrated into that Reg D offering
c. Protects a Reg D offering from having another offering
integrated into the Reg D offering where the other offering
is separated from the Reg D offering by more than 6
months
 d. Safe harbor conditioned on no sales of same or similar class
of security during either of the 6-month periods on either
side of the Reg D offering
4. Effect of Integration:
a. All offers and sales, in each offering into which another
offering is integrated, must be considered when
determining whether the offering, after integration, is
exempt from registration.
i. So, integration may prevent satisfaction of the
requirements of Reg because, after integration, an
integrated offering exceeds applicable aggregate
offering price or purchaser limits.
ix. Innocent and Insignificant Mistakes – Rule 508
1. Under rule 508, insignificant deviations from conditions in a
Regulation D exemption will not cause the loss of the exemption
for the purposes of a 12(a)(1) rescission action by purchasers in the
offering so long as the issuer made a “good faith and reasonable
attempt . . . to comply with all applicable terms, conditions and
requirements.” Rule 508(a)(3).
2. The following failures cannot be excused by rule 508(a) because
they are “significant to the offering as a whole:”
a. Violation of the $5 million aggregate price limit under 504
offerings;
b. Violations of the prohibition on general solicitations in 504
or 506(b);
c. Violations of the 35 Purchaser limitations in a 506(b)
offering
3. Does not block an enforcement action by the SEC.
d. Intrastate Exemptions
i. Section 3(a)(11) Statutory Exemption
1. For section 3(a)(11) exemption to apply all offers and sales must
only be to residents of the state of the issuer and an issuer must
also be a resident “doing business in” the same state; accordingly,
and any offer or sale to a non-resident will render the exemption
unavailable. Securities Act 3(a)(11).
2. Residence (Purchaser/Issuer)
a. The residence of a natural person means the natural
person’s domicile: the place where the natural person has
(1) presence through a true, fixed home and (2) an intent to
return or remain indefinitely.
b. Residence of a corporation or other entity organized under
state law is the place of incorporation or organization.
 c. The residence of an unorganized entity such as a general
partnership or sole proprietorship is the state with its
principal place of business.
d. A single offer to an out-of-stater loses the exemption.
3. “Doing Business In” Requirement (Only Issuer)
a. Under section 3(a)(11), the issuer must also be doing
business in the state which it is offering the securities. The
requirement of doing business in refers to revenue-
generating activity in the issuer’s home state and non-
revenue generating activity such as merely setting up an
office or conducting substantially all income-producing
operations elsewhere does not satisfy this requirement.
Busch v. Carpenter (10th Cir. 1987).
b. Accordingly, the issuer must also intend to use any income
derived from the offering for business activity within the
state—they cannot intend to use the majority of funds for
foreign state activities.
4. Restrictions on Resales: Coming to Rest
a. Securities must “come to rest” in the hands of a resident
of issuer’s state. SEC Release 4434 (1961).
b. An offering may be so large that it is impracticable that it
will come to rest in one state. SEC Release 4434 (1961).
c. The securities must come to rest in a resident of the state. A
quick resale by purchaser suggests that the stock did not
come to rest in the hands of a resident-puchaser; however,
this alone may or may not void the exemption. SEC
Release 4434 (1961).
ii. Rule 147
1. Issuer:
a. Under rule 147, all offers and sales are limited to resident
of the same state in which the issuer is a resident and doing
business in the same. Rule 147(c).
b. An issuer is deemed a resident if
i. A corporation or entity organized under state law, it
is incorporated and organized in that state and it has
its principal place of business—where the
executives primarily direct, control, and coordinate
the company’s activities—in the same. Rule 147(c)
(1)(i).
ii. An unorganized entity has its residence at its
principal place of business—where the executives
primarily direct, control, and coordinate the
company’s activities. Rule 147(c)(1)(ii).
 iii. A natural person is a residence where its principal
residence is located. Rule 1479c)(1)(iii).
c. Further, a issuer must be doing business in the same state
which means that it satisfies at least one of the following
under rule 147(c)(2)(i)–(iv):
i. It derives more than 80% of its gross revenues from
in-state operations;
ii. It has more than 80% of its assets within the state;
iii. It intends to use more than 80% of the proceeds
from the offering for its business in the state; or
iv. A majority of the issuer’s employees are located in
the state.
2. Offerees: Rule 147(d)
a. An issuer may only make offers and sale to residers in
which the issuer is a resident and who the issuer
“reasonably believes” to be residents at the time of the offer
or sale; therefore, a single offer to an out-of-state resident
causes the issuer to lose the exemption unless the issuer
reasonably believes that the offeree was an in-stater. Rule
147(d).
b. Residence for offerees is determined by:
i. For a corporation or other business entity—
organized or unorganized—the state of its principal
place of business (i.e. where the executives
primarily direct, control, and coordinate the
company’s activities), rule 147(d)(1).
ii. For an individual, the state in which they maintain
their principal residence, rule 147(d)(2)
iii. For businesses organized for the specific purpose of
acquiring securities offered under rule 147, the
business is only a resident if all beneficial owners
are residents of the state, rule 147(d)(3).
3. Limitations on Resale: Rule 147(e).
a. For a period of six-months from the date of sale, any resale
may only be made to residents within the state. Rule
147(e). Accordingly, the issuer must take steps to prevent
resale before this time including by placing a legend on the
certificate, issuing a stop transfer instruction to the issuer’s
transfer agent, or obtaining a written representation from
each purchaser. Rule 147(f).
i. If they sell before the six-month period, the
securities have not “come to rest.”
ii. NO INSIGNIFCANT MISTAKES PROVISIONS
 4. Anti-Integration Safe Harbor
a. A 147 offering will not be integrated with offers or sales
made prior to the commencement of the current 147
offering or made thereafter if they are made more than six
months after the 147 offering ends. Rule 147(g).
iii. Rule 147A (Use 147) except:
1. Issuers:
a. Issuer need not be incorporated or organized in the state (if
a corporation) or organized in the state (if an entity other
than a corporation); but must have its principal place of
business in the state and must meet the same “doing
business” test as under 147
2. Offerees:
a. Offers (but not sales) not limited to residents of the
issuer’s state; so offers by internet are permitted. ALL
SALES MUST STILL BE TO RESIDENTS. Rule
147A(d).
3. Essentially: No general solicitation under 147 but may have
general solicitation under 147A.

8. 12(a)(1) Rescission Actions

a. 12(a)(1) is a rescission action by the a purchaser or the SEC for violation of
section 5. The defendant cannot rely on an exemption unless
i. The defendant cam provide proof that the offering met the terms,
conditions, and requirements of the exemption or
ii. Any failure to comply with a term, requirement, or condition for a
regulation D offering is excused by rule 508 (insignificant mistakes)
b. Proper defendant in a 12(a)(1) action must “sell” the security to the plaintiff—i.e.
must be a statutory seller under section 12.
i. Statutory sellers include, and proper defendant must fit into, one of the
following categories:
1. Owner that passes title to the security to the defendant for value;
2. Someone who solicits the purchaser to buy the security, motivated
at least in part by a desire to serve their financial interest
a. Majority View: Solicitation more than simply preparing
offering disclosure documents is required; playing a
professional role (accountant, lawyer etc) is not enough)
i. Thus, sellers include (i) the issuer, (ii) officers or
employees of the issuer who sell the securities by
personally urging offerees to buy, (iii) and
placement agents and broker/dealers who sell by
personally urging offerees to buy
c. Recovery in 12(a)(1) Action
 i. If purchaser has not resold the security:
1. Return security to issuer
2. Receive: Amount paid plus interest less any income received from
holding the security
ii. If purchaser has resold the security
1. Receive: amount paid plus interest less any income received from
holding less price received on resale