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WHAT IS A SECURITY? Analysis of whether a transaction involves a security: 1. Start with 2 of the 33 Act 2. Howey test a.

. Investment of money with the expectation of return of profit b. Common enterprise horizontal (can have just 1 investor, but is there possibility of having 2 investors who have similar relationship in the enterprise) or vertical commonality (promoter and at least 1 investor share in success/failure of the venture) c. Efforts of others reliance strongly on the efforts of others 3. Economic realities of the transaction presumption is plain meaning (e.g. note or stock), but then apply Howey substance over formuse consumption 4. Is there a more applicable body of law? Marine Bank 5. Is the transaction unique? Marine Bank In real estate transactions, look for 1. expectations of the parties (intent to invest for profit?) 2. commonality 3. is investor relying on efforts of others? Presume a note is a security, but apply the following to determine whether it is for investment or commercial purposes. Reves family resemblance test 1. Would the public think its a security? 2. What is the pan of distribution? 3. What is the reasonable expectation of the investing public? 4. Is there another regulatory scheme? PUBLIC OFFERING Pre-filing period Quiet / consistent period Is issuer in registration? o Conservative sr mgmt made good faith decision to proceed w/ registration o Liberal letter of intent signed w/ underwriter Communications from issuer should be cleared by counsel Offers to buy/sell are illegal. o Doing things that are out of the ordinary; unnecessary to run the business o If issuer has issued a writing (e.g. a press release), does it fall under the safe harbor of Rule 135? Has issuer named underwriter? Not ok o But can enter into preliminary negotiations w/ underwriter. Underwriter can use syndicates Waiting period Issuer can circulate only a preliminary prospectus to get indications of interest o Ppl know the issuer intends to offer and sell securities, and who underwriter is. Issuer can make oral offers (but not TV or radio) No binding offer or acceptance can be made o No money can be accepted Have there been material changes? Issuer must reprint and recirculate final preliminary Underwriter can engage in oral sales efforts o Can circulate prelim prospectus but no other writings. Effective period

Issuer can have whatever writing it wants (subject to fraud limitations), so long as it is accompanied by prospectus. Formal offers may be made and accepted; sales may be consummated (w/ final prospectus) o Offers from those who saw preliminary prospectus become binding.

MATERIALITY OF INFORMATION Standard of materiality 1. Reasonable investor std a. Is there a substantial likelihood that a reasonable investor would consider it important in deciding whether to invest? b. Does it affect sales, earnings or assets by more than 5%? 2. Investor judicial notice a. Is it something so elementary? Then disclosure may not be necessary 3. Probability magnitude test for future events a. Quantify the probability of something happening against magnitude of it happening. Add together these %s. If less than 110, dont disclose. 4. Jalils public policy test a. What does society want to know about? Disclosure 1. Has issuer put important facts upfront and visibly? 2. If issuer has made disclosure, has issuer continued obligation to update? On a rapid and current basis? EXEMPT TRANSACTIONS IS OFFERING EXEMPT FROM REGISTRATION? 1. 4(1) is it by someone other than an issuer, underwriter, dealer or insider?

2. Is it an intrastate offering under 3(a)(11)? a. Does it comply w/ Rule 147 safe harbor?
i. Is issuer incorporated and doing business w/in that state? 1. Is corp organized in the state? 2. Are its headquarters / principal management / residence in the state? 3. Triple 80% test 80% of gross rev, assets and use of proceeds from offering must be from/used in that state. ii. Entire issue offered and sold w/in only 1 state 1. Can advertise, use mail, phone, etc w/in the state. iii. Purchaser must hold the security for 9 mo. before selling it out of state iv. Underwriter need not be from same state b. Do separate offerings need to be integrated? i. Are they part of a single plan of financing? ii. Do they involve the same class of securities? iii. Are they made around the same time? 1. If less than 6 mo apart, probably not ok. 1 yr apart is prob ok. iv. Is same type of consideration to be recd? v. Are the offerings made for the same general purpose? 3. Is it a private placement by an issuer under 4(2)? a. Look at 4 tradl factors i. # of offerees and their relationship to each other. Small class w/ special knowledge of issuer? ii. # of units offered. Small # of units in large denominations?

iii. Size of offering. Small offering? iv. Manner of offering. Direct negotiations rather than public distribution? b. Is the offeree the public? i. Ralston Purina - Does person need protection of securities laws? Unsophisticated? ii. Does offeree have sophistication and access? 1. Can investor understand and evaluate the nature of the risk based upon the info given to him? 2. Does investor have access by virtue of his position w/ the issuer, OR 3. Has he been given the info (same info in a registration statement)? c. Has there been general solicitation? Not ok. Reg A & 504 only private companies (good way for private co to get $$ w/o registering) 505 & 506 can be private or public co 4. Is it a Reg D? a. Basics i. Only for issuers ii. Issuer must file notice (Form D) w/ SEC no later than 15 days after sale, or cant do it. iii. Bad boy provision you also cant do a Reg D if youve done something wrong under the sec laws, although SEC can overrule this. iv. Immaterial mistakes are ok.

b. 504 no more than $1m i. Issuer cannot be a reporting co public co, investment co, blank check co
ii. Must aggregate other 3(b)s w/in 12 mo. and count it towards the $ cap. iii. Reqs 1. Look at all 3(b) (504, 505 or Reg A) offerings w/in last 6 mo. If beyond that, dont have to integrate 2. No disclosure necessary 3. May not generally solicit 4. Restricted securities iv. If you sell in a state that allows general solicitation and no restriction on resale, you can do the same in other states. Must also take most Draconian of laws in state in which youre offering and apply it generally.

c. 505 no more than $5m i. Issuer cannot be an investment co. / mutual fund.
ii. Must aggregate other 3(b)s w/in 12 mo. and count it towards the $ cap. iii. Reqs 1. Integration - any 3(b) offerings w/in 6 mo.? 2. Disclosure to investors (same as in reg stmt) but NOT to accredited investors 3. May not generally solicit 4. Restricted securities iv. No more than 35 purchasers 1. Exclude spouses, relatives, corps w/ >50% stake, and accredited investors. 2. Count corp. as one purchaser unless formed for the purpose of investing in the securities. If formed contemporaneously w/ the purchase, use 40/60 test. No more than 40% of assets invested in the 505 or 506.

d. 506 no dollar amount limit


i. 4(2) safe harbor available to any kind of company ii. Reqs 1. Integration - any offerings w/in 6 mo.? 2. Disclosure to investors (same as in reg stmt) but NOT to accredited investors

3. May not generally solicit, BUT can do so w/ accredited investors if they are existing clients. 4. Restricted securities iii. No more than 35 purchasers 1. Non-accredited investors must be sophisticated investors. 2. Exclude spouses, relatives, corps w/ >50% stake, and accredited investors. 3. Count corp. as one purchaser unless formed for the purpose of investing in the securities. If formed contemporaneously w/ the purchase, use 40/60 test. No more than 40% of assets invested in the 505 or 506. 4. NOTE if you have more than 500 investors issuer becomes public co. 5. Is it a Reg A? a. Basics

i. Mini-registration must prepare a registration statement and file disclosure stmt w/ SEC
ii. NOT available to public companies iii. Bad boy provision b. Reqs i. Offering up to $5m ($1.5m for insiders) in a 12 mo. period ii. Special aggregation rule count only other Reg As w/in 12 mo period only goes to $ amount. iii. Non-restricted securities iv. Insiders can use Reg A v. Must give SEC sales report 6 mo. later c. Can you convert from private to registered offering or vice versa? i. Rule 155 abandoned offers 1. Abandoned private offering registered offering a. Not considered same offering if: i. No securities sold during prvt offering ii. Issuer terminates all activity during filing of reg stmt iii. Disclosure of prior private offering iv. Wait 30 days after terminating activity in the private offering before filing reg stmt but dont have to wait if the only offerees were accredited investors or sophisticated investors. 2. Abandoned registered offering private offering a. Not considered same offering if: i. No securities sold under registered offering ii. Withdraw registration stmt iii. Wait 30 days after w/drawing reg stmt before commencing private offering

d. Can you change course mid-stream / gun jump in a Reg A? i. Rule 254 testing the waters
1. Must wait 30 days until filing the Reg A statement to gun-jump. ii. Can you abandon a Reg A and do a 504 or 505? 1. Not if you generally solicited for Reg A. Then you would have to use 502(a) 6 mo. safe harbor. But if the state allows general solicitation, then its ok. 6. Is it a Reg S? a. Is the offering offshore? i. Offshore transaction 1. Offer not made to person in US buyer is outside US or transaction takes place on foreign exchange ii. No directed selling efforts in US

1. Is there any activity undertaken for the purpose of or reasonably expected to have effect of conditioning the mkt in the US? a. General circulation? Publication primarily for US distribution (> 20% US subscribers) or in preceding 12 mo, avg circulation was 15,000 or more b. Exception for tours of US facilities for foreign corporations b. Does SEC have jurisdiction? i. Category 1 1. Defn a. Offerings by non-US isser which securities have no substantial US mkt interest, or i. If equity, no more than 20% of trading in US ii. If debt, no more than 300 debt holders in US and no more than $1bn in US b. Offerings by any issuer in overseas directed offering c. Offering in one foreign jurisdiction alone and in compliance w/ securities laws there 2. For valid Reg S - need offshore transaction and no directed selling efforts in US ii. Category 2 1. Defn a. Offerings of equity securities of foreign issuer that has securities traded in US, b. Any debt security of foreign issuer, or c. Debt securities of US issuer that has securities traded in US (ex. public co) 2. Must comply w/ category 1 reqs, but can do offering in more than 1 country. BUT, must ensure that securities wont be resold in US for at least 40 days and must be legended. iii. Category 3 1. Defn Everybody else 2. Must meet all reqs of Category 2, AND a. If debt must wait 40 days to sell in US b. If equity must wait 1 yr to sell in US and must be legended.

c. Is there solicitation on the internet? Does it constitute an offer directed to US? i. Is there a disclaimer that its offered to countries other than US?
ii. Securities must be legended. iii. Password protect the sit to prevent US buyers from coming in. SECONDARY OFFERINGS To determine whether someone is an underwriter (if so, must register) Is the purchase made w/ view to distribution to the public? o Rear-view mirror test look at length of time the security held. If held for 2 years, then considered not for distribution. Under a 504, 505 or 506 get certification that purchaser is buying for investment, or subscription agmt. If a purchaser is considered an underwriter, then you have to register. o Does the doctrine of profound and unforeseeable change apply? How can insiders and holders of restricted securities sell w/o registration exemption? Does the doctrine of profound and unforeseeable change apply? Does Rule 144 apply? o Only for securities of PUBLIC issuers o If more than 500 shares (or securities worth more than $10k) are sold in a 3 mo pd, must file Form 144 Restricted stock holders

Must hold for 1 year After 2 yrs, any restricted s/h who is NOT a control person can sell w/ no limits o Can only sell if a PUBLIC company which is current in SEC filings o Volume restrictions over 3 mo period o Broker transaction is it an open sale to the anonymous market? Control people / insiders o Can only sell if a PUBLIC company which is current in SEC filings o Volume restrictions over 3 mo period. Must aggregate sales b/w related parties o Broker transaction is it an open sale to the anonymous market? o Can insider sell to insider? Yes, w/ 4(1)(1/2) private placement from one insider to another Are accredited investors buying and selling to one another? o Rule 144A Is it an institution? Controls over $100m? Can security otherwise not be traded? o

RECAPITALIZATIONS, REORGANIZATIONS, AND ACQUISITIONS Is there a sale that must be registered? A disposition for value? o Does recipient need to make investment decision? o Does the issuer receive some benefit? Has there been a material change in an existing security that would render it a new security (requiring reg)? o What would be the view of a reasonable investor? Is it a 3(a)(9) exchange offer exempt from registration? Is the offer exclusively w/ the issuers security holders? Is it exclusively security for security? Is the transaction one that involves a vote by s/h and does Rule 145 apply? Is it a merger or acquisition? A reclassification of securities? What can parties say about the transaction? o They can basically say what is allowed under R 135. SEC wants public to know about transaction, but doesnt want gun-jumping o Issuer can state name, other parties, brief description of biz, date time & place of meeting to vote, brief description of transaction, and any stmt reqd by law Non-issuer parties and their affiliates are underwriters. How can they resell w/ no registration? o Affiliates can resell if: Current public info on issuer Volume limitations Broker transaction o Affiliate of party but not of issuer at time of sale can resell After 1 yr, if current public info on issuer o Affiliate of party but not of issuer at time of sale or for 3 mo. prior to sale can resell After 2 yrs w/o consideration of R 144 or anything else What about non-parties and non-affiliates (like public s/h of the acquired co)? o They can resell w/o registration. LIABILITY UNDER THE 33 ACT

Can you sue under 11 (false registration statement)? Must be a purchaser Offering must be registered Must not be a preliminary prospectus Omission or misstatement must be material o You cannot have known about it before purchase DONT need reliance or causation Does have a defense? Issuer is strictly liable People other than issuer: o Did they resign before effective date, tell SEC and issuer, and state that they bear no responsibility? o Due diligence Did they do everything they could w/in reason to ferret out truth and didnt know issuer was lying? Did they do everything the prudent man would have done in the management of his own affairs? Apply sliding scale Expert? Held to industry std; no personal knowledge of wrongdoing The higher up in the co, the higher the std of due diligence See Rule 176 for what constitutes reasonable investigation and reasonable grounds for belief Type of issuer, type of security, type of person, office held What are the damages? Cannot exceed total offering price o Amt paid disposal price o Value does not = market price must have bought the securities from offering made to the public, unless shares are traced Was there another reason why the stock went down? If so, that portion can be excluded from damages s are jointly and severally liable o But outside dirs can plead contributory neg, and are only responsible for % of stock they hold Can you sue under 12 (prospectuses and communications)? If there has been a violation of 5, then rescission is available. Law seems to be that offering must be registered Does have a defense? Due diligence defense, even for issuer (but not if it knew about the misstatement) There might be a defense if there are other reasons to explain the loss, but rescission should still be available. NOTE 1 year statute of limitations No private right of action based on fraudulent interstate transactions Cannot waive the 33 Act If is liable under 11 or 12, then control ppl are liable as well. But they have a due diligence defense. 34 ACT Is issuer a public company? 1. Has it voluntarily registered under 12(b)? 2. On the last day of the fiscal yr, are there more than 500 equity s/h (including insiders and employees) and is there at least $1m in assets?

3. Did it do a 33 Act registration statement? If so, must continue registration under 12 for at least a year. Then if there are 300 or less investors you can deregister. a. Note you can unlimited accredited investors in a 506, but if there are more than 400 issuer becomes public co. FRAUD IN CONNECTION W/ PURCHASE OR SALE OF SECURITY Can you sue under 10b-5? Is there fraud in connection with any purchase or sale of a security? o Was the misstatement reasonably calculated to affect trading or could be seen to do so w/ a modicum of foresight? Was it reasonably foreseeable that the stmt would make its way to the public? Did you rely on the misstatement? Causation is there a foreseeable possibility that the advice could possibly affect the stock? Is there a better more applicable body of law? o Is it a breach of fiduciary duty or a fraud on investors? If a br/ fiduciary duty, might be better addressed by corp. law. Scienter did know statement was false and was it rsbly foreseeable that it would be relied upon for trading? Did you plead w/ specificity the violations? Does have a defense? No scienter Due diligence you did everything you could to get it right and ferret out truth Was there a duty to disclose? Is info material? Info was previously disclosed and needs to be updated? It was true at first then became untrue? There are unusual movements in the stock price? Matters are already public? INSIDER TRADING Who can trade on inside information? Person w/ fiduciary obligation cannot trade. Otherwise, mere possession of matl nonpublic info is not a bar. o Who is a fiduciary? Someone given info w/ the expectation that it be held confidential and has reason to know the given info by the company. o Is person a temporary insider? An insider is anyone w/ a connection w/ the co. Rule 14e-3 anyone who knows about tender offer cannot trade, regardless of whether he has a fiduciary duty When can a fiduciary trade? Mere possession is not bar to sale unless but for the info, fiduciary would not have traded. o Is there a trading plan? Rule 10b5-1 on the basis of o If you knew the info, theres a presumption you traded on basis of that info, UNLESS before getting info You already entered into binding K Instructed another to trade for your account Adopted written trading plan Was there misappropriation?

Did you breach a fiduciary duty owed to issuer / employer / anyone and trade on info obtained from the breach? Did you breach a duty of trust or confidence? o Did you agree to keep it in confidence? o Was there a history of keeping it in confidence? o Did you get the info from a relative?

Does tipping constitute a violation? Did tipper receive benefit by giving out info? o Need not be monetary Did tippee know or should he have knows that a benefit would accrue to tipper? Did tipper just happen to find the information? o OK if tipper didnt put himself in position to find it. What if issuer or someone acting on its behalf discloses matl nonpublic info to professional investors? Reg FD have to disclose it to public o Simultaneously, if intentional disclosure o Promptly, if an unintentional disclosure 40 ACT Is issuer an investment co.? Subjective test is it or does it hold itself out to be engaged primarily in the biz of investing, reinvesting, or trading securities, OR Objective test is it engaged in the biz of investing, reinvesting, owning, holding or trading securities, and does it own investment securities having a value exceeding 40% of its assets? Do any of the following exceptions apply? o Operating co. exception is it an issuer primarily engaged directly or thur subs in a biz other than investing, reinvesting, or trading securities? o Exemptive order has the SEC found you NOT to be an investment co? o Investment club under 3(c)(1) are its beneficial securities not owned by more than 100 ppl? And you DO NOT make public offerings? BUT has the entity been formed for the purpose of investing in the securities? If so, you must count all the holders. o Hedge fund under 3(c)(7) NO public offerings? All the purchasers are qualified purchasers (person w/ at least $5m in investments, or $25m in trust)? Make sure no more than 500 purchasers; otherwise its a public co. o Religious or charitable institution? NOTE doctrine of integration o If you can convince the SEC that your 3(c)(1)s invest in different funds, then they wont be integrated and you can have different 3(c)(1)s. BUT, hedge fund can have identical 3(c)(1) and 3(c)(7) clone funds. SEC may not integrate, even if they meet all the integration requirements. If issuer is an investment co what type is it? Is it a Unit Investment Trust (UIT)? o Static portfolio? o Issues redeemable securities? Forward pricing at NAV. Is it a management co. (classic mutual fund)? o Open end fund? Issues redeemable securities? OR

o Closed end fund? Does NOT issue redeemable securities? If so, cannot sell for less than NAV.
Are you diversified? Are no more than 5% of your assets in one co., and no more than 10% of your portfolio (voting securities) in one co.? If a mutual fund? o Is it a load (sales charge; amt is unrestricted) or no-load? o Affiliates cant borrow from fund o Can only pay divs from earnings o

If youre an investment co., you must be registered At least $100k in seed money? At least 60% of board of dirs not affiliated w/ any B/D, underwriter, investment or bank you do biz with? Cant purchase on margin No funded funds cant own more than 3% of another investment co. Cant distribute your own securities (pay admin expenses) unless s/h approve Cant change classification w/o vote of majority s/h Cant fall below 3:1 leverage ratio No self-dealing b/w manager and investment co. Maintain books & records Independent auditor approved by independent members of board of dirs Are you an investment advisor? Must have a written K It must precisely describe compensation and be forwarded to s/h Cannot be for more than 2 yrs Cannot use fund as your piggy bank NOT an investment adviser if: o Your performance is incidental to your practice o Publish a publication w/ general circulation o SEC exempts you o 15 or fewer clients in a year and dont advertise generally as an investment adviser hedge fund If youre an investment adviser, you have to register DONT have to register if o For preceding 12 mo, you had no more than 15 clients. o You have $25m or less, dont have to register w/ SEC, only have to register w/ state. But must give disclosure doc to all customers Cant be compensated as % of gain, only as % of assets Must est and maintain written policies and procedures to prevent matl, nonpublic info from being used by investment advisers Every registered invest co. may only retain a registered investment adviser

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