Securities Regulation Outline #1

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SECURITIES REGULATION
Issuer Transactionsinvolving the sales of securities by the issuer to investors

Trading transactionspurchasing and selling of outstanding securities among investors
Primary Market=new companies, new IPOs
o Only a select few can get a piece of it at first
Secondary Market=old stocks
o There is much more information involved and EVERYONE can buy or sell these
HYPO: If you want to raise $100 million
o Bond Issueborrowing at an interest rate
People need a level of security before they invest with you and take on your debt
Security Interestan asset-backed dealthese assets set aside for debt, make the interest rate
lower
o Restrictive Covenantsagree to NOT take on any more debt
o Equity Cushionputting X amount of capital aside for debt
o Must think creatively of what will increase investor interest and lower interest rate
DEFINITION OF SECURITY
o SEC v. WJ Howey (1946)
Issuer as a citrus grove, selling it to people as an investment little plots, issuer does ALL of the
work
ISSUE: Is this an INVESTMENT CONTRACT which would make it a SECURITY under
2(1) of the 33 Act making it have to be REGISTERED under 5?
YESthis IS AN INVESTMENT CONTRACT, HOW:
(1) Must be an investment of money
(2) Into a common enterprise
(3) For profit
(4) Profit derived SOLELY FROM THE EFFORTS OF OTHERS
o Investor must have significant and essential managerial efforts
There was an investment of money, into this common enterprise, for profit, and Howey did
everything that derived the profits
o United Housing Foundation v. Forman (1975)
Housing development, told people that if they bought 18 shares of stock then they could get a
room for the low price. They did, but price went up, bring suit saying this is a security
ISSUE: Is this a security
NOThis is NOT A SECURITY
Stock: NOT A STOCK HERESubstance over Form
o Could NOT assign it, pledge it, use it for loan, no rights to profit
o ONLY could CONSUME IT
o If you leave have to sell it back at FIXED price, NOT at profit
How to figure out if it is stock:
o Called stock; issued by company; given for profit; gives a share of profit; maybe
derived from the efforts of others; cannot have major control by the investor.
o The right to receive dividends contingent upon profits
o Negotiability
o Ability to be pledged as collateral
o Voting rights
o Capacity to appreciate in value
o Sale of it by a corporation
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RULE: when a purchaser is motivated to use or CONSUME the item purchases then the
securities laws do NOT apply
SEC v. Edwards (2004)the FIXED return
People invested in a payphone sale and leaseback deal for investment, Edwards does ALL OF
THE WORKLike Howey
People got a 14% annual returnA FIXED RETURN
Company goes belly up
ISSUE: Is this an investment contract, thus a security, even when it is a FIXED return
rather than a VARIABLE return
YES THIS IS AN INVESTMENT CONTRACT
Security definition is BROAD in order to be FLEXIBLE to adapt to all of the
situations in which people devise plans to scheme others
SATISFIES ALL OF THE ELEMENTS OF HOWEYBUT, FIXED
RULE: Does not want circumvention, NO distinction between FIXED return and
VARIABLE return
Belmont Reid
Buying gold coins off of a company that is going to refine them soon so that they can catch the
rising market for gold and be WORTH MORE
Investment ContractHOWEY
Money: YES
Expectation of Profit: Yes
Common enterprise relying solely on others for profit
o Relying on them to refine in order to catch rising market
o YES, investment contract because of this reliance
o If NO rising market, NOT an investment contract, just relying on market
Chinchilla Case
You buy a chinchilla, take care of it, then it has babies and the promoter buys them back from you
at profit
Investment contract?
Howey:
Money: Yes
Profit: Yes
Common enterprise relying on the efforts of others:
o The investors took care of the animals HOWEVER, their resale came from the
promoters making their success rely on the efforts of others
Also, they are not expert investors AND there is a lack of disclosure here:
o They are very challenging to raise and die a lot of the time
o The court does NOT want to allow circumvention of the regulations by giving
investors NOMINAL participation AND the court wants to PROTECT investors
from shady schemes.
o NOMINAL PARTICIPATION NOT ENOUGH
McSushi Case
Franchisee manager
NOT an investment contract
NOT relying on efforts of othersYOU MAKE THE DAY TO DAY DECISIONS
Vertical Commonality
Whether the activities of the promoter are the controlling factor in the success or failure of the
investment.
A common enterprise may exist even though there is no pooling of investors funds or interests
Broad Vertical Commonality

Look only to a connection between the efforts of the promoter and the collective
successes or losses of the investors
Strict Vertical Commonality
Require a direct relationship between the success of the promoter and that of the investors
requires the promoters and investors to share the risks of the venture
o Horizontal Commonality
Requires a POOLING of investors fundsemphasizes the common enterprise among investors
PARTNERSHIP AND LLC INTERESTS AS SECURITIES
o US v. LeonardSubstance/Economic Realities Test
s had independent sales offices in order to solicit financing for movies, said they were taking
20% commission, really taking 50%.
s claim that these interests are not securities
SOLELY in Howey should not be taken literally
Mainly looking to see if the scheme was being promoted as an INVESTMENT
s state that this is a member-managed LLC and that the investors had control so it was not profit
derived solely from the efforts of others and it shows on their DOCUMENTS
Court says Substance/Economic Realities Test
In reality, people were inexperienced in this and had very little to NO control
NO Control in RealityThis is a security
o Limited Partners
Limited partners are the types of passive investors in need of the protections of the federal
securities laws. Because they do not have substantial managerial power in the partnership like
the General partner does
o LLC Interests as Securities
LLC offers its members the benefits of limited liability (corporations) AND a pass-through of tax
income and losses (partnerships)
Either member-managed LLC or manager-managed LLC
o Member-managed resemble GPs while manager-managed resemble LPs therefore in evaluating whether
LLC interests are investment contracts, the analysis parallels that of GPs and LPs
LPs deemed Investment Contracts and SecuritiesLack of Control
Look to whether the investors control options are more theoretical than real.
o Therefore, Securities:
Corporate Stock
Limited Partnerships
Interests in Manager-managed LLCs
o NOT Securities:
General Partnerships
Interests in Member-managed LLCs
o Landreth Case
IF you can use the Forman Elements for finding out if it is a Stock then you do NOT need to
go to a Howey analysis
HERE, they had all the Forman characteristics of a stockYES, a security, No Howey needed
o HYPO: Thinking of making a stock buy by Sam himself or Sams Corp. will buy all assets/liabilities
The Asset buy will NOT be a security
The Stock buy WILL be a security
REAL ESTATE AS SECURITIES
o GENERAL RULE: Standard real estate transaction in the form of a sale or lease of property does NOT
involve the offer of a security.
o BUT, IF
Promises of post-acquisition INCOME, OR

Aspects of Management Control, OR
Appreciation from future development of the ACTUAL issuer or seller
o Hocking v. Dubois (1989)
Guy in Vegas wanted to buy a condo in Hawaii for an investment
Dealt with an intermediary and was told to put his condo into a pool of other investors in a condo
development and should expect profit
Howey
Although this is through an intermediary and in the secondary market it is still like
Howey because he relinquished any right to enter or use the property
Investment of Money
o YES, for profit
Common Enterprise
o Yes, the purchase of real estate combined with a rental pool does evidence
horizontal commonality
Expectation of Profits from efforts of others
o Yes, he is inexperienced and lives far away, no day to day working
Gets to go beyond summary judgment
NOTES AS SECURITIES
o Difference on the treatment of notes by the two acts:
o 33 Act
A security is any note BUT NOT a note that arises out of a current transaction that will mature
WITHIN nine months
o 34 Act
A security is any note BUT NOT a note with a maturity of LESS THAN nine months
o Therefore, any note with a maturity exceeding nine months would seem to come squarely within the
statutory definitions of a security.
o Typical Attributes of a NOTE
(1) Fixed, periodic Interest rate
(2) Fixed Maturity rate
(3) NO voting rights
o Reves v. Ernst & Young (1990)
Company sold DEMAND NOTES, demand repayment at anytime, they go bankrupt
REVES TESTFamily Resemblance Test
(1) What is the Motivation of seller and buyer
o If Purpose of Seller is trying to raise money for the general use of a business or to
finance investments
o If Purpose of the Buyer is interested in profit from the noteinvestment
o This would make it likely a security
(2) Plan of distribution of the instrument
o Whether there is a common trading for speculation or investment.
o See if Marketed to a broad segment of the population
(3) The reasonable expectations of the investor
(4) See if there is any other risk-reducing agency or factor
Start with the Assumption that if the maturity on a note is LESS THAN OR EQUAL to
9 months then it is NOT a security, based on definition section
HOWEVER, if OVER, you can REBUT this assumption if you show that the
transaction shows a family resemblance to judicially crafted exceptions:
o (1) Notes delivered in consumer financing
o
o
o
o
o
o
Here:
(1) Co-op sold the notes in an effort to raise capital for its general business operations
AND purchasers bought for an investment opportunity, profit
(2) Offered and sold to a broad segment of the publicthis is all that is needed to satisfy
this1600 investors
(3) Advertised as investments to the public, thats what they thought
(4) NO risk reducing factorsuncollateralized and uninsured AND would escape federal
regulation entirely.
Therefore, the note IS a security
o With HOWEYYou need ALL of the elements to pass
o With Revesthis is a FACTOR TESTa BALANCING TEST
When talking about NOTESGo to Reves FIRST
MATERIALITY
o 33 and 34 Act:
Registrants must include in their registration statement such further MATERIAL information as
may be necessary to make the required statement, in light of the circumstances, not misleading.
o Rule of Thumb:
A misstatement regarding a financial statement item of 5 percent or less is NOT material.
o Basic Inc. v. Levinson (1988)
Involves 34 Act 10(b) materiality requirement
Basic says there are no merger talks, s sell stock, they actually have a merger, stock goes up
Material Misrepresentation Rule: From TSC Industries
(1) Substantial Likelihood
(2) That a Reasonable investor would find it important
(3) And would alter the total mix of the information available.
s state that disclosing everything could ruin deals and mislead investor
Court states RULE: Probability Relative to Magnitude Test
Court states that materiality will depend at any given time upon a :
o Balancing of both :
o The indicated probability that the event will occur and
o The anticipated magnitude of the event in light of the totality of the company
activity.
Use Probability Relative to Magnitude Test for CONTINGENT EVENTS
TRUTH ON THE MARKET (Sub-Set of Materiality)
o Wieglos v. Commonwealth Edison (1989)
Investor in a Nuclear Reactor Company. Edison reports they will be building new nuclear reactor
sites and this is how long it will take if everything goes right
Outside analyst and newspaper reports stating that they will be delayed
s bring suit because they are delayed
Truth on the Market Defense
RULE: Based on the information out there, that is commonly known, then people will
have to understand that they cannot take what a company says is true when it is
against all of the other outside information.
(2) Home mortgages

(3) Short term notes secured by a liento cover short term cash flows, for small
business, want them to have cash
(4) Character loanbased on good reputation with lender
(5) Short term notes secured by accounts receivable
(6) Note evidencing open account debt
(7) Note evidencing loans by commercial banks for current operations.
Look at the objective nature of this situation, if there is enough outside information for a
reasonable investor to know what is true.
NO liability because there was outside information saying otherwise and their statements
were optimistic and not misleading so it did NOT alter the total mix of the information
available.
PUFFERY (Sub-Set of Materiality)
o Eisenstadt v. Centel Corp (1997)
Centel disclosed that they got two investment banks to help in their sale and that the sale process
was going SMOOTHLY, ended up selling really low.
Puffery is NOT Material Misrepresentation
Everybody knows that someone trying to sell something is going to look and talk on the
bright side, wouldnt influence a reasonable investor
Mere sales Puffery is NOT actionable under 10b-5
HYPOyou have a sales lien and attorney tells you, you cannot sell this, and you say things are
going smoothly
THIS IS Material Misrepresentation and IS actionablethe sale is OVER
If it is just ROUGH PATCH like Centelit is STILL GOINGok to puffery
o HYPOVirginia Bank Case
Company says that we are receving high price for our stock
BUT THEY KNEW that they were NOT from a report
This is NOT pufferythis is CONCRETE
Analyze it OBJECTIVELYwhat did they KNOW
SOFT INFORMATION (Materiality)
o About information in the FUTURE, Forward Looking Statements
o The Bespeaks Caution Doctrine
o Kaufman v. Trumps Castle Funding (1993)
Trump looking for investors for his casino, there is Cautionary Language in the contract
Also it is very narrowly tailored and talks about the peak seasons of Atlantic City and the
difficult business of operating a successful casino, no operating history, who knows how
it is going to perform, capacity is huge, hard to fill, and profits and casinos generally
were going to fall, permits
Bespeaks Caution Doctrine
(1) Cautionary language in the offering document NEGATES the materiality of an
alleged misrepresentation or omission
(2) Has to substantive and tailored to the specific future projections, estimates or
opinions in the prospectus which the s challenge
o CANNOT BE BOILERPLATE
HERENOT general, narrowly tailored cautionary languageNO Liability
o Safe Harbor for Forward-Looking Statements
27A to Securities Act, 21E to Exchange Act, For Private Rights of Actions ONLY
(1) Bespeaks Caution Language
(2) OR, if fails to prove that the forward-looking statement was made with ACTUAL
KNOWLEDGE it was misleading
Can be for ORAL forward-looking statements as well IF the listener can find the
qualifying meaningful cautionary information.
NOT available for IPOs, tender offers, and going-private transactions.
Think about what Objectively, in common sense, would be MATERIAL
Form 8-K: what needs to be disclosed: Among others:
Insolvencybankrupt
Change in controltriggering debt obligations
o
o
Restrictive covenants
Conflicts of interest
Acquisitions
Notice of de-listingshows that they failed to maintain certain requirements
Waiving code of ethics
Asher v. Baxter International (2004)
For Material Misleading Misrepresentation
o You need to show:
Materiality AND
RELIANCE
For Fraud on the Market
o DO NOT NEED RELIANCE, just materiality and a total mix effect
Here, profits did not match expectations on press releases
Safe Harbor applies here is cautionary forward-looking statementsBespeaks Doctrine
o Need NOT identify what ACTUALLY is going wrong
HOWEVER, HERE, the cautionary language remained FIXED instead of changing
with the changeshave to see if this is materialARGUE THAT IT IS
Duty to Disclose Forward-Looking Statements (Materiality)
Info MUST be
Material AND
An Independent Duty to Disclose the Info
Comes from the Disclosure Rule of NO HALF TRUTHS
Half Truths measured at the TIME THEY WERE DISCLOSEDno hindsight
Panther Case
Duty to disclose only if reasonably certain
Desaigender Case
NO duty to disclose speculative gains
Kademian Case
Other info available that makes Kademian public info NOT alters the total mix of info
available.
NO bright line test, have to use judgment when counseling
FIBBERS:
CANNOT be protected by cautionary language if you know the facts OR some very high
degree of certainty that an event will occur
Economy is bad and still expensive Louis Vitton is projecting huge gainslook to see if
assumption makes sense
Look at the level of CERTAINTY for Soft Information
DisclosureManagement Integrity (Materiality)
In the Matter of Franchard Corp
Corporation owned by Glickmanpeople revered him and respected his reputation
The IPO in this corporation was made based on his reputation
DID NOT DISCLOSE ABOUT HIMSELF:
o Withdrawal of substantial amounts of cashNEED FOR CASH
o Diverting funds to personal accountLACK OF INTEGRIT OF MGMT
o Taking out loans to get more cashPossible CONTROL CHANGEcreditors
Directors of the Corporation
NOT liable
Glickman was NOT honest with themthey did their best
RULE: People invested on Reputation of MGMT, making their actions MATERIAL
In the Matter of WR Grace

NON disclosure of HUGE retirement benefits for Grace Jr.
Managers did NOT question why this was left out of the disclosure reports
RULE: If an officer or director KNOWS OR SHOULD KNOW that his or her companys
statements concerning particular issues are inadequate or incomplete,
They have an obligation to correct that failure.
THE PUBLIC OFFERING
o 5 of the 33 Act
BARS any offers to sell and sales of a security UNTIL a registration statement covering the
security has become effective
IN IT: Info about the securitys issuer, the security, the contemplated uses of the offerings
proceeds, and the manner of its sale
11
Imposes liability upon the issuer, its principal officers, its directors, and its underwriters
for any material omissions or misstatements in the registration statement when it became
effective
o Outsiders ALSO liable for the parts they work on or certify
UNDERWRITERS
If a corporation needs to acquire funds: Can decide to offer securities and engage the
services of broker-dealers to sell the securities to the public in either:
Firm Commitment Underwriting:
o One or more investment banking firms (multiple=syndicate)
o Agree to PURCHASE the securities from the issuer and they resale
o $10 a share. Sell to underwriters for $9 a share. The $1 is the SPREAD and the
underwriters get to keep this
o If they do NOT sell:
They are personally hurt financially AND reputation is hurt
o MORE CONFIDENCE With this
o If you say you are FC but actually Best EffortsMaterially Misleading
Best Efforts Underwriting
o Broker-dealers do NOT purchase the securities
o INSTEAD: agree, for a fee, to use their best efforts to sell the securities on
behalf of the issuer at the offering price
o 3 different degrees of risk, threshold number of shares that MUST be sold
before the Underwriters can CLOSE and get COMMISSION
o Straight
ANY securities sold to investors remain sold; there is NO minimum
amount that must be sold as a condition to the deal closingMOST
COMMON
o Mini/Maxi
a stipulated minimum amount of all the shares to be sold must be sold
during a specific period of time before the offering can closeall sales
are set in escrow until minimum is reached, if not, given back to
potential purchasers
o All or None
all the securities must be sold before the deal is completed
The difference between that price and the amount received by the issuer is known at the
gross spread.
Gross spread is composed of 3 parts:
o The management fee for the managing underwriter
o
The underwriting compensation received by the underwriters

The selling concession received for any securities sold to the public by any
broker-dealer participating in the distribution
o Documents preceding public offering
Letter of Intent
Represents the culmination of the preliminary negotiations and tentative understandings
between the managing underwriter and the issuer
Sets forth the relationship between the issuer and its underwriter until the underwriting
agreement
Agreement among the underwriters
Formal understandings among the members of the syndicate
Solidifies the managing underwriters authority
o The power to determine with the issuer the offering price of the securities
o The underwriting commission
o The concession/commission provided to dealers participating in the selling group
Allotments
100,000 shares of 10 million shares to be soldentitled to 1% of the commission ALSO
only has 1% of the liabilities
Over-allotments
Selling more than underwriting syndicate was obligated to sellhigh investor interest
Known as a green shoe option to purchase additional shares from the issuer
o Bigger demand than expected
FINRA limits the amount of over-allotments to 15% of the shares the underwriters are
obligated to purchase.
Anti-flipping Clause
Occurs when shares in an IPO are quickly resold in the market at a profitthis places
downward pressure on the price and impedes distribution
Penalties given for this behavior
Market Out ClauseMaterial Adverse Change (MAC)
Permits the underwriters to withdraw any time prior to the public offering and/or
settlement date if certain conditions ariseseen as poor form and is rarely used:
o The government or an SRO has imposed restrictions on the trading of securities
in general
o There is a war or other national calamity
o There has been a material adverse change in markets
o There has been a material adverse event affecting the issuer
REGISTRATION STATEMENT
o Information that must be included in the registration statement:
(1) Information with respect to the Registrant
Description of the registrants business, property, and management
(2) Information about the distribution and use of its proceeds
Underwriters in privity with the registrant must disclose the general terms of their
agreement and their compensation
The net expected proceeds of the offering must be disclosed
If the registrant has plans for the proceeds, those plans must be disclosed
(3) Description of the securities of the registrant
Common Stock
o CASH FLOW:
Residual rights and dividends
o LIQUIDATION:
o
o
Residual, after everyone?

VOTING RIGHTS:
YES
Preferred Stock
o CASH FLOW:
Priority for fixed amount of dividends
o LIQUIDATION
Priority
o VOTING RIGHTS
NO
BondDebt Securitiesmost common form of financing
o CASH FLOW:
Right to fixed interest payment
o LIQUIDATION:
Highest priority but is FIXED
o VOTING RIGHTS:
NO
(4) Various exhibits and undertakings that must be filed as part of the registration statement
Registrants articles of incorporation, bylaws, any 10-K or 10-Q reports
ONLY information within the first THREE categories must be reproduced in the prospectus
o Regulation S-K gives a detailed guide for what precisely must be disclosed
301 and 302
Require the registrant to disclose a wide array of other financial information about itself
that supplements and emphasizes the information in its audited financial statements.
303
Requirement to include managements discussion and analysis of the registrants financial
condition and results of operations.
408
Accurate filling out of registration statement that is expressly stated by the S-K AND any
other information to make sure information provided is not materially misleading, no
omissions.
Attorneys, accountants, other experts opining, and underwriters all have a duty of due
diligence.
o Cannot take things at face value, must dig in and get the truth
o Cannot ignore information that is blatantly available.
o Preparing the Registration Statement for Filing
Issuer and underwriters can promote the offering before the registration statement is filed;
HOWEVER, Section 5 imposes restrictions on the freedom of them to promote the offering
before filing.
o DUTCH AUCTIONGOOGLE, NOT a FC or BE
The Bidders Price the Stock
Have a set mark of what you want to sell and you have an auction, anyone below the best does
NOT get it
CANNOT go really high just to be highestwill NOT be accepted it
Can be ALLOCATED two different ways
o PRO RATAeveryone gets the same regardless of what they bid
o PROPORTIONALif you bid higher you get higher %
SEC LETTER OF COMFORT
o 8 of the 33 Act
The registration statement becomes automatically effective 20 days after filing.
o
FILING
THEN, Letter of Comment from SEC
They review statement, state any deficiencies
Failure to comply = formal STOP ORDER
Issuers do NOT want deficiencies in their statements when effective
Could lead to 11 liability for having misstatements in 5 statement
Therefore, they want delaying amendmentpush back effective date until they fix it
ALSO, can accelerate the effective date
THE PRE-FILING PERIOD
o Section 5(c)
Unlawful to offer to sell or offer to buy any security unless a registration statement has been filed
for that security
CANNOT condition the public or arouse public interest before making the actual public
offering
o Under Section 5if regulation statement NOT in effect yet, CANNOT:
(1) Transmit a PROSPECTUS
(2) Deliver a security
(3) Offer to sell
(4) Offer to buy
o HYPO-- In PFPpresident tells investment club that they can get in ground floor of new company at 20
dollars a share
There IS a motivation to sell
The audience is an investment clubgoing to take this seriously
This IS an offer to sellNO good in PFP
Look to see if it is an offer to sell:
(1) Audience
(2) Type of infowhat kind of impact it will have on audience
o Selling a product vs. selling a security
(3) Level of Distribution
(4) Timingare they close to making a public offering
o HYPO-- non-reporting company, May 1st filing date
February 1st, conference call to investors
IS THIS AN OFFER
Look at definition of offer--2(a)(3)
There is an exemption for underwriters and syndicate negotiations
NOW, look at definition of Underwriter--2(a)(11)
o If they BUY IT and sell it at their own risk
o NOT people that JUST get a commission
THEREFORE,
o It is OK to solicit interest from FUTURE underwriters, even if they say nohave
to be allow, how else would you get people to say yes, need to have negotiations
o HOWEVER, if it is JUST to someone that will get a commission ONLY, NO
EXEMPTION and it WILL be an OFFERNOT ALLOWED
o TYPES OF ISSUERS
o Non-reporting Companies
About to do S-1 filing, IPOsS-1 are no experience
o Unseasoned Reporting Issuers
Exchange act reporting
NOT able to do a S-3
Need a certain level of experience

Need have timely filed forms
Have to be up to date with filings
o Seasoned Issuers Reporting
Able to file a S-3
o Well-Known Seasoned Issuers (WKSI)
Rule 405
NEED $700 million in equity/world markets in the hand of NON-affiliates
OR, $1 billion in non-convertible debt that was issued in last 3 years
o CANNOT be Blank Check or Shell companies or Penny Stocks (<$5)
o SAFE HARBORS for Pre-Filing Period
30 Day Bright Line ExclusionRule 163A
Communication done BEFORE 30 days BEFORE the filing of a registration statement is
EXCLUDED from this rule
o AND does NOT reference the offering
o AND takes reasonable steps NOT to allow the information to be disseminated
during the 30 days before the filing
ANY of the above 4 companies can use this safe harbor, check this statute out
Rule 135Notice Provision
Can list name of issuer, # of shares, type of securities, timing, brief statement of the
purpose of the offering
MUST include a LEGENDthis is NOT an offer for sale
CANNOT MAKE BUSINESS PROJECTIONS
Rule 169
Regularly released factual business info
Ads about the issuers products or services
o CANNOT be new
o Previously released in ordinary course of business
o Timing, manner, and form is consistent with past
o Intended for customers and supplies, NOT investors
o Cannot be an investment company
CANNOT MENTION THE OFFERING
Rule 168 for REPORTING COMPANIES
Factual business information
Regularly released in ordinary course of business
STILL cannot mention the offering
BUT can make forward looking statements
Rule 163 for WKSIs
Can say anything
BUT, need LEGENDsaying this is not available until filing AND register with SEC, or
if exempted, keep on file for 3 years to show good intentions
The Waiting Period
o Section 5(c) prohibitions go away after the filing of a registration statement
o BUT, Section 5(a) kicks in and prohibits SALES until the registration statement becomes effective, BUT
selling efforts CAN commence
Section 5(b)(1)NO written communication is allowed offering a security for sale
ORAL offers are NOT prohibited
Changed somewhat
FlexibilityCAN give written communication if it just states what is on file in

the registration statement
o RED HERRINGbold red letters stating that this is not an offer to sell
o This is NOW called a PRELIMINARY PROSPECTUS
CLASS NOTE:
o Have to deliver a PROSPECTUS (2(a)(10))
Any written communication that offers securities for sale, like in radio,
ads, graphic (internet), needs registration statement info
This is like 5(c)
BUT NOW, can conditioned the market by ORAL communication
o To see if you have protection:
o Look to see if Oral, No?
o Look to see if offer is written?
o Look to see if it has everything need for Preliminary Prospectus
o Look to see if it is a 2(a)(10)(b) Tombstone Ad
o Look to 135no forward looking info, need legend
o Look to 169no forward looking info
o Look to 168have to be a Reporting Issuer
o Look to 163have to be WKSI
Free Writing Prospectus Rule 405
Glossy brochures, ads
Offer to sell or buy after the registration statement is filed
WHEN
o
WP
PEP
Non-Reporting
NO
YES
YES
Reporting
NO
YES
YES
Seasoned
NO
YES
YES
WKSI
YES if 163
YES
YES
Everyone CAN if they follow rules 164 and 433

Non-Reporting and Reporting
To generate interest in company
Have to provide the Final Prospectus (10(a)) before OR simultaneously with the Free
Writing Prospectus
IPOs have to include a price range
Seasoned and WKSI
Have to file Final Prospectus but do NOT have to deliver with the FWPjust include a LEGEND
saying read the prospectus
Filing
Have to file FWP with SEC
Graphic Art has to be filedpower points, recorded speeches, ads, media packets
EXCLUDED are LIVE transmissions (cannot be recorded)
Bona fide Road Shows do not need to fileexcept Non-Reporting/IPOs, IPOs need to have a
copy online for the public
If underwriter puts out FWP, and it is issuer info, and not from public sourcesthen this TOO
needs to be filed with the SEC
PFP
Problem 4-21PEP
Underwriter sends copies of an article about them in the WSJ to customers, this IS a FWP
Info NOT with the SECOK IF with LEGEND or with final prospectus simultaneously
Mail has a hyperlink to the underwriter website that has issuers prospectus
o NOT a direct linkit is to somewhere in the website
DIRECT LINK NEEDED
o NOT with SEC and NO legenddoesnt conform to 2(a)(10)
o 2(a)(10)(a)need final prospectus in their hands with FWP
OR direct hyperlinktogether
o Rule 433NEED legend and Filing
o 5(a)(2) allows security to be delivered to its purchaser as long as it is accompanied by a FINAL
prospectus
Offering price, underwriter compensation, proceeds
Problem with this, this info is given AFTER the investor is committed
o Section 5 prospectus burdens ONLY apply to issuers, underwriters, and dealers.
Issuers
Subject as long as they are offering the security to the public
Underwriters and dealers
As long as their allotment or subscription in the distribution is unsold
o Public Offers By Seasoned and Well-Known Seasoned Issuers
Basic Information package
Company-specific info useful to investors assessing the financial performance, position,
and prospects of the firm
Uniform disclosure requirements for filing under 33 and 34 Acts
The requirements for all financial items appear in Regulation S-X
The requirement for all non-financial items appears in Regulation S-K.
o Issuer Safe Harbors
Well Known Seasoned Issuer (WKSI): Rule 163
Permits such issuers to engage in unrestricted oral and written offers before a registration
statement is filed.
o ONLY by or on behalf of the issuer
Rule 168
Announcements by reporting issuers that have engaged in the regular release of factual
business information or forward looking info will not be treated as offers to sell a security
o F.B. Info
Facts about issuer, its business, or financial developments
o F.L. Info
Forecasts or discussions of future business plans
Post Effective Period
o Can sell now, dont have to worry about 5(a) anymore
Physical delivery, electronic, send to dealers
EDGAR onlineanyone can get a copy of it
ACCESS = DELIVERYRule 172
Section 4Exempted Transactionsso they dont have to comply with 5
o FIRST LOOK TO: These are importantprospectus is expensive to send
4(1): anyone other than an issuer, underwriter, or dealer
4(2): exempts issuers selling not involving a public offering (private)
4(3): Transactions by a DEALER, EXCEPT:
(a): LESS than 40 days AFTER Bona Fide offering
(b): LESS than 40 days AFTER Registration Statement filed

o IPO=90 days, after listing on a National Exchange=25 days
(c): Unsold Allotments through Underwriters
4(4): Unsolicited Order
ONLY for Brokers, NOT for Control Persons
Exemptionif you cannot satisfy the above
Rule 172: ACCESS=DELIVERY!
If no Rule 172 or 4, then:
Rule 173: Need to give NOTICEyou have 2 business days to give a final prospectus or
notice that registration statement is filed and available
Problem 4-22
This is by an UNDERWRITER: cannot get 4 because of (1)
So look to 5
This is a Free Writing ProspectusFWP NOT covered by Rule 172
o Has to comply with 2(a)(10) or FWP Safe Harbors
o FWP bar is higher
Problem 4-23
Effective date 7/1, allotment sold 7/5
7/10 Broker recommends stock in Omega
Must he forward a Final Prospectus?
Not just an offer, this is an actual TRANSACTION
This is by a DEALER, so no 4(1)
o This is by a dealer because when an underwriter sells his allotment then he
becomes a dealer when he has NO RISK
When he has a RISK, he bought what he is sellingthen not a dealer
o So look to 4(3), is a dealer HOWEVER:
This IS (a) Less than 40 daysException
Have to deliver Final ProspectusNO EXEMPTIONS
Rule 173he has 2 business days to give noticeeither give the
final prospectus or notice that the registration statement is filed
and available.
Problem 4-25
During the allotment period BUT the dealer is TOLD what to buy by the investor
o This is an Unsolicited Order--4(4) exemptionNO prospectus needed
Shelf Registration Process
o For Reporting Companies
o Do not want lump sum capital, want money when you need it
o WKSIcan file S-3 and get automatic Shelfput on shelf and take it when you need itfiling is
considered automatic
o Regulation S-K
Rule 512must make amendments for fundamental changes
Rule 424must make amendments for substantive changes
o Can do STICKERING
Actual stickers or another recent document, INSTEAD of filing actual amendment
If you file a changeprospectus is treated as the registration statement and effective date is
changed
Extends the time of which people can bring actions
So they would rather do Stickering
BUT, if it is a BIG change, must do amendment
SEC v. Ralston Purina

Whether allowing the exemption is consistent with the promotion of the full disclosure of the
information thought necessary to informed investment decisions and whether the class of persons
affected needs the protection of the Securities Act.
FACTORS:
# of offerees
Relationship of the offerees to each other and the issuer
The manner of the offering
Information disclosure or access
Sophistication of the offerees
o Regulation D, exemptions 504, 505, 506
Liability Under the Securities Act
Section 11
o A material misrepresentation or omission in a registration statement will subject the issuer and (subject to
due diligence defenses) a variety of persons associated with either the issuer or the distribution to
damages in a suit brought by any person who bought securities issued pursuant to that registration
statement.
o Because of this
Investment bankers expect additional compensation
This Section ultimately falls on the investor.
o No reliance needed, no causation or injury neededDETERRENCE
o Say you buy shares and they are just in a big pool of shares
Some shares are not part of this IPO, some are from a secondary market
99.985% are from IPO
BUT because there is the tiny piece not
TAKES YOU OUT OF STANDING FOR 11CANNOT TRACE IT BACK
MUST BE ABLE TO TRACE IT BACK FOR 11
o STANDING
Anyone who purchased the offeringcan be
Who can be a ?
Issuer, CEO, CFO
Anyone who signs the registration statement 6(a), 11(a)(1)
Underwriter 11(a)(5)
Directors, or about to be (named in the statement), 11(a)(3)
Experts, like accountants, maybe lawyers, whoever certified part of the registration
statement
Anyone who CONTROLS any of these above people are liable 15
o LIMITS
must not have been aware of the truth when they bought
Statute of limitations
1 year after discovery of the falsity or omission was made or should have been made
No more than 3 years after the security was offered to the public
has to show that the securities purchased were issued pursuant to the registration statement in
question
o ISSUER is strictly liable for the material misrepresentations or omissions
o Due Diligence is not the defense for the ISSUER, it is for:
Signers of the registration statement
Directors of the issuer
Accountants and/or experts preparing registration statement
o
The underwriters
Escott v. BarChris Construction
A factor
Buys receivables for cashnegotiates with businesses, sometimes guaranty
BarChris needs a factorthey need cash for a construction project of Bowling Lanes
Misrepresentation in registration statement
Guaranty of 100%, not 25%--lied about liabilities
$400k in unpaid loans from OFFICERS of the comp
o Show their ability to raise capital, lack of real creditors, never told
Overstate Net Profits
Misstated future prospects by making up companies
Material misrepresentations in financial statements
Lied about use of offering proceeds
Based its determination that the underwriters had not established a due diligence defense in large
part on the fact that the lead underwriter delegated much of its diligence responsibility to counsel
-- who merely took documents produced by the issuer and statements made by the issuer at face
value, and made no independent verification.
There must be an investigation, AND, after such investigation, no reason to doubt the accuracy of
the registration statement.
What if I figure out the mistake
But filed, then amend the next day
You stopped the timeanyone who bought in defective period would still have 11those that
bought after the amendmentCANNOT
You are responsible for what you EXERCISE CONTROL OVER
If you own 70% of companythats a lot, controlling person
If you just own some sharesNO CONTROLno liability
11 ELEMENTS
(1) A material misrepresentation or omission
BUT, DEFENSEif knew of the liesno liability
(2) NO SCIENTERSTRICT LIABILITYeven if you didnt mean it
(3) NO RELIANCE NEEDED
DAMAGES
(4) HAVE TO SHOW A LOSS
IF caused by something else not in registration statementNO GOODDEFENSE
NEGATIVE CAUSATION
If customer has already received a 12 month accurate financial statementDEFENSE
Due Diligence Defense
Akerman v. Oryx Communications
Oryx made an error in their financial statements, and the prospectus overstated earnings,
when they reported it to the SEC their stock went down, but when they disclosed it to the
public, it went up.
Stockholders bring suit
DAMAGES
o Entitled to recover the difference between the original purchase price and the
value of the stock at the time of suit.
o Defendant can REBUT by showing that other factors contributed to the
depreciation in value other than the material misrepresentationNegative
Causation
o FOR NEGATIVE CAUSATION (Defense)
Look to market reaction
Look to size of market for these shares

Look to many factors, are there OTHER FACTORS
s need clear evidence that this was caused by the material
misrepresentations or omissions in the registration statement
o HERE, state that misstatements were not likely to cause a stock price decline
AND the stock went UP
o THEREFORE,
s met their burden, by 11, by establishing that the misstatement was
barely material and that the public failed to react adversely to its
disclosure.
DAMAGES--11
Based upon the difference between the amount paid for the securityso long as that does
not exceed the offering priceand:
o Its value at the time of suit,
o The consideration received on resale if the security was sold before the suit, OR
o The consideration received if the security was sold after the suit, but before
judgment, IF that would produce a lesser measure than that stated in (a).
o NO liability if the issuers stock goes up after the offering
o In Shelf Registration Context
WorldCom Case
Telecommunication company bankruptcy
o When the company is performing a shelf takedown, not the same notice
Rule 176Write the elements down, pg. 201 of supplement
Underwriters are in a short period of time with shelf takedown
o STILL need to do a REASONABLE investigation into the info out there
o Like analyst reports, have to look beyond mundane answers and look to areas of
concern, RED FLAGSprobably good if you do that
o Particular Expertise in an areaHIGHER standardRULE 176 embraces this
In WorldCom Case the executive was held to this standardhe only relied on the statements of
his EEsbut then he settled out of pocket, knew this wasnt enough
o Pg. 507 problem 9-1
1ST QUESTION
Where would this misrepresentation be in the registration statement
Was it in a part in which the accused had CONTROL OVER
ND
2 QUESTION
WAS IT MATERIAL
o Was it important to a reasonable investor
o Probability v. Magnitude
o What would you need to know
What other info is out thereif you should know about it
Have to see if there is PUBLIC INFO
What Public could ACCESS
RULE 176were there red flags?
Should check into rumors
o Problem 9-2
FWPs
11 liability is ONLY for misrepresentations or omissions in REGISTRATION
STATEMENTS, NOT FWPs
Negative Causation
o Loss NOT caused by material misrepresentations or omissions
o NOT recoverable
o Akerman Case
12(a)(1)
o Pinter v. Dahl (1988)
Case about the sale of unregistered securities
Pinter was a registered securities dealer and he was going to sell leases for oil fields to Dahl.
Dahl then told his friends about it and they also invested, none of his friends met Pinter
Each security was signed stating that they are not going to be registered under the Securities Act
The venture failed, Dahl brings suit and Pinter brings counterclaim stating that the Dahl was the
seller of the securities when he told his friends about it
ISSUE: whether Dahl was a seller of securities for purposes of 12(a)(1)
STATUTE LANGUAGE
o Any person who offers or sells a security in violation of the registration
requirement of the Securities Act shall be liable to the person purchasing such
security from him
Includes those that offer or sell unregistered securities
Imposes liability on those who actually pass title, but can they extend to
Dahls case
Court says NEED MORE EVIDENCE
o The statute includes the phrase solicitation of an offer to buy which brings in
those who engage in solicitation
o Solicitation is the stage at which an investor is more likely to be injured, that is,
by being persuaded to purchase securities without full and fair info.
o BUT, solicitation is only liable to those that solicit for VALUE, for their own
financial benefit, NOT if they just want to assist a friend
o FURTHER EVIDENCE is needed to see if he was assisting friends or notwhat
was his motivation
o 12(a)(1)any person that sells or offers to sell in violation of 5 is liable and they get RESCISSION.
Pinter v. Dahl shows what it means to be a person that sells or offers to sell.
Was there a public offering,
Was 5 violated,
Was their offer or sale,
Was it made by this
What was their motivation?
o Scope
There is NO state of mind element: this is strict liability
NO requirement that the establish injury
Just show:
Violation of 5
The facilities of interstate commerce were involved in the offer or sale of the
The has made adequate tender of the security if it is still owned
The action is within the SOL of 13.
MEANT TO DETER
Remedy
RIGHT TO RESCISSION
o If it is still ownedconsideration paid plus interestRESCISSION
o If disposed of the securitydifference between the price paid and the amount
received in the sale
12(a)(2)
Extends rescissionary remedy to situation where a person offers or sells a security by the use of an
instrumentality of interstate commerce by means of a false or misleading prospectus or oral
communication.
o (1) Any person who offers or sells a security (or a controlling person)
Controlling person is a fact argument
o (2) Interstate commerce
o (3) material misrepresentation or omission
o (4) in a prospectus/oral communication
Remedy
RIGHT TO RESCISSION
o If it is still ownedconsideration paid plus interestRESCISSION
o If disposed of the securitydifference between the price paid and the amount
received in the sale
o DEFENSE
Due Diligence Defense Did not know, and in the exercise of reasonable care could not have
known, of the falsity or omission
Negative Causationloss was caused by something OTHER than the misstatements or omission
in the registration statement
Statute of Limitationsone year of reasonable discovery of the fraud, MAX of 3 years
o Gustafson Case
The issue was the stock purchase agreement
Offering and confirming salelooks like 2(a)(10) prospectus
s want full rescission
Court does not want such a broad view of a prospectus
Look to 10info required in a prospectus
The same info required to be in a registration statementneed for public offering, thats
why people do private offering
So the judge looks to see if there is an obligation to send a prospectus
o Meaning if it is a public offering
o He limits 12(a)(2) to ONLY PUBLIC OFFERINGS
o Hyer v. Malouf
trying to get s to invest in real estate projects
But it was a Ponzi scheme---ownership was never conveyed, no construction, gave their
investment to other investors
NO registration statement
Is this a public offering for 12(a)(2)
This is importantif allow to escape this then they can circumvent rule to register
Pg. 528 is the factorsdiscovery needed on these
o Oral Communications
Restricted to communication in connection to a prospectus
o FWP
Deemed public because it is related to the public offering
o Pinter standard applies to 12(a)(1) AND 12(a)(2)
RULE 159Aif you sell as an initial offering you are considered an issuer
o Who is an underwriter 2(a)(11)will have to registerNO exceptions
(1) purchase from an issuer with a view to distribute
(2) offers or sells for an issuer in connection with a distribution
(3) Directly or indirectly participation in above
Secondary Distributions
o Considering when sales of securities by NON-issuers are within the reach of 5
o
o
o
o
o
Issuer sales are known as primary offerings

Sales by others are referred to as either trading transactions or secondary distributions
Trading transactions ARE exempt from 5
Secondary distributions are NOT.
The Underwriting Concept and Sales for an Issuer
4(1) is the central exemption of the Securities Act
It exempts transactions by ANYONE except an issuer, underwriter, or dealer
Issuer and dealer are straightforward, underwriter is the gray area--2(a)(11) is broad
Some broad roles that qualify someone as an underwriter:
Any person who purchases from an issuer with a view to the distribution of a security; or
Any person who offers or sells for an issuer in connection with a distribution; or
Any person who participates or has a direct or indirect participation in the activities
covered by 1 or 2 above; or
Any person who participates or has a participation in the direct or indirect underwriting
of any such undertaking.
The purchase, sale or underwriting activity must be in connection with a distribution.
Gilligan v. SEC
Held securities for 10 months, the publishing company he was holding stock in was not doing as
well as he hoped, he sells them
Is he an UW
YES, this is an investment purpose
This is a View to Distribution because he was seeing how well he did, did bad, sells
LOOKING AT:
Timing
Investment Intent
Changed Circumstances (very rare)
Old Ruleif someone held it for 3 yearsNO view to distribute
NOWBenchmark is 2 years for Resale
If notyou are an underwriter because new guy does not have the same info you did when you
bought
They look atwhy are you selling at this time
DISTRIBUTION = PUBLIC OFFERING
4(2)Sophisticated Purchasers NOT a public offering
Can fend for themselves
Random peopleyes it is a public offering
Problem 6-4, pg. 350
Private placementwants to resale
CAN ONLY RESELL to
(1) Sophisticated Buyers
(2) Intrastate
(3) Accredited Investors
IF SO, then NOT a public offering and NO 5
Problem 6-5
Already existed in over the counter marketbut he bought it in Private Placement, now he wants
to resell it on the public market
NO GOODNO Disclosure to buyersNOT registered
IF Registeredcan sell to ANYONE
SEC v. Chinese Consolidated Benevolent Association (1941)
Corporation was formed for benevolent reasons and they URGED Chinese people in NY, NJ, and
CT to purchase Chinese government bonds, they accepted funds from people and delivered them
to the Bank of China in NYC.
At the time, Japan was invading China, trying to get money
They received NO COMPENSATION
Also, NO registration statement was ever made for the bonds advertised for sale
ISSUE:
Is this corporation an underwriting for the Chinese Government who is the issuer
Pinter v. Dahl
o If person solicits for the benefit of the issuer they can be liable EVEN if they are
not compensated.
o It is not for the benefit of the purchaser
RULE:
2(a)(11)underwriterany person who has purchased from an issuer with a view to, or
sells for an issuer in connection with, the distribution of any security, or participates or
has a direct or indirect participation in any such undertaking.
(1) Purchases from an issuer with a view to distribute
(2) Offers or sells for an issuer in connection with a distribution
(3) Directly or indirectly participation in above
HOLDING:
has violated 5(a) in connection with 2(a)(3) because it engaged in selling
unregistered securities issued by the Chinese government when it SOLICITED offers to
buy the securities for value.
They were doing CONTINUOUS SOLICITATIONone aspect
o Like if WSJ writes an article for them, its a onetime deal, not an UW
They were focused on the BENEFIT TO THE ISSUER
SOLICITATION
o Can come under this liability if is for compensation or not
o Chinese government does not need to authorize it
2 questions:
o Were the investors harmed?
Yes, no registration statement, NO DISCLOSURE
o Did the issuer benefit from the solicitation?
Yes, they were sold, they were transmitted
4(1) is for TRANSACTIONS
ARE THEY EXEMPT?
4(1)exempt transactions by ANYONE EXCEPT issuers, dealers, or underwriters
SO, are they underwriters?
o BELOW-- never acted for the Chinese government but only for the purchasers
of the bonds
o BUTthe AIM of the Securities Act is to have info available for investors
o THEREFORE,
A series of events were set in motion by the solicitation of offers to buy
which culminated in a distribution that was initiated by the . They ARE
underwriters.
o EVEN IF they are NOT considered underwriters
o The exemption was ONLY for trading transactions between individual investors
with relation to securities already issued and NOT to exempt distribution by
issuers
o HERE, the was participating in a transaction WITH AN ISSUER
o Reversed.
Purchase from an issuer
Among those included within Section 2(a)(11)s definition of UNDERWRITER is one who has
purchased from an issuer with a view tothe distribution of any security.
Includes
o The firm commitment underwriter
o Any purchaser of unregistered securities from an issuer who acquires the
securities with the intent to resell them to the public, even though he is not an
investment banker or even a full-time investor.
Control Persons
o If they arethey are ISSUERS
Informational advantage, power to force registration pursuant to 5
Health drink, CEO marketing it, shares to own executives and sophisticated investors
CEO 40% of it, a venture has 2%
They gave it out privately, now price is going up, want to resell on public market, who is
UW
2(a)(11)Issuer is one who directly or indirectly CONTROLS
o CEOinside info, has CONTROLthey are an ISSUER if resale
o VentureNO CONTROL, NOT AN ISSUER
o IF AN ISSUERNO 4(1) exemption
CANNOT use 4(4) exemption of unsolicited order, only for Brokers
Rule 144Safe Harbor for Resales of Control and Restricted Securities
o If you want to sell private offerings, go to this rule first
o The distinction between trading transactions and distributions is important because the former are exempt
and the latter are not
o RULE 144
Regulates the resale of 2 categories of securities:
Restricted securities
o Securities acquired pursuant to one of the transactions listed in Rule 144(a)(3).
Control Securities
o Commonly to refer to securities held by an affiliate of the issuer, regardless of
how the affiliate acquired the securities
If an affiliate acquires securities in a transaction that is listed in 144(a)(3), those securities
are BOTH restricted securities and control securities
A person selling restricted securities, or a person selling restricted or other securities on behalf of
the account of an affiliate,
Who satisfies ALL of Rule 144s applicable conditions is deemed NOT to be an
UNDERWRITER by 2(a)(11)
THEREFORE, may rely on 4(1) exemption for the resale of the securities
Must satisfy CONDITIONS:
o There must be adequate current public information available about the issuer;
o If the securities being sold are restricted securities, the security holder must have
held the security for a specified holding period;
o The resale must be within specified sales volume limitations;
o The resale must comply with the manner of sale requirements; and
o The selling security holder must file Form 144 if the amount of securities being
sold exceeds specified thresholds.
Chart on pg. 365.
o
Affiliates
Non-Affiliates
Reporting Issuers Holding Period
Minimum of 6 months
Minimum of 6 months, after 1 y

NO reqs
Non-Reporting Issuers Holding

Period
Minimum of 1 year
Minimum of 1 year
Current Info Requirement
All transactions
From 6 months to 1 yearPubl

needed from REPORTING issu
Volume Limitations
All transactions
NONE
Manner of Sale Requirement (g)
All transactions need a broker
NONE
Notice (h)
File Form 144 for All transactions
NONE
o
o
What if a non-affiliate held for 6 months, but it was issued 14 months before
144(d)CAN SELL, they have been out there, can be tacked on because she is non-affiliate
If CEO
DOESNT matter how long
They are an affiliate
HAVE TO BE CURRENT WITH PUBLIC INFO
Is it a Restricted Security in Rule 144look to Rule 144(a)(3)
o
o
Are they an Affiliate (Control Person) or Non

Even if not a restricted security, Affiliates still subject to the limits
Are they Reporting or Non
When did the Holding Period Start144(d) tells you
1st
nd
3rd
4th
5th
o Now work it through the chart

Control Person of Theta
o They do weekly trading volume of 150k
o 18 million shares outstanding
o She sells 150k in 3 months, 50k each month
o 144(e)it is cumulative of last 3 months, ROLLING, AND the GREATER OF RULE
Cannot sell more than the GREATER OF
1% of shares outstanding (here, 180k)
Or, Average Weekly Trading Volume (here, 150k)
THEREFORE, greater of, is 180k
In first 2 months, sells 100k (50 each)
THEN, in the 3rd month, can sell 80k
o What if she gives 120k of the shares to Cornell
It is an AGGREGATE rule, therefore, Cornell must abide by the 180k rule and can only sell 60k
o 144AQualified Issuer BuyersQIBS
Automated system on PORTAL
Can resell right away, give you liquidity
It is a safe harbor for registration requirement of 5 for resale of a restricted security to QIBs by
persons OTHER THAN THE ISSUER of the security
Intrastate Offering
o 3(a)(11) exempts intrastate offerings from the registration requirement
o 5 ONLY applies to Interstate Offerings
o ALL of the offerees must be RESIDENTS of the State
Mere presence is NOT enough
Rule 147(d)the Safe Harbor
If principal place of residence is in that state=Resident of that State
o If some are interstate and some are intrastate, have to look if the shares are INTEGRATED, like different
class of stock, if they are different, than probably not integrated
Have to make the argument, because if they are integrated, NO EXEMPTION
o Intrastate offering on January 1, last sale on March 1
A, purchases on Jan 15, wants to sell out of state, when can they?
147(e)time starts to run on last salethen 9 months
After that, can sell out of state without destroying the intrastate exemption
Issuer can make it a Restricted Sale if scared of destroying
Good Faith does not matter, if purchaser sells to OUT, you are screwed
SECs General Counsels Opinion of 4(2)FACTORS:
o Number of offerees
o Relations of offerees to each other and issuer
o Number of units
o Size of offering
o Manner of offering
o Ralston v. Purina
Giving to key EEs CS of $2 million
Who can invest in a non public offering?
Those that can fend for themselves
Therefore, Ralston adds a SOPHISTICATION factor
Burden of proof is on those trying to use the exemption
If you fail at getting the exemption of 4() then fall victim to 5
Sophistication
Access to info
Experience
Education
Income and net worth
Regulation D
o Rule 504
NO disclosure
NO sophistication required
BUT aggregated offering price is 1 million (501(c))
o Rule 505
Can do 5 million aggregate
HAVE to disclose to NON-accredited
NO sophistication required
o Rule 506
NO limit of aggregate offering price
HAVE to disclose to NON-accredited
SOPHISTICATION REQUIRED
Has to be less than or equal to 35 non-accredited investors and disclosure

Who is an accredited investor?
o 501(a)(5)
1 mil net worth
Have to do own investigation into clients assets, cannot take their word
for it
It is anyone who falls within any of the categories laid OR who the
issuer REASONABLY BELIEVES fall within
HYPOS
Jan 1 to April 1505 of 5 million
Can start on April 1 of next year again
BUT have to look at each month
Jan 1 mil, Feb 3 mil
Jan of next yearCAN ONLY DO 1 MIL
It is a Rolling Basis
Jan 1 to June 1 505 of 4.5 million, 5 million is the limit
AND on May 1 start a 504 offering1 mil is the limit
Want May 1 to July 1 750k
Have to make sure ONLY 500k between May 1 to June 1 because 5 mil is the limit
The two can count for each other
Aggregation is just a cap on the value you can raise on a 12 month basis
Integration is about if it is about the same offering or not (502(a))
Has to comply with aggregation rules first
HAVE TO LOOK AT AGGREGATION AND INTEGRATION
THEN
Single plan of financing?
Same class of securities?
At or near the same time?
Same Consideration?
Same purpose?
502(a) if there is a 6 month gap in raising nothing, can make an argument that they are not the
same offering
BECAUSE offers and sales made 6 months before it or after the completion are NOT the
same offering
+/- 6 months means not the same offering, safe harbor applicable
Must be NO other Regulation D offerings
And then after all of the factors, must meet aggregation requirements
Healthy drink wants 5 mil over 5 years
Doesnt want disclosure to anyone, doesnt want to care about sophistication and doesnt
want to call anyone504 offering, 1 million
10 months 1 mil, then 2 month hiatus, are they OK, YES, nothing over 1 mil
AGGREGATION OK1 million over one year
Integration?
o NO, they are both the same and NO 6 month safe harbor
o Anything started after the 10 months ended and before 6 months, ruins
integration
o Because it started before 6 months after the end of the first one, therefore,
integrated!
o
o
10 million, uses broker dealer that has relationships with 70 non-accredited, but sophisticated, to
raise 9 million
Cold calls to 2 wealthy investors and sell 1 million to them
For the 1 million one
o Can do it with 504
For the 9 million one
o NO 505over 5 million
o 506?
NO MORE THAN 35 non-accredited
So SPLIT IT UP
A 506 for 4.5 million from 35 non
And then do it again with the other 35
So AGGREGATION IS OK
504 and 505and violations of 5 are aggregated TOGETHER
504 and 506 are NOT aggregated together!
So it would be ok under aggregation, too easy to get around Regulation
D
o BUT HAVE TO LOOK AT INTEGRATION!!
YES, single plan
YES, same class
YES at the same time
YES, same consideration
YES, same purpose
THEREFORE,
They are integrated to be 10 million and a violation of 5
If we did not have this integration rule, aggregation would not be
enough to stop their violations
o Violations
Over 35 non-accredited
General solicitationcold calls and do not know
if they are sophisticated
Should have 506 offering to 35, then it would end, then 6 months after
the end of that, start the new 506 offering
When the last money is received=end of offering
Would have to space out the 1 million 504 offering as well.
MUST STILL LOOK AT AGGREGATION RULES
o Always look at Aggregation AND Integration AND then maybe back
Jan 1 of 2010 Feb 1 2010, 505 offering, preferred stock, through brokers, that have pre-existing
relationship, 5 mill, 30 non-accredited investors, complies with all rules (disclosure), to fund
facilities
Aug 1 201010 million of bonds 506 offering
o New marketing campaign, to fund marketing campaign
505, NO Aggregation problem because nothing was raised before
Then 6 month safe harbor, OK under integration, 6 months before 506
o EVEN IF within 4 months,
NO integration, NOT THE SAME PURPOSE, NOT the same class
506, NO aggregation problem, unlimited amounts
o Integration, but it was after 6 months, but even if, same as above
Jan 1, 504 offering, 1 million, common stock, 10 non-accredited and unsophisticated, pre-existing
relationships, closes on the same day, all cash, all to fund facilities expansion
On March 1, 506 offering, 10 million, common stock, cash, expansion of facilities, 35

non-accredited purchasers
November 1, 505 offering, 4 million of common stock, 25 former law students, not
sophisticated BUT are accredited and 25 non-accredited
o To fund a new office building
504 and 505 are aggregated together, 5 million, they are OK, 506 is not aggregated
Aggregation is OK
Integration?
o 504 and 506 (Jan, March)
ALL of the factors, very similar
They will probably be integrated with together, within 6 months
They will exceed non-accredited, no disclosure
NOW, they will hurt each other, 504 is now 11 million, violation
of 5
BUT still no integration with the 505, so the 505 is OK
But HAVE TO GO BACK TO AGGREGATIONaggregation looks at
12 months, not 6 months like integration
505 aggregated with 504 and violations of 5
11 million dollars worth, OVER 505 aggregation limit
GOODBYE AGGREGATION
o Always look to the ANCHOR OFFERING FIRST
HERE, 504 offering was first
o If violation
Right to rescission
There is a Good Faith exception, but very difficult
In the Matter of Kenman Corp
Two limited partnership offerings, Kenman was the GP, Kenman Securities was the UW.
Info on each offering was mailed to an unknown number of persons
1 page cover letter
4 page promotional document
Reply card to request a personal sales meeting
Chosen from 6 sources
People that participated in prior offerings with them
Executive officers of Fortune 500 companies
People that invested 10k or more in real estate offerings
Physicians in CA
Managerial engineers
Presidents of certain companies in Morris County, NJ
Rule 502(c)
Precludes the offer and sale of securities by any form of general solicitation or general
advertisement
Proscribes general solicitation activities by the issuer OR ANY person acting on its
behalf
No action letters from SEC show Difference between limited and general communications
Limited ARE permitted, general ARE NOT
Emphasis on a pre-existing relationship in order to have the opportunity to evaluate the
suitability of offerees as purchasers.
Broker-Dealer
A pre-existing relationship between a qualified offeree and the broker-dealer (rather than
the issuer) will suffice to render communication limited under Rule 502(c)
Fraud in connection with the Purchase or Sale of a Security
o Rule 10b-5
The centerpiece antifraud provision under the federal securities laws.
Must at the very least establish two things:
(1) There must be fraud, whether in the form of an affirmative misrepresentation or some
sort of device, scheme or artifice to defraud.
(2) That fraud must be in connection with (3) the purchase or sale of a security
o Link between s fraud and purchases or sales of securities by the victims
o SEC v. Texas Gulf Sulphur Co.
False corporate publicity was disseminated in a manner reasonably
calculated to influence the investing public
o BUT, it is NOT necessary to show that the purpose of the misleading statement
was to influence investors
ONLY that a material misstatement was disseminated in a medium on
which investors rely
Need not be a person to whom it was specifically directed
(2) in connection with
o Views of the court
Has to touch upon the sale of the security
Superintendent of Insurance v. Bankers Life Case
Foreseeable reliance
Semerenko Case
Investment aspect that is essential to scheme
o Just defraud someone out of their money, to convince them to buy me a car,
and then sell that car and buy IBM stocks
NOT in connection with
To Have standing to sue, need to purchase or sell the security
o NOT POTENTIAL PURCHASES
o SEC v. Zandford
In 1987, Charles Zandford, a securities broker, persuaded William Wood
to open a joint investment account for himself and his mentally retarded
daughter. The Woods gave Zandford discretion to manage the account
and a general power of attorney to engage in securities transactions
without their prior approval. After Wood died, all of the money that he
had invested was gone. Subsequently, Zandford was indicted on federal
wire fraud charges for selling securities in the Woods' account and
making personal use of the proceeds.
The securities broker's conduct was in connection with the purchase or
sale of any security.
Noting that Zandford's practices were not independent events,
the Court found that each sale was made to further his fraudulent
scheme and that each was deceptive because it was neither
authorized by, nor disclosed to, the Woods.
Therefore, Justice Stevens concluded, the stockbroker's breaches
of fiduciary duty were in connection with the securities sales,
within the meaning of the Securities Exchange Act of 1934,
because the securities transactions and breaches of fiduciary duty
coincided.
o Is getting someone to spend money to buy something, is it a securities transaction
NO, it is something you can use

If the proceeds of a fraud are used to buy something that you can use and
is not a security
Therefore, NOT in connection with
Here is a million dollars, invest my money broker, and he does, later, he says
liquidate my money, but the broker steals the money
NOT in connection with
CEO, making statements about companys prospects saying they are great when
he knows that they are not true
There is no purchase or sale of a security
But people rely on it to buy
This is Reasonably Foreseeable
YES, Fraud for 10b-5
Have to distinguish from Puffery or saying we are optimistic or tongue
and cheek
o
o
Standing to sue
Standing to sue in private actions under Rule 10b-5 is limited to actual purchasers or
sellers of securities (Blue Chip Stamps Case)
Scienter
Intent or knowledge of wrongdoing
Its subjective intent, but you can prove that with a clear statement to deceive
Ernst and Ernst v. Hochfelder (1976)
Private actions under Rule 10b-5 must show that the acted with scienter in order to
succeed
In this case, the s just based their argument on lack of diligence, meaning a
negligence claim
So no goodhas to be a mental state embracing intent to deceive, manipulate or
defraud.
Tellabs v. Makor Issues & Rights (2007)Supreme Court
As a check against abusive litigation by private parties, Congress enacted the Private
Securities Litigation Reform Act of 1995 (PSLRA)
The Act requires s to state:
o With particularity the facts constituting the alleged violation, AND
o The facts evidencing scienter
Congress states that this has to be proved that shows a strong inference
that the acted with scienter
Lower court says that strong inference standard is met if a reasonable person could infer
that acted with scienter
COURT SAYS NO
o Roadmap for Scienter:
o First, as with any motion to dismiss, the court must accept all factual allegations
in the complaint as true.
o Second, the court must consider the complaint in its entirety, as well as other
sources courts ordinarily consider when ruling on motions to dismiss -documents incorporated by reference and other matters of which the court may
take judicial notice.
The inquiry is whether all of the alleged facts, taken collectively, give
rise to a strong inference of scienter.
o Third, in determining whether the pleaded facts give rise to a "strong" inference
of scienter, the court must take into account plausible opposing inferences. The
inference of scienter must be cogent and compelling, thus strong in light of other
explanations.
In sum, the court 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?
Has to be cogent and compelling
NOT, plausible
They must have known with compelling certainty
o Vacated and Remanded
Makor Issues & Rights v. Tellabs (2008)On Remand Now
ISSUE
o How likely it is that the allegedly false statements were the result of merely
careless mistakes at the management level based on false info fed it from below
o OR
o An intent to deceive or a reckless indifference to whether the statements were
misleading
The product at issue was the companys FLAGSHIP product
o Not knowing everything about it and not knowing that the info they were being
fed was false is extremely unlikely due to its importance
Reversed, there is Scienter
Problem 12-3 pg. 675
Problem with how they are recognizing revenue
Coming in above of analyst projections
Coming in above competitor
CFO and outside auditor agrees to financial reports
CEO signs off on it
Comes out that financial reports were wrong on purpose
Is CEO liable for fraud?
o Do not need to intend to hurt investors
o JUST need to be reckless and knew it was wrong
Reckless, knew it was wrong?
o All the CFO and outside auditor say is that they are comfortable with the reports
o CANNOT take these at face value if you are the CEO,
o CEO never spoke to the auditors
o Like Tellabslook to significance
The CEO should have known, it was very significant to the company
Needed to perform due diligence due to its significance
It would definitely pass the pleading stage under the Tellabs Standard
The Tellabs Standard
Do the alleged facts to a strong inference of scienter
o Must be Cogent and Compelling
Problem 12-4
Negotiated Merger
o Want to look higher than they really are
o BUT, the other company has to take a close look to see if you are really worth
that much
So that can show that they were true with their reports
Insider Trading
o No apparent explanation for it but just a few people
Would it show fraud, not on its own, no one is going to go along with fraud just
for a few people
Unnamed sources says the company due that they were wrong
o Maybe it is an EE saying it but dont want to lose their job
Individually not enough, but what about collectively
o How plausible that the defendants didnt know
o If it is hard to believe that they didnt know
o This is the standard, but in the end has to be cogent and compelling
What if lower level EEs gave false reports to Upper Level EEs
o Have to look at the manner in which the false info was given
o If it is so absurd, then you must look into it
Scienter
(1) Clearly stated intent
(2) Know that something is false when you say, and it is foreseeable that an investor
would rely on these false statements, but not necessarily having a bad intent
(3) Recklessness
Fraud 10b-5 (Bad Act, Scienter, Reliance, This bad act caused losses)
(1) Material Misrepresentation of Fact
(2) Half Truth by omissionmakes it materially misleading
(3) Failure to disclose informationwhere duty to disclose
o (1) Statutory Requirements
Registration statement
Prospectus
Periodic reports (10-K, 10-Q)
Report unusual events or specified events from form 8-K (where a
company MUST disclose)
o (2) Failed to CORRECT a material misstatement when it was false when it was
made
CEO says earnings for 1st quarter were 1.6 billion, 2 months later, due to
a bunch of accounting errors, the earnings were really 1.2 billion
Gallagher Case
YES to correcting, NO to updating
This is WRONG when he said it, so HAVE to correct it
NOT to updating projections
When it is false when it is made, HAVE to correct it
If CEO says they have flu vaccines that will bring in 500 million
Next day, contaminated, only can get 100 million
Gallagher would say NO, it would be an UPDATE, do not have
to update
Was NOT FALSE when he made it
Have to disclose on periodic reports like the Exchange Acts says,
they will have to wait 3 months.
o (3) Must provide information to make otherwise statement not materially
misleading.
Statements that are true, but absent other information, will not be true.
Merger talks, say that they are in talks with merger that will bring more
revenue, drives up the stock price
Now it is off 2 days later
Gallagher would say NO, its updating
o
BUT, Time Warner Case (different view)

o Pg. 687, footnote 4 and holding
o It is now materially misleading and people are still
relying on that information
o You are omitting material information, it is a HALF
TRUTH
o When a corporation is pursuing a specific business goal
and announces that goal as well as an intended
approach for reaching it, it may come under an
obligation to disclose other approaches to reaching the
goal when those approaches are under active and
serious consideration
o SHOULD follow the Time Warner standard, because it is
safer, more disclosure.
True statement that we have merger talks, disclose it
Secret, not disclosed, that all these merger talks are dependent on my
ability to make a vaccine that are not looking good, probably not going to
happen, do not tell them this
This is a HALF TRUTH
Have to provide information that will make the disclosed
statements wholly true.
EVEN GALLAGHER would say you cannot make a half truth
o If you knew this when you said the other thing, you have
to provide this as well, this is not just simply updating.
Gallagher says NO continuous disclosure, Time Warner DOES bring
about a rule that looks like continuous disclosure.
(4) Deceptive Device
o Need RELIANCE
o (1) Face-to-Face
Where there is a misrepresentation, yes, a REASONABLE person would
have reliance
But if there is an OMISSION
Ute Citizens Case
o Positive proof of reliance is NOT a prerequisite to
recovery
o All that is necessary is that the facts withheld be
material in the sense that a REASONABLE INVESTOR
might have considered them important in the making of
this decision
A reasonable investor would look at it as important to making
the investment decision.
o (2) Fraud on the Market Theory
Basic Case
NO traditional reliance, I looked at something you said and I
relied on it, NOT the case here
Statements that no merger talks, two separate times that no
merger, there was a merger
The misrepresentations were BAKED INTO to the price
AND the s bought the stock at this price that was ALTERED
by the misrepresentation; this is Fraud on the Market.
Court creates a Rebuttable Presumption of Reliance
o
o
Rule 10b-5
Fraud
If you can show that a particular investor CLEARLY

relied on something else that was NOT your
misstatements, can break the link of liability
If you can show that the market makers KNEW about
this information and they priced it accordingly, if you
can get info from them and they were recognizing the
truth, then you can REBUT.
Bad Act/Material Misrepresentation or Omission

Scienter
Reliance
Loss Causation
o Approximately caused the economic harm to the
NOT responsible for other factors
Like NEGATIVE CAUSATION
has the burdenunlike 11
Of proving the bad act caused the loss is seeking to recover
The Bad Act actually caused the harm
o Why have this rule:
Compensatory for victims
But there are limits to this, have to show loss causation, do not
want frivolous lawsuits
Deterrence
OVERALL: Integrity of the Markey
AUSA Life Insurance v. Ernst & Young
o Bond holder s and the JWP company went bankrupt and the bonds were
worthless, looking to sue somebody
o Suing E & Y because they put out financial statements about this company.
o The CEO of JWP was good friends with the auditor from E & Y, looked the other
way while the CEO did whatever he wanted
o JWP had misstated financials and they were buying up companies and then they
bought up Businessland company and that company was losing 10 million dollars
a month
o So the issue is Foreseeability
The concurring judge says NO it was not material to the bondholders
When you are a bondholderis this company solvent and pay
me dividends and they will pay my principal in the end
Bondholders do not care if the stock goes up or down, just
worried about paying back their debt
So this should not matter to bondholders like it would to equity
holders
The dissenting judge says YES, it was clearly material, it relates to the
auditor INTEGRITY
If people would know these things, they would not have invested
in this venture
Misrepresentations were about the quality of the firms
management and auditor AND the firms current incentives with
regard to risk aversion
Every time someone makes a bad judgment, that goes towards

their overall judgment into the future, seems pretty intrusive
The majority
Look to the FORESEEABILITY of the consequences of the
misrepresentations that would lead to the harm to the investors
Have to plead the actual misrepresentations caused the loss
Goes back to the issue of Materiality
Each time you are presented with a materiality questionlook at was it
material in this situation with these people.
ALL three come to a different approach for the same facts
Dura Pharmaceuticals v. Broudo
o Did they adequately PLEAD loss causation
o Misrepresentations
Anticipated growth in drug sales
After disclosing47% price drop
Did NOT adequately plead SCIENTER
o Were not misrepresentations at the TIME THEY WERE
MADEnot intentional
o No evidence that it was false when it was made
o Could show reliance and causation
Only announcement being made, obviously the
market felt strongly about this
Approval of a new spray device
8 months later, no FDA approval
Not too much of a market reaction
o Lower court says all you have to show that if the stock price was INFLATED AT
THE TIME the stock was purchase
o Supreme Court says
The harm suffered is NOT at the time of purchase
HAVE TO SHOW CASUAL CONNECTION
o HYPO
Spray device
Misrepresentation we show
We state that this is material has a 25% affect on future earnings
Positive news simultaneous
CAN show the casual connection, BUT NO LOSS, the stock did
not move
o ANOTHER
What if after disclosure Spray Device, the price went down and stayed
down
Would have CASUAL CONNECTION AND A LOSS
o HYPO
Inflated financial statements, makes the stock rise
Truth comes out, stock goes down
Can show as the result of the truth coming out, the market clearly
reacted, the reaction was based SOLELY on this statement, the economy
was stable and this was the only statement
The true financials now makes the company pay higher interest rates,
more accelerated payments on debts
PROBLEM
Growth based on phone line installations

Correction saying the earlier ones were overstated and that future earnings will be
lowered
o Based on this, stock goes down
PROBLEM FOR
o Which one caused the loss
o The correction or the future earnings projection
o Companies should give all bad news together, harder for to show loss
causation
o DURA makes it hard when multiple causes of loss causation
In connection with
Purchase or sale
WHO CAN YOU SUE
o 11 liability
U/W and experts
o 12 liabilkity
Pinter v. Dahl, even if you help them
o Regulation D
o Rule 144
Unsolicited broker transactions for resales
o Third parties play a role
o Primary Violator
Commits the act proscribed by the statute or rule
Actually making the false statements and know that they are false when making them
o Secondary Violator
Assists or supports the primary violator or is liable because of a relationship with the violator
o Central Bank of Denver v. First Interstate Bank of Denver
17(a) the SEC has the authority to go after people even if they do not have Scienter or Reliance
10b-5nothing about Aiding and Abetting
Central Bank uses this to say NO
NO aiding and abetting in a private action under 10b-5
SEC can bring it under 10b-5
20secondary liability on CONTROL PERSONS brought by the SEC
o Stonebridge Investment Partners v. Scientific-Atlanta
Charter paid $20 dollars more to Motorola and Scientific-Atlanta for each box and in return, get
$20 worth of advertising, basically it was a wash
SA just booked this normally, BUT Charter booked the advertising revenue currently BUT
deferred the expensesBOASTED their books
Suppliers had no say in supplying this information, but had to know something was up,
this transaction makes no sense
If the supplier WAS making direct misrepresentations about Charterwould be primary
violator
If the supplier paid someone else to say themSTILL liable as a primary violatorthey
are DIRECTED them
If supplier tells a writer false information, knowing that it would go out to investors
o YES, making a false statement and know it was false when I said it, Scienter
foreseeability
If supplier is SILENT but still assists Charter to falsify scheme
o THIS IS THE STONERIDGE CASE
o That is NOT enough for basis of liability
o
o
Wright v. E & Y
Press Releases from BT, BT got their information from E & Y
No endorsement (final audit was not done) by E & Y, no direct statements to investors from E &
Y
No false or misleading statement was attributed to E & Y at the time of public dissemination
Central Bank says NO primary liability
If you draft and review and edited the information given to investors, then third parties would be
liable
Control Person and Respondeat Superior Liability
o 15 of the Securities Act and 20 of the Exchange Act hold control persons liable to the same extent as
the person they control
o Affirmative Defenses
15 of the Securities Act
The control avoids liability if it is established that the controlling person had no
knowledge of or reasonable grounds to believe in the existence of the facts upon which
the liability of the control person is alleged to exist
Mirrors 11 and 12(a)(2)
20 of the Exchange Act
Liability arises UNLESS the controlling person acted in good faith and did not directly or
indirectly induce the act or acts constituting the violation or cause of action
Having to show an inducement to act is a distinction to 15
Principal Difference Between the Two:
15
o No knowledge or reasonable grounds to believe that the basis of the violation, not
going to be held liable just because you are a Control Person
o If you do your job the right way, you will not be held liable
20
o UNLESS good faith and did not directly or indirectly INDUCE the fraudulent act
o Donohoe v. Consolidated Operating & Production Corporation (1994)
s claim that the s fraudulently lured them into investing in a project to drill oil wells on land in
which the s fully knew there wasnt any oil to be found
The main was Bridges, who defrauded everyone, whom is insolvent so the s are going after
Nortman and Berrettini on Control Person liability.
Lower court found for s but failed to address Control Persons liability
Harrison v. Dean Witter Reynolds Inc. TWO PRONG TEST for Control Person Liability:
FIRST
o The Control Person needs to have actually exercised general control over the
operations of the wrongdoer
SECOND
o The Control Person must have had the power or abilityeven if not exercised
to control the specific transaction or activity that is alleged to give rise to liability
N and B had significant control, BUT
Affirmative Defense of GOOD FAITH is available.
The Burden of proving Good Faith is on the
GOOD FAITH
o
If Charter over billed SA, then disclosed to public that over billed them, SA says
nothing, does not find it
Stonebridge case would say NO liability to SA, too intrusive, have to look into
every single mistake, and those mistakes will cause them to be liable.
o
o
o
o
Look at what the s could have done under the circumstances to prevent the
violation, and then
Ask whether the saware that they could take such measuresdecided not to
Have to look if there is a genuine issue of fact regarding the s recklessness
20 UNLESS
Good Faith AND Did not directly or indirectly INDUCE the acts
constituting the violation
HERE
o Among others, the s had substantial amounts of money invested and did
extensive research on Bridges
But this could look like a front and to lure investors
But the court did not look at that this way
Court said they made good faith efforts in carrying this out
AND they relied on Bridges technical expertise, therefore, did not have
the power or ability to control (second prong)
o THEREFORE, Good Faith represents an affirmative defense to the control
person liability here
o AFFIRMED.
Has to be something MORE than negligence, has to be AT LEAST recklessness
THEREFORE, the GENERAL RULE
o Actually exercise general control
o AND, Power or ability to control specific transaction in issue
OTHER CIRCUITS (OUR CIRCUIT)
Culpable participant standard
o Control person himself must either be an actor in the violation, OR
o Intend his passivity to further the violationfurthers the fraud (deliberate
inaction)
o Harder to prove
Brokerage House (most common way 20 is applied)
Good Faith defense has come to mean poof the brokerage firm has diligently enforced a
PROPER SYSTEM of supervision and control over its EEs
Non-Brokerage House
Requires proof the control person did not act RECKLESSLY
PROBLEM
Material False communications by an employee
NO monitoring system
EE acting on behalf of ER, Beta is arguably in trouble under Respondeat Superior
EE?
o Yes, material misrepresentations
What about the CEO?
o Actually exercise general control?
YES, she is the CEO
o Power or ability to control?
YES, could have set up a monitoring system
o Good Faith? Sure
o But Directly or Indirectly INDUCE the acts
o LACK OF MONITORING SYSTEM CAN GIVE LIABILITY
Pg. 779, Hendricksen v. Hendricksen
Ex-husband, worked for Smith Barney, using her account to

make more commissions and sent money from her account to
himself
Monitoring system was NOT implemented consistently
Rescission and Restitution

o Berckeley Inv. Group v. Colkitt (2006)
29(b)RESCISSION
A vehicle through which private parties may rescind contracts that were made or
performed in violation of other substantive provisions
Reliance is NOT required
No loss causation required
But, CANNOT be independent to the agreement, the violation has to be intertwined with
the agreement.
If it is with a registered dealer, then through 10b-5 it Has to be IN CONNECTION with
the Purchase or Sale of the Security
If they are NOT registeredthrough 5 you can rescind it by 29(b) because it must be
registered
Contract CANNOT be performed because of the violation
o OUTLINE OF THE ANTI-FRAUD PROVISIONS
o
Section 11
12(a)(1)
12(a)(2)
10b-5
StandingPurchaser o
(tracing)
Purchaser
Purchaser
Purchaser OR a seller
Defendants
o
Signatories, directors,
future directors, U/Ws,
Control Persons
Anyone who offers oro

sells the security
Anyone who offers oro

sells AND control
persons
Primary violators
(responsible persons,
control persons), NO
aiders or abettors (private
actions)
Elementsmaterial o
misstatement or omission
in a registration
statement, NO scienter,
NO reliance, NO
causation, just some kind
of losses or can ask for
rescission
Has to be a 5
violation
Material misstatemento
or omission, by means
of a prospectus in a
public offering, NO
scienter, NO reliance,
no loss CAUSATION,
but have to show loss
Material misstatement or
omission, device scheme
or artifice to defraud, have
to show reliance, have to
show loss causation
DefensesDue
o
Diligence (whistle
blowing defense), If
knew that this was false
when he got it, Negative
Causation for Damages
NO defenses absent o
any Safe Harbors,
violated 5 or you
didnt
Same as 11
Equal/comparative fault,
some of the courts allow
this, forward looking
statement safe harbors
Damages:
o
o
SoL
2 year discovery rule, 5

year maximum
To commit fraud
Insider Trading
o Any unlawful trading by persons possessing material nonpublic information, whether or not the trader is
truly a corporate insider
o Want confidentiality of sensitive market information
o And Informational Advantage
o Chiarella v. United States (1980)
Chiarella was a printer for a major printing company. They sent him down takeover papers to
print and he figured out the name of the company to be taken over and he used this inside
information to purchase stock in the new company
RULE
Silence in connection with the purchase or sale of securities may operate as a fraud
actionable under 10(b) and Rule 10b-5
o BUT, such liability is premised upon a duty to disclose arising from a
relationship of trust and confidence between parties to a transaction
HERE
Chiarella had NO prior dealings with the printing company
o He was not their agent
o Not a fiduciary
o Not a person in whom the sellers had placed their trust and confidence
o He was a COMPLETE STRANGER
To impose a duty to disclose here would be TOO BROAD and cannot be done without
proper Congressional intent
Misappropriation Theory was NOT adequately pleaded so it did not confront it
THEREFORE
When an allegation of fraud is based upon nondisclosure, there can be NO fraud
absent a duty to disclose
A duty to disclose under 10(b) and Rule 10b-5 does NOT arise from the mere
possession of nonpublic market information
ONLY commit fraud it you are under a duty to disclose
NO BREACH BY CHIARELLA
o Misappropriation Theory
Rule 14e-3
You have a merger/acquisitions or tender offer
Based on material non-public info that the person who is trading knows or has reason to
know is material non-public and knows or has reason to know that it was obtained from
the bidder, the target, or anyone connected with the two
With this rule Chiarella would be liable
o No breach of FD needed for this, doesnt matter about the relationship
o Just in possession bring liability
o Want to deter people from trying to get a hold of this information
o United States v. OHagan (1997)
OHagan was a partner in a law firm who was the counsel for the Grand Met who wanted to
takeover Pillsbury.
OHagan did not work on this case but used the information about the takeover to buy a ton of
shares of Pillsbury and profited when the takeover took place and Pillsbury stock went way up.
Misappropriation Theory (for PERSONAL use)

A person commits fraud in connection with a securities transaction (violating 10(b) and
10b-5,) when he misappropriates confidential info for securities trading purposes, in
breach of a duty owed to the source of the info
Premises liability on a fiduciary-turned-traders deception of those who entrusted him
with access to confidential info
So to violate 10(b), you need to have the chargeable conduct involve a deceptive device
or contrivance used in connection with the purchase or sale of securities
Deceptive device or contrivance
o Deception through NONDISCLOSURE is central to this
In connection with
o Without disclosure to the principal, he uses the information to purchase or sell
securities
A missapropriator who trades on the basis of material, non-public information gains
his advantageous market position through DECEPTION; he deceives the source of
the info and simultaneously HARMS MEMBERS OF THE INVESTING PUBLIC.
FIDELITY TO THE SOURCE
OHagan CONVICTED
If he would have told Grand Met he was going to buy shares of Pillsbury before, then it
would be OK, disclosure to the source
Tippers and Tippees
o Dirks v. SEC (1983)
Dirks received info from an officer, Secrist, an insider of Equity Funding that the financial
reports were vastly overstated as the result of fraudulent corporate practices
He want Dirks to disclose the information for the good of society
Neither Dirks nor his firm owned or trade any EF stock
Tells SEC, tells clients, tells the WSJ about this information
BUT, during his investigation, he openly discussed the info he had obtained with a
number of clients and investors, making them sell
o Avoided losses or made money (trades involved)
Chiarella says
NO duty to disclose where the person who has traded on inside information WHEN
o Not the corporations agent
o Not a fiduciary
o Not a person in whom the sellers of the securities had placed their trust and
confidence
NOTE
o Duty to disclose arises from a relationship of trust and confidence between
parties to a transaction
PRIOR TO TRADING
Trust or confidence
Agency Relationship
These obligations themselves are the ones that are violated
If I am an insider and there is material nonpublic information
o The corporation ITSELF may not have a duty to disclose it at that time
o BUT, if I want to TRADE on that information that is nonpublic
I MUST DISCLOSE IT BEFORE I DO SO
o TWO LIABILITIES
Classical Insider Trading
Violating a trust and confidence and traded to the detriment to YOUR

SHAREHOLDERS
Misappropriation Theory
You took info from someone who BREACHED THEIR DUTY
You took info which BREACHED YOUR DUTY
NEED FEDERAL LAWS BECAUSE OF THE WORLD WIDE NATURE OF
SECURITIES
BUT, a TIPPEE
o ASSUMES a fiduciary duty to the shareholders of a corporation not to trade on
material nonpublic information only when the insider has breached his fiduciary
duty to the shareholders by disclosing the info to the tippee and the tippee knows
or should know that there has been a breach
Without this, could circumvent securities laws by just tipping off to
someone
HAVE TO LOOK AT TWO THINGS:
o Whether the INSIDERS tip constituted a breach of the INSIDERS fiduciary
duty, AND
o Whether the INSIDER personally will BENEFIT, directly or indirectly, from his
disclosure
Some personal advantage
Cash, reciprocal information, reputational advantage, relative or
friend gift, personal satisfaction, or INTENTION to benefit
If NO breach by the Tipper, NO liability
o AND Tippee MUST KNOW or HAVE REASON TO KNOW that the Tipper is
breaching a Fiduciary Duty to the source
o AND IF NO BREACH OF DUTY, NO BENEFIT (Do not need much of a
benefit) OR INTENT TO BENEFIT
BREAKS THE CHAIN, NO LIABILITY
HERE,
o NO actionable violation by Dirks
He was a stranger to EF with no preexisting FDs to its shareholders
o Secrist has NO liability either, received NO personal BENEFIT
Motivated by a desire to EXPOSE the fraud
o NO DUTY to abstain from use of the inside info that he obtained.
THEREFORE
UNDER Rule 10b-5
o A tippee assumes a FD to the shareholders of a corporation NOT to trade on
material nonpublic information ONLY WHEN
The insider has breached his fiduciary duty to the shareholders by
disclosing the info to the tippee
AND the tippee KNOWS or SHOULD KNOW that there has been a
breach
What if Secrist was trading on put options betting that the stock would go down when Dirks
would disclose
He is LIABLE
o Jumping to the head of the line of other shareholders and breaching fiduciary
duty to the corporation
Classical Insider Trading
What if he does NOT tell Dirks about his shady behavior

Dirks is not reckless in not knowing about this or no reason to know
o Dirks NOT liable
A Tippee would stand in the shoes as the Tipper when they receive the information
o BUT he does NOT know or has reason to know of a breach
o No reason to know Secrist is secretly trading on this
It is a Tippee chain, have to see who is liable
Second Circuit Case
DO NOT NEED TO SHOW BENEFIT if it is a MISAPPROPRIATION CASE
o Getting Business Week articles before they hit the newsstands and TRADE based
on that info.
o Just guys in the distribution chains (printers, binders)
Selling the magazines in ADVANCE for more money
Did NOT know the value of the information they were giving
STILL DOES NOT MATTER IF THEY DID NOT KNOW
The fact that they were misappropriating the knowledge, and they
KNEW that the ERs did not want them to do this
Sufficient that knew it would be MISUSED somehow
Rule 14e-3
o Once a substantial step toward the commencement of a tender offer has been taken
It bars any person (OTHER THAN THE BIDDER) from acquiring ANY securities while in
possession of material info that he knows or has reason to know
Is NON PUBLIC, AND
Was acquired from the bidder, the target, OR any person associated with either one of
these
Insider Trading and 16
o 16(a)
REPORTING OBLIGATION, imposed on officers, directors, and 10% shareholders, to file with
the SEC forms that indicate holdings in the issuers stock upon achieving insider status
JUST KNOW IT EXISTS
WILL NOT BE TESTED
Insider Trading REVIEW
o Traditional, Classical Theory
If you have information because of your position in the company and you have a fiduciary duty
towards your shareholders, you CANNOT jump ahead of other shareholders
Cannot allow yourself to avoid losses that they will incur
NEED A GAIN, IN CONNECTION WITH
Breach of Loyalty
NEED A DUTY
Does NOT matter if you over hear something, you are not liable, no breach
o OHagon, Misappropriation Theory
If you have a fiduciary duty to the SOURCE of the information, agreed to maintain
confidentiality or a fiduciary relationship
If you have a fiduciary duty generally, like produce things, print things, in a film crew on the Jim
Cramer show.
And you violate that duty, you misappropriate that duty, and you TRADE on that, or someone
else does from your information, you are liable for the misappropriation theory of insider theory
NEED A GAIN, IN CONNECTION WITH
Breach of Trust or Confidence
NEED A DUTY
Does NOT matter if you over hear something, you are not liable, no breach
14e-3 (ONLY merger and acquisitions and Tender Offers)
DO NOT need a BREACH here
All you need is a tender offer or merger and acquisition, AND
You have NON PUBLIC MATERIAL INFO, THAT
KNOW or have REASON TO KNOW
Came from the Bidder, the Target, OR any person associated with either of these
DO NOT NEED A DUTY
DOES matter if you over hear something, you ARE liable, BREACH DOES NOT MATTER
o CEO of iPhone, tells his broker to sell all of his shares, his broker tells two people that the CEO of iPhone
is selling, so should you
Is this MaterialYES, CEO selling all of his stocks
Is this Non PublicYES
BREACH?
CEO
o FDA not approving his productNon Public
o This is Classical Theory, violating 10b-5
Jumping ahead of the line of his shareholders
o THERE IS A GAIN AND IN CONNECTION WITH
He avoided losses
Broker
o This is Misappropriation Theory
o Breach of a duty to the source
There is an expectation of privacy and confidentiality with the way you
handle your stocks
AND a material non public information about the corporation
o NEED A GAIN
Maybe reputational gain from other clients, get more clients
o IN CONNECTION WITH A TRADE
HE HAS NOT PERSONALLY TRADED ON THE INFO
Affirmative Defense for the two people
Standing order to sell at a certain price
First Question you ask in this section
o Is the Information MATERIAL
If NO, Defense
Second Question
o Is it NON-Public
If NO, Defense
CEO says our suppliers are very happy with us
But analyst finds out that this is wrong
So the suppliers are available to get the real info, so not really non-public
Next
o Was this Material, Non-Public info obtained or communicated in violation of a duty of trust or confidence
Chiarella
PRIME DUTYFiduciary Duties to their Shareholders
TYPES
A Fiduciary Duty of Insiders to the Shareholders
o CLASSICAL THEORY
Relationship related duty
o
Lawyer to client
OR 10b5-2(b)
Agrees to maintain information
A pattern of confidence or relationship of confidentiality
Spouse, parent, sibling, childpresumption of trust and confidence, but
this is rebuttable
o MISAPPROPRIATION THEORY
Employment related duty
o MISAPPROPRIATION THEORY
o
o
Next
o
Next
o
Was there a TRADE on this information (has to be in connection with)
If a TIPPER
Did that person do it for PERSONAL BENEFIT/GAIN
Did they have a fiduciary duty (Dirks)
Does NOT need to KNOW it was going to be traded on
JUST need to know they were using it for improper reasons
Like buying a cheap financial magazine for $200
o THE TIPPEE
Know or should Know
That the info was obtained in violation of a duty of trust or confidence
o A lot of the time you can argue both Misappropriation Theory as well as Tipper/Tippee
With Misappropriation TheoryNO Personal Benefit Needed
Sarbanes Oxley reading next
Rules of Practicepg. 827-837 in supplement, also on pg. 850 of casebook
o Drafting filing, advice for filing, probably going to be practicing before the commission
o ATTORNEY StandardRule 102(e)^5
Can deny privilege of practicing before the commission if:
Not possessing the requisite qualifications to represent others, OR
To be lacking in character or integrity or to have engaged in unethical or improper
professional conduct, OR
To have willfully violated (like (1) below), or willfully aided and abetted the violation of
any provision of the Federal securities laws
o ACCOUNTANTS fall under this
STANDARDImproper professional conduct
(1) Intentional or reckless violation of professional standard, OR
(2) Either of the following two types of negligent conduct
o (a) Single instance of highly unreasonable conduct that knew or should have
known that heightened scrutiny was warranted
o (b) Repeated instances of unreasonable conduct resulting in violations of
professional standard which indicates a lack of competence
Example of this is on pg 833, 13-13
o SEC v. National Student Marketing Corp.
NSMC
ACCTPeat Marwick
Randall/Joy are the principals
AttorneysWhite and Case
Interstate
ACCTPeat Marwick, THE SAME
Brown is the CEO principal

AttorneysMeyer
NSMC wanted to buy a subsidiary of Interstate, Interstate said no, NSMC wants to buy all of
Interstate
Wanted to pool all of the revenues of Interstate to be given to NSMC for the year to make
them look profitable
Stock for Stock deal
Interstate was to give an opinion letter from counsel that it was lawful to do merger
NSCM was to give the same
BOTH were to give comfort letters from accountants
o No material adverse changes, done with GAAP
At LAST SECOND, Accountants find that they under represent the NSMC companys losses and
over represent companys profits for the year and at BEST flat, even.
Interstate gets this, asks NSMC will this have an impact on companys earnings, NSMC says no
and the losses will be recouped.
Interstate had 3 options, shut it down, close the deal, or delay
If delay, you have to predict the future of the stock
They want another comfort letter, it is now WORSE
They go ahead with the stock for stock buy, NSMC went up, but then the numbers came out and
NSMC started to go down, bottom falls out
NO injunctive relief on the attorney of Interstate because NO likelihood of further conduct
BUT, DID get charged with aiding and abetting for not delaying or canceling
BUT if he did delay, and if it went up, then he would be sued for this!
o This case is troubling because it seems to put a duty on attorney to go to SEC AFTER the merger when
you find out things are wrong
Doesnt this violate attorney client privilege?
o HAVE to make an effort to be a WHISTLEBLOWER, have to get peoples attention and make
them take a look
If NOONE will, then you must withdraw
o HYPO
Information is false, NSMC KNOWS it is false, Interstate thinks it is true
Interstate
NO red flags that the info is false, went through due diligence, acted reasonably and were
lied to.
NSMC
Willfully violated
o Lawyers and CPAs have a heightened scrutiny
WHAT ABOUT OTHER PEOPLE
o Muwingmatter under investigation by the SEC
People do not have to listen and no subpoena power
If they have SOME informationreasonable belief that there was a violation that occurred, about
to occur, may occur in the future
Make a formal order memotelling the Commission that you need power to investigate and
most are approved.
Then you can put out subpoenas and file cases
Public Entity will have to make a public statementit is material that you are being investigated
need to disclose this
o Refusal Orders
Securities Act 8(b)
Refuse a registration statement to become effective, BEFORE IT DOES
o
o
With notice and a hearing

Stop Orders
Securities Act 8(d)
Stop a registration statement from being effective anymore
Ceased and Desist Orders
Securities Act 8(a), Exchange Act 21(c)
It is like injunctive relief
But injunctive needs higher burden of proof
HERE, just need rational reason that conduct will continue in the future
Disgorgement
Like restitution, putting them whole
Damages
Insider Trading has monetary penaltiesTreble Damages
Securities Act 20(d), Exchange Act 21(d)(3)
SEC has power to seek Monetary Damages
THREE TIERS, PER VIOLATION
o Individuals
(1) max 5k,
For anyonejust for violations
(2) max 50k,
Reckless disregard that resulted in violation
For violations involving fraud, deceit, reckless
(3) max 100k
ALL of the AbovePLUS loss or risk of loss to others
o Entities
(1) max 50k
For anyone and anythingjust for violations
(2) max 250k
Reckless disregard that resulted in violation
For violations involving fraud, deceit, reckless
(3) max 500k
ALL of the AbovePLUS loss or risk of loss to others
Officer and Director Barbarred from acting as these for a company
Court ImposedSecurities Act 20(e), Exchange Act 21(d)(2)
SEC ImposedSecurities Act 8A(f), Exchange Act 21C(f)
When you have an Anti Fraud Violation
HOW TO STOP THESE
Can give as a sacrificial lamb to say one guy is the problem
If you can say that
Somehow managed the problem
Give the SEC the requisite information about the problem
Can submit a Wells Notice
Explaining why the SEC should not be charging your client
Do not want your client to be investigated even if did nothing wrong, distraction, bad
publicity, costs money to give SEC what they want, bad reputation with client
What will SEC will look at:
If all or most of executives are on board with the violation
Corporate Culture affected by the violation, its what they do
KPMG v. SEC
Accounting FirmSEC wants them to be independentthey are an auditor and should

be looking at things objectively, if there is a consulting relationship, may not be
objectively
Sarbanes-Oxley makes Accounting and Consulting SEPARATE
HERE, says they violate 21(c), want a C and D order
The higher the number the Audit reports, the Higher KPMG gets, incentive
Says KPMG violated independent rules AND caused their company they were audited to
make their financials NOT audited by an INDEPENDENT Company
o THEREFORE, their company, PORTA, is in violation, NO filings, 13(d)
violation
KPMG says they were just NEGLIGENT
o Court says NO, 21(c) says you knew or SHOULD have known that they filing
would not be effective because they were not independent
KPMG says this is NOT enough for a C and D Order
o Court says this IS enough
WHEN APPROPRIATE TO FINE AN ENTITY
(1) The presence or absence of a direct benefit to the corporation as a result of the
violation; AND
(2) The degree to which the penalty will recompense or further harm the injured
shareholders
PROBLEM
Issuing options, their grant dates were earlier than the actual dates, making the yield
prices lower than the actual price, essentially being in the money right when you buy
75% went to senior management
Wanted to recruit good people, so they did this
LOOK AT THESE FACTORS to supplement (1) and (2) above
o The need to deter the particular offense
o The extent of the injury to innocent parties
o Whether complicity in the violation is widespread throughout the corporation
o The level of intent on the part of the perpetrators
o The degree of difficulty in detecting the type of offense
o The presence or lack of remedial steps by the corporation
o The extent of cooperation with the Commission and other law enforcement
agencies
Have penalty
o What is available, injunction, C and D, penalties
o THEN, SHOULD YOU, will it have deterrent threat, stopping bad behavior
without harming innocent people or shareholders.
Criminal Liability under the Securities Laws
o Do not have to show ScienterMartha Stewart lied to investigators
o 33 Act
24
Fine up to 10k and/or up to 5 years in prison
For willfully making false statement or omission of material facts
Willfully violates the Securities Actcould be CRIMINAL LAW
o 34 Act
32
Fine up to $5 million and/or up to 20 years in prison
Willfully violating Exchange Act
Or Willfully and Knowing (intent to deceive) making a false filing, need to file
DEFENSEno knowledge of the rule
o NO prison time then, BUT still do fine
o Corporations can be fined up to $25 million
o All individuals have to pay for their acts
o US v. Dixon
President of company, reporting, he knew he had to make filings and disclosures about insider
loans
Loaned a lot of money to HIMSELFany loans of over 10k to insiders must be disclosed
He had 65k of loansno disclosure
DEFENSEI didnt know you had to disclose, thought it was reporting at end of year
Knowingly and willfully means that people HONESTLY believe that they were being lawful
HEREthis guy knew about the statute, enough about it, engaged in enough conscious
behavior to get around them to KNOWINGLY AND WILLFULLY
Mail and Wire Fraud
o Cannot use mail or phones to commit fraud
NO Scienter
Just INTENT to be involved in a fraudulent scheme using the mails
Statute on pg. 869
Very powerful tool for prosecutors
o Up to 20 years in prison
o Intent to Commit a Fraud
US v. Simon
Brokers selling complete sham to investorsboiler room
Had a script from boss, blindly said it was a risk-free investment, huge returns
Ignoring the truth/obvious is ENOUGH to show Criminal Intent
US v. Parker
Brokers selling complete sham to investorsboiler room
Boss tells them this investment is secured by US Treasury Bills secured in a vault
somewhere else
NOT Enough to show Criminal Intent
NOT ignoring the obvious, could not go check if it was true
Ignoring the Obvious is Intent to Commit a Fraud
Recklessness standard is fine in some circuits
Some circuits say SPECIFIC Intent standard
AT LEAST REQUIRES CRIMINAL RECKLESSNESS
ALSO Requires a Property Interest, seen below
Carpenter v. US
Columnist in WSJwhen they would recommend, market would react
He realized thisarranges to give out ADVANCED copies of his recommendations and
they profit from it
Have to have a scheme to defraud people of money or property
o Court says CAN be intangiblethis information is the intangible property
o Scheme to defraud the Journal of this intangible property that this was
ENOUGH for the property requirement of a scheme to defraud
o Deceptive Deviceusing info in advance BEFORE the public
o Important that the Journal is involved because that brings in the Property
Interesthard to use Mail Fraud if no property
Wire Fraud ConvictionScary
Doesnt matter whether he gave the advanced people his column through the
mails or phones
o BUT, because OTHER subscribers got the Journal through mail then this is
ENOUGH to bring into the Mail Fraud Provision
This is good for prosecutorsit is a weapon to cooperate with themMail Fraud is very
broad and scary
o

Securities Regulation Outline #1

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What are the key elements of the Howey test for determining if something is an investment contract?

What are the key elements of the Howey test for determining if something is an investment contract?

What factors does the SEC consider when determining whether to pursue an enforcement action against a corporation?

What factors does the SEC consider when determining whether to pursue an enforcement action against a corporation?

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Issuer Transactionsinvolving the sales of securities by the issuer to investors

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Broad Vertical Commonality

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Promises of post-acquisition INCOME, OR

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(2) Home mortgages

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In the Matter of WR Grace

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The underwriting compensation received by the underwriters

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Residual, after everyone?

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Need a certain level of experience

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FlexibilityCAN give written communication if it just states what is on file in

Everyone CAN if they follow rules 164 and 433

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(b): LESS than 40 days AFTER Registration Statement filed

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SEC v. Ralston Purina

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Look to size of market for these shares

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Issuer sales are known as primary offerings

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Reporting Issuers Holding Period

Minimum of 6 months, after 1 y

Non-Reporting Issuers Holding

Current Info Requirement

From 6 months to 1 yearPubl

Manner of Sale Requirement (g)

All transactions need a broker

File Form 144 for All transactions

Is it a Restricted Security in Rule 144look to Rule 144(a)(3)

Are they an Affiliate (Control Person) or Non

Are they Reporting or Non

When did the Holding Period Start144(d) tells you

o Now work it through the chart

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Has to be less than or equal to 35 non-accredited investors and disclosure

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