SECURITIES REGULATION SHORT OUTLINE

I. Background:
3 approaches used for regulation:
o After the fact fraud can be detected and
filed.
o Want full disclosure in advance through
registration
o Merit regulationgovernment decides when
an issue is in the public interest.
Focus is disclosure and anti-fraud
34 Act
o egulates trading mar!ets and secondar"
stoc!
o Anti fraud regulation
II. WHAT IS A SECURITY
33 Act: 2(a)(1)
3 Act: 3(a)(1!)
#ow to appl":
$oo! first to the statute to see if it falls within
the list:
o %ote& stoc!& bond& investment contract&
an" interest or instrument commonl"
!nown as a securit".
'(nless the conte)t otherwise re*uires+
A. Stock"In#$%t&$nt Contract%
is! ,apital test: see how ris!" the investment is. -f
ris!" securit"
Four .art Howey test. /speculation immaterial0
-nvesting Mone"
o 1 or an" form of bargained form of
consideration
,ommon 2nterprise
o #ori3ontal when there are investors
investing with "ou /pooling0
o 4ertical
Broad: promoter increases the
value of the investor5s mone"
Strict: promoter must share in
the financial ris!. #is interests
are tied to the investors
2)pectation of .rofit
o easonable e)pectation on the front
end.
6olel" /mainl"0 from the profit of others
o -nvestor can participate but& results are
tied to the e)pectations of the investors
efforts
o .rofit is not gleaned from societ" as a
whole /gold e)ample0
Applications of Howey
Marine Bankwhen "ou have use of the land
not a securit" 7 here there was a uni*ue deal
between consumer and investor
Forman 7 when the stoc! determines the
*ualit" of "our apartment "ou are getting a sales
contract. %ot a securit"
Edwards 7 investment in pa"phones where
"ou e)pect profits is a securit"
Life Partner 7 when invest in life insurance of
A-8s patients "ou are not rel"ing on the
managerial efforts of others.
B. A%%oc'at'ona( )or&a('t'$%
Stocke)plicitl" listed in statute 7 but that5s not
dispositive.
Landreth 7 doesn5t matter that fails Howey . -t is
in the plain language of the statute.
o $oo!s for: transferable& voting rights&
dividends
o ight to recover divs contingent on
apportionment of profits negotiabilit"
o Abilit" to pledged or h"pothecated
o ,onferring of voting rights in proportion to
the number of shares owned
.urchase all the shares of stoc! sale of securit"
.urchase all the assets not a sale of securit"
o Appl" Landreth and then Howey
*artn$r%+',% 7 use Howey
9enera l 7 practical control issues: normall" not a
securit" unless /Williams0:
o .A eliminates investor control
o -ne)perienced have no idea what is going on
o .romoter has uni*ue s!ills
$imited 7 usuall" a securit"
o ;(< Steinhardt 7 when . had veto power
gave him control. <hus fails Howey.
o 6ophistication of the investor.
--C%
Manager-managed less control: more li!e a
securit"
Member-managed control: probabl" a securit"
C. R$a( E%tat$ a% S$cur't.
9eneral ule %=< A 62,(-<>
-nvesting Mone"?
,ommon 2nterprise?
o #ori3ontal 7 rental pool?
o 6trict vertical 7 "ou and rental agent
split proceeds of renting out condo
o ;road vertical 7 rental agent helps
despite compensation
2)pectation of .rofit?
o ;u"ing 2 as investment or for
consumption
From the profit of others?
1
SECURITIES REGULATION SHORT OUTLINE
o ;" the efforts of others or are "ou
managing?
o ;u"ing land and managing contract
ma" be a securit"
Hocking 7 go though Howey test and Williams test.
Franchise is not a securit" that5s from "our efforts not
others.
/. 0ot$% a% S$cur't'$%
@. Famil" esemblance <est
a. .resumption that all %otes are 6ecurties but
can be rebutted b":
b. 8oes it loo! li!e those that have been held to
%=< be a securit"& i.e. is this an investment
or a transaction:
i. ,onsumer financing
ii. Mortgage on home
iii. 6hort-term note secured b" lien
iv. ,haracter loan to ban! customer
v. 6hort-term note secured b" an
assigned of recievables
vi. =pen account debt
c. %ot on list Famil" esemblance <est 7 Aif
"ou pass the test then "ou are a securit"B
i. Motivation for <ransaction
@. purpose of investment to
raise mone"
ii. .lan of distribution of the
instrument
@. trading on a secondar"
mar!et or broad
distribution?
iii. easonable e)pectations of the
investing public
iv. is! reducing factors?
@. i.e. collateral: regulator"
agenc"& etc.
C. D month e)emption ?
a. An" note with a maturit" of less than D
months
b. (suall" onl" held to appl" to commercial
paper
i. #igh *ualit" instruments to fund
current operations and sold onl" to
highl" sophisticated investors.
3. 6ome circuits use the is! capital test
4. <est applied
a. Reves 6ecurit" if /@0 sold in an effort to
raise capital: /C0 offered notes to a broad
distribution: /30 public reasonable perceives
the notes as securities: /40 notes are
uncollaterali3ed and uninsured.
b. Wallenbrock 7 when provide mone" to
bu" into the accounts recievables it is a
securit" when the obEect is to ma!e mone"
with a broad distribution and there is no
secured rate
i. Financial derivatives are seen as
high ris!.
II. 1AR2ETS A0/ THEIR E))ICIE0CY
#ow to read the mar!et:
Wea! 2fficient Mar!et <heor" 7 cannot predict
future b" past prices
6emi-6trong 2fficient Mar!et <heor" 7 mar!et
prices reflect public information
6trong 2fficient Mar!et <heor" 7 mar!et prices
reflect A$$ information.
$essons on mar!et efficienc":
Mar!ets have no memor"
<rust m!t prices.
<AF2AWA>: securities laws are based on the
assumption that disclosure of information is a good
thing. -nformation is the best wa" to protect an investor.
III. THE *UB-IC 3))ERI04
A. )or&% and I%%u$r%
o 6-@ is for an unseasoned issuer. e*uires
most info
o 6-3 for seasoned issuers 7 have "ou been
reporting for @C months and are "ou up to
date A%8:
companies that are largel" held with
a lot of outstanding stoc! alread"
=ffer must be for cash
6toc! is alread" in the hands
of non-affiliates in e)cess of
1GH million
= primar" offerings of non-
convertible investment grade
securities
= <ransactions involving
secondar" offerings on big e)change
= if "ou5re a WF6-
#ave @ million in debt float
and GII million in e*uit"
egulation 6-F 7 describes disclosures on forms 6-@
and 6-3
o #ave to give terms. -tem HI@/c0
o -dentif" ris! factors. -tem HI3 /c0
o Must be in plain 2nglish. ule 4C@/d0
o %eed to disclosure financial statements and
balance sheets. -tem 3I@ and 3IC
o <rends and developments. -tem 3I3.
B. SEC Act'on%
<iming: egistration is effective CI da"s after filing.
o ,loc! starts over after an" amendment
o 62, determines acceleration /ule 4JI0
2
SECURITIES REGULATION SHORT OUTLINE
o K L /a0 sa"s that the securit" is effective
whenever 62, signs off.
2nforcement
o efusal order /Lb0 7 material submitted on
its face is insufficient
o 6top order /Ld0 7 material appears to be
false
o 62, can investigate and that suspends the
effectiveness of the amendment /Le0
What "ou get from 62,
o 'bed bug+ letter
o ,ustomar" review
o ,ursor" review
C. TI1I04 RE5UIRE1E0TS
6 7 prohibits the use of the mails& wires& or other
means of interstate commerce to sell or to offer to sell
unregistered securities 7 registered with effective.
1. 5u'$t *$r'od.
6(a) no sales
St$, on$: 6(c) unlawful to ma!e an 'offer to sell+
unless registration statement is filed: does not include:
o sale between underwriter and issuer
o discussions between lead underwriter and
s"ndicate
o K4/@0 transactions
o Face to Face intrastate transactions
St$, T7o: 6afe #arbors for .ermissible
,ommunication
Ru($ 136 7 can disclose intent to ma!e public
offering 7 the amount& t"pe of securit"& manner and
purpose of offering.
o Bar$ 8on$% %tat$&$nt.
o .ublicit" that is within the normal conduct
of business.
o ,an continue with @IF& and needed financial
disclosures
o ,annot name underwriters or securit" price
o Ma" post on website if within the ordinar"
course of business
o Loeb 7 publicit" ma" constitute an offer to
sell. M(6< be publicit" that is within the
normal conduct of business.
@. ,A%5< ,=%8-<-=% <#2 MF<.
Ru($ 193A 7 3!:/a. Br'g+t('n$ E;c(u%'on
o Applies to all issuers. %ot (W or dealers.
o ,an5t mention issue directl".
o <r" to prevent repeats of communication.
Ru($ 193 < W2SI% can engage in unr$%tr'ct$d
oral and written offers before the registration
statement is filed.
o =nl" for issuers
o Written offers must be filed and there must
be a legend
Ru($ 19= 7 announcements b" reporting issuers
engaged in regular release of factual busiess ifo
t!at is for"ard loo#ig
o =nl" issuers
o Must have released this sort of info before
o %o detail about the offer unless permitted
under @34 or @3H.
Ru($ 19> 7non-reporting issuers
o ,an report factual but NOT for"ard
loo#ig ifo$
o %o info about the offer
o ,ustomers and suppliers /non-investors0
must be intended audience.
o Must have released this information before.

R$%$arc+ R$,ort% 7 T+'rd *art. In?or&at'on
o Ru($ 13@ 7 non participating-bro!ers can
issue a report
@. can5t participate in distribution
C. can5t be paid b"
bro!erMdealerM(WMissuer
3. reports are in the regular course
4. can5t issue and then participate.
o Ru($ 13= 7 tal!ing about debt& common or
preferred or nonconvertible stoc!
@. ;ro!er or dealer must have
previousl" publishMdistribute in reg.
course of business
C. Must be reporting issuer
o Ru($ 13> 7 /non0Mparticipating bro!er or
dealer can publish recommendations
regarding
@. must be on 6-3 or F-3 companies
C. has other earlier regular reports
Focus report:
o regular research
program
-ndustr" report:
o with no special
prominence
o no more favorable
than a previous
recommendation
St$, T+r$$: <raditional approach 7 if "ou fail the safe
harbor& as!:
in registration?
,ondition the mar!et?
2. Wa't'ng *$r'od -- K H/b0
9eneral ule: %o sales efforts unless there is a
prospectus and the registration is filed.
o onl" prospectuses compl"ing with K @I Afinal
prospectusB *ualif"
3
SECURITIES REGULATION SHORT OUTLINE
;(< K@I/b0 allows the 62, to come
up with rules for documents that
will satisf" KH/b0
ed herring 7 need to put red
disclaimer that sa"s document is not
an offer.
%er&itted Co&&uicatios
ules @JL& @JD& @3H& @3G& @3L& @3D still appl"
,an ma!e sales =A$$>
o oad 6hows 33(d)(=)
4ideotapes 7
not a FW. if it5s a real-time
presentation to a live
audience
o ,an use visual
aides.
FW. if prerecorded 7 need
specific legends
o Afile if offering
e*uit" securit":
non-reporting co:
and has not made at
least one version of
the rd show publicl"
availableB
,an do an"thing that is in the normal course of
business and continued filings /@IN& @IF0
.reliminar" .rospectusRu($ 3!
o 6ame information as the final prospectus
e)cept omits: offering price& (W& dealer
compensation& amount of proceeds&
conversion rates& call prices& and other
matters dependant on offering price.
Ru($ 13<ombstone and -dentif"ing statements
o <ombstone Ad : if it states from whom a
written prospectus meeting the
re*uirements of section @I ma" be obtained
and& in addition& does no more than identif"
the securit"& state the price thereof and state
b" whom orders can be e)ecuted.
o 13(d) -dentif"ing 6tatements 7 e)pand
tombstone.
can distribute a customer card that
must be distributed with a
preliminar" prospectus 7 need
disclaimers /boo! buildings0
Free Writing per Ru($ 33
o 8ef: information circulating that is not
contained in the registration statement
o .rospectuses that satisf" re*uirements of
section @I& and therefore re*uirements of
H/b0
o Must include legend
o WF6- and seasoned issuers
File registration no preliminar"
prospectus re*uired to be delivered.
Oust notif" recipient of ($ for 62,
website
o %on-6easoned issuers
File registration statement and
preliminar" prospectus
%eed disclaimers and legends
%eed securit" price range
Must distribute prelim. .rospectus
,an be satisfied via
h"perlin! 7 33($)(2)
o -nclude legend
o -ndicate where
prospectus is
available
o 33(d) Filing re*uirementswhen "ou
must file:
FW. reflects information provided
b" the issuer
6upplementar" material prepared
b" non-issuer dependant on the
breadth of circulation
8escribe final terms of securities
o 33($)(1) 7 website P FW.
eporting or non-reporting co
#"perlin!senvelope theor"
2)ception: not FW. if
historical info about the
issuer in sep. section of
website.
o 33(?) 7 Media
.ress conference o!a"
File resulting news stories
wM62, wMin 4 bus. da"s.
-f issuer prepares& pa"s& or gives
consideration for preparation of
communication this is FW. and
must satisf" ule 433.
3. *o%t:E??$ct'#$ *$r'od
<wo wa"s for 6 to become effective:
<raditional: issuer submit a pricing
amendment& and re*uest approval
ule 4LI/;0: can go effective without pricing&
and have that added in @H da"s.
8eliver" =bligations
Ru($ 1@2(a) for bro!ersMdealersM(W:
o written confirmations and allocation notices
don5t need to be accompanied or preceded
b" final prospectus.
Final prospectus P term sheet plus
preliminar" prospectus
o =nl" re*uirement is file with 62,
o Applies until allotments are sold
o #=W242 For (Ws:
4
SECURITIES REGULATION SHORT OUTLINE
ule @H/c0C-L 7 deliver prelim
prospectus to bu"ers at least 4L hrs
before sending confirmation of sale.
Ru($ 1@2(8) When securities are delivered
o 03 o8('gat'on to ?or7ard ?'na(
,ro%,$ctu% if file with 62,
Ru($ 1@3 7 file a notice of registration indicating
that 6 has been filed and final .6 would be sent
absent an e)cuse
o @G3/e0 this is %=< FW..
o 6hould be submitted within C da"s of the
completion of the offering
,ommunications M Writings
FW 2)ception -- 2(a)(1!)
o ;roader than during waiting period
o ,an write what "ou want if "ou accompan"
with legend and filing re*uirement
o -f non-reporting iss. Must be proceeded b"
or accompanied b" a final prospectus /or
h"perlin!0
6econdar" Mar!ets
o K 4/30A-; #ave to deliver final prospectus
when:
/a0 resale within 4I da"s of when
sales began or
/b0 re-sale within 4I da"s 7 DI da"s
of registration statement effective
/c0 transactions that are part of an
unsold allotment
o ule @G4 e)ception to 4/30 re*uirement.
8o not have to deliver prospectus
within the 4I or DI da" period if the
issuer was a reporting compan"
For non-reporting co
%o prospectus deliver"
re*uirement b" dealers
beginning CH da"s after
offering date if securit" is
listed on nat5l e)change
o ;ro!er dealer e)ceptions:
4/40 7 e)empts bro!ers who
undergo a transaction on an
e)change ordered b" a customer.
%o prospectus re*uirements.
o ule @H3
2)cuses d$a($r from delivering
prospectus in a dealer to dealer
transaction on an e)change or
trading facilit"
8uration of 6ection H5s re*uirements
-ssuer
o As long as offering securit" to public
(W or dealer
o .rospectus re*uirements as long as their
allotment or subscription in the distribution
is unsold.
IA. SHE-) RE4ISTRATI30
Ru($ 16 (a)(1)(;) < e*uirements:
Must list on the registration statement what "ou will
be offering and then amend if there are an" changes.
Who can offer:
o 6-@ companies 7 can offer pursuant to
16(a)(')(';)
o 6-3 companies 7 can offer pursuant to
16(a)(;)
o WF6- 7 pursuant to instruction on From 6-
3.
#ave to register the amount reasonabl" e)pected to
sell within C "ears
#ave to issue within 3 "ears
o #ave to file with 62, within C da"s after "ou
ta!e down.
Available for all !inds of companies& but
re*uirements are more stringent the less "ou report.
.romise or (nderta!ing to update shelf registration
so 6 not stale /Ru($ 16 (a)(3)(It$& 612a o?
R$gu(at'on S:2)
o #ave to update 6 for fundamental changes
,an use a prospectus for D months.
o Amend for material changes.
o #ave to update registration after 3 "ears
WF6-
o ,an register unspecified amounts of
different specified t"pes of securities
o ,an add additional classes
o 2ver"thing becomes auto&atic ad effecti'e
i&&ediatel($
o ;ase 6 will Eust be incorporated b"
reference to 534 act filing.
-ssues with shelf registration is that (W still have to
perform due diligence.
A. U*/ATI04"C3RRECTI04 R.S.
ule 3! B authori3es omission
.rospectus does not meet the re*uirements of K
@I/a0 if information disclosed is falseMmisleading
/Manor0 and thus violates K H.
12(a)(2) if prospectus is misleading& bu"ers have a
claim to get their mone" bac!
.ost-2ffective Amendments
($2: must amend when there is a MA<2-A$
change
o Appl" a stic!er when there is an addition
o Amend 6 when information has
substituted.
5
SECURITIES REGULATION SHORT OUTLINE
62, can then ta!e action: refusal order: stop order:
cease and desist order: KH investigation.
o 62, must determine within a reasonable
time whether it will issue a stop order /Las
egas !evelo"ment #o$0
o ,an disregard amendments made after stop
order is issued /#ol%mbia &eneral0
Withdrawal
o ule 4GG need 62,5s permission
<rading .ractice ules
Ru($ 1!2 and 1!1 1 prohibit trading during the
'restricted period+ which would result in an unfair
manipulation of the price.
o $arge ,ompanies /average dail" trading
value Q @II!& and e*ual to or Q CH M in
float0
,an5t bu" or sell one business da"
before the person becomes a
participant = before the securit"5s
price is determined
.eriod ends at the end of
participation.
o 6mall ,ompanies
;egins H da"s before the" become a
participant or before 1 is
determined
o #uge companies /average dail" trading
value @ million and float of @HI million
%o re*uirements
2)ceptions
o (nsolicited orders 7 ule 1!1(8)(6)
o .urchasers from (W s"ndicate
o 8e minimus purchases
o 6tabili3ation 7 Ru($ 1! o? R$guat'on 1
,an purchase during the offering to
!eep price at the mar!et level
,an5t bid higher than the lower of
the issue price or the last
independent price of the m!t before
issuance. /if issue at CH& but the last
trade before "ou priced it was at CC&
"ou can onl" stabili3e up to CC0.
AI. I0TER0ATI30A- *UB-IC 3))ERI04S
egulation 6
Ru($ >!1
o %o need to register offers and sales that
occur outside of (6
o =ffshore offerings don5t appl" the 33 Act.
o Antifraud provisions do appl".
Ru($ >!2 7 definitions
Ru($ >!3
9eneral:
%eeds to be an offshore transaction
o <he bu"er is outside of the (6 or the securit"
is on a foreign e)change
o $oo! to residence of bu"
%o directed selling efforts in the (6
o ,an5t condition (6 mar!et
.ress ,onferences?
o Ru($ 136($) 7 Free press& if "ou a foreign
issuer and press conference is in a foreign
countr"& and an" materials have disclaimers
and securit" offering will not occur solel" in
(6
=nl" foreign issuer reports allowed
o %otice published in (.6.
Ru($ 136(c)
=nl" tombstones and onl" if
a reporting issuer
,an have a tombstone ad in
a (.6. publication if the
circulation CIR in the (.6.
%on-reporting compan":
%ot with 6afe#arbor& but
under egulation 6:
o 'directed selling
efforts+ does not
include information
that is printed in a
foreign countr" that
might reach the (6
in a limited wa"
o Website?
=!a" as long as "ou put a prominent
disclaimer to ensure no (6 res A%8
password protect the information.
St$, 3n$: <o egister in (.6. have to belong to one of
the following categor". 6tart with @ and then move
down. <he higher the categor"& the more hoops& the
more danger of flow bac! to the (.6.
Cat$gor. 1 :: >!3(8)(1)
o Nualifications:
Foreign issue with no '6ubstantial
(6 Mar!et -nterest+ =
2*uit" 7 if greater than CIR
of trading in (6 and no
foreign countr" has more
than HHR of trading mar!et
8ebt 7 not satisfied if more
than 3II (6 owners and
more than 1@; held b" (6
owners A%8 Q CIR of debt
is held b" (6 owners
Foreign issuer offers 8ebt of 2*uit"
in =%2 foreign countr" =
(6 issuer offers 8ebt /not stoc!0
directed at onl" =%2 foreign
countr"
6
SECURITIES REGULATION SHORT OUTLINE
-ssues bac!ed b" full faith and credit
of foreign gov.
2mplo"ee benefit plan in another
countr"
estrictions 7 Eust 9eneral DI3 restrictions
<ransaction restrictions
o %one 7 can sell to (6 citi3ens so long as
outside of (6
Cat$gor. 2 < >!3(8)(2)
Nualifications
o 8ebt offering b" non-reporting foreign
issuer
o 2*uit" offering b" eporting foreign issuer
A;asicall" all reporting companies& e)cept for
domestic foreign companies offering e*uit" 7
are in ,ategor" C if subst. (6 m!t interest and
directed to more than one foreign countr"B
estrictions 7 same as general DI3
<ransaction estrictions
o ,an5t sell to (6 person for 4I da"s after the
start of the offering in primar" distribution
o 4arious offering restrictions:
epresentations that "ou will not
sell to (6 people A%8
8isclaimers about not selling to (6
people A%8
,onfirmations sent to bu"ers sa"ing
that "ou cannot resell to (6 people
Cat$gor. 3 < >!3(8)(3)
Nualifications:
o 2ver"thing not in @ or C& i.e 7
o All e*uit" b" domestic nonMreporting (6
issuers
o 8ebt offering b" non-reporting non-
domestic issuers /unless direct at a single
countr" other than (60
o 2*uit" offerings b" non-reporting foreign
issuers /unless direct at one foreign countr"
or no substantial (6 mar!etMinterest0
6ame general DI3 estrictions
<ransaction estrictions:
o 8ebt : 6ame as ,ategor" @ and C& plus use
temp certificate until the" can verif" the" are
not (6 persons
o 2*uit":
can5t resell for one "ear.
.urchaser must cert non-(6 person
St$, T7o: =fferings Falling outside of egulation 6
/ Ban'%e 0
,onduct and effect test
o ,onduct resulted in shares directed at (6
interest
violating normal bac!ground rules of a foreign issue
and bu"er
AII. 1ATERIA-ITY
6ubstantial li!elihood test : substantiall" li!el" that a
reasonable& obEective person would have found it
important 7 2lements:
o Oust needs to alter the 'total mi) of
information+
,an5t bur" facts.
o =bEective person can be sophisticated or not.
o eliance on the information
o 8ut" to disclose
Anti-fraud law
,hanges in the 6
<est for 6peculative -nformation /Basic0
o Magnitude S .robabilit" P 8isclosure
e*uired
o 6till has to pass substantial li!elihood test
Mar!et <est 7
o easonable investor would find it important
o 2ffects the total mi) of info.& i.e. effects
mar!et price of the securities.
-ssuer5s 8efense: <ruth on the Mar!et
o -f the compan"5s stoc! price alread" reflects
all information on the m!t& a lie will not be
able to affect the total mi) of information.
o 2ven if false statements are made truth
ma" still be found in the m!t. =nl"
protecting reasonable investor not naTve
invest /Wielgos0
.uffer" -- <"picall" not material unless the" are
opining on something the" !now to be false
/Eisenstadt0
Forward $oo!ing 6tatements :
o ,ompanies must do proEected under the
M8UA
o . must show that predictions lac!
reasoable basis
o 8 can protect themselves b" ma!ing specific&
meaningful& substantive& and tailored
caut'onar. %tat$&$nt% in their
registration statement.
,an5t be boilerplate
6tatutor" 6afe #arbor 7 *S-RA /KCGA of 533 Act: K
C@2 of 534 Act0.
o Applies to:
Forward loo!ing statements 7
written or oral.
eporting companies onl"
%ot o!a" for maEor events li!e -.=&
tender offers& going private
o 6afe #arbor .rovisions 7
7
SECURITIES REGULATION SHORT OUTLINE
Forward loo!ing statement that5s
accompanied b" meaningful
cautionar" language
-mmaterial or puffing
$iars -- .laintiff doesn5t have to
prove "ou !new it was false if there
was meaningful language
8isEunctive rule.
o (sher -- if "ou don5t update "our
cautionar" statements then its going to loo!
more boilerplate.
8ut" to 8isclose
o ,ommon law fraud: no dut"
o 6ecurities $aw
Must refrain from false statements
>ou M(6< disclose things that
would ma!e previous statements not
misleading
o 8isclose if material 7 Ru($ !=Bcatch all
for material facts.
Must disclose present eventsMfacts if
contrar" to what is out there now.
8isclose something that would alter
the perception of health of the
compan".
,2=5s misconduct is material 7
integrit" of management should be
disclose /Franchard0
-tem 4I@ re*uirements for
disclosure of management5s
integrit" and e)perience
6hould disclose if directors
are Eust rubber stamping
/W$R$&race0
,an5t be a bad citi3en
Mone" loss not important 7
integrit" is what counts
/Schlit) Brewing0
6-F 4IJ must disclose if not
compan" code of ethics
.ending lawsuits should be
disclosed /-tem @I30
if a big deal
o doesn5t matter if
Eudgment reached
lawsuits against officers and
directors /4I@/f00
o criminal disclose
if pending
o civil disclose if
comes to Eudgment.
AIII. -IABI-ITY
(nder 33 act: 11
(nder 34 act: 1!8:6
S$ct'on 11
6tanding
o An"one that purchased the securities
pursuant to registration
o $iabilit" created b" material false statements
or omissions of fact
o %o reliance /causation0 necessar" 7 unless
more than a "ear has passed.
8amages
o 8ifference between price paid and the price
sold at now.
Who5s liable?
o 2ver"one who signed the registration
statement found in K J/a0
8efenses
o 2ver"one 7 if the plaintiff !new at the time
the statements were false and bought
an"wa"
issuer5s onl" defense.
o 8ue 8iligence
No)e*+erts o o)e*+erti,ed
&aterial no liabilit" if after
reasonable investigation there were
reasonable grounds to believe and
did believe it was true.
No)e*+erts o e*+erti,ed
&aterial no due diligence
re*uired unless reasonable ground
to !now something5s up.
E*+erts o t!eir o" e*+erti,ed
&aterial #ave to do "our own
investigation and get information
#ave a due diligence
re*uirement .$(6 reason
to believe in truth
E*+erts o ot!er e*+erts- e*+erti,ed
&aterials reasonable reliance is a
defense
Who5s an e)pert?
6liding scale 7 the more of a
bac!ground the more li!el"
"ou5ll be an e)pert.
=r loo! for certified wor!.
IC. ECE1*T TRA0SACTI30S
Must find an e)emption at each stage of the sale
watch the resale
2)empt from filing re*uirements of K H
%ot e)empt from fraud
A. Intra%tat$ o??$r'ng% 3(a)(11)
2lements:
o -66(2
o 6old to a resident within a single state A%8
o ;" someone who resides in the same state
8
SECURITIES REGULATION SHORT OUTLINE
St$, TW3: Co&&on -a7
I%%u$
6cope: -ntegration problem /common law0
Anote: WA%< them to integrateB
o %art of a sigle +la of fiacig
o Issuace of t!e sa&e class of securities
o .ade at or about t!e sa&e ti&e /rule of
thumb within @ "ear0
o Sa&e t(+e of cosideratio recei'ed
o .ade for t!e sa&e geeral +ur+ose
R$%'d$nt o? %'ng($ %tat$ or t$rr'tor.
All the people offered the securit" must be in the
same state.
-f "ou advertise out of state "ou have to have
disclaimers.
esidenc" P domicile
Co&$ to r$%t 'n t+$ Stat$
%o clear time in the common low 7 can Eust flip
them about of state.
I%%u$r +a% to 8$ a r$%'d$nt o? t+at %tat$
.erson: domiciled in the state
,orporation: incorporated A%8 doing business in
that same state
o 6tructure of transaction that matters
o Mail order catalogue that ships out of state
is still doing business in the state where it
receives orders.
(I) .ou Intra%tat$ .ou &u%t Int$grat$ ($;c$,t ?or
c$rta'n occa%'on% 7't+ R$g A)
St$, 30E: Ru($ 1@ Sa?$ Har8or
%o substantial compliance
-ntegration
o ,annot offer another issue before or after J
months /integrates with all other t"pes of
offerseg 8& e)cept for eg A0
o Watch out can integrate with HIJ
-ssuer
o %eed to be incorporated in the state
o LIR of gross revenue from state
o LIR of assets in the state A%8
o LIR of proceeds need to be used in that
state.
o A%ote: can round up between the
percentagesB
esidence of purchasersMofferees
o .erson principal residence
o ,orporation principal office
Advertising 7 should have disclaimers.
,ame to rest in the state
o When not resold out of state within D
months of the completion of the issue.
$imit re-sales with legends: stop
transfer instructions& etc.
o ,an resell in the state
o eoffers do not destro" the e)emption.
B. *r'#at$ 3??$r'ng% (2)
2)empts 'transactions b" an issuer not involving an"
public offering+
%o substantial compliance defense.
ule HIJ offering is a private offering
1. *r'#at$
;urden is on the issuer to show:
o %umber of offerees and their relationship to
each other and to the issuer
%o bright line number
o <he number of units offered
6maller is more li!el" to be private
o <he si3e of the offering /1110
o <he manner of the offering
Face to face v. general advertising
.ersonal contacts v. initiated b" an
investor
2. So,+'%t'cat$d /Ralston0
%eed both Access to -nformation
o -nformation that would be in the
registration statement
U /some H
th
,ir. courts sa" =0 6ophistication
o -nvestment professionals: e)perienced
business people: assisted b" law"ers and
accountants
o %ot Eust high education and no business
e)perience
6liding scale /!oran0
%o civic limitations on resale Eust !eep within the
e)emption.
3. Int$grat'on (166 Sa?$ Har8or)
>ou can shift a private offering to a registered
offering b" waiting 3I da"s /if "ou have not sold a
securit"0
(nder @HH/b0 7 "ou don5t have to wait the 3I da"s if
"ou offered was onl" to accredited or sophisticated
investors
(nder @HH/c0 7 "ou can shift from registered offering
to private after 3I da"s from withdrawal& as long as
"ou described the unregistered nature of the offering
and an" material changes that occurred after the 6
was filed
=therwise do the H factor test: @HC additional safe
harbor between private placement subse*uent registered
offering
C. R$g / 3??$r'ng% (0ot an E;c(u%'#$ E($ct'on)
($2 6! 6!6 6!9
Ma) 6i3e 1@ Million 1H Million 1%o $imit
Ma) V of
*urc+a%$
r%
(nlimited 3H S
unlimited
Accredite
d
3H S
unlimited
Accredited
9
SECURITIES REGULATION SHORT OUTLINE
/'%c(o%ur
$
=bligations
%o& e)cept if
state
regulations
>es& if
non-
accredited
investors
are
involved
>es& if
non-
accredited
investors
are
involved
W#= ,A%
(62:
8o
investors
have to be
So,+'%t'c
at$d
%o %o
#owever
if "ou
want to
*ualif" for
an
accredited
investor
there
are
re*uireme
nts.
>es& for
non-
accredited
investors -
Ma" have
a
representa
tive.
,an
reporting
companies
use?
%o >es >es
estriction
on R$%a($
6ometimes--
man" times it
depends on the
6tate
re*uirementu
suall" "es
>es >es
estriction
on 9eneral
Advertising
and
6olicitation
s
6ometimesus
uall" "es
6trong 6trong
$imited to
worth"
people?
/;ad ;o"0
%o >es %o
Add5l&
stricter
6tate
egulation
s
permitted?
>es >es %o
/'%c(o%ur$%)'($ R$g / ?or&
o Who has to disclose:
HI4 not necessar"
HIH& HIJ if sell to non-accredited
investors.
o e*uirements:
eporting compan" information
b" incorporation
-nformation to be furnished per rule
HIC/b0
;ased on si3e of offering.
An"thing over G.H mil must
be in registration form.
o Filing re*uirement
%eed to file eg 8 statement wMin @H
da"s of start of offer.
Int$grat'on 7 ule HIC/a0 7 applies to A$$ 3
o -f A%> 62,(-<> -6 =FF228 within J
months ;2F=2 = AF<2 offering
integration
o -f within J months: five factor test
o HIJ gets integrated but not aggregated
o /242><#-%9 -%,$(8-%9 M=%2>0
Aggr$gat'on
o HI4MHIH
$oo! @C M=%<#6 ;2F=2 and is a
rolling clock
eg A and securities that violate K H
can aggregate
o HIJ no limit
o $imited b" price of the offering
,ash
.ropert" /fair m!t value0
o =%$> M=%2> is Aggregated
Accr$d't$d In#$%tor% 7 HI@/a0
o (nder HIH& HIJ can have infinite number of
accredited invests.
-f someone lies the"5re estopped
An"one who is& or the issuer
reasonabl" believes is /8umb luc! is
o!a"0:
Financial institution
.ension plans
4enture capital firms
,orporations with 1 H M in
Assets and other
organi3ations
-nsiders of issuer
/officerMdirector- polic"
ma!er not polic" follower0
%atural person with net
worth in e)cess of 1@ million
o $imited to 3H non-accredited.
Must be sophisticated 7 have to
have a reasonable believe which
means chec!ing into each person:
$evel of education
Oobs or positions the" had
<raining in finance or
business
.rior investments
-nvestment portfolio
.urchaser representatives 7 ule
6!1(+)
10
SECURITIES REGULATION SHORT OUTLINE
/@0 can use a rep to sa"
"ou5re sophisticated& but
cannot be:
o Affiliate& director&
officer& or emplo"ee
of issuer& or
beneficial owner of
@IR or more of an"
closs of e*uit"
securities& (%$266
elative b"
blood&
marriage&
adoption
/C0 need to ac!nowledge in
writing
/30 must disclose an"
relationship with the issuer.
,orporation can hire a purchasing
agent for "ou careful because
investor can later argue that their
interests were not represented: must
disclose relationship
$imited number /3H0 -- 8on5t count
HI@ /e0:
Famil" or relatives that live
in same house
>our compan" that "ou and
famil" in same house that
have combined ownership
of more than HIR
.6M,orp. count as one 7
unless formed specificall" to
bu" shares
-f all corp.5s 6#ers are
accredited investors.
Su8%tant'a( Co&,('anc$ < Ru($ 6!=
o 2)emption not lost if: /I non-accredited
originall"& no-disclosures given& but @ person
claiming to be accredited lied0
@. <he failure did not pertain to a
protection for the other people
C. Was insignificant with respect to the
offering as a whole
a. 6ignificant would be:
general solicitations: going
over the ma)imum amount:
having more than 3H
unaccredited investors
purchase a HIH& HIJ: forget
to file form
3. 9ood faith reasonable attempt to
compl" with rules
-'&'t%
o esale 7 HIC/d0 7 can5t resell unless the" are
registered.
8o investigation on bu"ers
Written disclaimer to each
purchaser
.lace notice on certificates
o 0o 4$n$ra( So('c'tat'on% 7 must have
previousl" e)isting relationship No .atter
"!et!er t!e( are accredited/*enman
#or"0
,an use investment ban!s that pre-
*ualif" people
;(< then have to wait 4H
da"s
%o newsletters HIC/c0 7 have to see
how involved issuer is /pa"ing for it:
giving information0
-nternet 7 o!a"& but protect the
information
o 8ut" to 8isclose 7 6hould still follow. =F if
"ou follow ule @3H/c0 or are completing
@IN
-nEunction: -f there is an inEunction& HIG/a0 sa"s "ou
must go bac! to K4/C0
Aggregation .roblems onl" when: HI4 and HIH& eg
A and eg A5s& eg A then eg 8 @C months
/. R$gu(at'on A 3??$r'ng%
Mini-egistration offering onl" for non-reporting
small companies
=nl" for (.6. and ,andadian
%o bad bo"s
o 2)emption fails if: those involved in the
issuance wMin the last H "ears did securities
fraud or wMin last @I "ears were convicted of
crime.
o ;(< can get a waiver from the 62,
%ot restricted resell immediatel"
9eneral 6olicitations o!a".
8ifferent terms
o egistration statement P offering statement
%o sale until offering statement is
*ualified.
o .rospectus P offering circular
Aggr$gat'on ules /onl" with other eg A
offerings0
o ,annot e)ceed 1H million in @C months.
i.e. loo!ing for another egulation A
offering in the previous @C months.
o 6econdar" offerings officers also want to
sell some of their stoc! in the offering
$imited to 1@.H million and counts
toward total.
Int$grat'on 7 CH@/c0
o 6afe #arbor: offerings and sale made in
reliance with regulation A will not be
integrated with:
11
SECURITIES REGULATION SHORT OUTLINE
An. ,r'or o??$r'ng% or %a($%
('nc(ud'ng R$g /) =
6ubse*uent offers or sales that are:
egistered
made in reliance of rule GI@
/22 plans0
part of emplo"ee benefit
plan
reliance of egulation 6
made more than si) months
after the completion of a
regulation A offering
J month time period after
o if fail safe harbor H factors
T$%t t+$ Wat$r%
o ;efore filing can ma!e a solicitation
o ,an be b" ads or broadcasts
o %eed legends and disclaimers sa"ing not an
offer to sell: &ust file "it! SEC +rior to
solicitig if)) substati'e or &aterial
c!ages /if " ou fail to submit does not give
mone" bac!& but does give 62, the right to
suspend0
o Failure to submit adsMbroadcast to 62,
could result in stop order
o ,an switch to a registered offering
Ru($ 26(d) 7
-ntention must be bona fide
Must wait 3I da"s
o Abandoning the offering 7 CH4/d0
Abandon if "ou want -- ,an do full
offering after 3I da"s
-f "ou want to do a eg 8 should
probabl" wait J months to ma!e
sure it won5t integrate.
A?t$r )'('ng: "ou cannot test the water.
Su8%tant'a( Co&,('anc$
o Ru($ 29! 7 no loss in e)emption if:
-ssuer acted in good faith
8eviation was insignificant in
relation to the offering as a whole
e*uirement not observed was not
intended to protect the purchaser
C. SEC30/ARY /ISTRIBUTI30S
At each stage "ou need to either register or "ou need to
find an e)emption.
;road categories:
o 8istributions registration is needed
o M!t <rading does not need to be
registered
-f "ou bu" on the open m!t and want to resell 7
"ou5re fine without registering.
A. Co&&on -a7 Int$r,r$tat'on%
St$, on$: find an e)emption or register
St$, t7opotential e)emptionMproblem:
K4/@0 sa"s a transaction b" an"one other than an
issuer& underwriter& or dealer are e)empt from KH.
St$, t+r$$ 7 are "ou an underwriter:
o .art one:
#elpers for the issuer or control
person =
.urchase from issuer or control with
intent to resell =
-f "ou have investment
intent "ou are not an (W
.articipate directl" or indirectl" in
purchasing them
o A%8 .art two:
.art of a distribution.
,ontrol person?
o ,ontrol of policies& officers& power to control
compan"
o Authorit" to compel people to sign a
registration statement.
o @IR holding in most companies& but can be
as little as CR
o What can a control person do:
esell through original e)emption
D e)emption 7 loo!s li!e alston
6ell "ourself to people on street
corner
(se @44 6afe harborW
8istribution?
o %ot a distribution:
esale b" nonaffiliatedMnon-control
person of stoc! purchased in a
registered offering
-f unregistered:
%ot a control person and
securities come to rest
-f resale is consistent with
original e)emption
o Applies to affiliates
and nonaffiliates
,ontrol person purchases
registered securities can
resell to Ralston people
/4X e)emption0.
UW E1 :: H$(,$r o? '%%u$r"contro( ,$r%on F
d'%tr'8ut'on
o ,ontrol persons are not protected b" their
investment intent.
,are about purchasers investment
intent
12
SECURITIES REGULATION SHORT OUTLINE
o 9oing to re-issue shares& the" need to
register them or find an e)emption
o #hinese #onsolidated /deemed to help
the issuer and there was a distributioneven
though not agents or formall" related to the
,hinese government0
o Wolfson
o -f bu"er purchases from "ou& the" become
(W V3.
UW E2 < *urc+a%$ ?ro& I%%u$r or C.* 7't+ 'nt$nt
to r$%$((
What constitutes intent?
o ,$ unsure 7 time is an indicator
o <here is a change in circumstances
defense 7 however this has to be
convincing and specific.
$enders who use shares as collateral:
o 8epends on the li!eliness of default
o Will ma!e the lender an indirect
participant& i.e. (W V3.
o What can lender do:
,an sell to a sophisticated
person with access and not
violate 4/C0
8on5t sell at all.
UW E3 < 'nd'r$ct(. or d'r$ct(. ,art'c',at$ 'n E1
or E2
/3 )IRST Ru($ 1 SA)E HARB3R
9eneral safe harbor that sa"s not a distribution -F:
Ma!e disclosures
6ell in bro!er transaction
#onor volume limits
#onor holding period
Nualif" for non-affiliate @ "ear e)ception.
8oes not honor change in circumstances theor".
,overed 6ecurit"? 1(a)(3)
%on-public offering
eg 8
eg 6
A%ote 'ntra:%tat$ %$cur't'$% ar$ not co#$r$dB
o = has to be an Affiliate
,overed compan"? 1(c)
eporting compan" for DI da"s and current reports
Arationale: want lots of information about compan"
to ma!e this less ris!"B
%on-reporting compan" that has disclosed
information a!in to that of a reporting compan".
1(2)
<ransactions that fall under safe harbor:
6ales b" non-control person of restricted stoc!
6ales b" control persons and their bro!ers of
restricted stoc!
6ales b" control persons /through bro!ers0 of
unrestricted stoc!
#olding .eriod for estricted 6ecurities for reporting
issuers
e*uired holding period J months.
o From the original issuance 7 when "ou got
from the issuer or the affiliate.
Affiliate P someone the issuer has
control over.
%on affiliate P 9 &ont+% wM
information re*uirements& or Eust
wait @ "ear with no re*uirements
#olding .eriod for estricted 6ecurities for %=%
reporting issuers
e*uired holding period =%2 >2A.
For (nrestricted 6ecurities
%o #olding period& but all other restrictions appl"
For affiliate& be aware of @Jb
6pecial issues:
o -f "ou borrow mone" to purchase:
6tarts when "ou pa" it off& =
<ime relates bac! to when "ou
purchased the stoc! -F:
@. Full recourse loan A%8
C. with collateral other than
the securit"& A%8
3. the debt is full" paid before
the resale.
ationale: want to have the original
purchaser to have assumed all the
ris!.
o 6toc! split 7 deemed to hold all stoc! from
the original date.
o .ledged securities
-f pledgor is nonaffiliated 7 when
pledgor defaults& the ban! has to
wait @ "r after pledgor got securities
from issuer or affiliate.
-f pledgor is a??'('at$Mcontrol
person& ban! can tac! on time that
pledgor held securities
@. %o tac!ing if pledged
without recourse
o 9ifts
From 0on:a??'('at$ < go bac! to
when it initiall" purchased
-f a??'('at$ 7 unclear
@. ,an tac! on the time the
donor held it.
C. 6till subEect to volume
limitations
4olume $imits:
9reater of:
o @R of outstanding shares =
13
SECURITIES REGULATION SHORT OUTLINE
o Average wee!l" trading in an" three month
period.
Aggregation limits:
o Add in pledges b" sellers /i.e. pledges to a
ban!0
o 9ifts
2)ception: %on-affiliate has no volume limits
Manner of 6ale:
Must be done in Brok$r tran%act'on%
o ,an onl" e)ecute transactions of unsolicited
orders
o Allowed to contact other bro!ers to find
customers for the sale.
o 8ut" to ma!e sure this is not stoc! dumping.
,an give *uote to other intra dealers
1(G) 7 not the onl" wa" "ou can resell securities but
that this is what 62, prefers.
144 safe
harbor
Affiliate or behalf of
one
Non-affiliate (and
has not been one
for the previous
three months)
Restricted
securities of
Reporting
issuers
>6 months holding
w information!
volume ! manner of
sale for e"uit#
securities
restrictions and
filing of form 144
>6 months
holding!
information
re"uirement
>1 #ear! no
re"uirements
Restricted
$ecurities of
Non-
Reporting
%ssuers
>1 #ear holding w
information! volume
! manner of sale for
e"uit# securities
restrictions and
filing of form 144
>1 #ear holding!
no re"uirements
&nrestricted
securities
No holding
re"uirements w
information! volume
! manner of sale for
e"uit# securities
and filing 144

-f an affiliate wants to sell& he ma" sell to:
@. N-;: @44A
C. alston .eople: 4 X but must otherwise be
unrestricted
3. =pen Mar!et: @44
<he affiliate does not violate 4/@0 if:
@. 6treet ,orner
C. .ursuant to the 2)emption through which the"
obtained the securit"
N-; e*uirements
o Financial -nstitutions with @IIM plus assets
plus 1CH audited net worth in their latest
published annual financial statement
o ;ro!er-8ealers Eust have to have more than @IM
in assets
o ,orporations or .artnerships with @IIM
o esale of a 6ecurit" to a N-;&
o -nform bu"er the" are being sold pursuant to
@44A&
o ,an5t be the same class of securit" as on the
national e)change /normall" debt securities& not
e*uit"0&
o 6eller and ;u"er have to be able to get specific
info from bu"er& and
o 6eller can5t be the original issuer
4/@X0 2)emption
6tep @: 6ee if the securities is restricted for a
reason other than being owned b" a control
person
6tep C: 6ell to a alston person /sophisticated
wMaccess0
-f "ou can5t sell through4/@X0& tr" @44 or @44A
14