Prof Carlson

Sec Reg Outline

Fall 2005
PART A: DEFINING SECURITY I.E. WHAT INSTRUMENTS ARE SUBJECT TO THE
REGULATORY REGIME
I. WHAT IS A SECURITY?
a. A transaction involving a security triggers the following regulations
i. Registration of !u"lic offerings of securities
ii. #isclosure "y those who !u"licly offer the securities
iii. Registration "y co$!anies whose securities are !u"licly tra%e%
iv. #isclosure "y those who solicit votes fro$ hol%ers of !u"licly
tra%e% securities
v. #isclosure "y those who offer to "uy !u"licly tra%e% securities
vi. &i$its on tra%ing "y those who have insi%e infor$ation
vii. #isclosure "y insi%ers an% those who hol% s!ecifie% a$ounts of
!u"licly tra%e% securities
viii. Registration "y !ersons in the "usiness of inter$e%iating
transactions involving securities
i'. A%$inistrative an% (u%icial lia"ility of !ersons who violate
securities laws
'. Antifrau% !rotection for those who "uy or sell securities
b. 2(!("! #$ %&' S'()*+%+', A(% b*'-, ,'()*+%. /#01 +1%# $'0
(%'2#*+',:
i. )nterests or )nstru$ents s!ecifically na$e% in the Act
*. Stoc+ $ost things which are la"ele% stoc+ are securities.
2. ,otes things which evi%ence in%e"te%ness ten% to "e seen
as securities
-. Other interests s!ecifically na$e%
a. Preorgani.ation su"scri!tions for securities
". Fractional/ un%ivi%e% interests in oil/ gas or other
$ineral rights
c. Collateral trust certificates
%. Certain ty!es of recei!ts for securities
e. 01ui!$ent trust certificates
ii. )nvest$ent Contracts these "eco$e the catch2all which the courts
an% the S0C have use% for every new instru$ent3financial !ro%uct
which they see. 4his is the fall "ac+ !rovision which you can try to
fit so$ething un%er when it is not otherwise %efine% un%er 526a7
6*7.
iii. Catch2All )n a%%ition to the ite$s s!ecifically liste% in 526a76*7
an% the a$"iguous invest$ent contract/ the *8-- Act also inclu%es
a catchall !rovision that swee!s into the %efinition of a security/
in general/ any interest or instru$ent +nown as a security.
c. A13.,+, $#* ,'()*+%+',: 0&'1 (#1$*#1%'/ 0+%& ,#4'%&+12 1/ 1#% ,)*'
+$ +% +, ,'()*+%.5 ),' %&' $#33#0+12 13.,+,
i. )f a stoc+ or e1uity 9 !ro"a"ly consi%ere% a security
ii. )f a ,ote 9 !ro"a"ly consi%ere% a security
*
Prof Carlson
Sec Reg Outline
Fall 2005
iii. 0ven if it is so$ething which no$inally falls un%er an enu$erate%
category/ is itin actual fact not a security: 6see "elow for analysis
of situations when stoc+s3notes are not actually securities7
iv. )f ,O4 a note/ stoc+ or e1uity 6or one of the other enu$erate%
things79 can it "e viewe% as an invest$ent contract 6an% thus a
security7:
v. 0ven if it )S a security/ is there so$e reason not to regulate it li+e a
security/ such as a co$!eting fe%eral regi$e: 6International
Brotherhood of Teamsters v. Daniel)
II. IN6ESTMENT CONTRACTS
a. 4he ;owey 4est 6fro$ SEC v. WJ Howey Co. 7 7 8*% %',% $#* 0&'%&'*
,#4'%&+12 +, 1 I19',%4'1% C#1%*(%:
i. A 8'*,#1 +19',%, 93)' : 6later legal consi%eration suffices2 e'.
future service7
ii. I1 (#44#1 '1%'*8*+,' 2 !ooling </ !rocee%s = o!!ortunities
*. ;ori.ontal Co$$onality !ool of investors/ get !rofits
"ase% off this !ool
2. >ertical Co$$onality "etween investor 6a7 = investee 6"7/
a = " fortunes tie%/ each !rofits %e!en%s on relationshi!? if
the !ro$oter $a+es $oney the investors $a+e $oney?
they@re %irectly tie%.
-. #ifference with hori.ontal co$$onality the !rofits are
"ase% on the collective !ool of invest$ents. 4here is
nothing anyone a"ove the$ has to %o. H#*+;#1%3
(#44#13+%. 30., ,)$$+(+'1% %# ,%+,$. (#44#1
'1%'*8*+,' 0&'*', +1 ,#4' (,', 9'*%+(3 (#44#13+%.
,)$$+(+'1% b)% +1 ,#4' (,', 1#%.
A. On e'a$ argue for "othB
iii. W+%& %&' '<8'(%%+#1 #$ 8*#$+%, 2 6or change in econo$ic status7
iv. S#3'3. %&*#)2& %&' 412'*+3 '$$#*%, #$ #%&'*, C 6rela'e% to
!re%o$inantly 6!ractically solely77
". ,O40 C return a$ount %oes not always nee% to "e contingent/ a !ro$ise
of a high level fi'e% return can still "e !rofit un%er the ;owey test.
i. SEC v. Charles Edwards an invest$ent sche$e !ro$ising a fi'e%
rate of return can "e an invest$ent contract an% thus a security
su"(ect to the fe%eral securities laws. 4here is no reason to
%istinguish "etween !ro$ises of fi'e% return an% !ro$ises of
varia"le returns for the !ur!oses of the ;owey 4est.
c. Relevant Cases
i. SEC v. Koscot Interlanetary Inc 4his was a case involving a
!yra$i% sche$e. Security "3c loose for$ of vertical co$$onality
in that so$e econo$ic !ro%uction loosely tie% to !ro$oter@s return
*. !"TE in this case/ on way to have structure% it to "rea+
the co$$onality woul% have "een that the $anager gets
u! front !ay$ents3!ercentage/ an% the investors si$!ly eat
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Prof Carlson
Sec Reg Outline
Fall 2005
what they +ill C this woul% result in a "rea+ in the vertical
co$$onality since there woul% no longer "e !rofit sharing.
ii. Steinhardt v. Citi#ro$ ,ot )nvest$ent contract "3c veto !ower
$eans su"stantial involve$ent which $eans aren@t relying
su"stantially on others DFROE 0=0 &i$ite% !artner@s interests
are not securities if the &P can an% %oes e'ercise !ervasive
control of the !artnershi!F
iii. SEC v. %ife &artners ,ot invest$ent contract "3c !re2invest$ent
efforts %oesn@t satisfy relying on efforts of others. 4his case stan%s
for the i%ea that $anagerial effort to satisfy the ;owey 4est
$ust "e !ost2invest$ent.
iv. 'reat %a(es Chem Cor v. )onsanto Com &&C not security "3c
P ha% control over $g$t 6not sa$e veto !ower as in Steinhardt7
III. WHEN IS STOC= CONSIDERED A SECURITY?
a. Overview 526a76*7 of the Securities Act an% 5-6a76*07 %efine stoc+ is a
security unless the conte't otherwise re1uires. 4he courts have hel% that
,O4 all instru$ents la"ele% stoc+ are securities.
". 0cono$ic Reality 4est 6fro$ *nited Ho$sin# +o$ndation v. +orman7 the
%efinition of a security $ust reflect the econo$ic reality.
i. 4o %eter$ine whether stoc+ shoul% "e consi%ere% stoc+/ as+ the
following 1uestions
*. Are there rights to %ivi%en%s which are contingent on
!rofits:
2. ,egotia"ility
-. A"ility to "e !le%ge% or hy!othecate%
A. Are the voting rights !ro!ortionate to the nu$"er of shares
hel%:
5. Coul% the shares a!!reciate in value:
ii. ,O40 0cono$ic Reality 4est overrules Sale of Gusiness
#octrine. 6%andredth Tim,er Comany Co. v. %andredth7
I6. WHEN IS A NOTE CONSIDERED A SECURITY?
a. Overview 526a76*7 of the Securities Act an% 5-6a76*07 %efine a security to
inclu%e any note unless the conte't otherwise re1uires. )n !ractice/
$any notes given in consu$er an% co$$ercial financing transactions
shoul% not "e/ an% are not/ treate% as securities.
". Fa$ily Rese$"lance 4est 6fro$ -eves v. Ernst . /o$n#7 the test to
%eter$ine whether a !articular note is a security.
i. Start out with the re"utta"le !resu$!tion that all notes are
securities.
ii. 0'ce!tion to the re"utta"le !resu$!tion if the note falls into a
category of instru$ents 6such as a note which "elong to the lan% of
consu$er co$$ercial finance7 or if it "ears a fa$ily
rese$"lance to such instru$ents 9 the note is ,O4 a security
*. 4he following is a list of such notes which are not
securities
a. ,otes use% in consu$er len%ing
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Prof Carlson
Sec Reg Outline
Fall 2005
". ,otes secure% "y a $ortgage on a ho$e
c. Short2te$ notes secure% "y an assign$ent of
accounts receiva"le
%. Consu$er financing
e. character loans to "an+ custo$ers
f. short2ter$ secure% financing of accounts receiva"le
g. co$$ercial "an+ loans for current o!erations
h. short2ter$ o!en2account %e"ts incurre% in the
or%inary course of "usiness
iii. For new ty!es of notes transactions which are not covere% "y
this list/ use the following four factors to %eter$ine whether or not
the instru$ent is a security
". W&% +, %&' P)*8#,'> M#%+9%+#1 #$ b).'*>,'33'* ?+, %&'
8)*8#,' %# *+,' 4#1'. $#* b),+1',, '1%'*8*+,'>$+11('
+48*#9'4'1%,@A
a. )f for invest$ent3"usiness enter!rise 9 $ore li+ely
a security
". )f to finance !urchase of an ite$3i$!rove$ents 9
not a security
2. P31 #$ /+,%*+b)%+#1 ?+, %&'*' (#44#1
%*/+12>,8'()3%+#1@ A
a. )f wi%ely offere% an% tra%e% 9 $ore li+ely a
security
". )f given face2to2face or to a li$ite% grou! 9 $ore
li+ely not a security
B. R',#1b3' '<8'(%%+#1, #$ +19',%+12 8)b3+(
a. ,O40 in -eves Court sai% that !u"lic e'!ectations
coul% lea% to %efining so$ething as a security even
if it woul% not "e un%er an econo$ic analysis.
7. A*' %&'*' #%&'* $(%#*, %# *'/)(' *+,-?
a. )s there another Fe%eral Regulatory Regi$e: 0H
0R)SA/ "an+ing regulations etcI
". 0H certificates of %e!osit shoul% "e securities/ "ut
since there are other fe%eral regulatory regi$es to
re%uce ris+s/ they are not consi%ere% securities.
0)arine Ban()
c. )f the note is not collaterali.e% an% not su"(ect to
nosecurties regulations 9 $ost li+ely a security
%. )f note is secure% or otherwise regulate% "y another
regi$e 9 $ost li+ely not a security
5. ,O40 no one -eves factor is necessary or sufficient for a
note to "e a security.
c. ,O40 C $ost courts hol% that if a note %oes not !ass the fa$ily
rese$"lance test i.e. is not consi%ere% a security/ you cannot then go
through an% try to argue that it is an invest$ent contract instea%.
%. Cases
A
Prof Carlson
Sec Reg Outline
Fall 2005
i. -eves v. Ernst . /o$n# court foun% this to "e a Jall St. note an%
thus a security
ii. Daniel v. Teamsters this %ealt with e$!loyee !lacing one %ollar in
!ension !lan for every hour e$!loyees wor+. 4he 1uestion was
whether the e$!loyees were "uying a security: the court says it
was not really a %ecision on the !art of the e$!loyee to !ut u!
value/ since they aren@t surren%ering services to $a+e an
invest$ent/ "ut rather it is surren%ering services to get a (o" an%
get !ai%.
PART B: DEFINING THE TRANSACTIONS AND PARTIES SUBJECT TO THE ACT
I. WHEN IS THERE AN OFFER OR A SALE?
a. 55 a!!lies to offers to sell or actual sales of securities in interstate
co$$erce. 526a76-7 says that every contract of sale or /+,8#,+%+#1 #$
,'()*+%. $#* 93)' constitutes an offer3sale such that 55 a!!lies.
i. #is!osition 9 the act of transferring so$ething to another@s care
or !ossession.
ii. Sale inclu%es offer for sale2 solicitation/ entice$ent/
encourage$ent of sale. 0H Kust saying H is a goo% fir$ w3high
earnings $ay "e an offer
iii. )nclu%es even legal consi%eration
iv. Offer C soliciting interest in a sale
v. Sale C a sale or transfer of value/ with consi%eration "eing very
"roa%ly construe% 6security or a right or interest in a security
!assing for value7
". >arious )nstru$ents an% whether they constitute offers3sales
i. O!tions3Jarrants3Conversion Rights:
*. )f ,ot !resently e'ercisa"le 9 ,O4 a sale
2. )f !resently e'ercisa"le 9 "oth the rights an% the
un%erlying securities are treate% as "eing sol%/ an% $ust "e
registere% when issue%/ even "efore use
ii. #erivative: %irector of co$!any thin+s stoc+ goes %own/ "ut
%oesn@t want to sell "3c %on@t want to %isclose/ get to sa$e !lace/ is
it 526-7 this is not a sale so can get aroun%
iii. #erivatives can get result of sale/ without a 526-7 sale
iv. 0'. C0O of 4yco2 sai% long ter$ hol%er of stoc+/ at sa$e ti$e
"ought a %erivative2 %i%n@t have to %isclose.
v. ,O40 #ifficulty of law a%o!ting to innovation is seen through
%erivatives
c. - 0'a$!les of Jhen So$ething is a Sale
i. S!inoffs SEC v. Datronics En#ineers Inc.14er$ Lsale@ inclu%es a
L%is!osition of a security@/ the %isse$ination of a new stoc+ a$ong
#@s stoc+hol%ers was a sale "3c !u"lic co$!any receive% value
in e'change for the stoc+ it gave in the for$ of stoc+ fro$ the
!rivate co$!any.
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Prof Carlson
Sec Reg Outline
Fall 2005
*. GM4 ,O40 not all s!inoffs are treate% as sales. 0H if a
seasone% co$!any s!ins off a su" "y issuing the su"s@
shares as a %ivi%en% to the co@s !u" S; 9 no sale
ii. Once stoc+ interest gets change% it@s a sale
iii. Niving u! info is sufficient for consi%eration 0H #otco$
co$!any giving out securities to !eo!le who fill out a
1uestionnaire a"out the$selves.
%. - 0'a$!les of 4hings which are ,O4 Sales
i. Puts if you thin+ a stoc+ is a"out to fall an% you want to !rotect
self against loss/ you can sell your stoc+/ "ut if you %on@t want to
sell it now/ you can !ut your stoc+ to so$eone else at a
!articular !rice.
ii. Short Sale "orrower shares fro$ so$eone else/ sell the shares/ an%
then ho!e that the stoc+ %eclines so that when you "uy the stoc+ to
return to the other !erson the stoc+ has %ecline% so you have to
return less.
iii. Collar at 80 you get out of the $ar+et/ an% **0 they ta+e it fro$
you. 4his ensures that you are collare% in the $ar+et an% you have
li$ite% your ris+.
II. ISSUERS5 DEALERS5 UNDERWRITERS AND CONTROL PERSONS
a. )ssuers
i. 2(!(7! #$ %&' S'()*+%+', A(% an )ssuer is any !erson who issues
or !ro!oses to issue any security.
". #ealers
i. 2(!("2! #$ %&' S'()*+%+', A(% A %ealer is any !erson who
engages in the "usiness of %ealing or tra%ing in securities.
*. 0'e$!tions for #ealers
a. 5A6-7 of the Securities Act lifts the regulatory
"ur%en create% "y 5A6*7 once the registration !erio%
en%s.
". #ealers e'e$!t fro$ "eing consi%ere%
un%erwriters "y virtue of their !artici!ation in the
un%erwriting !rocess if they !erfor$ only nor$al
%ealer functions in e'change for nor$al %ealer
co$$issions.
c. Mn%erwriters
i. 2(!(""! #$ %&' S'()*+%+', A(%: An Mn%erwriter is so$eone who
engages in the %istri"ution of the security.
*. Categories of un%erwriters un%er 526a76**7
a. Purchase% fro$ issuer Dor control !ersonF w3view to
%istri"ute C %eals with resale of restricte% securities
". Agent for issuers 2 offers3 sells for issuer in
connection w3%istri"ution of any sec
c. #irect3 in%irect !artici!ation in any such
un%erta+ing C %eals with resale of control securities
2. #istri"ution any offer or sale to !u"lic investors.
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Prof Carlson
Sec Reg Outline
Fall 2005
++. A2'1% $#* I,,)'*
*. Co$!ensation fro$ the issuer is not a con%ition to "eing an
un%erwriter for an issuer.
2. SEC v. Chinese Consolidated Benevolent 2ssociation court
hel% CGA to "e un%erwriter when engage% in such
"ehaviors as selling "on%s/ !assing the securities on to the
"uyers/ an% collecting $oney.
iii. P)*(&,'* $*#4 I,,)'* 0+%& 9+'0 %# D+,%*+b)%': a !erson
who !urchases securities in a !rivate !lace$ent an% then resells in
a !u"lic tra%ing $+t is an un%erwriter if she !urchase% with a
view to resell to !u"lic investors.
*. Eust !urchase sec in non!u"lic offering !ursuant to 5A627
for invest$ent = not w3view to %istri" of sec/ otherwise
will "e un%erwriter 526a76**7
a. *S v. Sherwood1 )nvestor intent invest$ent not
w3view to %istri"ution 6# hel% sec 2 yrs7
". SEC v. '$ild +ilms "an+ ac1uire% !le%ge%
securities e'!ecting "orrower to %efault/ so seen as
ac1uiring with a view to %istri"ute.
2. Change of Circu$stance #octrine courts have re(ecte%
this.
a. 'illian3 Will . Co. v. SEC Ct re(ects change%
circu$stances argu$ent? )nvestor trie% to sell !riv
!lace$ent after O $nths "3c con%itions woul%@ve
le% !ru%ent investor to sell
-. ,O40 See "elow for %iscussion of Rule *AA C safe har"or
for resale of restricte% securities
iv. R',3', #$ C#1%*#3 S'()*+%+',: securities !rofessionals who assist
control !ersons in %u$!ing their stoc+ into !u"lic $+ts w3o
registration are lia"le as un%erwriters "y virtue of their
!artici!ation.
*. Jho is a Control Person
a. R)3' 7CD !ossession/ %irect3in%irect of !ower/
cause $g$t %irection = !olicies/ whether through
ownershi! of voting sec/ "y P/ or otherwise
". Presu$!tion of control own Q*0R of stoc+2
stronger if Q20R
c. Power even if une'ercise% $ay constitute a
controlling !erson
%. R of ownershi! or right to vote not conclusive evi%
of control "ut +ey
e. Controlling Nrou! generally unless
!erson3i%entifia"le grou! clearly in control "y
!ossession and use of voting !ower/ all %ir =
!olicy2$a+ing off !resu$!tively $e$"ers of
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Prof Carlson
Sec Reg Outline
Fall 2005
control grou! = only co$!elling evi% contrary
shoul% re$ove the$ fro$ the grou!
2. Cases
a. SEC v. +ran(lin 2tlas Cor. Pres of fir$ 6not a
S;7 was a control !erson
". 'ild +ilms1 !erson len%s $oney to so$eone who is
guarantee% "y stoc+. Jhen $oney isn@t !ai% he
sei.es stoc+ an% resells it. )n this case/ he is
consi%ere% a statutory un%erwriter 9 no goo% faith
e'ce!tion to these rulesB
v. Jays to avoi% "eing consi%ere% a statutory un%erwriter
*. if want to resell securities to investing !u"lic loo+ to
*AA3*A5
2. if want to resell !rivately loo+ at A6* T7 or *AAA
-. resell offshore un%er Regulation S outsi%e of MS
PART C: EEEMPTIONS FROM SECURITIES ACT REGISTRATION
I. EEEMPT SECURITIES
a. An 0'e$!t security is always e'e$!t fro$ registration/ "oth when issue%
an% later when tra%e%.
". 5-6a7627 Sec issue%3guarantee% "y any fe%/ state or terr gov entity or "y
national3state "an+
c. 5-6a76-7 Short ter$ notes or "ill of e'change fro$ a current transaction
6co$$ercial !a!er7.
%. 5-6a76A7 Sec fro$ non!rofit/ religious/ e%ucational/ fraternal or charita"le
e. 5-6a7657 Sec of certain S=& = far$ers@ coo!eratives
f. 5-6a76O7 )nterests in RR e1ui!$ent trusts
g. 5-6a76S7 Certificates of trustee3%e"tor in !ossession in "an+ru!tcy
!rocee%ing/ issue% w3ct a!!roval
h. 5-6a76U7 )nsurance !olicies or annuity P issue% su"( to su!ervision
%o$estic gov authority
i. )nvest$ent Co$! Act 52A6%7 e'e$!tion ina!!lica"le to any sec which an
invest$ent fir$ is issuer
(. 5-6a7687 )ssuer e'changes w3e4istin# c$stomer for new sec$rity2 e'e$!t
6no cash/ no gen sol7
i. ,ot a new security unless there are chan#in# economic conditions
i. !o Cash )nvestor $ay want < to e'change/ $ay let go "an+ru!t
"3c want cash
ii. !o 'en Sol allowed 4ough for investor to +now "enefits of
e'change
iii. ,ot su"(ect to integration or aggregation.
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Prof Carlson
Sec Reg Outline
Fall 2005
". 5-6a76*07 )f issue in connection w3"an+ru!tcy !rocee%ing 6state a!!rove%
!rocess C this a!!lies if the issuance is a!!rove% "y a court or
a%$inistrative agency !ursuant to a fairness hearing72 e'e$!t
II. O6ER6IEW OF TRANSACTION EEEMPTIONS
a. Overview ?SEE CHART PAGE 727@
i. 4ransactions sol% un%er a transaction e'e$!tion %o not the$selves
"eco$e e'e$!t. 0ach ti$e they are transacte%/ the seller $ust fin%
a transaction e'e$!tion to avoi% registration.
ii. Gur%en of !roof 9 on the !arty see+ing the transaction e'e$!tion.
". )$!ortant )ssues to Consi%er w34ransaction 0'e$!tions
i. I1%'2*%+#1 D!ri$arily 505350OF
*. As+ the following to %eter$ine if $ulti!le offers3sales
constitute an integrate% offering:
a. Are they !art of a single !lan of financing:
". #i% they involve the sa$e class of security
c. #i% they ta+e !lace at a"out the sa$e ti$e
%. #i% they involve the sa$e consi%eration:
e. Jere they %one for the sa$e general !ur!ose:
2. Safe ;ar"ors Mn%er the S0C safe har"or rules/ sets of
sales se!arate% "y si' $onths are consi%ere% se!arate
offerings an% are not su"(ect to integration.
a. Regulation # transactions 9 Rule 5026a7
". )ntrastate offerings 9 Rule *AS6"7627
-. 0'ce!tions to )ntegration
a. a P)P0 un%er rule *52 C if you %o a A627 PP an%
then a registere% !u"lic offering/ you %on@t integrate
the two.
". Rule *55 C if you a"an%on a faile% !u"lic offering
then you can wait -0 an% try a !rivate !lace$ent/
an% you %o not nee% to integrate the two.
c. A3G 0'change 6also un%er Rule *527C if you %o a
A627 %e"t offering through A627 followe% "y a
registration state$ent 6"ecause you %eci%e you
woul% rather have a !u"lic offering7 then it can "e
not integrate% un%er A3G e'change. )n effect you
are saying that this is a single offering. Vou are not
issuing new securities/ you are essentially changing
the character of the original securities. 4his is
essentially two se!arate transactions which woul%
nor$ally "e integrate%.
++. A22*'2%+#1
*. As the following 1uestions to %eter$ine if there was
aggregation
a. Jere the offerings %one un%er 5-6"7 e'e$!tions
6i.e. Rules 50A35057: )f ,O 9 aggregation cannot
a!!ly
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Prof Carlson
Sec Reg Outline
Fall 2005
". Jere the offerings %one within *2 $os of
eachother:
c. )f you co$"ine% the offerings/ woul% it e'cee% the
allowe% a$t for either offering:
+++. I1%'2*%+#1 (#48*'/ 0>A22*'2%+#1
*. )ntegration all offers an% sales that are !art of a Reg #
offering $ust $eet all the con%itions of the relevant
e'e$!tive rule
2. Aggregation si$!le %ollar calculation for the %ollar li$its
of the li$ite% su"set of -6"7 "ase% offerings 6R50A an%
5057
-. 50O or A627 "ase% transactions integration/ "ut no
aggregation
III. TRANSACTION EECEPTIONS : PRIMARY OFFERINGS BY ISSUERS
a. )ntrastate offerings
i. S%%)%#*. E<'48%+#1 : B(!(""! )n2state transactions e'e$!t
6"3c fe% laws72 incor! in state '/ !rinci!al !lace of "i. in state '/ all
investors in state ' 6if offere% to * !erson out of state/ even if it
%oes not result in a sale/ no e'e$!tion7
*. Sco!e of 5-6a76**7
a. All securities offere% as !art of an issue are
integrate%.
". 4he instate re1uire$ent says resi%ent an% %oing
"usiness within the state
c. )n state offerees offerees $ust "e %o$icile% within
the state
%. Restriction on resales securities $ust co$e to
rest !rior to "eing resol%.
ii. S$' H*b#* : R)3' "7F %efines resi%ence of noncor!oration as
the !lace where organi.e% or !rinci!al !lace of "i.. An )ssuer is
%ee$e% to "e %oing "i. in a state if !rinci!al office is in state an%
U0R of gross revenues/ U0 !ercent of consoli%ate% assets/ an% U0
!ercent of inten%e% use of offering@s net !rocee%s are in the state.
*. Sco!e of Offering
a. Set of sales se!arate% "y si' $onths are not
integrate%
". 4he re1uire$ent says Princi!al office within state/
an% U0 !ercent of gross revenues/ assets/ an%
!rocee%s use are within state
c. )n2state offerees Offerees $ust have !rinci!al
resi%ence within the state.
%. Restriction on resales ,ine2$onth safe har"or
hol%ing !erio%.
". Private Place$ents
i. S%%)%#*. E<'48%+#1 : 7(2!
*0
Prof Carlson
Sec Reg Outline
Fall 2005
*. Factors to %eter$ine if a given offer can "e consi%ere%
!rivate 6fro$ -alston &$rina7
. O$$'*'' G)3+$+(%+#1,
i. )s the investor so!histicate%:
ii. #oes the Offeree have the a"ility to ta+e
ris+s:
iii. #oes the offeree have e'!erience in these
ty!es of $atters3invest$ents:
iv. #oes the Offeree have a nee% for !rotection:
". A9+3b+3+%. #$ I1$#*4%+#1 C investors $ust have
access to infor$ation co$!ara"le to the +in%
availa"le via registration state$ent 6either "ecause
of !osition/ or "ecause it is issuer !rovi%e%7.
c. M11'* #$ %&' O$$'*+12 C %oes it have the
hall$ar+s of a !rivate !lace$ent offering as %istinct
fro$ a !u"lic offering: Must have no general
solicitation.
/. B'3+'$ %&% %&',' ,'()*+%+', ,&#)3/ (#4' %# *',% +1
%&' #$$'*''H, &1/,
i. ,O40 courts have inter!rete% the 5A627
e'e$!tion not to li$it the %ollar a$ount or
nu$"er of investors for a !rivate !lace$ent/
focusing instea% on a sli%ing scale of
investor so!histication an% access to
infor$ation a"out the issuer. 4he "ur%en of
esta"lishing the e'e$!tion rests on the
!erson clai$ing it.
2. 5A627 securities "eco$e restricte% securities.
-. Further 0'!loration of Neneral Solicitation
a. In re Kenman Sec$rities #isclai$er that so$ething
is not a solicitation %oesn@t $ean anything. Vou are
!er$itte% to solicit !eo!le you have a !ree'isting
relationshi! with.
". )PO ,et &etter 4he way to get out of so$ething
"eing consi%ere% solicitation is to follow the
Kenman ste!s i.e. have "uyers register w3"ro+ers
saying that they are intereste% etcI
A. Further e'!loration of )nfor$ation re1uire$ents !u"lic
co$!anies have lots of %uties re1uiring the$ to give out
infor$ation. )n !rivate !lace$ents they cannot (ust "last
out the infor$ation everywhere/ "ecause then it coul% "e
seen as general solicitation.
a. *-56c7 !u"lic co$!anies can give the "asic "are
facts regar%ing !rivate !lace$ents 6na$es/ !laces
etcI7 without the un%erwriters or contact
infor$ation for invest$ent o!!ortunities.
**
Prof Carlson
Sec Reg Outline
Fall 2005
". Reg F# co$!any can %ivulge infor$ation to
certain !eo!le "ut $ust o"tain confi%entiality
agree$ents so that they cannot use the infor$ation.
5. Cases
a. SEC v. -alston &$rina accor%ing to the court/ nee%
to loo+ at who the !eo!le are who are given offers/
not (ust the sales. )n this case so$e of the offerees
were e$!loyees who nee%e% !rotection 6not (ust
!resi%ents3C0Os7. DFro$ 0=0 the court hel% that
5A627 e'e$!tion a!!lies when offerees an%
investors/ regar%less of their nu$"er/ are a"le to
fen% for the$selves.
". Doran v. &etrole$m )#mt. Cor !arty clai$ing
5A627 e'e$!tion $ust show that each
!urchaser3offeree $eets the sli%ing scale of
so!histication3infor$ation or the e'e$!tion is lost.
++. S$' H*b#* I R)3' DCJ #$ R'2 D
*. ,o issuer li$its
2. Mnli$ite% a$ounts
-. M! to -5 nonaccre%ite% investors 6$ust receive %isclosure
%ocu$ent/ an% $ust "e so!histicate% or have investor re!7
A. #isclosure infor$ation re1uire%
5. ,o general solicitation
O. ,o "a% "oy %is1ualification as long as it is %isclose%
S. )nvestor So!histication is $ost i$!ortant here
U. ,o general $ar+eting
c. Certain s$all offerings
+. S%%)%#*. E<'48%+#1,
*. Rules 25*22OA 6Reg A7
a. Can e'e$!t offerings to !u"lic u! to 5E
". )ssuer $ust co$!ly with filing an% circular %elivery
re1uire$ents si$ilar to those in 55.
c. Only availa"le to nonre!orting MS an% Cana%ian
issuers
%. ,o "a% "oys C this $eans !eo!le who are "a%
"oys not allowe%
e. ,o li$itations on general solicitations
f. ,o investor 1ualifications
2. Rule S0*
a. 4his can "e use% for s$all "usiness an%
co$!ensation !lans
". )f a co$!any wants to offer stoc+3o!tions to
e$!loyees !ursuant so$ehow to co$!ensation
!lans
c. &ess than 5E 9 no reg nee%e%
*2
Prof Carlson
Sec Reg Outline
Fall 2005
%. Nreater than 5E 9 nee% to !rovi%e "asic financial
info
e. ,ot su"(ect to integration 6e'ce!t $ay"e with itself7
-. Rules 50A of Regulation #
a. A%o!te% "y S0C un%er authority un%er 5-6"7
". 0'e$!tion for offers3sales W *E 6*2 $os7
c. Mnli$ite% X of !urchasers
%. ,o re!orting co$!anies/ invest$ent co$!anies/ or
"lan+ chec+ co$!anies
e. ,o general $ar+eting
f. ,o %isclosure re1uire$ents
g. ,ot really use% any $ore
A. Rule 505 of Regulation #
a. A%o!te% "y S0C un%er authority un%er 5-6"7
". 0'e$!tion for offers3sales W 5E 6*2 $os7
c. unli$ite% accre%ite% investors/ u! to -5
nonaccre%ite% investors 6$ust receive %isclosure
%ocu$ent7
%. #isclosure infor$ation re1uire% 6no !ros!ectus/ "ut
$ust infor$ investor how !rocee%s are going to "e
use%7
e. Cannot "e use% "y invest$ent co$!anies
f. Cannot "e use% "y "a% "oys 6i.e. !eo!le convicte%
of securities frau% or other si$ilar cri$es7
g. ,o general $ar+eting
h. &i$its on resales
i. So!histication not as "ig an issue as it is w350O
5. Rule 50O of Regulation #
a. See a"ove
%. 0'changes "y the issuer
+. S%%)%#*. E<'48%+#1,
*. B(!(K!: Jhen an issuer a%(usts its ca!ital structure "y
e'changing its securities with e'isting hol%ers it is e'e$!t
fro$ registration.
a. Re1uire$ent
i. 4here $ust "e no co$$ission or other
re$uneration !ai% for soliciting the
e'change. i.e. no consi%eration
ii. ,o solicitation
iii. Can only "e use% with e'isting sharehol%ers
iv. Eust "e the sa$e issuer
v. ,o integration3aggregation
vi. Eust "e offere% only to issuer@s security
hol%ers
vii. Eust "e in goo% faith as %eter$ine% "y the
following factors
*-
Prof Carlson
Sec Reg Outline
Fall 2005
*. &ength of ti$e outstan%ing securities
hel%
2. X hol%ers of outstan%ing security
-. whether the e'change $otivate% "y
financial concerns of issuer
2. B(!("C!: 0'e$!ts securities issue% in e'change for "ona
fi%e legal clai$s/ securities/ or !ro!erty interests if after an
a%versary !rocee%ing a court a!!roves the tr'n@s fairness.
ii. 0H Jhat ha!!ens if you restructure3a$en% notes/ e'ten%ing the
!erio% fro$ one year to *0 years: 4he law woul% say that since the
econo$ic ter$s are change% there is a new security out there/ an%
you nee% to fin% a new transaction e'e$!tion. 5-6a7687 woul%n@t
wor+. GM4 if you %o so$ething li+e %efanging the "on%s 6having
the security hol%ers give u! their rights3re$e%ies it %oes not
change the econo$ic ter$s an% is thus not a new security.
#efanging ta+es only a $a(ority/ while changing econo$ic ter$s
re1uires all hol%ers. 4he other way to change econo$ic ter$s is
via "an+ru!tcy.
e. Regulation #
i. Reg # occu!ies Rules 50*250U an% creates three %ifferent
transaction e'e$!tions for !ri$ary offerings "y issuers 6via Rules
50A250O/ see a"ove7
ii. Eay only "e use% "y issuers/ control !ersons $ay ,O4 use Reg #.
*. Accre%ite% )nvestors "oth rule 505 an% 50O allow only -5
nonaccre%ite% investors.
a. 550* sets out what counts as accre%ite% investors
i. )nstitutional investors
ii. Gig Organi.ations
iii. Pey )nsi%ers
iv. Eillionaires 6in%ivs w3net worth w3s!ouse Y
*E7
v. )n%ivs w3200P in annual inco$e for two
years 6or -00P w3s!ouse7 who e'!ect it to
continue
vi. >enture ca!ital fir$s
vii. So!histicate% 4rusts
viii. Accre%ite%2owne% entities
". ,O40 an investor is accre%ite% if
i. ;e fits into one of the categories a"ove OR
ii. 4he )ssuer reasona"ly "elieves the
investor is accre%ite%.
iii. Rule 502
*. )$!ortant to see that whether there are $ulti!le offers
going on or whether they are really "eing snea+y an% (ust
%oing one "ig offer that really shoul% "e integrate%. GM4
,O40 C as it says a"ove/ Rule 502 !rovi%es a safe har"or
*A
Prof Carlson
Sec Reg Outline
Fall 2005
for integration as long as the offerings have ta+en !lace
$ore than si' $onths a!art. 655026a77
2. 4he ty!e of infor$ation which shoul% "e given to
nonaccre%ite% investors is the ty!e which woul% "e foun%
in a registration state$ent. Accre%ite% investors %o not
nee% to "e given the sa$e ty!e of infor$ation.
-. 4he offerings generally cannot use general solicitation.
A. 4he offerings generally result in restricte% securities/ which
result in shares whose resale rights are li$ite%.
iv. Rule 50U
*. if there is a $inor !ro"le$ in the filing/ as long as it isn@t
$aterial/ it %oesn@t "low u! the whole offering/ an% a for$
nee%s to "e file% w3the S0C. )f the $ista+e is $aterial then
the offering fails an% litigation will !ro"a"ly ensue.
I6. SECONDARY AND OTHER POSTOFFERING DISTRIBUTIONS
a. Overview
i. A nu$"er of transactions have infor$ational %angers si$ilar to a
!u"lic offerings "y issuers/ an% so fall within the Security Act@s
regulatory "oun%aries an% are su"(ect to registration.
*. #istri"utions "y !ersons acting as agents for the issuer
2. Restricte% Securities securities which were !reviously
!urchase% fro$ issuer in !rivate transaction
-. Control Securities securities %istri"ute% to the !u"lic "y
!ersons in a control !osition with the issuer.
ii. ;ow can the following !arties sell their shares:
*. ;ol%ers of restricte% securities
a. Jait until the securities have co$e to rest
". Co$!ly with Rule *AA
c. Avoi% a %istri"ution an% sell in a non!u"lic
transaction.
2. ;ol%ers of control securities
a. Clai$ that isolate% an% s!ora%ic sales into !u"lic
tra%ing $ar+ets are not a %istri"ution C unli+ely to
wor+
". Co$!ly with Rule *AA
c. Avoi% using an un%erwriter "y selling in a
non!u"lic transaction/ or selling on own without
assistance
". 7("!: 4ransactions "y !ersons other than issuers/ un%erwriters or %ealers
i. Pey issue here is that in so$e cases or%inary investors will "e
consi%ere% un%erwriters %e!en%ing on how they con%uct
the$selves/ 1''/ %# 3##- % %&' %',%, b#9'.
ii. Consi%erations for if you %o not want to "e an un%erwriter an%
want to "e a"le to use 5A6*7
*5
Prof Carlson
Sec Reg Outline
Fall 2005
*. )f you want to resell to the investing !u"lic 9 *AA an% *A5/
follow an% sell in accor%ance with the$ an% will not "e
statutory un%erwriter.
2. Resell !rivately 9 *AAA this will tell you how to resell
!rivately an% not "e a statutory un%erwriter.
-. Resell offshore/ not in the MS 9 Regulation S 680A an%
8057 this is outsi%e of our (uris%ictions.
c. R)3' "77 clarifies when a control !erson3hol%er of restricte% securities
$ay sell into !u"lic tra%ing $ar+ets
i. Eany "elieve that this is the only way for control !ersons to sell to
!u"lic w3o registration
ii. 4his is a !rivate !lace$ent of invest$ent securities/ so nee% to
have hel% securities for a while "efore reselling.
iii. Jhen trying to show that securities are not control securities 9
essentially a facts an% circu$stances test.
iv. *AA is none'clusive/ so can argue for other a$"iguities.
v. 0ffect of co$!lying w3Rule *AA if co$!lie% with/ sales "y control
!ersons of restricte%3non restricte% securities an% sales "y
noncontrol !ersons of restricte% securities Z %istri"ution 9 no
nee% to register in or%er to sell to !u"lic
vi. Re1uire$ents
*. Sales "y ,oncontrol !ersons of restricte% securities
a. ;ol%ing * yr
". 4ric+le 2*'%'* #$ 56 of o$tstandin# sec$rities or
av# w(ly tradin# in any - $os !erio%
i. ,O40 this is "ecause of the volu$e
restrictions un%er *AA6e7. )f in any - $onth
!erio% sell less than *R 6%ee$e% a s$all
a$ount7. 4hen you are not an un%erwriter.
c. Sale Eetho% "ro+er@s transactions 6soon after filing
For$ *AA7
%. )nfor$ation !u"licly availa"le infor$ation a"out
issuer. )ssuer $ust "e su"(ect to an% current
w3!erio%ic filing un%er 0'change Act or there $ust
otherwise "e !u"licly availa"le info which is
co$!ara"le.
e. Filing %isclosure on For$ *AA 6if sell $ore than
500 shares or $ore than <*0P7
f. P0V ,O40 all con%itions lifte% if hel% for at least
two yearsB 6Rule *AA+7
2. Sales "y Control !ersons of restricte% securities
a. ;ol%ing * yr
". 4ric+le greater of *R of outstan%ing securities or
avg w+ly tra%ing in any - $os !erio%
c. Sale Eetho% "ro+er@s transactions 6soon after filing
For$ *AA7
*O
Prof Carlson
Sec Reg Outline
Fall 2005
%. )nfor$ation !u"licly availa"le infor$ation a"out
issuer. )ssuer $ust "e su"(ect to an% current
w3!erio%ic filing un%er 0'change Act or there $ust
otherwise "e !u"licly availa"le info which is
co$!ara"le.
e. Filing %isclosure on For$ *AA 6if sell $ore than
500 shares or $ore than <*0P7
-. Sales "y Control !ersons of unrestricte% securities
a. ;ol%ing ,one 6this is the one %ifference7
". 4ric+le greater of *R of outstan%ing securities or
avg w+ly tra%ing in any - $os !erio%
c. Sale Eetho% "ro+er@s transactions 6soon after filing
For$ *AA7
%. )nfor$ation !u"licly availa"le infor$ation a"out
issuer. )ssuer $ust "e su"(ect to an% current
w3!erio%ic filing un%er 0'change Act or there $ust
otherwise "e !u"licly availa"le info which is
co$!ara"le.
e. Filing %isclosure on For$ *AA 6if sell $ore than
500 shares or $ore than <*0P7
%. 0'e$!tions for Secon%ary Private Place$ents
i. 7(" L !: the resale of securities originally !urchase% in a !rivate
tr'n 6e'e$!t un%er 5A627 or a s$all issue e'e$!tion7 an% then
resol% in another !rivate transaction is not a %istri"ution an%
%oes not trigger un%erwriter status. 4his is a shorthan%
e'!ression for the 5A6*7 e'e$!tion when offers3sales are to
non!u"lic investors.
*. Re1uire$ents
a. Purchasers@ so!histication = access to infor$ation
6ty!e in re1 st$t2 -alston7&$rina7
". So!histication Reg # accre%ite% investor: Mnclear
c. ,o %ecision re1 affir$ative %uty on hol%er to !rove
reg ty!e info to "uyer
%. ,o hol%ing !erio% is re1uire%
e. ,o general solicitation "3c that@s not what a !rivate
!lace$ent is all a"out
i. Eost no action letters content that general
solicitation isn@t allowe%
f. X !urchasers alone isn8t disositive
g. ,o restrictions on resales "y a !urchaser
ii. R)3' "77A: e'e$!tion for resale sec issue% in e'e$!t
transactions/ generally Reg # or Reg S 6choice of foreign !rivate
issuers = MS issuers of %e"t sec72 !rovi%es clarity
*. 0ffect of co$!lying w3 Rule *AAA si$ilar to *AA/ results
in !ersons "eing consi%ere% not to "e involve% in a
%istri"ution/ an% therefore not to "e %ealers3un%erwriters.
*S
Prof Carlson
Sec Reg Outline
Fall 2005
2. #efines an institutional resale an% what can "e a A6* T7
resale. Kust as Reg # "reathe% life into A627 so %oes *AAA
"reathe life into A6* T7. 4his is a !rivate resale e'e$!tion
for tra%ing "y large institutional co$!anies. 4he securities
$aintain status as restricte%.
-. Re1uire$ents
a. Guyer Eust "e 1ualifie% institutional "uyer
6[)GS72 really "ig institution "3c they can fen% for
the$selves
". Seller Eust ta+e reasona"le ste!s to ensure "uyer
aware that seller $ay rely on e'e$!tion fro$ Sec
Act un%er R*AA6a7
c. 4here $ust "e "asic infor$ation %isclose% "y
issuer 2 yr of co$!anies financials = 2 !aragra!h
%escri!tion of fir$
%. ,o "ar on general solicitation/ though so$e have
sai% that this is not really allowe% either.
e. Sec restricte%2 otherwise $ust "e sol% !ursuant to
R*AA after * yr hol%ing or "y non2affiliates !ursuant
to R*AA6+7 after a 2 year hol%ing !erio%
f. Can@t "e fungi"le sec2 $eans can@t "e of sec that is
availa"le on !u"lic $r+t i.e. a securities e'change
of ,AS#A[
A. )ssues
a. )n !ractice/ generally use% for notes not e1uity
". &i1ui%ity )f "uyer can resell to [M)G/ won@t re1 a
!re$iu$ "3c less ris+/ R*AAA clarity has create% a
$r+t for these sec.
e. R)3' "7D: Clarification of Rules concerning fun%a$ental Cor!orate
4ransactions
i. Pro!osals for "usiness reorgs re1uiring target S; a!!roval are
offers/ an% consu$$ation of such !ro!osals are sales. 4his $eans
that such transactions nee% to either "e registere% or covere% un%er
a !articular e'e$!tion.
ii. S!ecific 4ransactions Covere%
*. reclassifications
2. $ergers3consoli%ations
-. transfers of assets
A. asset ac1uisitions
iii. S!ecific 4ransactions ,O4 Covere%
*. stoc+ for stoc+ ten%ers
6. EEEMPTIONS RELATING TO FOREIGN TRADING>FOREIGN ISSUERS
a. R'2)3%+#1 S: 0'e$!tions for Resales of Securities to Foreign )nvestors
i. Overview
*U
Prof Carlson
Sec Reg Outline
Fall 2005
*. 526S7 %efines interstate co$$erce for the !ur!ose of 55
%uties to inclu%e securities activities "etween any foreign
country an% any State.
2. 4he Securities Act regulates the following with res!ect to
foreign countries
a. Pu"lic offerings "y MS issuers to foreign investors
outsi%e of the MS
". Secon%ary %istri"utions to MS investors who resell
to foreign investors an%
c. Pu"lic offerings "y foreign issuers outsi%e of MS if
any of the securities are !urchase% "y MS investors
ii. S!ecifics of Regulation S
*. Registration is only re1uire% for securities transactions
within the Mnite% States. Rule 80*
2. Safe ;ar"ors
a. 4wo safe har"ors i.e. ty!es of tr'ns %ee$e% ,O4 to
"e within the MS
i. )ssuer Offerings Rule 80-
ii. Resales Rule 80A C this is the transaction
e'e$!tion for selling securities offshore. )t
says that if the tr'n is offshore an% %oes not
involve any %irecte% selling efforts in the MS
6either $a+ing or soliciting7 then it is an
offshore transaction an% shoul% not "e
regulate% un%er MS rules.
*. ,O40 C there woul% ,O4 "e
aggregation if you sell un%er
505350O an% also use Reg S
2. ,O40 C the *AA %ri""le out rules
only a!!ly to a$ounts "eing sol% in
the MS/ so this ty!e of offering
woul%n@t affect a *AA offering going
on in MS.
". 805 fi'es a loo!2hole one of the real $isses which
was originally in !lace when Reg S first create% was
that if an issuer !rivately !laces to so$eone in MS
6restricte%7 an% in &on%on 6nonrestricte%7 an% then
the "uyer in &on%on i$$e%iately coul% sell to MS
an% have the$ not "e restricte%. KCD ,., %&% +$
'M)+%. ,'()*+%+', *' ,#3/ )1/'* R'2 S #$$,&#*'
%&'. *' 1#% *',%*+(%'/ b)% b'(#4' *',%*+(%'/ +$
%&'. *' ,#3/ b(- +1%# %&' US.
c. Re1uire$ents for satisfying the Safe ;ar"ors
i. 4he tr'ns $ust "e $a%e offshore
ii. 4he tr'ns $ay not involve %irect selling
efforts in the MS
*8
Prof Carlson
Sec Reg Outline
Fall 2005
iii. Eust satisfy a%%itional flow"ac+
safeguar%s
iii. Further 0'!loration of so$e +ey conce!ts w3r to Reg S
*. 4o "e an offshore tr'n $ust satisfy the following
a. N''/, %# b' 1 #$$,&#*' %*1,(%+#1. !o offer is
$a%e to a !erson in the Mnite% States Rule 8026h76i7
i. 4his $eans that "uyer $ust "e offshore/
6though it coul% "e a MS su"si%iary/ such as
Citi"an+ in Argentina7 an% the e'ecution
$ust "e offshore A,#
ii. 4he sale is acco$!lishe% in one of the
following ways Rule 8026h76ii7
*. Guyer is outsi%e of MS or
seller3agents reasona"ly "elieve this
to "e the case
2. Sale 6in issuer e'change7 is e'ecute%
on any esta"lishe% foreign securities
e'change
-. 4he sale 6in an investor resale7 is
e'ecute% on a %esignate% offshore
securities $+t 6%efine% to inclu%e
the lea%ing foreign stoc+ e'changes7/
an% the tr'n is not !rearrange% with
"uyer in MS
iii. ,O40 Reg S rela'es these re1uire$ents if
all offers3sales are $a%e for the accounts of
non2MS !ersons/ even if tr'ns occur in MS.
Rule 8026h76-7
2. N# D+*'(%'/ US S'33+12 E$$#*%,
a. #irecte% Selling 0fforts refers to activities that
$ight con%ition the MS $ar+et for any of the
offere% securities. Rule 8026c7
". 4hings which are allowe% i.e. e'clu%e% fro$ %ef of
%irecte% selling efforts
i. &egal notices re1uire% "y MS or foreign
authorities
ii. 4o$"stone a%s or i%entifying state$ents
6Rule *-57. Mn%er *-56c7 can give "are facts
a"out an offering an% this isn@t consi%ere%
an offer which constitutes %irecte% selling
efforts.
iii. Stoc+ 1uotations "y foreign securities fir$s
!ri$arily in foreign countries 6Rule 8026c7
6-77
iv. Foreign issuers can !er$it (ournalists to
atten% their !ress conferences hel% outsi%e
20
Prof Carlson
Sec Reg Outline
Fall 2005
of the MS 6Rules 8026c76-76vii7/ *-56e77.
4hese $ust "e "ona fi%e offshore
conferences accor%ing to local law/ cannot
have hy!ing/ an% $ust have a %isclai$er
that there is not an offer/ an% then it is not
consi%ere% an offer which constitutes
%irecte% selling efforts.
v. )f there is infor$ation !lace% on a we"site
offshore that hy!es the offering/ the S0C
lenient an% says that as long as there is a
!asswor% or so$ething that restricts access/
it isn@t consi%ere% a %irecte% selling effort in
the MS.
iv. ,o )ntegration of conte$!oraneous MS an% offshore offerings
Reg S allows for offshore tr'ns to occur conte$!oraneously with
%o$estic offerings. )f the offshore tr'n co$!lies w3Reg S/ there is
no integration with any %o$estic offering 6whether registere% or
e'e$!t fro$ registration7
". Rule *AAA Private Place$ents
i. See a"ove for %iscussion of *AAA
PART D: REGISTRATION OF SECURITIES OFFERINGS
I. REGISTRATION OF PUBLIC OFFERINGS
a. Overview
i. Jhen Register: 4o fin% enough investors nee% general solicitation
to cast wi%e enough net or institutional investor = %on@t want to
wait to slowly "lee% securities or want to hy!e. )f you can@t fin% a
transaction e'e$!tion you have to co$!ly with 55 an% 5*0. 0ach
transaction $ust fin% its own e'e$!tion. Securities $ay "e sol%
once registration state$ent effective.
ii. 526a76U72 Registration St$t inclu%es st$t cou!le% w3a$en%$ents
to that st$t 6!re!are% = file% w3S0C/ "ig %oc w3!ros!ectus/
e'hi"its etc.7
iii. S0C res!on%s/ refile w3a$en%$ent/ S0C res!on%s/ refile/ etc 6A or
5 ti$es7
iv. 5O2 Any sec $ay "e registere% w3Co$$ission "y filing a
registration st$t 6a7 signe% "y issuer/ C0O/ CFO an% %irectors
6)$!ortant for %eter$ining lia"ility7/ 6%7 fee is *3- of *R
v. 5S2 )nfo Reg in Registration St$t )nfo !ursuant to Sche%ule A
*. ,a$e of issuer/ state of issuer/ na$es3a%%ress of %irectors
= un%erwriters/ a$nt of sec of issuer/ st$t of sec/ a$nt of
ca!ital stoc+ of each class issue%/ esti$ate% net !rocee%s to
"e %erive% fro$ sec
2. &ots of %isclosure so$eti$es co$!anies face a tra%eoff
"etween their nee% to $aintain secrets an% a nee% to raise
2*
Prof Carlson
Sec Reg Outline
Fall 2005
ca!ital. 4he S0C generally says too "a% you nee% to
%isclose.
-. 0'!erts Accountants $ust sen% consent that e'!ert 6"3c of
lia"ility issue7
vi. 5U2 4a+ing 0ffect of Registration St$t
*. 20 %ays after filing
2. GM4 Rule AS- #elaying A$en%$ent essentially
continues so a$en%$ents "eco$e continues/ e'ten%s 20
%ays in%efinitely/ )ssuers sti!ulate to this 6at re1uest of
S0C7 to give S0C $ore ti$e to review.
-. )f inco$!lete3$islea%ing/ S0C notifies within *0 %ays of
its intention to issue a refusal or%er which +ee!s reg st$t
fro$ "eing effective. A$en%$ent can "e $a%e within the
ne't *0 %ays 6"efore 20 %ays7
A. )f A$en%$ent is $a%e after 20 %ays = is not inco$!lete
or inaccurate/ it "eco$es effective
5. Gefore or after effectiveness/ S0C can "egin a non!u"lic
investigation. 5U6e7. After the registration st$t "eco$es
effective/ S0C can issue a sto! or%er if it notices a %efect in
%isclosure. 5U%.
O. Rule AO0 as a con%ition to acceleration of the effective
%ate/ the agency tries to get issuers to ta+e reasona"le ste!s
to ensure that the !reli$inary !ros!ectuses have "een $a%e
availa"le to all !artici!ating un%erwriters3%ealers.
S. Once )n 0ffect can sell securities
vii. 52-2 Mnlawful to $a+e 6or cause to $a+e7 to any !ros!ective
!urchaser any re!resentation contrary to the foregoing !rovision of
this section
viii. Gut the S0C %oes not en%orse any offering that it a!!roves. )t is
u! to the investor to $a+e its own (u%g$ents.
i'. ,ee% to consi%er that there are $ulti!le %efinitions of !ros!ectus
". 4he Registration Process
i. 4he registration !rocess un%er 55 has three $a(or ti$e !erio%s
*. Prefiling Perio% the offering an% sale of any security is
!rohi"ite%
2. Jaiting Perio% this ta+es !lace after a registration
state$ent is file% w3S0C "ut "efore it "eco$es effective C
sales !rohi"ite%/ written offers strictly !rohi"ite%
-. Posteffective Perio% written offers continue to "e
regulate%/ all !urchasers $ust receive !ros!ectus whose
contents co$!ly w3S0C s!ecifications
c. Pre2Filing Perio% this is after the co$!any is in registration "ut "efore
the registration state$ent is file%.
+. P*#&+b+%'/ A(%+9+%+',
*. ,o sales or %eliveries
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Prof Carlson
Sec Reg Outline
Fall 2005
a. Sale un%er 526a76-7 inclu%es every contract of
sale or %is!osition of a security for value.
2. ,o offers to sell or offers to "uy
a. Offers un%er 526a76-7 inclu%es every atte$!t or
offer to %is!ose of or solicitation of an offer to "uy/
a security or interest in a security for value.
". Offer un%er S0C inter!retive rules any !u"licity
that $ay contri"ute to conditionin# the $,lic mind
or aro$sin# $,lic interest in the offering can "e
seen as !art of a selling effort an% thus constitute a
!rohi"ite% offer.
++. P'*4+%%'/ A(%+9+%+',
*. Preli$inary ,egotiations
a. 526a76-7 e'e$!ts !reli$ negotiations or agree$ents
"tw issuer an% un%erwriters3a$ong un%erwriters
which will "e in !rivity w3issuer.
2. Securities fir$ reco$$en%ations the S0C safe har"or
rules give gui%ance when an issuer is conte$!lating3has
file% reg st$t
a. Rule *-S ,on!artici!ant reco$$en%ations. A
securities fir$ not !artici!ating in the %istri"ution
$ay reco$$en% securities of an issuer in
registration if
i. 4he reco$$en%ation is in the regular course
of the fir$@s "usiness
ii. 4he issuer is a re!orting co$!any un%er
0'change Act
iii. 4he securities fir$ receives no s!ecial co$!
fro$ %istri"ution
". Rule *-U any securities fir$ 6inclu%ing one
involve% in the offering7 can reco$$en% securities
of the issuer which are on the other si%e 6i.e. %e"t
o!!ose% to e1uity "eing offere%7. 0'e$!tion only
a!!lies to seasone% re!orting co$!anies which
register securities on For$s S22 or S2- 6or F22 or F2
-7
c. Rule *-8 a securities fir$ which !artici!ates in the
%istri"ution $ay reco$$en% the issuer@s securities
if the reco$$en%ation a!!ears in a regular
!u"lication an% either
i. 4he issuer is a large seasone% co$!any OR
ii. 4he co$!any is a re!orting co$!any/ an%
the reco$$en%ation is inclu%e% in a re!ort
inclu%ing other securities/ it receives no
s!ecial !ro$inence/ an% is no $ore
2-
Prof Carlson
Sec Reg Outline
Fall 2005
favora"le than the last reco$$en%ation sent
out "efore the fir$ "eca$e a !artici!ant
-. Co$!any Announce$ents
a. Rule *-5 co$!any can $a+e an announce$ent of
its intention to $a+e a !u"lic offering "y stating the
following
i. 4he a$ount3ty!e of securities to "e offere%
an%
ii. 4he $anner3!ur!ose of the offering
". Re1uire% the announce$ent EMS4 state that
i. 4he offering will "e "y !ros!ectus
ii. 4he co$!any is una"le to i%entify
!ros!ective un%erwriters or the e'!ecte%
offering !rice
%. Jaiting Perio% after filing/ "ut "efore effectiveness
i. Prohi"ite% Activities
*. 556a7 ,o sales or %eliveries. 4his $eans that offers cannot
"e acce!te%. 4o get aroun% this/ usual !ractice is to collect
in%ication so interest/ "ut ,O4 to acce!t chec+s3or%ers.
2. 556"76*7 ,o Pros!ectuses 6%efine% as any selling effort in
writing7
ii. Per$itte% Activities
*. Oral offers
2. 556"76*7 Preli$inary Pros!ectus C allowe% not re1uire%
a. 5*06"7 authori.es S0C to !er$it the use %uring the
waiting !erio% of an inco$!lete !ros!ectus.
i. Rule A-0 !reli$inary or re% herring
!ros!ectus which is file% w3registration st$t
an% contains legen% cautioning that
securities cannot "e sol%. Contains sa$e
info as final !ros!ectus e'ce!t for offering
!rice3un%erwriting.
ii. Rule A-* Su$$ary !ros!ectus 6rarely use%7
-. 526a76*07
a. 4o$"stone A%s C i%entifies security/ !rice an%
un%erwriter
". Rule *-A 0'!an%e% Jritten co$$unication
i. Can give s!ecifie% written infor$ation a"out
issuer an% offering +$
ii. 0'!lain who is selling securities3where to
o"tain !reli$inary !ros!ectus/ b)%
iii. ,ee% ,O4 give this e'!lanation if
*. inclu%e only the infor$ation of the
to$"stone a% or
2. sen% an acco$!anying !reli$
!ros!ectus/ #*
2A
Prof Carlson
Sec Reg Outline
Fall 2005
iv. you can as+ investors to in%icate their
interest in the offering "y return car%/ if you
also sen% a !reli$ !ros!ectus an% e'!lain
there is no co$$it$ent
e. Posteffective Perio% this is the !erio% in which the registration state$ent
has "eco$e effective/ "ut "efore %elivery of final !ros!ectus3confir$ation.
+. P*#&+b+%'/ A(%+9+%+',
*. 556"76*7 !rohi"ition of any !ros!ectus unless it co$!lies
w35*0.
2. 556"7627 !rohi"ition of %elivery of securities unless
acco$!anie% 6or !recee%e%7 "y a 5*06a7 !ros!ectus.
++. P'*4+%%'/ A(%+9+%+',
*. Free Jriting while the 556"76*7 !rohi"ition against
written offers continues/ 526a76*07 e'ce!ts fro$ the
%efinition of !ros!ectus any written sales literature if it is
acco$!anie% 6or !rocee%e%7 "y a final !ros!ectus.
2. Pros!ectus %elivery with confir$ations un%er 526a76*076a7
a confir$ation is not a !ros!ectus if it is !rece%e% or
acco$!anie% "y a final/ statutory 5*06a7 !ros!ectus.
-. Pros!ectus %elivery with securities %elivery 556"7627
!rohi"its %elivery of securities after sale unless
acco$!anie% 6or !rece%e%7 "y a !ros!ectus that $eets the
re1uire$ents of 5*06a7 6final !ros!ectus7.
a. Rule *5- !er$its co$!liance with 556"7627 "y
%elivering final !ros!ectuses to the stoc+ e'change
where the offere% stoc+ is to "e tra%e%. #oes ,O4
a!!ly to securities to "e tra%e% on ,AS#A[ or
O4C.
A. coul% sen% a *-A ter$ sheet or announce$ent/ to$"stones/
oral state$ents/ things without the character of an offer 6i.e.
nor$al "usiness activities/ !ro$otions etcI7 offshore
!ress conferences3we"sites analyst re!orts 6Rules *-S2*-87
!er$itte% free writing !ros!ectuses.
iii. Eetho% of Pros!ectus #elivery 2 Rule A-A sen%ing a !reli$inary
!ros!ectus an% later a ter$ sheet satisfies the !ros!ectus %elivery
re1uire$ent/ if the ter$ sheet co$!letes the re$aining infor$ation
not inclu%e in the !reli$inary !ros!ectus.
iv. #uration of Pros!ectus #elivery Re1uire$ents Mn%er the 5A/
!ros!ectus %elivery re1uire$ents i$!ose% "y 55 %uring the
!osteffective !erio% a!!ly in the following $anner
*. )ssuer issuer $ust %eliver !ros!ectuses in%efinitely for any
sales it $a+es. 5A6*7
2. Original Allot$ent un%erwriter3%ealer $ust %eliver
!ros!ectus in%efinitely for any sales fro$ original
allot$ent. 5A6-76C7
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Prof Carlson
Sec Reg Outline
Fall 2005
-. Resales "y securities fir$s resales "y securities fir$s that
transact registere% securities ac1uire% in the $ar+et $ust
%eliver !ros!ectuses for a s!ecifie% !erio%. 4he statute
i$!oses o"ligation on %ealers which inclu%es any !erson
in the securities "usiness/ not $erely a fir$ that "uys3sells
securities. 55A6-76G7? 26a76*27
a. Perio% for %elivery %e!en%s on a$ount of info
availa"le a"out issuer
i. )f issuer@s first reg offering 9 80 %ays
65A6-77
ii. )ssuer has $a%e other reg offerings 9 A0
%ays 65A6-76"7
iii. 4he securities sol% on ,AS#A[ or a liste%
e'change 9 25 %ays 6Rule *SA6%77
iv. )ssuer was a re!orting co when file% its reg
st$t9 0 %ays 6Rule *SA6"77
". ,O40 no !ros!ectus %elivery o"ligation for sales
"y a securities fir$ acting as a "ro+er on custo$er
or%er. 5A6A7
v. )ssues with Overalott$ent 6Nreen Shoe O!tion7 this is an o!tion
for the un%erwriter. 4hey will reserve for the$selves the o!tion to
"uy an a%%itional *0R within -0 %ays of the initial !urchase. Jhat
ha!!ens is that the un%erwriter continues to sell shares an% they
want to generate over or%ers to $aintain high %e$an% "ecause
otherwise they can get stuc+ hol%ing securities they %on@t want.
vi. )ssues Concerning )ncorrect #isclosure
*. )f !ost2effective events $a+e !ros!ectus $islea%ing
a. Change is $aterial though $inor 9 Rule A2A6"7
6-72657 says that registrant can stic+er !ros!ectus
w3new info
". Change is fun%a$ental 6not (ust $aterial7 9 issuer
$ust a$en% reg st$t an% wait for S0C to %eclare
a$en%$ent effective.
2. Stale infor$ation 5*06a76-7 says that if a !ros!ectus is
use% $ore than 8 $os after effective %ate/ info in
!ros!ectus cannot "e $ore than *O $os ol%.
-. Cases
a. SEC v. )anor !$rsin# Centers3 Inc. Post2
0ffective/ if so$ething in !ros!ectus changes
$aterially = +now facts to "e %ifferent/ %uty to
change !ros!ectus? can change through su!!le$ent
or a$en%$ent to registration st$t which a$en%s
!ros!ectus therein
II. REGULATION FD
a. Overview
2O
Prof Carlson
Sec Reg Outline
Fall 2005
i. Regulation F# for"i%s !u"lic co$!anies fro$ selectively
%isclosing $aterial non!u"lic infor$ation.
ii. Jhat Reg F# %oes !rovi%es %etaile% rules on how co$!anies
shoul% res!on% to analyst in1uiries an% engage in investor
relations.
iii. 4o who$ %oes it a!!ly issuer %isclosures of $aterial non!u"lic
infor$ation to s!ecifie% $a+t !rofessionals an% security hol%ers
for who$ it is reasona"ly foreseea"le they will tra%e on the "asis
of the infor$ation. Rule *006"76*7
". Reg # re1uire$ents
i. #isclosure Re1uire$ents
*. )f %isclosure is intentional 9 issuers $ust %isclose insi%e
infor$ation to investing !u"lic sim$ltaneo$sly w3any
%isclosure to selecte% analysts3investors. Rule *006a76*7
2. )f %isclosure is unintentional 9 issuer $ust %isclose the
insi%e infor$ation to the !u"lic !ro$!tly 6i.e. within 2A
hrs7. Rule *006a7627
ii. )nfor$ation #isse$ination Eetho%s
*. )nfor$ation $ust "e %isse$inate% "y $etho%s reasona"ly
%esigne% to achieve "roa% non2e'clusionary %istri"ution to
!u"lic. Rule *00 *0*6e7
a. 0'a$!les of $etho%s which woul% 1ualify
i. )nternet !ostings
ii. Si$ulcasts
iii. Furnishing For$ U2P to S0C
2. 4hese restrictions a!!ly to issuer@s senior officials an%
those who regularly co$$unicate w3analysts an% investors/
such as investor relations or !u"lic relations officers. Rule
*0*6f7
c. 0'clusions un%er Reg # 6Rule *006"77
i. #isclosure occurring in nor$al course of "usiness/ such as to
!rofessional a%visers 6attorneys/ invest$ent "an+ers/ accountants/
"usiness !artners in contract negotiations or cre%it2rating orgs.
ii. #isclosure to $e%ia or govern$ent officials/ such as "y res!on%ing
to news!a!er in1uiries or co$!lying w3regulatory investigations
iii. #isclosures $a%e in securities offerings registere% un%er the
Securities Act/ such as to analysts an% institutional investors in
going !u"lic roa% shows an%
iv. #isclosure "y foreign !rivate issuers 6which if they $eet the
(uris%ictional re1uire$ents/ rea$in su"(ect to the securities
antifrau% !rovisions7
III. MISCELLANEOUS>RE6IEW
a. ,ew rules C %eal !ri$arily w3internet an% !ros!ectuses
i. #elivery Re1uire$ents
*. Ol% rule C %elivery re1uire$ents ha% to "e through $ail or
through e$ail as long as it was an internet savvy investor.
2S
Prof Carlson
Sec Reg Outline
Fall 2005
2. ,ow the new rule says that you can (ust !ost it on the
internet as long as it is internet savvy !eo!le. For a
seasone% investor who is internet savvy/ it is sufficient to
!ost the !reli$inary !ros!ectus %uring the waiting !erio%.
)n such a case/ !osting \ %elivery. ;owever/ for )POs/ the
rule is still the ol% rule/ which is that you nee% to have
actual %elivery or e$ail.
ii. ,ew rules w3regar%s to rules *-S2*-8. 4hese !ri$arily %eal with
analysts.
*. Safe har"or rules to +ee! so$ething fro$ "eing seen as a
!ros!ectus
a. *-S Vou are now allowe%/ even if you are an
analyst wor+ing for the un%erwriter of an issuer/
you are allowe% to write a"out it "ecause you are
!art of an un%erwriter fir$/ "ut not the on insi%e in
this !articular transaction/ so you are allowe%
"ecause on the outsi%e
". *-U %eals with analyst wor+ing for the un%erwriter
for that co$!any/ "ut writer wor+ing on other
security on the other si%e of the transaction.
c. *-8 %eals with wor+ing for un%erwriter an% a"out
actual security/ !er$itte% to write it if
i. a"out a large !u"licly tra%e% co
ii. written in or%inary course of "usiness
2. Rationale for these new rules Je are assu$ing that
investors are not $a+ing %ecisions "ase% on this writing.
;owever/ this generally %oes not wor+ for an )PO/ "ecause
in that case it woul% "e a co$!any which %oes not have
$uch re!utation in the in%ustry/ so !eo!le $ight %eci%e
"ase% on such a writing. GM4 coul% also write a"out it if it
is a"out a whole in%ustry C then coul% inclu%e co$!anies
un%ergoing an )PO. 4he re1uire% activities of analysts are
now %ivorce% fro$ the activities of the tra%ers/ in or%er to
re$ove i$!ro!riety C very $uch %ivorce%
iii. Passwor% !rotection $ore relates to offer3solicitation.
". )ssues Concerning Jhat is a Security
i. Gon%s \ %e"t \ security
ii. )f the note3stoc+3invest$ent contract is regulate% "y so$ething
else/ than even if it woul% "e a security/ it is not.
iii. 4hree +in%s of notes
*. co$$ercial notes
2. consu$er finance
-. "an+ finance
A. wall st 9 this woul% "e a security/ this is the only one
iv. Fe%erally insure% "an+ note not a note is an e'e$!t security/ "ut a
security of a "an+ hol%ing co$!any is not e'e$!t. GM4 coul% try
2U
Prof Carlson
Sec Reg Outline
Fall 2005
to argue a7 the note fro$ the hol%ing co$!any is not a security/ "ut
even "7 if it coul% argue it is e'e$!t un%er the securities
e'e$!tions -6a7627.
v. 0nergy contracts consi%ere% futures an% thus not securities/ foreign
currencies an% %erivatives not securities 9 why not:
*. 0nergy contract v. oil interest
2. 0nergy contract C you are not saying that we are going to
%ivi%e u! ownershi! an% s!lit !rofits/ so that you can
$islea% !eo!le as to what they are getting. Vou are (ust
saying/ you are going to get ' at this !rice. 4here is not the
sa$e nee% for infor$ation which securities regulation laws
are $eant to !rovi%e investors with.
9+. N''/ %# ,- &+4 b#)% $#*'+21 %&+12, I ,'()*+%+',???
vii. O!tion/ warrant/ guarantee are securities
viii. Certificate of %e!osit is ,O4 a security C $ay"e this is "ecause it
is very safe "ecause it is at "an+
i'. GM4 a guarantee for a C# C if it is not the issuer/ "ut fro$ a thir%
!arty/ JOM&# "e a security
c. 0'e$!tions : 4hings which are securities an% woul% "e registere% "ut you
fin% e'ce!tions
i. Private !lace$ent
*. A627 this is an issuer transaction C can only "e %one "y an
issuer. 4hese %o not involve !u"lic offerings. -alston
&$rina C 1''/ %# 3##- % 8)*8#,' #$ '<('8%+#1/ !eo!le
"eing offere%. )n that case/ e$!loyees consi%ere% to nee%
!rotection so !rivate !lace$ent e'ce!tion %i% not a!!ly.
2. Doran C nee% to loo+ at every offeree. So even if every
!urchaser is o+/ can still "e ruine% if an offeree was not o+.
-. 4he i$!ortant thing is that anyone offere% "e
so!histicate%3+nowle%ga"le.
a. 4hree 1ualifications for PP
i. Offeree nee%s to "e so!histicate%
*. i.e. so!histicate% investor/ not (ust
so!histicate% in general
2. nee%s to have a"ility to ta+e on ris+
-. nee%s to have e'!erience w3that +in%
of transaction
ii. Also loo+ to availa"ility of infor$ation out
there C the $ore infor$ation the "etter
iii. ,o general solicitation
". Private Place$ents are essentially situations where
issuer is offering !rivately to so!histicate% investors
ca!a"le of $a+ing %ecisions who %on@t nee%
!rotection of securities. )n Ralston/ they were not
all so!histicate%/ nee%e% !rotection.
28
Prof Carlson
Sec Reg Outline
Fall 2005
c. 4hese securities C there is a conce!t of co$ing to
rest C when you sell to the$/ you are not selling to
the$ to then have the$ resell. 4here is no real
gui%ance on this.
/. C1 .#) 8*#9+/' +1$#*4%+#1 %# 8*+9%'
83('4'1% #$$'*'', *%&'* %&1 4-+12 %&'4 *'3.
#1 +1$#*4%+#1 #)% %&'*'.
e. Rule 50O C a safe har"or !rovision for A627. )n 50O
you ;A>0 to give such infor$ation to offerees.
A627 %oesn@t s!ecify a nu$"er to which
nonaccre%ite% investors is li$ite%.
F. ,O40 2 All of the safe2har"ors we are %ealing
w3are none'clusive safe2har"or. 4his $eans that the
safe har"ors are stricter than the rules the$selves/
"ut as long as the safe har"ors are satisfie%/ the
rules the$selves are also satisfie%.
A. 4his is the first instance in which we tal+e% a"out
integration3aggregation
a. )ntegration 9 a!!lies to everything 50A/ 505/ 50O::
,O4 S0*:::
". Aggregation 9 only a!!lies to 50A/ 505
Other issuer e'e$!tions
4here are three e'ce!tions to integration
2 a P)P0 un%er rule *52 C if you %o a A627 PP an% then a registere% !u"lic offering/
you %on@t integrate the two.
2 Rule *55 C if you a"an%on a faile% !u"lic offering then you can wait -0 %ays to
try a new one
2 A3G 0'change C if you %o a A627 %e"t offering through A627 followe% "y a
registration state$ent 6"ecause you %eci%e you woul% rather have a !u"lic
offering7 then it can "e not integrate% un%er A3G e'change. )n effect you are
saying that this is a single offering. Vou are not issuing new securities/ you are
essentially changing the character of the original securities. 4his is essentially two
se!arate transactions which woul% nor$ally "e integrate%.
)ntegration
*. nee%s to "e a single !lan of financing
2. sa$e class securities
-. within a !articular ti$e !erio%
A. sa$e consi%eration
5. sa$e general !ur!ose
)ntrastate offerings
-6a76**7 e'e$!ts offerings offere%3sol% to only resi%ents of the state. ;ere $ain issue is
what %oes %oing "usiness $ean.
4his $eans su"stantial o!erating in a !articular state.
2 also nee% to consi%er issue of co$ing to rest
-0
Prof Carlson
Sec Reg Outline
Fall 2005
2 also nee% to consi%er integration
co$ing to rest C this is generally not %efine% in statutes. 4he !ur!ose is (ust not to have it
resol%/ so e'!ect it to "e hel%. ,o real ti$e fra$e. ,one'clusive safe har"ors !rovi%e
ti$e.
*AS C !rovi%es a safe har"or which says 8 $onths fro$ the last ti$e that an intrastate
har"or was co$$ence%.
&ists re1uire$ents
2 issuer $ust "e resi%ent/ $ust "e %oing "usiness in state
2 what %oes !rinci!al "usiness $ean: Resi%ent $eans !rinci!al resi%ence. Eeans
that U0R of "usiness is in the state. Co$ing to rest is nine $onths after issuing.
So if you $eet this you satisfy -6a76**7/ "ut you $ight "e o+ with less.
&i$ite% Offerings
4here are two statutory !rovisions to thin+ of -6"7 an% 52U.
5-6"7 is the !ower to S0C fro$ Congress to !rescri"e e'ce!tions to registration
re1uire$ents for s$all offerings li$ite% to 5E.
52U C Congress gave S0C !ower to e'e$!t offerings as necessary for !u"lic interest 9
no %ollar a$ount.
Reg A C short for$ registration C still have filing re1uire$ents "ut they are rela'e%. Point
use% to "e that you were a"le to test the waters to see if there was interest. )ssuer ocul%
not "e e'change act co$!any/ no "a% "oys/ 5E li$itation/ largely re!lace% "y S0*. ,O4
SMR0 J;A4 S0C4)O, 4;)S )S M,#0R )S )4 6-76G7: "asically o"solete
Re$e$"er S0* only has integration with itself
A6O7 C it is not really use% any$ore. )t is an early version of reg %/ it is an issuer version/
allows an e'e$!tion for a sale to accre%ite% investor un%er rule 2*5. has "een su!erce%e%
"y reg %.
Reg # 50*250U Dthis is another for$ of !rivate !lace$entF
50* C %ef of accre%ite% investor
2 net worth *E
2 inco$e of 200P OR %irector3!artner etcI.
502 C integration C this is the one that says you integrate reg %
w3505350O C you allow unaccre%ite% investors to !artici!ate C those investors nee%
registration li+e infor$ation
no general solicitation
u!on the sale of a security/ the securities are restricte% 6this is true for $ost issuer
e'e$!tions/ "ut so$e are not7
50- ::::::
-6"7 li$ite% offering e'e$!tions
50A3505 safe har"or
-6"7 is a li$ite% offering an% !rivate !lace$ent
-*
Prof Carlson
Sec Reg Outline
Fall 2005
A627 is (ust !rivate !lace$ent/ not li$ite% offering
50A
2 un%er -6"7 li$ite% to *E for *2$o
2 0 %isclosure
2 not use% any $ore
2 unli$ite% nu$"er of investors
2 while 502 sai% nonacre%ite% investors nee% registration li+e info/ that %oes not
a!!ly here
2 ,o general solicitation
505
2 -5 nonaccre%ite% investors
2 nee% to give nonacre%ite% infor$ation
2 5E ca!
2 "a% "oy !rovision C if convicte% of securities frau% cannot use
2 restricte% securities
2 %on@t have to worry a"out investor so!histication C this is "ecause as long as you
are co$!liant w350* an% they are accre%ite%/ %on@t have to "e so!histicate%
Ralston Purina C tal+e% a"out so!histication w3A627
Once you get the safe har"or of 505/ %on@t nee% to "e so!histicate%/ (ust nee% to $eet the
accre%itation re1uire$ents an% then you count as so!histicate% C so really if
accre%ite% %on@t have to "e so!histicate%.
50O C +ey %istinction C un%er 50O all !urchasers3agents EMS4 G0 SOP;)S4)CA40#
so can still have -5 nonaccre%ite% investors/ "ut they still nee% to "e so!histicate% 0H
Pen$an Securities C if you !ut a %isclai$er on so$ething saying that it is not a
solicitation it %oesn@t $ean anything. )t also says that you are allowe% to solicit !eo!le
you have a !ree'isting relationshi! w3. lays %own a !rocess it wants you to follow if you
want to "e !art of a !rivate !lace$ent C go register w3 a "ro+er. 4hen issuer will solicit
w3"ro+er/ an% then the "ro+er will "uy on "ehalf of the in%iv.
)PO net letter C this was issue% "y S0C C you are allowe% to !ost on internet/ s!ecifically
for )POs/ recogni.ing that they $ay have a %ifficult ti$e raising $oney. Can !ost on
we"site that they are loo+ing for new investors. Gasically says C if you !ost on internet
an% say contact $e for info that )S a solicitation C coul% "e o+ if you went through
Pen$an/ an% this was only accessi"le to clients. )f you !ost so$ething on internet which
says contact $e/ it is still an offer3general solicitation. Gut if you go through +en$an
ste!s it is ,O4 an offer3general solicitation.
50U C says that non$aterial %efects can "e cure%. Joul% have to %efine $aterial
0H if it ha!!ens afterwar%s that you fin% out after the fact that the guy $a%e only a little
less than *E %oesn@t ruin it.
R'2 S
)f "uyer an% e'ecution is offshore/ then %on@t have to register. Can use in con(unction
w3505 an% 50O an% they will not "e aggregate%.
80A is a transaction e'e$!tion for selling securities offshore.
-2
Prof Carlson
Sec Reg Outline
Fall 2005
)f G an% e'eution offsh:ore an% no %irecte% selling efforts in MS C no nee% to register. ,o
aggregation w3505350O :
,o %ollar li$it: ,o investor li$it:
,00# 4O C;0CP O, ),40NRA4)O,3ANNR0NA4)O, J3R0N S
,00# 4O C;0CP )F 4;)S )S A, )SSM0R 0H0EP4)O, OR A R0SA&0
0H0EP4)O,:::
!. 5UO
Rule 80- C safe har"or for %istri"utors/ inclu%ing issuers/ un%erwriters an% selling grou!s.
4his is an issuer e'e$!tion.
Rule 80A C this is a safe har"or for resales "y others inclu%ing those who ac1uire
securities in a MS !rivate !lace$ent or in a transaction e'e$!t fro$ registration un%er
Rule *AAA.
805 C if you engage in a Reg S transaction 6either a 80- or 80A7 in a foreign country an%
then you want to resell in the MS/ then as soon as they co$e "ac+ to MS/ they "eco$e
restricte% securities/ otherwise this woul% "e a way to su"vert the syste$. 4his was the
loo!hole that was close% later to !revent this fro$ su"verting the syste$.
!. O0- C ASP ;)E AGOM4 4;0 RM&0 SAV),N 4;A4 80- AE0,#0# SAV),N
4;0S0 S0CMR)4)0S CA,,O4 COE0 GACP 4O MS J)4;), A V0AR:::
Rule *-56c7 C you $ay give the "are facts a"out the offering. Co$es u! in various stages.
,o %irecte% selling efforts in MS un%er Reg S. *-56c7 says no %irecte% selling efforts/ "ut
you coul% give "are facts a"out offering an% it woul% not "e seen as %irecte% selling.
Carlson C "onafi%e offshore news conference o+ so long as there is no hy!ing/ if on
we"site want to hy!e/ nee% to $a+e sure it is !asswor% !rotecte%. Also nee% to "e careful
w3hy!erlin+s. So these are us issuers selling in another country
,ote/ in ter$s of reselling of restricte% securities/ *AAA is the fastest to use %o$estically/
an% 80A is the fastest to use offshore/ since they have the least %isclosure re1uire$ents/
no hol%ing !erio%s etcI
5-a8 an% -a*0 C other e'e$!tions C
-a8 2 you are allowe% to e'change one security for another w3e'isting securities. ,o
cash3other consi%/ no solicit/ !assive/ unli$ite% investors/ no 1ualifications. Only for
issuers.
-a*0 C if changing character of !articular note/ then can get e'e$!tion. 0H if in
"an+ru!tcy/ want to e'ten% this to $a+e the$ over 20 years rather than *0 years/ %o you
have to register: So woul% inclu%e "an+ru!tcy "ut $ay"e other things as well.
0'e$!t securities
)f un%erlying security is e'e$!t/ no nee% to file
-a2 C govern$ent an% "an+ issue% securities are e'e$!t "ut not hol%ing co$!anies
-aU C insurance -a5 C savings an% loan
Resales "y security hol%ers
--
Prof Carlson
Sec Reg Outline
Fall 2005
2 when using tr'n e'e$!tions/ generally lea%s to restricte% securities/ so how can
you resell
2 A6*7 is the "ig e'ce$!tion C can resell if not issuer/ %ealer or un%erwriter
2 the "ig issue is what securities are controlle%3restricte%
2 who is a statutory un%erwriter C if you !urchase for$ an issuer/ an affiliate of
issuer of control/ then you have to get an e'e$!tion or register to resell
%efinition of control
control securities C owne% "y affiliate of issuer. 4his is %efine% as %irect $g$t/ or if you
own *0R. J;A4 )S A, AFF)&)A40: An affiliate is an e'a$!le of a control !erson/
"ut a control !erson is not necessarily an affiliate. Pey thing C concern is that you will "e
consi%ere% an un%erwriter C nee% then to fin% an e'e$!tion or register
*. if you are trying to sell control securities
2. if you "uy restricte% securities
-. if acting as agents for an issuer
control securities C co$es fro$ so$eone who is an affiliate or *0R or has control or "y
contract etcI
restricte% securities C ac1uire% %irectly or in%irectly fro$ issuer/ "ut in a transaction not
involving )PO. )f you ac1uire the$ fro$ a chain of transactions using A627 then restricte%
also if ac1uire% fro$ 505/ 50O or S0*
if ac1uire% un%er *AAA C which is in itself a resale transaction
fungi"ility C if you have restricte% an% nonrestricte% securities of sa$e class3issuer/ the
restricte% ones !oison not restricte% ones. 4his is "ecause securities fungi"le.
CGA C no goo% faith co$!onent C nothing to %o w3$oney
)RA ;au!t C "ecause "ro+er was "uying fro$ control !erson fro$ issuer an% %istri"uting
on large scale C un%erwriter. Rule *AA an% *AAA/ an% even to so$e not literal sense A**32
these are safe har"or !rovisions. Gasically hau!t was "efore these. ;e sai%/ ) a$ a "ro+er
not a statutory un%erwriter. Coul% always argue that there was no intent to %istri"ute.
S0C sai%/ "ecause he sol% on large scale/ he was an un%erwriter.
*AA
a!!lies to affiliate who sells restricte% securities or sells on "ehalf of affiliate of issuer.
,00# 4O C;0CP )F 4;)S APP&)0S 4O CO,4RO& P0OP&0 AS J0&&:::
4his is for !u"lic resale.
Re1uire$ents
* year hol%ing !erio% w3tac+ing !rovision. 4his $eans if A "uys the$ an% hol%s for nine
$onths an% sells to G. A uses a *AAA or a A*3*2. then when G sells to C/ after three
$onths/ can tac+. GM4 can@t tac+ if one of those hol%ers were an affiliate.
#ri""le out rule C can sell the greater of *R of the outstan%ing securities/ or the average
of four wee+s tra%ing volu$e. ,00# 4O &OOP ),4O 4;)S.
,00# 4O &OOP ),4O J;04;0R ), 4;0 O,0 V0AR ;O&#),N P0R)O# CA,
S0&& A4 A&& OR J;04;0R CA,@4 S0&& A,# #R)GG&0 OM4:::
Affiliate C a !erson who controls or is controlle% "y issuer
-A
Prof Carlson
Sec Reg Outline
Fall 2005
*AAA C !urchaser $ust "e a [M)G/ or seller $ust reasona"ly thin+ that it is. )s this the
only !lace where reasona"ly thin+ing co$es in:
Reselling
statutory un%erwriter C if you "uy control3restricte% securities
control C fro$ so$eone who is controlling
restricte% C fro$ an issuer e'e$!tion 6nee% to chec+ C is this fro$ A&& )SSM0R
e'e$!tions:7
when you want to resell these securities/ if you sell the$/ statutory issuer is %efine% as
so$eone who resells control3restricte% securities which he "ought with intent to
%istri"ute.
*AA an% *AAA are safehar"ors for A6*7
*AAA C allows resales to [M)Gs
*OU3*O8
*OU2allows cos to $a+e forecasts
Review [uestions
0%war%s says that fi'e% return %oes not !revent so$ething fro$ "eing an invest$ent
contract. $ay"e &&Cs are generally invest$ent contracts:
4hrough the efforts of others 6the !ro$oter3thir% !arty7
Coul% trac+ the !rofits to the in%ivi%ual far$s/ rather than !ooling
Eore $g$t control/ !reinvest$ent involve$ent/ try to structure it with strict vertical
co$$onality C so$eti$es it can "e a security/ "ut har%er argu$ent C all acce!t
hori.ontal/ "ut only so$e w3!ro$oter
Coul% have !ro$oter not share !rofits coul% have flat fee instea%
4o have vertical co$$onality nee% to have non2flat rate
Jhen there is a "roa% $ar+eting etcI. li+ely to "e a security
Offer C $a+ing solicitation
virtual shares !. -2A were securities
fi'e% rate of return C in%icates a note
if trying to $a+e a !rofit C !ro" a security
loan !artici!ation agree$ents \ where they $a+e loans to investors an% then sell the loan
to so$eone else !.-U-
if so$eone is (ust correcting for cash flow !ro"le$s/ then a loan to fi' this woul% !ro"
not "e a security
general !artnershi! woul% "e unli+ely to "e an invest$ent contract
if you see a !artnershi! C use invest$ent contract analysis
"an+ c%s e'e$!t securities
warrants are securities if e'ercisa"le within a certain a$ount of ti$e
a warrant is a security.
-6a7627 %oes not a!!ly to "an+ hol%ing co$!anies.
*-56e7 C
cannot tell a"out !u"lic offering in the !refiling stage
-5
Prof Carlson
Sec Reg Outline
Fall 2005
-0 %ay safe har"or for well seasone% issuer C rela'e% rules for what well seasone% issuers
can %o
safe har"ors in the !refiling C
*-5 C say factual realatively "are "ones stuff
"usiness as usual
*OU an% *O8 C they nee% to "e in the or%inary course of "usiness.
well seasone% issuer C "etween three $onths "efore an% -0 %ays "efore/ can %o whatever
they want. For well +nown seasone% investor can say whatever they want.
Reg F# C if you give infor$ation to a certain grou!s of analysts/ will re1uire that this
infor$ation "e given to everyone. Reg F# only co$es u! w3registere% issues. 4here $ay
"e an e'e$!tion for %uring roa% shows/ "ut you $ay "e li$ite% %uring this ti$e to what
is in the !ros!ectus. 0'clusion for nor$al course of "usiness/ or if you are reson%ing to a
news!a!er.
#uty C how are triggere%
Gro+ers/ %ealers an% !ersons associate% with the$ an% securities analysts an% investors
who $ight "uy or sell the securities on the "asis of the infoC co$$unications w3the$
will trigger reg f% if security hol%er woul% "e li+ely to "uy "ase% on co$$unications
w3these !eo!le.
0'ce!tions
2 !erson owing a %uty of trust/ attorney/ accountants/ etc.. !eo!le e'!ressly !ro$ise
to +ee! it a secret/ ratings agency/ an% in connection w3securities offering
generally %ivi%en%s are not securities
generally if you %istri"ute so$ething as a %ivi%en% !art of a su"si%iary/ that is not a
security C !ure s!in off not security
everything which has integration issues has a si' $onth safe har"or
aggregation %oes not a!!ly here "ecause it@s not un%er -6"7
reg a is un%er -"
!.AA- of "oo+ C rules of reg a integration
-0 %ay "efore filing issuer %o what he wants C Rule *O-6a7
in !re2filing stage the %istinction "etween JPS) an% others is that they can use a free2
writing !ros!ectus.
Jaiting !erio% refor$ rules a%%e% the free writing !ros!ectus
Rule *-A C !ress releases/ announce$ents/ to$"stone a%%s o+/ can also use a free writing
!ros!ectus in the waiting !erio%. 4here is a %istinction "etween seasone% issuer an% a
well +nown seasone% investor.
For so!histication issue C you %on@t necessarily have to "e so!histicate% as long as you
have so$eone re!resenting you
!. 5*8 C !i!es can only "e use% "y co$!anies which are alrea%y !u"licly re!orting. 4hey
have to %o !rivate !lace$ent an% then !u"lic offering. ,ee%s to "e a registere% co$!any.
)f want to use !u"lic an% then !rivate offering/ nee% to have a clean "rea+.
-O
Prof Carlson
Sec Reg Outline
Fall 2005
*52 C !i!e
*55 C a"an%one% offer/ clean "rea+/ an% thirty %ays
50A C so$eti$es lea%s to restricte% securities
nee% to loo+ into when restricte% securities occur C un%er which transactions
505/ 50O 9 restricte%
are securities
if you have a control !erson you can@t use *AAA. *AAA is for !rivate resale.
4ac+ing C relates to a resale. Jhen you are %oing a !u"lic resale un%er *AA. if you
"ought securities un%er a A627 !rivate !lace$ent an% then you want to resell the$. Vou
%eci%e that rather than waiting an% %oing %ri""le outs you will go an% %o a !rivate
e'e$!tion resale in fe"/ (ust a $onth later. 4he !erson who "uys fro$ you is getting
restricte% securities. 4hey can then tac+ your one $onth on so they only have to wait **
$onths "efore selling !u"licly un%er *AA. no tac+ing in the case of "uying fro$ an
affiliate.
-S