EXEMPTIONS CHART

Regulation D
§4(a)(2) Rule 504 Rule 505 Rule 506 Reg. A Rule 701
Statutory PRIVATE §3(b) Limited § 3(b) Limited If 506 met, Safe Harbor- §3(b)(1) & (b)(2) Limited §3(b) Exemption
Offering Exemption Offering Exemption (deemed to meet 4(a)(2)) Offering Exemption For Offers/Sales of
OFFERing Exemption Meet all req’s of 501/502 - Mini Public Offering Comp. Benefit Plans
Issuer NO Reporting OR - NO Investment - Available ONLY for NO Exchange Act NO Reporting
Qualification Investment Companies issuer  NOT to its Reporting Enterprises Companies
NONE Companies - Bad-Actor affiliates or SHers, - Bad-Actor Disqualifier
(see print off for stuff
- States may have Disqualifier apply AND NOT to apply (see below) AND ONLY for
to add to 506) certain bad-actor (see below) subsequent sellers - Common for private Employee Comp; no
disqualifiers - Dodd-Frank adds bad- issues of E’e stock options exemption for raising
actor disqualifiers (esp. for Non-Accred) capital
Aggregate $1 million (w/in 12 $5 million (12 mos.) §3(b)(1) - $5 million (12 Greater of: (1) $1
Offering Price Unlimited mo. rolling period) - aggregate w/ other Unlimited mos.) million; (2) 15% of
offers under 3(b)(1) §3(b)(2) – JOBS Act assets; or (3) 15% of
Limits Unlike 506, 4(a)(2) offering Aggregate w/ other CLASS of Exempt outstanding securities
issuer doesn’t need to provide offers under 3(b)(1) Aggregate w/ other Securities (never have to class being issued in
info (as long as investor has and Rule 505 offers under 3(b)(1) be registered - $50 million past 12 mos.
access)  so in offering of and Rule 504 (12 mos.) - NO exemption for
relatively small amounts OR offers/sales intended
selling stock in CHC, 4(a)(2) § 4(a)(5) – offers & sales to raise capital
is better to accrediteds exempt IF -NOT aggregated w/
total offering >$5 MM other offerings
502(a) – Integration 502(a) – Integration 502(a) – Integration NOT integrated w/ PRIOR All offers and sales
applies applies applies offers or sales of securities pursuant to 701 are
None deemed to be a part
Integration 6 month safe harbor 6 month safe harbor 6 month safe harbor 6-month safe harbor of a single, discrete
BEFORE and BEFORE and BEFORE and AFTER offering (so NO
AFTER w/ other AFTER w/ other Reg w/ other Reg D 504/505 could integrate if integration into any
Reg D offerings D offerings offerings follows other offering made
by the issuer)
Number of Uncertain, BUT evidently a 35 + unlimited # of 35 + Unlimited # of Unlimited, BUT must
Investors finite number of offerees (see Unlimited (504(b)) accredited investors accredited investors – Unlimited be an eligible
Purina – if too many = public) – 505(b)(ii) – 501(e) (Reasonable belief) purchaser
reasonable belief BUT NO underwriters
- Focus on offeree and None required – NO NO sophistication - Purchaser MUST be - None required Purchaser MUST be
Investor purchaser need for issuer to requirements - NO sophisticated (alone or - reason it’s commonly employee, director,
- If any invalid or prohibited determine whether requirement that the w/ rep.) - $1M+ = OK used for private issuers of officer, consultant, or
Qualification offer, entire exemption voided the purchaser is investor have a - Accrediteds presumed employee stock options, advisor of an eligible
Must have a reasonable
belief on this
(rescission) sophisticated (or purchaser to qualify (reasonable especially when non- company who
(make sure to put this in - Offeree MUST be financially whether s/he has a representative belief) – 502(b)(1) & accredited, b/c that acquires the security
sophisticated (or w/ rep.) sophisticated institutions & wealthy eliminates 4(a)(2) and 506 as compensation
 Regulation D
§4(a)(2) Rule 504 Rule 505 Rule 506 Reg. A Rule 701
Statutory PRIVATE §3(b) Limited § 3(b) Limited If 506 met, Safe Harbor- §3(b)(1) & (b)(2) Limited §3(b) Exemption
Offering Exemption Offering Exemption (deemed to meet 4(a)(2)) Offering Exemption For Offers/Sales of
OFFERing Exemption Meet all req’s of 501/502 - Mini Public Offering Comp. Benefit Plans
the Due Diligence file) AND Issuer MUST satisfy representative) individuals irrebutably options
Sophistication = INFO requirement deemed sophisticated
knowledge/experience  Wealth NOT substitution - Non-Accreds have to
in business & finance to for sophistication (cf. 506 – be Sophisticated (or
evaluate merit/risks which is easier to satisfy) have purchaser rep)
- Offeree MUST receive OR 502(b)(2) - NO Rule 502(b) – IF Rule 502(b) – for §3(b)(1) –info from Reg. A No information
Information have access to type of info information needed non-accredited, NON-accredited, §3(b)(2) –Electronic filing specified EXCEPT IF
Registration would disclose to be given to delivery of info is delivery of info is to provide SEC & investors greater than $5
Requirements  Offeree likely has “access” investors UNLESS required (even if required (even if offering statement; audited million sold – 701(e)
if high-level exec; family ties, required by state law sophist.) sophisticated) financials; describe - then give ERISA
privileged r’ship due to prior - If accredited, NO - If accredited, NO info operations, financial summary/material
business dealings; OR info delivery reqm’t needed to be given condition, corp. gov., use terms; risk factors; &
economic bargain power of funds, etc. some fin. statements
General Solicitation NO general solicitation or General Solicitation 502(c) - Traditional - 502(c) -No GS or Ads General solicitation
or Advertising advertising permitted or Advertising IF: Rule w/ no permitted in traditional General solicitation & & advertising IS
- G.S. = “lack of (1) state registered exceptions – NO Rule 506 offerings advertising IS permitted permitted
preexisting 4(a)(2) ONLY exempts from OR general solicitation or - Under JOBS
relationship” (H.B. registration reqm’ts (2) state allows & advertising permitted Act/506(c) – GS or Ads Under § 4(a)(5)) – no
Shane - questionnaire) transactions by an Issuer NOT sold ONLY to AIs permitted IF ALL GS&A (and must file w/
- Advertising = print, involving any “public” - 504(b)(i)-(ii) purchasers are verified SEC)
digital, TV, radio, etc. offering as accredited
Resale Limitation/ Restricted  Purchaser must Restricted – 502(d) Restricted – 502(d) Restricted – 502(d) – NO resale restrictions Restricted – 701(g)
Holding Period hold for certain time (& Issuer --cant resell w/o ----cant resell w/o --cant resell w/o reg.. (UNrestricted) --cant resell w/o reg..
(Register OR Exemption) should do legend/stop order) reg.. OR exemption reg.. OR exemption OR exemption OR exemption
- 503 & 507 apply - 503 & 507 apply - Rule 503 & 507 apply §3(b)(2) –Required NO notice of sales
Filing with SEC NO notice of sales required - Form D required, - Form D required, - Form D required, but offering statement w/ SEC required to SEC
but not cond. of but not cond. of not cond. of exemption -must file audited financial
exemption exemption statements annually
Preemption and NSMIA preempts state State regulations do State regulations do - State law is State regulations do
Applicability of regulation of SEC rules/regs APPLY APPLY preempted by NSMIA, State regulations do APPLY
issued under 4(a)(2), BUT BUT must perfect APPLY
State Regulations states can impose their own exemption to preempt
- Earthboard Sports requirements for private - States can set forth
offerings that are exempt notice filing reqmts and
under the statute itself. bring fraud actions
Bad-Actor - No Fed bad-actor - Reg A 262 Applies to issuer; Reg A 262
Disqualifier? - BUT States may - Applies to issuer; D&O’s; 20% owners; - Applies to issuer; D&O’s;
 Regulation D
§4(a)(2) Rule 504 Rule 505 Rule 506 Reg. A Rule 701
Statutory PRIVATE §3(b) Limited § 3(b) Limited If 506 met, Safe Harbor- §3(b)(1) & (b)(2) Limited §3(b) Exemption
Offering Exemption Offering Exemption (deemed to meet 4(a)(2)) Offering Exemption For Offers/Sales of
OFFERing Exemption Meet all req’s of 501/502 - Mini Public Offering Comp. Benefit Plans
Criminal convictions None listed have certain bad- D&O’s; 10% owners; promoters; invstmt 10% owners; promoters;
inv. securities w/in past actor disqualifiers promoters; invstmt mgrs.. and solicitors invstmt mgrs.. and
10 years; OR SEC/State mgrs.. and solicitors solicitors
disciplinary actions
Substantial Rule 508-Can raise in private suits, BUT NOT w/ Gov’tD must show
Compliance Defense N/A 1) Particular reqm’t not designed to protect complaining party N/A N/A
2) Failure to comply is insignificant to offering as a whole; AND
(if no reasonable 3) A good faith and reasonable attempt to comply w/ all Reg. D requirements
belief, then you lose) NOT IF: (1) GS&A violation; (2) over $ limit; or (3) 36+ Non-Accreds

If you represent someone who’s purchasing in a 506 Offering

 Contractual Agreements to Sell (pg. 320)
o A person may contract with the issuer when he acquires the stock for the right of demand registration, thereby granting the control person the contractual
right to demand that the issuer file a registration statement  Demand registration – usually only in the case of publicly held companies
 IF NOT enough leverage to get this demand registration, could use Piggy Back Registration – if and when company files a registration statement, I
want my client to be able to piggy-back her shares to that reg stmt – so can sell shares in the public offering
 In the subscription agreement it would say that the party has the right to piggy-back his stock onto the registered offering
 IF NOT leverage to demand registration NOR piggy-back registration, could use Rule 15c2-11
o Provision of Rule 15c2-11
 A control person should insist that the issuer covenant to provide Rule 15c2-11 information (pg. 320 – list of basic information)
 Important b/c in order to have a public market develop with the stock, even if company is not a publicly reported stock, a broker-dealer
MUST have the 15c2-11 information in its possession OTHERWISE Broker-dealer has committed fraud, so this information has to be made
available.
o That’s why you want to bargain for this information – because allows a broker-dealer to form a public market for the stock
 15c2-11 prohibits broker-dealers from publishing a quotation for any security unless specified info is available with respect to the issuer and
the security
 If the control person induces the issuer to disseminate Rule 15c2-11 information, the current information requirement of Rule 144, which provides a
safe harbor in the resale context, will be satisfied
 Letter from Issuer’s Counsel
o To have the securities transaction consummated, the issuer’s securities law counsel must authorize by written communication the transfer agent to transfer
the stock into the street name of the seller securities broker-dealer firm, free of legends and free of stops
 INTRA-state Offering Exemptions
Section 3(a)(11) Rule 147 Safe Harbor
 Section 3(a)(11) provides an exemption from registration with respect to “any security which is part of an issue offered and sold only to persons resident within a
single State, where the issuer of such security is a person resident and doing business, or, if a corporation, incorporated by and doing within, such State.”
 Rule 147 is a safe harbor for 3(a)(11) (like 506 and 4(a)(2))
 Exempt security, NOT transaction
 Unlike 3(a)(11) , Rule 147 is only available for issuers, not secondary sales
Issuer must be a Resident AND be “doing business” with the state
 Issuer MUST be a resident where its offerees and purchasees reside
 Corporate sellers MUST be incorporated in same state where investors reside (same for GP & LP)
Issuer Qualification Doing business = substantial operations w/in that state
 Rule 147: 80/80/80 test:
o At least 80% of the issuer’s gross revenues AND 80% of the issuer’s assets originate in the relevant state;
o And at least 80% of the proceeds of the offering be spent in that state
Aggregate Offering
Price Limits UNLIMITED

Number of Investors UNLIMITED

Residents of the state in which the issuer is resident and doing business
Investor Qualification  Residence is fixed place of abode (can ONLY have one residence; vacation home does NOT count)
(make sure to put this in the  Entire issue MUST be offered and sold exclusively to residents of the state in which the issuer is resident and doing business
Due Diligence file)  Rule 147: All offers and sales must be made to persons resident w/in state where Issuer resides (only their “principal residence”)
o Foreigners are OK
Info Requirements State Requirements
General Solicitation or CANNOT offer to out-of-staters
Advertising  A advertisement outside of the state does NOT constitute an “offer” IF the solicitation contains explicit language limiting the offering to in-state
- G.S. = “lack of preexisting residents (Ad could include print, media, radio, TV)
relationship” (H.B. Shane -
questionnaire)
Once the securities have “come to rest” in the hands of resident investors, the Commission will allow them to be resold to non-residents either
directly or through financial intermediaries
 whether resident-purchasers take the securities w/ “investment intent,” not a view to distribute them to non-residents (1-year rule of thumb)
 Investor must show unforeseen change of circumstances that necessitated resale
Resale Limitation/  Rule 147: Can immediately resale to residents
Holding Period o ONLY available for issuers, NOT secondary sales  BUT 3(a)(11) is an exempt security, so that applies for resales
 Expressly prohibits resales to out-of-state residents for nine months after the last sale of the issue
 Requires Issuer to place legend noting restrictions on its certificates and issue stop transfer instructions to that effect to its transfer agent
Issuer must also obtain a written representation from each purchaser as to her residence
Filing with SEC NONE
State Regulations
- Earthboard Sports State Regulation Applies
 Rule 147 provides a safe harbor for integration that provides that other offerings which take place either 6 months BEFORE or 6 months
Integration AFTER an otherwise valid Rule 147 offering shall NOT be deemed part of that issue
 If can’t use Safe Harbor, can still avoid integration of other offers from the Intrastate issue if the 5-factor integration test is met
Section 5 of the Securities Act
 Generally, Section 5 of the ‘33 Act makes it unlawful to engage in activities intended to stimulate interest in a securities offering prior to the filing of a
registration statement containing the information required by the Securities Act. Specifically:
o Section 5(c) makes it unlawful to offer a security unless a registration statement has been filed;
o Section 5(a) makes it unlawful to sell a security unless a registration statement relating to the security has been filed and declared effective;
and
o Section 5(b) requires that any “prospectus” relating to a security must comply with the requirements of Section 10 of the Securities Act. A
“prospectus” for this purpose means any prospectus, notice, circular, advertisement, letter or communication that offers a security for sale.
o “offer” = any activity that may have the effect of soliciting or creating a buying interest in a security. Violations of communications restrictions
are NOT limited to issuers, and Underwriters must also be mindful of the restrictions.
 Ineligible Issuer Issuer is “ineligible” when it fails to file periodic reports OR engages in certain “bad acts” within the prior 3-year period
Non-reporting Issuer NOT required to file reports pursuant to Section 13 or 15(d) of the Act (about to do IPO, voluntary filer; done Reg D offerings
Issuer only before, hasn't met size qualifications ($10 M+ in assets or 2000 total investors OR 500 Non-Accrediteds)
Unseasoned  Currently reporting in the '34 Act framework and has done so timely, and has LESS than $75 MM in public float (dollar value of
Issuer shares held by non-affiliates - NON-officers, NON-directors, NON-parent corporation, NON-control persons)
 If timely filed for 12 months, & less than $75 MM public float (can be S-3 filer) BUT ONLY offerings for 1/3 of public float
Seasoned Issuer  Filed timely reports for at least 12 months; OVER $75 Million public float
 S-3 eligible filer and can do shelf registration (must be reviewed by SEC) – can incorporate by reference
Emerging Growth Emerging Growth company (JOBS Act 2012) - issuer w/ less than $1 B in annual gross revenue in previous fiscal year AND did NOT
Company have an IPO of equity securities on or prior to December 8, 2011-
-> given special treatment in registration framework AND with respect to continuous reporting framework under '34 Act
 Ceases to be EGC upon earliest of following: (1) last day of EGC’s fiscal year after 5 years of conducting its IPO; (2) last day of
its fiscal year in EGC’s gross revenues were $1 billion or greater; (3) date on which the company issued, over the prior 3-year
period, non-convertible debt exceeding $1 billion; or (4) date on which the company becomes a “large accelerated filer”
 Rule 147A - Section 5(d) - Emerging growth companies can make offers to sell in pre-filing period to institutional accredited
investors under Reg D ($5MM in assets), QIB ($100MM+ invested in securities) (pg. 196)
Well-Known Public float of at least $700 MM, or issued over $1B in convertible notes in the last 3 years
Seasoned Issuer  Can make offers to sell in the pre-filing period OR in whatever period --> SEC has exempted WKSIs out of Section 5
 S-3 eligible filer and can do automatic shelf registration (effective immediately upon filing) – Can incorporate by reference
Rule 163 – WKSIs are completely exempt from restrictions on offers during the pre-filing period
 They may communicate in compliance with Section 5 at any time by means of unrestricted ORAL and WRITTEN communications
 FWP in Pre-Filing and Waiting period does NOT need to be accompanied/preceded by any (preliminary) prospectus (Rule 433)
 Free writing communications in Post-Effective do NOT need to be accompanied/preceded by preliminary) prospectus
 But when considered “offers to sell,” still subject to liability under other securities law provisions based on misrepresentation or omission
 Delivery of notice ONLY applies to sales from allotment (4(a)(3) & Rule 174)

Type of Communication Ineligible NON-Reporting Unseasoned Seasoned Emerging Growth Well-Known

Issuer Issuer Issuer Issuer Company Seasoned Issuer
PRE-FILING PERIOD
 Pre-filing period starts w/ first meeting between issuer and underwriter
 Preliminary negotiations/agreements b/t issuer and underwriters exempted from “offer” (§2(a)(3))
 NO sales (§5(c)) AND NO offers for sale of securities, written or oral, prior to filing registration statement
Type of Communication Ineligible NON-Reporting Unseasoned Seasoned Emerging Growth Well-Known
Issuer Issuer Issuer Issuer Company Seasoned Issuer
 “Conditioning the market” (“gun-jumping”) are statements made during Pre-Filing prohibited b/c the SEC considers them “offers to sell” – BUT 5 Safe Harbors
**“Factual business information” does NOT include information about an offering or information released or disseminated as part of offering activities.
Rule 168 - Regularly released Permitted (but Permitted (but Permitted, but ONLY IF
factual business info AND cannot mention cannot mention the EGC is also a
forward-looking info by reporting Permitted N/A offering) and offering) and reporting issuer (no Permitted (but cannot
issuers (but NO mention of subject to anti- subject to anti- mention of offer & mention offering and
Offering) fraud rules fraud rules subject to anti-fraud) subject to anti-fraud)
Rule 169 - Regularly released N/A Permitted, but only to N/A N/A Permitted if EGC is a N/A
factual business info (not persons other than in non-reporting issuer and
intended for investors) BUT NO their capacities as only to persons other
mention of the offering investors. than in their capacities as
investors.
Rule 163A – Any communications N/A
MORE than 30 days BEFORE a  Permitted communications 30+ days BEFORE filing of Registration statement, BUT CANNOT reference offering
reg. statement filing, as long as an  Creates safe harbors for Issuers, BUT NOT underwriters OR any other participants
offering is NOT discussed -- (Safe  Issuer must take reasonable steps to prevent further dissemination of info during 30 day pre-filing period
Harbor for Issuer only, NOT any
UW or other participants)
Rule 135 Notice - Limited Permitted in accordance with Rule 135 (limited notices)
Communications within the 30  The name of the issuer (but NOT the underwriter);
days before Registration.  The title, amount, and basic terms of the securities offered;
Statement filing ONLY if they  The amount of the offering, if any, to be made by selling security holders;
follow 135 (Notice of  The anticipated timing of the offering
contemplated offering, but No UW  Brief statement of manner and purpose of the offering without naming the underwriters (don’t want investors contacting
name; only issuer’s) underwriters);
 Whether the issuer is directing its offering to only a particular class of purchasers;
Rule 163 - Free writing These filers can ONLY do preliminary negotiation/agreements with (or among) N/A  Permitted. b/c of breadth
prospectuses (FWPs) for pre-filing underwriters – 2(a)(3) But see Testing the of rule, WKSIs
written and oral offers by WKSIs  No written OR oral offers by these types of issuers Waters IF IAIs or generally not required to
Rule 164 ONLY available to WKSIs during filing period (and NOT any UWers or others QIBs rely on any other Rule
(AND written comm. must contain legend of where to get prospectus when it’s filed
Test-the-water Comm’s under N/A N/A N/A N/A Permitted to QIBs and N/A
Section 5(d) of ‘34A Accred. Inst. Investors
Type of Communication Ineligible NON-Reporting Unseasoned Seasoned Emerging Growth Well-Known
Issuer Issuer Issuer Issuer Company Seasoned Issuer
WAITING PERIOD
Rule 168 - Regularly released Permitted N/A Permitted Permitted Permitted if the EGC is a Permitted
factual business information AND Reporting Issuer.
forward-looking info by Reporting
Issuers
Rule 169 - Regularly released N/A Permitted, but only to N/A N/A Permitted if the EGC is a N/A
factual business information persons other than in Non-Reporting Issuer and
(excluding dividend notices) by their capacities as only to persons other than
NON-reporting issuers and investors. in their capacities as
voluntary filers investors.
Rule 164 - Free Writing N/A Permitted Permitted Permitted Permitted Permitted
Prospectus = Offer A statutory prospectus, A statutory No requirement to If EGC = seasoned issuer, No requirement to
including a price range prospectus, deliver a statutory no requirement to deliver a deliver a statutory
A writing that offers for sale the when required (as in the including a price prospectus with or stat. prospectus before or w/ prospectus with or in
case of an IPO) must range when in advance of a FWP; legend w/ info advance of a WKSI's
registered offerings of securities regarding how to obtain a
accompany or precede required (as in the seasoned issuer's FWP; a legend
that does not meet the detailed a FWP. case of an IPO) FWP; a legend stat. pros. is sufficient. containing
disclosure requirements of a must accompany or containing If EGC=non-reporting or information
Section 10(a) final prospectus unseasoned issuer:
No FWPs prepared and precede a FWP. information regarding how to
Stat. prospectus, including
(Rule 405) disseminated through  No FWPs regarding how to obtain a statutory
obtain a statutory price range when required prospectus is
media IF paid for by disseminated
must accompany or precede a
issuer or offering through media IF prospectus is sufficient.
FWP.
participant UNLESS paid for by issuer sufficient.
No FWPs through media if
accompanied/ preceded or UW UNLESS Statutory paid for by issuer or offering
by a stat. prospectus. accompanied/ prospectus must participant unless a statutory
preceded by a stat. first be on file prospectus is on file with the
prospectus. with the SEC. SEC.
Rule 134 notices Under Rule 134, Issuer may release general information about: (1) its business; (2) the terms of the securities being offered; (3) the underwriters of
the offering; (4) details on the offering process; (5) the anticipated schedule of the offering; (6) a description of marketing events; (7) indications of
interest and conditional offers to buy; and (7) the security rating that is reasonably expected to be assigned
 Tombstone Ad is exempt from the definition of prospectus pursuant to Section 2(a)(10)(b)
o BUT term sheet used by issuer will be treated as a FWP subject to the FWP requirements
 Allows the issuer to gauge the level of financial intermediary and investor interest in the prospective offering
o The SEC permits use of the Tombstone Ad prior to ascertaining a bona fide price range of the securities
 Does NOT allow the issuer to set forth a detailed description of the securities
Test-the-water Comm’s under N/A N/A N/A N/A Permitted to QIBs and N/A
Accredited Inst. Inv.
Type of Communication Ineligible NON-Reporting Unseasoned Seasoned Emerging Growth Well-Known
Issuer Issuer Issuer Issuer Company Seasoned Issuer
Section 5(d) ‘34A

POST-EFFECTIVE PERIOD
Rule 168 - Regularly released Permitted N/A Permitted Permitted Permitted Permitted
factual business information AND
forward-looking information by
reporting issuers
Rule 169 - Regularly released N/A Permitted, but only N/A N/A Permitted if EGC is a N/A
factual business information to persons other than Non-Reporting Issuer and
(excluding dividend notices) by in their capacities as only to persons other than
non-reporting issuers and investors. in capacity as investors.
voluntary filers
"Free Writing" as permitted by Permitted Permitted Permitted Permitted Permitted Permitted
Section 2(a)(10)  NOT
“FWP” but carve out from
definition of “prospectus.”

Rule 134 Tombstone Notice Under Rule 134, Issuer may release general information about: (1) its business; (2) the terms of the securities being offered; (3) the underwriters of
the offering; (4) details on the offering process; (5) the anticipated schedule of the offering; (6) a description of marketing events; (7) indications of
interest and conditional offers to buy; and (7) the security rating that is reasonably expected to be assigned
**Only permitted AFTER filing of
 Tombstone Ad is exempt from the definition of prospectus pursuant to Section 2(a)(10)(b)
Reg. Statement
o BUT term sheet used by issuer will be treated as a FWP subject to the FWP requirements
 Allows the issuer to gauge the level of financial intermediary and investor interest in the prospective offering
o The SEC permits use of the Tombstone Ad prior to ascertaining a bona fide price range of the securities
 Does NOT allow the issuer to set forth a detailed description of the securities
Rule 164 - Free Writing N/A Permitted if final Permitted if final Permitted Permitted if the EGC is Permitted
Prospectus = Offer prospectus delivered prospectus a Seasoned Issuer. If
w/ or before., AND delivered w/ or EGC is NOT a seasoned
No FWPs prepared before., AND issuer, permitted as long
or disseminated No FWPs as accompanied or
Rule 172 – Investors are through media if prepared and preceded by a final
Type of Communication Ineligible NON-Reporting Unseasoned Seasoned Emerging Growth Well-Known
Issuer Issuer Issuer Issuer Company Seasoned Issuer
presumed to have access to the paid for by issuer or disseminated prospectus.
Internet (Access = Delivery) UW unless through media if
accompanied or paid for by issuer
 Rule 173(a) - Confirmation preceded by a final or offering
Statement is so that investors prospectus. participant
can Trace for Section 11 claim unless
(b/c they bought pursuant to a accompanied or
Reg. Statement) preceded by a
final prospectus.
Broker-Dealers (Rules 137, 138, 139)
 Establish circumstances when broker dealers can publish research reports concerning issuers that propose to conduct a registered public offering
 These safe harbors can be used in ANY period of the offering process

Waiting Period
a. Preliminary Prospectus
i. Extremely detailed, mandated disclosures. Must comply with Regulation S-K
ii. Not final prospectus because still in waiting period  must be marked as a red herring
1. Sales are not allowed UNTIL prospectus is finalized (i.e. has pricing information)
iii. §2(a)(10)
b. Free Writing Prospectus
i. A writing that offers for sale the registered offerings of securities that does not meet the detailed disclosure requirements of a Section 10(a) final
prospectus (Rule 405)
1. FWPs may contain additional/supplemental info, but CANNOT conflict with the statutory prospectus
a. Statutory prospectuses are governed by §10 of SA
2. Use of FWP based on Issuer Class
a. WKSIs may use free writing prospectus during any phase of the offering but must contain a legend notifying the recipient where the
registration statement can be located (if one has been filed) (Rule 163)
b. Eligible seasoned issuers may use free writing but only if a registration statement containing a preliminary statutory prospectus has
been filed
i. Such a FWP must contain a legend identifying where the investor can access the statutory prospectus, a hyperlink to the
statutory prospectus, or the URL for the SEC website. (access = delivery)
c. Non-reporting issuers and eligible unseasoned issuers may use free writing prospectus if a registration statement has been filed with
the SEC and the free writing prospectus is accompanied or preceded by the most recent statutory prospectus (Rule 164)

ii. Confidential Review of IPO Registration Statements Filed by Emerging Growth Companies
1. Pursuant to JOBS, an emerging growth company may confidentially submit to the SEC its draft IPO registration statement for non-public review by the
Commission prior to the company’s public filing of such IPO registration statement
2. Any such confidential draft and amendments thereto MUST be publicly filed with the SEC at least 21 days before the date on which the company conducts
its road show for the IPO
3. This permits an EGC to initiate the IPO filing process without having to publicly disclosure sensitive information (to, amongst others, competitors)
a. However if the EGC elects to pursue the IPO, it MUST publicly file the confidential draft submission as set forth above – namely, at least 21 days
before conducting a road show for its IPO
 iii. Media
1. Where information (Oral OR Written) about an issuer or an offering is provided by the issuer or any offering participant to the media and the information
is subsequently published and constitutes an offer to sell, it will be considered a FWP.
a. As such, these are allowed BUT the issuer is required to file with the SEC such written communications within 4 business days of first publication
2. Other obligations depend on whether the issuer prepared or paid for the publication
a. If an issuer prepares, pays for, or gives other consideration for the preparation or dissemination of the publication then the issuer MUST satisfy all of
the conditions for that type of issuer using a FWP
i. Non-reporting issuers and reporting unseasoned issuers MUST precede or accompany the communications with a statutory prospectus
AND file the media piece with the SEC
ii. A seasoned issuer that prepared or paid for the communication ONLY has to have filed a registration statement with the SEC AND file the
media piece
iii. Any WKSI may use such media piece at any time, subject to filing FWP with the SEC
b. If FWP is prepared and published by media persons unaffiliated with the issuer, and the issuer has participated but NOT prepared or paid for the
publication, the issuer’s (other than WKSI) obligations under Section 5 is to have filed a registration statement (and thereby a statutory prospectus)
with the SEC
c. Road Shows
i. Conducted to prospective institutional investors and securities professionals as a means to present the issuer and the securities offered in a favorable light and
determine the extent of the party’s interest
ii. Through a number of no-action letters, the SEC staff had acquiesced in the view that roadshow media does not constitute a Section 2(a)(10) prospectus and
allowed the use of electronic media by issuers and underwriters to conduct roadshows for audiences consisting of sophisticated investors and securities
professionals
1. Now a more detailed approach as to what constitutes written offers and prospectuses
a. The conducting of real-time roadshows to live audiences that are also transmitted graphically in real-time are NOT deemed written communications
or FWPs.
b. On the other hand, roadshows that do NOT originate live, and NOT in real-time to a live audience and are NOT graphically transmitted are electronic
roadshows that will be considered written communications and, therefore, free writing prospectuses.
The Post-Effective Period
 Begins after the registration statement becomes effective
 Sales of the subject securities may now be made, BUT ONLY IF a Section 10(a) final statutory prospectus has been provided OR is accessible to the purchaser 
preliminary prospectus has certain incomplete info
o Access = Delivery (see below)
 Written offers continue to be regulated by the SEC offering rules, such as the use of FWPs
 The content of the final statutory prospectus are specified in Section 10(a)
o Final prospectus is used after the registration statement becomes effective
o During the post effective period, the section 10(a) final statutory prospectus must be provided or be accessible to purchasers of the subject securities
 Access Equals Delivery
o The SEC adopted an access equals delivery framework to the Section 5 prospectus delivery requirement in the post-effective period (Rule 172)
 Investors are presumed to have access to the Internet
  Accordingly, issuers and other offering participant may satisfy the prospectus delivery requirement by posting the final statutory prospectus on a readily
available website
o Thus, the Section 5 requirement that a final statutory prospectus precede or accompany the delivery of the securities for sale has been eliminated provided that
the final statutory prospectus is timely filed with the Commission and is posted on readily accessible website
 The SEC adopted a notification rule requiring dealers and underwriters to provide a Confirmation notice to purchasers that their purchase was pursuant to a
registration statement (Rule 173(a))  helps determine tracing (because offering was subject to that registration statement0
SECURITIES (’33) ACT – CAUSE OF ACTION CHART – also see Section 18 on ’34 Act Chart below and 29(b) below
Rule 10b-5 Section 11 Section 12(a)(1) Section 12(a)(2) Section 17(a)
Purchase OR Sale of Registered offering Unregistered, Exempt ANY written OR oral Sales AND Offers to
Coverage Securities (jdx – use of item Offering comm’ns as part of Public Sell (doesn’t cover
in interstate commerce) Offering (Gustafson) fraud on the Purchase)
Acquirer of registered Purchaser of Purchaser of securities – SEC Enforcement
Plaintiff Purchaser OR Seller securities  Tracing reqm’t unregistered securities strict privity reqm’t (NO private right)
Defendant Primary violator Issuer, Directors, specified “Seller” who solicits for “Seller” who solicits for Violating Seller or
Officers, Experts, UWers personal gain personal gain Offeror (e.g., Brokers)
Misrepresentation OR Untrue statement OR Violation of Section 5 Offer or Sale by oral offer Prohibits offerings,
Violation omission of material fact “in misleading omission of (sale or offer of OR prospectus containing whether registered or
connection w/ purchase or material fact in Reg. unregistered securities materially false or exempt, by false or
sale of any security Statement (+ Prospectus) OR gun-jumping) misleading statements misleading means
Culpability Scienter required (includes - Strict Liability for Issuer No scienter reqm’t, but NO scienter reqm’t - 17(a)(1) – scienter
Plead fraud /w recklessness, but negligence - Due Diligence defense for In Pari Delicto available Defense: Reasonable care - 17(a)(2) or (3) -
particularity is NOT enough) NON-Issuer D’s if P equally liable to D and NO knowledge negligence (Aaron)
Reliance required (unless NO reliance reqm’t – just
involves duty to speak OR NOT required (defense if show material misstatement
Reliance omission (Affiliate Ute) Income statement filed 12 N/A or omission  But defense N/A
- Can use F.O.T.M. (Basic) months after offering) if purchaser knows untruth
for rebuttable presumption or omission (not justifiable)
- Transaction Causation – but No Causation reqm’t, but No causal connection NO loss causation reqm’t
Causation for violation, transaction would Defense = all/part of loss required btw violation Defense = all/part of loss N/A
not have occurred caused by unrelated market and price drop caused by unrelated factors
- Loss Causation – injury factors (down to 0)
attributable to D’s act
Generally, out-of-pocket Damages = difference btw - Rescission (if P owns) - Rescission (if P owns) Civil injunctions and
Remedy damages amount paid & value when - Rescissory damages (if - Rescissory damages (if penalties in court;
sold OR time of suit already sold) already sold) C&D orders
Proportional liability for Proportional liability for
Limited Liability unknowing violators unknowing outside directors N/A N/A
Contribution Available Available N/A N/A
 Aider & Abettor No private right of action No private right of action No private right of No private right of action
Liability (Central Bank of Denver) action
-In SEC actions, A&A if
party knowingly/recklessly
provides help to primary P
Controlling Person Investors can also recover, on a joint & several basis, from persons (individuals or
Liability – Section 15 corporations) who control any person liable under Section 11 or 12, unless D had NO
knowledge of OR no reasonable grounds to believe in existence of facts
Limitations Period 2 years after discovery 1 year after discovery 1 year after discovery 1 year after discovery 2 years after discovery
5 years after violation 3 years after sale (maybe 3 years after offering 3 years after offering (maybe 2 5 years after violation
2 years/5 years, if fraud) years/5 years, if fraud)

EXCHANGE (’34) ACT – CAUSE OF ACTION CHART – also see Section 17 on ’33 Act Chart above and 29(b) below
Rule 10b-5 Section 18(a) – used more by Section 9(e) Section 20(a)
Institutional investors & no class (see § 10 & 14(e) & 15(c))
action
Trading in Exchange-listed Control Person liability
Coverage Purchase OR Sale of Securities SEC Filing Security (and Inside Trading )
Purchaser OR Seller Purchaser OR Seller of Purchaser OR Seller of For SEC actions ONLY
Plaintiff affected Securities manipulated Securities
Requirements:
Primary violator Person who makes false “willful participant” in
statements in filing manipulative conduct  (1) A primary
Defendant
securities law
Fraud/deceit, misrepresentation OR False or misleading statement Specified manipulative practices violation by another
Violation omission of material fact “in connection w.r.t. to material fact in SEC (wash sales, matched orders, (i.e. violation of
w/ purchase or sale of any security filing etc.) §10(b)),
Culpability Scienter required (includes recklessness, Defense: good faith & NO Required (“willful participation”  (2) substantial
Plead fraud /w but negligence is NOT enough) knowledge of falsity that assistance by alleged
particularity statement was aider/abettor in the
false/misleading commission of
Reliance required (unless involves duty to Reliance required – P must primary violation;
speak OR omission (Affiliate Ute) show that he actually read the N/A AND
Reliance - Can use Fraud-on-the-Market (Basic) to relevant parts of the document
 (3) the secondary
establish presumption of reliance, but D in question either by reading
can rebut by showing reliance NOT the filed document itself or as
actor’s knowledge of
reasonable (b/c adequate truthful info) described in another source OR recklessness as to
- Transaction Causation – but for “price affected by statement” price affected by violation that primary
violation, not have occurred Loss Causation AND violation
 Causation - Loss Causation – injury attributable to Transactional Causation
D’s act  in reliance on such materially Substantial Assistance 
false or misleading statement,
that P purchased or sold security Defendant (1) in some
at a price that was affected by the sort associated himself
disclosure deficiency
with the venture, (2) that
Remedy Generally, out-of-pocket damages Damages caused by reliance Damages as result of violation
he participated in it as in
Limited Liability Proportional liability for unknowing N/A N/A something he wished to
violators bring about, (3) and that
Contribution Available Available Available he sought by his action
Aider & Abettor No private right of action (Central Bank of Denver) to make it succeed (SEC
Liability v. Apuzzo)
Controlling Person In SEC actions, A&A if party knowingly/recklessly provides help to primary P
Liability – Section 20
Limitations Period 2 years after discovery 2 years after discovery 2 years after discovery
5 years after violation 5 years after violation 5 years after violation
 Rule 14a-9 – Implied Remedy for Material Misstatements or Omissions in Proxy Materials – (TSC Industries)
o Rule 14a-9 prohibits material misstatements & omissions in connection w/ solicitation of proxies (not just mgmt’s)
o P must show that he was injured in connection w/ covered proxy solicitation, regardless if purchase OR sale or not
 Corp. or shareholder has standing for proxy violation IF injury + casual connection btw violation & injury
 Any SH entitled to vote on the proposal has a right to full disclosure & can sue for violation of proxy rules
 NO scienter requirement, but a showing of negligent conduct will suffice (Aaron v. SEC)
o Materiality - the misstatement or omission must be of a character that there is ‘‘a substantial likelihood that a reasonable shareholder would consider it
important in deciding how to vote.’’ very factual (TSC Industries)
o Causation – Loss causation (connection between the misstatements/misrepresentation and the actual damages/economic harm resulting from the transaction)
AND transaction causation (= But-for causation, and demonstrates that the misstatements or omissions were causally related to the occurrence of the
transaction) (Dura)
 Section 14(e) – Tender Offer Fraud
o Section 14(e) prohibits fraud, deceit, and material misrepresentations OR omissions in connection w/ any tender offer OR request or invitation for tenders OR
any solicitation of SHers to favor or oppose such offer, request, or invitation  requires full and fair disclosure of the tender offers’ terms (no price reqm’t)
o NOT limited to tender offers of just ’34 Act registered reporting companies – Applies even to non-public companies
o P must show some misrepresentation OR nondisclosure AND that D acted w/ scienter
o Rule 14e-3 – prohibits insider trading during a tender offer (applies to insiders of target company AND anyone else)
o Applies a strict PARODY of INFORMATION rule – broadest application of insider trading rules  applies Disclose-OR-Abstain provision when a person is
in possession of material information relating to a tender offer AND knows or has reason to know that such info is non-public AND obtained directly or
indirectly from Bidder, Target corporation, any of their affiliated persons, OR anybody acting on behalf of either company.
  Generally, the rule (with certain exceptions) contains broad “disclose OR abstain from trading” provisions AND “anti-tipping” provisions.

 Section 29(b) – Voidability of Contract

o 29(b) says that every K formed or performed in contravention of the 1934 Act or any rule from there, shall be void…
Facts: broker and RE developer agreed that broker would market partnerships, then RE developer learned that broker never registered with
the SEC (thus violated 34 Act) – developer wants to rescind
o 29(b) gives a private cause of action  Supplies a private right of rescission to sections of the Act that otherwise do not allow for it
o Elements P must show:
 The K involved a prohibited transaction (here, violation of broker registration)
 Two, P must show he’s in contractual privity with D (here, no problem – only 2 parties)
 Three, P is in the class of persons the act is designed to protect (includes more than just investors)
 Broker-Dealer Liability - Only liable when it’s a discretionary account
o In the 10(b) context, broker-dealers are held to a strict standard of conduct  Brokers CANNOT lie/engage in misrepresentation, but can engage in puffery
o Shingle Theory (pg. 605) – not based on fiduciary law (b/c brokers aren’t deemed fiduciaries, but rather by professional conduct standards)
 By hanging its shingle, a broker-dealer impliedly represents its conduct and behavior of its employees will be fair & will comport w/ professional norms
 By not upholding these representations, a claim for misrepresentation may be brought
o Implied Representations within the Shingle Theory:
 Suitability theory – implied representation that broker will recommend only securities suitable for each customer’s investment goals & economic status
 An implied representation of fair pricing, including any markup or markdown  Brokers’ Commission, if any, must be disclosed AND must be fair
 An implied representation that the broker-dealer will execute only authorized transactions for its customers
 An implied representation to disclose any special consideration that influences the broker-dealer’s recommendation
 An implied representation to execute promptly customers’ orders; and
 An implied representation that any recommendation made by a broker-dealer to a customer has a reasonable basis
o Questions whether the theory still provides a basis for 10(b) action in light of Santa Fe’s holding that deception or manipulation must be shown
Bespeaks Caution Doctrine and Reform Act Safe Harbors
 Most courts recognize the “bespeaks caution” doctrine, by which the materiality of a forward-looking misstatement or omission can be negated by appropriate
cautionary language in a disclosure document.
o By its terms, the bespeaks caution doctrine, like the safe harbor provision in the Reform Act, is directed only to forward-looking statements.”
o Example: supplemental sales literature is not materially misleading when there is complete disclosure in the prospectus
 The Reform Act established a statutory safe harbor for certain forward-looking statements in Section 27A of the Securities Act and in Section 21E of the Exchange
Act 

o Forward-looking statements for purposes of the Reform Act’s safe harbor include:
 Those that “contain[] a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures,
dividends, capital structure, or other financial items,” those that are “statement[s] of the plans or objectives of management for future operations,”
and those that are “statement[s] of future economic performance.”
o The Reform Act safe harbor states that a person is not liable for a forward-looking statement if the statement is (1) immaterial or accompanied by cautionary
statements; OR (2) if the plaintiff fails to prove that the statement was made with actual knowledge that the statement was false or misleading.
 o The Reform Act’s safe harbor has no state of mind requirement; if cautionary language is adequate, the inquiry ends there.
 Even if a forward-looking statement is deliberately false, cautionary statements will protect the author from any liability, pursuant to the plain
meaning of the safe harbor provisions.

o “[U]nder the literal language of the safe harbor statute the author of any forward-looking statement — even though a deliberate falsehood — is insulated
from liability so long as that statement is accompanied by some meaningful cautionary statement.”).
 If forward-looking deliberate falsehoods are not accompanied by adequate cautionary language, however, the safe harbor will not apply.
 To immunize a forward-looking statement, “the cautionary language must be precise and must directly relate to the defendants’ forward-looking statement.” 
Acceptable cautionary language includes warnings that are specific and linked to the challenged projections.
o “General statements that fail to disclose specific underlying material information fail to trigger the protection [of the safe harbor].
o Likewise, boilerplate warnings merely reminding an investor that the investment holds risks are not sufficient.”
 Written only, or is oral cautionary language sufficient?
Federal and State Law
 Section 16 of the Securities Act and § 28(a) of the Exchange Act explicitly preserve remedies existing prior to passage of the securities acts. Thus, the
federal securities laws do not preclude state law actions, such as actions for common law fraud, arising out of securities transactions.

 Securities Act - Actions under the Securities Act can be brought in either federal or state courts, under § 22(a) of the Securities Act.
 Exchange Act - Section 27 of the Exchange Act requires actions under the Exchange Act to be brought only in the federal courts.
 SLUSA - These provisions make federal court the exclusive venue for nearly all securities fraud class actions
o SLUSA preempts certain class actions that allege fraud under state law and effectively makes federal court the exclusive venue for nearly all
securities fraud class actions.
o Specifically, SLUSA precludes a private party from bringing a “covered class action” in federal or state court based on state law alleging a
“misrepresentation or omission of a material fact” or the use of “any manipulative or deceptive device or contrivance in connection with the
purchase or sale of a covered security.”
 The term “covered securities” in SLUSA includes those listed or authorized for listing on the New York Stock Exchange, the American
Stock Exchange, or the NASDAQ Stock Market.
o Covered class actions brought in state court are removable to federal court and the state law claims are subject to dismissal based on the
preemption provisions in § 16(b) of the Securities Act and § 28(f)(1) of the Exchange Act  The party seeking removal must establish that the
action is “(1) a ‘covered class action,’ (2) thatis based on state law, (3) alleging a misrepresentation or omission of a material fact or use of any
manipulative or deceptive device or contrivance, (4) ‘in connection with’ [or ‘involving,’ for removal purposes], (5) the purchase or sale of a
covered security.”
Liabilities Under the SECURITIES ACT (primarily protects purchasers)
Overview of § 11 and § 12
 Sections 11 and 12 Contrasted
 Sections 11 and 12 are the basic private liability provisions of the Securities Act and only buyers, NOT sellers.
 Section 11 makes those responsible for a false or misleading registration statement liable in damages to any and all purchasers
regardless of from whom they bought
 Section 11 deals with the “manufacturers” and “wholesalers” of securities (i.e., issuers, underwriters and experts who aid them
in preparing registration statements)
 Has NO privity requirement
 Provides a remedy in damages.
 Section 12 allows a purchaser to rescind his purchase of securities, or to get damages from his seller if he no longer holds the securities,
if the seller used a false or misleading prospectus or false or misleading oral statements in making the sale.
 Section 12 deals with “retailers” of securities (i.e., the securities dealers who sell to the general public),
 Requires privity
 Provides primarily for a remedy of rescission.
 Overlap Between § 11 and § 12
 Anyone who buys a security directly from an issuer OR underwriter that is unregistered in violation of § 5 of the Securities Act OR on
the basis of false or misleading oral representations or a false or misleading prospectus may have an action for rescission under § 12 as
well as an action under § 11.
 Example: An underwriter liable under § 12(2) and an issuer could e liable under § 12(1)
 Exclusivity of § 11 or § 12 Remedies
 A buyer may NOT rescind or recover damages from his seller under § 12 AND THEN ALSO recover damages from an issuer,
underwriter or their advisors under § 11. Nothing prevents a litigant, however, from pursuing both § 11 and § 12 actions to judgment
and then electing his remedy.
 Rule 9(b) and § 11 and § 12
 Rule 9(b) applies to § 11 claims if the § 11 claims rely on the same alleged misrepresentations as a plaintiff’s 10(b) fraud claim
 Requires § 11 claims “based on averments of fraud” to meet the heightened pleading requirements of Rule 9(b)
SECTION 11 – pertains ONLY to PUBLIC offerings (and registration statements used therein)
 Section 11(a) makes specified persons liable for any untrue statement of material fact in a registration statement [in a Public Offering] OR any omission of any
material fact required to be stated in a registration statement or necessary to make statements therein not misleading, to any person acquiring the relevant security
UNLESS the acquiror knew of such untruth or omission at the time of the acquisition.
 Persons Liable
o If a registration statement is false or misleading, § 11(a) makes liable:

 the issuer;

 every person who signs the registration statement;

 the directors of the issuer; [Outside vs. Inside Directors? Read BarChris]

 persons named, by their consent, in the registration statement as about to become directors of the issuer;

 every expert (e.g., accountant, auditors, engineer, appraiser, etc.) who is named by consent as having certified or prepared
o What about Attorney opinion letters?

 any part of the registration statement; and

 every underwriter of the relevant security.

o All of the above, EXCEPT experts, are responsible for ALL misstatements and omissions in the registration statement.
 Experts are responsible for misstatements and omissions only in those parts of the registration statement they are named as having prepared or
certified (in the Expertised portions)
 The degree of investigation required of experts, such as accountants, is largely determined by professional standards  holding that even a
concurring partner on an audit must adhere to norms of accounting profession

o These cases establish that whether a § 11(b)(3) defense exists must be determined on a case-by-case basis and the magnitude of the duty imposed will vary
by party.
 Management and inside directors of the issuer will be under the highest duty to investigate the truth of the registration statement. nder § 11,
“[l]iability against the issuer of a security is almost absolute, even for innocent misstatements;
 Other defendants may resort to a due diligence defense”).
 Outside directors are under a lesser duty to investigate than are inside directors, see Rule 176(e). Nevertheless, they must also investigate to some
extent and cannot merely accept management’s representations that the registration statement is accurate.
 Scienter
o A § 11 plaintiff does NOT need to establish a defendant’s scienter, or even negligence, to prove his case, because § 11’s liability provisions
create “‘virtually absolute’ liability” do not require plaintiffs to allege that defendants possessed any scienter.
 o BUT under Section 27A(c) of the Securities Act, no liability will attach in a private action based on certain statutorily defined “forward-
looking statements” UNLESS the plaintiff proves actual knowledge of the false or misleading nature of the statement on the part of a natural
person making the statement or on the part of an executive officer approving the statement made on behalf of a business entity.

 Section 11 Defenses
o An ISSUER has virtually no defenses under § 11: it is strictly liable for material misstatements and omissions in registration statements of public offerings.
 However, a defendant can avoid liability by proving the plaintiff knew of the misstatements or omissions  it is insufficient to state a claim under
Section 11 (or 12) unless the statement was both “objectively false AND disbelieved by the defendant at the time it was expressed.”
o All other defendants have a variety of defenses under § 11(b), for all of which they bear the burden of proof.
 Due Diligence Defense - § 11(b)(3)- All defendants EXCEPT the issuer may escape liability by establishing certain defenses, among them one of
“reasonable grounds to believe” in the truth of the alleged misstatements or omissions contained in the registration statement  Standard of
reasonableness is “prudent man in management of his own property”

 Section 11(b)(3) in effect divides the registration statement into three portions:

o (i) parts based on statements made by official persons or in official records;

o (ii) parts based on statements, reports or valuations made by experts; and

o (iii) all other parts.

 Section 11(b)(3) then gives different defenses to experts and nonexperts with regard to misstatements or omissions in these different parts of the
registration statement:

o Experts— With regard to parts of the registration statement based on their own statements, reports or valuations, experts can establish a
defense by showing either (i) that after reasonable investigation they had reason to believe in the truth of their statements, reports or
valuations or (ii) that the registration statement did not fairly represent their statements or reports. Experts have no liability for portions of
the registration statement they are not named as having prepared or certified.

o Non-experts— With regard to parts of the registration statement based either on official reports or statements or on the reports or statements
of experts, a non-expert can establish a defense by showing that he had no reason to believe that such statements or reports were false or
misleading or were inaccurately represented in the registration statement. To this extent, nonexperts are allowed to rely on experts and on
official statements and reports. BarChris
 Example: “An underwriter need not conduct due diligence into the ‘expertised’ parts of a prospectus, such as certified financial
statements.”
 BUT With regard to other parts of the registration statement, a non-expert must show that he conducted a reasonable investigation,
and that, after such investigation, he had reasonable grounds for believing, and did believe, that the registration statement was
neither false nor misleading.
 o Underwriter Due Diligence
o BarChris - Underwriters, to effectuate the statute’s purpose of providing full disclosure to investors, are placed under a high duty to investigate.
They cannot accept an issuer’s representation of facts about itself at face value, but must make an independent attempt at verification.
o Use following factors in assessing the reasonableness of an underwriter’s investigation:
 (1) whether it is familiar with the issuer’s finances, management, and operations; (2) whether it had relevant industry knowledge; (3)
whether it interviewed the issuer’s employees; (4) whether it interviewed the issuer’s suppliers or customers or confirmed data with them;
and (5) whether it obtained verification from the issuer and its outside accountant that the prospectus was accurate. The underwriter’s duty
to investigate lasts up to the effective date of the offering.
o The SEC has suggested that each underwriter must satisfy itself that the lead underwriter’s investigation is sufficient, stating that each underwriter
“must show that he conducted a reasonable investigation of the registration statement . . . or a reasonable investigation of the [lead underwriter’s]
methods”)
 Reliance
o A plaintiff, in almost all cases, need NOT show that he relied on statements in a registration statement to recover under § 11, as courts have interpreted § 11
to establish a presumption of reliance upon the registration statement.
o Additionally, under § 11(a), when the plaintiff buys the security after an earnings statement has been published for the issuer covering at least 12 months
since the effective date of the registration statement, the plaintiff must show reliance; but he need not, by the terms of the statute, show that he actually read
the registration statement.
 Measure of Damages
o Under § 11(e), the measure of a plaintiff’s damages is the decline in the value of his securities.
 This is measured as the difference between the price at which the securities were bought (not to exceed the price at which the securities were offered
to the public) and the price at which the securities were sold, if the securities were sold before suit was filed, or the price as of the date the suit was
filed, if the securities are still held as of that date.

o There is no upper limit, other than the total value of the offering in question, to the liability under § 11 of defendants other than underwriters.

 Under § 11(e) no underwriter can be liable for more than the offering value of the securities underwritten by that underwriter, unless such
underwriter received special compensation from the issuer that other underwriters did not receive.
o Punitive damages are not recoverable under either the Securities Act or the Exchange Act.

 Causation and Standing

o Causation - Under § 11(e), a plaintiff does not have to show that a decline in the value of his securities was caused by a material misstatement or omission in
the registration statement  In a § 11 case, plaintiffs do not have the burden of proving causation
 Since there is no causation requirement in § 11 cases, the Third Circuit has ruled that, in those cases, there is no need for a determination of whether
the market for a company’s stock is efficient, as there would be in a § 10(b) case.
 But D can mitigate damages by showing that such decline was due to factors other than the misstatement or omission (“negative causation”)
o Standing - to have standing to pursue a claim under § 11, a plaintiff who PURCHASED “must plead that [his] stock was issued pursuant to the public
offering[s] alleged to be defective.”
  Most courts have held that stock purchased in a secondary market is “issued pursuant to the public offering[],” ONLY IF the plaintiffs can “‘trace’
their securities to the challenged registration.”
o Third Circuit view - “If plaintiffs’ shares were purchased in the secondary market, they would not be linked to a registration statement filed
during the class period, and the § 11 claim would fail.”
o BUT, 5th, 8th, 9th, and 10th Circuits also have refused to limit § 11 standing after Gustafsonto direct purchasers in the public offering.
o Once other securities not issued pursuant to the offering in question enter the market, however, persons acquiring their shares in the
aftermarket will not be able to trace those shares to the offering and, therefore, will not be able to establish a § 11 claim.
 ONLY purchasers, NOT sellers, of securities have standing under §§ 11 and 12.
 Statute of Limitations
o Like actions brought under § 12, actions brought under § 11 are subject to the limitations period set forth in § 13 of the Securities Act. Actions under § 11
must be brought within one year from the time of discovery of the untrue statement or omission, or from the time such discovery should have been made by
the exercise of reasonable diligence (the statute of limitations), and in no case more than three years after the security was first offered to the public (the
statute of repose).
 Inquiry notice may be triggered by any of the following non-determinative factors: public disclosures about the financial condition of the
corporation, other lawsuits alleging fraud committed by the defendants, suspension of trading in the issuer’s stock, public reports of federal or state
investigations of the issuer, notice that the issuer has filed for bankruptcy or a sharp decline in the issuer’s stock value  when cumulative, the
effect of several of these may trigger the one year time frame.
 Contribution
o Section 11(f) specifically states that any person who becomes liable under § 11 may recover contribution from any other person who, if sued
separately, would have been liable for the same payment, unless the person seeking contribution was guilty of fraudulent misrepresentation and
the other person was not. Thus, where liability is based on strict liability or negligent misrepresentation, contribution is available, but where
liability is based on fraud, it may not be. By the terms of § 11(f), where contribution is available, it is on a pro rata-basis, as in contract, rather
than a fault-basis, as in tort.
Section 12
 Under § 12(a)(1), any person who offers or sells a security required to be registered under the Securities Act but not registered is liable to the person purchasing the
security. Thus, Section 12(1) creates a right of action only for the solicitation or sale of securities in violation of § 5. Pinter v. Dahl
o § 12(a)(1) applies ONLY to securities subject to the requirements of § 5 of the Securities Act
o Privity requirement - only applies to the “owner who passed title, or other interest in the security, to the buyer for value,” or a person “who successfully
solicit[ed] the purchase, motivated at least in part by a desire to serve his own financial interest or those of the securities owner.” Pinter
 Under § 12(a)(2), [applies ONLY to public offerings] any person who by use of any means of interstate commerce offers OR sells a security on the basis of a
materially false or misleading prospectus or materially false or misleading oral statements is liable to the person purchasing from him, unless he can show that he did
not know, and could not in the exercise of reasonable care have known, of the falsehood or omission.
o In Gustafson, the Supreme Court held that § 12(a)(2) does not apply to a private contract for a secondary market sale of securities [Secondary transactions]
 the word ‘prospectus’ is a term of art referring to a document that describes a PUBLIC OFFERING of securities by an issuer or controlling shareholder.”
 Since Gustafson, a number of courts have held that § 12(2) does not apply to offerings made by means of a private placement memorandum.
 Securities that are considered private placements for the purposes of § 4(a)(2) and Regulation D are likely to be considered private placements for
purposes of § 12(2) as well.
o 12(a)(2) applies to all securities except those exempted from the Securities Act by § 3(a)(2)  liability imposed by § 12(2) cannot attach unless there is an
obligation to distribute the prospectus in the first place (or unless there is an exemption)
 Persons Liable
o Section 12 states that “[a]ny person who . . . offers or sells a security” in violation of its substantive provisions “shall be liable . . . to the person purchasing
such security from him.”
 This “privity” requirement has been interpreted to mean that underwriters could NOT be liable under § 12(2) to persons who did not purchase from
them.
 Only applies to the “owner who passed title, or other interest in the security, to the buyer for value,” or a person “who successfully
solicit[ed] the purchase, motivated at least in part by a desire to serve his own financial interest or those of the securities owner.” Pinter
 Example: Courts applying the Pinter standard to § 12(2) claims have generally held that lawyers and accountants who merely perform
professional services without active solicitation are NOT “sellers” under § 12(2).
 NOTE: issuers in primary offerings can be liable as sellers under § 12(a)(2) even when the sales occur through underwriters.
 Scienter and Defenses
o Under § 12(1), there is NO requirement that plaintiff show scienter or even negligence: a person who sells securities in violation of the registration
provisions of the Securities Act is strictly liable. Pinter
 Pinter makes clear that an in pari delicto defense is available under § 12(a)(1).
o 12(a)(2) is a virtually absolute liability provisions, and does not require plaintiffs to allege that defendants possessed any scienter.”
 Nor is there a requirement under § 12(2) that a plaintiff show scienter or negligence.
 However, under § 27A(c) of the Securities Act, NO liability will attach in a private action based on certain statutorily defined “forward-
looking statements” unless the plaintiff proves actual knowledge of the false or misleading nature of the statement on the part of a natural
person making the statement or on the part of an executive officer approving the statement made on behalf of a business entity.
 Generally, a plaintiff who shows that his seller made materially false or misleading statements or used a materially false or misleading prospectus,
and that the plaintiff had no knowledge of any untruth or omission, has established his case.
  However, defendant sellers have an affirmative defense under § 12(2) that they neither knew, nor could, in the exercise of reasonable care,
have known, of the untruth or omission. The effect of this defense is to turn § 12(2) into a negligence statute, with the burden on defendants
to prove lack of negligence.
 Section 12(a)(2) liability may be avoided by way of an affirmative defense of lack of loss causation.
 Section 12 defendant is liable only for depreciation that results directly from the misrepresentation at issue.”

 Reliance
o It is universally held that a plaintiff does not need to establish any form of reliance to recover under § 12(1) or (2)
 Remedies and Measure of Damages
o The primary remedy provided by § 12 is rescission: plaintiff tenders his securities to defendant and receives his purchase price, with interest, in
return. Interest is computed at what the court deems an equitable rate.

o Where plaintiff has received income, i.e., dividends or interest, on his securities, this income is subtracted from the purchase price in
determining what he will get upon tendering his shares.
o Where plaintiff has, before the filing of suit, disposed of the relevant securities, and thus cannot rescind the sale, he may recover
damages, measured as the difference between the purchase price and the disposal price of the securities, plus interest, and less any
income from the security received by the plaintiff. This measure of damages is intended to provide the equivalent of rescission.
o § 12(b) of the Securities Act, which provides that if a defendant in a § 12(2) action shows that all or a part of the security’s diminished value
was not caused by the misstatement or omission alleged in the complaint but rather by some other cause, the plaintiff may not recover damages
attributable to that other cause
o The defendant bears the burden of showing this absence of loss causation.
 Statute of Limitations

o Both § 12(1) and § 12(2) are subject to the limitations periods set forth in § 13 of the Securities Act.

o Actions under § 12(1)must be brought within the shorter of one year of the date of the violation, or three years from the date the security
was first offered to the public.

o Actions under § 12(2) must be brought within one year of the discovery of the untruths or omissions, or one year from the time such
discovery should with reasonable diligence have occurred, and in no event more than three years after the relevant sale.
 Standing
o Gustafson v. Alloyd Co - limited standing under § 12(2) to securities transactions that require a prospectus
o ONLY purchasers, NOT sellers, of securities have standing under §§ 11 and 12.
Section 17
 Section 17 is the general antifraud provision of the Securities Act. Section 17 applies to any purchase of securities, whether or not part of a public offering
o Sections 17(a)(1), (2) and (3), respectively, prohibit use of any means of interstate commerce:
o (1) to employ any device, scheme or artifice to defraud,
o (2) to obtain money or property by means of material misstatements or omissions; OR
o (3) to engage in any course of business that would operate as a fraud upon a purchaser.
o In keeping with the general scheme of the Securities Act, § 17 protects ONLY purchasers and operates only against sellers, unlike § 10(b) of the Exchange
Act, which operates against both purchasers and sellers.
 Private Right of Action Under § 17(a)
o Unlike §§ 11 and 12, § 17 does not expressly create a private right of action. It has been important primarily in actions brought by the SEC pursuant to §
20(b) of the Securities Act, which authorizes the SEC to seek injunctions against violations of the Act, and in criminal actions brought by the Justice
Department pursuant to § 24, which imposes criminal liability for willful violations of the Act.
o The growing consensus is that NO private right of action exists under § 17(a)
 The Contrast Between § 17(a) and § 10(b)
o Ernst & Ernst v. Hochfelder, (SCOTUS) and Aaron (SCOTUS)- shattered the assumption that § 10(b) and § 17(a) are parallel provisions.
o The Hochfelder Court ruled that scienter is required to be shown in private actions under § 10(b).
o The Aaron Court ruled that scienter is required in SEC injunctive actions under § 10(b) and under § 17(a)(1), BUT NOT under § 17(a)(2) or (3).
o If an action can be framed under § 17(a)(2) or (3), as virtually any action against a seller under § 10(b) or § 17(a)(1) can be, it can be tried under a
negligence, rather than a scienter, standard.
o Thus, the prospect existed after Aaron that there could be a private right of action against sellers under § 17(a)(2) or (3) that would be more
attractive to plaintiffs than that under § 10(b). The reaction of lower courts to this prospect has been to shrink back, and either not to recognize a
private right of action under § 17(a), or to limit it to actions that could in any case be brought under § 10(b)
 Scienter
o Based on an analysis of the language of § 17(a), that scienter is a necessary element of the SEC’s case in an injunctive action under § 17(a)(1), but not under
§ 17(a)(2) or (3).
o Moreover, courts have recognized that virtually any action against a seller that can be brought under § 10(b) or § 17(a)(1) can also be brought under § 17(a)
(2) or (3), since virtually any “device . . . to defraud” that violates the former provisions will “operate as a fraud” in violation of § 17(a)(3) OR involve
obtaining money or property by means of misstatements or omissions in violation of § 17(a)(2).
o Thus, Aaron encourages the SEC to plead under § 17(a)(2) or (3) rather than § 10(b) or § 17(a)(1);
 Standing
o A number of those courts that have implied private rights of action, mostly following the formerly accepted view that § 17(a) simply tracks § 10(b) but is
limited to actions against sellers, have held that there is a “purchaser” requirement under § 17(a), just as there is a “purchaser-seller” requirement under §
10(b), and hence that only one who has actually purchased securities can bring an action under § 17(a).
 Persons Liable
o There is no privity requirement under § 17(a), and that a plaintiff is therefore not limited to suing his direct seller under § 17(a).
 Reliance
o In those courts, if any, in which a private right of action under § 17(a) still exists, P will probably be required to plead and prove reliance.
 o Holding of Affiliated Ute Citizens of Utah v. United States,—which was brought under § 10(b) of the Exchange Act—that, where material omissions are
charged, reliance is presumed if materiality is shown, had also been applied under § 17(a).
o By contrast, the government need never prove, in SEC injunctive or criminal actions under § 17, reliance by individual investors.
 Remedies and Damages
o The remedies available in private rights of action under § 17(a) have included rescission and damages. The majority view is that punitive damages are not
available under § 17(a).
 Statute of Limitations
o The limitations period for civil actions under § 17 is not expressly governed by the provisions of § 13 of the Securities Act.
o Sarbanes-Oxley’s extended statute of limitations for securities law violations that sound in fraud to two and five years should apply to § 17 claims, as it does
to claims under § 10 of the 1934 Act.