Fall2011 576

Securities Regulation Exam Outline/P.
Mahoney/Fall2011 fz
Securities Regulation Exam Outline
1/!1
Securities Regulation Exam Outline/P. Mahoney/Fall2011 fz
Chapter 1: Introduction
Topic Contents
The market
- selected
issues
"hy securities exchange sur#i#e technological a$#ances in the %e
age&
'nfrastructure functions ( settlement an$ clearing ( may still ha#e
to e )erforme$ y agents li*e ro*ers+ mitigating transaction
costs associate$ %ith entirely strangers, transactions.
Frontman functions ( )ri#acy an$ anonymity of in#estors is
)rotecte$ y using ro*ers+ es)ecially in mo#e(the(mar*et tra$es.
-he un$er%riting system
Fixe$ )ricing ( cons)iracy on )rice(fixing+ cou)le$ %ith SROs,
re#ie% of fairness of un$er%riting com)ensation .no% y F'/R0
using #ague stan$ar$s *eye$ to the #alue+ ris* an$ ty)e of the
offering. F'/R0 Rule 1110.c2.2
3o% it %or*s ( gross s)rea$ 4amt )ai$ to the issuer an$ amt of the
offering )rice567 8 209 for manging un$er%riter : 209 for all
un$er%riters : ;09 for <=s
-he hierarchy of the un$er%riting )rocess .note M> as oth '<
an$ <= than*s to its retail net%or*2
2/!1
Underwriti
ng
Agreement
s
>O' ( issuer an$ manging un$er%riter
0greement 0mong ?n$er%riters
?n$er%riting 0greement
0llotments
@reenshoe o)tion ( .12 higher(than(ex)ecte$ in#estor $eman$A .22
stailizing )urchases. ?sually limite$ to 119 of the offering.
0nti(fli))ing clause ( un$er%riters oligate$ to ma*e sure uying
in#estors not sell the shares imme$iately on the mar*et
BS)inningB ( of Cuestionale legality no%
!/!1
Binsi$er loc*(u)sBD usually 1E0 $ays of 'PO
Mar*et out ( un$er%riters may gi#e u) the $eal if M0F occurs.
'n$emnification ( from issuer to un$er%riters for misre) y the
issuer
Fontriution ( se#eral liaility among un$er%riters
Fomfort letters ( issuer counsel an$ accountant )ro#i$e BcomfortB
as to the ex)ertise$ information in the )ros)ectus
'ssuer re)s an$ %arranties ( issuer assure the un$er%riters aout
the Cuality of information in the )ros)ectus
Chapter 2: Public Offering
Topic Contents
Overview
of Key 33
Act
Provisions
Sec. 1G D general anti(frau$
Sec. 1 D no non(exem)t sale %/o registration
Secs. 11 H 12 D uyers ha#e some )ri#ate reme$ies
Sec. 1I D no %ai#er
Sec. 1E D )reem)tion of lue s*y la%s exce)t for filing an$ fees
Sec. 1J D SEF,s general rulema*ing )o%er
Sec. 2E D SEF,s general exem)tion )o%er
Pre-filing
Period
Pre)aring the Registration Statement
Forms D S(1 for 'PO an$ S(! for "KS's
Regulations D Reg S(K for non(financial info+ S(L for financial
info.
Key contents of Reg S(K
For%ar$(loo*ing statements are encourage$ an$ shiel$e$ from
frau$ claims if ma$e %ith goo$ faith an$ reasonale asis an$
)resente$ in )ro)er format .i.e.+ a#oi$ing half(truths2. 'tem
10.2.
M=H0 D $iscussing liCui$ity+ca)ital resources+ results of
o)erations+ O<S arrangements an$ taular $isclosure of
contractual oligations co#ering full fiscal years an$
$iscussing material changes in financial con$ition an$ results
of o)erations in Cuarterly re)orts. 'tem !0!.
Pre(filing Fommunication Rules
no offer to sell or offer to uyD Be#ery attem)t or offer to $is)ose
of+ or solicitation of an offer to uy+ a security or interest in a
security+ for #alueB. Sec. 1.c2 an$ 2.a2.!2.
Exclu$ing un$er%riter communications D )reliminary
negotiations or agreements /% issuer an$ un$er%riter or
among un$er%riters. Sec. 2.a2.!2.
Fon$itioning the mar*et . 0ny ty)e of information )romoting
the com)any %hen the com)any is consi$ering an offering
coul$ )otentially e $eeme$ as an offer. E.g.+ SEF Release
I/!1
!!(!EII .1J1G2.
"hy matters& .12 )ractically+ SEF coul$ $elay the registration
to cool the mar*etA .22 theoretically+ sec. 12.a2.12 liaility for
sale #iolating sec. 1 coul$ e triggere$ y any #iolation+ %/o
reme$y.
Safe harors an$ exem)tions from the Bcon$itioning the mar*etB
inter)retation
0))licale to all ty)es of issuers
Rule 1!1 notice D notice %/o un$er%riter or )ricing info.
Rule 1;!0 !0($ay communication D communication y or
on ehalf of issuer is exem)t if .12 ma$e more than !0
$ays efore filing of the RSA .22 not referencing the
offeringA .!2 the issuer ta*es reasonaly ste)s to )re#ent
further $istriution or )ulication %ithin the !0 $ay
)erio$.
Rule 1;J Bregularly release$ factual usiness
informationB is exem)t if
Factual information aout the issuer+ its usiness or
financial $e#elo)ments or other as)ects of its
usiness+ or a$s aout the issuer,s ser#ices or
)ro$ucts.
Bregularly release$B
/ot referencing the offering an$ not release$ as
)art of offering acti#ities.
Pre#ious similar releases in or$inary course of
usiness
-iming+ manner an$ form of the release
consistent %ith )ast releases
'nten$e$ au$ience are for customers an$
su))liers+ not in their ca)acity as in#estors
Release$ y issuer,s em)loyees or agents
historically )ro#i$ing such information
Safe harors for certain issuers
Re)orting Fom)anies ( Rule 1;E Bregularly release$
factual usiness information an$ for%ar$ loo*ing
informationB
Eligile issuers D re)orting com)anies un$er !I 0ct
an$ certain large+ non(re)orting FP's.
Eligile information
Factual D Rule 1;J info .see ao#e2 : $i#i$en$
notices
For%ar$ loo*ing D )roMection of financials+
management )lans for future o)erations+ M=H0
info aout future economic )erformance.
Bregularly release$B .less stringent than Rule 1;J2
1/!1
/ot referencing the offering an$ not release$ as
)art of offering acti#ities.
Pre#ious similar releases in or$inary course of
usiness
-iming+ manner an$ form of the release
consistent %ith )ast releases
"KS's ( Rule 1;! F"P treatment of all )re(filing offers
"KS's D S(! issuers %ith a )ulic float of NG00
million. Rule I01.
Pro)erly legen$e$ D informing in#estors aout
a#ailaility of RS in the future.
Prom)t filing D )rom)tly file$ u)on RS or RS 0men$
filing
Waiting
Period
Prohiitions after filing a RS
/o )ros)ectus other than Bstatutory )ros)ectusB efore RS ta*ing
effect. Sec. 1.2.12. 0n$ no sale. Sec. 1.a2.
BPros)ectusB means any %ritten offer or offer y ra$io or -O.
Sec. 2.a2.102.
Oral communication $oes not count+ ut %ritten is inter)rete$
roa$ly to inclu$e all electronic me$ia exce)t for real(time
communication to a li#e au$ience. Rule I01 B@ra)hic
FommunicationB
/o sale or carrying of security for sale.
-he )reliminary )ros)ectuses )ermitte$ un$er 10.2
Rule I!0 B)reliminary )ros)ectusB D a 10.a2 statutory )ros)ectus
%/o )ricing(relate$ information. /ote that any )ros)ectus %ith
sustanti#e changes from the file$ )ros)ectus nee$ to e file$ at
the same time of the first use un$er Rule I2I.a2.
Rule I!1 Bsummary )ros)ectusB D )ermitte$ for a re)orting issuer
current in its re)orts an$ ha#ing re)orte$ for !; months.
Fontents of summary )ros)ectus are set forth in the en$ of
Form S(1.
Rule 1!I Bi$entifying statementsB 4un$er 2.a2.102 exce)tion7 D
Permissile info D $etaile$ information on the mechanics of the
offering an$ asic usiness information may e )ro#i$e$.
'n#estors, in$ication of interest may e solicite$ if )rice range
is $isclose$ an$ a statutory )ros)ectus is )ro#i$e$.
>egen$ D ma*e a#ailale the effecti#e RS.
Rule 1;I F"P meeting Rule I!! con$itions .
Fommon con$itions
'nformation D info eyon$ RS ut no conflict %ith RS an$
any re)orts incor)orate$ in the RS
>egen$ D notifying that RS is a#ailale.
Filing efore first use
;/!1
<y issuerD .12 issuer f%)A .22 issuer information in
f%) use$ y other offering )artici)antA .!2 $escri)tion
of final terms.
<y offering )artici)antD any f%) $istriute$ in a
manner Breasonaly $esigne$ to lea$ to its roa$
unrestricte$ $isseminationB .e.g.+ un$er%riter,s
internal riefings if roa$ly $isseminate$ to clients2
<ona fi$e electronic roa$ sho% exce)tion D one
#ersion ma$e a#ailale to any )erson .if not entirely
oral an$ thus not a )ros)ectus at all2.
Other exce)tions D .12 no material change from
)re#iously file$ f%)A .22 issuer info filing oligation
is not a))licale if the info is in )re#iously file$
f%)s.
Fon$itions for use y "KS's
Filing of RS
Fon$itions for use y non(re)orting issuers an$ 'PO issuers
Filing of RS containing a statutory )ros)ectus %ith a )rice
range
0ccom)anie$ or )rece$e$ y the most recent such
)ros)ectus .unless no material change from alrea$y sent
one2 or the final )ros)ectus .after effecti#eness of RS2
Satisfaction of the Baccom)anie$B con$itionD a
hy)erlin* to such most recent )ros)ectus
S)ecial ty)es of f%)s
'nfo or hy)erlin* from an issuer,s %esite constituting an
offer (P file unless historical issuer information se)arately
i$entifie$ an$ locate$
!
r$
)arty Bin$e)en$entB .un)ai$2 communication ase$ on
issuer )ro#i$e$ infoD the issuer or other offering
)artici)ant reme$ies %ithin I $ays of ecoming a%are of
the communication.
<oo* uil$ing )ractices
Start D /o solicitation until assurance that SEF has no maMor
)rolem %ith the )ros)ectus
Process of soliciting in$ications of interest D .12 institutional
in#estors through estalishe$ channels ( roa$ sho%sA .22 retail
in#estors ( mass a$s .Rule 1!I i$entifying statements2 or through
regional ro*ers.
Post-
Effectivene
ss Period
0fter effecti#eness+ only 1.2 matters ( no offer or $eli#ery %/o a
conforming )ros)ectus
Permitte$ )ost(effecti#eness communications not $eeme$ as
)ros)ectus at all ( asically free use of any a$$itional infoD .12
%ritten confirmations of sales containing info limite$ to Rule 10(
10A .22 notices of allocation of securities. Rule 1G2.a2A .!2 any
G/!1
communication accom)anie$ or )rece$e$ y a statutory
)ros)ectus .gi#en Rule 1G2,s $eeme$ )ros)ectus $eli#ery metho$+
any )ost(effecti#e communication is not a )ros)ectus at all an$
they coul$ sen$ anything they %ant2. Sec. 2.a2.102.
3o% to get an effecti#e RS %/o )ricing the $eal
Rule I!00 info )ermitte$ to e omitte$ in an effecti#e RS D to $eal
%ith un$er%riters, concern aout committing to a )rice only after
ma*ing sure a $eal coul$ $one .i.e.+ getting an effecti#e RS2+ SEF
)ermits offering )rice(relate$ info to e omitte$ from the final
amen$ to RS if a Rule I2I.2 filing is un$erta*en to e ma$e.
Rule I2I.2 filing of final )ros)ectus -he final )ros)ectus .%ith
I!00 info2 must e file$ y the earlier of .12 11 usiness $ays of
RS effecti#eness or .22 2 usiness $ays of )ricing the $eal y
un$er%riters.
3o% to meet the )ros)ectus $eli#ery reCuirement after an effecti#e RS
0lternati#e metho$ to really $eli#ering a final )ros)ectus
3a#ing an effecti#e RS not suMect to a$ministrati#e action.
Rule 1G2.2.
@i#ing a notice of registration to the )urchaser y un$er%riter
or $ealer %ithin 2 usiness $ays of the sale. Rule 1G!.
"ho has the oligation an$ %hen&
'ssuer ( continuing oligation if it sells the securities $irectly.
?n$er%riter ( until their allotment is sol$.
=ealer ( .12 if an un$er%riter+ continuous oligationA .22 if not
an un$er%riter or ha#ing sol$ the allotment+ continuing
oligation %ithin I0 $ays of the offering or J0 $ays of an 'PO.
Sec. I.!2. 'f the issuer is a re)orting com)any+ exem)t
entirelyA if tra$ing on an exchange+ exem)t entirelyA if to e
liste$ on an exchange in an 'PO+ shortene$ to 21 $ays. Rule
1GI an$ Rule 11!.
<ro*erD exem)t entirely. Sec. I.I2.
helf
!egistratio
n
Form S(! registration y re)orting com)anies
Key features com)are$ to Form S(1 registration D .12 most info
aout the issuer incor)orate$ y references to )ast an$ future
)erio$ic re)ortsA .22 SEF $oes not re#ie% all S(! RS .only
au$iting them2.
Eligiility for using Form S(!
!egistrant. .12 a re)orting com)any for 12 monthsA .22 current
in re)orts.
Transaction. .12 any cash )rimary offerings y an issuer %ith
a )ulic float of NG1 million or moreA .22 )rimary $et
offerings if ha#ing issue$ N1 illion $ets in the )ast ;0 $ays
or ha#ing outstan$ing $et securities %orth NG10 million.
Rule I11 shelf registration y "KS' an$ non("KS' re)orting
com)anies
E/!1
/on("KS' re)orting com)anies D any S(! Form user may file a
shelf RS for future offerings.
"KS's D automatic shelf RS that ecomes effecti#e u)on filing.
'nformation flo% in a shelf registration an$ ta*e$o%n
<ase )ros)ectus may omit information .12 s)ecific to future
offerings or .22 un*no%n or not reasonaly a#ailale to the
issuer. Rule I!0<.a2.
"KS's,s ase )ros)ectus D may omit more information
aout the ty)es of offerings to e ma$e.
Pros)ectus su))lement D .12 file$ for a )articular offering
%ithin 2 $ays of )ricing .an$ usually using it to com)lete the
$eal at the same time2. Rule I2I.2.22A .22 info must
incor)orate any suseCuent )erio$ic re)orts an$ any other
material changes from )re#iously file$ RS an$ material info
relate$ to the $istriution. 'tem 112.a2 of Reg S(K. .these
un$erta*ings are a con$ition to use shelf RS2.
"oreign
#ssuers
Sco)e of foreign issuers. Rule !(I
Foreign go#ernments
Foreign )ri#ate issuersD in$i#i$uals or entities organize$ in foreign
countries
Fa*e FP'sD .12 109 #oting shares hel$ y ?S resi$ents an$
either of the follo%ing
MaMority of $irectors or executi#es are ?S citizens or
resi$entsA
109 of assets in ?S
<usiness a$ministere$ )rinci)ally in ?S
S)ecial treatment of FP's
MQ=S ( Fana$ian issuers %ith )ulic float of NG1 million nee$ to
file $isclosure $ocs un$er Fana$ian la%
'n general D .12 F(1/F(! are less exact+ e.g.+ less $etaile$
management com)ensation $isclosure+ segment info not reCuire$ if
home Muris$iction $oesn,t so reCuireA .22 accounting stan$ar$s
relaxe$+ e.g.+ 'FRS(ase$ financial statements not reCuire$ to e
reconcile$ an$ non(@00P financial statements may e use$ if
reconciliation is )ro#i$e$A .!2 $isclosure reCuirements relaxe$+
e.g.+ semi(annual .not Cuarterly2 re)orting )ermitte$ if home
Muris$iction so )ermits.
Rule E01 rights offering y foreign issuers D exem)t from sec. 1 if
$%& U holders or less' ?S hol$ers ha#e no more than 109
of the outstan$ing class of securities suMect to the rights
offeringA
(ational treatment' ?S hol$ers are treate$ eCually as foreign
hol$ersA
#nformational national treatment' -he foreign issuer must
)ro#i$e ?S hol$ers %ith any informational $ocuments
J/!1
com)arale to those )ro#i$e$ in its home Muris$ictionA
ame class of securities. rights offering must e aout the
same securities as those currently hel$ y ?S hol$ersA
(o transfer in U' ?S hol$ers+ y the terms of the rights+ must
not transfer the rights unless in accor$ance %ith Reg S.
)egend' -he ris*s of such foreign securities+ inclu$ing
accounting+ $isclosure an$ enforcement ris*s+ must e )lace$
in any informational $ocument $isseminate$ to ?S hol$ers.
Mechanics of 0=Rs
Why* .12 FP's ha#e their stoc* registere$ in a foreign central
clearing agency+ %ith %hich ?S ro*ers $o not ha#e an accountA
.22 ?S in#estors )refer tra$ing through ?S ro*ers an$ in ?S
$ollars.
+ow* .12 ?S an* o)ens an account %ith a foreign clearing
agency an$ creates 0=S,s an$ issues 0=Rs to ?S in#estorsA .22
FP' registers the 0=S,s on F(1 an$ ?S an* registers the 0=Rs on
F(;A .!2 the )ros)ectus %ill ha#e info on oth F(1 an$ F(;.
Foreign go#ernment issuers
Eligile issuers D So#ereign go#ernments an$ instrumentalities
ac*e$ y their home go#ernment,s full faith an$ cre$it
'nformation D Form S(<.
Shelf registration D if $ets )re#iously issue$ reach certain amount+
registration for $elaye$ offering is a#ailale.
Perio$ic $isclosures D not reCuire$ if not tra$e$ on an exchange ut
SEF encourages #oluntary annual re)orts on Form 1E(K.
Chapter : Exemptions
Topic Contents
E,em-t
ecurities
"hat,s exem)t& Only sec. 1 registration reCuirements+ not anti(frau$
)ro#isions.
Select exem)t securities
@o#ernment securities+ an* securities .issue$ or guarantee$ y
an*s2+ an*(maintaine$ common trust fun$s+ or collecti#e trust
fun$s for em)loyee enefit. Sec. !.a2.22.
SEF intro$uce$ certain regulation of go#ernment securities
through <= regulation.
/ote that securities of <3Fs ( not the an*s ( are not exem)t.
FPs ( B)rime CualityB negotiale FP Bof a ty)e not or$inarily
)urchase$ y the )ulicB B%ith a maturity of J months or lessB for
Bcurrent o)erationsB. Sec. !.a2.!2
'n )ractice FP issuers rely on I.22 exem)tion to $o a%ay %ith
Bcurrent )ur)osesB reCuirement altogether.
/on()rofit organizations, securities. Sec. !.a2.I2.
SH>s an$ other coo)erati#es. Sec. !.a2.12.
10/!1
'nsurance an$ annuity )ro$ucts .other than #ariale insurance
)ro$ucts2. Sec. !.a2.E2.
Small issuer offerings .N1 million max2 ( Reg 0+ Rules 10I an$
101 of Reg =+ an$ Rule G01. Sec. !.2.
S<'Fs ( Reg E. Sec. !.c2.
SEF,s general exem)tion authority
Sec. 2E of !! 0ct an$ Sec. !; of !I 0ct.
./01
Private
Placements
-ransactions y an issuer not in#ol#ing any -u2lic offering.
-he SEF oMecti#e test
/umer of offerees .212
Relationshi) of offerees to the issuer an$ each other
/umer of units an$ $enominations
Size of offering
Manner of offering
!alston Purina test .?S 1J1!2
'nformation access ( eCui#alent to that )ro#i$e$ in a RSA 0/=
=irect )ro#ision of informational circularsA OR
Promise of access an$ realistic ex)ectation that the
offeree is going to ta*e a$#antage of the information
So)histication ( ale to fen$ for themsel#es
'ssuer shoul$ carefully )re(screen offerees an$ consi$er
facts inclu$ing .12 ris*iness of the in#estments an$ .22
%hether the in#estor is re)resente$ y a financial ex)ert
Practical en$ result as to the uni#erse of )otential in#estors D .12
institutional in#estorsA .22 in$i#i$ual in#estorsD issuer,s cor)orate
insi$ers an$ their family memers.
Resale controls so that resales $o not retroacti#ely in#ali$ate the
)rotection of the I.22 exem)tion
Purchasers sign statements aout their in#estment .rather than
$istriution2 intent
-ransfer restrictions are legen$e$ on the stoc* certificates
-ransfer agent of the issuer %oul$ not register any transfers
unless instructe$ y the com)any
!eg 3
Private
Placements
-he Reg = Fon$itions Matrix
11/!1
Key conce)ts of the Reg = con$itions
'nformation reCuirement for non(accre$ite$ in#estors
'nformation eCui#alent to RS shoul$ e )ro#i$e$ to any non(
accre$ite$ in#estor. Rule 102.2.
(ational treatment' 'nformation )ro#i$e$ to accre$ite$
in#estors shoul$ also e )ro#i$e$ to non(accre$ite$ ones Rule
102.2.22.i#2.
@eneral solicitation
(o mass media. 0ny communication through mass me$ia or
seminar/meeting resulting therefrom. Rule 102.c2.
#ndividuali4ed communications. Must e ase$ on -re-
12/!1
e,isting relationshi- or the in#estors sho% their interest %/o
solicitation.
E.g.+ .12 <=s may solicit clients after a cooling(off )erio$
.e.g.+ I1 $ays2 follo%ing setting u) the a/c for a ne%
clientA /o action lettersD EF 3untonA <atmanA .22 !
r$
)arty
%esites acce)ting unsolicite$ clients or soliciting clients
through <=s using their )re(existing relationshi).
-ecific e,em-tions for certain communications
!ule $35 2are 2ones notice 2y re-orting issuers. "/o
naming un$er%riters an$ not for the )ur)ose of
con$itioning the mar*et.
"orm 3 fling 2y all !eg 3 issuers. "ithin 11 $ays of first
sale.
!ule $35e 6ournalist access' ?S Mournalists may e
)ro#i$e$ %ith access to )ress conferences on truly gloal
offerings .i.e.+ not a Reg = offering limite$ to ?S
in#estors2.
Resale control D reasonale care to assure the )urchasers are not for
$istriution )ur)ose
E.g.+ reasonale inCuiry+ %ritten %ritten $isclosure aout
resale restrictions an$ legen$ the certificates. Rule 102.$2.
0ccre$ite$ in#estor D financial institutions+ cor)orate insi$ers an$
natural )ersons %ith significant assets or income. Rule 101.a2.
So)histication un$er Rule 10; D
7ague -rinci-le' the )urchaser has *no%le$ge an$ ex)ertise in
financial an$ usiness matters so that he is ca)ale of
e#aluating the merits an$ ris*s of the in#estment.
Practice' Merely as*ing Cuestions is not enough. "8
ecurities.
Founting !1 )urchasers
E,cluded from the countingD relati#es sharing the same
)rinci)al resi$ence %ith an accre$ite$ in#estor or a maMority(
o%ne$ entity y an accre$ite$ in#estor an$ his relati#es.
)ooking-through. Entities forme$ y non(accre$ite$ in#estors
%ill e loo*e$(through.
Sustantial com)liance un$er Rule 10E
Small $e#iations may e reme$ie$ if not inten$e$ to $irectly
)rotect the )articular in#estor an$ reme$ie$ in goo$ faith
What violations are deemed significant and non-remedia2le*
=ollar ceilings+ numerical )urchaser limits+ no general
solicitation.
"ho are using Reg =&
=omestic issuers for $et financing
Reg = eCuity financing not often ecause 12.g2 re)orting
oligations attach once you reach 100 in#estor an$ N10
1!/!1
million assets
Foreign issuers for oth eCuity an$ $et financing
</c 12g!(2.2 exem)tion
3e$ge fun$ financing
!eg A
9ini-
Offerings
Key features
More com)licate$ than Rule 101 offering
SEF has to Cualify the offering statement
Rule 21I testing the %atersD much li*e )re(filing f%)s use$ y
"KS's
#ntegration
Analysis
@eneral analysis for integrating other offerings %ith Reg = offerings.
Rule 102.a2.
Part of a single )lan of financing
'ssuance of the same class of securities
Ma$e at or aout the same time
Same ty)e of consi$eration recei#e$
Ma$e for the same general )ur)ose
Safe harors
Successful Reg 0 offerings %ill not e integrate$ %ith
0ny )rior offerings
0ny suseCuent registere$ or Reg S offerings
0ny )ri#ate offerings ; months later. Rule 211.c2.
0an$one$ Reg 0 offerings %ill not e integrate$ %ith
suseCuent )ulic offering if a ona fi$e aan$onment of a
Reg 0 offering an$ after !0($ay cooling off )erio$. Rule
21I.$2.
Successful Reg = offerings %ill not e integrate$ %ith
0ny )rior offerings ; months efore
0ny suseCuent offerings ; months later. Rule 102.a2.
Successful I.22 offerings %ill not e integrate$ %ith
SuseCuent )ulic offerings. Rule 112.
0an$one$ )ri#ate offering %ill not e integrate$ %ith
0 suseCuent )ulic offering if .12 the )ri#ate offering $oes
not sell any securitiesA .22 all offering acti#ities terminate$A .!2
statutory )ros)ectus $iscloses the aan$one$ $ealA .I2 RS is
not file$ until !0 $ays after termination of offering acti#ities
unless the )ri#ate offering,s solicitation is limite$ to accre$ite$
an$ so)histicate$ in#estors.
0an$one$ )ulic offering %ill not e integrate$ %ith
0 suseCuent )ri#ate offering if
/o sales in the )ulic offering
"ith$ra%al of the RS
/o )ri#ate offering acti#ity until !0 $ays after the
%ith$ra%al
/otifies offeree in )ri#ate offering aout the nature an$
1I/!1
ris*s of the )ri#ate offering an$ the aan$one$ $eal
0ny $isclosure $oc in )ri#ate offering shoul$ $isclose any
material changes since the filing of RS.
./$1
Underwrite
r and
8ontrol
Person
!esales
/o transaction exem)tion for Bun$er%ritersB in Sec. I
=efining Bun$er%riterB. Sec. 2.a2.112
Purchase from the issuer %ith a #ie% to $istriution
Resale after 2 years of the )ri#ate offering is not a
$istriution
"ithin 2 years+ ona fi$e resale $ue to genuine change of
circumstances in the )urchaser,s financial circumstances
is OK. :illigan; Will.
/oteD resales of )ulicly offere$ securities y non(
affiliates of the issuer ne#er a )ractical )rolem.
Offers or sells for an issuer in connection %ith a $istriution
Bsells for an issuerB $oes not reCuire com)ensation.
8hinese 8onsolidated <enevolent Association.
Partici)ates $irectly or in$irectly in the former t%o
un$erta*ings
Fontrol )erson resales are al%ays transactions %ith an un$er%riter an$
ha#e to see* safe harors un$e Rule 1II. Sec. 2.a2.112.
!ule $..
!esales
-ransactions co#ere$ y Rule 1II
/on(affiliates reselling Restricte$ Securities
Restricte$ Securities D those acCuire$ in )ri#ate )rimary
offerings+ Reg S offerings+ Rule 1II0 resales or Rule E01
rights offerings
0ffiliates reselling Restricte$ Securities an$ other securities of the
issuer
0ffiliates/Fontrol )ersons D control or common control
relationshi) of the seller %ith the issuer
BFontrolB is a fact(s)ecific inCuiry an$ SEF only sets
forth a #ague stan$ar$ ( Bthe )o%er to influence the )olicy
of the issuerB.
BPersonB also inclu$es his s)ouse+ relati#e or s)ouse,s
relati#e if resi$ing in the same home as the )erson an$
any trust or entity 109 eneficially o%ne$ y them.
Rationale D $ue to control )erson,s inherent informational
a$#antage+ their resales of the issuer,s securities ha#e to e
registere$ or un$er Rule 1II control
Fon$itions for non(affiliate resales
0fter 1 year of )urchase from the issuerD no restriction.
; months to 1 year of )urchase from the issuer
Pulic information a#ailale from a re)orting issuer
Fon$itions for control )erson resales
Same hol$ing )erio$ restrictions if reselling restricted securities
11/!1
/ote D if reselling non(restricte$ securities+ no hol$ing )erio$
reCuirement.
Pulic information a#ailale
Re)orting issuersD current in re)orts
/on(re)orting issuersD )ulic information a#ailale un$er
Rule 11c2(11.
>imitation on $is)osale amount
Oolume of current resale : sales %ithin )rior ! months R8 the
max of .12 19 of total outstan$ing shares or .22 a#erage
%ee*ly tra$ing #olume for )rior I %ee*s
Manner of sale
/o general solicitation an$ through ro*ers, transactions
Form 1II regar$ing the sale must e file$
Securities acCuire$ in a Rule 1II sale are unrestricted'
./$$=01
resales and
!ule $..A
!esales
Sec. ./$$=01 exem)tion ( )ri#ate resales are not $istriution an$ such
resellers are not un$er%riters
0))licale sco)e D .12 )ri#ate resales of restricte$ securities y
non(affiliates efore Rule 1II )ro#i$es )rotection ( e.g.+ efore ;
months of the )urchaseA .22 )ri#ate resales of securities y
affiliates %hen Rule 1II $oes not )ro#i$e )rotection or cannot
accommo$ate the size of the $eal ( efore ; months in case of
restricte$ securities or excee$ing tra$ing/size limitations in Rule
1II .Acker2erg v' >ohnson2.
3o% to Cualify for the exem)tion D -rivate resales ( thus not in
connection with a distri2utionD !alston Purina )ulic/)ri#ate
offering analysis un$er I.22.
Practice D relying on this exem)tion means a chain of contractual
agreements et%een roun$s of )urchasers on *ee)ing the resales
from going )ulic.
Rule 1II0 Resales of restricte$ securities among S'<s are $eeme$ to
Cualify as I.12 transactions or I.!2.F2
Sco)e of a))lication D %hen Rule 1II is not a#ailale for the
resales
En$ result D restricte$ securities freely transferale among S'<s ut
remaining restricte$
=efining S'<s D )urely institutional in#estors.
Fon$itions to otain the exem)tion
Seller elie#es the )urchaser to a S'<
Purchaser is ma$e a%are of the restricte$ nature of the
security
-he security is not fungile %ith any liste$ security of the
issuer .not same class2
'f the issuer is not a re)orting com)any+ the seller an$ the
)urchaser has the right to reCuest asic information from the
issuer.
1;/!1
Practical use
3omestic issuersD $et offerings using Reg = .to i(an*s2 an$
1II0 .to institutional in#estors y i(an*s2
"oreign issuersD eCuity/$et offerings using Reg S .to i(an*s2
an$ 1II0 .to institutional in#estors y i(an*s2
!eg
Offshore
Offerings
-he )ur)ose an$ usage of Reg S
0llo% ?S $omestic issuers to ta) foreign ca)ital mar*ets %/o !!
0ct concerns
0llo% FP's ta) foreign mar*ets %/o !! 0ct concerns
0ctual use D .12 ?S issuers $o Euro$ollar $et offerings un$er
category 2 rulesA .22 ?S issuers $o gloal offerings %ith !! 0ct
registration only for ?S )ortion .)lus a 109 uffer2A .!2 FP's $o
Reg S/Rule 1II0 gloal offerings %/o ?S registration.
-he categorization flo%chart of Reg S
S?SM'
ECuity D .12 ?S tra$ing mar*et the largest single tra$ing mar*et
for the issuerA OR .22 209 ?S tra$ing an$ less than 119
tra$ing in any single foreign mar*et
=et D .12 !00 ?S )erson in#estors of recor$A .22 N1 illion
hel$ y ?S )ersonsA an$ .!2 209 of the outstan$ing )rinci)al
hel$ y ?S )ersons.
O#erseas $irecte$ offering
Foreign issuer D offering $irecte$ into a single foreign country
an$ ma$e in accor$ance %ith local rules
=omestic issuer D $et offerings $irecte$ into a single foreign
country an$ ma$e in accor$ance %ith local rules
1G/!1
1E/!1
Fon$itions for the ! Fategories
Fategory 1 ( Must general con$itions
/o offer in the ?S H no sale in the ?S
(o offer ( offeree not in the ?S
(o sale ( the uy or$er originates outsi$e ?SA transaction
execute$ on a )hysical tra$ing floor of a foreign exchange
in a )rimary offeringA or transaction execute$ on an
offshore exchange in a resale.
/o B$irecte$ selling effortsB in the ?S
0cti#ity inten$e$ or reasonaly ex)ecte$ to con$ition the
?S mar*et for the security .#arious exce)tions for regular
or necessary ?S communication2
Fategory 2 ( general con$itions H offering an$ transaction
restrictions $uring I0($ay com)liance )erio$
Offering restrictions' .12 each $istriutor )romises in %riting
to com)ly %ith Reg SA .22 each $istriutor )romises not to
engage in he$ging transactions of a $omestic issuer,s eCuity
securities .relevant for category 3 only2A .!2 offering materials
are legen$e$ regar$ing ?S la% restrictions.
Transaction restrictions' .12 seller ma$e sure the uyer is not
?S )erson .regar$less of location2 an$ .22 each $istriutor
notifies the uyer of the category 2 restrictions.
Fategory ! ( general con$itions H offering restrictions H stricter
transaction restrictions $uring the I0($ay .$et2 1 year/; months
.eCuityA non(re)orting #s re)orting2 com)liance )erio$
Additional transaction restriction for de2tsD securities
re)resente$ y a tem)orary gloal security not exchangeale
until the later of .a2 I0($ay )erio$,s ex)iration or .2 in the
case of non($istriutor uyer+ a certification of non(?S )erson
status or an exem)tion a#ailale .e.g.+ Rule 1II02.
Additional restrictions for e?uitiesD .12 non($istriutor uyer
certification of non(?S )erson status or an exem)tion
a#ailaleA .22 uyer )romise to sell )ursuant to Reg
S/registration/exem)tionA .!2 securities are )ro)erly legen$e$
regar$ing ?S la% restrictionsA .I2 issuer ma$e sure no
#iolating transfer coul$ occur.
Offshore treatment of resales
@eneral con$itions as )rimary offerings
"or resales 2y dealers=2rokers in the category 0=3 com-liance
-eriodD .12 ma$e sure the uyer is not ?S )erson an$ .22 notify the
)urchaser of ?S la% restrictions
"or resales 2y senior officersD ma*e sure resales through ro*ers
in#ol#e only normal commissions .no a$$itional selling efforts2.
1J/!1
Chapter !: Securities Offerings in Reorgani"ations# Recapitali"ations and $ergers
Topic Contents
Ty-ical
Transactio
ns
/e% $et securities in $et restructurings
3ol$ing com)any incor)orate$ an$ issuing shares in exchange for
shares of the o)erating com)any
0cCuiring com)any issuing ne% shares in stoc*(for(stoc* acCuisitions
0 com)any forming a susi$iary to s)in off certain usiness lines an$
$istriuting the shares of the susi$iary to the com)any,s sharehol$ers
-in-offs
S)in(offs are generally consi$ere$ sales Bfor #alueB an$ nee$ to e
registere$. 3atronics.
Exce)tion for a #ali$ usiness transaction meeting the follo%ing
con$itions
the )arent sharehol$ers $o not )ro#i$e consi$eration for the s)un(
off sharesA
the s)in(off is )ro(rata to the )arent sharehol$ersA
the )arent )ro#i$es a$eCuate information aout the s)in(off an$
the susi$iary to its sharehol$ers an$ to the tra$ing mar*etsA
the )arent has a #ali$ usiness )ur)ose for the s)in(offA an$
if the )arent s)ins(off Brestricte$ securities+B it has hel$ those
securities for at least t%o years. SEF Staff >egal <ulletin /o. I.
9ergers
and
ac?uisition
s
Rule 1I1 for securities issue$ in an MH0
Fo#ere$ transactions D all ty)es of stoc*(for(stoc* mergers an$
sales of assets for stoc*s
FonseCuences D .12 sec. 1 registration $uty attaches to the acCuirer.
Form S(I/F(IA .22 communication restrictions un$er sec. 1 a))ly
unless Cualifying as follo%s
Rule 1!1 are ones notice D file$ efore first use un$er Rule
I21.a2.
Rule 1;1 %ritten communications .much li*e Rule 1;! f%)s
y "KS's2 .i2 file$ efore first use un$er Rule I21.2A .ii2
)rominent legen$ notifying the a#ailaility of file$ $ocs on
E=@0RA an$ .iii2 rele#ant ten$er offer rules .in case of an
exchange offer2 an$ )roxy rules .in case in#ol#ing security
hol$er #ote+ e.g.+ a merger2 are com)lie$ %ith.
/ote D any )artici)ant in the transaction other than the
issuer of the securities .e.g.+ acCuirer,s )arent or the
target2 may also rely on this exce)tion.
Rule 1;; B)re(announcement tal*B D any communication efore
the first )ulic announcement of the $eal not an offer un$er
sec. 1.c2 if all )arties ta*e reasonale ste)s %ithin their control
to )re#ent further $istriution or )ulication of such
communication.
Rule 1II resale restrictions .not%ithstan$ing the registere$ status
of the securities acCuire$2 if any shell com)any .other than a
20/!1
usiness comination relate$ shell com)any2 is in#ol#e$ a))ly to
the acCuire$ securities. Rule 1I1.c2 H.$2.
3e2t
restructuri
ng
/e,change
offer1
"hen a ne% $et security is a Bne%B security&
@enerally s)ea*ing+ there is a ne% security if a material change in
a security,s economic or #oting rights occurs. SEF /o(0ction >trs.
Sec. !.a2.J2 exchange offers are ex)ressly exem)t
Bexclusi#elyBD .12 the exchange must e et%een securities of the
issuer ( no other )arty may e in#ol#e$A .22 hol$ers must e the
same ol$ hol$ersA .!2 no ne% consi$eration may e gi#en y the
security hol$ers.
Bno commission for solicitationBD the issuer may not hire !
r$
)arties
to encourage the acce)tance of the exchange offer
Chapter %: &ct 'iabilities
Topic Contents
Procedural
2ackgroun
d
Sec. 1! D 1 year SO> from time of $isco#ery for misstatements or
selling unregistere$ securities an$ !(year SO> as an asolute ar
Sec. 11 D control )ersons of the $irectly liale )arties un$er secs. 11 an$
12 are Mointly liale for their controlle$ )ersons, liailities+ unless they
coul$ )ro#e .i2 no *no%le$ge of the facts or .ii2 a reasonale groun$ to
elie#e in any misstatements.
Sec. 1;H 2G D no state la% actions for misstatements H class action
restrictions in sec. 2G.
ec' $$ !
9isstateme
nts
Elements of the cause of action
B%hen such )art ecame effecti#eBD for shelf ta*e$o%ns+ the
original RS is $eeme$ to e effecti#e as of the ta*e$o%n $ate.
Rule I21.f2.
Material misstatements
BmaterialityBD a sustantial li*elihoo$ that an in#estor ma*ing
in#estment $ecision %ill consi$er.
BmisstatementsBD .12 untrueA .22 omitting facts reCuire$ to e
state$A .!2 omitting facts to ma*e the statement not
mislea$ing.
/o reliance is reCuire$ ( theoretically+ = may )ro#e the )erson
*ne% the truth
/o causation is reCuire$ ( = may )ro#e the $amages attriutale to
other factors
/o intent/scienter is reCuire$ ( issuer is strictly liale ut non(
issuer $efen$ants may estalish == $efenses
Sco)e of non(issuer $efen$ants D signatories of RS+ $irectors or
to(e($irectors+ accountants an$ other ex)erts name$ in the RS
.for ex)ertise$ )ortion only2+ an$ un$er%riters .liaility
limite$ to their $istriute$ amount unless they are s)ecially
com)ensate$ than other un$er%riters2
21/!1
== $uties for $ifferent )arties
Ex)erts
/on(ex)ertise$ )ortionD /O $uty
Ex)ertise$ )ortionD $ue $iligence : reasonale
groun$ to elie#e in the truthfulness
/on(ex)erts
Ex)ertise$ )ortionD reasonale groun$
/on(ex)ertise$ )ortionD == : reasonale groun$
BreasonalenessBD a )ru$ent man in the management of
his o%n )ro)erty ( you must $o reasonale follo%(u)
%or* eyon$ merely as*ing the management Cuestions
an$ acce)ting ans%ers at their face #alue. <ar8hris.
Re$uce$ == $uty for shelf(ta*e$o%ns& Rule 1G;
seems to suggest a sli$ing scale test+ %hile the
World8om court flatly reMecte$ any re$uce$ $uty.
Bex)ertise$ )ortionBD au$ite$ financial statements+ legal
o)inions for cor)orate matters+ geological re)orts+ etc.
/o )ri#ity is reCuire$ ( any )urchaser $uring the 1 year )erio$ may
sue
-racing )rolem for seasone$ issuers D )laintiffs other than
$irect )urchasers in an offering %ill ha#e $ifficulty
estalishing he )urchase$ securities offere$ last time rather
than years ago+ ecause courts reCuire them to )ro#e tracing.
=amagesD rescissory $amages .unless $is)ro#en y = through
negati#e causation analysis+ e.g.+ using statistical mo$els. Ory,
8omm'2
ec' $0/a1
/$1
Unregister
ed ales
Oiolation . -heoretically roa$ range of liaility if any Sec. 1
reCuirement is #iolate$ ( unregistere$+ #iolating )ros)ectus $eli#ery or
gun Mum)ing rules. 'n )ractice+ rarely so.
BsellerB that coul$ e $efen$ants un$er oth 12.a2.12 an$ 12.a2.22
the issuer itself irres)ecti#e of the un$er%riting metho$ unless the
uyer is relying on f%) not )re)are$ y the issuer .e.g.+ a $ealer
)urchasing from an un$er%riter relying on the latter,s
in$e)en$ently )re)are$ f%)2. Rule 11J0.a2.
?n$er%riters+ ut not )ersons gi#ing )urely free a$#ice. Pinter v'
3ahl.
0n un$er%riter is not res)onsile for sales using a f%) not
)re)are$ y him. Rule 11J0.2.
ec' $0/a1
/01
Pros-ectus
9isstateme
nts
Sco)e of transactions co#ere$ ( By means of )ros)ectus or oral
communicationB
Only B)ulic offeringsB are co#ere$. :ustafson.
B)ulicB is $etermine$ y the !alston Purina test un$er Sec. I.22.
?nresol#e$ issues D .12 $o Reg = offerings automatically get
exem)tion& Maye yes. .22 $o exem)t )rimary offerings .FPs+
22/!1
Reg 0 an$ Reg S2 that are B)ulicB in nature still ha#e to e
co#ere$& Maye yes.
BsellerB $efen$ants ( see analysis ao#e un$er Sec. 12.a2.12.
Plaintiffs D original )urchasers from the BsellersB
Misstatements
Fommunications co#ere$ .
Statutory )ros)ectus+ )reliminary )ros)ectus+ summary
)ros)ectus
0ny f%) file$ %ith SEF is )ulic an$ coul$ e the asis
for liaility irres)ecti#e of its actual $istriution metho$
gi#en that it,s file$. Rule I!!.a2.
Post(sale .after the contract of sale2 information is /O- a
asis for 12.a2.22 liaility. Rule 11J.
?ntrue or omissions of facts necessary to ma*e the statements
not mislea$ing
Reliance is not reCuire$ ( = may )ro#e P *ne% the truth
Fausation is not reCuire$ ( = may con$uct negati#e causation
analysis
== $efense ( no actual *no%le$ge an$ coul$ not *no% e#en y
exercising reasonale care
ec' $@/a1
:eneral
Anti-"raud
Provision
Only for enforcement )ur)ose as )ri#ate 10(1 actions ha#e een
mature. Fircuit court,s consensus.
Chapter (: ! &ct Registration and Reporting Obligations
Topic Contents
8om-anies
u26ect to
3. Act
!egistratio
n and
!e-orting
O2ligation
s
-he registration an$ re)orting .Sec 11.$22 $uty matrix
0ny security .eCuity or $et2 liste$ on an exchange. Sec. 12.a2.
'f unliste$+
0ny e?uity security of an issuer %ith N10 million assets an$
100 recor$ sharehol$ers. Sec. 12.g2 H Rule 12g(1.
FP's ( s)ecial treatment
Additional tra- for "P#s using (A3AA if they
only rely on $0g-$. they are exem)t only if their
security is also not Cuote$ n any automate$ inter(
$ealer Cuotation system. Rule12g(1.
<UT they have two additional e,em-tionsD
8ome within $0/g1. Only if they ha#e !00 ?S
sharehol$ers of recor$+ in a$$ition to meeting the
100 sharehol$er/10 million asset reCuirements.
Rule 12g!(2.a2.
2!/!1
Additional e,em-tion for "P#s with foreign
-rimary trading market. Rule 12g!(2.2.
Bforeign )rimary tra$ing mar*etBD a#erage
$aily tra$ing #olume reaches .i2 119 in a
single foreign country or .ii2 119 in t%o
foreign countries+ one of %hich is larger than
that in the ?S.
Ma$e a#ailale all )ulic information
$isclose$ in foreign mar*ets a#ailale to ?S
in#estors.
=eregistration un$er 12.g2 . Tou ha#e fe%er than !00
recor$ sharehol$ers.
0ny issuer of a security .eCuity or $et2 offere$ un$er a RS
ecomes a Sec. 1! re)orting issuer .ut not register their
security2. Sec. 11.$2
=eregistration un$er 11.$2 . -he concerne$ security as a
class has less than !00 hol$ers of recor$.
S)ecial $eregistration )roce$ure for FP's un$er 12.g2 an$
11.$2. 0 FP' may $eregister their securities un$er 12.g2 or
terminate their re)orting un$er 11.$2 if
3as re)orte$ for a year an$ file$ at least one annual re)ort
3as not con$ucte$ a registere$ )ulic offering in the
)re#ious year
3as a foreign )rimary tra$ing mar*et
0#erage $aily tra$ing #olume in the ?S is 19 or less of
%orl$%i$e tra$ing. Rule 12h(;.
3isclosure
s
Fontents of re)orts un$er Sec. 1!
10(K+ 10(S+ E(K.
Reg F=,s limitation on selecti#e $isclosure to securities
)rofessionals
0ny $isclosure y an issuer of material+ non()ulic
information to an outsi$e )erson .<=+ in#estment a$#iser+
in#estment com)any or a sharehol$er reasonaly elie#e$ to
e acting u)on the information2 must e ma$e )ulic
imultaneously+ if intentionally $isclose$
Prom-tly+ if non(intentionally $isclose$
Exce)tions D selecti#e $isclosure .12 to a )erson o%ing a $uty
of trust or confi$ence to the issuerA .22 to a )erson ex)ressly
agreeing to maintain confi$enceA .!2 to any cre$it rating
agency.
>imite$ sanctions D not rele#ant for 10(1 anti(frau$
$etermination or Bcurrent )ulic informationB analysis un$er
Rule 1II if there is a failure to com)ly %ith Reg F=.
#nternal
8ontrols
Kee) a reasonaly goo$ oo*s an$ recor$s system an$ an internal
control system o#er accounting )ractics. Sec. 1!.2 an$ World-Wide
2I/!1
on
3isclosure
s
8oin ystem.
ReCuirements on au$itors
Whistle2lowing duty following audit. -he au$it must inclu$e
)roce$ure )ro#i$ing reasonale assurance of $etecting illegal acts
an$ re)ort on such $isco#eries. Sec. 100.a2 H .2.
Avoiding conflicts of interest. FEO or FFO or F0O of an issuer
may not e em)loye$ y its au$itor in the )rece$ing year.
'nternal control certifications y management an$ au$itor. SOL Sec.
I0I
Management shall state its res)onsiility an$ ma*e an assessment
of its 'FFR an$ its au$itor shall in$e)en$ently e#aluate the
assessment as %ell.
Relate$ regs an$ stan$ar$sD SEF Release !!(EE10+ PF0O< 0S
/o. 1+ FOSO .)ri#ate initiati#e2.
"ea* cla%ac*s for financial restatements. SOL Sec. !0I
FEO an$ FFO shall reimurse the issuer for any onus or
incenti#e(ase$ com)ensation recei#e$ $uring 12(month )erio$
follo%ing the misstate$ financial statements an$ any )rofits
realize$ from selling the issuer,s securities $uring that )erio$.
9arket
9ani-ulati
on
Sec. J ex)ressly lists tra$ing )ractices the Fongress #ie%e$ as
concerns for mar*et integrity+ e.g.+ %ash tra$ing+ rumoring an$ short
sales+ margin len$ing .through Fe$ Reg2+ etc.
Chapter ): Corporate *o+ernance under ,ederal Securities 'a-
Topic Contents
hareholde
r 7oting
and Pro,y
!egulation
0ny )erson soliciting )roxies from sharehol$ers must first ma*e )ro)er
$isclosure on a file$ )reliminary or $efiniti#e )roxy statement
.Sche$ule 1I02 Rule 1Ia(!.
B)roxyBD e#ery )roxy+ consent or authorization+ inclu$ing failure to
oMect or $issent. Rule 1Ia(1.f2.
BsolicitationBD .12 actual reCuest for+ to execute+ or re#o*e+ a )roxyA
.22 any communication Bun$er circumstances reasonaly
calculate$ to result in the )rocurement+ %ithhol$ing or re#ocation
of a )roxyB. Rule 1Ia(1.l2.
F%) ty)e treatment of solicitations %/o )roxy statement D if the
communication is file$ %ith SEF efore use an$ has a )ro)er
legen$ an$ the actual )roxy form .%hen later sent2 is
accom)anie$ y a )roxy statement. Rule 1Ia12
Exce)tion for an existing sharehol$er,s )ulic announcement
of #oting )ositionD through mass me$ia or $irecte$ to one,s
eneficial o%ners .e.g.+ a <= as a recor$ hol$er2. Rule1Ia(1.l2
.22.i#2.
Exce)tion for re)ly to unsolicite$ reCuest for a )roxy . Rule
1Ia(1.l2.22.i2.
21/!1
Exce)tion for other ty)es of sharehol$er communications D if
no actual )roxy is furnishe$+ .12 any solicitation y a )erson
in$e)en$ent from the #oteA .22 any solicitation y a financial
a$#isor not )ai$ y )arties in#ol#e$ in the )roxy fightA or .!2
research re)orts. Rule 1Ia(2.2.
Filing of )roxy statements
Preliminary one must e file$ 10 $ays efore first use of the
$efiniti#e one+ unless it,s an unconteste$ annual meeting
regar$ing routine matters.
Filing of the $efiniti#e )roxy statement on the $ate of use.
Rule 1Ia(;.
Sharehol$er Pro)osals. Rule 1Ia(E.
Eligile sharehol$ers D 19 or N2+000 %orth of stoc*s continuously
hel$ for 1 year efore sumitting )ro)osal an$ through the
meeting.
Exclusions D .12 im)ro)er suMect for sharehol$er action un$er state
la%A .22 the )ro)osal relates to or$inary usiness o)erationsA .!2
)ro)osals that see* to affect the outcome of the u)coming election
of $irectors ( ut OK if other%ise relate$ to $irector elections .e.g.+
)roxy access for sharehol$er nominee2
Proxy frau$. Rule 1Ia(J.
/o false or mislea$ing statements or omissions regar$ing material
facts in the solicitation.
Pri#ate cause of action ase$ on negligence is )ermitte$+ ut
reliance .)resume$ if material2 an$ causation still nee$s to e
)ro#e$.
<oard and
8ommittee
tructure
and
E,ecutive
8om-ensat
ion
Man$atory )roxy access for certain sharehol$er $irector nominees
un$er )ro)ose$ Rule 1Ia(11 is stric*en $o%n y =F Fircuit in
<usiness !oundta2le.
Sec. 100.m2 ( memers of au$it committee must e in$e)en$ent from
the issuer an$ $eal %ith the issuer,s au$itor $irectly.
Sec. 10F ( memers of com)ensation committee must e in$e)en$ent
from the issuer an$ )otential conflicts of com)ensation consultant must
e $ealt %ith carefully an$ $isclose$ )ro)erly
Sec. 1I0 ( non(in$ing Bsay on )ayB .at least e#ery ! years2+ Bsay on
freCuency of say on )ayB .at least e#ery ; years2 an$ Bsay on gol$en
)arachuteB .in any )roxy solicitation regar$ing a usiness comination
suMect to sharehol$ers, a))ro#al2.
Sec. 1I< ( issuers must analyze %hy they ha#e or $on,t ha#e se)aration
of chairman an$ FEO.
Tender
Offers
Early warning - =isclosure of 19 or more eneficial o%nershi). Sec.
1!.$2.
Beneficial o%nershi)BD .12 any #oting or in#estment )o%er in
res)ect of the security through any contract or other%iseA .22 anti(
)ar*ing ( any scheme to e#a$e re)orting oligation is $eeme$
2;/!1
ineffecti#e. Rule 1!$(!.
0ggregation rules in $etermining eneficial o%nershi).
0ggregate hol$ings %hen t%o )ersons agree to act together for
the )ur)ose of acCuiring+ hol$ing+ #oting or $is)osing of
eCuity securities. Rule 1!$(1. E.g.+ an informal un$erstan$ing
to $is)ose of shares together coul$ result in aggregation an$
trigger 1!.$2 re)orting oligation. Wellman.
File Sche$ule 1!= or short(form 1!@ .a#ailale to institutional
in#estors not hol$ing more than 109 %ithout intent of control2
%ithin 10 $ays of the transaction resulting in triggering the
threshol$.
!
r$
)arty ten$er offer regulation. Secs. 1I.$2 an$ .e2.
"hat,s a ten$er offer&
Wellman testD .12 0cti#e an$ %i$es)rea$ solicitation of )ulic
sharehol$ersA .22 Ma$e for a sustantial )ercentage of the
issuer,s stoc*A .!2 offer at a )remiumA .I2 -erms are firm+ not
negotialeA .12 Fontingent on minimum ten$ere$ sharesA .;2
O)en for a limite$ )erio$A .G2 Offeree suMecte$ to )ressure to
sellA .E2 Pulic announcements )rece$e or accom)any a ra)i$
accumulation of the target shares.
Fommunications relate$ to a ten$er offer ( )re( an$ after(
commencement
BcommencementBD the i$$er )ulishe$+ sent or gi#en the
means to ten$er. Rule 1I$(2.a2.
Pre-commencement communicationsD file it un$er co#er of
Sche$ule -O efore use. Rule 1I$(2.2.
After-commencement communicationsD file Sche$ule -O an$
any u)$ate as amen$ment efore use. Rule 1I$(!.
9echanism to get tender offers to shareholders. .12
theoretically+ target com)any has to turn o#er its sharehol$er
list to you un$er Rule 1I$(1+ ut it %ill sue you for sure for
frau$A .22 alternati#ely+ you can )ulish the ten$er offer or a
summary of it in a ne%s)a)er un$er Rule 1I$(I.
-arget/!r$ )arty communications
similar $isclosure regime y filing Sche$ule 1I=(J. Rule
1I$(J.
Sto)(loo*(an$(listen statement exem)t from filing .
-he target com)any may issue such a communication
to urge sharehol$ers to $elay their $ecision until the
target com)any res)on$s.
9andatory target com-any announcement of -osition.
"ithin 10 usiness $ays of the ten$er offer+ shall issue a
statement regar$ing its )osition on the ten$er offer. Rule
1Ie(2.
2G/!1
Sustanti#e regulation
3urationB O)en for 20 usiness $ays .10 more if any change
of 29 or more in solicite$ securities2. Rule 1Ie(1.
Withdrawal right and -ro ration right. -hroughout the ten$er
offer )erio$+ sharehol$ers may freely %ith$ra% their ten$ere$
shares an$ enMoy )ro rata acce)tance of their shares if o#er(
ten$ere$. Rule 1I$(G an$ Rule 1I$(E.
All holders=<est -rice rule. 0ll hol$ers must e offere$ the
same o)tions for consi$eration an$ the est )rice )ai$ $uring
the ten$er offer )erio$ must e )ai$ to e#ery ten$ering
sharehol$er. Rule 1I$(10.
E.g.+ courts inter)rete$ this rule )ur)osely an$ easily $i$
a%ay %ith formalistic arguments+ as in "ield v' Trum-
.i$$er terminate$ ten$er offer+ negotiate$ %ith a
significant sharehol$er successfully an$ re(o)ene$ the
ten$er offer2.
(o side -urchase 2y the 2idder during the tender offer -eriod.
/o such )urchase or arrangement to )urchase later. Rule 1Ie(
1.
no short tender' 0ny sharehol$er ten$ering shares must ha#e a
net long )osition in the shares. Rule 1Ie(1.
Self(ten$er regulation. Sec. 1!.e2.
/o re)urchases $uring a !
r$
)arty ten$er offer )erio$ unless first
filing a )ulic statement. Rule 1!e(1.
Self(ten$ers y an issuer are suMect to similar $isclosure an$
sustanti#e regulation as !
r$
)arty ten$er offers. Rule 1!e(I.
@loal ten$er offers/self ten$ers y FP's
(on-cash consideration is -aid. !! 0ct exem)tion un$er Rule E02
if the follo%ing con$itions are met
?S hol$ers ha#e 109 or less o%nershi) in the issuer
?S hol$ers are gi#en eCual treatment.
?S hol$ers are gi#en eCual information+ %hich shoul$ e
legen$e$ )ro)erly.
Partial e,em-tion from !eg $.3. Rule 1I$(1.c2 an$ .$2.
Tier #' 'f ?S hol$ers ha#e 109 or less o%nershi) .or a#erage
$aily tra$ing #olume in case of a )rimary foreign tra$ing
mar*et2+ largely exem)t from $isclosure an$ %ith$ra%al right
reCuirements.
Tier ##' 'f ?S hol$ers ha#e I09 or less+ exem)t from certain
reCuirements conflicting %ith foreign la%s.
Chapter .: Regulation of /ro0er12ealers
Topic Contents
2E/!1
!egulation
of the
markets
Mar*et structure
/TSED floor ase$+ continuous auction+ s)ecialist mar*et .each
stoc*,s s)ecialist )laying the role of mar*et ma*er to asor o#er(
su))ly or o#er($eman$2+ or$er $ri#en .ro*ers negotiate among
themsel#es an$ if no tra$e+ go to the s)ecialist2
/0S=0SD screen ase$+ $ealer mar*et .each stoc* has se#eral
com)eting $ealers2+ Cuote($ri#en.
-he )olicy tensions ehin$ Reg /MS
<est-e,ecution' Multi)le exchanges incenti#ize inno#ation an$
com)etition in tra$ing mar*ets+ %hile at the same time increasing
the costs of )rice($isco#ery across mar*ets
Trans-arency' Man$ating too s)ee$y $issemination of or$er
information is goo$ for in#estors ut may hin$er exchanges,
incenti#e to )ro$uce the information in the first )lace. For
in#estors+ ha#ing the full )icture of or$er information is goo$ ut
the in#estors )osting the or$ers may e $iscourage$ from tra$ing
in the mar*et gi#en such $isclosures %oul$ s%ay the mar*et in a
$irection a$#erse to their interests.
Reg /MS
Post(tra$e trans)arencyD exce)t for the 11(minute %in$o%+ all
tra$e information has to e $isclose$ an$ aggregate$ for /MS
stoc*s .i.e.+ stoc*s liste$ on maMor stoc* exchanges2
Pre(tra$e trans)arencyD exchanges ha#e to consoli$ate their or$ers
an$ )ulish the /ational <est <i$/Offer ./<<O2.
>imitation on tra$e(thru across exchangesD .12 or$ers must e
route$ to the /<<O first ut if the or$ers at /<<O are ta*en u)+
other inferior )rices may e s*i))e$.
0lternati#es to exchangesD institutional in#estors may utilize
0lternati#e -ra$ing Systems to a#oi$ exchange(tra$ing entirely.
((P Reg 0-S reCuires 0-S ha#ing a tra$ing #olume excee$ing 19
in a certain stoc* to $isclose information li*e an exchange.
!egulation
of <3s
Fa)ital reCuirements.
Fon$uct of usiness rules
Best executionBD regar$less of /<<O+ it,s al%ays )ossile to tra$e
%ithin the s)rea$ an$ it,s unclear ho% much efforts a <= shoul$
)ut into in searching for a etter $eal for his client.
BsuitailityBD a <= has an oligation to assess the client,s nee$s
an$ )ro#i$e suitale a$#ice.
BchurningBD no excessi#e tra$ing for the )ur)ose of gaining
commissions
Chapter 3: Securities ,raud and Insider Trading
Topic Contents
$%2-5
Sco)e of the the Rule
2J/!1
"raud -
9isstateme
nts
'n connection %ith the sale or )urchase of any registere$ or
unregistere$ security
Scienter ( intent to $efrau$ or rec*lessness
Why* Sec. 10.2 reCuires Bmani)ulati#e or $ece)ti#e $e#iceB.
-hus 10(1.2,s misstatement language+ though seemingly
negligence(ase$+ still has to incor)orate a scienter
reCuirement.
+ow to -rove*
Sec. 21=.2.22 reCuires state of min$ to )lea$e$ %ith
)articularity gi#ing a Bstrong inferenceB aout the intent.
Tella2s court inter)rete$ this reCuirement to mean that the
scienter inference from the )lea$e$ facts must e the most
com)elling of all )lausile inferences ( e.g.+ in Talle2s+
the *ey status of the )ro$ucts %hose re#enues are
misstate$ ma*es the inference most com)elling.
Other %ays to )ro#e scienter . .12 )ersonal financial gainA
.22 $elierately engaging in illegal acti#itiesA .!2 = *ne%
or ha$ access to information contra$icting )ulic
statementsA .I2 failure to chec* information they are
oligate$ to monitor. (ovak.
=efrau$ing $e#ice or untrue or mislea$ing misstatements .or
omissions2
=uty analysis in case of an omission
'n general+ no $uty to $isclose material e#ents unless
reCuire$ y the )erio$ic re)orts or E(Ks. A22ott )a2s. <ut
see Time-Warner ecurities )itigation for a conflicting
minority )osition .$uty to u)$ate if necessary to ma*e
)rior )ulic announcements not mislea$ing2
S)ecific circumstances gi#ing rise to $uty to $isclose
=uty to correct ( %hen )rior announcements are
foun$ to e %rong %hen ma$e
Fi$uciary $uty exists et%een the Bconcealing )artyB
an$ the )arty see*ing reme$y ( go ac* to common
la%
/o half(truths ( if you choose to s)ea*+ all material
information relate$ to the suMect matter has to e
$isclose$ )ro)erly.
Reliance
'n general+ frau$(on(the(mar*et theory is enough to )resume
reliance. <asic )evinson.
For omissions+ no reliance is reCuire$.
Fausation
P has to )ro#e causation
Safe harors for for%ar$(loo*ing statements in a re)orting com)any,s
!0/!1
regular usiness. Sec. 2G of !! 0ct an$ 21E of !I 0ct.
9orrison an$ extraterritorial reach of ?S securities la%
10(1 claims only a))ly to a sale or )urchase in connection %ith a
security .12 liste$ on national exchanges or .22 other%ise
B$omesticB.
Foreign(cue$ or foreign(sCuare$ suits ha#e een $ismisse$ often
follo%ing 9orrison.
Enforcement action y SEF ex)an$e$ y =F0 D con$uct/effect test
resurrecte$ for SEF enforcement actions.
#nsider
Trading
under $%2-
5
-he search for B$uty to $isclose or astainB to estalish frau$ in insi$er
tra$ing
Flassic insi$er theory
For)orate insi$ers or tem)orary insi$ers ( they ha#e a
fi$uciary $uty to the sharehol$ers of the com)any an$ thus
ha#e a $uty to $isclose or astain. 8hiarella.
-i))ee of a cor)orate insi$er has $eri#ati#e liaility if
-he ti))er reaches his $uty y the $isclosure ( e.g.+ the
ti))er enefits )ersonally+ $irectly or in$irectly+ from the
$isclosure
-he ti))ee *no%s or shoul$ ha#e *no%n the reach.
3irks.
Frau$ on the source ( Misa))ro)riation theory
-he tra$ing )erson o%es a $uty of trust or confi$ence to the
source of the information an$ thus has $uty to astain or
$isclose. OC+agan.
Rule 101(2 on relationshi)s estalishing the $utyD
a )erson agrees to maintain the information in confi$ence
.no matter ho%e#er informally2A
the )ersons sharing information ha#e a )ast history of
$oing so an$ an ex)ectation of confi$entialityA
the )erson shares information %ith his )arent+ s)ouse+
chil$ or siling unless no reasonale ex)ectation of
confi$entiality coul$ e estalishe$.
/e% $e#elo)mentD %hat if the tra$ing )erson acti#ely see*s+ illegally+
insi$e information& Frau$ coul$ e the manner in %hich the
information is otaine$ ( e.g.+ hac*ing. 3oro4hko.
Other elements
cienterD )ossession or a%areness of the information is enough+
unless tra$ing accor$ing to a 101(1 )lan. Rule 101(1.
9ateriality of the informationD same materiality analysis.
S)ecial case of insi$er tra$ing relate$ to a ten$er offer. Rule 1Ie(!.
0ny )erson must not tra$e on material+ non()ulic information
relate$ to a ten$er offer if he *no%s or shoul$ ha#e *no%n the info
comes from any )arty in#ol#e$ in the transaction.
!1/!1

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