SECURITIES REGULATION

Spring 2009
Professor Shepherd

EVERY TRANSACTION HAS TO FIND AN EXEMPTION OR BE REGISTERED

I. Background: Securities Act of 1933 vs. Securities Exchange Act of 1934
a. Securities Transactions
i. Issuer Transactions (Primary Market)
1. Those involving the sales of securities by the issuer to the investors;
the means by which businesses raise capital
2. Most expedient form is the private placement of securities
ii. Trading Transactions (Secondary Market)
1. The purchasing and selling of outstanding securities among investors
b. The Legal Framework of Securities Regulation
i. Why Regulate?
1. Regulation of the public interest: regulation is in the public interest
and will cure market failure because it coordinates investors so an
efficient amount of information is produced
2. Interest group capture: regulation serves the interest of the regulated
3. Regulators benefit: SEC as a special interest group that engages in its
promulgation of rules that helps itself in terms of power or budget
ii. Various Approaches to Securities Regulation
1. Anti-Fraud Rules: after-the-sale of securities
a. After-the-fact response to fraudulent sales
b. Exists on a federal and state level: Rule 10(b)(5)
2. Registration and Disclosure: Before the sale of securities
a. Before you can sell securities have to make all sorts of
disclosures to the people you might sell securities to!
incentive to have more disclosures
3. Merit Regulation
a. Some states have merit regulationstate will not allow you to
sell securities in the state unless the state decides you have
merit (in the public interest)
b. Only 12 states have this kind of regulation
iii. The Federal Securities Laws
1. Securities Act of 1933
a. 1933 Act applies to the original distribution: new issuances
only (or controlling persons who are selling in a secondary
distribution)
2. Securities Exchange Act of 1934
a. 1934 Act covers the trading of securities in the market after
the original or secondary distribution
3. 1933 Act vs. 1934 Act

1933 Act 1934 Act
Structure 1-Registration
2-Exemptions to registration
requirements
3-Anti-Fraud: makes state anti-fraud
rules federal
1-Regulation of trading markets
(once 1933 Act complied with, then
trading in secondary markets which
is regulated by 1934 Act)
2-Anti-Fraud Rules (10 and
10(b)(5))
3-Continuing Disclosure
Requirements**
Philosophy Focused only on new issuances of
securities
Focused on trading markets
Effect Makes disclosure mandatory Allows government to delegate
responsibility to private
organizations: self-regulatory
organizations (SROs = NYSE)
Terms ! Self-regulatory organization: NYSE; lots of rules that you are required
to comply with
! Continuing disclosure requirements: company has to provide various
reports if:
1) Traded on a big national exchange OR
2) If you have more than $10 million in assets AND more than 500
shareholders OR
3) Filed a 1933 Act registration statement

4. Other Laws
a. Sarbanes-Oxley Act of 2002
i. Sets forth broad prescriptions for corporate
governance, authorizes the SEC to develop rules for
professional conduct for lawyers, and regulates areas
that have always been the province of the states (such
as loans to officers and directors)
b. Blue Sky Laws: state securities laws
5. Preemption of State Law Regulation
a. If your stock is traded on the big stock exchange
b. If you sell your stock to sophisticated people
c. Or if you fall under the federal exemptions
i. Then, state laws do not apply!
c. The People Involved in Securities Offering
i. Broker
1. Putting you in contact with dealer
ii. Dealer
1. Has it in his own stock and selling from the inventory
2. Dealer buys from the UW or the issuer
iii. Broker-Dealer
1. Someone who does both (see market-maker, below)

II. The Definition of a Security
a. What is a Security? Section 2(a)(1)! UNLESS THE CONTEXT OTHERWISE
REQUIRES

The term "security" means any note, stock, treasury stock, security future, bond, debenture, evidence of
indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust
certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust
certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral
rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of
securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or
privilege entered into on a national securities exchange relating to foreign currency, or, in general, any
interest or instrument commonly known as a "security", or any certificate of interest or participation in,
temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or
purchase, any of the foregoing

SEC v. SM Joiner Leasing Corporation (SCOTUS 1943): Dealt with sales of shares of land in an
oil field; promoter here sold sub-leases and not the actual interest in the oil or lease and argued that
lease is not mentioned under 2(a)(1). Court holds that even if something is not specifically
listed in 2(a)(1), can still be a security (character of the instrument test)! novel, common, or
irregular devices may fall within one of the definitions more descriptive categories, such as an
investment contract if the facts so warrant

b. Implications of the Definition of Security
i. A transaction that involves a security triggers a host of federal and state
securities regulation:
1. Registration and disclosure requirements in public offerings of
securities
2. Disclosure and other conditions necessary to claim exemption
3. Liability for selling unregistered securities and liability for
misrepresentations in a public offering
4. Antifraud protections for those who buy/sell securities
5. Limits on insider trading
6. Administrative and judicial liability for those who violate securities
laws
ii. Policy behind Securities Laws
1. Economical argument: does it make sense for people to do this?
2. Psychological argument: people tend to be overly optimistic
iii. Courts have focused on 2 questions in interpreting what a security is
1. When does an unorthodox investment fall within the catchall terms
(unless the context otherwise requires), principally investment
contract?
2. When are instruments that nominally fall into an enumerated
category (such as notes or stocks) actually not securities?
c. What is an Investment Contract?
i. The Howey Test: The Requirements
1. Invest money
a. The investment, which can be of cash or non-cash
consideration, is expected to produce income or profit
b. The investor is not buying a consumable commodity or service
(UHF v. Forman)
2. Common enterprise
a. Horizontal Commonality: Multiple investors have interrelated
interests in a common scheme
b. Vertical commonality: single investor has a common interest
with the manager of his investment
i. Broad Vertical Commonality
ii. Strict Vertical Commonality
3. Expectations of profits
a. The expected return must come from earnings of the
enterprise, not merely additional contributions, and this return
(whether fixed or variableSEC v. Edwards) must be the
principal motivation for the investment
4. From the efforts of others
a. Efforts of the promoters, not society as a whole
b. Investor can participate, but the efforts of others must be
essential to the expectations of the investor! investors must
be mostly passive
c. Also looks to how much control one maintains over the
investment (note: problem from E&E about 1-week rental use)

SEC v. WJ Howey (SCOTUS 1946): Howey Company owns large tracts of land in Florida, and has
a service company that develops these lands. Each customer is offered a land and service K (gives
you an interest in the manufacturing of the company, get more money with more fruit)question of
whether the land and sales K constitutes an investment K. Court interprets investment K broadly:
an investment K is a K, transaction, or scheme, whereby a person invests his money in a common
enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it
being immaterial whether the shares in the enterprise are evidenced by formal certificates or by
nominal interests in the physical assets employed in the enterprise.
! Here, the Ks were clearly investment Ks because offering something more than fee
simple interest in landoffering the opportunity to contribute money and to share in the
profits of a large enterprise, with all the elements of a profit-seeking venture present

ii. An Alternative to the Howey Test: The Risk Capital Test
1. Risk capital test: a security will not exist unless capital is provided
by the investors at a substantial risk
a. Unlike Howeys focus on the investors reliance on the
promoters efforts, the risk capital test focuses on the extent
to which the investors initial outlay is subject to the risks of
the enterprise, risks over which the investor has no managerial
control
b. Requires neither commonality nor that the profits be derived
from the efforts of others! easier to satisfy than the Howey
test
2. Example:
a. Lets say that a club is selling ownership interests, which
essentially act as a membership. The members cannot transfer
the interest and do not have voting rights. A court has found
that this was a securitywhy?
b. Under the risk capital test, the idea was that when you made
the investment, it was a risky investment! the promoter had
all the information about whether it would succeed
c. Howey, however rejects this risk assessment analysis
iii. Howey Applied
1. How the Test is Used
a. Some promoter will try to use the securities laws to create an
investment that seems to not qualify as a security OR
b. Someone offers to sell something but hasnt been advised by
good lawyers and call its something in the definition of a
security (ex: calling something a stock even though it is not)

Marine Bank v. Weaver (SCOTUS 1982): The Weavers pledged a bank certificate of deposit to
secure a bank loan to the Columbus Packing Companyin return, Weavers received a share of their
net profits with the rights to use the companys pasture and barn, as well as the right to veto further
borrowing. Columbus went into bankruptcy and the bank attempted to claim the pledged
certificate. The Weavers asserted the banks complicity in fraudulent misrepresentations in
inducing their investment! claimed security under Howey. Court says this is NOT a security: the
agreement is not the type of investment that typically comes to mind when security is used! no
prospectus, no public trading, unique character of transaction. Under Howey test: although
investment of money, may not have been common enterprise, no expectation of profits

2. Investment versus Consumption
a. UHF v. Forman
i. In general, if there is a substantial benefit that you get
that is NOT from an investment, it will lead to an
inference that it is not a security
ii. Federal securities laws are inapplicable when the
purchaser is motivated by a desire to use or consume
the item purchased rather than an anticipation of
receiving a return on the investment

UHF v. Forman (SCOTUS 1975): UHF initiated the development of Co-Op by organizing
Riverbay to own and operate land and buildings in the Co-Op. Riverbay then issued stock: to get an
apartment in Co-Op, you had to purchase 18 shares of stock in Riverbay for each room you wanted
(acted like a recoverable depositno voting rights, no transfer of shares, to terminate had to offer
stock). Court decides that the shares are NOT securities! reasonable people would not believe
they were actually getting investment securities because there were no dividends, no characteristics
of a stock, no voting, etc. Fails under expectation of profits under Howey! were not expecting
money from the investment, but were planning on living in the apartment
-Court ignores alternative argument: wanting to get below-market rents (profit)

3. Common Enterprise and Profits Solely from the Efforts of Others
a. SEC v. Edwards
i. An investment scheme promising a fixed rate of return
can be an investment K and thus a security subject to
the federal securities laws
SEC v. Edwards (SCOTUS 2004): Company offered payphones and promised a fixed return (to
exclude it form security regulations). The company then went bankrupt and SEC sued, claiming it
was a securityargued that since it was a fixed return, there was no expectation of profits (since
they have to be variable). Court holds: An investment scheme promising a fixed rate of return can
be an investment K and thus a security subject to the federal securities laws! there is no reason to
distinguish between promises of fixed returns and variable returns since in both cases, the investing
public is attracted by representations of investment income

b. What is a Common Enterprise?
i. Horizontal commonality: several people all investing
in the same enterprise; multiple investors have
interrelated interests in a common scheme
1) 2 ways to look at horizontal commonality:
a. Are all investors investing in the same
way? OR
b. Are all investing in the same enterprise
and will all get profits?
ii. Vertical commonality: single investor that has a
common interest with the manager of his investment!
THINK RISKS ON BOTH SIDES
1) Broad vertical commonality: 2 people
involvedas long as the fortunes of the
investor are tied to the promoter, then it is a
common enterprise (fits almost every form)
2) Strict vertical commonality: direct
relationship between fortunes of promoter and
investor
a. Ex: If the promoter and investor split
the profits = strict vertical commonality
b. Ex: If the investor is just paying the
promoter a fixed fee to invest his
money, this would satisfy broad but not
strict vertical commonality

Horizontal Commonality Vertical Commonality
Promoter

Investor Investor Investor
Promoter

Investor

c. What are Profits from the Efforts of Others?
i. Look to the REASONABLE INVESTOR: What
would a reasonable investor think?
1) Ex: going to Las Vegas when you know you
are going to lose money
2) Expectation of Profits: Use vs. MONEY
(Forman)
ii. SEC v. Life Partners
1) Case looked to what the promoters did in the
past
2) Other circuits come out the opposite way: look
to what the promoter will do in the future
iii. Efforts of others:
1) IS WHAT THE PROMOTER IS SELLING YOU
THE REASON YOU ARE RECEIVING A
PROFIT?

SEC v. Life Partners (DC Cir. 1996): People are dying of AIDS, someone set up a business to get
investors to purchase their life insurance policieswould purchase them for an amount below the
amount they would have purchasedperson dying would get the money now, and the investor
would get the death benefit. Court finds these to be securities! under the Howey test, under the
efforts of others factor! most the efforts of the promoters occurred before there was a sale of the
securitythe question is what the promoter will do in the future

d. Associational Formalities: Interests in Corporations, Partnerships, and LLCs as
Securities! Howey in Other Contexts

Security Not Security
Corporation Regular stock
Limited Partnership Limited Partner interests If limited partner exercises a lot
of control; general partnership
interests
General Partnership If interests meet Williamson General partnership interests
LLCs Manager-managed Member-managed

i. Corporation Interests as Securities
1. Stock as a Security
a. The federal securities acts define a security to include stock
subject to the caveat unless the context otherwise requires
b. As a result, courts have held that not all instruments labeled as
stock are securities
i. Non-Investment Stock
1) Ex: UHF v. Forman: definition of a security
must reflect economic reality, therefore
shares in a cooperative housing development
are not stock
ii. Sale of Business Doctrine
1) During the early 1980s, a number of lower
courts concluded that the transfer of a majority
of the stock of a closely held corporation is not
a securities transaction! under the sale of
business doctrine, the courts looked to Howey
2) Emphasis on management to conclude that the
sale of a majority interest passes complete
control to the purchaser, who becomes an
owner-entrepreneur, and not an investor
iii. However, see Landreth Timber v. Landreth: rejected
the corporate sale of business doctrine and refused to
apply Howey
1) When you are dealing with something that is
listed in the definition of a security and is a
normal kind of security that satisfies the
definition, do not need to undergo the Howey
test.
2) Distinguishes Forman: stock here bore all the
characteristics traditionally associated with
common stock
a. Right to receive dividends contingent
upon an apportionment of profits
b. Negotiability
c. The ability to be pledged or
hypothecated
d. Conferring of voting rights
e. Capacity to appreciate in value

Landreth Timber v. Landreth (SCOTUS 1985): Case involved the purchase of 85% of the
common stock of a closely held business that failed to live up to the purchasers expectations.
Court adopted a LITERAL approach to the issue of when a stock is a security. Court pointed out
that the stock in the transaction had all the traditional indicia of corporate stock: dividend rights,
liquidity rights, proportional voting powers, appreciation potential. However, the Court refused to
look at the economic substance of the transaction or to assume the securities acts apply to only
passive investors. Court pointed out that there would be difficult line-drawing issues in acquisitions
of less than 100% of a corporations stock or when a purchaser arranged to have the seller stay on to
manage the business (what happened here)no application of Howey since this fits the definition of
a security.

Summary of Corporate Stock:
-If normal stock (as in the definition), then security! Landreth (no Howey) (think
characteristic test! Joiner)
-If it is weird stock! Forman
-Anything else ! Howey factors

ii. General Partnership Interests as Securities
1. Under the Howey test, interests in general partnerships fail the
efforts from others factor! if a partner, you substantially contribute
to the partnerships success and you have an equal right of control
(1/3 of the effort)
2. However, there are situations where interest in a general partnership
will still be deemed a security (investment contract)
a. Williamson Test: An interest in a general partnership will not
be a security unless
i. The partnership agreement eliminates investor
control or
1) The partnership agreement leaves so little
power in the investors hands that the
arrangement in fact distributes power as would
a limited partnership (ex: electing a managing
partner at King & Spalding)
ii. Inexperienced investor or
1) The partner is so inexperienced and
unknowledgeable in business affairs that he
cannot intelligibly exercise his partnership
powers at the time of investment; or
iii. Promoter has unique skills: cant be replaced
1) The partner is so dependent on the unique
managerial ability of the promoter that he
cannot replace the manager or otherwise
exercise meaningful partnership powers
Williamson v. Tucker (5
th
Cir. 1981): Court held that general partners acquire securities when
they invest in real estate development in which all management functions (planning, zoning, etc.)
are left to the manager b agreement. Court treated the partnership interests as investment contracts.

iii. Limited Partnership Interests as Securities
1. In general, limited partnerships (when talking about limited partners),
are viewed as securities: more like you are an investor and this is from
the efforts of others
2. NOTE: Exception! if the limited partner starts to get too much
control and faces personal liability (note state statutes and RULPA:
LP can engage in certain activities but retain LP status)
3. Steinhardt Group, Inc. v. Citicorp (3
rd
Cir. 1977): held that LP
interests are NOT securities if the limited partner can and does
exercise pervasive control of the partnership
a. Note: question on sophisticated investors
i. Steinhardt suggests that it DOES MATTER if the
investor is sophisticated
1) Case mentions that this was a sophisticated
investor negotiating with representation
ii. Other courts, however, say it does not matter if you are
sophisticated or not

Steinhardt Group v. Citigroup (3
rd
Cir. 1997): Citicorp created a LP to purchase non-performing
assetsthe LP contracted with a 3
rd
party to manage and liquidate the loans of the GP (just 1 LP,
Steinhardt). Citicorp agreed to cover 90% of the purchase price of the loans, while the remaining
10% was to be paid by LP. Steinhardt sues say he was told false returns. Issue is whether the
transaction between Citicorp and the investor in a LP constitutes an investment KCourt says NO
since the LP retained pervasive control over its investment (can propose or approve of a new
business plan, has veto power, can remove GP) and cannot be a passive investor under Howey (fails
profits solely from the efforts of others)

iv. LLC Interests as Securities
1. Member-Managed vs. Manager-Managed
a. Manager-managed LLCs: like corporations! passive
investors who appoint someone to manage LLC for them
i. These ARE securities because they are more like
securities
b. Member-managed LLCs: like partnerships! everyone has
an equal right in the management
i. These are not securities because each of the members
has an equal right to manage the LLC (efforts not from
others)
2. However! if you have a member-managed LLC with 1000 members
(large LLC), would have to look to the actual structure of LLC (these
are not hard and fast rules)
v. Real Estate as Securities
1. Normally, the sale of real estate is not a securities transaction:
a. No vertical or horizontal commonality
b. Expect the use of the real estate
2. However, buying real estate: could be conceivable that it is a security
(ex: buying a condo and having someone manage it for you)
a. Commonality satisfied through rental pool agreement:
horizontal commonality because a bunch of co-condo owners
pool the potential receipts from renting out their condos and a
share is provided to each condo owner
3. Hocking v. Dubois (9
th
Cir. 1989): holding that the offering of a
rental condo along with collateral management agreement would
constitute an investment contract
a. Security could be found when a real estate agent offered a
rental condo and helped the buyer make arrangements with an
unrelated company that would manage the property
b. Decision raised concerns among real estate brokers that their
recommendation of a leasing agent (even if not affiliated with
such a broker) in connection with the sale as well as resale of a
vacation-type condo may trigger application of securities laws

Hocking v. Dubois (9
th
Cir. 1989): Hocking bought a condo in the secondary market and entered
into a rental pool agreement appointing an agent to manage his condo. He argues that the
investment was entirely passive and he relied on the agent to manage his investmentD argues that

Summary:
" IN GENERAL, GENERAL PARTNERSHIPS ARE NOT A SECURITY
o Note exceptions under Williamson factors
" IN CONTRAST, LIMITED PARTNERSHIPS VIEWED AS SECURITY
o Exception: control by the limited partner

he had a high degree of control based on the rental pool agreement. Note: this is different than
Howey because Hocking purchased in the secondary market (not from the developer), entered into a
completely separate RPA, and could terminate the RPA. Court does Howey test (investment of
money, horizontal and brought vertical commonality, expectation of profits) and also Williamson
test under produced by the efforts of others since Hocking had the technical ability to get out of
the RPA (partnership analogyfeatures of the relationship that would make it seem like control
wasnt an issue). Under Williamson, find that there is a question of what power is left in Hockings
hands, how knowledge he his, and whether Hocking was stuck with the rental manager (needed
75% of votes to get out).
NOTE: Williamson test is normally a test for partnershipscan see that this leading case
used it with respect to real estate interests as well. This is a mess!

vi. Notes as Securities
1. Generally
a. Under both the 1933 and 1934 Act, notes are securities
i. Note exception: if a note is for securities with a
maturity of LESS THAN 9 months, then that is not a
security! just for commercial paper!
1) Doesnt matter the security unless commercial
paper
ii. However, many extensions of credit (notes) do not
have the typical attributes of investments (ex: getting a
loan on a house)! so, courts have refrained from
calling ALL notes securities
2. Family Resemblance Test (Reves v. Ernst & Young)
a. Begins with a rebuttable presumption that every note is a
security unless it falls into a category of instruments that are
NOT securities
b. Notes used in consumer lending, notes secured by a mortgage
on a home, and short-term notes secured by an assignment of
accounts receivable are in the family of non-securities
c. For the new types of notes transactions, Reves set out 4
factors to determine the family into which the note fits
i. Motivation for the transaction
1) If the issuer of the note uses the proceeds for
general business purposes, it is more likely a
security
2) If the issuer gives the note to buy consumer
goods or for some commercial purpose, it is
more likely NOT a security
ii. Trading for broad distribution
1) If the notes are widely offered and traded, it is
more likely a security
2) If the note is given in a face-to-face negotiation
to a limited group of sophisticated investors, it
is more likely NOT a security
iii. Investors reasonable expectations
1) If investors view the type of notes to be
investments, it is more likely a security
iv. Risk reducing factors
1) If the note is not collateralized and not subject
to non-securities regulation, it is more likely a
security
2) If the note is secured or otherwise regulated
(such as by banking authorities), it is more
likely not a security

Reves v. Ernst & Young (SCOTUS 1990): To raise money, Co-Op sold promissory notes payable
on demand by the holders in the Investment Program (approximately 23,000 members of the public
with higher than average interest rates)ultimately filed for bankruptcy and sued E&Y. The notes
were advertised as investments. Court holds that these are securities under the family
resemblance test. Rejected Howey because notes are not investment contracts.

SEC v. Wallenbrock (9
th
Cir. 2002): Wallenbrock sold promissory notes secured by the accounts
receivable of latex glove manufacturershad to wait 80-90 days after shipment to collect from
American buyers during which they would lose 10% of their moneyWallenbrock would step in
TO DETERMINE IF A NOTE IS A SECURITY:
1) There is a family of kinds of notes that do not countCourts have legislated to find that they are not securities:
-Notes in consumer financing
-Notes secured by a mortgage on a home
-Short-term note secured by a lien on a small business
-A character to a bank customer
-A note secured by a businesss accounts receivable
! Consumer loans for purchases and houses do not get securities loans as well as normal business loansotherwise,
commerce would grind to a halt
! If redeemable in 9 months, then not a security! commercial paper only!
2) If not found on the list, then the Court says there are other things that might meet it: family resemblance test (look to
see if there is a resemblance to these things): 4 PART TEST that captures characteristics of these family members,
thereby telling us if other notes should be added to members of the family (not a security)
1. Motivation for the transaction
-Seller raising money for use of business or to finance investments
-If used in this way, then it is a security!
-Ex: Lets suppose that a law firm needs a line of credit. Bank would issue note. In issuing this
note, did the law firm have to register security? NO; this is a short-term, normal business use
and would not qualify as a security.
2. Trading for broad distribution
-If you sell this note and it immediately enters a secondary trading market, that would suggest that it is a
securityif broadly distributed, that would suggest that it is a security (SOPHISTICATED = no
security)
3. Investors reasonable expectations
-Did the investors think that this kind of investment is one that the securities laws would cover?
4. Risk reducing factors
-Are there other factors that reduce the amount of risk that this investment has? For example, is there a
lot of collateralissue a note, but the note has a mortgage?
-That would suggest that it is NOT a security
-Is there other governmental regulation to protect investors?

and would get the future payment assigned to Wallenbrock and buy the account receivable for 75-
80% of its value. Sold more than $170 million of notes to over 1000 investors in at least 25 states
big Panzi scheme (getting money from later investors to pay off earlier investors with a large return
of 20%). Applying Reves, the Court concludes that the notes ARE securities:
1) Motivations: at the core, investors want a profit and a high return
2) Notes offered to broad segment of public
3) Reasonable investor sending funds to W for a guaranteed return would expect
investment
4) No risk-reducing arguments to indicate the notes are not securities
! Narrowed the 90 day exemption

vii. Loan Participations and Derivatives
1. Loan Participations
a. Under Reves, normal loans are not securities
b. However, if the bank then sells loans to other investorscases
come out differently:
i. If the loans are sold ONLY to institutions and
sophisticated buyers, then not securities
ii. If the loans are sold only to unsophisticated buyers,
then securities
2. Derivatives
a. Cases are all over the place
b. One idea is that derivatives are not securities unless sold to
sophisticated investorshowever, this is a messy area

III. Markets and Their Efficiency
a. Markets and Investors
i. The Structure of Trading Markets
1. How does a security market work?
a. Basic idea is that you try to match up the person who will sell
something for the lowest amount with the person who will buy
it for the highest amount
b. Similar to an auction
2. Different Kinds of Markets: Three Distinct Parts
a. Exchanges: NYSE, Amex, 5 regional exchanges
i. Auction markets: buy and sell orders are executed at
a central location at the best available price (anti-
competitive prices)
ii. Typically, an investor who wishes to buy or sell an
exchange-listed security will give the order to an
exchange-listed security (i.e. agent) who executes the
order on the floor of the exchange and receives a
commission as compensation
iii. Most of the orders are:
1) Market orders: require the broker to execute the
order promptly at the best available price
2) Limit orders: require the broker to buy at or
below or sell at or above the stated (limit price)
iv. The Specialist System
1) What is a specialist?
a. Specialists compose a category of
exchange member firms separately
registered with the exchange
b. When a stock has been admitted to
trading, the exchange allocates it to a
particular specialist! any member who
wishes to trade in a stock must go to the
post of the specialist
1) Specialist may trade on his
own or a customers account
2) Also engage in limit orders: specialist will buy
the stock if it falls to a certain level
(automatically executed)
a. Thus, specialists will have information
that no one else has: knows the limit
orders and can market movements
(specialized information about
supply/demand in the market)
b. Over-the-counter market
i. Residual securities market; all transactions that do not
take place on a stock exchange are said to be executed
on the OTC market
ii. If an investor wishes to buy an OTC security, the
broker-dealer handling his account may sell him the
security as principal out of the broker-dealers
inventory! if broker-dealer does not own the security,
he will buy it from a market maker and sell the
security to his customer
1) Market maker: broker-dealer who holds
himself out as being willing to buy and sell a
security for his own account on a regular or
continuous basis
c. NASDAQ
i. Fully computerized marketlargest over-the-counter
market
d. Note: block trading! fourth market refers to trading of
shares directly between institutional investors without the use
of a broker-dealer (shares of more than 10,000)

Stock Exchanges vs. OTC Markets
Stock Exchange Over-the-Counter Markets
Centralization Each stock exchange provides a
central price for trading where all
De-centralized market in which
transactions are negotiated among
customers buy and sell orders in an
auction-like process
broker-dealers and between broker-
dealers and their customers
Direct Meetings Buyer and seller can meet directly Provides no way for the orders of a
buying customer and a selling
customer to meet directly!
professional dealer (dealer market)
Specialists Typically one specialist allocated to a
particular stock on any given stock
exchange
Common for there to be several
market makers in a particular OTC
stock
Specialist has a central location on
the exchange floor and can see the
trading
OTC market maker is in his office
and can become a participant in
trading only by issuing competitive
quotations

ii. Globalization
1. Companies that try to raise money in the US must comply with:
a. Securities Regulations
b. Accounting Rules
2. Reciprocity: if you can sell on NYSE, can sell in LSE
3. International mutual funds

b. The Efficient Market Hypothesis: Implications and Limitations
i. The Meaning and Mechanisms of Market Efficiency
1. What are efficient markets?
a. When looking at efficient markets, must address 2 main
questions:
i. If markets are efficient, do we need securities laws?
ii. If markets are efficient, does that tell us anything about
what the best kinds of securities regulations would be?
2. Two kinds of efficiency
a. Distributional efficiency (speculative efficiency/information
arbitrage efficiency)
i. Measures whether markets react spontaneously and
fully to new information
ii. Asks: can 1 person in the market gain because of the
ignorance of others based on certain kinds of
information? Are there bargains in the market by
getting more information?
b. Allocative efficiency
i. Measures whether the market allocates capital to its
highest and best use
ii. If it exists, would indicate that money flows to the
producers who can promise the highest return with the
lowest risk
iii. Markets cannot be allocatively efficient because stock
prices that are above the intrinsic prices stay there
too hard to find them

Informational Efficiency Allocative Efficiency
When company A receives a takeover bid from
company B that seems certain to succeed, the
stock price of A increases immediately to reflect
the per share bid premium! exhibits
distributional efficiency because asset prices
incorporate all prices fully and instantaneously
Stock market investors shun security offers from
firms in declining industries, but welcome
offerings from firms in more promising
industries! exhibits allocative efficiency
because it allocates capital to its highest and best
(more productive use)

3. The efficient market hypothesis: particular information in an
efficient market affects the market price of a companys stock as
though everyone had the same information at the same time
a. In an efficient market, there are no opportunities for super-
profitable trading strategies
a. A securitys price can be seen as being established in an
efficient market, if, with respect to specific information, the
price that exists for the securities is the same as the price it
would have if everyone had the same information
b. This is a paradox: efficient markets are based on a lot of
people not believing markets are efficient
ii. Forms for each kind of efficiency
1. Weak: exists when security prices reflect all the information
embodied in the past prices of that security
2. Semi-strong: exists if security prices reflect all publicly available
information
3. Strong: when security prices reflect all information, whether that
information is publicly available or not
iii. Forms in Detail
1. Weak-Form Efficiency
a. Definition: the history of stock prices does not predict future
prices
i. When a stock market impounds information about
historic trading practices so that investors cannot draw
charts of past prices to extrapolate future prices, the
market is said to have weak-form efficiency
b. Based on idea of random walk with drift: prices will drift
around and slight drift upwardsstalks will bounce around in
i. Random movements in stock prices based on
exogenous shocks
2. Semi-Strong Efficiency
a. Definition: Market prices reflect all public information that
sophisticated investment professionals get! stocks adjust
quickly
i. When a stock market promptly impounds all publicly
available information, the market is said to have semi-
strong efficiency
ii. This means that ordinary investors cannot beat the
market systematically by using public information that
affect stock prices (ex: companys earnings,
competitors products, etc.) because the market will
already have discerned the information and reacted to
it
1. Large body of evidence indicates that public
stock prices for widely followed companies in
the US change almost instantly and in an
unbiased fashion in response to new public
information
b. Investment professionals and mutual funds are worthless
under this model! everything is random
c. Basically true with distributive, but not allocative efficiency
3. Strong-Form Efficiency
a. Definition: prices reflect all information, both public and
private
b. Studies show this is WRONG! if this was right, would not be
able to make money with insider trading
c. Allocative efficiency
iv. Lessons of Market Efficiency
1. Markets have no memory (ex: wait for the market to bounce back
does not make sense)
2. Trust market prices (ex: stocks as undervaluedhow do you tell?)
3. Market prices tell a lot about performance (look to prices of bonds)
4. No financial illusions (people think management has secret good
news)
5. Cant do better than the market

SIDE-BAR: Mutual Funds vs. Index Funds
INDEX FUND Example: Suppose that you invest $100,000 for your retirement. Lets suppose you
can get 8% return for your stocks and there are no transaction costs. Your investment, after 30
years, would have grown to be compounded every year ($ 1,060,000).
MUTUAL FUND: Lets say you invest in a mutual fund that has a 2% fee (2% are paid in fees to
mutual fund). How much do you have after 30 years? You only get 6% return, and end up with
($500, 743). You lose HALF the return!


IV. The Registration Process: The Basics for the Public Offering
a. The Offering: What is it?
i. Different Kinds
1. Private Offering: best kind of offering
a. Section 4(2): provides an exemption from registration if you
are offering a private offering (much cheaper)
b. Typically bestowed to: insurance companies, pension plans, or
high-level officers/directors of the company (do not need
protection of securities laws)
2. Rights Offering
a. Selling shares (or bonds) not to the general public, but to a
subset: existing shareholders only
b. Common method for companies that are not yet public
i. Advantage: often cheaper than public offerings (note:
underwriters still involved); do not have to worry
about pricing the security appropriately because the
money was just going to the shareholders anyways
ii. Disadvantage of other offerings: setting the price
offered appropriately
1) If set too low: dont get enough money
2) If set too high: the offer may not sell
a. Securities laws mandate that only one
price can be set
b. Problem does not exist with rights
offerings
c. Typically will enter into a standby agreement with
investment banker (i.e. underwriter) where the underwriter
agrees to purchase any of the shares that are not purchased
3. Public Underwritten Offerings
a. When a company issues shares to the public for the first time
with the use of an underwriter
i. Often issued by smaller, younger companies seeking
capital to expand, but can also be done by large
privately-owned companies looking to become
publicly traded
b. Glass-Steagall Act was repealed to allow banks to combine
with investment banks
ii. Risks of the Offering
1. Price risk: who bears the risk if the price of the security falls during
the offering?
2. Cant be sold: who bears the risk of the security cant be sold?
3. Liability risks: who gets the risk of liability?

b. Ways of Issuing Securities: Approaches
i. Approach #1: Firm Underwriting
1. Underwriter purchases the offering, buys it, and then re-sells it
2. Underwriter agrees to take the risk on that he wont be able to sell the
shares! are compensated highly by taking this risk
3. Typical use:
a. Group of underwriters (underwriting syndicate) acts together
under the leadership of a managing underwriter who
negotiates with the issuer, arranges the issuance, etc.
b. Each member of the syndicate agrees to purchase a specified
percentage of the total offering and its profit or liability is
based on that percentage
ii. Approach #2: Best Efforts Underwriting
1. Underwriter doesnt purchase the securities, but uses best efforts to
sell the securities! typically used by smaller underwriters unwilling
to risk buying the offered securities
2. Various clauses that aid:
a. All or none clause: sales are just tentative; wont go through
until all of the securities (amount listed in registration
statement) will go through
b. Minimum percentage
3. Disadvantages:
a. Bad signal to the market; indicates that the issuer couldnt get
one of the investment banks to buy the capital (can expect a
lower price as a result)
b. Insider lock-ups: insiders may flip their shares quickly (says
insiders are not confident about the stock)
i. Managing underwriter can approve earlier resells by
the insiders
iii. Approach #3: OLD-FASHIONED Underwriting
1. The issuer directly offers its securities to the public and the
underwriter (acting as an insurer) agrees to purchase from the issuer
any securities not purchased by the public! paid a fee for assuming
the insurance risk
2. Typically used in rights offerings when companies give existing
shareholders the right to purchase additional shares

! Note: Green Shoe Option: agreement with underwriters may include over-allotmentallows
UW to buy additional shares from the issuer if demand outstrips the initial offering supplygives
the managing UW the means to stabilize the post-offering price by first over-selling the offering by
up to 15% and then, if necessary, buying back the oversold shares so as to buttress the post-offering
market price and prevent it from falling below the offering price.

c. Documents Used and the Participants
i. Documents
1. Letter of intent: agreement between the lead underwriter and the
issuer describing what the issuer proposes to do
a. Not binding nor generally enforceable! only way it can be if
it describes the various expenses the issuer will reimburse to
the underwriter if the issuance does not go forward
b. People generally comply with it
c. No price for the offering
2. Once the letter intent is signed, then the underwriter starts doing
preparations for the offering! contacts other underwriters to see if
they are interested in the underwriting syndicate
a. Wants to share the potential risks and benefits of the offering
(could be 5, 10, or 20 investment banks that participate)
b. Formal understandings among the members of the syndicate
are embodied in an agreement among the underwriters
(finalized just before RS becomes effective)
i. Imposes joint liability for selling expenses
3. At the same time, registration statement and prospectus will be filed
a. Prospectus: distributed to people who might participate in the
offering (other underwriters) as well as potential investors
b. Registration statement: describes the offering and the issuer;
RS filed with SEC; prospectus becomes principal selling
documentsubject to careful review
4. Fees and price: managing underwriter will get a large fee for
managing the issueother fees that non-managing underwriters will
get (other broker-dealers who actively sell the securities will get
another fee)
a. Selling dealers agreement: sets for the rights and obligations
of the dealers, including their agreement to sell the securities
at the public offering price; finalized just before offering
begins
b. Underwriting agreement: normally signed the day before the
securities start to be sold; has to have the price in it
(agreement between the issuers and underwriters)
i. Includes an over-allotment optionallows
underwriters to buy additional shares from the issuer if
demand exceeds original shares offered
ii. Participants
1. Managing underwriter: bears the risk of reviewing the registration
statement for accuracy; investigates the issuer
2. Underwriting syndicate: group of underwriters who help in selling
the securities
a. Note: largest fee goes to the sellers who actually market the
offering

ISSUERS! UNDERWRITERS! PARTICIPATING DEALERS !
INVESTORS/PURCHASERS

d. Providing Compensation
i. Both the underwriters and the selected dealers agree to sell the securities to
the public at a fixed public offering price
1. Difference between that price and the amount received by the issuer is
known as: gross spread
2. May range in size from a fraction of 1 to 10% or more of the public
offering price depending on a number of factors:
a. Characteristics of the security
b. Risk to the underwriters
c. Amount of selling effort required
d. Costs of distributing the security
ii. The spread is normally composed of three parts:
1. The management fee for the managing underwriters
2. The underwriting compensation received by the underwriters
3. Selling concession received for any securities sold to the public by
any broker-dealer participating in the distribution (set in advance by
the managing underwritermay be as high as 60-65% of the spread
depending on the effort)


e. Pricing the Offering
i. Studies show that underwriters typically underprice IPOs initially, to ensure
the issuer clears and to create profit opportunities for the first IPO purchasers,
typically institutional investors and other favored customers of the
underwriters
1. Why underprice?
a. Less risk for the underwriterworried the issue wont sell
b. Wanting to rip off own company for personal interest
i. Ex: having 2 IPOs and want the other one to sell
c. Issuer wants the investor to make money so that you can count
on the same investors ! in effect, bribing the investors to
invest with you again
d. There are more lawsuits when the price goes down, so people
will tend to sue in these instances! if the price goes up, then
this is a way to avoid liability
i. Ex: Google tried to get priced at an auction: way to
avoid potential to avoid under-pricing
ii. Long term, however, IPOs are systematically overpriced (more pronounced
for best efforts underwritings than firm commitment underwritings)
1. Note: DO NOT MAKE MUCH MONEY WITH IPOs

f. Shifting Liability: Contracting to Reduce Risk
i. Anti-Flipping Clauses
1. Prevent people from re-selling immediately after purchasing shares
2. All flips must be uniformfor all classes
3. Will penalize the dealers and underwriters! creates incentives to the
underwriter to place the shares with investors who are likely to hold
them for an extended period of time
Typical Way of Providing Compensation to the Various Participants:
" Lets suppose the public offering price is $10
" The price to the underwriter is $9
" The gross profit to the underwriters is $1! of that $1, may have 20 cents for the fee to the
managing underwriter
" There is now 80 cents/share left: profit to the underwriters if they sell to the public
o If they do not want to directly sell to the public and hire dealers instead: would give 50
cents/share of the dealer concession
o 30 cents/share is left to the underwriters
" NOTE: It is possible that the managing underwriter (if he does everything himself) could get
the full $1, but if the dealer shared the deal, then he would get 50 cents/share
o The MAJOR AMOUNT goes to the dealer who actually has to do the work

ii. Limiting Diluting Clauses
1. Want to limit the shares sold to prevent dilution (ex: think rare
Picasso example)
iii. Indemnification Clauses
1. Section 11: makes underwriters for any false statements in the
registration materials! incentive for underwriters to do due diligence
2. SEC looks down on indemnification
a. Need to have boilerplate in registration statement if
underwriters can be indemnified
b. Want underwriters to face liability
iv. Comfort Letters
1. Certification from an accountant or lawyer that statements are correct;
can take underwriters off the hook
2. If the underwriter gets sued, can sue the accountant for reimbursement
if the underwriter relied on what the accountant said
a. In effect, similar to an indemnification clause
b. Accountant/lawyer will be compensated for accepting that
kind of risk
g. The Problems of Fixed Price Offerings
i. The cornerstone of the underwriting syndicate is that all members must sell
the offered security to the public at a fixed price that is stated in the
registration statement and accompanying prospectus! various laws in place
to ensure this takes place (any deviation from prospectus would make the
prospectus misleading)
ii. However, there are 3 common circumventions:
1. Designated order technique: distributing underwriter agrees to
provide the purchasing institutions with a set amount of free goods or
research services as a form of discount for the institutions large
purchase
2. Overtrade/swap: institutional buyer swaps securities in its portfolio
for the security being distributed by the underwriter (indirect
discount)
3. Re-capture: institution will form a broker-dealer subsidiary that can
purchase the offered securities, then re-sells and reaps the selling
spread


V. Initial Public Offering: Contents of the Registration Statement
a. What is the Registration Statement?
i. Generally
1. Prospectus: informational pamphlet given to potential investors
2. Registration statement: carefully prepared set of documents,
including the prospectus which is filed with the SEC prior to an initial
public offering
ii. The Applicable Sections
1. Section 7A mandates what has to go in the registration statement
a. In addition, 10(a) specifies which of the Schedule A
information must be included in the prospectus
2. Forms S-1, S-3, etc! differ in how much information is required to
be included in the registration statement
3. Section 6A: who has to sign the registration statement
a. Different officers: board, Comptroller, CEO all have to sign
means you are on the hook if there are defects in the
registration statement
4. Section 8: when the registration becomes effective
5. Section 5: big-deal section
a. Cant start making any sales of securities until the registration
statement becomes effective = once the SEC has approved it
(not when it is filed)
iii. WHAT NEEDS TO BE IN THE REGISTRATION STATEMENT (ALL 4)
1. Information about the registrant and issuer
2. Distribution of the securities and proceeds
3. Nature of the securities: preferred stock, etc.
4. Various exhibits and undertakings
a. Articles of incorporation
b. Bylaws
c. Opinions the lawyers provide
d. Underwriting agreement
e. Financial statements (Regulation S-X)
f. Non-Financial statements (Regulation S-K) ! MD&A
(projections)
i. PROSPECTUS: # 1 -3
ii. REGISTRATION STATEMENT: # 1- 4
5. Anything deemed material!

b. The Forms of the Registration Statement
i. Generally
1. SEC has used its rulemaking authority to create forms (sets of
disclosure instructions) for the registration statement
2. The forms contemplate a 2-part filing:
i. Part I! prospectus
ii. Part II! technical information, undertakings,
signatures, and exhibits
ii. Form S-1
1. Contains the most detailed set of instructions and must be used by
companies that do not qualify to use Form S-3:
a. Non-reporting issuers (making an IPO)
b. Small or unseasoned reporting issuers
2. For reporting issues that are current in their Exchange Act filings for
the past year, the prospectus may incorporate company-related
information by reference to other SEC filings (hyperlinks as well)
iii. Form S-3
1. Available to large, seasoned companies if:
a. Have been reporting companies for at least 1 year and,
b. If they are offering new equity securities, that have a public
float of at least $75 million (seasoned reporting issuers)
i. Public float = aggregate market value of the
companys equity stock held by public investors who
are not insiders or affiliates of the company
2. In addition, issuers with less than $75 million public float can qualify
for S-3 if they have:
a. Been a reporting company for 12 months
b. Common stock is listed on a national stock exchange
c. Issue more than 1/3 of their public float in a 12-month period
3. If you get a rating for investment grade rating, then you also qualify
iv. The Integrated Disclosure System
1. Companies that have already issued some securities are required to
file various reports (10K, 10Q)
2. Regulation S-X and S-K: information in the registration statement and
periodic reports now the same
3. Basic Disclosures
a. Annual report: issued to shareholders (requirements under S-
K and S-X)
b. Form 10-K: submitted each year to SEC
c. Form 10-Q: submitted each quarter to SEC
d. Form 8-K: if something major happens to the corporation
i. Note: all subject to S-K and S-X requirements
ii. Basic information package: BIP
c. The Plain English Requirement
i. Issuers must use plain English in writing the prospectus!


SEC Forms

" Form S-1: Used by first-time issuers for IPOsbasic, long-form RS. Unseasoned
Exchange Act reporting companies also use Form S-1 for their at-the-market offerings of
common stock. With respect to such unseasoned issuers, generally incorporation by
reference is permitted.
" Form S-3: Generally available to reporting companies under the 1934 Act for a 12-month
periodbut, for issuer primary offerings of common stock, eligible issuers, prior to any
such offering, also must have a public float of at least $75 million.
o Companies meeting these requirements are allowed the fullest incorporation by
reference of 1934 Act documents into the RS.
o They need only include the transaction-specific description of the offering in the
prospectus, as well as events that occurred after the filing of the most recent 1934
Act report incorporated by reference
" Form 8-K: Form that requires disclosure of specified events that may arise in the period
between 1934 Act periodic filings. Disclosure of events OTHER than those called for by the
firm is permissive rather than mandatory
" Form 10-K: Form used by issuers which are Exchange Act reporting companies for filing
their annual reports pursuant to 13 or 15(d) of the Exchange Act. Info required to be
included in the Form 10-K includes, for example, audited financial statements, and a
meaningful description of the issuers business, operations, and financial conditions
What 5 Mandates:
! You cannot make
offers until a
registration statement
is filed with the SEC
( 5(b))
! Once the
registration statement
is filed, you cannot
use a prospectus
unless it contains
specified information
( 5(b)(1))
! You cannot make
sales or deliveries
until the registration
statement becomes
effective and then
deliveries must be
accompanied by a
formal prospectus (
5(a), 5(b)(2)

" Form 10-Q: The form used by issuers which are Exchange Act reporting companies for the
filing of quarterly reports pursuant to 14 or 15(d) of the 1934 Act.

VI. The Registration Process for Initial Public Offerings
a. Generally
i. In registration! refers to the entire registration period, commencing at
least from the time the issuer reaches an understanding with the managing
underwriter prior to the filing of the registration statement to the time that the
prospectus delivery requirements terminate in the post-effective period
ii. SECTION 5 covers three basic time periods for making offers and sales of
securities during a registered offering:
1. Pre-filing period: time period before a registration statement is filed
a. Beginning when the issuer prepares for the offering and is in
registration
b. Marking and sale of any security is prohibited
2. Waiting period: time period between filing and effectiveness
a. After a registration statement is filed with the SEC but before
it becomes effective
b. Sales are still prohibited, and written marketing efforts are
strictly regulated
3. Post-effective period: after registration statement becomes effective
a. After the registration statement becomes effective, until the
offering ends and the issuer no longer is in registration
b. Sales are permitted, but written marketing continues to be
regulatedpurchasers must receive a prospectus that complies
with statutory and SEC specifications


iii. SEC Review of the Registration Statement
1. Effectiveness
a. The registration statement becomes effective automatically 20
days after its filing (or 20 days after any amendment) unless
the SEC determines an earlier effective date! 8(a)
i. Have to file a delaying amendment to amend the RS
and thus postpone the 20-day period for automatic
effectiveness until the SEC exercises its discretion to
accelerate the effective date
2. SEC Review
a. After the filing, the SEC has 10 days to review the registration
statement for incomplete or misleading disclosure and give
notice of its intent to issue a refusal order that keeps the
registration statement from becoming effective ! 8(b)
b. Acceleration is at the agencys discretion ( 8(a))! under the
SEC current policy of selective review, the agency reviews all
initial registrations and grants acceleration of effectiveness
only after it completes its review
3. SEC Oversight
a. Before or after effectiveness, the SEC can begin a non-public
administrative investigation ! 8(e)
b. After the registration statement becomes effective, the SEC
can issue a stop order if it notices a defect in disclosure !
8(d)
c. No offering activities are permitted when a refusal or stop
order is outstanding or the SEC is investigating a registration
statement ! 5(c)
b. Issuer Classifications
i. Non-reporting issuers
1. Companies that are not required to file under the Exchange Act
2. Such as issuers going public in an IPO
ii. Unseasoned issuers
1. Someone who has not stepped into the public and equity markets
beforerequired to file Exchange Act reports, but are not eligible for
S-3
2. Typically use S-1 (do not qualify as S-3)
iii. Seasoned reporting issuers
1. Reporting companies that are eligible for S-3 (more than 1 year since
going public and $75 million public float)
2. Requirements:
a. Been through the registration process before or
b. Have $10 million dollars of assets and more than 500
shareholders
c. Selling on a national exchange
iv. Well-known seasoned issuers
1. Issuers represent the largest amount of capital raised and traded in the
US public capital markets
2. Because WKSIs have such a wide following by market participants,
institutional investors and the media, the SEC has determined that
these issuers merit the greatest flexibility in regard to their activities
during the public offering process
3. Requirements:
a. Issuer is required to comply with SEA
b. Issuer must meet requirements of S3 (3 requirements for
seasoned)
c. Must not be an ineligible issuer
d. Issuer must satisfy S-3 AND have either:
i. Have common stock of at least $ 700 million or
ii. Have issued at least $ 1 billion of non-convertible
securities in registered public offerings for cash in the
last 3 years
Side-Bar: Blank-Check Companies
" Normally, all the information (registrant info, distribution, etc.) would describe a lot
but, what if the company just forms the company and then says it will decide what to do
later?
o Investors do not know what the are purchasing
" Section 419: money of such an issuance of stock goes into an escrow account; the
company will decide what it wants to do with the company; investors have opt-out
rights
" Deters from blank-check companies


FILING EFFECTIVE
Pre-Filing Period Waiting Period Post-Effective Period
After the company is in
registration but before the
registration statement is filed
(quiet period)
After the registration statement
is filed, but before it becomes
effective
After the registration statement
becomes effective, until the
distribution ends and the issuer
is no longer in registration
5(a)(1): no sales
5(a)(2): no deliveries
5(b)(1): no prospectus unless it complies with 10
5(b)(2): no delivery, unless
accompanied by 10(a)
prospectus
5(c): no offers

c. Pre-Filing Period
i. Overview
1. Time period before a registration statement is filed
2. Two statutory prohibitions apply:
a. Section 5(a): No sales or deliveries
i. Prohibits the sales of unregistered securities or
deliveries for the purposes of sale
ii. Section 2(a)(3): sale! includes every contract of
sale or disposition of a security for value
b. Section 5(c): No offers
i. Prohibits any person to offer to sell or offer to buy
any security unless a registration statement has been
filed
1) Prohibitions apply to situations where sold in
interstate commerce (very broad)
2) Section 4(a)(1): provisions of Section 5 shall
not apply to transactions other than the issuer,
underwriter, or dealer! why normal secondary
sales do not have to file a registration statement
ii. Definition of offer is tricky
1) Section 2(a)(3): defines offers to sell and
offers to buy to include every attempt or
offer to dispose of, or solicitation of an offer to
buy, a security or interest in security for value
a. VERY BROAD
b. Cannot use oral selling efforts
c. Can only OFFER to UWa final sale
remains prohibited by 5(a)(1)
3. The Traditional Rules: The Road to the Safe Harbor
a. Can see there is a tension between requirements in the pre-
filing period (trying to put a cap on sale efforts to focus on
prospectus) but also the benefits of allowing the company to
provide information to the markettherefore:
i. Traditional rule: can provide normal information, but
could not provide information that was designed
specifically to sell the security (vague)
b. In Re Carl M. Loeb, Rhoades, & Company (SEC 1959):
underwriters issued a press release that turned out to not be
correct; SEC said it violated Section 5(c) because it was part
of the sales company (not coming from the issuer itself and
not normal information in the course of business)
i. After the Loeb case, in order to decrease the risk of
what is in the normal course of business, SEC passed
the safe harbors
c. SEC has created safe harbors for certain types of
communications; however a communication that falls outside
the safe harbor must still be assessed by the triple
considerations of:
i. Whether the communication was by someone other
than an issuer, underwriter, or dealer
ii. Conditioned the market AND
iii. Was made when the issuer was in registration
1) See below for in registration

ii. The Safe Harbor Rules: Permitted Activities

NOTE: Section 5 applies if there is a jurisdictional nexusface-to-face do not apply
(underwriters are excluded from the interstate commerce rule)

1. Rule 163 (for WKSIs)
a. Can pretty much do what they want
i. Can make any ORAL OFFERS during registration
ii. Can make written offers that bear a legend (warning
to read the prospectus and where to get the prospectus)
and filed with the SEC
b. Limits:
i. Only the issuer can make these statements
ii. Written offers must be filed with the SEC
2. Rule 163A
a. No liability for statements made more than 30 days before
filing of the registration statement: statements are safe if made
more than 30 days before filing
b. Limits on how far this can go:
i. Statements can only be made by the issuer (not the
underwriters or dealers)
ii. Issuer must issue statements in ordinary course of
business
iii. Cannot refer to the issue
iv. Efforts to stop re-distribution during the 30 days (ex:
news paper reports)
3. Rule 135
a. Permits the issuer (or any person acting on behalf of them) to
reveal the existence of an upcoming issue (bare-bones
information: amount/type of security to be offered and the
timing/manner/purpose of the offering)
i. Must state that the offering will be by prospectus but
cannot identify prospective underwriters or the
expected offering price
1) Announcement would satisfy the rule that the
offering will be made only be means of a
prospectus
ii. Ex: If Google is about to issue stock, it is important
that the market get that type of news
b. Transactions between market professionals
4. Rule 168 (for reporting issuers only)
a. Can provide:
i. Actual business information (even forward-looking)
ii. Not just information about what happened in the past,
but what might happen in the future
b. Limits:
i. Only the issuer
ii. Same type of information as before: can only release
this factual business information only if in the past it
has released this kind of information
iii. Cannot provide information about the offer
5. Rule 169 (for non-reporting issuers only)
a. All issuers can continue to release factual business
information to their customers, suppliers, and other non-
investors
b. Limits are the same as Rule 168
i. Only the issuer
ii. Can only release factual business information as in the
pastno forward looking information
1) Ex: cannot issue glossier reports (ex: 4-14)
2) Ex: Answering an unsolicited question about
factual info is OK, but the analysis that
responds to a question with a prediction rather
than factual information (ex: 4-15)
iii. No information about the offer
6. Rule 137
a. Analysts can continue to create their research reportsreports
are OK from a non-participating broker
b. Requirements:
i. Cannot participate in the offering
ii. Cannot be paid by a participant
iii. Has to be in the regular course of business (normal
kind of report that is regularly published)
1) Note: Problem 4-11! if report of the issuer is
still affecting the market, non-participating
broker cannot join underwriting syndicate
7. Rule 138: Reporting issuers only
a. Even if you are a participant in the offering, the person who is
a participant in a debt offering can continue to publish
information on the kinds of securities that are NOT being
offered
b. Reporting issuers who have existing securities being traded
want the market to continue to proceed with the info it already
has
i. Already issued reports in the regular course of business
8. Rule 139: Reporting issuers only
a. Participating broker can offer information about securities
being offered
b. Limitations
i. Has to be S-3 reporting company
ii. Participant must have already issued regular reports
about the issuer
9. Preliminary Negotiations
a. Section 2(a)(3): exempts from the definition of offer
preliminary negotiations or agreements between the issuer and
the underwriters, or among underwriters, that will be in privity
with the issuer

Pre-Filing Period Waiting Period Post-Effective
Period
Rule 135: offering announcements (issuer)
! Allows notice of public offering
! Limiting information: issuer, security, amount offered, timing, manner,
and purpose
! Applicable only to issuer; cannot name underwriter

Rule 163: free writing prospectus (WKSIs)
! Permits written communications, if they contain
legend and are filed with SEC
! Available ONLY to WKSIs in the pre-filing
period: not available to others

Rule 163A: pre-registration communications
(issuer)
! Permits communications 30+ days before filing
RS, cannot reference offering
! Creates safe harbors for issuers, but not UWs or
other participants

Rule 168: regular communications (reporting issuers)
! Permits factual info and SEC filed FLI, provided timing, manner, and form are similar to past
releases, may not refere offering
! Applies to domestic reporting issuers but not UWs and other participants
Rule 169: regular communications (by new issuers)
! Permits regularly released factual info but not FLI, may not reference offering, must be intended
to only non-investors
! Applies only to non-reporting issuers, but not UWs or other participants
Rule 137: non-participant research reports
! A firm not participating may publish regular research reports (note requirements)
Rule 138: research reports on issuers non-offered securities (reporting issuers)
! Any securities firm may publish research reports about the issuers common stock, if the offering
is for fixed-income securities (vice-versa)
Rule 139: participant research reports (reporting issuers)
! A securities firm that participates in the distribution may issue company-specific research reports
about an issuer if the report appears in a regular publication and the issuer is a WKSI/reporting
company

SO IF YOU DO NOT MEET ANY OF THE SAFE HARBORS, THEN YOU GO TO THE
TRADITIONAL ANALYSIS: IN REGISTRATION and CONDITION THE MARKET
In Registration: hasnt been defined by SEC but at least starts from the period of when the letter of
intent is signed with the UW
i. Conditioned the market AND
ii. Was made when the issuer was in registration
1) Means the entire process of registration, at least
from the time the issuer reaches an
understanding with broker-dealer, which is to
act as a managing underwriter until the
completion of the offering and the period of 40
or 90 days during which dealers must deliver a
prospectus
! Example 6, Securities Act Release No. 3844: Can do what you want to do before intent to file
registration

d. Waiting Period
i. Overview: after filing, but before the registration becomes effective
1. SEC is required to respond to a registration statement within 20 days
a. Since this is a short time period, the SEC can choose to:
i. Refusal order (Section 8B): where the SEC says that
on the face of this registration statement, it is obvious
that it cannot become effective due to defects
ii. Stop order (Section 8D): during the waiting period or
even the post-effective period, could be an order that
requires the issuer to stop any activity for selling the
securities
iii. Accounting order: order calling for a proceed for
accountingmight be a disgorgement if something
was amiss (during post-effective period)
iv. Cease and desist orders: SEC telling the company to
stop
v. Acceleration situations (Section 8A): SEC can
accelerate the effective date
vi. Letters of comment: usually SEC will just ask
registrant to fix various sections in this way
b. Note: anytime the issuer amends the statement, the 20 day
starts again
i. If the issuer wants immediate effectiveness or wants to
amend the registration statement, then needs a pricing
amendment
ii. Price will always be left out because the issuer cannot
know market conditions (do not need 20 days)
2. Two prohibitions:
a. Section 5(a): no sales or deliveries
i. To avoid creating a binding K, any solicitation of
interest must be phrased not to constitute a common-
law offer capable of acceptance
ii. Usual practice: collecting indications of interest from
investors, but not to take checks or otherwise accept
orders
b. Section 5(b)(1): No prospectuses
i. It is unlawful to use any prospectus unless it complies
with Section 10
1) Section 2(a)(10): prospectus! any
communication written or by radio or
television, which offers any security for sale
a. Thus, any selling effort in writing
ii. Permitted Activities

168, 169, 137, 138, 139 still apply in the waiting period!

1. Normal reporting documents (10Q, 8K)
a. Limited ability to distribute information! anything other than
the prospectus is a free writing
b. Rule 134: can have identifying documents that talk about the
issuance
i. Any communication that complies with Rule 134 is
deemed not a prospectus (134(e))
ii. ID statements: brief statements that identify potential
prospectus recipients
1) Rule 134(d): expressions of interest
(communications not deemed to be a
prospectus)
2) Have to have a disclaimer that one cannot
accept the offer until the registration statement
becomes effective
3) Differs from Rule 135: includes issuer info,
info about security, issuers business, price of
security, use of proceeds, ID of sender, names
of UWs, schedule, and nature of the offering
a. Can also seek investor interest, if
accompanied by a preliminary
prospectus and includes statement that
interest is not binding, but fully
recovable (ex: interest cards)
2. Oral Offers
a. 5(b)(1) prohibition relates only to WRITTEN offers
b. Oral selling efforts are subject only to the anti-fraud
provisions of the securities laws
i. No prospectus with oral offersjust with written
offers
3. Preliminary Prospectus
a. 10(b) authorizes the SEC to permit the use during the
waiting period of an incomplete prospectus
b. Rule 430: allows a preliminary prospectus, which is filed with
the registration statement and includes a marginal legend that
cautions the securities cannot be sold yet
i. Preliminary prospectus contains information found in
the final prospectus but omits information on the
offering price and the underwriting
ii. Also called red herring prospectus
4. Tombstone Ads
a. Section 2(a)(10): exempts from the definition of prospectus
advertisements (typically made in the financial press with a
tombstone like border) that state from whom a 10 prospectus
may be obtained and then do NO MORE than ID the security,
state its price, and name the underwriters who will execute
orders
5. Road shows (Rule 433(d)(8))

A communication that is provided or transmitted simultaneously with a road show and is provided
or transmitted in a manner designed to make the communication available only as part of the road
show and not separately is deemed to be part of the road show. Therefore, if the road show is not a
written communication, such a simultaneous communication (even if it would otherwise be a
graphic communication or other written communication) is also deemed not to be written.

a. Where a representative of the issuer or the underwriter go out
and talk with institutional investors about the issuance
i. Any real time presentation to a live audience in a
closed room it is not written communication! if
delayed in any way (re-distributed later), then free
writing
ii. If you are just watching, can write everything you see
and re-broadcast
1) Any PP and written handout is fine as long as
live: as soon as you delay it, then you have
FWP and must comply
2) Even if live, if you start transmitting to a
BROAD audience! then becomes FWP
b. Audience specific: Can record roadshows but only to
sophisticated investors (if to everyone, then violation of
Section 5)
c. Always ask: is it live? Who is your intended audience?

6. Websites if an Issuer
a. Analysts can keep providing reports
b. Treacherous to have links to other analysts reports
i. Envelope rule: when you are talking about whether
something on the web and links, then thought to be in
the same envelope
1) Only time you can get in trouble is if the
information considered to be PP contradicts
what is in your registration statement
c. Has to satisfy 433
d. Chat sessions as oral communications?

iii. Free Writing Prospectus: Rule 433
1. What is it?
a. Various free writings that would otherwise violate Section
5(c)
b. Any written or graphic communication by the issuer or on its
behalf (including web postings, mass e-mails, etc.) that
satisfies certain conditions:
i. Consistent information and legend
1) Rule 433(c)(1): May include information
beyond that found in the prospectus, but must
not conflict with information in the RS or other
filings
2) Rule 433(c)(2): Must have a legend that
advises the investor to read the preliminary
prospectus and how to obtain a copy
ii. Filing
1) Must be filed with the SEC on or before the
day first used (Rule 433(d))
2) Exceptions:
a. Previously filed information
b. Non-final terms
c. Offerings of asset-backed securities
d. Business combination
iii. Prospectus accompaniment
1) For offerings by non-reporting and unseasoned
issuers, must be accompanied by the
preliminary prospectus (Rule 433(b)(2))
a. In an IPO: must include price range
b. If electronic: preliminary prospectus
must be hyperlinked
2) Requirement eliminated for WKSIs
2. Media
a. NO PAYMENT: Any media company that covers the
security and interviews the issuer can do so as long as the
issuer or other offering participants has not compensated the
media! WHERE INFORMATION (ORAL OR WRITTEN)
ABOUT AN ISSUER OR AN OFFERING IS PROIDED BY
THE ISSUER OR ANY OFFERING PARTICIPANT TO
THE MEDIA AND THE INFORMATION IS PUBLISHED
(= OFFER TO SELL), IT WILL BE CONSIDERED A FREE
WRITING PROSPECTUS
i. The story is treated as a free writing prospectus, but the
issuer or offering participants must file the story and
do not need legend within 4 days of become aware of
that (Rule 433(f))
1) Can get around filing the story if you just send
the SEC all the same information you sent the
reporter
ii. Do not have to file the preliminary prospectus
b. PAYMENT: If the issuer or those acting on its behalf
prepares, pays, or gives consideration for the preparation of a
communication in the media! have to do 433
c. By contrast, if the communication is not so prepared or paid
for (ex: issuer simply grants an interview to a journalist who
writes about it)Rule 433(f) does not require that there be
delivery of a statutory prospectus and provides that the filing
requirements of the Rules are satisfied if copy filed within 4
days
3. NOTE: Employees qualify as potential investorsso free writings
sent to employees must still be filed
4. Solicitation with selling dealers is ok during the waiting period

5. What Each Issuer Must Do:
Issuer What They Must Do
WKSIs -Can basically do whatever they want
-Can provide any written material during the waiting period
-When combined with 163, can do whatever they want at any
time
Seasoned issuers -Can use free writing prospectuses and no requirement of a
preliminary prospectus (hyperlink to prospectus)
-Only requirement is that there is a legend on the free writing
material that refers to the SEC website; various filing
requirements
Unseasoned issuer -Have to have delivered Section 10 preliminary prospectus that
complies with normal rules

iv. SEC Power of Acceleration
1. Under Section 8(a) of the Securities Act, a registration statement
becomes effective the 20
th
day after it is filed with the SEC


e. Post-Effective Period: After the Registration Statement Becomes Effective
i. Generally
1. Once the SEC says the statement is ready and the issuer files a pricing
amendment and acceleration letter, the SEC will allow acceleration
and the registration statement becomes effective
a. File a substantive pricing amendment
b. Seek acceleration from SEC
c. Statement can then become effective
2. Note exception: Section 430A
a. The registration can become effective without any price if you
are issuing securities for cash
b. Within 2 days, you have to add the price once it becomes
effective
c. Price can be changed and actual size of the offering can be
changed up to 20%
3. Access Equals Delivery
a. As part of its effort to modernize the offering process, the SEC
has adopted an access equals delivery framework to the
Section 5 prospectus delivery requirement in the post-effective
period
i. Under this approach, investors are presumed to have
access to the Internet
ii. Accordingly, issuers and other offering participants,
such as dealers, may satisfy the prospectus delivery
requirement by posting the final statutory
prospectus on a website
Applicable Rules in the Waiting Period
" Rule 134
" Rule 135: offering announcement
" Rule 164/433: free writing
" Rule 168: regular communications (by reporting issuers)
" Rule 169: regular communications (new issuers)
" Rule 405/433: road shows
" Rule 433: press interviews

Applicable Rules in the
Post-Effective Period:
" Rule 134
" Rule 153:
prospectus
delivery for
securities firms
" Rules 164/433:
free writing and
press interviews
" Rule 168: regular
communications
(by reporting
issuers)
" Rule 169: regular
communications
(by new issers)
" Rule 172:
prospectus
delivery
" Rule 173: notice of
registration

iii. Also notification rules requiring dealers/underwriters
to provide a notice to purchasers that their purchase
was pursuant to a RS
ii. Two Prohibitions
1. Section 5(b)(1): no prospectus, unless final prospectus
a. Section 5(b)(1) prohibits use of any prospectus unless it
complies with 10
2. Section 5(b)(2): no deliveries, unless accompanied by final
prospectus
a. Section 5(b)(2) prohibits any deliveries of securities, unless
accompanied (or preceded) by a 10(a) prospectus
b. The final prospectus includes all the information normally
contained in a preliminary prospectus plus information on the
offering price, underwriter compensation, amount of the
proceeds, and other information that is dependent on the
offering price, such as terms of any conversion feature of the
security
iii. Permitted Offerings: Prospectus Delivery
1. Prospectus Delivery Requirements
a. Preliminary Prospectus
i. Doesnt have any pricing information
ii. Under Section 15(c)(2)(8): must deliver preliminary
prospectus at least 48 hours in advance of
confirmation of purchase of securities (no requirement
to see prospectus)! only for underwriters
b. Final Prospectus (preliminary prospectus + pricing)
i. Section 5(b)(1): dissemination of prospectus that
complies with 10(a)
ii. Traditional rule: when you distributed the security, had
to also physically distribute the final prospectus
1) However! NO LONGER REQUIRED
a. In 2005, SEC liberated much of the
capital formation process from the
necessity of distribution participants
physically delivering a final prospectus
to investors
1) Rules 172 and 173: do not
have to require the final
prospectus for deliveries of
securities
2) Does not apply to free writing
b. Rule 172(a): exempting from Section
5(b)(1) written confirmations (as well as
notices of allocations that will be made
from a registered offering)! brokers,
dealers, and UW
1) NOTE: Absent this exemption,
a written confirmation or
-Term sheet: piece
of paper that
supplements a
preliminary
prospectus
(contains price) to
turn it into a final
prospectus
-TERM SHEET +
PRELIMINARY =
FINAL
PROSPECTUS

allocation notice would have
to be accompanied or preceded
by a final prospectus
2) Now, brokers can confirm sale
or inform an investor of the
exact number of shares they
will be allocated in a distribute
security WITHOUT having to
provide the final prospectus
3) Rule 15(c)(2)-(8)(b) still
applies: requires that UW
deliver a preliminary
prospectus to buyers at least 2
days before sending
confirmation of the sale !
gives the buyers to see the
information
c. Rule 172(b): relaxation of prospectus
delivery requirements when the
registered securities are to be
transferred! brokers, dealers, UW, and
issuer
1) Section 5(b)(2)s obligation to
forward a final prospectus
when delivering securities is
satisfied if the issuer has filed
with the SEC a prospectus
meeting 10(a)
d. Rule 173: issuers, dealers, and UWs
have to provide notice (which includes
price) saying that the registration
statement has been filed with the SEC
within 2 days (and you are not sending
final prospectus)
1) Failure to comply with 173
does not prevent the dealer or
UW from invoking 172 when
confirming a sale or
transporting the security (non-
participating dealer or no
longer participating UW)

e. Free Writing! Rule 433 also applies
here!
1) Permits the use of free writing
prospectus at any time after
RS! Rule 433 broadly
authorizes distribution
New Rules in the Post-
Effective Period:
! No physical delivery of
final prospectus (price +
preliminary prospectus)
! 172 + 173 in combination:
no delivery of final prospectus
but notice and a link is
required within 2 days after
the completion of the sale (or
a copy of final prospectus)
! Preliminary prospectus
must still be sent 2 days
before confirmation of the
sale
! 433 free writing rules still
apply: still send preliminary,
legend, and file
participants to use a free
writing prospectus during both
the waiting and post-effective
period
2) Still need to satisfy Rule 433s
legend and filing requirements
OR
3) Section 10(a) permits free
writing in the post-effective
period conditioned only upon
free writing material being
accompanied or preceded by a
final prospectus
c. Duration of the Requirements under Section 5
i. Issuer: Requirements apply as long as they are still
selling securities to the public! once totally sold out,
obligation ends
1) Note: sale to the underwriter does not end the
issuers duty to deliver notices for sales
ii. Dealers and Underwriters: until the underwriter
allotment and dealer allotments are sold, this ends the
requirements (Section 4(3)(C))
1) Once the issuance is sold out and the
underwriters/dealers have sold allotments, there
are no further requirements with respect to free
writing and delivery
d. Re-Sales
i. NON-REPORTING COMPANY and RE-SALES:
1) Do not have to send the prospectus 25 days
after the offering date if listed on NASDAQ,
national exchange, or authorized (Rule 174(d))

ii. REPORTING COMPANY and RE-SALES! Rule
174: if a reporting company, do not need additional
delivery requirements (does not have to provide final
prospectus)
1) Dealer need not deliver a prospectus on any re-
sale of a security of an issuer who is a reporting
company
2) Dealer that is not a UW or otherwise selling an
allotment or subscription is completely relieved
of the need to make available the 40 or 90-day
period specified in 4(3) if the issuer, prior to
filing the registration statement, was a reporting
company
iii. Trading on a National Exchange
1) Reporting Company: Rule 153: no prospectus
delivery requirement if traded on a national
exchange, or if there is a disciplinary
proceeding against the issuer

2. BROKERS + SOLICITATION! Unsolicited offerings: Broker-
Dealer Exemption
a. Section 4(4): do not have to comply with the securities laws if
you process an unsolicited order (do not have to send
preliminary prospectus at all)! however, if you solicit an
order, then the securities laws apply if you solicit an order
then the securities laws apply!
b. Note: the selling customer must find its own exemption

The Rules of the Post-Effective Period

Rule What? Who?
172(a) Exempts written confirmation
from 5(b)(1) (final
prospectus) delivery
Broker, dealers, and UWs
172(b) Exempts transfers from
delivery
Issuers, brokers/dealers, and
UWs
173 If not exempt by 4(3) or 174
issuers, UW, dealers must
provide a final prospectus
within 2 days of the completion
of the sale OR give notice sale
was made pursuant to a RS
Issuers, broker/dealers, and
UW
153 Excuses need for a dealer to
deliver a prospectus to a dealer
in correction with the delivery
of securities sold through an
exchange (dealer-dealer
transaction)
Dealers (or broker/dealers) only
174 A dealer that is not an UW is
relieved of requirement to
make a final prospectus
available under 40-90 day
requirement (4(3)) if the issuer,
prior to filing its registration
statement was a reporting
company
Reporting company only
174(d) If listed on NASDAQ, no final
prospectus requirement for
dealers if:
1) Non-reporting
2) More than 25 days after
offering
If:
Non-reporting company only
! National exchange OR
NASDAQ
Section 4(3) Non-reporting company, NOT
on stock exchange and NOT on
NASDAQ, must send final
prospectus:
! 40 days for previous issuer
from the later of the sales
began OR RS effective or
! 90 days if IPO
Non-reporting company
Rule 15(c)(2)(8) Must deliver preliminary
prospectus 48 hours before
confirmation of sale
Only for underwriters
4(4): Broker exemption Do not have to comply with the
securities laws if you process
an unsolicited order (do not
have to send preliminary
prospectus at all)
Brokers

SUMMARY

Pre-Filing Period Waiting Period Post-Effective Period
Non-Reporting Issuers
Permitted:
-Preliminary negotiations and
agreements with underwriters
-Issuer announcements of
proposed offerings (135)
-Issuer communications 30+
days before offering (163 A)
-Regularly released info (169)
Permitted:
-Oral offers
-Preliminary negotiations and
agreements with underwriters
-Tombstone ads/ID statements,
requests for interest (134)
-Preliminary prospectus (10b,
430)
-Free writing prospectus
(164/433)
Permitted:
-Oral offers
-Distribution and sale of
securities
-Tombstone ads, ID statements,
requests for interest
-Free writing communications
-Final prospectus
Required:
-Distribution of preliminary
prospectus (15-c2-8)
Required:
-Written confirmations for
sales from allotment and dealer
sales (172, 174)
-Filing by issuer of final
prospectus (153, 172)
-Delivery of notice within 2
days after sale
WKSI (same as non-reporting issuers except):
Permitted:
-Oral offers (163)
-Free writing prospectus need
not be accompanied/preceded
by any prospectus (163)
Permitted:
-Free writing prospectus need
not be accompanied/preceded
by preliminary prospectus
(433)
Permitted:
-Free writing communications
need not be
accompanied/preceded by
preliminary prospectus (433)
-Regularly released, forward-
looking information (168)
Required:
-Delivery of notice only applies
to sales from allotment (174)


VII. Shelf Registration
a. What is it?
i. Permits registration of securities for later sale if the registrant undertakes to
file a post-effective amendment disclosing any fundamental change in the
information set forth in the original registration statement
1. Why shelf registration?
a. Situations exist in which the issuer will find it desirable to
register securities that either it does not presently intend to
offer for sale or that it is presently offered for salebut no
reason to believe that a sale is not likely to occur
b. Past Dictates Need
i. It used to be that you could not register securities
immediatelyas a result:
1) Put UW and investors at a disadvantage
compared to foreign investors and UW
2) Distributions of bonds was troublesome when
interest fluctuated: after a change in interest
rates during the long registration process, a
distribution might not be as good as it would
have been during the beginning of the process
a. Cause issuers to start going abroad to
sell their issuancesreduced
opportunities for US UW
b. So, the SEC expanded shelf
registration!
ii. To ensure that investors have access to current information, Rule 415
imposes a variety of conditions on delayed or continuous offerings: allows
the company to register in advance and wait to distribute the securities!
company can wait for appropriate market conditions to issue the security
b. Requirements
i. Issuer is (USUALLY) a Form S-3 Company
1. Company is reporting under the 1934 Act for at least 12 months
2. Company has investment grade securities or $75 million afloat
ii. Have to promise to update: Item 512(a) of Regulation S-K
1. Fundamental changes: have to promise to update fundamental
changes (415(a)(3))
a. Must amend to reflect any change in factors or events after RS
became effective which individually or in the aggregate
represent a fundamental change in the RS information
b. Include any material information with respect to the
plan/distribution or material change in information from RS
2. Amend the RS: For a shelf registration, must amend the entire RS
every year (Item 512(a)
3. Must provide financial statements: Under 10(a)(3), when a
prospectus is used more than 9 months after the effective date of the
RS, none of the information of the prospectus can be more than 16
months stale! means that as part of the RS, must provide financial
statements
a. NOTE: Even without requirements, there is an incentive to
update because of anti-fraud provisions!
4. Limits on stock: Cannot register more securities than can be
reasonably sold in 2 years (WKSI = 3 years)
a. If selling equity at market price on a market, then there is a
limit on the amount of equity that you can sell:
i. If it is voting stock, then 10% of market value of
voting stock is the limit
ii. 10% limit must be sold through a UW
iii. Must list the UW in the original registration materials
5. Time limit: 3 years for WKSI and S-3 (ALL)
iii. The Need for Universal Registration
1. Originally, shelf registration was not really used for sales of equity,
but mostly for sales of bonds
a. Market overhang effect
i. Suppose there are 1 million shares of outstanding stock
and you do a shelf registration for the additional
100,000 shareswhat does this do to the price of the
existing shares?
ii. It will cause the price to drop
iii. Market overhang effect: happens because existing
shareholders know that at some point another 10% will
be added to the existing shares and thus, their shares
will be diluted within the next year or two! prospect
of dilution of shares would cause the prices to decline
2. To solve the market overhang effect, SEC introduced universal
registration: can register both equity and bonds but do not have to
tell anyone what you are going to issue

c. Rule 415 in its Entirety
i. Rule 415(a)(1)(i): If you wanted to sell securities not from the issuer but from
one of the CEOs of the issuersallowed you to register the securities from
the CEO in the shelf registration process (or control person)
ii. Rule 415(a)(1)(x): as long as you qualify for Form S3, can register securities
for the shelf (even though you dont know exactly what kind of securities you
want to sell)
iii. Rule 415(a)(3): registrant must undertake to file post-effective amendments
to the RS for the purpose of preserving the currency of the disclosures in its
RS and prospectus
1. What Rule 415 requires: requires you file post-effective amendments
at the time you are actually going to sell to reflect recent changes in
your business
2. Item 512(a)(1)(i): registrant must file a post-effective amendment
covering any prospectus required by Section 10(a)(3)
iv. Rule 415(a)(1)(iv): allowed to register for securities that can be converted
later
v. The sale of the bonds: use 415(a)(x)
vi. S-1 Company: 415(a)(1)(i)-(ix) (but would have to verify the type and
amount you have to sell so would be inadvisable)

415(a)(1)(i) Securities which are to be offered or sold solely by or on behalf of a
person or persons other than the registrant, a subsidiary of the
registrant, or a person of which the registrant is a subsidiary (ex: can
register for shelf shares from CEO or CP)
415(a)(1)(ii) Securities which are to be offered and sold pursuant to a dividend or
interest reinvestment plan or an employee benefit plan of the
registrant
415(a)(1)(iii) Securities which are to be issue upon the exercise of outstanding
options, warrants, or rights
415(a)(1)(iv) Securities which are to be issued upon conversion of other
outstanding securities
415(a)(1)(v) Securities which are pledged as collateral
415(a)(1)(vj) Securities which are registered on Form F-6
415(a)(1)(vii) Mortgage related securities including such securities as mortgage
backed and mortgage participation or pass through certificates
415(a)(1)(viii) Securities which are issued in connection with business combination
transactions
415(a)(1)(ix) Securities the offering of which will be commenced promptly, will
be made on a continuous basis and may continue for a period in
excess of 30 days from the date of initial effectiveness
415(a)(1)(x) Securities registered on Form S-3 or Form F-3 which are to be
offered and sold on an immediate, continuous or delayed basis by or
on behalf of the registrant, a majority-owned subsidiary of the
registrant or a person of which the registrant is a majority-owned
subsidiary OR
415(a)(1)(xi) Shares of common stock which are to be offered and sold on a
delayed or continuous basis by or on behalf of the registrant


d. Automatic Shelf Registration for WKSIs
i. Form S-3: WKSIs are automatically deemed to have conducted shelf
registration
ii. WKSIs can file S3 registration statements and these immediately become
effective without waiting and are automatic shelf registrations
1. This is valid for 3 years (expanded for 3 years)
iii. Can register for an unspecified about of securities
iv. Rule 430(B): WKSI can omit information unknown at the time of the filing:
including, whether filing is primary/secondary, names of selling securities
holders, etc.
v. Any post-effective amendments are automatically effective

S-1: have to verify TYPE and AMOUNT! would lose all benefits to shelf if we do this
S-3: have to verify just the TYPE
WKSI: do not have to verify anything

e. Issues Arising Under Shelf Registration
i. Underwriters are going to be shut out of this
1. Will only require 1 UW to take bids on the offering when the market
is right
2. Especially with respect to bonds, do not even need the UW at all
3. Prices are low because there is no time to do any work
ii. Underwriting commissions are drastically reduced
1. How can they do the necessarily due diligence?
a. They cant, making this riskierUW only becomes part of the
team 1 day or so before the issue is sold
b. However, this isnt as much of a problem because of S-3
companies
i. They are reporting companies with lots of information
already out there
1) SEC understands that information from the UW
due diligence doesnt help that much

f. Underwriters and Shelf Registration
i. Underwriters in a shelf registration will have slightly less diligence thats due
than a normal underwriting: Rule 176
1. Ex: WorldCom: investors are relying on the UW to have done due
diligenceso if they dont, they can still be on the hook

VIII. Duties to Update Materials Already Filed: Updating the RS
a. The Misleading Prospectus
i. SEC v. Manor Homes (2
nd
Circuit): imposes strict liability if the prospectus
contains materially false and misleading statements with respect to
information required by 10(a) to be disclosed
1. Subject to criticism: by imposing strict liability, thereby nullifies the
due diligence and reasonable care defenses contained in Section 11
and 12(a)(2) of the Securities Act
2. For this reason, a number of courts have limited its holding to apply
only where the prospectus or a like document is egregiously
incomplete or permeated with misrepresentations
3. Other courts, in analogous situations, have completely rejected
Manors rationale
ii. Views on Manor Nursing: What View is Correct?
1. To hold that a Section 5 violation occurs whenever a security is sold
pursuant to a materially false or misleading statement in the RS or
like document (prospectus) would negate the defenses that would
otherwise be available! such a result would not be one intended by
Congress
2. However, confining Manor Nursing to just issuers of registered
offeringsthen the decision may be viewed as compatible with
Section 11
a. Because Section 11 holds issuers strictly liable for the making
materially false or misleading statement in a RS, the Manor
rationale may be viewed as consistent with the framework of
Section 11, provided that it is limited only to issuers

SEC v. Manor Nursing Centers (2
nd
Cir. 1975): Case focuses on several activities that occurred
after the RS for Manor became effectiveeach was inconsistent with the representations made both
in the RS and prospectus. For example: no escrow account, didnt sell out all shares, didnt return
the funds, shares were sold for other than cash, some that participated received extra
compensation! all violations of the RS. Court finds there was a violation of the prospectus
delivery requirement. Although the RS is not required to be amended, the prospectus should be.
Plaintiffs could not sue under Section 11: allows you only to sue if the RS is false at the time it was
effective (at the time, it was true). Court states that a false prospectus is the equivalent of no
prospectusviolation of 5(b)(2). Ordered rescission of the sales.
! NOTE: Law of the 2
nd
Circuit still holds: If you distribute a prospectus that is false, even if you
have due diligence defenses, those do not apply and you are absolutely liable

! Material addition: no change to RS
-Ex: adding the fact that there was a fire (not materially changing 900,000)
! Substitution: then have to change the RS
-Ex: a type that was wrong at the time it was made

b. Refusal Orders and Stop Orders
i. The weakest weapon the SEC can use is to issue a refusal order under
Section 8(b) barring a filed RS from becoming effective
1. This is of limited use because it reaches only patent misstatements
and omissions in a filed registration statement
2. Does not apply where the misleading feature of the RS is not apparent
on its facedoes not apply where the misleading character can only
be discerned from conditions or facts not appearing in the RS
3. Requires the SEC gives notice of a hearing within 10 days of the
statements filing
4. Must be issued before RS becomes effective
ii. Due to the time constraints, the SEC frequently proceeds under Section 8(d)
to issue a stop order that acts if it appears at any time that the RS includes
any untrue statement of a material fact
1. Broader than simply correcting material omissions and misstatements
that appear in the RS
2. Serves as notice to the investing public that the SEC has found the
issuers RS disclosures to be materially misleading
a. Power exists ONLY if the RS was misleading when it became
effective! DOES NOT REACH POST-EFFECTIVE
DEVELOPMENTS
! A stop order proceeding is available at any timethere are limitations however on the issuance
of a refusal order.

c. Post-Effective Amendments
i. The 20-day period for the SEC to make the RS effective starts all over again
with a post-effective amendment! however, the SEC may, on request,
shorten this period and declare the statement effective.
ii. Correcting Material Inaccuracy
1. The RS can be amended after it has become effective and under
Section 8(c): a post-effective amendment shall become effective on
such date as the Commission may determine
a. Purpose of the post-effective amendment: correct any material
inaccuracy appearing in the RS when it became effective
2. When do you have to amend the RS?
a. Basic rule that the SEC would like the courts to apply: any
material change that exists in the registration statement needs
to be corrected by an amended registration statement
b. The rule the courts apply is different:
i. Distinction between material ADDED on top of pre-
existing material: requires NO amendment
ii. This is in contrast to material that was in the
registration statement and needs to be changed
requires amendment
1) This is hard to determine in practice
2) NOTE: ONLY A DUTY TO AMEND
THINGS BEFORE EFFECTIVENESS
iii. Supplementing Information that is Permitted to be Omitted Prior to
Effectiveness
1. Rule 430A: permits a RS to become effective despite omission of
certain price-related information
a. Rules 430B and 430C permit a good deal of information to be
omitted from the base prospectus for shelf registration
offerings
b. Each of these rules requires filing the omitted information
with the SEC
2. Rule 424(b)(2): within 2 business days of the sale, the information
permitted to be omitted by Rule 430B in connection with a shelf
registration must be filed by the SEC
a. Such a post-effective amendment to the prospectus becomes
part of the RS
iv. Withdrawal of the Registration Statement
1. Can only withdraw the RS if the SEC lets you withdraw it
a. Rule 477: provides that an issuer may withdraw its RS or any
amendment or exhibit thereto; the withdrawal is effective
immediately, unless the SEC objects within 15 days to the
objection being filed
b. SEC has successfully denied the withdrawal of a RS in cases
where:
i. The registrant has sold securities covered by the
deficient RS
ii. Where the registrant had previously sold securities in
the same class
2. Reasons behind this:
a. If you were allowed to immediately withdraw the statement,
the market would never know of the fraudyou could come
around and offer securities again
b. SEC may forbid you from doing this: stop order,
publication! want to publicize the bad acts so the market will
be warned

IX. Trading Practice Rules, International Offerings, and State Laws
a. The Trading Practice Rules
i. Purchases During a Distribution
1. Generally
a. SEC has promulgated Rules 100-102 in Regulation M to
prevent those involved in the distribution of securities from
artificially conditioning the market for securities to facilitate
the distribution
i. Regulation M forbids each participant in a distribution
from bidding or purchasing securities that because of
their terms, can affect the price of the securities being
distributed
ii. Exempts purchases by securities firms participating as
UW, if the issuer is a large public company and its
securities are actively traded
b. Rules 101 and 102 of Regulation M
i. Rule 102: Prohibits manipulative purchases during a
restrictive period for issuers
ii. Rule 101: Prohibits manipulative purchases during a
restrict period for underwriters
1) Also covers affiliated purchasersthose who
are acting in concert with any of the broker-
dealers, underwriters, etc. in the distribution or
who control or under the control of the
distribution participant
2) Note: does not mean it is always forbidden!
there is a restricted period where you cannot do
this
2. Time Constraints
a. In general, the prohibition against bids and purchasers during
a distribution applies until the regulated person has completed
his participation in the distribution
b. When do 101 and 102s prohibitions of bids commence?
i. Both Rule 101 and 102 prohibit purchases and bids
only during the restricted period: either 1 business
day or 5 business days before the security price is
determined (UW) or when the person becomes a
distribution participant (DEALERS)
1) What matters is when the PRICE IS SET
ii. Choice between these 2 numbers is guided by the
average daily trading value of the security to be
distributed and different commencement time applies
to IPOs and acquisitions
3. Determining the Length of the Restrictive Period

Type of Company Restrictive Period
Small Companies --For smaller companies, the period is LONGER: period
starts 5 days before the person doing the manipulation is
supposed to start offering
--Small company = ATV < $100,000 and float < $25 million
--Since the trading volume is smaller and its smaller, need
more time
--Possible to effect price for a longer period
Large Companies If there is more than $100,000/day of trading volume (ATV),
and a float of more than $25 million, cannot do it within a
day of when the price was set or when the person starts
participating in the offering
! Can do it MORE than a day, but cannot do it within a day
! Ex: Large companies can buy their own securities 3 days
before because of ECMH
HUGE Companies --If you have a $1 million ATV and a float of more than $150
million, then there are NO restrictions
Exceptions 1) Broker is allowed to respond to an unsolicited purchase of
securities in the secondary market: stabilizing purchases may
smooth out supply-demand imbalances during an offering
(must be for preventing a decline in the market price)
2) There is an exemption for companies with a huge trading
volume
-If you have a $1 million ATV and a float of more
than $150 million, then there are NO restrictions
3) 101(b)(7): de minimum exception
--Can make tiny purchases if small compared to ATV (less
than 2%)
4) Investment grade bonds that are not convertible: 101(c)(2)

RULE: Under 101 or 102, have 5 day or 1 day restrictive period unless you are a broker
responding to an unsolicited purchase in the secondary market OR you are a huge company!

ii. Stabilization
1. Definition
a. Stabilization is the pegging or fixing of a securitys market
price through purchases or bids for the limited purpose of
preventing or retarding a decline in the securitys price during
a public offering for the security
i. Only allowed in certain situations
b. Seen as beneficial in connection with the securitys
distribution (see below)
2. What is allowed under the stabilization rules
a. Propping up the price up to the price the offering is set for
(ex: if the RM say that you are going to sell the shares at
$25/share, you can prop up the price for $25/share
i. Cannot go above the price that was the max market
price right before the offering price was set
1) Ex: cannot set the price at $30 with a market
price at $25 and try to move the price up to
$35limited by either the higher of the asking
price that you seek in registration materials or
the highest market price before you sell
securities
Rule 104(e): cannot attempt to stabilize or purchase securities at a price HIGHER than the
lower of the issuer price or the last independent price before you actually priced the security
! Price must be the lower of:
1) The ISSUER PRICE at time of filing of pricing amendment or
2) The last independent price before pricing

b. Why is this kind of stabilization allowed?
i. This is due to political pressures by the UW: UW
afraid they cant sell the securities
1) Want to prop the price up so they are not stuck
with unsold securities
2) Reduces the risk for underwriters and improves
liquidity
ii. Encourages people to purchase securities
3. Example: Lets suppose you price the securities on a certain day at
$30/share. At the time that you priced the securities, the market price
of these securities in the after-market was $25/share.
a. The highest price you are able to bid on these if affiliated with
the offering: $25/share
b. Cannot bid $30/share: that would be a scam
i. This is a danger when you have a small float
ii. No one knows about the securities being traded
iii. Possibility of real manipulation
b. The International Public Offering
i. Generally
1. SEC has always had really broad authority to regulate international
offeringsbased on the power of the interstate commerce
a. As long as any check that goes through US banking system or
phone call through US telephone lines or mail is enough of a
nexus so that the SEC can regulate those transactions
2. However, the SEC has not elected to use the full regulatory authority
that it could
a. In the 1960s, US companies would go over to foreign
countries to sell their securitiesdid this because the
regulatory barriers were lower there
i. A lot of companies would sell their securities there and
in Europe
b. In 1964, the SEC stated its view that 5 does not reach
offerings to foreign investors if the offering is reasonably
designed to come to rest abroad and not be redistributed to US
nationals
ii. Accommodating Foreign Issuers Offerings in the US
1. Generally
a. There are about 500 foreign companies that are listed on
NYSE and NASDAQ
b. Formerly required that all foreign companies comply with
regulations! however, this became tough given the
discrepancy between home and US accounting standards
i. Therefore, the SEC has lightened the foreign issuers
disclosure burdens
2. Therefore, SEC allows foreign companies to sell securities in the US
as long as they comply with their home country requirements (ex:
accounting standards)
a. Differences:
i. Permit use of foreign issuers accounting standards
ii. Have options to not disclose certain categories of
information that are mandatory for all US companies,
such as revenues and earnings by lines of business
iii. Have much lower disclosure obligations with respect
to management compensation and their material
transactions with the issuer than customarily apply to
U.S. issuers
b. Why would the SEC allow these foreign companies to get
away with providing potentially less information than
domestic companies?
i. This is political: we have to return the favor to let our
companies sell there
ii. Want US investors to have access to these securities
iii. US stock exchanges get prestige and fees when they
convince foreign companies to list security on their
exchange
3. Foreign issuer forms:
a. There are separate forms that foreign issuers use in the US:
Forms F-1, F-2, and F-3 parallel the hierarchy of registration
forms available to US issuers (S-1, S-2, and S-3)
b. The Forms

Forms What They Are
F-3 --Limited to issuers who have been reporting companies for 1 year
--All filings timely during 12 months preceding filing of RS
--Limited to issuers whose worldwide float of common stock held
by non-affiliates is equal to $75 million
--Cant have failed to pay a dividend, interest, debt, etc since the
end of the fiscal year since when it has filed certified financial
statements (not in S-3)
F2 An issuer may qualify for F-2 if:
EITHER it has been a reporting company for 3 years OR
It has a worldwide float of common stock of at least $75M AND
has filed at least one annual report under the 34 Act reporting rules.
F1 Firms that cannot file F-2 or F-3


iii. Offerings Outside the United States
1. Generally
a. Even before Regulation S, SEC would make a distinction
between where the securities are only being sold in the foreign
country or it is a scam where they are just going to be selling
in the US or there is a possibility that relatively quickly, the
securities will find their way into the US
b. Regulation S codifies the SEC position that Securities Act
registration is required only for securities transactions within
the United States! a territorial principle
i. Specifies 2 safe harbors for off-shore transactions
deemed to be within the US
1) Issuer offerings: Rule 903
2) Re-sales: Rule 904
ii. Regulation S has complicated the rules for
distinguishing benign issuances in the foreign country
from the kinds that are just offerings in the US
(thereby requiring protection for US investors)
2. Regulation S
a. The Sections
i. Section 901: If a sale occurs outside of the US, then
do NOT have to do requirements of 1933 Act
1) But, which kinds of issuances are deemed to
have occurred outside the US?
2) Even if an issuance of a security is deemed to
have occurred outside of the US, still have anti-
fraud rules and damages
ii. Section 902: Definitions
1) Off-shore transaction: one in which no offer is
made to a person in the United States
2) US persons: broadly defined to include
persons who reside in the US, businesses
organized in the US, and entities or accounts
managed by US persons
iii. Section 903: Safe-harbors
1) To satisfy the SEC safe harbors, both issuer
offerings and investor re-sales
a. Must be made in an offshore
transaction and
b. May not involve directed selling efforts
in the US
1) Directed selling efforts: refers
to activities that might
condition the US market and
raise investor interest for any
of the offered securities
2) Excluded from the prohibition
are legal notices required by
US or foreign authorities,
tombstone ads, stock
quotations, and press
conferences
2) Issuer offerings under 903 and investor re-sales
904 must satisfy additionally flow-back
safeguards
3. The Safe-Harbors: Rule 903
a. Generally
i. Specifies 3 categories of permissible issuer offerings
ii. Each category reflects the likelihood of flowback into
the US and the level of public information available to
US investors about the offered securities
iii. The categories turn on
1) The kind of issuer (foreign or domestic)
2) The type of securities offered (equity or
debt)
3) The level of US information about the issuer
(reporting or non-reporting)
4) The level of existing market interest in the
US and
5) The market in which the offering is made
b. General Restrictions: The safe harbors are not applicable if the
offer or sale is made to a person in the US OR if there are
selling efforts within the US! ONLY NEED to be an
OFFSHORE TO GET THE SAFE HARBOR
i. OFF-SHORE TRANSACTION: 903(a)(1): safe
harbors only apply if off-shore transaction
1) The buyer has to be OUTSIDE the US or the
transaction has to be on a foreign exchange to
qualify as an off-shore transaction
2) As long as the transaction is off-shore, can still
sell to a US citizeneven if the person is just
on vacation in a foreign country
ii. NO DIRECTED SELLING EFFORTS: No directed
selling efforts in the United States (902)
1) Cannot condition the market
a. Ex: could not put ads in the US to tell of
offering in NZ
2) Special exception for tombstone ads: can put
a tombstone ad in a publication in another
country even if some of the copies publication
will find its way to US (even if 20% would find
its way to US)
a. Up to 20% can find its way back into
the US
b. Has to be a FOREIGN reporting
company
iii. NO SALES TO US PEOPLE: Residency
Requirements
1) Ex: If stationed in France and indefinitely
working there, even if you are US citizen, you
are NOT a US person
2) Focused on whether you are selling to people in
the US (i.e. residents)
iv. Additional requirements based on what category your
issuance is in

4. The Three Categories of Safe Harbors
a. Category I: Low Risk Offerings (903(B)(1))
i. Restrictions
1) Offshore transaction: buyer has to be outside
the US
2) No directed selling effort in the US
ii. Classifications
1) Foreign issuer with no substantial US interest
a. Substantial US interest for equity: if
principal market is within US, then that
doesnt qualify OR if no greater than
20% of trades occur in US and no other
country has more than 55%, then that is
not deemed to be qualifying
b. Substantial US interest for debt: 1) 1f
held by more than 1 million U.S.
people, or 2) More than 300 holders in
US and greater than $1 billion in debt
held by US people OR 3) More than
20% held by US people
1) Debt allowed because it is
only to sophisticated
institutional investors (doesnt
require protections of the
securities laws)
2) Offering of a foreign issuer, of debt or equity,
directed at 1 non-US country
a. This means not incorporated in US
1) Ex: IF we have a British
company incorporated in
Britain that is issuing shares
only in Britain or in France,
then that qualifies
2) Idea is that there is less danger
of flow-back into the US if we
have this issuance directed to
that country
3) Look just to the place of
incorporation
3) Offering of US issuer, of debt, directed at 1
non-US country
4) Backed by FFC and foreign government
a. Idea is that these are safe because they
are backed by another countrydebit
issued in another country (sophisticated
purchasers)
5) Employee benefit from another country
b. Category 2: Mid-Risk Offerings; Cannot be In Category I
(903(B)(2)
i. Generally
1) Requirements
1. Substantial US market interest AND
2. Not directed into just 1 foreign country
ii. Category 2 vs. Category 1
1. More danger of flow-back into the US
(hence more restrictions)
2. This is not a huge worry because for the
reporting companies there are lots of
information in the USalready an efficient
market price for the companies securities
and the market already knows a lot
3. More danger that securities will quickly
find their way back into the US and people
in the US will buy them and need
information from securities regulatory
regime
iii. Restrictions
1. All general restrictions (off-shore + directed
selling) and Category I restrictions
2. Cannot sell to US people (residents of US)
for 40 days after the date of closing of the
offer
3. Re-sales are forbidden as well
4. Offering restrictions
a. Each distributor, underwriter or
dealer, has to have in writing to sell
in compliance with these rules
b. Offering materials all have to state
that the securities have NOT been
registered in US and cannot be sold
in US or to US people (both in and
outside US)
c. There are circumstances where they
could be sold to US peoplesubject
to various exemptions
d. Each distributor has to send a sheet
as part of the confirmation of the
sale, telling the buyer they are
subject to various restrictions as
well (notice indicating all the
restrictions)
iv. Classes
1. Debt Offering by Reporting Issuer (Foreign
or Domestic)
a. Reporting foreign issuer: foreign
companies who have stock sold in
secondary market in UShave to
report in US pursuant to 1934 Act
even though based in foreign
country
2. Debt Offering by Non-Reporting Foreign
Issuer
3. Equity by Reporting Foreign Issuer
4. NOTE: All reporting companies (whether
domestic or foreign) are in Category II
except domestic issuers of equity
a. A foreign issuer is in Category II
ONLY IF substantial US market
interest and not directed to just 1
foreign country
b. If there was no US market interest
or just directed to 1 foreign country,
then in category I (regardless if debt
or equity or reporting or not)

HOW YOU TELL FOREIGN/DOMESTIC ISSUER: based on place of incorporation

c. Category III: High-Risk Offerings
i. Restrictions
1) All the restrictions in Category II
2) Debt
a. Same as category II
b. During the 40-day period, get a
temporary certificate of ownershipdo
not own the debt until 40 days are over
c. Makes it impossible to flip something in
the 40 days
d. Get a real certificate if you certify that
you are a non-US person
3) Equity
a. Same as category II
b. 40-day period extends to 1 year
c. During this 1-year period, purchaser has
to certify they are a non-US person
d. Distributor cannot take the word of the
purchaser
e. Purchaser has to sign a contract that
they wont re-sell
f. Purchaser has to agree not to flip the
securities during the 1-year period
4) Classes
a. All equity offerings by domestic
issuers, reporting or not
b. Debt offerings by non-reporting
domestic issuer (unless to single non-
US country)
c. Equity by non-reporting foreign issuers
(unless no US market intent or to just 1
country)


Category I Category II Category III
General Restrictions
(Applicable to all 3)
! Off-shore transaction
! No directed selling efforts
! No sales to US people
Classes ! Foreign issuer with ! Debt Offering by ! All equity offerings
no substantial US
interest
! Offering of a
foreign issuer, of debt
or equity, directed at 1
non-US country
! Offering of US
issuer, of debt, directed
at 1 non-US country
! Backed by FFC and
foreign government
! Employee benefit
from another country

Reporting Issuer
(Foreign or Domestic)
! Debt Offering by
Non-Reporting
Foreign Issuer
! Equity by
Reporting Foreign
Issuer
! NOTE: All
reporting companies
(whether domestic or
foreign) are in
Category II except
domestic issuers of
equity

by domestic issuers,
reporting or not
! Debt offerings by
non-reporting domestic
issuer (unless to single
non-US country)
! Equity by non-
reporting foreign
issuers (unless no US
market intent or to just
1 country)

Restrictions ! Offshore
transaction: buyer has
to be outside the US
! No directed selling
effort in the US

! All general
restrictions
! Cannot sell to US
people (residents of
US) for 40 days after
the date of closing of
the offer
! Re-sales are
forbidden as well

! Offering restrictions
1--Each distributor,
underwriter or dealer,
has to have in writing
to sell in compliance
with these rules
2--Offering materials
all have to state that
the securities have
NOT been registered
in US and cannot be
sold in US or to US
people (both in and
outside US)
3--There are
circumstances where
they could be sold to
US peoplesubject to
various exemptions
4--Each distributor has
to send a sheet as part
! All the restrictions
in Category II
! Debt:
-Same as category II
-During the 40-day
period, get a temporary
certificate of
ownershipdo not
own the debt until 40
days are over
-Makes it impossible
to flip something in the
40 days
-Get a real certificate if
you certify that you are
a non-US person

! Equity
-Same as category II
-40-day period extends
to 1 year
-During this 1-year
period, purchaser has
to certify they are a
non-US person
-Distributor cannot
take the word of the
purchaser
-Purchaser has to sign
a contract that they
wont re-sell
of the confirmation of
the sale, telling the
buyer they are subject
to various restrictions
as well (notice
indicating all the
restrictions)

-Purchaser has to agree
not to flip the
securities during the 1-
year period




CATEGORY ONE
903(b)(1)
CATEGORY TWO
903(b)(2)
CATEGORY THREE
903(b)(3)
Qualifications
1) A foreign issuer that has
no substantial US
market interest or
2) A foreign issuer
engaged in an overseas
directed offering
1) A domestic or foreign
issuer offering debt
2) A foreign issuer subject
to Exchange acts
reporting requirements
offering equity
! All reporting issuers except
domestic issuers of equity
All other issuers
Conditions to be Satisfied
Must be:
a) Offshore transaction
b) No directed selling efforts
Offering Restrictions
None During the distribution compliance period
--Each distributor agrees to conform efforts to requirements of
safe harbor; and
--All offering material will bear a legend that securities have not
been registered in the US without either registration or an
exemption
Transaction Restrictions
None During the 40-day distribution
compliance period,
--No sales to the account of a
US person and
--Distributors during the period
must inform securities
professionals of the restrictions
on sale to US persons
Distribution compliance period
is 40 days for debt and 1 year
for equity
--Purchasers during period
must certify they are not a US
person and are not purchasing
for such person
--Equity purchasers during
restricted period must agree
only to sell with Regulation S,
a 33 Act registration or an
exemption therein
--Shares of domestic issuer
must bear legend barring
transfer except in accordance
with Regulation S
--All issuers must have a
provision in bylaws or
elsewhere empowering it to bar
transfers not in accordance with
Regulation S

5. Press Conferences in Other Countries
a. Foreign Company Issuing Securities Pursuant to Regulation S
i. If a foreign country only sells securities in another
country and has a press conference, the US press can
be invited within certain conditions
ii. Rule 135(e):
1) Press conference must be off-shore
2) Offering not made solely in the US
3) Materials must have disclaimers
b. US Company Issuing Securities Pursuant to Regulation S
i. If a US company is selling securities in a foreign
country, it cannot have a foreign press conference and
invite US journalists
1) Rule 135 only applies to foreign journalists
2) The link between US and the issuer is much
greater if the issuer is a US company
ii. Tombstone ads, however, are OK under Rule 135(c)
for reporting companies
1) Note: 135 only applies to reporting
companiesnon-reporting would not have this
safe harbor
2) Tombstone ads for a foreign offering by a US
non-reporting company
a. If less than 20% of the circulation was
in the US, then not a directed selling
effort in the US
b. If a debt offering directed at a foreign
country:
1) No directed selling effort
2) There is a publication in
another country that finds up
to 20% circulation in the US,
then that is OK
c. SIDE-BAR: Where would you expect to get a higher price for
securities, at home or in France?
i. Tend to get higher price in US than in Francemore
market for securities
ii. All of Regulation S is designed to prevent people in
US from purchasing securitiescuts off potential
purchasers, making price lower in France
iii. Required for disclosure? NO
iv. Offerings Outside of Regulation S
1. If a transaction does not fit within Regulation S, can it escape
coverage by normal securities laws?
a. All Regulation S does is create a safe-harbor! should go to
background rules
i. In an effort to protect American investors and to
prevent this country from being employed as a base for
deceptive conduct in transactions abroad affecting
American or foreign investors, the US courts have
given broad extra-territorial application to the anti-
fraud provisions of the federal securities laws
b. Courts generally have applied Section 10(b) of the Exchange
Act to foreign transactions occurring abroad when fraudulent
conduct of material importance (ex: material misstatement) or
conduct integrally associated with fraud that directly caused
the Ps alleged damages IF the conduct took place in the US
i. KEY CONDUCT MUST BE IN UNITED STATES
ii. See Banque case
Europe and Overseas Commodity Traders v. Banque Paribas (2
nd
Cir. 1998): Carr, the sole
shareholder and agent of EOC, a Panamanian company with a mailing address in Monaco,
commenced discussions in London with Arida, a UK national, regarding a substantial investment
EOC would make through Arida. Carr then departed to FLhe approved the purchase by EOC of
shares from Arida. Carr, believing that Arida had lied to him, sued for fraud under Section
12(a)(1)alleging that Arida had sold a security in the US in violation of section 5. Court finds the
conduct was not enough to satisfy US JD: Conduct was not such as to have the effect of creating a
market for those securities in the US. Carrs presence here was entirely fortuitous and personal and
the actual purchaser of shares was an offshore corporation without a place of business here
! Really this is just a sale of securities that is a foreign sale and doesnt implicate the rationales
that would otherwise require registration

2. Offerings in Other Countries
a. Other countries have merit review
b. Systems differ
i. Japan: anyone can sell, the issue is getting listed on an
exchange! merit review by exchanges
ii. China: many government companies that are financed
1) Issue is getting the government to pick the
securities
3. State Securities Laws
a. In 1996, Congress preempted many state law regulations:
Section 18 of the SEA

X. Materiality
a. General
BALANCE THE
FOLLOWING:
Probability how likely
will the contingent even
occur?
v.
Magnitude how large
are the ramifications of
the contingent event? Is
it an important
corporate event?

The higher the
probability and the
larger the importance =
MATERIAL

i. To avoid information overload, want to reveal only material information
1. There has to be an independent duty to disclose
2. No fundamental requirement that all material information be
disclosed
ii. Disclosure duties come from:
1. Fraud law
2. Liability rules: 10-b-5, Section 11, etc.
3. RS requirements: Regulation S-K (SEC lists information that it
considers to be material)
4. Annual and quarterly reports have various reporting requirements
5. Rule 408: if other information is required (not specifically listed) to
make other submitted material not misleading, have a duty to disclose
a. NOTE: IF REGULATION REQUIRES INFORMATION,
THAT INFORMATION IS DEEMED MATERIAL
b. What is Materiality?
i. Substantial Likelihood Test
1. The definition of materiality under the federal securities laws, though
judge-made, has assumed the status of statutory language:
a. A fact is material if there is a substantial likelihood a
reasonable investor would consider it important in making a
securities related decision (TSC Industries v. Northway,
1976)
2. Who is a reasonable investor?
a. Reasonable investor does not necessarily mean sophisticated
b. Objective standard
i. Reasonable investors are usually concerned with how
much profit they get, not how profits are derived
ii. Relationship of Materiality and the Duty to Disclose
1. Duty relates to whether and when information must be disclosed;
materiality relates to what information must be disclosed
2. Thus, the first issue in any securities disclosure context is:
a. Is there a duty to disclose?
b. If so, is the information material?
3. Disclosure duties under the securities laws arise under 2 ways
a. SEC filing obligations
b. Duty of honesty:
i. Materially false statements
ii. Materially misleading statements
iii. Failure to correct materially false or misleading
statements
iv. Failure to update certain statements that have become
materially false or misleading
iii. Speculative Information
1. Generally
a. When information is relevant but it portends a future event
(ex: mergers): courts apply a special version of the substantial
likelihood test! the probability-magnitude test
b. Materiality will depend on balancing of both the indicated
probability that the event will occur and the anticipated
magnitude of the event in light of the totality of the company
activity (Basic v. Levinson)
2. The probability-magnitude test
a. Measures the current value of information that bears on a
future event by measuring the financial significance of the
event, discounted by the chances of it actually happening
b. Probability and Magnitude Factors (Basic v. Levinson)
i. Probability factors: interest upper level management is
taking in the matter (ex: board resolutions, talks with
underwriters, actual negotiations)
ii. Magnitude factors: size of the entities, premiums over
market value
c. Information about activities that suggest an event with
significant price ramifications might happen, even though the
probability of the event is low, may be material
i. Information is material if its expected value
(discounted by its uncertainty) indicates it would affect
investor behavior
ii. How to determine when merger negotiations become
material:


Not important Important
Certainty Maybe Material
No Certainty Not material Maybe


Basic Inc. v. Levinson (SCOTUS 1988): Combustion Engineering expressed interest in a possible
merger with Basic. Basic made 3 public statements denying that it was engaged in merger
negotiationsbut then agreed to merger. Ps are former Basic shareholders who sold their stock
after Basics first public denial and before suspension of tradingassert 10(b)(5) violation; in
reliance they sold their shares. Court find information to be material but Court adopts a
proportional test: materiality in the merger context depends on the probability that the transaction
will be consummated, and its significance to the issuer of the securities. Materiality depends on the
facts and thus is to be determined on a case-by-case basis.
! Footnote 17: No comment statements are the equivalent of silence! if not saying anything
about mergers, then do not independently have an affirmative duty to disclose the discussions:
SILENCE NOT ACTIONABLE AND NO COMMENT IS TREATED AS POLITE CORPORATE
SILENCE

! Silence is not actionable and no comment is treated as polite corporate silence
! Rumors: No need to correct false stories in the news media
! The duty to update, to the extent it exists, lasts only as long as the prior incorrect information
continues to effect prices in the market

3. Puffery
a. One kind of speculative information is an overstatement of
present circumstances, based on a hope that events will turn
out well! general statements of positive enthusiasm
b. Federal courts have been reluctant to treat optimistic
statements as misleading: puffery is not actionable
c. Eisenstadt and selling: Pro-Defendant Rule
i. When the company put itself up for sale and
represented that the auction process was going
smoothly, its optimism was not actionable since
everyone knows that someone trying to sell
something is going totalk on the bright side
ii. Mere sales puffery is not actionable under 10(b)(5)
d. There are studies that puffing does affect the price and fools a
legitimate amount of peoplehowever, still have this pro-
defendant rule

Eisenstadt v. Centel Corp. (7
th
Cir. 1997): Centel Corp announced it had 2 investment banking
firms assisting it in orchestrating its sale through a competitive auctionas a result, the stock rose
to $48/share. In the ensuing weeks, Centel and its investment bankers when they found out no one
wanted to buy themdespite this, Centel told the press that things were going smoothly even
though they had 7 really low bids (rejected all 7 and negotiated sale to a non-bidder). A class action
was initiated on behalf of those who purchased in reliance on the press announcements. Court
dismisses the case: mere sales puffery is not actionable under 10(b)(5). Court doubts that non-
specific representations that an auction price is going well can influence the reasonable investor
everyone knows that people try to skew things to the bright side when they are trying to sell! There
was an expectation of puffing. Even if one person was susceptible to puffery the market would still
reflect the most accurate price.

iv. Materiality in Context: Total Mix of Information
1. Generally: Price Changes
a. The price of a security does not need to change for the
information to be materialhowever, if it does change, then it
is material (a slum dunk indication)
b. If the material comes out and the price doesnt change, the
information could still be material for the following reasons:
i. The information is stale: the market could have already
figured out the information
1) Ex: FDA rejects a pharmaceutical companys
drugs that leaked to the public before the
company reveals the information
ii. The definition of material doesnt require a price
change: all that matters is that it was important enough
that a reasonable investor would want to know about it
in the total mix of information when making
investment decisions
iii. Analysis of extraneous factors: what if the stock came
out on 9/11?
iv. If the corporation issues false information that is
positive but the market doesnt respond because there
is already so much bad information, then the good
information does not encourage investors! therefore,
no price change
2. Total Mix Test
a. In defining materiality, SCOTUS recognized the contextual
nature of securities disclosure
i. There must be a substantial likelihood that the
disclosure of the omitted fact would have been viewed
by the reasonable investor as having significantly
altered the total mix of information made available
(TSC Industries)
ii. Thus, an omission is NOT MATERIAL (even if
important to investors) if reasonable investors already
know or can infer the omitted information from other
disclosures
3. Total Mix in an Efficient Market
a. Omitted information that is already known to the market is not
actionable, even if material (ECMH)
b. It is even possible that false or misleading disclosure on
important company matters is not material if professional
securities traders who set the market price know the disclosure
to be wrong! Wielgos v. Commonwealth
i. Truth on the Market Defense: Wielgos case
1) Even if someone says something is false, but
the market already knows the information is
falsethere can be no 10(b)(5) argument
2) This is not material information: no damage to
shareholders as the information has been
reflected in the market
3) Objective test based on a reasonable standard
ii. Fraud on the Market
1) False statements have fooled the market and
therefore the price paid for stock was effected
by the false statements! even if you have
never heard of the statements (still have a cause
of action)
Wielgos v. Commonwealth (7
th
Cir. 1989): CE was building nuclear power plants and made
statements about the cost/time it would take to get the plants runningkept saying it was almost
there but kept adjusting it. They were using old numbers in their prospectus regarding the nuclear
power plants and when they would be coming online. An investor purchased based on what they
read in the prospectusright after he bought the stock, the permit was pulled for the plant and the
investor sued. Court does not violation of 10(b)(5). Concluded that omitted information about
regulatory proceedings that resulted in costly delays for a utilitys nuclear power plants was not
material since securities analysts already knew of the proceedings and their risks! market already
reflected information and no one believed the overly optimistic projections. The numbers the
prospectus used were old, but any reasonable investor could have seen that the utility company
adjusted its numbers each year and a reasonable investor would have known that the projections
were a lie
! Even though the statements were false, they did not reflect the total mix of information; the truth
was already on the market. There is no altering the total mix of information.

4. Buried Facts Doctrine
a. Under the buried facts doctrine, disclosure can be misleading
if it contains material information that is inaccessible or
difficult to assemble
i. Ex: Court found a proxy statement to be materially
misleading for prominently disclosing an investment
advisers favorable opinion, but burying in an
appendix that the adviser had failed to evaluate the
firms assets (Kohn v. American Metal)
v. Forward-Looking Information
1. Historically
a. SEC used to only allow recovery for historical statements and
not forward-looking statements
b. Problem with just historical information: may have little
predictive valueinvestors are concerned with the future!
i. What happens in the past cannot dictate the future
c. SEC began allowing forward-looking statements to encourage
future predictionsbegan requiring under S-K, Item 303
(MD&A)
i. Given that predictions are not completely accurate and
companies want to avoid liability, SEC has come up
with various protections
1) Bespeaks caution doctrine
a. If you make a prediction accompanied
with cautionary language, then you are
not liable for inaccurate predictions
2) PSLRA: statutory
2. Safe Harbors for Forward-Looking Statements
a. Bespeaks Caution Doctrine
i. Under this judicial created doctrine, cautionary
disclosure (beyond boilerplate warnings) can negate
the materiality of, or reliance on, an unduly optimistic
prediction
1) Cannot just be in the boilerplate!
2) Have to make a description of the main,
significant risks and the doctrine still covers
you if you fail to list the specific risk that
causes the risk (do not have to include every
last risk)! doesnt apply if fail to disclose an
IMPORTANT RISK
ii. Doctrine only applies when there is a forward-looking
statement and the cautionary language is directly
accompanied with it
iii. Does NOT limit liability if the bad events have already
occurred (ex: cannot say might occur if it has already
occurred)
iv. Main benefit of the doctrine: allows dismissal before
trial and often before discovery (can often analyze just
with the face of the filed documents)
1) Deceases settlement leverage
Kaufman v. Trumps Castle Funding (3
rd
Cir. 1993): Donald Trump offered a debt offering (14%
interest in bonds vs. 9% normal bonds on the market) for an AC casino. Investors received a large
discount on the bounds because Trump wanted to induce investors (high risk of default). The
prospectus disclosed the shakiness of the bonds. Investors sued due to hopeful statements in the
prospectus that operations will be sufficient to cover all of the issuers debt service. The hopeful
statements were rendered immaterial by the extensive cautionary statements in the prospectus
numerous disclosures of the circumstances that could adversely affect the issuers ability to pay
interest, which alerted investors to the risk of the venture.

3. PSLRA Safe Harbor
a. History
i. In 1995, Congress passed the Private Securities
Litigation Reform Act to reconcile the growing market
demand for forward-looking information and the ease
with which lawsuits (particularly class actions) are
filed when projections fizzles
1) Similar to bespeaks caution doctrine: Section
27(A) of the Securities Act
ii. To encourage issuers to disclose forward-looking
information (whether voluntary or not), the PSLRA
immunizes public companies and their executives from
civil liability for forward-looking statements that
company with the Acts safe harbor provisions.
b. What the PSLRA Does
i. Application
1) Applies only to reporting companies
ii. Elements: No liability for a forward looking statements
if:
1) Accompanied by meaningful, cautionary
statements OR
2) Even if not, if the P cannot prove the D knew
the statement was false (if D thought statement
was true when making it)
a. Thus, allowed to make forward looking
statements, unless the P can show that
he did know they were false
b. The interactions of (1) and (2) suggests
that if you have a forward looking
statement and you know its false, you
are STILL off the hook if accompanied
by cautionary language
1) Is this a license to lie?
2) The idea is that they wanted to
eliminate litigation about
whether the person making the
statement knew it was false or
not
3) This is different than the
bespeaks caution doctrine:
known to be false when made

Safe Harbors Description
No actual knowledge Ex: P fails to prove the D had actual knowledge that the
forward-looking statement was false
! Safe harbor applies to oral or written forward-looking
statements and immunizes reckless or negligent forward-
looking statements from private liability
Immateriality Ex: The forward-looking statement was immaterial
! The safe harbor focuses attention on whether the forward
looking statement is too soft to be material and opens the
door to the judicial bespeaks caution doctrine as a separate
basis for immunity
Cautionary Statements Ex: The forward-looking statement is IDd as a forward-
looking statement and is accompanied by meaningful
cautionary statements identifying important factors that could
cause actual results to differ materially form those projected in
the forward looking statement
! Provides clear projectioncalls for the dismissal of a
lawsuit without an inquiry into knowledge or materiality

iii. PSRLA v. Bespeaks Caution Doctrine

PSLRA! Reporting issuers ONLY! Bespeaks Caution
Does not apply to non-reporting
companies, bad boy issuers, blank
check issuers, penny stock issuers, IPOs,
or offerings by partnerships
! Would apply to Trump case because it
was an IPO and a partnership issuing
securities
Applies generally
Seeks to eliminate litigation about whether
the person making the statement knew it
was false or not! doesnt matter!
Known to be false when made (suit
dismissed only if known to be false when
made)

Do not apply if talking about historical statements

Asher v. Baxter International (7
th
Cir. 2004): Baxter released financial results, and sales/profits
did not match analysts expectations, causing shares to fall ($43 to $32). Litigation ensuedPs
contend that the higher price, $43 price, was the result of materially misleading projections by
Baxter (business would yield revenue in the low teens, compared to the prior year growth in the mid
teens). Argue materially false because certain divisions had not met internal budgets in years,
plants were closing, market was oversaturated for certain products, some sales low, etc. Court finds
that Baxter provided a number of cautionary statements (ex: 10-K filing), but they remained the
same even though the risks changed. Court decides that more discovery needed to say if these were
the principal risks that the company confronted and remands. Baxter has to establish that the
cautions did reveal what were the major risks.
! Oral statements: declarant must say that actual results must differ from actual projections and
must say where to find the actual projections

c. Historical Statements vs. Forward-Looking Statements
i. Bespeaks Caution and PSLRA
1. Both PSRLA and bespeaks caution doctrine do not apply if talking
about historical factsBOTH DEAL WITH FORWARD-LOOKING
STATEMENTS ONLY
2. HAVE TO BE CAREFUL SO THE PS ATTORNEY CANNOT
CHARACTERIZE SOMETHING AS FORWARD-LOOKING
THAT IS A HISTORICAL FACT
ii. Examples of Historical Statements
1. Prime example: earnings last year were $50/share
2. Tricky examples:
a. Factory has burned down and you say factory is still
standing! Not a statement about future economic
performance; This is a historical statement because you are
lying about the past
b. What if a company had been in negotiations for a merger and
first says negotiations are going great! probably allowed;
no implication of PSLRA or bespeaks
c. Negotiations are going great and merger is imminentthis
is a total lie and wont happen; Court found this to be a
historical statement since it is just a summary of information
that has happened in past negotiations
d. Negotiations have gone very well and we have agreed in
principle to a merger! This is a historical fact because you
are talking about what happened in the past (this is equivalent
to merger is imminent)way of summing a historical fact
e. There have been questions in the press about whether our
AIDS drug has been approved by the FDA. We expect profits
to be very large next year.
i. Nominally, this is a forward-looking statementbut its
intent is to say that the FDA has approved the drug
ii. Really a historical statement
iii. Mixed Statements: Forward-Looking and Historical
1. 27(a)(i)(1): forward-looking statements are predictions about things
that will affect performance in the future
2. Statements mixed of past historical fact and forward-looking
statements are deemed forward-looking
3. Examples: Courts will interpret forward-looking
a. Unique challenges are behind the company! usually
forward looking statements
b. Our business plan and underlying strategies are sound!
forward-looking since it affects performance in the future
d. The Duty to Disclose Forward-Looking Information: Failure to Disclose

i. Generally
1. The mere fact that something is material does not itself determine
whether there is a duty to disclose
a. That is, the informations materiality is a necessary but not
sufficient condition to require its disclosure: need an
independent duty to disclose
2. Duty to disclose soft information (ex: projections, estimates, or
opinions) arises generally from the overall obligation that
announcements not be materially misleading! courts generally do
not impose duty
a. Overall, when a statement is made there is a duty to make such
additional disclosure as necessary to assure that the statements
that are made are not misleading in light of the circumstances
under which they are made
ii. Examples:
1. Ex: Suppose that your company has done a forecast that shows your
company will be flushed out financiallybut you do not reveal that to
the market. Can you be liable for failing to disclose bad financial
information?
a. Puffing, bespeaks, and PSLRA do not apply because there has
been no forward-looking statement
b. Materiality: YES! reasonable investors would want to know
about it and would affect the total mix of information for some
group of investors
c. Duty to disclose:
i. Under normal fraud law: NO
ii. Under the securities laws: specific requirements that
you make under Regulation SK
Disclosure of Information: Summary
" Traditionally, the securities laws have required disclosure of hard information: factual,
objectively verifiable data
" Soft information! focuses on forward-looking statements like projections, forecasts and
predictions; most courts decline to impose liability upon issuers who decline to disclose soft
information
o Isolated and general remarks about future results, not worded as guarantees,
normally are not actionable as they are viewed as soft, puffing statements
o Soft information in the merger context historically has been treated as immaterial as
a matter of law
o No duty to disclose financial projections

iii. Rule against issuing half-truthshave a duty to make
the next statement not misleading
1) Courts will sometimes require disclosure of
half-truths based on this theory
2. Suppose you disclose based on improved earnings for 6 months
what if your internal forecast shows that it will go down. Do you
have a duty to disclose the down part of your forecast?
a. Courts say NO! however, can argue that not disclosing is
misleading
3. Mergers and Liquidation: Courts go both ways!
4. Insider Trading
a. When you are an insider, have a duty to disclose OR abstain
from trading
b. You create the duty to disclose based on trading on the inside
information

No liability if puffing, PSLRA safe harbor, or bespeaks caution

INSERT FRAMEWORK TO DO PROBLEMS

e. SEC and Corporate Governance
i. Disclosure Beyond the Bottom Line: Management Integrity
1. Generally
a. The SEC has long asserted the materiality of information that
bears on management integrity
i. Note: Franchard! when the SEC stopped a securities
offering for not disclosing suspicious stock pledges of
the companys controlling stockholder! however,
refused to require disclosure of the boards lax
monitoring of the shareholder.
b. SEC will find materiality if something affects the
corporations assets (SEC may give cut-off point)
2. Lawsuits
a. Lawsuits against the Issuer
i. If there is a lawsuit against the issuer: Regulation S-K,
Item 103: Issuer has a duty to disclose lawsuits that
seek to obtain more than 10% of the issuers assets
b. Lawsuits against officers and directors
i. Regulation S-K: only have to disclose lawsuits that are
completed (final judgments)
ii. The only pending lawsuits that have to be disclosed are
criminal
In the Matter of Franchard Corp. (SEC 1964): Company made 3 public offeringsCEO was
involved in some sketchy business practices (he would use the companys money to purchase real
estate or pay off his own debtssupposed to get approval from BOD for self-interested
transactions). CEO was giving up interest in his shares as collateral for lenders! concern was that
he was a controlling shareholder. Court finds a duty to disclose: company was selling securities
based on CEO reputation and creating a misleading picture of the company (collateral as material).
However, Court does not find duty of disclosure for the boards lax monitoring.

3. Disclosures and Other Issues in Response to Watergate
a. Corporations are encouraged to have a code of ethics:
Regulation S-K, Item 406 requires a code of ethics
b. Audit committee report discusses the actual financial
statements with independent auditors
c. Regulation SK, Item 401 requires lots of disclosures about
management
i. Do not have to admit if you are a horrible manager, but
the company does have to disclose info about
managers
1) Example: 401E: business experience of
manager (limited to past 5 years)
d. Disclosure of any PENDING criminal lawsuits or lawsuits
have been concluded against officers or directors as long as
they are within 5 years too
e. Disclosures regarding management compensation
i. Regulation 402: Have to reveal lots of information
about the compensation that is earned by
officers/directors
ii. Note: IMPACT! increased compensation of
officers/directors because those that werent getting
paid want to get paid as well
f. Rule 408: general duty to provide any additional information
that is required to make earlier information that you have
already provided not misleading

ii. The Interface of Materiality and Corporate Governance
1. Courts have been reluctant to require disclosure of fiduciary breaches,
unless management misfeasance is clear
2. However, SEC is clear that disclosure duties are HEIGHTENED
when management self-dealing is a possibility
a. Thus, company officers and directors must ensure proper
disclosure about benefits in a retiring CEOs compensation
package, even though they did not differ from the benefits that
the CEO received before treatment (Grace)
b. If an officer or director knows or SHOULD KNOW that his
companys statements concerning particular issues are
inadequate or incomplete, he/she has an obligation to correct
that failure.

In the Matter of W.R. Grace and Co. (SEC 1997): SEC charged that company did not disclose
CEOs retirement benefits as well as transaction in which son would require a subsidiary of the
company. Court holds that, even though the counsel had prepared the disclosure, successor CEO
and outside D were subject to disciplinary proceeding since former CEO had substantial influence
over company. There is a need to ensure that the shareholders receive accurate information!
should have raised the issue of disclosure of the other benefits by discussing the issue specifically
with the disclosure counsel. If an officer or director knows or SHOULD KNOW that his companys
statements concerning particular issues are inadequate or incomplete, he/she has an obligation to
correct that failure. An O/D may rely upon the companys procedures for determining what
disclosure is required only if he/she has a reasonable basis for believing that those procedures have
resulted in full consideration of those issues

iii. The Materiality of Being a Bad Citizen: Violations of State or Federal Law
1. In general, federal securities law mandates disclosure of the
companys compliance with other non-securities norms only if non-
compliance is clear and its ramifications have financial significance: a
heightened test of materiality
a. SEC generally does not require the disclosure of executives
criminal behavior unless it has resulted in an indictment or
conviction in the last 5 years (Item 401, Regulation S-K)
2. Note: just because violating the law is in the companys interest, it is
still a violation of the law and needs to be disclosed (Schlitz)
3. Bribes to Foreign Officials
a. Some courts have held that paying bribes to get your product
placed is NOT material: does not look like management
integrity
b. The importance of the cases has declined because of actual
changes that require reporting to the actual material! in
section 30(a), there is the Foreign Practices Act that is now in
the Securities Act
i. Requires you report all this information
ii. Designed to prevent American companies from bribing
foreign officials

SEC v. Jos. Schlitz Brewing Co. (E.D. Wisc. 1978): Court finds that $3 million of kickbacks to
beer retailers, in violation of liquor laws, was material since such kickbacks went to the integrity of
companys management and jeopardized liquor licenses of customers upon which companys
business depended. Company argues that there is no statute specifically to require a corporation to
report its involvement in marketing or business practices. Just because violating the law is in the
companys interest, it is still a VIOLATION of the law and needs to be disclosed.


XI. Section 11 Liability
a. Generally
i. Various Liability Provisions
1. Under the 1933 Act, there are various liability provisions:
a. 12(a)(1): can get rescission for failure to comply for violations
of 5
b. 11(a)(1): Damages under 11(a)(1) for false statements or
omissions in the registration materials
c. 12(a)(2): other fraud not just in registration statement! civil
liability for prospectus that is false (information that comes
subsequent to the RS)
2. Other provisions under the 1934 Act that call for liability:
a. Rule 10(b)(5): uniformly the basis for most federal securities
fraud claims


ii. What Section 11 Does
1. Creates a civil remedy for purchasers in registered offering if they can
point to a material misrepresentation or omission in the registration
statement
a. Provides liability not only against the issuer, but against
lawyers, accountants, underwriters, officers, directors, etc.
2. Joint and several liability falls on the issuer and other specified
defendants associated with the distribution, subject to various
exceptions
3. Requires ONLY that the P show a material misrepresentation of
omission: without having to show scienter, reliance, or causation
b. Section 11 Plaintiffs

Rule 11(a): Any person who obtains securities pursuant to a registration statement can sue under
Section 11 (all purchasers of registered securities have standing to sue)
i. Standing
1. Under Rule 11(a), all purchasers of registered securities have standing
to sue
2. Some courts have limited Section 11 standing to those who acquired
the registered securities in the original distribution
3. Other courts, looking at the liability scheme of Section 11, have
extended Section 11 standing to those who acquired registered
securities in the post-offering after-market (Hertzberg)

Hertzberg v. Dignity Partners (9
th
Cir. 1999): Case arises out of alleged misstatements or
omissions in Dignitys registration statement for an initial public offering of Dignitys common
stock. Dignity involved in buying the rights to life insurance policies from people with AIDS and
premiums. However, shortly after the offering, the AIDS patients turned out to be living longer
because of new AIDS treatmentsthis was public knowledge and the stock plummeted. Plaintiffs
are investors who purchased Dignity stock more than 25 days after the initial offering but BEFORE
the news of the longer life expectancy or large losses became public knowledge! claims that
Dignity KNEW of the longer life but failed to disclose it. Dignity tried to argue that Ps lacked
standingyou have to purchase within 25 days. Court says that this is NOT the case: just have to
The SEC Arsenal
" Liability for non-compliance with registration requirements ( 12(a)(1))
" Liability for fraudulent registration statement ( 11)
" Liability for other fraud in registered offering ( 12(a)(2))
" Control person liability: investor can recover for persons who control any person liable
under 11 or 12 ( 15)
" Government civil liability: broad enforcement powers of SEC
" Government criminal enforcement: willful violations (anti-fraud/ 5) are punishable

purchase as a result of registration statement (can even be in secondary market). This is broadly
expansive. When the challenged offering is an IPO, there should be little question that a P who
purchases securities in the open market is a person acquiring such security for purposes of Section
11 standing.
c. What Kind of Conduct Creates Liability?
i. Generally
1. Under Section 11, conduct that creates liability deals with FALSE or
OMMITED statements
2. Reliance: NO
a. P does not have to show that they relied on the registration
statement! so long as there were false statements in the
registration statement, do not have to show reliance
i. Exception: situations where more than 1 year has
passed and the company has already issued another
earning statement
3. Damages:
a. Section 11(e): difference between price that you paid and price
that you can get now
i. Capped by the offering price
4. Causation: NO
a. D can reduce damages by showing that something other than
fraud showed the injury! P does not have this burden
(negative causation defense)

ii. Section 11 Defendants
1. Generally
a. 11 Defendants need not be in privity with the purchasing
investor and need not have actually created or disseminated
the challenged information
b. Liability is JOINT and SEVERAL
2. Those who can be sued
a. 11(a)(1): All those who sign the registration statement! look
to 6(a)
i. Issuer itself (on behalf of the issuer)
ii. Principal executive officers
iii. Principal financial officers
iv. Principal accounting officers
v. Majority of board of directors had to have signed it too
b. All directors can be held liable even if they didnt sign the
registration statement
c. Professionals: liable when they certify legal documents
(provide promises)
i. Accountants: certify financial statements
ii. Engineers
iii. Other professionals
iv. Note lawyer discussion
d. All underwriters
Section 11 Defendants
" Those who signed
the registration
statement
" All directors at the
time of the filing
" Underwriters of
the offering
" Any expert who
consents to his
opinion being used
in the registration
statement

i. Limited to the amount of participation in the offering
(except for managing underwriter)
ii. Note: definition of underwriters is very expansive
anyone who helps out with the issuance can also be
sued
3. Lawyer Liability
a. In general, lawyers cannot be held liablecan only be held
liable under Section 11 if they have some other role (serving
as a director, etc)
b. Also, people who have certified things can be held liable:
i. Accountants
ii. Engineers
iii. Lawyers may have to certify certain documents to (ex:
corporate form is adequatelimited array where the
lawyers can be directly sued)
c. Lawyers can also be held liable for malpractice: the fact that
lawyers are not directly held liable does not mean they cannot
be implicated and later held liable


d. Defenses to Section 11 Liability
i. Issuer Defenses
1. The issuer is ABSOLUTELY LIABLE for falsities in the registration
statement
2. There are no defenses
ii. Non-Issuer Defenses
1. Section 11 provides for various other defenses:
a. Whistle blower defense: if you tell the Commission why you
are resigning before the RS is effective, that is a defense
b. Reasonable care defensescreate idea of due diligence
i. Rule 11(b)(3): The amount of reasonable care is
different dependent on which part of the registration
statement you are talking about:
1) Non-expertised material (normal)
2) Expertised material: things where someone is
certifying that the material is right (ex:
financial data from accountants where they
certify that data is sound, appraisal valuations,
report from lawyers that the corporation is
legally established)
a. Liability under this regime:
2. Liability under Rule 11(b)(3)
a. Non-Expert Liability for Non-Expertised Material
i. Example: something in the registration materials that
indicates that we will have 3 plants next year, but only
end up having 2! non-expertised statement
ii. There is no liability if:
1) There is due diligence AND
2) They also didnt actually know the statement
was false (reasonably)
a. Need to do a reasonable about of
investigation
b. NOTE: CEO and main officers are
basically guarantors of the
information in the registration
statementthey rarely can use the
due diligence defense
b. Non-Expert Liability for Expertised Material
i. Example: if the accounting people certify the earnings
were X amount, the non-expert who relies on this does
not have to do due diligence
ii. There is liability if:
1) Non-expert knew the statement to be false
a. Relies on the idea that expert material is
so complicated that we do not want to
force non-experts to figure out if
experts are right or wrong
b. Good faith and reasonable ignorance is
an excuse
c. Expert Liability for Expertised Material
i. Example: falsity in the accountants expertised
material and the accountant gets sued. Accountant
claims that he just put in the information that the CEO
said.
ii. There is no liability if:
1) Due diligence and
2) Didnt actually know statement was false

Escott v. BarChris Construction Company (SDNY 1968): BarChris had a business where they
built bowling alleys and sold them other people. Kind of unique business modelBarChris would
get paid after installation and would rely on the fact that the alleys would be profitable in the future.
They would accept a promissory note for future payment and did not get much by way of initial
payment. So to get immediate cash, they would discount the notes and receive part of their face
amount in cash. However, the bowling industry became over-saturated and the business began to
fail . To save the company, the company tried to raise money and issued a registration statementit
was created by cutting and pasting from old registration statementsbut a lot of this material was
no longer true. BarChris then filed for bankruptcy. Plaintiffs challenge the accuracy of a number of
the figures in the registration statementalso say material information was omitted in the
prospectus as well. Court goes through liabilities for different groups:
! Issuer: absolutely liable
! CEO of the Company: he could not possibly believe all the statements in the registration
statement were true! non-expert: he knew everything, thus, he knew the materials were false
! Treasurer of the Company: Withheld information; cannot just rely on the experts! duty to
investigate
! Secretary/Director: anyone who signs registration materials is on the hook
! Outside director: still liable even if he didnt sign statement
! Main outside lawyer: liable for NE information; did not do reasonable investigation
! Underwriters: cannot simply rely on what they are told; liable for NE information
1) Underwriters: Appropriate defendants
! Accountants: liable for expert material; no reasonable investigation

NO DUTY TO BOND HOLDERS; ONLY TO EQUITY HOLDERS

XII. Exemptions
a. Generally
i. To avoid the rigors of registration, the securities laws provide you with
various exemptions (ways to save clients a lot of money) by avoiding Section
5
ii. Two kinds of exemptions
1. Section 3: exempted securities
a. Whether debt or stock, doesnt have to comply with the
securities laws regardless of how it is sold
i. Has nothing to do with the nature of the transaction
b. Entities that do not have to file registration materials:
i. Section 3(a)(2): federal government does not have to
comply with registration process
ii. Section 3(a)(3): commercial paper is specifically
exempted
iii. Section 3(a)(4): issuances of stocks/bonds from non-
profit companies
1) Bankruptcy trustees, railroads, etc.
c. Note: Although you do not have to comply with the
registration requirements, you are still constrained by the anti-
fraud provisions: Section 12(a)(2)! liability wither or not
exempted under Section 3 (other than paragraphs 2
(federal/local state governments) or paragraph 14)

2. Section 4: exempted transactions
a. If you sell the stock in a certain way, then that kind of
transaction is exempt (however, if resold, requirements for
registration)
i. Section 4(1): exempt for transactions for anyone other
than an issuer, underwriter, or dealer
1) Example: So, if I have 1 share of stock, I dont
have to re-register it (because I am not an
issuer, underwriter, or dealer)
ii. Section 4(4): brokers transactionbroker buys/sells
stock based on unsolicited order from a customer
broker can do that and that is exempt because of the
nature of the transaction in which the broker finds
him/herself in selling the stock
b. Due to a drafting screw-up, there are exempted transactions in
Section 3
i. Section 3(a)(9): If you have securities exchanged
between an issuer and its own security holders (people
who already own), then that is exempttransaction
exemption
ii. Section 3(a)(10): securities exchanged if an authorized
governmental official OKs it
iii. Section 3(b): authorizes SEC to come up with rules
that exempt certain small offerings
iv. NOTE: Just because you issue a small transaction
does not mean it is ALWAYS exempt

b. Intrastate Offerings

Any security which is a part of an issue offered and sold only to persons resident within a single
State or Territory, where the issuer of such security is a person resident and doing business within,
or, if a corporation, incorporated by and doing business within, such State or Territory.

i. Generally
1. Under 3(a)(11), the Securities Act exempts from registration purely
local offerings: those by in-state issuers to in-state residents
2. Courts and the SEC have interpreted it quite narrowly
a. To temper its use (statutory exemption), the SEC has
promulgated a safe harbor rule that creates bright-line
standards that define the scope of the offering, whether the
issuer and offerees are in-state, and when out-of-state resales
are permissible: Rule 147
i. Note: an offering that FAILS Rule 147 can still be
exempt under the 3(a)(11) standards!
ii. Remains subject to state blue laws
3. Benefits of the Exemption
a. No need to comply with Section 5
b. Exemption from jurisdictional means: federal securities laws
apply on when you have a sale, offer with interstate
commercethis exemption gets you around this
c. Not limited to sales by issuers: many situations in which, for
example, the founder of the company wants to sell his stock
(securities laws would mandate compliance by him)! but,
under the exemption, may help the founder by not having the
register
d. The location of the business that matters, not the location of
the underwriters! can still have an intra-state offer, even if
your underwriters are from some other state
ii. The Requirements for Section 3(a)(11):
1. INTEGRATION
a. ALL of the securities that are sold pursuant to this issue have
to be sold pursuant to this state or territory
i. If not, the ENTIRE thing fails: Need to have 100%
b. Determining what constitutes an ISSUE: 5-Factor Test
i. Are the offerings part of a single plan of financing?
ii. Do the offerings involve issuance of the same class
of securities?
iii. Are the offerings made at or about the same time?
iv. Is the same type of consideration to be received?
v. Are the offerings made for the same general
purpose?
1) If the sale passes the 5-factor test then look to
the other requirements
2. RESIDENCY: Offered or sold only to those within a particular state
or territory
a. Residency = domicile = reside there with intent to remain
i. Need 100% compliance
b. Even if you never sell anything to people outside the state,
even if you OFFER to someone outside, then the entire
exemption fails and people can get their money back
c. NOTE: Advertising: what if you have an ad that is circulated
to people outside the state?
i. That does not fail the exemption so long as you have
disclaimers: can only be sold to people within the state
ii. Allows for ads for intra-state offerings
3. COME TO REST: Offer must come to rest in the state
a. If people flip and sell outside the state, then the offer has not
come to rest!
b. How long do you have to wait for re-sales?
i. SEC old rule: 1 yearnot so clear now
4. DOING BUSINESS: If incorporated in the state and doing business
there
a. Doing business = predominate amount of business
i. Revenues, assets, principal office, and use of offerings
and proceeds are principally in-state! more likely to
be doing business in the state
b. Note: LL Bean example: headquarters in Maine, sending
products all around the country! Maine is the state where it
does its predominant amount of business
i. Operation headquarters
iii. Problems with the 3(a)(11) Statutory Exemption
1. People found that the statutory exemption was safe to use ONLY in
situations where you offered securities to a small amount of people!
however, there were other exemptions that worked for issuances of
small amounts of people
2. This exemption offers strict liability! if someone lies to you and tells
you they are a resident, then the ENTIRE EXEMPTION FAILS
iv. The Safe Harbor: Rule 147
1. ALL OR NOTHING! even if 1 person conflicts, the entire thing
fails (much narrower than 3(a)(11)
2. Characteristics
a. Integration: are the 2 offerings actually the same?
i. 6 month time limit
1) If after, will not be deemed integrated
2) If you cant wait the 6 months, then it will be
deemed integrated
a. Ex: If you sold some securities in
Maine, and then you wait to sell in MA
for 6 months: this complies with the
safe harbor
b. Ex: Lets say you sell something in 3
monthsdo you lose the exemption?
NOin that situation, you just look at
the 5 factors (other integration factors)
b. Nature of the issuer
i. If corporation: must be incorporated in the state
ii. If partnership: where principal office is located (in
statutory exemption, deemed to be where any of the
partners actually live)
1) Ex: If you have a law firm partnership in
downtown Boston, would still be in MA even if
some of the partners lived in other states
c. Doing business test: (statutory exemption says predominant
amount had to be in the statehere, even stricter)
i. 80% test
1) 80% of the gross revenue must come from in-
state
2) 80% of the assets must be in-state
3) 80% of the proceeds of the issuance must be
used within the state
a. ALL BASED ON USE
4) If you fail this test, you cannot use the safe
harbor and must try to use the statutory
exemption
a. There are various exceptions: LL Bean
deemed to be ME corporation because it
does most of its business in the state
(still same idea)
b. Note GAAP standards: reflect the assets
as they are reflected on your accounting
statements! 79% cannot be rounded to
80% (1/2 percent round up)
d. Residents of purchasers: ALL OR NOTHINGall the
offers/sales have to be made to persons who are residents of
the state (not that the seller reasonably believes them to be
residents1 lying purchaser can ruin the exemption)
i. Must be residents of the state
ii. Must be principal residence: uses more objective
standards for determining when a person is considered
a resident within a state
iii. Resident of corporation purchaser: state of principal
office (d-1)
iv. Different rule than determining whether the
corporation is a resident for determining when it is an
issuer
v. Abandons the domicile testprincipal residence
e. Limitations of re-sales to issuers
i. 147(e)! 9 months deemed to come to rest (issue is
complete/final sale)
ii. If no one buys or sells out-of-state for 9 months, then
you are within the safe harbor

3(a)(11) Rule 147
Integration All securities offered as part
of an issue are integrated (5-
factor test)
Set of sales separated by 6
months are not integrated (this
is a restriction on the issuer)
Residency of the issuer Resident and doing business
within the state (predominant
business test)
Principal office within the
state, and 80% of gross
revenues, assets, and proceeds
used within the state
! Principal residence
Residency of the offerees Offerees must be domiciled
within the state
Offerees must have principal
residence within the state
Restrictions on re-sales Securities must come to rest
prior to being resold
Nine-month safe harbor
holding period
Control Person re-sales Does not cover secondary sales
by control persons
Does not cover secondary sales
by control persons

NOTE: WHEN DOING PROBLEMS, GO THROUGH 147 THEN 3(A)(11)

c. Private Offerings
i. Generally
1. Section 4(2) of the Securities Act exempts from registration any
offering by an issuer not involving any public offering
a. Private placement exemption justifications:
i. Congress: embodies a congressional judgment that
registration is unnecessary when investors on their own
have adequate sophistication and information to
protect themselves
ii. Economics:
1) Intuitively, there are economic justifications for
not investigating as much for smaller offerings
2) When an issuer is trying to sell securities to
several people, there is more incentive for
doing an investigation due to large rewards
2. Private placement exemption exists in 2 forms:
a. Statutory exemption: the 4(2) statutory exemption completely
exempts issuers from all disclosure/registration requirements
i. Courts have interpreted the 4(2) exemption not to limit
the dollar size of a private offering or the number of
investors: sliding scale of investor qualification
b. Safe harbor rule: A regulatory safe harbor exemption
(Regulation D) provides clear guidance for issuers, though
mandates disclosure to certain investors
ii. How Courts Initially Interpreted 4(2): 1935 SEC Release Factors (Do
AFTER RALSTON TEST)
1. The number of offerees: if you make an offer to thousands of people,
will cause the SEC to say that it is not part of the private offering
exemptions
a. Cannot make an offer to thousands of people and say that you
are only going to sell it to 1 person and have it fit: focus is the
number of oferrees
2. Offeree relationship to each other and to issuer: if this group that is
approached by the issuer is a pre-identified group that already have a
relationship with the issuer, easier to see this is a private offering and
have access to information
3. Number of units offered:
a. Lets suppose you are trying to sell 100,000 units of
securitiescould sell 1 unit for $100,000 or sell 1000 $100
unitsit matters whether you divided it or not
b. If you divide into pieces, SEC says this can readily be flipped
and create a public market
c. In contrast, with just a public market, then less risk of
flippingno worry about a liquid after market
4. The size of the offering: the total dollar amount
a. If you are trying to sell $100 of securities, SEC cannot tell you
to register this and state regulation might well do the trick
b. However, if you are selling a HUGE amount, suggests not
really a private offering
5. Manner of the offering:
a. Doing face-to-face vs. putting a huge ad (public, general
solicitation)
iii. Ralston Purina
1. Facts: The case involved Ralstons policy of selling its common stock
to its employeeswithout registration. Hundreds of employees in a
variety of positions had purchased unregistered stock on their own
initiative. The SEC sued, demanding the future sales be registered.
a. The Court held that the 4(2) exemption applies when
offerees and investors, regardless of their number, are able to
fend for themselves
2. Requirements are now:
a. Sophisticated investors
i. Finance expertise! investment professionals
ii. Businessmen with experience are borderline
iii. Cannot waive sophistication requirement
iv. Wealth does not play into this
v. Note: experts! Lay person + expert = sophisticated
1) Usually need someone with financial
sophistication
2) Specialized expertise is questionable
b. Access to information
i. Some courts say that they need to have personal
bargaining power and savvy to force the companies to
open up their books = access
ii. Cases go both ways in determining if BOTH access
and sophistication are required (SEC v. Kenton
required both!)

SEC v. Ralston Purina (SCOTUS 1953): Between 1947 and 1951, Purina sold nearly $2 million of
stock to employees without registration (made use of mails). Did not solicit, but if employees
inquired, then they would allow them to buy stock. Buyers lived all overcompany claims it only
offered stock to key employees, but stock clerks and other employees participated. Court finds the
exemption NOT TO APPLY: rejects argument over substantial numbers, finds no warrant for
superimposing a quantity limit on private offerings as a matter of statutory interpretation.
Exemption does not deprive corporate employees of the safeguards of the Actabsent a showing of
special circumstances, employees are just as much members of the investing public as nay of their
neighbors in the community with the BOP on the issuer.
! The focus of the inquiry should be on the need of the offerees for the protections afforded by
registration: the offerees here were not shown to have access to the kind of information which
registration would disclose: The exemption applies only in the situations where its not necessary to
put information in the registration statement

BOTTOM LINE: Should always think: do these people need the protection of the act?

The less sophisticated the investor, the more disclosure that is required; the more sophisticated,
the less disclosure is required
After Purina:
--2 important requirements to determine if the exemption should be applied:
1) Have to have sophisticated buyers
2) Have to have access to information
--Unclear if BOTH sophistication and access are required
--Burden of proof on the issuer to show that exemption does exist
--Have to make sure that all the people to whom an offer is made have the requisite sophistication and/or
access
---Cases now can proceed under Section 11 and 12




Securities and Exchange Commission v. Kenton Capital (DDC 1998): Kenton is an entity
incorporated in the Caymans; President arranged for Carter to act as a consultant, Carter arranged
AP to issue surety bonds as insurance for investors. From Arkansas, Carter contacted prospective
investors about providing capital to Kenton for a trading program! stated returns of 3750% for
40 weeks. The President signed these agreements but did not monitor Carters representation to
investors. On the basis of these representations, over 40% of investors pledged to invest $1.7
million in the program. D argues that the number of oferrees was limited, they were sophisticated,
and had access to information. Court finds trading program to NOT qualify as a private offering
buyers were not sophisticatedonly given numbers to sales officials, no real access. Ds have
offered no evidence that the company even possessed the kind of information that would normally
be disclosed in a registration statement. Court says that you have to prove BOTH
SOPHISTICATION and ACCESS TO INFORMATION.

d. Regulation D
i. What is Regulation D?
1. In 1982, SEC amalgamated its exceptions for small and private
offerings through Regulation D: give detailed guidance on what
qualifies as a private offering (Rule 506) and what constitutes other
small offerings (504, 505)
2. Regulation D provides 3 exemptions (504, 505, and 506) that cover
the vast majority of offerings exempt from registration
Investor Qualification
! Do all the offerees have to have access to information? How does that work?
-Some courts have held YES that you need BOTH access and sophistication
-One argument is that as long as 1 is sophisticated amongst the offering group, that is
enough to protect everyone elseother courts have said everyone has to satisfy the
sophistication requirement
! Do you get off the hook by hiring an adviser?
-In some situations, the issuer has the incentive to hire an advisor to represent the buyer
can see that this leads to problems because if the issuer is playing the salary of the expert
that could lead to problems
-If the issuer wants to be safe, they have to make sure that an unsophisticated person has
representation of some sort however
! What level of sophistication is required?
-In one case, an airline pilot owns a lot of stockis he considered to be sophisticated? NO
-Akin to finance expertise rather than airline pilots or doctors
! What kinds of people are deemed to be sophisticated?
-Investment professionals are considered to be sophisticated
-Experienced businessmen: on the border-line
-If he is represented/helped by investment professionals, then he is deemed to be
sophisticated
-Educated people without business people are not deemed to be sophisticated
! What if a potential buyer waives the provision for sophistication?
-NO; provision in Section 14 of Securities Act says you cannot do that (cannot waive
provisions of the securities act)
! Are BOTH sophisticated and access needed?
-Most cases say both are needed; though there are some that go the other way (5
th
Circuit)
-Question after Ralston = offering is not public when limited to those who are able to fend
for themselves! what gave courts leeway
a. 504: less than $ 1 million
b. 505: up to $ 5 million
c. 506: private offering exemption

504 505 506
Maximum size $ 1 million $ 5 million No limit
Max # of purchasers No limit (assumption
that state law covers)
35 non-accredited + as
many accredited
investors as you want
35 non-accredited + as
many accredited
investors as you want
Disclosure requirements No; except under state
law (*still want to
disclose due to anti-
fraud
provisions/business)
Yes, if non-accredited
investors (not for
accredited)
Yes, if non-accredited
investors (not for
accredited)
Reporting
companies can use?
No Yes Yes
Restrictions on re-sale Sometimes no Yes Yes
Restrictions on
advertising
Sometimes no Yes Yes
Sophistication
requirement if non-
accredited
No No Yes
Limit to worthy issuers* No Yes No
*Non-worthy issuer = someone who has gotten in trouble with securities laws; worthy issuer = has not
gotten in trouble with the securities laws


ii. Reporting and Non-Reporting Companies Disclosures Under Regulation D
1. Reporting Companies
a. Under Rule 502, just have to provide the most recent 1934
filings (10K or 10Q)! can provide information in S-1, if filed
recently
b. Brief description of what has occurred since the most recent
1934 filing
2. Non-Reporting Companies
a. Relatively brief information from Form 1-A for offerings up to
$ 2 million
b. Information from Form S(b)(2)
i. If you are above $1 million and less than $2 million
(505), brief disclosures are required
ii. If above $2 million, additional requirements
iii. If above $7.5 million, have to provide the same
information as the registration statement
1) Question: why not register the securities then?
a. Cheaper: no back and forth with SEC
about the registration statement
b. Liability under 12(a)(2), but NOT under
Section 11 (need registration statement)
iii. Categories of Accredited Investors
1. Generally
a. Rules 505 and 506 permit an unlimited number of accredited
purchasers, but only 35 non-accredited purchasers
b. Rule 501(a) sets out the categories of accredited investors
2. Rule 501(a)
a. Institutional investors: banks, savings institutions, brokerage
firms, insurance companies, mutual funds, and certain benefit
plans
b. Big organizations: tax-exempt organizations and for-profit
corporations with assets with more than $ 5 million
c. Key insiders: the directors, executive officers, and general
partners of the issuer
i. What is an executive officer?
1) Rule 501(f): executive officer shall
mean.president, any VP in charge of a
principal business unit, any officer who
performs a policy-making function
2) Someone who is setting the policy, not
implementing it
d. Millionaires: individuals who have a net worth (along with
their spouse) of over $ 1 million
e. Rich people: individuals who have had for 2 years, and expect
to have an annual income of $200,000 (or $300,000 with their
spouse)
1) NO Sophistication test: $ 1 million! does not
matter if you do not know anything about
finance, it is the ASSETS that matter
a. Accredited so long as you have $200K
over the last 2 years or $ 300K with
your spouse
f. Venture capital firms: firms that invest in start-up companies
to which they make available significant managerial
assistance
g. Sophisticated trusts: Trusts with over $ 5 million in assets and
run by a sophisticated manager
h. Accredited-owned entity: an entity in which all the equity
owners are accredited investors

Categories:
-Financial institutions
-Pension plans
-Venture capital firms (private business development companies and small
business)
-Corporations and other organizations exceeding a certain size
-Insiders of the issuer (general partner, executive officer, director)
-Natural persons with wealth or income exceeding threshold standards ($1
million)
-Entity owned by accredited investors

**Must either fall into these categories OR the issuer must reasonably believe they do at the time of
the offering

3. Counting Non-Accredited Purchasers
a. Both Rules 505 and 506 are available only if the number of
purchasers does not exceed 35 or, alternatively, if the issuer
reasonably believes the number of purchasers does not exceed
35
b. Rule 501(e) computes the number of purchasers by excluding
accredited investors! the effect is that the 35 purchaser
limit is really a 35-non-accredited investor limit
i. Have to reasonably believe they are accredited: Rule
506(b)(2)
c. Rule 501(e) EXCLUDES certain types of purchasers from this
count:
i. Accredited investors
ii. Trusts or estates in which purchasers (and persons
related to him) have beneficial interests exceeding 50%
iii. Spouses or certain relatives of purchasers who has the
same principal residence as the purchaser
iv. Corporations or other organizations (and any of those
related to him) in which purchasers own more than
50% beneficial owners
1) A corporation, partnership, or other entity that
is not accredited is counted as a single
purchaser unless it was formed for the purpose
of purchasing securities in the offering
2) Look to:
a. Existence, duration, and nature of prior
activities by the entity
b. The structure of the entity
c. The proposed activities of the entity
d. The size of the entitys capitalization in
relation to its investment in the 505/506
offering
e. Extent to which all equity owners will
participate in all of the entitys
investments


NUANCES of RELATIVES:
! If Daughter and Father each owned 25% and live in the same house = 2 (corporation and treated
as 1)
! If Shepherds (divorced) and live in same house and both own 25% = 3 (corporation, J/G
Shepherd)
! If Daughter and Father each owned 26% in the same household = 1
! Shepherds (divorced) and owned 26% = 3 (not married)

CORPORATION BUYING:
! If a corporation that has $ 5 million = accredited
! If not solely for purposes of investment = 1 non-accredited
--Corporation not formed solely for investment will count as 1 non-accredited (unless over $5
million)
-If non-accredited corporation and formed solely for the purposes, look to shareholders and
look to non/acc
--If non-accredited partnership solely created for purposes of investment then each individual
partner will count as non-accredited investor
--If non-accredited partnership is NOT solely created for purposes of investment then only 1 non-
accredited investor
--Do not know what an accredited partnership entails

4. Who are Sophisticated Investors?
a. Rule 506: need to have such knowledge so as to be capable of
evaluating the investment
b. Mark v. FSC Securities
i. Case shows that it is insufficient to rely on the word of
the buyers! need to check if the buyers are really
sophisticated
ii. It is ideal to have individually signed documents
indicating sophistication
1) To avoid this, 505/506 issuances are often
limited to accredited investors, much easier to
show accredited than sophisticated!
Mark v. FSC Securities Corp. (6
th
Cir. 1989): Malaga LP formed to invest in the Spanish Arabian
horse industry. FSC, a broker-dealer, sold partnership interest to Ps in this action. Ps want to
rescind the transactions on various grounds, including the failure of the offering to come within the
private placement safe harbor of Rule 506. Court finds the issuer did not bear its burden to show
that the purchasers were sophisticated. Under Rule 506, FSC is required to offer evidence of the
issuers reasonable belief as to the nature of the purchaser! the only testimony at trial to establish
this was that one person had knowledge: now enough!

5. Purchasers and Representatives
a. Under 506, can satisfy the sophistication requirements
(506(b)(2)(i)) if you have a purchaser or representative
b. Cannot be a representative if there is a CONFLICT of
INTEREST (must be disclosed)
c. Allowed to have a representative who is relative! issue only
arises when there is an insider situation (Rule 501(h))
i. Relative = blood, marriage, or adoption
ii. Relative must disclose insider position (conflict of
interest disclosure requirement)
iii. Affiliates, directors, officers, or other employees of
the issuer or beneficial owner of 10% CANNOT be
representatives unless related by blood, marriage,
or adoption and disclosure

Relative + Officer = OK if disclosed
Relative = OK
Officer = NOT OK


d. Lawyers are not automatically sophisticated and shouldnt
offer to be the representative due to different liabilities (note:
neither are CPAs)
e. If the investor doesnt want to pay for the representative, can
the issuer pay for it?
i. Deemed by Rule 504(b)(4) to be sufficient as long as it
is an independent contractor and must disclose any
relationship they have with the issuer
ii. Most likely smarter for them to pay for it than to pay
for the stock without getting into trouble

Rule 501(h): Purchaser representative shall mean any person who satisfies all of the following
conditions or who the issuer reasonably believes satisfies all of the following conditions:
! NOT an affiliate, director, officer, or other employee of the issuer or beneficial owner of 10% or
more of any class of the equity securities or 10 percent or more of the equity interest in the issuer
! CAN BE a relative of the purchaser representative by blood, marriage or adoption and not more
remote than a first cousin (and an officer);
! Has such knowledge and experience in financial and business matters that he is capable of
evaluating, alone, or together with other purchaser representatives of the purchaser, or together
with the purchaser, the merits and risks of the prospective investment;

iv. The Limits Under Which You Can Make a Reg D Offering: Rule 502(C)
Rule 502(c); Limitation on manner of offering. Except as provided in Rule 504(b)(1), neither
the issuer nor any person acting on its behalf shall offer or sell the securities by any form of
general solicitation or general advertising, including, but not limited to, the following:
1) Any advertisement, article, notice or other communication published in any
newspaper, magazine, or similar media or broadcast over television or radio; and
2) Any seminar or meeting whose attendees have been invited by any general solicitation or
general advertising; Provided, however, that publication by an issuer of a notice in
accordance with Rule 230.135c or filing with the Commission by an issuer of a notice of sales
on Form D (17 CFR 239.500) in which the issuer has made a good faith and reasonable
attempt to comply with the requirements of such form, shall not be deemed to constitute
general solicitation or general advertising for purposes of this section; Provided further,
that, if the requirements of Rule 230.135e are satisfied, providing any journalist with access
to press conferences held outside of the United States, to meetings with issuer or selling
security holder representatives conducted outside of the United States, or to written press-
related materials released outside the United States, at or in which a present or proposed
offering of securities is discussed, will not be deemed to constitute general solicitation or
general advertising for purposes of this section.

1. Prohibitions Against General Solicitations
a. General Solicitations Generally
i. What is a general solicitation?
1) Regulation D does prohibit general solicitations
or general advertising in a Rule 505 or 506
offering, as well as Rule 504 offerings not
subject to state offerings
2) Examples of general solicitations: newspaper,
magazine, TV or radio ads, and open seminars
or investment meetings
ii. Rule 504
1) In some situations, general solicitations may be
alright under 504:
a. Sales only to accredited investors OR
b. State disclosure document required
2) NOTE: 504 cannot be used by publicly-held
corporations
iii. Rule 505
1) No general solicitations allowed
2) Need a promise from the buyer indicating that
they will not resale securities
a. Good practice: words and legend
indicating they cannot be resold
iv. Rule 506
1) No general solicitations allowed
b. When is a solicitation not general?
i. SEC has interpreted the prohibition as requiring the
issuer (or a person acting on its behalf) to have a pre-
existing relationship with each offeree
1) Under this interpretive gloss, the action
sophistication or financial wherewithal of the
offerees is irrelevant (In Re Kenman Corp.).
2) Requires a suitability screening occurs before
Reg D offering occurs
a. Have to have some kind of relationship
in which they have either received
securities before, or been customers
beforejust knowing someone socially
is not enough
b. Does not matter if accredited or not: NO
GENERAL UNLESS PRE-EXISTING
ii. To get around the pre-existing relationship
requirement, someone engaging in a Regulation D
offering should hire a broker who already has past
relationships
1) Can piggyback on the prior relationship that
you or your broker has
2) Should not just rely on old information without
checking up
a. Under SEC no-action letter: under no
circumstances under any offering
materials be sent for a period of at least
45 days after first mailing to new clients
iii. How do the brokers create a relationship to qualify as
professionals to be hired for this purpose?
1) Can solicit people and say we do not have any
special Regulation D offering that we are
offering right now, but in the future we might
want to present you with Regulation D
offeringsso we want to create a relationship
with you now
2) The brokers would then contact those people,
ask if there is interest for creating that
relationship, and then find out the necessary
information
3) Want to do this in advance
a. Wait for a while and then you are
deemed to have a prior relationship
b. If a broker sent out a questionnaire, had
people sign it, and then said that this is
a Regulation D offering! this would
qualify as a general solicitation because
of the instantaneous offering
SHOULD MAKE SURE INFORMATION IS NOT CLOSED!
In the Matter of Kenman Corporation (SEC 1985): Proceedings were instituted against Kenman
Securities, a broker-dealer, and Kenman, its parent. In 1983, Kenman Securities and Kenman
participated in 2 LP offeringsinformation on each offering was mailed to an unknown number of
persons (chosen from 6 sources: prior participants, Fortune 500 officers, previous investors, list of
physicians in CA, managerial engineers, and a list of presidents in NJ). Ps argue a violation of
general solicitations prohibition under 502(c). Court holds that Kenman and Kenman Securities
engaged in general solicitations and therefore the exemptions under 4(2) do not apply and the safe
harbor is not available! need to have a previous relationship with the people you solicit.

2. Newsletters
a. If you send out a newsletter to everyone (or a company =
representative), then that is a solicitation
b. However, if an issuer pays its representative for a newsletter,
than that is a general solicitation
c. Can interview the CEO without Regulation D problems
i. OK to get info from public sources not private
sources
3. Rule 135(c) Notices
a. In the case of a public corporation, a tension may arise
between the rather severe attempts of Rule 502(c) to limit the
dissemination of information and a corporations
responsibility to inform investors of events of material
importance, which may include new offerings of its securities
b. Rule 135(c): allows reporting companies and certain foreign
issuers to announce their plains to make unregistered offerings
of securities
i. The notice may NOT be used to condition the market
and may not contain information other than the rather
limited information specified in the Rule: e.g., name of
the issuer and class of security to be offered
4. Regulation D Offerings on the Internet
a. Can use the Internet to pre-qualify people:
i. People can sign up and create the necessary pre-
existing relationship with a broker
ii. After an appropriate waiting period, then it is OK to
contact these people about Regulation D offerings
b. SEC has issued a no-action letter: website needs to verify the
information to at least some extent (not Ok to say check the
box if you are accredited)
i. Can only give access to people until they have waited
for a while
ii. Same rules with the Internet as with brokers
iii. As long as the website issues a questionnaire and
verifies the information to make sure the individuals
are accredited, then that is an acceptable form of
solicitation

v. Integration v. Aggregation

Integration: involves treating different offers and sales as a single offeringtreated together they
may satisfy the conditions of the relevant exemption
Aggregation: involves a simple calculation of whether the amount to be financed in a 12-month
period exceeds the Rule 504 or 505 dollar limit

1. Integration
a. Reg D offerings are governed by the integration principle:
treating different offers and sales as a single offeringtreated
together, they may or may not satisfy the conditions of the
relevant exemption
i. This means that all offers and sales that are part of a
Reg D offering must meet all the conditions of the
relevant exception
ii. This deals with the question of whether an offering
will be considered as 2 separate offerings or integrated
into 1
b. Regulation D, however, creates a safe harbor against
integration for offers and sales occurring 6 months before the
sale and after (Rule 502(a))
i. Removes from possibility any offers and sales that that
occur more than 6 months before the start of a
Regulation D offering or more than 6 months after its
completion
ii. Securities offered LESS than 6 months before the start
or 6 months after the completion of a Regulation D
offering may be integrated
c. If there has been an offering within 6 months, that does not
mean automatic integration! 5-factor test
i. If you have some other issuance of securities pursuant
to another exemption and within 6 months, does not
mean you automatically lose, just have to analyze
pursuant to the vague 5 factor test
1) Whether the sales are part of a single plan on
financing
2) Whether the offerings involve the same class
of securities (stock v. debt)
3) Whether the sales have been made at about
the same time
4) Whether the same type of consideration is
received
5) Whether the sales are made for the same
general purpose

More than 6 months before or after Regulation D: Safe harbor 502(a) applies
Less than 6 months before or after Regulation D: 5-factor test

vi. Aggregation
1. Rules 504 and 505, cap the aggregate dollar amount that an issuer
may raise in any 12-month period! aggregation involves a simple
calculation of whether the amount to be financed in a 12-month
period exceeds the Rule 504 or 505 dollar limit
a. Aggregate offering price limitations for offerings under either
rule are reduced by the aggregate offering price of securities
sold w/in the previous 12 months in reliance upon any of the
3(b) exemptions. (504 and 505 and Reg. A and 701).
NOTE: 3(b) does not include 506!!--> 12 months just applies to 3(b)

2. The cap is calculated by:
a. The offering price of all securities sold pursuant to the Rule
504 or 505 exemption PLUS
b. The offering price of all securities sold within the previous 12
months in reliance on any 3(b) exemption: Rule 504, 505,
Reg A, 701, PLUS
c. The offering price of all securities sold in the previous 12
months in violation of the 5 registration requirements: non-
exempt unregistered offerings also count
i. THIS AGGREGATE CANNOT EXCEED $ 1
MILLION (504) OR $5 MILLION (505)
3. NOTE: To avoid aggregation problems, 506 can be changed into 504
so long as requirements are met (not an exclusive election)! could
technically even blown it!
4. If not for cash, then use FAIR MARKET VALUE: value non-cash
whatever the value you give to cash

THINK AGGREGATE ROLLING CLOCK: Look to the date of sale and go 12 months back
--On January 1, 2008 you sell $4.99 million and then on April 1, 2008, you sell $1. You have until
January 2, 2009 (12 months) to raise the $ 5 million. You have 6 months from April 1, 2008 for
integration issues.
--Do aggregation first, then integration

vii. Integration can happen without there being an aggregation problem
1. Ex: Suppose a $1 million intra-state offering to 20 in-state purchasers
in January is followed by a $2 million Rule 505 offering to 20 out-of-
state purchasers in March. If integrated, the combined offering would
not satisfy the intra-state exemption (if the 40 purchasers were non-
accredited). But, even if we aggregate the January and March
offerings, the $5 million cap of Rule 505 would not be exceeded
(even though this violates aggregation rules!)

Aggregation v. Integration:
" Aggregation is the principle by which an issuer determines the dollar worth of exempt sales
directly under Section 3(b) (504/505/Reg A), whereas integration is a principle under which
an issuer determines overall characteristics of its offering.
" Examples:
o An issuer who has conducted an offering under Rule 505 in May 2005 must
aggregate the proceeds from that offering with the proceeds of a Rule 505 offering
conducted in December 2005.
" (505) May 2005 ! (505) December 2005: 7 months
" Can aggregate (3(b)) and 12 month period), but no integration ( > 6 month)
o On the other hand, if the May offering had been under Rule 506, it would not need to
be aggregated with the December offering.
" (506) May 2005 ! (505) December 2005: 7 months
" No aggregation (506 is not 3(b)), and no integration (> 6 months)
o If a Rule 506 offering had been conducted in July 2005, 502(a) would not be
available as to the subsequent Rule 505 offering in December. Although the
proceeds from the July Rule 506 offering would NOT be added to the December
Rule 505 aggregate offering price under aggregation principles, they would have to
be included if they were integrated
" (506) July 2005 ! (505) December 2005: 5 months
" No aggregation (506 is not 3(b)), but integration (within 6 months)
" Assuming integration, then the issuer would have to evaluate all characteristics of the
combined transactions, e.g., number of investors, aggregate offering price, etc., when
determining the availability of the exemption.

viii. Additional Regulation D Requirements and Features
1. Limitations on Resale
a. The resale of securities acquired under Regulation D is
restricted
b. To ensure resale is effectively restricted, Rule 502(d)
originally required the issuer to use reasonable care to ensure
the purchasers of the securities are not underwriters
i. The requirements:
1) Make reasonable inquiry that the purchasers are
acquiring the securities for their own accounts
and not with an intention to re-sell
2) Provide written disclosures to each purchaser
that the securities are unregistered and cannot
be sold unless registered or under the
exemption
3) Place a legend on the securities identifying
their status as restricted shares
4) File a Regulation D form: Rule 503
a. Do not automatically lose the
exemption, if you forget to fileSEC
can give you a break
2. State Regulation
a. Section 18: federal statute that preempts a lot of state
regulation
b. States however can supply additional rules for 504/505
offerings! Section 18 allows for the additional state
regulation

507(a): you cannot use 504/505/506 if subject to injunctions by SEC! but might get 4(2)

ix. Rule 508: The Safety Safe Harbor for Regulation D
1. Rule 508 was designed to ensure additional flexibility so some
technical defect does not fail the entire exemption
2. A defect with respect to 1 investor doesnt mean that the exemption is
eliminated for all investors if:
a. Violation did not harm others AND
b. Failure was insignificant AND
c. Attempted to comply with good faith
i. Creates a due diligence defense
3. Things deemed to be automatically significant and WILL
AUTOMATICALLY cause 508 not to apply
a. General solicitation
b. Dollar amount too high
i. 504: over $ 1 million
ii. 505: over $ 5 million
iii. Under 505/506: if more than 35 non-accredited
investors
4. Example
a. Lets suppose you have 36 non-accredited investors. What are
the 2 ways that you could have the exemption still survive?
i. Rely on language in 505/506: reasonable belief that
they are accredited; sent questionnaires; did the due
diligence that allow you to say that the person who
turned out not to be accredited was accredited
ii. If you do not qualify for having a reasonable
belief! Can try to use 508: say its a violation but it
is ONLY ONE PERSONwould have to argue that:
1) The violation did not harm any of the others
2) Failure was insignificant
3) Attempted to comply in good faith
a. Most likely, if you dont qualify under
the reasonable belief factor, you
wont get good faith

THE ONLY TIME 508 WILL APPLY: If there are ALL accredited and 0 non-accredited
investors and you never supplied information/disclosures. Then, it turns out that 1 accredited (or
even up to 35) misrepresented. This is fine because of the 3 requirements: violation didnt harm
others, failure was insignificant, and attempted to comply with good faith! WILL ONLY ARISE
WITH DISCLOSURE. **Note: need good faith check

e. Regulation A and Integration of Offerings
i. Generally
1. Authorizes the SEC to exempt from registration a class of securities if
the aggregate offering price of the issuance does not exceed $ 5
million
a. Results in unrestricted securities and is available for primary
or secondary offerings
b. Basically do everything you would for a registered offering,
except the documents to be supplied are less rigorous
2. The Limits
a. Dollar ceiling limit is $ 5 million for primary offerings;
available for secondary offerings for up to $ 1.5 million
b. Re-sales: unlike Regulation D, securities sold under
Regulation A are not restricted and can be resold immediately
c. Worthy offering limit: Rule 262 prohibits bad boy issuers
i. Rule 22 extends to those who have done bad
things! issuers, 10% shareholders, directors,
underwriters, or officers! if any of this wide group of
people have any convictions or civil suits for fraud,
then the exemption is lost
3. The Benefits of a Regulation A Offering
a. Testing the waters: general solicitation to drum up interest
b. No Section 11 liability: liability only under 12(a)(2) for those
directly involved
c. Free trading: securities are not restricted (unlike Regulation D
where you have limits on to whom it can be resold)
d. Disclosures that are required are much easier to fulfill
i. Why wouldnt everyone want to use Regulation A?
1) Still a lot of work!
2) Much cheaper however than Regulation D

ii. How Regulation A Works
1. Documents
a. Instead of a regulation statement, create an offering statement
i. Much easier to create, use different form (ex: financial
statements do not have to be audited, etc)
b. Can also create something similar to a prospectus, called an
offering circular (subset of the information you have already
offered)
c. Just as with normal registration, file offering statement with
the SECthe SEC then qualifies it (same idea with
registration statement)
i. Instead of effective it becomes qualified
ii. No sales until the registration statement has been
qualified
d. Preliminary prospectus = preliminary offering circular
2. General Solicitations
a. Unlike for Regulation D, THERE CAN BE GENERAL
SOLICITATIONS
i. Could even go on TV and have print ads
ii. Even before filing any materials with the SEC, can
test the waters even before you file anything
iii. Can issue ads or broadcasts about the information to
see if people are interested in it
1) If the interest is provoked, then issuer can
proceed with filing
3. Dollar Limits and Aggregation Rules
a. Under Rule 251(d)
i. Limit is $ 5 million in the past 12 months
1) Unlike for 504/505, it is not just the issuer who
can sell pursuant to the exemption, but CEO or
executive insider can sell too (up to $ 1.5
million)
2) $1.5 million is subtracted from the $ 5 million
the company can offer
ii. Other offerings under 3(b)504/505 and Regulation A
are all 3(b) exemptions because the enabling statute for
ALL of them is Section 3(b) (provision that allows
exemptions)
1) For the other offerings, do not have to deduct
a. Only deduct OTHER 3(b) offerings
b. Differs from 504/505 offerings
2) Here, only deduct Regulation A offerings



You only have an aggregation issue with
--504 and 505
--Regulation A with other Regulation A
--Unique situation: Reg A and then subsequent to that within 12 months Regulation D! Regulation
--A can aggregate into the D and destroy it

4. Integration Rules
a. Rule 251(c)
i. Provides that Regulation A offerings will not be
integrated with either:
1) Any prior offerings or
2) Later offerings that are registered, made in
reliance upon 701 (compensatory benefit
plans), made in reliance upon Regulation S, or
made more than 6 months AFTER the
regulation A offering
ii. Thus, ALL PRIOR OFFERINGS ARE EXCLUDED
FROM INTEGRATION
iii. This is a two-way safe-harbor (unlike 502 safe harbor
for 6 months)
iv. Example: Lets say there are 2 offerings, separated by
7 months. The first is under the intra-state offering
Example:
! Lets suppose there was a Regulation A offering for $ 2 million. How much could you issue
under the 505 offering that was 3 months after a Regulation A offer for $ 2 million?
-Subtract from the $ 5 million limit any other 3(b) offering in the last 12 months
! So, if there was a $ 2 million Regulation A offering in Jan, and then what kind of offering can
the 505 offering be on April 1?
-Need to subtract from $ 5 million maximum the $ 2 million in Regulation A (within last
12 months)!Max = $ 3 million
! Suppose you flip thisHave first the 505 offering for $ 5 million in January 1, and then
Regulation A 3 months later. How big can the Regulation A offering be?
-Could be the full $ 5 million
-ONLY LOOK BACK FOR 12 MONTHSBUT ONLY SUBTRACT FROM THE
REGULATION A AMOUNT THE OTHER REGULATION A OFFERINGS
-IF there had been another Regulation A offering, then you would have subtracted
-Here, there was a 505 offering so you dont subtract it
! Three months earlier, there was an intrastate offering. Does this have anything to do with
aggregation rules? NO
-Aggregation rules deal only with 504, 505 and Regulation A
-Those count towards $ 5 million

exemption under Section 3(a)(11), and the second is
under Rule 505 of Regulation D.
1) Regulation Ds safe harbor operates to protect
only the 505 offering from the effects of earlier
sales under the Section 3(a)(11) offering!
does nothing to protect the Section 3(a)(11)
offering from the effects of later sales under the
505 offering
2) Rule 251(c) of the Regulation A, on the other
hand, not only will protect from integration the
earlier 3(a)(11) offering, but also the earlier
offers and sales will be protected from
integration with the later Regulation A offering
5. Testing the Waters
a. Rule 254 allows issuers to test the waters by soliciting
interest from prospective investors prior to filing offering
statements
i. May be accomplished by means of a written document
or scripted media broadcast, which, in addition to be
subject to anti-fraud rules, must be filed with the
Commission before it is used
1) A testing the waters document is NOT a
prospectus as defined in Section 2(10)
2) Coupons returnable can be testing the waters
document (254(c))
ii. Cannot test the waters after filing the offering
documents: have to use the preliminary offering
circular instead (Rule 254(b)(3))
1) Include all the things the Rule specific
iii. Under 254(b), need to submit to SECbut if you fail
to do so SEC may suspend issue (but merely not doing
this does not give money back): but highly encouraged
because of Rule 258(a)(1): failure to comply with the
provision is grounds for SEC to prevent issue! Rule
260
b. Altering Course After Testing the Waters
i. If an issuer tests the waters and concludes that the
Regulation A offering should not go forwardcan the
issuer then offer the securities under another
exemption or as part of a registered offering?
ii. Rule 254(d): if the issuer has had a bona fide change of
intention and registers an offering, the aborted
Regulation A offering will not be integrated with the
registered offering if at least 30 days have elapsed
between the last solicitation of interest in the
Regulation A offering and the filing of the RS
iii. Changing Course:
1) If Regulation D: wait 6 months after Regulation
A completes
XIII. Secondary Distributions:
a. Generally
i. Primary vs. Secondary Distributions
1. Primary distributions: issuer sales
2. Secondary distributions: sales by others (not exempt from Section
5)
ii. Burden on all who sell or even offer to sell a security is to prove compliance
with Section 5! Focus starts with Section 4(1) and 2(a)(11)
1. Section 4(1): A transaction exemption for everyone except
transactions by an issuer, underwriter, or dealer


Section 4(1): The provisions of section 5 shall not apply to--transactions by any person other than
an issuer, underwriter, or dealer.

2. Because of the breadth of the definition of UW in Section 2(a)(11),
much of the focus of whether a person falls within this transaction
exemption depends entirely on whether the person is a UW

Section 2(a)(11): The term "underwriter" means any person who has purchased from an issuer with
a view to, or offers or sells for an issuer in connection with, the distribution of any security, or
participates or has a direct or indirect participation in any such undertaking, or participates or has
a participation in the direct or indirect underwriting of any such undertaking; but such term shall
not include a person whose interest is limited to a commission from an underwriter or dealer not in
excess of the usual and customary distributors' or sellers' commission. As used in this paragraph
the term "issuer" shall include, in addition to an issuer, any person directly or indirectly controlling
or controlled by the issuer, or any person under direct or indirect common control with the issuer.

iii. What is the problem with re-sales of non-exempt securities?
1. Does the re-sale destroy the exemption the issuer relied upon when it
sold that security without registration?
a. Ex: PRIVATE PLACEMENT! This would happen if the
issuer relied on the private offering in Section 4(2) and its
sophisticated purchaser sold to someone who does not satisfy
Ralston Purina
b. Ex: INTRASTATE OFFERING! A re-sale to one whose
residency is different from that of the issuer may disqualify an
offering that initially was exempt under the intrastate
exemption of 3(a)(11)
2. Are the control persons public offerings are caught within the
regulatory reach of Section 5?
3. Does the dealers obligation under 4(3) to deliver a prospectus in
connection with public offerings extend when they are simply acting
as agents who are carrying out their clients instructions to buy
securities being distributed?
! An UW is:
PART A
1) Helpers for the issuer or control person! (someone who offers or sells for an issuer
in connection with the distribution) OR
2) Purchasing from issuer or control person with an intent to re-sell! (there has to be a
view to distribute) OR
3) People who participate directly or indirectly with #1 or #2:
AND

PART B
4) Part of the distribution (do not have to register if what you are planning to do is
not part of a distribution)

iv. The Broad Categories of Secondary Distributions
1. Distributions Subject to the 1933 Act
a. Issue will center around who is an UW under 4(1)
2. Market Trading with No Regulations
a. Regular market trading is exempt pursuant to 4(1)
3. The Murky Middle Area: What counts as a distribution?
v. Safe Harbors and Exemptions
1. Rule 144: applies to re-sales of restricted securities and to sales of
securities on behalf of control persons! provides much needed
certainty in determining whether those involved in the resale of
restricted or the control persons securities are underwriters
2. 4 (1 !) Exemption: for those sales that cannot fit within Rule 144

b. The Underwriter Concept and Sales for an Issuer
i. There are broadly defined roles that qualify someone as an UW
1. Helpers for the issuer or control person
2. Purchasing from the issuer or control person with an intent to re-
sell
3. People who participate directly or indirectly with #1 or # 2
AND
4. Part of the distribution
ii. Control Persons
1. Under 2(a)(11): the term issuer shall include control persons
2. Great complications arise with control persons
a. Any control person is deemed to be an issuer
i. Why?
1) Information asymmetry: issuer thought to know
more about the securities and should provide
information
b. Who is a control person?
i. Covers someone who controls the issuer or is
controlled by the issuer
ii. Definitions of Control Person
1) A person is a control person if they have the
ability to decide who can sign the registration
statement
2) In a publicly traded company, a control person
is one who owns more than 10% of the shares
iii. Example:
1) When the Google founders sold stock during
the IPO, have to sell with the registered
offering because they are treated as if they were
the issuer
2) No exemption would fit this situation
iii. The Categories
1. Category 1: Helpers of the Issuer or Control Person
a. Any person who offers or sells for an issuer in connection with
a distribution is considered to be a helper of the issuer or
control person
b. SEC v. Chinese Consolidated Benevolent Association (2
nd
Cir.
1941)
i. The words sell for an issuer in connection with the
distribution of any security ought to be read as
covering continual solicitations
ii. Does not matter if no money is received for the
helpingcan fit Category 3: people who participate
indirectly or directly with the helping
iii. Look to the reasons behind the securities laws: want to
give people information to people before they make
investments
1) Unless the Court called them UWs, the
information would not go to the people
2) Thus, in order to promote the rationales of the
securities laws, the definition of UW is applied
very broadly!

SEC v. Chinese Consolidated Benevolent Association (2
nd
Cir. 1941): D is a NY company
organized for benevolent purposes. Chinese government had purchased a bunch of bonds, so D set
up a committee (no official relation to the Chinese government) to try and aid the Chinese people
and get people to buy the bonds. Committee urged members to buy the bonds: received $600 to get
the bonds, delivered the money to the NY branch of the Bank of China, together with the written
application by the respective purchasers for the bonds which they desired to buy, NY office would
transfer the funds to HK, HK office returned the bonds to the NY branch who forwarded them to the
individual purchasers (D would help out with this sometimes). Court finds a violation of Section
5(a) because D engaged in selling unregistered securities when it solicited offers: the solicitation
was equally for the benefit of the Chinese government and the issuer with the distribution of the
bonds. D acted as a UW: holds that the words sell for an issuer in connection with the distribution
of any security ought to be read as covering continual solicitations, such as the D engaged in.
Moreover, even if the D is not an issuer, UW, or dealer it has participated in the transaction with
an issuer
! Criticism: Very broad holding (i.e. if a charity group put an ad in the paper, the newspaper could
be a UW if it is participating directly/indirectly).

2. Category 2: Purchasing from the Issuer or CP with an Intent to
Re-Sell
a. Under 2(a)(11), such persons should have a view to
distribute
i. Reaches any purchaser of unregistered securities from
an issuer who acquires the securities with the intent to
re-sell them to the public, even though he is not an
investment banker or even a full-time investor
ii. A central element is that this be for value
1) Ex: A donee is not a UW unless one can find as
a condition of the gift an undertaking by the
donee that would constitute the giving of
value
2) Ex: The loyal alumna who endows with
unregistered securities a chair to be named in
her honor may have gratitude of the purchaser
and university
b. Investment Intent
i. To determine who is an underwriter, the courts have
come up with the following:
1) An underwriter status is assumed by one who
acquires an unregistered security for other than
long-term investment
2) So, If you originally purchased with investment
intent, you are not an UW because you did not
have an intent to resell
a. It is difficult to have this definition to
apply since investment intent is
SUBJECTIVE
ii. How do you determine investment intent?
1) DURATION
a. The length of time the purchaser has
held the shares before re-selling them
plays a pivotal role in determining
whether the purchaser acquired the
shares with a view to their distribution
b. If you hold it for a long time before re-
selling it, then deemed to have requisite
intent
1) At one time, most practitioners
believed investment intent is
established if the shares have
been held for 3 years
2) For holding periods less than 3
years, consideration is given to
the purchasers intent when
purchased (note: SEC has
never held a definitive period)
2) INTENT WHEN YOU PURCHASE
a. Ex: If you hold on to securities for 30
years and then re-sell them after you
retire?
1) Do not have to register them
because your intent when you
purchased them was to hang
on to them
2) It is the intent when you
purchase them
3) CHANGE IN CIRCUMSTANCES
a. Ex: If you want to sell after 3 months or
so, you can say that although you
purchased with investment intent, now
there has been a change and you must
sell
b. Valid excuses accepted by the SEC:
change in purchaser circumstance
1) A change in purchaser
circumstance indicates that the
purchasers reason for re-
selling is to obtain liquidity
and not to act as a conduit for
bad securities, thus buttressing
a claim of original investment
intent
c. Examples:
1) Stock price going down:
Pursuant to an exemption if I
buy an offering and want to
sell after 6 months because the
stock is going down: this does
not qualify because it is not a
change in MY circumstance
(purchaser).
2) Cancer: I purchase in a private
offering and get cancer and
need money to pay my doctor
bills. This is a change in MY
circumstance, not the
company.
d. NOTE: The longer you hold the
securities, the easier it is to change
the circumstances
1) If you wait 3 years or 2 years,
even a modest change in
circumstance would be
sufficient to show a change in
circumstance
2) Although I originally had
investment intent, things have
changed so I need the money
now
iii. Why is investment intent important?
1) Incurring liability under Section 5
2) Incurring liability under Section 11
3) Destroying the issuers exemption
a. Regulation D, Item 502: Issuer shall
exercise reasonable care to ensure the
purchasers of the securities are NOT
underwriters within 2(a)(11)
b. The issuer who wants to enjoy
Regulation D has to ensure these people
are not purchasers with an intent to re-
sell
iv. Other Issues
1) Fungibility of Shares: Shares Bought at
Different Times Under Different Exemptions
a. What if you bought shares in a public
offering and then shares in a private
offering a few days ago? Can you sell
the first shares the next day?
1) Will argue that the first shares
are from long ago
b. SEC has said NO: how do we know
which shares you are selling?
1) They are all FUNGIBLE
2) To allow this would allow you
to sell identical shares and
cannot do that
2) Pledged Shares
a. The inadvertent underwriter problem
(with the prospect of rendering 4(1)
unavailable) also arises in connection
with sales by pledgees (e.g., banks) of
securities pledged by control persons
(as well as other sales by such pledgees
of restricted securities pledged by either
control persons or non-affiliates
1) Ex: If the pledger control
person defaults on a bank loan
secured by the pledge, can the
bank sell the securities
pledged without being a UW?
SEC v. Guild Films (2
nd
Cir.): The pledgor, the controlling shareholder, pledged as collateral for a
bank loan a substantial block of securities which bore a restrictive legend on the face of the
securities. After the shareholder defaulted on the loan, the bank, knowing of the restrictive legend,
sold some of the securities with a RS being filed. Court held that the bank was a UW. Even though
the bank may have taken the securities as collateral and had not directly dealt with the issuer, the
bank knew that it had been given unregistered stock, and that the issuer had specifically forbidden
the stock to be sold. If the lender can immediately sell them, then there has been flipping of the
shares and these shares were never held for investment (always the intent to re-sell). To avoid
Section 5 liability, the bank had to retain the securities pledged, invoke an exemption, or induce the
issuer to file a RS.
b. Ex: What if you borrow money from
someone and they say I will give you a
30% interest rate. Can tell by the
interest rates that the lender expects a
large possibility that the loan will not be
repaidis this in effect, really a sale?
c. In these pledge cases, the focus is on the
person getting the loan, not the bank
1) If the pledgor just expects to
take the loan proceeds and
leave, and we allow that to
happen, what the bank is just
doing is allowing them to just
sell the securities and the
BANK can be a UW!
d. What the Bank SHOULD DO in these
cases:
1) A letter by the pledgor to the
effect registration of the
securities (a registration
covenant) in the event of the
pledgors default (probably
not worth much)
2) The invocation of an
exemption from registration,
such as the 4 (1 !) exemption
3) A more circumspect approach
to accepting pledgor securities
as collateral

3. Category 3: People who Participate Directly/Indirectly with #1 or
#2
a. Officers, Directors, and Promoters
i. Courts in their zeal to reach the right result sometimes
engage in strained constructions of key definitional
concepts: especially true with promoters, officers, or
CP who have actively promoted an unregistered
offering
ii. Anyone who has arranged from public trading of an
unregistered security through advertisements, research
reports, or other promotional efforts can easily be seen
to have participated in the issuers distribution
1) Some courts have even characterized officers,
promoters, or control persons as issuers when
they actively promote the sale of unregistered
stock
2) Deeming officers or issuers as issuers is NOT
A GOOD INTERPRETATION
c. What is a Distribution?
i. Generally
1. Distribution is not defined in the Securities Act, even though it is the
linchpin of Section 2(a)(11)s definition of an UW
2. Courts have been pretty consistent in reasoning that the meaning of
distribution is to be found in the Supreme Courts standard announced
in SEC v. Ralston
a. For determining when an issue is a public offering: a
distribution exists if there are sales to those who cannot fend
for themselves ! so, if you sell to sophisticated people with
access, this is NOT a distribution and is OK!

d. Control Person Distributions
i. Definition of Control Persons
1. One who directs (or has the power to direct) the management and
policies of the issuer, whether through stock ownership, position,
contract, or otherwise (Rule 405)
2. Whether the person has the power to obtain signatures of those
required to sign the registration statement
3. In a public offering, one who owns more than 10% of the stock
ii. Avoiding the Securities Laws: How can holders of restricted shares and
control persons re-sell their shares?
1. Non-Control Holders of Securities can avoid registration by:
a. Wait until the securities come to rest (a vague and uncertain
concept)
b. Avoid a distribution and sell in a non-public transaction
(subject to the 4(2) placement exemption) OR
c. Comply with Rule 144, the SECs safe harbor for secondary
distributions OR
d. Have issuer register shares

Situation Distribution?
I buy in a registered public offering and I am not
a control person. I intend to sell them
immediately. Do I have to register the securities
NO! This is just market trading
when I sell them again?
I buy in a private placement and I am not a
control person. I intend to sell them immediately
to non-Ralston people. Register?
NO distribution if no intent to re-sell (hold for a
long time/change in circumstances defenses)

2. Control Persons wanting to avoid registration:
a. Claim that isolated and sporadic sales into public trading
markets are not a distribution (very risky)
b. Avoid using an underwriter either by selling in a non-public
transaction or by selling directly on their own without
assistance (tricky) OR
c. Comply with Rule 144 OR
d. Have issuer register shares
3. A control person selling shares is treated JUST LIKE AN ISSUER or
an UNDERWRITER (note: street corner exemption)
a. Not an issuer unless determining if helper is UW
b. If there is no helper, then there is no UW, then no issuer
i. Solution = street corner = no help, then CP doesnt
need to register
ii. Could register the shares
iii. Sell pursuant to 4 (1 !)

WOLFSON CASE: Wolfson and his immediate family are CPown over 40% shares. Him and his
immediate family sell much of their stock through brokers. Question is whether their sales through
CP should have been registered. Wolfson and his family say they fell under 4(1): not distributions
but just market trading. Court disagrees: for the purpose of registration, Wolfson is an issuer
brokers do not face liability. CP cannot hide under the broker exemption and must find its own
exemption.

e. 4(1) Exemption: Transactions not involving an Issuer, UW, or Dealer
i. Exemptions for Secondary Private Placements: 4 (1 !) Exemption
1. Generally
a. The re-sale of securities originally purchased in a private
transaction (exempt under 4(2) or one of the small-issue
exemptions) and then re-sold in another private transaction
is not a distribution and does not trigger UW status
b. Such re-sales are exempt from 4(1) because, by definition,
they involve no transaction by an issuer, UW, or dealer
2. 4 (1 !) Exemption
a. There is NO distribution under the criteria for private
placement by an issuer (control person) under 4(2)
i. There is an exemption when you sell to Ralston
people: sophisticated people with access
b. This is 4 (1 !) because is just a shorthand expression for a
4(1) exemption when offers and sales are to non-public
investors: no distribution, no UW, no registration!
SUMMARY:
" NON-CP,
REGISTERED:
Sell instantly (not
a distribution)
" NON-CP,
PRIVATE
PLACEMENT:
Re-sell if you sell
to Ralston
" CP,
REGISTERED/U
NREGISTERED:
Re-sell if you sell
to Ralston

i. Ex: The issuer sought the exemption available for
private offerings in Section 4(2) and Alice, owning
1000 shares, quickly re-sold her shares. If that re-sale
is to one who possessed sophistication and information
about the Issuer, her re-sale does not involve a
distribution; however, if her re-sale was to one who
lacked sophistication and/or information about the
issuer, the re-sale destroys the issuers exemption and
there is a distribution
ii. Exemptions for Secondary Private Placements: Rule 144
1. Generally
a. SEC created Rule 144 to solve the ambiguities with the
statutory exemptions for secondary offerings: provides
objective criteria for determining that the person selling
securities to the public has not acquired the securities from the
issuer for distribution
i. Rule 144: permits the public sale by CPs and affiliates,
as well as other persons who have acquired restricted
securities of the issuer
ii. Does not focus on how LONG you have held the
securities, but focuses on how MUCH are going to be
re-sold
1) Under 144, not deemed to be distribution and
thus not a UW under 2(a)(11) if you comply
with the requirements of 144
iii. The Provisions of 144

144(c) Availability of public information
144(d) Holding periods for restricted securities
144(e) Limitations on the amount of control securities that can be sold
144(f) Manner of sale of control securities
144(h) Required filings with the SEC that give notice of the sale by CP

b. Rule 144 protects certain resale transactions from the
Securities Acts registration mandates when such transactions
are engaged in by:
i. NON-AFFILIATES: Non-affiliated persons who
have acquired securities from either the issuer or the
affiliate of the issuer in a transaction not involving a
public offering (restricted securities)
ii. AFFILIATES: Persons who are deemed to be
affiliates of the issuer at the time they propose to
resell any securities of the issuer (irrespective of
whether such securities are restricted or unrestricted)
(Rule 144(b)(2)) AND
iii. BROKERS: Brokers who effect transactions in
compliance with the Rule

Definitions:
" Affiliate: generally, an affiliate of an issuer is one who controls, is controlled by, or under
common control with, either directly or indirectly through 1 or more intermediaries, such
issuer (ex: control person, CEO, BOD, etc)
" Non-Affiliate: all others
" Restricted securities: generally, securities acquired directly or indirectly from an issuer or its
affiliate in a non-public offering of securities (unregistered private sale)! private
placement, Regulation D (intrastate not included)
" Non-restricted securities: bought on the public market

2. The Basic Structure of Rule 144
a. Who can Re-Sell?
i. Non-affiliate + non-restricted securities: CAN RE-
SELL
ii. Affiliate + non-restricted securities: CANNOT RE-
SELL (deemed same as issuer) UNLESS SELLS
HIMSELF
1) However, 144(b)(2) permits the affiliate to sell
non-restricted securities himself (ex: stret
corner)
2) 144(b)(2) says that 144 applies ONLY to an
issuer if sells restricted stock! it applies to a
helper of an issuer if he sells restricted or
unrestricted stock
a. This means that an issuer can freely sell
unrestricted stock himself, on a street
corner
b. But, if he gets help, then he is subject to
everything in 144
iii. Affiliate/non-affiliate + non-restricted securities:
complicated rules of 144
1) Rule 144 mainly deals with situations where
you have an affiliate (ex: CP) who wants to re-
sell shares OR a situation where you have a
non-affiliate and have restricted shares (ex:
private placement)
2) Under 144, there are different rules for whether
the securities are restricted or not, as well as
whether the person selling is an affiliate or not
! FEWER RESTRICTIONS IF NON-
RESTRICTED SECURITIES
b. What are restricted securities? 144(a)(3)
i. 144(a)(3)(1): Private Placement
1) Securities not acquired through a public
offering
ii. 144(a)(3)(2): Regulation D offerings/Regulation S
1) Securities acquired that are subject to the re-
sale limitations of 502 of Regulation D
2) Regulation S issuances (international offerings)
iii. What is NOT included: Intra-state offerings
1) Intrastate offerings are non-restricted for 144!
if sold pursuant to 147, however, limits for re-
selling within 147 (9 months)
c. What kind of companies can use 144?
i. 144(c)(1): Reporting Companies
ii. 144(c)(2): Non-reporting companies that supply the
same information as if they were a reporting company
on the market (very uncertain)
1) Thus, 144 available to reporting companies or
companies submitting reporting company-like
information
3. Holding Periods Under Rule 144
a. Generally
i. The holding period applies ONLY to restricted
securities sold under an exemption (144(d))
ii. When Selling Non-restricted Securities:
1) Affiliate/CP + non-restricted: no need for
holding period
2) Non-affiliate + non-restricted: no need for 144
since you can just re-sell without any
exemption (however, limits on how much you
sell per month)
a. During restrictive period: 6 months
iii. When Selling Restricted Securities: Rule 144!
b. The 6-Month Holding Period for Reporting Companies:
144(d)(1)(i)

If the issuer of the securities is, and has been for a period of at least 90 days immediately before the
sale, subject to the reporting requirements of section 13 or 15(d) of the Exchange Act, a minimum
of six months must elapse between the later of the date of the acquisition of the securities from
the issuer, or from an affiliate of the issuer, and any resale of such securities in reliance on this
section for the account of either the acquiror or any subsequent holder of those securities.

i. 6 months have to have elapsed between the LATER of:
1) The time the person who wants to sell them got
them OR
2) Someone else got them from an issuer or
affiliate
ii. If there have been multiple sales to non-affiliates: can
do tacking! go back to original purchase from non-
affiliate
1) So long as there has been MORE than 6 months
between the sales, then person X can re-sale
2) If there has been a sale to an affiliate, then there
is no tacking and the clock starts again (6
month)

Example Answer
Reporting !
non-affiliate !
X
Issuer sells to non-affiliate on January 1. Today, it is July 2
(over 6 months). Can the non-affiliate now sell stock if this is
a reporting company?
YES; it has been
6 months
Reporting !
affiliate ! X
What if instead the issuer sells to an affiliate on January 1.
The affiliate, on April 1, sells to a non-affiliate. How long
does the non-affiliate have to wait before re-sale? 6 months
from original sale (Jan 1) or 6 months from April 1 (when I
purchased securities from non-affiliate)?
Later of the
date6 months
from the later of
the sale from the
issuer or the
affiliates sale to
the non-affiliates
6 months from
April 1

Reporting !
Non-affiliate
! Non-
affiliate! X
What if the issuer sold to non-affiliate on January 1. Then, re-
sale to another non-affiliate on April 1? I purchase on April
20. When can I re-sell?
Tacking: can go
back to original
purchase from the
non-affiliateso
long as there has
been MORE than
6 months between
the sales, then X
can immediately
re-sale. Only if
there has been a
sale to affiliate
can there be no
tacking.
X ! non-
affiliate!
affiliate! Y?
If you sell to a non-affiliate and the non-affiliate sells to
affiliate, when can the affiliate sell?
Cannot
immediately re-
sell: have to
register or find an
exemption!
person who re-
sells has to wait 6
months
-Whenever there
is an affiliate, the
clock starts again
3 years, CEO
purchase ! X?
After 3 years, CEO of Apple purchases Apple stock. Can it
be immediately be re-sold?
NOneed an
exemption (under
2(a)(11) if CP is
going to help,


4. The 1-Year Holding Period for Non-Reporting Companies:
144(d)(1)(ii)

If the issuer of the securities is not, or has not been for a period of at least 90 days immediately
before the sale, subject to the reporting requirements of section 13 or 15(d) of the Exchange Act, a
minimum of one year must elapse between the later of the date of the acquisition of the securities
from the issuer, or from an affiliate of the issuer, and any resale of such securities in reliance on this
section for the account of either the acquiror or any subsequent holder of those securities.

a. Generally
i. There is a 1-year holding period for non-reporting
companies
5. Holding Period for Securities Bought on Credit
a. Borrowing money from a bank to purchase securities: when
does the holding period start?
b. 144(d)(2): if you purchase the securities pursuant to a
promissory note, not deemed to have purchased them unless
some strict requirements are satisfied
i. If I borrow money from a bank, purchase is deemed to
be IMMEDIATE
c. However, if you borrow money from the issuer to purchase
securities! not deemed immediate (144(d)(2))
i. Doesnt count as having bought the securities until
fully paid
ii. If credit from the issuer, not fully paid unless K with
the issuer says: full recourse against purchaser of the
securities (can take your house if you dont pay), has to
be secured by collateral other than securities, or have
to have paid off debt to issuer before you can re-sell
d. Example
i. If I purchase on January 1 by giving one of these full
recourse notes (collateral other than the stockif I
dont pay, they can take something other than the stock
back) and then 6 months later, I pay off the debt to the
issuer. When can I start re-selling the securities?
1) HAVE TO WAIT 6 MONTHS FROM WHEN
I PAID OFF THE NOTE
6. More on Tacking of Holding Periods
then CP = UW
CEO own sales Lets suppose the Apple CEO purchases his own sales in a
public offering. Cannot be immediately resold. Lets suppose
he buys them pursuant to a public offering and waits 2
yearsstill cannot resell without registering (public
information).

If the CEO has a
bucket of
securities selling
them himself
would be OK to
resell
a. Stock Splits

Stock Dividends, Splits and Recapitalizations. Securities acquired from the issuer as a dividend or
pursuant to a stock split, reverse split or recapitalization shall be deemed to have been acquired at
the same time as the securities on which the dividend or, if more than one, the initial dividend was
paid, the securities involved in the split or reverse split, or the securities surrendered in connection
with the recapitalization.

i. Example of Stock Split: 144(d)(3)
1) What if you got stock in the following way:
you own 1000 shares of company stock and
then there was a stock split or a stock dividend
and the company issued you another 1000
shares (meaningless because everyone else got
1000 too and you get the same amount). Lets
suppose you want to re-sell the stock. Can you
do that? Or do you have to wait 6 months?
2) 144 says that is unfair to wait 6 months since
you have not gained anything economically
you still own the same slice of the company
3) Can still sell the same slice as if there hasnt
been this stock split
b. Conversions
i. Permitted to go back to the same time the stock was
issued
c. Collateral for Loans and Default
i. AFFILIATE PLEDGOR: What about the example
where an affiliate has stock and use it as a collateral for
a loan and the bank is stuck holding the stock. What
can the bank dodoes it have to wait and show
investment intent?
1) 144(d)(4): only deals with pledges of stock by
an affiliate
2) The pledgee who gets stock from an affiliate is
deemed to have acquired the stock when the
pledgor (affiliate) originally got the stock
a. Thus, do not have to wait 6 months
unless scam
3) If securities pledged without recourse, then no
tacking and deemed to be acquired by the bank
at the time of the pledge (time the affiliate gave
the stock to the bank)
a. If non-recourse loan (like going to a
pawn broker) then there is NOT the
tacking
Example: I am an affiliate and I have had the stock for 1 year. I get a loan and immediately violate
the loan agreement. This is a non-recourse loan. When can the bank re-sell the shares?
-Since non-recourse loan, have to wait 6 months
-Normal rule applies with respect to non-recourse loan and affiliates
-If recourse loan, then bank gets the special giftcan stand in the shoes of the
affiliate if you give a full recourse loan to a affiliate (can resell immediately so long
as affiliate has held the stock for the appropriate period)

ii. NON-AFFILIATE PLEDGOR
1) Under 144, if non-affiliate pledges stock to
bank and defaults, see how long it has been
since the issuer sold the stock of some affiliate
sold the stock! how long the person pledging
the stock had it from the affiliate
2) Same exact tacking rule that applies pursuant to
this section (6 months)
7. Gifts
a. NON-AFFILIATE GIFTS: What if a non-affiliate gives X
stockhow long does X have to wait to re-sell?
i. See if it has been 6 months since non-affiliate gave to
X
ii. If non-affiliate waited 6 months from the LATER of
someone purchasing from the issuer or the affiliate,
then can be re-sold immediately
b. AFFILIATE GIFTS: What if a non-affiliate gives X stock
how long does X have to wait to re-sell?
i. This could be deemed a purchase from an affiliate:
however, affiliates period of holding is tacked on with
X holding period (want to avoid penalty)
c. INHERITANCE and AFFILIATE: Affiliate dies with
stock! so long as the dead person held for appropriate time,
then can immediately re-sell
8. What happens after 6 months?
a. Cannot immediately re-sell and must comply with
requirements
b. FOR AFFILIATES:
i. 6 month holding period (no holding period for non-
restricted securities)
ii. Volume limits
1) Why?
a. Danger that manipulation will cause
fluctuation in stock price AND will
need to engage in extensive selling
efforts that sound like a distribution
b. Therefore, trickle shares out
2) Rules
a. Affiliate can only sell the GREATER
of, every 3 months, 1% of outstanding
shares (ex: if 100,000 outstanding, can
only sell 1% every 3 months) or average
weekly trading volume ! for stock
b. For debt, larger limit10% of a certain
kind of bond
c. If whole bunch of bonds issued by a
company and divided into certain
varieties, can sell up to 10% of the
variety you are trying to sell
iii. Information requirements
iv. Have to file forms
1) Notice of sale filed with SEC
v. Manner of sale
vi. Can only be sold pursuant to brokers transactions
(144(g))
c. FOR NON-AFFILIATES
i. Wait holding period, but need to comply with
information requirements for 6 more months
ii. If you wait a year, no information requirement:
144(b)(1)(i)
iii. Volume limits do not apply if non-affiliateapplies
ONLY if affiliate
9. Aggregation Rules (VOLUME LIMITS)
a. What are counted towards the limits? 144(e)(3)
i. Sales by pledgees of a seller
1) If I have given collateral for a loan (stock to
bank) and I do not pay loan and bank has to sell
the securities, then the amount they sell, counts
towards my limit
ii. Gift/Sales to Relatives
1) If I give stock to my daughter, her sales are
aggregated with my sales

NOTE: Rule 144 is not an exclusive safe harbor. A person who does not meet all of the applicable
conditions of Rule 144 still may claim any other available exemption under the Act for the sale of
the securities. The Rule 144 safe harbor is not available to any person with respect to any
transaction or series of transactions that, although in technical compliance with Rule 144, is part of
a plan or scheme to evade the registration requirements of the Act.
! The SEC does not really mean this
-If trying to re-sell securities by saying I do not fit 144 but I have had a change of
circumstances, and want a no-action letter to go ahead and sell the securities, SEC will not
helpwant to force to use 144 rather than the statute
-SEC tries to make it difficult to induce people to use 144
-This means becoming a reporting company

10. Summary of Rule 144

AFFILIATE NON-AFFILIATE
or Person Selling on Behalf of an
Affiliate
(and has not been in affiliate during
the Prior 3 months)
Restricted
Securities of
Reporting
Company

! 6 months for
reporting
! During 6 month holding period:
no re-sales permitted
! After 6-months holding period,
may re-sell under 144 if:
" Current public information
" Volume limitations
" Manner of sale requirements
for equity securities AND
" Filing of Form 144
! During 6 month holding period:
no re-sales permitted
! After 6 month holding period but
BEFORE 1 year:
" Unlimited re-sales under Rule
144 except that the current
public information
requirement still applies
! After 1 year holding period:
" Unlimited public re-sales
under 144 and do not need to
comply with any Rule 144
requirements
Restricted
Securities of Non-
Reporting
Companies

! 1 year for NRC
! During 1 year holding period: no
re-sales permitted
! After 1 year holding period: may
re-sell in accordance with all Rule
144 requirements if:
" Current public information
" Volume limitations
" Manner of sale requirements
for equity securities and
" Filing of Form 144
! During 1 year holding period: no
re-sales under Rule 144 permitted
! After 1 year holding period:
" Unlimited public re-sales
under Rule 144; need not
comply with any other Rule
144 requirements
Non-Restricted
Securities of
Reporting
Company
Cannot be resold (deemed same as
issuer) unless sells himself (street
corner with no UW)
Can be re-sold
Non-Restricted
Securities of Non-
Reporting
Companies
Cannot be resold (deemed same as
issuer) unless sells himself (street
corner with no UW)
Can be re-sold
" 6-month holding period for reporting companies! 6 months have to have elapsed between
the LATER of: The time the person who wants to sell them got them OR Someone else got
them from an issuer or affiliate
" 1 year holding period for non-reporting companies
" Do not forget tacking with non-affiliates (not available for affiliates)
" Intrastate not non-restricted


Resales of restricted
securities of reporting
companies
" 6-month holding period for both NCP and CP who
resell restricted securities of reporting companies
" After 6 months, NCP can re-sell on the sole condition
the issuer is a reporting company current with its
Exchange Act filings
" After 1 year, NCP can re-sell without limitation
" CPs who have held restricted securities for 6 months
can re-sell but are subject to the trickle, sales method,
information, and filign limitations of Rule 144
Resales of restricted
securities of non-reporting
companies
" There is a longer, 1-YEAR holding period for both
NCP and CP who resell restricted securities on NR
companies
" After 1 year, NCP can resell without limitation
" But CP who have held for 1 year can resell only
subject to the other Rule 144 limitations
Resales of non-restricted,
control securities
" There is NO holding period for non-restricted
securities held by CP
" BUT, resales of such control securities are always
subject to the other Rule 144 limitations


iii. Exemptions for Secondary Private Placements: Rule 144A
1. Generally
a. SEC has partially codified the 4 (1 !) exemption to facilitate
trading in securities privately placed with institutional
investors! there can be a re-sale by an affiliate to a Ralston
person (sophisticated person with access to information)
i. Under 144A: if you sell securities to a qualified
institutional buyer (QIB) then there is no problem
ii. Rule 144A: provides a safe harbor exemption from the
registration requirements of 1933 for re-sales of
restricted securities TO qualified institutional buyers
(other than the issuer)

Requirements of 144A:
" Must sell to a QIB: any institutional investor with at least $100 million securities portfolio
" Securities cannot be traded on any exchange or NASDAQ
" Information must be available to QIBs
" Issuers must either be reporting companies, foreign issuers with an exempt ADR program
in the US, foreign governments, or company that has undertaken to provide current
financial information
" Not available for the issuer

2. Eligible Securities
a. Rule 144A would not extend to the offer or sale of securities
that, when issued, were of the same class as securities listed on
a national exchange registered under 6 of the Exchange Act
3. Eligible Purchasers
a. Types of Institutions Covered
i. What is a qualified institutional buyer?
1) An institution must in the aggregate own and
invest on a discretionary basis at least $100
million in securities of issuers that are NOT
affiliated with the institution
2) Means insurance companies, big huge
companies, pension companies
a. Idea is that the huge institutions do not
need protection of securities laws, so
there can be quick and easy re-sales
i. Venture Capitalists: Suppose you are a VC and
brought 50% of the stock. Is 144 useful for you? If
volume restrictions, then NO
1. If you are sitting on the board, as an affiliate,
this would not be helpful for youif you
owned 50% of the company, long time before
you sold the stock
2. Therefore, 144A is the resale provision
ii. Banks and Savings and Loan Associations
1. Must have at least $100 million in securities
2. Audited net worth of least $25 million
a. Demonstrate this in their latest
published annual financial statements
iii. Registered Broker-Dealers
1. Broker dealer registered under the Exchange
Act which in the aggregate owns and invests on
a discretionary basis at least $10 million in
securities of issuers that are not affiliated with
the broker-dealer is a qualified institutional
buyer
iv. Others
1. Any corporation or partnership that meets the
$100 million in securities threshold may
purchase under the Rule, except for a bank or
savings and loan institution which must satisfy
the net worth test
2. How Does 144A Work?
a. 4(1): if you are not an UW, then fit within 4(1) an do not have
to register securities
i. Rule is simple: as long as you sell to a QIB, then you
can re-sell without any limitations
b. 144(a)(c): any dealer who complies with the requirements of
being a large dealer ($10 million of assets) is not a participant
in the distribution! so, can help the VC to re-sell without
having problems
c. Initial user of 144A doesnt have to worry about re-sales to
non-compliers
d. Chain: 144(a)(3)(iii)
i. Restricted securities: securities acquired in a
transaction or chain of transactions meeting the
requirements of Rule 144A
3. Restrictions under 144A
a. Securities that you are trying to re-sell CANNOT be re-sold
on a national securities exchange
b. If issuer is a non-reporting issuer, than the proposed buyer
must have the right to retain brief information from the issuer
about the company (144(a))
i. Not as deep as information that has to be provided to
reporting company
ii. The Section 4(1 !) Exemption (MORE)
1. Generally
a. A CP may find that he is unable to bring his sale within Rule
144! just for affiliates
i. Example: number of shares to be sold may exceed the
volume limit, or the issuer may not be current in its
1934 reports, or the information publicly available
about a NRC may not be sufficient or the same may
not occur through a brokers transaction
ii. The 4 (1 !) Exemption may help
2. What is the Section 4 (1 !) Exemption?
a. If an affiliate wants to re-sell securities, can re-sell, so long as
4(2) is complied with: private placement exemption (sale to
sophisticated person with access)
b. However, private placement does not apply to anyone but the
issuer! thus 4 ( 1 !) helps in using the 4(1) rule! says that
if you sell to a sophisticated person with access, the person
helping is not deemed a UW so do not fall under 4(1) and thus
free to re-sell
3. When does 4 (1 !) Apply?
a. Affiliate has what would otherwise be non-restricted
securities and wants to re-sell (Ackerberg v. Johnson, see
below)
i. Because he is an affiliate, then the securities laws
apply
ii. Two situations in which an affiliate would have non-
restricted securities in this way:
1. Affiliate purchase in IPO
2. Affiliate purchases restricted securities but
holds them until they are deemed to come to
rest
3. If you are an affiliate, cannot re-sell them freely
(true if you had them in a public offering or had
them for 20 years)! have to comply with
securities laws or find some exemption
b. Situation in which the securities were sold to public
offering
i. Ex: If Steve Jobs sold $1 million shares of Apple in an
Apple IPO cannot freely re-sell! could sell to
sophisticated people with access pursuant to 4 (1 !)
exemption (where affiliate wants to sell shares that
would otherwise be restricted)
c. 4 (1 !) applies to situations in which we are talking about
non-restricted securities but for the fact we have an affiliate

Ackerberg v. Johnson (8
th
Cir. 1989): Ackerberg bought the Vertimag shares in March of 1984
bought 12,500 shares from Johnson, who was the chairman of the board, founder of the company,
and its largest individual stockholder. He received a 99-page private placement memo which
contained information about Vertimag. Signed a subscription agreement prepared by counsel for
Vertimagtestified that he read and understood that no sale could be made without the subscription
agreement (unregistered + readily transferable). Ackerberg argues that because of the broker
involvement, the 4(1) exemption cannot be available for Johnson since he is a UW. Court finds that
A is a sophisticated investor and in no need of protections under 1933 Act (no public offering, no
distribution, and thus no UW)! Falls under 4 (1 !) exemption: securities that would be otherwise
non-restricted sold to sophisticated person with access. Ackerberg had the knowledge and the
experience in investigating to properly evaluate the merits and risks of his purchase, could bear the
economic risk, he had full information, he knew the securities were not registered! he was a
conscientious and prolific investor


SUMMARY:
1-How can an affiliate sell securities?
-Street corner
-144
-144A
-4 (1 !)
2-What are the situations in which 4 (1 !) used?
-Situations in which the securities would otherwise be unrestricted (originally purchased in a public
offering or in the open market OR have come to restaffiliates had them so long)! affiliate isnt
then allowed to sell in an unrestricted way because he is an affiliate
-4 (1 !) permits re-sale to people with sophisticated people with access

XIV. Reorganizations and the For Value Requirement
a. Generally
i. The securities laws apply to ONLY the sale or offers to sell of securities!
what is a sale?
1. SEC has said that a sale must be for value
b. Giving Away Stock
i. Giving 500 Shares To Go on a Website: SALE
1. Paying people with the stock to do something you want = sale
ii. Owners of company keep ! the stock and give away the rest: SALE
1. Creating a public market for yourself = sale
a. Public market increases the value of shares by 20%
iii. Example: BlueCross
1. When BlueCross was a charitable organization and wanted to become
a public organizationBlueCross proposed to give all new shares to
its existing subscribers. If you owned insurance for BlueCross and get
shares when it turned into for-profit corporation. Lawyers for
BlueCross made the shares be non-transferrable for 3 years.
2. SEC refused to OK this and tried to get a no-action letter saying this
wasnt for value
c. Stock Dividends
i. New Share for Every Stock: NO SALE
1. No consideration = no sale
2. If every shareholder keeps getting shares, then everyone gets the same
thing: no value that is being exchanged
ii. $2 or Share for Every Stock: NO SALE
1. Although looks like for value, no sale
2. As long as option is given at the same time, not for value
a. Shepherd: doesnt make sense
d. Selling Options to Purchase Shares: Warrants (Option Sold by Issuer)
i. Selling Option to Purchase Shares that Can be Exercised NOW: SALE
1. Sale of the option itself has to be registered
2. Listed as an express item under definition of security: if selling an
option and receive money, for value
ii. Registration of the Underlying Stock that the Option can be Exercised for
1. If option is exercisable now, then registration required
2. If option can only be exercised in the future, do not need to register
nowjust need to register at the time the option will be exercised
a. Ex: if you only exercise the option in 3 years, do not need to
register the option
b. People normally do SHELF REGISTRATION for this
i. 415(a)(1)(iii): securities to be exercised upon warrants
or rights
ii. If selling warrants, and you shelf register the
underlying securities
iii. There are 2 different securities: the option and the
underlying security
e. Changing the Security
i. Changing the Maturity of Bonds: Only if Substantial Change
1. Normal rule: if there is a substantial change in the conditions of the
security under the rules of the security, then there needs to be
application under the full securities law
a. Minority case says NO: as long as the underlying contract
setting up the security/bond said it was possible to change the
rules of the bond, then do not need to re-register the securities
b. This is a minority decision because every K has something
about changing securities
i. Only when substantial change, then re-registration!
majority rule
ii. Idea is that if you change the characteristics of the
bond, that is the same as giving people a new bond!
sale of a security for value
ii. Incorporation in Good Shareholder State to Re-Incorporation in Bad
Shareholder State: NO
1. What if you are incorporated in a state that is good for shareholders
(allows them to sue easily, has cumulative voting, etc) and the
company then re-incorporates in a state that is bad for minority
shareholdersis that a new security?
a. Shepherd: changes important rights you have as a shareholder
but the SEC says NO
b. Would have to register and then say that since the shares are
$0SEC says you still have to provide information about
what is going on
iii. Entitlement to Preferred Shares in Arrears
1. If you already have an entitlement to preferred shares (in arrears)at
that point can you exchange for shares instead?
a. NOT within the holding of SECthis is different because you
are being asked to give up something you already had for the
shares instead
2. As long as you are given the SAME CHOICE in money or stock,
even if one is worth more or less, that is NOT a SALE FOR
VALUE ! Needs to be at the same time to be not for value
3. If you already have a entitlement for money, and the company
says they will give you stock insteadthat is a SALE FOR
VALUE (giving up value)

f. Spin-Offs
i. What is a spin-off?
1. Classic spin-off: parent corporation distributes shares of a private-
held subsidiary as a stock dividend to its current shareholders (only a
matter of time before shares become publicly traded)
2. Shareholders dont really own anything they didnt own before
a. Before the spin-off, had an ownership interest in the original
company, and now they own interest in exactly the same
thing: companys stock for the new subsidiary
b. In these situations, SEC does come in and say there has been a
sale for value
3. Defendants, charged with failing to register a spin-off offering have
asserted that the stock dividend distributed to shareholders was not an
offer to sell or sale within 2(a)(3): Courts reject this because the
creation of a public market for the spin-off securities constitutes
VALUE to the parent corporation when the stockholders dispose of
their securities
a. Moreover, parent corporations that cause their subsidiaries to
engage in such practices may be deemed UW (SEC v.
Datronics, below)

SEC v. Datronics (4
th
Cir. 1973): Corporation set up wholly-owned subsidiarycaused him to pay
cash for private company. Parent sets up a subsidiary and it will pay cash to merge with some
private company. Now, parent has all the shares of the subsidiary, the main asset of which is a
private company (not traded publicly). The parent will distribute the shares of the subsidiary to all
the shareholders of the parent. The subsidiary has a big asset: the private company. All of a sudden,
the private company value increases by 20%. Before, had a private company with no sale or market
in shares. After this spin-off, have thousands of shareholders of the parent owning shares from the
subsidiary is the traded company. Have the shareholders received anything of value? Arguments
for NO: Before this, had shares in a parent company that had shares in a private company vs.
Arguments for YES: Because there is public trading, the shareholders are getting something 20%
more valuable than they had before. Court holds: that spin-off is required to be registered! this is
a scam for having this company go public without having to register. The end of the transaction
(parent sets up a sub, merges with private and distributes shares): end result is the private company
is now publicly traded without having shares registered. Lots of people buying shares in secondary
market who never got the information about it.


ii. Do you have to register spin-offs?
1. SEC has come up with various guidelines that the SEC will use in
determining whether a spin-off will be subject to challenge as being
for value and those in which it is not
a. SEC does not say that ALL spin-offs have to be registered,
just some
b. What spin-offs have to be registered?
2. No registration for spin-off IF:
a. No consideration for shares: company doesnt require
shareholders to pay for shares AND
b. Pro-rated distribution of shares to shareholdercomplete
accord with how many shares you already own with the
parent AND
c. Adequate information provided to shareholders and
market AND
i. The shareholder so the parent even before the shares
were distributed, owned the subsidiary
ii. Who does need the information?
1) This is a scheme to get public trading in the
shares
2) The danger is that people purchasing do not
have information about the subsidiarywhy
there needs to be adequate information
d. Valid business purpose for the distribution AND
e. Restricted securities
i. Shares associated with spin-off have to be restricted
ii. Designed to stop this from being an immediate public
market

Summary:
" Giving people stock to do something you want = sale
" Creating public market = sale
" No consideration = no sale
" Warrants, options, or conversion rights do not represent sales for value unless immediately
exercisable
" Substantial change in the security than register
" Changing incorporation to bad shareholder state = no sale
" If option between money/stock at the same time = no sale
" If already have entitlement to money (arrears) and company says they will give you stock =
sale
" Spin-offs may have to be registered unless 5 factor test met




The People Involved in a Securities Offering

ISSUER
Issuing the securities, approaches the broker-dealer to help with the sale
When a company goes public, they typically go to an underwriter who helps them determine the
price, buy the shares from you, and distribute to the public

INSTITUTIONAL INVESTOR UNDERWRITER
An underwriter owns the shares it selling so it accepts a lot of risk with respect to the price if they
dont find enough investors and may have to hold on to the securities if there isnt enough demand

An institutional investor typically approaches an underwriter to get dips on an IPO issuing or
broker-dealer to buy it on the market (rare to go to the issuer)

BROKER/DEALER OR DEALER
A dealer buys and sells to/from its own account and 3rd parties aren't involved (third party =
someone that has a separate account at the broker-dealer, like an individual investor or institutional
investor)
A broker-dealer is a firm or individual that deals securities for itself, individuals, or other
institutional investors (see below)

BROKER
A broker acts as an intermediary between a buyer of a security and a seller (uses the accounts of
others)
Works with UW to sell shares for a transaction fee


INVESTOR
Buys the securities

When a Broker-Dealer Acts as a BROKER:
! When it acts for 3rd parties like consumer investors and other institutional investors. For
example, the issuer may approach Citibank and ask them to facilitate a sale of stocks they are
issuing. Citibank is acting as the broker in that transaction.
! NOTE: a broker-dealer doesn't necessarily underwrite the securities (i.e. they don't assume the
risk of not finding enough investors). A broker never owns the stock.

When a Broker-Dealer Acts as a DEALER:
! A broker-dealer acts as a dealer when it is trading within its own account. This could be a firm
that has cash floating around and executes buy/sell transactions to try to make a profit for itself.

**Broker/dealer = market-maker