Securities

Front 1

Who may bring a claim under Section 17(a) of the 33 Act?

Back 1

The SEC

Front 2

In what two standards may a court require that scienter is established under 10b-5?

Back 2

[1] The defendant desired to mislead investors in furthering some self serving purpose (narrow - MSLO w. Martha Stewart) or [2] The defendant was simply aware of the propensity of the misstatement to mislead.

Front 3

Does recklessness constitute scienter in a 10b-5 claim?

Back 3

Generally, recklessness satisfies scienter but the standard of recklessness itself varies [a] extreme departure from ordinary care vs. [b] gross negligence (objective) vs. [c] carelessness approaching indiference

Front 4

What issue arises regarding a claim of ignorance of the law within the defense of a 10b-5 scienter claim?

Back 4

Ignorance is not a defense, but professional advice that certain facts are immaterial may protect the defndant while advice that the misrepresentation is not actionable probably will not help the defendant

Front 5

What four main Sections of the Securities Act of 33 create liability for issuers and other involved parties?

Back 5

Section 11: civil liabilities for false registration statement

Section 12(a)(1): civil liabilities in connection with prospectuses/communications (violates section 5)

Section 12(a)(2): Untrue statements of material fact in connection with a prospectus/communication

Section 17: Fraud in offers/sales of securities (gov't enforcement)

Front 6

How does Section 12(a)(1) of the 33' Act create liability?

Back 6

[1] any person

[2] who violates Section 5 of the Act

[3] is liable to the buyer of securities for damages subject to Section 12(b)

Front 7

What does the plaintiff not need to show on a 12(a)(1) claim?

Back 7

[1] Mental state (it's strict liability)

[2] Injury

Front 8

What four things must a plaintiff show to prevail under Section 12(a)(1)?

Back 8

[1] Section 5 violation

[2] Use of facilities of interstate commerce in sale or offer

[3] If still owned, the plaintiff made an adequate tender of the security

[4] Statute of limitations has not expired

Front 9

If an offer violates Section 5 but the subsequent sale is legal is a rescission available under Section12(a)(1)?

Back 9

Yes. You cannot retroactively fix a Section 5 violation with respect to Section 12(a)(1) liability.

Front 10

What is the remedy available for a plaintiff under 12(a)(1)?

Back 10

[1] a rescission where the securities are returned for amount paid plus interest

[2] if no longer held by the plaintiff: Amount paid minus the proceeds of the sale of the security (minus income received while the security was owned)

Front 11

What did Pinter v. Dahl hold?

Back 11

Solicitors could be found in violation of Section 12(a)(1) but not with strict liability. The motive of the solicitor is examined for personal financial interest or those of the owner/issuer. (not just encouraging a friend to buy)

Front 12

What does Section 12(a)(2) add to Section 12(a)(1)?

Back 12

Section 12(a)(2) extends the rescission remedy for offers/sales via interstate commerce in which a prospectus/oral communication includes untrue statements or material omissions

Front 13

What does Section 10 of the Securities Act describe?

Back 13

The requirements of information to be included in a prospectus.

Front 14

What was the critical question in Gustafson v. Alloyd?

Back 14

Whether a contract of sale was a prospectus under Section 12(a)(2) and thus gave rise to rescission remedies due to inaccuracies. Held: K was not a Section 12 prospectus - only documents describing public offerings by an issuer or controller are Section 12 prospectuses

Front 15

What did Hyer v. Malouf hold regarding Section 12(a)(2) claims?

Back 15

Whether an offering is public under Gustafson for 12(a)(2) liability is whether the class solicited needs defense (Ralston holding) according to 4 factors: [1] number of offerees [2] sophistication of the offerees [3] size/manner of the offering [4] relationship of the issuer and offerees

Front 16

How did congress address the scope of Section 12(a)(2) in the JOBS Act?

Back 16

Part of the mandate for Reg A+ (mini-registration) includes the requirement that securities sold under the exemption would be subject to Section 12(a)(2). Post Gustafson

Front 17

What is the distinction some courts have drawn between Section 11 and 12(a)(2) claims for plaintiffs who bought in the secondary market?

Back 17

The remote liability avenue available to secondary market buyers through tracing shares back to the issuer is not available because of the public requirement of Gustafson (secondary sales are not public) In practice tracing is also a very challenging option for plaintiffs.

Front 18

What does Section 11 of the Securities Act liability provide for?

Back 18

Civil claims against parties for material misstatements and omissions related to registration statements.

Front 19

Generally, who has standing under Section 11 of the Securities Act?

Back 19

Any person who has purchased stock pursuant to a defective registration statement. There is ordinarily no need to show reliance on the registration statement (or statutory prospectus) or the falsity of the statement

Front 20

If the defendant can prove that the plaintiff knew the truth related to the fraud alleged under a Section 11 claim, is there liability?

Back 20

No. Section 11(a) provides that the plaintiff may not be aware of the untruth in the registration statement

Front 21

What does Hertzberg add to the Section 11 standing doctrine?

Back 21

Buyers in the secondary market where only IPO shares are for sale/resale have standing under Section 11 regardless of time of sale b/c their shares are associated with the defective registration statement.

Front 22

What does the pcOrder case add to the Section 11 standing?

Back 22

When there is stock that has other than IPO shares available, resale purchasers must show more than high statistical probability that their shares can be traced to the defective registration statement.

Front 23

Which class of defendant is subject to strict liability under Section 11?

Back 23

The issuer.

Front 24

What class of defendants have a due diligence defense under Section 11 of the Securities Act?

Back 24

[1] Signatories of the registration statement

[2] directors of the issuer a the time of the filing

[3] accountants/experts named on the registration statement that helped prepare portions of the statement

[4] the issuers underwriter

Front 25

What is an 'underwriter' for the purposes of Section 11 liability?

Back 25

Narrowly construed as opposed to other areas of the Act: those who buy form the issuer with a view for distribution and not rating agencies, non-endorsing brokers et. al.

Front 26

How can the representations of a registration be categorized according to Section 11(b)?

Back 26

[1] Expertised sections under which a duty to investigate only attaches to the expert drafters and [2] the non- expertised sections in which directors, underwriters and signatories may not raise a due diligence defense lacking a showing of reasonable investigation into the falsity

Front 27

Can a director or signatory be excused from investigation under a due diligence Section 11 defense b/c the issuer's attorneys are the 'expert' drafters?

Back 27

No. Counsel normally conducts a due diligence meeting to provide an opportunity to show investigation. Blind reliance on counsel as experts will not prevail.

Front 28

What does Rule 176 provide the courts/jury in evaluation of liable parties under Section 11 of the Securities Act?

Back 28

Rule 176 gives factors to consider when evaluating a parties reasonable investigation and grounds for reliance on counsel/experts:

[1] type of issuer

[2] type of security

[3] type of person

[4] office held for officers

[5] relationship to issuer for directors

[6] reliance vs. what the defendant should know given position

[7] underwriters: the type of arrangement (shelf?)

[8] incorporated by reference to 34 Act docs?

Front 29

With respect to directors, how does Barchris allocate a duty to investigate?

Back 29

Barchris implies a sliding scale of responsibility according whether the director is an insider or outsider. This is codified in rule 176.

Front 30

Is the application of 176 an issue of fact for the jury or law to be decided by a judge?

Back 30

Courts are split on this.

[1] plaintiff friendly: En re worldcom -> send it to the jury. Too fact specific.

[2] Defendant friendly: Software Toolworks -> the judge can decide. Too technical and experts will confuse jury

Front 31

What Section 11 issue did the Fait case address?

Back 31

Whether an accountants assessment of goodwill was a material fact under Section 11. Held: no - an opinion is not actionable. Misstated fact must be objectively false at the time of the statement.

Front 32

What do Rule 408 and 12b-20 require respecting disclosures.

Back 32

Information must be added when its omission would make the other mandated disclosures misleading in the registration statement and 34 Act filings

Front 33

What is the buried facts doctrine?

Back 33

Information must be made in a manner that does not require assembly.

Front 34

What are the lead cases in the buried facts doctrine?

Back 34

Kohn - the run around in a 175 page proxy statement was misleading vs. Merck where investors can simply do the math to arrive at forecasts from unassembled but unfavorable facts

Front 35

What did Basic v. Levinson hold respecting materiality under 10b-5?

Back 35

[1] Adopted the TSC industry standard that to be material there must be a substantial likelihood that omissions significantly altered the total mix of information per the reasonable investor.

[2] It is fact dependent, so it is difficult for defendant to get summary judgment on this issue

[3] Introduced the probability/magnitude test to address materiality of a fact

Front 36

What is the 33 Act Section 2(a)(11) and why is it important with respect to resales?

Back 36

The definition of 'underwriter'. Section 4(a)(1) exempts everyone but issuers, dealers and underwriters. Statue as an underwriter can trigger Section 5 (registration) obligations.

Front 37

Can an individual who merely buys stock from the issuer and looks to flip it be considered an underwriter of the issuer?

Back 37

Yes. Under 2(a)(11) 'underwriter' includes one who purchases from an issuer with a view to distribute which a stock flipper would be.

Front 38

What are two primary interpretive issues when assessing whether a person is an underwriter for the purposes of a 4(a)(1) exemption in the resale of a security purchased from an issuer? (assuming 144 is not relied upon)

Back 38

[1] was there a 'view to the distribution' i.e. did the purchaser have investment intent

[2] is the secondary sale a sale within a distribution

If there is investment intent or the sale is not in a distribution, the person falls outside of the underwriter definition

Front 39

What is an emerging growth company?

Back 39

An issuer with < $1B in annual gross revenue. Remains so until

[a] the last day of a year it exceeds $1B

[b] 5 years after registering

[c] the date upon which it issues > $1B in debt

Front 40

In what types of events might qualify as 'changed circumstances' regarding a resale of unregistered securities originally purchased from an issuer, so as to preserve investment intent (avoid becoming an underwriter)

Back 40

Forced liquidations such as trying to avoid insolvency or responding to a call on a demand note, etc.

Front 41

When analyzing 4(a)(1) outside of 144, what is the primary inquiry to establish whether a resale where there is no investment attempt is also part of a distribution?

Back 41

Whether the resale destroys an exemption under which the purchase to the seller in question was made. i.e. a resale to an out-of-state person if the underlying exemption was intrastate

Front 42

What is the statutory basis of the private placement offering?

Back 42

Section 4(a)(2) which exempts offers that are not public.

Front 43

What determines whether or not an offer is 'not public' to satisfy 4(a)(2)?

Back 43

Whether those solicited can fend for themselves per Ralston.

Front 44

What are the two pillars of being able to 'fend for yourself' in the 4(a)(2) analysis?

Back 44

Sophistication and information (info. is further divided into access and disclosure)

Front 45

Of what quality must the disclosure of information be for an issuer relying on the 4(a)(2) private exemption?

Back 45

Equivalent to a registration statement.

Front 46

What establishes a a prima facie case for a Section 5 violation?

Back 46

[1] no registration statement filed

[2] defendants offered or sold shares

[3] interstate transportation or comm. used in connection with sale/offer

Front 47

What are the main exemptions to filing for an issuer?

Back 47

[1] 4(a)(2) private offering

[2] Rule 506 safe harbor to 4(a)(2)

[3] Rule 504 exemption for small issues

[4] Rule 505 limited offering exemption

[5] Regulation A/A+ exemption for mini-public offerings

[6] 4(a)(6) for crowdfunding

[7] 3(a)(11) intrastate exemption

Front 48

Do the exemptions protect the issuer from the antifraud provisions?

Back 48

No

Front 49

What are the two general types of exemptions?

Back 49

Exempt transactions

Exempt securities

Front 50

What are the general types of securities exempted under Section 3(a)...

Back 50

short term promissory notes; municipal state or federal securities; NPO's

Front 51

What are the basic requirements of a Section 4(a)(2) private offering

Back 51

Capital raised: unlimited

Number of Investors: undefined but more tends to suggest public offering

Investor qualification:

[1] information: available -insider needed- or delivered

[2] financial sophistication

Front 52

What are the requirements of a Regulation D exemption?

Back 52

Capital Raised Cap - $1million

number of investors - unlimited

Investor qualifications - none

Commissions - ok

Manner: no solicitation/advertisements

Resales: restricted

Issuer qual: no reporting co.s or inv. co's

Filing: Form D - but not a prerequisite to exemption

Front 53

When is a control person considered an issuer under the Securities Act?

Back 53

Only within the definition of underwriter for the purposes of determining the status of a person who buys from or sells for the control person. Control person is not an issuer who can use R147

Front 54

In what instances is a control person like any other holder of securities regarding Section 5?

Back 54

[1] when the control person holds an exempt security

[2] when the sale by the control person relies on the same exemption that previous sale to the control person relied upon (provided the security has not come to rest)

Front 55

What is a dealer?

Back 55

Defined in 2(a)(12) as a person who full or part time, directly or indirectly acts as an agent, broker, or principal in the offering, buying selling or trading of securities issued by another person.

Front 56

How is a dealer commonly distinguished from a broker?

Back 56

A dealer sells in his own inventory whereas a broker sells as his clients agent.

Front 57

What is Rule 172?

Back 57

Relaxation on the delivery of prospectuses for dealers.

Front 58

What is exemption 4(a)(4)?

Back 58

Exempts brokers buying or selling for clients but not solicitations.

Front 59

What is Rule 144?

Back 59

A safe harbor that exempts certain resales from registration under the Securities Act.

Front 60

Who is an affiliate of an issuer under rule 144?

Back 60

One who controls or is under control of the issuer.

Front 61

What is a restricted security under Rule 144?

Back 61

Securities purchased directly from the issuer/affiliate in other than public offering

Securities subject to resale restrictions under Reg D.

et. al.

Front 62

What is Rule 405?

Back 62

Defines control as the ability to control management decisions.

Front 63

What was the holding of Dura Pharm. ?

Back 63

In a 10b-5 claim loss causation cannot be proven by a showing that fraud inflated the stock price at the time of sale.

Front 64

What does footnote 17 of Basic v. Levinson provide?

Back 64

A suggestion that 'no comment' is a safe harbor respecting materiality.

Front 65

What did Matrixx (Zicam case) add to the materiality doctrine?

Back 65

Failure to show statistical significance is not fatal on materiality grounds to a pleading of fraudulent omission -- damaging news does not have to be supported with a statistical study

Front 66

What did Wielgos add to the materiality doctrine? (nuclear reactors licensing)

Back 66

Information has been disclosed by other sources (news, gov't report, etc.) can be part of the total mix. Introduces truth-on-the-market (license failures were publicly known and already baked into share price at the time of omission)