Securities Reg

Front 1

What is a control person?

Back 1

A control person has the ability to control the management policies of the company. SEC Rule 405 "control", "controlled by" means... possession direct of the power to direct or cause direction of the management and policies of a person whether through ownership of voting securities, contract, or "otherwise"

Front 2

Are all control people affiliates? What about vice versa?

Back 2

All control people are affiliates, but not all affiliates are control person affiliate includes those that the issuer itself controls 10% holders, affiliate

Front 3

Can an invidual ever be controlled by a legal entity?

Back 3

SEC takes the position that an individual is never controlled by a legal entity. So for the purposes of determining who the affiliate of a corporation, the people that control it are its affiliates, but its employees are not. This will save you a lot of trouble later

Front 4

How long do the restrictions of Rule 144 for affiliates last?

Back 4

Forever. TODO: is the same true of control persons?

Front 5

Is Rule 144 ever available for a shell company?

Back 5

Not since February. Rule 144 is never available for sales of securities issued by a shell company. This absolutely destroys the marketability of those shares. It isn't entirely clear what a shell company is. There's an "out"

Front 6

What is the "out" for the Rule 144 shell company?

Back 6

If the shell company becomes registered under '34 Act (not '33) and thereafter for one year files its periodic reports, then it may use Rule 144

Front 7

What is the purpose of registration under the '34 act?

Back 7

To provide an accurate ongoing picture

Front 8

Can you voluntarily register under the '34 Act?

Back 8

Sure. Anyone can voluntarily register a class of securities under the '34 Act even with one shareholder. There are a lot of sleezy companies that did that. Then they apply for a listing under OTC and off they go.

Front 9

When do you have to regiser under the '34 Act?

Back 9

Don't have to register until you have 500 shareholders *of record.* The "of record" is important. Why? Also, $10m in *assets* not net worth. TODO: check this. I think it's Section 12(g)

Front 10

Why is it important that only company with over a certain number of shareholders *of record* have to register under '34 Act?

Back 10

Because you don't have to look behind the "street name." Schwab could have 100 million shares, but only show up as one shareholder of record

Front 11

Do you have to have $10 million in net worth or in assets to trigger the forced registration under '34 Act?

Back 11

Just total assets, but you still have to have 500 shareholders of record.

Front 12

Foreign issuers may be forced to register under the '34 Act. But when?

Back 12

Same $10m in assets, 500 shareholders of record, but there must be 300 US shareholders, not just of record

Front 13

How does the foreign issuer figure out whether it has US shareholders when consider whether it needs to register under the '34 Act?

Back 13

Transfer agent sends a letter to all the brokerages looking for US addresses of SH. If the brokerage refuses, you have to assume all the shares are held by US citizens

Front 14

Is Nasdaq an OTC market or an exchange?

Back 14

An exchange now

Front 15

What's the first thing do you have to do if you want to offer shares on the exchanges?

Back 15

If a company wants to have a listing on a US exchange, Section 12(b) says you have to register with SEC first. If you don't, then the alternatives are small because Nasdaq is now considered exchange

Front 16

What is the electronic OTC?

Back 16

The OTC is a BB link among all NASD members say they are willing to buy and sell at certain prices. If a dealer wants to quote a price, it's at 100

Front 17

What is a market maker?

Back 17

Licensed securities dealers buy positions in issuer that customers want to trade in. So they buy it.

Front 18

What are the similarities and differences between '34 Act registration and '33 Act registration?

Back 18

Only difference is that you aren't offering and selling, so you don't have use of proceeds and others

Front 19

What is the sequence of events for registering on an exchange?

Back 19

(1) File with SEC and the exchange and the listing contract [exchange will require others], (2) the exchange actually does the review of the 12(b) application, (3) the exchange has to be happy to list the registration

Front 20

What is a trap with '34 Act registrations?

Back 20

60 days after the application, the registration becomes automatically effective. if you want to get on the OTC, you have to file with the NASD. While the SEC is thinking about it, and 60 days elapsed, you have to start filing your 10-K or 10-Q

Front 21

What is the relationship between filing a '33 Act registration and the '34 Act period reporting requirements?

Back 21

Section 15(d): says if you file a registration statement under the '33 Act, whether or not you meet the requirements for mandatory registration under '34 Act, now you periodically report all material aspects

Front 22

TODO

Back 22

review the foreign registration under the '34 Act and the 6-K sandwich

Front 23

What is a consideration of the financials under '34 Act filings?

Back 23

Requires that the financial statements not be "misleading." GAAP alone may not be sufficient. TODO review the Simon case

Front 24

TODO

Back 24

Review worldwide coin

Front 25

What is the independent audit committee requirement of SOX?

Back 25

(1) May not receive any compensation other than directors fees; (2) must be a financial expert; (3) sole power to talk to auditors; (4) auditors can no longer consult on the side

Front 26

Can shareholders vote on the auditor?

Back 26

They can after SOX

Front 27

What are the executive certification requirements of SOX?

Back 27

(1) each periodic report "fully complies" with 13(a) or 15(d); (2) information fairly presents; (3) Section 302 requires certification that each periodic report, signing officers have. Must "fairly present"

Front 28

Do reporting companies have to reconcile pro-formas with actual results?

Back 28

They do after SOX. Regulation G

Front 29

What's the difference between a proxy and a proxy statement?

Back 29

(1) the proxy is the vote: one page ballot, you can vote or give your vote to someone else, "proxy" is often shorthand for the proxy statement (2) the proxy statement might be very long that includes that proposal

Front 30

What is a "solicitation" of a proxy?

Back 30

Anything reasonably calculated. Remember the proxy is the request for authority to vote the share. But if you simply ask someone not to vote, it is a solicitation.

Front 31

What will happen if you decide you want to influence the board by running ads in the Wall Street Journal?

Back 31

Management will sue you if they don't like your proposal. Be careful as an activist shareholder. Management likes to use this as an weapon against the activist, so it's kind of an abusive use of the tool

Front 32

TODO

Back 32

Clean up the proxy notes with the book. This was Beatty's presentation, so I got some crappy notes

Front 33

TODO

Back 33

Get notes about 16(b) cleaned up

Front 34

What do certain important people have to report regarding transactions in shares?

Back 34

16(a) requires officers, directors, and 10% shareholders to file statements of initial ownership and then any purchase or sale of those transactions on Form 4. Under SOX, they have second business day to report this.

Front 35

What is the harsh result of the short swing profit rule?

Back 35

This is what you need to know: it's kind of arbitrary. IF an officer or director makes a profit within six months, the issuer gets the benefit

Front 36

How do you calculate profits under the short swing profit rule?

Back 36

"Any purchase or sale or sale and purchase" It says you don't have to take them in that order. you end up with really bizarre results

Front 37

Why is the 10% rule in short swing profits important?

Back 37

The 10% rule is arbitrary, and lots of time unfair. Lots of time they don't have the kind of control

Front 38

What's a defense to the short swing profits rule?

Back 38

Unorthodox transactions. Buy and sell is easy, what about these weirder cases? For example, if you get squeezed out, you didn't have a choice, so there was no offer and sale. The case we studied wasn't voluntary though.

Front 39

Talk about the "for value" concept when someone is giving away shares.

Back 39

The example were the dot coms giving away equity. Because they were using it to market the company, it was "value." The SEC was mostly worried about the secondary market.

Front 40

What is the requirement with a spin off?

Back 40

You have to prove that there was a "business purpose" for it... can't just be in the business of spinning out shells to avoid the registration monster

Front 41

What are the two key exemptions with reorganizations, mergers, and tenders?

Back 41

3(a)(9) - the exchange with shareholders and 3(a)(10) - the non-bankruptcy judicial reorganization

Front 42

What are the requirements of a 3(a)(9) exchange?

Back 42

(1) Must involve only existing security holders; (2) No additional consideration... can't raise new money; (3) No commissions; (4) If old securities were themselves restricted, then the new ones are as well

Front 43

Does the holding period of restricted securities tack under a 3(a)(9) exchange?

Back 43

Yep Caspar Instruments (1976)

Front 44

What are the requirements of securities issued or exchanged under 3(a)(10)?

Back 44

Non bankruptcy judicial or administrative reorganization, where the distribution follows fairness. Any agency or administration as long as there is a can give you a fairness hearing, anywhere in the world.

Front 45

Can you raise new money under a 3(a)(10) exchange/issue?

Back 45

YES

Front 46

Are securities issued under a 3(a)(1) exchange or issue restricted?

Back 46

Nope. However, affiliates still have to comply with Rule 144

Front 47

Can you avoid registration by issuing shares in bankruptcy?

Back 47

You can avoid registration and liability, but the purpose must be principally for the debts. However, if you want to go after those who are not debtors to raise money, then you're under the standard requirements

Front 48

TODO

Back 48

take another look at the bankruptcy requirements to make sure whether you want to study it

Front 49

Where is tender offer defined?

Back 49

It isn't. But it gets used all the time. Basically an offer made to the public was very much like a distribution. The public has to make an investment decision, so why not require full disclosure

Front 50

What if you acquire more than 5% but don't want to file the 13D?

Back 50

The rules permit, however, the use of a much simpler form, 13G by passive investors. If you acquire no more than 20% without any intention to change control.

Front 51

What if more than two people are acquiring shares of an issuer?

Back 51

It could look like a group. "Combined group is two more combined in furtherance of a common objective"

Front 52

If a group is formed for the purpose of a takeover, when does the 13D need to be filed?

Back 52

If you form a group, you have to file a 13D at the moment its a group, not on first act

Front 53

How can you acquire a large block of a company without filing 13D (even if you intend a change of control)?

Back 53

Parking shares with friends is illegal. But where no more than 2% of the class is acquired in 12 consecutive months. The creeping acquisition. You can go up to 10% This is 16(a)

Front 54

Do you have to prove scienter for violating 13D filing requirements?

Back 54

Nope. Strict liability.

Front 55

TODO

Back 55

get the eight factors of a tender offer written down

Front 56

When do you have to file if you want to takeover another company?

Back 56

SEC Filings and disclosure requireed by all people making the offers before the bidder first publishes or given means to tender securities.

Front 57

Can you withdraw your tender under a tender offer?

Back 57

Acceptance of the tender offer can be withdrawn any time. You can take it back before close.

Front 58

How long does the tender offer have to remain open?

Back 58

Must be open at least 20 days and at least 10 days after any material amendment of Form T-O

Front 59

What are two key rules under the tender offer?

Back 59

(1) All holders rule: all shareholders must get the offer. (2) Best price rule: all shareholders must be paid the highest price offered to any person to whom the offer was made

Front 60

Once a tender offer expires, should another offer be integrated with the two rules?

Back 60

Courts are split on this

Front 61

What if a tender offer is over subscribed?

Back 61

If offer is oversubscribed, then it is a pro-rata basis to prevent stampedes. Every target must inform shareholders whether it supports or opposes the bid within 10 days.

Front 62

Is the liability under the tender offer rules limited to public companies?

Back 62

NO: 14(e) liability/anti fraud is not confined to public companies!!

Front 63

TODO

Back 63

see if you can make more sense out of the tender offer liability provisions

Front 64

What is the rule for going private transactions?

Back 64

Section 13(e) of '34 forbids a self tender by an issuer the effect of which would make a '34 act reporting company no longer subject to '34 unless disclosure to shareholders

Front 65

When can you get out of the mandatory reporting requirements under the '34 Act?

Back 65

I'm thinking of the forced registration and reporting. But an issuer who falls below 300 shareholders of record can get out from under '34 reporting

Front 66

What are the sources of broker dealer regulation?

Back 66

(1) Federal and state, every state has its own: sometimes the state is a lot more meaningful; (2) rules of the SEC; (3) rules for the SROs (two types)

Front 67

Who regulates the broker-dealers?

Back 67

The SROs, the SEC, the blue sky regulators

Front 68

Are the SROs rules regulated?

Back 68

Yes, the rules must be cleared through the SEC

Front 69

What if you are a broker and you only sell intrastate?

Back 69

Then there is an exemption but its hard to satisfy

Front 70

Who has to register under the broker-dealer laws?

Back 70

Executive officers and directors must register along with all the people in the firm, other than the administrative people as "associated persons" or "registered representatives" people who want to register must take NASD exams and a state exam

Front 71

How can the brokerage firm avoid liability raised by its brokers?

Back 71

Section 15(b)(4)(E) brokerage firm not liable by the regulators for the misconduct of its associated persons as long as it has compliance measures in place

Front 72

Why is the compliance officer in a broker-dealer so important?

Back 72

Because under Section 15(b)(4)(E) brokerage firm not liable by the regulators for the misconduct of its associated persons as long as it has compliance measures in place

Front 73

What is the first level of policing in the broker dealer business?

Back 73

SRO

Front 74

What's the second level of policing in the broker-dealer business?

Back 74

SEC, State (But NSMIA has curtailed that in some respects), Dept. of Justice (criminal), Private Attorneys General

Front 75

What's the third level of policing in the broker-dealer business?

Back 75

Common law fiduciary duties and shingle theories

Front 76

What is the most important FINRA rule?

Back 76

FINRA 2010 (most important FINRA Rule): All broker-dealers must observe Hi Standards of Commercial Honor and Just and Equitable Principles of Trade

Front 77

TODO

Back 77

figure out what selling away is

Front 78

What is FINRA's prohibition on excessive compensation?

Back 78

Refers to either commissions or markup (if you are buying securities for which they are the market-maker)

Front 79

What are FINRA's suitability rules?

Back 79

Make sure that all recommendations of securities are suitable: Know your customer rule, Know your security rule

Front 80

What is FINRA's net assets rule?

Back 80

All brokers must keep liquid assets in the amount of potential liabilities: Idea is to keep bankrupt brokers from going down with customer's monies There is the Securities Brokerage Protection Agency

Front 81

What does the federal reserve have to do with broker-dealer regulation?

Back 81

Required to make margin requirements. Governing amount of credit that broker-dealers can give to investors for purchasing on the margin. 50% Idea is to prevent the margin death spiral

Front 82

What are some of the key blue sky regulations on broker-dealers?

Back 82

States enforce: Back office & bookkeeping. Net asset rule. Like FINRA, they cap commissions (Even on exempt offerings (that FINRA wouldn't touch))

Front 83

Why can't the broker sell his own shares before his clients?

Back 83

under agency law, broker is a fiduciary, and may not favor itself in a conflict of Interest, unless it obtains a waiver.

Front 84

What is the shingle theory?

Back 84

Used as a common law theory: it's an Implied promise of fair dealing with broker and its customers

Front 85

Will Washington let a broker's customer make a fool of himself?

Back 85

Yep. Some States will impose duties for brokers to stop their client from purchasing bad investments

Front 86

In the ninth circuit, do you have to warn a customer that they are making poor investment decisions?

Back 86

9th circuit says that you don't have to warn the customer

Front 87

Can you bring a suitability claim under FINRA's rules?

Back 87

SROs all have suitability rules as part of their authority to promote just and equitable principles of the trade. Trend is to not imply a private right of action under these rules. You have to bring a suit based on the shingle theory.

Front 88

What renders an investment unsuitable?

Back 88

You have to match client's risk and return. Can factor: Age, sophistication, etc. Most likely it is dependant on how extreme the facts are.

Front 89

Is there a duty to read?

Back 89

Brokerage customers might be under a duty to read. See Brown v. E.F. Hutton

Front 90

What is the outer limit of the suitability rule?

Back 90

The aggressive customer: No obligation to warn about unsuitable investments when the customer seeks only execution and the broker makes no recommendation.

Front 91

What do the broker dealer rules say about day trading?

Back 91

NASD requires that any firm promoting day trading make a determination that day trading is appropriate for any customer who intends to use the account for that purpose

Front 92

What are the 2 broker dealer rules relating to penny stocks and microcap fraud?

Back 92

(1) there are big disclosure rules; (2) a penny stock transaction with a new customer is illegal

Front 93

What are the disclosure requirements for penny stocks for broker dealers?

Back 93

"Generic warnings about penny stocks.

Front 94

What has to happen before a broker can sell penny stocks to a customer?

Back 94

Rule 15g-1 through -9: Unless the broker has previously approved the investor's account. (1) Investor provides written data re financial situation and objectives. Must be in hand writing. Must disclose: (a) Fact that they want to buy (b) How much (b) How long they get to hold it. (2) Broker gives a written statement with more disclosures to customer (a) Investor must sign disclosure (3) The disclosures have to match the price of the market Or else the transaction can't go forward.

Front 95

How can an issuer work around the 15g penny stock rule?

Back 95

That rule prevents brokers from selling. Instead, they will use newsletters or investment advisers. Newsletter writers will tout the stock But that raises another issue

Front 96

What issues does writing a newletter raise?

Back 96

17(b): It is unlawful for newsletter to tout the stock without also stating how much consideration you have received to recommend the stock

Front 97

Discuss the "know your security" rule

Back 97

When you recommend something to your client, you have to have an adequate and reasonable basis for the recommendation. Broker has to do its own research. And then broker has to disclose all the material bad stuff with the good stuff

Front 98

What is a hedge clause?

Back 98

Disclaimer that recommendation is probably good, but information may not be 100% So long as it is an honest hedge

Front 99

What do you need to prove in a churning case?

Back 99

Broker has control of the account and turns it over too often

Front 100

How to you prove the broker has control over the account in a churning case?

Back 100

(1) If broker has discretionary power. (2) If broker really has control, for example - if the person really doesn't know what they are doing (Limited education, easily driven)

Front 101

What is excessive turnover in a churning case?

Back 101

There is a rebuttable presumption after ????

Front 102

Do Washington have a statute on churning?

Back 102

RCW § 21.20.035 statutory prohibition on churning. o Federal common law also prohibits

Front 103

What is parking?

Back 103

Any effort to disguise the true ownership of the security. Example: where underwriter hides ownership to get around FINRA, get around 5% rule, get around 10% rule (short sales)

Front 104

What is a front run?

Back 104

Species of insider trading: Broker buys up the securities in advance of the research section publishes its analysis.

Front 105

What is scalping?

Back 105

Where investment advisor (or broker-dealer) recommends the purchase of a security, and fails to disclose that they all ready own it.

Front 106

What is a big trap to watch out for in an investment company?

Back 106

Whether or not the business is for that purpose: any entity which has more than 40% of its assets invested in investment securities (not gov't or it's own subsidiaries)

Front 107

what are the three types of investment companies?

Back 107

(1) face amount certificate companies (arcane) (2) unit investment trust (3) management companies

Front 108

What are the four types of mutual fund (management) companies?

Back 108

(1) open end; (2) closed (3) diversified (4) non-diversified

Front 109

How does a hedge fund do it?

Back 109

They are Unregistered investment companies. How? Section 3(c)(1) - that has fewer that 100 shareholders and not engaged in public offerings and does not contemplate, is exempt from registration requirements of '40 Act

Front 110

TODO

Back 110

write down the restrictions on hedge funds in the book

Front 111

What is an investment advisor?

Back 111

An investment adviser is a person who for compensation advises another person on investments in securities, with a big exception

Front 112

What is the big exception related to investment advisors?

Back 112

If you are recommending stocks incidentally to your business, you aren't an investment advisor: A lawyer might make a. Accountant. Engineer. Teacher. Whose recommendation is just incidental to their business. You can't charge a fee.

Front 113

How can an investment advisor get out of state regulation

Back 113

NSMIA - if an investment adviser has $25m or more, they are regulated solely by the feds

Front 114

Do the states regulate investment advisors?

Back 114

The states can and do regulate you. If you have a place of business or customers in the state, you'll have to register

Front 115

What are some of the requirements applied to investment advisors?

Back 115

(1) Brochure rule, (2) forbids unilateral assignment by the adviser of his advisory contracts, (3) must have accurate books and records, (4) prohibits misreps of material fact

Front 116

What about financial planning and broker dealer regulation?

Back 116

Unlicensed investment advisors held themselves out as financial planners. Insurance agents were also financial planners

Front 117

Do financial planners have to register in Washington?

Back 117

By statute in Washington, a financial planner also requires financial planners to register: Unlike brokerages, there is no SRO but there are informal trade groups. CFP

Front 118

TODO

Back 118

get the cases in the book relate to investment advisors

Front 119

Talk through the enforcement of broker dealers

Back 119

first at firm level / compliance officer; next up management; then SRO, audit, monitor; SEC has plenary power over all of them

Front 120

Why do the states watch SEC and FINRA enforcement of broker dealers closely?

Back 120

Almost every blue sky statute allows the blue sky admin to kick out a broker dealer from their state if it was kicked out of another state. So the stakes are often very high. It just has to pick up road kill

Front 121

What is a key requirement of the financial condition of broker dealers?

Back 121

Net capital rule 15c3-1: Every brokerage (depending on size) must have a specified amount of liquid assets above and beyond liabilities. Have to calculate daily and report monthly. Must immediately notify SRO if they are approaching a net capital problem

Front 122

What is one way that the financial condition of broker dealers is enforced?

Back 122

Rule enforced by annual audits paid for by the firm by a CPA and occaisional inspections by SRO, SEC, and Blue Sky regulators

Front 123

Do foreign broker dealers have to register?

Back 123

Usually. That's why they normally set up US subsidiaries so they don't have to comply with two laws at once

Front 124

Can a foreign broker do any business in the US without registration?

Back 124

Yes, it can take unsolicited orders and work with big institutional buyers. But the states might nail you.

Front 125

Do you register securities?

Back 125

NO. We don't register securities. We register offers and sales. When it's been registered, it doesn't mean it can be sold to anyone.

Front 126

Is an exemption from registration ever a protection from the antifraud provisions?

Back 126

NO.

Front 127

What three exemptions under section 3 are actually transaction exemptions?

Back 127

Specifically, Section 3(a)(9), (10) (the corporate reorganization), and (11) (intrastate offerings)

Front 128

What do securities lawyers mean when they refer to "government securities" ?

Back 128

They actually mean those issued by the federal government

Front 129

What are municipal securities?

Back 129

Those that are other than "government securities" There are two types.. what are they?

Front 130

What are the two types of municipal securities?

Back 130

(1) Revenue bonds - for example, selling bongs to pay for a new toll road... the repayment is tied to the tolls. Very popular these days. (2) "GOs" - general obligation bonds backed by the full faith and credit of the government that issued them

Front 131

Can private remedies be enforced against 3(a)(2) securities for governments?

Back 131

NO. These cover those securities issued by governments, states, municipalities, and etc. However, there is one way

Front 132

What is the one thing that municipal securities have to do?

Back 132

There is Rule 15c-12. It requires registered broker-dealers to obtain and deliver a "official statement" from the municipality. It is kind of like a prospectus. this rule requires a prospectus for anything other than a competitive bid

Front 133

What are the disclosure obligations of the Red Book?

Back 133

It is for municipal bonds. They are disclosure guidelines. Bond counsel attempts to issue a "follow" of the guidelines.

Front 134

How does the SEC regulate municipal securities?

Back 134

The SEC regulates by regulating the broker-dealers. In fact, Congress created the municipal securities rulemaking board MSRB

Front 135

What is the MSRB and what are the key rules?

Back 135

It's the municipal securities rulemaking board MSRB. (1) deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice and (2) forbid "pay for play"

Front 136

Are foreign banks covered by the 3(a)(2) exemption?

Back 136

NO

Front 137

Are bank securities exempt?

Back 137

YES, but TODO: check on this

Front 138

What is commercial paper?

Back 138

The definition offered by Mericle is that "commercial paper" is short term notes issued by the most credit worthy of debtors. Think of them as short term blue chip promissory notes.

Front 139

What is an important prong of the 3(a)(3) commercial paper exemption?

Back 139

The "current transactions" prong is regarded by Commission, as well as the the law and lore of 3(a)(3), as having to do with purchases to be used up in a business. That is, it applies to overhead, not buildings. Salaries. Short-term stuff.

Front 140

What would clearly violate the 3(a)(3) commercial paper exemption?

Back 140

Using the funds from the notes to construct a building

Front 141

What is the key language for the 3(a)(4) non profit securities exemption?

Back 141

Exempts any securities . . . exclusively for . . . not for pecuniary profit . . . no part of the net earnings can inure to the benefit of a person, or a fund

Front 142

What is affinity / relational fraud?

Back 142

There is commonly known "affinity fraud" - SEC enforcement and Blue Sky know this. Religious organizations take advantage of the faith of their followers. The promoters offer to sell church bonds. Then they pocket the proceeds and end up in Paraguay. Preying on the affinity of the suckers.

Front 143

What is an easy way to lose the 3(a)(4) non profit exemption?

Back 143

Any form of profit to a promoter of the investment will result in the loss of the exemption. For example, see SEC v. Children's Hospital.

Front 144

TODO

Back 144

figure out what this no action letter from 1988 Mericle likes is

Front 145

TODO asdas

Back 145

Get the facts of the Jesus People no action letter in there

Front 146

What is a risk for the 3(a)(8) insurance and annuity exemption

Back 146

When the insurance company tries to get cute and starts to shift risk to the holder and not the insurance company itself, then you end up with a security

Front 147

What is the rationale of holiding a variable life or variable annuity contract to be a security?

Back 147

When the investment risk is on the annuitant, so no true underwriting of risk

Front 148

When does the 3(a)(11) intrastate exemption get used mostly?

Back 148

As a defense; Mericle has never seen anyone claim one

Front 149

What is the theory behind the 3(a)(11) intrastate exemption?

Back 149

Federalism

Front 150

What are the two exemptions under the 3(a)(11) intrastate exemption?

Back 150

(1) statutory and (2) regulatory (through Rule 147)

Front 151

TODO gfrepk243[5r

Back 151

Put the requirements for an intrastate exemption in the book; also the Rule 147 requirements and the CASE LAW too

Front 152

What are the requirements for a statutory 3(a)(11) exemption?

Back 152

(1) All purchasers and all offerees must be residents of the issuer's state of incorporation; (2) The entire offering must "come to rest" in that state; (3) Issuer doesn't have to conduct all its operations there, but it does have to conduct substantial activities there; (4) Can advertise if the ad says only residents of the particular state are being; (5) affiliate of the issuer, even if not a resident, may resell provided that the affiliate follows the same rules

Front 153

What are the requirements for the regulatory Rule 147 exemption for 3(a)(11) intrastate exemptions?

Back 153

A little softer than the statute itself. (1) Put a legend on the security saying you can't sell, transfer, etc... until a certain date, specifically nine months and 1 day after the final closing. (2) Instruct the transfer agent that this can't be transferred without proof that the person buying is a bona fide resident of the state. (3) Disclose the restrictions to the buyers and then also get their representation that they will abide by these restrictions

Front 154

What are the three big hang ups with 3(a)(11)?

Back 154

(1) Put a legend on the security saying you can't sell, transfer, etc... until a certain date, specifically nine months and 1 day after the final closing. (2) Instruct the transfer agent that this can't be transferred without proof that the person buying is a bona fide resident of the state. (3) Disclose the restrictions to the buyers and then also get their representation that they will abide by these restrictions.

Front 155

Is a private placement ever called a distribution

Back 155

NO! It's the antithesis of a private placement

Front 156

What are the three rules from Ralston?

Back 156

(1) ask whether these offerees are the type who can fend for themselves; (2) if they are the kind who can fend for themselves, the next question is do they have access to the kind of information that registration would afford? (3) despite language of the opinion that made it sound like "quantity" was unlimited, you need to ask how the offering was made, to whom, and by what means

Front 157

What does Ralston want the kind of information that a registration statement would afford?

Back 157

Even though the offerees may be smart, there better be something there for their smarts to operate on

Front 158

Why does Mericle think that Ralston makes a rule that it matters how many people were offered and the manner of the offering?

Back 158

After the pronouncement that it didn't matter, the case itself considered the number of people and how. Thus, lower courts routinely look to this as well.

Front 159

What is the famous footnote 11 in Ralston?

Back 159

The word public is a "general" word. No particular numbers. Two to infinity. Perhaps one person could count as "public" (if intended to be first in a series). A single offer to one who lacks all the requisite blows it for all. Indeed, that was the result in Butler

Front 160

What have the battles been over after Ralston?

Back 160

Over (1) sophistication and (2) access to information

Front 161

TODO f2,r2

Back 161

Get the cases post Ralston in the book

Front 162

What does it mean to have access to information after Ralston?

Back 162

This comes from the Doran case: (1) either you must have a full disclosure provided by the issuer itself (voluntarily or on demand) in the form of a PPM. (2) must have access to full disclosure because of relationship - status, chairman, etc...

Front 163

What does it mean to have a sophisticated investor under Ralston?

Back 163

Remember that you can offer and sell only to those who can fend for themselves... "financially sophisticated." Must ask whether the investor can understand and evaluate risks of that particular offering

Front 164

TODO

Back 164

Take a look at the suitabiltiy cases on page 286

Front 165

How do you make sure no purchaser will end up being an underwriter?

Back 165

Make sure no one took it with a view to distribution. (1) Put a restrictive legend on the security; (2) Also noted in the transfer records (agent); (3) Make the private investor represent that they will not resale and they are looking for an investment

Front 166

Can you make a general solicitation under 4(2)?

Back 166

Hell no

Front 167

Does the issuer has to prove each and every element of the exemption, even for just one offeree?

Back 167

Hell yes

Front 168

When do you turn to the statutory exemption?

Back 168

When you can't fit in the regulatory safe harbor

Front 169

What is 501 of Reg D?

Back 169

Has definitions

Front 170

What is 502 of Reg D?

Back 170

Has common requirements for all the Reg D exemptions

Front 171

What is 503 of Reg D?

Back 171

Requires the filing of Form D and notice

Front 172

TODO

Back 172

Get the 504, 504, and 506 exemptions clearly in here

Front 173

What are the common requirements of Reg D covered by Mericle?

Back 173

(1) the integration safe harbor under 502(d); (2) prohibition against general solicitation; (3) the directed selling efforts [TODO], (4) Form D

Front 174

What is the integration safe harbor of Reg D?

Back 174

If you have an offering that you claim is exempt and you close it today and make no further offers or sales. Then, if there is no other offering for six months, then you can do it again on the first day after six months.

Front 175

What if you do a Reg D and Reg S offering?

Back 175

Mericle does this stuff all day long: Look at the preliminary notes to Reg D and Reg S. There is a promise there too (#7). One offering effected in compliance with Reg S outside the US will not be integrated with any offering effected at the same time in compliance with Regulation D.

Front 176

Can you make directed selling efforts under Reg S?

Back 176

NO!

Front 177

Is 4(2) based on offerings or sales?

Back 177

OFFERINGs: See footnote 11 of Ralston, if you offer to even just one member of the public, you may have blown your exemption.

Front 178

Are preexisting relationships between the offeror and seller required for a private offering?

Back 178

There was a handout. It proves that preexisting relationships are not actually required. So, don't let the litigators get away with the "pre-existing relationship" requirement. Mericle thinks its ridiculous that I can't offer securities to Warren Buffet.

Front 179

TODO

Back 179

Get the best parts of EF Hutton in here

Front 180

Will you blow it as an issuer if you present your offering to a seminar of investors?

Back 180

Maybe. Under 502(c) you'll blow it as an issuer if you present your offering to a seminar of investors invited by a general solicitation. Make sure they are prequalified before being invited

Front 181

What if you have an offer pending at the time you run around to find people to build a preexisting relationship as an accredited investor?

Back 181

This will violate the rule against general solicitation

Front 182

TODO

Back 182

Clean up my notes on regulation S, 10-7-2008

Front 183

What is a trap to watch out for on Form D?

Back 183

You have to list issuer, offering, and any broker-dealer. Make sure you match the broker-dealer listed on the state Form D doesn't match

Front 184

Do states still have some power after NSMIA?

Back 184

Yes. It's reasonably clear, even with NSMIA, that states still retain power to require a broker-dealer in the local state. You could still blow it if you bring in a finder or broker-dealer out of state.

Front 185

What lifeline do you have under Regulation D?

Back 185

Rule 508: Provides a pardon for errors that are innocent and immaterial. There is also the language "failure to comply was insignificant with respect to the offering as a whole." But Rule 508 won't save you with two things. What are they?

Front 186

What will Rule 508 of Reg D not do for you?

Back 186

Normally is help you with innocent and immaterial failures to comply with Reg D, but (1) you can't blow it on the number of investors (35), (2) general solicitation? 508 will not save you

Front 187

What happens if you give one person full disclosure when you are claiming a statutory exemption?

Back 187

Then you better give them to everyone else. This, because once you disclose risk factors to one person but not the rest of them, then you just gave the plaintiff's lawyer the complaint they'll write against you.

Front 188

Can you allow free transfer of shares issued under and exemption? What do you have to do?

Back 188

Cannot allow free transfer: (1) apply restrictive legends; (2) instructions to your transfer agent that there can be no transfer with out opinion of counsel; (3) obtain reps and warranties from the buyer that there is no "view to distribution"

Front 189

Does ULOE mirror Rule 505 on the state level?

Back 189

Intended to be a mirror of 505 on the state level. Don't believe it. No such thing as uniformity in blue sky laws

Front 190

What are the ways to get incentive plans to employees

Back 190

The special registration S-8 and Rule 701. TODO: verify this

Front 191

What does S-8 do for you?

Back 191

This is to register the options and the shares under a stock option plan

Front 192

How does S-8 work?

Back 192

You basically just have to report a copy of the stock option plan in the prospectus and a description of how people qualify. (1) written compensatory benefit plan; (2) must be actual employees, officers, directors, consultants; (3) only if the consultants are human and provide bona fide services; (4) the services are not in connection with the offer or sale of securities and do not promote directly or indirectly or make a market in the securities or for capital raising

Front 193

If you aren't a reporting company, can you rely on S-8?

Back 193

NO, have to use Rule 701

Front 194

TODO

Back 194

Get the requirements of Form S-8 in the book

Front 195

What is a benefit of Rule 701?

Back 195

There's a nice integration safe harbor: it's not integrated with anything else

Front 196

What are the requirements of Rule 701?

Back 196

(1) Any amount may be offered in reliance on 701, but (2) Aggregate sales price actually sold may not exceed the greatest of $1m OR 15% of total assets OR 15% of the outstanding amount of the class of securities (usually people use this); (3) shares are restricted

Front 197

What is Section 4(6)?

Back 197

Exemptions up to $5million to accredited investor. No general solicitation. Have to file Form D. Not covered by NSMIA. Not really used anymore. It was a Congressional attempt to open up a safe harbor, but then came Regulation D.

Front 198

What is Regulation A promulgated under?

Back 198

It is promulgated under Section 3(b)'s grant of power over "registration exemptions up to $5m"

Front 199

What do you have to file under Regulation A?

Back 199

Something like a mini-registration. The prospectus looks like a registration statement. It uses an offering statement, like a prospectus

Front 200

What are the benefits of Regulation A?

Back 200

The mini-registration is reviewed, but when you're effective, you can sell under federal law to anyone. No restrictions. Can advertise. Because it's an exemption, you don't run the gauntlet of the '33 Act provision. Not subject to 15d under '34 Act. Don't have to be a reporting company.

Front 201

What is the main problem with Regulation A?

Back 201

There are no state counterpart exemptions. Each state needs a registration statement. But see the coordinated equity review. With the $10m limit, there's no real benefit over 506

Front 202

What is coordinated equity review under Regulation a?

Back 202

However, they have a coordinated equity review where they try to coordinate comments. One state reviews the financials. Another state reviews the non-financials.

Front 203

What is the isolated transaction exemptions under Washington state?

Back 203

The exemption is junk because you are allowed only three transactions for twelve months

Front 204

TODO

Back 204

Review the Washington state isolated transaction exemptions

Front 205

What is Washington state's Rule 504?

Back 205

Rule 504 exemption allows only 20 purchasers in Washington State. No sales commissions can be paid to anyone. If you allow non-accredited purchasers, you must meet suitability standards. You must file Form D, but there's a trap!!

Front 206

What are the suitability requirements under Washington's Rule 504?

Back 206

If you allow non-accredited purchasers, you must meet suitability standards. You can do this if the investment is less than 15% of the investor's net worth.

Front 207

What is the terrible trap with Form D in Washington esp under Rule 504?

Back 207

You must file form d. You have to file and pay fee prior to receipt of consideration or the signed subscription agreement. Mericle called this a "terrible trap"

Front 208

How does the Washington securities division interprety washington's version of 4(2)?

Back 208

It will interpret the Washington State private placement identically to the federal exemption to 4(2) is interpreted

Front 209

How do Washington's 4(2) compare to the federal 4(2)?

Back 209

TODO: figure this out

Front 210

What are Mericle's comments on pre-existing relationship?

Back 210

The handout proves that you don't have to have a pre-existing relationship: you can approach them before you need to make the offer. But make sure you don't have an offer in place when you do it

Front 211

What exemptions do not need state registration?

Back 211

Only 506, NSMIA

Front 212

What is the catch with Rule 506 and state law?

Back 212

Even in those states where NSMIA and 506 trump, the states retain the power to require that if you pay a commission or other remuneration in connection with the issuances of the securities that the people you paid that must be licensed as a securities dealer under that state

Front 213

What is New York's weird law with issuers?

Back 213

Issuers are by definition dealers: When sold "to the public" then it must register as securities dealer. They aren't that hard to fill out. If raising money privately, and you can say with a straight face that it isn't for the public, you're exempt.

Front 214

What are the safe harbors against integration?

Back 214

Rule 147, Regulation D - both give you a six month and Rule 701 - not going to be integrated

Front 215

TODO

Back 215

Get the integration factors in the book

Front 216

What are the five integration factors?

Back 216

(1) single plan of financing; (2) class of security; (3) timing; (4) consideration; (5) for the same general purpose

Front 217

What is the single plan of financing factor in integration?

Back 217

(1) some courts look at intent, (2) some courts look to the other four factors of integration; what's clear: if you can convince that this was a single plan, it's dispositive. Whatever, it's really just a conclusion

Front 218

What is the same class of security factor in integration?

Back 218

They have to be "materially different"

Front 219

How do courts interpret the timing factor in integration?

Back 219

The court decisions tend to mirror the six month safe harbor

Front 220

How to deal with the consideration factor in integration?

Back 220

This is tricky: if one is for cash, and another is for patent rights, or real property, then it tends away; if it's just cash, it doesn't do much to convince you it is

Front 221

What are the shining rules of the NASD?

Back 221

high standards of commercial honor + just and equitable principles of trade

Front 222

TODO

Back 222

get the NASD rules in

Front 223

TODO

Back 223

get In re Kunz and SEC v. Murphy notes in the book

Front 224

TODO

Back 224

get the summary of Rule 152 and Rule 155 requirements in there

Front 225

What are two rules to think about when you're thinking about IPO, but then want to go with a private offer, or vica-versa?

Back 225

Rule 152 and Rule 155

Front 226

What is a benefit of have a broad set of private remedies?

Back 226

Army of AGs: The SEC will never have enough resources to fully protect, so we call upon the public to protect itself with private civil suits

Front 227

TODO

Back 227

Figure this out: Then the Uniform State Law Act or something... any class action could not include any claim of state law

Front 228

When will a regulator likely weigh in on your case?

Back 228

Usually only if there is a novel question of law; or a lot of people; or huge damages

Front 229

What should you file first if sued under securities laws?

Back 229

12(b)(6) they have to carefully plead all elements, Sec 13 of '33, you are SoL unless brought within one year of the discovery of the omission....so, make sure you plead the reasons why you didn't discover

Front 230

What are the liability sections under the '33 Act, in summary

Back 230

Section 27, Section 11, Section 12(a)(1), Section 12(a)(2), Section 17(a)

Front 231

What is the importance of Section 27 in '33 Act liability?

Back 231

Allows you to bring in federal or state court

Front 232

What is Section 11 liability under the '33 Act generally?

Back 232

The great draconian provision. If there is material misstatement or omission in a registration statement

Front 233

TODO

Back 233

Get the holding out of BarChris, page 487

Front 234

Does anyone sue under Section 11?

Back 234

Almost nobody sues under section 11. But you should still be afraid of it. But almost nobody does because of strictures in filing.

Front 235

What are the elements of a suit under Section 11?

Back 235

(1) tracing; (2) statute of limitations; (3) plaintiff must not have been aware of the omission at the time of purchase; (4) NO causation; (5) no reliance; (6) the CURSED can be sued

Front 236

What is the tracing requirement under Section 11?

Back 236

Plaintiff must show the securities that he or she purchased were pursuant to the misleading registration statement. This is very hard

Front 237

What is the statute of limitations under Section 11?

Back 237

(a) file within one year, (b) actual discovery of the statement, (c) one year from when you should have made the discovery, (d) three year statute of repose after the first sale, this came from Lampf case in SCOTUS

Front 238

Discuss the causation requirement under Section 11?

Back 238

NO causation requirement. Don't have to prove the misrep was what lead to the injury. BUT, the defendant can rebut causation by showing that the misstatement had nothing to do with the price

Front 239

Who can be sued under Section 11?

Back 239

The CURSED: controlling people under Section 15, underwriters, the registrant (issuer), signatories, experts, directors

Front 240

Who has a due diligence defense under Section 11?

Back 240

Everyone except the issuer

Front 241

Explain the due diligence defense under Section 11

Back 241

You are liable unless "reasonable ground... " or reasonable investigation standard is prudent man in the management of his own property. TODO: clean this up

Front 242

What is the standard of care under Section 11's due diligence defense?

Back 242

In context of sec 11 liability: due diligence by a professional means adherence to that profession's standard of care. Ex - guilty of malpractice in law?

Front 243

Talk about the controlling people in the context of Section 11 liability

Back 243

The C has its own liability section, section 15. Page 19 of the statute book. Every person . . . controls any person liable under sec 11 and 12 there is joint liability unless the person had no knowledge of . . .

Front 244

Discuss Section 12(a)(1) liability

Back 244

for the issuer it is strict liability. no excuses. however, some state laws say no liability if the plaintiffs were sophisticated and aware (but that's not not true in washington).

Front 245

What can the plaintiff get it it sues under Section 12(a)(1)?

Back 245

Defendant has to return money plus interest, or damages if sold.

Front 246

What are the three key concepts under Section 12(a)(1)

Back 246

(1) remember Ralston, the person who argues for the exemption has to plead and prove each and every element; (2) good faith does not matter; (3) doesn't matter that the plaintiff knew the security wasn't registered.

Front 247

Can the defendant defend himself if he notes that the plaintiff knew the security wasn't registered under Section 12(a)(1)?

Back 247

Doesn't matter that the plaintiff knew the security wasn't registered. defense counsel might raise this even through this is a total red herring.

Front 248

What if you register the securities after they've been offered in the context of Section 12(a)(1) liability?

Back 248

Don't forget page 521 where you'll find the Lomasney case. If an offering was illegally offered prior to the registration, it doesn't matter if the registration was later perfected

Front 249

Who is liable under Section 12?

Back 249

Only those who offer and sell. But what does that mean?

Front 250

What does it mean to be a seller under Section 12(a)(1)?

Back 250

Pinter v. Dahl: (1) pass title or (2) some kind of gain / the solicitor liable must be motivated . . . own interest . . . or the securities owner

Front 251

What does Washington state consider the soliciation of an offer

Back 251

Unlike the federal "for value" (1) pass title or (2) some kind of gain; Washington uses the substantial factor test (a bigger net)

Front 252

What are the elements of a suit under Section 12(a)(2)?

Back 252

(1) material misrep or ommission; (2) interstate commerce; (3) by means of a prospectus (bzzzt) or oral communication with the purchasers not knowing; (4) you have tender the securities

Front 253

What are the defenses under Section 12(a)(2)?

Back 253

Seller didn't know of the miresp or ommission and any exercise of reasonable care could not have known

Front 254

What is the remedy under Section 12(a)(2)?

Back 254

Rescission or damages

Front 255

What are some of Mericles key points of Section 12?

Back 255

(1) no scienter (sometimes courts talk about negligence); (2) no causation or reliance; (3) unlike section 11, section 12 does not itemize who can be liable so far all courts use the same test as Pinter v. Dahl

Front 256

TODO

Back 256

Look into this comment in the context of Gustafson: This would stop a 3(a)(9) or 3(a)(10)

Front 257

What does a "prospectus" mean in Section 12(a)(2) liability?

Back 257

Prospectus for 12(a)(2) means only a writing prepared in connection with a public offering.

Front 258

What is the impact of Gustafson?

Back 258

Basically you have no private right of action under Section 12; but there is always federal enforcement

Front 259

TODO

Back 259

Figure out what to do with oral statements after Gustafson

Front 260

Why does Uncle Sal not get in trouble under Section 12(a)(1) if he recommends a security

Back 260

Because of the "for value" requirement: must (1) pass title or (2) get some kind of gain

Front 261

What about using Section 17A as a remedy after Gustafson

Back 261

Looked hopeful, but courts decided there was no private right of action. Still, Section 17A is a powerful tool in the hands of the SEC because SCOTUS says you don't need scienter. Pure heart, empty head will not save. Aaron v. SEC, 1979. Page 537.

Front 262

TODO

Back 262

Figure this out: Many blue sky laws are identical to Section 17A. Section 10 Washington is identical. Kittleson v. Ford - scienter is not required to prove a case under Securities Act of Washington.

Front 263

What is the statute of limitations under Section 12(a)(1)?

Back 263

One year from date of sale, no discovery rule -- comes from Section 13

Front 264

What is the rule of thumb for who a control person is?

Back 264

Executive officers, directors, big shareholders (10% because that's the '34 Act reporting)

Front 265

What is the big trap with the jurisdictional statute under the '33 Act?

Back 265

SLUSA: No action can be removed to Federal Court even if you have diversity jurisdiction. IF you file in state court, it stays. However, courts interpret to mean the '33 Act claims can't be removed, but the rest of the suit can be.

Front 266

Can you violate 10b-5 even if you aren't offering or selling yourself?

Back 266

So, you can violate even if you yourself are not offering or selling. "In connection with" is broad enough thought Judge Friendly. SEC v. Texas Gulf Sulfur

Front 267

What was the broadest reading of the "in connection with" requirement of 10b-5?

Back 267

Super. of Insurance v. Banker's Life (page 658 note). Held: it is enough that the fraud "touches upon" the sale of a security provided that the investment aspect of the wrongdoing is an essential part of the claim. What you're complaining must touch upon investment aspects

Front 268

Do you have to own, or have owned, a security to bring a 10b-5 case?

Back 268

You have to be either a purchaser or a seller to bring an action. The Birbaum rule was there to prevent everyone from bringing a suit because of the breadth of the "in connection with" language.

Front 269

What kinds of cases does 10b-5 apply to?

Back 269

The court said what you complain of must involve fraud. Must be deception. Simply because it's unfair doesn't make it manipulative.

Front 270

What is the burden of proof with 10b-5 cases?

Back 270

Preponderance of the evidence

Front 271

TODO

Back 271

Think about what you want to say with Nursing Home Pension v. Oracle

Front 272

Can reliance on counsel negate the scienter requirement under 10b-5?

Back 272

Where defendants sought counsel and reasonably relied, the element of scienter is defeated

Front 273

What is the relationship between reliance and causation in 10b-5?

Back 273

Pretty close, it's very related to transaction causation

Front 274

What does the plaintiff have to allege for reliance in 10b-5?

Back 274

Just allege that the plaintiff in the case of an omission was ignorant of the truth, in a misrepresentation, the plaintiffs would have considered important. Don't have to say, "I would not have bought." But if the client says, "I would have bought it anyway..."

Front 275

How can the defendant defeat the reliance requirement in 10b-5?

Back 275

If the plaintiff says he knew about the fraud, but he would have bought it anyway

Front 276

What are the elements under 10b-5?

Back 276

The rule's elements: (1) purchase or sale of security; (2) a device artifice, etc; (3) "in connection with". Then there is the gloss: scienter, reliance, and causation

Front 277

What is the scienter requirement in 10b-5?

Back 277

"Wrongful intent" Regardless of what Rule 10b-5 says, you have to prove scienter because Section 10(b) requires it. Scienter in this context refers to (1) wrongful actual intent (2) or maybe recklessness (in a Hochfelder footnote)

Front 278

What are the pleading requirements with regard to scienter in 10b-5?

Back 278

There is the FRCP 9(b) "particularity" requirement, but then the PSLRA has a strong inference requirement.

Front 279

What is the "strong inference" requirement with regards to PSLRA and scienter in 10b-5?

Back 279

Plaintiff must prove facts, not only with particularly, but also a showing "strong inference" of scienter. But the courts have split over this. Whatever, the PSLRA was intended to remove "negligence" as an option

Front 280

How have the courts interpreted the "strong inference" requirement with regards to PSLRA and scienter in 10b-5?

Back 280

Most circuits: totality of the circumstances; 2/3rd: just a showing of "motivation and opportunity" to have violated. Intent can be inferred; 9th: "deliberate recklessness or conscious misconduct"

Front 281

What does reckless mean?

Back 281

TODO: refer to pages 670-73

Front 282

What are the two causation requirements under 10b-5?

Back 282

(1) Loss causation and (2) transaction causation

Front 283

What is PSLRA's formulation of for loss causation under 10b-5?

Back 283

Section 21D(b)(4) of the '34 Act: In any private action arising under this chapter, the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate this chapter ***caused the loss*** for which the plaintiff seeks to recover damages.

Front 284

What are the two basic factual circumstances for causation under 10b-5?

Back 284

(1) a face to face transaction and (2) open market

Front 285

What is the reliance prong in a face to face transaction under 10b-5?

Back 285

TODO Look up: Affiliated Ute Citizens is the landmark case

Front 286

What is an omitted facts case in the context of 10b-5?

Back 286

This was an omitted facts case: In an omitted facts case, reliance is rebuttably presumed that if the plaintiff can prove materiality where there is a substantial likelihood given total mix

Front 287

How do you know if a case in an omitted facts case is omitted or misstated in the context of 10b-5?

Back 287

There is a problem figuring out whether there is an "omission" or not. The case has to be "primarily" an omission case. Or "primarily" a misstatement case.

Front 288

Discuss the causation requirement in a face to face transaction under 10b-5

Back 288

There are two different takes on this. One is to require something like common law fraud, but the other is to argue that the purpose of the act is to make it easier for the plaintiff to bring. Wasn't it supposed to do one better than common law fraud? We've always had fraud out there.

Front 289

Discuss the reliance requirement in an open market transaction in the context of 10b-5

Back 289

There are two types. Type 1: an efficient market was defrauded. This is Basic. Type 2: even though the market is not provable of being efficient in terms of its absorption of information. If you can prove the securities would never be sold at any price had the truth been out there.

Front 290

What is Mericle's rule for a fraud on the market claim?

Back 290

You can prove reliance by showing that the market was well developed and incorporated new information readily as it became available. As to disclosure, the market was efficient. Battle of experts. For national exchanges, it's easy.

Front 291

Discuss the causation requirement in an open market trasnaction in the context of 10b-5

Back 291

This was the Dura Pharmceuticals case: all this case says is that you can't claim "we just paid too much"; you'll have to show how much was lost in the old fashioned Palsgraf sense due to what they lied about

Front 292

How to you show loss causation and reliance in a churning case?

Back 292

Causation and reliance are different. If the broker is churning your account, the loss causation element is irrelevant

Front 293

Does PSLRA impose proportional liability under 10b-5?

Back 293

Yep

Front 294

What is the statute of limitations for 10b-5?

Back 294

Action must be brought no later than the earlier: (1) 2 years after the discovery of the facts constituting the violation or (2) 5 years after the act. After 5 years, you're timed out. Statute of repose.

Front 295

Does the plaintiff have to demonstrate due diligence in a 10b-5 claim?

Back 295

There is no law. See page 720. Duty not to be reckless. If the plaintiff was reckless (a) where the defendant lies, but also discloses the truth (talking out of both sides of their mouth) (b) where the plaintiff knows the truth despite the defendant's lies (c) where the plaintiff knows enough of the truth not rely on the defendant

Front 296

Does it matter whether there are other remedies to the plaintiff besides 10b-5?

Back 296

Availability of other remedies does not matter. 10b-5 is implied, so if there are express remedies... but the supreme court didn't like this.

Front 297

What private remedies are available under the '34 Act?

Back 297

Section 18, Section 29, Section 9, Section 15

Front 298

Discuss Section 18 liability under the '34 Act

Back 298

Makes it unlawful to make materially false statements in '34 Act filings. The problem is with the remedy. To obtain the remedy, you have to prove you actually relied the statement. Case law is unclear as to whether a fraud on the market claim works or not.

Front 299

Discuss Section 29 remedies under the '34 Act

Back 299

This gives the plaintiff the chance to void the contract or provision under anti-waiver doctrines. The court can do whatever it believes to be fair because it is an equitable doctrine.

Front 300

Discuss Section 9 remedies under the '34 Act

Back 300

Prohibits manipulative and deceptive acts on the exchanges (but not OTC). Has not been relied on.

Front 301

What kind of liability can attach to defendants?

Back 301

Primary and secondary

Front 302

Discuss the three types of liability that are (or aren't) viable?

Back 302

Aiding and abetting is dead; scheme liability doesn't work; control person liability does; RICO does, but it's hard

Front 303

Discuss control person liability as a secondary liability

Back 303

Section 15 of '33 Act - liability upon "control" . . . unless no knowledge . . . (due diligence); Section 20 of '34 - there is liability unless the person acted in good faith AND did not directly or indirectly induce the violation. Somewhat easier on the defendant.

Front 304

Discuss finders

Back 304

A finder is not required to register as a broker dealer so long as all they do is introduce the buyer and the seller and makes no recommendation and does nothing to facilitate the sale

Front 305

What was Mericle's idea for making finders liable?

Back 305

Isn't this a violation of Section 29(b)? I.e., you've failed to register, so can't an aggrieved investor sue to void the subscription because of the connection to the sale

Front 306

TODO

Back 306

Take a look at Dean Little's notes

Front 307

TODO

Back 307

write down the statutes of limitation in the book

Front 308

What is the defense of laches and when can you use it?

Back 308

Works for equitable claims, not legal claims (rescission, not damages). Two requirements: (1) failure to diligently pursue known claim (2) resulting in prejudice to defendant 791, Hecht

Front 309

Can you use laches to defend against SEC charges?

Back 309

No. But Mericle says not to concede the argument

Front 310

What is estoppel and when can you raise it?

Back 310

Legal defense, not equitable. Four requirements: (1) party to be estopped must know true facts (2) must intend or imply that his or her conduct to be relied upon (3) one asserting estoppel must be ignorant of truth (4) and must have relied to detriment on conduct of other party

Front 311

Discuss waiver as a defense

Back 311

"voluntary or intentional relinquishment of known right" Waiver prohibits waiver of future claims, but once there is a known dispute, then the right can be waiver

Front 312

TODO

Back 312

list all the defenses somewhere in the book

Front 313

Discuss in pari delicto

Back 313

When two parties are bad... Example case: Plaintiff sues on grounds that defendant had inside information, but the inside information was wrong, so they sued

Front 314

Discuss indemnity and contribution in the context of defending against claims

Back 314

No indemnity for primary bad actors, but some courts held that secondary liability, then indeminication is possible

Front 315

Discuss bankruptcy as a defense to securities fraud

Back 315

Once a defendant is bankrupt, you can't do anything more against them. all proceedings end: no motions, no discovery. There was a fraud exception, but you have to prove actual fang-toothed fraud

Front 316

Can you arbitrate claims?

Back 316

Yep. It is now the rule: two Supreme Court decisions. You can abitrate anything. Before, the anti-waiver provisions stopped it

Front 317

TODO

Back 317

take a look over Martin Cordell's notes

Front 318

What is the preliminary investigation by the SEC?

Back 318

Informal investigation - no formal authority, just staff

Front 319

When does the preliminary investigation turn into something more?

Back 319

if it believes it needs more information, then it needs a "formal order of investigation" FOOI

Front 320

Does the formal order of investigation need to alert defendants?

Back 320

Once obtained, it does not have to alert potential defendants as to who it is seeking evidence from. The SEC doesn't have to tell anyone about its investigative activities. Counsel is limited, but Mericle says they are entitled to the effective representation of counsel. Don't need to let the SEC interrogate, even if those are the rules

Front 321

How does the fifth amendment apply to formal order of investigation?

Back 321

5th Amendment applies only to individuals. A subpoena requiring corporate officer to deliver documents because the records were the corporation's even if the records will incriminate a natural person.

Front 322

What about due process and a formal order of investigation?

Back 322

If someone can show there is improper purpose or influence, then you might have a 14th amendment argument

Front 323

What is a parallel proceedings issue with due process and a formal order of investigation?

Back 323

Justice and SEC bring simultaneous action. The SEC might be trying to use the civil discovery process to funnel information to the Justice where that would be forbidden under criminal procedures

Front 324

What can you do after a formal order of investigation?

Back 324

Ask for a Wells submission

Front 325

What is a Wells submission?

Back 325

Once the SEC has put together a case and wants to go to the Commission, the defendants should have a say too. So the staff will notify the "target" that they are going to

Front 326

What is a risk with the Wells submission?

Back 326

Have to be very careful because you don't want to make an admission of wrong doing or draw their attention to something they didn't focus on in their investigation

Front 327

TODO

Back 327

List the steps in the OIP/ALJ stuff

Front 328

How can the SEC bring it's own action?

Back 328

15(c)(4) of '34 Gives Commission right to bring actions if it appears that the provisions of the '34 act were violated.

Front 329

What is section 102(e)?

Back 329

SEC can disbar as a securities lawyer if you demonstrate that you are unfit to act as counselor through incompetence of dishonesty

Front 330

How does the SEC issue reports about conduct they don't like?

Back 330

21(a) report of '34: They can publish reports about their investigations without taking any sanction. They have reputational effects.

Front 331

How can the federal courts issue injunctions?

Back 331

Preliminary upon a "likelihood of success" on the merits and that the injunction is necessary to preserve status quo; A premanent injunction requires realistic likelihood of recurrence

Front 332

What is something to think about with fines coming from the courts instead of the SEC?

Back 332

Fines under 21B just as much as the SEC can, but it's worse: the judicial fine can be the higher of the SEC fine or the gain made by the defendant. Courts can now bar people from serving as an officer or director of a public company forever (requires egregiousness or recidivism).

Front 333

Can the SEC enforce its own subpoena?

Back 333

No, has to go to court

Front 334

TODO

Back 334

get the collateral consequences into the book

Front 335

What is the risk of collateral estoppel in an enforcement action?

Back 335

If you go to trial and lose, anyone who wants to sue simply points to that final judgment. Thanks to SCOTUS in Parklane Hosery v. Shore, you are collaterally estopped

Front 336

What does the SEC have to prove for criminal liability?

Back 336

34 Act Filings: criminal prosecutions for phony reports, prosecutor must show willfull and knowing

Front 337

What's a way to stay out of prison?

Back 337

Can't be imprisoned for the violation if you can prove you didn't know. You can't say you didn't know about a specific rule

Front 338

Does mail fraud apply to securities cases?

Back 338

Nope

Front 339

What is Mericle's definition of insider trading?

Back 339

"Unprivileged transactions in the public trading of securities while aware of material nonpublic information"

Front 340

In Mericle's definition of insider trading, what does "public trading" mean?

Back 340

Only applies where you have nameless faceless transactions. Insider trading has no relevance in face to face deals (because you cannot make misstatements or omissions)

Front 341

What does unprivileged information mean in Mericle's definition of insider trading?

Back 341

(1) noone is ever privileged to make misstatement in a face to face; (2) officers and directors of an issuer never have a privilege to trade on material nonpublic information regarding their company; (3) same is true of other people inside: employees or agents

Front 342

Do officers and directors of an issuer ever have a privilege to trade on material nonpublic information regarding their company?

Back 342

Absolutely not

Front 343

TODO

Back 343

Write down the three cases

Front 344

What are the two classes of analyses in insider trading cases?

Back 344

Primary duty of disclosure and secondary duty of disclosure

Front 345

What is the primary duty of disclosure?

Back 345

Insider trading consists of an inquiry into whether the person had some duty to the source of information involved

Front 346

What kind of duty and relationship is key to primary duty of disclosure insider trading cases?

Back 346

Fiduciary relationship to the source of the information (which is the motive for the trading), agent and principle or prior duties such that they would give rise to a relationship of trust and confidence

Front 347

What is the misappropriation doctrine in the primary duty of disclosure insider trading cases?

Back 347

Under this theory, a fiduciary's (lawyer) self serving use of the information to purchase in breach of confidentiality, defrauds the principal of the exclusive use of that information... misapp premises on a trader's use . . .

Front 348

Just generally, what is seconary liability in insider trading cases

Back 348

Tipper-tippee

Front 349

What gives rise to secondary liability in insider trading cases

Back 349

Tippees must abstain or disclose only if the insider that they got the information from breached a duty that they got the information from. There is no breach of a duty where there is no direct or indirect benefit to the tipper. A benefit may be gifting the information to someone who's relationship that that insider is "close." It's a gift to your buddy. A close relationship is ... who knows?

Front 350

What can insiders do with inside information?

Back 350

Insiders have some special relationship to the isuser of securities which are the subj of market trading: minimum directors, officers, agents, and employees are within scope. as to material non public information, they can do one of two things: (a) dislcose the information both "publicly and fairly" disclose and then wait around for the market to absorb it (b) or abstain from trading, including vicarious such as tipping for a benefit

Front 351

What can outsiders do with inside information?

Back 351

Those with no independent disclosure duty under Chiarella or O'Hagan, they are free to do as they like unless they know or should know that the information was acquired directly or indirectly through either another person's self serving breach of their duty of nondisclosure or through misapp

Front 352

Who cannot sell short?

Back 352

16(c) - officers, directors, ten percenters may not sell short. Because they think the price is dropping.

Front 353

What is the interesting trick the PSLRA did for insider trading?

Back 353

Congress created a private right of action 21A for insider trading. It made the private actions almost meaningless. 21A says, if you want to file, the most you can cough up is the amount of gain. Not liable for anything else.

Front 354

What happens if you accidentally give information to a private group that you should have disclosed publicly?

Back 354

Regulation F-D, adopted in 2000. Fair disclosure (not "full disclosure"). Says if someone authorized to speak for a public co discloses to anyone (exception) material nonpublic information, then they must immediately do it publicly or follow up immediately with full public disclosure.

Front 355

How can you sell your shares if you are Bill Gates?

Back 355

You can have a 10b5-1 plan, Must be in writing. Identify specific number of shares or specific means for calculating. Must lock you in to a methodology for selling the shares. So long as the computation is not influenced by information regarding the company. Cannot modify the plan.

Front 356

TODO

Back 356

get the Washington stuff cleared up

Front 357

What is registration?

Back 357

we register the offering, not the security... even more specifically: we register distributions. The '33 Act covers distributions.

Front 358

What is an issuer?

Back 358

the person who created the security. GM, MSFT, YHOO, all issuers. More arcane: promissory note. the issuer is the one making the note. If Mericle writes the note, he's the issuer

Front 359

What is an underwriter?

Back 359

If there is a distribution, there is an underwriter and if there is an underwriter, there is a distribution

Front 360

What is the key to 2(a)(11)?

Back 360

In short, you're an underwriter if you take the stock on an issuer with an eye to distributing it

Front 361

What is a broker?

Back 361

someone acting as an agent. A broker does not take title to the securities, but acts as an agent. If you want to buy stock, Merrill will sell stock from someone else to you. The specialist intermediary on the floor of the exchange will do it.

Front 362

What is a dealer?

Back 362

if the securities firm owns the stock its going to sell you, it's the dealer. It is the principal in the transaction.

Front 363

What is an affiliate?

Back 363

Most sec laws think it means someone who is an executive officer, on the board of directors, or a substantial shareholder (rule of thumb used by securities lawyers: control of 10% or more of the outstanding voting securities of the issuer) See the definition. It is something like "control, controlled by, common control" In really, really big companies less that 10% will probably qualify as an affiliate

Front 364

What is a control person?

Back 364

an affiliate is a controlling person (by definition), but the SEC takes the position that anyone who can exert control over the issuer or an identifying unit of the issuer is probably a control person

Front 365

What is primary financing?

Back 365

Quintessential example is the IPO, or the first public distribution

Front 366

What is a secondary financing?

Back 366

The issuer finances thereafter

Front 367

What is a secondary offering?

Back 367

An offering of that issuer's securities by someone else (Gates sells it all, he needs to file a registration statement)

Front 368

What is secondary trading?

Back 368

An offering of that issuer's securities by someone else (Gates sells it all, he needs to file a registration statement)

Front 369

If you have a distribution, does it automatically mean that you have a registration statement in place?

Back 369

No. there are lots of distros that are not registered because of exemption ex - federal paper is exempt

Front 370

If you have a registration statement in place, does it mean there is a distribution?

Back 370

Yes

Front 371

What does a firm commitment underwriter do?

Back 371

Firm commitment buys whole offering . . . a series of distros through other underwriters and agents

Front 372

What are the three subtypes of firm commitment underwriters?

Back 372

(1) all or none; (2) mini-max; (3) straight

Front 373

What are the two key reasons for going public?

Back 373

(1) liquidity for corporate insiders and those who provided the seed capital oftentimes VCs; (2) to provide better future access to capital. Easier to go back to the markets [related: think of corporate stock as money]

Front 374

TODO

Back 374

list all the reasons for not going public

Front 375

TODO

Back 375

list all the prerequisites for going public in the book

Front 376

TODO

Back 376

list all the players in going public in the book

Front 377

What are the key terms that go into structuring the IPO?

Back 377

Number of shares, price,

Front 378

Why do the underwriters not like cashing out current stockholders?

Back 378

Looks like a bail out. If this is so great, why are the insiders cashing out? So they use lock up agreements

Front 379

What is the directed selling program in the context of the IPO?

Back 379

People close to management want to buy before the IPO. Management has to be really careful not to do this or they will blow the registration process

Front 380

Are preliminary negotiations between the issuer and underwriter count as an offer?

Back 380

No.

Front 381

What can you do after you file the registration statatement (but before it's effective)?

Back 381

(1) Written offers can only be made with tombstone prospectuses in the WSJ (for example). (2) You can use the red herring: not deemed to be an offer (3) Since 2005, you can create a short form of the prospectus (can't contradict nor contain material misstatement of omissions) that's been file: "free writing prospectus"

Front 382

TODO

Back 382

write down all the steps in registering. What you can do when

Front 383

What can you do after the registration statement is effective?

Back 383

(1) Actual sales can now be made; (2) Send the confirmation slip and the copy of the printed final prospectus; (3) In 2005, SEC changed the rule to say that the EDGAR version is effective

Front 384

What is the green shoe option?

Back 384

For a period of 30 days after the closing The company will issue an additional 15% over the maximum You don't want a situation where they over sold and someone won't get the shares

Front 385

If shares are on the national exchanges, what is a key benefit?

Back 385

Don't have to register at the states under NSMIA

Front 386

How do issuers often have to restructure their business prior to the IPO?

Back 386

All minutes in order, charter amendments, get rid of the preemptive share purchases (too much work to always be going back), get rid of the staggered boards, any other clauses in the charter, take sure stock ledger is clean, compliance with SOX, control systems, accounting records

Front 387

What are some examples of gun jumping?

Back 387

A conveniently timed press releases (our prospects are fantastic), a conveniently timed favorable research report

Front 388

What happens if you gun jump?

Back 388

(1) there is a cooling off period; (2) and 12(a)(1) liability: any security "offered" or sold in violation...

Front 389

TODO

Back 389

Get the list of stuff after the organizational meeting in the book

Front 390

What is integrated disclosure

Back 390

Makes it possible for some issuers [TODO: figure out which] to file by reference

Front 391

What is the great catch all rule for registration statements and Regulation S-K?

Back 391

Rule 408 (under '33 Act): regardless of what the forms require, you must still not omit to state facts needed to make facts not misleading

Front 392

What is the safe harbor related to gun jumping?

Back 392

Honest, accurate statements about business; as long as 30 days or more prior; we will scrutinize all announcements during 30 days immediately prior

Front 393

What can you do about 12(a)(1) liability if you jump the gun by offering securities?

Back 393

Not much except wait out the one year statute of limitations

Front 394

What is the quiet period?

Back 394

once filed, then you can make oral offers, but not by means of broadcast. You can hold meetings. But you may not offer by writing except by tomstone; red herring; free writing prospectus

Front 395

What kind of offers can you make in the quiet period?

Back 395

(a) tombstone (b) the red herring (printed prospectus minus important details, but maybe ranges) once confident that no further comments from SEC (c) "free writing prospectus" sales literature / can't contain anything not already in the prospectus / must be filed / liability will attach

Front 396

What is the role of underwriter's counsel in the offering?

Back 396

(1) heavily involved in drafting the letter of intent and (2) the underwriting agreement

Front 397

What are the major features of the underwriting agreement?

Back 397

(1) green shoe provisions / overallotment; (2) sixteen months of issuance: earning statement [11(a) of '33 act / extent of liability if issuer doesn't do this] (3) a market out clause (4) liability shifting provisions (bitterly fought) (5) indemnification for everything [sometimes the courts will ignore this anyway] (6)provisions for contribution

Front 398

Does FINRA review the underwriting agreement?

Back 398

Yep. FINRA starts reviewing the underwriting agreements: very complex rules regarding how much money they can make, reviews affiliations / relationships. SEC won't do anything until FINRA is happy

Front 399

What division of the SEC comments on your registration statement?

Back 399

Division of Corporation Finance

Front 400

What are some things to consider when replying to the comment letter from the SEC?

Back 400

(1) consider each comment as constructive because they are intended that way- they actually point out holes that plaintiffs would find (2) if not "covered securities" then coordinate responses to SEC and state regulators for consistency and coincidental effectiveness. Send a copy of the comment letter to the state regulators.

Front 401

When should you print the red herring and go on the road show?

Back 401

Once you think there are no more comments from the SEC

Front 402

What is something to worry about on the roadshow?

Back 402

Be very careful to say only what's on the prospectus you could be just as liable as if you put it in the prospectus itself

Front 403

What are the big three exchanges that qualify you as a "covered security" under NSMIA?

Back 403

NYSE, AMEX, NASDAQ

Front 404

What are the three types of state registration?

Back 404

notification (forget it, nobody does it); qualification; coordination

Front 405

What is the acceleration request?

Back 405

To be declared effective, you have to respond to SEC, states, NASD, exchanges. Then, you have to ask for an acceleration request. SEC will ask about FINRA now

Front 406

TODO

Back 406

review the state registration notes

Front 407

When do you sign the underwriting agreement

Back 407

After you've hit the accelerate button at the SEC

Front 408

What are the three powers the SEC has when you file the registration statement to stop it?

Back 408

Refusal order; stop order; cease and desist order

Front 409

When does the SEC issue a refusal order?

Back 409

something has to be wrong on the face of the registration

Front 410

When does the SEC issue a stop order?

Back 410

Used more often, if (a) material misstatement or omission and (b) they think you won't cooperate. It stops distro of the security.

Front 411

When does the SEC issue a cease and desist order in the context of a registration?

Back 411

Not readily used, but used in gun jumping sometimes

Front 412

What is something changes after you filed the registration statement?

Back 412

You have to file a new amendment and doing this stops all sales: the old registration is not effective. By filing the amendment, it pulls all the prior disclosure to current amendment and liability will attach to both the prior and the new.

Front 413

TODO

Back 413

figure out what withholding is during the sales process

Front 414

What can the underwriters do to stabilize the price of the security during a stablization?

Back 414

Always to keep the price up. In a stablization the underwriter is out on the open market, buying the security itself. They can't bid up, but they can buy it on the way down, and buy at the increased price.

Front 415

Who has to certify the internal controls under SOX?

Back 415

CEO and CFO

Front 416

TODO

Back 416

list the corporate governance considerations of SOX in the book

Front 417

TODO

Back 417

review the Trust Indenture Act stuff.... I was really confused

Front 418

What does it take for a foreign issuer to trigger the '33 Act?

Back 418

Under 2(a)(7), if a British Company makes a single call to an underwriter in New York, the '33 Act has been triggered

Front 419

What is a foreign private issuer?

Back 419

"any private corporation or other private company organized under the laws other than the of the United States, territories, possessions with fewer than 50% of its voting securities held by US persons"

Front 420

Does the FPI have to look beyond the street names?

Back 420

YEP. So, an FPI has look beyond the street names (i.e., merrill) to see whether it qualifies. It does this by asking all the depositories how many US addresses they have.

Front 421

Why does it matter whether one is an FPI or not?

Back 421

FPIs are treated much more favorably by the securities laws

Front 422

Even if an FPI has more than 50% of its voting shareholders in the US, it will still be treated as an FPI if the following are satisfied...

Back 422

All of the following must be true: (1) HQ outside US (2) majority of assets are outside (3) majority of its directors are not US citizens OR residents (4) majority of its officers are not US citizens OR residents. So, you could have 100% US ownership of the FPI as long as all these other four requirements are met

Front 423

TODO

Back 423

write the requirements of the FPI down in the book

Front 424

What does Regulation S help with

Back 424

When you want to issue outside or inside the US

Front 425

What are the four safe harbors under Regulation S, in summary?

Back 425

Category 1: don't do any "directed selling efforts" into US; Category 2: an FPI who does have SUSMI and is current in their '34 Act reporting obligations; Category 3: all US domestic issuers; Category 4: trading

Front 426

What is the category 1 safe harbor under Regulation S?

Back 426

So long as you don't do any "directed selling efforts" into US and offers and sales are made entirely to persons outside (even if you send a lot inside the US), then Sec 5 does not apply. There can be no substantial US market interest (shorthand): only on trading on foreign exchanges (SUSMI). You need not place any legend or any restrictions on the stock

Front 427

What is the category 2 safe harbor for FPIs that have a substantial US market interest under Regulation s?

Back 427

Under this safe harbor, sales outside the US are exempt as long as: (a) no directed selling, (b) offer and sell only outside the US, (c) the issuer deliver upon closing reminders to the buyers that the securities may not be resold into the US for 40 days. Must be current in reports.

Front 428

What is the category 3 safe harbor for US companies or FPIs that blew the other safe harbors or Regulation S?

Back 428

(a) No directed selling (b) all offers and sales outside (c) you must legend the securities: (1) destroys your ability to trade on the exchanges (2) no exchange wants to trade restricted shares

Front 429

TODO

Back 429

Take a look at EOC v. Banque Paribas

Front 430

TODO

Back 430

Write some key notes from the quest lecturer on Canadian securities

Front 431

If a foreign broker dealer wants to take orders from an American, how can he do it under federal rules?

Back 431

It says that completely unsolicited OK (even websites can be solicitation); but there's a problem with the states?

Front 432

What if the foreign broker dealer wants to solicit business from a big hitter, what can they do?

Back 432

If you are soliciting from "major institutional investors," you can call them, you can sell to them, but you must be accompanied with a local broker dealer. So, as a consequence, now all the major brokerages have local offices to work with the "major institutional investors"

Front 433

What do the states say about foreign broker dealers who are taking orders from american clients?

Back 433

Most have a de minimis rule (no place of business, effects no more than 5 people in the state (some 10, 25)) - just a way to get off the hook

Front 434

What state does not allow foreign broker dealers to work with local broker dealers?

Back 434

Maine

Front 435

What are two important exemptions for dealers?

Back 435

Even though they aren't exempt under 4(1) there is 4(3) and 4(4)

Front 436

<need to make a card about 4(3) and 4(4)>

Front 437

What is a distribution by someone other than the issuer?

Back 437

distro by others are called secondary distributions

Front 438

When is someone an underwriter?

Back 438

Anyone who offers or sells on behalf of an issuer or affiliate, or with a view to distribution

Front 439

Why were the bonds in Chinese Benevolent not exempt?

Back 439

Because they were bonds from a foreign government

Front 440

When someone helps an issuer in a distribution what kind of participation is sufficient?

Back 440

Direct or indirect participation is sufficient (see Chinese Benevolent)

Front 441

<TODO Get Harden's holding, page 351 as an example>

Back 441

HARDEN

Front 442

<TODO Get Byrne's holding> <REVIEW THIS!!!>

Back 442

Forgot to deliver a prospectus to the purchaser, he was an underwriter because he took from the issuer with a view to distribution and participated in the distribution

Front 443

How do you know if there is an distribution under most holdings?

Back 443

Gilligan, Will (2nd Cir.): Distribution exists if there are sales to people that cannot fend themselves

Front 444

What is a way to prevent others from becoming underwriters?

Back 444

Restrict the stock

Front 445

What is a distribution the reverse of?

Back 445

A 4(1) trading transaction exemption

Front 446

On the exam, how to spot a distribution

Back 446

Look at the things that break a private placement, and this tells you whether you have a distribution

Front 447

What is the only safe way to know if you are not an underwriter

Back 447

The only way to safely sell short of filing a registration statement is through the passage of time

Front 448

What happens if you have an underwriter in your transaction?

Back 448

You blow your exemption

Front 449

<review> What does Rule 100 of Reg M do?

Back 449

Offers one definition of distribution: magnitude or special selling efforts

Front 450

What if the transaction as a whole includes an underwriter?

Back 450

If the transaction taken as a whole includes an underwriter, then you can't rely on exemption 4(1)

Front 451

Why are shares referred to as restricted sometimes?

Back 451

Most, not all, transactional exemptions carry with them no concomitant right to resell, and as a result, they are referred to as restricted securities

Front 452

What problem will control people always have?

Back 452

Regardless of how a control person obtained the securities, they will always have a problem

Front 453

How can you (1) resell restricted securities and (2) allow control people and affiliates to resell their shares?

Back 453

Make sure there is no distribution involved

Front 454

What two safe harbors are offered by Rule 144?

Back 454

(1) covers resale of restricted securities (2) a safe harbor for the resale of securities owned by affiliates and control persons, regardless of how they acquired

Front 455

If a control person acquires shares on the open market, can they just resell those?

Back 455

Even if the control person buys shares on the open market, they will still have the problem of reselling securities they acquired. Mericle went on a side discussion reasoning that if Bill Gates buys a lot of MSFT and then wants to sell it, it starts to look like a distribution.

Front 456

Why do control people have a problem selling their shares?

Back 456

The problem stems from the language of 2(a)(11) that declares anyone who takes from a control person or an affiliate with a "view to distribution" In other words, if you are Bill Gates and you want to sell some shares, then you are a statutory underwriter

Front 457

What if someone buys shares from Bill Gates?

Back 457

Except for Rule 144, the definition of underwriter makes anyone who buys from our hypothetical Bill Gates an underwriter, no matter how he acquired the shares.

Front 458

At a high level, what are the four requirements of Rule 144?

Back 458

(1) adequate public information in the market; (2) must be sold in broker's transactions; (3) There are selling and volume limitations; (4) file Form 144

Front 459

What does it mean to have adequate public information for the purposes of Rule 144?

Back 459

(1) A '34 Act reporting company is current; (2) a foreign public issuer that has an exemption; (3) otherwise made info available under Rule 12c2-11

Front 460

What is Rule 12c2-11?

Back 460

Requires the broker-dealers to keep adequate certain information about the issuer; put it in S&P or Moodys. You can use it to get enough information into the market to satisfy Rule 144.

Front 461

What does it mean to use a broker in a Rule 144?

Back 461

Have to use a licensed securities dealer; dealer cannot shop around; has to be an open market transaction

Front 462

What if the broker uses publicity in a Rule 144 transaction?

Back 462

It starts to look like a distribution

Front 463

What are some of the problems that Wolfson would have had with Rule 144?

Back 463

Can't use a lot of different brokerages and there are volume limitations

Front 464

What are the volume and selling limitations of Rule 144?

Back 464

If they are traded on a exchange, then in a 3 month period, you can sell up to 1% of the outstanding shares, or you can look to the weekly average trading volume averaged over the preceding four weeks. But there's a trap! What is it?

Front 465

What is the trap with volume and selling limits of Rule 144?

Back 465

Comes up over and over with small companies. If the issuer is on the pink sheets or on the OTC, then it can only use the 1% of outstanding test. It cannot use the weekly average test because this is a classic pump and dump technique.

Front 466

What is the filing requirement of Rule 144?

Back 466

You must file it no later than when you place your order to sell. It discloses what you're doing, how many shares, volume, etc. The point is to let the SEC keep an enforcement eye out either for unregistered distribution or for good faith compliance

Front 467

What is the different with Rule 144 as applied to control shares compared to restricted securities?

Back 467

Mericle said this fast: everything that applies to control persons also applies to restricted securities. But "unlike control securities, there is a holding period" but I'm not sure if this is right

Front 468

What are the waiting requirements under Rule 144?

Back 468

You must ask the question whether it is a reporting issuer and how current it is in its filings (see above). Under the new rule, if the issuer is current, then you only have to wait six months before you can resell the restricted securities (if it's a reporting issuer). Doesn't matter if you are an affiliate or not. It used to be two years.

Front 469

What is one of the great things about selling restricted securities under Rule 144?

Back 469

After one year (restricted securities), if you are not an affiliate or control person and you haven't been in the last three months, then all the conditions go away. You can resell however you choose, to whomever you choose.

Front 470

How long do you have to hold the shares under Rule 144 if it's a non-reporting issuer?

Back 470

If you acquire restricted securities from non-reporting issuers you have to hold for one full year from the time of full payment

Front 471

If you are am affiliate or control person, does it matter how long you hold the shares under Rule 144?

Back 471

You are never exempt from all the requirements of Rule 144 no matter how much time has passed or where you got the issuer's shares from. You must follow the requirements: public information, reporting issuer, six month, etc...

Front 472

<review the chart on TWEN>

Back 472

Review the chart

Front 473

Is 4(1) available if there is an underwriter in the deal?

Back 473

NO

Front 474

Talk through the 4(1.5) exemption

Back 474

If someone hasn't followed Rule 144, but we structure the transaction so that they act like an issuer under 4(2), if we set it up so that what they are doing is not a public offering, then we blew up the distribution, and the underwriter monster dies.

Front 475

What is a QIB?

Back 475

QIBs are financial institutions. Banks, Federal banks. Major institutions. Big insurance companies. Companies with a minimum investment portfolio.

Front 476

What does Rule 144A do?

Back 476

Under Rule 144 you would have at least a six month waiting period, but under this rule, the very next day is ok, if to another QIB. Must inform that the seller is relying on Rule 144A, and it thereafter can only sell to another QIB.

Front 477

What's the last way to avoid Rule 144, 4 (1.5), and 144A

Back 477

Regulation S. Insofar as section 5 might be triggered, if you communicate with a foreign person known not to be a citizen or resident, if your offer to sell securities to that person is in compliance with foreign law, then SEC doesn't care.

Front 478

Do you have to legend the stock under Regulation S?

Back 478

Yes, because we're worried that the stock will end up back in the US markets. Rule 905

Front 479

What did NSMIA do in regards to Section 4(1)?

Back 479

NSMIA, appearing in Section 18 of '33 Act, Congress said in 18(b)(4)(a) that it was preempting all state registration requirements if the trade qualified for the exemption found in Section 4(1) and the issuer in question was a reporting company under the '34 Act.

Front 480

Do the states have any power over non-reporting companies and trading transactions under Rule 144?

Back 480

YES

Front 481

What state exemptions apply for trading transactions for non-reporting issuers?

Back 481

(1) uniform securities act has a tiny exemption; (2) the "manual" exemption; (3) 402(b)(3)'s unsolicited offer to buy; (4) small offering exemption of 404(b)(9)

Front 482

What is the problem with the uniform securities act exemption for trading transactions for non-reporting issuers?

Back 482

every state has its own idea of what this exemption means, even though it's supposed to be "uniform"

Front 483

What Washington's uniform securities act exemption for trading transactions for non-reporting issuers?

Back 483

4 transactions every 12 months, not very useful

Front 484

What is the state's "manual exemption" for trading exemptions for non-reporting issuers?

Back 484

The states adopted as a supplement to NSMIA. It's an exemption for secondary trading if the security is listed in a "recognized securities manual". Example is Mergent's Industrial Manual or S&P

Front 485

What is the 403(b)(3) unsolicited offer to buy for trading exemptions for non-reporting issuers?

Back 485

If they receive a wholly unsolicited offer, but the sale must be effected by a locally registered broker-dealer

Front 486

What is the 404(b)(9) small offering exemption for trading exemptions for non-reporting issuers?

Back 486

registration exemption for 10 offers as long as purchaser takes for investment not view to distribution. The shares must be restricted. You cannot pay a sales commission

Front 487

TODO

Back 487

Get the Washington stuff