Reg 4 Securities Regulations

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1933 Act Regulates

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Original Issuances of Securities

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1934 Act Regulates

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Purchases and Sales after Initial Issuance

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If the Investor is Passive

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i.e. Relies solely on the management of others to make money, the investment is most likely a security.

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Limited Partnership Interests

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are deemed securities.

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General partnership interests are

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NOT deemed to be investments.

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1933 Act is to Assure

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Investors have sufficient information to make informed investment decision.

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1933 Act Requires most Issuers

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to Register new issues of securities with the SEC and to provide Prospectus containing material information regarding the securities to prospective investors.

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The SEC does not

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Guarantee accuracy of prospectus, evaluate offering's financial merits or give assurances against loss.

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1933 Act Registration Requirements only apply to

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Issuers,

Underwriters,

Dealers

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An Underwriter is an

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Intermediary who sells an issuer's securities to the general public or to dealers.

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Most Securities cannot be sold unless

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they are first registered with the SEC.

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Registration Statement Consists of 2 parts

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Prospectus.

Detailed Info regarding securities.

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The Prospectus is a

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Written offer to Sell Securities.

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The Prospectus Summarizes

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important information contained in the Detailed Information regarding securities.

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Each Investor must receive a copy of the

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Prospectus before or Contemporaneous with every sale of the security.

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Information about Securities Issued must include

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Audited balance sheet Dated not more than 90 days before filing and Profit and Loss for the past 5 years. Financials must be certified by a public accounting firm registered with the PCAOB.

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The Registration Statement must also include a description of the business and the following

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Shelf Registrations

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For Issuers constantly issuing new securities, issuers can prepare just one registration statement for all securities that they will offer in the future.

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Shelf Registration is permitted if the issuer has

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continuously filed under the 1934 Act for one year and the information is continuously updated.

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SEC Reviews the Registration Statement to ensure

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Both Parts are complete.

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The Registration Statement becomes effective on

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the 20th day after its filingwith the SEC unless issues a refusal or stop order.

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Blue sky laws

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State laws governing stock sales

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No sales is allowed within

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30 Days before Registration unless issuance is exempt.

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After Registration but before Effectiveness (Waiting Period), there is a

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20 day waiting period between registration and filing date.

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Some sales are allowed during after registration but before Effectiveness:

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Oral offers to sell but no written offers.

Tombstone ads.

Preliminary prospectus (red herring) can be made.

Summary prospectus are allowed.

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Seasoned issuers are issuers that have been

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continuously reporting under the 1934 act for at least 12 months, have not failed to pay a dividend or required payment on preferred stock and have not defaulted on material debt or a long term rent obligation.

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Well-known Seasoned issuers

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are issuers with at least $700M in equity outstanding worldwide in the hands of persons not affiliated with the issuer or most issuers that have issued at least $1B in non convertible securities in the last 3 years.

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A Well-known Seasoned issuer

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may make Oral or Written offers at any time.

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WKSIs also have a special form of

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Shelf Registration that is effective immediately.

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Exemptions from 1933 Registration Act

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Securities Exemptions.

Transaction Exemptions.

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The Following Securities never have to be Registered:

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BRNGS

Securities issued by:

Banks and S&Ls.

Not for Profits.

Governmental.

Regulated Common Carriers (railroads).

Short Term Commercial Paper with 9months or less Maturity Date.

Insurance Policies.

Charitable Organizations.

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Transaction Exemptions

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Casual Sales - Not by issuer, underwriter or dealer.

Exchanges with Existing Holders and Corporate Reorganizations.

Government approved exchanges that occur as a result of corporate reorganization.

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Intrastate Sales

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Section 3(a)(11) of the 1933 Act provides an exemption for securities offered and sold only to persons who are residents of the issuer's state.

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Under rule 147, which implements Section 3(a)(11),

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the entire issue must be offered and sold only to residents of that state, the issuer must do at least 80 % of its business in that state, and purchasers cannot resell the securities for 9 months to nonresidents of that state.

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Private Offering Exemption - Regulation D

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Regulation D Exempts "private" offerings and the SEC has 3 private offering exemptions under Regulation D: 504, 505 and 506.

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Purchasers of Regulation D Securities may not

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Immediately re offer Securities to the public. Must hold for 2 years or more. "Restricted" stock.

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SEC must be notified of Regulation D stock within

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15 days of sale

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Rule 504 - $1M limit

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To be exempt under the 504, the issuance of securities may not exceed $1M within 12 months.

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Rule 504 has no limitations on

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Number or type of purchasers

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Rule 504 generally does not require any specific

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Disclosure to investors prior to sale.

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If Rule 504 is registered under state law, the general prohibition against

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General advertising does not apply

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To be exempt under Rule 505

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The issuance of securities may not exceed $5M within 12 months

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Securities issued under Rule 505 may be sold to any number of

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Accredited investors and 35 or fewer unaccredited investors

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An accredited investor is

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A bank.

Person with $1M net worth or $200K annual income.

Officers or directors of the issuer

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If only accredited investors purchase Rule 505 stock

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No disclosure is required. If any unaccredited investors, all investors must be given annual audited financials.

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Under Rule 506 there is

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No limit to the amount of stock to be sold

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Rule 506 stock may be sold to any number of

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Accredited investors and 35 unaccredited but sophisticated investors

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Summary

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Regulation A Simplified filing

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Not a registration exemption but a simplified form of registration to allow small companies to make public offerings quickly and less cost.

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Companies using Regulation A file an

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Offering statement which consist of a Notification and an Offering Circular

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Companies may test the waters first before filing if

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Offers are preceded or accompanied by a Preliminary Offering Circular.

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Which companies may not use Regulation A:

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Tiers

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Section 11 imposes

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Civil liability for misstatements, intentional or not.

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Section 12 imposes

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Civil liability if required registration not made, if prospectus was not given, if materially false statements were made or omitted in connection with sales or offers to sell.

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Section 17 imposes

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Criminal penalties against fraud. Enforced by SEC and prosecuted by justice department

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Plaintiff suing under Section 11 need only show

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Plaintiff acquired stock.

Plaintiff suffered loss.

Registration statement contained material misrepresentation or material omission .

Need not prove intent to deceive or negligence or reliance on part of defendant.

Only damages are remedy. Rescission not available

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Anyone who signs registration statement may

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Be liable under Section 11

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Defendants are not liable if they can prove

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Due diligence

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Due diligence means defendant had

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Reasonable grounds to believe the facts in the registration statement were true and no material facts were omitted

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1934 Act is concerned with

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Exchanges e.g. sales, purchases of securities after issuance

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1934 Act has registration and reporting provisions that apply only

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To certain companies and anti fraud provisions that apply to all purchasers and sellers regardless of registration

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The SEC can seek suspension or revocation of company's

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Registered securities for violating 1934 act

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The 1934 act registration requirements

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Companies traded on national exchange.

Companies with more than $10M in assets and at least 2000 shareholders or 500 unaccredited shareholders.

National stock exchanges, brokers and dealers must also register

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Form 10K

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Annual report filed within 60 days for large corporations (90days for small ) of the end of the year. Must contain Certified financials.

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Form 10Q

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Quarterly report filed within 40 days for large corporations (45 days for small) at end of each quarter. Must contain reviews of interim financials.

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Form 8K

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Must be filed within 4 days after major change in company

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5% or more owners must report to

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SEC, the issuer and the exchange on which stock is traded. The report must include background information about the purchaser, source of funds and purpose kn buying.

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Any party making 5% or more tender offer

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Must file SEC report

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Insiders must file a

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Report with the SEC disclosing their holdings in the reporting company and make monthly updates.

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Insiders are

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Officers, directors, more than 10% shareholders, accountants or attorneys of a company registered under 1934 act.

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1934 act limits insider trading by imposing

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Absolute liability on any insider profiting from purchase or sale in 6 month period

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Proxy solicitation

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Written request for permission to vote a shareholders shares at a shareholder meeting

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Anti fraud Rule 10B-5 applies even if

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Registration not required

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Rule Rule 10B-5 prohibits fraud in connection with

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Purchase or sale of any stock

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Violation of Rule 10B-5 can result in

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Civil damages, SEC injunction or criminal penalties.

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To recover damages for violating Rule Rule 10B-5 , plaintiff must prove

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Plaintiff bought and sold Securities.

Suffered loss.

Material misrepresentation or omission.

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Pass key

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Reselling restricted Securities under Regulation D

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Can be done as exempt from registration

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Original issue of exempt Securities sold to the public containing intentional omissions would be liable to

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Anti fraud provisions of both 1933 and 1934 Acts.

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Tombstone ad includes

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Nature of security.

Price.

Availability of prospectus.

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Under Regulation D, SEC must be notified within

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15 days of first sale

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Company stock listed on National exchange can make a

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Private placement offering

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Maximum time period exempt offering under Regulation D

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12 months

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CPA must use this defense against civil liability under Section 18 of 1934 Act

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Good faith

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If issuer sells security and fails disclosure requirements

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Purchaser may sell back security and get refund

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If only accredited investors invest

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No prospectus need be given