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SECURITIES OUTLINE FALLONE FALL 2013

KINDS OF TRANSACTIONS
- 1. Issuer Transactions:
o Company sells stock to first buyer as a way to make money.
o IPO, regulated by 1933
- 2. Trader transactions:
o transaction from person to person (not for first time) secondary market

1.0 THE DEFINITION OF A SECURITY:
- 2(a)(1) of the 33 Act and 3(a)(10) of the 34 Act, defines a security as a: stock, bond,
debenture, note, evidences of indebtedness, certificates of interest in profit sharing agreements or
transferable share, and the catchall term investment contract.

- Investment Contract: Howey test:
o 1. Investment of money due to an expectation of profits
! Something is not an investment if for consumption purposes.
o 2. A common enterprise
! Investors pooling their funds together towards a common goal. (ie purchasing a
orange farm) Need money from several people to pool to make a larger profit.
o 3. Which depends solely on the efforts of a promoter or third party
! The S. Ct has defined that solely does not really mean solely, it is more defined
as the predominant/key management activities are done by others than the
investors.
!
o 1. Expectation of profits
! Investment can be of cash or no cash, consideration, and is expected to produce
income or profits; investor is looking for financial returns, not a consumable
commodity or service.
! Expected return must be the principal motivation for the investment.
o 2. Common enterprise: Two types of common enterprise:
! Vertical Commonality: Commonality arises between the investor and the
promoter. Promoter has risk, ex. Broker who says give me your money and Ill
invest it and your fee will be 1% of what we make.
Different from horizontal in that there the commonality is between the
investors.
No pooling of funds is necessary.
! Horizontal commonality (minority): requires 1) a pooling of investors funds, 2)
profit sharing, and 3) loss sharing. (Profits/losses determined pro rata)
Occurs when multiple investors have interrelated interests in a common
scheme.
- Characteristics of Stock as a security: (Forman)
o 1. Right to receive dividends contingent upon profits.
o 2. Negotiability

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o 3. The ability to be used as collateral
o 4. Confers voting rights in proportion to shares owned.
o 5. Capacity to appreciate in value.
! Forman: A cooperative housing corp. required residents to buy shares to secure
housing. Upon moving residents were required to sell back shares at same price
they purchased them for. Ct held that no 10b(5) action could be brought forth.
Intent for sale and purchase was simply to supply a place to live.

- Business entities as securities:
o General Partnership:
! Generally, not a security because each partner has equal management power.
Williamson Test: (General partnership as security) A general partnership
or joint venture Will be designated a security if: 1) No legal control, 2) no
capacity to control, 3) no practical control.
o Limited Partnership:
! Again, if there is a managing partner that controls the business while others simply
provide money and no expertise then it is a security.
! Passive partners/investors are in need of protections of securities laws.
Must pass 3
rd
prong of Howey Test, somewhat rare.

- Real Estate as a Security
o Generally, not a security. However, sale of real estate coupled with real estate
management agreement raises a material issue as to whether it is a security and should
pass summary judgment.
! Similarity to Howey: Just like Howey, 1) investors purchased real estate at the
same time they relinquished much of their right to use the property, 2) investors
were not obligated to purchase the service Ks, 3) investors were usually
nonresidents who lacked knowledge and equipment necessary to manage the
investment.

- Notes as Stock: A note is credit w/ promise to repay.
o Familial resemblance test: Test Presumes that Notes that are longer than 9 months of
maturity are securities UNLESS the notes at issue resemble the kind of notes that are not
securities. 4 elements:
! 1. Motivation of seller and buyer
If issuer of note uses proceeds towards business purposes it is likely a
security. If used to buy consumer goods then not.
o (Investment of money)
! 2. Plan of distribution
If generally distributed then likely a not. If face-to-face then not!
o (Horizontal commonality)
! 3. Reasonable expectations of investing public
Investors expectations matter, if they view them as an investment then
likely a security.
o (Expatiation of profit)
! 4. Is note governed by other laws?
Such as by banking authorities, then more likely not a security.


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EFFICIENT MARKET HYPOTHESIS
- Idea that stock price is not dependent on past prices but rather on all the present information that is
available about a company.
o 1. Weak form: Stock price reflects past price
o 2. Semi-Strong: the stock reflects all publically available information.
o 3. Strong form: all past and present publicly known info, as well as all privately known
info (inside knowledge) is reflected in the stock price
! Noise: is the pricing influences not associated with a rational expectation about
stock values. It is used to describe irrational trading by investors.

PUBLIC OFFERING
- Two Types of Laws
o 1. Mandatory Disclosure
! 1. Event based disclosure: (tied to the occurrence of an event)
1. A public offering triggers disclosure under the 1933 act.
o Registration Statement: A company must register an offering with
the SEC, the registration statement then becomes public.
! Reg SX: details about financial information that needs to be
included in the registration statement.
! Reg SK: Details what non-financial information must be
included in the registration statement.
o Prospectus: Similar to a registration statement (sales statement)
2. Hostile Takeover is an event that triggers disclosure.
3. Soliciting proxies: asking shareholders to vote
o Sarbanes-Oxley adds addl disclosure reqs, particularly that CEO & CFO must personally
sign off on reports

! Continued Reporting: (from the 34 act)
10-Q, quarterly
o Same info as 10-K
10-K, annual reporting includes
o Business
o Properties
o Legal proceedings
o Market for common stock
o Mgmt. Discussion & Analysis of Financial Condition & Results of
Operations (aka M D & A) basically, known risks and
opportunities
o Directors & officers
o Executive compensation
8-K, specific events occur within 3 days
o Death of CEO
o Bankruptcy
o Acquisition/disposition of 10% of assets
Additionally, Regulations SK and SX apply to continuous reporting.

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o Incorporation by reference: A company that has previously filed
an annual or quarterly report can reference this report when filing a
registration statement.
o Problem with selective disclosure is that voluntarily disclosed information can have the
same effect on the market that mandatorily disclosed information has, therefore companies
may use voluntarily disclosed info to sway the market.
! Regulation FD meant to control this:
Differentiates between inadvertent disclosure and voluntary.

o 2. Anti-Fraud Rules: Seeks to punish lies and omissions

A. Who must disclose: there are three types of companies subject to this requirement under 12 of
the 34 Act.
a. 1) Listed on public exchange: those offering securities on a public market (e.g. NYSE)
12(a), (b)
b. 2) Over The Counter Market $10M/500 shareholders: those w/ assets more than $10M
and more than 500 equity shareholders. 12(g) Antimanipulation provision in 12 to say
you cant manipulate record holder names to get below the 500+ shareholder level.
c. 3) Filed registration statement: those that have filed a registration statement under the 33
Act.

A. Generally: with certain exceptions, there is no affirmative duty for an issuer to disclose material
nonpublic information. Despite the unwillingness of the courts and SEC to recognize such a
general mandate, there exist issuer affirmative disclosure requirements in a number of specific
circumstances:
1. When SEC rules and regulations require disclosure of specified information;
2. When mandatory disclosure of forward looking statements is called for by Item 303 of
Regulation S-K which pertains to MD&A;
3. When the issuer is purchasing or selling its securities in the markets;
4. When the information revealed by the issuer contains a material disclosure deficiency at
the time that the statement was made; under such circumstances, there exists a duty to
correct;
5. When the issuer previously has made a public statement that, although accurate when
made, continues to be alive in the market place and ahs become materially false or
misleading as a result of subsequent events; under such circumstances, a duty to update
may exist; and
6. When material information has been leaked by, or rumors in the marketplace are
attributable to the issuer.
UNDERWRITERS
A. Methods of Underwriting: a corporation may acquire funds by 1) borrowing from a bank, 2)
selling securities in a public offering, or 3) a private offering.
Underwriter Compensation
i. Best efforts
Underwriters dont purchase the security but instead agree to use their best
efforts to sell security. Usually, commission is given.
ii. Firm Commitment:

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Investment banking company agrees to purchase agrees to purchase
securities form issuer to resell to public as specified offering price
Dutch Auction: under this technique, the issuer solicits bids from institutions and broker-
dealers for any amount of securities each bidder wishes to acquire; the bidder states the
amount of securities it wishes to purchase and the amount it will pay for those securities.
- Reducing Risk
Flipping: occurs when shares in an IPO are quickly resold in the market at a profit.
Spinning: Underwriting allocates some of the scarce IPO shares with preferred customer
as a means of retaining their business ; the executive then flips the shares.
Letter of Intent: usually the only document purporting to set forth a relationship b/w
issuer and underwriter until shortly b/f the registration statement becomes effective, at
which point they sign the underwriting agreement.

Underwriter Risk: Underwriters have various risks (below) that they hedge.
i. Underwriter withdrawal: a common feature of the firm commitment
underwriters agreements with the issuer is a clause that permits the underwriters to
withdraw any time prior to the public offering and/or the settlement date if one of
the following occurs:
Government restrictions: the govt has imposed restrictions on the trading
of securities in general
War: there is a war or other national calamity.
Adverse event: there is a material, adverse event affecting the issuer.
ii. Omission or misstatement: underwriters face the risk of liability if the registration
statement contains misstatements of material facts. There is typically a standard
clause requiring the issuer to indemnify the underwriters of this liability.
Peculiar knowledge: this clause makes an exception for misstatements of
matters the underwriters had peculiar knowledge of.
TYPES OF ISSUERS UNDER 33 ACT
- 1. Non-reporting Company: Use S-1, No disclosure statement with SEC
- 2. Unseasoned Reporting Company
o 1. Stock is listed on National exchange
o 2. Company has filed an effective Registration statement
o 3. Co. has more than 10 M in assets and more than 500 unaccredited shareholders
- 3. Seasoned Reporting Company: Reporting company that can use a FORM S-3
o 1. Must have been a reporting company for at least 1 year
o 2. Have greater than 75 M of publically available stock
- 4. Well Known Seasoned Issuer (WKSI)
o Have either
! 1. Over 700 million of common stock
! 2. Or if issuing debt or non-convertible stock then must have issued 1 billion in
debt in prior three years.
Also WKSIs get benefit of Rule 163 whereas they can, at anytime, solicit
offers for sales.
Very limited SEC regulation, exempt from disclosure
- 5. Emerging Growth Company
o Company that has less than 1 Billion in revenue.
o Jobs Act 2(a)19

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o Can remain EGC for 5 years
o EGCs can file their registration statements in private.
! Integrated Disclosure (Seasoned Companies): For reporting companies that are
current in their exchange act filings for the past year, the prospectus may
incorporate company related info by reference to other SEC filings.

Overview of Form S-1 and Form S-3
o A form S-1 is used by a Reporting Company
o A form S-3 is used by Seasoned Issuers and WKSIs
! In order to qualify to use a Form S-3, become a Seasoned Issuer:
(1) Must be a reporting company for more than 1 year and one of the
following:
(2) Have greater than $75 Mil public float; or
(3)(a) If less than 75M in a cash offering, Must
o 1. Have their stock listed on Exchange for 12 months; and
o 2. They DO NOT issue more than 1/3 of their public float in a 12
month period.
(4) in a sale of debt securities, issuer must meet one of the following
requirements:
o (a) issued greater than 1 billion in non-convertible debt in prior 3
years
o (b) issuer has outstanding greater than 75 mil in non-converted
securities (already owe that much);
o Issuer is a subsidiary of a WKSI or issuer is a Real Estate Interest
Trust aka REIT.
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SECTION 5 REGISTRATION
- Central goal of 1933 act was the preparation of a registration statement for publically offered
securities
- Process for filing: The first registration statement can take months to compile.
o Preparing for Filing: lots of preliminary work that can take months.
o Letter of comment: after filing w/ the SEC, the registration statement is reviewed. It is
typically amended based on recommendations given by the SEC in a Letter of Comment.
o Underwriters signing: typically, underwriters wont sign their K to purchase shares until
they have reviewed the registration statement.
Overview of 1933 Act
- 5 prohibits the sale of securities before a registration statement is filed with the SEC and forbids
certain kinds of marketing of the sale. Also, it forbids a final sale to the purchaser without the
delivery of a prospectus.
- 3 & 4 provide exemptions: the types of securities and transactions that are not regulated by 5.

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- 7 & 10 provide the content that must be included in the necessary disclosure documents (these
are very bare bone but do point to reg. SX and SK)
- 11 prohibits material misstatements or omissions in the Registration Statement
- 12 prohibits material misstatements or omissions in the Prospectus
- 17 prohibits fraud
The Registration Process is divided into three sections: (1) Pre-filing period (before registration is filed;
(2) Waiting period (after the registration is filed but before it becomes effective); and (3) Post-effective
period (after registration becomes effective).
1. PRE-FILING PERIOD (GUN JUMPING)
- Generally the marketing and sale of any security is prohibited.
- Definition: Under Section 5(c), it is unlawful to offer to sell or buy any security unless a
registration statement has been filed.
- 5(a) Prohibits sales of unregistered securities or deliveries for purposes of sale.
o 2(a)(3): Defines offer to sell and offers to buy as every attempt or offer to dispose of, or
solicitation of an offer to buy a security or interest in a security

- UNSEASONED ISSUERS: SAFE HARBORS -- PRE-FILING PERIOD
o 1. Rule 163(a): Anything issuer releases before 30 days prior to filing of registration
statement as long as it doesnt mention upcoming public offering is not considered an offer
for sale.
! 1. The communication Cannot reference the public offering.
! 2. To invoke rule 163 a written version of an offer made 30 days prior to the users
filling a registration statement must be filed promptly with the commission when
the registration statement is ultimately filed.
o 2. Rule 135: allows notice of public offering (exempted from definition of security)
! Limited information: Issuer, security, amount offered, timing, manner, purpose,
CANNOT name underwriter

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! Must include a legend explaining that it is not an offer, that there will be a
registration statement filed, and that there will be a prospectus forthcoming
! Cannot make estimates about future capacity, If to institutional companies or
sophisticated buyers then can talk about future.
o 3. Rule 169: Non-reporting companies may continue to release factual information that
is regularly released.
! Reporting companies: Can continue to release factual information as well as
forward looking information.
o 4. Section 2(a)(3) 33 Act: provides in the definition of sale, sell, offer that there is an
exception for arrangements with and among underwriters and issuers.
- Rule 168: Reporting Companies (applies throughout the life of the IPO): includes the regular
release of factual business information or forward looking information; however, it does not
protect communications issued by the underwriter or other distribution participants.
o Also condition on the information being the type the issue has previously released in the
ordinary course of its business and that the manner of its dissemination should correspond
to past released to that type of info.
- Emerging Growth Company exceptions:
o Section 5(d): Creates a safe harbor for emerging growth companies to communicate
about themselves even before the registration statement is filed as long as it is directed to
qualified institutional buyer (Mutual funds, banks, considered to be sophisticated can
protect themselves) and accredited investors (also considered sophisticated investors who
can cut thru flowery language.

- RESEARCH REPORTS (RULES 137, 138, 139) (p. 189-90
o (1) Rule 137:Permits nonparticipating brokers and dealers to publish or distribute, in the
regular course of business, information, opinions, and recommendations regarding an
issuer in registrations securities. (The dealer and/or broker must not receive compensation
from the issuer for the report made or else they are considered an underwriter).
o (2) RULE 138 FOR REPORTING ISSUERS: A broker or dealer, even if a participant in
the distribution of bonds offering but not stock offering, can publish opinions or
recommendations for the registrants common stock. AND VICE VERSA. This exemption
is conditioned on the broker or dealer having previously published or distributed in the
regular course of its business research reports for similar types of securities.
o (3) RULE 139 Participant research Report: Broker or dealer that is even participating in
the distribution of common stock can release reports, opinions, etc. that are solely about
the issuer (as long as the issuer is a reporting company). The broker or dealer must have
previously issued similar kind of report when relying on this rule.
2. WAITING PERIOD_________________
- Oral solicitations are allowed, written solicitations are allowed IF, it is accompanied or preceded
by a preliminary prospectus: Sales barred: while sales are still barred after registration is filed
until it becomes effective, selling efforts can commence.
o Written offers: written offers made during the waiting period using a prospectus known as
a red herring are permitted.


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o 1. 2(a)(10) provides that any written communication, or communication on the radio or
tv is a prospectus that must meet req. of section 10.
o 2. Rule 15(c)(2)-(8) provides that a non-reporting company and its underwriters must
deliver a preliminary prospectus to any purchaser at least 48 hours prior to the closing of a
sale.
o 5(b)(1): prohibition relates only to written offers. Oral selling efforts are only subject to
anti fraud rules.
- SAFEHARBORS
o 1. Rule 134 Identifying Statement: Permits identifying information about issuer
(exempted from definition of prospectus)
! (a) permitted: issuer info, info about security, issuers business, price of security,
use of proceeds, identity of sender, schedule, nature of offering.
! (b) During waiting period must include Legend explaining that the offer is not
binding and you can back out of it, and that no payment can be received until the
reg. Statement becomes effective.
! (c) Can seek investor interest if accompanied by prospectus.
Must include legend detailing that offer is not binding!
o 2. Rule 135: offering announcement still allowed
o 3. Rule 168: Reporting issuers, and 169 New issuers Regular communications
! Still allowed
o 4. Rule 433 Free Writing: (For Non-reporting or Unseasoned issuers)
! Written communications will be allowed as free writing prospectuses that
qualifies as a prospectus under section 10 if certain conditions are satisfied: the free
writing must be preceded by, or accompanied with a prospectus that satisfies
Section 10 (preliminary prospectus) and includes the securities price range.
Also, a legend must be included on the free writing explaining where a
prospectus is available.
Note that some free writings must be filed with the SEC.
Also, information included in the free writing cannot be contradictory to
information presented in the registration statement.
Can send email information as long as a hyperlink to the prospectus is
included in compliance with S 10.
Also, if you provide info that is considered a free writing on your website
you better include a legend and a hyperlink to your prospectus
! Seasoned issuers & WKSIs need not include preliminary prospectus
o Rule 433: Press interviews:
! Media disseminated Free writing prospectus originating from issuer such as press
interview. File w/in 4 days by providing transcript of what was said.
No legend or prospectus necessary
o Rule 405: Road Shows
! Live or real time web casts and road shows are treated as oral communications.
! Powerpoint considered graphic, subject to 433 legending req.

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o 5. Tombstone Ad as excluded in definition of Prospectus in 2(a)(10): can identify the
security, the price, and underwriter if it provides where and from whom a written
prospectus can be obtained
Basically, during the Waiting Period:
o Increased available means of communicating offers not genly available during Pre-Filing
Period
! Oral Communications
! Statutory Prospectus under Sec. 10
! Tombstone stmts
! Free Writing Prospectuses

3. Post-effective Period
- No sale can close before the effective date; however, sales can occur and securities can be
received so long as they are accompanied with or preceded by a final prospectus.
- Section 2(a)(10): exempts from the definition of prospectus any written sales literature if it is
accompanied or preceded by a final 10a prospective.
- 5(b)(2) requires that every security delivered be accompanied or preceded by a prospectus that
meets the requirements of 10(a) aka a final prospectus
- However, now the main rule is Rule 172(b), requiring that a final prospectus need not be delivered
as long as access to the final prospectus is provided.
- Rule 433 Free Writing: made during the post-effective period is fine as long as it is accompanied
with a legend and satisfies the necessary SEC filing requirements and it must be accompanied or
preceded by a final prospectus --Access is probably sufficient

WKSI OVERVIEW
To qualify as a WKSI:
o In a Stock Offering: have to be S-3 Eligible w/ greater than $700 mil in public float aka
value of shares held by the public is greater than $700 mil
o For a Debt Offering: S-3 Eligible w/ greater than $1 billion worth of non-convertible debt
sold over the last 3 years
o Stock Offering: have greater than $75 mil in public float and greater than $1 billion in debt
over last 3 year
Benefits of Being a WKSI
o No rule 163: a WKSI can make almost any statement before the registration statement is
filed (there is no 30 day rule or no cooling off period/quiet period)
! The communications must be made by or on behalf of the WKSI, cannot be made
by the underwriter.
! all communications must be accompanied with a legend and filed with the SEC
o Rule 433 Free Writing: there is no requirement that a WKSI deliver a prospectus with a
free writing the free writing must just be accompanied by a legend and satisfy SEC
filing requirement
o Rule 415 Shelf Registration: Automatic for WKSIs, no registration statement necessary
prior to offering securities.

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EXEMPTIONS FROM REGISTRATION UNDER 5
Two kinds of exemptions: (1) issuer exemptions and (2) resale exemptions
o (1) Issuer Exemptions
! 1) Intrastate, 2) private placement,

o 1. INTRATSTATE OFFERING3(a)(11):
! Scope of offering (Integration):
All securities offered as part of an issue are integrated.
! In-State issuer:
Resident and doing business within the state
! In-State offerees:
Offerees must be domiciled within the state.
! Restrictions on Sales
Securities must come to rest prior to being resold.
o Rule 147: If 147 is followed SEC guarantees that issue of stock will comply
! Scope of offering (Integration):
Sets of sales separated by six months are not integrated.
! In-State issuer:
Principal office within state, and doing business w/in state: 80% of gross
revenues, assets and proceeds used are within the state.
! In-State offerees:
Offerees must have principal residence within the state
Come to rest: Confirming that securities were only sold to residents of a
single state can only happen after the securities have come to rest.
! Restrictions on Sales
Since offering the sale to a nonresident destroys the exemption, rule 147(e)
prohibits the resale of any exempt security to a nonresident within nine-
months from the date of the last sale by issuer.
o If even one security is sold to a non-resident or later transferred within the integration
period the entire exemption becomes void!
Integration: basically holding 2 offerings at the same time (and really trying to apply an
exemption to both when only 1 would qualify) rule 147 provides the 6 month 2 way integration
rule: so long as there is 6 months between offerings they will not be integrated.
o 5 integration factors to apply if offerings w/in 6months of each other:
! (1) are the offerings part of a single plan of financing;
! (2) do the offerings involve issuance of the same class of security;
! (3) are the offerings made at or about the same time;
! (4) is the same type of consideration to be received;
! (5) are the offerings made for the same general purpose.

o 2. PRIVATE PLACEMENTS: No public offering 4(2)

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! Section 4(2) exempts from registration, any offering by an issuer not involving
any public offering
! Offeree in a private placement must be sophisticated and have access to the same
kind of information that would appear in a registration stmt.
Cannot qualify for exception if general solicitations are used.
Person claiming 4(2) exemption must show that each purchaser and each
offeree meets the sliding scale test for sophistication.
! Additional Steps For A Private Placement:
(1) The number of offerees and their relationship to each other and to
the issuer: the more offerees the more likely the offer will be considered
public. Relationship is important because if the offerees are members of
class that has special knowledge than more likely private. (Fallone says
there is no magic number but that less than 100 people is key)
(2) The number of units offered: large number of cheap securities equal
more public. small number of expensive securities equal more private
(3) The size of the offering: small offerings were intended to be exempt.
(4) The manner of the offering: direct contact is key as opposed to
informal advertising (no advertisements, no public distributions, No mass
communications).

o Accredited investor Offerings 4(6):
! Self-operating exemption for offerings up to 5M made exclusively to accredited
investors provided there is no advertising or public solicitation and the issuer files
with the SEC.
o What is an accredited investor? For the purpose of Regulation D, an accredited investor
includes 1) financial institutions, 2) pension plans, 3) venture capital firms, 4) corporations
larger than 5M in assets, 5) people with wealth >$1M or annual income > $200,000 or over
$300,000 w/ spouse 6) high level employees of the issuer.

LIMITED OFFERINGS: REGULATION D
A. Basics: Aimed at easing the burdens the registration requirements placed on small businesses,
Regulation D provides three exemptions to the general requirements spelled out in Rules 504, 505,
and 506.
a. 4(2) states that registration requirements of 5 do not apply to transactions by an issuer
not involving any public offering.
REGULATION D: 504 505 506
Aggregate offer limit $1 M (aggregate against
505) 12 months
$5M in 12 Mo.
Deducting any
amounts raised under
504 (12 months)
$Unlimited (doesn't count
against 504, 505 amount)
Number of investors Unlimited 35 non-accredited &
unlimited accredited
investors
35 sophisticated purchasers &
unlimited accredited investors
Issuer Qualifications Only non-reporting Any type of issuer Any type of issuer

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companies
Limits on Manner of
offering
Need a pre-existing
relationship between
issuer and offeree. (not
allowed to do mass
solicitations to the public)
Exception:
Dont need a pre-existing
relationship if the offer is
made solely in a state that
doesnt require it and
registration is done in the
state

Or if in a state that allows
accredited investors to
purchase w/o pre-existing
relations.

General solicitation or
advertising to sell the
securities is not
allowed.

Widespread offerings : ie
television, internet, will be
allowed as long as all actual
purchasers are accredited and
verified by reasonable steps.

Reasonable steps include the
collection of tax forms.
Or
If broker has client as a client
and pre-clears them.
Limits on resale Restricted, person who
buys securities is told that
they have not been
registered so they may
have to register them,
themselves our use a
resale exemption.
Restrictions on resales
for all 3!
Issuer has to take
reasonable care that
the there sales are not
falling into the hands
of those who are
looking to quickly flip
the security.
Provide written notice
to purchaser
Also has a ledger on
security that states that
it is a restricted
security.
Restricted
Limits on disclosure No disclosure to
accredited

Disclosure to non-
accredited

No disclosure to
accredited

Disclosure to non-
accredited
(if disclosure to
Unaccredited, then
must disclose to AI.
No disclosure to accredited

Disclosure to non-accredited

Over 7.5 million need audited
financial statements.
Exempt under state law NO state law preemption
state can still require
additional filing
NO state law
preemption state can
still require additional
filing
Federal law preempts state law,
no further disclosure just filing
fee.

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Incomplete Compliance with Regulation D:
- Even if an issuer fails to comply with Reg D, the exemption is not lost if the issuer shows the
failures were insignificant:
o 1. The noncompliance didnt undermine purchaser protections.
o 2. Noncompliance didnt involve the ban on general solicitations, $ limits, or limits on # of
accredited investors.

Rule 504 provides an exemption for the offer and sale of up to $1,000,000 of securities in a 12-month
period.
Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-
month period.
Rule 506: Must satisfy:
Can raise an unlimited amount of capital;
Seller must be available to answer questions by prospective purchasers;
Financial statement requirements as for Rule 505; and
Purchasers receive restricted securities, which may not be freely traded in the secondary market after
the offering.
Reliance on any of the Reg D exemptions requires that notice be filed with the SEC within 15 days
after the first sale Rule 503(a).
Safe harbor: Rule 506 acts as a safe harbor for the private offerings exemption meaning that a
party that conforms to Rule 506 will always comply with 4(a)(2) Private placement that is why
they have to be sophisticated.

What is an accredited investor? For the purpose of Regulation D, an accredited investor includes 1)
financial institutions, 2) pension plans, 3) venture capital firms, 4) corporations larger than 5M in assets,
5) people with wealth >$1M or annual income > $200,000 or over $300,000 w/ spouse 6) high level
employees of the issuer.

Reg A: Rules 252-264 Insiders can sell up to 1.5M.
- Offering Circular: simplified disclosure document, doesnt have to be audited.
- Sales may commence 20 days after the filing. Prior to the circular being qualified investors can
use a preliminary offering circular.
- Rule 255: allows issuers to test the waters

Regulation A Regulation
A+
Crowd funding 4(a)(6) Regulation 701
Amount raised $5 Million $50 Million $1 Million $1M or 15%
Number of
investors
No limit No limit Unlimited but w/ caps
on the amount they can
invest based on their
income
Any employee
Issuer
Qualifications
Non-reporting
companies only
Non-
reporting
Non-reporting Non-reporting
Limits on
Manner of
solicitation
Offering circular:
simplified reg.
Statement.
Offering
circular
Done through a broker
or internet portal.
Part of plan

15
Allowed to test the
waters prior to filing
offering circular
allows small
companies to see if
there is interest in the
securities.
Limits on resale Anytime, Anytime 1-year basic holding
period. Can sell to
family member or back
to issuer.
Restricted >
$5M
Limits on
disclosure
Offering circular: An
abbreviated
prospectus for a new
security listing.
Offering
circular
Basic information +,
must annually file
updated financial
statements

Exempt under
state law
Not covered YES,
covered
security
Yes, covered Depends
Regulation A: exemption for securities offerings under a certain dollar amount.
a. Rules: only non-reporting co., "$5m/12mo(only A, also can sell $1.5m
secondary), unlimited purchasers,
b. disclosure: Offering Stmt. & Offering Circular (analogous to basic RegStats &
StatProspecs)
c. No Resale Restrictions!
d. relaxed gun-jumping rules: firm may test the waters pre-filing, as long as company is
filed w/ SEC & it has disclaimer
i. no free writing during waiting period, allowed post-qualification period
e. Liability - 10b-5 applies, 11 does NOT, 12(a)(2) less clear)

EMPLOYEE BENEFIT PLANS: Rule 701
A. Rule 701: allows private companies to sell securities to employees without filing a registration
statement when those sales are part of an approved employee benefit plan or compensation
contract. This is not allowed when the purpose of the sale is to raise capital.
B. Who qualifies: Rule 701 sales can be made to employees, officers, directors, partners, consultants
and advisors.
C. Maximum: the max amount of securities that can be sold in one year under Rule 701 is 1) $1
million, 2) 15% of total assets, or 3) 15% of the outstanding securities of that class.

EXEMPTIONS FROM REGISTRATION UNDER 5
The regulatory boundary between regulated distributions and unregulated market trading is drawn by
4(1)
- 4(A) MOTHER OF ALL EXEMPTIONS
o 4 exempts from registration under section 5 any transaction not involving an issuer,
underwriter, or dealer.
! Does not exempt from registration sales by control persons of the issuer.
! Control Person: equivalent of underwriter/issuer; someone who can dictate policy
at issuing company, top official, officer.
- 2(a)(11) Defining Underwriter

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o Defined broadly as to limit 4(1) exemption.
! (1) any person who purchases from an issuer with a view to the distribution of a
security;
! (2) any person who offers or sells for an issuer in connection with a distribution;
! (3) any person who participates or has direct or indirect participation in the
activities covered by 1 or 2 above;
! (4) any person who participates or has a participation in the direct or indirect
underwriting of any such undertaking (under 1 or 2).
o Furthermore, someone engaged in the continual solicitation or active promotion of
unregistered securities may be an underwriter even thought they have no official
connection to the underwriter.
Essentially Three categories of underwriters exist:
o 1. Agent for issuer:
! Those who offer to sell for issuer in connection with a
distribution.
o 2. Purchaser from issuer with intent to distribute:
! Intent to distribute is key.
o 3. Underwriter for control person
! Someone who performs either 1-2 in connection w/ a control
person.
! For the definition of underwriter to apply there must be a distribution!

o DISTRIBUTION:
! When does a purchaser have a view to distribute?
Two factors to determine intent: to determine whether the securities were
purchases w/ a view todistribution look at 1) length of time b/w initial
purchase and resale, and 2) any change in the purchasers circumstances
following the purchase.
o General presumption: it is generally presumed that a party who
has held securities for more than 3 years did not purchase with
intent to distribute. Furthermore, when there has been a change in
circumstances for the purchaser, it is presumed that holding for more
than a year satisfies the rule.
! If the securities CAME TO REST with Purchaser 1, then the
issuer is off the hook for any rescinding of the initial sale (if
the securities did not come to rest with P1 and P1 resells in a
way that is contrary to the original exemption, then it voids
the first exemption for the issuer)
There is a 9-month holding period for purchaser of
intrastate offering security; then you can sell to
anyone.
! If the security came to rest with purchaser 1, then the issuer
is exempt from prosecution as the distribution is over.
! Gilligan (came to rest): Test is whether they were bought
with investment intent? If greater than 3 years then you have
investment intent.

17
<1 year presumption that you dont have investment
intent.
o Ultimately, the question of whether an investor is an underwriter turns on whether the
investor who resells is likely to be in a better informational position based on a relationship
with the investor then the buyer.

- 4(1): Exemption: Transactions not involving an issuer, underwriter, or dealer
o How can holders of restricted securities and control persons resell shares without
registration?
! 1. Wait until security comes to rest
! 2. Avoid a distribution and sell in nonpublic transaction.
! 3. Comply with Rule 144.
Control persons have 3 options:
o 1. Claim that isolated sales are not a distribution.
o 2. Avoid using an underwriter either by selling in a nonpublic
transaction or by selling directly without assistance.
o 3. Comply with rule 144.

RULE 144 SAFEHARBOR FOR RESALE OF RESTRICTED SECURITIES
A. Rule 144: provides that any person, whether it be a control person or a non-control person, who in
compliance with the rules on holding period, amount sold, informational availability, manner of
sale, and SEC filing, sells restricted securities on behalf of himself or on behalf of a control person
(such as a broker would do), will not be deemed to be engaged in the distribution of securities, and
therefore will not be considered an underwriter as defined in 2(11) of the Act.
B. RULE 144
1) Availability of current public information, 144(c)
i. Issuer must be current with filing requirements under the Exchange Act
2) Holding periods for restricted securities 144(d)
i. Control persons selling
3) Limitation on the amount of control securities that can be sold 144(e)
i. Amount of securities sold cannot exceed the greater of one percent of the class
outstanding, or if traded on the exchangethe average weekly volume on all such
exchanges, during the four weeks preceding the sale, looking back 3 months.
1. Greater of the two standards determines how much could be sold in a 3-
month period.
a. Average weekly trading volume in a typical week for the 4 weeks
preceding the sale. Then take a 3-month period and during that
three-month period the most that you could sell is the greater of the
two.
4) The manner of sale of control securities 144(f)
i. Securities must be sold in a broker transaction.
5) Required filings with the SEC that give notice of the sale by a control person 144(h)
C. SUMMARY OF 144
1) Resales of restricted securities of reporting company
i. 6 month holding period for both control and noncontrol persons. After 6 months
noncontrol person can resell as long as issuer is reporting company and current
with Exchange Act; after one-year noncontrol persons can sell without any
restrictions. Control persons after 6 months can sell but are subject to trickle, sale
method, information, and filing limitations of Rule 144.

18
2) Resales or restricted securities of non-reporting company
i. 1 year holding period for both control and noncontrol persons. After 1 year
noncontrol can sell w/out restriction. Control people still must comply with Rule
144 limitations.
D. 144A Qualified Institutional Buyers: institutional investor w/ at least 100M portfolio.
1) Non-issuer sale of restricted securities, (cant be used for registered securities)
i. Sales of unregistered privately placed securities to QIBs does not require
registration as there is not a distribution.
ii. There is a whole market place that only qualified institutional buyers have access
to.
2) Cannot be same class traded on NYSE or NASDAQ
i. Shares of stock in a foreign company are the most often traded in these.

EXCEPTION FOR SECONDARY PRIVATE PLACEMENTS:
- The resale of securities originally purchased in a private transaction (exempt under 4(2) and then
resold in another private transaction is not a distribution and does not trigger underwriter status.
Exception 4 !
! Simply stated 4 # is just the concept that because under 4(1) no distribution is said
to occur if a transaction is private.
! When offers and sales or to nonpublic investors: no distribution, no underwriter, no
registration


EXEMPT SECURITES & STATE BLUE SKY LAWS 3
- Exempt Securities: 3:
o Government Securities, State Securities, Bank Securities, Insurance Policies and Annuities.
State Law
- Securities Act 18 Preempted state regulation of offerings to Qualified purchases, specified 3(b)
offerings and 4(2) offerings.
- Still subject to states registration are resales of securities acquired in certain federally exempt
offerings.
o 1. Offerings of charitable or religious orgs.
o 2. Offering of municipal securities in issuers state.
o 3. Intrastate offerings exempt under 3(a)(11) and
o 4. Small offerings exempt pursuant to 3(b)Rule 504, 505, Rule 701 and Regulation A.
! In Wisconsin you are now allowed to Test the Waters using Reg A.

NSMIA: Covered Securities (If comply with Fed law, dont have to comply w/ state law)
- 1. Covered security: All securities that are filed with a national exchange NYSE, DOW, NASDAQ
- 2. Any security issued by a mutual fund.
- 3. Any security sold to qualified purchasers
- Qualified Purchasers: SEC has not defined. (Same as accredited investor)
- 4. Securities sold under Rule 506
- 5. A 505 offering only to accredited investors

19
- 6. Various re-sales (ie. re-sales exempt under 4(a)(1): transactions not involving issuer,
underwriter, or dealer)
- 7. Regulation A+
- 8. Crowd funding
What is not a covered security?
1. Rule 504
2. Reg A
3. Intrastate offering
4. Private placement

LIABILITY UNDER THE SECURITIES ACT 11
11 Material Misrepresentations in Registration Statement:
All purchasers of registered security have standing to sue. 11(a).
A. What Does P have to prove? P has to show
a. 1) standing to bring suit,
b. 2) that he is bringing it against an appropriate category of D,
c. 3) misstatement or omission,
d. 4) material,
e. 5) damages.
B. What Doesnt P have to prove?
a. 1) Scienter the state of mind of the individual Ds. Dont have to have knowledge of
wrongdoing or recklessness or willful blindness;
b. 2) Reliance Dont have to show that Ps suing actually read the registration statement.
Just that they purchased the securities;
i. (BUT P Cant know truth)
c. 3) Lost causation P does not have to show their losses were even caused by the
misstatement. That is left as an affirmative defense of the D.
i. SOL under section 11 is one year of discovery or should have discovered
1. Tracing: Plaintiffs must show that securities that they are suing for are
linked to a defective registration statement.
C. Who can be sued:
(1) Every person who signed the registration statement (CEO, accountant, etc)
(2) Every director of the issue, whether or not they signed reg stmt.
(3) Incoming directors named in statement
(4) Every Expert who consents to his opinion being used in Reg Stmt.
Liability is limited to only info prepared by expert.
(5) Every underwriter (liability limited to amount of participation)

- Defenses:
o Issuer liability: Issuers are strictly liable for material misstatements and omissions in their
registration statements. (no due diligence defense)
o Due diligence: due diligence is a possible defense for all other persons liable under 11,
including current and prospective directors, accountants, other experts, and underwriters.
! Generally, the due diligence defense requires the person to have made a reasonable
investigation and had no reason to doubt the statements accuracy.

20
o Affirmative Causation 11(e): Defendant has the burden as a defense that there was an
intervening cause that caused the misstatement.
! (Ie. The US Gov defaulting on debt would be an intervening cause)
- Forward looking statements
o Plaintiff must show that the person making the forward looking statement had actual
knowledge that the statement was false or misleading.
- Experts:
o Expert opinions: For expertised portions of the registration statement, experts are liable
for misstatements/omissions unless they actually and reasonably believed the statements
were true, after reasonable investigation.
! However, non-experts are not liable for these portions if they did not believe, and
had no reasonable ground to suspect, that there was an inaccuracy/omission.
11(b)
o Non-expert opinions: For nonexpertised portions, the responsible persons may escape
liability only if after reasonable investigation they had reasonable ground to believe
and did believe the statements were true and complete. 11(b)
o Duty to Verify Issuers Statements: An issuers accountants, attorneys, and underwriters,
in conducting due diligence of a registration statement, must verify the issuers officers
statements against the original underlying documents. Lawyers have to review the major
contracts.

12(A)(1) CIVIL LIABILITY FOR UNREGISTERED SECURITY
- Allow purchasers to sue statutory sellers for offering or selling a non-exempt security without
registering it. As long as the purchaser can prove a direct link between the purchaser and the
seller, and the suit is within the statute of limitations, the purchaser may obtain rescission with
interest, or damages if the investor sold his securities for less than he purchased them.
How violations occur
- 1. Failure to register properly
- 2. Failure to fall into an exemption when you believe you did.
o Solicitations for purchase occurred prior to acceptable time, w/ no exemption

Elements of Violation: No Injury or Intent required - No proof of injury or intent needed
- 1. 5 violation: there was an unlawful sale of unregistered security.
- 2. Interstate commerce: the sale/offer of securities involved interstate commerce.
- 3. SOL: the action is within the statute of limitations of 13.
o 1 year from when they should have discovered and in no event after 3 years.
- 4. Privity: must prove that you purchased the security from the seller
o (different from Section 11) (Language states someone who offers or sells)
- 5. Affirmative defense of loss causation.

A. Persons liable: SELLERS: Pinter v. Dahl
a. Rule: 12(a)(1) extends liability for selling unregistered securities to sellers, and
brokers/solicitors, but not to gratuitous solicitors or people peripherally involved in the
sale.
i. Need more than just solicitation to be considered a seller, need to be paid for
solicitation or services or provided a commission.

21
ii. Attorneys who are paid at an hourly rate are usually not considered sellers
(Because they dont have a stake in whether the security sells or not. However, if
they have a financial interests in the sale then a lawyer may be considered a seller)
B. For an action under 12(a)(1) it is strict liability, no reliance is required, no intent is needed, and
no causation is needed. However, there is an affirmative defense of loss causation
C. Remedy: The remedy for violations is rescission of the security for the original consideration. If
P sold the security, he may recover the original consideration minus the value received.
12(A)(2) MISREPRESENTATIONS IN PUBLIC OFFERINGS
A. Background: if a security is sold through a false or misleading prospectus or oral communication,
through an instrumentality of interstate commerce, the purchaser is entitled to rescission.
a. Only applies to public offerings! (Gustafson)
1. Consequently, private placements and Rule 506 offerings are loopholes.
B. (1). G/R: Elements of a Cause of Action under 12(a)(2): to bring a cause of action for
rescission under 12(a)(2):
a. 1. The prospectus or oral communication regarding prospectus must have contained a
material misstatement of fact made by the sellers;
b. 2. The sellers did not sustain the burden of proving due diligence; then
c. 3. The buyers would have the right to obtain rescission if those misstatements were made
by means of prospectus or oral communication.
C. Proof: Reliance is not required under 12(a)(2); indeed, a plaintiff need not prove that he ever
received the misleading prospectus.
D. DEFENSES
a. Loss Causation: the defendant may avoid all or part of the damages that otherwise would
be incurred by proving that all or part of the depreciation in the value of the securities in
question resulted from factors unrelated to the material misstatements or omissions.
b. Due Diligence Defense: Nonculpability is a defense. The seller must show he did not
know and in the exercise of reasonable care could not have known of the
misinformation.
i. Since Pinter v. Dahl Courts have refused to apply 12(a)(2) liability to aiders and
abettors.
E. Liability of Control persons:
a. Persons who control any person liable under 11 and 12 are jointly and severally liable to
the same extent as the person who is controlled.
b. Control persons have a defense if they did not know, and had no reason to know, of the
facts on which liability is based.

MATERIALITY OF INFORMATION
A. Objective test: The general rule is whether there is a substantial likelihood a reasonable
shareholder would consider the non-disclosed information important in voting, purchasing or
selling then it is material.
a. Bespeaks Caution Doctrine: Statements of opinion and forward-looking statements of
future projections are deemed immaterial as a matter of law, so long as they appear with
sufficient cautionary language warning about the uncertainty of the statements.

22
b. Buried facts doctrine: disclosure of material information in a way that it is obscured or
difficult to ascertain or notice, is inadequate.
B. Truth On The Market: there will not be an material omission if info is not included but the info
was available in the market (when everyone knows the info because it is already in public
knowledge)
C. Absent a duty to disclose, the omission of a material fact is not actionable.
D. Future Possibilities as Material:
a. Probability vs. Magnitude test1
i. Something that has only a limited probability of occurring but a huge magnitude
may be considered material, needing disclosure.
E. Rule 303(c), Regulation S-K
F. Information about Management Integrity
a. SEC line item disclosure rules require information about management incentives
(compensation, conflict of interests,) Management integrity (lawsuits involving personal
insolvency, convictions, stock fraud) and management commitment to the company (stock
ownership, stock as security for loans)
G. Disclosing pending litigation
a. Environmental suits involving damages >10% of current assets.
10(b)(5) SECURITIES ANTI-FRAUD RULE
10b(5) Elements:
- 1. In connection with
o (Close enough to a security transaction that we can say it touched the transaction, close in
time, causally related, not a hard standard to meet)
o Misrepresentation of financials when attempting to purchase another company is close
enough
- 2. The purchase or sale of a security
o Must actually have a purchase or sale, cant have fraud that deterred you from purchasing
or caused you to not sell.
- 3. A material
o Substantial likelihood that a reasonable investor would consider it as altering the total
mix of information in deciding whether to buy or sell.
o Manipulation:
! Activities that manipulate the price of securities by creating false appearances of
market activity can have the same effects as false statements and can be actionable.
- 4. Misstatement or omission of fact was made
o Must be material for both actual facts and projection for the future.
o Silence does not equal fraud, unless there is a duty to disclose.
- 5. Upon which plaintiff relied
o P must provide evidence that they acted or relied on misstatement.
o Reliance: To state a 10b-5 claim, P must show reliance, but this requirement is loosely
interpreted. Sometimes reliance may be presumed (subject to rebuttal)

23
o when there is:
! 1) a face-to-face transaction,
! 2) a material omission, and
! 3) a fiduciary relationship b/w P and D. Affiliated Ute Citizens v. US.
Reason for this switch is that fraud was set up under a historical account
where fraud occurred face to face, so now sometimes it is presumed there
was fraud and burden switches to D to disprove.
! Fraud on the Market Theory
In cases of false or misleading statements on a public trading market Fraud
on the Market Theory applies finding that a misstatement affects the price
of the security based on the efficient market hypothesis and this is the
basis of decision-making.
o Defense to Fraud on Market theory:
! 1) Misrepresentation did not affect the stock price
! 2) Particular P would have bought anyway.

- 6. That was made w/ scienter (or was reckless for not knowing it)
o Not enough simply to say that the D must have knew must at least list a few facts to
support assumption in complaint.
- 7. That caused a but for cause: and loss cause:
o But-For: But for the Ds fraud, P would not have entered into the transaction.
o Loss Causation: P must show the misrepresentation was the cause of the loss, not just a
link in the chain.
! Fallones boat hypo: a company owns 1 single ship that it uses for exporting. It
states that the ship can hold 500 ft of cargo, when in fact it can only hold 300 ft of
cargo. The ship is not insured and is sunk in a storm. The stock collapses. Is there
loss causation? No, because the misstatement, that the boat could hold more than it
actually could, was not related to the loss, the boat sinking in a storm.
- 8. Damages
o The difference between what you paid for the security and what it was worth at the time of
the lawsuit, plus interest.
PRIMARY VIOLATORS: 10b(5) Defendants
- Any person who makes false or misleading statements and induces others to trade to their
detriment (primary violator) can become liable.
- Control persons liability
o Exchange act imposes joint and several liability on any person who controls a primary
violator
o Control persons are liable for securities violations of controlled wrongdoers if
! 1) actually exercised general control over the wrongdoers operations, and
! 2) had the power to control the specific transaction creating the liability, unless
the D proves good faith or mere negligence.
- Aiding and Abetting:
o the SC has held that there is no aiding and abetting liability under Exchange Act
10(b)/Rule 10b-5 for private suits. Central Bank of Denver v. First Intl Bank of Denver.

24
! Case: Cent. Bk of Denv. v. First Intl Bk of Denv. (No Aiding and Abetting
liability under 10(b)/Rule 10b-5 for private suits)
Facts: When an indenture trustee allowed a bond issuer to violate its
covenants, a bondholder sues the trustee for aiding and abetting securities
fraud.
Subsequently, SEC may pursue these actions thru enforcement actions.
Rule: There is no aiding and abetting liability under 34 Act 10(b) or Rule
10b-5 for private suits.
- Secondary actors: Secondary actors primarily liable if they are substantial participants in the
fraud, considering their role in preparing and approving the misstatement. (Wright v. Ernst &
Young aiders cannot be primarily liable unless they made a misleading statement to investors.
o In order for an aider and abettor to be liable there must be:
1. Existence of primary violation
2. Knowledge of violation
3. Substantial assistance
MATERIALITY AND DUTY TO DISCLOSE
- -1. Possession:
o Corporations possessing material nonpublic information have no duty to disclose it, even
to counteract misimpressions/rumors, as long as the corporation itself did not cause the
misimpressions.
- 2. Duty to correct:
o If you said something that you thought was true when you said it but you later find out that
it is not true you have a duty to correct.
o If the corporation supplies financial information to third parties, it acquires the duty to
correct those third parties mistaken statements.
! However, if a third party independently writes a story about a future product
without influence the Co. has no obligation to correct.
! Silence does not equal fraud absent a duty to disclose.
- 3. Duty to Update:
o Abbot labs: 7
th
circuit said that there is no obligation to update.
o Split in circuits:
o 2
nd
Circuit: TimeWarner: If a corporation issues a press release saying it is pursuing a
business goal with a stated approach, it has a 10b-5 obligation to disclose when alternate
approaches are under active consideration, if the original information has become
misleading. In re Time Warner Securities Litigation.
! Rule: If a corporation makes a press release about a stated goal and its approach to
achieving it, it has a duty to disclose when alternative approaches are under active
consideration.
- 4. Half Truths:
o if a security issuer makes a voluntary statement that is only half of the truth, it acquires the
duty to speak completely and avoid half-truths.
o Pg 727: Would it be a half truth that it was committed in strategic plan, however it doesn't
declare that the CEO opposed it?
! Yes, this likely qualifies as a half-truth and would need correcting.
- 5. When the Company is in the Market for its own securities:

25
o Must disclose what it knows, if company is selling in a public offering or a buyback then it
must disclose what it knows because this creates a fiduciary responsibility with those on
the other side of the transaction.
! Case: Jordan v. Duff & Phelps, Inc (close corporations must disclose material
information to shareholders)
Facts: Closely-held companys employee left and sold back his shares just
before a merger would have increased their value. He sued, contending the
corporation should have disclosed the merger plans.
Rule: Closely-held corporations have a duty under 10b-5 to disclose
material information about their securities to at-will employees and
shareholders when the plan a share repurchase.
- 6. Listing Standards:
o New York Stock Exchange, upon becoming a member you must promptly disclose
material information even if usually it wouldnt have to be disclosed.
o If you violate this standard, there is no private right (ie wont get sued for fraud) however,
the NYSE might kick you off. (big company probably doesnt have to worry)

! Reality of disclosure:
Regulation S-K must be filed ever 90 days, which requires managerial
disclosure where material information must be released, even if not required
voluntarily.
o (Really just a question of how long you can keep it secret.)
Manipulation
- Manipulation: manipulation is a term of art in the securities field and it refers to certain practices,
such as matched orders, wash sales, or rigged prices, that are designed to mislead investors by
artificially affecting market activity, including the price of the subject companys securities.
- Generally, to find manipulation under 10(b) it has to be proven that the defendant engaged in the
transactions in questions with the specific intent to solely affect the market price of the securities
at issue.
(9)(a)(2): Prohibition Against Manipulation of Security Prices: generally, to prove manipulation under
9(a)(2) [which is more difficult than under 10(b)], the following elements must be shown:
1. that the defendant effect a series of transactions in a security registered on a national securities
exchange;
2. creating actual or apparent active trading in such a security, or raising or depressing the price of
such security;
3. for the purposes of inducing the purchase or sale of such security by others.
SECURITIES LAWYERS DUTIES
A. Basic obligations: lawyers basic professional obligations are set by legal ethics codes. Additional
rules arise under the SECs dictates under Rule 102(e) and aiding and abetting caselaw.
a. Case: In re Keating, Muething & Klekamp (SEC may sanction or suspend law firms
involed in securities violations)
i. Facts: law firm negligently prepared misleading securities filings. The SEC sought
to require better supervision and a temporary suspension.
ii. Rule: SEC may use Rule 102(e) to sanction law firms involved in securities
violations.

26
B. Aiding and Abetting: lawyers are liable for aiding and abetting securities fraud if they participate
in a securities transaction knowing it was based on materially misleading information.
a. Opinions: they are only liable for opinions if the opinion enables the transaction, but are
not liable for failing to retract opinions after the transaction. SEC v. National Student
Marketing Corp.
b. Attorneys are liable for aiding and abetting securities fraud if they participate in a
transaction knowing it is based on materially misleading information
C. Duty to Act: lawyers who regularly handle securities disclosure, and who become aware their
client is committing violations, must act promptly and reasonably to stop the violations. Rule
102(e).

INSIDER TRADING
A. Definition of Insider Trading: Insider trading is any unlawful trading by those in possession of
material nonpublic information. The prohibition is justified on the ground that it fosters investor
confidence by providing them with a reasonable assurance that they are not at an unfair and
insurmountable informational disadvantage vis--vis a select group of insiders.
a. Duty to disclose: there is a duty to disclose nonpublic information held by certain insiders.
Corporate insiders are barred from trading on inside information based on duties oweed to
shareholders. These duties would require the disclosure of that information before trading
on the market.
b. Possession is not enough: possession of material nonpublic information does not, alone,
create a duty to disclose prior to trading on the market. Chiarella v. US.
i. Case: Chiarella v. US (Duty to disclose material nonpublic information must
arise from a fiduciary relationship)
1. Facts: After finding the identity of several targets of a takeover bid, without
ever disclosing that information the employee purchased shares in the target
companies and sold the shares after the takeovers were publicly announced.
2. Rule: Abstain or disclose.
3. Assessment: The holding in Chiarella has been read to negatively imply
that the duty to disclose arises from the existence of a fiduciary relationship
with marketplace traders.
A. Materiality: as in other areas of securities law, insider trading standard of materiality is the
reasonable investor/total mix formulation. SEC v. Bausch & Lomb Inc.

OUTSIDER TRADING:
- Where corporate information is revealed to underwriters, accountants, lawyers or consultants and
the corporation expects the information to remain confidential, these professionals become
fiduciaries of the shareholders. Dirks v. SEC.

THE MISAPPROPRIATION THEORY
A. Misappropriating confidential information: a person commits fraud in connection with a
securities transaction (violating 10(b) and Rule 10b-5, when he misappropriates confidential
information for security trading purposes. US v. OHagan. (extending the misappropriation theory
to outsiders)
a. Case: US v. OHagan (non-traditional outsiders commit insider trading when he
misappropriates confidential information in breach of a duty owed to the source of the
information)

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i. Facts: SC upheld the conviction of an attorney who purchased and sold securities
using confidential information about a tender offer his law firm was hired to work
on.
ii. Rule: The use of confidential information obtained as a result of a fiduciary
relationship served as the deception necessary under 10(b) and was in
connection with the subsequent trading.
b. Limits on Theory: There is no deception where 1) the misappropriator discloses his intent
to trade on the information, prior to transacting in the marketplace, and 2) the
misappropriator must have a duty to keep the sources information confidential.
B. What type of relationship suffices for the misappropriation Theory? The SC has been silent
on the issue of what kind of relationship is necessary for this theory to be applicable. However,
the theory has been applied in cases involving partners, employees associated w/ acquiring
companies, investment bankers, lawyers and printers. Familiar ties do not necessarily give rise
to a duty to keep the information confidential.
C. Misappropriation is governed by state law!

RULE 14e-3 KNOWLEDGE OF IMPENDING TENDER OFFERS
A. Tender Offers: pursuant to the rule-making power granted in the Williams Act, the SEC has
prohibited all people from trading based on knowledge of impending tender offers.
B. Rule 14e-3: prohibits all people from acquiring any securities of the target of a tender offer when
that person possesses information he has reason to know is nonpublic and was acquired from the
bidder, target or a person affiliated with either. This power was upheld in US v. OHagan.

TIPPERS AND TIPPEES
A. Tipper/Tippee Liability Defined: this liability deals with situation where a corporate insider
passes along nonpublic information to a person who then trades using that information.
a. Corporate outsider: a corporate outsider who trades on nonpublic information obtained
from a corporate insider may be liable for securities fraud if the corporate insider
communicated the information in breach of his duty to the shareholders. Dirks v. SEC.
i. Case: Dirks v. SEC (Rule: corporate insiders breach their duty to shareholders
when they disclose information for personal gain)
b. Eaves Dropping: overhearing a conversation by a third party is not deemed a tip. SEC v.
Switzer.