Securities and Capital Markets

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SECURITIES AND CAPITAL MARKETS - SUPER CONDENSED

INTRODUCTION:

Securities Transactions
! issuer / primary transaction: issuer to investor " e.g. private placement, IPO,
secondary public offering " subject to 33 Act
! trading transactions: investor to investor " most occur on organized securities markets
(e.g. NYSE, NASDAQ)
! both brokers (earning commission) and dealers (earning off spread) must register w/ SEC

The 33 and 34 Acts
! 33 Act: disclosure (i.e. no fraud) and not merit regulation " key concept is materiality
o 5: register or find an exemption
o registration = filing reg. statement w/ SEC and disseminating a prospectus
o violations of 5: private causes of action and/or SEC enforcement
! 34 Act: system of periodic disclosure for companies listed on a national securities
exchange OR w/ assets $10m+ and equity securities held by 500+ persons
! SEC, as primary regulator of securities markets, also provides regulations and guidance:
formal Rules and Regulations; releases; no-action letters; informal guidance (by phone
and website); speeches " few bright line rules

Primary Exchange Act Forms
! Form 10-K annual report: audited financials, descriptions of business and financial
condition, MD&A, etc.
! Form 10-Q quarterly report: unaudited financials and MD&A
! Form 8-K: disclosure of specified, material events b/w periodic filings
! Forms 10K and S-1: primary reg. form for new issuers " integrated disclosure
! materiality built into regulations (fall-back provisions: even if no express line-item, if
otherwise material, you must disclose " Rule 408 of 33 Act and 12b-20 of 34 Act)

Market Regulation
! SEC
! state regulators
! SROs: National Securities Exchanges (e.g. NYSE, AMEX, regional exchanges) and
National Securities Association (NASD) " exchanges have quasi-govtal functions re
issuing rules and enforcing compliance

Market Competition and Fragmentation
! diff. mechanisms to buy securities incl.: proprietary systems (the third market), e.g.
Instanet; electronic communication networks (ECN), e.g. Island
! securities may trade on many diff. exchanges " theoretically beneficial to investors b/c it
shrinks spreads and fees but creates fragmentation problems

Efficient Capital Markets Hypothesis (ECHM)
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! market efficiency = info. widely and cheaply avail. to investors + all relevant and
ascertainable info. reflected in securities prices
! weak form: no predictable pattern (i.e. random walk) " price reflects all past info., but
says nothing about future " stock price driven by new info. onto marketplace
! semi-strong form: prices reflect not just past prices, but all publicly available info. "
heart of disclosure philosophy " large exchanges react quickly to new info.
! strong form: price reflect all info., publicly available or not (incl. inside info., and info.
costly to obtain) " most people do not believe this exists
! noise traders: people who trade irrationally affect this model

MATERIALITY:

! materiality: mixed question of law and fact; fact-specific
! if set too low, hard for investors to pick out important info. from largely irrelevant info.
! costs of additional disclosures should create real benefit for investors
! SAB No. 99 factors incl.:
o masking change in earnings?
o hiding failure to meet analysts expectations?
o changing loss to profit?
o expected market reaction to info.?
! TSC v. Northway standard: objective, as to a reasonable investor
o subst. likelihood reasonable investor would consider info. important in deciding
how to vote (or whether to buy or sell)
o subst. likelihood info. would have been viewed by reasonable investor as having
significantly altered total mix of info. made avail. (defn of important)
! puffery: generalized statements of optimism = per se immaterial (Eisenstadt v. Centel)
! hindsight problem: bad event has happened, if litigation exists, so likelihood is 100%

Speculative Info. and Materiality
! Basic v. Levinson: balancing test based on probability of event coming to pass /
magnitude of event in light of totality of companys activities
! duty to correct: if disclosure made in good faith, but incorrect at the time, duty to
correct mistake when discovered " but a duty does not mean info. is material
! mere possession of material info. ! duty to disclose " primary source of duty is some
SEC duty or regulation (e.g. a line item of Reg. S-K)
! truth on the market defense: material error, but in context, immaterial " Wielgos v.
Commonwealth Edison

Forward-Looking Statements (FLS)
! hard info. (historical facts on profits, revenues, etc.) v. soft info. (opinions/intentions)
! FLS broadly defined in 21E(i) of Exch. Act:
o revenue and other financial projections
o statements of plans or objectives
o statements of future economic performance, incl. statements in MD&A
o statements of underlying assumptions
! once you speak, you have duty to speak completely and honestly (Basic)
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! safe harbor - 27A of Sec. Act and 21E of Exch. Act
o for reporting companies, their agents and underwriters BUT not for IPOs or
tender offers or other activities w/ fraud concerns
o does not apply to SEC actions, only private actions
o objective safe harbor: reqs. identification of FLS as such + meaningful
cautionary statements (i.e. factors that could cause actual results to differ
materially - not boilerplate) " avail. even if corp. fails to list risk factor that
actually comes about " immaterial FLS also protected, 21E(c)(1)(A)(ii) -
codification of puffery doctrine
o subjective safe harbor: applies when objective not avail. " "s must prove FLS
was made w/ actual knowledge it was false or misleading
o bespeaks caution acts as a gap-filler
! bespeaks caution doctrine - judicially created
o evid. of thought and consideration to specific risks + proximity to related statet
o Kaufman v. Trumps Castle Funding: subjective statement of belief in MD&A "
in context, could be misled b/c of numerous disclaimers / cautionary statets under
risk factors " FLS would not influence reasonable investors decision
! Regulation FD: prohibits selective disclosure of material, non-public info. to
enumerated persons " reqs. simultaneous public disclosure
o applies to unregistered offerings (not to reg. offerings)
o materiality: depends on pre-existing defns " no liability for mistaken judgment,
but persons cannot be reckless
o selective earnings guidance: high risk of FD violation
o unintentional disclosure: can cure by prompt public disclosure (w/in 24h or
before start of next NYSE trading day) " clock starts when senior official learns
o violations of FD: no private right of action " does not affect issuers filing status
" does not disqualify issuers eligibility for safe harbor (i.e. not fraud)
! oral FLS: must identify FLS + say actual results might differ materially + reference
readily avail. materials containing meaningful cautionary language (e.g. SEC filings)
! Item 303 in Reg. S-K - MD&A
o written very broadly " probability trigger
o req. disclosures: liquidity; capital resources; results of operations, interim
financial info.
o determination: is trend / demand / commitment / event / uncertainty known by
management? " if yes, can management determine event is not reasonably likely
to occur? " if no, assume event will occur - can management determine that a
material effect on financial condition or operations not reasonably likely to occur
(Basics probability / magnitude)? " if no, Item 303 disclosure req. (w/ special
exemption for M&A activity)

Management Integrity and Materiality
! In re Franchard: Glickman taking money from corp. for own purposes + pledged his
stock as collateral (potential shift in control of corp.) " material as to integrity/quality of
management (esp. true when corp. has important indiv. player(s))
! US v. Matthews: no duty to disclose uncharged criminal conduct
! Berkman v. Rust Craft: conflict of interest in a friendly takeover " material omission
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! Regulation S-K, Subpart 400: requires disclosure of managements incentives/integrity
" incl. family relationships, bus. experience, certain legal proceedings
! Item 404: requires disclosure of transactions $60,000+ w/ conflict of interest, or
transactions w/ entity related to officers and directors (e.g. law firm or I-bank)
! Sarbanes: audit committees must = all indep. board members + one financial expert (in
education and experience) " intrusive into internal corp. governance

DEFINITION OF A SECURITY

! 2(a)(1) of Sec. Act and 3(a)(10) of Exch. Act " gateway into fed. regulatory scheme
" addresses vulnerability for purchasers of intangible assets, agency costs, and collective
action problems of investors
! 4-pt. Howey investment contract test: traditionally used to analyze exotic investments
o investment of money
o in a common enterprise
o w/ an expectation of profits (overlap w/ first element)
o solely (subseq. expanded to predominantly) from efforts of others
o *presence of comprehensive leg. scheme - e.g. ERISA or fed. banking laws
o *risk is immaterial in Howey, but comes back into play in United Housing
! Howey: funny orange groves " security b/c of common enterprise (principal motivation
was profit and not consumption of oranges)
! United Housing: buying stock in co-op to get apartment " not a security (court looks
beyond the label to economic realities " investors not buying stock, but a place to live)
! SEC v. Life Partners: buying life insurance policies of terminal patients at discount "
not a security b/c no common enterprise " controlling factor in investment is how long
patient lives, so profits dont come predominantly from efforts of Life Partners
! common enterprise:
o horizontal commonality: requires pooled investment funds, shared profits and
shared losses b/w indiv. investors (most restrictive test)
o vertical commonality (when impossible to show horizontal): two types are strict
(investors fortunes tied to promoters fortune - they share risk of the venture) and
broad (investors fortunes linked to promoters efforts) " in either type, there is
commonality if a single investor has common interest w/ investment manager

Notes
! exemption for commercial paper - short term notes w/ maturities <9 months
o exemption applies to reg. reqs., but not to anti-fraud rules
! Reves v. Ernst & Young: re demand notes (no specified term) " court adopts family
resemblance test (essentially the Howey investment contract test) - primary motivation
is investment/profit; broad plan of distribn; publics reasonable expectations; risk-
reducing factors
! SEC will give no-action letter to provide certainty in this area

Underwriting Methods
! firm commitment: UW purchases securities from issuer and re-sells to public
! best efforts: UW helps issuer sell " UW eliminates risk of sticky issue and liability
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! Dutch auction: investors bid for security " addressed problems of allocation/scarcity
! syndication: many firms " helps UWs reduce risk
! UW provides issuer w/ access to purchases, mostly institutions " road show
! UW supposed to perform screening function (but less so when market is good)

REGISTRATION PROCESS

! enormous SEC authority in this area
! Form S-1: default reg. form for most domestic companies going public
o integrated disclosure: cross-references Sec. Act regulations and Regs. S-K and
S-X to eliminate overlap
o info. on issuer reqs.: registrant-specific info. on market for issuers securities;
audited balance sheets and income statements; MD&A
o info. on offering reqs.: transaction-specific info. about UW; type/number of sec.
o undertakings and exhibits
o Rule 421(d): plain English reqs.
! Forms S-2 and S-3: eligibility tied to type of issuer (i.e. reporting history)
o registrant-specific info. may be incorporated by reference, but transaction-specific
info. is always disclosed (no overlap b/c info. not avail. before)
! Form SB-1, SB-2, Regulation S-B for small business issuers: eligibility = US or
Canadian issuer + revenues / public float <$25m + not an investment company

Pre-Filing Period
! 5(c) - no offers or sales (defined broadly) " cannot condition market (gun-jumping)
! due diligence: mo material misreps. in offering materials " strict liability (no intent or
negligence reqs.)
! company is in reg. at least from time issuer reaches understanding w/ UW (prelim.
negotiations w/ issuer or to syndicate are not incl. in defn of in reg.)
! safe harbors of Rules 137-139 - reports and recommendations
o protects from broad defn of offer (138 and 139) or UW (137)
o applies to broker/dealers re reporting companies only
o applies in all three periods
o diff. rules depending on eligibility for S-2 or S-3 v. S-1
o 139 protects broker/dealers in offering
o 137 protects broker/dealers not in syndicate or participating in offering
! Rule 135: issuers not offering when publishing notice of proposed offering if contains
restrictive legend and only discloses permitted info.
! violation = action under 12(a)(1) and purchasers get right of rescission

Waiting Period
! no sales or deliveries " however, can now make offers (subject to restrictions on
offering techniques: only writings permitted are tombstones, identifying statements, and
various 10 prospectuses; oral offers also permitted)
o web: in general, poor adaptation of regulatory system to electronic media "
hyperlinks pose danger of incorporating things into prospectus (i.e. analyst report)
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under SECs envelope theory " e-mail is a writing that may violate 5 (note that
voicemail will not)
! SEC corp. fin. dept reviewing reg. statement " comment process for changes or face
8 refusal/stop order (rare)

Post-Effective Period
! sales and deliveries permitted
! delaying amendment: language in reg. statement automatically amends to keep re-
running the clock to give SEC sufficient time to renew
! acceleration: SEC has power to accelerate process " can deny if prospectus not broadly
distributed
! price and size of offering not determined until effective date " reg. statement can go
effective w/o this info., as long as it is provided in supp. prospectus w/in 15 bus. days
(face 11 liability if you miss this window)
! final prospectus delivery req.: must precede/accompany delivery of security " this
delivery also makes free writings permissible (i.e. not prospectuses)
o term sheet + prelim. prospectus (but not summary pros.) = 10 final prospectus
o electronic media: posting to website is insufficient " if investors specifically
consent, can have electronic delivery (but must make paper copies avail.)
o exemptions: for unsolicited brokers transactions; transactions by those other
than issuer/UW/dealer; some dealers transactions
o no receipt is necessary to fulfill delivery reqs. (sent or given is enough)
! Rule 174 - duration of delivery obligations
o issuer must always deliver final prospectus if offering securities to public
o UW or dealer must deliver if selling original allotment (even if investor not
buying from that allotment)
o after public distribn begins, dealers obligations re market transactions reduced to
90d if issuers first offering; 40d if not first offering; 25d if listed on stock
exchange or NASDAQ; 0d if issuer was reporting company when it filed

Rule 15c2-8: Anti-Fraud
! prohibition of fraudulent, manipulative, deceptive practices in offer or sale of securities
" e.g. failure to disseminate prospectus broadly is such a practice
! issuer must deliver prelim. prospectus to those who expect to receive confirmation AND
those who request it
! issuer must make prelim. prospectus avail. to associated persons in selling effort
! managing UW must provide other broker/dealers in distribn w/ copies of prospectus
! reasonable steps to furnish final prospectus to those who request it in post-eff. period

How to Approach a Registration Problem
! is this a reg. offering? " if no, the problem ends here
! where in offering? " pre-filing, waiting, or post-effective period?
! who is it? " underwriter, dealer, broker, issuer?
! what are they doing? " offering, selling, delivering?

Shelf Registration - Rule 415
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! Rule 415(a)(1)(i)-(ix) codify traditional shelf offerings [supp. p. 117]
! innovative Rule 415(a)(1)(x) permit S-3 and F-3 issuers to register for shelf debt or
equity securities to be offered on delayed/continuous basis
o only for what it reasonably expects to sell over next 2 years
o registrant must furnish Reg. S-K undertakings (updated financial statements, any
fundamental changes to reg. statement; any material changes to distribn plan)
! market offering: registered offering of voting stock limited to no more than 10% of
outstanding voting stock " requires use of underwriter

Updating and Correcting
! 8(b) refusal order: must be issued before reg. statement goes effective + notice w/in
10d of filing and hearing w/in 10d of notice + defect internal to reg. statement
! 8(d) stop order: allows SEC to suspend reg. statement (5 once again prohibits offers
or sales) " defect must have existed at time reg. statement became effective " also
requires notice and hearing
o failure to cooperate w/ 8(e) investigation is grounds for stop order
o collateral consequences: SEC may prohibit issuer from exempt offerings for 5yrs
! for defects from post-eff. developments:
o 8A cease and desist order: administrative proceeding " internal solution
o 20 court injunction: higher level of seriousness
! corp. may file post-eff. amendment to correct errors (does not suspend effectiveness) "
if amendment goes effective, it reaffirms everything in prospectus and creates new eff.
date for 11 liability
o if info. is substituted, post-eff. amendment needed
! stickering: change/supplement prospectus w/o formal post-effective amendment (or can
be done in addition to) " as name implies, goes right over misleading info. " no SEC
review before use
o if only new info. added, can sticker (no post-eff. amendment needed)

Withdrawing the Reg. Statement
! must apply to SEC " granted in most cases (but SEC will issue stop order to give notice
to public if they think offering is riddled w/ fraud)

LIABILITY

! 11: express cause of action for misreps/omissions in effective reg. statement
o "s: any purchaser of security w/ defective reg. statement (no privity req.) " "
must be able to trace shares to original reg. offering (i.e. not in aftermarket or
secondary offering - statistical probability is not enough)
o #s jointly and severally liable
o # issuer incl. anyone who signs reg. statement (i.e. CEO, CFO, directors - see
Escott v. BarChris for sliding scale) " defenses are m/o not material; purchasers
knew; negative causation; published earnings statement w/in 12mos
o # underwriter " liability limited to actual securities underwritten " does not
incl. those who only work for commission " UWs cannot just rely on reps. - must
verify what info. they can w/ outside sources
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o # experts (listed in prospectus - incl. accountants, engineers, etc. but not
lawyers): only liable for portion they prepare/ certify " have due diligence
defense
o # non-experts: have whistleblower and due diligence defenses
o any non-issuer # has reliance on expert defense for expertised sections
o remedy is rescission - diff. b/w price paid (limited to offering price) and value of
security at time suit brought
! 12(a)(1): express right of rescission for violations of 5 (private right of action)
o "s: any purchaser of security sold in violation of 5
o #s are limited to statutory sellers " Pinter v. Dahl " i.e. those who pass title,
motivated by financial interest (does not incl. lawyers, accountants, etc.)
o strict, joint/several liability - no proof of reliance, causation, or materiality req.
o remedy is rescission for up to 1yr from date of violation (or 3yrs from offering)
! 12(a)(2): express cause of action for materially false/misleading statements in
prospectuses or oral communications (misinterpreted by S.Ct.)
o reqs.: purchase of security + jurisdictional nexus + material misrep. (no reliance)
o # is stat. seller (Pinter v. Dahl) " defenses are purchaser knew; due care;
negative causation
o applies to sales materials not part of reg. statement; sticker supps., oral misreps.
AND can imposes liability on members of selling group who are not stat. UWs
o remedy: rescission
o misinterpreted in Gustafson v. Alloyd and Manor Nursing to only apply to public
offerings (distinction should be b/w primary and secondary offerings)
! 15: control person liability
! 17: general prohibition against fraud in offer or sale of securities " applies only to
offers and sales (and not purchases)
o scienter only required for 17(a)(1) " 17(a)(2) and (3) liability for negligence
o alleged misreps. must be material
o no private right of action (only SEC can bring)
! criminal: only other form of potential liability

Summary - Causes of Action as a Whole
! 11: registered offerings and reg. statement w/ SEC
o no claim if no reg. statement
! 12(a)(1): violations of 5 (heart of the Act) - either public or failed private offerings
o no claim if no violation of 5 (e.g. permissible free-writing)
! 12(a)(2): picks up everything else " should cover any offering, public or private, to
extent that there is misrep. in prospectus or oral communication
o no claim if communication neither oral nor a prospectus OR if overriding
exemption (e.g. 2(a)(10) exemption for free-writing w/ final prospectus)
! together, they cover all aspects of primary transactions and provide private causes of
action for purchasers
! final recourse is 10b-5

EXEMPTIONS

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! burden always on issuers to est. the availability of exemption
! no exemption from the anti-fraud rules " no 11 liability b/c no reg. statement, but still
may be 10b-5 liability

Intrastate - 3(a)(11) and Rule 147
! offering size: no limit on size, theoretically, but large offerings may create problems in
meeting other reqs.
! residency req.: all offers must be to in-staters (can specify in offer that only avail. to in-
staters " one offer to out-of-stater can destroy exemption)
! resale restriction: resales to out-of-staters can defeat intrastate exemption " must
come to rest in hands of in-staters, but no precise holding period req. (after restrictions
dissolve, resales do not need reg. b/c of 4(1) transactional exemption)
! Rule 147 creates non-exclusive, objective safe harbor " covers issuer transactions only
o strict compliance necessary " generic 3(a)(11) intrastate exemption is fall-back
o provides objective defns of residency and doing bus.
o 6-month non-integration window " w/in window, 5 factor test (single plan of
financing? same class of security? at or about the same time? same type of
consideration? same general purpose?)
o resale restrictions dissolve after 9mos " must take precautions against interstate
sales (written disclosure of restrictions to offerees; legended securities; stop
transfer instructions; purchasers written representations of residency)

Private Placement - 4(2)
! no general solicitation or advertising
! offerees must usually be sophisticated or have advice of someone who is + have access
to info. that would be in reg. statement
! SEC focuses on all offers (not just purchases)
! issuer must take precautions against resales
! SEC v. Ralston Purina: key is knowledge of offeree - must be able to fend for himself

Regulation D
! subst. compliance fail-safe: issuer gets benefit of doubt if good faith and reasonable
attempt to comply + failure did not pertain to a req. meant to protect the particular
purchaser + failure to comply was insignificant (ban against general solicitation and
dollar and purchaser limits are by defn always significant)

Rule 504 Rule 505 Rule 506
Statutory Basis 3(b) 3(b) 4(2)
Dollar Limit $1m / 12 mos. $5m / 12 mos. unlimited
Disclosure none none, if all accredited
(but must disclose to
non-accredited)
none, if all accredited
Investor Sophistican
(see below for details)
irrelevant irrelevant unaccredited must be
sophisticated (alone or
w/ purchaser rep.)
Investor Limit unlimited, but cannot unlimited accredited; unlimited accredited;
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(see below for details) generally solicit <35 unaccredited <35 unaccredited
Resale restricted restricted
Solicitation mostly banned -
depends on state law
absolute prohibition -
Rule 502(c)
absolute prohibition -
Rule 502(c)
Aggregation
[note: intrastate offerings
cannot be aggregated]
12-month - cannot
exceed dollar limit
12-month - cannot
exceed dollar limit
NO aggregation w/
504 or 505 offerings
* see handout chart on Reg D exemptions for more details

! accredited investors: financial institutions OR venture capital firms OR public pension
plans w/ assets $5m+ OR corps. / partnerships / tax exempt organizations w/ assets $5m+
OR directors / executive officers / general partners of issuer OR wealthy indivs. w/ net
worth $1m+ or annual income $200,000+ ($300,000 for couple)
o issuer must show reasonable belief investor fits in category (objective standard)
o accredited investor is presumptively sophisticated
! sophisticated investors: such knowledge and experience in financial matters that
investor is capable of evaluating merits and risks of prospective investments
o only applies to Rule 506
o can satisfy w/ purchaser rep. who independently satisfies sophistication standard
(rent a brain)
! calculating # of purchasers: specific rules concerning relatives, trusts, and other entities
" complicated, so avoid unaccredited investors if possible (all 3 exemptions allow
unlimited accredited investors)
! ban on general solicitation: incl. mass mailings, broadcasts, and general postings on
Internet BUT NOT private placement tombstones
o communications pursuant to pre-existing relationships permitted
o questionnaires: permitted to pre-qualify investors BUT must wait to make offers
of securities - relationship created must precede offer
! aggregation: 504 and 505 offering will be aggregated w/in 12 months " look back 12
months to determine dollar limits on current offering (never look forward) " if
transaction falls outside exemption, buyers get rescission

Reg A
! mini-reg. " slimmed down reg. statement (called offering statement) " lower filing
fees " also, can test the waters (very important)
! $5m limit, but no investor limit (and no investor qualifications)
! 6-month integration safe harbor (two-sided, as opposed to Reg Ds one-sided)

Intrastate Exempn Private Placement Reg. A
Statutory Basis 3(a)(11) - transaction
exemption
4(2) 3(b) - but subject to
state regulation
Dollar Limit unlimited (theoretically) size limits $5m - only reduced by
other Reg As w/in 12
mos.
Disclosure knowledge of / access
to info.
Reg A info " easier
than for reg. offering
Investor Limit issue must come to rest be sophisticated or unlimited " no
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w/ in-staters rent someone who is investor qualifications
Resales transfer restrictions to
out-of-staters - 9 mos.
after last sale
issuer must take
precautions against
resale
no restrictions " but
possible lack of liquid
secondary market
Solicitation offers to in-staters only no general solicitation
or advertising
can test the waters
" general solicitation
/ advertising permitted
Aggregation cannot be aggregated w/
Rule 504 or 505 offerings
$5m limit only
reduced by other Reg
As w/in 12 mos.
Misc. issuer must do bus.
w/in state
no 34 Act reporting
reqs. unless satisfy
Rule 12g-1 " no 11
liability " lower
filing fees

How to Approach an Integration Problem
! Reg A + any transaction + 6 months = Reg A two-sided protection (no integration)
! Reg D + Reg D + 6 months = 2 $ Reg D one-sided protection (no integration)
! Reg D + S1 registered offering + 30 days after last solicitation before filing reg.
statement = Rule 254(d) protection " if 6 months, Rule 502(a) Reg D safe harbor will
also protect Reg D offering
o also works w/ 4(2) or 4(6) or 506 or testing waters under Reg A + S1 reg.
offering, i.e. if 30 days after last solicitation before filing reg. statement
o note: this private-to-public move will only work if previous offer was withdrawn
! Reg D + intrastate + 6 months = Reg D safe harbor will protect Reg D transaction (no
rescission for buyers) " if intrastate exemption fits under 147 (objective transaction
exemption w/ safe harbor, etc.), there is also a 6 month safe harbor for the intrastate
! Reg D + 4(2) private placement + 6 months = Reg D safe harbor will protect Reg D
transaction (no rescission for buyers) " as for the private placement, it has no
independent safe harbor - subject to 5 factor test (which usually means integration
problems, and buyers will have rescission while, once again, the Reg D buyers do not)
! rescission: note that its the transaction that is blown for which buyers have rescission "
other transaction (if its fine), maintains integrity
! aggregation v. integration
o b/w 0 and 6 months = can be both integration and aggregation problems
o b/w 6 and 12 months = only possible aggregation problems (b/c non-integration
window kicks in if transaction w/in a safe harbor)
o after 12 months = aggregation is not a problem " likely, neither is integration
(though still under the unclear 5 factor test)
o aggregation applies only to dollar limits b/w Rule 504 and 505 offerings, or
among Reg A offerings

SECONDARY DISTRIBUTIONS

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! w/ reg. securities, no problem w/ secondary distribn to public at large (no need to re-
register or otherwise comply w/ 5)
! w/ restricted securities (e.g. 506 offering), Rule 502(d) says securities acquired in Reg D
offering cannot be resold w/o registration or exemption

Restricted Securities
! trading transactions - two investors buy/sell 100 shares of Microsoft on E*Trade
o indiv. investors: exempt under 4(1) b/c not issuers, underwriters, or dealers
o E*Trade: dealer under 4(1), but has separate exemption for most trading
transactions under either 4(3) or 4(4)
! 4(1) only meant to exempt routine trading transactions b/w indiv. investors " not meant
to cover distribns, either by issuer, or indivs. who facilitate distribns
! restricted securities defined as:
o acquired directly/indirectly from issuer or affiliate (directly/indirectly controls, is
controlled, or is under common control w/ issuer) in non-public transaction
o acquired from issuer subject to Reg D resale restrictions
o note that affiliates and person selling affiliates reg. securities may violate 5
! underwriter: members of selling group are not underwriters (if interest is only
commission), but many diff. roles can make you a UW, incl.:
o if you purchase issuers securities w/ view toward distribn
o if you offer or sell issuers securities in connection w/ distribn
o if you offer or sell issuers securities for a control person w/ view to, or in
connection w/ a distribn
o look for Rule 144 carve out

Major Issues
! what is an offer or sale in connection w/ a distribn?
o broad defn under Chinese Consolidated and Burns v. Faulkner " incl. any subst.
involvement, like being conduit for sale (w/ or w/o commission) " highly fact
specific
o however, incidental or collateral selling efforts (e.g. newspaper that publishes ads)
will not make you a UW
! what does it mean to buy w/ a view toward distribn?
o investment intent, holding for 2 yrs generally enough (being a conduit = UW)
o significant change in circumstance: defense not avail. if change reasonably
foreseeable at time securities purchased " only for investors changes, not
issuers (Gilligan) " note: not a factor under Rule 144 non-exclusive safe harbor
! what is a distribn? - not defined in Sec. Act
o size: more securities sold at one time = more like distribn
o nature of sale: selling to market (NASDAQ or NYSE), or to sophisticated
buyer? " courts say distribn = public offer
o who is seller?: control or non-controlled person of issuer?
! who is a control person?
o control person = possession, direct or indirect, of power to direct or cause
direction of management and policies of a person, whether through ownership of
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voting securities, contract, or otherwise " fact-specific inquiry (e.g. policy-
making officer, majority stockholder)
o sale by control person: reg. doesnt matter " face more restrictions than non-
controls " difficult b/c cannot get many exemptions avail. to issuer (e.g. 4(1))
o sale by non-controls: are sec. reg.? " if no, can seller est. investment intent? "
if no, is sale consistent w/ original basis for issuers exemption (i.e. issuer could
sell to secondary buyer directly)? " one yes means exemption as 4(1) trading
transaction = no distribn " note: broker can only be underwriter if seller is

Rule 144 Safe Harbor
! Rule 144 objective safe harbor from defn of UW " strict compliance
o alts.: if do not fit, can still argue not a UW, or register
o 144 avail. to affiliates (directly or indirectly controls, is controlled by, or is
under common control w/ issuer) and non-affiliates reselling restricted securities
! reqs.:
o current public info. must be avail. " i.e. issuer is reporting company for 90+
days + current in filings for 1 year (or, if shorter, time when it was a reporting
company) " seller may rely in good faith on issuers reps. of compliance " very
hard for non-reporting companies to satisfy (though 144 also avail. to them)
o min. 1 year holding period for restricted securities (usually from date company
issued securities) " holding period irrelevant for unrestricted securities "
applies to affiliates and non-affiliates " note: restricted sec. does not incl.
intrastate offerings (so 144 not avail.)
o limits on amount of securities " must trickle out " limit is greater of 1% of
outstanding securities of that class, or average weekly trading volume over
previous 4wks " sales limit measured over three-month moving window (note
that limits apply to affiliates no matter how long they hold, but if <1yr, cannot
trickle out at all " for non-affiliates, only applies to restricted securities and
limits dissolve after 2yrs holding)
o sales must be through 4(4) brokers transaction or directly through market
maker " solicitations limited to customers who formerly expressed interest and
brokers can only receive usual/customary commission
o most sales require Form 144 notice of proposed sale
o bona fide intention to sell (no shelf offerings)
o termination of 144 restrictions for non-affiliates: after holding 2yrs, no current
info. req.; no limit on amount of securities or manner of sale; no notice reqs.
! note that quintessential private placements (e.g. sale to single sophisticated investor)
happen all the time w/o reg., and outside 144 " no violation of 5

Rule 144(A)
! safe harbor: permits unlimited resales to qualified institutional buyers (QIBs) " i.e.
broker can buy w/ view to re-sell to QIBs and QIBs can re-sell amongst themselves
! QIB = broker/dealers $10m+ and institutions $100m+
! all offers and sales must be to QIBs or those seller reasonably believes are QIBs
! securities offered cannot be fungible w/ those traded in public market
! info. req.: brief description of issuers bus. + specified current financials
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4(1!) Exemption
! in a nutshell, if 4(2) Public Offering = 2(a)(11) Distribn BUT Careful Sale ! Public
Offering THEN Careful Sale ! 2(a)(11) Distribn and Seller ! Underwriter " sale
qualifies under 4(1)
! reqs.:
o purchaser must have access to current info. about issuer
o purchaser must meet 4(2) qualifications - i.e. be sophisticated
o no general solicitation (must be private placement and not public offering)
o too many 4(1!) sales w/in a given period may = distribn " uncertainty
o purchaser receives restricted securities
! if sale consistent w/ original exemption, transaction fits w/in 4(1)
o for intrastate offerings, 4(1!) only applies when shares come to rest (consistent
w/ original exemption) " then consider public offering v. careful sale
! cannot cumulate exemptions (sort of like an integration problem) - must sell consistent
w/ exemption issuer did in fact use, not one issuer could have used
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