I.

BACKGROUND SECURITIES MARKETS AND REGULATION

A. The Basics
1. Two types of securities transactions:
a. Primary market transactions issuer sells securities to maret!lace
". Secondary market transaction "et#ee$ t#o outsi%e i$&estors
'. How we protect consumers:
a. Disclosure
". (rocess rule
c. Ba$s
%. E%ucatio$
e. I$terme%iaries !ro)it*%ri&e$ i$ce$ti&e to e$sure +ualit,
-. ./at is %i))ere$t a"out commo$ stoc0
a. Centrality of capital markets !rices %etermi$e allocatio$ o) ca!ital1 so #a$t accurate
!rice si2$als eco$omic 2ro#t/
". Importance of investments relative to other decisions lar2e )ractio$ o) $et #ort/
c. Irrational reed ris e$tire sa&i$2s
%. Intani!le %e!e$%s o$ e3!ertise 4i$)o $o#$ ", i$si%ers5 i$)ormatio$al
as,mmetr,
e. "nderlyin value "ase% o$ ca!ital a!!reciatio$1 %i&i%e$%s1 li+ui%atio$
). Collective Action Pro!lem i$&estors too $umerous to "a$% to2et/er
6. #fficient Capital $arket Hypothesis %#C$H&: 7o# t/e maret lear$s
a. 'eak(form8 all i$)ormatio$ co$cer$i$2 /istorical !rices is )ull, re)lecte% i$ curre$t
!rice
". Semi(stron8 stoc !rices i$cor!orate all !u"licl, a&aila"le i$)o 4i.e. /istorical i$)o 9
curre$t !u"lic i$)o5 !rotecte% i) !urc/ase at curre$t stoc !rice.
c. Stron(form8 !rices i$cor!orate all i$)ormatio$1 #/et/er !u"licl, a&aila"le or $ot.
1
B. Securities )isclosure
1. 'ays to value securities:
a. Technical analysis /istorical stoc !rice !atter$s
". *undamental valuation (D: ; e3!ecte% !a,me$t < %iscou$t
i. Discou$t )or time &alue o) mo$e,
I. Reaso$s )or8 i$)latio$1 u$certai$t, o) retur$1 im!atie$ce</e%o$ism
ii. (D: ; cas/ )lo# < 41 9 r5
t
I. Riss CA(M8 R ; R
)
9 "eta4R
m
R
)
5
'. *irm(specific information worth knowin
a. (ro=ectio$s e3!ecte% costs a$% cas/ )lo#s
". Busi$ess !la$1 Use o) !rocee%s o) I(O
c. Ca!ital structure
%. Sources o) )i$a$ci$2
e. >uali)icatio$s o) ma$a2eme$t
). Riss "usi$ess1 liti2atio$1 re2ulator,
2. Com!etitors 42e$eral i$)o5
/. ?Curre$t stoc !rice )or1 e.2.1 GE 4ECM75
-. +on(leal Incentives to )isclose
a. Issuer: attract i$&estors1 %isti$2uis/ co. )rom com!etitors #/o %o$@t %isclose
". "nderwriter, accountants, etc.: mai$tai$ re!utatio$ #it/ clie$ts
6. Aruments for mandatory disclosure:
a. Sol&es coordination pro!lem 4lie U.S. GAA(5
". Aency costs accurate %isclosure /el!s %irectors %isci!li$e ma$a2ers
c. Positive e-ternalities
i. I$crease accurac, o) securities !rices
ii. Airm*s!eci)ic i$)o use)ul to com!etitors a$% t/ir% !arties
%. )uplicative research ot/er#ise i$%i&i%uals #oul% )u$% #aste)ul researc/
C. Securities .aw Apparatus
1. Securities #-chane Act of /012 %#-chane Act&
a. (rimaril, re2ulates seco$%ar, maret tra$sactio$s
". (rotects !rimaril, t/rou2/ %isclosure o"li2atio$s
i. A$ti)rau% Lia"ilit, * B 1C4"51 Rule 1C"*D
'. Securities Act of /011 %Securities Act&
a. Re2ulates !rimar, maret tra$sactio$s
". T/ree A!!roac/es
i. Ma$%ator, Disclosure 4re2istratio$ %ocume$t a$% !ros!ectus5
ii. Gu$*=um!i$2 rules
iii. 7ei2/te$e% A$ti)rau% lia"ilit,
'
II. MATERIALITE
A. 'hat $atters to Investors3
1. 'anted I$)ormatio$ salie$t to mai$2 i$&estme$t %ecisio$s
'. +ot 'anted
a. %Buried facts doctrine5 iA %isclose too muc/1 u$%ermi$es &alue o) important i$)o.
". Disclose !ri&ate i$)o 4e.2.1 CEO /eart attac5 %eter 2oo% !eo!le )rom "ecomi$2 CEO
c. Disclose secret !la$s com!a$ies less i$cli$e% to "e com!etiti&e
B. The $ateriality Threshold
1. 4ule /5!(6 antifraud lia!ility8
a. It s/all "e u$la#)ul
i. )or a$, !erso$1
ii. in connection with the purchase or sale of any security1
iii. to
I. mae a$, untrue statement of a material fact1 OR
II. omit to state a material fact $ecessar, i$ or%er to mae t/e stateme$ts ma%e1 i$
t/e li2/t o) t/e circumsta$cesF$ot mislea%i$21
'. SA 4ule 257 and S#A 4ule /8!(85 catc/all8
a. I$ a%%itio$ to i$)o re+uire% i$ a stateme$t1 there shall be added such further material
informationFas ma, "e $ecessar, to mae t/e re+uire% stateme$tsF$ot mislea%i$2.
". Ca$$ot mae a G/al) trut/H i$ i$)o )ile% #it/ SEC.
-. Item /5/%a& of 4e S(9 a$% S*I 4$o$*)i$a$cial i$)o5
a. Descri"e t/e general development of business o) t/e re2istra$tF%uri$2 t/e !ast D
,earsF.I$)ormatio$ s/all "e %isclose% )or earlier !erio%s i) material to a$
u$%ersta$%i$2 o) t/e 2e$eral %e&elo!me$t o) t/e "usi$ess.
-
C. 'hat is $aterial3
1. :alues in a $ateriality Test
a. Predicta!ility: GI $o# it #/e$ I see itH is u$!re%icta"leJ com!a$ies $ee% 2ui%a$ce
". Accuracy: Eou #a$t to /i$2e lia"ilit, o$ im!orta$t i$)o1 i2$ore u$im!orta$t i$)o
'. $ain 4ule %Basic/TSC Industries&
IA
a. t/ere is a su!stantial likelihood
". t/at %isclosure o) certai$ i$)ormatio$ #oul% /a&e "ee$ &ie#e% ", t/e reasona!le
investor
c. as
i. important in decidin whether to !uy or sell t/e securit,1 OR
ii. /a&i$2 sinificantly altered the total mi- of information ma%e a&aila"le1
T7EN t/e i$)ormatio$ is material.
-. Interpretations of $ain 4ule
a. I 9now It 'hen I See It
i. Not #/at courts sa,1 "ut !ossi"l, #/at some %o
". Pro!a!ility - $anitude 4Basic v. Levinson5
i. Test
4(ro"a"ilit, o) E&e$t5
I
4A$tici!ate% Ma2$itu%e o) E&e$t i$ li2/t o) totalit, o) com!a$, acti&it,5
ii. B"T #/at is t/e t/res/ol%0J Basic Court 2a&e $o 2ui%a$ce
c. 4ule%s& of Thum!
i. +umerical Cutoffs ( REKECTED IN Ganino
I. #-amples
A. L IM o) Assets<Re&e$ue<I$come N O Material 4Ganino lo#er court5
B. P QDCM o) RRRRRR N Material 4SC su22estio$5
II. 4ationale8 Certai$t,
III. Pro!lem8 Roa%ma! to )rau% 4com!a$, $o#s /o# muc/ "a% it ca$ %o5
ii. Presumptions ( OK1 T/ou2/ I$su))icie$t
I. L DM o) Re&e$ue N (ro"a"l, O Material 4SEC SAB SS5
II. But1 must also %o )ull a$al,sis o) rele&a$t co$si%eratio$s 4te3t"oo !. T15
6
%. $arket 4eaction Test 4Ganino1 Merck5
i. Test
IA
I. Com!a$, tra%es o$ e))icie$t maret1 AND
II. Maret %oes $ot si2$i)ica$tl, mo&e #/e$ i$)o re&eali$2 !ast )rau% release%1
T7EN i$)ormatio$ $ot material
ii. 4ationale: Decisio$*maer i$&estors1 $ot =u%2e
I. B"T, =u%2e must still use =u%2me$t i$ %etermi$i$2 i$)o e&e$t %ate 4see Merck5
iii. #vent Study
I. Information #vent )ate: ./e$ $e# i$)o re&eali$2 !ast )rau% is ma%e !u"lic
A. 4ule %Merck&
IA1 2i&e$ a&aila"le !u"lic i$)o1 a$al,st ca$ )i2ure out si2$i)ica$ce o) i$)o at
issue1
T7EN i$)o /as "ee$ %isclose%
II. #vent 'indow
A. 1*- %a,s arou$% e&e$t %ate
B. Calculate e3!ecte% retur$ t/at com!a$, s/oul% recei&e 2i&e$ o&erall maret
mo&eme$t %uri$2 e&e$t #i$%o#
III. %Calculate& A!normal 4eturn ; Actual retur$ E3!ecte% Retur$
I:. Sinificance of A!normal return: Calculate !ro"a"ilit, a"$ormal retur$ is
statisticall, %i))ere$t )rom Uero
e. Total $i- %)efenses&
i. ;Truth on the $arket< )efense 4Food Lion5
IA i$)o re&eali$2 !ast )rau% re&eals o$l, #/at is alrea%, #ell*$o#$1
T7EN i$)o is $ot material
ii. ;Bespeaks Caution< )efense
IA )or#ar%*looi$2 stateme$ts accom!a$ie% ", %isclosure o) riss t/at ma, !reclu%e
)or#ar%*looi$2 !ro=ectio$ )rom comi$2 to )ruitio$1
T7EN stateme$ts $ot material
iii. ;Puffery< )efense 4Food Lion5
IA alle2e% misstateme$t Gt/e i$% o) !u))er, a$% 2e$eraliUatio$s t/at reaso$a"le
i$&estors coul% $ot /a&e relie% o$ #/e$ %eci%i$2 #/et/er to "u, or sell1H
T7EN misstateme$t $ot material
D
6. *orward(.ookin Information8 Basic v. Levinson 4U.S. 1SSV1 !. 6T5 4%e$, mer2er5
a. Held8 E3!licitl, %e$,i$2 rumors a"out t/e !ossi"ilit, o) a mer2er coul% "e a material
misstatement u$%er !ro"<ma2$itu%e test 4rema$%e%5.
". 4e=ects areement(in(principle %AIP& test
i. AIP Test: a$, i$)ormatio$ !rior to #/e$ com!a$ies a2ree o$ !rice<structure is
!resum!ti&el, immaterial.
ii. >ustifications for AIP Test
I. Bri2/t li$e
II. Aalse o!timism calme%
III. Secrec, &alue% ", ac+uirer
iii. 'hy AIP Test 4e=ected
I. Bri2/t li$e is o&er* a$% u$%er*i$clusi&e as to #/at a Greaso$a"le i$&estorH #oul%
lie to $o#
II. I$&estors %eser&e trut/ t/rou2/ %isclosure1 $ot !ater$alism.
III. Secrec,8 D@s %i% $ot /a&e %ut, to %isclose so coul% /a&e sta,e% sile$t1 "ut t/e,
c/ose to lie.
A. Lies tai$t t/e maret1 "ut silence does not taint other disclosures.
D. Historical *acts8
a. Ganino v Citizens Utilities 4'% Cir. 'CCC1 !. DD5 4accou$ti$2 c/a$2e5
i. Held8 T/e com!lai$t success)ull, alle2es W1C.1m accou$ti$2 lie is material
misrepresentation a$% ca$$ot "e %ismisse%.
I. Lie Basic1 re=ects )ormulaic a!!roac/ to assessi$2 materialit,1 i.e. %oes $ot use
%istrict court@s -*1CM o) re&e$ue rule o) t/um".
ii. ?ualitative factors8 ma, cause misstateme$ts o) +ua$titati&el, small amou$ts to "e
material1 e.2. i)8
I. Misstateme$t mass c/a$2e i$ ear$i$2s<tre$%s.
A. 7ere DC*,ear ear$i$2s tre$% $ot met
II. Misstateme$t /i%es )ailure to meet a$al,sts@ co$se$sus e3!ectatio$s )or t/e
e$ter!rise.
III. Accou$ti$2 error is intentional
I:. XNot clear #/et/er &er, lar2e $um"er is always materialY.
iii. Stock price@market reaction ca$ smoe out materialit,
I. Taes %ecisio$ out o) =u%2e@s /a$%s a$% !uts it i$ /a$%s o) reasonable i$&estor.
". In re Merck & Co. 4-% Cir. 'CCD1 !. T-5 4Me%co co*!a,me$t !ro"lem5
i. Held8 No material misstateme$t or omissio$ ", Merc.
I. Trut/ came out #/e$ Merc )ile% )orm S*11 $ot .SK article 4a)ter #/ic/ stoc
%ro!s 1'.-M5 "ecause a$al,sts coul% /a&e %o$e .SK calculatio$ s/o#i$2
ma2$itu%e o) mis"ooe% re&e$ues "ase% o$ S*1.
A. .SK t/us !ro&i%e% $ot/i$2 new.
T
T. The ;Total $i-<8 Longman v. ood Lion 46t/ Cir. 1SSS1 !. TV5 4(rimeTime
%ocume$tar,5
a. Holdin /8 No material misstateme$t or omissio$ #<r<t la"or la#s "ecause maret )irst
lear$e% a"out !ro"lems i$ 1SS11 so truth was already out ", 1SS' %ocume$tar, did
not alter the ;total mi-< of information ;truth on the market< defense.
i. 4ule of thum!8 (ro"lem alle2e% earlier ", U$io$ also $ot material "<c settleme$t
", com!a$, )or less t/a$ t#o ce$ts !er s/are.
ii. $arket reaction8 Court loos at time o) settleme$t1 "ut i) co$siste$t #it/ Gtotal
mi3H s/oul% loo at 1SS1Z
iii. SC8 Maret /as pieces to )i2ure out lie i$ Merck1 "ut /ere $ot as strai2/t)or#ar% as
multi!l,i$2 $um"ers.
". Holdin 88 No material misstateme$t #<r<t u$sa$itar, co$%itio$s "ecause stateme$ts
ma%e a"out /a&i$2 Gclea$ storesH is mere puffery.
i. (eo!le e3!ect a$% %iscou$t !u))er, su"set o) Gtotal mi3H ar2ume$t
[
III. .7AT IS A SECURITE0
A. Backround
1. Securities 4eime
a. Ma$%ator, %isclosure
". Ae%eral a$ti)rau% lia"ilit,
c. (u"lic o))eri$2 a$% !ri&ate !laceme$t !roce%ures
'. Security %statutory def&
a. A8%a&%/&, B11 Act
i. Safety :alve: Gu$less t/e co$te3t ot/er#ise re+uiresH
ii. Cateories of Securities
I. I$strume$ts commo$l, $o#$ as securities 4e.2.1 stocs1 "o$%s5
II. I$strume$ts s!eci)ie% as securities 4e.2.1 )ractio$al u$%i&i%e% i$terest i$ 2as1 oil1
or ot/er mi$eral ri2/ts5
III. Catch(all provision C investment contract
A. Courts %etermi$e #/et/er )i$a$cial i$strume$t is securit,
B. Sto!s o!!ortu$istic !romoters )rom a&oi%i$2 securities la#s
". A1%a&%/5&, B12 Act
i. De)i$es securit, )or seco$%ar, maret
B. ;"nless the conte-t otherwise reDuires<
1. 4ule %!aniel&
IA )e%eral $o$*securities la# re2ulates a certai$ tra$sactio$ t,!e1
T7EN !resume a2ai$st t/e tra$sactio$@s i$&ol&i$2 securities
'. Applications
a. !aniel 4U.S. 1S[S1 !. ST5
i. Held: (e$sio$ !la$s $ot securities1 "ecause ERISA re2ulates t/em1 so $o $ee% )or
)e%eral securities la#s
". Marine Bank:
i. Held: Certi)icate o) %e!osit is $ot a securit, "ecause com!re/e$si&e )e%eral "a$i$2
re2ulatio$s1 a$% ADIC.
c. SEC sa,s &olu$tar, !la$s #it/ em!lo,ee co$tri"utio$s are securities 4"ut e3em!te%
)rom re2istratio$ re+uireme$ts u$%er -4a54'55.
V
C. Investment Contract
1. $ain 4ule %"o#e$&
IA1 t/rou2/ a co$tract1 tra$sactio$1 or sc/eme1
a. A !erso$ i$&ests /is mo$e,1
". I$ a commo$ e$ter!rise1 a$%
c. Is le% to e3!ect !ro)its
%. Solel, )rom t/e e))orts o) ot/ers 4!romoters or t/ir% !arties51
T7EN t/e co$tract1 tra$sactio$1 or sc/eme is a$ Gi$&estme$t co$tract
'. 4ationale8 Su"sta$ce o&er )orm 4i.e. same eco$omics as securit,5
-. Applications@Interpretations of $ain 4ule
a. S%C v. &.'. "o#e$ Co. 4U.S. 1S6T1 !. S15 4Alori%a ora$2es5
i. Held8 .and sales contract to "u, a stri! o) la$% !lus o))er o) a service contract1
#/ere mo$e, is %istri"ute% pro rata1 is a$ investment contract.
I. ./at matters is t/at !aca2e #as offered1 e&e$ i) $ot e&er,o$e taes ser&ice
co$tract.
ii. Application of "o#e$ test8
I. I$&estme$t ,es
II. Commo$ e$ter!rise ,es1 mo$e, "ei$2 !oole% a$% t/e$ !ro rata 4i.e. )ortu$es
are tie% to2et/er5
III. E3!ectatio$ o) !ro)its ,es1 !ur!ose is !ro)its
I:. Solel, e))orts o) ot/ers ,es1 i$&estors are !assi&e.
A. Retur$s %e!e$% u!o$ 7o#e,*i$*t/e*7ills ser&ice !ro&i%er.
". Investment of $oney
i. 4ule %!aniel& 4some#/at +uestio$*"e22i$25
IA a$ e3!e$%iture is a$ i$&estme$t o) mo$e,1
T7EN t/e e3!e$%iture #as not a li&eli/oo% %ecisio$1 "ut a$ i$&estme$t
ii. !aniel 4U.S. 1S[S1 !. ST5
I. Held8 U$io$ !e$sio$ !la$ t/at is mandatory a$% noncontributory is $ot a$
i$&estme$t co$tract a$% t/ere)ore $ot a securit,1 "<c $ot a$ i$&estme$t %ecisio$
II. 4ationale8 Aactual )i$%i$2 t/at ( did not invest mone$ "ecause %ecisio$ to #or
)or com!a$, is a livelihood decision, not a decision that affected capital
markets.
A. Alter$ati&es )or ( #ere $ot ca!ital marets o!tio$s1 "ut li&eli/oo% o!tio$ss
tem!oral %i))ere$ce as to #/at is i$ !erso$@s mi$% #/e$ mai$2 %ecisio$.
B. (eo!le i$&est to 2et more mo$e,1 "ut #or to li&eZ
C. 7ere ( %i% $ot 2i&e u! Gsome ta$2i"le a$% %e)i$a"le co$si%eratio$ i$ retur$
)or a$ i$terestH #it/ c/aracteristics o) a securit,.
S
c. Common #nterprise
i. Circuit Split Ever HoriFontal Commonality %HC& and :ertical Commonality
%:C&
I. Three )ifferent 4ules
A. HC 4eDBd %SG&: Commo$ E$ter!rise N 7oriUo$tal Commo$alit,
B. :C Suff.: :ertical Commo$alit, N Commo$ E$ter!rise
C. #ither: Commo$ E$ter!rise N 7C :C
II. HoriFontal Commonality %def&8 2rou!s o) i$&estors pooled to2et/er a$% their
returns are tied together1 i.e. all ear$ same retur$ !er)orma$ce M 4e.2. commo$
stoc5.
III. :ertical Commonality
A. )ef8 ce$traliUe% !romoter a$% &arious i$&estors1 "ut i$&estors coul% ear$
different returnsJ !romoter@s e))orts im!act i$%i&i%ual i$&estors collecti&el,
B. Broad vs. +arrow
1. Two )ifferent 4ules
a. Broad 4eDuired: :C N Broa% Commo$alit,
". +arrow Sufficient: Narro# Commo$alit, N :C
'. Broad %def&8 .ell*"ei$2 o) all i$&estors %e!e$%e$t u!o$ !romoter
e3!ertise
-. +arrow%def&8 .ell*"ei$2 o) i$&estors %e!e$%e$t eit/er u!o$ !romoter
or t/ir%*!art, e3!ertise
ii. S%C v. SG Ltd. 41st Cir. 'CC11 !. 1C15 4(o$Ui sc/eme #e"site1 !romise% 1CM
retur$5
I. Held8 SEC alle2e% )acts t/at satis), Howey*test a$% su!!ort assertio$ t/at
o!!ortu$it, to i$&est i$ s/ares o) !ri&ile2e% com!a$, is i$&estme$t co$tract.
II. Adopts horiFontal commonality
A. 4ationale8 Nice "ri2/t li$e rule1 lie )acts i$ Howey1 a$% Securities Act
re+uires uniform %isclosure to all i$&estors1 #/ic/ maes se$se o$l, i)
i$&estors o"tai$ t/e same1 u$%i&i%e% s/are i$ !ool o) assets < !ro)its. i.e.
7omo2e$ous !re)ere$ces eco$omies o) scale.
B. But %oes$@t t/is ratio$ale still a!!l, i) SVM commo$ )actors a$% 'M
i$%i&i%ualiUe%0
III. Application8 7oriUo$tal commo$alit, /ere "ecause clear G!ooli$2H a$% (o$Ui
sc/eme #ill colla!se )or e&er,o$e
A. (o$Ui sc/eme re+uisite profit and risk-sharing to su!!ort /oriUo$tal
commo$alit,.
B. But is$@t it %i))ere$t #it/ re)erral )ees0
1C
%. #-pectation of Profits 4$o# usuall, com"i$e% #it/ i$&estme$t o) mo$e,5
i. 4ule %orman&
IA i$&estor is Gle% to e3!ect !ro)itsH
T7EN i$&estor reasona!ly e3!ects !ro)its
ii. Considerations
I. Consumption: I) lar2e consumption purpose1 t/e$ $ot a$ i$&estme$t
II. Timin8 I) imme%iate co$sum!tio$1 t/e$ $ot a$ i$&estme$t
iii. orman 4U.S. 1S[D1 !. 1CS5 4GstocH i$ Co*o! Cit,1 W'D !er s/are to 2et a!t.5
I. Held8 T/e stoc is $ot a Gsecurit,H
II. Issue /: 'hether the ;stock< was a stock
A. Test8 Loo to tra%itio$al c/aracteristics o) stoc $o$e /ere8
1. )ividend rihts $ot a%&ertise%1 %e mi$imis "e$e)its 4e.2. Lau$%romat5
'. Capital appreciation $o$e
-. :otin rihts ,es o$ /ousi$2 issues1 "ut not tied to shares 4o$e &ote
!er a!artme$t5
6. Transfera!ility $o1 /a% to tra$s)er s/ares "ac to com!a$, at original
price
B. Em!/asis o$ su!stance over form1 a$% eco$omic realit,
C. SC8 >uestio$s #/et/er t/ese are 2oo% )actors "ecause ca$ c/a$2e /,!o to
meet all )actors.
III. Issue 8: 'hether the ;stock< was an investment contract
A. #-pectation of profits8 (ur!ose o) re$ter*i$&estor te$a$ts is to live i$
/ouseZ Aorm is GstocH "ut su"sta$ce is G%e!ositH consumption $ot
i$&estme$t.
1. Same e&e$ i) %e mi$imis "e$e)it )rom su!ermaret !er)orma$ce.
'. (ro)its ; eit/er ca!ital a!!reciatio$ or i$come ,iel%e% ", a$ i$&estme$t
4!eo!le t/i$ a)ter Forman i$&estme$t co$tract limite% to &aria"le
a!!reciatio$5.
a. (ro)it $ot )rom stores a$% ser&ices #/ic/ #ere esta"lis/e% to mae
ser&ices a&aila"le to te$a$ts
". (ro)it $ot )rom !ossi"ilit, o) re$tal re%uctio$
B. SC8 Some courts t/ou2/t mo&i$2 to#ar% o$e %e)i$itio$ o) securit,1 a u$i)ie%
test 4i.e. Howey test5 "ecause em!/asis o$ su"sta$ce o&er )orm.
i&. S%C v. %d#ards 4U.S. 'CC61 !. 11T5 4!a,!/o$es5
I. Held8 A$ i$&estme$t sc/eme !romisi$2 fi-ed rate of return 4!ro&i%e% /ere to
i$&estors )rom sale*lease"ac a2reeme$t #it/ tele!/o$e com!a$,5 counts as
profits )or !ur!oses o) Howey test i$&estme$t co$tract a$% securit,.
A. Profits include fi-ed, uaranteed payments over time 4%es!ite Forman5
$ote or %e"t coul% also "e i$&estme$t co$tract1 still ris o) %e)ault a$%
)alse se$se o) co$)i%e$ce )rom G2uara$tee%H )i3e% rate.
11
e. #fforts of Another
i. 4ule %Merc(ant Capital @ Li)e *artners&
IA i$&estme$t is ", t/e Ge))orts o) a$ot/er1H
T7EN
I. (ro)its are 2e$erate% predominantly ", t/e e))orts o) ot/ers1 OR
II. I$&estor retai$s little a"ilit, to co$trol t/e !ro)ita"ilit, o) t/e i$&estme$t
ii. +otes
I. Courts %o $ot rea% Gsolel,H i$ Howey literall,
iii. Considerations %Merc(ant Capital&
I. In General
A. .ack of investor power
B. .ack of investor e-pertise, knowlede %dependency on manaement&
C. .ack of a!ility to replace manaement, other control
D. Investment dependent on luck, manaementBs function ministerial
II. Timin(4elated
A. I$te$t at time o) co$tract a2reeme$t 4Merchant apital5
III. *ormal vs. Actual: Two :iews
A. Actual Co$trol 4Merchant apital5
B. Aormal Co$trol i$ Co$tract 4!ivanna "rawlers5
i&. Applications
I. Partnerships
A. General Partnership
1. I$terest 2e$erall, not a securit, "<c power to control management of
partnership
'. (resume not t/rou2/ e))orts o) ot/ers.
B. .imited Partnership
1. I$terest 2e$erall, a securit, "<c t,!icall, $o co$trol
#. $resumed to be securities
C. .imited .ia!ility Partnership 4Merchant5
1. (art$ers as ma=orit, /a&e co$trol to )ire</ire ma$a2i$2 !art$er1 "ut
limite% lia"ilit,
'. A!!l, GI$ Ge$eralH co$si%eratio$s a"o&e
D. Merc(ant Capital 411t/ Cir. 'CC[1 !. 1'C5 4i$&est i$ RLL(s1 Merc/a$t is
MG(5
1. Held8 RLL( i$terests #ere i$&estme$t co$tracts1 t/e i$&estors 4limite%
lia"ilit, !art$ers5 #ere e3!ecti$2 !ro)its through the efforts of another
II. S%C v. Li)e *artners 4D.C. Cir. 1SST1 !. 1'[5 4outsi%e )actor !rimar,
%etermi$a$t5
A. *acts8 (re*!urc/aser ser&ices ", !romoter to mae !ool co$tract
a2reeme$t !ost*!urc/ase ser&ices to e$sure !remiums !ai%.
B. Held8 (ool o) li)e i$sura$ce !olicies is not an investment contract pro)it
depends entirel$ upon mortalit$ o) insured1 a$% pre+purc(ase services as
)inder+promoter and ministerial post+purc(ase services not enoug( to
1'
esta,lis( -t(roug( t(e e))orts o) ot(ers..
C. 4ationale8
1. Pre(purchase services8 I2$ore%1 ris o) i$)ormatio$ as,mmetr, is $ot
u$i+ue to securities 4t/i$ use% cars5.
a. Clear t/at t/ese are i2$ore%.
'. Post(purchase services8 Mere ministerial functions $ot e$ou2/.
a. O$l, ris is t/at !romoters #ill em"eUUle mo$e,1 "ut a$, co$tract
e$tails some ris t/is !ro&i%es $o "asis to %isti$2uis/ securities
)rom $o$*securities.
D. Choi8 Court &ie#s Ge))orts o) ot/ersH as u$i+ue to ca!ital marets "ecause
ma$a2erial a$% e$tre!re$eurial e))orts. Loos lie %isti$2uis/i$2 "et#ee$
securities a$% $o$*securities riss.
E. Summary8 Ot/er cases sa, i) !ost*!urc/ase ,ou help seco$%ar, maret
tra%i$2 occur i$ securitiUe% !ro%ucts1 or mo$itor cre%it#ort/i$ess o)
u$%erl,i$2 assets1 t/at is e$ou2/ )or Ge))orts o) ot/ers.H
). Stock
1. 4ule %Landret(&
IA a$ i$strume$t is
a. la"ele% a stoc1 AND
". EIT7ER
i. /as some traditional characteristics of stock1 OR 4MAEBE5
ii. creates reaso$a"le i$&estor e3!ectatio$s o) !rotectio$ ", )e%eral sec@s la#s1
T7EN t/e i$strume$t is a securit,.
'. 4ationale
a. Statutory .anuae: T/e statute says Gstoc
". Conressional Intent: Co$2ress i$te$%e% sec@s la#s to co&er c/a$2e o) co$trol
tra$sactio$s.
c. Clarity: Core ca!ital marets tra$sactio$ #e %o $ot #a$t li$2eri$2 u$certai$t, a"out
#/et/er #/at is tra%e% o$ NESE is a securit, or $ot.
-. Traditional Characteristics of Stock
a. )ividend 4ihts
". Capital Appreciation
c. :otin 4ihts
%. Transfera!ility
6. Landret( Tim,er Co. 4U.S. 1SVD1 !. 1-15
a. Held8 Re=ects sale o) "usi$ess %octri$e1 stoc tra$sactio$ is a securit,.
i. Sale of !usiness doctrine8 Sale o) stoc to tra$s)er co$trol o) "usi$ess is not a
securities i$&estme$t "ecause it is $ot Gsolel, t/rou2/ e))orts o) ot/ers1H "ut rat/er
t/rou2/ e))orts o) !urc/aser. E&e$ t/ou2/ it is a stock1 a$al,sis s/oul% tur$ o$
eco$omic realities1 $ot )orm 4co$siste$t #< &ie# t/at all t/at matters is Howey test5
". +ote8 No more u$i)ie% test %i))ere$t cate2ories matter 4s/i)t )rom Forman5.
1-
#. +ote
1. +otes
a. 9ey Characteristics
i. Ai3e% a$% certai$ i$terest !a,me$t
ii. 7i2/er !riorit, 4relati&e to stoc5 i$ li+ui%atio$
iii. No &oti$2 ri2/ts i$ cor!oratio$
i&. Ai3e% maturit, %ate
&. Re!a,me$t o) !ri$ci!al at maturit, %ate
". )emand +ote %def&: A $ote !a,a"le o$ %ema$% o) t/e le$%er
'. 4ule %/eves&
IA a$ i$strume$t is a $ote1
T7EN t/e i$strume$t is a securit,1
UNLESS t/e i$strume$t<tra$sactio$ %oes $ot matc/ t/e ;family resem!lance< factors
a. *amily 4esem!lance *actors
i. $otivation of Seller@Buyer 4i.e. i$&estme$t )or issuer1 !ro)it )or le$%er5
ii. Plan of distri!ution 4is t/ere commo$ tra%i$2 )or s!eculatio$ or i$&estme$t05
iii. 4easona!le e-pectation of investin pu!lic
i&. Presence of alternative reulatory reime
". E!servation: GA$, $oteH is $ot a $ote "ecause ot/er#ise i) co$sumer "u,s T: o$
i$stallme$t "asis )rom Best Bu,1 t/e co$sumer is issuer a$% must %isclose
-. /eves v. %rnst & 0oung 4U.S. 1SSC1 !. 1-[5 4$otes !a,a"le o$ %ema$%1 u$collateraliUe%1
u$i$sure%1 &aria"le i$terest rateJ issuer is Aarmer co*o!5
a. Held8
i. Notes are securities u$%er )amil, resem"la$ce test
ii. Also %ema$% $otes $ot #it/i$ Gless t/a$ S*mo$t/ maturit, e3ce!tio$H "ecause
#oul% "e i$co$siste$t #it/ Co$2ress@ i$te$t a$% a&oi% ma$i!ulatio$.
". Application of *amily 4esem!lance Test
i. T/is #as i$&estme$t i$ "usi$ess e$ter!rise )or !ro)it
ii. 7ere capability o) commo$ tra%i$2 "<c sol% to "roa% se2me$t o) !u"lic.
iii. A%s calle% $otes Gi$&estme$tsH a$% a%&ertise% as sa)e.
i&. No alter$ati&e re2ulator, sc/eme /ere1 so $o ris*re%uci$2 )actor.
c. 4elationship !etween /eves and "o#e$
i. E&e$ i) somet/i$2 is $ot i$&estme$t co$tract1 coul% still "e a Note u$%er !eves
ii. But1 $ot clear )rom !eves #/et/er i) somet/i$2 is $ot a Note1 coul% still "e
i$&estme$t co$tract 4coul% ru$ i$to !ro"lem o) )i$%i$2 Best Bu, customer #/o "u,s
o$ cre%it a$ GissuerH #/o must re2ister t/e $ote5
16
I:. DISCLOSURE AND ACCURACE
A. Secondary $arkets
1. (ur!oses
a. Li+ui%it, more liel, to )i$% "u,er o$ e3c/a$2e1 elimi$ates illi+ui%it, %iscou$t
". S!ee%
c. (rice Tra$s!are$c, see #/at !rices ot/ers are #illi$2 to !a,
'. +asdaD $arket $akers8 i$stitutio$s i$ "usi$ess o) !ro&i%i$2 li+ui%it, 4e.2. #ill co$$ect
t#o "roera2e /ouses lie E*Tra%e a$% Merrill5
a. Mae !ro)it o$ "i%*as s!rea%
". Ris i$&ol&e% t/at maret as a #/ole #ill s/i)t
-. +HS# centraliFed specialist8 /el!s matc/ "u,ers<sellers.
B. )isclosure in the Secondary $arket
1. Reaso$s )or mandatory disclosure8
a. StandardiFation8 ca$ com!are com!a$ies
". Aency costs8 ma$a2ers ot/er#ise /esita$t to %isclose i$)o t/at /i2/li2/ts /o# muc/
t/e, are tai$2 )rom s/are/ol%ers 4i.e. com!e$satio$5
c. #conomies of scale @ duplicative info research8 I) i$)ormatio$ is alrea%, $o#$1
researc/ e3!e$se #oul% "e %u!licati&e a$% #aste)ul.
i. Stoc !rice #ill also "e more accurate
%. Evercomes e-ternality pro!lem8 )irms #oul% $ot ot/er#ise create "e$e)its to
i$&estors1 com!etitors o) releasi$2 i$)ormatio$
'. Important Issues with $andatory )isclosure
a. Someo$e must %etermi$e #/at i$)o must "e %isclose%
". Someo$e must e$sure %isclose% i$)o is trut/)ul
1D
C. 'hat is a ;Pu!lic Company<3
1. Pu!lic Company I #-chane Act 4eportin Issuer %#A4I&
'. $ain 4ule
IA a com!a$, is a !u"lic com!a$,1
T7EN t/e com!a$, /as &arious re+uireme$ts 4see "elo#5
-. Three 'ays to Gain Pu!lic Company Status
a. 4ule
IA a com!a$,
i. is listed on a national securities e-chane
ii. /as a minimum level of assets AND minimum num!er of eDuity holders1 OR
iii. /as filed a reistration u$%er t/e Securities Act #/ic/ /as "ecome e))ecti&e1
T7EN t/e com!a$, is a !u"lic com!a$,
". .istin on a +ational Securities #-chane %A /8%a&&
i. Re2istratio$ !rocess set )ort/ u$%er B1'4"5
ii. E.2. NESE1 AMEI1 re2io$al e3c/a$2es1 Nas%a+
c. $inimum .evel of Assets and #Duity Holders %A /8%&&
i. $inimum .evels %4ule /8(/&
I. $inimum Asset .evel: W1C millio$
II. $inimum #Duity Holder .evel: DCC (erso$s
ii. Time of $easurement: Last Da, o) Issuer@s Aiscal Eear
%. #ffective 4eistration Statement under Securities Act %A/6%d&& 4!u"lic o))eri$25
i. Maes !ri&ate !laceme$t more attracti&e
ii. Status 4eDuirements and #-ceptions
I. 4eDuirements
A. (erio%ic %isclosure re+uireme$ts 4B 1-5
II. #-ceptions
A. Sectio$ 16
B. Sectio$ 1T
6. Pu!lic Company Status 4eDuirements
a. Section /1: 4eportin 4eDuirements
". Sectio$ 168 (ro3,<Te$%er o))er rules
c. Sectio$ 1T8 S/ort s#i$2 !ro)it rules
%. Sar"a$es*O3le,
e. #-ceptions for A /6%d& Pu!lic Companies %see a!ove&
1T
D. Termination of Pu!lic Company Status
a. $ain 4ule
IA a com!a$, ma, termi$ate its (u"lic Com!a$, status1
T7EN
i. %if PC under AA /8%a&(%!&& T/e com!a$, /as %eliste%1
ii. %if PC under A /8%&& T/e com!a$, /as certi)ie% to t/e SEC
EIT7ER
I. T/at it /as L -CC s/are/ol%ers o) recor%
II. T/at it /as /a% L DCC S7s a$% L W1Cmm i$ assets o$ t/e last %a, o) eac/ o) its
!rior t/ree )iscal ,ears1
AND
iii. %if PC under A /6%d&& T/e com!a$,
I. 415 /as certi)ie% to t/e SEC 4'5 t/at it /as L -CC /ol%ers o) recor% 4-5 at t/e
"e2i$$i$2 o) a )iscal ,ear 465 "esi%es ,ear i$ #/ic/ t/e re2istere% !u"lic o))eri$2
"ecame e))ecti&e1 AND
II. Does $ot 2et \ -CC /ol%ers o) recor% i$ a$, su"se+ue$t )iscal ,ear
". S!ecial Rules )or Aorei2$ Issuers %4ule /8h(J&
c. 4ationale8 I) &er, small co.1 cost outweighs benefit o) )orci$2 ma$%ator, %isclosure
4a$% u$$ecessar, "<c less collecti&e actio$ !ro"lem5
Section Trier 4eDuirements Termination
A /8%a&
and A
/8%!&
Be liste% o$ a
Natio$al E3c/a$2e
*(erio%ic )ili$2s
*(ro3, rules 9 a$$ual re!ort
*Te$%er o))er rules
*I$si%er stoc tra$sactio$s
4A/J5
*Sar"a$es O3le,
Delisti$2 A+) eit/er8
a5 L -CC s/are/ol%ers E4
"5 L DCC s/are/ol%er A+) L
W1C millio$ i$ assets )or -
,ears
A /8%& More t/a$ DCC
S/are/ol%ers A+)
More t/a$ W1C
millio$ i$ assets
*(erio%ic )ili$2s
*(ro3, rules 9 a$$ual re!ort
*Te$%er o))er rules
*I$si%er stoc tra$sactio$s
4A/J5
*Sar"a$es O3le,
Eit/er8
a5 L -CC s/are/ol%ers E4
"5 L DCC s/are/ol%er A+) L
W1C millio$ i$ assets )or -
,ears
A/6%d& Re2istere% (u"lic
O))eri$2 u$%er @--
Act sometime i$ t/e
!ast
*(erio%ic Aili$2s
*Sar"a$es*O3le,
L -CC s/are/ol%ers A+) $o
earlier t/a$ 1 ,r )ollo#i$2
t/e re2istratio$ stateme$t
2oi$2 e))ecti&e. 4o$l,
sus!e$%e%5
1[
Ge$ui$e
Termi$atio$
Mere
Sus!e$sio$
). 'hat Information $ust a Pu!lic Company )isclose3
1. Interated disclosure system
a. A/1%a& of #-chane Act
i. 4ule
IA !u"lic com!a$,1
T7EN com!a$, must )ile V*K1 1C*K a$% 1C*>
ii. *orms 7(9, /5(9, and /5(?
I. Aorm V*K e!iso%ic
II. Aorm 1C*K a$$ual
III. Aorm 1C*> +uarterl,
". Ether *orms
i. Aorms S*11 S*- !u"lic o))eri$2s
ii. Sc/e%ule 16A !ro3, stateme$t
c. All Aorms re)ere$ce Re2s. S*K a$% S*I
1V
'. *orm 7(9
a. 4eDuirements
i. Content: e3tremel, im!orta$t e&e$ts
ii. Timin8 Disclosure #<i$ 6 "usi$ess %a,s o) e&e$t
". ;#-tremely Important #vents<
i. 4eistrantBs Business K Eperations
I. $aterial )efinitive Areements 4V*K B 15
A. )efinition: co$tracts outsi%e or%i$ar, course o) "usi$ess
B. I$clu%es letters o) i$te$t ONLE IA letter im!oses e$)orcea"le o"li2atio$s
II. Aili$2 o) "a$ru!tc, or recei&ers/i!
ii. *inancial Information
I. Eff Balance Sheet Arranements 4V*K B '5
A. O)te$ i$clu%es sales o) u$%er!er)ormi$2 assets to Gs!ecial !ur!ose e$titiesH
II. $aterial Impairments of Assets 4V*K B '5
A. I$clu%es %ecli$e i$ 2oo%#ill &alue
iii. Securities K Tradin $arkets
I. Shareholder Interests 4V*K B -5
A. Delisti$2 or listi$2 c/a$2eJ sale o) u$re2istere% securitiesJ c/a$2e i$ ri2/ts
o) s/are/ol%ers
i&. $atters 4elated to Accountants K *inancial Statements 4V*K B 65
I. C/a$2e i$ au%itorJ %isa2reeme$ts #it/ )ormer accou$ta$ts "e)ore c/a$2eJ
restateme$t o) !rior )i$a$cial results or %etermi$atio$ o) $ee% )or c/a$2e
&. Corporate Governance K $anaement
I. C/a$2e i$ Co$trol
II. $atters 4elatin to )irectors K Principal Efficers
A. Aact a$% %ate o) %e!arture or electio$<a!!oi$tme$t o)
B. 4easons 4eistrant Believes Caused )eparture
1. )irectors: Ees i) relates to re2istra$t@s o!eratio$s1 !olicies or !ractices
'. Principal Efficers: No
III. CompanyBs Code of #thics 4V*K B D5
A. Disclosure o) #/at co%e is1 or e3!la$atio$ o) #/, t/ere is $o$e1 a$% #ai&ers
)rom
&i. 4No$e Reser&e% )or later use5
&ii. 4eulation *)
I. A$, %isclosure re+uire% to com!l, #it/ Re2ulatio$ AD
&iii. 4O!tio$al5 Anythin Issuer Considers 4elevant to Shareholders
i3. *inancial Statements K #-hi!its 4)or "usi$esses ac+uire% ", t/e re2istra$t5
3. See Case!ook pp. /6J(6L for more specifics
c. In t(e Matter o) "e#lett+*ackard Co. 4'CC[1 !. 1DS5 4%irector o"=ects to "oar% &ote
a$% resi2$s5
i. Held8 U$%er Item 6.58%a&, t/e com!a$,@s )ailure to %isclose reaso$s )or (eri$s@
resi2$atio$ #as &iolatio$ "<c %isa2reeme$t relate% to com!a$,@s o!eratio$s1
!olicies1 or !ractices
1S
-. *orms /5(9 and /5(?
a. 4ule: Certification 4eDuirement 4Sar"a$es*O3le,5
IA certi)icatio$ re+uireme$t satis)ie%1
T7EN CEO a$% CAO must eac/ certi), t/at
i. 7e /as re&ie#e% t/e re!ort1
ii. Base% o$ /is $o#le%2e1 re!ort %oes $ot co$tai$ material misstateme$ts or
omissio$s1
iii. Base% o$ /is $o#le%2e1 )i$a$cial stateme$ts G)airl, !rese$t i$ all material
res!ectsH t/e issuer@s results a$% )i$a$cial co$%itio$J
i&. I$ter$al co$trols are esta"lis/e% a$% mai$tai$e%
I. T/at are %esi2$e% so t/at material i$)ormatio$ is ma%e $o#$ to t/em1
II. T/at /a&e "ee$ e&aluate% )or t/eir e))ecti&e$ess ", o))icer #<i$ SC %a,s o) t/e
re!ort1
III. ./ose sou$%$ess /as "ee$ e&aluate% ", t/e o))icer i$ t/e 1C*K
&. 7e /as %isclose% to t/e com!a$,@s au%itors a$% au%it committee a$, #ea$esses i$
t/e i$ter$al co$trols a$% )rau% ", !erso$s #/o /a&e a si2$i)ica$t role i$ t/e issuer@s
i$ter$al co$trols1
&i. A$, c/a$2es to i$ter$al co$trols ma%e su"se+ue$t to t/e e&aluatio$ are %isclose% i$
t/e re!ort
". *orm /5(9 %Annual&
i. General Areas of )isclosure
I. Busi$ess
II. (ro!erties
III. Le2al (rocee%i$2s
A. Item -8 )ur$is/ i$)o re+uire% ", Item 1C- o) Re2 S*K
1. Item 1C-8 Descri"e material !e$%i$2 le2al !rocee%i$2sF
I:. Maret )or Commo$ Stoc
:. MD ] A
:I. Directors a$% O))icers
:II. E3ecuti&e Com!e$satio$
:III. Securit, O#$ers/i! o) Certai$ Be$e)icial O#$ers a$% M2mt.
II. Certai$ Relatio$s/i!s a$% Relate% Tra$sactio$s
I. (ri$ci!al Accou$ti$2 Aees a$% Ser&ices
c. *orm /5(?
i. Ai$a$cial stateme$ts $ee% $ot "e au%ite%1 "ut must com!l, #it/ GAA(
'C
6. Re2ulatio$ AD 4Re2ulatio$ o) :olu$tar, Disclosure5
a. Purposes
i. #liminate informational advantaes and disadvantaes
I. I$stitutio$al i$&estors<a$al,sts /a&e i$)ormatio$al a%&a$ta2e
ii. #liminate analyst corruption that leads to price distortions
I. A$al,sts #oul% mae "etter re&ie#s i$ or%er to mai$tai$ access to selecti&e i$)o
". Potential Pro!lem of Chillin )isclosure
i. .orr, t/at com!a$ies )eari$2 lia"ilit, u$%er Re2. AD #ill &olu$taril, %isclose less
i$)o
c. $ain 4ule
IA
i. A$ #A4I or #A4I source
ii. Intentionally or "nintentionally
iii. %iscloses material non(pu!lic information
i&. to covered persons1
T7EN t/e EARI must also mae pu!lic disclosure o) t/e i$)o
%. #A4I Source8 "hose speaking on behalf of issuer1 e.2. Gse$ior o))icialH or ot/er a2e$t
o) issuer #/o re2ularl, commu$icates #it/ co&ere% !erso$
e. Intentional vs. "nintentional
i. Intentional )isclosure
IA %isclosure to #/ic/ Re2ulatio$ AD a!!lies #as i$te$tio$al1
T7EN com!a$, must simulta$eousl, %isclose t/e i$)o to t/e !u"lic maret
ii. "nintentional )isclosure
IA %isclosure to #/ic/ Re2ulatio$ AD a!!lies #as i$te$tio$al1
T7EN com!a$, must %isclose i$)o ", t/e later o)
I. '6 /ours o) t/e selecti&e %isclosure1 OR
II. T/e time tra%i$2 comme$ces o$ t/e NESE
). $aterial +on(Pu!lic Information
i. $aterial
I. In General: See a"o&e 4Basic1 Ganino1 etc.5
II. S#C .ist of ;Hiher Pro!a!ility< $ateriality
A. Ear$i$2s i$)ormatio$
B. Mer2ers ] ac+uisitio$s1 etc.
C. Ne# !ro%ucts1 %isco&eries
D. C/a$2e o) co$trol
E. C/a$2e i$ au%itorJ Ai$a$cial restateme$ts
A. C/a$2es i$ issuer@s securities
G. Ba$ru!tc,
ii. +on*Pu!lic: I$)o /as $ot "ee$ %issemi$ate% i$ a ma$$er su))icie$t to e$sure its
a&aila"ilit, to t/e i$&esti$2 !u"lic 4%iebel5
I. Also1 #/at is t/e Gtotal mi3H0 4also see a"o&e5
II. Later stateme$ts $ee% $ot "e verbatim #/at /as alrea%, "ee$ sai%
'1
2. Covered Persons
i. Broer*%ealers
ii. I$&estme$t a%&isors
iii. I$&estme$t com!a$ies
i&. A$, e+uit, /ol%er #/o it is reaso$a"l, )oreseea"le #oul% tra%e o$ t/e i$)ormatio$
/. #-ceptions8 Re2ulatio$ AD %oes $ot a!!l, to %isclosure ma%e8
i. To a =our$alist i$ a$s#er to +uestio$s !ose% ", t/e =our$alist
ii. To !erso$ #/o o#es %ut, o) trust<co$)i%e$ce 4e.2. attor$e, or i$&estme$t "a$er5
iii. To !art, t/at e3!ressl, !romise% to ee! i$)o co$)i%e$tial
iv. In connection #it( registered pu,lic o))ering
I. 4eistration statement
II. *'P 4some5
III. Any other /5%!& prospectus
I:. Tom!stone notices
:. Eral communications
:I. B"T S## #MC#PTIE+S: 4ule /J1, 4ule /J1A
i. #nforcea!ility: SEC o$l,J $o !ri&ate ri2/t o) actio$
=. Sie,el S$stems 4SDNE 'CCD1 !. -[T5 4CAO /ol%s co$)ere$ce )or a$al,sts sa,i$2 more
o!timistic t/i$2s t/a$ CEO sai% to !u"lic5
i. Held8 Re2ulatio$ AD #as $ot &iolate%
I. 7ere stateme$t at co$)ere$ce #as not material "ecause e&uivalent in substance
to i$)o !u"licl, %isclose%.
II. (ri&ate #or%i$2 a%%e% $ot/i$2 to Gtotal mi3 o) i$)oH !u"licl, a&aila"le
#. $akin )isclosures Credi!le
1. SEC A%mi$strati&e (rocee%i$2s
B (rocee%i$2 Sa$ctio$s
'1C Cease*a$%*Desist Tem!orar, or%ers
Cease or%er )rom &iolati$2 securities la#s
Dis2or2eme$t
O))icer a$% Director "ar
Ci&il !e$alties )or accou$ti$2 )irms
1D4c5465 Disclosure :iolatio$s Or%er to sto! %isclosure &iolatio$s
'14a5 Re!ort o) I$&esti2atio$ (u"lic a$$ou$ceme$t o) &iolatio$s
1'4=51 45 Tra%i$2 Sus!e$sio$ 7alt tra%i$2 )or te$ %a,s or i$%e)i$itel,
''
:. EIC7ANGE ACT ANTIARAUD LIABILITE
A. Everview
1. #conomics of Securities *raud
a. 7o# Arau% A))ects t/e Maret
i. Influences How Investors )irect Capital
I. I$&estors i$&est i$ )rau%ule$t com!a$ies1 allo#i$2 com!a$ies to i$&est i$
!ro=ects t/at are $ot cost =usti)ie%
II. Com!a$ies retai$ mo$e, or ot/er resources "etter %e!lo,e% else#/ere
III. Com!a$ies o&erall !a, /i2/er cost o) ca!ital
ii. Shareholders "na!le to $onitor *irm Performance
I. (oor ma$a2eme$t creates illusio$ o) 2oo% !er)orma$ce
". ./, CEO mi2/t i$te$tio$all, mae )alse1 o!timistic )orecasts
i. Eptimism8 Some lies ma, $ot e&er "e )ou$% out1 ma,"e ca$ com!e$sate later o$
ii. Aency Pro!lem8 ma$a2er 2ets stoc o!tio$s a$% ma, retire "e)ore lie re&eale%
'. Securities Class Actions
a. Solve Collective Action Pro!lem
i. I$%i&i%ual !rosecutio$ o) claim is cost*!ro/i"iti&e
ii. A22re2atio$ o) i$terests is cost*e))ecti&e
". ^ attor$e, acts as e$tre!re$eur1 )i$%s lea% !lai$ti))1 )iles com!lai$t on behalf of class
-. Pro!lem of Strike Suits
a. The Pro!lem
i. 7i2/ settleme$ts )or la#suits #< less merit "<c )irms /a&e i$ce$ti&e to settle8 costl,
to 2o to trial1 %istracts ma$a2eme$t1 "a% )or re!utatio$
ii. Timin: T/e lo$2er it taes to 2et ri% o) actio$1 more liel, to settle earl, o$.
". Attempted Solution: Private Securities .itiation 4eform Act /006 %PS.4A&,
#-chane Act AA 8/) and 8/#
i. 4ationale
I. Elimi$ate )ri&olous la#suits
II. Allo# meritorious la#suits
ii. 4eDuirements
I. Re"utta"le !resum!tio$ t/at lea% ^ is s/are/ol%er #it/ lar2est )i$a$cial i$terest
i$ liti2atio$
II. (lea% #it/ !articularit, )acts t/at lea% to stro$2 i$)ere$ce o) scie$ter
III. Sta, o$ %isco&er, u$til a)ter motio$ to %ismiss
I:. Sa)e /ar"or )or )or#ar% looi$2 stateme$ts
:. Limits lia"ilit, o) _s $ot e$2a2e% i$ i$te$tio$ )rau% to !ro!ortio$ate s/are o)
/arm cause%
:I. Earl, class $otice
:II. Court re&ie# )or reaso$a"le attor$e,@s )ees
iii. *ailure: (LSRA /as $ot re%uce% $um"er o) la#suits
'-
B. #-chane Act A /5, 4ule /5!(6
1. Statutory and 4eulatory Te-t
a. Section /5
i. It s/all "e u$la#)ul )or a$, !erso$F4"5 to use or em!lo,1 in connection #it( t(e
purc(ase or sale o) an$ securit$ re2istere% o$ a $atio$al securities e3c/a$2e or a$,
securit, $ot so re2istere%Fa$, ma$i!ulati&e or %ece!ti&e %e&ice<co$tri&a$ceF
". 4ule /5!*6 %$AI+ 4".#&
Actio$a"le &iolatio$ IA
i. a$, !erso$
ii. %irectl, or i$%irectl,1
iii. %transactional ne-us& in connection with t/e purchase or sale o) a$, securit,1
i&. %=urisdictional ne-us& ", t/e use o) a$, mea$s or i$strume$talit, o) interstate
commerce1 or o) t/e mails or )acilit, o) a$, $atio$al securities e3c/a$2e1
&. ANE OA
I. em!lo,s a$, %e&ice1 sc/eme1 or arti)ice to defraud1
OR
II. EIT7ER
A. maes a$, untrue statement of a material fact1 OR
B. omits to state a material )act $ecessar, i$ or%er to mae t/e stateme$ts
ma%e1 i$ t/e li2/t o) t/e circumsta$ces u$%er #/ic/ t/e, #ere ma%e1 $ot
mislea%i$21
OR
III. e$2a2es i$ a$, act1 !ractice1 or course o) "usi$ess #/ic/ o!erates or #oul%
o!erate as a fraud or deceit u!o$ a$, !erso$
&i. %Also, .ead Plaintiff 4eDuirement&
'6
Tra$sactio$al
Ne3us
9 Kuris%ictio$al
Ne3us
9
#<i$ Statute o)
Limitatio$s
;
Standin to Sue
$isstatement@E
mission
9
4Material
9
Scie$ter
9
Relia$ce
9
Causatio$
9
Dama2es5
;
#lements of
Cause of Action
De)e$%a$t Re+uireme$t
4entral Bank1 %toneridge5
'. Standin to Sue
a. Statute of .imitations
IA ^ /as sta$%i$2 u$%er Rule 1C"*D1
T7EN suit "rou2/t ", s/orter o)
i. t#o ,ears a)ter ^ o$ inDuiry notice 4; $e# or s/oul% /a&e $o#$ o) )acts 2i&i$2
rise to /is claim51 OR
ii. )i&e ,ears a)ter t/e )rau% #as committe%
". Transactional +e-us
i. Purchase or Sale
I. 4ule %Blue C(ip Stamps&
IA ^ /as sta$%i$2 u$%er Rule 1C"*D1
T7EN ^ is an actual purchaser or seller1 $ot mere o))eree.
II. 4ationale
A. Statutory Te-t
1. Co$2ress %i% $ot a%% Go))erH o) securities1 %es!ite SEC su22estio$
'. BB 11 ] 1' co$tai$ e3!licit causes o) actio$1 "ut o$l, )or actual
!urc/asers
B. Policy
1. .orr, a"out o&er)lo# o) la#suits1 or ve-atious litiation1 "<c ( co$trols
all i$)o a"out #/et/er /e #oul% /a&e "ou2/t securit,
'. Trul, /arme% !arties are e3clu%e%1 "ut ma$, more &e3atious !arties are
as #ell
III. Blue C(ip Stamps 4G!urc/ase or saleH5 4U.S. 1S[D1 !. '6S5 4Ma$or Dru2s
%eci%e% not to buy stock o) Blue C/i! "<c o) !essimistic misre!rese$tatio$s5
'D
ii. In Connection 'ith
I. 4ule %1and)ord&
IA )rau% coincides with securities tra$sactio$1
T7EN )rau% is in connection with t/e securities tra$sactio$
II. Ether Possi!ilities
A. But(for causation
IA )rau% #oul% $ot /a&e occurre% !ut for securities tra$sactio$1
T7EN )rau% is in connection with t/e securities tra$sactio$
B. Contractual Privity
IA )rau% is in connection #it/ t/e securities tra$sactio$1
T7EN t/ere is co$tractual !ri&it, "et#ee$ ^ a$% _
C. Intrinsic :alue
IA )rau% a))ects intrinsic value o) t/e securit,1
T7EN )rau% is in connection #it/ t/e securities tra$sactio$.
D. *oreseea!le Intrinsic :alue
IA )rau%
1. a))ects t/e intrinsic value o) t/e securit,1 AND
'. e))ect is foreseeable1
T7EN )rau% is in connection #it/ t/e securities tra$sactio$.
III. S%C v. 1and)ord 4Gi$ co$$ectio$ #it/H5 4U.S. 'CC'1 !. 'DD5 4.oo% 2a&e
mo$e, to "roer `a$%)or%1 ` taes W-CCK )rom selli$2 stoc a$% s!e$%s it o$
/imsel)5
A. Holdin /8 T/ere #as a material omissio$ "<c ` o#e% )i%uciar, %ut, to . to
tell /im /e@s steali$2 mo$e,.
B. Holdin 88 ` ca$ "e a _1 t/is satis)ies Gi$ co$$ectio$ #it/H1 e&e$ t/ou2/ no
privity "et#ee$ D a$% ( 4` as a2e$t $e&er /ol%s title5
c. >urisdictional +e-us: I$terstate Commerce 4Eas, to Satis),5
'T
-. The .ead Plaintiff
a. Selection of the .ead Plaintiff %A 8/)%a&%1&%B& of /012 Act5
i. 4ule
IA !erso$ or 2rou! o) !erso$s
I. EIT7ER
A. 7as "ee$ a lea% ^ i$ $o more t/a$ )i&e securities )rau% actio$s %uri$2 t/e
!re&ious t/ree ,ears1 OR
B. Court !ermits !erso$ or 2rou! to "e lea% ^ %es!ite !artici!atio$ i$ sec@s
)rau% actio$s1
II. Sees a !er*s/are reco&er, $o 2reater t/a$ t/at o) a$, ot/er class mem"er1
#<o<r<t Greaso$a"le costs a$% e3!e$ses1H
III. EIT7ER
A. filed complaint1 OR
B. ma%e motion to "e lea% !lai$ti))1
I:. /as1 i$ t/e %etermi$atio$ o) t/e court1 larest financial interest i$ relie) sou2/t
", class1
AND
:. ot/er#ise satis)ies 4also i$ t/e %etermi$atio$ o) t/e court5 re+uireme$ts of 4ule
81 of *4CP 4415 commo$alit,1 4'5 adeDuacy of representation1 4-5
$umerosit,1 465 t,!icalit,51
T7EN t/e !erso$ or 2rou! o) !erso$s is t/e most adeDuate 4lea%5 N1
UNLESS a mem"er o) ^ class !ro&es t/at t/e !resum!ti&el, most a%e+uate ^
:I. #ill $ot )airl, a$% a%e+uatel, !rotect t/e i$terests o) t/e class1 OR
:II. is su"=ect to u$i+ue %e)e$ses t/at re$%er t/at ^ i$ca!a"le o) a%e+uatel,
re!rese$ti$2 t/e class
ii. 4ationale8 Lea% !lai$ti)) s/oul% "e i$stitutio$al i$&estors #it/ lar2est stae
counterweight to !lai$ti)) attor$e,.
I. B"T mi3e% success8
A. Intermune8 Aour mo&a$ts1 $o i$stitutio$al i$&estors1 t/e$ si%e %eals amo$2
la# )irms to #it/%ra# "e)ore =u%2e maes %ecisio$.
B. Spear K >ackson8 - )irms<!lai$ti))s com"i$e
iii. *air and AdeDuate 4epresentation %In Presumption #sta!lishment&
I. Considerations
A. ./et/er mo&a$t /as %emo$strate% a #illi$2$ess a$% a"ilit, to select
com!ete$t class cou$sel a$% to $e2otiate a reaso$a"le retai$er a2reeme$t
#it/ t/at cou$sel
'[
Presumption
#sta!lishment
4Court@s I$%e!e$%e$t
Ku%2.J A"use o)
Discretio$ Re&ie#5
Presumption
4e!uttal
4Bur%e$ o$ ^ class
mem"er5
i&. Groups
I. Considerations
A. ./et/er #a, )orme%1 or ma$$er i$ #/ic/ co$stitute%1 !reclu%es mo&a$t
)rom )ul)illi$2 tass assi2$e% to a lea% ^
B. ./et/er too lar2e 4!resum!tio$ a2ai$st P D mem"ers5
". Selection of Counsel
i. 4ule %Cendant&
IA lea% ^@s selectio$ a$% a2reeme$t #< cou$sel are reaso$a"le o$ t/eir o#$ terms1
T7EN court must a!!ro&e lea% ^@s c/oice
ii. 4ationale: (SLRA assumes t/at1 i$ t,!ical case1 !ro!erl, selecte% lea% ^ is liel, to
%o a 2oo% or "etter =o" at !ici$2 cou$sel t/a$ court
iii. Considerations
I. >ua$tum o) le2al e3!erie$ce a$% so!/isticatio$ !ossesse% ", lea% ^
II. Ma$$er i$ #/ic/ lea% ^ c/ose #/at la# )irms to co$si%er
III. (rocess ", #/ic/ lea% ^ selecte% its )i$al c/oice
I:. >uali)icatio$s a$% e3!erie$ce o) cou$sel selecte% ", lea% ^
:. E&i%e$ce t/at retai$er a2reeme$t $e2otiate% ", lea% ^ #as !ro%uct o) serious
$e2otiatio$s "t# lea% ^ a$% !ros!ecti&e lea% cou$sel
'V
c. AttorneyBs *ees
i. 4ule: Presumption of 4easona!leness "nless Clear #-cessiveness 4endant5
Attor$e,@s )ees $e2otiate% ", lea% ^ are reaso$a"le
UNLESS court %etermi$es t/e, are clearl, e3cessi&e
ii. +ote8 Most )ees ra$2e "et#ee$ 'CM a$% --M
iii. Considerations
I. Chaned Circumstances: I) u$usual a$% u$)oreseea"le c/a$2es1 i.e.1 t/ose t/at
coul% $ot /a&e "ee$ a%e+uatel, tae$ i$to accou$t i$ t/e $e2otiatio$s
i&. "se of Auctions
I. 4ule 4endant5
IA !ermissi"le1
T7EN
A. court /as %etermi$e% t/at1 a$% clearl, state% #/,1 lea% ^@s i$itial c/oice is
i$a%e+uate1
B. court /as %irecte% lea% ^ to u$%ertae acce!ta"le selectio$ !rocess1 AND
C. lea% ^ /as "ee$ u$a"le or u$#illi$2 to u$%ertae acce!ta"le !rocess
&. Court $ethods of )eterminin 4easona!le AttorneyBs *ees
I. .odestar $ethod
A. Step /: Calculate !ase attorney fee amount "ase% o$
1. Num"er o) /ours attor$e, reaso$a"l, e3!e$%e% o$ t/e matter
'. Reaso$a"le /ourl, maret rate )or attor$e,s #< similar "ac2rou$% a$%
e3!erie$ce
B. Step 8: A!!l, multi!lier to "ase amou$t1 tai$2 i$to accou$t
1. T/e risi$ess o) t/e liti2atio$1
'. T/e com!le3it, o) t/e case
-. 7o# #ell t/e attor$e,s !er)orme% )or t/e class
6. Ot/er rele&a$t )actors
II. Percentae of *unds 4ecovered for Class $ethod
'S
%. In re Cendant Corp. Litig. 4-% Cir. 'CC11 !. 'DS5 4Ce$%a$t a$$ou$ce% retractio$ o)
)i$a$cials1 stoc )ell )rom W-D to W1D5
i. *acts8 District court selecte% - !u"lic !e$sio$ )u$%s 4i$stitutio$al i$&estors51 %i% $ot
allo# re"uttal o) !resum!tio$1 ] /el% auctio$ )or att$,.
ii. Held / C presumption8 Sim!le )act t/at i$stitutio$al i$&estors retai$e% Ce$%a$t
stoc 4creati$2 co$)lict o) i$terest5 $ot e$ou2/ to o&ertur$ settleme$t. 7ere !e$sio$
)u$%s #ere !resum!ti&e lea% ^
I. (ro"lem8 But i$st. i$&estors /ere #ill $ot #a$t to tae mo$e, out o) o$e !ocet
4Ce$%a$t5 a$% !ut it i$ a$ot/er 4S7s5 #it/ t/is ta3 4attor$e,@s )ee5 alo$2 t/e #a,
i$ce$ti&e $ot to !us/ /ar%.
II. Court sai% Co$2ress $e# t/is i$ce$ti&e e))ect a$% ma%e t/is %ecisio$ to /a&e
i$st. i$&estors i$&ol&e% as lea% !lai$ti)).
iii. Held 8 C re!uttal8 Bur%e$ o) !roo) is o$ o!!osi$2 !lai$ti)) #/o #a$ts to "ecome
lea% !lai$ti)) to re"ut !resum!tio$1 a$% lea% ^ status /ere $ot re"utte% 4acte%
)airl,<a%e+uatel,1 court re=ects !a,*to*!la, ar2. as i$su))icie$tl, !ro&e%J $ee% more
t/a$ =ust recei!t o) mo$e,J "ut SC8 #/at i$% o) e&i%e$ce %oes t/e court #a$t0 T/is
stu)) is$@t e!t i$ !u"lic recor%s5
i&. Held 1 selection of lead counsel8 Re=ects auctio$1 (SLRA !ro&i%es t/at lead
plaintiff /a&e riht to select@retain counsel s.t. court@s su!er&isio$.
&. Held 2 C attorneyBs fees8 Rema$%e%1 (SLRA !uts i$ stro$2 lea% !lai$ti))
=uris!ru%e$ce s/oul% tae accou$t o) t/at c/a$2e !resum!tio$ o) reasonableness
#<r<t )ess1 "ut W1DK</r /ere too /i2/.
-C
6. )efendants
a. 4ule %Central Bank, Stoneridge&
IA e$tit, ma, "e a _ i$ a suit u$%er Rule 1C"*D1
T7EN e$tit,
i. #as primary violator o) Rule 1C"*D1
ii. !ro&i%e% assista$ce to !rimar, &iolator t/at ma%e )rau% necessary or inevita!le,
OR
iii. #as
I. a co$trol !erso$
II. %i% $ot act i$ 2oo% )ait/1 AND
III. %irectl, or i$%irectl, i$%uce% t/e misstateme$t or omissio$.
". Primary :iolators
i. Ene :iew 4'% Cir.5
IA !art, is !rimar, &iolator1
T7EN !art, actuall, s!oe OR omitte% to s!ea #< %ut, to %isclose
ii. Another :iew
IA !art, #as su!stantial factor i$ !ro%uci$2 %ocume$ts t/at co$tai$e%
misstateme$t1
T7EN !art, is !rimar, &iolator
c. Central Bank 4U.S. 1SS61 !. -'15 4trustee "a$ /a% $o %ut, to %isclose to i$&estors5
i. Held8 /5!(6 does not prohi!it aidin and a!ettin of fraud
ii. 4ationale
I. Te-t: Ai%i$2 a$% a"etti$2 $ot i$ t/e statute 4"ut $eit/er #as !ri&ate ri2/t o)
actio$Z5. Also ot/er sectio$s o) @-6 Act %o !ro/i"it ai%i$2<a"etti$2.
II. 4eliance: Ai%i$2<a"etti$2 lia"ilit, allo#s circum&e$tio$ o) relia$ce re+uireme$t
%. S#C $ay Sue Aider(and(A!ettors
i. 4ule %A85%e& #-ch. Act&
SEC ma, "ri$2 actio$
I. )or i$=u$cti&e relie)
II. a2ai$st a$, !erso$ t/at $o#i$2l, !ro&i%es su!stantial assistance to a$ot/er
!erso$ i$ &iolatio$ Rule 1C"*D1 AND
III. suc/ !erso$ is i$ &iolatio$ to same e3te$t as !rimar, &iolator
e. +ecessary and Inevita!le
i. Stoneridge v. Scienti)ic+2tlanta 4U.S. 'CCV1 !. -'D5 4Scie$ti)ic@s co$%uct
)acilitate% )rau%1 "ut C/arter !ut out )rau%ule$t %ocs5
I. Held8 Su!!liers@ %ece!ti&e acts1 #/ic/ #ere $ot %isclose% to i$&esti$2 !u"lic1
are too remote to satis), t/e re+uireme$t o) relia$ce.
II. 4e=ects scheme lia!ility "ecause i$&estors %o $ot rel, u!o$ &e$%or@s stateme$ts
or re!rese$tatio$s. A &e$%or #/o is sile$t "ut #ill)ull, assists is $ot lia"le i$
)rau%.
A. Scheme lia!ility8 E$tit, lia"le i)G"ut )orH causatio$ 9 su"sta$tial
!artici!atio$ le% to deceiving co.@s au%itor as !art o) a Gsc/eme
-1
D. #lements of the Cause of Action
a. T/e Eleme$ts
4ule: ^ must s/o#
i. $aterial
ii. $isstatement or Emission 4oral or #ritte$5
iii. Scienter
i&. 4eliance
&. Causation
&i. )amaes
". $aterial 4see a"o&e5
c. $isstatement or Emission
i. $isstatements
I. $ain 4ule: )eception 4eDuirement %Santa e&
A. 4ule
IA a misstateme$t i$curs lia"ilit, u$%er Rule 1C"*D1
T7EN t/e misstateme$t /as #ore% some sort o) deception
B. Santa e Industries 4U.S. 1S[[1 !. '['5 4SA %oes s/ort*)orm mer2er #<
Kir",1 SA o))ers W1DC<s/are 4less t/a$ state% "oo &alue51 S7s /a&e
a!!raisal ri2/ts5
1. Nee% %ece!tio$. Not e$ou2/ to sa, somet/i$2 is u$)air or a "reac/ o)
)i%uciar, %ut,.
a. 7ere Sa$ta Ae #as o!e$ a"out "oo &alue !rice.
'. 4ationale8 Nee% to ca"i$ 1C"*D a$% !rotect state cor!orate la#. Case
limits #/at is actio$a"le u$%er 1C"*D a$% ra$2e o) %e)e$%a$ts.
C. +ote8 Sometimes com!lai$t claims )ailure to %isclose t/at ,ou are "reac/i$2
a )i%uciar, %ut, as t/e %ece!tio$
II. Epinions and *acts
A. 4ule %3irginia Banks(ares&
IA a com!a$, s!eaer@s re$%eri$2 o) a$ o!i$io$ is a Gmisstateme$tH u$%er
Rule 1C"*D1
T7EN t/e u$%erl,i$2 su"=ect matter is !ossi"l, true or )alse
B. 3irginia Banks(ares Inc. 4U.S. 1SS11 !. '[[5 4Am. Ba$ :a. %irectors tol%
S7s t/at W6'<s/are #as G)air a$% /i2/H i$ )reeUe*out mer2er5
1. Held8 Aalse o!i$io$s are misstateme$ts1 a$% ma, "e actio$a"le i) ot/er
eleme$ts satis)ie% 4!articularl,1 s!eaer must "elie&e t/at stateme$t
o))ere% is )alse5
a. 7ere #/et/er W6' #as /i2/ a$% !ro!osal )air %e!e$%e% o$ provable
facts a"out Ba$@s assetsF
-'
ii. Emissions
I. $ain 4ule: 4eDuirement of )uty to )isclose %2,,ott La,s.&
IA a$ omissio$ i$curs lia"ilit, u$%er Rule 1C"*D1
T7EN t/e !erso$ had a duty to disclose t/e i$)ormatio$ u$%er !ositi&e la#
II. )uty to )isclose
A. 4eulatory Te-t
1. Dut, to %isclose i) 4material5 i$)o omitte% is G$ecessar, i$ or%er to mae
t/e stateme$ts ma%e1 i$ t/e li2/t o) t/e circumsta$ces u$%er #/ic/ t/e,
#ere ma%e1 $ot mislea%i$2H
B. How Applied
1. )uty to Correct: H#S
a. )uty to Correct %def&: a %ut, to !ut out $e# i$)ormatio$ to correct
!rior %isclose% i$)ormatio$ t/at #as )alse or mislea%i$2 at t/e time o)
t/e !rior %isclosure
". 4ule
IA
415 a !rior stateme$t
4'5 ", !erso$ OR t/ir% !art, #< #/om !erso$ #as Ge$ta$2le%1H
4-5 #as materiall, false or misleadin #(en made,
T7EN !erso$ /as a %ut, to correct t/at i$)ormatio$
'. )uty to "pdate: $".TIP.# :I#'S
a. )uty to "pdate %def&: a %ut, to !ut out $e# i$)ormatio$ t/at #as
!re&iousl, %isclose% 4a$% correct at t/e time o) i$itial %isclosure5 "ut
tur$s out later to "e )alse or mislea%i$2
". Ene :iew: +o )uty to "pdate 4'bbott Labs.5
IA a !rior stateme$t1 true #/e$ ma%e1 /as "ecome u$true1 e&e$
materiall,
T7EN $o %ut, to u!%ate t/e stateme$t to re)lect t/e trut/
c. Another :iew: %.imited& )uty to "pdate 4Some cts.1 e.2.1 '% Cir.5
IA
415 a !rior stateme$t1 true #/e$ ma%e1 /as "ecome materiall, )alse or
mislea%i$21
4'5 t/e stateme$t /as GH)or#ar% i$te$t a$% co$$ectio$ u!o$ #/ic/
!arties ma, "e e3!ecte% to rel,
T7EN t/ere is %ut, to u!%ate t/e !rior stateme$t
-. Gallag(er v. 2,,ott La,oratories 4[t/ Cir. 'CC11 !. 'V'5 4ADA
#ar$i$2s "ut A""ott %oes $ot re&eal u$til settleme$t tals a$% co$se$t
%ecree5
a. Held8 Ai$% )or A""ott "ecause $o %ut, to u!%ate.
". )uty to correct8 Does $ot a!!l, "<c o$ Marc/ S )ili$2 1C*K A""ott
%i% $ot $o# a"out letter )rom ADA $o %ut, to correct t/is
stateme$t.
c. )uty to update8 Re=ecte% ", t/is courtJ %ut, #oul% %e)eat !ur!ose
--
o) !erio%ic %isclosure1 a$% mae it co$ti$uous %isclosure.
iii. *orward(.ookin Statement Safe Har!or C #-chane Act A 8/# 4(SLRA5
I. 4ationale8
A. I$ter$al !ro=ectio$ is valua!le info.1 "ut com!a$, %oes $ot #a$t to tell
com!etitors !la$s
B. 'orries a!out lawsuits "<c hindsight "ias )ear ^ attor$e,s #ill sue o$l,
#/e$ !ro=ectio$s %o$@t #or out.
II. Time of "se: '1E o)te$ a!!lie% i$ motio$ to %ismiss /el! %eter )ri&olous
suits.
III. )iscovery Stay8 Sta, %uri$2 !e$%e$c, o) motio$ to %ismiss or summar,
=u%2me$t 4usuall, %eci%e% o$ motio$ to %ismiss5
A. 4ationale: Ds costs less i) %eci%e% soo$er stic it out a$% %o$@t settle
I:. 4ule
I*
A. a$, o)
1. a$ EARI1
'. a !erso$ acti$2 o$ "e/al) o) a$ EARI1
-. a$ outsi%e re&ie# retai$e% ", a$ EARI1 OR
6. a$ u$%er#riter 4#<r<ti$)o !ro&i%e% ", issuer5
B. EIT7ER
1. BOT7
a. I%e$ti)ies a )or#ar%*looi$2 stateme$t as suc/1 AND
". Gi&es meaninful cautionary statements i%e$ti),i$2 im!orta$t
)actors t/at coul% cause actual results to %i))er materiall, )rom
!ro=ectio$s1
OR
'. N fails to show )or#ar%*looi$2 stateme$t
a. %if made !y natural person& #as ma%e #< actual knowlede t/at
stateme$t #as )alse or mislea%i$21 OR
". %if made !y !usiness entity& #as
415 ma%e ", or #it/ t/e a!!ro&al o) a$ e3ecuti&e o))icer o) e$tit,1
AND
4'5 ma%e or a!!ro&e% ", suc/ o))icer #it/ actual $o#le%2e ", t/at
o))icer t/at t/e stateme$t #as )alse or mislea%i$2
AND
C. t/e stateme$t %oes $ot i$&ol&e
1. a$ I(O
'. a te$%er o))er
-. )i$a$cials 4GAA(5
6. a "la$ c/ec co.1 OR
D. a 2oi$2 !ri&ate tra$sactio$1
-6
Applica!ility
'ays Eut
#-clusions
TH#+ t/e EARI ca$$ot i$cur lia"ilit, )or t/e stateme$t u$%er Rule 1C"*D
:. Special 4ules for Eral Statements 4see case"oo !.'VS5
A. B"T, *raud(on(the($arket
1. 4ule
IA oral stateme$ts su"sta$tiall, similar to #ritte$ stateme$ts to #/ic/
mea$i$2)ul cautio$ar, stateme$ts /a&e "ee$ a!!e$%e%1
T7EN $o lia"ilit, )or )ailure o) oral stateme$ts to i$clu%e cautio$ar,
stateme$ts
'. 4ationale: t/e cautio$ar, stateme$ts /a&e alrea%, "ee$ a"sor"e% i$to
t/e stoc !rice
:I. $eaninful Cautionary Statements
A. 4ule %Ba4ter Int5l&
IA EARI /as ma%e Gmea$i$2)ul cautio$ar, stateme$tsH +uali),i$2 )or t/e
)or#ar%*looi$2 stateme$t sa)e /ar"or1
T7EN t/e EARI /as %isclose% the principal risks t/at coul% cause actual
results to %e!art )rom t/e !ro=ectio$s i$ its )or#ar% looi$2 stateme$ts
B. Considerations
1. S!ectrum8 More t/a$ Gca&eat em!torH<"oiler!late "ut less t/a$ Gall
material i$)oH
'. Do not $ee% to %isclose u$%erl,i$2 assum!tio$s a$% !ro"a"ilit, "a$%s
-. I$clu%e important factors t/at coul% cause !re%ictio$ to %i))er
materiall,1 a$% s!eci)ic to com!a$,.
C. 2s(er v. Ba4ter Int5l Inc. 4[t/ Cir. 'CC61 !. 'VT5 4EARI maes !ro=ectio$s
4oral1 !ress release1 1C*K51 $o#s o) !ro"lems1 t/e$ a$$ou$ces e3!ectatio$s
$ot met5
1. Held8 Cannot dismiss complaint u$%er safe har!or 8/# "<c com!a$,
must esta"lis/ a)ter %isco&er, t/at stateme$ts %i% co$tai$ meaninful
cautionary lanuae1 i.e. cautio$s %i% re&eal e3 a$te t/e ma=or riss.
a. O$l, one s!eci)ic 4$o$*"oiler!late5 stateme$t #as ma%e ", issuer i$
cautio$ar, la$2ua2e relati$2 to com!a$,@s %ial,Uers.
". Also la$2ua2e %i% $ot c/a$2e e&e$ t/ou2/ $e2ati&e e&e$ts 4sterilit,
)ailure5 tae !lace.
c. (ossi"le t/at com!a$, $e# o) im!orta$t &aria"les t/at #oul% a))ect
)orecasts "ut omitte% t/em )rom la$2ua2e
'. Criticism
a. O$l, #a, to %etermi$e #/et/er riss %isclose% #ere G!ri$ci!alH is ",
%isco&er,J "ut sa)e /ar"or1 i$ sta,i$2 %isco&er, !e$%i$2 motio$ to
%ismiss<summar, =u%2me$t1 mea$t to sa&e com!a$, )rom %isco&er,
-D
%. Scienter
i. Standard
I. 4ule
IA a misstateme$t or omissio$ i$curs lia"ilit, u$%er Rule 1C"*D1
T7EN t/e misstateme$t<omissio$ #as ma%e #it/
A. Actual intent
B. Actual knowlede, OR
C. 4ecklessness 4u$less alle2e% misstateme$t is )or#ar%*looi$25
II. Actual Intent
A. )efinition: Actual i$te$t to %e)rau%
B. U$i&ersall, acce!te%1 "ut /ar% to !ro&e 4$ee% memo5
III. Actual 9nowlede
A. )efinition: Actual $o#le%2e o) )acts a$% a!!reciatio$ o) /o# maret #ill
"e misle%
B. U$i&ersall, acce!te%1 a$% e&i%e$tiar, tool "<c /ar% to s/o# actual i$te$t
I:. 4ecklessness
A. )efinition: So /i2/l, u$reaso$a"le a$% suc/ a$ e3treme %e!arture )rom t/e
sta$%ar% o) or%i$ar, care as to !rese$t a %a$2er o) mislea%i$2 ^ so o"&ious
t/at t/e %e)e$%a$t must /a&e "ee$ a#are o) it
B. U$i&ersall, acce!te%
C. Does $ot a!!l, i) stateme$t )or#ar%*looi$2
:. %rnst v. "oc()elder 4U.S. 1S[T1 !. 'S-5 4Er$st au%itor )or )rau%ule$t "roera2e1
#/o i$siste% o$ o!e$i$2 /is o#$ mail1 GNa, ruleH5
A. Held8 Ne2li2e$ce is $ot e$ou2/ to esta"lis/ scie$ter.
B. Spectrum )rom actual i$te$t actual $o#le%2e recless $e2li2e$t8
1. Memo t/at E]E #ill)ull, s/are% Na,@s sc/eme
'. Memo s/o#i$2 E]E knew a"out Na,@s sc/eme "ut %i% $ot/i$2
-. Memo s/o#i$2 E]E $e# a"out 4a5 Na,@s !ast securities &iolatio$s1 4"5
#ar$i$2s )rom em!lo,ees t/at Gsomet/i$2 $ot ri2/tH a$% 4c5 Na, rule
6. Memo t/at E]E $e# a"out 4a5 #ar$i$2s Gsomet/i$2 $ot ri2/tH1 4"5 Na,
rule
D. Memo s/o#i$2 E]E $e# a"out Na, rule
T. Memo s/o#i$2 E]E %i% $ot )ollo# i$%ustr, sta$%ar%s i$ c/eci$2
E]E@s i$ter$al co$trols
-T
ii. Pleadin 4eDuirements
I. 4ule %A 8/)%!& #-ch. Act&
I$ a$, !ri&ate a$ti)rau% actio$1 com!lai$t must
A. S!eci),
1. each statement alle2e% to /a&e "ee$ misleadin1
'. t/e reason%s& why stateme$t is mislea%i$2 4i.e. #/o1 #/at1 #/e$1 #/ere
a$% /o#1 o)te$ t/rou2/ co$)i%e$tial #it$ess5
B. (lea% #it/ !articularit, )acts ivin rise to a strong in)erence that the
defendant acted with the reDuired state of mind
II. ;Stron Inference< of Scienter
A. 4ule %Tella,s&
IA t/e )acts !le% 2i&e rise to a stro$2 i$)ere$ce o) scie$ter1
T7EN
1. acce!ti$2 all )actual alle2atio$s i$ com!lai$t as true1 a$%
'. e3ami$i$2 all )acts collecti&el,1
-. a reasona!le person #oul% %eem t/e i$)ere$ce o) scie$ter co2e$t a$% at
least as compellin as a$, o!!osi$2 i$)ere$ce
B. Tella,s v. Makor Issues 4U.S. 'CC[1 !. 'SV5
C. #-amples
1. CEO /as s!ecial i$ce$ti&e com!e$satio$ !a,i$2 /er 1CM o) $et
accou$ti$2 !ro)its )or 1 )iscal ,ear )ou$% to "e e$ou2/ )or !lea%i$2
'. CEO a$% CAO sell W-Cm o) com!a$, s/ares i$ 1 ,ear o)te$ $ot
e$ou2/ )or !lea%i$2 "<c mi2/t =ust "e %i&ersi),i$2
-. SiUe o) accou$ti$2 restateme$t o) re&e$ue ; -CM o) re&e$ues o)te$
s/eer ma2$itu%e o) !rior accou$ti$2 error e&i%e$ce o) scie$ter
III. Sources of *acts for Pleadin with Particularity
A. I$si%er tra%i$2 4u$usual &olume1 !ro)its1 timi$25
B. Di&er2e$ce "t#$ i$ter$al re!orts a$% e3ter$al stateme$ts
C. Close$ess o) time o) alle2e%l, )rau%ule$t stateme$t<omissio$ a$% later
%isclosure o) i$co$siste$t i$)o
D. E&i%e$ce o) "ri"er, o) to! com!a$, o))icial
E. Accou$ti$2 restateme$t
A. S/eer ma2$itu%e o) misstateme$t
G. Co$)i%e$tial #it$esses
-[
e. 4eliance %Transaction Causation&
i. 4eliance Dua Transaction Causation %def&8 i$)ormatio$ caused i$&estor to c/a$2e
%ecisio$ to "u,<sell securities. A"out %ecisio$*mai$2 o) i$&estors 4G"ut )orH )rau%1
( #oul% $ot /a&e "ou2/t<sol%5
ii. 4e!utta!le Presumption of 4eliance
I. 4ule %2))iliated Ute @ Basic&
IA ^ ca$ s/o# t/at
A. _ ma%e !u"lic material misstateme$t or omissio$ i$ "reac/ o) a %ut, to
%isclose1 AND
B. %only w@r@t material misstatements& s/ares tra%e% o$ a$ efficient market
T7EN ^@s relia$ce o$ _@s material misstateme$t or omissio$ is presumed
UNLESS _ ca$ mae s/o#i$2 t/at se&ers li$ "et#ee$
C. alle2e% misstateme$t<omissio$ a$%
D. EIT7ER
1. T/e !rice recei&e% or !ai% ", ^1 OR
'. ^as %ecisio$ to tra%e at a )air maret !rice
II. 4ationale
A. #C$H: I$&estor relies o$ Gi$te2rit,H o) t/e maret !rice1 a$% !rice re)lects
all !u"licl,*a&aila"le i$)o1 i$clu%i$2 )alse i$)ormatio$ %isclose% to !u"lic
B. (laci$2 o"li2atio$ o$ ^ #oul% %estro, #ort/ o) class actio$ mec/a$ism
III. #fficient $arket
A. *actors 4ammer 4D.N.K. 1SVS55
1. 7i2/ #eel, tur$o&er
'. Num"er maret maers a$% ar"itra2eurs
-. De2ree o) a$al,st co&era2e
6. Aorm S*- eli2i"ilit,
D. S/o#i$2 o) em!irical Grelatio$s/i!H "et#ee$ $e# i$)ormatio$ a$% stoc
!rice mo&eme$ts
I:. #-amples of 4e!uttal
A. GMaret maersH !ri&, to trut/ a"out su"=ect o) misstateme$t<omissio$ or
maret ot/er#ise actuall, a#are o) t/e trut/
B. ^ "elie&e% t/at alle2e% misstateme$t was false
C. Maret $ot e))icie$t
D. I$&estor forced to "u,<sell securities 4e.2.1 ", co$se$t %ecree5
E. I$&estor #oul% /a&e ma%e same %ecisio$ a$,#a,
A. _ ma%e correcti&e stateme$ts
:. 2))iliated Ute Citizens o) Uta( 4U.S. 1S['1 !. -CD5 4a2e$t )ails to %isclose to
I$%ia$ tri"e5
A. Held8 I$ situatio$ o) omission #it/ %ut, to %isclose1 presumption of
reliance
-V
Arau%*o$*t/e*Maret
(resum!tio$
Re"uttal o) (resum!tio$
:I. Basic v Levinson 4U.S. 1SVV1 !. -CV5
A. Held8 ^ %oes $ot /a&e to s/o# i$%i&i%ual relia$ce as lo$2 as /e s/o#s
fraud(on(the(market presumptionJ a$% presumption is re!utta!le
iii. Summary
*ace(to(*ace Epen $arket
Emissions that !reach duty to
disclose
No relia$ce re+uireme$t
4'ffiliated (te5
No relia$ce re+uireme$t
4'ffiliated (te5
Affirmative misrepresentation I$&estor must s/o# i$%i&i%ual
relia$ce
(resum!tio$ o) relia$ce
4Basic5
-S
). .oss Causation
i. Standard
I. 4ule %!ura&
IA a misstateme$t or omissio$ i$curs lia"ilit, u$%er Rule 1C"*D1
T7EN t/e misstateme$t or omissio$ pro-imately caused t/e i$)latio$<%e)latio$
o) t/e s/are !rice
A. o$ t/e %a, o) ^@s !urc/ase<sale1 AND
B. #/e$ t/e )acts misstate% or omitte% "ecome $o#$
II. 4ationale
A. Sec@s la#s %o $ot mae issuers insurers o) all losses 4(os$er i$ Bastian5
ii. Pleadin 4eDuirements %A8/)%!&%2&&
I. 4ule
I$ a$, !ri&ate a$ti)rau% actio$1 ^ "ears "ur%e$ o) !roo) to s/o# loss causatio$
II. 4ationale
A. A$ti*i$sura$ce ar2ume$t
B. Discoura2e too ma$, la#suits
C. Ca$@t =ust let t/is 2et settle% at %ama2es sta2e "<c #e $e&er 2et t/ere "<c o)
settleme$t
iii. !ura *(arma v. Broudo 4U.S. 'CCD1 !. -1T5
I. Held: Mere causatio$ o) !rice i$)latio$<%e)latio$ ", misstateme$t or omissio$
i$su))icie$tJ causatio$ o) su"se+ue$t !rice i$crease<%ecrease o$ce rele&a$t )acts
are ma%e $o#$ also re+uire%
6C
2. )amaes
i. Goals of damaes
I. Compensation
A. But less o"&ious t/a$ tort "<c %i&ersi)ie% i$&estors o$ a&era2e "e$e)ite% as
muc/ as /arme% ", )rau%.
II. )eterrence
III. .orr, a"out frivolous litiation
ii. "niversal )amaes Cap: +E P"+ITI:# )A$AG#S
I. A 87%A& #-ch. Act: Dama2es limite% to Gactual %ama2esH
iii. Epen $arket )amaes: Eut(of(Pocket $easure
I. 4ule
IA &iolatio$ o) Rule 1C"*D i$ a$ o!e$ maret tra$sactio$1
T7EN ^ /as su))ere%1 a$% is e$title% to1 Eut of Pocket )amaes
II. Eut of Pocket )amaes
X4(urc/ase<Sale (rice5
Greater o)
4True :alue at Time o) (urc/ase<Sale5Y
OR
4mea$ tra%i$2 !rice o) securit, %uri$2 SC*%a, !erio% "e2i$$i$2 o$ %ate o$ #/ic/
misstateme$t<omissio$ is !u"licl, correcte%5Y
III. Pro!lems8
A. Too lo# %ama2es i$ !rimar, maret )rau%
1. Dama2es li$es u! #it/ /o# muc/ com!a$, "e$e)ite%.
'. I) M o) 2etti$2 cau2/t L 1CC1 %ama2es $ot e$ou2/ )or %eterre$ce
B. Too /i2/ %ama2es i$ seco$%ar, maret )rau%
1. Loss to com!a$, #/e$ !a, %ama2es1 ma,"e some 2ai$ to ma$a2ers
most gain from fraud goes to outsider investors #/o sol% stoc.
a. Goo% "<c t/is !u$is/es #ro$2%oers 4crus/i$2 out )rau%5 "ut t/is
lea%s to ris o) )ri&olous la#suits
". S7s 2et stuc !a,i$2 %ama2es1 $ot reall, !u$is/i$2 managers
c. 7arm to i$&estors P "e$e)its to _1 #< little correlatio$ to !ro". o)
%etectio$
'. Not $ecessaril, a li$ "et#ee$ damages a$% benefit to corporation or its
ma$a2ers i) =ust seco$%ar, maret tra%i$2.
61
B '1D4e5415 Dama2es
Ca!
i&. *ace(to(*ace )amaes: Three )ifferent $easures
I. 4ule
IA &iolatio$ o) Rule 1C"*D i$ a )ace*to*)ace tra$sactio$1
T7EN ^ /as su))ere%1 a$% is e$title% to1
A. Epen $arket )amaes,
B. )isorement,
OR
C. 4escission
II. )isorement
A. 4ule %*idcock&
IA
1. #<r<t a &iolatio$ o) Rule 1C"*D i$ a )ace*to*)ace tra$sactio$1
'. 42e$erall, s!eai$25 %e)rau%i$2 !urc/aser _@s !ro)its P &ictim seller ^@s
actual losses1
T7EN ^ is !resum!ti&el, e$title% _@s !ro)its1
UNLESS
-. _ s/o#s t/at some !ortio$ o) !ro)it attri"uta"le to causes ot/er t/a$
)rau%1 AND
6. ^ %oes $ot !ersua%e trier o) )act t/at _@s e3!la$atio$ s/oul% $ot "e
acce!te%
B. 4e!uttal #vidence
1. OBs Special and "niDue #fforts %+ot Part of 4eular Salaried
4esponsi!ilities&
a. A22ressi&e a$% e$ter!risi$2 ma$a2eme$t acti&ities
". Mo%er$iUatio$
'. _@s e3te$%i$2 !erso$al 2uara$ties o$ "a$ loa$s
-. _@s i$tro%uci$2 $e# li$es o) "usi$ess
6. (assa2e o) time
C. *idcock v. Sunn$land 2m. 41SVV1 !. -6-5 47ar&ar% lie to S7 (i%coc
sa,i$2 $o "u,ers1 ( sells at lo# !rice1 ' ,ears later "u,er "u,s muc/ /i2/er5
1. Held8 Court or%ers disorement of profits 4"<c %e)rau%i$2 !urc/aser
recei&e% more t/a$ seller@s actual loss5
'. 4ationale: E+uit,J %e)icie$c, o) out*o)*!ocet measure i$ t/is case
6'
4e!uttal
Epportunity
III. 4escission8
A. 4ule %Garnatz&
IA
1. #<r<t a &iolatio$ o) Rule 1C"*D i$ a )ace*to*)ace tra$sactio$1
'. 2e$erall, s!eai$2
a. ^ #oul% $ot /a&e e$tere% tra$sactio$ "ut )or _@s
misstateme$t<omissio$1 AND
". $eit/er o!e$ maret %ama2es $or %is2or2eme$t is a%e+uate1
T7EN ^ e$title% to
-. %if N is seller& retur$ o) t/e securities
6. %if N is purchaser& %ama2es e+uali$2 EIT7ER
a. 4(urc/ase (rice5 4:alue ^ recei&e% as result o) )rau%ule$t
tra$sactio$5
OR
". 4(urc/ase (rice5 4Su"se+ue$t (rice _ Recei&e% Selli$2 Sec@s5
B. 4ationale: (uts ( "ac i$ !ositio$ as i) ( /a% $ot e$tere% i$to tra$sactio$ at
all 4#it/ a%=ustme$ts )or i$terest1 o!!ortu$it, costs5
C. Garnatz v. Sti)el 41S[[1 !. -6[5 4"roer !uts Gar$atU i$to =u$ "o$%s a$%
#ill)ull, lies ", 2uara$teei$2 i$&estme$t5
1. Held8 Court 2i&es rescission damaes 2i&es Gar$atU !urc/ase !rice
re%uce% ", a$, &alue recei&e% as result o) )rau%ule$t tra$sactio$.
'. 4ationale
a. De)icie$c, o) out*o)*!ocet "<c =u$ "o$%s at time o) !urc/ase #ere
W1CC !er "o$%1 a$% Gar$atU !ai% t/at out o) !ocet ; WC 4)rau%
%oes $ot 2o to value o) =u$ "o$%s5.
". Dis2or2eme$t also i$su))icie$t /ere "<c "roer@s !ro)its o$l,
commissio$1 arou$% W[.
6-
&. >oint .ia!ility 4A 8/)%f& #-ch. Act&
I. >oint and Several .ia!ility for 9nowin %and Some Ether& :iolations
A. 4ule
IA
1. _ $o#i$2l, &iolate% Rule 1C"*D1 OR
'. ^
a. is e$title% to %ama2es P 1CM o) ^@s $et #ort/1 AND
". /as $et #ort/ less t/a$ W'CC1CCC1
T7EN _ is =ointly and severally lia!le to ^
B. >oint and Several .ia!ility %def&: A$, _ ca$ "e lia"le )or all o) ^@s
%ama2es
II. Proportionate .ia!ility
A. 4ationale: (rotect au%itors #< %ee! !ocets le)t /ol%i$2 t/e "a2
B. 4ule
IA _
1. merel, reclessl, &iolate% Rule 1C"*D1 AND
'. eit/er o) ^ %ama2es or $et #ort/ +uali)iers a"o&e %oes $ot a!!l,1
T7EN is lia"le )or
-. 4M o) Res!o$si"ilit,5 4Total ^ Dama2es5
9
6. Lesser o)
a. XDCMY X4M o) Res!o$si"ilit,5 4Total ^ Dama2es5Y
OR
". A$, s/ort)all %ue to Co*_@s I$sol&e$c,
C. Percentae of 4esponsi!ility: Determi$e% ", =ur, or )i$%er*o)*)act 4"ase%
o$ conduct a$% causal relationship to damaes5 )or eac/ #ro$2%oer
III. 4iht to Contri!ution: _ /as ri2/t to see co$tri"utio$ )rom ot/er &iolators
I:. +o )isclosure to >ury: Kur, ma, $ot /ear eit/er 415 sta$%ar% )or allocatio$ or
%ama2es1 or 4'5 !roce%ure )or reallocatio$ o) u$collecti"le s/ares
:. )efinitions
A. Co&ere% !erso$ ; _ i$ a$ !ri&ate actio$ arisi$2 u$%er @-6 Act1 or a _ i$
!ri&ate actio$ arisi$2 u$%er B 11 o) @-- Act #/o is outsi%er %irector
66
:I. (UBLIC OAAERINGS
A. #conomics of Pu!lic Efferins
1. 4ationale for #Duity Efferins
a. Companies need to finance their operations
". Ether *inancin Sources Insufficient
i. Internal *inancin: Com!a$, re&e$ues too small a$% too )ar i$to t/e )uture to
co&er curre$t e3!e$ses1 !articularl, i) "usi$ess is ca!ital*i$te$si&e
ii. *ounder *inancin: Aou$%er mi2/t $ot /a&e e$ou2/ W
iii. Bank *inancin: Di))icult to 2et loa$s1 must !a, i$terest a$% !ri$ci!al1 o)te$ at
/i2/ rate
'. "nderwriters and the Pu!lic Efferin Process
a. "nderwriters %"'s&
i. "nderwriter %def: A 8%a&%//& SecBs Act&: A$, !erso$ #/o /as purchased from a$
issuer #it/ a &ie# to1 or offers or sells )or a$ issuer i$ co$$ectio$ #it/ t/e
%istri"utio$ o) a$ securit,F
ii. 4ole of "'s
I. Initial Startin Point: I$ /ot marets1 u$%er#riters o)te$ a!!roac/ com!a$ies
a"out I(Os
II. Source of
A. Advice: O))er 2ui%a$ce o$
1. Structuri$2 cor!oratio$ a$% o))ere% securities
'. O$ o))eri$2 amou$t a$% !rice
B. Contacts #it/ lar2e i$stitutio$al i$&estors
C. *inancin
iii. Some Terms
I. Tom!stone %def&: A%&ertiseme$t t/at !ro&i%es %etails o) t/e o))eri$2
II. Bule Bracket %def&: U.s #< /i2/est re!utatio$s a$% amou$t o) o))eri$2
u$%er#ritte$ 4liste% at to! o) tom"sto$e5
III. Gross Spread %def&: U. %iscou$t 4WI<s/are5
I:. $anain "nderwriter
A. )efinition: U. i$ o))eri$2 res!o$si"le )or
1. allocati$2 o))ere% s/ares to i$&estors
'. !re!!i$2 issuer )or !u"lic o))eri$2
-. e$suri$2 )ili$2 a$% "ecomi$2 e))ecti&e o) re2istratio$ stateme$t
6. !rici$2 o))eri$2
D. !er)ormi$2 %ue %ili2e$ce )or re2istratio$ stateme$t
T. $e2otiati$2 #< issuer o$ "e/al) o) s,$%icate
[. ma$a2i$2 ultimate %istri"utio$ o) securities to t/e !u"lic
B. *ee: T,!icall, 'CM o) 2ross s!rea%
:. "nderwriter Syndication: Multi!le U.s1 /el!s s!rea% ris
:I. Everallotment Eption %def&: U.s1 at t/eir %iscretio$1 ma, e3!a$% $um"er o)
s/ares i$ o))eri$2 u! to 1DM
:II. Sellin Concession %def&: Com!e$satio$ )or mem"ers o) t/e s,$%icateJ
t,!icall, TCM o) 2ross s!rea%
:III. *ormal "nderwritin Areement %def&: Sets )ort/ terms o) o))eri$2 4b
o) s/ares to "e sol% 4", issuer or U.s51 !u"lic o))eri$2 !ri$ce1 2ross s!rea%1
o&erallotme$t o!tio$5
6D
". )ifferent Types of Efferins
i. *irm Commitment Efferin
I. Issuer sells its securities %irectl, to U. 4t,!icall, s,$%icate5
II. U. sells to ot/er %ealers or i$&estors
III. U. !ro)its ", "u,i$2 at %iscou$t 4[M51 i$ e3c/a$2e )or sales assista$ce a$%
tai$2 o$ ris t/at o))eri$2 #o$@t sell
I:. Issuer 2ai$s certainty a$% U. taes ris 4i$sura$ce )u$ctio$5
:. Re!utatio$ o$ t/e li$e1 i$&estors less #orrie% a"out issuer
ii. Best #fforts Efferin
I. In General
A. U. 4G!laceme$t a2e$tH5 a2rees to use G"est e))ortsH as a2e$t to sell issuer
securities o$ commissio$
B. Most o) ris o$ issuer
C. T,!ical )or ris, a$% s!eculati&e issuers 4U.s #o$@t %o )irm commitme$t
"<c ris, co.1 a$% i$&estors more se!tical "<c o) t/at5
II. Three Types
A. Straiht
B. Conditional: U.s a$% issuer !romise t/at1 i) o))eri$2 $ot sol% out1 t/e, #ill
resci$% all sales
C. $ini@$a-i 405
iii. )irect Pu!lic Efferin
I. )efinition: Issuer sells securities %irectl, to !u"lic1 #<o U.
II. Two Types
A. 4ihts Efferin: Sale to co.@s e3isti$2 !u"lic s/are/ol%ers
B. Pu!lic At .are: Sale to !u"lic at lar2e
III. 4are
A. Ma$, issuers lac $ecessar, e3!ertise to com!lete a !u"lic o))eri$2
B. I$&estme$t "a$s !la, 2ateee!er<+ualit, co$trol role
i&. )utch Auction
I. How It 'orks
A. Issuer ass i$&estors to su"mit "i%s !ro&i%i$2 b o) s/ares a$% !rice 4t/us
i$&estors set !rice5
B. Li$e u! "i%s /i2/est to lo#est !y price1 start )rom to! a$% mo&e %o#$ u$til
/it $um"er o) s/ares issuer #a$ts to sell.
II. Costs and Benefits
A. Benefits: Issuer1 "<c %esi2$e% to 2et issuer /i2/est !rice !ossi"le
B. Costs: (u"lic1 #/o ma, "e =ust as irratio$all, e3u"era$t a"out a Dutc/
Auctio$ as a"out a$, ot/er !u"lic o))eri$2
-. "nderpricin in IPE $arket
a. Phenomenon: (rice i$ seco$%ar, maret su"sta$tiall, /i2/er t/a$ o))eri$2 !rice
". Possi!le 4easons *or
i. Issuer %esire to a&oi% la#suits
ii. U. ris*a&ersio$ 4i$ )irm commitme$t o))eri$2s5
iii. Maret E3u"era$ce
i&. Corru!tio$
6T
6. Costs of Goin Pu!lic
a. Restructuri$2 cor!oratio$ )or !u"lic ca!ital marets
". Out o) !ocet a$% im!ute% costs8 t,!icall, SM o) o))eri$2 amou$t
c. Dilutio$ e))ect o$ S7s
%. Ris o) taeo&er
e. O$2oi$2 costs o) !u"lic )ili$2 4Sar"a$es*O3le,5
B. Pu!lic Efferin )isclosure
1. Pro!lem: Issuers a$% i$si%ers e$=o, i$)ormatio$ a%&a$ta2e o&er outsi%e i$&estorsJ ris )or
outsi%ers t/at issuers #ill use a%&a$ta2e to sell o&er&alue% s/ares to irratio$al i$&estors
'. Solution: Issuer )isclosure E!liations
a. 4eistration Statement
". Statutory Prospectus
-. 4eistration Statement
a. "se: Aile% #it/ SEC
". Antifraud Provision: B 11 Sec@s Act
c. Three Cateories of Information
i. Tra$sactio$*relate% i$)ormatio$ 4e.2.1 o))eri$2 amou$t1 use o) !rocee%s1 U.s5
ii. Com!a$, i$)ormatio$
iii. E3/i"its a$% u$%ertai$2s
%. Two *orms
i. *orm S(/
I. #lii!le: T/ose #/o %o$@t +uali), )or Aorm S*- 4e.2.1 I(O issuers5
II. Transactional 4eDuirements: +E+#
III. Incorporation !y 4eference
A. 4ule: I$cor!oratio$ ", Re)ere$ce i$ S*1 ONLE AOR
1. eli2i"le re!orti$2 issuers #it/ o$e a$$ual re!ort1 AND
'. backward i$cor!oratio$ ", re)ere$ce
ii. *orm S(18 Re2istra$t re+uireme$ts are8
I. #lii!le: ONLE IA
A. U.S. cor!oratio$
B. EARI1 AND
C. Aile% i$ timel, ma$$er )or !ast 1 ,ear
II. Transactional 4eDuirements
A. 7a&e W[Dm commo$ e+uit, i$ /a$%s o) $o$*a))iliates.
B. I$&estme$t 2ra%e %e"t securities
C. A$, seco$%ar, o))eri$2 i) securities o) same class liste% o$ $at@l e3c/.
D. Ri2/ts o))eri$2s or co$&ersio$s o) co$&erti"le securities
E. I$&estme$t*2ra%e asset*"ace% securities
III. Incorporation !y 4eference
A. 4ule: Ca$ i$cor!orate ", re)ere$ce a$, !erio%ic re!ort ONLE IA
1. i$clu%e material c/a$2es to !erio%ic )ili$2s1 AND
'. /a&e %e)ault*)ree recor%
6. Statutory Prospectus
a. "se: Distri"ute% to I$&estors
". Antifraud Provision: B 1'4a54'5
c. Is (art I o) Re2istratio$ Stateme$t
6[
C. Gun(>umpin 4ules %In General&
1. Purposes
a. Generation of 4eistration Statement and Statutory Prospectus
". )istri!ution of Statutory Prospectus i$ co$$ectio$ #it/ o))eri$2 a$% )or s!eci)ie%
!erio% o) time
c. 4estrictin Information A!out Efferin %Pre(*ilin@?uiet Period&
%. "pdatin
'. Transaction vs. Company 4eistration
a. Securities Act %oes $ot re2ulate com!a$ies1 it re2ulates transactions
". B"T, rece$t re)orms /a&e o&erlai$ com!a$, re2istratio$ eleme$ts o&er tra$sactio$*
s!eci)ic s,stem 4#it/ a%&a$ceme$ts i$ tec/$olo2, a$% 2reater %ema$% )or i$)o5
-. Three time periods %i&i%e% ", filing a$% in effect
a. Pre(filin
*Aili$2 o) Re2istratio$ Stateme$t
". 'aitin
*Re2istratio$ Stateme$t E))ecti&e
c. Post(effective
6V
6. Issuer Cateories
a. +on(4eportin Issuers
i. 4ule
IA issuer is $o$*re!orti$2 issuer1
T7EN issuer is
I. Not re+uire% to )ile re!orts u$%er eit/er B1- a$% B1D4%5 o) E3c/. Act1 AND
II. Not )ili$2 t/ese re!orts &olu$taril,
". "nseasoned Issuers
i. 4ule
IA issuer is u$seaso$e% issuer1
T7EN issuer is
I. Re+uire% to )ile re!orts u$%er eit/er B1- a$% B1D4%5 o) E3c/. Act1 AND
II. Is i$eli2i"le to )ile a Aorm S*- 4or A*-5 )or a !rimar, sec@s o))eri$2 4see a"o&e5
c. Seasoned Issuer
i. 4ule
IA issuer is seaso$e% issuer1
T7EN issuer is
I. Re+uire% to )ile re!orts u$%er eit/er B1- a$% B1D4%5 o) E3c/. Act1 AND
II. Eli2i"le to )ile a Aorm S*- 4or A*-5 )or a !rimar, sec@s o))eri$2 4see a"o&e5
6S
%. 'ell(9nown Seasoned Issuers 4.KSI5
i. 4ule %4 256&
Issuer is a .KSI1
IAA1 as o) t/e .KSI@s determination date1 t/e issuer
I. is re+uire% to )ile re!orts u$%er eit/er B1- a$% B1D4%5 o) E3c/. Act1
II. is eli2i"le to )ile a Aorm S*- 4or A*-5 )or a !rimar, sec@s o))eri$2 4see a"o&e5
III. #<i$ TC %a,s o) %etermi$atio$ %ate1 /as EIT7ER
A. P W[CC millio$ o) commo$ e+uit, #orl%#i%e maret &alue /el% ", $o$*
a))iliates1
OR
B. BOT7
1. Issue% W1 "illio$ a22re2ate !ri$ci!al amou$t o) $o$*co$&erti"le
securities i$ re2istere% o))eri$2s %uri$2 t/e !ast t/ree ,ears1 AND
'. .ill re2ister
a. o$l, $o$*co$&erti"le securities1 ot/er t/a$ commo$ e+uit,1 AND
". )ull a$% u$co$%itio$al 2uara$tees o) a$, su"si%iar, securities
I:. is curre$t i$ its E3c/a$2e Act )ili$2s a$% /as $ot "ee$ ot/er#ise )or t/e !ast 1'
mo$t/s1
:. is $ot a$ inelii!le issuer or a$ asset*"ace% issuer1 AND
:I. is $ot a$ i$&estme$t com!a$, or "usi$ess %e&elo!me$t com!a$,
:II. is a ma=orit,*o#$e% su"si%iar, o) a !are$t t/at is a .KSI
ii. )etermination )ate %def&
I. %if issuer has filed shelf reistration statement& Later o) %ate o)
A. Issuer@s most rece$t s/el) re2istratio$ stateme$t )ile%1 OR
B. Issuer@s most rece$t B 1C4a54-5 ame$%me$t to a s/el) re2istratio$ stateme$t
II. %if issuer has +ET filed shelf reistration statement& Date o) )ili$2 o) most
rece$t 1C*K
iii. Inelii!le Issuer %def&: I$clu%es issuers t/at1
I. #<i$ !ast - ,ears
A. #ere "la$ c/ec com!a$,1 s/ell com!a$,1 or issue% a re2istere% !e$$,
stoc o))eri$2
B. )ile% a BR !etitio$ #<i$ !ast - ,ears1 u$less /a&e )ile% a$$ual re!ort #<
au%ite% )i$a$cial stateme$ts !ost*emer2e$ce )rom BR
C. &iolate% a$ti*)rau% !ro&isio$s o) )e%eral sec@s la#s
D. )ile% a re2istratio$ stateme$t t/at is su"=ect o) !e$%i$2 !rocee%i$2 u$%er B V
o) Sec@s ActJ OR
E. /a&e "ee$ su"=ect o) re)usal or sto! or%er u$%er B V o) Sec@s Act1 OR
II. are su"=ect o) !e$%i$2 !rocee%i$2 u$%er B VA o) Sec@s Act i$ co$$ectio$ #< a$
o))eri$2
DC
1
'
OR
.KSI
EIT7ER
IAA
D. Pre(*ilin Period 4Or1 t/e G>uiet (erio%H5
1. Prohi!ition on Sales %A 6%a&&
a. $ain 4ule:
IA i$ (re*Aili$2 (erio% 4i.e.1 re2istratio$ stateme$t $ot ,et )ile%5
T7EN !ro/i"ite% )or a$, !erso$ to sell t/e securities t/rou2/ i$terstate commerce
'. Prohi!ition on Effers %A 6%c&&
a. $ain 4ule %A 6%c&&
IA in Pre(*ilin Period 4i.e.1 re2istratio$ stateme$t $ot ,et )ile%51
T7EN !ro/i"ite% )or a$, !erso$ to mae offers t/rou2/ i$terstate commerce
". 4ationale8 .orr, i$)o #ill G#/i! u! a s!eculati&e )re$U,H 4%i))ere$t )rom assum!tio$
a"out i$&estors i$ Basic5.
c. ;In Pre(*ilin Period< C 'hen )oes it Bein %for Purposes of A 6%c&&3
i. 4ule %SecBs Act 4el. +o. 6550&
IA "et#ee$
I. t/e earlier o)
A. T/e time a$ issuer reac/es a$ u$%ersta$%i$2 #it/ t/e "roer*%ealer #/ic/ is
to act as a ma$a2i$2 u$%er#riter1 AND
B. 4&a2ue5 t/e start o) t/e G!rocess or re2istratio$H ot/er#ise
AND
II. t/e later o)
A. t/e !erio% o) 6C or SC %a,s %uri$2 #/ic/ %ealers must %eli&er a !ros!ectus1
AND
B. 4&a2ue5 t/e com!letio$ o) t/e o))eri$2
T7EN t/e (re*Aili$2 (erio% is i$ e))ect1
UNLESS t/e 4ule /J1A safe har!or a!!lies
D1
ii. 4ule /J1A Safe Har!or %15()ay Cool )own5
I. 4ule %4 /J1A%a&&
IA
A. a$, commu$icatio$ ma%e ",
1. t/e issuer ETH#4 THA+ a !lank check or shell company or a penny
stock issuer1 OR
'. a !art, #ori$2 o$ "e/al) o) t/e issuer ETH#4 THA+ a "' or dealer
participatin in the offerin,
B. more than 15 days "e)ore t/e %ate o) )ili$2 o) re2istratio$ stateme$t1
C. does not reference securities offerin, AND
D. the issuer takes reasona!le steps within its control to prevent further
distri!ution or !u"licatio$ o) t/e i$)ormatio$ %uri$2 t/e -C %a,s "e)ore t/e
%ate o) )ili$2 o) t/e re2istratio$ stateme$t1 AND
E. t/e commu$icatio$ is $ot a sham moti&ate% ", a 2e$ui$e %esire to co$%itio$
t/e maret1
T7EN t/e commu$icatio$ is $ot a$ o))er u$%er B D4c5 4"<c t/e (re*Aili$2 (erio%
is $ot ,et i$ e))ect5
II. 4ationale
A. In General: -C*%a, !erio% assures t/at commu$icatio$s #ill $ot co$%itio$
t/e maret "<c su))icie$t time to cool any interest
B. *or "' #-clusion: Greater co$cer$ U. commu$icatio$s %esi2$e% to
co$%itio$ maret
III. 4elation to #-emption from 4e *) in 4ule /55%!&%8&%iv& %4 /J1A%d&&
A. 4ule
IA commu$icatio$ e3em!t )rom B D4c5 %ue to Rule 1T-A1
T7EN commu$icatio$ +ET e3em!t )rom Re2 AD %ue to 4ule /55%!&%8&%iv&
B. 4eulation *) 4ule /55%!&%8&%iv&
1. E3em!tio$ )rom Re2 AD #/e$ i$ co$$ectio$ #it/ securities o))eri$2
D'
%. Effer
i. +ote8 4isk Aversion
I. Gi&e$ t/e harsh conseDuences )or &iolati$2 B D4c5 4i.e.1 B /8%a&%/& crush(out
lia!ility51 !lus )act t/at Go))erH is u$certai$1 attor$e,s err o$ si%e o) cautio$
4+uiet51 u$less sa)e /ar"or rules a!!l,
ii. ;Effer< in A 8%a&%1&
I. Sectio$ '4a54-5 o) Sec@s Act co$tai$s a %e)i$itio$ o) Go))er1H "ut it is co$te$t*
less1 #MC#PT THAT
II. It e-empts preliminary neotiations !etween issuers@those actin on their
!ehalf and "'s
iii. $ain 4ule
I*
I. any kind of communication or pu!licity 4e&e$ i) $ot couc/e% i$ terms o) a$
e3!ress o))er5
II. conditions the market 4or1 e+ui&ale$tl,1 co$%itio$s t/e mi$% or arouses t/e
!u"lic i$terest5 )or t/e rele&a$t securities1
T7EN t/e commu$icatio$ is a$ o))er
UNLESS o$e o) t/e safe har!ors o) Rule /J71 Rule /J01 Rule /J11 or Rule /16
a!!lies
i&. Any 9ind of Communication or Pu!licity
I. Include
A. +on(real time electronic communications %;raphic communications<&
%4 256&
1. E.2.1 emails1 &i%eota!es1 CD*ROMS1 a$% recor%e% electro$ic &ersio$s o)
roa%s/o#s
B. Hyperlinks %4 211%e&%/&&
1. E.2.1 i$)ormatio$ co$tai$e% o$ issuer@s #e"site1 or /,!erli$e% ", issuer
)rom issuer@s #e"site to t/ir% !art, #e"site
II. #-clude
A. 4eal Time Communications %4 256&
1. E.2.1 roa%s/o#s
B. Certain #lectronic Historical Issuer Information %4 211%e&%8&&
1. 4ule
IA /istorical issuer i$)ormatio$ is
a. Co$tai$e% i$ a se!arate sectio$ o) issuer@s #e"site1 AND
". Not i$cor!orate% ", re)ere$ce1 i$clu%e% i$ a !ros!ectus o) issuer
use% i$ t/e o))eri$21 or ot/er#ise use% or re)erre% to i$ t/e o))eri$21
T7EN suc/ i$)ormatio$ ca$$ot "e "asis o) a$ o))er
D-
%In re Carl M. Loe,&
%8556 Pu!lic Efferin
4eforms, #-cept 4
/16&
&. Conditionin the $arket %SecBs Act 4el. +o. 1722 K 6/75&
I. S#C *actors 4Sec@s Act Rel. No -V665
A. $otivation of communication changes in behavior as !ro3, )or
moti&atio$ to co$%itio$ t/e maret
1. Arra$2eme$ts a)ter )i$a$ci$2 %ecisio$ more liel, a$ o))er
B. Type of information soft) forward-looking )ormatio$ is more liel, a$
o))er1 more liel, to mislea% i$&estors
C. Breadth of distri!ution "roa%er mea$s it #ill a))ect ma$, i$&estors
a$% more liel, a$ o))er
D. *orm of communication #ritte$1 easil, re!ro%uce% a$% %istri"ute%
commu$icatio$s more liel, a$ o))er
E. $entionin facts a!out offerin 4e.2.1 $ami$2 u$%er#riter5 is more liel,
a$ o))er
II. Permitted Activities C +ET Effers
A. Co$ti$ui$2 to a%&ertise !ro%ucts a$% ser&ices
B. Co$ti$ui$2 to se$% out customar, +uarterl,1 a$$ual a$% ot/er !erio%ic
re!orts to stoc/ol%ers
C. Co$ti$ui$2 to mae a$$ou$ceme$ts to !ress #<r<t )actual "usi$ess a$%
)i$a$cial %e&elo!me$t 4i.e.1 e&e$ts o) i$terest to t/e commu$it, i$ #/ic/ t/e
"usi$ess o!erates5
D. A$s#eri$2 u$solicite% i$+uiries )rom stoc/ol%ers1 )i$a$cial a$al,sts1 t/e
!ress a$% ot/ers co$cer$i$2 )actual i$)ormatio$
E. O"ser&i$2 Go!e$ %oorH !olic, i$ res!o$%i$2 to u$solicite% i$+uiries
co$cer$i$2 )actual matters )rom securities a$al,sts1 )i$a$cial a$al,sts1
securit, /ol%ers1 a$% !artici!a$ts i$ t/e commu$icatio$s )iel% #/o /a&e
le2itimate i$terest i$ cor!oratio$@s a))airs
A. Co$ti$ui$2 to /ol% stoc/ol%er meeti$2s as sc/e%ule% a$% a$s#eri$2
s/are/ol%ers@ i$+uiries at suc/ meeti$2s relati$2 to )actual matters
III. *or!idden Activities C A4# Effers %SecBs Act 4el. +o. 6/75&
A. Issua$ce o) )orecasts1 !ro=ectio$s1 or !re%ictio$s relati$2 "ut $ot limite% to
re&e$ues1 i$come1 or E(S
B. (u"lis/i$2 o!i$io$s co$cer$i$2 &alues
C. CEO tells re!orter t/at GSEC !ro/i"its me )rom mai$2 a$, stateme$ts t/at
#oul% /,!e m, I(OH a$% %iscusses /is i$%ustr, a$% com!etitors
D6
&i. 4ule /J7 Safe Har!or %Erdinary Communications !y #A4Is&
I. 4ule
IA
A. a$, commu$icatio$ ma%e ",
1. a$ EARI1 OR
'. a !art, #ori$2 o$ "e/al) o) t/e EARI OT7ER T7AN a U. or %ealer
!artici!ati$2 i$ t/e o))eri$21
B. releases EIT7ER
1. factual !usiness information1 OR
'. forward(lookin information
C. t/at
1. is o) a t,!e t/at "ee$ !re&iousl, release% or %issemi$ate% i$ t/e or%i$ar,
course o) t/e issuer@s "usi$ess1
'. is materiall, co$siste$t i$ timi$21 ma$$er a$% )orm #it/ t/e issuer@s
similar !ast releases or %issemi$atio$s o) suc/ i$)ormatio$1
-. BOT7
a. %oes $ot re)er to t/e o))eri$2 itsel)1 AND
". #as $ot %issemi$ate% as !art o) o))eri$2 acti&ities i$ t/e o))eri$2
AND
6. is $ot a sham moti&ate% ", a 2e$ui$e %esire to co$%itio$ t/e maret1
T7EN t/e commu$icatio$ is $ot a$ o))er u$%er BB '4a54-5 ] D4c5 4a$% is $ot a
!ros!ectus u$%er B '4a541C55
II. *actual Business Information and *orward(.ookin Information
A. In General
1. I$clu%es i$)ormatio$ i$ !erio%ic re!orts 4e.2.1 1C*Ks5 a$% ot/er materials
)ile% #it/ t/e SEC5
B. *actual Business Information
1. I$clu%es )actual i$)ormatio$ a"out issuer a$% its "usi$ess1
a%&ertiseme$ts o) issuer@s !ro%ucts or ser&ices1 a$% )actual i$)ormatio$
co$tai$e% i$ issuer@s !erio%ic E3c/. Act re!orts
C. *orward(.ookin Information
1. I$clu%es )i$a$cial !ro=ectio$s1 stateme$ts a"out issuer@s ma$a2eme$t
!la$s a$% issuer@s )uture eco$omic !er)orma$ce1 a$% a$, u$%erl,i$2
assum!tio$s
III. #ffect of 4ule /J7 Beyond Pre(*ilin Period
A. Rule 1TV e3clu%es commu$icatio$s )rom Go))erH u$%er B '4a541C51 a$%
t/ere)ore )rom G!ros!ectusH u$%er B '4a541C51 a$% t/ere)ore )rom a!!licatio$
o) B D4"5415 i$ "ot/ .aiti$2 a$% (ost*E))ecti&e (erio%s
DD
I:. #-amples that *all "nder 4ule /J7
A. Issuer se$%s Aorm 1C*K co$tai$i$2 MD]A i$)o a"out )uture tre$%s a$%
u$certai$ties
B. Re2ular a%s to tra%e =our$als touti$2 !ro%ucts a$% !ast recor%
1. Sa)e /ar"or a!!lies1 "ut also =ust G$ot a$ o))erH
C. (ress release as re2ular course o) commu$icatio$s #it/ !ro=ectio$s a$%
)uture !ro)ita"ilit,
D. Issuer e3!a$%s a%s to se&eral )i$a$cial ma2aUi$es #orr, a"out
Gmoti&atio$H a$% G"rea%t/1H so a$s#er #ill tur$ o$ 1TV4%51 Gtime1 ma$$er
a$% )ormH 4also &a2ue5.
DT
&ii. 4ule /J0 Safe Har!or %Erdinary Communications !y Issuers&
I. 4ule
IA
A. a$, commu$icatio$ ma%e ",
1. a$ issuer1 OR
'. a !art, #ori$2 o$ "e/al) o) t/e issuer OT7ER T7AN a U. or %ealer
!artici!ati$2 i$ t/e o))eri$21
B. releases factual !usiness information
C. t/at
1. is o) a t,!e t/at "ee$ !re&iousl, release% or %issemi$ate% i$ t/e or%i$ar,
course o) t/e issuer@s "usi$ess1
'. is materiall, co$siste$t i$ timi$21 ma$$er a$% )orm #it/ t/e issuer@s
similar !ast releases or %issemi$atio$s o) suc/ i$)ormatio$1
-. is release%
a. to !erso$s1 suc/ as customers a$% su!!lies1
". ot/er t/a$ i$ t/eir ca!acities as i$&estors or !ote$tial i$&estors i$ t/e
issuer@s securities1
c. ", t/e issuer@s
415 em!lo,ees OR
4'5 a2e$ts #/o re2ularl, a$% /istoricall, /a&e !ro&i%e% suc/
i$)ormatio$ to suc/ !erso$s
6. BOT7
a. %oes $ot re)er to t/e o))eri$2 itsel)1 AND
". #as $ot %issemi$ate% as !art o) o))eri$2 acti&ities i$ t/e o))eri$2
AND
D. is $ot a sham moti&ate% ", a 2e$ui$e %esire to co$%itio$ t/e maret1
T7EN t/e commu$icatio$ is $ot a$ o))er u$%er BB '4a54-5 ] D4c5 4a$% is $ot a
!ros!ectus u$%er B '4a541C55
II. *actual Business Information 4see Rule 1TV5
III. #ffect of 4ule /J0 Beyond Pre(*ilin Period
A. Rule 1TS e3clu%es commu$icatio$s )rom Go))erH u$%er B '4a541C51 a$%
t/ere)ore )rom G!ros!ectusH u$%er B '4a541C51 a$% t/ere)ore )rom a!!licatio$
o) B D4"5415 i$ "ot/ .aiti$2 a$% (ost*E))ecti&e (erio%s
I:. #-amples that *all "nder 4ule /J0
A. No$*EARI se$%s re2ular a% to tra%e =our$als.
B. No$*EARI e3!a$%s a%s to )i$a$cial ma2aUi$es tur$s o$ Gtime1 ma$$er1
a$% )ormH "ut also !ro"lematic "<c tar2eti$2 i$&estors.
D[
DV
&iii. 4ule /J1 Safe Har!or %'9SI #-emption&
I. 4ule
IA
A. a$, commu$icatio$ 4oral or #ritte$5 ma%e ",
1. a .KSI1 OR
'. a !art, #ori$2 o$ "e/al) o) t/e $o$*EARI OT7ER T7AN a U. or
%ealer !artici!ati$2 i$ t/e o))eri$21
B. %oes $ot relate to a mer2er or ot/er "usi$ess com"i$atio$
C. EIT7ER
1. is )ile% 4as a G)ree #riti$2 !ros!ectusH5 !rom!tl, u!o$ t/e .KSI@s )ili$2
o) t/e re2istratio$ stateme$t1 OR
'. #/ose immaterial or u$i$te$tio$al )ailure to "e so )ile% or %ela, i$ "ei$2
)ile%
a. occurre% %es!ite a 2oo% )ait/ e))ort to )ile it timel,1 AND
". #as accom!a$ie% ", a )ili$2 as soo$ as !ractica"le a)ter %isco&er, o)
t/e )ailure to )ile1
AND
D. %if a written communication& EIT7ER
1. i$clu%es a le2e$% i$)ormi$2 i$&estors a"out t/e )ormal statutor,
!ros!ectus a$% /o# to 2et it
'. #/ose immaterial or u$i$te$tio$al )ailure to "e i$clu%e suc/ a le2e$%
a. occurre% %es!ite a 2oo% )ait/ e))ort to i$clu%e it1 AND
". #as accom!a$ie% ", a$ ame$%me$t o) t/e )ree #riti$2 !ros!ectus to
i$clu%e t/e s!eci)ie% le2e$% as soo$ as !ractica"le a)ter %isco&er, o)
t/e )ailure to i$clu%e t/e le2e$%
T7EN t/e commu$icatio$ is $ot a$ o))er u$%er BB '4a54-5 ] D4c5
II. 4ationale: Assum!tio$ i$&estors ca$ /a$%le i$)o )rom .KSI "<c .SK1 lots o)
a$al,sts1 stoc !rice is $o#$.
III. +ote: Re$%ere% less im!orta$t ", !ossi"ilit, o) s/el) re2istratio$
I:. 4elation to #-emption from 4e *) in 4ule /55%!&%8&%iv& %4 /J1A%d&&
A. 4ule
IA commu$icatio$ e3em!t )rom B D4c5 %ue to Rule 1T-1
T7EN commu$icatio$ +ET e3em!t )rom Re2 AD %ue to 4ule /55%!&%8&%iv&
B. 4eulation *) 4ule /55%!&%8&%iv&
1. E3em!tio$ )rom Re2 AD #/e$ i$ co$$ectio$ #it/ securities o))eri$2
:. #-amples that *all "nder 4ule /J1
A. .KSI !laces a% i$ .SK soliciti$2 o))ers to "u, !rior to )ili$2 r<s a$%
!ro&i%i$2 re&e$ue a$% !ro)it !ro=ectio$s
DS
i3. 4ule /16 Safe Har!or %Tom!stone Ads&
I. 4ule
IA
A. EIT7ER
1. a$ issuer1 OR
'. a$, ot/er securit, /ol%er i$ t/e o))eri$21
B. maes a commu$icatio$ t/at
1. i$clu%es a le2e$% to t/e e))ect t/at t/e commu$icatio$ %oes $ot
co$stitute a$ o))er o) a$, securities )or sale1 AND
'. ot/er#ise co$tai$s no more than t/e
a. $ame o) issuer
". title1 amou$t1 "asic terms o) t/e o))ere% securities
c. ma$$er a$% !ur!ose o) t/e o))eri$21 w@o namin the "'s
%. a$tici!ate% timi$2 o) o))eri$2
T7EN t/e commu$icatio$ is $ot a$ o))er u$%er B D
II. #ffect of 4ule /16 Beyond Pre(*ilin Period
A. Rule 1-D e3clu%es commu$icatio$s )rom Go))erH u$%er B '4a541C51 a$%
t/ere)ore )rom G!ros!ectusH u$%er B '4a541C51 a$% t/ere)ore )rom a!!licatio$
o) B D4"5415 i$ "ot/ .aiti$2 a$% (ost*E))ecti&e (erio%s
e. Test the 'aters8 Certai$ issuers ca$ "e$e)it )rom a"ilit, to Gtest t/e #atersH to )i$% out
i) i$&estors #ill "u, securities
i. But u$$o#$ i$ter$et startu!1 $ot Microso)t1 #ill "e$e)it )rom testi$2 #atersJ ,et
Microso)t 4.KSI5 is o$e t/at ca$ u$%er t/e rulesZ
ii. Cou$terar2ume$ts8
I. Be$e)it #oul% "e to u$$o#$ issuer1 "ut cost to i$&estor
II. U$$o#$ startu!s most liel, to mislea% i$&estors 4G/otH maret5
III. I$ter$et startu! o$l, le)t #it/ 1TS a$% 1T-A.
TC
Safe
har!or
#-emption Type of
issuer %!ut
see e-cluded
issuers&
Type of information allowed $andatory
information
Ether restrictions
Rule 1T-A BD4c5 All * Ma, $ot re)ere$ce o))eri$2
* Re2 AD a!!lies 1T-A4%5
No$e * P -C*%a,s !rior to )ili$2 o) r<s 4issuer tae
reaso$a"le ste!s to co$trol )urt/er %istri"utio$
1T-A4a5
* Not )or U<. or %ealer !artici!ati$2 i$ o))eri$2
1T-A4c5
* E3clu%e% issuers 1T-A4"54-51 465
Rule 1T- BD4c5 .KSI
1T-4a5415
* O))ers OK
* Re2 AD a!!lies 1T-4e5
Le2e$% i)
#ritte$
1T-4"5415
* Must )ile #ritte$ commu$icatio$ as A.( a)ter
)ili$2 o) r<s 1T-4"54'5
* Not )or U<. or %ealer !artici!ati$2 i$ o))eri$2
1T-4c5
* E3clu%e% issuers 1T-4"54-5
Rule 1TV BB D4c5 a$%
'4a541C5
EARI * Aactual I$)o 9 A%s 9 Di&.
$oticeJ certai$ )or#ar%*looi$2
i$)o 1TV4"54151 4'5
* Ma, $ot "e !art o) o))eri$2
acti&ities 1TV4c5
* Re2 AD a!!lies
No$e * Not )or U<. or %ealer !artici!ati$2 i$ o))eri$2
1TV4"54-5
* (re&. release%<or%i$ar, course o) "usi$ess 1TV4%5
415
Co$siste$t timi$21 ma$$er1 )orm 1TV4%54'5
* Not i$&. Co. or "us. De&. Co. 1TV4%54-5
Rule 1TS BB D4c5 a$%
'4a541C5
All * Aactual i$)o 9 a%s 1TS4"5415
* Ma, $ot "e !art o) o))eri$2
acti&ities 1TS4c5
* Re2 AD %oes $ot a!!l,
No$e * Not )or U<. or %ealer !artici!ati$2 i$ o))eri$2
1TS4"54'5
* Or%i$ar, course o) "usi$ess 1TS4%5415
* Co$siste$t timi$21 ma$$er1 )orm 1TV4%54'5
* No$*i$&estor reci!ie$ts<issuer@s a2e$ts /istoricall,
!ro&i%e% suc/ i$)o 1TS4%54-5
* Not i$&. Co. or "us. De&. Co. 1TS4%5465.
T1
-. Prospectus
a. Plain #nlish 4eDuirement %4ule 28/%!&&
i. 4ule
Issuer must !re!are !ros!ectus usi$2 t/e )ollo#i$2 sta$%ar%s8
I. (rese$t i$)o i$ clear, concise sections, pararaphs, and sentences. ./e$e&er
!ossi"le1 use short, e-planatory sentences a$% !ullet lists.
II. Avoid lealistic or overly comple- presentations t/at mae su"sta$ce o)
%isclosure %i))icult to u$%ersta$%.
". 4e S(98 co$tai$s 2lossar, list o) re+uireme$ts t/at &arious SEC Aorms !ull )rom
c. #lements
i. *ront cover pae Item 1 o) Aorm S*18 Item DC1 o) S*K
ii. 4isk *actors Item - o) Aorm S*18 Item DC-4c5 o) S*K
I. Mostl, useless1 cut a$% !aste )rom similar com!a$ies.
iii. "se of Proceeds Item 6 o) S*18 Item DC6 o) S*K
I. Most commo$ is G)or 2e$eral cor!orate !ur!osesH 4also useless5
i&. )escription of securities to !e reistered Item S o) S*18 Item 'C' o) S*K
I. .e %o lear$ somet/i$2 /ereZ
II. E.2. Eac/ s/are o) Class A commo$ stoc is e$title% to o$e &ote !er s/areF
&. )ilution Item T o) Aorm S*18 Item DCT o) S*K
I. I) ,ou are !a,i$2 more !er s/are t/a$ t/ose t/at came "e)ore ,ou1 ,our "oo
&alue !er s/are is less t/a$ mo$e, ,ou !ut i$.
II. But $ot t/at use)ul "ecause o!erati$2 "usi$ess ca$ "e #ort/ more t/a$ "oo
&alue1 a$% e&er,o$e $o#s )ou$%ers !a, less.
&i. A!out the Company Item 11 o) Aorm S*1
I. Descri!tio$ o) "usi$ess 41C1 S*K5J o) !ro!erties 41C'51 le2al !rocee%i$2s 41C-51
e3ecuti&e com!e$satio$ 46C'51 cor!orate 2o&er$a$ce 46C[51 certai$ relatio$s/i!s
a$% tra$sactio$s 46C65
II. Directors a$% o))icers 46C15 must 2o "ac )i&e ,ears
A. Must i$clu%e ot/er i$)o. $ecessar, not to mae #/at /as alrea%, "ee$
%isclose% materially misleading.
&ii. $)KA %manaement discussion K analysis& /as "ecome e, sectio$ o)
%isclosure %ocume$t1 1C*K a$% S*1 Item 114/5 o) Aorm S*18 Item -C- S*K
I. T/is is o$l, )or#ar%*looi$2 sectio$1 "ut still %oes $ot i$clu%e ear$i$2s
!ro=ectio$s 4=ust 2e$eralities5.
II. Co$tai$s8 Ma$a2eme$t@s $arrati&eJ )i$a$cial co$%itio$ ] results o) o!eratio$J
tre$%s relate% to cas/ )lo#1 ear$i$2s1 li+ui%it,J o))*"ala$ce s/eet arra$2eme$ts.
&iii. Principal and sellin security holders Items [1 114m5 o) Aorm S*18 Items
DC[1 6C- o) S*K
i3. Plan of )istri!ution Item V o) S*18 Item DCV S*K
3. *inancials %Audited& Item 114e5 o) S*18 Re2 S*I
I. Reall, sectio$ i$&estors tur$ to1 t/ou2/ all historical.
II. Bala$ce s/eets1 i$come stateme$ts1 cas/ )lo#s1 $otes to )i$a$cial stateme$ts
3i. Summary8 Most is "oiler!late. Ke, !ro&isio$s are )i$a$cials a$% MD]A.
I. I$&estors #oul% reall, lie ear$i$2s !ro=ectio$s1 "ut t/is is $ot re+uire% so
i$&estors =ust !resume #/at /a!!e$e% i$ !ast #ill co$ti$ue i$to )uture.
%. +ote
i. '1D a$% '1E sa)e /ar"or )or )or#ar%*looi$2 stateme$ts %oes not a!!l, to I(Os
!ote$tial a$ti)rau% lia"ilit, u$%er 1C"*D or ot/er !ro&isio$s.
T'
#. 'aitin Period
1. Prohi!ition on Effers %A 6%c&&: +E .E+G#4 APP.I#S
'. Prohi!ition on Sales %A 6%a&&
a. $ain 4ule
IA i$ .aiti$2 (erio% 4re2istratio$ stateme$t )ile% "ut $ot ,et e))ecti&e51
T7EN !ro/i"ite% )or a$, !erso$ to sell t/e securities t/rou2/ i$terstate commerce
-. Prohi!ition on Prospectuses 4B 6%!&%/&&
a. $ain 4ule
IA i$ .aiti$2 (erio% 4re2istratio$ stateme$t )ile% "ut $ot ,et e))ecti&e51
T7EN !ro/i"ite% )or a$, !erso$ to tra$smit any prospectus t/rou2/ i$terstate
commerce
UNLESS the prospectus is a A/5 Prospectus
T-
". ;Any Prospectus< "nder A 8%a&%/5&& %for purposes of 'aitin Period&
i. 4ule %A 8%a&%/5&&
IA a commu$icatio$ is
I. a$, !ros!ectus1 notice, circular, advertisement, letter, or communication,
written or !y radio or T:
II. #/ic/ offers a$, securit, )or sale
T7EN t/e commu$icatio$ is a !ros!ectus1
UNLESS A 8%a&%/5&%!& safe har!or a!!lies
ii. Types of Communications that Can Be Prospectuses
I. Included: All written a$% "roa%cast commu$icatio$s
A. Graphic Communications %4 256&: i$clu%e emails1 i$ter$et #e"sites1
)a3es1 etc.
II. #-cluded
A. Eral Communications not Involvin a Broadcast medium
1. 4oadshows
'. 4eal Time Audio :isual Aids %4 211%d&%7&&
B. 4ationale8 Gets at a"ilit, to as +uestio$s a$% res!o$%
III. +ote: 'innerBs Curse
A. I$stitutio$al i$&estors 2et CEO at roa%s/o#1 a$% i$%i&i%ual i$&estors =ust 2et
col% call )rom "roer i$%i&i%ual i$&estors 2et i$to I(O o$l, #/e$ it
sucs.
iii. Effers 4see a"o&e8 B '4a54-51 etc.5
i&. Section 8%a&%/5&%!& Safe Har!or
I. 4ule
IA a commu$icatio$
A. is a $otice1 circular1 a%&ertiseme$t1 letter or commu$icatio$ i$ res!ect o) a
securit,1
B. states )rom #/om a #ritte$ !ros!ectus meeti$2 B 1C ma, "e o"tai$e%1
AND
C. %oes $o more t/a$
1. i%e$ti), t/e securit,
'. state t/e securit,@s !rice
-. state ", #/om or%ers #ill "e e3ecute%1 AND
6. co$tai$ a$, ot/er i$)o t/e Commissio$ ma, !ermissi"l, re+uire
T7EN t/e commu$icatio$ is $ot a !ros!ectus u$%er B '4a541C5
T6
c. Section /5 Prospectuses %for purposes of A 6%!&%/& Compliance in 'aitin Period&
i. 4ule
IA a !ros!ectus is a B 1C (ros!ectus1
T7EN t/e !ros!ectus is a
I. A /5%a& Prospectus OR
II. A /5%!& Prospectus
ii. Section /5%a& *inal Statutory Prospectus
I. )efinition: co$tai$s all price and price-related info 4e.2.1 u$%er#riter51 i.e. )i$al
e$%*!ro%uct 4see B 1C4a5 )or )urt/er s!eci)icatio$5
II. Must "e %istri"ute% to i$&estors %uri$2 (ost*E))ecti&e (erio%
iii. Section /5%!& Preliminary Prospectus
I. 4ule
IA a !ros!ectus satis)ies t/e re+uireme$ts o)
A. 4ule 215%a& %Preliminary Prospectus&,
B. 4ule 21/ %#A4I Summary Prospectus&,
C. 4ule 256@/J2@211 %*ree 'ritin Prospectus&
D. 4ule 215A, 4ule 215B, or 4ule 215C Prospectus
T7EN t/e !ros!ectus is a B 1C4"5 (relimi$ar, (ros!ectus
II. 4ule 215 Preliminary Prospectus 4Gre% /erri$2H5
A. )efinition: A B 1C4a5 !ros!ectus !ut for price and price-related info 4e.2.
u$%er#riter %iscou$t5
III. 4ule 21/ Preliminary Prospectus 4EARI Summar, (ros!ectus5 4.E DIDN@T
CO:ER T7IS5
TD
I:. 4ule 256@/J2@211 *ree 'ritin Prospectus %*'P&
A. 4ule
IA a commu$icatio$
1. is a written communication
'. t/at o))ers to sell or solicits o))er to "u, a securit, t/at is or #ill "e
su"=ect to a re2istratio$ stateme$t1
-. use%
a. %if non('9SI& a)ter t/e )ili$2 o) t/e re2istratio$ stateme$t1
". %if '9SI& #/e$e&er1
AND
6. EIT7ER
a. meets t/e reDuirements of 4ule 256@/J2@211
OR
". a$, filin, leend, or record retention violation u$%er t/ose rules
#as cured
T7EN t/e !ros!ectus is a$ A.( < B 1C4"5 (relimi$ar, (ros!ectus
B. Policy8 I$ !ractice1 $ot #i%el, use% "<c still )ace B 1'4a54'5 /ei2/te$e%
lia"ilit,
1. Mostl, use% )or term s/eets a$% to !u"lis/ electro$ic roa% s/o#s.
C. 'ritten Communication %4 256&
1. Includes: .ritte$1 !ri$te%1 "roa%cast a$% raphic communications
a. Graphic Communications %def&: All )orms o) electro$ic me%ia1
suc/ as e*mails1 #e"sites1 CD*ROMs1 &i%eota!es1 a$% su"sta$tiall,
similar messa2es #i%el, %istri"ute% o&er a &ariet, o) electro$ic
commu$icatio$ $et#ors
". I$%irect commu$icatio$s )rom issuer to maret!lace t/rou2/ me%ia
sources1 i$clu%i$2 i$ter&ie#s 2i&e$ ", cor!orate o))icers
'. #-cludes
a. 4eal(time #lectronic Communications
TT
Cure Provision %4
/J2&
D. 4ule /J2@211 4eDuirements
1. +on(4eportin and "nseasoned Issuers
a. Section /5 Prospectus )elivery 4eDuirement
415 Basic )elivery 4eDuirement %4 211%!&&
Commu$icatio$ must "e !rece%e% or accom!a$ie% 4i$clu%i$2
electro$icall,1 i$clu%i$2 &ia /,!erli$5 ", EIT7ER
4a5 %if durin 'aitin Period& t/e most recent A /5%!&@4ule
215 prospectus1 OR
4"5 %if durin Post(#ffective Period& a B 1C4a5 Ai$al (ros!ectus
4'5 4eDuirement on Su!seDuent Communications %4 211%!&%8&%i&&
IA issuer
4a5 se$%s su"se+ue$t commu$icatio$ 4attem!te% A.(51
4"5 #<o se$%i$2 a$ot/er B 1C !ros!ectus1 /a&i$2 earlier se$t a B
1C !ros!ectus1
T7EN t/ere must /a&e "ee$ $o material c/a$2es to t/e
i$)ormatio$ i$ t/e !re&iousl, se$t B 1C !ros!ectus
". Information 4eDuirements %4 /J2%c&@211%c&&
415 +o Inconsistent Information %4 211%c&%/&&
Commu$icatio$ ma, $ot co$tai$ i$)ormatio$ t/at is i$co$siste$t
#< i$)o co$tai$e% i$ EIT7ER
4a5 A )ile% statutor, !ros!ectus1 OR
4"5 A curre$t re!ort i$cor!orate% ", re)ere$ce i$to t/e
re2istratio$ stateme$t
4'5 .eend 4eDuirement %4 211%c&%8&&
Commu$icatio$ must i$clu%e le2e$% i$%icati$2
4a5 T/at issuer /as )ile% re2istratio$ stateme$t #it/ t/e SEC1
AND
4"5 ./ere reci!ie$t ma, o"tai$ !relimi$ar, or "ase !ros!ectus
T[
c. *ilin 4eDuirements %4 /J2%!&@211%d&&
415 *ilin of *'P and Time Thereof
A.( must "e )ile% #it/ SEC $o later t/a$ %ate o) )irst use o)
4a5 A$, ;issuer free writin prospectus< use% ", a$, !erso$1
OR
4"5 A$, ;issuer information< co$tai$e% i$ a$ A.( !re!are% ",
a$, ot/er !erso$ 4"ut $ot i$)o !re!are% ", a$, ot/er !erso$
o$ t/e "asis o) issuer i$)ormatio$5
4c5 Issuer *'P %def& %4 211%h&%/&: All i$)o %istri"ute% ", t/e
issuer1 o$ "e/al) o) t/e issuer1 or use% or re)erre% to ", t/e
issuer
4%5 Issuer Information %def& %4 211%h&%8&: Material i$)o a"out
issuer or its securities t/at /as "ee$ !ro&i%e% ", or o$ "e/al)
o) issuer
4'5 *ilin of )escription of *inal Terms %4 211%d&%/&%i&%C&&
Issuer must )ile
4a5 %content& %escri!tio$ o) )i$al terms o) issuer@s securities a)ter
suc/ terms /a&e "ee$ esta"lis/e%
4"5 %timin& ", later o) %a& %ate suc/ )i$al terms /a&e "ee$
esta"lis/e% )or all classes o) t/e o))eri$2 a$% %!& %ate o) )irst
use
4-5 #-ceptions to *ilin 4eDuirements %4 211%d&%1&, %2&, K %7&&
4a5 A.( %oes $ot co$tai$ su"sta$ti&e c/a$2es )rom or a%%itio$s
to a !re&iousl, )ile% A.(
4"5 Issuer i$)o alrea%, i$clu%e% i$ a !re&iousl, )ile% !ros!ectus
or A.(
4c5 Issuer tra$smitti$2 !re*recor%e% &ersio$ o) electro$ic
roa%s/o# 4thouh, if non(#A4I, only if issuer makes
BE+A *I)# version of roadshow availa!le w@o
restriction to any person5
4I5 Bona *ide: !rese$tatio$ ", o$e or more o))icers1 a$% i) P
1 s/o#1 i$clu%es %iscussio$ o) same 2e$eral areas o) i$)o.
re2ar%i$2 issuer as ot/er issuer roa% s/o#s
4%5 See also R 6--4)5 )or me%ia commu$icatio$s 4"elo#5
%. 4ecord 4etention 4eDuirements %4 /J2%d&@211%&&
T/ree ,ears 4i) $ot )ile%5
'. Seasoned Issuers a$% '9SIs
a. Same as a!ove, #MC#PT +E P4ESP#CT"S )#.I:#4H
4#?"I4#$#+T %4 211%!&%/&&
". '9SIs: Ma, use A.(s i$ (re*Aili$2 !erio% u$%er R 1T-
TV
-. Persons Ether Than Issuer
a. "'s K Ethers Participatin in the Efferin
415 *ilin 4eDuirements %4 211%d&%/&%i&&
IA commu$icatio$ %istri"ute% i$ a ma$$er reaso$a"l, %esi2$e% to
ac/ie&e !road unrestricted dissemination1
T7EN must )ile #it/ SEC
4a5 Broad "nrestricted )issemination: A.(s se$t %irectl, to
customers o) o))eri$2 !artici!a$t #it/out re2ar% to $um"er
are not "roa%l, %issemi$ate% 4Sec@s Act Rel. No. VDS15
4'5 4ecord 4etention 4eDuirements %4 211%&& Same as )or $o$*
re!orti$2 a$% u$seaso$e% issuers
". $edia Sources
415 #-emption from 4eDuirements %4 211%f&&
IA me%ia source1 /a&i$2 !u"liciUe% A.(1 $ee% $ot
4a5 satis), !ros!ectus %eli&er, re+uireme$t o) R 6--4"54'54i51 OR
4"5 satis), )ili$2 4R 6--4%55 a$% le2e$% 4R 6--4c54'55
re+uireme$ts
T7EN issuer or ot/er !artici!a$ts
4a5 %o $ot com!e$sate me%ia source )or #ritte$ commu$icatio$
or its %issemi$atio$1 AND
4"5 ANE OA
4I5 )ile me%ia commu$icatio$s #< SEC 4I5 #< le2e$% AND
4II5 #<i$ 6 "usi$ess %a,s o) "ecomi$2 a#are o)
!u"licatio$
4II5 )ile a co!, o) all materials !ro&i%e% to t/e me%ia1
i$clu%i$2 Gtra$scri!ts o) i$ter&ie#s or similar materialsH
4#< le2e$%05
OR
4III5 alrea%, )ile% t/e su"sta$ce o) t/e commu$icatio$
#it/ t/e SEC
4'5 #ffect of Compliance with 4 211%f& on Issuers@Efferin
Participants
IA issuer or o))eri$2 !artici!a$t com!lies #it/ R 6--4)5 #<r<t a
me%ia commu$icatio$1
T7EN t/e )ili$2 a$% le2e$% re+uireme$ts are %eeme% satis)ie%
TS
E. Cure Provision %4 /J2&
1. *ilin Cure %4 /J2%!&
a. 4ule
IA a )ailure to )ile or )ili$2 %ela, o) a$ A.( u$%er Rule 1T6<6--
415 #as immaterial or u$i$te$tio$al )ailure1
4'5 occurre% %es!ite a 2oo% )ait/ e))ort to )ile it timel,1 AND
4-5 #as accom!a$ie% ", a )ili$2 as soo$ as !ractica"le a)ter
%isco&er, o) t/e )ailure to )ile
T7EN t/e )ili$2 &iolatio$ /as "ee$ cure%
'. .eend Cure %4 /J2%c&&
a. 4ule
IA a )ailure to i$clu%e a le2e$% i$ a$ A.( u$%er Rule 1T6<6--
415 #as immaterial or u$i$te$tio$al1
4'5 occurre% %es!ite a 2oo% )ait/ e))ort to i$clu%e t/e le2e$%1
4-5 #as accom!a$ie% ", a$ ame$%me$t o) t/e )ree #riti$2
!ros!ectus to i$clu%e t/e s!eci)ie% le2e$% as soo$ as !ractica"le
a)ter %isco&er, o) t/e )ailure to i$clu%e t/e le2e$%1 AND
%2& %if *'P already transmitted w@o the specified leend&
4a5 is retra$smitte% #< t/e le2e$%
4"5 ", su"sta$tiall, t/e same mea$s1 AND
4c5 %irecte% to su"sta$tiall, t/e same !ros!ecti&e !urc/asers to
#/om t/e A.( #as ori2i$all, tra$smitte%
T7EN t/e le2e$% &iolatio$ /as "ee$ cure%
-. 4ecord 4etention Cure %4 /J2%d&&
a. 4ule
IA )ailure to retai$ a$ A.( u$%er Rule 6--425
415 #as immaterial or u$i$te$tio$al1
4'5 occurre% %es!ite a 2oo% )ait/ e))ort to com!l, #< R 6--4251
T7EN t/e recor% rete$tio$ &iolatio$ /as "ee$ cure%
A. Antifraud .ia!ility
1. +ET A //
a. "<c A.( $ot !art o) )ormal re2istratio$ stateme$t
'. H#S A /8%a&%8&
a. "<c A.( G!u"licH commu$icatio$s u$%er R 6--4a5<Gustafson
G. 4elation to 4eulation *)
1. 4ule: A.(s $ot su"=ect to Re2 AD 4u$lie commu$icatio$s +uali),i$2
u$%er Rules 1T-A X-C %a, cool%o#$Y a$% 1T- X.KSIsY5
'. 4ationale: No !ractical %i))ere$ce1 "<c A.(s $ee% to "e )ile% #< SEC o$
or "e)ore )irst %a, o) use i) co$tai$ $e# i$)ormatio$
[C
6. Process of Goin #ffective
a. Two Eptions, Second Everwhelminly Popular
i. Section 7%a&8 A)ter 'C*%a, !erio%1 o))eri$2 #ill automaticall, 2o e))ecti&e.
I. SEC selecti&e comme$t a$% re&ie#
II. I$ !ractice1 $o issuer )ollo#s t/is 'C*%a, rule.
III. A$, ame$%me$t to t/e r<s resets t/e 'C %a, cou$t%o#$ u$%er A 7%a&
ii. 4ule 2L1 Allo#s issuer to )ile %ela,i$2 ame$%me$t #aiti$2 )or SEC to %eclare
re2istratio$ stateme$t e))ecti&e
". S#C 4eview
i. A..: I(Os
ii. SE$#: No$*I(Os
c. 'hy )o Issuers "se 4ule 2L1
i. Aree le2al re&ie#
ii. A$, time ,ou ame$% r<s1 t/at resets t/e 'C %a, !erio%
iii. Ba% si2$al to SEC i) ,ou %o$@t 2i&e t/em time SEC !o#ers V4"51 4%5
I. 7%!& refusal power 4rare5 SEC or%er !rior to e))ecti&e %ate i) r<s is Go$ its
)aceH i$com!lete or i$accurate i$ a$, material res!ect X$otice a$% o!!ortu$it,
)or /eari$2Y
II. 7%d& stop order sus!e$%i$2 e))ecti&e$ess o) r<s X$otice a$% o!!ortu$it, )or
/eari$2Y
A. I) maret lear$s o) SEC co$tem!lati$2 sto! or%er1 stoc !rice #ill 2o %o#$
III. 7%e& investiatory powers
%. Acceleration Power %4 2J/&
i. Issuer ca$ re+uest t/at SEC accelerate e))ecti&e %ate o) r<s
ii. S#C *actors for Grantin Acceleration 4eDuest 4case"oo !.6DS
[1
e. Possi!le to Go #ffective 'ith:
i. Section /5%a& *inal Statutory Prospectus
I. I$clu%es !rice a$% !rice*relate% i$)o
II. (art o) 4eistration Statement
A. (art I8 !ros!ectus
B. (art II8 ot/er stu))
III. "pdatin8 statutor, !ros!ectus a$% r<s tae o$ se!arate li&es o&er time 4u!%ate
!ros!ectus more o)te$5. T#o #a,s to u!%ate !ros!ectus
A. Stick a sticker and not file w@ S#C
B. *ile with S#C t/e$ &ie#e% as i$cor!orati$2 i$)o i$to re2istratio$
stateme$t1 so !art o) same %ocume$t a2ai$.
I:. So !ros!ectus a$% r<s are same at8
A. E))ecti&e %ate1 a$%
B. ./e$ re)ile !ros!ectus #it/ SEC u$%er 6'64"5.
ii. 4ule 215A Prospectus
I. E+.H *E4 Cash Efferins
II. Can omit price and price(related information at e))ecti&e %ate
III. B"T "pdatin 4eDuirement for 215A Prospectuses %4ule 282%!&%/&&
4ule: Issuer must )ile !ros!ectus i$clu%i$2 !rice a$% !rice*relate% i$)ormatio$
", ' "usi$ess %a,s a)ter later o)
A. Date o) %etermi$atio$ o) o))eri$2 !rice1 OR
B. Date i$ (ost*E))ecti&e !erio% i$ #/ic/ o))eri$2 !rice is )irst use% i$
co$$ectio$ #it/ a !u"lic o))eri$2 or sales
I:. 4eDuirement of Post(#ffective Amendment
A. 4ule
IA !ost*e))ecti&e ame$%me$t $ot $ee%e% u!o$ com!lia$ce #< R 6'64"54151
T7EN com!lia$ce too !lace L 1D %a,s a)ter r<s #e$t e))ecti&e
['
*. Post(#ffective Period
1. Prohi!ition on Effers %A 6%c&&: +E .E+G#4 APP.I#S
'. Prohi!ition on Sales %A 6%a&&: +E .E+G#4 APP.I#S
-. Prohi!ition on Prospectuses %A 6%!&%/&&
a. $ain 4ule
IA i$ (ost*E))ecti&e (erio% 4re2istratio$ stateme$t e))ecti&e51
T7EN !ro/i"ite% )or a$, !erso$ to tra$smit any prospectus t/rou2/ i$terstate
commerce
UNLESS the prospectus is a A /5 Prospectus
[-
". ;Any Prospectus< "nder A 8%a&%/5& %for purposes of Post(#ffective Period&
i. $ain 4ule
IA a commu$icatio$ is EIT7ER
I. %/& a$, !ros!ectus1 notice, circular, advertisement, letter, or communication,
written or !y radio or T: %8& #/ic/ offers a$, securit, )or sale1
OR
II. a written confirmation of sales
T7EN t/e commu$icatio$ is a !ros!ectus1
UNLESS
III. Section 8%a&%/5&%!& safe har!or a!!lies
I:. t/e commu$icatio$ +uali)ies as traditional free writin u$%er A 8%a&%/5&%a&
:. Section 2%/& a!!lies
:I. Section 2%1&@4ule /L2 a!!lies
:II. 4ule /L8 a!!lies %e-empts only written confirmations of sales&
ii. Types of Communications that Can Be Prospectuses 4see .aiti$2 (erio%5
iii. Effers 4see (re*Aili$2 (erio%5
i&. Section 8%a&%/5&%!& Safe Har!or 4see .aiti$2 (erio%5
&. Traditional *ree 'ritin %A 8%a&%/5&%a&& %Indirect Prospectus )elivery 4eD.&
I. 4ule
IA a commu$icatio$ is preceded or accompanied !y a A /5%a& *inal
Prospectus,
T7EN t/e commu$icatio$ +uali)ies as tra%itio$al )ree #riti$2 a$% is $ot a
!ros!ectus u$%er B '4a541C5
II. Brokers always send confirmation of sales co$)irmatio$ is !ros!ectus so
&iolatio$ o) B D4"541* #<o accom!a$ime$t ", B 1C4a5 !ros!ectus

&i. Section 2%/& %Secondary $arket #-emption from A 6, P.). 4eD&
I. 4ule
IA NO !erso$ i$ a securities tra$sactio$ is a$ issuer) underwriter) or dealer1
T7EN
A. Sectio$ D %oes $ot a!!l, to t/at tra$sactio$1 AND
B. s!eci)icall,1 a$, commu$icatio$ ma%e ", a !erso$ i$ t/e tra$sactio$ is $ot a
!ros!ectus 4t/ere)ore no prospectus delivery reDuirement5
[6
&ii. Section 2%1&@4ule /L2 %)ealer #-emption from A 6, P.). 4eD&
I. 4ule
IA a !erso$ i$ a securities tra$sactio$
A. is a dealer1
B. is no loner actin as a "' #<r<t t/e securit, i$&ol&e% i$ t/e tra$sactio$1
AND
C. is outside the relevant 4ule /L2 time period1
T7EN
D. Sectio$ D %oes $ot a!!l, to t/at !erso$1 AND
E. s!eci)icall,1 a$, commu$icatio$ ma%e ", t/at !erso$ is $ot a !ros!ectus
4t/ere)ore no prospectus delivery reDuirement5
II. )ealer 4see A 8%a&%/5&58 Someo$e #/o assists ot/ers to "u, sec@s
III. +o .oner Actin as a "'
A. 4ule
IA %ealer G$o lo$2er acti$2 as a U.H
T7EN %ealer
1. is $ot !artici!ati$2 i$ t/e o))eri$21 OR
'. /as sol% all o) its allotme$t1 OR
I:. 4ule /L2 Time Periods
A. Issuer 'as #A4I Before Efferin %4 /L2%!&&
P C Da,s a)ter E))ecti&e Date
B. Issuer 'hose SecBs 'ill Be .isted on +atlB SecBs #-ch. Er +AS)A?
N 'D Da,s a)ter E))ecti&e Date
C. +on(IPE Issuer
N 6C Da,s a)ter E))ecti&e Date
D. IPE Issuer
N SC Da,s a)ter E))ecti&e Date

[D
assume issuer i$
cate2or, %oes $ot )it
i$to cate2ories a"o&e
it
&iii. 4ule /L8 %Access #Duals )elivery: #-emption from P.). 4eD E+.H&
I. 4ule
IA1 #<r<t a !erso$ i$ a securities o))eri$21
A. t/e e))ecti&e re2istratio$ stateme$t is $ot t/e su"=ect o) a$, !e$%i$2
!rocee%i$2 or e3ami$atio$ u$%er BB V4%5 or V4e5
B. $eit/er t/e issuer1 U. or !artici!ati$2 %ealer is su"=ect o) !e$%i$2
!rocee%i$2 u$%er B VA i$ co$$ectio$ #< t/e o))eri$21
AND
C. EIT7ER
1. issuer /as
a. )ile% a B 1C4a5 )i$al !ros!ectus1 OR
". BOT7
415 )ile% a Rule 6-CA !ros!ectus1 AND
4'5 EIT7ER
4a5 .ill mae a 2oo% )ait/ a$% reaso$a"le e))ort to )ile a B 1C4a5
)i$al !ros!ectus #it/i$ time allo#e% ", Rule 6'61 OR
4"5 I) )ails to )ile i$ accor%a$ce #it/ Rule 6'61 )iles B 1C4a5
!ros!ectus as soo$ as !ractica"le a)ter#ar%s
OR
'. !erso$ is a %ealer1
T7EN Sectio$ D4"5415 %oes $ot a!!l, to t/at !erso$ to t/e e3te$t t/e !erso$
se$%s out written confirmations of sales 4t/ere)ore $o !ros!ectus %eli&er,
re+uireme$t )or !erso$5
c. Section /5 Prospectuses %for purposes of A 6%!&%/& Compliance in Post(#ffective
Period&
i. 4ule
IA a !ros!ectus is a B 1C (ros!ectus1
T7EN t/e !ros!ectus is a
I. Section /5%a& *inal Prospectus1
II. 4ule 21/ Summary Prospectus
III. 4ule 211 *ree 'ritin Prospectus
I:. 4ule 215A, 4ule 215B, or 4ule 215C Prospectus

[T
4 /L8%c&
4 /L8%a&
6. Traditional Prospectus )elivery 4eDuirement 4A 6%!&%8&&
a. 4ule
IA a$, !erso$ ma, tra$smit securities )or sale t/rou2/ i$terstate commerce1
T7EN EIT7ER
i. t/e securities are !rece%e% or accom!a$ie% ", a B 1C4a5 Ai$al (ros!ectus1 OR
ii. 4ule /L8 a!!lies
". 4ule /L8 %Access #Duals )elivery: #-emption from TradBl P.). 4eD&
i. 4ule
IA1 #<r<t a !erso$ i$ a securities o))eri$21
I. t/e e))ecti&e re2istratio$ stateme$t is $ot t/e su"=ect o) a$, !e$%i$2 !rocee%i$2
or e3ami$atio$ u$%er BB V4%5 or V4e5
II. $eit/er t/e issuer1 U. or !artici!ati$2 %ealer is su"=ect o) !e$%i$2 !rocee%i$2
u$%er B VA i$ co$$ectio$ #< t/e o))eri$21
AND
III. EIT7ER
A. issuer /as
1. )ile% a B 1C4a5 )i$al !ros!ectus1 OR
'. BOT7
a. )ile% a Rule 6-CA !ros!ectus1 AND
". EIT7ER
415 .ill mae a 2oo% )ait/ a$% reaso$a"le e))ort to )ile a B 1C4a5
)i$al !ros!ectus #it/i$ time allo#e% ", Rule 6'61 OR
4'5 I) )ails to )ile i$ accor%a$ce #it/ Rule 6'61 )iles B 1C4a5
!ros!ectus as soo$ as !ractica"le a)ter#ar%s
OR
B. !erso$ is a %ealer1
T7EN t/at !erso$@s o"li2atio$s u$%er B D4"54'5 are %eeme% met
c. Practically Insinificant: Most i$&estors %o $ot tae !/,sical !ossessio$ o) actual
securit, certi)icates1 "ut recei&e o$l, #ritte$ co$)irmatio$ o) sales
[[
4 /L8%c&
4 /L8%!&
D. +otice 4eDuirement in A 2%1&@4ule /L2 +on(#-empt Transactions %4 /L1&
a. 4ule
IA a securities o))eri$2 is a$ o))eri$2 to #/ic/ t/e e-emption in A 2%1&@4ule /L2 )rom
t/e )i$al !ros!ectus %eli&er, re+uireme$t )E#S +ET apply1
T7EN
i. ANE OA
I. a !artici!ati$2 U.1 "roer1 or %ealer1 OR
II. a$ issuer 4i) securities sol% %irectl, ", issuer5
ii. must se$% to eac/ !urc/asi$2 i$&estor
iii. $otice t/at
I. sale too !lace u$%er
A. a$ e))ecti&e re2istratio$ stateme$t1 OR
B. )i$al !ros!ectus !ursua$t to a$ e))ecti&e re2istratio$ stateme$t
II. !urc/aser ma, /a&e ri2/ts u$%er BB 11 a$% 1'4a54'5
i&. $o later t/a$ t#o "usi$ess %a,s )ollo#i$2 com!letio$ o) t/e sale
". #-emption from A 6%!&%/&: Notices are $ot t/emsel&es !ros!ectuses
c. :iolation .ia!ility S#C #+*E4C#$#+T E+.H
[V
T. +on(Shelf "pdatin
a. Practical Sinificance: U!%ati$2 i$ $o$*s/el) co$te3t is $ot "i2 %eal "<c 2e$erall, $ot a
lot o) time #ill !ass "e)ore e$tire o))eri$2 sol%
". "pdatin the Prospectus
i. How )one
I. Stickerin %A 282%!&%1&(%6&&: Ne# i$)ormatio$ a%%e% to rele&a$t !a2e o)
!ros!ectus
ii. Sources of )uty to "pdate Prospectus
I. Section /5%a&%1& 0 $onth@/J $onth 4ule1
A. 4ule
IA
1. a !ros!ectus is use% P S mo$t/s a)ter e))ecti&e %ate o) r<s1 AND
'. EIT7ER
a. i$)o i$ !ros!ectus is G$o#$ to t/e user o) t/e !ros!ectusH1 OR
". coul% "e !ro&i%e% ", user #<o u$reaso$a"le e))ort or e3!e$se
T7EN i$)o use% i$ !ros!ectus ma, $ot "e P 1T mo$t/s ol%
II. Antifraud .ia!ility under 4ule /5!(6 and A /8%a&%8&
A. 4ule
IA !ros!ectus $o lo$2er accurate1
T7EN 4ule /5!(6 a$% A /8%a&%8& !ote$tiall, a!!l,
B. Gi&e issuer incentive to update prospectus
III. Manor 6ursing @ A/8%a&%/& %8d Cir. E+.H&
A. 4ule
IA materiall, mislea%i$2 !ros!ectus1
N Not a B 1C !ros!ectus at all1
N :iolatio$ o) B D4"54151
N B 1'4a5415 crus/ out lia"ilit,
B. Criticism
1. Re$%ers BB 11 a$% 1'4a54'5 su!er)luous
'. Elimi$ates %ue %ili2e$ce %e)e$ses i$ BB 11 a$% 1'4a54'5
I:. Shelf 4eistration under 4ule 2/6 4see "elo#5
[S
c. "pdatin the 4eistration Statement
i. $ain 4ule
No %ut, to u!%ate t/e re2istratio$ stateme$t
ii. Two #-ceptions
I. Shelf 4eistration "nder 4ule 2/6 4see "elo#5
II. Su!stantive Chanes to Prospectus %4ule 282%!&%1&&
A. 4ule
IA issuer maes su"sta$ti&e c/a$2e )rom or a%%itio$ to a !re&iousl, )ile%
!ros!ectus1
T7EN t/e issuer must )ile t/e c/a$2e or a%%itio$ as !art o) t/e re2istratio$
stateme$t
B. ;Su!stantive< Chane or Addition
1. Su"sta$ti&e P Material
C. 4einterates prospectus and reistration statement o$ce )ile% #it/ SEC
!ote$tiall, tri22ers new effective date.
VC
G. Shelf 4eistration
1. 4ationale: Se$se t/at1 )or certai$ t,!es o) issuers1 all t/ese restrictio$s are u$$ecessar,
a$%<or /arm)ul
'. Section 8%a&%1&: Sales and Effers8 Aor co$&erti"le "o$%
a. T/e "o$% is %eeme% as issue% today
". E+uit, is %eeme% a$ o))er or sale when it is converted 4i.e. #/e$ o!tio$ is e3ercise%5.
-. $ain 4ule %A J%a& SecBs Act @ S(a#nee C(iles S$ndicate 4SEC 1S615&
IA securities are $ot i$te$%e% to "e o))ere% imme%iatel, or i$ t/e $ear )uture 4Q15 days3&1
T7EN !ro/i"ite% )or issuer to re2ister suc/ securities1
UNLESS 4ule 2/6 a!!lies
6. 4ule 2/6
a. 4ule
IA issuer EIT7ER
i. meets 4#/ere a!!lica"le5
I. Efferin Type 4eDuirement
II. Two(Hear Time .imit
III. "pdatin 4eDuirements
I:. ;At the $arket< #Duity Efferin 4eDuirement
:. Three(Hear Time .imit
OR
ii. is a '9SI Dualifyin for automatic shelf reistration
T7EN
iii. t/e issuer +uali)ies )or a s/el) re2istratio$ 4; issuer@s securities ma, "e o))ere% o$ a
Gco$ti$ue% or %ela,e% "asis i$ t/e )utureH51
i&. %if issuer has previously done a shelf reistration& ma, tae a%&a$ta2e o) 4ule
2/6%a&%J& rollover opportunities1
&. %if issuer is a '9SI Dualifyin for automatic shelf reistration& t/e issuer ma,
rea! t/e !enefits of automatic shelf reistration
AND
&i. t/e issuer ma, )ile a 4ule 215B Base Prospectus in satisfaction of A 6%!&%/& %and
hence A /5&
V1
4eDuirements of
Shelf
Benefits of Shelf
I t/i$ all o) t/ese still
a!!l, to .KSIs %oi$2
Auto S/el) Re2istratio$
". Efferin Type 4eDuirement %4 2/6%a&%/&&
i. 4ule
IA s/el) re2istratio$ !ermissi"le1
T7EN o))eri$2 i$&ol&es 4ANE OA5 securities
I. %4 2/6%a&%/&%i&& #/ic/ are to "e o))ere% or sol%
A. solel, ", or o$ "e/al) o)
B. a !erso$ or !erso$s ot/er t/a$
1. t/e issuer
'. a su"si%iar, o) t/e issuer1 OR
-. a !erso$ o) #/ic/ t/e issuer is a su"si%iar,1
II. %4 2/6%a&%/&%iv&& #/ic/ are to "e issue% u!o$ co$&ersio$ o) ot/er outsta$%i$2
securities %R converti!le !onds&1
III. %4 2/6%a&%/&%i-& t/e o))eri$2 o) #/ic/
A. #ill "e comme$ce% !rom!tl,1
B. #ill "e ma%e o$ a co$ti$uous "asis1 AND
C. ma, co$ti$ue )or a !erio% P -C %a,s )rom t/e e))ecti&e %ate1
OR
I:. %4 2/6%a&%/&%-&&
A. re2istere% 4or +uali)ie% to "e re2istere%5 o$ Aorm S*- or Aorm A*-
B. #/ic/ are to "e o))ere% a$% sol% o$ a$ imme%iate1 co$ti$uous or %ela,e%
"asis
C. ", or o$ "e/al) o)
1. t/e issuer1
'. a su"si%iar, o) t/e issuer1 OR
-. a !erso$ o) #/ic/ t/e issuer is a su"si%iar,
V'
c. Two(Hear Time .imit %4 2/6%a&%8&&
i. 4ule
IA a$ o))eri$2 is
I. EIT7ER
A. u$%er Rule 61D4a54154&iii5 4"usi$ess com"i$atio$s51 OR
B. u$%er Rule 61D4a541543i5 4co$ti$uous o))eri$2s to "e comme$ce% !ro!erl,1
II. $ot re2istere% o$ Aorm S*-
AND
III. is NEIT7ER
A. o$ "e/al) o) a !erso$ ot/er t/a$ t/e issuer1 NOR
B. issue% u!o$ co$&ersio$
T7EN t/e securities ma, E+.H "e re2istere%
I:. i$ a$ amou$t #/ic/1
:. at t/e time t/e re2istratio$ stateme$t "ecomes e))ecti&e1
:I. is reasona!ly e-pected to !e offered and sold within two years )rom t/e
i$itial e))ecti&e %ate o) t/e re2istratio$.

V-
%. "pdatin 4eDuirements %4 2/6%a&%1&&
i. 4ule
IA s/el) re2istratio$ !ermissi"le1
T7EN t/e issuer must )ur$is/ t/e undertakin reDuired !y Item 6/8%a& of
4eulation S(9
ii. Item 6/8%a& "ndertakin: Three 4eDuirements
I. Post(#ffective Amendments if A /5%a&%1& 4eDuirement
A. 4ule %Item 6/8%a&%/&%i&&
IA issuer u!%ates a !ros!ectus used Q 0 months a)ter t/e e))ecti&e %ate o)
t/e re2istratio$ stateme$t i$ order to remove information Q /J months
old1
T7EN t/e issuer must )ile u!%ate% !ros!ectus as a !ost*e))ecti&e ame$%me$t
to t/e re2istratio$ stateme$t
II. *undamental Chanes
A. 4ule %Item 6/8%a&%/&%ii&&
IA
1. issuer maes ;fundamental< chanes to t/e re2istratio$ stateme$t1
AND
'. BOT7
a. issuer is $ot a Aorm S*- issuer1 AND
". i$)ormatio$ a"out material c/a$2e is NOT
415 co$tai$e% i$ a$, E3c/. Act )ili$2 t/at is i$cor!orate% ",
re)ere$ce i$to t/e re2istratio$ stateme$t1 OR
4'5 i$clu%e% i$ a )ile% !ros!ectus su!!leme$t u$%er Rule 6'64"51
T7EN issuer must
-. u!%ate !ros!ectus to re)lect c/a$2es1 AND
6. )ile u!%ate% !ros!ectus as a !ost*e))ecti&e ame$%me$t to t/e re2istratio$
stateme$t
III. $aterial Chanes
A. 4ule %Item 6/8%a&%/&%iii&&
IA
1. issuer maes ;material< chane to plan for distri!ution o) t/e o))eri$2
4e.2.1 b o) s/ares51
AND
'. %see a!ove, *undamental Chanes, II.A.8 S;BETHT<U&
T7EN issuer must )ile !ost*e))ecti&e ame$%me$t to t/e re2istratio$
stateme$t co$tai$i$2 t/e material c/a$2e
V6
e. ;At the $arket< #Duity Efferin 4eDuirements %4 2/6%a&%2&&
i. 4ule
IA a$ o))eri$2
I. is a$ ;at the market< e+uit, o))eri$21
II. ", or o$ "e/al) o) t/e issuer1
T7EN t/e issuer ma, o$l, mae use o) A 2/6%a&%/&%-& to +uali), )or a s/el)
re2istratio$
ii. At the $arket #Duity Efferin %4 2/6%a&%2&&
)efinition:
I. a$ o))eri$2 o) e+uit, securities1
II. i$to a$ e3isti$2 tra%i$2 maret )or outsta$%i$2 s/ares o) t/e same class
III. at ot/er t/a$ a )i3e% !rice
iii. Section 2/6%a&%/&%-& 4see also a"o&e O))eri$2 T,!e Re+uireme$t5
I. )efinition
A$ o))eri$2 o) securities
A. re2istere% 4or +uali)ie% to "e re2istere%5 o$ Aorm S*- or Aorm A*-
B. #/ic/ are to "e o))ere% a$% sol% o$ a$ imme%iate1 co$ti$uous or %ela,e%
"asis
C. ", or o$ "e/al) o)
1. t/e issuer1
'. a su"si%iar, o) t/e issuer1 OR
-. a !erso$ o) #/ic/ t/e issuer is a su"si%iar,
VD
). Three(Hear Time .imit %4 2/6%a&%6&&
i. 4ule
I* t/e s/el) re2istratio$ is !ermissi"le o) a$ o))eri$2 re2istere%
I. u$%er 4ule 2/6%a&%/&%vii&1
II. BOT7
A. u$%er 4ule 2/6%a&%/&%i-&1 AND
B. o$ Aorm S*- or A*-
OR
III. u$%er 4ule 2/6%a&%/&%-&1
TH#+ t/e securities must $ot "e o))ere%1 w@o re(reistration1 lo$2er t/a$ t/e
LATER OA
I:. t/ree ,ears
:. %if reistered under a prior shelf reistration statement& t/e EARLIER OA
A. t/e e))ecti&e %ate o) t/e $e# re2istratio$ stateme$t1 AND
B. 1VC %a,s a)ter t/e t/ir% a$$i&ersar, o) t/e i$itial e))ecti&e %ate o) t/e !rior
re2istratio$ stateme$t1
AND
:I. %if continuous offerin of securities& t/e e))ecti&e %ate o) t/e $e# re2istratio$
stateme$t
ii. 4ule 2/6%a&%/&%vii& %we did not cover&
iii. 4ule 2/6%a&%/&%i-&
I. )efinition
A$ o))eri$2 o) securities1 t/e o))eri$2 o) #/ic/
A. #ill "e comme$ce% !rom!tl,1
B. #ill "e ma%e o$ a co$ti$uous "asis1 AND
C. ma, co$ti$ue )or a !erio% P -C %a,s )rom t/e e))ecti&e %ate1
i&. 4ule 2/6%a&%/&%-&
I. )efinition
A$ o))eri$2 o) securities
A. re2istere% 4or +uali)ie% to "e re2istere%5 o$ Aorm S*- or Aorm A*-
B. #/ic/ are to "e o))ere% a$% sol% o$ a$ imme%iate1 co$ti$uous or %ela,e%
"asis
C. ", or o$ "e/al) o)
1. t/e issuer1
'. a su"si%iar, o) t/e issuer1 OR
-. a !erso$ o) #/ic/ t/e issuer is a su"si%iar,
VT
2. 4ule 2/6%a&%J& 4ollover Epportunities
i. 4ule
IA issuer
I. +uali)ies )or a s/el) re2istratio$ u$%er Rule 61D1
II. /as !re&iousl, %o$e a s/el) re2istratio$
III. t/at )alls u$%er t/e t/ree*,ear 4or t/erea"outs5 time limit u$%er Rule 61D4a54D5
4see a"o&e5
T7EN issuer ma,
I:. i$clu%e i$ a $e# re2istratio$ stateme$t a$, u$sol% securities co&ere% i$ t/e
earlier s/el) re2istratio$ stateme$t )alli$2 u$%er Rule 61D4a54D51
AND
:. roll o&er a$, !re&iousl, !ai% a$% u$use% )ili$2 )ees #<r<t t/e u$sol% securities to
o))set )ili$2 )ees )or t/e $e# re2istratio$ stateme$t
V[
/. Automatic Shelf 4eistration for '9SIs %4 256&
i. 4ationale: .KSIs /a&e muc/ 2reater a$al,st co&era2e
ii. 4ule
I*
I. a .KSI
II. )iles a$ automatic s/el) re2istratio$ )or a$ o))eri$2 o$ Aorm S*-1 AND
III. com!lies #it/ t/e three year time limit
T7EN
I:. t/e .KSI +uali)ies )or1 a$% is e$title% to !enefits of, automatic shelf
reistration
iii. Three Hear Time .imit
I. 4ule: Automatic Re2istratio$ Stateme$t e))ecti&e )or t/ree ,ears )rom e))ecti&e
%ate
II. Housekeepin #ffect
A. Si$ce automatic s/el) re2istratio$ stateme$ts "ecome e))ecti&e o$ )ili$21
t/ree*,ear time limit =ust ser&es /ouseee!i$2 !ur!ose )or .KSIs ",
a22re2ati$2 all u!%ates i$to o$e %ocume$t
i&. Benefits of Automatic Shelf 4eistration
I. 4@S and P@# Amendments #ffective "pon *ilin %4 2J8&
II. 4@S and P@# Amendments )eemed *iled on Proper *orms %4 25/%&%8&&
A. 4ule: Automatic s/el) re2istratio$ stateme$t a$% a$, !ost*e))ecti&e
ame$%me$t %eeme% )ile% o$ !ro!er )orms unless and until SEC o"=ects
III. '9SI may 4eister "nspecified Amount of Securities on 4@S %4 215B%a&&
A. 4ules
1. .KSI ma, re2ister u$s!eci)ie% amou$t o) securities o$ automatic s/el)
re2istratio$ stateme$t
'. Automatic s/el) re2istratio$ stateme$t $ee% o$l, i$%icate $ame or class
o) securities
I:. '9SI may Add Additional Securities Classes w@o +ew 4@S %4 2/1%!&&
A. 4ule: .KSIs ma, a%% a%%itio$al classes o) securities to automatic s/el)
re2istratio$ stateme$t t/rou2/ !ost*e))ecti&e ame$%me$t
:. '9SI may Choose Pay(as(you(o *ilin *ees %4 26J%!&&
A. 4ule: .KSI ma, !a, )ili$2 )ees o$l, #/e$ securities are actuall, sol%
:I. #-ch. Act 4eports Automatically "pdate 4eistration Statement
VV
i. 4ule 215B Base Prospectus
i. Permissi!le Emissions
I. 4ule 2/6%a&%/&%vii& or %-& Shelf Efferins %4 215B%a&&
A. 4ule
IA s/el) o))eri$2 u$%er EIT7ER
1. 4ule 2/6%a&%/&%vii&, E4
'. 4ule 2/6%a&%/&%-&
T7EN !ros!ectus ma, omit i$)ormatio$ t/at is
-. u$$o#$1 OR
6. not reasona!ly availa!le
B. Information ;+ot 4easona!ly Availa!le<
1. (u"lic o))eri$2 !rice
'. U. %iscou$t a$% ot/er !rice*relate% i$)o
II. 4ule 2/6%a&%/& Shelf Efferins B#SI)#S %vii& and %viii& %4 215B%a&&
A. 4ule
IA s/el) o))eri$2 u$%er Rule 61D4a5415 B"T +ET #ITH#4
1. 4ule 2/6%a&%/&%vii&, E4
'. 4ule 2/6%a&%/&%viii&,
T7EN !ros!ectus ma, omit
-. #/et/er o))eri$2 is
a. a !rimar, o))eri$21
". a$ o))eri$2 o$ "e/al) o) !erso$s ot/er t/a$ issuer1 OR
c. a com"i$atio$ t/ereo)1
6. !la$ o) %istri"utio$ o) securities
D. %escri!tio$ o) securities re2istere% 4other than identification of name
or class51 AND
T. i%e$ti)icatio$ o) ot/er issuers
B. Application to '9SIs
1. .KSIs ca$ omit i$)o1 even if known1 a"out !la$ o) %istri"utio$1 t,!e o)
securities1 #/et/er !rimar,<seco$%ar, o))eri$21 etc 4"ut not $ame or
class o) securities5
VS
III. Certain 4ule 2/6%a&%/&%i& Shelf Efferins %4 215B%!&%8&&
A. 4ule
IA a s/el) o))eri$2 is
1. u$%er Rule 61D4a54154i51
'. co$%ucte% ", issuer eli2i"le )or Aorm S*- or A*-
AND
-. EIT7ER
a. o$ a$ automatic s/el) re2istratio$ stateme$t1
OR
". i$ a situatio$ #/ere ALL OA
415 t/e i$itial o))eri$2 tra$sactio$ o) t/e securities1 t/e resale o)
#/ic/ are "ei$2 re2istere% o$ "e/al) o) eac/ o) t/e selli$2
securit, /ol%ers1 #as com!lete%1
4'5 t/e securities #ere issue% a$% outsta$%i$2 !rior to t/e ori2i$al
%ate o) )ili$2 t/e re2istratio$ stateme$t co&eri$2 t/e resale o) t/e
securities1
4-5 t/e re2istratio$ stateme$t re)ers to a$, u$$ame% selli$2 securit,
/ol%ers i$ a 2e$eric ma$$er ", i%e$ti),i$2 t/e i$itial o))eri$2
tra$sactio$ i$ #/ic/ t/e securities #ere sol%1
AND
465 t/e issuer #as $ot1 i$ t/e !ast t/ree ,ears1 a "la$ c/ec or s/ell
com!a$, or a$ issuer i$ a !e$$, stoc o))eri$2
T7EN t/e !ros!ectus ma, omit
6. t/e i$)ormatio$ s!eci)ie% i$ Rule 6-CB4a51
D. t/e i%e$tities o) selli$2 securit, /ol%ers1 AND
T. amou$ts o) securities to "e re2istere% o$ "e/al) o) selli$2 securit,
/ol%ers
SC
ii. "pdates
I. Timin Ef %4 282%!&%8&&
A. 4ule
IA 6-CB !ros!ectus use% )or
1. !rimar, o))eri$2 o) securities u$%er Rule 61D4a5415%-&1
'. !rimar, o))eri$2 o) securities re2istere% )or issua$ce o$ %ela,e% "asis
u$%er Rule 61D4a5415%vii&1
-. !rimar, o))eri$2 o) securities re2istere% )or issua$ce o$ %ela,e% "asis
u$%er Rule 61D4a54154viii& t/at %iscloses t/e !u"lic o))eri$2 !rice1 a$%
%escri!tio$ o) securities or similar matters
T7EN u!%ate% !ros!ectus must "e )ile% #< SEC $o later t/a$ 8 !usiness
days )ollo#i$2 EARLIER OA
6. %ate o) %etermi$atio$ o) !rice1 OR
D. %ate )irst use% a)ter e))ecti&e$ess
II. How To
A. 4ule %4 215B%d&&
Issuers ma, u!%ate 6-CB !ros!ectus t/rou2/
1. !ros!ectus su!!leme$t1
'. E3c/a$2e Act re!ort 4i$cor!orate% ", re)ere$ce51 OR
-. !ost*e))ecti&e ame$%me$t
B. #ffect of "pdatin
1. 4ule
U!%ate %eeme% !art o) re2istratio$ stateme$t1 #/ic/
N %issuer and "'s& $e# e))ecti&e %ate o) r<s u$%er B 11
N %officers, directors, e-perts, other Os& $o c/a$2e i$ %ate
iii. Satisfaction of A 6%!&%/&
I. 4ule: 6-CB !ros!ectus meets B 1C !ros!ectus E+.H *E4 !ur!oses o) B D4"5
415
A. T/us1 #ill $ot satis),
1. Rule 1[' access ; %eli&er,
'. Sectio$ D4"54'5 tra%@l !ros!ectus %eli&er, re+uireme$t
-. Sectio$ '4a541C54a5 tra%itio$al )ree #riti$21 OR
6. Rule 6--4"54'5 )ree #riti$2 !ros!ectus
S1
Summary C 2/6%a&%/&%-& Shelf Comparison
+on(Automatic Shelf Automatic shelf %'9SI& C 4ule
256
+ew classes of securities I$clu%e $e# classes t/rou2/ !ost*
e))ecti&e ame$% 4automaticall,
e))ecti&e1 Rule 61-4"55.
4e(reistration E&er, - ,ears1 Rule 61D4a54D5 E&er, - ,ears1 Rule 61D4a54D5
#ffective date 1VC %a,s !ast - ,ears a$%
co$ti$uous o))eri$2s1 Rule
61D4a54D54ii5
E))ecti&e u!o$ )ili$2 4i$clu%es auto.
s/el) re2. a$% !ost*e))ecti&e ame$%.51
Rule 6T'4e5J Rule 61D4a54D5
*ilin fees V unsold sec.
4ule 2/6%a&%J&
Carr, )or#ar% o) u$sol%
securities a$% )ili$2 )ees
Carr, )or#ar% o) u$sol% secJ !a,*as*
,ou*2o )ili$2 )ee1 Rule 6DT4"5
S'
:II. (UBLIC OAAERING ANTIARAUD LIABILITE
A. Everview
1. Section //: Lia"ilit, )or )rau% i$ t/e reistration statement
'. Section /8%a&%/&: Strict lia"ilit, )or violation of rules of reistration process
-. Section /8%a&%8&: Lia"ilit, )or )rau% i$ t/e prospectus a$% related documents
B. Section //
1. $ain 4ule
Actio$a"le &iolatio$ IA
a. ^ is
i. any person acDuirin such security
ii. UNLESS it is !ro&e% t/at at time o) ac+uisitio$ !erso$ $e# o) u$trut/ or omissio$1
". _ is
i. a si2$er o) t/e re2istratio$ stateme$t 4i$clu%es issuer1 CEO1 CAO5 %AA //%a&%/&,
J%a&&
ii. a %irector o) or !art$er i$ issuer at time o) )ili$2 o) re2istratio$ stateme$t %A //%a&
%8&&
iii. a$,o$e #/o co$se$te% to "ei$2 $ame% i$ re2istratio$ stateme$t as "ei$2 or a"out to
"ecome a %irector or !art$er %A //%a&%1&&
i&. a$ e3!ert #/o !re!are% or certi)ie% a !art o) t/e re2istratio$ stateme$t AA //%a&%2&
&. a U. %A //%a&%6&&
&i. a co$trolli$2 !erso$ o) a$, o) t/e a"o&e 4e.2.1 !are$t cor!oratio$5 %A /6&
c. i$ a$, !art o) t/e reistration statement1 #/e$ suc/ !art became effective1 EIT7ER
i. co$tai$s a misstatement of fact1 OR
ii. omitted to state a )act re+uire% to "e state% t/erei$ or $ecessar, to mae t/e
stateme$ts t/erei$ $ot mislea%i$21
%. suc/ misstateme$t or omissio$ is material1
e. NONE o) t/e )ollo#i$2 defenses %not applica!le to issuers& is a&aila"le
i. )ue )ilience )efense
ii. .oss Causation )efense
AND
). ^ /as damaes
S-
Standin 49
Statute o)
Limitatio$s5
Statutory Os
#lements of
Cause of
Action
)efenses
)amaes
'. Standin
a. Tracin 4eDuirement
i. 4ule %7rim&
IA sta$%i$2 to sue u$%er B 111
T7EN ^
I. is a !urc/aser
II. %tracin reDuirement& #/o ca$ %emo$strate #it/ certai$t, t/at /is s/ares are
tracea"le to t/e c/alle$2e% re2istratio$ stateme$t 4mere !ro"a"ilit, i$su))icie$t5
ii. 4ationale
I. Statutory: B 11 re+uires !urc/aser Go) suc/ securit,H t/e o$e sol% i$ "a% r<s
II. Policy: .orr, a"out too muc/ lia"ilit,
iii. Practical #ffect8 I$ !ractice1 traci$2 limits lia"ilit, to I(Os a$% $o$*e+uit,
o))eri$2s.
I. 'here Tracin Generally 'orks
A. Bo$% issues
B. Loc*u! a2reeme$ts #it/ I(O.
II. 'here Tracin Generally )oes +ot 'ork
A. Seaso$e% o))eri$2s1 es!. )rom t/ose #/o %o $ot "u, %irectl, )rom
u$%er#riters 4i.e. "u, i$ seco$%ar, maret5
B. T/ose #/o sue usuall, $ot o$es #/o initially "ou2/t "<c !ro)it usuall, 2oes
u! a$% t/e$ %o#$.
i&. 7rim v. pc8rder.com Inc. 4'CCD1 !. 6SD5 4SDM s/ares )rom I(O or S(O1 o$l, small
)ractio$ )rom i$si%ers1 ^ "u,s )rom seco$%ar, maret5
I. 4e=ects pro!a!ility arument8 t/at i$ t/is case1 #it/ -1CCC s/ares a$% SDM o)
&ault eit/er I(O or S(O1 !ro"a"ilit, t/at at least o$e s/are )rom I(O or S(O is
SCM
-. Statute of .imitations %A /1&
IA ^ /as sta$%i$2 u$%er B 111
T7EN suit "rou2/t ", s/orter o)
a. o$e ,ear a)ter ^ o$ inDuiry notice 4; $e# or s/oul% /a&e $o#$1 2i&e$ reaso$a"le
care1 o) )acts 2i&i$2 rise to /is claim51 OR
". t/ree ,ears a)ter t/e securities #ere o))ere% to t/e !u"lic
S6
6. )efendants
a. Siners of 4eistration Statement
i. Sectio$ T4a5 re+uires t/at issuer si2$ re2istratio$ stateme$t tri22ers lia"ilit,
". )irectors@Partners 4B 114a54'51 4-55
c. :arious #-perts 4B 114a54655
i. :arious e3!erts #/o !re!are% or certi)ie% !art o) r<s 4i.e.1 t/e ;e-pertised portion<5
%. "nderwriters 4B 114a54D55
i. Not treate% as e3!erts
ii. Lie ai%i$2 a$% a"etti$2 4lie Ke$$e%, i$ entral Bank5
e. Controllin Person of Any of the A!ove 4B 1D5
i. E.2. !are$t cor!oratio$
D. #lements of Cause of Action
a. $isstatement or Emission
i. Time of )etermination: As o) t/e e))ecti&e %ate o) t/e re2istratio$ stateme$t
ii. Possi!ility of $ultiple )ates: Di))ere$t !arts o) re2istratio$ stateme$t ma, "ecome
e))ecti&e o$ %i))ere$t %ates 4e.2.1 !ost*e))ecti&e ame$%me$ts5 a$% t/us ma, /a&e
%i))ere$t e))ecti&e %ates
". $ateriality 4see a"o&e5
c. Scienter: +E+# %Strict .ia!ility&
i. B"T, Due Dili2e$ce De)e$se 4see "elo#5
%. 4eliance: +E+# u$til 1 ,ear ear$i$2s stateme$t
i. 4ule
IA
I. issuer maes !u"lic a$ ear$i$2s stateme$t
II. co&eri$2 a !erio% o) at least 1' mo$t/s "e2i$$i$2 a)ter t/e e))ecti&e %ate o) t/e
re2istratio$ stateme$t1
T7EN ^ "ears "ur%e$ o) %emo$strati$2 relia$ce
e. Causation: +E+#
i. B"T, Loss Causatio$ De)e$se 4see "elo#5
T. PS.4A Provisions
a. Applica!le 4see a"o&e5
i. Disco&er, sta,
ii. Aor#ar%*looi$2 sa)e /ar"or 4"ut $ot I(Os5
iii. Lea% !lai$ti)) !ro&isio$
i&. (ro!ortio$ate lia"ilit, )or outsi%er %irectors
&. Ma$%ator, sa$ctio$s )or )ri&olous suits
&i. Ku%icial re&ie# o) attor$e, )ees )or reaso$a"le$ess
". +ot Applica!le
i. (lea%i$2 scie$ter #< !articularit,
SD
[. )efenses %ISS"#4 CA++ET "S#&
a. Section //%!& )irector defense: )or ste!!i$2 %o#$ ] $oti),i$2 SEC
". .oss Causation )efense %A //%e&& 4see Dama2es5
c. )ue )ilience )efense %A //%!&%1&5
.<r<t #/et/er stateme$ts i$ r<s #ere true a$% #/et/er t/ere #as a$ omissio$1 &arious
actors must s/o#8
#-pertised +on(#-pertised
I* #-perts * Reaso$a"le i$&esti2atio$
* Reaso$a"le a$% actual "elie) i$
stateme$ts
4B 114"54-54B55
Not a!!lica"le 4e3!erts 4e.2.1 au%itors5
$ot res!o$si"le )or a$,t/i$2 ot/er t/a$
au%ite% )i$a$cials5
4B 114a54655
I* +on(#-perts * No i$&esti2atio$ re+uireme$t
* Reaso$a"le a$% actual "elie) i$
stateme$ts 4Greliance defenseH5 ca$
rel, o$ i$&esti2atio$ o) e3!ert
4B 114"54-54C5 s/iel%5
* Reaso$a"le i$&esti2atio$
* Reaso$a"le a$% actual "elie) i$
stateme$ts
B114"54-54A5
e.2. CEO1 %irectors1 u$%er#riters
ST
i. )ue )ilience in General
I. 4easona!leness
A. General Standard8 (ru%e$t ma$ i$ t/e ma$a2eme$t o) /is o#$ !ro!ert,
B. 4elevant *actors %4 /LJ&
1. OBs Identity
'. Reaso$a"le relia$ce o$ o))icers1 em!lo,ees1 a$% ot/ers
-. I) U.1 t,!e o) arra$2eme$t1 role o) U. a$% a&aila"ilit, o) i$)o #<r<t t/e
re2istratio$
6. ./et/er1 #<r<t )act or %ocume$t i$cor!orate% ", re)ere$ce1 t/e _ /a% a$,
res!o$si"ilit, )or t/e )act or %ocume$t at time o) )ili$2 )rom #/ic/ it #as
i$cor!orate%
C. 4easona!le and Actual Belief
1. *or +on(#-perts
a. Efficers K )irectors: Cre%i"ilit, !ro"lem tou2/ time 2etti$2 %ue
%ili2e$ce %e)e$se "ecause ca$$ot s/o# actual belief
". Eutsiders: I) $o access to )acts1 mi2/t "e a"le to s/o# actual "elie)
D. 4easona!le Investiation
1. *or +on(#-perts:
a. ;4ed *la< 4ule %&orldCom&
IA $o$*e3!ert relia$ce o$ e3!ertise% !ortio$s o) r<s is =usti)ie%1
T7EN EIT7ER
415 t/ere are no red flas #<r<t t/ose !ortio$s1 OR
4'5 $o$*e3!ert co$%ucte% reaso$a"le i$&esti2atio$ #<r<t re% )la2s
". 4ed *las %def&: )acts #/ic/ come to _@s atte$tio$ #/ic/ #oul%
!lace reaso$a"le !art, i$ _@s !ositio$ o$ $otice t/at au%ite% com!a$,
#as e$2a2e% i$ #ro$2%oi$2 to t/e %etrime$t o) its i$&estors
c. Not a )ull au%it1 "ut must loo at easil, o"tai$a"le %ocume$ts1 e.2.1
"oar% mi$utes1 co$tracts1 !rior SEC )ili$2s5J ca$@t "li$%l, rel,
II. #-perts K +on*#-perts
A. #-perts: Accou$ta$ts
B. +on(#-perts
1. To! e3ecuti&e o))icers
'. U.s
-. Outsi%e %irectors o) issuer #< some s!eci)ic role i$ t/e o))eri$2 4e.2.1
attor$e,*%irector or U.*%irector5
6. Outsi%e %irectors #< $o ot/er role
D. Cou$sel 4#oul% relie&e e&er,o$e )rom lia".
III. #-pertised K +on(#-pertised
A. #-pertised: Issuer@s au%ite% )i$a$cials
B. +on(#-pertised:
S[
I:. %scott v. BarC(ris 41STV1 !. DCT5 due dilience defense 4"o#li$2 alle,5
SV
ii. )ue )ilience for "nderwriters
I. 4easona!le and Actual Belief 4see a"o&e5
II. 4easona!le Investiation
A. 4eliance on Comfort .etters
1. 4ule %&orldCom&: "'s may not rely on an accountantBs comfort
letters )or i$terim )i$a$cial stateme$ts t/e, %o $ot Ge3!ertiseH a$,
!ortio$ o) re2istratio$ stateme$t
B. Shelf 4eistration and )ue )ilience
1. Pro!lem8 S/el) o))eri$2s %o tae%o#$ a$% select u$%er#riter #it/i$
%a,s. SO amou$t o) time to %o %ue %ili2e$ce is smaller solutio$ #as
continuous due dilience
'. 4ule8 Same %ue %ili2e$ce o"li2atio$ )or s/el) re2istratio$ as )or
reaso$a"le i$&esti2atio$
a. ./at is NOT OK )or %ue %ili2e$ce )or $o$*e3!ertise% !ortio$8
415 Rel,i$2 o$ com)ort letter alo$e
4'5 Limite% $um"er o) co$&os #it/ issuer or au%itor
4-5 Cursor, i$+uiries
465 Aailure to 2o "e/i$% a$, o) almost )ormulaic a$s#ers 2i&e$ to +@s
4D5 Aailure to i$+uire i$to issues o) !romi$e$ce i$ U.@s o#$ i$ter$al
e&aluatio$s o) )i$a$cial co$%itio$ o) issues or i$ !ress.
". Must i$&esti2ate e&e$ i) i$&esti2atio$ #oul% $ot /a&e u$co&ere%
!ro"lem 4t/is is $ot a %e)e$se5
C. In re &orldCom 4SDNE 'CC61 !.D1T5 4)rau% i$ au%ite% a$% $o$*au%ite%
)i$a$cials1 li$e*item e3!e$se sue u$%er#riters5
1. 7ere1 re% )la2 #as e3!e$ses<re&e$ue "<c .orl%Com e3!e$ses #ere
lo#er t/a$ com!etitors 4e&e$ t/ou2/ D coul% ar2ue t/is is $ot
$ecessaril, )rau% coul% mea$ .orl%Com more e))icie$t1 i.e. i$$oce$t
e3!la$atio$J a$% e&e$ t/ou2/ E<R ratio #as !u"licl, a&aila"le5
'. Re=ects co$ti$uous %ue %ili2e$ce i$ t/is case "<c re%*)la2*lie )la2s1 i.e.
#ar$i$2 si2$s "<c U.s /a% %o#$2ra%e% .orl%com rece$tl,.
a. U$clear #/et/er co$ti$uous %ue %ili2e$ce is always i$su))icie$t1 or
=ust t/is $arro# situatio$ #/ere t/ere #ere re%*)la2*lie )la2s
-. Post(&orldcom8 Cou$sel )or u$%er#riter sta,s t/e same "<c issuer
selects cou$sel "ut co$)lict o) i$terest "<c issuer /ires )irm1 so $o
i$ce$ti&e to %i2 %ee!l,.
SS
V. )amaes
a. $ain 4ule %A //%e&&
Dama2es ; XLesser o) 4(rice (ai%5 AND 4O))eri$2 (rice5Y
I. %if N sold shares !efore filin suit&
P !rice at #/ic/ ^ sol% s/ares
II. %if N still owns shares at end of suit&
P value o) s/ares at time o) )ili$2 o) suit
III. %if N sold shares after filin suit !ut !efore =udment&
N Greater o)
4!rice at #/ic/ ^ sol% s/ares5
AND
4value o) s/ares at time o) )ili$2 o) suit5
ii. +otes
I. Implicit .oss Causation
A. (olic, c/oice t/at i) !rice 2oes %o#$1 it is %ue to )actors u$relate% to )rau%1
so i2$ore %ama2es.
B. (olic, c/oice t/at i) !rice 2oes u!1 it is %ue to i$itial panic sellin1 so true
stateme$t o) )rau% is /i2/er !rice.
II. Efferin Price )amaes Cap %A //%&&
A. Reco2$iUes t/at i$ seco$%ar, maret1 it@s $ot issuer #/o@s "e$e)iti$21 it@s
outsi%er i$&estors
B. Ca! also o!erates as automatic loss causation "<c c/a$2e to W-C coul%
re!rese$t unrelated factors
iii. ;:alueH
I. Beec(er v. 2,le
A. ^ ar2ues8 &alue L maret !rice "<c maret slo# to res!o$%
B. _ ar2ues &alue P maret !rice "<c !a$ic*selli$21 u$%isclose% !ositi&e i$)o
C. Held8 Court si%es #it/ _1 %etermi$i$2 &alue ; WV6.S' 4$ot maret !rice W[D5
"<c irratio$alities a))ecte% maret &ia !a$ic selli$2
1. Court )ollo#s !ast !atter$ o) !rice )alli$21 "ut ignores the fraudulent
announcementZ
II. Policy8 !ro"a"l, s/oul% =ust "e &alue ; !rice1 =u%2es "a% at t/ese %ecisio$s.
1CC
". .oss Causation )efense %A //%e&&
i. 4ule
IA _ ca$ !ro&e t/at !ortio$ o) %e!reciatio$ o) stoc@s &alue resulte% )rom )actors
ot/er t/a$ misstateme$t<omissio$ i$ re2istratio$ stateme$t1
T7EN _@s lia"ilit, re%uce% ", t/at !ortio$
UNLESS ^ re"uts
ii. )efendants ca$ reduce %i))ere$tial "et#ee$ o))er !rice a$% &alue ", ar2ui$28
I. At same time )rau% release%1 ot/er negative e&e$ts /a!!e$e% 4)irm*s!eci)ic or
o&erall maret5 causi$2 !rice to %ro!.
iii. Plaintiffs re"ut t/at %ro! #as i$ e3cess o) maret mo&eme$t1 ot/er !ositi&e
u$%isclose% i$)o1 a$% leae% i$)o a"out )rau% !rior to e&e$t stu%,.
i&. 2kerman v. 8r$4 Communications 4'% Cir. 1SV[1 !.D-D5
I. Held: Misstateme$t i$ r<s o&erstati$2 ear$i$2s $ot t/e cause o) !rice %ro!1
"ecause 415 !ros!ectus #as !essimistic1 4'5 t/ere #as $o %ecli$e i$ !rice
"et#ee$ time o) !u"lic %isclosure a$% )ili$2 o) suit1 a$% 4-5 ^ )aile% to 2i&e
statistical e&i%e$ce s/o#i$2 #/,1 co$trolli$2 )or ot/er )actors1 Or,3@s %ecli$e
#as a"$ormal
c. >oint and Several .ia!ility %A //%f&&
i. In General: De)e$%a$ts are =oi$t a$% se&erall, lia"le
ii. B"T1 certai$ %e)e$%a$ts recei&e ca! o$ %ama2es8
I. %A //%e&& "'Bs lia"ilit, capped at total price underwritten ] %istri"ute%
II. %A //%f&%8&& Eutsider %irectors are proportionately lia!le i) t/e, %i% $ot $o#
o) &iolatio$
1C1
C. Section /8%a&%/&
1. $ain 4ule
Actio$a"le &iolatio$ IA
a. N is !erso$ #/o purchased security
". O is a$, !erso$ #/o offered or sold security to N
c. securit, #as o))ere% or sol% i$ &iolatio$ o) B D
%. #<i$ statute of limitations
'. Standin K )efendants
a. 4ule %*inter / 4e S(9 Item 6/8%a&%J&&
IA ^ ma, sue a _ u$%er B 1'4a5415
T7EN ^ G!urc/ase% a securit,H )rom _ suc/ t/at ANE OA
i. t/ere is privity "et#ee$ t/e ^ a$% _1
ii. BOT7
I. _ solicits ^ to "u, securit,1
AND
II. _@s acti&it, #as moti&ate% i$ !art ", a %esire to ser&e EIT7ER
A. /is o#$ )i$a$cial i$terests1 OR
B. t/ose o) t/e securities o#$er
OR
iii. BOT7
I. _ is issuer i$ a$ Item D1'4a5 u$%ertai$2 i$ a s/el) re2istratio$ %Item 6/8%a&%J&&1
AND
II. ^ !urc/ase% i$ t/e s/el) %istri"utio$
". *inter v. !a(l 41SVV1 !. D665
i. Held8 A%o!ts test a"o&eJ re=ects su"sta$tial )actor test
ii. 4ationale:
I. 4e=ects su!stantial factor test 4su"sta$tial )actor i$ tra$s)erri$2 securities5
"ecause8
A. Policy: U$certai$t, as to #/o is a _
B. Statutory: GO))erH %oes $ot mea$ Gsu"sta$tial )actorH '4a54-5
II. Adopts Test "<c
A. Policy: .a$t ris o) lia"ilit, o$ solicitors
B. Statutory: GO))erH i$clu%es solicit1 a$% "u,er G!urc/ases )romH solicitor
e&e$ i) solicitor %oes $ot /ol% title
1C'
Standin K
)efendants
#lements of CoA
-. #lements of Cause of Action
a. Section 6 :iolation
". Scienter: +E+#
6. Statute of .imitations %A /1&
a. 1 ,ear )rom %isco&er,1 OR
". - ,ears )rom sale
D. )efenses: +E+#
T. 4emedy: #ITH#4
a. 4escission
4Co$si%eratio$ )or Securit, 9 I$terest5 4I$come Ear$e%5
OR
". %if N no loner owns the security& 4escissionary )amaes
4Co$si%eratio$ )or Securit, 9 I$terest5 amou$t realiUe% i$come recei&e%
[. Interation
a. 4ule
IA issuer &iolates B D #<r<t o$e i$&estor 4e.2.1 )or2ets to se$% B 1C !ros!ectus51
T7EN
i. all tra$sactio$s /a&e &iolate% BD 1 AND
ii. a$, i$&estor ca$ sue
". "sually not a pro!lem "<c access ; %eli&er,5
1C-
). Section /8%a&%8&
1. $ain 4ule
Actio$a"le &iolatio$ IA
a. o))er or sale o) a securit, #as !y means of EIT7ER
i. a prospectus1 OR
ii. oral communication %relatin to a prospectus&,
". N is !erso$ #/o purchased security1
c. O is a$, !erso$ #/o offered or sold security to N1
%. !ros!ectus or oral stateme$t EIT7ER
i. co$tai$s a misstatement of fact1 OR
ii. omitted to state a )act re+uire% to "e state% t/erei$ or $ecessar, to mae t/e
stateme$ts t/erei$ $ot mislea%i$21
e. suc/ misstateme$t or omissio$ is material1
). #<i$ statute of limitations,
2. ^ /as damaes
AND
/. NONE o) t/e )ollo#i$2 defenses is a&aila"le
i. NWs Actual 9nowlede
ii. 4easona!le Care
iii. .oss Causation
1C6
#lements of
Cause of
Action
Standin
%Prospectus V
N& K
)efendants @
Causation %;!y
means of<&
)efenses
'. Standin K )efendants
a. A ;prospectus<
i. ;Prospectus< "nder A /8%a&%8&
I. 4ule %Gusta)son&
IA lia"ilit, )or )rau% ", mea$s o) a !ros!ectus u$%er B 1'4a54'51
T7EN alle2e% !ros!ectus is
A. a B 1C !ros!ectus1 E4 $AHB# 4"<c Gustafson is u$clear5
B. a %ocume$t use% i$ a !u"lic o))eri$2
II. #ffect8 (ri&ate !laceme$ts a$% seco$%ar, maret tra$sactio$s are not
!ros!ectuses. But still room le)t )or ot/er %ocs use% i$ !u"lic o))eri$2 to "e
%eeme% !ros!ectuses1 e.2. Rule 6-- A.(s
III. Criticism
A. B ' is %e)i$itio$al sectio$1 $ot B 1C
B. Rule is i$co$siste$t #it/ B D4"54151 #/ic/ clearl, uses G!ros!ectusH i$ t#o
#a,sJ i) rea% G!ros!ectusH i$ B D4"5415 to mea$ GB 1C !ros!ectus1H !ro&isio$
is mea$i$2less a$% i$o!era"le
I:. Gusta)son v. 2llo$d 4U.S. 1SSD1 !. DD'5
A. Held8 Co$tract o) sale /ere $ot /el% out to t/e !u"lic $ot a !ros!ectus.
ii. Timin
I. 4ule: Accurac, o) !ros!ectus measure% as prospectus is being used1 $ot as o)
e))ecti&e %ate
1CD
". #lii!le Plaintiffs K )efendants
i. 4ule %*inter @ Gusta)son(3alence @ 4 /60A @ 4e S(9 Item 6/8%a&%J&&
IA ^ ma, sue a _ u$%er B 1'4a54'51
T7EN
I. ^ !urc/ase% securit, i$ a tra$sactio$ #/ic/ prospectus delivery was reDuired
%Gusta)son(3alence&1
AND
II. ^ G!urc/ase% a securit,H )rom _ suc/ t/at ANE OA
A. t/ere is privity "et#ee$ t/e ^ a$% _ %*inter&1
B. BOT7
1. _ is issuer i$ EIT7ER
a. a$ i$itial %istri"utio$ o) securities %4 /60A&1 OR
". a$ Item D1'4a5 u$%ertai$2 i$ a s/el) re2istratio$ %Item 6/8%a&%J&&1
AND
'. ^ !urc/ase% i$ t/e i$itial<s/el) %istri"utio$
OR
C. BOT7 %*inter&
1. _ solicits ^ to "u, securit,1
AND
'. _@s acti&it, #as moti&ate% i$ !art ", a %esire to ser&e EIT7ER
a. /is o#$ )i$a$cial i$terests1 OR
". t/ose o) t/e securities o#$er
ii. Transaction in 'hich Prospectus )elivery was 4eDuired
I. Includes
A. I$itial %istri"utio$s
B. Seco$%ar, %istri"utio$s i$ #/ic/ !ros!ectus %eli&er, re+uire%
II. In re 3alence Tec(nolog$ Securities Litigation 4N.D. Cal 1SST1 !.DDS5
A. Held: Seco$%ar, !urc/asers to #/om %ut, o) !ros!ectus %eli&er, #as $ot
o#e% ca$$ot "e !lai$ti))s u$%er B 1'4a54'5<Gustafson
1CT
-. #lements of the Cause of Action
a. $isstatement or Emission
". $ateriality 4see a"o&e5
c. Scienter: +E+# 4"ut reaso$a"le care %e)e$se5
%. Causation %;By $eans of<&
i. 4ule %Sanders&
IA !ros!ectus a))ecte% t/e maret !rice1
T7EN G", mea$s o)H causatio$ re+uireme$t satis)ie%
ii. %anders v. +ohn ,uveen - o. 4[t/ Cir. 1SVC1 !.DT'5
I. Held: !ros!ectus re!orti$2 o$ issuer@s )i$a$cial co$%itio$ a))ects maret !rice1
t/ere)ore causatio$ satis)ie%J !u"licatio$ o) true )i$a$cials #oul% /a&e cause%
colla!se o) maret i$ $otes.
6. Statute of .imitations %A /1&
a. 1 ,ear )rom %isco&er,1 OR
". - ,ears )rom sale
D. )efenses
a. NWs Actual 9nowlede of $isstatement or Emission in Prospectus
". 4easona!le Care )efense
i. 4ule
IA_@s ca$ !ro&e1 #<r<t misstateme$t or omissio$1
I. No actual $o#le%2e1 AND
II. I$ e3ercise o) reaso$a"le care1 coul% $ot /a&e $o#$1
T7EN $o B 1'4a54'5 lia"ilit,
ii. Second Circuit Interpretation
I. Sectio$ 11 %ue %ili2e$ce 4reaso$a"le i$&esti2atio$5 %e)e$se more stri$2e$t t/a$
B 1'4a54'5 reaso$a"le care %e)e$se
c. .oss Causation )efense 4see also B 111 'kerman5
i. 4ule
IA _ ca$ !ro&e t/at !ortio$ o) %e!reciatio$ o) stoc@s &alue resulte% )rom )actors
ot/er t/a$ misstateme$t<omissio$ i$ re2istratio$ stateme$t1
T7EN _@s lia"ilit, re%uce% ", t/at !ortio$
T. )amaes: 4escission or rescissio$ar, %ama2es 4see B 1'4a54155
1C[
:III. (RI:ATE (LACEMENTS 4EIEM(T OAAERINGS5
A. Introduction
1. Types of #-emptions
a. A 1%!& of Securities Act: Allo#s SEC to e3em!t tra$sactio$s o) L WD millio$
i. 4ule 652 of 4e )
ii. 4ule 656 of 4e )
". A 2%8& of Securities Act: E3em!ts s!eci)ic transactions
i. /alston @ !oran
ii. 4ule 65J of 4e )
'. A 6 of Securities Act must "e com!lie% #it/ i) $o e3em!tio$J &iolatio$ 1'4a5415
-. #-emption from A6
a. Gets Hou Eut Ef
i. Ma$%ator, %isclosure 4re2istratio$ stateme$t a$% !erio%ic )ili$2s5
ii. Gu$*=um!i$2 rules 4restrictio$s o$ i$)ormatio$ %isclosure1 !ros!ectus %eli&er,1
!ros!ectus a$% r<s u!%ati$251 a$% t/us B 1'4a5415 lia"ilit,
iii. 7ei2/te$e% a$ti)rau% lia"ilit, 4BB 11 a$% 1'4a54'55
6. 4ationale for Private Placement #-emptions
a. Hih Costs: Re2ulatio$ is &er, costl, a$% sometimes %iscoura2es issuers )rom selli$2
securities to i$&estors1 eit/er ", tur$i$2 to ot/er )orms o) )i$a$ci$2 or ", esc/e#i$2 a$
ot/er#ise !ro)ita"le "usi$ess &e$ture alto2et/er
". .ow Benefits: Re2ulatio$ $ot $ee%e% as muc/ to !rotect so!/isticate% i$&estors
1CV
B. Section 2%8& Efferins
1. Section 2%8&8
a. 4ule
IA tra$sactio$ does not involve a pu!lic offerin1
T7EN B D %oes $ot a!!l,
". Pu!lic Efferin
i. 4ule %/alston *urina&
IA G!u"lic o))eri$2H u$%er B 64'51
T7EN _ must !ro&e t/e o))erees o) t/e o))eri$2 do not need the protections
afforded !y reistration@can fend for themselves
ii. +eed for Protections Afforded !y 4eistration@*endin *or Themselves
I. 4ule %!oran&
IA o))erees /a&e $o $ee% )or !rotectio$s a))or%e% ", re2istratio$<ca$ )e$% )or
t/emsel&es1
T7EN BOT7
A. t/e information t/at #oul% a))or%e% ", a re2istratio$ stateme$t i$ a !u"lic
o))eri$2 #as availa!le to all offerees,
AND
B. t/e other factors #ei2/ a2ai$st $ee% )or !rotectio$s
II. Availa!le Information
A. 4ule %!oran&
IA re+uire% i$)ormatio$ a&aila"le to all o))erees1
T7EN all o))erees EIT7ER
1. /a&e access to re+uire% i$)ormatio$1 OR
'. /a&e actuall, "ee$ )ur$is/e% re+uire% i$)ormatio$
B. Access
1. 4ule %!oran&
IA o))eree /as access to re+uire% i$)ormatio$1
T7EN o))eree /as relatio$s/i! #it/ issuer1 suc/ as "ase% o$
em!lo,me$t1 )amil,1 or eco$omic "ar2ai$i$2 !o#er1 t/at e$a"les o))eree
to e))ecti&el, o"tai$ re+uire% i$)ormatio$
1CS
III. Ether *actors %SecBs Act 4el. +o. 876, !oran&
A. +um!er of Efferees
1. Not merel, $um"er o) actual !urc/asers
'. S#C 4ule of Thum!: P -D O))erees N (u"lic
B. Sophistication of Efferees
1. Not clear8 I$&esti$2 e3!erie$ceJ #ealt/0
'. Solutio$ is Re2 D
C. 4elationship of Efferees
1. To eac/ ot/er a$% to issuer
D. +um!er of "nits Effered
E. SiFe of the Efferin
1. S#C 4ule of Thum!: P WDC millio$ N (u"lic
'. 4ationale8 Do$@t cut o)) small com!a$ies )rom ca!ital mts
A. $anner of the Efferin1 e.2.1
1. (erso$al co$tact "et#ee$ issuer a$% o))erees
'. Lac o) !u"lic a%&ertisi$2
-. Lac o) i$terme%iaries suc/ as i$&estme$t "a$ers or securities
e3c/a$2es
6. Ot/er !u"lic o))eri$2 tactics
'. /alston *urina 4U.S. 1SD-1 !. DTS5 4W'm o))eri$2 to Ge, em!lo,eesH1 i.e. a$,o$e i$ )irm5
a. Held: O))er to com!a$,@s o#$ Ge, em!lo,ees1H $ot mare% o)) ", so!/isticatio$ or
access1 is $ot a !ri&ate !laceme$t
-. !oran v. *etroleum Mgmt. Corp. 41S[[ !. D[15 4W1'DK securities sol% to Dora$1 #/o /as
!etroleum e$2i$eeri$2 %e2ree1 $et #ort/ W1m1 ot/er W i$&este% i$ oil1 9 ot/er o))erees5
a. Held: I$&estor@s so!/isticatio$ $ot e$ou2/ #it/out s/o#i$2 o) access or %isclosure o)
i$)o
11C
C. 4eulation ): 4ules 652, 656, and 65J
1. +otes
a. +E+# IS $"T"A..H #MC."SI:#
". P#4SE+ C.AI$I+G B#A4S B"4)#+ E* P4EE*
'. Common #lements
a. *orm ) 4eDuirement %4 651&
i. 4ule: Issuers e$2a2e% i$ o))eri$2 u$%er Rules DC61 DCD1 or DCT must )ile Aorm D
#<SEC ", )i)tee$t/ %a, a)ter start o) t/e o))eri$2
". )isDualification %4 65L&
i. 4ule
IA issuer su"=ect to a$ or%er1 =u%2me$t1 or %ecree ", a$, court e$=oi$i$2 it )rom
&iolati$2 R DC-1
T7EN issuer %is+uali)ie% )rom usi$2 Re2ulatio$ D
c. Accredited Investor %4 656 K 65J Enly& %4 65/%a&%/&, %1&, %2&, %6&, %J&&
i. )efinition: A$,o$e a$ issuer reasona!ly !elieves to "e ANE OA
I. Ba$s 4"roer*%ealers5
II. E$tities 4trusts1 !art$ers/i!s1 cor!oratio$s5
A. not )orme% s!eci)icall, to ac+uire securities o))ere% 4loo*t/rou2/ rule51
AND
B. #< P WD millio$ i$ assets
III. Directors or e3ecuti&e o))icers o) issuer
A. E3ecuti&e %e)i$e% ", 65/%f& ; CEO or :( i$ c/ar2e o) !ri$ci!al "usi$ess
u$it or !olic,mai$2 )u$ctio$ 4u$certai$5.
I:. Natural !erso$ #/ose i$%i&i%ual $et #ort/1 or =oi$t $et #ort/ #< s!ouse1 at time
o) !urc/ase P W1 millio$ 4class o) asset irrele&a$t5
:. Natural !erso$ #/o
A. /as
1. i$%i&i%ual i$come P W'CCK i$ eac/ o) most t#o rece$t ,ears1 OR
'. =oi$t i$come #< s!ouse P W-CCK #it/ s!ouse i$ eac/ o) most rece$t t#o
,ears1
AND
B. /as reaso$a"le e3!ectatio$ o) reac/i$2 same i$come le&el i$ curre$t ,ear
111
Not I$)latio$
A%=uste%
%. Prohi!ition on General Solicitation %4 658%c&&
i. Application:
I. 4ules 656 K 65J CAT#GE4ICA..H
II. 4ule 652 CE+)ITIE+A..H
ii. $ain 4ule: Neit/er issuer $or a$, !erso$ acti$2 o$ its "e/al) s/all o))er or sell
securities ", a$, )orm o) eneral solicitation or advertisin
iii. General Solicitation or Advertisin
I. Considerations:
A. Pre(e-istin 4elationships
1. Pre(e-istin relationships !etween issuer and offeree t/at #oul%
e$a"le issuer 4or !erso$ acti$2 o$ its "e/al)5 to "e aware of financial
circumstances or sophistication o) !erso$s #it/ #/om relatio$s/i!
e3ists or t/at ot/er#ise are o) some su!stance and duration.
B. Sophistication of offeree 4"ut ma,"e $ot ma,"e o$l, !re*e3isti$2
relatio$s/i! Xa"o&eY matters5
C. +um!er of offerees
II. +ote8 (ree3isti$2 relatio$s/i! is $ot %is!ositi&e some i$&estors are so clearly
sophisticated 4e.2. /e%2e )u$% ma$a2er5 t/at %o $ot $ee% !ree3isti$2
relatio$s/i!.
i&. In re 7enman Corp. 4SEC 1SVD1 !. DVD5
I. *acts8 (ri&ate !laceme$ts1 issuer co$tacte% !rior !artici!a$ts i$ o))eri$21 e3ecs
o) Aortu$e DCC com!a$ies1 all Cali !/,sicia$s1 e$2i$eers1 !rior i$&estors o)
W1CK9.
II. Held8 Issuer e$2a2e% i$ eneral solicitation a$% t/us ca$$ot use 64'5 a$% Rule
DCT sa)e /ar"or.
&. Mineral Lands /esearc( +o Action .etter 4SEC 1SVD1 !. DV[5
&i. #ffect8 Private Placement Aents Indispensa!le
I. I$ter$et startu! #it/ )e# !ree3isti$2 relatio$s/i!s must hire a placement agent
to %etermi$e #/ic/ i$&estors are accre%ite%<so!/isticate% 4o)te$ +uestio$$aires5.
II. I) a2e$t is !roker(dealer1 )urt/er limits o$ a"ilit, to sell to i$&estors1 must "e
suitable to ris !ro)ile o) i$&estors
11'
e. )isclosure 4eDuirements %4 656 K 65J Enly&
i. Accredited Investors: NONE
ii. +on(Accredited Investors
I. A.. %4 658%!&%8&%iv&(%v&:
A. Brie) #ritte$ %escri!tio$ o) a$, material #ritte$ i$)o co$cer$i$2 t/e o))eri$2
2i&e$ to accre%ite% i$&estors
B. %if written reDuest from non(accredited investor& i$)o 2i&e$ to accre%ite%
i$&estor #<i$ reaso$a"le time !rior to !urc/ase
C. O!!ortu$it, to as +uestio$s a$% recei&e a$s#ers relati$2 to o))eri$2
D. I$)o $ecessar, to &eri), accurac, o) ma$%ator, %isclosure items IA 415
re+ueste% ", !urc/aser AND 4'5 !ossesse% or ac+uira"le #<o u$reaso$a"le
e))ort or e3!e$se
II. I* Issuer is non(#A4I
A. *inancial )isclosure %4 658%!&%8&%i&%B&%/&(%1&&
1. Efferin X Y8 million: Item -1C o) Re2 S*B 4e3ce!t o$l, issuer@s
"ala$ce s/eet must "e au%ite%5
'. Efferin X YL.6 million: Ai$a$cial stateme$t i$)o co$tai$e% i$ Aorm SB*
' 4"ut see e3ce!tio$1 !.DS-5
-. Efferin Z YL.6 million: Ai$a$cial stateme$t i$)o co$tai$e% i$ !u"lic
o))eri$2 re2istratio$ stateme$t 4"ut see e3ce!tio$1 !. DS-5
B. +on(*inancial )isclosure %4 658%!&%8&%i&%A&&: Same i$% o) i$)o co$tai$e%
i$ (art I o) re2istratio$ stateme$t use% i$ a !u"lic o))eri$2
III. I* Issuer is #A4I: Must %isclose ALL OA
A. %4 658%!&%8&%ii&%A&(%B&& EIT7ER
1. ALL OA
a. most rece$t a$$ual re!ort1
". %e)i$iti&e !ro3, stateme$t1 AND
c. %only if reDuested !y purchaser in writin& most rece$t 1C*K
OR
'. %only if it contains info found in annual report& most rece$t 1C*K
B. A$, more rece$t E3c/a$2e Act )ili$2s si$ce t/ose !ro&i%e% u$%er Rules
DC'4"54'54ii54A5 or 4B5
AND
C. %4 658%!&%8&%ii&%C&& Brie) %escri!tio$ o)
1. t/e securities "ei$2 o))ere%
'. t/e use o) !rocee%s )rom t/e o))eri$21 AND
-. a$, material c/a$2es i$ issuer@s a))airs t/at are $ot %isclose% i$ t/e
%ocume$ts )ur$is/e%
11-
). 4esale .imitations %4 658%d&&
i. Application:
I. 4ules 656 K 65J CAT#GE4ICA..H
II. 4ule 652 CE+)ITIE+A..H
ii. Prohi!ition on 4esale: Securities sol% u$%er Re2ulatio$ D are %eeme% restricted
securities a$% 2e$erall, may not !e resold
iii. Issuer 4easona!le Care E!liation
I. 4ule
IA securities sol% u$%er Re2ulatio$ D are $ot
A. re2istere% t/rou2/ a !u"lic o))eri$21 OR
B. sol% t/rou2/ a$ot/er e3em!tio$ u$%er BD1
T7EN issuer must tae reasona!le care to assure t/e, are $ot resol%
II. 4ationale8 .it/out limitatio$1 coul% re*create firm commitment o))eri$2
t/rou2/ !ri&ate !laceme$t 9 imme%iate resales $ee% "ala$ce.
III. 4easona!le Care %4 658%d&%/&(%1&&
A. Satisfied !y
1. Reaso$a"le i$+uir, i$to !urc/aser
'. .ritte$ %isclosure to !urc/asers t/at securities are restricte%
-. Le2e$% re)erri$2 to restrictio$s o$ tra$s)era"ilit,
116
2. Interation %4 658%a&&
i. Interation %def&: Nomi$all, se!arate o))ers a$% sales treate% as o$e tra$sactio$
ii. 4ationale8 (re&e$t issuers@ $omi$all, "reai$2 t/i$2s u! i$ or%er to 2et arou$%
rules a$% %o de facto !u"lic o))eri$2s t/at are e3em!t
iii. Two 'ays to Avoid "nder 4ule 658%a&
I. Safe Har!or
II. Balancin *actors
i&. Safe Har!or %4 658%a&&
I. 4ule
IA1 #<r<t a$ o))eri$2 u$%er Re2ulatio$ D1 sales tae !lace EIT7ER
A. P T mo$t/s "e)ore start o) o))eri$21 OR
B. P T mo$t/s a)ter com!letio$ o) o))eri$2
T7EN i$te2ratio$ sa)e /ar"or a!!lies1
UNLESS
C. issuer o))ers or sells securities
D. t/at are of the same or similar class as t/ose o))ere% or sol% u$%er
Re2ulatio$ D
E. at a$, time EIT7ER
1. T mo$t/s "e)ore start o) o))eri$21 OR
'. T mo$t/s a)ter com!letio$ o) o))eri$2
&. Balancin *actors %4 658%a&&
I. ./et/er t/e sales
A. Are !art o) a si$2le plan of financin
B. I$&ol&e issua$ce o) t/e same class of securities
C. 7a&e "ee$ ma%e at or a"out t/e same time
1. E.2.1 ' ,ears su))icie$tl, %i))ere$t
'. SC8 timi$2 is most im!orta$t "<c u$liel, a s/am i) )ar a!art
D. Are ma%e )or t/e same eneral purpose
1. E.2. %i))ere$t i) o$e to "uil% )actor, a$% o$e $ot
II. ./et/er t/e same type of consideration is "ei$2 recei&e%
A. Does$@t matter i) "ot/ )or cas/J matters i) t#o %i))ere$t $o$*cas/
&i. #ffect: O$ce t#o o))eri$2s are i$te2rate%1 must #orr, a"out ot/er Re2 D
re+uireme$ts for whole offerin1 e.2.1 a22re2ate o))eri$2 !rice1 $um"er o)
!urc/asers1 etc.
I. T/is ca$ infect a$ ot/er#ise 2oo% o))eri$2 4&ia1 e.2.1 MAO(1 t/at /as "ee$
i$te2rate% i$to a$ i$te2ratio$*%e)ecti&e o))eri$25
&ii. Summary as t#o +uestio$s8
I. ./et/er t#o o))eri$2s are com"i$e% )or !ur!oses o) %etermi$i$2 Re2 D
eli2i"ilit,
A. Tur$s o$ i$te2ratio$
II. Co$se+ue$ce i) $o eli2i"ilit, 4o$l, )or securit, "ei$2 use% as a$c/or5
11D
-. 4ule 652
a. Promulated "nder: B -4"5
". Inelii!le Issuers
i. EARIs
ii. I$&estme$t Com!a$ies
iii. Bla$ C/ec Com!a$ies
c. $a-imum Areate Efferin Price %$AEP&:
i. 4ule
$AEP ;
4Y/ million o) securities5
SUM OA
securities sol% i$ 1' mo$t/s !rece%i$2 o))eri$2 !ursua$t to a$, o))eri$2
4u$%er B -" Xi$clu%es Rule DC6 ] Rule DCDY5
AND
4i$ &iolatio$ o) B D5
%. $a-imum +um!er of Purchasers: NONE
e. Prohi!ition on General Solicitation: CONDITIONAL 4see commo$ eleme$ts i) ,es5
i. 4ule %4 652%!&%/&%i&(%iii&&
IA $o !ro/i"itio$ o$ 2e$eral solicitatio$1
T7EN issuer sells e3clusi&el, i$ a state t/at
I. !ro&i%es )or re2istratio$ o) its securities u$%er state la#1 AND
II. re+uires !u"lic )ili$2 a$% %eli&er, to i$&estors o) a Gsu"sta$ti&e %isclosure
%ocume$tH !rior to sale
). )isclosure 4eDuirements: NONE
2. 4esale 4estrictions: CONDITIONAL 4see commo$ eleme$ts i) ,es5
i. 4ule %4 652%!&%/&%i&(%iii&&
IA $o !ro/i"itio$ o$ resale o) s/ares1
T7EN issuer sells e3clusi&el, i$ a state t/at
I. !ro&i%es )or re2istratio$ o) its securities u$%er state la#1 AND
II. re+uires !u"lic )ili$2 a$% %eli&er, to i$&estors o) a Gsu"sta$ti&e %isclosure
%ocume$tH !rior to sale
11T
6. 4ule 656
a. Promulated "nder: B -4"5
". Inelii!le Issuers
i. I$&estme$t Com!a$ies
ii. Issuers i$&ol&e% i$ a !ast securities la#s &iolatio$
c. $a-imum Areate Efferin Price %$AEP&:
i. 4ule
$AEP ;
4Y6 million o) securities5
SUM OA
securities sol% i$ 1' mo$t/s !rece%i$2 o))eri$2 !ursua$t to a$, o))eri$2
4u$%er B -" Xi$clu%es Rule DC6 ] Rule DCDY5
AND
4i$ &iolatio$ o) B D5
%. $a-imum +um!er of Purchasers: -D
i. #-cluded
I. A$, relati&e1 s!ouse1 or relati&e o) t/e s!ouse o) a !urc/aser #/o /as t/e same
!ri$ci!al resi%e$ce as t/e !urc/aser
II. Accredited Investors 4see a"o&e5
ii. E$tities cou$t as o$e !urc/aser UNLESS )orme% to "u, t/e securities
e. Prohi!ition on General Solicitation: EES 4see commo$ eleme$ts5
). )isclosure 4eDuirements: EES 4see commo$ eleme$ts5
2. 4esale 4estrictions: EES 4see commo$ eleme$ts5
11[
/. )isDualification %4 656%!&%8&%iii&&
i. 4ule
IA
I. ANE OA
A. issuer1 a$, o) its !re%ecessors or a$, a))iliate% issuer1
B. a$, %irector1 o))icer1 or 2e$eral !art$er o) t/e issuer1
C. "e$e)icial o#$er o) \ 1CM o) a$, class o) issuer@s e+uit, securities1
D. a$, U. 4i$clu%i$2 !laceme$t a2e$ts5
AND
II. 4ANE OA5
A. /as !e$%i$2 Sectio$ V !rocee%i$2
B. #as su"=ect o) re)usal or sto! or%er i$ !ast D ,rs
C. #as co$&icte% o) )elo$, or mis%emea$or relati$2 to !urc/ase or sale o)
securities or i$&ol&i$2 )alse )ili$2 #< SEC #<i$ !ast D ,ears
D. #as su"=ect to a$, or%er1 =u%2me$t1 %ecree o) a court #<i$ !ast D ,ears
e$=oi$i$2 co$%uct or !ractice relati$2 to sale o) securities or )alse )ili$2 #it/
SEC
T7EN issuer %is+uali)ie% )rom usi$2 Rule DCD
11V
D. 4ule 65J
a. Promulated "nder: B 64'5
". Inelii!le Issuers: NONE
c. $a-imum Areate Efferin Price %$AEP&: NONE
%. $a-imum +um!er of Purchasers: 16 A+) Sophisticated
i. #-cluded
I. A$, relati&e1 s!ouse1 or relati&e o) t/e s!ouse o) a !urc/aser #/o /as t/e same
!ri$ci!al resi%e$ce as t/e !urc/aser
II. Accredited Investors 4see a"o&e5
ii. E$tities cou$t as o$e !urc/aser UNLESS )orme% to "u, t/e securities
iii. Sophistication 4eDuirement %4 65J%!&%8&%ii&&
I. 4ule
IA i$&estor so!/isticate%1
T7EN i$&estor /as
A. eit/er i$%i&i%uall, or t/rou2/ purchaser representative1
B. t/e knowlede a$% e-perience i$ )i$a$cial a$% "usi$ess matters to assess
merits and risks o) i$&estme$ts
II. Purchaser 4epresentative %A 65/%h&&
A. 4ule
IA G!urc/aser re!rese$tati&eH )or !ur!oses o) Rule DCT4"54'54ii51
T7EN re!rese$tati&e
1. is NOT a$ a))iliate1 %irector1 o))icer1 or lar2e s/are/ol%er #/o is NOT
relati&e closer t/a$ seco$% cousi$.
'. /as $o#le%2e a$% e3!erie$ce i$ )i$a$cial "usi$ess matters to assess
merits
-. is ac$o#le%2e% ", !urc/aser in writing
6. /as %isclose% to !urc/aser material co$)licts 4e.2. i) re!rese$tati&e is
!laceme$t a2e$t )or o))eri$25
III. *actors to Consider Towards 9nowlede and #-perience to AssessT
A. .ealt/ a$% i$come
B. E3!erie$ce 42e$eral "usi$ess or more s!eci)ic to securities i$&estme$t5
C. E%ucatio$
D. (rese$t i$&estme$t status 4#ell*%i&ersi)ie% or $ot5
E. (er)orma$ce o$ a$ i$&estme$t test 4muc/ lie a %ri&er@s lice$se5
e. Prohi!ition on General Solicitation: EES 4see commo$ eleme$ts5
). )isclosure 4eDuirements: EES 4see commo$ eleme$ts5
2. 4esale 4estrictions: EES 4see commo$ eleme$ts5
11S
T. *oriveness for Innocent and Insinificant $istakes
a. 4ule 657 *oriveness
i. 4ule
IA )ailure to com!l, #it/ term1 co$%itio$ or re+uireme$t o) Re2 D %oes $ot result i$
loss o) e3em!tio$1
T7EN !erso$ rel,i$2 o$ e3em!tio$ must s/o# t/at
I. )ailure to com!l, %i% $ot !ertai$ to re+uireme$t directly intended to protect
that particular individual or entity,
II. )ailure to com!l, #as insinificant #<r<t o))eri$2 as a #/ole1
AND
III. a ood faith and reasona!le attempt #as ma%e to com!l, #it/ re+uireme$ts
ii. ;)irectly Intended to Protect the Particular Individual or #ntity<
I. E.2.1 i) issuer )or2ets to se$% o))eri$2 memo to o$e !erso$1 that person coul%
sue u$%er 1'4a54151 "ut e&er,o$e else ca$$ot
iii. Insinificant *ailure to Comply
I. #-cludes %!@c necessarily sinificant&
A. Ge$eral Solicitatio$ 4R DC'4c55
B. Ma3imum A22re2ate O))eri$2 (rice 4R DC64"54'51 DCD4"54'54i55
C. Num"er o) (urc/asers DCT4"54'54i51 DCD4"54'54ii5
i&. S#C #+*E4C#$#+T STI.. APP.I#S )#SPIT# 4".# 657
". B"T ;4easona!ly Believes< *oriveness %Better #-cuses&
i. 4ule
IA issuer reasona,l$ ,elieves1 or s/o#s reasona,le care #<r<t RRRRR N $o &iolatio$
I. Accre%ite% i$&estors1 issuer Greasonably believesH. Rule DC14a5
II. (urc/aser re!.<so!/isticate%1 Greasonably believesH. Rule DC14/51 DCT4"54'54ii5
III. Num"er o) !urc/asers1 Greasonably believesH. DCD4"54'54ii51 DCT4"54'54i5
I:. Resale limitatio$s1 Greasonable careH
1'C
II. SECONDARE MARKET RESALES
A. Everview
1. 4ationale for 4esales: Li+ui%it, )or i$&estors 4ma$, issuers %o$@t issue %i&i%e$%s5
'. 4ationale for .imitin 4esales
a. Prevent Sham pu!lic offerin
". "ninformed investors
i. Lac o) i$)o i$ !u"lic maret!lace
ii. U$i$)orme% selli$2 to u$i$)orme% s/oul% #e care1 or OK "<c le&el !la,i$2 )iel%0
I. BUT t/ose #/o #a$t to commit )rau% /a&e easier time.
II. Allo#a"le1 "ut SEC %oes$@t lie it.
c. Information advantae 4)ull, i$)orme% selli$2 to u$i$)orme%5
i. Dum!i$2 s!eculati&e securities i$)o a%&a$ta2e o$ !art o) reseller
I. O$l, tem!orar, )or most i$&estors !assa2e o) time %imi$is/es i$si%er
a%&a$ta2e 4=usti)ies '*- ,ear rule o) t/um"5
ii. A))iliate 4Bill Gates5 /as e$%uri$2 i$)o a%&a$ta2e
-. Section 68 i$%e)i$itel, !ro/i"its a$,o$e )rom selli$2 securities usi$2 i$terstate commerce
#<o curre$t re2istratio$ stateme$t a$% )ormal statutor, !ros!ectus eit/er !rece%i$2 or
accom!a$,i$2 &iolatio$ tra$sactio$ !ro/i"its seco$%ar, maret tra$sactio$s.
6. Possi!le #-emptions
a. Section 2%2&
". Section 2%/&
i. Gilligan9 &ill @ C(inese Consolidated @ &ol)son
ii. 4ule /22
B. Section 2%2&: "nsolicited BrokerBs Transactions
1. 4ule
IA
a. "roer e3ecutes tra$sactio$ u!o$ customer@s or%er
". o$ a$, e3c/a$2e or i$ o&er*t/e*cou$ter maret1 AND
c. %i% $ot solicit t/e or%er1
T7EN B D %oes $ot a!!l, to t/e ,roker
'. &ol)son 4'% Cir. 1STV1 !. TDV5 4.ol)so$ co$trolli$2 S71 sells some s/ares usi$2 - "roers
to i$&estors i$ maret!lace1 "ou2/t s/ares ma$, ,ears a2o1 i.e. /e@s $ot u$%er#riter5
a. Held8 2%2& protects :ust ,rokers 4a"out !arties $ot tra$sactio$s5 .ol)so$ ca$$ot use
t/is to !rotect /imsel).
1'1
C. Section 2%/&: Gilligan9 &ill @ C(inese Consolidated @ &ol)son
1. Everview
a. 9ey Issue8 Is sale )rom issuer to E1 a$% E to `1 o$e tra$sactio$ or t#o0
i. I) o$e tra$sactio$ lose 6415 e3em!tio$ )rom BD. Two views o$ co$se+ue$ces )or
issuer8
I. Ene view8 Treat as o$e tra$sactio$1 hinese1 so all !arties 2et 6415 or $o$e %o.
No# coul% "e tra$sactio$ t/at loses DCT e3em!tio$ a$% 64'5 e3em!tio$ 4e.2. i)
$o# to 6C i$&estors i$stea% o) -D5
II. Second view8 U$certai$t,1 $ot all or $ot/i$2 issuer coul% ar2ue t/at Rule
DC'4%5 !ro&i%es reasonable resale restriction a$% issuer s/oul% still /a&e Rule
DCT.
ii. I) t#o tra$sactio$s 6415 e3em!tio$ a!!lies )or seco$% tra$sactio$
". Aocus o$ re2ulatio$ o) transactions. hinese onsolidated.
'. $ain 4ule
IA +E person i$ a securities tra$sactio$ is a$ issuer, underwriter1 or dealer1
T7EN
a. Sectio$ D %oes $ot a!!l, to t/at tra$sactio$1 AND
". s!eci)icall,1 resales o) t/e securities ", a$, !erso$ i$ t/e tra$sactio$ are !ermitte%
c. +ote8 Transactions do not care a!out history i) issuer later "u,s "ac s/ares )rom
public o))eri$2 a$% resells t/is is a2ai$ a !rimar, o))eri$2 B 6415 u$a&aila"le
i. (u"lic o))eri$21 issuer u<# !u"licJ acce!te% t/at a)ter i$itial u$%er#riters sell1
t/e issuer@s tra$sactio$ is se!arate.
ii. No$*!u"lic o))eri$2 must as #/et/er all o$e tra$sactio$ or se!arate.
-. Issuer %A 8%a&%2&&
6. )ealer %A 8%a&%/8&&
a. )efinition: a$, !erso$ #/o e$2a2es eit/er )or all or !art o) /is time1 %irectl, or
i$%irectl,1 as a2e$t1 !roker1 or !ri$ci!al1 i$ t/e "usi$ess o) o))eri$21 "u,i$21 selli$21 or
ot/er#ise %eali$2 or tra%i$2 i$ securities issue% ", a$ot/er !erso$.
". B"T, mere involvement of !roker in transaction does not eliminate A 2%/&
e-emption %2cker,erg v. 'o(nson&
i. Aocus is $ot o$ presence of issuer or underwriter
ii. 4ationale: Ot/er#ise )e# seco$%ar, tra$sactio$s i$&ol&i$2 resales #oul% "e
e3em!t u$%er B 6415
I. 47o#e&er1 B '4a541'5 e3!licitl, i$clu%es G"roerH i$ its %e)i$itio$ o) G%ealerH5
1''
D. "nderwriter
a. 4ule %A 8%a&%//&&
IA a !erso$
i. /as !urc/ase% )rom a$ issuer #it/ a view to, or o))ers or sells )or a$ issuer i$
co$$ectio$ #it/1 t/e distri!ution o) a$, securit,1
ii. participates or has a direct@indirect participation in EIT7ER
I. !urc/asi$2 )rom a$ issuer #it/ a &ie# to, or o))eri$2 or selli$2 )or a$ issuer i$
co$$ectio$ #it/1 t/e %istri"utio$ o) a$, securit,1
OR
II. u$%er#riti$2 t/e !urc/ase )rom a$ issuer #it/ a &ie# to, or o))eri$2 or selli$2
)or a$ issuer i$ co$$ectio$ #it/1 t/e %istri"utio$ o) a$, securit,
OR
iii. ser&es as a$ underwriter for a control person
T7EN t/e !erso$ is a$ u$%er#riter
1'-
Gilligan9 &ill
C(inese
Consolidated
&ol)son
". ;:iew to . . . distri!ution<
i. :iew to
I. Chaned Circumstances Test %Gilligan9 &ill& 4%is)a&ore% ", SEC5
A. 4ule
IA chaned circumstances1
T7EN O &ie# to
B. Chaned Circumstances
1. Includes
a. C/a$2es i$ investorBs circumsta$ces
". Passae of Time %2cker,erg v. 'o(nson&
415 Resol% L ' ,ears a)ter !urc/ase N re"utta"l, !resume G&ie# toH
4'5 Resol% '*- ,ears a)ter !urc/ase N re"utta"l, !resume O G&ie#
toH
4-5 Resol% P - ,ears a)ter !urc/ase N irre"utta"l, !resume O G&ie#
toH
'. #-cludes
a. C/a$2es i$ issuerBs circumsta$ces 4u$less 'ckerburg P - ,ear rule
a!!lies5
". 4ationale8 Ot/er#ise s!eculati&e %ealer coul% %um! "a%1 s!eculati&e
stocs o$ t/e maret!lace
ii. )istri!ution of Securities %Gilligan9 &ill&
I. 4ule
IA %istri"utio$ o) securities1
T7EN G!u"lic o))eri$2H u$%er !alston-$urina 4G)e$% )or t/emsel&esHJ see
a"o&e5
iii. Gilligan9 &ill v. S%C 4'% Cir. 1SDS1 !. TDC5 4Gilli2a$ %eci%es to co$&ert %e"e$tures
i$to commo$ stoc1 t/e$ resells "roa%l, to ra$%om i$&estors o$ Ame35
I. Held8 Resales e3ecute% #ere a %istri"utio$ 4or !u"lic o))eri$25 a$% Gilli2a$ /a%
G&ie# toH %istr. Gilli2a$ #as u$%er#riter a$% tra$sactio$s $ot e3em!t u$%er B
6415
II. +ote8 Gilli2a$ ca$$ot use B 64'5 "<c /e is $ot t/e issuer
c. ;Participates or has a direct@indirect participation inT<
i. 4ule %C(inese Consolidated&
IA a !erso$ solicits o))ers to "u, a securit, )or &alue1 #< or #<o com!e$satio$1
T7EN t/e !erso$ is a$ u$%er#riter
ii. S%C v. C(inese Consolidated Benevolent 2ss5n 4'% Cir. 1S611 !.TD65
I. Held: Acti&ities o) committee o) u$com!e$sate% i$%i&i%uals to solicit i$&estors
i$ C/i$ese 2o&@t "o$%s cou$te% as Gu$%er#riterH )or C/i$ese 2o&@t1 "<c
soliciti$2 cou$ts as G!artici!atio$H
1'6
%. "nderwriter for a Control Person
i. 4ule
IA a !erso$
I. /as !urc/ase% )rom a control person #it/ a view to, or o))ers or sells )or a
control person i$ co$$ectio$ #it/1 t/e distri!ution o) a$, securit,1
II. participates or has a direct@indirect participation in EIT7ER
A. !urc/asi$2 )rom a$ control person #it/ a &ie# to, or o))eri$2 or selli$2 )or
a control person i$ co$$ectio$ #it/1 t/e %istri"utio$ o) a$, securit,1
OR
B. u$%er#riti$2 t/e !urc/ase )rom a control person #it/ a &ie# to, or o))eri$2
or selli$2 )or a control person i$ co$$ectio$ #it/1 t/e %istri"utio$ o) a$,
securit,
T7EN t/e !erso$ is a$ u$%er#riter
ii. Control Person %a.k.a., Affiliate&
I. %A 8%a&%//&58 a$, !erso$ %irectl, or i$%irectl, co$trolli$2 or co$trolle% ", t/e
issuer
II. %4 256&: !erso$ is i$ !ositio$ to direct manaement and policies o) com!a$,1
#/et/er t/rou2/ o#$ers/i! o) &oti$2 securities1 ", co$tract1 or ot/er#ise
iii. ;:iew to< @ A 2%/ [& #-emption %2cker,erg v. 'o(nson&
I. 4ule
IA co$trol !erso$ resale +ET a G!u"lic o))eri$2H u$%er !alston $urina 4G)e$%
)or t/emsel&esHJ see a"o&e51
T7EN resale %oes $ot i$&ol&e a$ u$%er#riter
i&. &ol)son 4'% Cir. 1STV1 !. TDV5 4.ol)so$ co$trolli$2 S71 sells some s/ares usi$2 -
"roers to i$&estors i$ maret!lace1 "ou2/t s/ares ma$, ,ears a2o1 i.e. /e@s $ot
u$%er#riter5
I. Held /8 Co$trol !erso$ resale to "roer "roer is u$%er#riter u$%er B '4a5
4115 $o 6415 e3em!tio$.
II. 4ationale %Choi& )or t/is re+uireme$t
A. .ol)so$ coul% )orce com!a$, to re2ister securities )or sale 4seco$%ar,
o))eri$25
B. .ol)so$@s i$)o a%&a$ta2e has not dissipated co$trol !erso$ /as enduring
information advantage.
C. OK i) $o "roer "<c 1*o$*1 tra$sactio$ is !ro3, )or i$&estme$t
so!/isticatio$.
D. Note8 No scie$ter )or B 1'4a5415 lia"ilit,1 so .ol)so$ ca$$ot ar2ue /e ma%e
mistae.
1'D
;:iew to< @
Possi!le A 2%/
[& #-emption
i.e., Assistance
in Control
Person 4esale
). Section 2%/&: 4ule /22 Safe Har!or from ;"nderwriter< Status
1. 4ationale: Elimi$ate u$certai$t, o) Gc/a$2e% circumsta$cesH1 etc.
'. $ain 4ule
I*
a. EIT7ER
i. affiliate or ot/er !erso$ #/o sells restricte% securities1
OR
ii. !erso$ #/o sells restricte% or ot/er securities on !ehalf of an affiliate,
". com!lies #it/ ALL OA
i. Holdin Period
ii. Current Pu!lic Information 4eDuirements
iii. %if affiliate& Affiliate(Specific 4eDuirements
AND
c. %oes $ot e$2a2e i$ a plan or scheme to e&a%e t/e re2istratio$ re+uireme$ts1
TH#+
%. a))iliate or ot/er !erso$ is not an underwriter u$%er B '4a54115 a$% 4t/ere)ore5 B 64151
AND
e. !urc/aser o) securities recei&es unrestricted securities
1'T
-. Common #lements
a. Affiliate
i. )efinition %4 /22%a&%/&&
(erso$ t/at
I. %irectl, or i$%irectl, co$trols issuer1
II. is co$trolle% ", issuer1 OR
III. is u$%er commo$ co$trol #it/ issuer
ii. Control %def ( 4 256&8 t/e !ossessio$1 %irect or i$%irect1 o) t/e power to direct or
cause the direction of the manaement and policies of a person1 #/et/er t/rou2/
t/e o#$ers/i! o) &oti$2 securities1 ", co$tract1 or ot/er#ise.H
". +on(Affiliate: Ca$@t /a&e "ee$ a))iliate #<i$ !rior - mo$t/s
c. 4estricted Securities %def C 4 /22%a&%1&
ANE OA securities ac+uire%
i. %irectl,<i$%irectl, from issuer or affiliate i$ tra$sactio$ or c/ai$ o) tra$sactio$s
not involvin a pu!lic offerin1
ii. i$ a tra$sactio$ i$ #/ic/ Rule DC'4%5 resale limitatio$s a!!l, 4i.e.1 R DCD or DCT
o))eri$2s5
OR
iii. i$ tra$sactio$ meeti$2 Rule 166A.
1'[
6. Holdin Period %4 /22%d&&
a. 4estricted Securities
i. 4ule
IA com!lia$ce #it/ Rule 1661
T7EN !art, must /ol% a$, restricted securit,1
I. from t/e .AT#4 E* %ate o) acDuisition of securities )rom
A. t/e issuer1 OR
B. a$ a))iliate o) t/e issuer
II. to
A. %if #A4I reportin for Q 05 days !efore resale& T mo$t/s
B. %if any other issuer& 1 ,ear
". "nrestricted Securities: +E HE.)I+G P#4IE)
1'V
D. Current Pu!lic Information 4eDuirements %4 /22%!&(%c&&
a. Affiliates
i. 4ule
IA !art, is a))iliate1
T7EN issuer must /a&e satis)ie% information reDuirement 4see "elo#5
". +on(affiliates
i. Issuer is #A4I %4 /22%!&%/&%i&&
I. 4ule
IA $o$*a))iliate !art, reselli$2 securities o) a$ EARI1
T7EN
A. %information period&
1. from .AT#4 E* %ate securities #ere ac+uire%
a. )rom t/e issuer1 OR
". )rom a$ a))iliate o) t/e issuer1
'. to one year later
B. EARI must /a&e satis)ie% information reDuirement 4see "elo#5
ii. Issuer is non(#A4I %4 /22%!&%/&%ii&&: +E I+*E4$ATIE+ 4#?"I4#$#+T
c. Information 4eDuirement %4 /22%c&
i. Issuer is #A4I
I. 4ule
IA
A. EARI /as "ee$ a$ EARI )or \ SC %a,s "e)ore resale1 AND
B. EARI /as "ee$ curre$t i$ its E3c/. Act !erio%ic %isclosure )ili$2s )or !ast 1'
mo$t/s1
T7EN !art, reselli$2 securities /as satis)ie% i$)ormatio$ re+uireme$t
ii. Issuer is non(#A4I %A**I.IAT#S E+.H&
I. 4ule
IA $o$*EARI /as ma%e a&aila"le t/e i$)ormatio$ s!eci)ie% i$ Rule 1Dc'*114a5
4D54i5*43i&5 a$% 43&i5 4see case"oo !!.TT[*TV5
T7EN !art, reselli$2 securities /as satis)ie% i$)ormatio$ re+uireme$t
iii. Party may rely on issuerBs written representation on current filins
1'S
%. Affiliate(Specific 4eDuirements
i. 4eDuirements
I. :olume .imit
II. $anner of Sale 4eDuirement
III. +otice 4eDuirement
ii. :olume .imit %4 /22%e&&
I. 4ule
IA &olume limit satis)ie%1
T7EN a))iliate resol%
A. %uri$2 previous three(month period
B. $o more t/a$ GREATER OA
1. %if eDuity securities&
a. 1M o) outsta$%i$2 s/ares o) u$its o) same class o) securities1 OR
". A&era2e #eel, tra%i$2 &olume o) same class o) securities %uri$2
)our cale$%ar #ees !rece%i$2 )ili$2 o) $otice #< SECo$ &arious
securities e3c/a$2es
'. %if de!t securities& 1CM o) !ri$ci!al amou$t o) tra$c/e
C. B"T #MC.")I+G
1. securities sol% !ursua$t to a$ e))ecti&e re2istratio$ stateme$t
'. securities sol% !ursua$t to a$ e3em!tio$ !ro&i%e% ", Re2ulatio$ A F J
-. securities sol% i$ a tra$sactio$ e3em!t !ursua$t to B 6 F a$% $ot
i$&ol&i$2 a$, !u"lic o))eri$21 AND
6. securities sol% o))s/ore !ursua$t to Re2ulatio$ S
II. 4ationale
A. Aear o) maret %isru!tio$ )rom lar2e $um"er o) securities e$teri$2 maret at
o$ce
B. SiUe o) o))eri$2 as !ro3, )or !u"lic o))eri$2 tactics
1-C
iii. $anner of Sale 4eDuirement %4 /22%f&(%&&
I. 4ule
IA ma$$er o) sale re+uireme$t satis)ie%1
T7EN a))iliate resells t/rou2/
A. a$ unsolicited !rokerBs transaction
B. %irectl, #it/ a market maker1
OR
C. a riskless principal transaction
II. "nsolicited BrokerBs Transaction
A. 4ule
IA u$solicite% "roer@s tra$sactio$1
T7EN "roer must
1. not solicit orders
'. %o $o more t/a$ e3ecute or%er or or%ers to sell t/e securities as a2e$t )or
t/e !erso$ )or #/ose accou$t t/e securities are sol%
-. recei&e $o more t/a$ t/e usual a$% customar, "roer@s commissio$
6. mae a reasona!le inDuiry i$to t/e circumsta$ces o) t/e sale tra$sactio$
to %etermi$e #/et/er t/e seller is acti$2 as a U. tai$2 !art i$ t/e
%istri"utio$ o) securities )or t/e issuer
B. Solicitation of Erders
1. #-cludes
a. I$+uiri$2 o) customers #/o /a&e i$%icate% a$ Gu$solicite% "o$a )i%e
i$terestH i$ t/e securities #<i$ t/e !ast 1C %a,s
". (osti$2 "i% a$% as +uotatio$s i$ a$ i$ter*%ealer +uotatio$ s,stem or
a$ alter$ati&e tra%i$2 s,stem 4i) re+uireme$ts met see !.T['5
C. 4easona!le InDuiry: 4eDuires
1. Loo at Aorm 166 )ili$2 o) some sellers i$%icati$2 e3!ecte% amou$t o)
securities to "e sol%
'. Determi$e
a. le$2t/ o) time seller /as /el% securities
". /o# seller ac+uire% securities
c. #/et/er sellers i$te$% to sell a%%itio$al securities o) same class
%. i) seller /as ma%e a$, solicitatio$s
III. $arket $aker
A. )efinition: Dealers #/o co$ti$uousl, o))er +uotatio$s i$ s!eci)ic securities1
/ol%i$2 t/emsel&es out to t/e 2e$eral seco$%ar, mt as "ei$2 #illi$2 to "u,
or sell t/e securities at s!eci)ie% "u, a$% sell !rices
I:. 4iskless Principal Transaction
A. )efinition: Securities %ealer i$ res!o$se to a sale 4or "u,5 or%er )rom a$
i$&estor "u,s 4or sells5 securit, )or t/e %ealer@s o#$ accou$t
1-1
i&. +otice 4eDuirement %/22%h&
I. 4ule
IA a))iliate sells o&er WDCK or o&er DCCC u$its1
T7EN must
A. co$curre$tl, #<
1. !laci$2 o) )irst sale or%er #< a "roer1 OR
'. e3ecutio$ o) tra%e %irectl, #< a maret maer
B. )ile Aorm 166 #<
1. SEC1 AND
'. %if securities trade on a natBl securities e-chane& !ri$ci!al e3c/a$2e
o$ #/ic/ securities a%mitte% )or tra%i$2
C. #< a "o$a )i%e i$te$tio$ to sell t/e securities #<i$ a reaso$a"le amou$t o)
time a)ter )ili$2 t/e )orm
Y
.ess than J months J months to / year / year or more
No$*A))iliate
EARI
Restricte%
Rule 166 $ot a&aila"le
Rule 1664%54154i5
/ol%i$2 !erio%
I$)ormatio$
re+uireme$ts 1664"5415
4i5
Areel, resell
No$*A))iliate
No$*EARI
Restricte%
Rule 166 $ot a&aila"le
Rule 1664%54154ii5 /ol%i$2 !erio%
Areel, resell
No$*A))iliate
U$restricte%
Areel, resell 4%o$@t $ee% Rule 166 /ere "<c use 64155
A))iliate
EARI
Restricte%
Rule 166 $ot a&aila"le
Rule 1664%54154i5
/ol%i$2 !erio%
:olume1 i$)ormatio$1 u$solicite% "roer@s
tra$sactio$1 $otice
A))iliate
No$*EARI
Restricte%
Rule 166 $ot a&aila"le
Rule 1664%54154ii5 /ol%i$2 !erio%
:olume1 i$)ormatio$1
u$solicite% "roer@s
tra$sactio$1 $otice
A))iliate
U$restricte%
:olume1 i$)ormatio$1 u$solicite% "roer@s tra$sactio$1 $otice
1-'