Securities Regulation

Examples & Explanations (6th edition)

Examples

Pg. 9 (Interconnection among financial markets)

1. You want to buy General Electric stock at he prevailing market price, as published
each day in the newspapers financial section.
a. How can you buy?
b. Will you own stock in your own name?
c. How would you sell the stock?
2. You come into a large inheritance and want to diversify your securities portfolio.
a. You want to buy corporate bonds. How can you?
b. You want to invest in start-up firms as a venture capitalist. How can you?
3. You become so good at playing the market, you take a new job as the manager of a
large investment portfolio.
a. You worry about your portfolios holding in multinational companies. These
companies do a significant amount of business outside he United States, and if
the U.S. dollar falls compared to other currencies; their dollar-pegged earnings
will also fall. How can you protect your portfolio against a falling dollar?
b. You are convinced that the Federal Reserve will raise interest rates, causing a
decline in the value of equity securities. If you sell your holdings, which are
significant, you will likely drive down the market price by your very selling.
How do you avoid losses to your portfolio without selling your holdings?

Explanations
1.
a) As an individual investor, you will rely on securities intermediaries to match your
buy order with anothers sell order. You will probably call a stockbroker and give the
broker an order for your account Market buy order
a. Can fill order in several ways
i. Exchange (auction) markets (NYSE)
ii. Over-the-counter (dealer) markets (NASDAQ) 11.23
iii. Sell from inventory. (If seller owns requested stock) see 11.24
iv. ECNs eliminate the usual intermediaries by allowing investors to
place their orders online (E*Trade)
b) No. Like most investors, you will probably never receive certificates for your stock.
a. Proxy materials must be made available to you either directly or through the
intermediary.
 c) The sale of stock reverses the transactions described in 1a for the purchase of
securities.
2.
a) Problematic. To reduce financing costs, companies sell their debt in large
denominations only to institutional investors, thus avoiding the underwriting costs
of a wide offering and the regulatory costs of a registered public offering.
a. Individual investors can own portfolios of corporate bonds by buying shares of
mutual funds a portion of a diversified pool of corporate bonds. (Buy
through fidelity investments or vanguard groups, etc.)
b. Some mutual are no-load, meaning that there is no commission for
purchasing shares in the fund, though there are periodic fees assessed by the
fund advisers and managers that are ultimately borne by fund owners.
b) More Problematic. Venture capitalists are wealthy, sophisticated investors who
invest in start-up companies, typically buying a significant minority position (20 to
49 percent) of the companys shares and receiving agreed-upon management
prerogatives. See 5.2.2 5.2.4
a. An individual who does not meet the criteria cannot invest as a venture
capitalist.
3.
a) You can buy currency futures. A currency future is a contract in which the seller
promises to sell a particular currency (or a basket of currencies) at a fix price on a
fixed date in the future.
a. Buying currency futures allows you to lock in exchange rates for foreign
currencies.
b) You can sell index futures. An index future is a contract in which the seller promises
to sell in the future at a specified price a block of stocks that represents a stock index
(typically the Standard & Poors 500)

Examples

Pg. 65 (Definition of Security)

1. Identify which of the following arrangement involve a securities transaction

a. Alicia buys voting common shares of Citrus Corporation, a publicly traded
corporation that owns citrus groves in Florida and harvests and markets
citrus fruits and juices.
 b. Bob buys a row of 48 citrus trees from Howey Company. Although not
required, Bob agrees to have Howey-in-the-Hills (a related company) cultivate,
harvest, and market his citrus, along with that of many others who own rows
like Bobs.
c. Carlita and Carlos agree to work for Howey-in-the-Hills as orange pickers,
with half their pay in cash and the other half a bonus based on a percentage of
the profits of the company.
d. David, Delilah, and Dina buy a citrus grove in Florida as tenants in common.
They contract with Sam, a local farmer, to manage their farms.
e. There is a terrible freeze in Florida, and neither Citrus Corporation, Howey-in-
the-Hills, nor Sam has any smoke machines to save their groves delicate
blossoms. What remedies do Alicia, Bob, Carlita, and David have if they were
never told about he lack of smoke machines?
2. First Lynch Securiites offers its customers managed trading accounts, in which the
brokerage firm exercises its discretion to buy and sell securities and commodities
for the customers accounts. Identify which of the following managed accounts
involve a securities transaction:
a. Alvine joins with investors Alvert, Allen, and Aldo to pool their investments in
one discretionary trading account in which First Lynch is paid a flat fee based
on the amount of assets in the account.
b. Brady joins with investors Bertha, Beverly, and Betty in a pooled discretionary
trading account in which First Lynch is paid a flat fee based on the amount of
assets in the account.
c. Cristina gives her money to First Lynch, which sets up a discretionary trading
account for her. First Lynchs fee is based on the accounts performance.
d. Daniel gives his money to First Lynch, sets up a discretionary trading account
for him. First Lynch receives a flat fee based on assets in the account.
3. Identify which of the following real estate transactions involve a securities
transaction:
a. Beachfront Resorts offers to sell rooms in its beachfront hotel. Buyers of
rooms agree that all rents are pooled, and each room owner receives from the
rental pool a pro rata payments for the hotel room she owns. Buyers cannot
occupy their rooms, except for two designated weeks each year. Beachfront
Resorts emphasizes that rent payments will more than cover the owners
principal and interest (P&I) obligations.
4. Identify which of the following business investments involve a securities
transaction:
a. Albert and Amanda invest in the stock of an S-corporation formed under the
New Columbia Business Corporations Act. Albert and Amanda are the only
 shareholders, and they enter into a shareholders agreement in which they do
away with the board of directors and agree to co-manage the business. Albert
and Amanda are both sharp business people.
b. Bart and Barbara invest in a joint venture that buys apartment buildings for
investment. Bart and Barbara enter into an agreement with a manager,
Goodacre Investments, to develop, lease, and sell the ventures properties.
Under the agreement, the buyers retrain authority to approve any purchase
and development of new properties and to remove Goodacre as manager. Bart
and Barbara, however, lack any business or investment sophistication.
c. Carol and Carl invest with ten other investors in a limited liability company.
They all are members with equal financial and management rights.
d. Donald and Dana invest with ten other investors as limited partners in a
limited partnership formed in a jurisdiction that has adopted the Revised
Uniform Limited Partnership Act (RULPA). Under the partnership agreement,
the limited partners can advise the general partner on partnership business,
participate in partner meetings, vote to remove and replace the general
partner, and amend the partnership agreement.
e. Edgar and Erin (two wealthy medical practitioners) invest in a partnership
that owns an 80-acre tract of land and produces jojoba. Edgar and Erin enter
into a partnership agreement with Chew, who acts as operating partner for
their jojoba farm, as well as for 20 other adjoining 80-acre jojoba farms. Chew
hires a foreman who does all the work. Under their agreement, Edgar and Erin
(along with the other general partners) have full control of the business. In
fact, though, the general partners are mostly passive.
f. Fred and Freda invest their life savings in a partnership under the New
Columbia Uniform Partnership Act. Fred and Freda are the only partners, and
they enter a partnership agreement in which they agree to co-manage the
business. Fred is not that sharp; Freda really runs the business.
5. Identify which of the following notes involve a securities transaction:
a. Gladys buys a motorcycle and gives her bank a promissory note in which she
promises to repay her loan in 36 equal payments over 36 months. The note is
secured by the bike.
6. Olde College has a large endowment and looks for ways to make it grow. Identify
which of the following investments involve a security.
a. Olde College and other universities hire Alma Mater Campaigns (AMC) to
conduct fundraising campaigns for heir schools. AMC solicits donations and
passes on donations to the designated schools after its commission. If any
donors designate their gift for higher education, these funds (after deducting
 AMCs commission) go into a pool in which all participating universities share
pro rata.
b. New Age Fund offers universities its contacts with wealthy philanthropists
who wish to give anonymously to higher education. If a university commits to
putting money into an account for six months, New Age says its secret donors
will match the same amount at the end of the six-month perioda 100
percent return. Olde College learns of this opportunity from Renowned
University, which has already used New Age twice with results as promised.
c. Cougars Football, Inc. hopes to acquire a professional football franchise and
offers to sell 100-seat blocks in its planned new stadium. If the Cougars get
thefranchise, buyers can use their seats or sell them (at a potentially sizable
profit) through the Cougars ticket office. If the Cougars do not get the
franchise, the club will return the buyers purchase price, less the promoters
expenses in seeking the franchise. Olde College, which odes not have a football
team, buys 20 blocks of seats for students and alumni.
d. Life Partners, Inc. identifies persons with terminal diseases who wish to use
the proceeds of their life insurance policies while still alive. For a fee, Life
Partners finds investors willing to purchase the insurance policies at a
discount, thus giving the patients access to immediate cash and a substantial
return to the investors when the patient dies. Life Partners monitors the status
of the insureds, making sure their premiums are paid and then disbursing the
insurance proceeds when they lie.
e. Tacos Unlimited operates a taco restaurant on campus an offers to sell the
business to Olde College. Tacos suggests two option: Olde College could
purchase all the stock of the existing campus restaurant, which Tacos holds as
a subsidiary; or Olde College could purchase the restaurants assets. In either
case, Tacos would operate the restaurant for Olde College and remit to it a
fixed percentage of net revenues.

Explanations

Pg. 68

1.
a. Security. This stock transaction involves the prototype security and falls squarely
within the federal securities laws enumerated list of securities.
b. Security. These are the facts of the landmark Howey case.
 c. Probably security. Although the cash payment for orange-picking services raises no
securities issue, there is a question whether the agreement to take a profit-sharing
bonus is an investment contract under the Howey test. The Supreme Court in
Intl Brotherhood of Teamsters v. Daniel (2.3.3) stated that an investment of
money need not take the form of cash only, but can include goods and services.
d. Not a security. Although the three land speculators have combined and are passive
investors, the success of their common investment depends on the demand and
supply of a commodity, not their entrusting of control to another.
e. Alicia has full-blown securities remedies. If she purchased in a non-exempt,
unregistered public offering, she may rescind her purchase. Securities Act 12(a)(1)

2.
a. Security. When an investor sets up an account with a broker for the trading of
securities or commodities, the account itself has similarities to an investment if the
broker has discretion over trading in the account.
b. Security, probably. Although this pooled account has the horizontal commonality
that most courts have insisted on, courts have viewed the fixed-fee arrangement as
making it less of a common enterprise.
c. Not security, probably. Many courts require horizontal commonality for there to be
an investment contract.
d. Not security, probably. This arrangement lacks horizontal commonality and only a
few courts have applied a broad rule of vertical commonality that is satisfied when
thee brokers compensation is tied merely to the size of the account, not investor
profits. Long v. Shultz Cattle Co.
3.
a. Security. This rent-pooling arrangement is a classic real estate investment contract.

4.
a. Security. The corporate form dictates the result. Although neither investor would
seem to need the protections of the securities laws, the Supreme Court has said that
stock is stock. Landreth Timber Co. v. Landreth.

b. Perhaps a security. Although the federal securities acts do not include partnership
interests on their definitional list, lower federal courts have come to use a contextual
approach in assessing whether partnerships involve securities. Co partner
claiming the existence of a security must show
1. The arrangement legally denied partnership-
type control to the investors or (2) the investors
lacked the business experience or (3) the
 investors depended, as a practical matter, on the
unique like expertise of the promoter or other
manager. (Williamson v. Tucker)
c. Not enough information. LLCs represent an organizational structure that fits neither
the typical corporation nor the typical partnership mold. Apply contextual
economic reality
d. Probably security. Courts have generally assumed that a traditional limited partner
interest is a security since it shares many attributes with corporate common stock.
e. Security. Although structured as a partnership, the structure in economic reality
has few of the attributes of a typical co-partnership. Williamson v. Tucker analysis
f. Not security. As with a corporate investment where the organizational structure
dictates the result, this typical partnership does not create a security because of the
organizational structure.

5.
a. Not Security. Although the federal securities laws define a security to include any
note, the Supreme Court has held that notes may or may not be securities
depending on their family resemblance. Reves v. Ernst & Young.

6.
a. Not Security. Olde Colllege has purchased two fundraising services.
b. A security, perhaps. You might be interested to know that this example, though
seemingly far-fetched, retells the 1990s story of New Era Fund. Double your money
pyramid scheme
c. Perhaps security. The offer of a block of seats, with the attendant promise to market
them later, has the elements of an investment contract.
d. Perhaps Security. Life Partners acts as an intermediary, brining together cash-needy
patients and cash-rich investors, and then facilitating the payment of the patients
insurance proceeds to the investor. Does the investment return depend primarily on the
efforts of the intermediary?
e. There are two issues. (1) Is the acquisition a security? (2) Even if not, is the franchise
arrangement a security? The structure of the acquisition makes all the difference. The
subsequent franchise arrangement may involve a security if the franchisor manages the
operation.

Pg. 97 Materiality table

Types of Disclosure Test Issues

Historical facts TSC v. Northway (U.S. Who is reasonable
 1976):
Substantial likelihood
that reasonable investor
would consider such facts
important.
Speculative information Basic v. Levinson (1988):
Current information
bears on probability and
magnitude of future
event.
Soft information Virginia Bankshares v.
(forward-looking projections, Sandberg (U.S. 1991):
opinions) Opinions actionable only
if not believed and
mislead about subject
matter.
Information on management In re Franchard (SEC
integrity 1964): management
conflicts of interest highly
material, though not
failures in board
oversight.
Social/environmental Guidance on climate
information change Disclosure (SEC
2010): impact of existing
or anticipated laws, and
physical impacts, may be
material.
investor?
How important is
information to
companys finances?
Did information, when
revealed, affect stock
price?
How does information
affect probability of
event?
What is magnitude
(price) effect?
How far along are
merger talks?
Is forward-looking
statement voluntary or
mandatory?
Was there basis for
opinion or prediction?
Is there safe harbor (see
below)?
Does information reveal
management conflict of
interest?
Is noncompliance with
other laws clear
(criminal state
fiduciary)?
Do
social/environmental
policies affect
companys business?
Are environmental
compliance proceedings
pending or potential?
Is companys business
potentially affected by
climate change?
Pg. 100
Private Securities Litigation Reform Act (1995)
Three safe harbors: (Only applies to SEC reporting Corporations)
No actual knowledge
Immateriality
Cautionary statements
Defines Forward looking statements to include:
1. Projections of revenues and other financial items
2. Plans and objectives for future operations
3. Statements of future economic performance, including MD&A statements of
financial condition and results of operation.
4. Assumptions underlying these statements.

Examples

Pg. 103 Materiality

Explanations

Pg. 123
Documentation in a Public Offering
Letter of Intent
Issuer housekeeping
Registration statement includes the prospectus
Comfort letters
Agreement among underwriters
Underwriting agreement
Selling-group agreements

Examples

Pg. 125 Registration of Securities Offerings

Explanations
Pg. 132 Registration Process
Prefilling period
Waiting period
Posteffective period

Principal Registration forms for domestic U.S. issuers:

Form S-1
Form S-3
Foreign companies that sell in this country:
Form F-1
Form F-3
Special forms govern securities issued in a merger or acquisition
Form S-4
Part of an employee stock purchases plans
Form S-8
Real Estate Companies
Form S-11

JOBS Act (2012) emerging growth companies less than $1 billion dollars in annual
revenues during its most recent fiscal year. Securities Act 2(a)(19)

Pg. 135 Preparation of Registration statement

Part I contains the prospectus
1. It was written to pass SEC muster and must faithfully disclose all the
information required by the relevant registration form.
2. The prospectus is a selling document
3. The prospectus with an eye to litigation
4. Must use Plain English
a. Short sentences
b. Everyday language
c. Active voice
d. Tabular presentation of complex material
e. No legal jargon
f. No multiple negatives
Part II contains supplemental information, signatures, and exhibits

Pg. 158 Prefiling Period

 Prohibited Activities
o No Sales or Deliveries
o No Offers Broad rule, interpretive
Permitted Activities
o Preregistration communications
Made 30 days before the registration statement is filed, provided the
proposed offering is not mentioned. Rule 163A
o Regularly Released Information
o Preliminary Negotiations
o Research Reports (varying regulations)
By nonparticipants
On Issuers non-offered securities
By participants
o Company Announcements
o WKSI Communications
Gun-Jumping Exemptions (Prefiling Period) *Added and Amended by 2005 public
Offering Reforms

Filing Effective
Prefiling Period Waiting Period Post effective period
Rule 135: offering announcements
Allows notice of public offering (exempted from
definition of offer)
Limited information: issuer, security, amount offered,
timing, manner, and purpose (special requirements for
rights offerings, offerings to employees, exchange
offers, mergers)
Applicable only to issuer; cannot name underwriter
Rule 163: free writing
prospectus
Permits written
communications, if they
contain legend (where
to get copy of
prospectus once
available and
instructions to read it)
and are filed with SEC
 after filing RS.
Available only to WKSIs
in prefiling period; not
available to
underwriters (UWs) or
other participants
Rule 163A: preregistration
communications
Permits
communications 30+
days before filing RS:
cannot reference
offering
Creates safe harbor for
issuers, but not UWs or
other participants
Rule 168: regular communications (by reporting issuers)
Permits factual info and SEC-filed FLI, provided timing, manner, and form are similar
to past releases (excluded from definition of offer); may not reference offering
Applies to domestic reporting issuers (and seasoned reporting foreign issuers), but
not UWs or other participants
Rule 169: regular communications (by new issuers)
Permits regularly released factual info, but not FLI (excluded from definition of
offer); may not reference offering; must be intended only for non-investors
Applies to non-reporting issuers, but not UWs or other participants

Gun-Jumping Exemptions (Waiting Period)

Filing Effective
Prefiling Waiting period Post effective period
Rule 134: identifying information:
Permits identifying information about issuer (exempted from
definition of prospectus)
(a) Permitted: issuer info, info about security, issuers
business, price of security, use of proceeds, identity of sender,
names of UWs, schedule, and nature of offering
(b) During waiting period: must include legend and whree to
obtain preliminary prospectus
(c) Can avoid (b), if tombstone ad or accompanied by
 preliminary prospectus
(d) Can seek investor interest, if accompanied by preliminary
prospectus and includes statement that interest is not binding,
but is fully revocable
Available to issuer, UW, or other participant
Rule 135: offering announcement (see prefiling period)
Rule 164: free writing
Permits free writing prospectus (FWP) (deemed to
satisfy 10(b) if Rule 433 conditions are satisfied)
Excuses immaterial or unintentional failure to file or
legend FWP, if (1) it was good-faith attempt, (2) filing
or legend happens as soon as practicable after
discovery, (3) properly legended FWP is resent
Available to issuer, UW, or other participant
Not available to ineligible issuers (Rule 405): not
current with Exchange Act filings, bad boys, or
subject to SEC investigation
Rule 433: Conditions
FWP can include info not in RS, but cannot conflict
with RS or SEC filings
FWP must include legend (read prospectus, how to
obtain)
FWP must be accompanied by (or link to)
preliminary/final prospectus
Applies to non-reporting, unseasoned issuers: if by
issuer (or someone paid by issuer) or other
participants
Does not apply to seasoned issuers, WKSIs
Must file with SEC (on date of first use)
Issuers must file FWP and issuer info (press
interview)
Other participants must file FWP if broad
unrestricted dissemination.
Must retain FWP for three years, if not filed
Rule168: regular communications (by reporting issuers) (see prefiling period)
Rule169: regular communications (by new issuers) (see prefiling period)
Rule 405/433: road shows
Treats live or real-time webcast road shows as oral
communications

Gun-Jumping Exemptions (Post effective Period)
Prefiling period
Rule 168: Regular communications (by reporting issuers) (see prefiling period)
Permits PowerPoint (PPT) presentations at show
(deemed graphic communications), subject to FWP
consistency and legending conditions, and must be
accompanied by prospectus
Filing of PPT or other handouts generally not
required, except for equity offering by non-reporting
issuers: must file PPT unless bona fide electronic
road show (officers present, similar info as other
road shows) and available online
Rule 433: press interviews
Specifies conditions for media-disseminated FWP
(such as press interview) originating from issuer or
other participant.
Must be consistent with RS, other SEC filings
Must file within four days after issuer becomes aware
of publication (filings can include corrections or
simply give transcript of what was provided to
media)
Not subject to prospectus-accompaniment rules, need
not be legended provided no payment was made
Filing Effective
Waiting Post effective period
period
Rule 134: Identifying statement (see waiting period)
Rule 153: prospectus delivery for securities firms
For broker-dealer confirmations, access
equals prospectus delivery
Securities trading on stock exchange,
NASDAQ, or ATS
Provided issuer files or plans to file final
prospectus
Provided no pending SEC proceedings against
the offering, issuer, or other offering
participants
Rule 164/433: free writing and press interviews (see waiting period)
Rule169: regular communications (by new issuers) (see prefiling period)
Rule 172: Prospectus delivery
For confirmations, access equals prospectus
delivery (provided issuer files or plans to file
final prospectus)
Confirmation must include information
required by Rule 10b-10
Confirmation may include Rule 173 notice
and incidental information about offering.
For deliveries of stock certificates, access
equals prospectus delivery (provided issuer
filed or plans to the file final prospectus)
Provided no pending SEC proceedings against
the offering, the issuer, or other offering
participants

Rule 173: Notice of registration

For issuers, underwriters, or dealers selling
securities subject to prospectus-delivery
requirements
Must give purchaser, within two days of sale,
either notice or final prospectus
Notice must state sale made pursuant to
registration statement
Purchaser can request final prospectus
Notice requirement independent of access
equals delivery
Non-Reporting Issuers
Permitted: Permitted: Permitted:
Preliminary negotiations Oral offers Oral offers
and agreements Preliminary Distribution and sale of
with/among negotiations and securities
underwriters (2(a)(3)) agreements Tombstone ads, identifying
Issuer announcements of with/among statements, requests for
proposed offering (Rule underwriters (2(a) interest (2(a)(10)(b). Rule
135) (3)) 134)
Issuer communications Tombstone ads, Free-writing communications
30+ days before offering identifying (2(a)(10)(b))
(Rule 163A) statements, requests Final prospectus (10(a))
Regularly released for interest (2(a)(10) Required:
information (Rule 169) (b), Rule 134) Written confirmations for
Preliminary (red- sales from allotment and
herring) prospectus dealer sales (5(b)(1).
(10(b). Rule 430) Rules 172 and 174. Rule
 Summary prospectus 10b-10)
(10(b), Rule 431) Filing by issuer of final
Free writing prospectus (5(b)(1).
prospectus, 5(b)(2), Rules 153, 172)
accompanied/precede Delivery of notice within
d by preliminary two days after sale (Rule
prospectus (10(b), 173)
Rules 164 and 433)
Required:
Distribution of
preliminary
prospectus (Rule
15c2 8)

Well-Known Seasoned Reporting Issuers (WKSI) Same as Non-reporting Issuers, except:

Permitted: Permitted: Permitted:
Oral offers (Rule 163) Free writing Free-writing communications
Free writing prospectus need not need not be
prospectus need not be be accompanied/preceded by
accompanied preceded accompanied/precede preliminary prospectus (Rule
by any prospectus (Rule d 433)
163) by preliminary Required:
Regularly released, prospectus (Rule 433) Delivery of notice only
forward-looking applies to sales from
information (Rule 168) allotment (4(a)(3), Rule
174)

Pg. 257 Securities Act Liability

Liability for noncompliance with registration rules --12(a)(1)
o If a seller or offeror violates the registration or gun-jumping requirements of 5,
securities purchases can rescind their investment. [6.2]
Liability fro fraudulent registration statement--11
o If a registration statement (including the prospectus) contains a materially false or
misleading statement, purchasers in a registered offering can recover damages
from specified participants in the offering. [6.3]
o Potential Defendants
Signers
Directors
Underwriters
Experts
Liability for other fraud in registered offering--12(a)(2)
 o If sales or offers in a registered offering (not subject to 11 liability) are
accomplished by means of materially false or misleading information, purchasers
can rescind their investment. [6.4]
o Pg. 275 Gustafson v. Alloyd Co., 513 U.S. 561 (1995)
Control person liability--15
o Investors can also recover, on a joint and several basis, from persons (individuals
or corporations) who control any person liable under 11 or 12 [6.5]
Crowdfunding liability--4A(c)
o If the issuer (including its top managers) or any intermediary in a crowdfunding
makes a materially false or misleading statement, investors can rescind their
investment or recover damages. [6.6]
Government civil enforcement--17
o The SEC has broad authority under 17, which prohibits offerings (whether
registered or not) accomplished by false or misleading means. [6.7] Under 20,
the SEC can seek civil injunctions and penalties in court for violation of the
Securities Act or its rules. Under 8A, the SEC can issue administrative cease-and-
desist orders.
Government criminal enforcement--24
o Willful violations of the Securities Act, such as the antifraud provisions of 17 or
the registration requirements of 5, are punishable by up to five years in prison and
fines of $10,000. [12.5]

Pg. 281 [6.8] Liability Under State Blue Sky Laws

USA 410 [now 509(b)] Securities Act 12(a)(2)
Plaintiff Purchaser Purchaser
Defendant Seller, controlling Seller and statutory
person, and partners; seller (person who
directors, officers, and solicits sales for own
employees; broker- financial interest)
dealers and agents who
materially aid in sale.
An attorney who meets
with potential investors
and promotes
investment can be liable.
Johnson v. Culp, 658
N.E. 2d 575 (Ind. 1995)
Predicate Purchase by means of Sale or offers by means
materiality false or of prospectus or oral
 misleading statement
Culpability Seller: strict liability (no
defense)
Non-seller: defense if
did not know or could
not have known in
exercise of reasonable
care
Partners, Officers, and
directors are strictly
liable, even if they did
not aid in sale. Taylor v.
Perdition Minerals
Group, Ltd., 766 P. 2d
805 (Kan. 1988)
Reliance Purchaser does not know
of untruth or
omission. Reliance is
not an element. Ritch v.
Robinson-Humphrey
Co., 748 So. 2d 861
(Ala. 1999)
Causation [Not specified]
Liability Joint and several + right
of pro rata contribution
among liable persons
Damages Consideration paid + 6
percent annual interest +
costs and attorneys fees
communication that
includes materially false
or misleading statement.
Sale or offer must be
part of a public
offering. Gustafson
(see 6.4.1)
Defense if defendant did
not know or could not
have known in exercise
of reasonable care
Purchaser does not know
of untruth or omission
+ sale by means of
prospectus or oral
communication
Defense if seller shows
damages to be other than
from depreciation due to
false or misleading
statement [12(b)]
[Not specified]
Consideration paid +
interest thereon OR
damages if purchaser no

Limitations/repose
(less any income
received) OR damages if
purchaser no longer
owns securities
Two years after purchase One year after discovery
[under new 2002 Act,
two years after
discovery but five years
after purchase]
longer owns securities
of false or misleading
statement but three years
after purchase [perhaps
longer under 28 U.S.C
1658 (b)]

Pg. 364 Securities Exchange Act

Corporate Governance Listing Standards (NYSE and NASDAQ)

Board independence Majority of directors must be
independent
Board must determine directors have no
material that would interfere with
independent judgment (NASDAQ)
Determination of director qualifications
disclosed in proxy statement (or annual
report if company not subject to proxy
rules)

Independence defined Director not independent if

Director is company employee, or
directors family member is company
executive (past three years
Director (or family member) receives
annual payments from company (more
than $120,000, past three years)
Director (or family member) is affiliated
with current or past auditor (past three
years)
Company executives sit on compensation
committee of outside directors company
(past three years)
Company has significant dealing with
outside directors company (NYSE:

Executive sessions
Audit committee
Nominating and compensation committee
Shareholder approval of equity pay plans
$1,000,000 or 2% of outside companys
revenues: NASDAQ: $200,000 or 5% of
outside companys revenues)
Independent directors must meet at
regularly scheduled meetings without
management
Company must have method for internal
and shareholder communications to
independent directors (NYSE only)
Composed solely of three or more
independent directors who are
financially literate, as required by
Exchange Act 10A-3
One non-independent, non-officer
director allowed in exceptional and
limited circumstances (NASDAQ only)
Members must meet SEC standards on
independence; at least one member must
meet SEC financial expert standard
Committee must have written charter
delineating its purpose, an annual
performance evaluation of the
committee, and the committees
responsibilities
Composed solely of independent
directors (NYSE and NASDAQ) or
determined by majority of independent
directors on board (NASDAQ only)
One non-independent, non officer
director allowed in exceptional and
limited circumstances (NASDAQ only)
Committee must have a written charter
delineating its purpose and
responsibilities, available on the
companys website
Shareholders must have say on pay of
all equity-compensation plans, though
not those plans adjusted or acquired in a
merger (NYSE only)
 Shareholders must also have say on any
material revisions to equity-
compensation plans
Code of conduct Company must adopt and disclose code
of conduct that meets requirements of
Sarbanes-Oxley
Any waivers for directors and officers
must be approved by board and disclosed
on Form 8-K
Corporate governance guidelines Company must adopt and disclose
guidelines on director qualifications,
compensation, education,
responsibilities, management succession,
annual evaluation, access to management
(NYSE only)
Foreign private issuers must disclose
how their corporate governance practices
differ from those of domestic listed
companies (NYSE only)
Audits Company must have internal audit
function, cannot be outsourced to
companys outside auditor (NYSE only)
Company must disclose receipt of audit
opinion with going concern
qualification (NASDAQ only)
Related party transaction Audit committee, or group of
independent directors, must approve
related party transactions (NASDAQ
only)
Certification CEO must certify annually that company
in compliance with governance listing
standards (NYSE only)
Company must notify NYSE or
NASDAQ if company executives
become aware of material non-
compliance
Independent director requirements not
applicable to companies controlled 50%
or more by individual, group, or another
 company
Exceptions Investment companies generally not
subject to governance listing standards
Foreign private issuers not subject to
governance listing standards, except SEC
standards on audit committee
independence

Pg. 373 Securities Exchange Act of 1934

Pg. 429 Express Federal Remedies for Securities Fraud Pg. 432

Securities Act
11 12(a)(1) 12(a)(2)
Coverage Registered Unregistered, Public
offering nonexempt offering
offering
Plaintiff Acquiror of Purchaser of Purchaser of
registered unregistered securities
securities securities
Defendant Issuer, directors, Statutory seller Statutory seller
specified (person who (person who
officers, experts, solicits for solicits for
underwriters personal gain) personal gain)
Violation Untrue Violation of 5 Offer or sale
statement or (sale or offer of by means of
misleading unregistered prospectus or
omission of securities or gun- oral
material fact in jumping) communication
registration containing
statement materially false
or misleading
statement
Culpability Strict liability: n/a Defense:
Issuer due reasonable
diligence care and no
defenses: non- knowledge
issuer
 defendants
Reliance Not required n/a Defense if
(defense if purchaser
income knows untruth
statement filed or omission
12 months after
offering)
Causation Defense n/a Defense
(negative (negative
causation) causation)
Remedy Damages Recession or Rescission or
formula (capped recessionary recessionary
at aggregate damages damages
offering price)
Limited liability Proportional n/a n/a
liability for
unknowing
outside
directors
Contribution n/a n/a
Limitations 1 year after 1 year after 1 year after
period discovery/ 3 violation discovery/ e
years after years after
offering offering
(perhaps 2 (perhaps 2
years/ 5 years, if years/5 years,
fraud) if fraud)

Regulation in Public Offerings

Pg. 512
Gun-jumping compliance
Underwriter liability
Dealer liability

Antifraud prohibitions
Pg. 514
Rule 10b-5
Section 15(c)(1) of the Exchange act
 Section 17(a) of the Securities Act.