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Securities Regulation
Santa Clara University School of Law
Diamond, Stephen F.

I                      Introductory Material
A.     Overview of Players involved in the issuance of securities
1.         Players:
a.       Company that wants to issue stock to the public (Issuer)
b.      Investment Bank (Underwriter)
c.       Lawyers (for the issuer and underwriter)
i.        Lawyers prepare the registration statement
d.      Accountants
e.       SEC overseers (lawyers)
f.        Congress oversees SEC (lawyers)
i.        33 Act and 34 Act are the heart of issuing stock and are enforced by the SEC
B.      What is an Initial Public Offering – IPO (Bronson Article)
1.         Offer shares of company’s stock to the public
2.         Prior shares issued privately
a.       In private financings
i.        Usually in the form of convertible preferred stock to VCs
b.      As stock options to employees
i.        Options are a right to purchase stock vesting over a four year period in exchange for an agreed upon sum
3.         Diagram of Procedure:
Investors                                                                                             Financial Markets
                                    Company (going IPO)             I. Banks         
Employees                                                                                           Public
–          founders
–          CFO/CEO
a.       Stock needs to be registered for a sale
                                                                                i.          Stock is fictitious capitol
·                Right to vote and to dividends based on a price/earnings ratio
·                A claim to future earnings on the company
o           as an investor, must determine what a fictitious claim is worth
b.      I. Banks underwrite IPOs – provided financing, commit to a certain amount of shares (these are the initial investors who pay money to the company, I. Banks immediately re-sells to the public
                                                                                i.          This is a risk I. Banks are willing to take, to reduce the risk:
·                they may take orders for shares (no Ks)
·                they may spread risk amongst several underwriters (lead UW and syndicate)
o           as long as the public buys, the I. Banks make money
·                This risk distinguishes I. Banks from commercial banks
c.       The “Agency Chain”
                                                                                i.          Chain of relationships from the company to early investors
·                Company has principle agent responsibilities which get stretched, fragile, and uncertain
d.      This exchange is under the scrutiny of the SEC and the markets themselves
C.     Advantages of IPO
1.         Valuation – puts a price

lity? – the risk of under-disclosure
–          Key Features
o        Debt and Equity – securities
o        Other financial Instruments – many
§         Those regulated by the SEC are utilized by the avg. investor
II                   What is a Security?
A.     Definition (§ 2(a)(1) of 33 Act/§ 3(a) of 34 Act)
1.         Broken down into 2 Tests focusing on 2 Questions
a.       Specific Test: Is the security an enumerated category (a note, stock, bond, or debenture)?
i.        When are instruments that nominally fall into an enumerated category actually not securities?
·   “Unless the context requires otherwise”
b.      General Test: Is the security an Investment Contract (catch-all)
i.        When does an unorthodox investment fall within the catch-all term, “investment K”?
B.      Investment Contracts – the Howey Test
1.         Court promulgates a 4-Prong test: An investment K is any transaction in which,
a.       A person invests money
The investment, which can be of cash or noncash consideration, is expected to produce income or profit; the investor is not buying a consumable commodity or service