SECURITIES REGULATION – SPRING ‘07
I. Is a security involved? The statutory definition: “unless the context otherwise requires”, the term securities means stocks, bonds, debentures, notes, transferable shares, evidences of indebtedness, investment Ks, profit sharing agreements
NOTE: Government securities are exempted from the definition of “securities” and exempt from regulation under the Securities Act.
A. Investment Contracts (use this framework any time ownership and control are separated—suggests the importance of disclosure)
1. Howey
a. investment- expected to produce profit , not consumption
b. common enterprise- (Howey does not distinguish vertical or horizontal)
– horizontal: multiple investors with common scheme (Wals)
Posner: may have horizontal commonality with 1 investor- determined by “character of the investment vehicle”
– vertical (not all courts will accept vertical commonality, require horizontal) (Koscot)
· Broad vertical commonality: efforts of promoter related but success or failure of investors
· Strict vertical commonality: must be direct relationship between success of promoter and investors (shared risk)- if promoter is given a flat fee, regardless of success of investment, then no strict vertical commonality because no sharing of the risk
· Courts that require vertical commonality, REQUIRE STRICT
c. profits
d. “solely from the efforts of others”- “solely” requirement gets changed to include situations where the efforts of managers are predominant.
RISK IS NOT AN ELEMENT UNDER HOWEY
2. Risk Capital Test: STATE LAW ONLY- easier to satisfy than Howey
a. no “commonality” required
b. no “efforts of others” required
c. test: whether the investor is subject to risk
B. Real Estate
Real estate transactions are generally not securities
EXCEPTION: when the marketing to purchasers emphasizes the economic benefits to be derived from managerial efforts of promoter (promoter can be a real estate agent)
C. Partnership Interests
1. Corporation: the common shares are securities
2. Limited Partnership: The interests of limited partners are securities
3. General Partnership (Joint Ventures) : The interests of G.P’s are not securities
BUT examine substance over label of partnership agreement!
5th Circuit in Williamson gives 3 factors (BUT this is not an exhaustive list)- used by lower courts to permit a nominal general partner to claim that the interest is an investment K.
a. No legal control: the partnership agreement leaves so little power in the investor’s hands that the arrangement in fact distributes power as would a limited partnership OR
b. No capacity to control: the partner is so inexperienced and unknowledgeable in business affairs that he cannot intelligently exercise his partnership powers OR
c. No practical control: the partner is so dependent on the unique managerial ability of the promoter that he cannot replace the manager or otherwise exercise meaningful partnership powers.
D. Pension Plans
1. Employer funded, fixed benefit pension plans: employees make no direct contributions and participation is compulsory—NOT A SECURITY (Daniel)
2. Voluntary, variable benefit pension plans- Daniel suggests that they are not securities because subject to alternative, comprehensive legislation- ERISA
E. Notes
1. Securities Act: a note that “arises out of a current transaction” and that matures within 9 months is exempt from registration
2. Traditionally consumer and commercial transaction s are NOT securities (bank loans)
3. Notes sold to many inves
o matter how material)
1. SEC filing obligations: SEC requires companies to include in filings any other material information necessary to make required line-item disclosure
2. Duty of Honesty: antifraud provisions require complete honesty if one speaks in connection with certain securities transactions- includes
a. duty not to make materially false statements (or omissions)
b. duty not to make materially misleading statements (or omissions)
c. duty to correct materially false or misleading statements (or omissions)
3. Merger Negotiations:
a. General preliminary negotiations if unsure if transaction will be merger, tender offer, or sale of assets— no duty to disclose
b. SEC form 8k requires of disclosure of merger transactions only once consummated.
c. MD&A normally requires disclosure of “known uncertainties” such as merger/acquisition transactions. However, if mgmt thinks that disclosure would jeopardize transaction , no need to report.
III. Materiality:
DO NOT CONFUSE MATERIALITY, RELIANCE, AND DUTY TO DISCLOSE
The materiality of information depends on the costs that disclosure adds to business transactions, the availability of the same information through unregulated channels, and the effect disclosure adds to business transactions, the availability of the same information through unregulated channels, and the effect disclosure has on substantive regulation in other areas.
