· Goal of these fed securities laws
o Disclosure of corp info to investors
· Do not pass on quality of securities
· TEST –
o Is this financial instrument a “security” ?
o Is this security exempt from registration?
o Was it sold in an exempt transaction?
o What must be done to register the security?
· Definition 2(a)(I) of Securities Act:
o Is both concrete and ambiguous (“stock,” “bond” etc
o Additional language both broadens (investment K)
o And narrows the concrete terms.
· “Unless context requires otherwise” – stock could not be a security
Topic 2 – Investment K
· Howey Test –
o investment of money,
o In a common enterprise “commonality”
o With expectation of profit
o “Solely” by the efforts of others
· Really primarily by the efforts of the promoter
· *primarily by the managerial efforts of the promoter (even if the investor does a lot of ministerial work)
§ If both are the brains – like franchise then not a security
· Koscot –
o Clarifies the “efforts of others prong”
o Who is the brains of the operation?
o Commonality? – is vertical alone enough? Yes (however, some courts will say no)
· Horizontal – focuses on relationship btw investors in the scheme
§ Do the investors share profits and losses?
§ Are the investors' funds pooled?
§ ALONE – all courts say is enough
· Vertical – focuses on relationship btw a single investor and the promoter
§ Are their fortunes – good or bad – tied together?
· Two types:
· Narrow – fortunes of promoter & investor are tied
· Broad – fortunes of investor tied to efforts of promoter
§ ONLY some circs think ALONE is enough like Koscot
· Life Partners: efforts of others element
o Majority: viatical settlement is not a security
o Promoter's post purchase efforts are ministerial
o Promoters pre purchase efforts are not critical so “viatical settlements” not an investment K/
· Roulette analogy: fate not the promoter determines whether or not these investments succeed of fail
o Majority view follows dissent VS is a security
· Promoters efforts are critical to success here
§ Horse racing analogy: the investment's success depends entirely on “picking ponies” to bet on.
o Common enterprise element
· Remember the two questions we ask for horizontal commonality
§ Are the investors interdependent? (is there shared profits and losses, and are funds pooled bc they need to be)
· Pooling has to be essential to the scheme, not mere happenstance or coincidence.
o To qualify as “profit” return can be fixed and guaranteed, as well as variable and uncertain.
TOPIC 3: ECONOMIC REALITIES
· Forman: when is stock not a security? (co-op “stocks”)
o When stock in question had none of the traditional characteristics of stock…
· Traditional characteristics of stock:
§ Right to dividends (if declared by board)
§ Can be pledged/hypothecated
§ Voting rights = pro rata (typically 1 vote per share)
§ Can appreciate it value
o Then it is consumption, not an investment. (not expecting a profit)
o HYPOS –
· What if tenants could sell their interests for a profit? A private co-op?
§ If profit motive is purely incidental to purchase of residential housing. Look at primary motive – generally consumption.
· Another “stock” that isn't a security.
§ Green bay packers are owned by the city – can buy a ceremonial share.
· Interest in a country club… can get a stock but own that stock to use the country club — like the co-op.
· Grenader –
o Followed Forman for co-op “stock” which has some of the characteristics of traditional stock.
· Primary motivation for buying “stock” was still consumption even if stock could appreciate
· Daniel –
o Non contributory compulsory pension plan not an investment K udner howey
o But contributory voluntary plans are securities
· Unincorporated entities GP
o As a factual matter, Gp are rarely a security because
· All P by statute have equal right to participate in the management
· Limited P are typically passive investors and have no right to manage the firm
· Modern statutes do not require this however, so it will depend on the facts. Based on the agreement
o GP exceptions
· A GP is a security if
§ The investor can establish she has no power to control the partnership due to:
· The agreement btw the partners
· Inexperience and/or ignorance
· Dependence on promoter's unique skills
o LP exceptions
· A LP is not a security if
§ The investor has more control over the business than is typical for passive investors
· Ct con
ut maybe yes if among regular investors!
o Exchanges of cash flows (fixed for floating)
· Person borrows at a floating rate and pay the bank to get a fixed rate.
o Previously explicitly exempted
· Dodd-Frank securitiy based swaps are secrties and regulated by the SEC
TOPIC 6: INTRO TO EXEMPTIONS
· Securities Act §5 is strict liability
o Exemptions are strictly construed (except if exemption explicitly says otherwise.
· Types of Exemptions
o Two general types of exemptions
· Exempt securities (mainly in §3(a))
§ Exempt by their very nature – therefore they are always exempt.
· Transaction exemptions (mainly 4(a))
§ Exempt only due to status as part of a transaction that is exempt. – therefore, they are not exempt upon re-sale unless there is another trans exemption
· Exempt securities
o Found mainly in §3(a)(2)-(8)
o Eg stocks issued or guaranteed by a bank, treasury bills, municipal bonds, etc
o Types of securities for which Congress did not wish to require additional disclosure
o Bc there is some reason to trust the issuer
o The issuer is already highly regulated, a bank, a non for profit or govt entity
· Issuer – why it matters
o 1933 act5 which requires registration of securities that are offered and sold applies to any person, so everyone involved in a sale of securities is technically required to comply w §5
o But §4(1) exempts from §5 all persons other than issuers, underwriters and dealers
· This exemptions allows us to trade in securities
· Only issuers, underwriter and dealers exemptions
· Issuer definition
o 1933 act 2(a)(4):
· Every person who issues …any security
· Issuer is mostly narrow and obvious ask:
§ What entity's name is on the security?
§ An interest in what entity is being sold?
§ What entity receives the money (from the initial sale of the securities to the public)?