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Securities Regulation
St. Johns University School of Law
Perino, Michael A.

 
SECURITIES REGULATION
 
I.              Reporting Companies
a.    The Securities Exchange Act of 1934
                                          i.    Creates a System of Periodic Disclosures for Companies that (prior to 2012)
1.    Have Securities Listed on a National Securities Exchange
a.    § 12(b)
2.    Have Assets in Excess of $10 million and Equity Securities held by at least 500 Holders of Record
a.    § 12(g) and Rule 12g-1
3.    Have an Effective ’33 Act Registration Statement
a.    § 15(d)
b.    JOBS Act Substantially Altered the Definition of Reporting Companies
                                          i.    Under OLD Rule, Reporting Companies were those w/ Assets in Excess of $10 million and Equity Securities held by AT LEAST 500 Persons – § 12(g) and Rule 12g-1
1.    JOBS Act Raised from 500 to 2,000
2.    Company is a Reporting Company IF it has 500 or More Shareholders of Record who are NOT Accredited Investors
3.    Individual who Acquired their Shares Pursuant to an Employee Compensation Plan are Excluded from the Count
 
Definition of a Security
 
I.              Statutory Definition
a.    § 2(a)(1) of the Securities Act
b.    § 3(a)(10) of the Exchange Act
II.            The Howey Investment Contract Test
a.    Investment of Money
b.    In a Common Enterprise
                                          i.    Courts SPLIT on Definition of Common Enterprise
1.    Horizontal Commonality
a.    MOST Restrictive Test
b.    Requires Pooling of Investment Funds and/or Shared Profits and Losses among Investors
c.    Fortunes of each Investor are tied to the Overall Success of the Venture
2.    Vertical Commonality
a.    Strict Vertical Commonality
                                                                                          i.    Investor’s Fortunes tied to Promoter Fortunes
                                                                                        ii.    Promoter and Investor have to Share Risk of Venture
b.    Broad Vertical Commonality
                                                                                          i.    Investor’s Fortune’s Linked to Promoter’s Efforts
                                                                                        ii.    Problem
1.    Conflates “Predominately from the Efforts of Others” Element AND Common Enterprise
c.    With an Expectation of Profit
                                          i.    Definition of Profit from United Housing v. Forman
1.    Capital Appreciation resulting from the Development of the Initial Investment
2.    Participation in Earning resulting from the Use of Investors’ Funds
                                        ii.    “Expectation” of Profit – INCONSISTENT RESULTS
1.    Howey
a.    “If the Test be Satisfied, it is Immaterial whether the Enterprise is Speculative or Non-Speculative or whether there is a Sale of Property with or without Intrinsic Value
2.    United Housing v. Forman
a.    Income Potential was “Far too Speculative and Insubstantial to bring the Entire Transaction within the Securities Acts
d.    Solely from the Efforts of Others
                                          i.    “Solely” => Predominately
                                        ii.    Inquiry:  Are the efforts of others the “Undeniably Significant Ones . . .” 
1.    SEC v. Glenn W. Turner Enter., 447 F.2d 476 (9th Cir. 1973).
e.    Additional Element?
                                          i.    Presence of Comprehensive Legislation Governing the Investment
1.    IBT v. Daniel, 439 U.S. 551 (1979).
2.    Emblematic of the Court’s Inconsistent Treatment of Risk
III.           United Housing Foundation v. Forman, 421 U.S. 837 (1975).
IV.          STOCK
a.    Landreth Timber Co. v. Landreth
                                          i.    NO Unified Test for Securities
1.    Cannot Use Investment Contract Test (Howey) for ALL Securities
2.    Howey Investment Contract Test is for “Unusual Instruments NOT easily Characterized as ‘Securities’”
                                        ii.    Court look to Investor’s Reasonable Expectations
1.    Transactions where Investors Expect the Securities Laws to Apply
V.           UNINCORPORATED BUSINESS ORGANIZATIONS
VI.          NOTES (Bonds)
a.    Securities Act
                                          i.    Notes
1.    § 2(a)(1) defines ANY Note as Security
                                        ii.    Commercial Paper
1.    § 3(a)(3) EXEMPTS Securities Act coverage for Short-Term Note
a.    Maturity Less than 9 Months
b.    Exchange Act
                                          i.     § 3(a)(10) EXEMPTS Notes with Maturities Less than 9 Months from the Definition of Security
1.    Excludes Notes from ALL Provisions of the Act (including Ant-Fraud Provisions)
2.    Most Courts interpret § 3(a)(10) to ONLY Exempt Commercial Paper
c.    Reves v. Ernst & Young
                                          i.    Family Resemblance Test
1.    Primary Motivation is Investment
2.    Plan of Distribution:  Public Trading
3.    Public’s Reasonable Expectations
4.    Existence of a Risk-Reducing Factor
                                        ii.    Note Similarity between Family Resemblance Test and Investment Contract Test from Howey
1.    Difference: 
a.    Investment Contract Test => Element Test
b.    Family Resemblance Test (Notes) => Balance Test 
VII.         DERIVATIVES
a.    Options
b.    Swaps
 
The Public Offering
 
I.              Underwriting
a.    Firm Commitment
                                          i.    Underwriter agrees to Purchase the Entire Offering from the Issuer and Re-Sells to Public at a Fixed Price
                                        ii.    Underwriter Profits on the Spread
                                       iii.    RISKS
1.    “Sticky” Issue => Difficulty Selling the Issue
2.    Loss of Reputation for Failed Offerings
3.    Great Litigation Risks
b.    Best Efforts
                                          i.    Underwriter Agrees for a Fee to Use its Best Efforts to Sell Securities for Issuer at Offering Price
II.            REGISTRATION PROCESS
a.    Registration Statement
                                          i.    Form S-1
1.    Part 1 of the Re

.    Price and Size MUST be made Available in a Prospectus Supplement  within 15 Days of Effective Date
 
The Pre-Filing Period
 
I.              OFFER
a.    Definition § 2(a)(3)
                                          i.    “Every Attempt or Offer to Dispose of, or Solicitation of an Offer to Buy, a Security or Interest in a Security for Value”
b.    Section 5(c)
                                          i.    Prohibits ALL Offers and Sales (Oral or Written) before Registration Statement is Filed with SEC
                                        ii.    Section 4(a)(1)
1.    Section 5 does NOT Apply to Transaction by Anyone other than Issuer, Underwriter, or Dealer
                                       iii.    Three (3) Issues Implicated
1.    When is a Company “In Registration”?
a.    Issuer is in Registration from at least the Time the Issuer reaches an understanding with the Broker-Dealer that will serve as Underwriter until the Prospectus Delivery Requirement is Complete
2.    What Constitutes an Offer or Sale?
3.    What Kind of Issuer is involved?
a.    NON-Reporting
b.    Reporting
                                                                                          i.    Unseasoned
                                                                                        ii.    Seasoned
                                                                                       iii.    WKSI
c.    Section 5(d)
                                          i.    Allows Emerging Growth Companies to Engage in Oral or Written Communication with Potential Investors in the Pre-Filing Period
                                        ii.    Communication may ALSO occur during the Waiting Period
                                       iii.    Communication Limited to Qualified Institutional Buyers (QIBs) or Accredited Investors
1.    QIBs are generally Financial Institutions w/ Portfolios of at least $100 Million
2.    Accredited Investors satisfy specified Net Worth/Sophistication Standards
d.    Written vs. Oral Communications – Rule 405 Implications?
                                          i.    Written Communications include ANY Communication that is Written, Broadcast, or that Constitutes a “Graphic Communication”
1.    Graphic Communications are Electronic Communications
a.    Email
b.    Audio
c.    Video
d.    Internet Websites
                                        ii.    Oral Communications are Live, Real-Time Communications, including those carried over the Internet