Securities Regulation – Spring 2008 Woolery
Securities Regulation Cases & Materials 5th ed.
I. INTRODUCTION TO SECURITIES
A. Regulatory Organizations
a. The SEC
i. Governance/regulation over two types of transactions (txaxns)
1. Issuer txaxns (under the 1933 Act)
a. Registered offerings (primary distribution/IPO/use prospectus, designed to provide all necessary info) or
b. under exemptions (private placement memorandum, PPMs)
i. if exempt, still subject to anti-fraud provisions
2. Trading txaxns(1934 Act) – movement of outstanding securities among investors
3. Note, even if you offer a security, you are subject to the federal securities laws (a txaxn does not have to take place)
ii. Operation
1. Board of 5 members
2. No action letters – (written by staff, no force of law)
a. Private parties can challenge a txaxn but SEC will not
b. For example – Vail Resorts, Inc.
3. Telephone Interpretations
b. Self-regulatory Organizations – work with SEC to develop rules on how companies will be listed/registered
1. Big 3 – NYSE, AMEX, NASDAQ
2. Others, Bds. Of Trade
i. Stock Exchanges v. Stock Listing
1. Stock Exchange – Physical place where a specialist is working
2. Stock Listing is different (NASDAQ)
B. Rule 10b5
a. most important anti-fraud rule – requires disclosure of material facts
b. must be a purchaser to bring this claim
c. Relaxes most of the common law fraud requirements
II. WHAT IS A SECURITY?
A. Definition of a security is same for purposes of 33 Act (issuer txaxns) and 34 Act (trader txaxns)
B. Investment Contract as a security
a. SEC v. Howey (1946) – selling orange groves
i. investment contract – a contract, txaxn or scheme whereby a person invests his money in a common enterprise with the expectation of profit solely [now mainly] from the efforts of others
ii. test is inappropriate to use when instrument in question falls under statutory definition and has normal attributes of a security
1. classification of instrument is mandated by economic substance of the txaxn
b. Summary of factors
i. Investment [v. Consumption] – expectation of profit is a determining factor. When purchaser is motivated by desire to use/consume
nnection b/w efforts of promoter and collective successes or losses of investors (5th, 11th circuits). No pooling requirement here.
b. strict – require direct relationship b/w success of promoter and investors. Requires promoters and investors to share risks (9th)
2. horizontal commonality – requires pooling of investors’ funds. (3rd, 6th, 7th require this)
iii. Profits solely [mainly] from efforts of others – [expanded]
1. Glen W. Turner Enterprises relaxed standard to ‘undeniably significant efforts’ where those efforts affect the failure or success of the business
2. Fixed or variable profits not dispositive factor. SEC v. Edwards – if attracted by representation of investment income could be found to be investment contract
Franchise exception – not securities, level of activity required of franchisee is generally sufficient to defeat classification as investment contract
