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Securities Regulation
University of Iowa School of Law
Yockey, Joseph W.

1.      Jurisdictional Means
a.       Securities Act – interstate commerce  – jurisdictional means = anything means that includes an interstate grid (telephone even if in-state, emails, telegraphs, publications)
2.      Definition of Security under 33’ and 34’ Securities Act
a.       Interstate commerce + registered / unless exempt under §3(b)
b.      Security under §2(1) 33’ and 34’ Sec Act
                                                              i.      Straightforward: Notes, stock, bonds, debentures, and certificates of deposit
                                                            ii.      Flexible à expansive interpretation: investment contracts, certificates of interest in profit sharing agreements
c.       Investment K
                                                              i.      Howey test: Is there an “investment K” under §2(1)?
1.      KEY
a.       1) Flexibility: “Investment K” under §2(1) is a catchall term; meant to capture the full range of situations where people seek to use the money of others and promise profits in return.
b.      2) Investor protection: assess if there is sufficient agency cost here: is the collective ownership rights meaningfully separated from control? Is protected and minimized by securities law, or by other means (voting/veto right, banking law, employment law…etc.)
2.      This is a package deal:
a.       Land sales: land conveyed to purchase by warranty deed; no fee simple interest to land, no right of entry to land, no right to fruit,
b.      Service K:
                                                                                                                                      i.      Management: given full discretion and authority about how to cultivate the land, lease-hold interest w/ full and complete possession of the land, 10-year duration, no option to cancel;
                                                                                                                                    ii.      Investor: pro rata profits sharing on land and fruit; investors no efforts in managing land or fruit; no personal skills
3.      3 prong test: profit seeking venture v. occupy and develop biz oneself
a.       (1) Invest money
b.      (2) in a common enterprise
c.       (3) expect profits solely (predominantly) through the efforts of others – attracted by prospects of return
                                                            ii.      Private transaction v. public trading; Marine Bank v. Weaver
1.      Bargaining power in private transactions – investor protection
a.       One-on-one private offers, especially b/w large companies is relatively equal, less concern for investor protection
b.      Veto power over further loans…
c.       Issued deposit note – banking law protection is enough
2.      Takeaway: is offer widely disseminated? Investor’s bargaining power? Investment K terms privately closely negotiated?
                                                          iii.      Prong 1: investment of money
1.      Really means investment of goods/services of value
2.      Distinguish investment of service v. employment bonus plan Teamsters v. Daniel
a.       Is there enough employee protection under the employment K?
b.      Success of venture depends on investor efforts, or promoter’s efforts? How much investor participation is essential to success of the venture?
                                                          iv.      Prong 3: motivated by profits predominately from managerial efforts of others
1.      Investment v. consumption; United Housing v. Forman
a.       NPO issued stocks, purpose is to generate proceeds to build houses; Shares of stock entitled purchaser to lease an apartment in Co-Op City; sole purpose of acquiring these shares is to enable purchaser to occupy an apartment; lease/stock cannot be transferred, no co-tenant allowed, cannot be pledged or encumbered.
b.      Catchall Investment K test
                                                                                                                                      i.      Investor’s expectation/motivation: personal consumption v. profits predominantly due to managerial efforts of others
1.      Here, investors are motivated by consumption benefit instead of profits generated through investment. So, not investment K.
2.      Consumption: living in apt.
3.      Investment for profits
a.       Forman court’s profit: capital appreciation resulting from development of the initial investment; or participation in earnings resulting from use of investors’ funds.
b.      Reduced rent in future? NOT profits, b/c lower leaser rates not due to managerial efforts but gov. subisidy
c.       Bargaining power in private transactions
                                                                                                                                      i.      Economies of scale = large building construction makes possible bargaining power
                                                                                                                                    ii.      Alternative investor protection: Is the K remedies enough?
2.      Fixed v. variable return; SEC v. Edwards
a.       Package deal again: Sale-lease-back K: guaranteed 14% fixed annual return; Management K: ETS selected site and managed/serviced phone, but guaranteed fix return regardless of ETS’s discretion.
b.      Fixed income v. variable income:
                                                                                                                                      i.      Not a distinction under Howey test. Key is investor motivated by return solely from managerial efforts of others.
                                                                                                                                    ii.      Fixed income is more attractive as motivation to profit from managerial efforts of others, lower risk.
                                                            v.      Prong 2 – Common enterprise element of the Howey test (NOTE: common enterprise evaluates if there is meaningful separation between collective ownership and control à individual passive investor has little control over management)
1.      Horizontal commonalities
a.       Investor – investor: Focus on a pooling of investors’ funds = money raised for same purpose AND from several investors AND cannot differentiate (so individual investor has little control over promoter)+ all investors’ fortunes tied together in venture (share profits + losses), best pro rata.
b.      All courts find horizontal commonalities enough, b/c meaningful separationàagency cost.
2.      Vertical commonalities
a.       Investor – promoter/manager
b.      2 versions
                                                                                                                                      i.      Broad: promoter putting discretional efforts that affect the success and failure of venture (technical); share of risk not required.
                                                                                                                                    ii.      Restrictive: promoters and investors fortunes tied + share risks together
1.      Compensation scheme: flexible pay; fixed payment
                                                          vi.      Prong 3 – profits from managerial efforts of others
1.      Securities law protects passive investors; keep this in mind to decide how much investor participation is allowed when still looking for
2.      Franchise v. pyramid scheme, Miller v. Central Chinchilla Group
a.       Pyramid scheme: Success/ failure of venture depends on promoter’s efforts to MARKET/recruit new investors and sells them at inflated prices.
b.      Franchise: Success/failure of venture depends on investors’ efforts; advertising, training employees
3.      Time of efforts SEC v. Life Partners
a.       Managerial/discretional efforts AFTER investment = managerial efforts to establish an investment K; pre-investment services cannot establish
b.      Counter-argument policy: key is whether profit depends on those efforts, regardless of pro-investment or pre-investment.
4.      Market fluctuation v. managerial efforts
d.      LLC interest (substance over formalities)
                                                              i.      KEY: depend predominantly

1.      Companies want to liquidate stocks to cash
2.      Companies/individuals want to invest
                                                            ii.      Cons
1.      Cost: IPO costly; compliance with Securities Act; voting cost; derivative suits
2.      For high tech companies, investors look for high growth.
                                                          iii.      Alternative money raising measures
1.      Debts
2.      Issue stocks to private entities/individuals…still remain private company
3.      Corporation à LLC
c.       Underwriters
                                                              i.      Types of underwriting
1.      Best efforts:
a.       Issuer directly offers stated amount of securities to public
b.      Issuer pays underwriter fee for helping place the issue
c.       Issuer and underwriter agree to “all or none” underwriting or “minimum percentage” underwriting
2.      Firm commitment
a.       Issuer sells securities to underwriter at agreed price
b.      Underwriter sells securities to brokerage firms or public at a profit
c.       Underwater receives a spread b/w purchaser price / public offering price
d.      Underwriting syndicate: arrange the whole IPO process, which underwriter to purchase which percentage of securities + each underwriter’s profit/liability based on this percentage.
                                                            ii.      Underwriter compensation
1.      Public Offering Price (IPO price) = $10
2.      Price to Underwriter = $9
a.       Gross Profit to Underwriter = $1
                                                                                                                                      i.      Subtract “fee” to Managing Underwriter = $0.60
1.      Final Profit = $0.40 per share.
                                                          iii.      Steps in Registered IPO
1.      Issuer meets and negotiates with potential managing underwriters.
2.      Issuer general counsel begins drafting Registration Statement.            
***Counsel for underwriter works on underwriting          agreements (among underwriters; between issuer and            underwriter; between underwriters and dealers).         
3.      Issuer general counsel does “clean-up” work.
4.      Managing underwriter formalizes members of syndicate.
5.      Registration Statement sent around for review.
***Comfort letters given to managing underwriter
6.      Discuss use of dealers.
7.      Underwriters and dealers distribute preliminary prospectus and begin marketing efforts.
8.      Company files Amendments to RS if necessary.
9.      Day before effective date, finalize deal.
10.  Morning of effective date, file “price amendment.”
11.  Registration Statement becomes effective.
12.  Underwriters and dealers start selling to public.
13.  “Closing” occurs 3-4 days after effective date.
4.      Registration Statement
a.       Key Statutory Provisions (33 Act):
                                                              i.      Sec. 6 – Mechanics
                                                            ii.      Sec. 7 – Content
                                                          iii.      Sec. 8 – Effectiveness: After RS filed, automatically effective after 21 days.