Capital Raising by Privately-Held Business Firms — Spring 2007
1. Defining “Securities”
a. General Definitions
i. 1933 Act, § 2(a)(1) — “Security” means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, pre-organization certificate or subscription, transferable share, investment contract . . . or, in general, any interest or instrument commonly known as a “security”.
ii. 1934 Act, § 3(a)(10) — “Security” means [same as 1933 Act] . . . but shall not include any note which has a maturity . . . not exceeding nine months. . . .
i. Traditional common stock bearing both the name and usual characteristics of stock is plainly covered by the Acts with no further analysis. Landreth Timber Co.
ii. Characteristics usually associated with common stock are:
1. Right to receive dividends contingent upon apportionment of profits.
a. Shares with no potential for profit are not “stock” under the Acts. Forman.
2. Negotiability of the instrument.
3. Ability to be pledged or hypothecated.
4. Ownership confers voting rights proportional to number of shares owned.
5. Capacity to appreciate in value.
iii. Policy — purchasers of stock might assume that securities laws apply and rely on that assumption as a consideration prior to purchase. Forman. (Odd reasoning with little practical application.)
i. Unlike stock, “note” is a broad term encompassing instruments with varying characteristics, depending on whether issued in a consumer or investment context. Reves.
ii. Short-Term Debt (notes with maturities less than nine months) —
1. 1933 Act, § 3(a)(3) – exempts short-term debt from the registration requirements [§ 5(a)(1)] but not the antifraud provisions [§ 12(a)(2)].
a. Applies only to 1 prime quality negotiable commercial paper 2 of a type not ordinarily purchased by the general public, 3 used to facilitate well-recognized types of current operational busin
item, issuer can ask the court to add a new instrument to the list by analyzing the character of the note.
i. Motivations. Examine transaction to assess motivations that would prompt a reasonable seller and buyer to enter into the deal. Note is most likely a security if seller is raising capital for general use in a business or to finance substantial investments and buyer is interested primarily in the profit the note is expected to generate.
1. “Profit” here is merely a “valuable return on an investment” and includes gains from interest. (Defined more broadly than under Howey in order to include notes paying a rate of interest not keyed to business earnings.)
Plan of Distribution. Instrument need only be offered and sold to a broad segment of the population; it need not have been traded on an exchange.