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Securities Regulation
University of Kansas School of Law
Hoeflich, Michael H.

 
Securities Regulation Outline
 
I.                    Regulation of the Public Distribution of Securities.
a.       Introduction-
                                                              i.      Advantages of publicly owned company.
1.      Liquidity for owners – Existing owners get liquidity in the secondary market for shares, and can sell shares in the offering. The offering establishes a market value which is helpful for proving an exempt transaction or for pledging the shares for collateral.
2.      Raising additional capital for research and for expansion of the business.
3.      Ability to hire qualified employees- incentive based or stock based compensation, also allows a public market for other employees to sell shares.
4.      Prestige of being publicly owned.
 
                                                            ii.      Disadvantages of being publicly owned.
1.      Loss of confidentiality – The required registration statement requires full disclosure of information about the business, shareholders, shares owned by owners, salaries of officers, transaction entered into between interested persons and the corporation, information for competitors.
2.      Initial and ongoing expense of a registered offering – It is hard to do a regional public offering for less than $500,000, and it is often more than $1 million. Expenses include legal fees, accounting fees, printer fees. There are also subsequent annual costs that equal $100,000. These include reporting obligations under the 1934 Act, audited financial statements, printing and mailing proxy materials for annual s/h meetings, transfer agent fees.
3.      Dilution of ownership – Initial owners will suffer dilution in ownership as shares are sold to the public and as percentage owned by others increases, Risk of losing control with a hostile takeover.
4.      Possibility of lawsuits – There almost always is a stock drop case after the IPO.
 
                                                          iii.      Structure of an offering: Issuer – Lead underwriter- Underwriting syndicate – Selling group – Public.
 
                                                          iv.      Types of Offerings:
1.      Firm commitment – the underwriters agree to purchase all of the shares in an offering hoping to resell them at a higher price than the purchase price. The risk falls on the underwriting syndicate and not the issuer.
2.      Best efforts – the underwriters agree to use their best efforts as agents of the company to sell as many shares in the offering as possible.
 
b.      Regulation of Distribution Process by Securities Act of 1933
                                                              i.      Prohibitions for each period.
1.      Pre-filing period: The time between the decision to do an offering and when the first draft of a registration statement is filed with the SEC.
a.       § 5(a)(1).
b.      § 5(a)(2).
c.       § 5(c).
 
2.      Waiting Period: The time between the first draft of a registration statement and the effective date of the final registration statement.
a.       § 5(a)(1).
b.      § 5(a)(2).
c.       § 5(b)(1).
d.      § 5(b)(2).
 
3.      Post-effective period: The time between the effective date of the registration statements and when all securities of the offering are sold.
a.       § 5(b)(1).
b.      § 5(b)(2).
 
4.      Any person exemption. § 4.
a.       The provision of section 5 only apply to issuers, underwriters and dealers.
b.      § 4. The provisions of section 5 shall not apply to –
                                                                                                                                      i.      (1) transactions by any person other than an issuer, underwriter, or dealer.
                                                                                                                                    ii.      (2) transactions by an issuer not involving any public offering.
                                                                                                                                  iii.      (3) transactions by a dealer except . . .
 
                                                            ii.      Description of Prohibitions for each period.
1.      § 5(a)(1). Prohibition against any person selling a security unless a registration statement is in effect.
a.       Applies during the pre-filing and waiting period. Until the registration statement is effective, you cannot sell a security. If the securities are sold then § 12(a)(1) has an express cause of action for rescission and damages.
                                                                                                                                      i.      “Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly – (1) to make use of any

                                                          ii.      The terms “shall not include preliminary negotiations or agreements between an issuer (or any person directly or indirectly controlling or controlled by an issuer, or under direct or indirect common control with an issuer) and any underwriter or among underwriters who are or are to be in privity of contract with an issuer (or an person directly or indirectly controlling or controlled by an issuer, or under direct or indirect common control with an issuer).”
                                                                                                                                  iii.      An investor with only 8% does not control the issuer.
 
4.      § 5(b)(1). You cannot carry or transmit something that is a prospectus unless it meets section 10. We will have to know what a prospectus is and what section 10 provides.
a.       This prohibition applies to waiting and post-effective period.
b.      “It shall be unlawful for any person, directly or indirectly – (1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to carry or transmit any prospectus relating to any security with respect to which a registration statement has been filed under this title, unless such prospectus meets the requirements of section 10;”
c.       A prospectus is defined in § 2(a)(10).
                                                                                                                                      i.      “The term ‘prospectus’ means any prospectus, notice, circular, advertisement, letter or communication, written or by radio or television, which offers any security for sale or confirms the sale of the security . . .”
                                                                                                                                    ii.      Basically anything other than an oral offer to sell a security.