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Securities Regulation
University of Kentucky School of Law
Campbell, Rutheford "Biff"

1.      Types of Securities Transactions
a.       Issuer Transactions – sales of securities by the issuer to investors, in order to raise capital.  
                                            i.            Most expedient issuer transaction is the private placement—where the issuer sells securities to a select number of investors. 
                                          ii.            If not enough $ raised in private placement, issuer may make a public offering to a large number of diverse investors – primary distribution. Primary distributions usually occur through an underwriter.
b.      Trading Transactions—purchasing and selling of outstanding securities among investors. These resale’s can be either privately negotiated or conducted through a public market
                                            i.            If the amount of securities resold is large enough to support a public offering, it is called a secondary distribution. Most usual occurrence is when issuer’s control person wants to sell his shares.
                                          ii.            Most public resale’s occur through a securities market.
                                        iii.            People buying on public exchange look for exact same things when buying as those buying in a primary distribution. 
2.      Legal Framework of Securities Regulation
a.       Federal Securities Laws
                                            i.            1933 Act – regulates the public offering and sale of securities in I/C. The Act’s objective is FULL DISCLOSURE to prevent fraud and keep securities markets working properly. Disclosure is done through registration with the SEC.
                                          ii.            Securities Exchange Act of 1934—main concern is trading markets and participants in trading markets. Companies under 34 Act regulation are required to continuous disclose information. 3 types of companies subject to 34 Act regulation (together, called reporting companies):            
1.      companies that have a class of securities listed on a national securities exchange (12b)
2.      companies that have assets > $10 million and over 500 SHs,
3.      companies that have filed a 33 Act registration statement that has become effective
                                        iii.            Reporting companies required to register with the SEC and after that, make timely filings required by Section 13 of 34 Act. Required information to disclose: Form 10-K annual report, form 10-Q quarterly report. Idea of “integrated disclosure”—companies could fulfill 33 Act disclosure requirements by incorporating into the registration statement information from the Exchange Act filings. 
b.      State Blue Sky Laws
                                            i.            Different from federal approach to security regulation vs. state approach to security regulation is that federal is mainly disclosure oriented, while states include a merit qualification standard and qualification depends on convincing the state blue sky administrator of the substantive merits of the offering.
                                          ii.            33 Act was amended in 1996, and Congress exempted “covered securities” from states’ registration procedures. Covered securities are those that are listed (or will be listed) on the NYSE, ASE, or NASDAQ. 
3.      Markets and Their Efficiency (Cox, 93-113)
a.       Structure of Trading Markets
                                            i.            Shares will be either listed on an exchange (NYSE, NASDAQ, etc.) or traded in the over-the-counter market. Securities not listed on an exchange are referred to as “over-the-counter” securities.
1.      Over-the-counter: market makers are the core of the OTC market—market makers either maintain an inventory of a particular security, or maintain an order book and provide quotes that reflect investor interest in the security.
b.      Derivative Markets
                                            i.            Derivatives- financial instruments whose value depends on the price of some underlying instrument. 2 common types of derivatives include options and futures.
                                          ii.            Options- right to buy or sell securities from or to another at some predetermined price and date. Essentially they are risk-shifting devices.
1.      Call option- rights to buy
2.      Put options- right to sell. 
                                        iii.            Futures-future delivery of some commodity at a fixed price and date. 
4.      Efficient Market Hypothesis (p.103)
a.       EMH describes relationship between disclosure of financially significant information and changes in securities market prices – focuses on relationship between price and information. 
b.      EMH = security’s price can be established in an efficient market, if with respect to specific information, the price that exists for the security is the same as the price it would have if everyone and the same information. 
c.       3 levels of market efficiency: weak, semi-strong, strong. If there was STRONG market efficiency, a security’s price would reflect ALL information, whether publicly available or not. Semi-Strong exists if a security price reflects all publicly information available—true debate is whether market today is semi-strong.
d.      Some factors used to indicate efficiency of a market: percentage of shares traded weekly, analysts followings, presence of market shares and arbitrageurs, eligibility to take advantage of SEC’s integrated disclosure procedures pursuant to form F-# for engaging in public offerings, and responsiveness of a security’s price to new information. 
5.      Public Offerings
a.       Typically, PO’s occur through underwriters. 2 types of underwritings: Firm Commitment underwriting & Best Efforts Underwriting
b.      Firm Commitment Underwriting- one or more IB firms purchase securities from issuer for resale to the public at a specified public offering price.          
                                            i.            Formation of underwriting syndicate- members of syndicate are managed by the “managing underwriter” who has broad discretionary authority to manage the underwriting. Each syndicate member is committed to buy or underwrite a certain amount of securities, as agreed to in the underwriting agreement.
c.       Best Efforts- broker-dealers do not purchase securities, but instead get paid to use their “best efforts” to sell securities on behalf of the issuer at the offering price
6.      Process –
a.       Pre-Filing: 
                                            i.            Issuer selects underwriter, and they enter into a LOI. LOI is nonbinding except with respect to ONE provision, which is the amount that the UW will get paid if the deal does not go forward. 
                                          ii.            Drafting of Registration Statement—responsibility of issuer’s counsel. Registration statements for IPO’s are very different from those of a seasoned company. This is VERY expensive process for issuer.
b.      Filing Period (after filing, until effective is called “Waiting Period”)
                                            i.            At filing, information about company is publicly available. But not ALL information is available. For example, information about proceeds, common offering price is not available.
                                          ii.            Selling efforts can begin here, but this is problem bc SEC is in process of reviewing registration statement at this time.
                                        iii.            SEC review- takes a minimum of 30 days. Many times under full review, SEC will require changes to be made… so usually selling efforts do not begin until after SEC reviews, to avoid problem of soliciting information to investors based on false information. OR, SEC can opt to “no review” – typically they will do this, and write you telling you that you can become effective whenever the UW chooses. 
                                        iv.            Formation of underwriting syndicate- Syndicates are used when there may be too much stock for one underwriter to offer itself. To extent syndicate has not already been formed, it is formed in this waiting period. 
                                          v.            Underwriting agreement- gets firmed up at this time. It is a contract for sale between the issuer and underwriters, pursuant to which underwriters agree to purchase X amount from the issuer. Drafting UAgreement is obligation of underwriter counsel. 
                                        vi.            Also, FINRA review underwriting commissions to ensure it meets the limitations on the amount of spread the underwriter can take. FINRA has to approve before you can move forward with the deal.
                                      vii.            Right before effective period, marketing has to have been completed so they can make sure they can sell the stock. 
                                    viii.            At this point, registration statement has “blanks” in it. Because you have not yet priced the deal.
                                        ix.            8(a) of 33 Act—registration statement becomes effective automatically 20 days after filing. Typically when you file registration statement you waive this via a legend on registration statement, bc if you get a full review the SEC has to have time to review. This postpones the automatic effective date of reg.statement until issuer has amended statement to comply with comments from SEC after its review.

         ii.            4(1) exempts from Section 5 transactions by a person other than an issuer, underwriter, or dealer. 
1.So if regular person (not an issuer, not an UW, and not a dealer made an offer to buy securities from an underwriter, this is NOT a § 5 violation. BUT, if the UW were to ACCEPT the offer, this IS a violation, because the definition of “sale” in 2a3 includes “contract for sale.”   At the point the UW agrees to sell it becomes a contract for sale, so underwriter CANNOT accept the offer in order to comply with § 5.
2.Dealer (defined in 2a12 ) can NOT call underwriter and make an offer to buy some securities from him. Dealer does not enjoy 4(1) exemption so he must comply with § 5 and cannot make offers during pre-filing.
3.A person becomes an underwriter and thus loses its 4(1) exemption when a meeting and decision to become an underwriter is made.
b.      What communications amount to an offer under 2a3? 
                                            i.            Offer = any attempt or offer to dispose of, or solicitation of an offer to buy, a security. This is a very EXPANSIVE definition.
                                          ii.            Test is NOT based on the EFFECT the communication has—if the communication has a positive impact this is not determinative of whether an offer has been made.
                                        iii.            TEST = INDEPENDENT SIGNIFICANCE: If there independent significance for the release of information that is NOT related to the offer, then it is probably NOT an offer.
1.Focus is more on intent or purpose of the communication.
2.Is the communication designed to “condition” the market and arouse interest in the company. Statements made in advance of a proposed financing, although not couched in terms of an express offer, may in fact contribute to conditioning the public mind or arousing the interest in the issuer that it may raise a serious question as to whether the publicity is in fact a part of the selling effort.
3.What is the line between newsworthy information and conditioning the market? Hard line to draw. Even if there is news value to the information, if it appears that there is NO independent significance for the release other than in connection with upcoming registration and marketing, then it is a violation. If the release or publicity is of a character calculated by arousing interest à Violation.
4.Examples—release of information about ore strike is NOT a violation bc it does have independent significance. Brochures may or may not be offers—see Rule 168 below).   NOTE—information does not have to be sent by the mail, it CAN be distributed over a WEBISTE. Evaluate info in website the same as other forms of communication in determining if offer was made.
                                            i.            Safe Harbors generallyà if you meet safe harbor criteria (ALL of requirements), then the communication does NOT constitute an offer. If you MISS the safe harbor, then it does NOT necessarily mean that there has been an offer. You then evaluate it under common law analysis above (independent significance test).
                                          ii.            Rule 163A – any disclosure made MORE THAN 30 DAYS BEFORE filing, is not an offer.  Requirements:
1.Communication must be made by or on behalf of the issuer
2.Communication cannot make any reference to the securities offering
3.Issuer must take reasonable steps to prevent further distribution or publication of the communication during the 30 days immediately before filing. 
                                        iii.            Rule 135—Tombstone Ads. It is okay to release very basic information about the offering. 
1.Issuer can disclose its intent to make a public offering and can announce such information as the amount and any type of security as well as the manner and purpose of the offering.