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Securities Regulation
University of North Carolina School of Law
Hazen, Thomas Lee

State – Blue Sky
States can no longer require registration or qualification, impose conditions on offering documents or other sales literature or engage in any merit regulation.
For covered securities, states can only require notice filing and collect fees.
All legislation in federal courts
Except the Delaware Carve Out – for state cases that allege fiduciary breaches under state corporate law.
Preemption regime
Federal registration or exemption preempts registration or exemption for state; except for few instances
Preemption for offerings exempt extends to:
Qualified purchases, made statutory pursuant to § 4(2) private placement
Exempt securities, but not including offerings pursuant to § 3(a)(11) – intrastate exemption. § 18(b)(4)(C)
Reg. 506 Offerings exempt from federal registration by SEC under § 4(2), which is currently limited to Rule 506 of Reg. D. § 18(b)(4)(D)
State Exemptions
Non Preemption for offerings exempt under Federal Reg.
§ 3(b) small offering exemption – Rule 504, 505, Reg. A
Statutory § 4(2) private placement
§ 3(a)(11) intrastate exemption
SEC Exemptive Power from regulation
’33 § 3(b) – power to exempt from registration securities offerings up to $5 million, if registration is unnecessary in the public interest
’33 § 19(b) – power to define accounting, technical, and trade terms
’34 § 12(h) – power to exempt issuers, and their directors, officers and 10 percent shareholders from Exchange Act requirements as necessary or appropriate
’33 § 28; ’34 § 36 – authority to exempt “any person, security, or transaction, or any class or classes of persons, securities, or transactions,” from any provision f the Securities or Exchange Act or any rule or regulation promulgated under those statutes.
Beyond SEC exemptive authority
Rules applicable to government securities brokers and dealers
’34 § 15c – Treasury Dept.
Turns on whether investors have entrusted their money to another’s management and whether they face practical difficulties in collectively supervising management
’33 § 2(1)
’34 § 3(a)(10)
Howey Test – Investment contract
(1) a person invests money (2) in a common enterprise and (3) is led to expect profits (4) solely from the efforts of others.
Horizontal or vertical commonality
Risk Capital Test
Does not require commonality or profits derived from others efforts
Test focuses on the extent to which the investor’s initial outlay is subject to the risks of the enterprise or which the investor has no managerial control.
Real Estate – yes, when tied to economic benefits to be derived from the managerial efforts of promoters.
Business interest – depends on form of business organization
Corporation – common shares, preferred shares – yes
Limited partnership – limited partner interests – yes; general partner interests – no
When so dependent on promoter or manager that could not exercise meaningful control.
No legal control – so little power in investor’s hands that arrangement in fact distributes power as would a limited partnership
No capacity to control – partner so inexperienced or unknowledgeable that cannot exercise partnership power.
No practical control – so dependant managerial ability or cannot exercise meaningful partnership powers.
Partnership (joint venture) – partner interests, co-venturer interests – no
Pyramid schemes
Using Howey Test
(1) seek to attract cash investments (2) in an enterprise involving schemes (3) with the promise of future investment returns (4) arising from the efforts primarily of the promoter to attract new investors and provide management services related to the nominal business.
Pension Plans
An employer-funded, fixed-benefit pension plan in which the employees made no direct contributions and their participation was compulsory was not a security.
Employee’s plan benefits are fixed and dependent not on the plan’s return on investment but on the employee becoming eligible under the plan to participate.
Strong suggestions that ERISA preempts securities law here.
Exempt as security: ’33 § 3(a)(3) and ’34 § 3(a)(10) – A note that arises out of a current transaction and matures within nine months is exempt from registration.
Family Resemblance Test
4 factor test
(1) Motivation of seller and buyer: if issuer of note uses the proceeds for general business purposes it is more likely a security.
(2) Plan of distribution: if the notes are widely offered and traded, it is more likely a security
(3) Reasonable Expectations of investing public: If investor would generally view it as a security, more likely to be one
(4) Factors that would reduce risk: If the note is not collateralized and not subject to nonsecurities regulation (another protecting regime), it is more likely a security. If the note is secured or otherwise regulated (such as banking authorities) is it more likely to not be a security.
Rebuttable presumption that every not is a security unless it falls into a category of instrument that is not a security.
Notes used in commercial lending, notes secured by mortgage on home, short-term notes secured by assignment of accounts receivable are in the family of nonsecurities.
Sale-Leaseback Financing
Can be a security even if involved a fixed or variable rate of return.
CD (Certificate of Deposit)
Are not a security. An alternative regulatory scheme exists.
Stock – investment or noninvestment
Is it investment stock? (Remember the apartment case)
Are there…voting rights to dividends contingent on profits; are the shares negotiable; are voting rights proportionate to the number of shares held; can the shares actually appreciate in value?
Or is the share just representative of the right to participate or take part in something
Sale of Business
Landreth – Stock is stock
Substantial Likelihood Test
A fact is material if there s a substantial likelihood a reasonable investor would consider it important in making a securities-related decision.
Not just possibly be important
Not a “but for”
If no speak, or no duty to, can keep it a secret unless unless a duty to
Probability-Magnitude Test – re: speculative and future events

uly optimistic prediction.
Forward-looking statement by any person, whether or not in SEC filings
Statement not material (or presume no reliance), if statement cautions and generally describe possible risk factors
PLSRA Safe Harbor for Forward-Looking Statements ß Statutory – (“cautionary language”)
Objective disclosure assessment
Immunizes public companies and execs from civil liability for forward-looking statements that comply with the Act’s Safe Harbor Provisions. ’33 § 27A; ’34 § 21E
No private liability
3 Safe Harbors for later incorrect forward looking statement
No Actual Knowledge that forward looking statement was false
Immunizes reckless and negligent statements
Immateriality – if forward looking statement was immaterial.
If it is too soft, it is immaterial.
But, if it is hard…then still have the Bespeaks Caution Doctrine
Cautionary Statements – forward looking statement is identified as a forward looking statement and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the forward looking statement.
Applies to: SEC reporting corporations, does not apply to recent violators of federal securities antifraud provisions, investment companies, and penny stock issuers
Does not Apply:, Statutory safe harbor does NOT apply to IPO, Tender Offers, going private transactions, beneficial ownership reports under § 13(d)
Forward-looking statement by issuer (subject to exceptions) in specificied SEC filings
No private liability, if statement identified as forward-looking and accompanied by meaningful cautionary language that identifies risk factors
— How Securities are sold to the public, registration process, and regulation of disclosure to investors during registration process. —
Distribution of Securities to Public Investors
Types of Public Offerings
Issuer arranges with financial firms [underwriting] (wholesalers, retailers, brokers) for the distribution of securities to public investors
Standby or Old-Fashioned Underwriting
Issuer directly offers securities to the public and the underwriter (as insurer) agrees to purchase from the issuer any securities not purchased by the public
Best-Efforts Underwriting
Issuer directly offers a stated amount of securities to public and underwriter agrees to use best efforts to find investors.
Firm Commitment Underwriting