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Securities Regulation
University of San Diego School of Law
Prakash, Saikrishna B.

·        Issuers
o       S1 v. S3
§         S1
·        Non-Reporting Companies
·        Unseasoned companies (report under ’34 Act but haven’t been doing so long enough to be able to use S3)
o       Can still incorporate by reference
§         S3
·        Which companies
o       Seasoned Issuers (all S3 companies)
o       WKSI (see Rule 405 for definition)
§         It’s like a “seasoned issuer +”
§         Can also use the automatic shelf offering
·        Requirements (2 categories; must meet those w/in both)
o       Registrant Reqs
§         w/in law of US
§         12b of Exchange Act (reporting company)
§         Filed for the preceding 12 months (in a timely manner)
o       Transactional Reqs
§         Either
·        $75M outstanding stock (“public float”)
o       Offering securities for cash provided that you’ve got outstanding stock held by non-affiliates of $75M+
§         Basically just really well-known companies that are probably already well-followed
·        Non-convertible investment securities
o       = don’t have to meet the 75M requirement
·        So they get 2 big benefits
o       1) don’t have to include as much info in prospectus (only a streamlined prospectus describing the particular offering)
o       2) they can incorporate a lot by reference
o       WKSIs (see Rule 405)
§         They’re so well-followed that they can issue before registering
§         Rule 405 Definition  
·        Meets the “seasoned issuer” reqs above
·        Must meet either of the following reqs
o       Equity Req
§         That worldwide mkt value of $700M or more (held by non-affiliates)
·        Having enough equity held by non-affiliates goes along w/ the idea that having a ton in circulation will make people want to and actually follow your company
o       Non-Convertible Securities (Bonds)
§         Reqs
·        Issued in last 3 yrs an aggregate principle amt of at least $1B of non-convertible securities (other than C/S) &
·        Is registering non-convert securities (other than C/S) only (unless eligible for C/S under equity reqs)
§         Underlying notion = diff’t mkt b/w stocks & bonds and there not being a problem talking about the bonds (non-convert) when there’s an upcoming stock offering
·        Institutional investors buy the non-convert bonds & individuals are more likely to buy the stock
·        So if you’re offering 1 kind then it’s ok to talk about the other kind
·        Underwriters (defined in Section 2a11)
o       3 Types
§         1) Standby
·        = issuer sells directly to public and UW gets a fee for being willing to purchase securities not purch’d by the public
o       So the issuer knows it’ll get a sum certain
·        Mostly used in the context of “rights offerings” to employees (the unsubscribed portion must be bought by UW)
§         2) Firm Commitment
·        UWs take title and then they turn around and sell them
o       Great for issuer b/c it’s a sum certain
o       UWs take the risk that they won’t be sold to the public b/c they actually purchase them from the issuer
·        May seem as though UW is bearing all the risk, but there’s certain out options
o       Contingency stuff (wars, adverse mkt conditions, etc)
o       But for the most part UWs don’t exercise their rights under the opt-out provisions
§         3) Best Efforts
·        UWs are basically just acting as agents – if we don’t sell them then too bad and if we do then good
·        3 Kinds
o       1) Straight
§         Like above – UWs agree to try to sell and whatever we sell we get a commission on (and the sale sticks) and whatever we don’t then sucks for you
o       2) All or None
§         Either UW sells all the securities or the offering doesn’t go through at all (any sale is contingent upon the whole offering being sold in its entirety;  or else everyone gets their $ back and there’s no sale)
·        Issuer will get either all that they want or nothing
·        EX of where this is best for the issuer = issuer wants to build a factory and they’d rather just have it all to be able to spend it or none whatsoever b/c they’ve got no other uses for it
o       3) Mini/Maxi
§         Set a max and a minimum amt of $ to raise
·        If we get the minimum then it goes through but if not then the offering is a failure and we’re not going to sell anything
o       UW Liability
§         Defenses for S11 liability (listed in 11b)
·        11b3 = est’d by “engaging in due diligence”
o       So UWs can avoid liab that’s based on reg stmt misstatements by engaging in due diligence in their confirmation that the info the issuer is giving it is accurate
·        Note that for issuers = strict liability
o       ’34 Act = basically only for intentional or reckless (in context of continuous disclosure scheme)
·        Registration & Section 5 Liability
o       Who is subject to Section 5
§         Laid out in Section 4 (which provides exemptions for Section 5)
·        4(1) = provisions of Section 5 don’t apply to transactions by any person other than an underwriter, dealer, or issuer (“control persons” – and those that sell for them – are considered issuers so they’re included)
o       So, when you sell your own shares, you don’t have to worry about it (but if you were the issuer then you’d have to)
o       Section 5 Process
§         Are we in registration?
§         Is this a violation of S5?
·        Is this an offer to sell?
o       Are there any safe harbors?
o       3 Main Periods
§         Pre-Filing Period
·        5c = no offers to sell or buy a security until filing
o       Also applicable while refusal or stop order is in place
§         Waiting Period
·        Section 5a1 = no sales of the security until effective date of registration stmt
·        Section 5a2 = no delivery of the security until effective date of registration stmt
·        Section 5b1 (applicable from filing through post-effective)
o       After registration is filed = can’t use a form of prospectus unless it complies w/ Section 10 of ’33 Act reqs
§         Basically regulates written offers of any sort
§         Post-Effective Period
·        Section 5b2 = no delivery unless accompanied/preceded by a 10a prospectus
·        Section 5b1 = still applicable (any prospectuses must comply w/ Section 10)
o       Gen’l Overview of Timing & Rules / Safe Harbors
§         Pre-Filing
·        Section 5c = can’t offer to sell or buy in the pre-filing period
o       Notice that 5c also includes offers to buy (unlike the rest of Section 5)
§         Application of this = make sure that – when you’re discussing the solicitor’s potential liability – Section 4(1) is applicable to that person (like that he’s a “dealer” or something)
·        Someone like me wouldn’t be subject to any liability b/c 4(1) only covers issuers, UWs, and dealers
·        Rules/Exceptions/Safe Harbors
o       R135 (limited notice)
§         For issuer communicationsonly
§         Conditions
·        Legend
·        “Limited Notice Content” (amt, description of offering, anticipated time, etc; w/out naming UWs)
o       EX = planned use of proceeds might be too much info
o       Section 2a3 (preliminary negotiations b/w UW and issuer – about engaging in underwriting)
§         Def of “Sale/Sell” = says that “offer to buy” doesn’t include negotiations b/w issuer & any UW or among UWs who are or may become participants
§         2a11 def of an “underwriter” = notes that it doesn’t include smaller firms that can’t actually underwrite but that are just helping to sell (so the 2a3 exemption doesn’t apply to them)
o       R137 (research reports by non-participating brokers/dealers)
§         This is the only rule (among 137-139) that allows research reports regarding non-reporting cos.
§         Allows brokers & dealers to publish reports about issuers and securities where they’re not participating in the offering
·        Takes them out of the definition of an “underwriter”
o       Says that the terms “offers,” “participates,” or “participation” in 2a11 aren’t applicable under certain conditions
·        The publishing broker-dealer (or its affiliates) can’t participate in the offering and can’t receive any consideration or be acting pursuant to agreement
o       Subsequent Participation = may create a Section 5 violation if the report is thought to have “continuing effects”
§         So a dealer doesn’t have to worry about S5 until after the effective date, but if they publish a report like this they shouldn’t join beforehand
§         “Research Report” def (137e)
·        Written communication that includes info, opinions, or recs w/ respect to securities of an issuer or an analysis of a security or issuer
o       Doesn’t matter if it provides info reasonably sufficient upon which to base an investment
o       R138 (research reports by brokers/dealers about securities other than those they’re distributing; Reporting Cos. only)
§         Says that certain reports aren’t considered “offers to sell” for purposes of 2a10 and 5c
§         Conditions (138a) 
·        1) either (i) report is about C/S or convertible debt and the offering is non-convert debt or non-convert, non-participating P/S or (ii) vice versa
·        2) Reporting Issuer
o       R139 (research reports by brokers/dealers distributing securities)
§         Says that certain reports won’t be considered “offers to sell” under 2a10 and 5c even if the broker/dealer

es investors are to follow to express their interest in the offering (a12)
o       Intended use of the proceeds (a7)
§         134b – – req’d inclusions in 134 communications
·        1) Legend
·        2) Info about how to obtain a S10 prospectus
§         R134d (interest card/form)
·        Excepts certain written communications from “prospectus” def
·        Conditions
o       Accompanied/preceded by a Preliminary Prospectus
o       Legend
§         Stmt that offers to buy or $ can’t yet be accepted (and that they can be w/drawn before acceptance after effective date)
o       R430 (Preliminary Prospectus)
§         Auth’d pursuant to S10b
·        Says that S10 is met for 5b1 purposes (during the waiting period)
o       So you can send a “preliminary prospectus” (as broadly defined below) to anyone during the waiting period
§         “Substantially the same info” as req’d by S10 & rules is contained in it
·        Or it can contain substantially the same info except for the omission of info w/ respect to
o       Offering price
o       UW discounts or commissions to dealers
o       Amt of proceeds
o       Conversion rates
o       Call prices
o       Other matters depending on price
o       R431 (Summary Prospectus)
§         Auth’d pursuant to Section 10b
§         Various Reqs to it including
·        Reporting co. for 36+ mos.
·        No dividend pmt failures or other defaults w/in yr (by issuer or its subs)
·        Notice of how to get a complete prospectus
o       R433 (Free Writing)
§         Allows the release of supplemental info that’s not included in the reg stmt (classifies it as a preliminary prospectus under 10b as long as certain conditions are met)
§         See also R164 and R405 (def of terms)
·        R164 = basically grants the allowance of a FWP (provided that the 433 conditions are met)
o       And allows certain failures to comply w/ the 433 conditions
·        R405 gives you the def of a “FWP”
o       It’s basically any communication – post filing – that’s not covered by one of the other rules
§         Universal Conditions
·        Legend (433c2i)
o       R164c = allows 5b1 avoidance for “immaterial or unintentional” failures to comply – – so long as
§         1) GF & reasonable effort was made to comply
§         2) FWP is amended ASAP (after discovery of failure)
§         3) Retransmitted w/ legend
·        Filing Conditions (433d)
o       Issuers (d1i) = must file…
§         “Issuer FWPs” (it’s a particular type of FWP; where issuer prepares, uses, or refers to it)
§         Issuer info from FWP used by other participants
§         Final Terms description
o       UWs & other non-issuer participants (d1ii)
§         = only when reasonably designed to lead to “Broad Unrestricted Dissemination”
o       R164b = allows 5b1 avoidance for “immaterial or unintentional” failures to file – – so long as
·        Retention Condition
o       = issuers and offering participants must retain for three years any free writing prospectuses that aren’t filed
o       R164d = allows 5b1 avoidance for “immaterial or unintentional” failures to comply – – so long as a GF & reasonable effort was made to comply
·        No Contradictory Info (433c)
o       Info in FWPs can’t conflict w/ any info in the reg stmt or in anything inc’d by reference
§         Conditions that depend on the nature of the issuer
·        WKSIs (b1) = can use at any time (even before filing the registration stmt)
·        Seasoned (b1) = may use only after registration is filed (but no add’l reqs)
·        Non-reporting/unseasoned (b2)
o       Only after reg stmt is filed
o       Must be preceded by most recent statutory prospectus (w/in Section 10)
Send them a Preliminary Prospectus 1st (that includes pricing info)