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Securities Regulation
Wayne State University Law School
Sugar, Peter

Securities Regulation Sugar Winter 2017

1.Basic regulatory structure of the 33&34 Acts

The structure of 33 and 34 Act[1]

A map through the 33 Act

How the liability provisions drive the regulation?

General understanding of civil liability provision applicable to sales of securities

Frame of liability rules:

Rules in all:

SA § 5: “prohibitions relating to interstate commerce and the mails”
SA § 11: “civil liabilities on account of false registration statement”
SA § 12: “civil liabilities arising in connection with prospectuses and communications”
SA §15 “liability of control person”
SA § 17: “fraudulent interstate transactions”

This is a negligence based liability for material misstatements and omissions under §17(a), which is not available in private actions, but only in SEC enforcement actions.

The operation of liability rules:

SA §12(a)(1)

*why use?

The registration is required

+company used jurisdictional means in the offering

investors may seek rescission under the strict liability scheme of §12(a)(1)

the investors need only show unregistered sales of securities,

investors no need to show any misrepresentation, any culpability, or any relationship between disclosure defects in the prospectus and their losses or any relationship between

the only issue would be whether the company was a “statutory seller” in the offering—which may depend on the type of underwriting:

[1]if a best-efforts underwriting, the company would be a seller for passing title;

[2] if a firm-commitment underwriting, the issuer would be liable if it engaged in “solicitations” (obviously for its benefit)

SA §11

*if the offering was not registered, there can be no §11 liability, even though the circular contained prospectus-like information

*purchasers have a §11 claim only when misinformation appears in a registration statement that becomes effective after being filed with the SEC.

SA §12(a)(2)

*whether exempt or not, investors might seek rescission for misinformation in the self-styled prospectus.

*this rule permits investors to rescind their investment if the offering was accomplished by means of a “prospectus” .

*Gustafson v. Alloyd Co. creates doubts about the applicability of SA §12(a)(2) to unregistered offerings, exempt or notàthe “prospectus” referred to in SA §12(a)(2) is limited to the document filed with the SEC in a registered offering

*however, the above case can also be read as the offering by “public” in nature is enough, such as an exempt public offering or even illegal, unregistered public offering

*JOBS Act for R-A+ offerings are explicitly made subject to §12(a)(2) liability

understand its K elements and the analysis:

*definition: purchasers in an offering may seek rescission from “statutory sellers” if the offering was carried out “by means of a prospectus or oral communication” that is materially false or misleading.

*coverage: it applies to sales that involves the use of instruments of transaportation or communication in interstate commerce or the mails—jurisdictional means and it applies to sales and offers of securities except government securities


not only the seller who passes title potentially liable;

but also any collateral participant who solicits purchases for his own or the issuer’s benefit

*ELEMENT ONE: misrepresentation of material fact:

by showing either a material untruth or the omission of a material fact necessary to make what is said not misleading;

*ELEMENT TWO: culpability of seller:

makes the defendant’s nonculpability a defenseàthe seller must show he did not know and “in the exercise of reasonable care” could not have known of the misinformationàreasonable care and a due diligence duty issue

*ELEMENT THREE: reliance of purchaser:

the purchaser need not show that her relied on the alleged misinformationàrather, the section conditions recovery on “the purchaser not knowing” of the challenged misinformation”

*ELEMENT FOUR: loss causation

loss causation—a causal link between the misinformation and the plaintiff’s loss—has become an affirmative defense in this liability section.

SA §15

Those individuals or entities who control any person liable under §11 or §12 are also liable. (Director and officers)

EA §10b-5

*proof burden for plaintiff:

materiality misinformation/scienter/reliance/causation/damages

2.The process for Registrant, company going publicly and SA&EA system


SEC has a broad power to make the exemption. However, there are a few limits to this exceptive authority, which may be exercised on a finding that action is “necessary or appropriate in the public interest. And consistent with the protection of investors,” a broad standard found in numerous place elsewhere in the federal securities laws.


NSMIA[2]: (X): state authority to regulate securities offering is largely preempted with respect to “covered securities.” In offering of these securities, states can no longer require registration or qualification, impose conditions on offering documents or other sales literature, or engage in any merit regulation.

therefore, state can only require notice filings and collect fees to finance their policing of securities fraud


State retain their authority to require notice filings, sales reports, consent to service of process, and the payment of filing fees with respect to “covered securities” sold within their jurisdictionàfailure to submit a notice filing or pay a required fee can be the basis for a state to suspend, within its jurisdiction, the offer or sale of securities
Listed or senior “covered securities” in the first category, the exemption is complete
States can also continue to police securities fraud by investigating and bringing enforcement actions under their own antifraud laws.

“Covered Securities”:

state securities regulation is limited to small, regional, or interstate securities offerings

Exchanged-listed securities:

SA §18(b)(1): for securities listed (or authorized for listing)on the NYSE or the Amex, as well as, securities included in the National Market System of

State can no lo

board audit committee composed entirely of independent directors; code of ethics and procedures for handling whistle-blower complaints about accounting improprieties

EA § 12(g)(1): A company becomes a “reporting company” if it has more than 500 equity owners of record and more than $5 million in year-end assets.

The integrated disclosure system

K rules from syllabus:

SA §6(a):”Registration of securities”
SA §10(a): “information required in prospectus”
registration statement topic

SA §10(a) specifies which of the Schedule A information must be included in the prospectus and this is subject to SEC Rules
SA §7 (by reference to the list-of-disclosure item in SA’s Schedule A) specifies the information that must be included in the registration statement filed with the SEC
SEC uses “forms” (sets of disclosure instructions) for the registration statement

Part I: prospectus (disseminated to investors), including the information about the registration, the securities being offered, the issuer and its business, the issuer’s financial history, the distribution, and the use of the proceedsàrequirement for prospectus:

It is written to pass SEC muster and must faithfully disclose all the information required by the relevant registration from
The prospectus is a selling document, it must provide investors an enticing picture of the issuer and the securities offered
The prospectus is written with an eye to litigation
Plain English requirement:

R-421(d) requiring “plain English” in the front and back covers pages, the summary, and the risk factors section of the prospectus
SEC six stylistic principles:

Short sentence; everyday language; active voice; tabular presentation of complex materials; no legal jargon and no multiple negatives

Part II: contains technical information, undertakings, signatures, and exhibits (EDGAR)

[1] R-505: the repeal of R-505 will be effective May 22, 2017;

[2] National Securitas Markets Improvement Act of 1996

[3] SOX: the Sarbanes-Oxley Act of 2002 also known as the “Public Company Accounting Reform and Investor Protection Act” (in the Senate) and the “Corporate and Auditing Accountability, Responsibility, and Transparency Act” (in the House). It is a US federal law that set new or expanded requirements for all U.S. public company boards, management and public accounting firms. There are also a number of provisions of the Act that also apply to privately held companies, for example the willful destruction of evidence to impede a Federal investigation.