Securities RegulationKey Definitions1)Accredited Investor [Rule 502] Any person who falls within one of the categories, or whom the issuer reasonably believescomes within such category at the time of sale. Categories are designed to catch (a) regulated entities [(a)(1)-(3)], insiders [(a)(4)], and high net worth investors [(a)(5)-(6)].1)Institutional Investors [Rule 501(a)(1)]: Includes (a) Banks acting in either an individual or fiduciary capacity, (b)Broker-Dealers, (c) Insurance Companies, (d) Investment Companies, (e) Business Development Companies, (f)Small Business Investment Companies, (g) ERISA Plans, etc.2)Private Business Development Company [Rule 501(a)(2)]3)Corporation or Partnership with $5M Assets [Rule 501(a)(3)]: In addition to the asset requirement, it also cannotbe formed for the express purpose of acquiring the securities.4)Natural Persons:a)Issuer Insiders [Rule 501(a)(4)]: If the individual is a director, officer, or general partner of the issuer.b)High Net Worth [Rule 501(a)(5)]: If an individual has a net worth of greater than $1M, excluding the person’sresidence as an asset, but including any indebtedness over the value of the home as a liability.c)High Income [Rule 501(a)(6)]: If single, has an income over $200,000, or if married, a joint income in excess of$300,000, for the prior two years, and there is no “reasonable expectation” of falling below.5)Trusts [Rule 501(a)(8)]: Any trust with total assets in excess of $5M, that was not organized with the express purposeof acquiring the securities, whose purchase is directed by a “sophisticated person.”6)Entities with all Accredited Investors [Rule 501(a)(8)]: If all equity owners are AI, then organization qualifies.2)Directed Selling Efforts [Rule 902(c)]: The absence of directed selling efforts is integral to both safe harbors, and isdefined to include and exclude certain communications.a)Activities Deemed to Constitute Directed Selling Efforts [Rule 902(c)(1)]: Includes any activity with a “purpose of, orthat could reasonably be expected to have the effect of, conditioning the market in the United States for any of the securities being offered” in reliance on Regulation S, which includes “placing an advertisement in publication ‘with a general circulation in the United States’ that refers to the offering of the securities.”i)With a General Circulation in the United States [Rule 902(c)(2)(i)]: Is any publication that (1) is printedprimarily for distribution in the United States, or (2) has had during the preceding twelve months, an averagecirculation in the United States of 15,000 or more copies per issue.”ii)If Multiple Editions [Rule 902(c)(2)(ii)]: If there are multiple editions, then it will only include the “separate U.S. edition.”b)Activities Deemed NOT Directed Selling Efforts [Rule 902(c)(3)]:i)Legally Required Publications [Rule 902(c)(3)(i)]: Provides that any advertisement required to be publishedunder either U.S. or foreign law, so long as (a) it contains no more information than legally required and (b) alegend stating that it has not been registered.ii)Non-U.S. Persons [Rule 902(c)(3)(ii)]: Communications with persons “excluded” from the definition of “U.S.Person” or accounts held by persons excluded from “U.S. Persons” definition.iii)Tombstone Ads [Rule 902(c)(3)(iii)]: Tombstone Ads with (a) less than 20% of their general circulation in the U.S., (b) an appropriate legend, and (c) only contain the information permitted in a tombstone ad.iv)Rule 135(c) and (e) Publications [Rule 902(c)(3)(vi)]:v)Journalist Access to Rule 135(e) Conferences [Rule 902(c)(3)(vii)]: In addition to the publications themselves, permitting journalists with access to such press conferences.3)Research Reports [Rule 902(c)(3)(viii)]: If a research report by a broker or dealer is published in accordance with Rule138(c) or Rule 139(b).Exxon Capital Exchanges and PIPEs Deals:a)For Cash Requirement: Securities Laws often require that an offering have been issued “for cash” rather than“exchange.” This emerged because of Exxon Capital Exchanges and PIPEs Deals, which the SEC previouslypermitted through no-action letters.b)Nature of Transactions: In short, this was a way of accomplishing shelf-registration before it was permitted.Therefore, the SEC tries to cut back on these because Shelf-Registration is supposed to accomplish the same goals, but with additional requirements.i)Exxon Capital Exchange → Debt : In order to reach markets quickly, the Issuer of debt would issue notes througha Private Placement, which is exempt from registration under Sec. Act § 4(a)(2). These instruments, however, arehighly illiquid because they are privately held (Restricted Securities), and therefore the Issuer subsequentlyregisters an identical class of notes with the SEC, then exchanges its outstanding non-registered notes for thenewly issued registered notes. Achieves access to the market when desired without registration.ii)PIPEs Deal → Equity : Similar deal but with Equity instead ofc)Continued Use: An Exxon Capital Exchange or a PIPEs deal would still be used if the Issuer failed to satisfy therequirements for a shelf-registration under Rule 415, which would occur if either (a) Non-Public Issuer, if the Issuer is not public, (b) Non-Timely with Filings, is in a 12-month penalty box for not timely filing reports, or (c)Insufficient Float, lacks the public float requirements.4)Free Writing Prospectus (“FWP”) [Rule 405]:a)Generally: A Free Writing Prospectus is “any written communication,” which includes “graphic communications,”that constitutes “an offer to sell or a solicitation of an offer to buy” securities that is made by means other than (1) a prospectus satisfying the requirements of § 10(a) or another 10(b) prospectus [e.g. Rule 430 and Rule 431]; (2) , and(3) communications that are excluded from the definition of Prospectus under § 2(a)(10)(a).b)Requirements → Rule 433: A FWP will be deemed to satisfy the requirements of Sec. Act § 5(b)(1) by qualifying asa Sec. Act § 10(b) Prospectus only if the Prospectus complies with the requirements of Rule 433. If it does not, thenthe communication will violate Sec. Act § 5(b)(1).c)When it May be Used → Depends on Issuer [Rules 163 & 164]: WKSIs are permitted to use FWPs during the QuietPeriod under Rule 163. Under Rule 164, almost all other issuers, save excluded and ineligible issuers, are permitted to rely on the rule during the Waiting Period.5)Ineligible Issuer [Rule 405]: Issuers that are subject to “problems” described below are prohibited from relying on anumber of provisions of the Securities Laws as they become “ineligible issuers.” Defined to include:a)Missed Filing Reporting Issuer: If the Issuer is a reporting issuer that failed to file all materials required to be filedduring the past Twelve Months, other than certain information required under Form 8-K, then they are ineligible. This though does not have a timeliness requirement, so they can file late and still satisfy.b)Blank Check, Penny Stock, and Shell Companies: If the Issuer has qualified at any point in the prior three years asone of these, then they are ineligible.i)Blank Check Company [Rule 419(a)(2)]: Is a company that (i) Development Stage—a company that has “nospecific business plan” or “has indicated that its business plan is to engage in a merger or acquisition with anunidentified company,” and (ii) Penny Stock—is issuing “penny stock,” as defined in Rule 3a51-1.ii) Shell Company [Rule 405]: A company, other than an asset-backed issuer, that has (1) operations, either none or nominal, and (2) Assets, either none or nominal, solely of cash or cash equivalents, or cash and cashequivalents and only nominal other assets.iii)Penny Stock Issuer [Rule 3a51-1]: Any issuer of securities other than securities exceeding the requirements set forth in Rule 3a51-1. These are normally for low value, low capital firms, as the issuer must exceed (A) certainasset or income minimums, (B) operating history or market value of securities, (C) greater than $4/share value,etc.c)Limited Partnership: If it is a limited partnership that is offering and selling its securities other than through a FirmCommitment Underwriting.d)Bankruptcy and Insolvency: If the Issuer within the past three years has become insolvent or filed for bankruptcy,then it is ineligible, provided that if it was involuntary, ineligibility occurs at a special determination date and that the three years only starts to run after they filed an annual report after emerging from bankruptcy.e)Felony/Misdemeanor: If in the past three years the Issuer was convicted of felonies specified in Exch. Act § 15(b)(4)(B)(i)-(iv).f)Adverse Government Action: If in the past three years, the Issuer was the subject of an adverse government action,be it administrative or judicial, that subjects them to either (A) prohbiitions on certain conduct such as violating anti-fraud provisions of securities laws, (B) requires cease-decist violating securities laws, (C)6)Qualified Institutional Buyer Defined [Rule 144A(a)(1)]: QIBs are any of the following entities, acting on its own accountor for the account of another QIB [Note: this precludes “sophistication by proxy” as under Rule 506, because can only purchase for someone else and count as a QIB if purchasing for another QIB].a)Catchall Institutions → $100M in Securities [Rule 144(a)(1)(i)]: Insurance company, investment company,employee benefit plan, trust fund, business development company, 501(c)(3) organization, corporation, partnership, investment advisor.i)NOTE: You can create a corporation for the express purpose of buying 144A securities (unlike Reg D).b)Dealers Generally → $10M in Securities [Rule 144A(a)(1)(ii)]: Dealers, if acting on their own or a QIBs account,that owns $10M investments in securities not affiliated with the dealer.i)Unsold Allotments → Not Counted : Provides that any securities being held as part of an unsold allotment do notcount as being “owned” by such dealerc)Dealer Riskless Principal Transactions for QIBs [Rule 144A(a)(1)(iii)]: Dealers qualify as QIBs when engaged inriskless principal transactions for QIBs.i)Riskless Principal Transaction [Rule 144A(a)(5)]:A transaction in which a dealer buys a security from any personand makes a simultaneous offsetting sale of such security to a QIB.d)Registered Investment Companies → $100M in Securities [Rule 144A(a)(1)(iv)]: Any investment company that ispart of a family of investment companies, meaning it has the same advisor for multiple funds or affiliate funds, which owns in the aggregate $100M in non-affiliated issuer’s securities.e)Owners are QIBs [Rule 144A(a)(1)(v)]: Any entity, such as a corporation, where all equity owners are QIBs, that actfor either their own account or for the account of other QIBs.f)Banks → $25M Independent Net Worth [Rule 144A(a)(1)(vi)]: Banks must have, in addition to owning $100M insecurities of non-affiliated issuers, must have at least $25M in independent net worth from such securities.7)Seasoned Issuer [Rule 433(b)(1)]:a)Seasoned Issuers are Issuers that are (1) Reporting Issuers, meaning subject to the Exch. Act § 13 and 15 reportingrequirements, (2) Form S-3 Eligible, and (3) NOT an Ineligible Issuer.8)Substantial U.S. Market Interest (“SUSMI”) [Rule 902(j)]: There are different standards for determining if there is a“substantial U.S. market interest” in an issuer’s securities depending on whether the securities are equity or debt securities.a)Equity SUSMI [Rule 902(j)(1)]:There is SUSMI with respect to an issuer’s equity securities if eitheri)U.S. Market is Largest Market [Rule 902(j)(1)(i)]: The U.S. market is the largest market for the class ofsecurities in the last fiscal year.ii)De Minimis Traded on non-U.S. Exchange [Rule 902(j)(1)(ii)]: Twenty percent (20%) or more of all trading in the class of securities took place in, on or through the facilities of securities exchanges, and less than fifty-fivepercent (55%) of such trading took place in/through the facilities of security markets of a single country.b)Debt SUSMI [Rule 902(j)(2)]: There is SUSMI with respect to an issuer’s equity securities if all of the following aresatisfied—i)>300 Aggregate U.S. Debt Holders [Rule 902(j)(2)(i)]: There are, in the aggregate, 300 or more U.S. personswho are record holders of the issuer’s debt securities.ii)U.S. Debt Holders have $1B or 20% [Rule 902(j)(2)(ii)-(iii)]: If U.S. persons hold at least $1B of and 20% of,(1) the principle amount outstanding of its debt securities PLUS (2) the greater of liquidation preferences on parvalue of its securities described in Rule 902(a)(1), PLUS, (3) the principle amount or principle balance of itssecurities described in Rule 902(a)(2).iii)Commercial Paper → Ignored [Rule 902(j)(3)]: for purposes of these debt calculations, securities exempted under the commercial paper exemption are not included.9)Well Known Seasoned Issuer (“WKSI”) [Rule 405 , P129 ]: There are three ways for an Issuer to become a WKSI underRule 405.a)Always Required → Form S-3 Registrant Requirements [Para. (1)(i)] → P584:i)US company andii)Reporting company(1)Issuers with a class of securities listed on an exchange (Sec 12 (b) of the Exchange Act) or(2)Issuers having both total assets exceeding $10 million and a class of equity securities held by 500 or morepeople (Sec 12(g) of the Exchange Act) or(3)Issuers with outstanding securities sold pursuant to 1934 Act registration statement (Sec 15(d) of theExchange Act) → = file registration for a class of securities with SEC→ eg. Registered public debt offering iii)Has reported for at least 12 monthsiv)timely filing the reports and no defaults during prior yearb)In addition, the Issuer must satisfy one of the following options.i)Opt. One → $700M Public Float [Para. (1)(i)(A)]: Within 60-Days of the Determination Date, must have a“worldwide market value of its outstanding voting and non-voting common equity held by non-affiliates of $700million or more.”ii)Opt. Two → within 60-Days of the Determination Date, the issuer must have issued $1B in non-convertible securities, other than equity (debt or preferred stock), in the last 3-Years, “in primary offerings for cash, notexchange, registered under the Act.” [excludes PIPEs and Exxon Capital Exchanges] +Only Registering Non-Convertible Non-Equity [Para. (1)(i)(B)(2)] → (must only register “nonconvertible securities, other thancommon equity, and full and unconditional guarantees.”)iii)Opt. Three → within 60-Days of the Determination Date, the issuer must have issued $1B in non-convertible securities, other than equity (debt or preferred stock), in the last 3-Years, “in primary offerings for cash, notexchange, registered under the Act.” [excludes PIPEs and Exxon Capital Exchanges] + Form S-3 TransactionRequirements [Para (1)(i)(B)(2)] → (the market value of the voting and nonvoting common equity held by non-affiliates of the issuer is more than $75 million)c)Determination Date [Para. (2)]: Determination Date is the later of either (i) Shelf-Registration Filing, the filing ofthe most recent shelf registration statement; or (ii) Shelf-Registration Amendment, time of the most recentamendment to a shelf-registration statement; or (iii) Most Recent Form 10-K Filing, if there is not a Shelf-Registration, then it is the most recent Form 10-K filing date.Coverage of Securities Regulations: Definition of “Security”“Every sale of a security in the United States must be registered or exempt.”1)Jurisdictional Question : Whether or not something is a security determines whether securities laws apply. If it is not asecurity, the Securities and Exchange Commission has no jurisdiction to regulate its sale. If an instrument is deemed a “security,” then the major regulations are applicable.2)Statutory Definitions of “Security” [Sec. Act § 2(a)(1); Exch. Act § 3(a)(10)]: The two major statutes set forth nearlyidentical definitions of what constitutes a security.a)Unless Context Provides: Both statutes have a proviso that the listed instruments will count as securities “Unless thecontext otherwise requires.” In short, even if something technically is called one of the following instruments, context may deem that it is not appropriately called a security.b)Specific Listing of Instruments: Expressly provides that any “note,” “stock,” “bond,” and “debenture” will bedeemed a security.c)Catchall Provision: "Evidence of indebtedness," "certificate of interest or participation in any-profit sharingagreement," "investment contract," and any "instrument commonly known as 'security.'”d)Key Difference—Commercial Paper:3)How to determine whether an Interest is a Security : In examining an instrument, must examine whether it will be deemeda security as either traditional common stock, a note, or as an investment contract.a)Traditional Common Stock [Landereth] (p. 6)i)Label: Under Landereth, an instrument labeled as a “stock” will be deemed a security if it possesses the “usualcharacteristics” associated with common stock.(1)If mere label (but none of the characteristics in (ii), the court may apply the Howe Catchall analysis)ii)Usual Characteristics: These usual characteristics of a stock include (1) the right to receive dividends, (2) negotiability, (3) the ability to pledge or hypothecate the security, (4) voting rights in proportion to the number ofshares owned, and (5) the capacity to appreciate in value.b)Traditional Note Test [Reeves]: Under Reeves, an instrument labeled as a “note” is presumptively a security,however, this presumption may be rebutted in two circumstances.i)Precluded List : First, courts utilizing the Reeves analysis have identified certain “notes” that are, by their nature,not appropriately regulated by the securities laws. If an instrument falls on this list, then it is similarly excludedfrom being treated as a security.(1) A note delivered in consumer financing;(2) A note secured by a home mortgage;(3) A short-term note secured by a lien on a small business or some of its assets;(4) A note evidencing a character loan to a bank customer;(5)Short-term notes secured by an assignment of accounts receivable;(6) A note formalizing an open-account debt incurred in the ordinary course of business; and(7)Notes evidencing loans by commercial banks for current operations..ii)Individual Analysis : Second, even if not already excluded based on the foregoing list a note may still be excluded.In determining whether note rebuts the presumption of being a security, Courts will examine (1) the partiesmotivations, (2) the plan of distribution of the instrument, (3) the expectations of the investing public, and (4) theexistence of a risk reducing factor which renders securities regulations unnecessary.c)Investment Contract Test [Howe]: Under the catchall Howe Investment Contract Test, an instrument will be deemeda security if (1) there is an investment of money, (2) made with the expectations of profits, (3) originating from acommon enterprise, (4) where profits are derived “solely,” meaning “predominantly,” from the efforts of others.i)Investment of Money→ Self Explanatoryii)Expectation of Profit→ Contrast “cash profits” from “consumption motive.”iii)Common Enterprise(1)Horizontal Commonality (Available in All Circuits—7th takes only it): Pooling of investment funds plusshared profits and losses (i.e. interdependency of the investors).(2)Strict Vertical Commonality (Available in 5th, 2nd, 9th Cir): The investment must be tied to the promoter’ssuccess(3)Broad Vertical Commonality (Available only in 5th): The investment need not be tied to the investor’sperformance at allTraditional Common Stock: “Usual Characteristics” Test1) Introduction : Stock is one of the expressly enumerated categories of securities listed in both Sec. 2(a)(1) and Sec. 3(a)(10).Therefore, there is a specific test for determining whether2)Usual Stock Characteristics Test : An investment instrument labeled as a “stock” by the promoter will qualify as a Sec. 2(a)(1) stock, and therefore render the instrument a security, provided that it carries the “significant characteristics typicallyassociated with stock.a)Critical Characteristics: These usual characteristics of a stock include (1) the right to receive dividends, (2)negotiability, (3) the ability to pledge or hypothecate the security, (4) voting rights in proportion to the number ofshares owned, and (5) the capacity to appreciate in value.i)Landreth Timber Company v. Landreth – The “Timber!” Case [Page 295](1)Landreth family owned all of the outstanding stock of a lumber business. While they were attempting to selltheir controlling shares, a fire broke out. Potential investors were advised of the damage, but told the millwould be rebuilt and modernized. Purchaser acquired 100% of the stock, but rebuilding costs greatlyexceeded expectations. Purchasers sued.(2)Court noted that here the stock bore all the traditional characteristics of a stock, and furthermore it was soldin the context of a transaction typically covered by securities laws, the sale of a stock in a corporation.Therefore, the investor would reasonably believe that this was covered by the securities laws.b)Mere Label as Stock is Insufficient: If a security is labeled a stock, but it does not bear these critical characteristics,then it will not be deemed a security as a “stock.” The court may, however, analyze whether it is a security under the general catchall test for securities.i)United Housing Foundation, Inc. v. Forman – The “Co-Op City” Case [Page 270](1)Defendant sold shares in a non-profit corporation to individuals so that they could live in a non-profit co-op.The shares at issue did not have proportionate voting, as management was based on a per-apartment bases,there were no dividends, the shares were not freely alienable, there were no dividends, and the shares wouldbe sold at the end of occupation at the same price that they paid for them initially(2)Court determined that this was not a “stock” as the name would suggest, and therefore proceeded to analyzeit under the Howe test (eventually determining it was not an investment contract either).3)Power of Formalism : The investment will be deemed to be a security under this test, even if it would not be deemed asecurity under the general catchall investment contract analysis.a)Landreth Timber Company v. Landreth – The “Timber!” Case [Page 295]i)Compare the result here with that in Steinhardt (LPs) and Monsanto (LLCs), where the question would haveturned on passivity (or reliance upon the “efforts of others”). Here, they were acquiring 100% of the stock, so itwould not have been considered a security under Howe.ii)Court noted that the Howe test was designed to govern the catchall provisions at the end of Sec. 2(a)(1), but to find that this should be applied to all securities would ignore the fact that the statute expressly enumerated certaintypes of securities before the general catchall provision. Therefore, the mere fact that something would not beconsidered under another test did not mean that it should be relevant to the stock inquiry.Notes: “Family Resemblance” Test1)Introduction : The label “note” is expressly included in the definitions in § 2(a)(1) and §3(a)(10); however, unlikeconventional stock which has a core set of critical characteristics, notes embrace a wide variety of financial instruments that are issued for wildly different purposes, not all of which are fit for regulation as securities. Therefore, a different test is required.a){Reeves v. Ernst & Young – The “Note by any Other Name” Case [Page 301]i)Farmer’s Cooperative (“The Co-Op”) issued promissory notes payable on demand by the holder in order tosupport its general business operations. Notes were uncollateralized and uninsured. Notes were advertised in TheCo-Op’s Newsletter, and stated that though they were uninsured, there were more than $11,000,000 in assetsstanding behind the investment. The Co-Op eventually floundered, leaving 1,600 bondholders holding the bill for$10 million in worthless notes.ii)Quote: “While common stock is the quintessence of a security, and investors therefore justifiably assume that a sale of stock is covered by the Securities Acts, the same cannot be said of notes which are used in a variety ofsettings, not all of which involve investments. Thus, the phrase ‘any note’ should not be interpreted to meanliterally ‘any note,’ but must be understood against the backdrop of what Congress was attempting toaccomplish in enacting the Securities Acts.”}{}means 讲过但不重要。
