Seg. Reg.

Outline Choi Fall 2006

Building a Policy Argument
SHAPING: How will the rule impact society when it is put into affect?
a) Cost Benefits: future consequences who will !ain an" who will lose
#) Impact on $i!hts: esta#lishin! or un"erminin! them?
A%&INIS'$ABI(I'): How is rule implemente"?
a) *ill it actually wor+ in practice
,is the new or ol" rule unclear
#) *ill it actually #e followe"
c) $ules - Stan"ar"s Pro#lem
$ules: Bri!ht line #ut ri!i" easier to pre"ict o-er,"eterrence or un"er,"eterrence
Stan"ar"s: Case #y case amorphous fle.i#le mi!ht #e more ri!ht #ut the ris+ of
!ettin! it wron! less pre"icti-e
/0N%A&1N'A( /AI$N1SS: 1lements of morality an" 2ustice
a) 0nfairness of a Chan!e: How will the transition perio" #e han"le"?
,$eliance on the ol" rule
#) 'reatin! (i+e Cases Ali+e: How will it fit with other rules of society?
3) uniformity with other states
,-ersus promotin! e.perimentation 4/e"eralism)
5) fairness across social cate!ories
c) &erit -s 1quality
3) &eritocracy: accept unequal "istri#ution as somethin! to promote the social
!oo"
5) 1!alitarian: powerful aspect of our society especially for the necessities of life
INS'I'0'I6NA( $6(1: *hat are their roles are they #est suite" for it?
a) Is this normally for 2u"!es of (e!islators
,*ill it un"ermine either institution to #e "oin! it?
#) *ho is #est at "oin! it
,notion that le!islators are #etter at un"erstan"in! impact since they ha-e "e#ates
reflect a !reater "i-ersity an" stu"y thin!s thorou!hly
N6N, IN'1$/1$1NC1: Is this somethin! !o-ernment shoul" #e "oin!?
a) (aisse7 8faire: let people #e
#) Inter-entionists: !o-ernments 2o# is to protect people from tyranny
c) *ill this action un"ermine the authority of !o-ernment as a whole
3) #ecause it won9t respon" to the in2ustice
5) #ecause it has create" further in2ustice
I. INRO!"CION
5 :ey $e!ulations :
o Sec; Act of 9<<: $e!ulates Primary 'ransactions
o 1.chan!e Act of 9<=: $e!ulates Secon"ary 'ransactions
Purposes of Sec $e!ulation
3) Informin! In-estors; *hy "o in-estors nee" information
a; Intangibility 8 Security mar+et prices are #ase" on unpre"icta#le future cash
flows; *ithout information in-estors woul" not +now how to -alue these cash
flows;
#; Homogeneity: Since in-estors all want the same information to ma+e money
the Securities re!ime is an easy source for that homo!eneity;
c; Collective Action Problem: It9s har" for in-estors to !et to!ether to collect the
pertinent info on mar+ets; 'herefore there is -alue in a Securities re!ime that
collects an" "isseminates the info;
"; Centrality of Securities Market: Ha-in! a Securities re!ime allows companies
who coul" not otherwise affor" to "isseminate their information to #e intro"uce"
to the pu#lic;
e; Asymmetrical Information: &ana!ers an" insi"ers +now more than the pu#lic;
'he Securities $e!ime acts to smooth that asymmetry;
f; Capital Markets: It9s important to trac+ the flow of money throu!h the mar+ets;
'herefore consumers shoul" !et the most -alua#le thin!s at the #est price;
!; Efficient Market Hypothesis: )ou woul" nee" to +now less information in the
case of a seasone" company #ase" on this theory since all pu#lic information is
alrea"y reflecte" in the stoc+ price; Stron! -s; *ea+ form; *e "ispro-e" the
Stron! /orm; 6therwise there woul"n9t #e insi"er tra"in!;
5) *hy not require "isclosure of e-erythin!?
a; 'oo 1.pensi-e
#; Some thin!s li+e tra"e secrets nee" to #e +ept secret
c; %rown: In-estors will #e o-erwhelme" siftin! throu!h the irrele-ant to fin" the
rele-ant;
<) Benefits of man"atory "isclosure:
a; Creates stan"ar" metho" of information "isclosure 8 easy for in-estors an"
companies
#; $e"uces Costs #ecause companies are repeat players
c; $e"uces "uplicati-e research #y in-estors an" analysts
=) Class Actions
a; Concern for fri-olous suits 4only one !oes to trial per year)
i; Stron! Incenti-e to Settle: cause" #y insurance a-oi"
payin! "efense attorney fees a-oi"s the clou" of
liti!ation can #e "istractin! for mana!ement 4may !et
"epose")
ii; A!ency Pro#lem: attorneys #ear all the cost an" !et a
contin!ency fee if they win
iii; >irtually all settle 3? !o to 2u"!ment 4only = in the
nineties an" the "efen"ant won each)
i-; CIRC"#ARI$: the sharehol"ers are the ones who file
an" then en" up payin! out since it comes from the
corporation; 'he only "ifference is the
transaction costs of filin! a motion 'H1 (1GA(
/11S
%um# -s; Smart in-estors
Some #elie-e that in-estors are completely irrational an" create mar+et #u##les; 6thers #elie-e that
in-estors are sa--y;
'ypes of $e!ulation
3) Disclosure: $equire man"atory "isclosure from issuers prior to sale of securities;
P$6B(1&: How "o you ensure that in-estors will rea" the info?
Ha-e G0N @0&PING rules which require man"atory "isclosure at
certain times to focus attention on in-estors;
P$6B(1&: &an"atory "isclosure is cheap for lar!e companies #ut e.pensi-e
for smaller companies;
5) SelfHelp: %on9t require man"atory "isclosure an" if in-estors aren9t satisfie" they can
simply not #uy any more securities from that company;
P$6B(1&: Althou!h some in-estors will not #uy a!ain you cannot !uarantee
that all in-estors will fin" out that other in-estors !ot screwe" an" stop #uyin!
securities;
<) Self!egulation: Ha-e outsi"e or!ani7ations such as the NAS% an" S1C monitor the
issuers;
P$6B(1&: 'here mi!ht #e conflicts of interest;
=) Private !egulation: Ha-e I,Ban+s re-iew information on issuers an" then ma+e
recommen"ations to pu#lic in-estors; Issuers woul" ha-e incenti-e to "isclose on their own
since they want I,Ban+ers au"itors un"erwriters an" attorneys to recommen" their stoc+;
P$6B(1&: Smaller companies who can9t affor" e.pensi-e un"erwriters an"
who aren9t co-ere" #y analysts woul" #e shut out;
P$6B(1&: Pri-ate Sanctions mi!ht not #e enou!h to "eter companies;
3) Merit !egulation: Ha-e a !o-ernment a!ency put its seal of appro-al on issuers it
#elie-es are soli";
P$6B(1&: If in-estors ha-e no consensus how is the !o-ernment to
monitor companies?
P$6B(1&: 'ellin! in-estors what to in-est in is too paternalistic;
'ypes of Securities :
o Common Stock
o Preferre" Stock
o #on"s
Stoc+hol"ers ha-e the ri!ht to future cash flows that are resi"ual 4"i-i"en"s) left,o-er 4in liqui"ation)
an" "iscretionary; 'hey can also -ote;
Bon"hol"ers ha-e the ri!ht to fi.e" an" perio"ic cash flows an" first ri!ht in liqui"ation; No -otes;
>aluin! Securities
'*6 ISS01S:
43) *hat will the -alue of the security #e in the future?
45) How ris+y is the security?
*hy is money worth more now than in the future?
43) Inflation
45) $is+
4<) Gratification
4=) 6pportunity Cost of not ta+in! the money now is what you coul" ha-e spent it on
/ormulas:
i; Present >alue: the -alue of the return N6* at time A
P% & F% ' () * r+,n- n i. the num/er o0 1eriod.
ii; /uture >alue: the worth in the future at a specific point
F% & P% 2 () * r+,n
iii; Net Present >alue /ormula:
NP% & 3(initial co.t+ * P%
%i-ersification: accountin! for -aryin! ris+s in securities an" in-estin! in multiple types in or"er to
"i-ersify ris+
a; Certain ris+s are purely "i-ersifia#le 4e.ample to in-est in um#rella company an" lemona"e
company)
#; Systemic $is+s: ris+s that you cannot "i-ersify 4e.ample is the sun #lowin! up)
*ays to $aise Capital
$% Securities
5; Internally 8 throu!h e.cess cash
&% 'oans
II(A+. 4A5RIA#I$ , (!O 65 S5C"RII5S #A7S APP#$8+
Information is B&aterial9 if: Cthere is a substantial likelihoo" that the "isclosure woul" ha-e #een
-iewe" #y the reasonable investor as ha-in! significantly altere" the total mi( of information ma"e
available%D 8 'SC In"ustries
*hat statements are &aterial un"er the a#o-e "efinition?
S5P )9 *hat +in" of statement is it an" what $ule is Affecte" 4PA$' I)?
3; &isstatement 8 Anythin! you say must #e truthful; S6&1'I&1S CSI(1NC1 IS :1)D i;e; Basic
5; 6mission 8 6nly material if there is a duty to di.clo.e; )ou may remain silent or say Cno commentD
if there is no "uty to "isclose;
1.chan!e Act:
3; Rule )0/3:- 1 ;<<: unlawful to ma+e any untrue statement of material fact or to omit to state a
material fact in connection with the sale or purchase of a security;
1.planation: 'his is the !eneral antifrau" pro-ision in securities
5; Rule )2/320- 1 :)2: Any information out there that will ma+e a filin! not materially
mislea"in! must #e pro-i"e" to the e.tent that it is material
1.planation: 'his is the half,truth pro-ision encoura!in! full "isclosure
S5P 2 : *hat +in" of statement is it 4PA$' II)?
3) /orwar",(oo+in! StatementsEContin!ent Information: Any information that is nee"e" to "etermine
whether somethin! in the future such as a mer!er or e.ploratory minin! that mi!ht lea" to a fin" will
happen;
Basic -; (e-inson: /acts: Basic "enie" #ein! in mer!er tal+s in se-eral press releases; 'urns out
they were in fact in mer!er tal+s an affirmati-e misstatement; H6(%ING: 'o "etermine what is material
use the Pro/a/ility 2 4agnitude te.t where you multiply the pro#a#ility of the e-ent happenin! #y the
-alue of the e-ent; &er!ers will usually pass the ma!nitu"e part of the test since this is the -ery
information that in-estors want;
'he court re2ects 5 tests:
4a) Agreement in Princi1al te.t9 Cuntil pricin! an" structure are wor+e" out
information is not material;D $e2ecte":
3; A #ri!ht,line rule is too o-erEun"er,inclusi-e
5; Paternalistic 8 presumes in-estors are "um#
4#) 6th Circuit e.t9 C6nce any statements are ma"e any facts ma+in! the statement
untrue #ecome material;D
3; 6-er,Inclusi-e
5) Historical Information: Information that is useful in assessin! a company9s past performance
Ganino -; Citi7ens: Citi7ens wants to +eep up its recor" of profit increases an" so it manipulates
its earnin!s which only consiste" of 3;F? of total re-enue; H6(%ING:
4a) &ateriality of historical facts "epen"s on Co-erall conte.t all rele-ant circumstances of the
case;D No #ri!ht,line G? rule,of,thum# will wor+;
4#) (oo+ to the "rop in stoc+ price #efore an" after the frau"; Simply loo+in! at the stoc+ price
after the frau" mi!ht not !i-e you the whole picture;
4c) 'he small percenta!e "oes not matter; 'he real num#er is important
<) 6pinions
>ir!inia Ban+shares: Pro.y statement sai" that mer!er price was CfairD an" Chi!hD; H6(%ING:
%is#elief or un"isclose" moti-es alone are insufficient to ma+e opinions actiona#le; 'here must #e
o#2ecti-eE-erifia#le information un"erlyin! the opinion in or"er to ma+e it actiona#le; 6pinions can #e
actiona#le if the Boar" both misstate" its #eliefs which can #e -erifie" throu!h factual information an" the
moti-e of the Boar" was not "ecepti-e or manipulati-e;
4a) If the company comes out an" says it9s "oin! C!reatD you mi!ht #e a#le to fin" some support
to -erify it;
4#) C&y life is peachyD, !oin! to #e tou!h to -erify this;
S5P = 8 1-en if the information is &aterial "oes it affect the 'otal &i. of Information?
C)ruth on the Market DefenseD: if the material fact is alrea"y +nown to the whole mar+et i;e; that
&icrosoft pro"uces *in"ows HP it is consi"ere" alrea"y part of the 'otal &i. of information; /oo" (ion
S5P ; 8 1-en if the information is &aterial an" affects the 'otal &i. of information "oes the company
ha-e any "efenses to the materiality claim?
Possi#le %efenses:
3) C#espeaks Caution DoctrineD: /orwar" (oo+in! statements are immaterial as a matter of law so lon! as
the forwar" loo+in! statements are accompanie" #y a list of ris+s that mi!ht preclu"e the future e-ent from
happenin!; Co"ifie" as Safe Har#or in PS($A I 53; %61S N6' APP() to IP69s 'en"er 6ffers or
/inancial Statements;
5) CStock MarketDrop )estD: 'he information is only material if it cause" a "rop in share price; /oo" (ion
an" Ganino;
<) CPuffery DoctrineD: 'he information is not material if it9s mere CpufferyD
II(B+. S5C"RI$ , !5FINIION
S5P ) 8 Shoul" the Security (aws not apply #ecause the thin! for sale is not a security?
S'1PS to "eterminin! whether a CStoc+D is a security un"er the Securities Acts:
43) If the in-estment is calle" CStoc+D use the (an"reth Analysis;
45) If the in-estment fails the (an"reth Analysis then apply the Howey test;
N.B.>> !O BO6 PARS OF S5P )9 A ? B>>>>
A9 %oes the thin! in question fall un"er the "efinition of CSecurityD in I 54a)43) of the 9<< Act 1.) an"
<4a)43A) of the 9<= Act 1.26=?
43) S'6C: : (an"reth: Guy #uys stoc+ of company rather than assets to !ain control;
%9s ar!ue that the purchase was not for !ains #ut rather for control of the
company; ISS01: Is this a stoc+ purchase? H6(%ING: )es; Callin! somethin! a
Cstoc+D "oesn9t necessarily mean it9s a stoc+ #ut rather "epen"s on the
characteristics of the instrument:
3; 'he ri!ht to recei-e "i-i"en"s upon an apportionment of stoc+
5; Ne!otia#ility
<; A#ility to #e ple"!e" as collateral
=; Confers -otin! ri!hts in proportion to shares owne"
G; Capacity to increase in -alue
45) N6'1SEB6N%S: $eco!ni7e these #y specifie" interest rate principal payment an"
maturity; $e-es: H6(%ING: Here are the steps in "eterminin! whether a Note is a
security:
3; A Note has a presumption of #ein! a security
5; C/amily $esem#lanceD: 'he presumption can #e re#utte" only if it can #e
shown that the note #ears a resem#lance to an enumerate" list of notes that are
not consi"ere" securities: 4a) note "eli-ere" in consumer financin! 4#) note
secure" #y a mort!a!e on home 4c) the short,term note secure" #y a lien on a
small #usiness or some of its assets 4") the note e-i"encin! a CcharacterD loan to
a #an+ customer 4e) short term note secure" #y an assi!nment of accounts
recei-a#le 4f) or a note which simply formali7es an open,account "e#t incurre"
in the or"inary course of #usiness
<; /actors in "eterminin! C/amily $esem#lanceD
4a) 'he moti-ations that woul" prompt a reasona#le seller an" #uyer to enter
into the transaction 4is the seller9s purpose the raisin! of money an" is the #uyer
primarily intereste" in ma+in! a profit on the note or is the note #ein! use" to
facilitate the purchase an" sale of a minor asset or consumer !oo")
4#) 'he plan or "istri#ution of the instrumentJ is the
instrument one in which there is common tra"in!
for speculation or in-estment?
c) 'he reasona#le e.pectation of the in-estin! pu#lic
") 'he e.istence of another re!ulatory scheme which
si!nificantly re"uces the ris+ of the instrument
there#y ren"erin! the application of the Securities
Acts unnecessary;
=; If the note has a maturity of less than K months it9s not a security
B9 If not a classic security is it cau!ht #y the catch,all phrase in I 54a)43) of Cin-estment contract?D
'6 %1'1$&IN1 whether somethin! is an CIn-estment ContractD:
S1C -; Howey : S'AN%A$%: An In-estment contract is a Contract 'ransaction or
Scheme containin! all of the followin! elements:
L; In-estment of &oney
F; A Common 1nterprise
M; 'he 1.pectation of Profits
K; Solely 'hrou!h the 1fforts of another
3A; A mere C6fferin!D is enou!h; People "on9t actually nee" to purchase the
contract for it to fall un"er the rules;
43) IN>1S'&1N' of &6N1) : Int9l Brotherhoo": H6(%ING: 1mployer fun"e"
fi.e" #enefit pension plan to which employees ma+e no contri#utions an" which
participation was not compulsory is not a security #ecause there was no in-estment
of money; 'o qualify as in-estment of money:
33; 'he purchaser must ha-e !i-en up somethin! tan!i#le 4not necessarily cash)
in e.chan!e for an interest that has su#stantially the characteristics of a
security;
35; If there is another re!ulatory scheme that alrea"y monitors this type of
scheme there is less li+elihoo" that the contract will #e a security;
45) C6&&6N 1N'1$P$IS1 : Sec -; SG: Pon7i scheme stoc+ C!ameD H6(%ING:
If there is Commonality #etween an" amon! the in-estors the enterprise is a
common enterprise:
3<; Hori*ontal Commonality : Poolin! of assets in which e-eryone in the
!roup9s returns are ine(tricably linke" an" !o up or "own to!ether;
3=; +ertical Commonality : All in-estors "epen" on a central hu# for
information #ut all ha-e "ifferent returns;
a; Broa": $eturn of in-estors is "epen"ant on promoter9s e.pertise
an" the promoter is inclu"e" in the ris+ of the in-estment i;e; a
promoter who ta+es a flat fee for his a"-ice;
#; Narrow: 'he in-estors9 return in #ase" on the efforts of the
promoter or <r" party who ta+e a percenta!e of the in-estors9
!ains; Promoter "oes not ta+e on ris+ of the in-estment;
4<) 1HP1C'A'I6N of P$6/I'S:
3G; 0nite" Housin! -; /orman : $esi"ents of apt; #uil"in! ha" to #uy shares in
the Co,6p; H6(%ING: Shares were not an in-estment contract #ecause
there was no e.pectation of profits:
a; 'he shares were not a stoc+ ha" no apprecia#le -alue were not
transfera#le no "i-i"en"s no -otin! ri!hts an" no #enefit accrue"
as a result of the mana!ement of a <r" party; 'he 1conomic
$eality is that such an instrument is not an in-estment contract;
#; 'he in-estment was merely for consumption namely li-in! in the
apartment;
3L; S1C -; 1"war"s : Sale lease,#ac+ of payphones H6(%ING: 1-en if there is
no promise of capital appreciation or participation in #usiness earnin!s #ut
only a !uarantee of a fi.e" return is still an in-estment contract an" a
reasona#le e.pectation #y in-estors of !ettin! that return;
4=) S6(1() 'H$60GH the 1//6$'S of AN6'H1$
I; Particularly tryin! in questions of franchises an" partnerships;
$i-ianna 'rawlers: 'hompson acte" as mana!ement for passi-e !eneral partners;
H6(%ING:
3; %espite their passi-ity the General Partners9 powers were so si!nificant that
there was no way the efforts of 'hompson woul" ha-e #een solely the "ecision of
'hompson;
5; 'ypically General Partnerships are not consi"ere" in-estments
<; (imite" Partnerships are "efaulte" to #e in-estment contracts unless the
limite" partners e.ercise effecti-e control;
III. P5RIO!IC !ISC#OS"R5S under the @=; AC
7hat com1anie. are goAerned /y the di.clo.ure regime8 = S5PS
S5P ) IS 65 CO4PAN$ P"B#IC8
A. Companies who meet any of the < metho"s #elow are require" to re!ister as Pu#lic Companies an" are
hence co-ere" #y "isclosure re!ime un"er the 3K<= 1.chan!e ActD 8 S1C 1.ercises its authority to create
a "isclosure re!ime pursuant to I 3<4a) an" I 3<4#) of 9<= Act;
Section rigger ReBuirement. ermination
C)2(a+ and C )2(/+ Be liste" on a National
1.chan!e
,Perio"ic filin!s
,Pro.y rules N annual
report
,'en"er offer rules
,Insi"er stoc+
transactions 4C)6)
%elistin! N either:
a) O <AA sharehol"ers or
#) O GAA sharehol"er N O
P3A million in assets for
< years
C)2(g+ &ore than GAA
Sharehol"ers N
&ore than P3A million
in assets
,Perio"ic filin!s
,Pro.y rules N annual
report
,'en"er offer rules
,Insi"er stoc+
transactions 4C)6)
1ither:
a) O <AA sharehol"ers or
#) O GAA sharehol"er N O
P3A million in assets for
< years
C):(d+ $e!istere" Pu#lic
6fferin! un"er 9<< Act
sometime in the past
,Perio"ic /ilin!s O <AA sharehol"ers N no
earlier than 35 months
followin! the
re!istration statement9s
!oin! effecti-e;
Q /or most lar!e companies since it9s too "ifficult to !et un"er <AA sharehol"ers the only way to go
1riAate is to #uy up all pu#lic shares an" ta+e the company pri-ate;
S5P 2 IF CO4PAN$ i. P"B#IC it 4"S FI#5 65 FO##O7IND P5RIO!ICA##$9
43) E3F: Perio"ic 1-ents; *ithin = "ays of any of the #elow occurrin! a company must file an M::
a; 1ntry Amen"ment or 'ermination of a Cmaterial "efiniti-e a!reementD i;e; contracts outsi"e
the or"inary course of #usiness
#; /ilin! of Ban+ruptcy
c; Acquisition or "isposal of an amount constitutin! 3A? or more of the company9s total assets
"; $esults of operations an" financial con"ition if "isclose" #y press release prior to filin! of 3A:
or 3AR;
e; Costs associate" with termination #enefits for employees contract termination costs
f; &aterial impairments to assets such as !oo"will
!; $eceipt of a notice of "e,listin!
h; 0nre!istere" sales of equities
i; material mo"ifications to sharehol"er ri!hts
2; Chan!es in the company9s outsi"e au"itor
+; Notice that pre-ious financial reports shoul" not #e relie" upon
l; Chan!e in control of the $e!istrant
m; %epartureEelection of new Boar" mem#ers
n; Amen"ments to By,(aws or Articles of Incorporation
o; 'emporary tra"in! suspension un"er employee #enefit plans
p; Amen"ment to $e!istrant9s Co"e of 1thics
q; Anythin! the issuer at its option thin+s woul" #e of interest to sharehol"ers
r; Any "isclosure require" to comply with $e!ulation /%

45) )03F (Annual Re1ort+ and )03G (Guarterly Re1ort+ : Perio"ic %isclosures with some forwar"
loo+in! information a#out the followin!:
a; Business
#; Properties
c; (e!al Procee"in!s
"; &ar+et for Common Stoc+
e; &ana!ement %iscussion
f; Analysis of /inancial Con"ition
!; $esults of 6peration
h; %irectors an" 6fficers
i; 1.ecuti-e Compensation
2; Security 6wnership of certain Beneficial 6wners an" &ana!ement
+; Certain relationships an" transactions
l; Principal accountin! fees an" ser-ices
4<) CO4PAN$@. R5SPONSIBI#I$ O FI#5 P5RIO!ICA##$
'o ensure the financials are accurate I 3<4#)45) req reportin! firms to +eep accurate #oo+s an" maintain
reasona#le internal accountin! metho"s /urthermore a""e" incenti-e is the fact that +nowin! -iolations of
3<4#)45) are criminal offenses; 3<4#)4G)
&atter of *;$; Grace: H6(%ING: 1.ecuti-es ha-e responsi#ility of a!!ressi-ely fin"in! out what
"oesE"oes not nee" to #e "isclose"; 'hey cannot rely solely on "isclosure counsel;
S5P =9 I/ C6&PAN) is P0B(IC an" S1(1C'I>1() "iscloses it must "o it as per $e!ulation /% if
certain con"itions are met;
$e!ulation /%: Pre-ents company from "isclosin! only to select analysts an" #an+ers; A company
"isclosin! non31u/lic material in0ormation to certain coAered 1er.on. must "isclose the same to the
pu#lic in-estors at the same time if:
43) Company is "omestic or wor+in! on #ehalf of a "omestic company
45) 'he information is "isclose" to #ro+ers "ealers #an+ers un"erwriters etc;
4<) If the "isclosure is in-oluntary an M,: is file" within 5= hours of the "isclosure to
the co-ere" persons to the rest of the in-estor population in a way that is
Hrea.ona/ly de.igned to 1roAide /road non3e2clu.ionary di.tri/ution o0 the
in0ormation to the 1u/lic.I
4=) %isclosure ma"e in connection with an offerin! is not inclu"e" 4e.emptin! the
roa"show) as well as those "isclosures to a 2ournalist or a person who owes the
company a "uty of confi"ence 4lawyers etc;)
4G) 6nly enforcea#le #y the S1C
Sie#el Systems: H6(%ING: A meetin! with Gol"man people in which C16 sai" profits woul" increase
-iolates $e!ulation /%; S1C can file cease an" "esist or"er;
I%. 5JC6AND5 AC ANI3FRA"! #IABI#I$ once a material -iolation #y a pu#lic company
was ma"e with re!ar"s to a security here9s what coul" happen;
6O7 !O $O" DO ABO" BRINDIND A S"I FOR FRA"!8
S5P )9 )ou ha-e a pri-ate cause of action un"er $ule 3A#,G;
Pri-ate $i!ht of Action un"er $ule 3A4#),G of the 9<= Act 1.==< if the company states Cany untrue
statement of material fact or omits to state a material fact which is necessary in li!ht of the
circumstances to ma+e the statement not mislea"in!;D
o 'he 1riAate right o0 action is reco!ni7e" #y Hu""leston;
o Hu""leston : H6(%ING: %espite the fact that I 33 alrea"y imposes lia#ility for frau" a plaintiff is
not preclu"e" from #ein! a suit un"er 3A#,G;
S5P 29 %etermine if you ha-e stan"in! un"er 3A#,G
CIn connection with the sale or purchase of securitiesD
43) Blue Stamp: H6(%ING: 'o ha-e stan"in! un"er 3A#,G you must ha-e sol" or purchase" stoc+;
45) Sanfor": H6(%ING: 'he securities transaction must ha-e #een a necessary part of the frau";
4<) /orseea#ility: If it9s foreseea#le that people woul" rely on your frau"ulent acti-ity some courts say
that9s enou!h for stan"in!;
4=) Intrinsic >alue: Some courts hol" that if the frau" affects the intrinsic -alue of the security that9s
enou!h for stan"in!;
4G) Pri-ity: If there is a contract you A(&6S' A(*A)S ha-e a cause of action;
S5P =9 %i" the statute of limitations pass?
a; 5 years after the "isco-er of the frau"J or
#; G years after the frau" was committe";
S5P ;9 Get your class to!ether;
PS($A I 53% T I 531 1.=0;: 'his section tells you what the class nee"s to "o;
43) Sharehol"er with lar!est financial loss in the case shoul" #e lea" plaintiff; N6'IC1: P has 5A
"ays to notify the class an" LA "ays to mo-e to #ecome lea" plaintiff;
a; 'his is an effort to stop professional plaintiffs
45) (ea" Plaintiff selects attorney
4<) Cannot #e lea" plaintiff in more than G class actions within < year perio"
4=) In re Cen"ant : H6(%ING: Groups of sharehol"ers such as pension fun"s coul" #e lea"
plaintiffs to!ether so lon! as the !roup is not artificially constructe" 2ust to lea" the class;
4G) /acts must #e plea"e" with particularity with a stron! inference of scienter
4L) Imposes a stay on "isco-ery until the completion of the motion to "ismiss
4F) Safe,Har#or for forwar" loo+in! statements
4M) (imits lia#ility of %efen"ants not en!a!e" in intentional frau" to their proportionate shares
QQQ PS($A has not #een successful in "iminishin! class actions;
S5P :9 S'A'1 )60$ CAS1
43) *as there a @0$IS%IC'I6NA( N1H0S: 'he mail telephone or some other means of interstate
commerce must ha-e #een use";
45) *as there a &A'1$IA( &IS$1P$1S1N'A'I6N or 6&ISSI6N on a S1C0$I') of a P0B(IC
C6&PAN)8 0sin! the information on &aterialityESecurityEPu#lic Company was there a su#stantial
li+elihoo" that the reasona#le in-estor woul" fin" the information useful in the total mi. of information?
45#) *ho is the %1/1N%AN'?
a; Ai"ing , Abetting: 'here is no pri-ate cause of action for ai"ers an" a#ettors; 6nly the S1C
can #rin! claim un"er I 5A4e); 'he S1C "oes not nee" to show reliance;
#; Primary Defen"ant: 5" Cir; Says misstatement must #e "irectly attributable to %; Kth Cir;
Says that Csu#stantial participationD is enou!h; Corporations are lia#le for the officers an"
"irectors;
c; Control Person 'iability: Controller of issuer is the % if he intentionally or rec+lessly allowe"
the frau"; :eim
45c) %61S the C6&PAN) ha-e the /6$*A$%,(66:ING SA/1,HA$B6$? If yes SOP 6ere> I0
not- go on.
PS($A I 531: Safe Har#or for /orwar" (oo+in! Statements: APP(I1S '6 P0B(IC C6&PANI1S AN%
%61S N6' APP() to IP69s 'en"er 6ffers T /inancial Statements; If the forwar" loo+in! statement are
accompanie" #y all the potential ris+s that coul" "amper the future e-ent you !et the safe har#or; Asher
4<) %1C1P'I6N 8 Santa /e: H6(%ING: 'he con"uct must ha-e #een manipulative or "eceptive; If the
information is fairly represente" an" Sharehol"ers ha-e the ri!ht to choose to accept or re2ect the
information there is no manipulation or "eception; Furthermore if there is a state reme"y such as
appraisal rights we are more reluctant to allow the Security (aws to apply;
4=) %0') to C6$$1C'E0P%A'1: 'he statement has to #e false at the time it was ma"e in or"er for
there to #e a cause of action;
%0') to C6$$1C': If at the time the prior "isclosure was ma"e it was incorrect the "isclosure
has to #e correcte" at a later time;
%0') to 0P%A'1: if at the time the prior "isclosure was ma"e it was correct #ut later e-ents
ma"e it incorrect the statement must #e up"ate"; 'here is no continuous "uty to up"ate; 6nly those thin!s
require" #y perio"ic "isclosure un"er M,: 3A,R an" 3A,: must #e up"ate"; A##ot (a#s
4G) SCI1N'1$?
a; Actual Intent: If P can pro-e there was intent the scienter requirement is met; 'his is "ifficult
to pro-e;
#; !ecklessness: 'here must #e somethin! so out of the or"inary that the e.ecuti-es saw #ut
"i"n9t follow up on;
c; -egligence: N6' 1N60GHU Hochfel"er
4F) Plea" your case with PA$'IC0(A$I')
I 53% an" Green 'ree: Accepts a mushy #alancin! of moti-e opportunity an" other circumstantial
particular facts that show there was scienter; 'he followin! are usually in"ications:
i; Insi"er 'ra"in!
ii; %iscrepancies
iii; Closeness of time a false statement that imme"iately
turne" out to #e false
i-; Bri#ery
-; S1C 1nforcement Action
-i; Accountin! $estatement
-ii; Sheer ma!nitu"e of the misstatement
4M) $1(IANC1:
i; In .mission Cases: $eliance is presume"; Affiliate" Citi7ens
ii In Misstatement Cases: 'here are "ifferent tests:
4a) In a /AC1,'6,/AC1 '$ANSAC'I6N: P must show he #elie-e" the representation
an" that the misrepresentation cause" him to enter into the "eal;
4#) In an 6P1N &A$:1' '$ANSAC'I6N: $eliance is presume" un"er the C/rau" on
the &ar+et 'heoryD that all in-estors assume that the open mar+ets ha-e inte!rity; 'he
presumption can #e re#utte" #y se-erin! the lin+ #etween the misrepresentation an" the
price pai" #y P or his "ecision to tra"e at mar+et price; Basic
4c) SH6$' S1((1$S: %6 N6' ha-e presumption of C/rau" on the &ar+et 'heoryD
Slotnic+
4K) CA0SA'I6N
I 53%4#)4=) of B<=: P9s #ear #ur"en of showin! causation;
In face,to,face transactions CA0SA'I6N is presume" if "uty to "isclose is -iolate"
In 6pen &ar+et 'ransactions P9s must pro-e pro.imate causation an" "irect economic loss; Inflate"
purchase price will not alone pro-e causation; %ura Pharm;
43A) %A&AG1S
3A#,G: P #ears #ur"en of showin! "ama!es; 6nce that is pro-en #ur"en shifts to % to show why there
shoul" #e no "ama!es;
53%4e)43): %ama!es are cappe" at the "ifference #etween the purchase or sale price pai" or recei-e" an"
the mean tra"in! price of the security "urin! the KA "ays followin! a correction on the misstatement or
omission;
a; 6pen &ar+et %ama!es: Out o0 PocKet !amage. %iff; #etween price pai" an" -alue of the
securities;
#; /ace,to,/ace %ama!es:
i; Disgorgement: Pay #ac+ what you !aine" plus interest unless you can pro-e that
what you !aine" was not as a result of the frau" #ut rather as a result of other wor+ you
"i" to increase the -alue of what you !aine"; Pi"coc+
ii; !escission: Put the P #ac+ into the position he woul" ha-e #een in ha" he not entere"
the transaction i;e; !i-e the share #ac+ an" !et your money; 0se when the frau" is
e!re!ious or if out of poc+et is "ifficult; Garnat7
433) P$6P6$'I6NA'1 (IABI(I')
If %9s are foun" to ha-e committe" +nowin! frau" they are 2oint an" se-erally lia#le meanin! P can
collect from either % an" that % can sue the other % for his part;
If %Vs are foun" to #e $1C:(1SS the 2ury apportions lia#ility to each %;
o I 53%4f)4=): If a %efen"ant is Ban+rupt or cannot co-er the amount he has to pay or the
Plaintiff has net worth less than P5AA+ an" lost 3A? or more of his net worth the amount
the #an+rupt % coul" not pay is @oint an" Se-eral amon! the rest of the %9s; 1ach % can
#e lia#le for an increase of GA? o-er what they were lia#le 4so if you owe 5A? of the
"ama!es you coul" owe up to <A? of one % cannot pay;)

%. P"B#IC OFF5RINDS
S5P ) Choose 'ype of 6fferin!:
a; /irm Commitment: 0n"erwriter #uys all the shares from the company an" sells them to
institutions at a hi!her price; 0n"erwriters #ear all the ris+;
#; Best 1fforts: 0n"erwriter will ma+e #est efforts as sales a!ent for issuer #ut "oesn9t #uy
shares from issuer;
c; %irect Sale to the Pu#lic 8 Chances of frau" are hi!h;
"; %utch Auction 8 If you ha-e < shares 3 #i"s PG 3 #i"s P= 3 #i"s P< the issuer sells are shares
at P< since those that #i" P= an" PG will certainly #uy at P<;
S5P 2 8 !etermine Lhat Kind o0 i..uer you are $O" CAN B5 4OR5 6AN ) o0 65S5
a; Non,$eportin! : Issuer that is not require" to report un"er I 3< or I 3G4") of 9<= Act an" ha-e
not #een -oluntarily reportin!;
#; 0nseasone" Issuer : Issuer is require" to report un"er I 3< or I 3G4") #ut "oes not /ualify for
/orm S,<;
c; Seasone" Issuer : Rualifies for /orm S,<
"; *:SI : Rualifies for /orm S,< and either has 43) a minimum of PFAA million in common
equity hel" #y non,affiliates or 45) Has issue" P3 Billion or more of non,con-erti#le
securities within the past < years has a minimum of PFG million in capitali7ation hel" #y non,
affiliates;
*:SI %ISR0A(I/ICA'I6N 8 If the company is not current in its
reportin! in the past 35 months was a #lan+ chec+ or shell company in the
past < years or was an in-estment or "e-elopment company;
S5P = !etermine your Regi.tration Statement
)ou are su#2ect to Anti,/rau" (ia#ility un"er I 33 an" so #e careful;
43) FOR4 S3): A-aila#le to all issuers; &ust contain e-erythin! require" #y I F4a)
an" I M of 9<< inclu"in! 4a) 'ransaction relate" information 4i;e; price use of
procee"s un"erwriters etc;) 4#) company information 4c) e.hi#its an"
un"erta+in!s;
)our prospectus un"er S,3 only nee"s to contain company an" transaction
relate" information
45) FOR4 S3=: 6nly a-aila#le to companies reportin! for more than a year un"er the
9<= Act an" who ha-e PFG million or more in capitali7ation hel" #y non,affiliates;
&ay omit from re!istration statement an" prospectus Company Information
alrea"y file" with the S1C; Company filin! un"er this /orm can choose to not
!i-e a 3A,:;
4<) FOR4 SB329 Small #usinesses with re-enues un"er P5G million; (a. "isclosure
requirements;s
4=) FOR4 SB3)9 Small #usinesses with offerin!s of P3A million or less in a 35 month
perio"; (a. "isclosure requirements;
S5P (=/+ Incor1orate /y Re0erence MM I0 you Guali0y
If you qualify for /orm S,5 or S,< you can incorporate #y reference anythin! you file" to S1C at a prior
time;
S5P (=c+ A/ide /y Rule ;20@. te2t'0ont .iNe and /y Rule ;2)@. P#AIN 5ND#IS6
S5P ; PR53FI#IND P5RIO! ime Prior to 0iling o0 Regi.tration Statement
I; Be!ins: at the latest when the letter of intent with the 0n"erwriter has #een si!ne"; S1C
$elease G3MA
II; I = e.empts any Secon"ary mar+et transactions from these rules;
III; Prohi#ite":
I G: /I$S' "etermine if there has #een an instrumentality of interstate commerce;
a; Sale. , I Ga 8 No sales until $e!; Statement !oes 1ffecti-e
#; O00er. , I G4c) 8 No offers until $e!; Statement !oes 1ffecti-e; .-'0 APP'IES in P!E
1I'I-2 PE!I.D
i; An o00er i. an attem1t to o00er or .ell a .ecurity or intere.t in .ecurity.
I 54a)4<);
ii; An o00er i. anything that condition. the marKet 0or a 1u/lic o00ering. (oe#
iii; An o00er i. anything that arou.e. 1u/lic intere.t in the 1articular .ecurity
S1C $elease <M==
i-; An o00er i. anything that 0acilitate. the .ale o0 .ecuritie.. S1C $elease G3MA
c; SelectiAe !i.clo.ure. $e!; /%
= factors in "eterminin! whether somethin! is an offer:
43) Brea"th of proliferation 4i;e; is the a" only to customers 8 if
so pro#a#ly not an offer is it to in-estors 8 if so pro#a#ly
an offer etc; how #roa" is the a"-ertisin!?)
45) Any mention of the offerin! or un"erwriter
4<) Su""en chan!e in practice 4has the company not
historically release" this information #ut all of a su""en
"oes?)
4=) Contains Soft forwar" loo+in! information
I>; ISS01$ SA/1,HA$B6$S from I G4c) 6N()
QQQQ 3LM 3LK 3L< CANN6' B1 0S1% B) 0N%1$*$I'1$SQQQQ
a; 3L<A : A+AI'A#'E ). A'' Prior to <A "ays 4<A "ays N) to the filin! of the $e!;
Statement communications that "o not refer to the CofferD an" where the issue ta+es
reasona#le steps to ensure that the information will not #e "istri#ute" or pu#lici7e"
"urin! the <A "ays prior to filin! are permitte"; R5D F! still pre-ents Selecti-e
%isclosure;
#; $eportin! Issuer Safe,Har#or 8 3LM 8 $e!ularly release" in the or"inary course of
#usiness factual an" forwar" loo+in! information is permitte"; Not a-aila#le to
un"erwriters an" "ealers;
c; Non,$eportin! Issuer Safe,Har#or 8 3LK 8 $e!ularly release" in the or"inary course of
#usiness factual material only 41HC(0%1S /6$*A$% (66:ING IN/6) an" that
was "istri#ute" to customers an" suppliers in capacities other than as in-estors;
"; *:SI Safe Har#or 8 3L< 8 Allows *:SI to ma+e oral an" written communications that
ma+e offers an" that inclu"e information a#out the offer; 'hese communications are
calle" free-writing prospectuses an" must #e file" with S1C upon $e!istration Statement
filin! an" contain a le!en"
e; Short,/actual Safe Har#or , 3<G 8 I/ 0N%1$*$I'1$ IS I%1N'I/I1% 'HIS SA/1,
HA$B6$ %61S N6' APP(); Available to all inclu"ing issuer3 security hol"ers
selling in offering3 those 4orking on their behalf; Short communications which i"entify
the issuer anticipate" time of offerin! amount an" #asic terms;
N6N,A//I(IA'1% ANA()S' SA/1,HA$B6$
a; 3<F: Allows Bro+er,%ealers not in-ol-e" in the offerin! only to ma+e
recommen"ations in the or"inary course of #usiness only an" cannot recei-e any
consi"eration "irectly or in"irectly from the issuer an" are not consi"ere"
un"erwriters un"er I 54a)433) "efinition an" are therefore e.empt from I G4#) an" I
G4c) as per I =4a)4<);
A//I(IA'1% ANA()S' SA/1,HA$B6$
a; 3<M: Allows Bro+er,%ealers in-ol-e" in the offerin! of an S,< Company 6N() are
allowe" to "isseminate research on a company9s 4A) Common stoc+ "e#t an"
con-erti#le preferre" securities #ut only if the offerin! is for non,common stoc+
non,con-erti#le "e#t an" non,con-erti#le preferre" shares or 4B) Pro-i"e research
on non,common stoc+ non,con-erti#le "e#t an" non,con-erti#le preferre" shares
#ut only if the offerin! is for common stoc+ "e#t or con-erti#le preferre";
#; 3<K: Gets you out of I G4#) an" I G4c): Allows analyst wor+in! with the issuer on an
offerin! to comment on 1.chan!e Act $eportin! Issues; 5 'ypes:
a; 1or S& Companies: 'he opinionEresearch is "isseminate" in a pu#lication
"istri#ute" with Creasona#le re!ularity in the course of #usiness;D
#; 1or -.- S,< Companies:
i; 'he opinionEresearch is "isseminate" in a pu#lication "istri#ute"
with Creasona#le re!ularity in the course of #usiness;D
ii; Inclu"es a su#stantial W of other stoc+s
iii; %oes not !i-e the stoc+ a lar!er space than other stoc+s
i-; %oes not !i-e a more,fa-ora#le re-iew than the last time the
#ro+er recommen"e" any of the Issuer9s other stoc+ prior to the
#ro+er9s affiliation with the issuer;
S5P :9 3 7AIIND P5RIO! ime /etLeen 0iling o0 Reg. Statement and A11roAal
ROA!S6O7 ha11en.
I; I G4c) no lon!er applies an" offers are permitte";
II; P$6HIBI'1%:
a; Sale. , I G4a) still applies
#; Pro.1ectu. Re.triction9 I G4#)43) 8 Prohi#ite" to sen" out any writtenE#roa"cast prospectus
that "oes not meet the requirements of I 3AA or 3AB; 'o %1'1$&IN1 whether I G4#)43) has
#een -iolate":
i; (oo+ to see if what was maile" meets the "efinition of CProspectusD
un"er I 54a)43A): Any written prospectus circular note #roa"cast
or other written or #roa"cast information or C%9s we#sites
recor"e" info which is not li-e which offers a security for sale or
confirms the sale of a security; $ule =AG
ii; 0se the "efinition of CofferD a#o-e to see if the prospectus has ma"e
an offer i;e; con"itions mar+et; If so I G4#)43) has #een -iolate";
c; SelectiAe !i.clo.ure. Prohi#ite" un"er $e!; /%
III; P1$&I''1%:
a; Oral Communication. o0 an O00er 8 in a room o-er the phone $oa"show etc;
#; )0A Pro.1ectu. the prospectus file" with $e!; Statement
c; )0 B Pro.1ectu. L' #5D5N! 8 $ule =<A 8 preliminary prospectus wE (e!en" warnin! that
securities may not #e sol";
"; Real ime Broadca.t in0ormation. G?A i. the Fey 8 $ule =AG
e; om/.tone Ad. 8 I 54a)43A)4#) 8 a communication that only i"entifies the security the price
an" un"erwriter so long as the 5$6 Preliminary or 1inal prospectus is ma"e available%
f; Free 7riting Pro.1ectu. $ules 3L= T =<<; By "efinin! these as a 3AB Prospectus you
!et out of I G4#)43):
= 'ypes of /*P:
43) Issuer /*P
45) Issuer !i-es info to 0n"erwriter to ma+e /*P
4<) 0n"erwriter /*P which is #roa"ly "isseminate"
4=) =<<4m): &e"ia free,writin! prospectus where &e"ia person is not affiliate" with
0n"erwriter
i; Any written #roa"cast C% we#site etc; communication that offers to sell
a security or solicits to #uy 4use "efinition of CofferD to see if you e-en nee"
this e.ception) a security su#2ect to $e!; Statement requirements;
ii; 1(IGIBI(I') :
3; Non Seasone" : &ust ha-e file" $e!; Statement; &ust inclu"e a
3AA or 3AB prospectus or #e prece"e" #y a mailin! of a 3AA or
3AB; 6nce 3AA or 3AB is sent any free,writin! is permitte" so
lon! as there is no material chan!e from 3AA or 3AB prospectus;
Inclu"e a le!en" as to where $e!; StatementE3AA or 3AB can #e
foun" of not accompanyin!;
5; *:SIESeasone" 8 &ust ha-e file" $e!; Statement No nee" to
pro-i"e or prece"e with 3AA or 3AB prospectus; Inclu"e a le!en"
as to where $e! Stat; can #e foun";
/*P isn9t part of the formal re! statement an" isn9t su#2ect to potential 33 antifrau" lia#ility #ut its
still a Cpu#lic communicationD un"er $ule =<<4a) for purposes of 354a)45) antifrau" lia#ility
pursuant Gustafson;
I>; ISS01$ SA/1 HA$B6$S
a; Q 3<= p;<G: Allows e.pan"e" tom#stones i;e; written communications on an offer
an" e.clu"es you from the "efinition of prospectus un"er I 54a)43A) so lon! as:
iii; *hat9s inclu"e" is specifically allowe" un"er I 3<=;
i-; (e!en" is inclu"e"
-; )ou e.plain who the un"erwriter is an" where you can o#tain a preliminary
Prospectus
QQ 3<=: I0 a Preliminary Pro.1ectu. is inclu"e" in the communication you can "o
the followin! in a""ition to the a#o-e:
-i; )ou can see+ solicitation of interest from sharehol"ers -ia a return car"
-ii; )ou "on9t nee" to inclu"e a le!en"
QQ 3<=: A re!ular tom#stone a" "oes not nee" a le!en"Einformation on o#tainin!
preliminary prospectus
#; 3<G: Short factual communications that "on9t mention the un"erwriter
c; 3LM: !eporting Issuers: 6r"inary Course factual information an" forwar" loo+in!
statements
"; 3LK: -on!eporting: 6r"inary course factual info 1HC1P' forwar" loo+in!
statements
N6N,A//I(IA'1% ANA()S' SA/1,HA$B6$
#; 3<F: Allows Bro+er,%ealers not in-ol-e" in the offerin! only to ma+e
recommen"ations in the or"inary course of #usiness only an" cannot recei-e any
consi"eration "irectly or in"irectly from the issuer an" are not consi"ere"
un"erwriters un"er I 54a)433) "efinition an" are therefore e.empt from I G4#) an" I
G4c) as per I =4a)4<);
A//I(IA'1% ANA()S' SA/1,HA$B6$
c; 3<M: Allows Bro+er,%ealers in-ol-e" in the offerin! of an S,< Company 6N() are
allowe" to "isseminate research on a company9s 4A) Common stoc+ "e#t an"
con-erti#le preferre" securities #ut only if the offerin! is for non,common stoc+
non,con-erti#le "e#t an" non,con-erti#le preferre" shares or 4B) Pro-i"e research
on non,common stoc+ non,con-erti#le "e#t an" non,con-erti#le preferre" shares
#ut only if the offerin! is for common stoc+ "e#t or con-erti#le preferre";
"; 3<K: Gets you out of I G4#) an" I G4c): Allows analyst wor+in! with the issuer on an
offerin! to comment on 1.chan!e Act $eportin! Issues; 5 'ypes:
a; 1or S& Companies: 'he opinionEresearch is "isseminate" in a pu#lication
"istri#ute" with Creasona#le re!ularity in the course of #usiness;D
#; 1or -.- S,< Companies:
i; 'he opinionEresearch is "isseminate" in a pu#lication "istri#ute"
with Creasona#le re!ularity in the course of #usiness;D
ii; Inclu"es a su#stantial W of other stoc+s
iii; %oes not !i-e the stoc+ a lar!er space than other stoc+s
i-; %oes not !i-e a more,fa-ora#le re-iew than the last time the
#ro+er recommen"e" any of the Issuer9s other stoc+ prior to the
#ro+er9s affiliation with the issuer;

S5P 69 DO 5FF5CI%5
I M4a): $e! Stat; !oes effecti-e 5A "ays after filin!; Issuers usually request "elay un"er $ule =F<; Any
Amen"ment to the $e!; Stat; resets the 5A "ay count"own un"er I M4a);
S5C OSto1 Order@9 0n"er I M4#) if the $e! Stat; is incomplete or inaccurate in any material aspect
the S1C can halt the process; 0n"er I M4") if any material fact or material omission is ma"e the S1C
can halt it as well;
S5P P9 POS35FF5CI%5 P5RIO!
I; P$6HIBI'1%:
a; Sale. not accom1anied'1receded Lith a )0A (i.e. Lith Price+ 1ro.1ectu.; G4a)45) T G4#)45)
#; 7ritten'Broadca.t in0ormation not accom1anied'1receded /y )0A (i.e. Lith Proce+
1ro.1ectu.. 54a)43A)4a) an" G4#)43)
c; !eliAery o0 .hare. not accom1anied'1receded /y a )0A
II; P1$&I''1%
a; Sale. accom1anied'1receded /y )0A (i.e. Lith Price+
#; 7ritten'Broadca.t in0o accom1anied'1receded /y )0A i.e. Lith Price.
c; !eliAery o0 .hare. accom1anied'1receded /y a )0A
"; BroKer3!ealer.9 Can sen" out sales information if accompanie" #y 3AA 4i;e; with Price)
III; %1(I>1$ the P$6SP1C'0S
$ule =<AA: Issuer may file final Prospectus without the Price #ut a!ree" to file post,effecti-e price as
per Item G354i) of $e!; S,:;
ACC1SS 1R0A(S %1(I>1$) $ule 3F5
ISS01$ : All Sales Communications must #e accompanie" #y a 3AA prospectus un"er I G4#)
inde0initely;
6$IGINA( A((6'&1N' B$6:1$SE%1A(1$S : I =4<)4c) , Bro+er,"ealers must "eli-er a
prospectus for any of the ori!inal allotment inde0initely;
0N%1$*$I'1$S 8 An 0n"erwriter still affiliate" with the Issuer must "eli-er a prospectus
inde0initely e-en after the allotment has #een sol"; I =4<)
B$6:1$S : Bro+ers tra"in! for their customers "on9t nee" to "eli-er a prospectus I =4=)
%1A(1$S T /6$&1$ 0N%1$*$I'1$S , 1HC1P'I6NS i;e; "on9t require 3AA "eli-ery :
I =43): Any Secon"ary &ar+et transactions;
I =45): 'ransactions #y an issuer not in-ol-in! an offerin!
I =4<): 'ransactions #y a "ealer any former un"erwriter for the issuer or other
securities firm "o not require "eli-ery on the followin! time frame followin!
$e!; Stat; filin! #y the issuer:
If Issuer is !eporting: A %ays after filin!
Issuer 'iste" on -at7l E(change but seasone": 5G "ays
Issuer not liste" but has issue" in the past: =A "ays
Issuer involve" in an IP.: KA "ays
A post,effecti-e amen"ment price is consi"ere" to ha-e #een file" with the $e!; Stat at the ori!inal
time for purposes of I 33 frau" lia#ility;
1ach time an amen"ment is ma"e to the $e!; Statement the time perio" for frau" un"er I 33 resets;
I>; SH1(/ $1GIS'$A'I6N
$ule =3G , Companies CPre,$e!isterD shares #ecause they want to "o a num#er of issues o-er a perio"
of time #ut "on9t want to ha-e to re,$e!ister e-ery time;
F con"itions lai" out in =3G:
3; 6nly certain types of securities qualify =3G4a)43)
Securities offere" or sol" #y someone other than the $e!istrant it9s affiliates;
=3G4a)43)4i);
Securities to #e issue" upon con-ersions of other securities =3G4a)43)4i-)
Securities which are offere" promptly are sol" on a continuous #asis an" will
#e sol" passe" <A "ays from the initial effecti-eness; =3G4a)43)4i.)
Securities re!istere" un"er S3= which are to #e sol" #y the $e!istrant or on
#ehalf of the $e!istrant continuously an" on a "elaye" #asis; =3G4a)43)4.)
5; NON S3= $e!istrants ha-e a 5 year shelf life if their shares are of the types liste" in =3G4a)43)
4-iii) an" 4i.) from "ate of initial effecti-eness;
<; 0n"erta+e e-erythin! in Item G354a)
=; CAt the &ar+etD If Issuer offers to sell shares at whate-er the mar+et price is an" is unfi.e"
the shares must ha-e satisfy =3G4a)43)4.) 1.<;;
G; Asi"e from W5 shares ha-e shelf,life of = year.;
L; G35: &ust up"ate Prospectus if there is any Cfun"amental chan!e;D
F; /ile a CBase ProspectusD pursuant to =<AB
>; 0P%A'1ECHANG1 the P$6SP1C'0S when N1C1SSA$)
a; P6S',1//1C'I>1 A&1N%&1N' 8 any su#stanti-e chan!es from or a""itions to the
Prospectus must #e file" un"er =5=4a) as a post,effecti-e Amen"ment;
#; &IN6$ CHANG1S 8 Any minor chan!es can simply #e Cstic+ere"D as per =5=4#);
c; Prospectus more than K months ol": )ou can use the same prospectus so lon! as it9s still part of
the ori!inal offerin!; Cannot contain information ol"er than 3L months if the information is
+nown to the issuer an" can #e pro-i"e" without much e.pense; I 3A4a)4<);
"; A-oi" /rau" 8 )ou9ll want to up"ate to a-oi" 3A#,G or I 354a) lia#ility
e; Shelf $e!istration 8 must up"ate if there9s any Cfun"amentalD chan!e; G35
%I. P"B#IC OFF5RIND ANI3FRA"! 0or R5DISRAION SA545N
C )) pro-i"es for anti,frau" lia#ility for any material .tatement or material omi..ion in the $e!istration
Statement;
As per Hu""leston a plaintiff can sue un"er #oth I 33 I 35 an" I 3A#,G #ut there are "ifferent
requirements; P9s want to #rin! I 33 cases rather than 3A#,G #ecause of the strict lia#ility no reliance
require" % has to pro-e %ue %ili!ence an" % must pro-e (oss Causation;
S5P 09 6a. the Pu/lic O00ering Proce.. /egun yet8
S5P )9 7a. there a material mi..tatement or material omi..ion in the Regi.tration Statement8
0se the "efinition of CmaterialityD a#o-e; Also see if the company is pu#lic an" if it9s sellin! a Csecurity;D
S5P 29 !etermine Lhether you haAe .tanding to .ue.
A##ey : H6(%ING: 6nly those who purchase" stoc+ an" who can ha-e their shares trace" to the
offerin! ha-e stan"in!; Shares co,min!le" with ol" shares in a trust "o not !i-e the whole trust
stan"in!;
I 334a): If the issuer has ma"e an earnin!s statement co-erin! at least 35 months after
effecti-eness you nee" to show that you relie" on the material misstatement or omission when
you #ou!ht the shares; )ou nee" not ha-e rea" the $e!; Statement to pro-e $eliance;
S5P =9 7ho can you .ue8
I 334a): Anyone who si!ne" the $e!; Statement inclu"in! the Issuer C16 C/6 etc; see I L4a)
I 334a)45)4<): %irectors
I 334a)45)4<): Partner in the issuer whose lia#ility is asserte"
I 334a)4=): Accountant 1n!ineer Appraiser other e.perts who ha-e prepare" a specific portion
for or certifie" a specific part of the $e!; Statement
I 334a)4G): 0n"erwriters
I 3G: Any person controllin!
S5P ;9 I. your Statute o0 #imitation. u18
)ou must file within 3 year of "isco-erin! the frau" or within < years of the $e!; Statement !oin!
effecti-e;
S5P :9 PRO%5 the 5#545NS
&ust ha-e #een a &aterial &isstatement; 4No reliance no causation no scienter require" unless issuer
has ma"e an earnin!s statement co-erin! at least 35 months in which case you ha-e to pro-e reliance; I
334a);
S5P 69 !O 65 !@. haAe any !5F5NS5S8
43) Actual :nowle"!e: Show that the P9s +new a#out the frau" yet purchase" anyhow or show that the
mar+et alrea"y +new a#out the frau";
QQQQN;B; ISS01$S CANN6' 0S1 'H1 /6((6*ING %1/1NS1SQQQQ:
45) $esi!nation: If the % resi!ne" hisEher office #efore the effecti-e "ate of $e!istration an" a"-ise" the
S1C that he "oes not ta+e responsi#ility for the $e!; Statement; I 334#)
4<) Pu#lic Notice: If % !a-e reasona#le pu#lic notice as to the particular portion of the $e!; Statement;
I334#);
4=) (oss Causation: If % can show that somethin! other than the frau" cause" the loss to the purchaser
I334e); In Ac+erman the price actually increase" after the frau"
4G) %ue %ili!ence %efense:
QQQ N6' A>AI(AB(1 to ISS01$S 1HC1P' for S,< ISS01$SQQQ
For Experts: Cannot #e lia#le for non,e.pert section I 334a)4=); /or e.pert sections he can
escape lia#ility #y showin! that he "i" reasona#le in-esti!ation as per $ule 3FL an" as require" #y
his profession 1scott that there were !roun"s to #elie-e an" that he "i" in fact #elie-e somethin!
to #e true; I 334#)4<)4B);
For Non-Experts including Underwriters, Form S-3 Issuers, Inside/Outside Directors: /or
non,e.pert sections he can escape lia#ility #y showin! that he "i" reasona#le in-esti!ation as per
$ule 3FL that there were !roun"s to #elie-e an" that he "i" in fact #elie-e somethin! to #e true;
I 334#)4<)4A); /or e.pert sections he can escape lia#ility #y showin! that there were reasona#le
!roun"s to #elie-e an" he "i" in fact #elie-e somethin! to #e true; I334#)4<)4c); N6
IN>1S'IGA'I6N IS N11%1% /6$ 1HP1$' S1C'I6NS 0N(1SS 'H1$1 is a $1% /(AG;
In re *orl"com
S5P P9 CO##5C !A4AD5S
Step I; &easure %ama!es: 'he "ifference #etween what P pai" an" one of the followin!:
4a) If P still owns shares -alue of shares at time of filin! suit
4#) If P sol" the shares -alue of shares when they were sol"
4c) If P sol" after filin! #ut #efore 2u"!ment resale price if that price was
hi!her than the price at the time of filin!;
Step II; &eanin! of >alue: Beecher: &ar+et >alue is some e-i"ence of fair -alue; P9s nee" N6'
miti!ate "ama!es to %;
Step III; %etermine How much each % will pay
a; Start with Qoint and SeAeral #ia/ility 4P can collect from any % an" % can sue
other %9s for reim#ursement; I 33
a; 0n"erwriter Cappe" lia#ility at total -alue of amount un"erwritten an"
"istri#ute"; I 334e)
#; 6utsi"e %irectors pay Proportional (ia#ility if they can show they ha" no
+nowle"!e of the lia#ility; I 334f)45)4A)
%II. P"B#IC OFF5RIND ANI3FRA"! 0or D"N3Q"4PIND %IO#AIONS
S5P 09 6a. the Pu/lic O00ering Proce.. /egun yet8
S5P )9 7a. there a Aiolation o0 any Rule. during the Regi.tration Proce..8
S5P 29 C6OOS5 6O7 $O" 7AN O 4AF5 654 #IAB#5
')P1 A: I 354a)43) for any -iolations of I G such as sellin! offerin! etc; "urin! the $e!istration
process at an inappropriate time;
i; P9s are anyone who purchase shares while issuer was -iolatin! I G;
ii; % can #e anyone who solicit sales for themsel-es or the issuer ; Pinter
iii; % %efenses : 6nly that 3 year has passe" since the "isco-ery of the
-iolation or if < years since 1ffecti-eness has passe";
i-; 1(1&1N'S : P only has to show a I G -iolation occurre"
-; %A&AG1S : $escission if the stoc+s were sol" an" then the "ifference
#etween the purchase an" sale price;
')P1 B: I 354a)45) for any &aterial &isstatements or 6missions in a C )0 PROSP5C"S or
ORA# CO44"NICAIONS R5#A5! to a PROSP5C"S ON#$
Step I; %etermine if the &isstatementE6mission was &aterial if a Security is #ein! sol"
an" if the company is Pu#lic;
Step II; )ou can only use this section in a Pu/lic O00ering; Gustafson
Step III; )ou can only use this section if there was a Pro.1ectu. !eliAery reBuirement
an" you can de0initiAely trace the .hare. to the offerin!. H4o.t #iKelyI "oes not count;
In re >alence
Step I>; 'he shares must ha-e #een purchase" "irectly from Issuer; Hert7#er!er
Step >; S'A'0'1 6/ (I&I'A'I6NS: 3E<; I 3<
Step >; %etermine if the material misstatementEomission was ma"e in connection with a
I 3A Prospectus or if the statements were ma"e orally; Gustafson
Step >I; % can #e anyone who solicit sales for themsel-es or the issuer or who Control
the issuer I 3G e2ce1t aider. and a/ettor. Pinter
Step >II; P$6>1 'H1 1(1&1N'S:
i; 'here was a misstatement or omission in the I 3A Prospectus or in an 6ral
Communication relate" to a Prospectus;
ii; Instrumentality of Interstate Commerce was use"
iii; CBy &eans ofD: Show that P purchase" shares #y some causation of the
misstatement; No nee" to show reliance; Showin! that there9s a mar+et for the
shares seems to #e sufficient; San"ers
Step >III; %9s %1/1NS1S
i; P9s ha" actual +nowle"!e of the frau" an" #ou!ht shares anyhow;
ii; (oss Causation: If % can show that somethin! other than the frau" cause" the loss
to the purchaser I334e); In Ac+erman the price actually increase" after the frau"
iii; %9s "i" not +now an" in the Ce.ercise of rea.ona/le careD coul" not have kno4n
a#out the misstatement or omission;
*hether an actual in-esti!ation is require" "epen"s on the circumstances
#ut an 0n"erwriter woul" pro#a#ly ha-e to "o a reasonable investigation
of the issuer; San"ers
Step IH; %ama!es
$escission "ama!es
%III. PRI%A5 P#AC545NS (5J54P OFF5RINDS+
Companies "o Pri-ate Placements to escape I G the Gun @umpin! $ules I 33 an" I 35 lia#ility etc;
QQQQ >I6(A'ING 6N1 ')P1 6/ 1H1&P' 6//1$ING %61SN9' P$1C(0%1 )60 /$6&
0SING AN6'H1$QQQQ
H6* '6 %1'1$&IN1 I/ S6&1'HING IS AN 1H1&P' 6//1$ING:
Step 3: CH66S1 an 1H1&P' 6//1$ING 46N1 or B6'H)
')P1 A: I =45) e.empts offerin!s #y an Issuer in-ol-e" in a NON3Pu/lic O00ering
I; Are you an Issuer? : Issuer is clearly "efine" in I 54a)4=)
II; Are you "oin! a non31u/lic offerin!? %epen"s on wei!ht of a num#er of factors the :1) is
the 6fferees not the ultimate purchasers:
a; %o the 6fferees nee" the protection of the 9<< Act? 'he more sophisticate" the offerees
the more li+ely it9s non,pu#lic; $alston
#; 6fferees ha" access to All Information; 5 ways to show:
i; 6fferees ha-e close relationship to Issuer; %oran
ii; 6fferees !ot information usually inclu"e" in $e!; Statement from Issuer; %oran
c; W of 6fferees: 'he fewer the 6fferees the more li+ely non,pu#lic; $alston
"; A#sence of resales: the less people resellin! their shares the more li+ely non,pu#lic;
e; 6ther factors that ma+e the offerin! seem pu#lic such as PPP amount of offerin! 4the
smaller the more li+ely non,pu#lic) how it was a"-ertise" etc;
')P1 B: I <4#) allows the S1C to create e.emptions for PRI%A5 P#AC545NS for whom the
Securities (aws are not nee"e" an" who issue un"er PG million; 'he S1C create" $1G0(A'I6N % which
lists who is consi"ere" a H.mall i..uer'1riAate 1lacementI an" therefore e.empt from the Securities
(aws; 'here are a num#er of companies here:
$0(1 GA= $0(1 GAG $0(1 GAL
Rule :0= requires issuers to file a Form ! with the S1C;
i; It contains 2ust #asic i"entifyin! information 4note" on pa!e
GM=)
ii; Ha-e until the 3G
th
"ay after the start of the offerin! to file
iii; 'here are no imme"iate penalties #ut Rule :0P says an
issuer may not use Regulation ! if it is su#2ect to an or"er
2u"!ment or "ecree #y any court for -iolatin! Rule :0=;
Rule :0: %isqualification: has it9s own "isqualification statue in
Rule :0:(/+(2+(iii+ references Rule 262 of Regulation A
a#sent a reprie-e if the issuer a "irector or !eneral partner of the
issuer or an un"erwriter has #een in-ol-e" in -iolation of the
securities law then the issuer is "isqualifie" from usin! Rule :0:;
I; 1HC(0%1%
ISS01$S
Q <= $eportin! Co;
Q In-stEShell Co;
Q In-st; Co
Q 0nworthy 6fferin!s
$ule 5L5
Q N6 1HC(0SI6NS
II; &AH A((6*AB(1
6//1$ING >A(01 in
35 &6N'H P1$I6%
P3 millionE35 months
inclu"es any shares
offere" pursuant to !eg
D nd any shares
offere" in violation of
5 8
PG millionE35 months
inclu"es any shares
offere" pursuant to !eg
D nd any shares
offere" in violation of
5 8
N6 (I&I'
III; &AH W of
P0$CHAS1$S
A((6*1%
N6 (I&I' <G Non,Accre"ite"
Purchasers
'he <G "oes not inclu"e:
a; GA34e)43)4i):
$elati-es Spouse or
relati-e of Spouse who
li-es in the same
resi"ence as the
purchaser
#; GA34e)43)4i-)
Accredited InAe.tor.
!e0ined a.9
()+ (ar!e Institutional
#uyers with Assets o-er
PG million GA34a)
(2+ %irector 6fficer GP
of the Issuer; GA34a)4=)
(=+ Any personEcouple
with assets o-er P 3
million; GA34a)4G)
(;+ Any person who
ma"e P5AA+ in the past
5 years 4or P<AA+ wE
spouse) an" has
reasona#le e.pectation
of ma+in! the same this
year; GA34a)4L)
<G Non,Accre"ite"
Purchasers
'he <G "oes not inclu"e:
a; GA34e)43)4i):
$elati-es Spouse or
relati-e of Spouse who
li-es in the same
resi"ence as the
purchaser
#; GA34e)43)4i-)
SO!"IS#I$%#ED
Accredited InAe.tor.
!e0ined a.9
()+ (ar!e Institutional
#uyers with Assets o-er
PG million GA34a)
(2+ %irector 6fficer GP
of the Issuer; GA34a)4=)
(=+ Any personEcouple
with assets o-er P 3
million; GA34a)4G)
(;+ Any person who
ma"e P5AA+ in the past 5
years 4or P<AA+ wE
spouse) an" has
reasona#le e.pectation
of ma+in! the same this
year; GA34a)4L)
X
Y X E
*H6 the ISS01$
R5ASONAB#$
B5#I5%5S are
S.PHIS)ICA)ED
GAL4#)45)4ii)3
!5FIN5! AS9 Csuch
+nowle"!e in financials
an" #usiness that he is
a#le to e-aluate
meritsEris+s of the
in-estmentD:
Issuers must
rea.ona/ly /elieAe the
in-estor to #e
sophisticate" usin!
factors such as: *ealth
income e.perience
current in-estments
results on in-estment
test e"ucation etc;
I>; AN)
S6(ICI'A'I6N
1HC1P'I6NS? General
Solicitation i;e; a"s
notices
communications
seminars etc; are N6'
A((6*1% un"er $ule
GA54c)
Solicitation allowe"
only if Issuer sells in
State that pro-i"es for
$e!istration un"er State
laws; GA=4#)43)4i),4iii)
N6 S6(ICI'A'I6N
A((6*1%
N6 S6(ICI'A'I6N
A((6*1%
>; %1'1$&INING
ACC1P'AB(1
S6(ICI'A'I6N for
A(( ')P1S
3; If Issuer an" In-estors ha-e a #usiness r9ship where the Issuer +nows the
In-estor9s financials an" e.pertise it9s not consi"ere" Solicitation
5; :enman: Callin! people from L ar#itrary recor"s an" not +eepin! recor"s is
still solicitation;
<; &ineral (an" No Action (etter: Sheer Num#er of contacts ma"e "oesn9t
necessarily mean solicitation thou!h the hi!her the W the more li+ely it9s
solicitation;
>I; CAN SHA$1S B1
$1S6(%?
Allowe" only if Issuer
sells in State that
pro-i"es for
$e!istration un"er State
laws an" complies #y
the laws; GA=4#)43)4i),
4iii)
N6 GA54") N6 GA54")
>II; SH60(%
IN'1G$A'I6N
$1S'$IC'I6NS
APP()? 8 &ultiple
6ffers are sometimes
consi"ere" sin!le offers
#rin!in! the Issuers
a#o-e the &a.imum
amounts an" un"er I G
lia#ility;
I G;5 /actors use" to "etermine if separate offers shoul" #e treate" as one
transaction:
i; *hether sales are part of a sin!le plan of financin!
ii; *hether sales in-ol-e the issuance of the same class of securities
iii; *hether the sales ha-e #een ma"e at or a#out the same time
i-; *hether the same type of consi"eration is recei-e"
-; *hether the sales are ma"e for the same !eneral purpose
:02 SAF5 6ARBOR: creates safe har#or a!ainst inte!ration for offers sol" L
months #efore an" L months after the $e! % offerin!;
>III; SA/1 HA$B6$ 8
$ule GAM
>iolatin! GA= GAG an" GAL "oesn9t necessarily mean you fall un"er I G; )ou
can ma+e in.igni0icant mi.taKe. an" still use these sections un"er Safe Har#or
$ule GAM so lon! as a Creasona#le an" !oo" faith effort to complyD was ma"e;
CA>1A'S:
43) 6nly !ets you out of Pri-ate actions; S1C can still penali7e youJ and
45) 6nly applies if -iolation is insi!nificant compare" to the offerin! as a
whole
4<) 6nly applies if noncompliance "i" not un"ermine the protection a-aila#le
to the issuer
4=) 6nly applies if the mista+e i. not -iolatin! !eneral solicitation &a.
Allowa#le 6fferin! P or &a. W of In-estors allowe";
In0ormation !i.clo.ure: Comple. 8 see ta#le #elow an" accompanyin!
notes:
Non3Accredited InAe.tor. Accredited InAe.tor.
Rule :0; No Specific information
"isclosure requirement
No Specific Information %isclosure
$equirement
Rule :0: or Rule :06 Specific %isclosure
$equirements as specifie" in
Rule :02(/+(2+
No Specific Information %isclosure
$equirement
/or Rule :0: or Rule :06 offerin!s in-ol-in! a non,accre"ite" in-estor the type of "isclosure man"ate"
un"er Rule :02(/+(2+ then -aries #ase" on: 43) the type of issuer an" 45) the si7e of the offerin!:
Non352change Act Re1orting
Com1any
52change Act Re1orting
Com1any
6fferin!s "1 to R2 4illion Non,financial info un"er Rule
:02(/+(2+(i+(A+
/inancial Info un"er Rule :02(/+(2+
(i+(B+()+
Rule :02(/+(2+(ii+
6fferin!s "1 to RP.: 4illion Non,financial info un"er Rule
:02(/+(2+(i+(A+
/inancial Info un"er Rule :02(/+(2+
(i+(B+(2+
Rule :02(/+(2+(ii+
6fferin!s OAer RP.: 4illion Non,financial info un"er Rule
:02(/+(2+(i+(A+
/inancial Info un"er Rule :02(/+(2+
(i+(B+(=+
Rule :02(/+(2+(ii+
In0ormation 0or 52change Act Re1orting I..uer.: Rule :02(/+(2+(ii+ Issuer may either pro-i"e (A+ a
com#ination of the most recent annual report the "efiniti-e pro.y statement an" 4if requeste" #y the
purchaser in writin!) the most recent Form )03F 4or similar S1C filin! containin! information a#out the
issuer 4Rule :02(/+(2+(ii+(A+) or (B+ the most recent Form )03F 4or other similar S1C filin! containin!
information on the issuer 4Rule :02(/+(2+(ii+(B+);
In either case issuers must also "isclose any more recent S1C filin!s since the information pro-i"e" un"er
the rule an" must pro-i"e Ca #rief "escription of the securities the use of the procee"s from the offerin!
an" any material chan!es in the issuer9s affairs that are not "isclose" in the "ocuments furnishe"; Rule
:02(/+(2+(ii+(C+
In0ormation 0or Non352change Act Re1orting I..uer.: Rule :02(/+(i+(A+ pro-i"es for the same non,
financial "isclosure re!ar"less of the si7e of the offerin! ma+es reference to the Csame +in" of
informationD foun" in Part I of the re!istration statement use" in a pu#lic offerin!;
'he offerin! amount #ecomes important for the financial information "isclosure for non,1.chan!e Act
reportin! companies as note" a#o-e with the correspon"in! rule;
IJ. R53SA#5S in S5CON!AR$ 4ARF5
C ;()+ e.empts transactions from the Securities (aws #y anyone other than i..uer- underLriter- or
dealer.
S'1P 3: %61S 'H1 '$ANSAC'I6N IN>6(>1 AN) 6N1 6/ ISS01$ 0N%1$*$I'1$ 6$
%1A(1$ /6$ !ISRIB"ION OF 65 SOCF? I/ )1S 'HIS 1H1&P'I6N %61S NO APP()
"N#5SS $O"@R5 A !5A#5R CO4P#$IND 7I6 );;A(!+; I/ N6 &6>1 6N '6 S'1P 5;
43) Issuer: "efine" in I 54a)4=)
45) %ealer: "efine" in I 54a)435) as professional #uyin! shares for hisEher own account
4<) 0n"erwriter: "efine" in I 54a)433) as an" person who purchase" securities with:
a; A AieL to offer or sell in connection Lith a di.tri/ution for an issuer
#; Actually offers or sells in connection Lith a di.tri/ution for an issuer
S'1P 5: A$1 )60 AN 0N%1$*$I'1$?
Gilli!an : H6(%ING: A person who #ou!ht shares an" then resol" them on the A&1H or for speculation
is an un"erwriter unless he coul" show that his initial purchase was for in-estment #ut circumstances
!enuinely chan!e" his min" an" force" him to sell;
Gilli!an: A(S6 if purchaser ha" information or ha" access to information from the Issuer that woul"
!enerally #e in a $e!; Statement the 1H1&P'I6N cannot #e use"; $elyin! on $alston
Chinese Consoli"ate" : H6(%ING: Purchaser is an un"erwriter if he has a AieL to offer or sell for an
issuer regar"less of the purchaser9s moti-es;
Ac+er#er!: $ule of 'hum# After 5 years of hol"in! an in-estment there9s a re#utta#le presumption that
you ori!inally #ou!ht for in-estment purposes; After < years it9s #asically confirme" that you #ou!ht for
in-estment an" not "istri#ution;
S'1P <A: A$1 )60 $1S'$IC'1% /$6& S1((ING )60$ SHA$1S?
If you #ou!ht your shares in a I =45) or $e! % offerin! you cannot sell you shares in the secon"ary mar+et
4unless you meet I 3==A 1.emption #elow)
S'1P <B: IS 'H1$1 A CC6N'$6(D P1$S6N IN>6(>1% S1((ING 'H$60GH AN
IN'1$&1%IA$)? I/ )1S 1H1&P'I6N CANN6' B1 0S1% 0N(1SS )60 &11' 'H1 I 3==A
1H1&P'I6N B1(6*; I/ N6 S:IP 'HIS S'1P;
4I) Anyone who CcontrolsD the issuer cannot "istri#ute shares with the help of any intermediary
without re!isterin! them #ecause the interme"iary will #e consi"ere" an un"erwriter since an Issuer is
"efine" in I 54a)433) as someone who controls the issuer as well; *olfson
Summary: 'wo Step Inquiry
a; As+ whether the control person was actin! as an un"erwriter for
the issuer? 4for in-estors that are not control persons this is
the only inquiry)
#; As+ whether an interme"iary assistin! the control person in the
resale is actin! as an un"erwriter for the control person
S'1P =: CAN )60 R0A(I/) /6$ 'H1 I =43 Z) 1H1&P'I6N?
'he $esale of securities ori!inally purchase" un"er I =45) or $1G % an" then resol" is not a C"istri#utionD
an" hence the reseller "oes not ha-e the un"erwriter status an" any interme"iary is neither a "ealer nor
0n"erwriter;
S'1P G: IS 'H1$1 AN) *A) /6$ A C6N'$6( P1$S6N E 6'H1$ $1S'$IC'1% SHA$1S '6
S1(( HIS S1C0$I'I1S un"er 3==A?
4I) Complyin! with 3==A ma+es your transaction not a "istri#ution an" hence the reseller cannot
#e an un"erwriter an" !ets the I =43) $esale 1.emption;
4II) H6* '6 C6&P():
a; 3==c: Current Pu/lic In0ormation a/out the I..uer mu.t /e made aAaila/le
i; /or $eportin! Companies: information is Ca-aila#leD if the company has
#een a Creportin!D company for KA "ays or Issuer is current for the last 35
months;
ii; /or Non,$eportin! Companies: information is Ca-aila#leD if the info in rule
$ule 3Gc5,334a)4G)4i),4.i-) is ma"e a-aila#le
#; 3==": 6olding Period9 &ust ha-e #een in the a!!re!ate for 3 year 4i;e; a "onor9s time
is tac+e" on to the recipients hol"in! perio" if the shares are !i-en as a !ift;)
Q N6 hol"in! perio" for C6N'$6( people sellin! 0N$1S'$IC'1% shares;
c; 3==e: Guantity #imitation: within a < &onth Perio" the greater of the followin!
may #e sol":
i; 3? of the outstan"in! shares of the class you want to sell
ii; A-era!e -olume on all Nat9l 1.chan!es for the = wee+s prior to your sale;
"; 3==A: File Lith the S5C 8 file form 3== an" requires sellers to "isclose their
i"entity their relationship with the issuer the "ate an" nature of the acquisition
transactions throu!h which the seller o#taine" the securities to #e sol" information on all
securities of the issuer that the seller has sol" in the past three months an" the name an"
a""ress of each #ro+er an" mar+et ma+er throu!h whom securities are to #e sol";
Q N6 N11% '6 /I(1 *I'H 'H1 S1C if within < months the reseller sells
GAA or less shares -alue" at P3AAAA or less;
e; 3==4f): Sell your .hare.9 either throu!h an Cunsolicite" #ro+er transactionD un"er I
=4=) or on the open mar+et throu!h a &ar+et &a+er "efine" in I <4a)4<M);
f; Re3Re.ale.: Securities sol" to a RIB continue to #e restricte" until 3 year is up;
S'1P L: I/ )609$1 N5I65R A CONRO# P5RSON NOR R5SRIC5! OR )609$1 A
!5A#5R H1$19S H6* '6 S1(( )60$ SHA$1S 0N%1$ 3==A:
3; &a+e your offer or sale to a Rualifie" Buyer "efine" as an entity in-estin! P3AA million or more in
shares not affiliate" with the Rualifie" Buyer 3==A4")43)
5; Seller or Seller9s a!ent must inform purchaser that he is sellin! pursuant to 3==A;
<; 'he shares you9re sellin! cannot #e of a class that are re!ularly sol" on an 1.chan!e #y the Issuer or are
con-erti#le into such shares; 3==A4")4<);
=; Seller must pro-i"e purchaser with certain "isclosure information a#out the issuer unless issuer is a
re1orting com1any; 3==A4")4=);
G; Securities sol" to a RIB can #e resol" to another RIB imme"iately;