Federal Securities

Question 1

What triggers the 1933 Act?

Answer 1

1. Corporation proposes to use its stock as acquisition consideration, OR
2. Corporation proposes to use its other securities as acquisition consideration
   
   • A resale of those securities is a separate and distinct transaction –> so must register transaction or qualify for an exemption

Question 2

Requirements of the 1933 Act

Answer 2

• If the Act is triggered, the corporation must register the distribution, UNLESS it can find an exemption
  
  • Compliance amounts to a registration of the transaction, not the underlying securities
• Comply by:
  
  • Filing a Registration Statement with the Securities & Exchange Commissioner
  • Once the SEC declares the registration effective, the corporation may proceed with issuing/selling/distributing its securities

Question 3

Exemptions to the 1933 Act

Answer 3

1. Private Placement Exemption §4(2)
2. Limited Offering Exemption - Rule 504 and 505
3. Restricted Securities = securities acquired in an unregistered, private sale

Question 4

Exemptions to the 1933 Act - Private Placement Exemption §4(2)

Answer 4

• Rule: Issuer must show that the transaction does not involve a public offering (i.e., that it is “non-public”)
  
  • “non-public” if issuer can show that ALL offerees and purchases have access to information a registration would disclose
    
    • i.e. the offering is limited to those who can “fend for themselves”

Question 5

SEC Safe harbor Standard -> Rule 506 of Reg D

Answer 5

1. Non-accredited purchasers must satisfy financial sophistication in Regulation D
2. There can be no more than 35 non-accredited purchasers, though presumably any number of accredited purchasers
3. Can unwind the transaction if the purchaser fails to satisfy the financial sophistication standard
4. Accredited purchasers = those who can fend for themselves (meet a certain criteria)

Question 6

Exemptions to the 1933 Act - Limited Offering Exemption - Rule 504 and 505

Answer 6

• promulgated by SEC under § 3(b) of the ’33 Act
• Rule: Allows SEC to exempt offerings (up to $5M) from the registration requirement

Question 7

Exemptions to the 1933 Act - Restricted Securities = securities acquired in an unregistered, private sale

Answer 7

• Shares issued under any Regulation D exemption
  
  • Rule 504: Offering up to $1M
  • Rule 505: Offering up to $5M
  • Rule 506: Private placement safe harbor
• Securities sold in reliance on § 4(2) private placement exemption
• NOTE: Re-sales of restricted securities is restricted (e.g., waiting periods imposed)
• NOTE: Re-sale rules set forth both in Rules 144 and 145

Question 8

What is the SEC’s primary goal?

Answer 8

Adequate disclosure –> only care about the adequacy of the disclosure, will not evaluate the merits of the transaction

Question 9

What triggers §14 of the 1934 Act?

Answer 9

1. If a corporation is a “reporting company”, and
2. The corporation must obtain shareholder approval for the transaction.

Question 10

Requirements of the 1934 Act re: Proxies

Answer 10

Any proxy solicitation must comply with federal proxy rules (under the ’34 Act) in soliciting shareholder votes with respect to the transaction

Question 11

Section 14 of 1934 Act:

Answer 11

• Law prohibits solicitation of proxies without compliance with federal proxy rules
• Regulation 14A contains the relevant rules
  
  • Timing
  • Procedural requirements
• Schedule 14A sets forth information which must be included in the proxy statement
• Where Bidder is using its securities as acquisition consideration, Form S-4 is to be used instead of Schedule 14A

Question 12

What is 10b-5?

Answer 12

• 10b-5 makes it unlawful for any person to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made not misleading in connection with the purchase or sale of any security
• Anyone in possession of material inside information must either disclose it to the investing public or must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed (“disclose or abstain” rule)

Question 13

What is “Agreement in Principal”?

Answer 13

A statement, negotiations, discussions don’t become material until there is agreement in principal as to price and structure of the transaction

Question 14

What is insider trading?

Answer 14

• It’s trading in securities with the benefit of material, non-public information
  
  • Material = substantial likelihood that a reasonable investor would consider the information to be important and the omitted fact significantly altered the “total mix” of information made available (TSC Industries)

Question 15

Who can be liable for insider trading?

Answer 15

• Insiders
  
  • Actual Insiders: officers, directors, controlling shareholders, employees
  • Constructive Insiders: attorneys, CPAs, bankers performing services
• Tippers/Tippees
  
  • Tipper = person breaching fiduciary duty for improper purpose
  • Tippee = person who knows that tipper is breaching fiduciary duty
• Misappropriators = breaching a duty of trust and confidence owed to the source of the information
  
  • Those agreeing to keep information confidential
  • Those with established history of keeping confidences
  • Relatives/spouses/etc (barring countervailing proof)

Question 16

What is the Williams Act?

Answer 16

disclosure is preferred means of regulating the market; designed to avert a “stampede effect” in tender offers

Question 17

What are short swing profits?

Answer 17

• Section 16(b) of the ’34 Act allows issuers to recover short swing profits earned (or losses avoided) by
  
  • Directors
  • Officers
  • Beneficial owners of MORE THAN 10% of a corporation’s stock
• Short swing profits are those earned within a six-month window
• Applies to
  
  • Buying then selling
  • Selling then buying
• Caveat: only applies to publicly-held companies traded on national exchanges OR corporation with at least 500 shareholders and more than $10 million in assets