Chapter 9The Regulation of Securities Issuance

Outline

(last updated 19 Sep 06)

Chapter 9The Regulation of Securities Issuance

  1. Federal Regulation of Securities Offerings
  2. Introduction
  • Federal "truth in securities" regulation - Securities Act of 1933
  • response to Stock Market Crash of 1929 - disclosure philosophy, not merit regulation
  • part of integrated disclosure: ongoing disclosure under Securities Exchange Act of 1934
  • the registration process
  • registration statement
  • prospectus disclosure: issuer, management, plans, financial history, purposes and nature of offering
  • signed by issuer and corporate insiders
  • responsible parties: issuer, insiders, board of directors, underwriters, experts (accountants)
  • regulation of selling process
  • no marketing / sales effort before filing of registration statement
  • no sales until effectiveness
  • exemptions from registration
  • market trading
  • nonpublic offerings / private placements
  • small offerings (relief for small business issuers)
  • Doran v. Petroleum Management Corp.
  • liability under the Securities Act of 1933
  • damages against participants in registered offering
  • issuer: strict liability for any materially false or misleading statement
  • other participants: liability, subject to "due diligence" defense
  • rescission of nonexempt, unregistered sales
  • rescission of false/misleading statements outside registration statement
  1. State Blue Sky Laws
  • Basic regulatory devices:
  • Anti-fraud
  • Registration or licensing of dealers, brokers, agents, and advisors
  • Registration of securities.

Class Notes

A. Federal Regulation of Securities Offerings
Problem
Michael and Jessica, each 40% shareholders of Precision Tools Corporation, plan to expand the company's product line. Banks won't lend another $3 million, but maybe a venture capitalist would invest. They figure they'd have to offer the VC convertible preferred - promising both current dividends and the possibility of wide-open participation if the company later goes public. Think about the securities laws?
  • Was a '33 Act registration statement required when PTC sold stock and notes in its original financing?
  • common stock - to Michael and Jessica?
  • common stock and notes - to Bernie?
  • notes - to Columbia Bank?
  • notes - to sellers of old PT?
  • Will a '33 Act registration statement be required when they sell to a VC?

Registration
 Registration of securities offerings
  • registration statement
  • prospectus disclosure: issuer, management, plans, financial history, purposes and nature of offering
  • signed by issuer and corporate insiders
  • responsible parties: issuer, insiders, board of directors, underwriters, experts (accountants)
  • regulation of selling process
  • no marketing / sales effort before filing of registration statement
  • no sales until effectiveness
Zymogenetics - Registration Statement
SEC - EDGAR website(find Zymogenetics) / Securities Act § 5 Prohibitions relating to interstate commerce and the mails
(a) Sale or delivery after sale of unregistered securities. Unless a registration statement is in effect as to a security, it shall be unlawful for a person, directly or indirectly--
(1) ... to sell such security ... ; or
(2) to [have delivered] any such security ... after sale.
(b) Necessity of prospectus meeting requirements of section 10 of this Act. It shall be unlawful for any person, directly or indirectly—
(1) ... to carry or transmit any prospectus [after RS filed] ... unless such prospectus meets the requirements of section 10; or
(2) to [have delivered] ... such security ... unless accompanied or preceded by a prospectus that meets the requirements of subsection (a) of section 10.
(c) Necessity of filing registration statement. It shall be unlawful for any person, ... to offer to sell or offer to buy ... unless a registration statement has been filed as to such security, ...
Exemptions from registration
Doran v. Petroleum Management Corp. (5th Cir. 1977)
Doran is an oilman. He has a petroleum engineering degree from Texas A&M, had a net wroth of more than $1 million, owned 26 oil and gas properties worth $850,000. He purchased "special participation" interests in a oil and gas company organized as a limited partnership. When he refused to make further payments on his investment, the company sued him. Doran in turn said that he was not bound on the investment contract, since it should have been registered under the '33 Act. Not being registered he was entitled to rescind.
When is an offering subject to the private placement exemption?
  • number of offerrees - must each offeree be qualified?
  • offerees' relationship to issuer - what does it mean "those who can fend for themselves"?
  • investor's sophistication - how is this measured?
  • access to information - necessary that investor actually receive information?
  • size of offering - can offering be for $500 million? or is there a cap?
  • manner of offering - does it matter if all purchasers are "qualified"? what about "offerees"? why this concern?
/ Securities Act § 4 Exempted Transactions
The provisions of section 5 shall not apply to--
(1) transactions by any person other than an issuer, underwriter, or dealer.
(2).transactions by an issuer not involving any public offering.
Regulation D
  • Rule 504 - up to $1 million - state "blue sky" law
  • Rule 505 - up to $ 5 million - 35 non-accredited investors / disclosure document
  • Rule 506 4(2) safe harbor - 35 qualified non-accredited investors / disclosure document

Liability
If PTC sells unregistered securities in transactions for which an exemption is not available, what liability does the company face?
If PTC registers its securities, is it liable for false statements in the prospectus? Who else is liable? / Securities Act § 11 -- Civil Liabilities on Account of False Registration Statement
(a) In case any part of the registration statement ... contained an untrue statement of a material fact or omitted to state a material fact. any person acquiring such security may sue—
(1) every person who signed the registration statement;
(2)every person who was a director of ... the issuer ...
(3)every person who, ... is to become a director, ....
(4)every accountant, engineer, or appraiser, [who] prepared or certified any part of the registration statement,
(5) every underwriter with respect to such security.
Securities Act § 12 -- Civil Liabilities Arising in Connection with Prospectuses and Communications
(a) Any person who--
(1) offers or sells a security in violation of section 5, or
(2) offers or sells a security ... by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact ... and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission,
shall be liable, subject to subsection (b), to the person purchasing such security from him, ... to recover the consideration paid for such security with interest thereon

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Chapter 9 – The Regulation of Securities Issuance