This ou!ine is e-mailware" #hi!e here is no $os for using he ou!ine% you &us 'rop &e ( !ine ( dfalgoust@alumni.utexas.net o e!! &e )h( you hin*% if i he!pe' you% e$.+ i,' (!so -e ni$e if you 'roppe' -y &y )e- p(ge ( http://www.geocities.com/NapaValley/3578/ (n' signe' &y gues -oo*. .ee! free o re'isri-ue his ou!ine unmodified o (nyone )ho &(y fin' i usefu!. This ou!ine is pro/i'e' 0(s is1 (n' I &(*e no pro&ises (s o is ($$ur($y 2i )or*e' for &e% your &i!e(ge &(y /(ry3. Goo' Lu$* on e4(&s" 5(&ien .(!gous Uni/ersiy of Te4(s S$hoo! of L() I. Inro'u$ion A. The e4 for his $ourse is he 6ennings% 7(rsh% Coffee (n' Se!ig&(n $(se-oo* on se$uriies regu!(ion (n' s(uory supp!e&en% p!us so&e proprie(ry &(eri(!s -y Prof. Hu. A. A--re/i(ions (n' $on/enions use' 1. HH Henry Hu 8. U9# un'er)rier+ s9h sh(reho!'er :. PSLRA Pri/(e Se$uriies Liig(ion Refor& A$ of 199; <. SEC Se$uriies E4$h(nge Co&&ission ;. A!! s(uory referen$es (re o he 19:: Se$uriies A$ 2(s (&en'e'3 (n' not o he 19:< E4$h(nge A$ 2or oher ($3 un!ess oher)ise noe' =. >ey Ter&s 1. Pri&(ry /s. Se$on'(ry &(r*es pri&(ry is he 0origin(! issue%1 )here he se$uriy is so!' -y he issuing $o&p(ny o he pu-!i$+ se$on'(ry refers o su-se?uen r(ns($ions -e)een in/esors. C. Gener(! .r(&e)or* of C(pi(! 7(r*es @ Se$uriies Regu!(ion 1. The Se$uriies A$s (3 The 19:: Se$uriies A$ re?uires h( se$uriies -e registered 2)ih so&e e4$epions3 -efore hey $(n -e so!'. 213 Ru!es (re su-ses of regu!(ions+ h( is% regu!(ions (re 0!i-r(ries1 of ru!es. They in$!u'eA 2(3 Gener(! ru!es (n' regu!(ions 21BBs% 81;% 8:C3 2-3 Reg. A 2for s&(!! issues3 28;1D8C:3 2$3 Reg. C 2go/erning regisr(ion% <BBs3 2'3 Reg. 5 2!i&ie' offer9s(!e )ihou regisr(ion% ;BBs3 2e3 Reg. S 2offer9s(!e ousi'e U.S. )ihou regisr(ion% 9BBs3 1 of << 2f3 Reg. SD= 2inegr(e' 'is$!osure for s&(!! -usiness3 2g3 Reg. SD> 2insru$ions for for&s for -oh ,:: (n' ,:< A$s3 2h3 Reg. SDT 2go/erning e!e$roni$ fi!ing3 2i3 .or&s 2SD1% SD8% SD:3 283 Ru!es pro&u!g(e' un'er he ,:: A$ (re 'eno&in(e' -y hreeD 'igi nu&-ers% e.g.% R. <:B+ if i isn, in ( )oD'igi regu!(ion 2i.e.% SD>3% hen no regu!(ion is noe'. Noe ru!es un'er )oD'igi regu!(ions (re 2&os!y3 er&e' 0Ie&s1 inse(' of 0Ru!es.1 -3 The 19:< E4$h(nge A$ regu!(es $on'u$ on pu-!i$ se$on'(ry &(r*es% in$!u'ing perio'i$ reporing re?uire&ens. Cre(e' he SEC. 213 Ru!es pro&u!g(e' un'er he ,:< A$ (re n(&e' (fer heir se$ion% e.g.% 1B-D; is he fifh ru!e pro&u!g(e' un'er E 1B2-3. 283 E4$epion o he (-o/eA Reg. 7 is 'eno&in(e' in hreeD'igi nu&-ers. A!so noe ,:< A$ for&s% &os no(-!y 1BD> (n' 1BDF. 8. Un'er)riing (n' he pri&(ry &(r*e (3 Un'er)riers 2U9#3 (re he iner&e'i(ries h( -ring ( ne) offering o he pu-!i$. 213 The un'er)rier% in (''iion o ($u(!!y &(r*eing he se$uriy% ('/ises he issuing $o&p(ny on issues su$h (s he ype of se$uriy o offer% he er&s of he se$uriy% e$. They h(/e so&e inpu ino 'r(fing he 'o$u&ens (s )e!!% hough h( is &os!y he !()yer,s Go-. 283 There (re% gener(!!y spe(*ing% hree ypes of un'er)riing h( (*e p!($eA 2(3 .ir& $o&&i&en U9# ($u(!!y -uys (n' rese!!s he se$uriy on he open &(r*e. Thus% he U9# (*es &os of he ris*. 2-3 0S(n'D-y1 se$uriies on!y offere' o e4ising s9h+ U9# 0s(n's -y1 o -uy (ny unpur$h(se' sh(res. 2$3 0=es effors1 U9# on!y ($s (s (n agent of he issuing $o&p(ny+ he U9# Gus he!ps he $o&p(ny &(r*e is se$uriies 2using is 0-es effors13. Ris* re&(ins )ih he issuing $o&p(ny. 2i3 Noe h( pri$ing is si!! i&por(n e/en for 0-es effors1 in spie of he !o) &one(ry ris*% -e$(use he U9#,s repu(ion is ( s(*e. 2'3 There (re oher% 0inD-e)een1 f!(/ors (s )e!!% su$h (s 0(!! or nohing1 (n' 0&inD&(41 un'er)riings. 2:3 Ho) $(n he U9# re'u$e his ris* on ( fir& $o&&i&enH Choi$es in$!u'eA 8 of << 2(3 Negoi(ing ( 'is$oun on he offering pri$e 2hus i&pro/ing he $h(n$es h( (!! sh(res )i!! -e so!'3. 2-3 Spre('ing he ris* -y (*ing on (''iion(! U9# 2fir& in $h(rge is he 0&(n(ging U9#13. 2$3 #(iing uni! he !(s possi-!e &o&en o se he fin(! pri$e. 2'3 Puing 0&(r*e ous1 ino he un'er)riing (gree&en. 2<3 Regu!(ion of U9# 2(3 N(,! Asso$. of Se$uriies 5e(!ers 2NAS53 is ( se!fDregu!(ory -o'y h( resri$s he $on'u$ of U9#. 2-3 SEC r('ing ru!es 2!i*e Reg. 7% resri$ing U9# (-i!iy o reD -uy issue' sh(res o in$re(se pri$e in he se$on'(ry &(r*e I-u s(-i!iJing ( f(!! is O>K3. 2$3 R. 1B; $(n, go shor (n' su-s$ri-e ( he s(&e i&e. :. The se$on'(ry &(r*e (3 A se$on'(ry &(r*e is i&por(n -e$(use i insures he /i(!iy of he pri&(ry &(r*eA (n in/esor is un!i*e!y o pur$h(se sh(res fro& ( $o&p(ny if here is no &(r*e for hi& o rese!! hose sh(res ( ( !(er '(e. -3 There (re )o -ro(' ypes of se$on'(ry &(r*esA r('iion(! e4$h(nges 2personifie' -y he NLSE3 (n' o/er he $ouner 2OTC3 &(r*es 2personifie' -y NAS5AF3. 213 Tr('iion(! e4$h(nge so&e)h( -ure(u$r(i$+ 0spe$i(!iss1 -rings ogeher -uyers (n' se!!ers% -uys9se!!s on his o)n ($$oun o &o'er(e se/ere pri$e s)ings 2M!e(ning (g(ins he )in',3. 283 OTC No ( 0p!($e%1 -u ( series of !in*e' $o&puers. E($h so$* is represene' -y (n in/es&en -(n* inse(' of ( spe$i(!is. 5. A fe) )or's on he 19NO $r(sh 1. Ho) 'o )e *no) i h(ppene'H Indexes fe!!. In'e4es (re ( 0-(s*e1 of represen(i/e so$*s. The 5o) 6ones is ( s&(!! -(s*e+ he S@P ;BB is ( !(rger -(s*e+ he Russe!! 1BBB is !(rger si!!. 8. #hy $(re (-ou he $r(shH =e$(use of he 0)e(!h effe$1 )hen he &(r*e is up% $onsu&er $onfi'en$e gener(!!y is up% oo+ hus% he p(per e$ono&y i&p($s he re(! e$ono&y. A!so% $r(shes $re(e ( &(r*e for (*eo/ers. II. Regu!(ion of he 5isri-uion of Se$uriies A. O/er/ie) he -(si$ sru$ure of he ,:: A$. 1. The -(si$ go(!s of he A$ (re )ofo!'A o pro/i'e infor&(ion o in/esors% (n' o prohi-i fr(u'u!en s(!es. 8. There (re hree *ey hings o 19:: A$ $o&p!i(n$eA : of << (3 5o$u&ens in/o!/e' 213 Gener(!!y% ( prospectus 2see E 82(321B 'efiniion -e!o)3. There (re )o ypesA 2(3 A preliminary prospectus% use' 'uring he )(iing perio'+ i $on(ins no pri$e infor&(ion 2-3 A final prospectus% use' 'uring he posDeffe$i/e perio'. -3 Regisr(ion re?uire&ens 213 >eys (re EE C% O% Reg. C for gener(! ru!es% (n' Reg. SD> for he nonDfin(n$i(! porions. $3 Ti&ing resri$ions 2i.e.% )h( you $(n 'o (n' )hen3 213 There (re hree perio'sA preDfi!ing% he )(iing perio'% (n' he posD effe$i/e perio'. Always -e(r in &in' )h( perio' you (re in" :. 5 " #he $ost %mportant &ection' (3 Su&&(ry of E ; pro/isionsA 213 E ;2(3 $(n, se!! ( se$uriy 2or 'e!i/er se$uriy for s(!e3 un!ess ( regisr(ion s(e&en h(s -een pu in effect 2i.e.% post-effective date3. 283 E ;2-3 2(3 213 $(n, use ( prospe$us 2see E 82(321B3 -e!o)3 o se!! un!ess he prospe$us &ees E 1B re?uire&ens+ 2-3 283 $(n, 'e!i/er se$uriy (fer s(!e un!ess preceded -y ( E 1B prospe$us. 2:3 E ;2$3 prohi-is offers to sell prior o he filing of he regisr(ion s(e&en 2or if su-Ge$ o SEC sop or'er3. -3 >eys o (pp!i$(ion of E ;A 213 The hing so!' &us -e ( 0se$uriy1 2'is$usse' infr(3 283 6uris'i$ion(! &e(ns 2use of &(i!s or iners(e $o&&er$e3 gener(!!y very easy o &ee 2in f($% i,s h(r' not o &ee i3. 2:3 E : !iss e4e&pe' securities 2'is$usse' infr(% &os no(-!y go/ern&en se$uriies3 2(3 Noe his se$ion e4e&ps he !ise' se$uriies from the entire act. 2<3 E < !iss e4e&pe' transactions 2&os no(-!y E< 213 !i&iing E ; o r(ns($ions -y 0issuers% U9#% (n' 'e(!ers%1 (n' he E <283 e4e&pion for r(ns($ions 0no in/o!/ing ( pu-!i$ offering13 2(3 Noe his se$ion only e4e&ps r(ns($ions fro& E ;+ i does not e4e&p he& fro& (ny oher re?uire&ens 2i.e.% (nifr(u' ru!es3. < of << <. Oher *ey pro/isionsA (3 E 82(3213 'efiniion of se$uriy 2'is$usse' infr(3 -3 E 82(321B3 'efiniion of 0prospe$us1 -(si$(!!y% anything 2in$!u'ing $ir$u!(rs% ('/erise&ens% !eers% (n' $o&&uni$(ions3 h( offers a security for sale. 213 E4$epionA if sen posDeffe$i/e '(e (n' E 1B prospe$us )(s sen o he -uyer -efore or ( he s(&e i&e% hen i isn, ( prospe$us. 283 E4$epionA ( noi$e9$ir$u!(r9('9e$. is no ( prospe$us if i i'enifies ho) ( E 1B prospe$us $(n -e o-(ine' and on!y i'enifies he se$uriy (n' is pri$e (n' oher infor&(ion 'ee&e' (ppropri(e -y he SEC. 2:3 E 1B prospe$us is -(si$(!!y ( prospe$us h( h(s (!! of he s(&e infor&(ion (s he regisr(ion s(e&en 2see E 1B2(33. $3 E 82(32N3 'efines 0regisr(ion s(e&en1 (s ( E C regisr(ion s(e&en+ E C ses ou he re?uire&ens for regisering 2fees% e$.3 '3 E 82(32113 0un'er)rier1 is (nyone )ho pur$h(ses from the issuer )ih ( /ie) o 'isri-ue 2or in'ire$!y p(ri$ip(es in su$h ( U9#3 e3 E 192(3 SEC h(s (uhoriy o &(*e ru!es o $(rry ou he A$. =. The PreDfi!ing Perio' 20GunD6u&ping13 1. Re$(!! h( E ;2$3 &(*es i un!()fu! for (ny person o offer o buy or sell ( se$uriy preDfi!ing. (3 E 82(32:3 'efines 0offer o se!!1 (s (ny ($i/iy re(son(-!y $(!$u!(e' o so!i$i or gener(e ( -uying ineres. -3 Loe-% Rho('es -igDhype press re!e(se is 'ee&e' (n offer o se!!. 213 SEC s(ys h( i,s O> o &(*e (nnoun$e&ens in he nor&(! $on'u$ of -usiness% hough. $3 R. 1:; e4e&ps $er(in ypes of press re!e(ses fro& he gunDGu&ping prohi-iion if hey $on(in no more h(n he !ise' infor&(ion. 2no(-!yA no pri$e info% (n' no n(&ing he U9#+ you h(/e o s(e h( he ($u(! offering )i!! -y /i( prospe$us3 213 FuesionA is his ( 0s(fe h(r-or1 or (n e4$!usi/e !isH 2i.e.% $(n oher ie&s no !ise' in R.1:; also -e e4e&pH3 '3 Re!e(se ;1NB $(n pu-!i$iJe facts only 'uring he preDfi!ing perio'+ i.e.% no fore$(ss% e$.+ (ns)ering unso!i$ie' in?uiries fro& he press% (n(!yss% (n' ohers is en$our(ge'. 8. Pro-!e&s (3 CEO of $o&p(ny 'oes iner/ie) for !o$(! p(per )here he s(ys 0In'usry is $onsi'ere' ( P:B=9yr in'usry (n' )i!! gro)+ Co&p(ny )(ns o -e ( !e('er in is in'usry% (n' o 'o so )e (re p!(nning o Mgo pu-!i$, in he ne(r fuure.1 ; of << 213 >eyA 'oes his 0(rouse pu-!i$ ineres1H 2Re$(!! E 82(32:3% Loe-% Rho('es3. Thus% his &(y -e ( E ;2$3 /io!(ion. 283 Ho)e/er% he CEO 'i' no so!i$i he iner/ie) Re!. ;1NB )or*s in his f(/or 'ue o his f($. A!so% sin$e his is ( !o$(! p(per% i is !ess !i*e!y o i&p($ he )i'er &(r*e. 2(3 =u proGe$ion of in'usry gro)h &(y (*e i ou of Re!. ;1NB -e$(use i &(y -e $onsi'ere' ( fore$(s. 2:3 Noe h( pu-!i$!yDhe!' $o&p(nies ypi$(!!y ge &ore !ee)(y h(n 'o pri/(e!y he!' $o&p(nies 'ue o he nee' o *eep sh(reho!'ers infor&e'. -3 CEO $on($s 'e(!er (-ou offer% )ho $on($s U9#+ CEO (n' U9# infor&(!!y (gree o offer 17 sh(res o he U9# ( P1B9sh.% o -e reso!' o he pu-!i$ ( P119sh. They sign !eer of inen o h( effe$. 213 E 82(32:3 excludes fro& he 'efiniion of 0offer1 (ny 0pre!i&in(ry negoi(ions or (gree&ens1 -e)een issuer (n' U9#. 283 Thus% his is pro-(-!y O>. On!y re(! ?uesion is if 0pre!i&in(ry1 &o'ifies 0(gree&ens1 or no 2i.e.% is (n enfor$e(-!e (gree&en e4$!u'e' fro& he e4$epionH3 $3 U9# prep(res press re!e(se (nnoun$ing he offering 213 Pro-(-!y O> un'er R. 1:;% )ih fo!!o)ing pro/isosA &us -e from the company 2no he U9#3+ i cannot name the U/W+ (n' &us s(e ($u(! offering )i!! -e &('e /i( prospe$us. '3 U9# e!ephones (n' )ries o se$uriies 'e(!ers n(ion)i'e o in/ie he& o Goin he U9# syn'i$(e. 213 O> un'er E82(32:3% )hi$h excludes fro& he 'efiniion of offer $on($ 0(&ong U9# )ho (re or (re o -e in pri/iy of $onr($ )ih he issuer.1 e3 U9# $on($s se$uriies 'e(!ers )ih !(rge re(i! se!!ing org(niJ(ions% (s*s if hey )ou!' !i*e o pur$h(se ( ( ;BQ 'is$oun for res(!e. 213 This is pro-(-!y ( /io!(ion 2H3 f3 U9# &(i!s ou o prospe$i/e U9#% 'e(!ers% (n' is o)n $uso&ers (n inern(! su'y s(ying he $o&p(ny,s in'usry is ( gro)h in'usry. I 'oes no &enion he $o&p(ny spe$ifi$(!!y. 213 R. 1:O almost &(*es his O> i &(*es his *in' of repor O> for ( public 2i.e.% one h( is su-Ge$ o ,:< A$ reporing3 $o&p(ny if h( *in' of repor is gi/en ou o/er he nor&(! $ourse of he 'e(!er,s -usiness% (n' 'e(!er re$ei/es no $o&pens(ion fro& he regisr(n. I &(*es i O> -y re&o/ing he reporing p(ry fro& he E 82(32113 'efiniion of 0U9#.1 C of << 2(3 Pro-!e& is h( he 'e(!er issuing he repor &us no -e ( p(ri$ip(n 2or propose o -e ( p(ri$ip(n3 in he 'isri-uion of he se$uriy. 283 R. 1:9 is -(si$(!!y he s(&e ru!e% -u i is &ore !(4 ( 'e(!er can p(ri$ip(e in he 'isri-uion (n' si!! &(*e re$o&&en'(ions ifA 2(3 The issuer is (n SD: $o&p(ny 2ypi$(!!y ( -ig% )i'e!yDfo!!o)e' $o&p(ny3 p!us &ees M&ini&u& f!o(9in/es&en gr('e, re?uire&ens 2$o&&on e?uiy RPO;797oo'y,s r(ing3% or 2-3 The re$o&&en'(ion is of ( *in' 'isri-ue' )ih reasonable regularity% is (n industry-wide report or is a comprehensive list of recommended securities% he issuer is gi/en no greater prominence h(n (nyone e!se% (n' he opinion is no more favorable h(n in he !(s pu-!i$(ion. g3 Re(i!er of $o&p(ny,s pro'u$s he(rs of propose' offering fro& CEO% phones 'e(!er (n' offers o -uy ;BB sh(res. 5e(!er s(ys he )i!! se (si'e he sh(res if he $(n% hen phones U9# (n' offers o -uy 1%BBB sh(res. 213 Noe E <213 !i&is (pp!i$(ion of E; o (n 0issuer% U9#% or dealer1+ furher noe h( i 'oes not in$!u'e he retailer. 283 5oes h( &(*e senseH The r(ion(!e is h( if he offer o -uy isn, prohi-ie'% hen he 'e(!er (n' U9# )i!! Gus 'e(! )ih e($h oher in roun'(-ou f(shion% ren'ering he !() &e(ning!ess. :. The Ro!e of he Aorney (3 On$e he 'e(! is 'one% he *ey person -e$o&es he issuer,s $ounse!. He h(s o 'o he fo!!o)ingA 213 5ue 'i!igen$e 2$o/ere' in 'e(i! infr(3+ he -(si$ ru!e is h( everything ('/erse &us -e 'is$!ose'. 283 A he priner% prep(ring four p($*(ges% e($h respe$i/e!y going oA 2(3 SEC he ($u(! regisr(ion s(e&en% e$. Reg. C h(s he &os 0i$*yD($*y1 ru!es h( $(n rip you up. 2See R. <B8% <B: on ho) he s(e&en &us -e -oun'% e$. for (n e4(&p!e3 2-3 S(e regu!(ors his use' o -e &ore i&por(n+ re$en (&en'&ens h(/e $h(nge' h(. 2$3 NAS5 h(s heir o)n re?uire&ens 2'3 The U9# syn'i$(e in (''iion o ( $opy of he regisr(ion &(eri(!s% (!so sen' insru$ions on )h( hey $(n (n' $(nno s(y9'o for -oh s(e (n' fe'er(! !() purposes. C. The #(iing Perio' 1. On$e he regisr(ion s(e&en h(s -een fi!e'% he issuer &us ()(i SEC (ppro/(! 2hen he s(e&en is 0effe$i/e13. This ypi$(!!y (*es (ny)here fro& one o hree &onhs. This is ?uie -ur'enso&e% )hi$h is )hy shelf registration 2$o/ere' infr(3 h(s -e$o&e ?uie popu!(r. O of << 8. Re$(!! h( E ;2(3213 prohi-is actual sales fro& (*ing p!($e uni! he regisr(ion s(e&en is (ppro/e'+ furher noe h( hus oral offers (re per&ie' so long as the sale is not consummated 2or e!se hey,' run (fou! of E ;2-33. :. 7(*ing (n un(uhoriJe' )rien offer 'uring he )(iing perio' is $(!!e' 0free )riing.1 <. Pre!i&in(ry Prospe$uses (3 E ;2-3213 per&is ( E 1B prospe$us o -e use' o offer ( se$uriy for s(!e. 213 E 1B2-3 gr(ns he SEC (uhoriy o issue ru!es for preliminary prospectuses for E ;2-3213 purposes. 283 R. <:B 'oes Gus h(. =(si$(!!y% he pre!i&in(ry prospe$us &us h(/e (!! he infor&(ion of he fin(! prospe$us except price. 2(3 Noe h( uni! he 199Bs% he pr($i$e )(s o )(i uni! he nigh -efore he SEC )(s o 'e$!(re he s(e&en effe$i/e (n' hen fi!e ( 0pri$ing (&en'&en.1 Then he SEC ('ope' R. <:BA% )hi$h per&is ( regisr(ion o -e 'e$!(re' effe$i/e )ihou pri$ing '((+ h( infor&(ion &us -e 'is$!ose' -y fi!ing ( re/ise' prospe$us o he SEC 1; '(ys (fer he effe$i/e '(e% or -y &(*ing ( for&(! posDeffe$i/e (&en'&en. -3 Noe h( he pre!i&in(ry prospe$us does not s(isfy he E1B2(3 re?uire&ens of he final prospe$us% (n' hus $(n on!y -e use' o &(*e offers% no o 'e!i/er he se$uriy ise!f. ;. Su&&(ry Prospe$uses (3 Un'er he s(&e gr(n of (uhoriy in E 1B2-3% he SEC (!!o)s summary prospectuses for $er(in $o&p(nies. -3 R. <:1 per&is $er(in $o&p(nies 2gener(!!y spe(*ing% 'o&esi$ $o&p(nies using for&s SD: or SD8 )ho h(/e -een su-Ge$ o he ,:< A$ reporing re?uire&ens for hree ye(rs or &ore3 o use su&&(ry prospe$uses. $3 Ag(in% his prospe$us 'oes not s(isfy he E 1B2(3 re?uire&ens for ( fin(! prospe$us. C. To&-sone A's (3 To&-sone ('s (re per&ie' /i( he E 82(321B32-3 'efiniion of ( prospe$us+ i e4$!u'es fro& he 'efiniion ('s h(A 213 S(e fro& )here ( E 1B prospe$us $(n -e o-(ine'% (n' 283 5o no &ore h(n i'enify he se$uriy% is pri$e% (n' )ho )i!! e4e$ue he or'ers. -3 Noe h( (!hough ( o&-sone (' is no ( prospe$us% i is si!! (n 0offer1 (n' hus f(!!s )ihin E ;2$3% (n' hus $(nno -e use' in he preD N of << fi!ing perio' 2i.e.% $(n on!y -e use' in he )(iing or posDeffe$i/e perio's3. O. I'enifying S(e&en (3 Li*e he o&-sone ('% -u )ih &ore infor&(ion. E 82(321B32-3 per&is he SEC o 0e4p(n'1 he (/(i!(-!e $onen of he o&-sone. -3 R. 1:< (n' 1:<( 'o Gus h(. They !is he per&issi-!e $onen of he i'enifying s(e&en. 2E4.A They per&i ( gener(! 'es$ripion of he -usiness% (n' infor&(ion (-ou senior se$uriies% e$.3 N. A''iion(! Issues (3 R. 1;$8DN re?uires ( 'e(!er o &(*e his or her -es effors o 'isri-ue prospe$uses upon re?ues 2noe his ru!e is pro&u!g(e' un'er he ,:< A$3. -3 Noe he 'iffi$u!y $(use' -y he inerne (n' eD&(i! 2is eD&(i! )rien or or(!% in su-s(n$eH #h( (-ou )e- p(ges $(n one hyper!in* o &(eri(!s no in he prospe$usH3 $3 Re!e(se <9CN% R. <CB &us &(*e goo' f(ih effor o 'isri-ue ( re(son(-!y nu&-er of $opies of he regisr(ion s(e&en o 'e(!ers in or'er for he SEC o ($$e!er(e he effe$i/e '(e. 9. Pro-!e&s 2s(&e f($s (s pre/ious se3 (3 U9# $(!!s 'e(!er% offers o reser/e 8%BBB sh(res for hi&. 5e(!er ($$eps. 213 The offer is O> -e$(use i is oral. The E ;2$3 pros$ripion on offers on!y (pp!ies 'uring preDfi!ing. 283 Ho)e/er% he acceptance is not O>. E ;2(3213 prohi-is preD (ppro/(! s(!es. 2:3 Pro-!e&A U9# h(s o -e (-!e o &(r*e he sh(res in or'er o ($$ur(e!y pri$e he offering. The so!uion is pro-(-!y o s(y o he 'e(!er e4p!i$i!y h( 0his is no (n offer1 2-(si$ $onr($ !()A if here,s no (n offer% here $(n, -e (n ($$ep(n$e3. -3 U9# )(ns o pu-!ish (n (' in he #(!! Sree 6ourn(!% 'es$ri-ing he n(ure of he -usiness (n' ho) he offering,s pro$ee's )i!! -e use'% p!us (n in/i(ion o su-s$ri-e ( P119sh(re. 213 Pro-!e&A E ;2-3213 re?uires h( he prospe$us $onfor& o E 1B. 283 R. 1:< (n' 1:<( e4$!u'es i'enifying s(e&ens. Noe he re?uire' 'is$!(i&er !(ngu(ge in R. 1:<2-3213. 25oes 'es$ripion of ho) pro$ee's )i!! -e use' *i!! hisH3 $3 U9# &(i!s o he res of he U9# syn'i$(e (n' o se!e$e' 'e(!ers $opies of ( pre!i&in(ry prospe$us )hi$h )(s in$!u'e' in he regisr(ion s(e&en 2no pri$e infor&(ion3. A!so in$!u'e' is ( !eer s(ying he U9# hin*s his is (n (r($i/e in/es&en% ( ;Dye(r e(rnings 9 of << proGe$ion% (n' (n in/i(ion for e($h 'e(!er o in'i$(e he nu&-er of sh(res hey (re inerese' in. 213 Prospe$usA >ey $on$ern is E ;2-3213 $(n, 'e!i/er ( nonDE 1B prospe$us+ re$(!! E 1B2-3 (uhoriJes 0!esser1 prospe$us /i( SEC regu!(ion. 2(3 Pre!i&in(ry prospe$us R. <:B 2&us h(/e e/eryhing -u pri$e3. Noe Reg. SD> I. ;B121B3 0&(gi$ !(ngu(ge1 h( &us ($$o&p(ny su$h ( prospe$us. 2-3 Su&&(ry prospe$us R. <:1 (!&os ne/er use' -e$(use i,s use!ess 2in/esors )(n &ore infor&(ion h(n i pro/i'es3. A!so noe -oh pre!i&in(ry (n' su&&(ry prospe$uses $(n on!y $(n -e use' for E ;2-3213% no 2-3283. 283 LeerA This is ( /io!(ion. I is (n offer o se!! (n' 'oes no f(!! )ihin he e4$epions. 2(3 I is pro-(-!y O> for he !eers sen o he U/W% hough -e$(use E 82(32:3 e4$!u'es 'e(!ings -e)een U9#,s fro& he 'efiniion of 0se!!.1 2-3 5oes R. 1:< he!pH No% -e$(use of he proGe$ion of e(rnings (n' he s(e&en h( he in/es&en is (r($i/e. Neiher (re !ise' in R. 1:< (s per&issi-!e. 2i3 Noe h( e/en hough he R. 1:<2-3 re?uire' !(ngu(ge pro-(-!y isn, here% his (!one )ou!'n, ren'er i i&proper -e$(use un'er R. 1:<2$3 you nee' no in$!u'e i if he prospe$us is in$!u'e'. 2$3 A$u(! $(seA ( guy s(p!es his -usiness $(r' o prospe$us )ih h(n')rien 0p!e(se $(!! ASAP1+ he!' ( /io!(ion (s (n offer o se!!. '3 5e(!er )ries o $uso&er so!i$iing (n offer o -uy ( P119sh(re% -u 'oes no in$!u'e ( pre!i&in(ry prospe$us sin$e he *no)s $uso&er h(s (!re('y re$ei/e' one fro& (noher sour$e. 213 If his )(s (n oral offer% he,' pro-(-!y -e fine% sin$e E ;2$3 on!y (pp!ies o he preDfi!ing perio'% (n' E ;2-3 on!y (pp!ies o )riings. 283 =e$(use i,s ( !eer% ho)e/er% i runs ino he s(&e pro-!e&s (s he pro-!e& (-o/e. e3 Co&p(ny )(ns ($$e!er(ion of he effe$i/e '(e of he regisr(ion s(e&en+ i h(s fi!e' one (&en'&en (fer re$ei/ing SEC $o&&en on is inii(! fi!ing 2)hi$h su-s(ni(!!y $h(nge' he pre!i&in(ry prospe$us3+ To )ho& &us he re/ision -e supp!ie'H 213 The SEC h(s no s(uory (uhoriy o re?uire 'isri-uion of ( pre!i&in(ry prospe$us. 283 Thus% hey use R. <CB (n' <C1. 1B of << 2(3 <CB per&is SEC o (*e ino ($$oun if issuer h(s (*en re(son(-!e seps o &(*e ('e?u(e infor&(ion 2(n' $opies of he regisr(ion s(e&en3 (/(i!(-!e. 2-3 <C1 uses ($$e!er(ion (s ( 0$(rro1 o insure pro&p 'isri-uion of (&en'&ens. This is e4p!i$i in R. <C12-3283. f3 5e(!er $(!!s $uso&er% offers o se!! 2)hen issue'3 ( P119sh. No pre!i&in(ry prospe$us is sen. 213 R. 1;$8DN (ssu&es fr(u' is presen if here is no prospe$us 'e!i/ere'. 2(3 Noe his is ( ,:< A$ ru!e i uses SEC po)er o regu!(e -ro*ers (n' 'e(!ers. 2-3 Noe su-p(r 2$3% re?uiring ( 'e(!er o (*e re(son(-!e seps o fu!fi!! (ny )rien re?uess for he pre!i&in(ry prospe$us% (n' su-p(r 2g3% re?uiring he &(n(ging U9# o furnish $opies of s(&e o (!! p(ri$ip(ing -ro*ers or 'e(!ers. 283 .or his pro-!e&% noe su-p(r 2-3% re?uiring 'e!i/ery of pre!i&in(ry prospe$us o (ny person re?uesing i ( !e(s <N hours -efore he effe$i/e '(e if he issue is (n IPO. g3 Rese(r$h 'ep(r&en of ( 'e(!er h(/ing no $onne$ion o he offering 'e$i'es in'epen'en!y h( he $o&p(ny is ( goo' in/es&en% (n' s(ys so in is )ee*!y ne)s!eer. 213 .irs ?uesionA is his (n 0offer1H I &igh -e+ i $ou!' -e seen (s 0$on'iioning he &(r*e.1 If i is (n offer% i (!so &ees he 'efiniion of prospe$us% so )e (re possi-!y f($e' )ih ( E;2-3213 pro-!e&. 283 E <213 2!i&iing E; o he issuer% U9#% (n' 'e(!ers3 'oes not he!p -e$(use he is ( 0'e(!er1+ neiher 'oes E <2:3 2e4e&ping 'e(!er,s r(ns($ions after fi!ing -u prior o <B '(ys (fer he effe$i/e '(e3 'ue o he i&ing 2sipu!(e' -y HH3. 2:3 Thus% )e urn o R. 1:OD1:9 2$o/ering re$o&&en'(ions -y -ro*er9'e(!ers3. 2(3 R. 1:O 'oes no he!p -e$(use i on!y $o/ers issues su-Ge$ o he ,:< A$ reporing re?uire&ens 2i.e.% no (n IPO3. R. 1:N is spe$ifi$ o $er(in ypes of offerings no (pp!i$(-!e here. .in(!!y% 1:9 'oesn, he!p -e$(use i oo on!y re!(es o pu-!i$ $o&p(nies 2(n' hen on!y o SD: $o&p(nies or in'usryD)i'e repors gi/ing he issuer no e4r( pro&inen$e3. 2-3 Noe if his was ( $o&p(ny (!re('y su-Ge$ o he ,:< A$% R. 1:O )ou!' per&i he spe$ifi$ re$o&&en'(ion so !ong (s he 'e(!er )(s no ( 0p(ri$ip(n o he 'isri-uion%1 i.e.% 'i' no re$ei/e $o&pens(ion fro& he 'isri-uion. 5. The PosDeffe$i/e Perio' 11 of << 1. Three $o&ponens o 0going effe$i/e1A (3 S(uory re?uire&ens 213 Re$(!! E ;2(3 s(ys you $(nno se!! uni! ( regisr(ion s(e&en is in effe$. 283 A!so re$(!! h( E ;2-3213 &(*es i ( /io!(ion o r(ns&i (ny nonDE 1B prospe$us even after the effective date% (ut E 82(321B32(3 &(*es i O> o sen' ( nonDE 1B prospe$us after the effective date if ( E 1B prospe$us h(s (!re('y -een sen o he re$ipien. -3 8B 5(y ru!e E N2(3 s(ys ( s(e&en goes effe$i/e 8B '(ys (fer fi!ing if here is no SEC ($ion. I $(n -e f(ser /i( ($$e!er(ion 2(!so per&ie' -y E N2(33 or s!o)er if he SEC i&p!e&ens ( E N2-3 refus(! or'er. 213 The origin(! i'e( -ehin' his ru!e )(s h( i )(s 0'o(-!e1+ o'(y% i,s ( -ure(u$r(i$ nigh&(re. Ho) o ge &ore i&eH R. <O: per&is 0'e!(ying (&en'&ens1 he resu! is h( he SEC ges (!! he i&e i )(ns+ he s(e&en ne/er -e$o&es effe$i/e (fer 8B '(ys" $3 Pr($i$(! &(ers The (&oun of re/ie) gi/en 'epen's on he $o&p(ny. E/en hough e$hni$(!!y he SEC is inerese' on!y in fu!! 'is$!osure% hey )i!! go o/er un*no)n or ris*y -usinesses &ore $(refu!!y h(n s(-!e% es(-!ishe' issuers. Thus ( .orune ;BB $o&p(ny &(y no h(/e is prospe$us re/ie)e' ( (!!% )hi!e (n IPO or $o&p(ny in ( rou-!e' in'usry 2!i*e he S@L,s in he !(e NBs3 )i!! ge ( fu!! re/ie). 213 The SEC )i!! (!so 'o 0r(n'o& fu!! re/ie)s1 Gus o *eep peop!e on heir oes+ so&ei&es% hey go ino e4$ru$i(ing 'e(i! o/er (n es(-!ishe' $o&p(ny Gus o &(*e ( poin o he se$uriies )or!' (-ou so&e spe$ifi$ 'is$!osure issue. 283 The 75@A (n' SD> :B: se$ions usu(!!y ge he -u!* of he SEC,s fo$us. 2:3 The SEC $(n *i!! (n offering /i( E N2'3 sop or'ers -e$(use E N2e3 per&is he& o e4(&ine -oo*s% e$. for ( 2'3 'eer&in(ion% (n' f(i!ure o $ooper(e is groun's o issue he or'er. A sop or'er suspen's effe$i/eness of he regisr(ion s(e&en% hus -ringing he E ;2$3 prohi-iion (g(ins offering se$uriies su-Ge$ o ( sop or'er o -e(r. Thus E N2'3 gi/es he SEC ( lot of po)er" 8. E!e$roni$ 5is$!osures (3 Re!e(se O8:: he *eys o per&issi-!e e!e$roni$ 'e!i/ery of 'o$u&ens (re 13 noi$e 2i.e.% in/esor shou!' *no) (-ou i h(/e o e!! he& 0i,s on &y )e- sie13+ 83 ($$ess 2re$ipiens &us h(/e he (-i!iy o re/ie) he 'o$u&ens3+ (n' :3 e/i'en$e of 'e!i/ery 2possi-!y in$!u'ing infor&e' $onsen of re$ipien3 18 of << :. Noe h( ( 0goo'1 'e(! in he posDeffe$i/e perio' )i!! no s(/e you fro& /io!(ions in he pre/ious perio'. (3 5is*in /. Lo&(nsney @ Co. =ro*er sen's !eer 2i.e.% ( )riing3 'uring )(iing perio' offering o $o&&i sh(res o $uso&er% -u sen's no pre!i&in(ry prospe$us. Cuso&er re$ei/es E 1B prospe$us -efore he 'e(! is $onsu&&(e'. He!'A he !eer $onsiues ( E ;2-3213 /io!(ion 2p!(iniff re$o/ers un'er E 18213% pro/i'ing $i/i! !i(-i!iy for E ; /io!(ions3. <. Noe h( E ;2-3 si!! &(*es i ( /io!(ion o sen' ( nonDE 1B prospe$us or o 'e!i/er ( se$uriy for s(!e (-sen ( E 1B prospe$us% e/en in he posDeffe$i/e perio'. (3 =yrnes /. .(u!*ner% 5()*ins @ Su!!i/(n )rien $onfir&(ion of s(!e is ( 0prospe$us1 un'er E 82(321B3% (n' hus /io!(es E ;2-3 -e$(use i 'oes no $onfor& o E 1B. -3 Ho)e/er% un'er he E 82(321B32(3 'efiniion% you can 0free )rie1 if ( E 1B prospe$us h(s (!re('y -een sen if you (re in he posDeffe$i/e perio' ;. A!so noe h( R. 1B-D; 2,:< A$ (nifr(u' ru!e3 &(y re?uire 'is$!osure of su-se?uen 'e/e!op&ens e/en (fer he effe$i/e '(e. SEC /. 7(nor Nursing Ho&es 2(!so noe R. <8<2-3 0si$*ering13 C. #hen $(n ( 'e(!er 2not (n U9# or 'e(!er si!! ($ing (s (n U9#3 r(ns($ in ( se$uriy )ihou )orrying (-ou E ; 2espe$i(!!y re?uire&en o sen' ( E 1B prospe$us3H (3 There is no i&ing !i&i in E ; ise!f+ hus% )e urn o E <2:3. Su-p(r 2A3 on!y (pp!ies o nonDfi!e' se$uriies 2H3+ 2C3 on!y (pp!ies o unso!' (!!o&ens. -3 Thus% )e (re !ef )ih E <2:32=3% e4e&ping r(ns($ions <B '(ys (fer effe$i/e '(e or prior o <B '(ys (fer he firs 0-on( fi'e offer1 of he se$uriy. 213 HHA pro-(-!y -es o inerpre 0-on( fi'e offer1 (s (n offer )hen you can se!!% o (/oi' surp!us(ge pro-!e&. $3 )owe*er% noe he !(s p(r(gr(ph in E<2:3 he SEC $(n &o'ify he i&e !i&is /i( ru!e. They h(/e 'one so in R. 1O<. The fo!!o)ing s$he&e ensuesA 213 No re?uire&en o 'e!i/er prospe$us ( (!! if i,s ( ,:< A$ 2EE 1:% 1;2'33 $o&p(ny -efore fi!ing 2i.e.% G73. R. 1O<2-3% 2$3 INonDIPOK 283 8; '(ys (fer offering '(e 2!(er of effe$i/e or -on( fi'e offer '(e3 if no ,:< A$ $o&p(ny% -u is on (n e4$h(nge 2i.e.% Gener(! 7(gi$3 R. 1O<2'3 IIPOK 2:3 9B '(ys (fer offer for 0-!(n* $he$* $o&p(ny1 2i.e.% /ery s&(!! offers% !i*e Peer!ess3 R. 1O<2g3 IIPOK 1: of << 2<3 <B '(ys $o&p(nies se!!ing 'ire$!y Ireporing $o&p(nies )ih no prior regisr(ion ( r(re $(seK O. Pro-!e&s 2s(&e f($ p(ern (s (-o/e% e4$ep in posDeffe$i/e perio'3 (3 7us ( 'e(!er sen' ( E 1B prospe$us )ihA 213 Leer o $uso&er offering so$*H If E 1B prospe$us )(s pre/ious!y sen% hen no% sin$e E 82(321B3 e4$!u'es his fro& he 'efiniion of 0prospe$us1 sin$e i is posDeffe$i/e. Oher)ise% yes. 283 A so$* $erifi$(e &(i!e' o $uso&er )ho ($$epe' or(! offer o -uyH Les+ E ;2-3283 re?uires ( E 1B prospe$us o ($$o&p(ny 'e!i/ery. 2:3 S(&e (s (-o/e% -u $erifi$(e is 'e!i/ere' ( 'e(!er,s offi$eH A!&os $er(in!y yes. The on!y (rgu&en is ( Guris'i$ion(! &e(ns one 2i.e.% no using he &(i!s or iners(e $o&&er$e3. Cours )i!! pro-(-!y s(y h( so&e)here% ( so&e i&e% one of he &e(ns )(s use'. 2(3 Noe his $(n -e pro-!e&(i$ )hen foreign $ounries (re in/o!/e'% ho)e/er. 2<3 S(&e (s 283 (-o/e% -u $uso&er re$ei/e' E 1B prospe$us 'uring he )(iing perio'H Les. E ;2-3283 (g(in. No e4$epion for delivery for ( person )ho (!re('y h(s ( prospe$us+ ( E 1B prospe$us must ($$o&p(ny or pre$e'e 'e!i/ery. 2;3 A $onfir&(ion of s(!e )here ($$ep(n$e )(s o (n or(! e!ephone offerH Les. E ;2-3213% E 82(321B3 he $onfir&(ion is pro-(-!y ( 0prospe$us1 -u of $ourse 'oes no $onfor& o E 1B. On!y )(y o (*e i ou of E 82(321B3 'efiniion of 0prospe$us1 is o sen' ( E 1B prospe$us )ih i. 2C3 Afer $onfir&ing s(!e -y e!ephone o $uso&er )ho &('e offer o -uy /i( e!ephoneH No. =e$(use i is or(!% he $onfir&(ion is no ( 0prospe$us1 un'er E 82(321B3% so here is no E ;2-3213 pro-!e&. 2Of $ourse% you si!! h(/e o sen' ( prospe$us )hen he se$uriies (re 'e!i/ere'3. 2(3 A!so noe h( R. 1B-D1B re?uires -ro*ers o gi/e heir $uso&ers )rien $onfir&(ions. -3 C(n ( -ro*er $onfir& (n or(! s(!e )ih ( $opy of he fin(! E 1B prospe$usH Les. No E ;2-3 pro-!e&s here. $3 5e(!er &(i!s ( -ro$hure opi&isi$(!!y 'es$ri-ing $o&p(ny (!ong )ih he E1B s(uory prospe$us. =ro$hure ne/er fi!e' )ih SEC. Sio!(ionH 213 No% sin$e he E 1B prospe$us is ($$o&p(nying i% he -ro$hure isn, ( 0prospe$us1 un'er E 82(321B3. Nor&(!!y su$h -ro$hures 'o no nee' (ppro/(! 2here (re ( fe) e4$epions% no(-!y for &uu(! fun's3. 1< of << 283 Ho)e/er% here &(y -e !i(-i!iy un'er he (nifr(u' pro/isions of -oh A$s 2i.e.% poeni(! for &isrepresen(ions (n' o&issions+ fe(r of !i(-i!iy ypi$(!!y pre/ens issuers fro& using su$h -ro$hures3. '3 8 &onhs (fer he effe$i/e '(e% &us he 'e(!er sen' ( E 1B prospe$us o $uso&ers -uying he so$* on he open &(r*eH Les+ see 'es$ripion of E <2:32(3 (n' R. 1O< (-o/e+ his offer f(!!s ino he <B 2or 9BH3 '(y IPO r(nge. e3 One ye(r (fer effe$i/e '(e% 'e(!er si!! h(s so&e so$* fro& his origin(! pur$h(se fro& he U9#+ &us he 2or $(n he3 'e!i/er ( E 1B prospe$us o $uso&ers o )ho& he rese!!s he so$*H E <2:32$3 e4e&ps unso!' (!!o&ens fro& E;+ R. 1O<2f3 $onfir&s his. 213 =e)(re% ho)e/er% E 1B2(32:3 9 &onhs posDeffe$i/e% ( prospe$us $(n, -e o/er 1C &onhs o!' o ?u(!ify (s ( E 1B prospe$us. f3 T)o ye(rs (fer effe$i/e '(e% (n' one ye(r (fer he offer )(s $o&p!ee'% he $o&p(ny is !ise' on he NLSE. S(&e U9# )i!! h(n'!e ( ne) issue. C(n he U9# upgr('e he $o&p(ny in is ne)s!eerH 213 Ag(in% )e reurn o R. 1:OD1:9. R. 1:O $(nno -e use' -e$(use he U9# is 0p(ri$ip(ing in he offering.1 283 Thus% )e !oo* o R. 1:9. I per&is ( p(ri$ip(n o spe$ifi$(!!y re$o&&en' ( se$uriy if he $o&p(ny bothA 2(3 Is (n SD: $o&p(ny. The .or& !iss he re?uire&ens% -u gener(!!y i refers o $o&p(nies su-Ge$ o ,:< A$ 'is$!osure for o/er ( ye(r% )ih no 'ef(u!s% e$.% e$.+ (n' 2-3 7ees ( 0&ini&u& f!o(1 re?uire&en 2$o&&on e?uiy /(!ue is R PO;73 or 0in/es&en gr('e1 re?uire&en 2-on's r(e' ( $er(in gr('e -y 7oo'y,s% e$.3 2:3 A!ern(i/e!y% he re$o&&en'(ion is per&ie' un'er R. 1:9 ifA 2(3 The re$o&&en'(ion is of ( *in' 'isri-ue' )ih re(son(-!e regu!(riy% (n' 2-3 Is (n in'usryD)i'e repor or is ( $o&prehensi/e !is of re$o&&en'e' se$uriies% (n' 2$3 The issuer is gi/en no gre(er pro&inen$e h(n (ny oher se$uriy% (n' 2'3 The opinion is no &ore f(/or(-!e h(n in he !(s pu-!i$(ion% g3 Ten &onhs (fer he se$on' offering 'es$ri-e' (-o/e% he $o&p(ny fi!es ( regisr(ion s(e&en reg(r'ing ( ne) $!(ss of preferre' so$* using s(&e U9#. Shor!y here(fer% he $o&p(ny (nnoun$es (-o/eD proGe$ion e(rnings. C(n U9# re$o&&en' ( 0-uy1 no) in is ne)s!eerH 1; of << 213 R. 1:N if ( .or& SD8 or SD: $o&p(ny% -ro*er $(n re$o&&en' if issue is non$on/eri-!e% nonp(ri$ip(ing preferre' so$*. 283 >ey o .or& SD8 e!igi-i!iy &us h(/e -een su-Ge$ o ,:< A$ reporing for :C &onhs prior o regisr(ion. I,s ( $!ose $(!! in his $(se 2i 'epen's on ho) !ong he se$on' offering oo*3. III. The Regisr(ion Pro$ess A. The Inegr(e' 5is$!osure Syse& 1. I use' o -e h( ,:: A$ (n' ,:< A$ 'is$!osures )ere o(!!y sep(r(e. Reg. SD> 219OO3)(s he firs sep o)(r's inegr(ion% (n' !(er re/isions fo!!o)e' 2e.g.% .or& 1BD>% R. 1<(D:% Reg. SDT3. 8. .or&s SD1% SD8% (n' SD: ('op ( hreeDier syse& for &os regisr(ions 2fro& he !onges o he &os (--re/i(e' regisr(ions3. :. A -rief )or' on Effi$ien C(pi(! 7(r*e Hypohesis 2EC7H3 (3 This is -(si$(!!y ( heory h( (!! infor&(ion (-ou ( se$uriy is $on(ine' in is pri$e. 213 EC7H h(s hree for&sA srong% se&iDsrong% (n' )e(*. Srong s(ys (!! infor&(ion% e/en insi'er infor&(ion% is $on(ine' in he pri$e+ se&iDsrong s(ys he pri$e in$!u'es (!! pu-!i$ infor&(ion+ (n' )e(* s(ys h( (!! p(s '(( is in$orpor(e' in he pri$e. 283 SEC regu!(ion is pre&ise' &os!y on he se&iDsrong hypohesis of EC7H. This is p(ri(!!y )hy he e&ph(sis is on disclosure. This is p(ri$u!(r!y e/i'en )ih .or& SD: 2for )e!!Des(-!ishe' $o&p(nies3+ he presu&pion is h( hese $o&p(nies (re fo!!o)e' $!ose!y -y he &(r*e so 'e(i!e' 'is$!osure for e/ery offering is unne$ess(ry. <. T)o *ey $on$eps for he 'is$!osure syse&A (3 7e$h(ni$(!!y% ho) 'o you 'is$!oseH 213 The 0oo!*i1A Reg. C gi/es you &e$h(ni$s 2fons% e$.3+ SD> 'e(!s )ih nonD($$ouning 'is$!osures+ SDT 'e(!s )ih ($$ouning s(n'(r's. 283 The -igges p(in is SD> I. :B:% 7(n(ge&en 5is$ussion (n' An(!ysis 275@A3. 7(ny ( $orpor(e (sso$i(e goes -!in' !oo*ing o/er his suff" -3 Ho) 'o )e !ighen ,:: A$ -ur'ens in !igh of EC7HH 213 7os!y% reporing re?uire&ens (re ie' $!ose!y o pro4y s(e&en 'e!i/ery (n' ,:< A$ 'is$!osures% he r(ion(!e -eing h( in (n effi$ien &(r*e one 'is$!osure is enough. ;. 5is$!osure Aspe$s of Perio'i$ Reporing Re?uire&ens 1C of << (3 E 182(3 of ,:< A$ -ro*er $(n, r(ns($ in ( se$uriy on ( n(ion(! e4$h(nge un!ess here is (n e4$h(nge regisr(ion s(e&en in effe$ 2not ( ,:: A$ regisr(ion"3 213 Is i possi-!e o regiser for ,:< A$ -u no for ,::H Les if se$uriy is !ise' on e4$h(nge -u is e4e&p fro& ,:: A$ for so&e re(son. 283 5e(i!s of regisr(ion (re in ,:< A$ E 182-3 -3 E 1:2(3 if regisere' un'er E 18% you &us perio'i$(!!y repor. 213 Pro-!e&A E 182(3 is in$o&p!ee 2on!y ges n(ion(! e4$h(nges3+ E 182g3213 (n' R. 18gD1 pu!!s in $o&p(nies )ih P17 (sses (n' o/er O;B sh(reho!'ers. 283 #h( if ( $o&p(ny issues nohing -u -on's 2(n' h(s fe) or no sh(reho!'ers3H There is no E 182g3 (n(!og% -u E 1;2'3 (n' is regu!(ions pu!! in so&e. $3 5is$!osure re?uire&ens un'er he ,:< A$ 213 R. 1:(D1 re?uire&ens of (n (nnu(! repor+ .or& 1BD> is usu(!!y use'% i pi$*s up ( !o fro& Reg. SD>+ 1:(D11 re?uires .or& ND> for unusu(! e/ens. 283 R. 1<( reg(r'ing pro4y so!i$i(ion is ( *ey ru!e i re?uires S$he'u!e 1<A% )hi$h (!so (ps Reg. SD> 2:3 Ne) 0p!(in eng!ish1 ru!es 2R. <813 &e(ns you )in' up h(/ing% in effe$% 0)o1 prospe$uses% one for he or'in(ry in/esor (n' one for insiuion(! in/esor. =. The Regisr(ion S(e&en 1. 5is$!osure (3 Fu(!i(i/e 5is$!osure 213 The SEC re?uires ?u(!i(i/e infor&(ion (s )e!! (s ?u(ni(i/e '(( so h( in/esors $(n e/(!u(e he $h(r($er% inegriy% (n' (-i!iy of &(n(ge&en. 283 In he 7(er of .r(n$h(r' Corp. &(Goriy sh(reho!'er &(*es se/er(! ?uesion(-!e !o(ns o hi&se!f. He!'A hese &us -e 'is$!ose' e/en hough hey (re no re?uire' -y (ny for& -e$(use hey (re material o he in/esing pu-!i$. 2(3 The 0*(!ei'os$opi$ /(riey of e$ono&i$ !ife1 pre$!u'es enu&er(ion of e/eryhing h( &us -e 'is$!ose'. 2-3 Noe R. <BN i -(si$(!!y ('ops his !ine of hin*ing% s(ying you h(/e o in$!u'e in he regisr(ion s(e&en (ny &(eri(! infor&(ion e/en if no spe$ifi$(!!y enu&er(e'. 2:3 Noe h( SD> I. <BBs 'i$(e inegriy 'is$!osures% )hi$h (''ress &(ny of he $on$erns in .r(n$h(r'. 7os no(-!e is I. <B12f3. 1O of << 2<3 .urher noe SD> I. <B8 2&(n'(ing 'is$!osure of offi$er $o&pens(ion3 (n' I. 1B: 2&(eri(! pen'ing !eg(! &(ers% espe$i(!!y en/iron&en(! suis3. -3 Ne) Appro($hes o 5is$!osure 213 0Sof1 infor&(ion 2i.e.% for)(r'D!oo*ing s(e&ens3 2(3 These use' o -e for-i''en. They )ere en$our(ge' -y he ('opion of R.1O; (n' R. :-DC% )hi$h &(*es su$h s(e&ens no fr(u'u!en so !ong (s hey h(/e ( reasona(le (asis (n' (re 'is$!ose' in good faith. 2i3 #ei!gos /. Co&&on)e(!h E'ison he O h Cir. 'e$i'es h( goo'Df(ih for)(r' !oo*ing s(e&ens $(n yie!' su&&(ry Gu'g&en for 'efen'(ns -(se' on R. 1O;. 2-3 Re!e(se CO11 The 75@A se$ion 2SD> I. :B:3 must 'is$!ose 0*no)n ren's1 (n' heir i&p($ on he $o&p(ny. 2i3 75@A goes on he 1BD> (n' 1BDF 2ii3 One $(nno sue pri/(e!y for 'ep(rures fro& he re?uire&ens of I. :B: on!y he SEC $(n enfor$e i 2-u possi-!y $(n )ih (nifr(u' pro/isions% e$. for o&issions% e$.3 2$3 Re!e(se CN:; 7us 'is$!ose fuure un$er(inies )ih ( poeni(! &(eri(! i&p($ 2'3 PSLRA in 199;% refor& (''e' +7, o he ,:: A$ (n' +-. o he ,:< A$. =oh pro/i'e 0s(fe h(r-ors1 for for)(r'D!oo*ing e(rnings proGe$ions if ( 0&e(ningfu! $(uion(ry s(e&en1 is in$!u'e'. See 'is$ussion infr(. 283 0P!(in Eng!ish1 ru!es R. <81 )en ino effe$ in O$o-er 199N re?uiring e(sierDoDre(' !(ngu(ge in fi!ings. See (-o/e for 'is$ussion. $3 Pro-!e&s SD1 regisr(ion+ )h( 'is$!osures (re re?uire' in e($h of he fo!!o)ingH #h( is per&ie'H 213 L(s ; ye(rs profis )ere !o)er h(n he ; ye(rs pre/ious. 2(3 .or& SD1% I. 112f3 'ire$s us o SD> :B1 2-3 SD> I. :B12(3 re?uires fin(n$i(! '(( fro& he pre/ious ; ye(rs+ :B12-3 re?uires (ny (''iion(! ye(rs nee'e' o *eep he infor&(ion fro& -eing 0&is!e('ing.1 2$3 So he ?uesion isA is o&iing he 'rop 0&is!e('ing1H Cou!' -e ( re(! 'e$!ine% -u hen (g(in $ou!' -e in'usryD)i'e 'e$!ine or ($$ouning $h(nge. In/esors )i!! )(n o *no) his (n' )i!! )(n o *no) )hy. 1N of << 2'3 Noe I. :B1 Insru$ions% U8% V 8 for &(eri(! fuure un$er(inies or hings h( (ffe$ $o&p(r(-i!iy of fin(n$i(! '(( 2!i*e ($$ouning $h(nges3% you &us 'is$!ose. 2e3 A!so noe I. :B: 2pi$*e' up -y SD1 I. 112h33% he 75@A se$ion. I e$!ipses &u$h of he (-o/e+ -(si$(!!y% you,/e go o 'is$!ose e/eryhing h( has or could &(eri(!!y (ffe$ he $o&p(ny. 283 Issuer rens -ui!'ing fro& p(rnership. CEO,s )ife is ( p(rner in h( p(rnership. 2(3 5o )e nee' o 'es$ri-e he -ui!'ingH SD> I. 1B8 2pi$*e' up -y SD1 I. 112-33 re?uires 'is$!osure of &(eri(! or prin$ip(! properies. The (ns)er is un$!e(r on hese !i&ie' f($s. 2-3 SD> I. <B<2(3 2pi$*e' up -y SD1 I. 112n33 re?uires 'is$!osure of r(ns($ions in e4$ess of PCB* in )hi$h ( 'ire$or% e4e$ui/e offi$er% R;W sh(reho!'er% or 2un'er su-p(r 2(32<33 ( &e&-er of he i&&e'i(e f(&i!y of one of he !ise' persons. 2i3 Ho) o $oun he PCB*H Insru$ion : e!!s us o in$!u'e (!! perio'i$ ins(!!&ens+ hus% )e ('' up he !e(se p(y&ens. 2ii3 #h( is (n 0e4e$ui/e offi$er1H R. <B; 'efines i+ i is he presi'en% (ny SDP in $h(rge of ( prin$ip(! -usiness uni% or (nyone )ho perfor&s ( 0po!i$y &(*ing fun$ion.1 2iii3 Noe Insru$ion N2C3 if she is Gus ( limited p(rner 2not ( gener(! p(rner3 2$3 A!so noe SD> I. CB1 2pi$*e' up -y SD1 I. 1C3 re?uiring e4hi-is% in$!u'ing &(eri(! $onr($s for .or& SD1 2see (-!e3. CB12-321B3 'efines 0&(eri(! $onr($+1 i in$!u'es or'in(ry $onr($s )ih 'ire$ors (n' offi$ers+ !ogi$(!!y% his &us (!so in$!u'e heir f(&i!y o (/oi' e(sy 0en'Druns.1 2:3 Issuer is $on'u$ing high!y $onfi'eni(! negoi(ions for he ($?uisiion of (noher $o&p(ny. 2(3 SD> I. :B: 275@A% pi$*e' up -y SD1 I. 112h33 re?uires 'is$!osure of un$er(inies h( )i!! h(/e ( &(eri(! i&p($+ he pro-!e& here is h( 'is$!osure )ou!' !i*e!y *i!! he 'e(!. 2-3 R. <BC pro/i'es ( possi-!e so!uion+ i per&is ( $o&p(ny o re?ues h( $er(in infor&(ion fi!e' )ih he SEC -e *ep $onfi'eni(! 2hough his is &ore $o&&on!y use' for r('e se$res3. 2$3 Re!e(se ::DCN:; SEC s(ys you 'on, h(/e o 'is$!ose if i )ou!' Geop(r'iJe he r(ns($ion and the only reason for disclosure is S-K It !"!. 19 of << 2i3 Noe re?uire&en is h( i would Geop(r'iJe he r(ns($ion no h( i could. 2<3 Issuer h(s -orro)e' fro& insur(n$e $o&p(ny+ (gree&en re?uires he $o&p(ny o *eep ( $er(in (sseDoD!i(-i!iy r(io. 2(3 SD> I. 8B1 2pi$*e' up -y SD1 I. 112'33+ 8B12$3213 re?uires 'is$!osure of (ny resri$ions h( $ou!' &(eri(!!y !i&i he regisr(n,s (-i!iy o p(y 'i/i'en's. 2-3 A!so% SD> :B: 275@A3 $ou!' re?uire his. 2;3 One SDP &(*es ( su-s(ni(!!y higher s(!(ry h(n he oher SDP,s+ 'is$!osure )ou!' serious!y i&p(ir re!(ions -e)een he&. 2(3 SD> I. <B82(32:3 2pi$*e' up -y SD1 I. 112l33 re?uires 'is$!osure of he CEO p!us he highesDp(i' oher e4e$ui/e offi$ers. 2i3 Re$(!! h( R. <B; 'efines (n 0e4e$ui/e offi$er1 in p(r (s (nyone perfor&ing ( 0po!i$y&(*ing fun$ion.1 2-3 Cou!' ry o use R. <BC $onfi'eni(!iy (pp!i$(ion% -u i,s un!i*e!y o -e (ppro/e'. 2C3 CEO re$en!y so!' ( -un$h of sh(res ($?uire' )o ye(rs (go /i( he e4er$ise of so$* opions. 2(3 SD> I. <B82-3 is on!y ge(re' o)(r' $o&pens(ion p(i' in he p(s ye(r+ ho)e/er% )o ye(rs (go% sh(res )ere unregisere'+ SD1 I. 1; pi$*s up SD> I. OB1% re?uiring 'is$!osure of (!! s(!es of unregisere' se$uriies in he p(s hree ye(rs. 2-3 5oes he CEO h(/e o 'is$!ose he nu&-er of sh(res he ho!'sH SD1 I. 112&3 pi$*s up SD> I. <B:% re?uiring 'is$!osure of se$uriy o)nership of -enefi$i(! o)ners (n' &(n(ge&en. 2$3 If CEO only he!' opions% )ou!' h( h(/e o -e 'is$!ose'H Les% -e$(use SD> I. <B: *i$*s you o R. 1:'D:2'32132i32A3% )hi$h &(*es (n opion ho!'er ( 0-enefi$i(! o)ner.1 2'3 A!so noe insi'er r('ing ru!es &(*e i (n (uo&(i$ /io!(ion if ( 'ire$or or offi$er se!!s )ihin C &onhs of -uying+ enfor$e&en herefore re?uires 'is$!osure of when hey -uy (n' se!!. 2O3 Co&p(ny h(s -een -ri-ing foreign offi$i(! o ge ( $onr($. 2(3 The .oreign Corrup Pr($i$es A$ 2.CPA3 prohi-is !(rge gifs+ if !iig(ion ensues% SD1 I. 112$3 *i$*s in SD> I. 1B:% re?uiring 'is$!osure of !eg(! pro$ee'ings. 2-3 A!so noe SD> I. <B12f3 2*i$*e' in -y SD1 I. 112*33 re?uires 'is$!osure of !eg(! pro$ee'ings in he p(s fi/e ye(rs -e(ring on he inegriy or (-i!iy of ( 'ire$or or oher e4e$ui/e offi$er. 8B of << 2$3 If here is no !iig(ion% hen here is no ru!e on poin hough he SEC &igh -ring ( .r(n$h(r'Dype sui. 8. 7(eri(!iy (3 7(eri(!iy is everything. .(i!ure o 'is$!ose is on!y ( pro-!e& if he 'is$!osure )ou!' -e &(eri(!. -3 =(si$ /. Le/inson Supre&e Cour s(ys 0&(eri(!1 &e(ns he pro-(-i!iy 4 &(gniu'e of (n e/en 'eer&ines &(eri(!iy for $oningen or spe$u!(i/e e/ens+ i is ( f($Dspe$ifi$ in?uiry (n' here is no -righ !ine ru!e 2fro& Te4(s Gu!f Su!phurH3 213 =(si$ is &ore i&por(n in h( i ('ops he 0fr(u' on he &(r*e1 heory i.e.% ( p!(iniff 'oesn, h(/e o pro/e ($u(! re!i(n$e on ( &iss(e&en or o&ission 2re!i(n$e is presu&e'% (n' he 'efen'(n &us re-u i3. $3 The 0&ighD)ou!'1 'e-(e 'oes ( f($ nee' o -e certain o i&p($ (n in/esor,s $hoi$e% or nee' i on!y might i&p($ s(&eH 213 Supre&e Cour s(ys neiher hey s(y 2in =(si$3 ( 0su-s(ni(! !i*e!ihoo'1 is )h( is re?uire' 2)hi$h isn, /ery he!pfu!3. '3 =(si$ $our s(ys in foonoe 1O h( Mno $o&&en, )i!! suffi$e (s no &is!e('ing if no disclosure is mandated. This is pro-!e&(i$ -e$(useA 213 Corpor(ion ypi$(!!y h(s no 'uy o $orre$ ( ru&or un!ess i $(&e fro& (n insi'er+ poeni(! !i(-i!iy for$es $orpor(ions o on!y $orre$ f(!se ru&ors% )hi$h *i!!s he effe$i/eness of ( Mno $o&&en., 283 E4$h(nges 2!i*e NLSE3 ofen re?uire 'is$!osure. 2:3 Co&p(ny &(y h(/e ( 'uy o 'is$!ose if e/ens h(/e $(use' prior s(e&ens o -e$o&e &is!e('ing. 2<3 If ( $o&p(ny is -uying or se!!ing is o)n se$uriies hey h(/e o 'is$!ose (!! &(eri(! infor&(ion o pre/en insi'er r('ing. 2;3 Insi'er Tr('ing (n' Se$uriies .r(u' A$ of 19NN s(ys ( $o&p(ny $(n, *no)ing!y or re$*!ess!y f(i! o (*e 0(ppropri(e seps1 o -e sure insi'ers (ren, r('ing on insi'e infor&(ion )hi$h ypi$(!!y &e(ns 'is$!osure. e3 Pro-!e&s 213 6usi$e 5ep. sen's !eer o regisr(n reg(r'ing possi-!e (nirus /io!(ions. 2(3 SD> I. 1B: 2pi$*e' up -y SD1 I. 112$33% !(s senen$e &us 'is$!ose !iig(ion 0*no)n o -e $one&p!(e'1 -y he go/ern&en. Thus% you nee' &ore f($s 'oes his ype of !eer nor&(!!y &e(n ( !()sui is $o&ingH 2-3 R. <B9 'e(!s )ih un*no)n infor&(ion -(si$(!!y% you shou!' 'is$!ose h( you 'on, *no) 2(n' $(n, *no)3. 81 of << 2$3 Ho) 'oes his (ffe$ 75@AH T)o p(r (n(!ysis+ firs% figure ou if his is !i*e!y o o$$ur+ if you $(n, figure h(% (s* )h( he poeni(! i&p($ )ou!' -e if i 'oes o$$ur. 283 EPA or'ers $o&p(ny o sop 'is$h(rge fro& is p!(n. 2(3 Insru$ion ; of SD1 *i$*s you o SD> I. 1B12$321324ii3 en/iron&en(! $!(i&s (re h(n'!e' sep(r(e!y. :. Re'u$ing 'is$!osure ris*s 2esp. for)(r'D!oo*ing s(e&ens3 (3 In Re #or!'s of #on'er 2#O#3 Se$. Li. 9 h Cir. (nnoun$es he /(espea0s caution1 'o$rine h( is% ( for)(r'D!oo*ing s(e&en in he prospe$us is per&issi-!e if ($$o&p(nie' -y ( &e(ningfu! $(uion(ry s(e&en. 213 The s(e&en $(n, -e ( 0-!(n*e )(rning1 2i.e.% 0(!! se$uriies (re ris*y1 ype s(e&en3+ i &us -e (i!ore' o spe$ifi$ ris*s. The )(rnings (!so nee' o -e pro&inen (n' shou!' 'is$!ose (ny (ssu&pions re!ie' upon. 283 The !e/e! of proe$ion (ffor'e' /(ries (&ong Cir$uis 28 n' gi/es &ore proe$ion h(n ; h + so&e $ir$uis% !i*e < h % reGe$ ourigh3. -3 Congression(! response he 2&34, 213 P(r of he 0Ne) re/o!uion%1 he PSLRA is ( pie$e of ,9< !egis!(ion &(*ing i&por(n $h(nges for 'is$!osure !i(-i!iy. I )(s p(sse' o/er Pres. C!inon,s /eo. I represens ( signifi$(n $uing -($* of se$uriies regu!(ion. 283 New +-. 5633 ,ct7 and +7, 5638 ,ct7 /&afe )ar(or1 is he &os i&por(n (''iion. 2(3 This is ( s(uory ('opion of he #O# 0-espe(*s $(uion1 'o$rine. 2-3 The ne) se$ions (pp!y o $o&p(nies su-Ge$ o ,:< A$ EE 1:2(3 (n' 1;2'3 2i.e.% reporing $o&p(nies3% persons ($ing on hose $o&p(nies, -eh(!f% ousi'e re/ie)ers% (n' U9#. 2$3 These ne) se$ions pro/i'e ( 0s(fe h(r-or1 for for)(r'D !oo*ing s(e&ens. There (re )o (!ern(i/es. 2i3 A!ern(i/e U1A To ?u(!ify% he s(e&ens &usA 2(3 =e i'enifie' (s for)(r'D!oo*ing% 2-3 =e ($$o&p(nie' -y ( 0&e(ningfu! $(uion(ry s(e&en%1 2$3 The $(uion(ry s(e&en &us i'enify f($ors )hi$h $ou!' $(use &(eri(! 'e/i(ion fro& he proGe$ions. 2ii3 A!ern(i/e U8A p!(iniff &us sho) h( s(e&ens )ere &('e )ih actual #nowledge of heir f(!siy. 88 of << 2'3 There is (!so ( s(fe h(r-or for oral statements+ i is !i&ie' o he issuer (n' 0persons ($ing on -eh(!f of he issuer1+ he 0s(fe h(r-or1 is -(si$(!!y he s(&e% )ih he (''iion h( he )(rnings $(n -e in ( 'o$u&en in$orpor(e' -y he or(! s(e&en. 2e3 There (re (!so 0-(' -oy1 e4$epions e4$!u'ing he 0s(fe h(r-or1 fro& persons $on/i$e' of ( fe!ony in he p(s hree ye(rs% issuers of penny so$*s% IPOs% e$. 2:3 Heighene' p!e('ing s(n'(r's 2(3 The PSLRA in$re(se' he !e/e! of 'e(i! h( &us -e in$!u'e' in ( p!(iniff,s p!e('ings. 2-3 Re$(!! fro& =usiness Asso$i(ions h(% un'er Erns @ Erns /. Ho$hfe!'er% o (sser ( /(!i' 1B-D; (nifr(u' pro/ision% you &us (!!ege s$iener. 2i3 Prior o he PSLRA% he /(rious $ir$uis h(' /(rying p!e('ing s(n'(r's for s$iener 2i.e.% 8 n' re?uire' high p(ri$u!(riy% 9 h )(s ?uie !(4 (-ou p(ri$u!(riy3. 2ii3 The PSLRA ('ope' ne) E 8152-321D83% )hi$h re?uires ( p!(iniff o p!e('A 2(3 .or !iig(ion on &is!e('ing s(e&ens% e4($!y )hy he s(e&en is &is!e('ing 2-3 .or !iig(ion )ih ( s$iener re?uire&en 2i.e.% 1B-D;3% particular facts h( gi/e rise o ( strong inference h( he 'efen'(n ($e' )ih he re?uisie s(e of &in'. 2i3 Typi$(!!y% his &e(ns eiher es(-!ishing ( motive and opportunity o $o&&i fr(u'% or rec#lessness in he 'efen'(n,s $ons$ious -eh(/ior. 2iii3 Noe h( his is ($u(!!y ( higher s(n'(r' h(n h( e&p!oye' -y e/en he 8 n' Cir. 2<3 Oher $h(ngesA (!er(ion of ru!es for n(&e p!(iniff in se$uriies $!(ss ($ions% (!er(ion of he !i(-i!iy sru$ure 2&os!y for ousi'e 'ire$ors3. $3 HHA Pr($i$e noeA The PSLRA h(sn, !e' o (n (/(!(n$he of for)(r'D !oo*ing s(e&ens% pro-(-!y -e$(use no one )(ns o -e ( guine( pig+ i,s pro-(-!y -es o e!! $!iens no o (*e i oo !ier(!!y 2i.e.% for or(! s(e&ens% &(*e he $(uion(ry s(e&ens or(!!y r(her h(n re!ying on in$orpor(ing so&e )rien 'o$u&en3. <. E/(!u(ion of he 'is$!osure syse&. (3 Re$(!! h( he se&iDsrong /ersion of EC7H 'o&in(es he r(ion(!e -ehin' go/ern&enD$o&pe!!e' 'is$!osure. 8: of << -3 There (re% ho)e/er% (rgu&ens (g(ins re?uiring 'is$!osureA 213 In/esors )i!! 'e&(n' infor&(ion% espe$i(!!y insiuion(! in/esors )ho h(/e &ore $!ou. This is espe$i(!!y rue for IPOs. 283 A $o&p(ny,s repu(ion on #(!! Sree &(ers $o&p(nies h( pro/i'e &ore infor&(ion o'(y )i!! -e re(e' -eer )hen hey offer ( ne) se$uriy o&orro). A!so% $o&p(nies use 'is$!osure (s ( sign(!ing 'e/i$e o he &(r*e (-ou he $o&p(ny,s he(!h. 2:3 NLSE% NAS5% e$. se!fDregu!(e no one )i!! ris* -eing osse' off (n e4$h(nge% so hey )i!! 'is$!ose. 2<3 An U9# is 0rening1 his repu(ion )hen he &(*es (n offering+ he )i!! re?uire he $o&p(ny o 'is$!ose -e$(use he )on, )or* for he& if hey $ou!' ge hi& ino rou-!e. $3 Of $ourse% here (re p!eny (rgu&ens in f(/or of &(n'(ory 'is$!osureA 213 There (re srong in$eni/es o hi'e neg(i/e infor&(ion+ (-sen &(n'(ory 'is$!osure% on!y posii/e infor&(ion )ou!' -e 'is$!ose' ?ui$*!y. 283 Co&p(ny &(y )(n o hi'e $o&peii/e ('/(n(ges (s !ong (s possi-!e. 2:3 7(n(ge&en &(y fro& i&e o i&e )(n he so$* pri$e o -e low% su$h (s in prep(r(ion for ( L=O or so&e so$* opion p!(ns )hi$h ie he opion pri$e o he &(r*e pri$e. 2<3 Insi'er r('ing is e(sier if here is no 'is$!osure re?uire&en insi'ers $(n -uy (n' hen 'is$!ose. '3 A prin$ip(! (rgu&en re/o!/es (roun' he $oss of geing infor&(ion. 213 #ihou &(n'(ory 'is$!osure% hous(n's of (n(!yss (n' in/esors (re 'up!i$(ing e($h oher,s effors o ge he s(&e infor&(ion% )hi$h is /ery ineffi$ien. 283 There,s (!so ( 0free ri'er1 pro-!e& on$e ( 'is$o/ery is &('e% he pu-!i$ )i!! ?ui$*!y (-sor- i )hen i !e(*s. The (n(!ys )ho &('e he 'is$o/ery 'oesn, -enefi fu!!y fro& i% so his in$eni/e o 'ogge'!y rese(r$h is 'i&inishe'. ;. Ci/i! Li(-i!iy @ 5ue 5i!igen$e (3 >ey sour$es of $i/i! !i(-i!iyA 213 ,:: A$ E 11 &(*es designated persons !i(-!e for material &is!e('ing s(e&ens or o&issions in the registration statement un!ess ( 'ue 'i!igen$e 'efense is (/(i!(-!e. 283 >eys (re &(eri(!iy (n' he s(e&en &us -e in he regisr(ion s(e&en. 2:3 ,:: A$ E 182(3213 !i(-i!iy for ( s(!e h( /io!(es E ;. 8< of << 2<3 ,:: A$ E 182(3283 &(*es misleading statements/omissions in $onne$ion )ih ( sale/offer to sell a security -y &e(ns of prospectus or oral communication. 2(3 >ey is h( ( 0se$uriy1 &us -e so!'% (n' h( he se$uriy is no (n e4e&p one un'er E :2(3283 Igo/ern&en se$uriiesK. Noe h( or(! s(e&ens $(n gi/e rise o !i(-i!iy here. 2-3 A!soA (ffir&(i/e 'efense of 0re(son(-!e $(re.1 2;3 ,:< A$ E 92e3 (nyone 0)i!!fu!!y p(ri$ip(ing1 in (n ($ h( /io!(es E 9 I&(nipu!(ion of se$uriy pri$esK. 2(3 This se$ion is ri''!e' )ih e4$epions% so p!(iniffs 'on, !i*e i. Noe he s(ue of !i&i(ionsA )ihin one ye(r of 'is$o/ery and hree ye(rs of he /io!(ion. 2-3 A!so noe he M)i!!fu!ness, re?uire&en% (s )e!! (s he f($ h( i 'oes no (pp!y o he OTC &(r*e 21B-D; is e(sier on his3. 2C3 ,:< A$ E 1N $i/i! !i(-i!iy for (ny f(!se or &is!e('ing s(e&en in ( ,:< A$ fi!ing. 2(3 >eysA p!(iniff &us h(/e pur$h(se' or so!' he se$uriy% he pri$e &us h(/e -een (ffe$e'% he p!(iniff re!ie' on he s(e&en% (n' he 'efen'(n $(nno pro/e ( 0goo' f(ih1 'efense. 2O3 ,:< A$ E 1<2'3% 2e3 (nifr(u' pro/isions for en'er offers. 2N3 1B-D; he -(si$ (nifr(u' pro/ision. 2(3 I is 0un!()fu! for (ny person IXK 213 o e&p!oy ( 'e/i$e% s$he&e% or (rifi$e o 'efr(u'% 283 o &(*e (ny unrue s(e&en of &(eri(! f($ or o o&i o s(e ( &(eri(! f($ ne$ess(ry in or'er o &(*e he s(e&en &('e% in he !igh of he $ir$u&s(n$es un'er )hi$h hey )ere &('e% no &is!e('ing% or 2:3 o eng(ge in (ny ($% pr($i$e% or $ourse of -usiness )hi$h oper(es or )ou!' oper(e (s ( fr(u' or 'e$ei on (ny person% in $onne$ion )ih he pur$h(se or s(!e of (ny se$uriy.1 2-3 >(r'on /. N(ion(! Gypsu& $re(es (n i&p!ie' $(use of ($ion un'er his ru!e+ sin$e hen% here h(s -een ( huge (&oun of Gurispru'en$e inerpreing s(&e. 2$3 This ru!e is use' so &u$h h( (&ong he se$uriies -(r i is si&p!y $(!!e' 0he ru!e.1 -3 Ci/i! Li(-i!iy un'er E 11 of he ,:: A$ 213 >ey Fuesions 2(!! $o/ere' in 'e(i!% infr(3A 2(3 #ho &(y sueH 2-3 #ho &(y -e sue'H 8; of << 2$3 Ho) o &e(sure '(&(gesH 2'3 #h( &us he p!(iniff pro/eH 2e3 Is here ( 'ue 'i!igen$e 'efense (/(i!(-!eH 283 #ho &(y sueH 2(3 Anyone )ho pur$h(ses ( se$uriy in eiher he pri&(ry or se$on'(ry &(r*e 2-oh se$ions3. 2i3 =(rnes /. Osofs*y p!(iniff &us trace his sh(res o he spe$ifi$ offering $h(!!enge'. #hyH =e$(use he se$uriy &us -e re!(e' o he regisr(ion s(e&en 2(rgu(-!e inerpre(ion3. 2-3 Noe E 1: pro/i'es ( s(ue of !i&i(ions for E 11 (n' E 182(3 283 : ye(rs (fer he offering (n' one ye(r fro& 'is$o/ery. 2$3 E 1: (!so pro/i'es ( !i&i for E182(3213 ($ions one ye(r (fer he /io!(ion. 2:3 #ho &(y -e sue'H 2(3 E 112(3 !iss hose )ho $(n -e sue'A 2i3 E/eryone signing he regisr(ion s(e&en+ 2(3 Noe his (uo&(i$(!!y in$!u'es he regisr(n 2i.e.% issuer3 -e$(use Insru$ion 1 o .or& SD1 re?uires i. 2ii3 5ire$ors 2(n' hose (-ou o -e 'ire$ors3 (n'9or persons perfor&ing 'ire$orD!i*e fun$ions+ 2iii3 The U9#s+ 2i/3 E4pers 2($$oun(ns% e$.3 to the extent of the portion certified by the expert. 2-3 A!so noe he E 1; 07r. =ig1 e4$epion ( person e4er$ising $onro! 2/i( (gree&en or so$* o)nership3 o/er (noher is !i(-!e Goin!y (n' se/er(!!y o he s(&e e4en (s he $onro!!e' person. 2$3 Noe here is no su$h !is for E 18. 2<3 Ho) o &e(sure '(&(gesH 2(3 Noe E 112f32832A3 I!i(-i!iy of ousi'e 'ire$orsK re/ision i refers o E :N of he ,:< A$% -u E :N 'oes no e4is" They pro-(-!y &e(n E 812'3. 2i3 If h( is $orre$% hen Goin (n' se/er(! !i(-i!iy is on!y (/(i!(-!e if he p!(iniff pro/es ( #nowing /io!(ion of he se$uriies !()s+ (!so% per$en(ge f(u! is o -e 'eer&ine' -y per$en(ge $(us(ion+ here (re so&e e4$epions% oo. 2-3 A!so noe E 112e3 pro/isos% no(-!y h( U9# is on!y !i(-!e o he e4en of his proporion(e ineres in he un'er)riing. 8C of << 2$3 E 11 ( firs -!ush soun's !i*e i uses res$issionDype '(&(ges -u pro/iso in E 112e3 &(*es i &ore !i*e ouDofDpo$*e $oss% )hi$h is &ore in !ine )ih $o&&on !() fr(u'. 2'3 .in(!!y% noe h( '(&(ges &us -e re'u$e' o he e4en h( he defendant pro/es h( he p!(iniff,s !oss )(s fro& so&ehing oher h(n he &iss(e&en9o&ission. E 112e3. 2i3 This is soD$(!!e' 0neg(i/e $(us(ion%1 h( is% he 'efen'(ns &us pro/e hey didn$t $(use he h(r&. 2ii3 A*er&(n /. Ory4 Co&&uni$(ions 'efen'(n &e 0neg(i/e $(us(ion1 -ur'en -y sho)ing h( he pu-!i$ 'i' no re($ ('/erse!y o 'is$!osure of ( &iss(e&en+ in f($% he pri$e of he so$* rose. 5efen'(n is no !i(-!e for preD pu-!i$ 'is$!osure 'e$!ine. 2(3 P!(iniff $ounersA he re!e/(n 'is$!osure '(e should -e '(e of 'is$!osure o he SEC% no he pu-!i$% -e$(use insi'er r('ing h(' for$e' he pri$e 'o)n (n' U9# use' /(rious e$hni?ues o prop he pri$e up here(fer. Cour ignores -e$(use p!(iniff $(n, pro/e. 2-3 The $our is unusu(!!y proD'efen'(n in his $(se+ i is pro-(-!y (n ou!ier #O# is &ore !i*e!y o -e fo!!o)e'. 2;3 #h( &us he p!(iniff pro/eH 2(3 E 112(3 he &us on!y pro/e (n unrue s(e&en or o&ission of &(eri(! f($. There is no reliance re%uirement. 2i3 Re$(!! he =(si$ 0fr(u' on he &(r*e1 heory. 2ii3 9ut NoteA E 112(3% !(s p(r(gr(ph re!e(se of e(rnings s(e&en $o/ering ( perio' of twelve months (fer he effe$i/e '(e re?uires he p!(iniff o pro/e $(us(ion. 2iii3 There is (!so no s$iener re?uire&en (s here is )ih R. 1B-D;. 2i/3 Noe h( here is ( &(eri(!iy re?uire&en% ho)e/er. 2-3 Re$(!! =(rnes /. Osofs*y re?uires p!(iniff o pro/e his sh(res $(&e fro& he spe$ifi$ offering he regisr(ion s(e&en re!(e' o. $3 5ue 5i!igen$e 5efenses un'er E 11 213 E 112-3 !iss 0'ue 'i!igen$e1 (ffir&(i/e 'efenses (/(i!(-!e o 'efen'(ns. 2(3 Noe h( he issuer is a(solutely (arred fro& (ssering ( 'ue 'i!igen$e 'efense -y E 112-3. 8O of << 2-3 The res of he se$ion 'es$ri-es )hen e4pers (n' none4pers )i!! -e he!' !i(-!e for he 0e4perise'1 (n' 0nonDe4perise'1 porions of he regisr(ion s(e&en% respe$i/e!y. Noe he $h(r ( he en' of he ou!ine )hi$h su&&(riJes hese pro/isions. 2$3 E4pers 2i3 Are no !i(-!e at all for nonDe4perise' porions ( (!!. E 112(32<3. Thus% hey don6t ha*e to esta(lish a defense for hese porions. 2ii3 Are !i(-!e for he e4perise' porions un!ess hey $(n sho) ( 0re(son(-!e groun'1 for heir -e!ief (fer ( re(son(-!e in/esig(ion. E 112-32:32=3. 2'3 NonDE4pers 2i3 Are !i(-!e for nonDe4perise' porions un!ess hey $(n sho) ( 0re(son(-!e groun'1 for heir -e!ief (fer ( re(son(-!e in/esig(ion. E 112-32:32A3. 2ii3 Are no !i(-!e for he e4perise' porions unless plaintiffs $(n sho) no 0re(son(-!e groun'1 for heir -e!ief (fer ( re(son(-!e in/esig(ion. E 112-32:32C3. 283 Noe R. 1OC% 'efining )h( is ( 0re(son(-!e in/esig(ion1 -(si$(!!y% i 'epen's on )ho he person is (n' )h( heir re!(ionship o he $o&p(ny is. 2:3 Es$o /. =(rChris $!(rifies )h( /(rious ypes of 'efen'(ns &us sho) o es(-!ish ( 0re(son(-!e in/esig(ion1 for ( 'ue 'i!igen$e 'efense. 2(3 Offi$ers 2C.O >ir$her3 e4re&e!y high s(n'(r'% sin$e hey (re in ( posiion o *no) )h( is going on. Tough o es(-!ish ( 'efense for eiher e4perise' or nonDe4perise'. 2-3 Insi'e 5ire$ors 2young !()yer =irn-(u&3 $ou!' re!y on e4per,s figures% -u $ou!' no re!y on ousi'e $ounse!,s porions 2-e$(use h( is $onsi'ere' 0une4periJe'13. He &us &(*e his o)n in/esig(ion. 2$3 Insi'e 5ire$ors 2o!' !()yer Gr(n3 $our is h(rsher )ih hi& h(n )ih =irn-(u& -e$(use he,s -een here !onger (n' hus h(s gre(er ($$ess o infor&(ion. 2'3 Ousi'e 5ire$ors 2Aus!(n'er3 he $ou!' re!y on he e4per,s figures% -u is on he hoo* for he none4perise' porions. He $(n, Gus re!y on he offi$er,s s(e&ens 2h(' o ( !e(s re(' he prospe$us"3 >eyA you can delegate: (ut you are lia(le for your delegate6s in*estigation. 2e3 Un'er)riers 2Co!e&(n3 on!y !i(-!e for none4perise' porion% -u &us -e thorough in in/esig(ing 2i.e.% here% he 8N of << on!y 0&(Gor $onr($1 !oo*e' ( )(s (n insur(n$e $onr($ h(,s $er(in!y no enough"3. A!so% U9# $(n re!y on (gen% -u is !i(-!e for (gen,s in/esig(ion. 2f3 E4pers 2Pe(% 7(r)i$*3 !i(-!e on e4perise' porion 'ue o insuffi$ien in/esig(ion 'uring he (u'i. 2<3 Is here ( 'ifferen$e -e)een he E 11 'ue 'i!igen$e 'efenses (n' he E 182(3283 0re(son(-!e $(re1 'efensesH So&e s(y no. So&e 2!i*e 6. Po)e!!3 s(y h( 'ue 'i!igen$e is ( 'uy o in/esig(e r(her h(n one of $(re. The SEC s(ys h( E 18 is ( !o)er s(n'(r' 2see R. 1OC3. 2;3 Noe he pro-!e& of re$or's reenionA on he one h(n'% i $(n he!p sho) ( /(!i' 'ue 'i!igen$e effor% -u on he oher h(n' i per&is p!(iniff,s !()yers o !oo* ( &e&os% e$.% )ih he -enefi of hin'sigh inno$uous 'o$u&ens $ou!' pro/e '(&(ging !(er. '3 Ci/i! Li(-i!iy un'er E 18 of he ,:: A$ 213 E 182(3213 re$(!! i &(*es ( s(!e in /io!(ion of E ; ($ion(-!e. 2(3 7ore spe$ifi$(!!y% ( p!(iniff nee's o sho)A 2i3 The 'efen'(n )(s ( 0se!!er%1 2ii3 6uris'i$ion(! &e(ns )(s s(isfie' 2iners(e $o&&er$e9&(i!s3% 2iii3 5efen'(n f(i!e' o $o&p!y )ih E ; 2usu(!!y (n unregisere' offer or s(!e or f(i!ure o i&e!y 'e!i/er ( prospe$us3% 2i/3 A$ion is no -(rre' -y s(ue of !i&i(ions 2E 1:3 2/3 A'e?u(e en'er of he se$uriy is &('e )hen p!(iniff see*s res$ission inse(' of '(&(ges. 2-3 Re$(!! E ; re?uires registration 2un!ess you (re e4e&p3+ hus% E 182(3213 ($ions esseni(!!y $h(rge h( 0you shou!' h(/e regisere'1 inse(' of f(!se9&is!e('ing s(e&ens9o&issions. 2$3 =y is o)n er&s% E 182(3213 (ppe(rs o h(/e ( sri$ pri/iy re?uire&en+ h( is% on!y he person )ho he -uyer pur$h(se' he se$uriy fro& is !i(-!e. Ho)e/er% $(ses &(*e $!e(r h( i!e p(ss(ge is no he on!y hing h( $(n gi/e rise o !i(-i!iy. 2'3 Piner /. 5(h! =(si$ issue is 0)h( is ( Mse!!er, for E 182(3 purposesH He!'A one is ( se!!er if one ma#es active solicitations for the purchase. 2i3 The Supre&e Cour hus reGe$s he -ro('er ; h Cir. 0su-s(ni(! f($or in he s(!e1 es. 2ii3 A!so noeA he $our s(ys ( 0so!i$i(ion1 &us -e for the personal gain of the solicitor% i.e.% gr(uious urging o pur$h(se ( se$uriy is no 0so!i$i(ion.1 89 of << 2e3 E 182(3213 '(&(ges (re !i&ie' o res$ission if he p!(iniff si!! o)ns he se$uriy+ he $(n on!y pursue '(&(ges if he no !onger o)ns i. 283 E 182(3283 re$(!! i i&poses !i(-i!iy for misleading statements/omissions in $onne$ion )ih ( sale/offer to sell a security -y &e(ns of prospectus or oral communication. 2(3 >ey (ffir&(i/e 'efensesA 13 &negative causation'( Iin su-se$ion 2-3K (n' 83 &reasonable care1 Iin 2(3283 ise!fK 2i3 Re(son(-!e $(re is &u$h !i*e 'ue 'i!igen$e+ see poeni(! 'ifferen$es 'is$usse' supr( here% ho)e/er% he 'efense (!so (ppe(rs (/(i!(-!e o (n issuer. 2-3 Gus(fson /. A!!oy' A 0prospe$us1 is only ( 'o$u&en use' in ( pu-!i$ offering for E 182(3283 purposes+ hus% E 182(3283 $(nno -e use' o sue o/er ( se$on'(ryD&(r*e r(ns($ion. 2i3 Noe his !i&is he usefu!ness of E 182(3283 -e$(use he issuer r(re!y 'e(!s 'ire$!y )ih he pur$h(ser% hus e!i&in(ing Piner pri/iy. An' he U9# is no !i(-!e )here he pur$h(ser 'e(! )ih 'e(!er for he s(&e re(son. 2ii3 7os $o&&en(ors s(y his is ( poor 'e$ision 2(n' i re/erse' ( !o of !o)erD$our pre$e'en3. The $our uses E 1B (s ( 0'efiniion1 se$ion inse(' of referring o E 8 !i*e hey pro-(-!y ough o. 2$3 Noe here is no 0e4perise'1 'efense here !i*e here is un'er E 112'3 you h(/e o sho) re(son(-!e $(re (n' $(n, Gus re!y on e4pers. C. In'e&nifi$(ion% Conri-uion% (n' 6oin @ Se/er(! Li(-i!iy (3 In'e&nifi$(ion shifing !osses o oher 'efen'(ns 213 Gener(!!y% s(e !() 'eer&ines )hen ( 'ire$or9offi$er $(n ge in'e&nifi$(ion for se$uriies ($ions -rough (g(ins he&. 2(3 So&e h(/e 05@O in'e&nifi$(ion1 s(ues ypi$(!!y% hey (!!o) in'e&nifi$(ion in goo' f(ih. 283 Offi$i(! SEC posiion is h( in'e&nifi$(ion is (g(ins pu-!i$ po!i$y. 2(3 SD> I. OB8% ;1B% ;18 he s(ue is si!en+ SEC re?uires 'is$!osure of effe$ of in'e&nifi$(ion 2OB83 (n' s(e&en of SEC,s opinion of in'e&nifi$(ion 2;1B3 o ge ($$e!er(ion. A!so h(/e o (gree o !iig(e is (ppropri(eness un'er I. ;182h3 o ge ($$e!er(ion. 2-3 G!o-us /. L() Rese(r$h Ser/i$e $our refuses o honor in'e&niy (gree&en (s (g(ins pu-!i$ po!i$y+ he fe(r is h( U9# )ou!' -e $(re!ess if in'e&niy )(s (!!o)e' in (!! $ir$u&s(n$es. :B of << -3 Conri-uion Sh(ring of '(&(ges (&ong orfe(sors 213 ,:: A$ E 112f3 per&is re$o/ery for $onri-uion 0(s in $onr($.1 $3 6oin @ Se/er(! Li(-i!iy 213 PSLRA (''s ,:< A$ E 8152g32832A3 *i!!s Goin @ se/er(! !i(-i!iy un!ess he /io!(ion is #nowing. I is -rough in o ,:: A$ E 11 -y E 112f32832A3 for outside directors on!y. O. Pro-!e&s .($sA offering on 1191B9N1 ( P1B+ on :91B9N8 (n' N:% i re!e(se' (nnu(! repors for ye(rs N1 (n' N8% respe$i/e!y. On C98B9N:% $o&p(ny goes -(n*rup+ sh(res -e$o&e )orh!ess. (3 C(n pur$h(ser of so$* re$o/er un'er E 11 2(n' )h( &us he pro/e3 if he -ough he so$*A 213 On 119189N1 fro& U9# 2(n' re$ei/e' prospe$us3H On!y nee's o sho) &iss(e&en or o&ission. No re!i(n$e re?uire&en for E 11. 283 On 1891;9N1 fro& 'e(!er )ho pur$h(se' in he se$on'(ry &(r*e 2(n' )ho sen ( prospe$us o &ee E <2:3 re?uire&ens3H 2(3 If here,s no r($ing pro-!e& 2(s in =(rnes3% hen here is no pro-!e& sue $o&p(ny% e$. 2-3 If here,s ( r($ing pro-!e&% $ou!' ry E 182(3283 -u -e$(use of Piner pri/iy you,re !i&ie' o suing he 'e(!er. An' he h(s ( 0re(son(-!e $(re1 (n' 0neg(i/e $(us(ion1 'efenses he for&er )ou!' !i*e!y s(/e hi&. 2:3 On C91;9N8 fro& 'e(!er )ho pur$h(se' in se$on'(ry &(r*e% -u 'i' no gi/e -uyer ( prospe$usH 5oesn, &(er+ (ns)er is s(&e (s (-o/e. E 182(3283 )ou!' -e (/(i!(-!e% -u sin$e E < e4e&ps 'e(!ers if is re?uire&ens (re &e 2(n' his r(ns($ion is !ong enough (fer he offering o fi hose re?uire&ens3% here is no E ; /io!(ion o use. 2<3 On C91;9N:% fro& 'e(!er )ho pur$h(se' in se$on'(ry &(r*e ye 'i' no gi/e hi& ( prospe$us. 2(3 >eyA E 112(3% !(s p(r(gr(ph re!e(se of e(rnings s(e&en $o/ering ( perio' of twelve months after the effecti*e date re?uires he p!(iniff o prove causation. 2i3 The 0(fer he effe$i/e '(e1 pro/ision is )hy i 'i' no (pp!y o he pre/ious pro-!e&. 2ii3 Noe his $re(es ( huge in$eni/e o ge e(rnings ou in ( hurry" R. 1;N 'es$ri-es (n e(rnings s(e&en h( s(isfies his se$ion. -3 #h( is he !(es possi-!e '(e for ( p!(iniff o sueH E 1: : ye(rs (fer he -on( fi'e pu-!i$ offering 2ypi$(!!y% he effe$i/e '(e3 for E 11 (n' 182(3213 ($ions% i.e.% 1191B9N<. $3 #h( )ou!' he '(&(ges per sh(re -e ifA :1 of << 213 =ough ( P1B% so!' ( P18H )ero" E 112e3 2'ifferen$e -e)een (&oun p(i' (n' /(!ue ( i&e of sui9pri$e so!' (3. Here% you si&p!y s(y 0h(n* you.1 283 =ough ( P1;% so!' ( P;H P;% -e$(use offer pri$e )(s P1B. 2E 112e3 re?uires h( he pur$h(se pri$e $(nno e4$ee' he offering pri$e for '(&(ge $o&pu(ion purposes3. 2:3 =ough ( PN (n' he!'H PN 2S(!ue ( i&e of sui is Jero3. '3 #h( 'efenses (re (/(i!(-!e o all 'efen'(nsH E 112e3 neg(i/e $(us(ion% !($* of re!i(n$e 2ough o sho)3% i&&(eri(!iy. C. She!f Regisr(ion 1. Pro-!e&A Regisr(ion% e$.% is ( -ig% $u&-erso&e pro$ess+ i )ou!' -e ( !o e(sier if $o&p(nies $ou!' Gus regiser on$e (n' hen pu!! se$uriies 0off he she!f.1 8. R. <1; !es you 'o Gus h(+ se$uriies $(n -e 0preDregisere'1 for up o rough!y two years. (3 R. <1;2(3213243 !i&is his o SD: $o&p(nies 2he res of 2(3213 !iss oher spe$i(! $(ses )here i is per&ie'3. -3 R. <1; 2(3283 re?uires h( su$h regisr(ions -e 0re(son(-!y e4pe$e'1 o -e offere' (n' so!' )ihin )o ye(rs. :. The 'o)nsi'e o she!f regisr(ion 'ue 'i!igen$e ?u(!iy en's o 'e$!ine. (3 This is -e$(use he she!f is fast (n issue $(n go fro& i'e( o $!osing in rough!y hree '(ys. -3 Ho) o h(n'!e his pro-!e&H Co&p(nies en' o use he s(&e U9#% )ho in urn *eeps he s(&e !() fir& on re(iner. They 'o 'ue 'i!igen$e on ( regu!(r% ongoing -(sis. The $o&p(ny )i!! (!so h(/e ( 'ue 'i!igen$e $o&&iee h( &ees regu!(r!y. .re?uen!y% he !() fir& )i!! (ssign one or )o !()yers )ho )or* )ih he $o&p(ny on ( regu!(r -(sis so hey (re up o spee' on ongoing 'e/e!op&ens. $3 Re$(!! h( R. 1OC 'efines 0re(son(-!e in/esig(ion1 for 'ue 'i!igen$e (s 'epen'ing on &(ny f($ors% in$!u'ing he 0ype of se$uriy.1 This &(y pro/i'e so&e !ee)(y for ( she!f regisr(ion,s $o&presse' i&e. 5. S(e Se$uriies Regu!(ion 20=!ue S*y1 !()s3 1. Prior o 199;99C% (n issuer no on!y nee'e' SEC $!e(r(n$e% -u he $!e(r(n$e of e($h s(e )here he se$uriy )ou!' -e so!'. (3 #hi!e &(ny s(es ('ope' SECDsy!e 'is$!osureDon!y re/ie)% &(ny ohers 2in$!u'ing Te4(s3 h(' &eri re/ie) hey )ou!' re/ie) ( se$uriy o see if i )(s ( 0goo' 'e(!.1 8. These !()s (re no) &os!y pree&pe' -y fe'er(! !()% h(n*s o he C(pi(! 7(r*e Effi$ien$y A$ of ,9C 2p(r of he N(ion(! C(pi(! 7(r*e I&pro/e&en A$ of ,9C3 :8 of << (3 I (''s ne) E 1N o he ,:: A$. -3 E 1N prohi-is s(es fro& regu!(ing 0$o/ere' se$uriies+1 hey in$!u'eA 213 Se$uriies so!' on n(ion(! e4$h(nges 2in$!u'ing seg&ens of su$h e4$h(nges3 )ih !ising s(n'(r's% spe$ifi$(!!y in$!u'ing he NLSE% A7ET% (n' NAS5AF. 283 0Fu(!ifie' pur$h(sers%1 ypi$(!!y sophisi$(e' in/esors. 2:3 Insiuion(! in/es&en /ehi$!es% prin$ip(!!y &uu(! fun's. :. So )h( $(n he s(es si!! regu!(eH (3 The A$ e4p!i$i!y preser/es heir (uhoriy o 'e(! )ih fr(u' (n' 'e$ei. -3 I (!so preser/es heir (-i!iy o re?uire fi!ing of SECDre?uire' 'o$u&ens% (s )e!! (s heir (-i!iy o $o!!e$ regisr(ion fees. $3 The &os $o&&on ype of se$uriy f(!!ing ousi'e E 1N,s pree&pion (re s&(!! 0penny so$*s1 r('e' on !o$(! &(r*es. IS. S$ope of Se$uriies Regu!(ion A. 5efiniion of 0Se$uriy1 1. #hy is his i&por(nH =e$(use E ; (!*s (-ou offers o se!! 0( se$uriy.1 Thus% if so&ehing so!' isn, ( se$uriy i is -eyon' he pur/ie) of E ;. This is usu(!!y &u$h e(sier o (rgue h(n o (rgue i isn, ( 0s(!e1 or Guris'i$ion(! &e(ns. (3 HHA .or ( 'isgrun!e' in/esor% he (-i!iy o $!(ssify so&ehing (s ( 0se$uriy1 is he pro&ise' !(n'% per&iing hi& o sue. 8. S(uory 'efiniion in ,:: A$ E 82(3213 (n' ,:< A$ E :2(321B3A *ey er&s (re 0(ny noe% so$*% re(sury so$*% -on'% 'e-enure% IXK in/es&en $onr($% IXK or% in gener(!% (ny insru&en $o&&on!y *no)n (s ( Mse$uriy.,1 (3 Ho)e/er% noe he $h(pe(uA 0un!ess he $one4 oher)ise re?uires.1 This &e(ns h( so&ei&es hings )hi$h $(rry one of he enu&er(e' !(-e!s &(y no -e ( se$uriy for purposes of se$uriies regu!(ion. -3 Noe hen h( here (re )o ess in su$$essionA ( spe$ifi$ es% hen ( gener(! es. The for&er (s*s 0is i on he !isH1 (n' he !(er (s*s 0is i ( se$uriy in su-s(n$eH1 :. In/es&en Conr($sA The Ho)ey Tes (3 SEC /. #.6. Ho)ey A issue (re or(nge gro/es+ he 'e(! g(/e in/esors )o $onr($s% one for he !(n' 2i.e.% you o)n ( -un$h of or(nge rees3 (n' one for ser/i$e 2i.e.% Ho)ey )ou!' en' o gro)ing (n' h(r/esing he or(nges3. There )(s no regisr(ion s(e&en fi!e'. -3 The $our 'e/e!ope' )h( is no) *no)n (s he )owey #est o 'eer&ine )heher (n in/es&en $onr($ is ( 0se$uriy.1 I,s e!e&ensA :: of << 213 An investment of money 283 In ( common enterprise 2:3 #ih (n expectation of profits 2<3 Solely from the wor# of others. 2(3 Noe his !(s e!e&en h(s -een refine' -y !(er $(ses o &e(n 0predominantly fro& he )or* of ohers.1 $3 Thus% for e4(&p!e% ( fr(n$hise (gree&en is never ( se$uriy -e$(use he effors re?uire' -y he in/esor (re oo gre(. '3 Co&&on enerprise ho) &u$h $o&&on(!iy is re?uire'H 213 HoriJon(! $o&&on(!iy 2i.e.% poo!ing of in/es&en (&ong &u!ip!e in/esors3 2(3 This is ($$epe' -y /iru(!!y all $ours. Noe h( for $ours h( on!y ($$ep his 'efiniion% he Ho)ey es $(n on!y -e &e -y in/es&en s$he&es )ih &ore h(n one in/esor. 283 Seri$(! $o&&on(!iy 2i.e.% in/esorDpro&oer3. Cours )hi$h per&i /eri$(! $o&&on(!iy o s(isfy Ho)ey (*e )o possi-!e /ie)sA 2(3 Sri$ /ie) ( pro&oer (n' in/esor,s forunes &us -e $!ose!y ie' ogeher. 2i3 Thus% in SEC /. >os$o Inerp!(ne(ry% ( $os&ei$s A&)(yD!i*e pyr(&i' s$he&e s(isfies sri$ /eri$(! $o&&on(!iy -e$(use he in/esor,s forunes (re $!ose!y ie' o hose of he pro&oer,s re$rui&en s$he&e% )hi$h (!so (ffe$s he pro&oer,s su$$ess in he enerprise. 2-3 =ro(' /ie) in/esor,s forunes nee' on!y -e !in*e' o pro&oer,s effors. 2:3 Pro-!e& IID1 Res(ur(eur se!!s 1BW of his profis e($h o hree !i&ie' p(rners. They (!so ge 1BW o)nership e($h% p!us he righ o ('/ise he res(ur(eur. They &ee (!! he oher e!e&ens of he Ho)ey es% so is here $o&&on(!iy hereH 2(3 Pro-(-!y yes. There is ( pooling of funds (&ong in/esors% so his &ees horiJon(! $o&&on(!iy. 2-3 The *ey here is h( $o&&on(!iy is $onsi'ere' ( ough s(n'(r' o &ee+ i is he &os sringen of he Ho)ey e!e&ens. e3 #h( is &e(n -y 0e4pe$(ion of profi.1H 213 Unie' Housing /. .or&(n A issue (re sh(res in ( nonprofi housing $oDop. The sh(res $(nno -e r(nsferre' or p!e'ge' for !o(ns. They $(n 'es$en' on!y o he ho!'er,s spouse. CoDop /oing is not on ( perDsh(re -(sis. :< of << 2(3 He!'A /.conomic 4eality1 go/erns )heher his is ( se$uriy or no here% he $our (pp!ies he Ho)ey es. 2-3 Here% here is no e4pe$(ion of profi sin$e he sh(res $(nno -e r(nsferre'% e$.% so he sh(res (re no 0se$uriies.1 2$3 Gren(e'er 2in noes fo!!o)ing $(se3 if (ny profi &oi/e is pure!y in$i'en(!% i is si!! no ( 0se$uriy1 2so e/en if hey could -e r(nsferre'% hey &(y no -e 0se$uriies%1 hough his is ( $!oser $(!!3. 283 A!so see 'is$ussion of 0so$*1 (n' L(n'reh% infr(. 2(3 IE'.A A pure!y ($('e&i$ ?uesion 'oes his &e(n h( e$ono&i$ re(!iy9L(n'reh 'eer&ines )heher his is ( 0so$*1 2)hi$h is ( !ise' ie& in E 83 (n' Ho)ey 'eer&ines if i is (n 0in/es&en $onr($1 2(noher !ise' ie&3% or 'oes Ho)ey 'eer&ine -ohHK f3 #h( is &e(n -y 0in/es&en of &oney1H 213 Inern(ion(! =roherhoo' of Te(&sers /. 5(nie! A issue is ( non$onri-uory% $o&pu!sory pension p!(n. 2(3 He!'A his is no (n 0in/es&en of &oney1 -e$(use he porion of his p(y$he$* use' o fun' he pension is no sep(r(e' fro& his gener(! $o&pens(ion 2sin$e his is ( 'efine'D-enefi r(her h(n ( 'efine'D$onri-uion p!(n3. A!so% here is no re!(ionship -e)een ho) &u$h he p(ys in (n' ho) &u$h he re$ei/es fro& he p!(n. 2-3 Noe foonoe 18 (n 0in/es&en of &oney1 nee' no -e $(sh+ goo's (n' ser/i$es $oun% oo. 2$3 A!so noe h( he $our suggess h( ERISA regu!(ion of pensions )ou!' &(*e SEC $o/er(ge re'un'(n. This see&s o -e (n (ferhough% -u i is i&por(n !(er 2!i*e #e(/er% s(ying h( .5IC regu!(ion pree&ps he use of se$uriies !()s in so&e $(ses3. 283 SEC Re!e(se C1NN SEC (*es posiion h( /o!un(ry% $onri-uory pension p!(ns (re 0se$uriies.1 <. So$* (3 L(n'reh Ti&-er /. L(n'reh s(!e of !u&-er $o&p(ny+ )ou!' no &ee Ho)ey -e$(use in/esor )ou!' $onri-ue signifi$(n effors. 213 He!'A 0so$*1 is spe$i(!. The n(&e 'oes not $onro!% -u so$* is presu&pi/e!y ( se$uriy. Es(-!ishes *ey e!e&ens of 0so$*1 (s ( se$uriy. 2Is his 0e$ono&i$ re(!iy1 (s use' in .or&(nH3 283 Thus% i 'oesn, &(er if he in/es&en is no ( p(ssi/e one if he se$uriy in ?uesion is 0so$*.1 -3 L(n'reh e!e&ens of so$*A :; of << 213 Righ o re$ei/e 'i/i'en's )hen 'e$!(re' 283 Negoi(-i!iy 2:3 P!e'ge(-i!iy 2<3 Proporion(! /oing righs 2;3 Poeni(! for (ppre$i(ion in /(!ue ;. Noes (3 Re/es /. Erns @ Loung A issueA ( f(r& $oDop 'e&(n' noe. 213 A noe )ih Y 9 &onhs is spe$ifi$(!!y e4e&p un'er he 'efiniion of se$uriy in he ,:< A$ (n' -y he E : e4$epions in he ,:: A$. 2(3 FuesionA ( 'e&(n' noe $ou!' f(!! )ihin or )ihou he e4$epion% 'epen'ing on )hen ( 'e&(n' for p(y&en )(s &('e. Is i e4e&p on his -(sisH Cour s(ys no -e$(use i $ou!' -e $(she' ye(rs fro& no) 2hough 'issen 'is(grees3. 283 The $our s(ys a note is not li0e stoc0 here is no L(n'rehD!i*e srong presu&pion in f(/or of i -eing ( 0se$uriy.1 A!so% Ho)ey shou!' only -e use' o 'eer&ine if so&ehing is (n 0in/es&en $onr($%1 not o 'eer&ine if i is ( 0noe.1 2:3 The $our ('ops he 8 n' Cir$ui,s 0family resemblance1 es 2no) he Re/es es3. -3 #he 4e*es /family resem(lance1 test A noe is presu&e' ( se$uriy% -u h( presu&pion $(n -e re-ue' -y he fo!!o)ingA 213 .irs% refer o he 8 n' Cir$ui,s !is of noes h( (re no se$uriies. 283 If no on he !is% use he fo!!o)ing four f($orsA 2(3 Seller$s motive i.e.% is i o r(ise &oney 2( se$uriy3 or o f($i!i(e se!!ing ( &inor (sse or $onsu&er goo' 2no ( se$uriy3H 2-3 *lan of distribution i.e.% is here spe$u!(i/e r('ing in he insru&enH #i!! he insru&en gi/e rise o spe$u!(i/e r('ing -y he gener(! pu-!i$H If so% i &igh -e ( se$uriy. 2i3 The *ey here is ho) &(ny of he insru&en (re offered% no sold. 2$3 +easonable expectations of the investing public i.e.% if his is so&ehing he in/esing pu-!i$ )ou!' -e!ie/e o -e $o/ere' -y he se$uriies !()s% i &igh -e ( se$uriy. 2'3 ,oes another regulatory scheme preemptH Typi$(!!y ERISA% .5IC% or -(n*ing !()s+ if pree&pe'% i &igh not -e ( se$uriy. :C of << C. HH,s ('/i$e in 'eer&ining if so&ehing is ( se$uriy always !oo* o he gener(! purpose of he se$uriies !()s 2pre/ening fr(u' (n' 'is$!osure of infor&(ion o he in/esing pu-!i$3. =. E4e&pe' Se$uriies O. E :2(328DN3 of he ,:: A$ e4e&ps $er(in se$uriies fro& ,:: A$ re?uire&ens. =ro('!y spe(*ing% hey (reA (3 283 Se$uriies issue' -y or gu(r(nee' -y he fe'er(! or ( s(e9!o$(! go/ern&en% or -y ( n(ion(!9s(e -(n*. -3 2:3 Shor er& noes 2Y 9 &onhs3 use' in ( $urren r(ns($ion. $3 2<3 Re!igious or nonprofi issuers '3 2;3 Cer(in s(/ings (n' !o(ns (n' f(r& $oDops e3 2C3 R(i!ro(' e?uip&en russ f3 2O3 Cerifi$(es issue' -y ( re$ei/er or -y he rusee9'e-or in possession in ( -(n*rup$y $(se. g3 2N3 Insur(n$e po!i$ies (n' (nnuiy $onr($s. N. Noe h( Gus -e$(use you (re e4e&p fro& regu!(ion 'oes not e4e&p you fro& (nifr(u' ru!es. II. Ne) .in(n$i(! Pro'u$s 25eri/(i/es3 A. HHA T)o /isions of ne) fin(n$i(! pro'u$s &oi/(e he 'e-(e o/er heir re(&enA 9. 06ur(ssi$ P(r*1 fin(n$i(! s$ieniss in*ering )ih re(!iy $re(e $h(os h( )i!! 'esroy he& (n' hur he )or!' e$ono&y. 1B. 0Or'er I&pose' on Ch(os1 ne) pro'u$s re'u$e ris*. =. Ter&ino!ogy 11. OpionA he (-i!iy o pur$h(se or se!! ( ( se pri$e in he fuure. 2A 0pu1 is (n opion o se!!% ( 0$(!!1 is (n opion o -uy3 18. 0Sri*e pri$e1 is he pri$e he opion is pur$h(se' for+ he 0e4er$ise pri$e1 is he pri$e he opion $(n -e e4er$ise' (. 1:. .uures Conr($A ( $onr($u(! o-!ig(ion o -uy or se!! ( ( fi4e' pri$e in he fuure. 1<. S)(pA sophisi$(e' &e$h(nis& use' o re'u$e ris* 2'es$ri-e' -e!o)3 1;. 0Noion(! A&oun1 fi$ion(! prin$ip(! (&oun use' o $(!$u!(e p(y&en o-!ig(ions in ( s)(p r(ns($ion. C. There (re )o si'es o he 'e-(eA pro'u$ (n' pro$ess. 5. Pro'u$A Ineres R(e S)(ps 1C. =(si$ gis A h(s fi4e'Dr(e inf!o)s (n' /(ri(-!eDr(e ouf!o)s+ = h(s he opposie. They $(n -oh he'ge (g(ins heir respe$i/e ris*s 2for A% ineres :O of << r(es rising% for = ineres r(es f(!!ing3 -y 0s)(pping1 heir ineres p(y&ens. 1O. This r(ns($ion $(n -es -e f($i!i(e' -y (n iner&e'i(ry su$h (s ( -(n*. This is so for se/er(! re(sonsA (3 The -(n* $(n ($ (s ( matchma#er% sin$e he se(r$h $oss for ( fir& o fin' (noher fir& )ih opposing -u $o&p!i&en(ry ris* )ou!' -e prohi-ii/e. -3 The )o p(ries &(y -e )(ry of e($h oher,s $re'i)orhiness+ he -(n* (s iner&e'i(ry $(n so!/e his pro-!e&. $3 Noion(! (&oun &(y -e 'ifferen -e$(use of 'iffering siJes of he enerprises on e($h si'e of he r(ns($ion+ -(n* $(n Gus se up &u!ip!e r(ns($ions )ih s&(!! p(ries o s(isfy nee's of ( !(rge p(ry. '3 The (&oun of i&e he he'ge is nee'e' &(y no &($h% eiher+ he -(n* $(n ($ (s ( 0so!/en1 o h(n'!e his pro-!e& 2noe in his s$en(rio% he -(n* ($u(!!y (*es so&e ineres r(e ris*3. E. Pro$essA Pri$ing 7o'e!s 1N. =e$(use fin'ing physi$(! $ounerp(rs is e4pensi/e% he -(n* $(n se up ( model o 'eer&ine )h( o -uy 2!i*e ineres r(e fuures3 h( &($hes ineres r(e &o/e&ens so he -(n* $(n &(*e f!o(ing r(e p(y&ens. (3 7os $o&&on su$h &o'e! is he =!($*DS$ho!es Opion Pri$ing 7o'e!+ hough no) !(rge!y ou of f(/or% i ho!'s 2)ih so&e heroi$ (ssu&pions3 h( you on!y nee' o *no) /o!(i!iy% he i&e perio'% (n' he e4er$ise pri$e o pri$e (n opion. 213 If he e4er$ise pri$e is !o)% hen he opion pri$e is high 2-e$(use he possi-i!iy of e4er$ising )hen he &(r*e is (-o/e he e4er$ise pri$e is gre(er3. 283 If he /o!(i!iy is high% hen he opion pri$e is high 2-e$(use you 'on, have o se!!% you 'on, h(/e o )orry (-ou -ig 'rops+ hus% high /o!(i!iy &e(ns here is ( gre(er $h(n$e for (-o/eD(/er(ge profi on e4er$ise -e$(use i &e(ns -eer o''s on -ig pri$e Gu&ps3. 213 If he i&e perio' is !ong% he opion pri$e is high 2-e$(use here is &ore i&e for he &(r*e pri$e o poeni(!!y rise3. III. S(uory E4e&pions A. Noe ( he ouse h( e($h of hese e4e&pions only e4e&p ( se$uriy fro& E ;+ hey 'o not e4e&p one fro& he (nifr(u' ru!es. =. E <213 NonDIssuer E4e&pion 8. Noe h( E <213 e4e&ps fro& E ; e/eryone -u 0issuers% U9#% (n' 'e(!ers.1 Fuesion herefore is 0)h( is (n issuerH1 :. E 82(32<3 0issuer1 is e/ery person )ho issues or proposes o issue ( se$uriy+ e4$epions for C5s% /oingDrus $erifi$(es% e$. :N of << <. SEC /. 7urphy person org(niJing 2in his $(se% !i&ie' p(rnerships3 (n' pri&(ri!y responsi-!e for he /enure,s su$$ess or f(i!ure is (n issuer. A. E <283 Pri/(e Offerings ;. E <283 e4e&ps fro& E ; r(ns($ions 0no in/o!/ing (ny pu-!i$ offering.1 C. The -ur'en is on he issuer o sho) h( (n offering is no pu-!i$. O. A popu!(r e(r!y /ie) (&ong pr($iioners )(s h( if he nu&-er of in/esors )(s 8; 2so&ei&es 1BB3% hen he offer )(s no $onsi'ere' pu-!i$. N. To'(y% Regu!(ion 5 2$o/ere' infr(3 pi$*s up &os pri/(e offerings. Thus% E <283 is ( !iig(ion 'e/i$e use' )hen $o&p!i(n$e )ih Reg. 5 h(s -een s$re)e' up. A. Is use (s ( p!(nning 'e/i$e is gener(!!y !i&ie' o s&(!! offers o insiuion(! in/esors. =. >ey e!e&ens for E <283 (re he (/(i!(-i!iy of infor&(ion% ($$ess o infor&(ion% he n(ure of he offerees 2i.e.% (re hey sophisi$(e'H3% he &(nner of he offer% (n' he (-i!iy o rese!! one,s pur$h(se. 9. A$$ess o Infor&(ion (n' E <283 A. A s(!e of so$* o (!! or &os e&p!oyees is not ( pri/(e offering. SEC /. R(!sonDPurin(. The *ey is ($$ess o infor&(ion for all offerees. =. E($h offeree &us h(/e considerable -usiness e4perien$e. Li/e!y /. Hir$hfe!'. C. E($h offeree &us h(/e (!! he infor&(ion h( )ou!' oher)ise -e in$!u'e' in ( prospe$us. Hi!! Lor* Co. /. AI.. A!so noe he *ey is ($u(! offerees% not ($u(! pur$h(sers. 5. Ho) &u$h infor&(ion is nee'e' -eyon' h( )hi$h )ou!' -e in he prospe$usH 213 ; h Cir. see&e' o in'i$(e in Coninen(! To-($$o h( (n offeree &us (!so h(/e he righ o inspe$ he -oo*s. This see&e' o in'i$(e he nee' for ( pree4ising re!(ionship -e)een he offeror (n' he offeree. 283 In 5or(n /. Pero!eu& 7(n(ge&en Corp.% hey &o/e ()(y fro& his ru!e% in'i$(ing h( ($$ess o infor&(ion h( )ou!' -e pro/i'e' in he regisr(ion s(e&en &(y enough 'epen'ing on )ho he offeree is (n' his re!(ionship o he issuer. 2:3 5or(n $ies four f($orsA 2(3 The nu&-er of offerees 2no pur$h(sers3 (n' heir re!(ionship o he issuer (n' o e($h oher. #his is most critical. 2i3 Insiders 'o no nee' prospe$usD!i*e 'is$!osure. They $(n re!y on access o s(isfy heir infor&(ion nee's. 2(3 Noe he insi'er &us -e (n insi'er with respect to the securities issued. 2foonoe 1N of 5or(n3. :9 of << 2ii3 -on-insiders nee' disclosure of he infor&(ion h( )ou!' -e in he regisr(ion s(e&en. 2(3 Noe h( so&e $ours )ou!' 'is(gree% &(y re?uire 'iffering !e/e!s of 'is$!osure. 2iii3 A!so noe he sophisi$(ion of he offerees (re ( issue (n' all he offerees &us -e 'ee&e' sophisi$(e' with regards to the securities. 2Here% *no)!e'ge (-ou oi! )e!!s 'oes no e?u(e o sophisi$(ion (-ou ineress in hose )e!!s3. 2-3 The nu&-er of unis offere' 2$3 The siJe of he offer 2i.e.% he fin(n$i(! s(*es ( ris*3 2'3 The &(nner of he offer. 2i.e.% o he gener(! pu-!i$H ('/erisingH Ch(n$es for re'isri-uionH% e$.3 2<3 A!ern(i/e !is of f($orsA 2(3 Sophisi$(ion (n' )e(!h of offerees 2-3 7(nner of offer 2$3 Possi-i!iy of re'isri-uion 2'3 Nu&-er of in/esors 1B. Inegr(ion (n' E <283 A. An offering )hi$h is p(r of ( !(rger series of offerings $(n -e 'ee&e' 0inegr(e'1 ino h( offering -y he SEC% (n' hus he pri/(e offer e4e&pion )i!! -e un(/(i!(-!e. =. R. 1<O% pre!i&in(ry noe : ses ou fi/e f($ors for inegr(ionA 213 Are he offerings p(r of ( sing!e p!(n of fin(n$ingH 283 5o he offerings in/o!/e he issu(n$e of he s(&e $!(ss of se$uriyH 2:3 Are he offerings &('e ( or (-ou he s(&e i&eH 2<3 Is he s(&e ype of $onsi'er(ion o -e re$ei/e'H 2;3 Are he offerings &('e for he s(&e gener(! purposeH 11. R. 1;8 A su-se?uen 'e$ision o fi!e 'oes no preGu'i$e ( prior $!(i& h( ( se$uriy is ( pri/(e offering. 18. Pro-!e& Se on E <283 A. .($sA H@H p!(ns on -ui!'ing $on/(!es$en ho&es% e($h se up (s ( su-si'i(ry $orpor(ion. 1BD8B 'o$ors )i!! $hip in o r(ise $(pi(! un'er he p!(n for ( 8;W (ggreg(e ineres. 5o$ors (re on $o&&iee h( runs ho&es. Su-s $onr($ )ih H@H for &(n(ge&en ser/i$es 2er&in(-!e )ih one ye(r,s noi$e3. 5o$ors e4pe$ ( p(r of (ny profis% -u (re pri&(ri!y inerese' in &(*ing he f($i!iy (/(i!(-!e. Sipu!(e h( he ineress (re 0se$uriies.1 <B of << =. Sophisi$(ionH NO he 'o$ors *no) ( !o (-ou &e'i$ine% -u nohing in'i$(es hey *no) (nyhing (-ou -usiness. 213 The *ey is he (-i!iy o (ssess ris*s. Lou h(/e o !oo* o he 0Ho&er Si&pson1 of he group he !e(s $o&&on 'eno&in(or $onro!s for sophisi$(ion purposes. 283 Noe here is (n uns(e' presu&pion )e(!hy persons (re &ore sophisi$(e' h(n poor persons. Thus% ( 'o$or )ho is Gus ou of &e'i$(! s$hoo! (n' $rushe' )ih 'e- is &ore !i*e!y o -e 'ee&e' unsophisi$(e' h(n (n es(-!ishe' surgeon. The *ey here is he ability to absorb ris#. 2:3 As ( -usiness !()yer% ho) 'o you (/oi' his pro-!e&H =es (ns)er is o $ir$u!(e ?uesionn(ires 2before he offer &e&o"3 o poeni(! offerees% (s*ing (-ou heir pre/ious -usiness e4perien$e (n' in/es&en e4perien$e% espe$i(!!y on oher si&i!(r pri/(e 'e(!s 2sin$e h( )ou!' &e(n oher !() fir&s (re $o&for(-!e )ih his sophisi$(ion3. C. Infor&(ionH Lou 'on, )(n o re!y on (n ($$ess (rgu&en+ he 'o$ors (re no in ( srong -(rg(ining posiion% so hey,re un!i*e!y o -e (-!e o 'e&(n' infor&(ion. Thus% i,s -es o 'is$!ose% Gus (s you )ou!' in ( regisr(ion s(e&en. 5. A-i!iy o Re'isri-ueH Gener(!!y% his is !ess of ( pro-!e& h(n he oher f($ors+ i,s &os!y ( pro-!e& )here he res(!e )ou!' -e immediate 2i.e.% using he firs s(!e (s ( $on'ui o he se$on'3. To (/oi' pro-!e&s% pu !i&is on r(nsfer(-i!iy. E. Nu&-er of OffereesH The &(gi$ nu&-er is pro-(-!y 8BD8;% so )e,re fine !o$(!!y. =ig ?uesion is hisA H@H is -ui!'ing ho&es n(ion)i'e% so 'o )e inegr(e (!! hose r(ns($ionsH 213 Un'er 7urphy 2&u!ip!e $(-!e TS syse&s3 (n' R. 1<O% you pro-(-!y )ou!' inegr(e here. .. E <2C3 S&(!! =usiness E4e&pion 1:. E <2C3 e4e&ps r(ns($ions )ih accredited investors )hi$h (re !ess h(n he (&ouns spe$ifie' in E :2-3 2(ggreg(e (&oun of P;73% (n' here is no ('/erising perfor&e' for he issue. 1<. E 8 2(321;3 (n' R. ;B12(3 'efine 0($$re'ie' in/esor1 see infr(. A. Regu!(ion 5 2R. ;B1D;BC3 S&(!! Offering E4e&pions 1;. Regu!(ion 5 ses up spe$ifi$ gui'e!ines )here (n issuer $(n -e $er(in he is )ihin he pri/(e offering e4e&pion. 1C. R. ;B1D;B: $on(in gener(! pro/isions A. R. ;B12(3 'efines 0($$re'ie' in/esor1 2E 82(321;3 per&is i o3. There (re eigh $(egoriesA 213 %nstitutional %n*estors 2re('A -(n*s% &uu(! fun's3. 283 Pri/(e -usiness 'e/e!op&en $orpor(ions. <1 of << 2:3 T(4 e4e&p org(niJ(ions. 2<3 5ire$ors% e4e$ui/e offi$ers% (n' gener(! p(rners of he issuer. 2;3 Natural persons )ih ( ne )orh ;<-$. 2C3 Natural persons )ih in$o&e of <+==0 if fi!ing sing!e or <3==0 if fi!ing Goin!y for in$o&e (4es for he past two years. 2O3 Truss )ih (sses Y P;7 2un!ess i is (n ($?uisiion /ehi$!e3 if pur$h(se is 'ire$e' -y ( sophisi$(e' person. 2N3 An eniy )here 1BBW of he e?uiy is he!' -y (n ($$re'ie' in/esor. =. R. ;B12e3 go/erns he $(!$u!(ion of he nu&-er of pur$h(sers 2noe you e4$!u'e spouses (n' re!(i/es% (s )e!! (s accredited investors3. C. R. ;B12h3 'efines 0purchaser representati*es.1 >ey is h( he issuer on!y nee's o reasonably believe h( he represen(i/e s(isfies (!! he $on'iions !ise'. 5. R. ;B82(3 go/erns inegr(ion. Gener(!!yA 0s(fe h(r-or1 if offers (re &('e ousi'e of si4 &onhs fro& e($h oher 2i.e.% ( si4D&onh 0g(p1 $(n s(/e you3. E. R. ;B82-3 es(-!ishes 'is$!osure re?uire&ens 2&us on!y -e gi/en o non($$re'ie' in/esors3. I is extremely 'e(i!e'. .. R. ;B82$3 -(ns 0gener(! so!i$i(ions1 2un!ess i $o&p!ies )ih R. 1:;$3 G. R. ;B82'3 re?uires 0re(son(-!e $(re1 o (ssure he se$uriies (re no reso!' 2(n' pro/i'es e4(&p!es of su$h $(re3. 1O. R. ;BC is he most important ru!e in Reg. 5. A. I is he -(si$ 0s(fe h(r-or1 for E <283. Ho) 'o )e *no) hisH =e$(use i s(ys so su- 2(3 s(ys offers $o&p!ying )ih his ru!e 0sh(!! -e 'ee&e'1 o &ee E <283. =. Re?uire&ensA 213 Lou &us &ee R. ;B1 (n' ;B8 2R. ;BC2-32133. 2(3 The &os i&por(n ones in pr($i$e (re ;B82(3 inegr(ion% 2-3 infor&(ion re?uire'% 2$3 !i&i on gener(! ('s% (n' 2'3 re?uire&en o !i&i res(!e. 283 Nu&-er of Pur$h(sers $(nno -e > 35 2R. ;BC2-32832i33. 2(3 Issuer &us 0re(son(-!y -e!ie/e1 here (re no &ore h(n :; 2(n' re$(!! ($$re'ie' in/esors 'on, $oun3. 2:3 Sophisi$(ion of In/esors 2R. ;BC2-32832ii33 2(3 Non($$re'ie' in/esors 2)ho 'on, h(/e ($$re'ie' pur$h(ser represen(i/es3 h(/e enough fin(n$i(! e4perien$e o e/(!u(e he ris*s. 2<3 There is no dollar limit on R. ;BC. <8 of << C. Pro-!e& Se 2s(&e f($s $on/(!es$en ho&es3 213 Inegr(ionH R. ;B82(3 pro/i'es ( CD&onh s(fe h(r-or% so you $(n sru$ure hese 'e(!s o &ee i. If no% you,re -($* o he fi/eD f($ors of R. 1<O. 283 Infor&(ionH If you,re on!y se!!ing o ($$re'ie' in/esors% no nee' o pro/i'e (ny un'er R. ;B82-3. If here,s ( &i4% i,s -es o pro/i'e i o e/ery-o'y. 2:3 Nu&-er of offereesH E(si!y un'er he :; &(r*. An' here,s e/en fe)er h(n h( un'er R. ;B12e32132i/3 you 'on, $oun ($$re'ie' in/esors. P!us% re&e&-er h( he issuer nee' on!y 0re(son(-!y -e!ie/e1 here (re fe)er h(n :;. 2<3 7(nnerH Re&e&-er% no gener(! so!i$i(ions. Nee' &ore f($s. 5. >ey poins on 'efiniion of 0($$re'ie' in/esor1 The =e/er!y Hi!!-i!!ies" 213 Noe h( 6e' C!(&pe is (n ($$re'ie' in/esor no -e$(use he,s s&(r% -u -e$(use he,s ri$h 2i.e.% ne )orh or in$o&e ess3. This is )h( HH $(!!s he 0Re(g(n presu&pion1 of sophisi$(ion. 283 6ehro isn, (n ($$re'ie' in/esor -u he &(y ?u(!ify (ny)(y -e$(use he h(s ( pur$h(ser represen(i/e% n(&e!y 7r. 5rys'(!e. 1N. R. ;B< (n' R. ;B; A. R. ;B<A issuer $(nno -e su-Ge$ o ,:< A$ reporing 2or (n in/es&en $o&p(ny% or ( 0-!(n* $he$*1 $o&p(ny3% (ggreg(e of no &ore h(n P17 issue' in ( 18D &onh perio'+ (ny nu&-er of in/esors. =. R. ;B;A issuer $(n se!! up o P;7 per ye(r o up o :; pur$h(sers 2re$(!! h( ($$re'ie' in/esors (re e4$!u'e' fro& he 'efiniion of 0pur$h(ser%1 so you $(n se!! o (ny nu&-er of ($$re'ie' in/esors3. 7us &ee ;B1 (n' ;B8 re?uire&ens. 19. Oher issues in Reg. 5 A. 7(r* /. .SC Se$. Corp. in 'eer&ining sophisi$(ion% you &us re!y on &ore h(n he in/esor,s represen(ions. =. 0=(' =oy1 'is?u(!ifiers R. ;B;2-32832iii3 pre/ens so&eone 'es$ri-e' in R. 8C8 fro& using R. ;B; 2-u no ;B< or ;BC3. R. 8C8 -(si$(!!y s(ys (nyone $onne$e' )ih fr(u'% $on/i$e' of ( fe!ony% su-Ge$ o ( sop or'er or refus(! or'er% e$. C. R. ;BO $(n, use R. ;B<D;BC if ( $our h(s e/er enGoine' you fro& using he& -efore for f(i!ing o &ee R. ;B:. 5. R. ;BN Insignifi$(n 5e/i(ions 0s(fe h(r-or1 no !os if ( f(i!ure o $o&p!y )(s insignifi$(n (n' ( goo' f(ih effor )(s &('e o $o&p!y. <: of << ?ig. -: @ue @iligence @efenses .xpertised 2ortion Non-.xpertised 2ortion .xperts E 112-32:32=3 0re(son(-!e groun's1 for -e!ief (fer re(son(-!e in/esig(ion. E 112(32<3 No !i(-!e Non-.xperts E 112-32:32C3 0no re(son(-!e groun's o -e!ie/e he s(e&ens )ere f(!se.1 E 112-32:32A3 0re(son(-!e groun's1 for -e!ief (fer re(son(-!e in/esig(ion. << of <<
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