“Securities for the Non-Securities Lawyer”

1. “Securities for the Non-Securities Lawyer” Association of Corporate Counsel – America August 3, 2006 Presented by: Kurt L. Kicklighter Luce, Forward, Hamilton & Scripps LLP

2. Why Should You Care About Securities Law? • In house counsel concerns in the private company or division of a public company • Pledges of securities? • Promissory notes? • Owner shares? • Securities brokerage/dealers? 3731806

3. How Do You Know You Have a Securities Issue? • Stocks, bonds . . . . And • Any “investment contract” or “risk capital” arrangement • Promissory notes • Condominium rental pool • Investment Club Memberships • Tenants in Common Interests? • Joint Venture profit participation by non-managing partner? • General partnership interest of a partner who does not actually participate in management 3731806

4. What laws regulate securities? • Federal law • “Disclosure” model • Securities Act of 1933 • Securities Exchange Act of 1934 • Exemptions – but not exemption from fraud claims • Website for all Federal securities statutes and rules: Securities Lawyer’s Deskbook at University of Cincinnati - http://www.law.uc.edu/CCL/xyz/sldtoc.html 3731806

5. What laws regulate securities? (continued) • California law • “Substantive fairness” model • Corporate Securities Law of 1968, Corporations Code Sections 25000 through 25707 • Exemptions • Website for California statute:http://www.leginfo.ca.gov/cal.html;regulations (Title 10: http://www.calregs.com/linkedslice/default.asp?SP=CCR-1000&Action=Welcome);Guide to CA Securities Law Practice, The Corporations Committee of the Business Law Section of The State Bar of California (2003). 3731806

6. What laws regulate securities?(continued) • Blue Sky laws of other states – primarily “disclosure” obligations, not “substantive fairness.” • Foreign securities laws – apply to sales to nationals and in those other jurisdictions. 3731806

7. Which laws apply to any particular securities transaction? • Federal registration requirements: U.S., unless intrastate or foreign • State law jurisdiction: Any state that touches a transaction • AIM Stock Exchange • http://www.londonstockexchange.com/en-gb/products/companyservices/ourmarkets/aim/ 3731806

8. Which laws apply to any particular securities transaction? (continued) • Sarbanes-Oxley Act of 2002 • Securities Act Section 18 limited pre-emption of state laws • Stock Exchanges. See http://www.nasdaq.com/about/MarketPlaceRules.stm 3731806

9. Private Placements (Note that none of these exemptions exempt the transaction from the securities fraud regulations.) • Securities Act Section 4(2) – “transactions by an issuer not involving any public offering” • Regulation D – Clear guidance, safe harbor from registrations requirements of the Securities Act if certain requirements are met and filing is made • Accredited Investor definition: Individuals with $200,000 annual income ($300,000 jointly) or $1 million net worth; entities with $5 million; banks and other institutions; executive officers and directors of the issuer • Practice Note: If even one non-accredited investor is included in an offering a detailed private placement memo will have to be prepared for all 3731806

10. Private Placements(continued) (Note that none of these exemptions exempt the transaction from the securities fraud regulations.) • California exemptions • 25102(f): Sales to 35 plus accredited • 25102(h): Sales of voting common stock in a corporation where there will be only 35 shareholders after the sale • 25102(i): Sales to institutional investors – banks, pension plans, insurance companies • 25102(n): Sales to “qualified” investors (similar to accredited investors) unlimited in number, by California corporation or corporation subject to Section 2115 3731806

11. Securities Regulation of “brokers.” • Federal definition of broker: any person engaged in the business of effecting transactions in securities for the account of others • Guide to Broker-Dealer Registration, Division of Market Regulation, U.S. Securities and Exchange Commission, December 2005 http://www.sec.gov/divisions/marketreg/bdguide.htm#II 3731806

12. Securities Regulation of “brokers.” (continued) • California definition of broker/dealer: Corporation Code Sections 25120 and 25230(a) • California licensing of real estate agents as business brokers • Federal and California “finder” exception 3731806

13. Becoming “publicly” traded • Securities Exchange Act Section 12(g) • The 500 shareholder threshold (the in-bound regulation) • The 300 shareholder threshold (the out-bound regulation) 3731806

14. Securities as “security” under the UCC • What is a “security” under the UCC? • How is an interest perfected? • How can a creditor realize on the security? 3731806

15. Giving employees “securities” • Stock options, California Corporations Code 25102(o), SEC Rule 701 • See Guide to California Securities Law Practice by The Corporations Committee of the Business Law Section of the State Bar of California (June 2004 printing) § 4.1 (for 25102(f)) and § 4.4 (for 25102(o)) 3731806

16. Giving employees “securities” (continued) • Restricted Stock • Performance Stock • Phantom Stock (Stock Appreciation Rights) • Other compensation schemes? (See definition of “securities” discussion above.) 3731806

17. Securities Arising in the M&A Context • Issuance of promissory notes • Hold back provisions • Earn-out provisions • Issuance of stock to number of owners • Consider purchase of assets alternative • Acceleration of stock options 3731806

18. Securities arising in the Joint Venture/Investment Context • Interests in joint venture are securities • Registration Rights • Demand Rights • Piggyback Rights • Supremacy Clauses • “Drag Along” Rights • “Tag Along” Rights 3731806

19. Securities Issues in theIPO Context • SEC will review prior issuances of securities to see if appropriate exemptions apply • Employee plans may have to be reviewed to determine effect of IPO on their securities • Disputed employee stock options/stock rights and economic “blackmail” 3731806

20. Biggest Trouble Spots forPrivate Companies • Undocumented or misdocumented stock options • Change of Control bonus arrangements • Deferred compensation arrangements permitting issuance of stock • Unclear agreements among owners regarding stock transfer restrictions, buy-outs, registration rights 3731806

21. Biggest Trouble Spots for Private Companies(continued) • Too many “private” offerings in short time periods • Allowing non-“accredited” investors to purchase securities 3731806

22. “Securities for the Non-Securities Lawyer” Association of Corporate Counsel – America August 3, 2006 Presented by: Kurt L. Kicklighter Luce, Forward, Hamilton & Scripps LLP