Chapter 23 Securities Markets

1. Module VIII – Stock Trading Chapter 23Securities Markets Bar exam Corporate practice Stock trading: “Truth in Markets” Market efficiency Federal regulation: ’33Act, ’34 Act Relation to state Blue Sky laws Public companies: disclosure, proxy voting, disclosure of insider trading Securities offerings: “Truth in Securities” Public offerings: registration Registration exemptions Stock trading Intrastate offering Statutory § 4(2) private placement Reg D: 504 / 505 / 506 Resales of unregistered securities Law profession Citizen of world

2. Efficient Market

3. Federal securities regulation … Securities Act of 1933 Securities Exchange Act of 1934

4. NetFitness.com “Please invest ... I need your money!”

5. What is ’33 Act registration?

6. Registration of securities offering Securities Act of 1933 § 5  (a) Unless a registration statement is in effect as to a security, it shall be unlawful for a person, directly or indirectly-- (1) ... to sell such security ... (b) It shall be unlawful for any person, directly or indirectly--   (2) to [have delivered] ... such security ... unless accompanied or preceded by a prospectus that meets the requirements of section 10(a). (c) It shall be unlawful for any person, ... to offer to sell [a security] ... unless a registration statement has been filed as to such security, ...

7. Prospectus disclosure: Issuer’s business, risks Management MD&A Financial statements Plans for proceeds Nature of offering Principal shareholders   Signed by issuer and corporate insiders EDGAR S-1 / SEC Info Final prospectus Registration statement

8. Controlled disclosure no marketing until RS filed no sales until RS effective SEC review Liability for misrepresentations Issuer (strict liability) Top executives Directors Underwriters Experts (accountants)  EDGAR S-1 / SEC Info Final prospectus Registration system

9. Expenses SEC registration fee.………....... . $ 45,000 NASD filing fee.............................. .. 18,500 Nasdaq NM listing fee………........ ..150,000 Blue Sky fees and expenses........ ..... 5,000 Printing.engraving expenses....... ….175,000 Legal fees and expenses............. ... 750,000 Accounting fees and expenses ...... 425,000 Transfer Agent and Registrar .......... 10,000 Miscellaneous expenses................... 21,500 Total........................................... $1,600,000 Underwriters’ spread………….. $8,400,000 EDGAR S-1 / SEC Info Final prospectus Costs of IPO registration(raise $120 million)

10. EDGAR S-1 / SEC Info Final prospectus Costs of IPO registration(raise $120 million)

11. How avoid registration?

12. Securities Act § 4  Exempted Transactions The provisions of section 5 shall not apply to-- (1) transactions by any person other than an issuer, underwriter, or dealer. (2) transactions by an issuer not involving any public offering. Exemption from registration

13. Issues Number of offerees? Offerees “who can fend for themselves"?  Sophistication Access to information Size of offering?   Manner of offering? Restrictions on resales? Private placement

14. Doran v. Petroleum Management, Corp.(5th Cir 1977) Mystery investors Doran offers purchase Limited Partnership

15. Regulation D Rule 504 Up to $1 million No marketing / unless state registration Rule 505 Up to $5 million No marketing / at most 35 unaccredited investors Rule 506 No $$ limit No marketing / at most 35 unaccredited investors, but must be savvy or rep. Regulation D

16. What are “restricted securities” … “Come to rest” Rule 144

17. The End

18. What is liability forfalse statements / not registering?

19. Liability – falsehoods / not registering • Failure to register • Section 12(a)(1) • Nonexempt, unregistered sales • Rescission - purchasers have one-year “put” Fraud in registered offering • Section 11 • any materially false or misleading statement in RS • Issuer – strict liability / others "due diligence“ • Damages equal to losses • Section 12(a)(2) • Misrepresentation outside registration statement • Rescission – purchasers get money back from “sellers”

20. Liability – falsehoods / not registering • Failure to register • Section 12(a)(1) • Nonexempt, unregistered sales • Rescission - purchasers have one-year “put” Fraud in registered offering • Section 11 • any materially false or misleading statement in RS • Issuer – strict liability / others "due diligence“ • Damages equal to losses • Section 12(a)(2) • Misrepresentation outside registration statement • Rescission – purchasers get money back from “sellers”

21. What is “security”?

22. Carlo Ponzi (circa 1919) Listed securities Note Stock Bond Debenture Participation in profit-sharing plan Preorganization subscription Investment contract Definition of “security”

23. www.stockgeneration.com Promises investors a risk-free, guaranteed return of 10% per month (215%/yr) “Virtual stock exchange" trading stock in "virtual companies“ "privileged company" shares "only rise" - guaranteed 10% monthly return. Card table with money: $ in from new players / $ out by old players $4,700,000 “invested” on “virtual stock exchange” – a big game! Investment contract Howey Co. v. SEC (US 1940) Investment of money  in a collective enterprise  with expectation of profits  from the efforts [primarily] of others Definition of “security”