Section 5 4 categories of issuers, Offerings by:

o WKSI (well-known seasoned issuer)- Rule 405- most favorable category you could be in. To be a WKSI, must meet registrant requirements of General Instructions I.A of Form S-3. = Is an exchange act reporting company, files 10-k, 10Q, and 8k. (3 ways to become exchange act reporting company: 1) 12a- listed on a nat’l exchange (NYSE, AMEX, NASDAQ) 2) 12g- total assets exceeding $10 million and a class of equity security held by 500 or more holders 3) 15d- file effective registration statement under 33 Act. ) AND:

(A) has a worldwide market value of its outstanding voting and non-voting common equity held by non-affiliates of $700 million or more OR (B) (1) has issued at least $1 billion in non-convertible (i.e. not convertible into equity) securities other than common equity, in primary offering for cash, not exchange, registered under the act; and (2) will register only non-convertible securities…unless…the issuer also is eligible to register a primary offering of its securities relying on General Instructions 1.B.1 of Form S-3

o Seasoned Issuer - Form S-3 eligible. Two requirements for eligibility: 1) be a reporting company 2) transactional requirement- 2 ways, $75 million dollars in common equity (general instructions 1.B.1) or investment grade non-convertible debt.

Form S-3 is nice because you can just incorporate other SEC filings by reference, don’t have to redo them. See Rule 176. This also makes a director’s due diligence defense requirements under §11 easier to meet, bc if material misstatement is in document incorp by reference prepared before you were on board, you couldn’t be responsible for it. Becomes closer to a reasonable care defense under 12a2.

See Rule 174o Unseasoned Issuer - see slide, went by too fast.o Non-reporting company - everybody else.

1. Pre-Filing Period a. Can’t offer to sell or offer to buy.b. Prohibitions apply to underwriters, issuers, and dealers.c. ***Rules 135, 168, 169, 163, 163A create exceptions, last 3 being the

most important deregulations.i. 135- Issuer can give notice it intends to make an offering.

d. When does pre-filing/”in-registration” period begin? Not a lot of guidance. SEC has said “at least from the time the issuer has reached an understanding with the BD which is to act as managing underwriter.”

e. Rule 163A- deregulation of pre-filing period for non-WKSIs. As long as communication more than 30 days prior to filing and doesn’t reference a securities offering, you’re ok as long as you take reasonable steps to prevent further distribution or publication during 30 days before filing.

(WKSIs have rule 163, they are fine even w/in 30 day period for “free writing prospectus”.)

f. Rule 168- can release factual business information OR forward-looking information.

g. Rule 169- safe-harbor for non-reporting companies for factual information (additional restrictions than Rule 168 on use of factual information)

i. Must be: 1) factual 2) aimed at non-investors 3) (very) consistent with prior releases.

2. Waiting Period a. Basic Prohibition: For UIDs to transmit a “prospectus” with respect to

which a registration statement has been filed unless it contains certain information, §5(b),

i. Note: No prohibition on oral communications b. What is a Prospectus? Broad definition of information if communicated in

writing or by radio or television, §2(10).i. Does not include tombstone ads, §2(10)(b)

ii. Does not include some additional basic information about anticipated offering, Rule 134

iii. Does not include factual information and some “forward- looking information” Rules 168 & 169

iv. Broad deregulation of waiting period by allowing the use of “free-writing prospectuses.” Conditions depend on issuer status, Rules 405, 433, 164.

v. Required Information for “Preliminary” Prospectus (10b, Rule 430): Any information in registration statement except

1. Documents referred to in (28) to (32) of Schedule A, §10(a)(1)

2. Price and fee related informationc. Rule 15c2-8 of 34 act- must deliver prospectus during waiting period to

anyone who requests it. (33 act only says IF you deliver a prospectus during waiting period, must be a §10 prospectus.)

i. Reasonable steps to deliver to UIDs anticipated to be involved in distribution, Rule 460 (failure will lead to denial of acceleration)

d. Rule 134d - used commonly in waiting period to guage interest/solicit offers to buy. Communication that includes or is preceded by a §10 prospectus (but not a FWP), usually a prelim prosp, can solicit an offer to buy. Must include 134d boilerplate (no sale of firm commitment during waiting period.)

3. Post-Effective Period a. Section 5b- affirmative delivery requirement to include 10a prospectus

with delivery of security in effective period.b. Prospectuses must be §10 prospectuses (i.e. 5b1 still applies). c. Once you have sent out a 10a prospectus, no longer have to worry about

5b1 for any communication after that.

d. Rule 174 (look at in conjunction with §4(3)), allows us to come up with a framework for understanding when a 10a prosp really has to accompany delivery of security.

i. 174b- don’t have to deliver prosp w/ security if you are a 34 act reporting company (3 ways to become this) prior to filing, exempt from 5b2 requirements.

ii. 174d- if not a 34 reporting company, but as of offering date you are listed on a national exchange (NYSE, NASDAQ, AMEX) must deliver 10a prosp for 25 days from initial offering date.

iii. 174f- none of these exemptions apply if broker/dealer is still acting as underwriter.

e. Section 4(3)- 40 day and 90 day periods where dealers have to send 10a prosp.

f. When do delivery requirements of 5b2 end?i. Never apply to unsolicited brokers’ transactions, §4(4)

ii. For non-reporting companies:1. For sales by “dealers” of stock not listed on exchange or

NASDAQ????2. Unsold allotments by dealers - requirements never end,

§4(3)(c)3. For sold allotments by “dealers”: 1) 40 days from effective

date for companies whose securities have been sold pursuant to prior registration statement, §4(3); 2) . 90 days from effective date for others, §4(3)

4. For sales by “dealers” of stock listed on exchange or NASDAQ - 25 days from the offering date, Rule 174(d)

iii. For reporting companies - for sales by “dealers” after filing of registration statement, Rule 174(b)

iv. Rule 174(h): Any obligation pursuant to Section 4(3) of the Act and this section to deliver a prospectus . . . may be satisfied by compliance with the provisions of Rule 172

g. §4(4)- exemption from §5 for “broker’s transactions executed upon customers’ orders…but not the solicitation of such orders.”

h. In re Haupt -What if not solicited but broker acting qua underwriter (i.e. in the process of selling an unsold allotment)? Case says you are NOT exempt from §5 requirements, no 4(4) exemption.

i. Rule 172 :i. 172b- any obligation under 5b2 (delivery/10a requirement) is

satisfied if 172c conditions met. (So 172 is about satisfying the 5b2 requirements, not about being exempt from them like decision tree above.) Paragraph c conditions, all we need to know is 172c3- must file 10a with the SEC”delivery equals access”. Very powerful.

ii. we need to know 172 and not worry about 153. (they overlap a lot.)

iii. Rule 172(b)- regulatory relief from 5b2 if paragraph c conditions met (10a filed with SEC). Access = delivery.

iv. Rule 172(a)- regulatory relief from 5b1 requirement (i.e. prospectus don’t have to be §10 prospectuses) for confirmations.

v. 5b1 too! Free Writing: Once “prospectus” delivered, no restrictions on communication, §2(10)(a) prohibition on 5(b)(1) lifts

j. 5b2 is really a requirement on the B/D bc they are the ones actually causing the security to be delivered to the purchaser.

4. “Free Writing Prospectus” FWP - Definition of FWP (defined in Rule 405)- written communication, after reg statement filed (or before for a WKSI), that OFFERS to sell or SOLICITS an offer to buy security. Something sent out to solicit investor interest after reg statement filed, often contains info not in reg statement.

a. Written communication defined broadly in 405 to include electronic communications.

b. Although exempt from 5b1, FWP is considered public, which exposes you to 12a2 liability.

c. A confirmation for sale would be considered a 2(10) prospectus but not a FWP.

d. Different treatment of WKSI/S-3 companies v. Unseasoned and non-reporting. Latter must include §10 prospectus with FWP.

e. 10a, preliminary (410), and rule 431 are excluded from definition of FWP.f. FRW includes “graphic communication”- which means almost every form

of electronic communication (even audio tapes, cd-rom, etc.)g. Rule 433 - important aspect of this rule is (a)- says that if it’s a FWP and

you meet conditions of Rule 433, a FWP is considered a 10b prospectus, ensuring compliance with 5b1. It will also be deemed to be a public prospectus (invoking 12a2 liability under Gustafson.)

i. Conditions to use of 433- 1. WKSI and S-3 companies: 433b1- all you need to do is file

a §10 prospectus with SEC. i.e. once you file a prelim prospectus with SEC along with your reg statement, you can use a FWP in waiting period offering.

2. Non-reporting and unseasoned reporting companies: 433b2- have to not only file prelim prospectus with SEC with reg statement, and must include this prelim prospectus along with any FWP sent out. It’s sufficient to include a hyperlink to prelim prospectus.

h. Oral communications not a prospectus under 2(10)

5. Shelf Registration a. Rule 415 lists securities offerings eligible for shelf registration (a1(i)—

a1(x)).b. Limitations on Shelf Registrations: a2-a5

c. automatic shelf registration- available to WKSIs. Reg statement becomes effective immediate upon filing. Thus, WKSIs can keep a periodically updated reg statement (which doesn’t have to contain detailed info about offering) and make offerings whenever they want.

6. Updating and Amending Reg Statement a. The question when something changes to make your reg statement

misleading or inaccurate (e.g. Manor Nursing) is: should you amend the prospectus, or do you need to also file an amendment to the registration statement? If the reg statement contained a material misstatement when it became effective, you can be sued under §11. So if you just amend the prospectus and there is still a mistake, you are only liable for the prospectus (i.e. no sec 11 liability), but if you amend the reg statement, it becomes effective as of amendment and if there is still anything inaccurate in it you have §11 liability. (and even though inaccurate now, no liability if accurate at effective date.)

b. Why would you want to amend the prospectus even if you don’t want to amend the reg statement, what protections does that create? Bc you don’t want to face 12a2 liability.

c. In no action letters and guidance, SEC has said when you have to amend reg statement: Material change. “Only a form of prospectus that contains substantive changes from or additions to a prospectus previously filed with the Commission (see slide)” requires an amendment to reg statement. i.e. if you are changing/substituting something in reg statement rather than just adding to it. Murky test.

d. Item 512(a) of Reg S-K : tells us when we have an obligation to amend registration statement (when it’s a shelf registration.)

i. (ii) only have to amend reg statement for “fundamental changes” from reg statement, or (iii) “material” changes relating to plan of distribution.

Liability1. Section 11 -(a) liability only applies to material misstatements after the

registration statement becomes effective.i. Elements:

1. Eligible : any person who acquires securities registered under the 33 Act; no reliance requirement. Allows class action suits. BUT have tracing requirement: have to prove your securities were issued pursuant to the defective RS.

2. Proscribed Activity: a. Material b. Misstatements or omissions in RS c. By parties enumerated in § 11(a). These include:

i. Every person who signed the RS: § 6(a) requires the issuer, principal exec officers, CFO, majority of the Board. This provision sweeps the issuer in

for liability because they will always be a signatory of the RS.

ii. Directors of the issueriii. Persons who are named as being or about to

become a directoriv. Experts like accountants who prepare part of the

RSv. Underwriters

vi. Note: § 15: Control persons have § 11 liability unless they had no knowledge or reasonable grounds to believe the facts on which the liability is premised.

vii. This is an exclusive list; there is no aiding and abetting liability under § 11; lawyers only liable if they certify an expertized portion, which they do have to do to say that the shares are properly issued under the corporate law of the state, but this almost never gives rise to § 11 liability.

3. State of mind : Strict liability for issuer; due diligence defenses for others under § 11(b)

4. Nexus to injury : affirmative defense available if knew of the misstatements or omissions in RS for both issuer and other ’s.

5. Measure of damages : capped rescission with other cost defense

ii. Due diligence defenses under § 11(b)1. Issuer has no DD defense2. If not the issuer, look to the following chart.

If the error is in: Expert’s liability Non-expert’s liabilityExpertized portion

(b)(3)(B) reasonable investigation AND reasonable grounds to believe AND did believe (e.g. fraud after the expert finishes the work)

(b)(3)(C) reasonable ground to believe and did believe; no investigation requirement; don't have to check the work but if you give accountant wrong #'s, you are liable

Non-expertized portion

no liability (a)(4) (b)(3)(A) reasonable investigation AND reasonable grounds to believe AND did believe: "due diligence"

3. BarChris: One of the only cases to talk about DD with error in RS. Adopted two main points

a. Underwriters are in an adversarial position vis-à-vis the issuer; U’s have responsibility to be skeptical of the info provided to them and a meaningful duty of reasonable investigation to verify this information.

b. Management v. non-management: i. Outside directors: easier std of reasonable

investigation for outside directors than inside directors.

ii. Skill set: take into account skill set and prior knowledge in determining if satisfied reasonable investigation, etc requirements.

iii. This results in a sliding scale of liability. 4. Rule 176 essentially codified Bar Chris. It enumerates factors

to look at for what counts as “reasonable investigation” and “reasonable belief” as in § 11(c) for parties other than the issuer. They are:

a. Type of issuer, Type of security, Type of person, Office held

b. If a director, the presence or absence of other relationship with issuer (outside v. inside)

c. Reasonable reliance on others whose duties should have given them knowledge of the particular facts

d. Type of underwriting, availability of info about I to Ui. Shelf registration U’s have less time to verify all

the info. e. If the info came from a document incorporated by

reference, whether the document was prepared by the . i. U might not have had a role in preparing the 34

act documents and the liability regime under § 18 of the 34 act requires ’s to have relied on the info, and thus, gives rise to far less liability, so preparers are less careful.

iii. Causation: Akerman, p. 495, 2d. Cir.1. § 11(e), which says the burden of proof is on to prove that any

price decline was the result of factors other than the material misstatement

2. Nonetheless, this case held that any price decline prior to disclosure to the public that there was an error is not recoverable. Burden of proof on to establish that any price decline prior to the disclosure is due to the misstatements. This essentially switched the B of P for price declines prior to public disclosure.

3. Rationale: court may have thought the misstatement here was just barely material, even called it “innocent.”

iv. Joint and Several liability under § 111. All parties except for outside directors are jointly and severally

liable under § 11.

2. Outside directors only have proportional liability. § 11(f)(2). Outside directors rarely have to pay for securities violations, except in Enron and Worldcom.

3. Contribution: ’s can sue each other to recover for contribution.4. Indemnification: SEC does not like it when the corporation

indemnifies DSH, directors, officers. Item 512(h) requires court approval for such agreements bc they screw the SH.

v. Policy of § 11: Gatekeeper function. Want the have intermediaries between issuer and public and give these intermediaries incentive to ensure the accuracy of the RS. Cf. § 18 of the 34 act, which requires reliance.

2. Section 12a1 - offers or sells security in violation of §5a. Elements

i. Eligible ’s: purchasers of securities offered or sold in violation of § 5

ii. Proscribed activity: Pinter v. Dahl offeror or seller in violation of § 5

iii. State of mind: Strict liabilityiv. Nexus to injury: nonev. Damages: “consideration paid for such security with interest

thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if she sold it.” This amounts to rescissionary damages.

vi. Statute of limitationsb. Who is an offeror/seller for purposes of both §§ 12(a)(1) and (2)? Pinter v.

Dahli. Facts: Dahl was enthusiastic investor in oil properties, he and

others gave $ to Pinter for investments without a registration statement on file for the securities. Dahl had convinced these investors to join. Pinter was found liable to these other investors when the venture failed and sued Dahl in contribution, claiming that he was also an offeror/seller.

ii. RULE: There are 2 ways to become a Pinter v. Dahl seller1. Pass title2. Solicit investors AND have a pecuniary interest for

either self or issuer.iii. Must look at Dahl’s motivation for soliciting the investors—was it

to benefit himself/Pinter or was he just being a nice guy to his friends, the investors?

iv. The pecuniary motivation requirement comes from the § 2(3) definition of offer: the for value requirement!

v. Typically the standard argument that someone is a Pinter seller is that they needed to get other investors to put money in for their own investment to be worth anything.

vi. Pecuniary interest prong must be contingent on the placement of securities for the person to be Pinter seller. Lawyer who does

solicitation for client and gets paid hourly wage is in the clear. Don’t want to sweep in ordinary professionals. E.g. bond rating agencies.

3. Section 12a2 –sales or offers by materially misleading prospectus or oral communication

a. Elements: i. Eligible ’s : purchasers of securities in a “public offering,”

Gustafson.ii. Proscribed activity : Offering or selling (Pinter v. Dahl) a security

by means of a materially misleading prospectus or oral communication

iii. State of mind : Due care defenseiv. Nexus to injury : Loss causation defense available v. Damages : rescission

vi. Statute of limitations b. Gustafson

i. Facts: Control person sold their block to purchasers, using a set of disclosures that contained material misstatements. Issue was whether the ’s could sue under § 12(a)(2), namely, whether the errors occurred “by means of a prospectus or oral communication.”

ii. Majority opinion looks at § 10 for definition of “prospectus” rather than the definitions section, § 2(10). Says it’s not going to be a P if it need not comply with § 10 absent an exemption. Ask whether document would have to comply with § 10 if it didn’t have to comply with an exemption. This is circular though bc if a document didn’t have to comply with § 10 then it necessarily has a an exemption. Court also says that P refers to “documents of wide dissemination.”

iii. Most courts have interpreted this case as saying Unless it’s a document disseminated in a “public offering,” it’s not a § 12(a)(2) prospectus.

1. This also doesn’t make sense since the § 4(2) is limited to purposes of § 5.

2. Also, § 12(a)(2) explicitly says § 3 exemptions are not applicable for liability under § 12(a)(2).

3. Majority was really worried about vast liability in the secondary market. BUT § 17 gives cause of action for secondary market transactions. Also there are reasonable care defenses under § 12(a)(2). Also facts of this case were private placement.

iv. Need public offering for § 12(a)(2) liability. Look at # of investors, sophistication, etc, as under Ralston Purina.

v. Gustafson has essentially created 2 definitions of “prospectus”, one for § 5(b)(1), which includes all written offers not falling into safe harbor and one for § 12(a)(2), which requires public offering.

vi. Ginsburg’s dissent

1. Footnote 1: “I understand the Court’s definition of public offering to encompass both transactions covered by § 5 AND transactions that would have had to be registered had the securities not complied with § 3.”

2. Thus it is possible to be on the hook for § 12(a)(2) even if you are exempt from § 5 if the exemption falls under § 3.

a. Thus, there can be § 12(a)(2) liability for 504 and 505 Reg D offerings.

b. Since 506 is by definition a private placement, no § 12(a)(2) liability.

3. Courts have interpreted § 12(a)(2) using the same “public offering” definition as used for the § 4(2). “Public offering” concept is very important for § 4(2), § 12(a)(2) liability and also, it has been taken to be coextensive with “distribution” and thus the concept is key for who is a U.

c. Other rules for § 12(a)(2)i. § 2 (10)(a) free writing exemption from definition of P: Free

writing communications CAN give rise to § 12(a)(2) because the exemption from consideration as “prospectus” is for purposes of § 5(b); these communications are prospectuses for § 12(a)(2). The way this was fit into the language of Gustafson is that § 2(10)(a) is an “exemption” and but for this exemption, the communication would have had to comply with § 10, so it’s a P.

ii. Oral communications : interpretation has been that these must be in the context of the “public offering” in order to give rise to § 12(a)(2) liability. Thus if you lie orally in a private placement, no § 12(a)(2) liability.

4. Section 12 flowchart analysisa. For both § 12(a)(1) and § 12(a)(2) need Pinter v. Dahl seller/offerorb. If § 12(a)(2), must be “public offering”, Gustafson

i. Even with exempt transactions under § 3, it is still possible for “public offering”

ii. Free writing and oral communications can give rise to § 12(a)(2) liability also; 2 different definitions of P for § 5 and § 12(a)(2)

c. If § 12(a)(2), reasonable care defense: lower std of diligence than for § 11 defense. It’s very easy for an unsophisticated investor to establish § 12(a)(2) defenses. Issuer/U have much harder time since they should know more info about whether a P is misleading.

5. SEC v. Manor Nursing: after reg statement effective, there were major deviations from the plan of distribution, making the prospectus (10a) going out to the investors false. Did the BD violate 5b2 due to false 10a. 2nd Circ. Ct: yes, 10a so defective it gave rise to 5b2 violation. (It would also give rise to 12a2 liability.)

a. By transforming a material misstatement in 10a into a 5b2 violation, you also bring in 12a1 liability, rescission. So Manor Ct basically transformed 12a2 liability into 12a1 liability, which is more severe. aftermath of

Manor Nursing is that cts have backed off of that decision and tried to distinguish it as an outlier.

6. Rule 159A - Issuer continues to be a “seller” regardless of underwriting/issuing method used (removes shield Pinter v. Dahl created for Issuers, only for 12a2).

What is a Security SEC v. Joiner Leasing - SupCt, 1943. offers and sales of specific leasehold

interests in oil and gas leases. Were these securities? §2(1) specifically refers to “fractional undivided interest in oil, fas, or other mineral rights”, so does it not apply to divided interests? SupCt says no, we look at substance not form, want definition of security to be broad enough to capture everything it should. Refers to investment contract language in 2(1).

1. Howey - - buy strip of orange grove w/ optional service contract for Howey to do all of the work, distribution, etc. SupCt finds this was an offer and sale of securities, under investment contract language of 2(1). Howey test: investment of money, in a common enterprise, with an expectation of profits, solely from the efforts of others (cts interpret this to be substantially from efforts of others.)

a. Investment of money: yes, clearly.b. What is the commonality? horizontal. The profits from the entire orange

grove are combined and distributed pro rata.c. Expectations of profits solely from efforts of others. Yes. Didn’t even

have right to enter the property.d. 15% of the people bought the grove share but not the service contract, but

there’s still a question of whether they were still “offered” a security, which would be illegal.

e. Ct says “it is immaterial whether enterprise is speculative or non-speculative” suggesting risk not a factor. But some later cts place emphasis on risk.

2. Landreth/Forman a. United Housing v. Forman- subsidized housing coop. To get a room, had

to buy “shares” according to how many rooms you wanted. When you got a room, you paid below market rent. When you move out you sell shares at fixed price to coop. No voting rights. Cost overruns cause coop to increase rentlitigation. Was there offers or sales of security?

b. Landreth case-SupCt. 3 features needed in order to be stock: 1) voting rights 2) ability to transfer/sell/pledge 3) dividends or capital appreciation.

c. Forman stock is not stock under this test, so Ct looks to whether its an investment contract under Howey. Ct creates idea of “Forman consumption”, the motive of buyers was desire for consumption, not expectation of profit.

i. SupCt said stock finances part of construction, bonds finance the great majority. Because no expectation of profit from stock, not an investment contract.

ii. But 2nd circuit says stock purchasers get an apartment, and the discount below the market rate of rent is the return on their stock. Like paying market rate, then getting money back.

iii. Both cts descriptions are economically equivalent, SupCt just chooses to call it consumption, not profit/return, formalistic view.

d. Forman ct in dicta says Howey test applies to all securities, not just investment contracts, but later SupCt has strongly backed off this, says Howey just for investment contracts.

3. Edwards - SupCt. Sale and leaseback of payphones. Investor buys a pay phone and leases it to company to run, promise 14% annual return over five years.

a. (when something is a pyramid/ponzi scheme like this, ct will try very hard to find that it is a security.)

b. conversely, cts will be very reluctant to find that franchise arrangements are securities (restaurants, car dealerships, etc.)

c. SupCt finds it is a security. Says fact that it was a fixed return irrelevant, still expectation of profit.

4. Life Partners - LPI sells interests in life insurance policies it purchased from AIDS patients. D.C. Cir. Ct focuses on efforts of others prong. Finds that it was not a security bc all the efforts were done before investors purchased the interests, after the work was de minimus admin work. Pre-purchase efforts are reflected in price and don’t need federal regulation.

a. Ct relies on economies of scale argument to find horizontal commonality. Fixed costs required large number of investors to make it profitable.

5. Remember Aqua-Sonics- this is a situation where ct did find franchise arrangement was a security, due to specific facts. Key fact was that investors had absolutely no background in medical device sales, very unlikely to take active role and distribute machine in their assigned area.

6. Reves : farmers coop with 23k members from general public. Marketed promissory notes payable on demand. Are they “notes” for 34 or 33 act?

a. Test:i. 1. Forman consumption idea (investment v. consumer/commercial

motivation)ii. 2. Plan of distribution (e.g. to broad public)23k people. Numbers

are not determinative, but that seems very large.iii. 3. Public expectations (as to securities law protection). Somewhat

circular. (And how likely is it that unsophisticated investors really have any expectations about securities law protections at all?)

iv. 4. Existence of Alternative Regulatory Structures (that reduce or minimize risk the investors are bearing.) Cts have looked at things like contractual mechanisms (e.g. collateral in Belmont example) besides regulatory structures.

b. Have to have this test, bc a definition of note that is too broad would include things like credit cards, mortgages, etc.

c. Another important issue in this case is that the notes payable on demand. Under 3a10 of 34 Act notes having maturity of not more than 9 months excluded from definition of security. But Ct says that’s not sufficient to

get an exclusion, might be if the “design of the transaction suggested that both parties contemplated that demand would be made within the statutory period.”

Exemptions1. 4(1) Not an issuer, UW, Dealer2. 4(2) Not a public offering

a. transactions by an issuer not involving any public offering (Ralston Purina- investors can fend for themselves).

i. General Counsel’s (of SEC in 30s?) factors: 1) number of offerees 2) size of the offering 3) manner of the offering 4) number of units offered.

ii. The Ralston Purina test is also used to define “distribution” for purposes of 2a11. (**This will be on exam**) “An offering to those who are shown to be able to fend for themselves is a transaction ‘not involving any public offering’”.

1. Two key issues in Ralston Purina: 1) who were the “key” employees offered the stock? included very low level employees in wide variety of positions 2) What were the records that were kept? No records were kept of those to whom offers were made, estimated number 500. Led to conclusion that public, couldn’t fend for themselves.

3. Reg D - a. Reg D is the key exemption (all transactional exemptions except intrastate

offering fall under Reg D). Includes Venture Capital and Private Placements.

b. Rule Trade-Offs- more requirements v. higher $ limitsi. Rule 506- no $ limit. disclosure and sophistication requirements

for non-AIs. By definition is a 4(2) and cannot give rise to 12a2 liability (under Gustafson).

ii. 505- up to $5 mill. only disclosure requirements for non-AIs.iii. 505/506- if to AIs only, no disclosure of sophistication

requirements.iv. 504- up to $1mill. to anyone, with no disclosure or sophistication

requirements.v. Limitation of 35 for 505/506 (35 cap does not include AIs)

c. Accredited Investor? Executive of Issuer-Rule 501(f) (Is it a “policy-making” function?) Wealthy individuals-501a5, net worth >$1mill at time of purchase. 501a8- any entity in which all owners/equity investors are AIs is an AI itself.

i. Purchaser Representative concept. An otherwise unsophisticated purchaser will be sophisticated if has soph rep. Rule 501(h)1 and h4. h1- can’t be purchaser rep if director, officer, or other employee of issuer unless blood or marriage or adoption relative of purchaser. h4- rep must disclose any relationship to issuer or affiliates.

d. Rule 502(c)- prohibition on general solicitations. Very important. SEC puts a very important gloss on this prohibition, the “pre-existing relationship” gloss. Must have this PER for it not to be a general solicitation, regardless of sophistication of offerees. This prohibition applies to issuers and any person acting on behalf of issuer (anyone who has enough contacts with issuer is acting on their behalf.) This requirement can be tougher than Ralston Purina, can’t always solicit even institutional and accredited investors.

i. Debate question is why this applies to 504 and 505, since those are 3b exemptions and SEC doesn’t have to require this.

ii. IPONet No Action Letter. Generic questionnaire and verified. Registered BD. Password protected, cooling off period. SEC said this is in compliance with 502c, no problems.

e. Aggregation- i. 505- $5 mill cap. (See also 501(c)). Will count towards that cap

any offerings in violation of 5a and any 3b offerings within 12 month period before and the offer and during the offer.

ii. Aggregation is not integration.

4. 3(b) a. 3(b)- small offering exemptions (as the Commission prescribe by

regulation) up to $5 mill, e.g. Reg D. But rule 506 of Reg D is promulgated pursuant to 4(2), so it cannot give rise to 12a2 liability. Can’t make an argument for exemption based on statute directly, bc it’s not self-executing, requires Commission to make regs.

5. 3a11 a. 3(a)11 of 33 Act- intrastate offerings:

i. part of an issue offered and soldii. only to residents within a single state

iii. where the issuer of such security is a person resident and doing business within that state (and if a corporation, incorporated and doing business within.)

iv. Release 4434- an offer to a single nonresident will blow the entire 3a11 exemption.

v. 4434 also: defines “doing business” as “substantial operational activities” (compare Chapman “predominant”). Also introduces “come to rest” notion, must come to rest with residents before being resold.

vi. The SEC has made clear that putting a disclaimer in your ad and website that offer is only for residents of state, you are fine even if read by nonresidents.

vii. You still have to worry about the resale issue. Get around by restricting resale of stock, purchasers enter contract with you not to resale for period of time.

b. Rule 147 (For 3a11 exemption)-

i. (a) Demanding standard. Must meet all the requirement of the rule to be eligible (whereas Reg D will let you off the hook even if you screw up in some areas.)

ii. Burden of Proof is on the issuer (true for all transactional exemptions.) So issuer has to create documentation of who is receiving offers, make sure proper disclaimers are there.

iii. 147c(2) Doing business requirement. 80-80-80 rule. 80 percent of: gross revenues, assets, and net proceeds (of offer are used) are within state.

iv. 147e and f. Resales limitations. 1. (e)- no resales to out of state residents for 9 months after

last security sold by issuer.v. 147b2 safe harbor- for integration. Offers that are registered or

exempt under §3 or 4(2) done 6 months before or after are not integrated with 3a11 offer

6. Integrationa. SEC 5 factor test to determine integration:

1. Single Plan of Financing (the most important factor, along with same general purpose.) (Livens v. Witter- he really thought each offering would be the last, but kept needing more. not integrated, it’s a subjective test.)

2. Same class of security, equity v. debt3. Time of the offering (two offerings more than 6 months

apart, rebuttable presumption that distinct, 12 months apart, almost certainly distinct, conclusive.

4. Type of Consideration, cash is not indicative, non-cash is (not very helpful.)

5. General purpose: Donohue. Both offerings had same general purpose, but key was commonality.

7. Safe Harbors from integrationa. Reg D offerings, Rule 502(a)- offerings that occur more than 6 months

before or six months after not integrated.

Control Persons and Resales1. 2a11

a. SEC v. Chinese Consolidated Benevolent Association : Chinese immigrants in NY got together (no official connection to Chinese govt) and solicited interest in a Chinese govt bond offering, took money from buyers and bought the bonds, got no commissions or anything. Ct: was not only solicitation of offers to buy, but the offers themselves, the transmission of the offers and purchase money to Chinese govt. These were underwriters. Ct says even if not an issuer, underwriter or dealer, it was participating in a transaction with an issuer, the Chinese govt. This language of the ct indicates a very broad interp of underwriter.

b. Harden v. Raffensperger - defendant who performs due diligence (even though not involved in any solicitation) is an underwriter. Performing due diligence and then stating that offering was good is enough.

c. Byrnes v. FDS - sellers identified in the reg statements as potential underwriter are covered by §5,.

d. all indicated broad interp of underwriter.e. “with a view to” Coming to rest- need to have some intent to actually

sell the stock to more investors when you purchase initially. Comes down to time. Less than 1 year, very hard to show investment intent; 1-2 years, still very hard to show investment intent, but can show otherwise if there was a change in circumstances, 2-3 years, presumption is now reversed, presume have come to rest, but rebuttable; >3 years- absolute cutoff, have come to rest, not rebuttable.

f. Change in circumstances has to be with investor, not the issuer. e.g. insolvency of investor could be enough to rebut presumption.

g. What is a distribution? Gilligan, Will v. SEC distribution means public offer (see slide).

h. Rule 405 , Definition of Control: power to direct management and policies of the company. Broad definition.

i. 4(4) - if all a broker does is execute a transaction on customers orders, he will not be regarded as an underwriter for that transaction.

j. In re Ira Haupt & co . Control persons wanted to sell stocks in liquor distributor, had ongoing agreement with broker (Ira Haupt) to sell 200 shares into NYSE every time stock price increased by 2/8. Later, liquor dist decides to distribute dividends in liquor, stock price shoots up fastIra Haupt suddenly selling a lot of stocks for control persons. Ira H claims it’s not part of distribution, claims 4(4) broker exemption, but SEC says Ira should have foreseen that so many stocks would have been sold, should have seen that what control persons were trying to do was a distributionIra had duty to inquire. That’s holding of case.

k. U.S. v. Wolfson - W and friends own 40% of CE, he exercises such control over company that he is clearly a control person. He wanted to sell stocks into OTC market. He used many brokers to sell small numbers of shares each. Is there an underwriter? For purposes of 2a11 there are underwriters and the whole offering needs to be registered. But Ct still gives brokers the 4(4) exemption, none of the brokers could have seen the overall plan and known it was a distribution.

l. See Slide “Control Person Distributions”i. 1st, examine whether the securities have come to rest

1. No, control person dist must satisfy the criteria of the issuer’s exemption

2. Yes, don’t need to satisfy.

2. Rule 144 a. Because secondary distribution was vague and confusing, SEC pressured

to come up with Rule 144. Applies to control person, affiliate, or regular

purchaser who wants to sell restricted securities. Will not be considered engaged in a distribution, and thus not an underwriter if meet requirements of rule.

b. Operative provisions of safe harbor Rule 144 are in (b)- if you meet requirements of Rule 144it’s not a distribution, and get benefits of 4(1) exemption.

c. Two types of securities: Restricted and Control Person/Affiliate. Something could be both.

i. Restricted- acquired through exemptions from registration.ii. Control/Affiliate = securities that are sold on behalf of an affiliate

d. Main elements of Rule 144:i. Requirement for current information (c) (12 months for reporting

issuers, ongoing for non-reporting issuers.) Don’t need to know the specifics of this.

ii. 144d holding period requirement1. 6 months for reporting companies, 12 months for non-

reporting.iii. Volume requirements (e)- only for control persons

1. Amount sold, together with all shares of same class w/in last 3 months, shall not exceed the greater of:

a. 1% of shares outstanding, orb. average weekly reported volume of trading in last 4

weeks, orc. (weekly trading average measured in specialized

way)iv. Limitations on manner of resale (f)- only for control personsv. Requirements to provide info to SEC- only for control persons

e. 144e3(vii)- The following sales of securities need not be included in determining the amount of securities sold in reliance on this section: …securities sold in a transaction exempt pursuant to Section 4 of the Act and not involving any public offering.

f. Suppose securities from an issuer have not come to rest in hands of the purchaser, and the issuer relied on some exemption from registration. Can purchaser now engage in resale? Have to ask if resales are consistent with initial exemption issuer relied on, e.g. if 4(2) exemption, resales also have to be to investors who can fend for themselves. Everyone is in the same boat (has to rely on same exemption, and if exemption destroyed, destroyed for everyone, if resale blows exemption, issuer is in trouble too.)

i. If securities have come to rest, everybody on their own, not in same boat. Resale does not have to rely on same exemption.

3. Rule 144A a. QIBs- Qualified Institutional Buyers. Control parties and initial purchasers

often sell their shares into QIB market, QIBs trade among themselves.

How do QIBs sell their 144A securities into public/OTC markets? Use Rule 144, bc 144A securities are restricted securities under 144(a)3.

b. Foreign companies have come to raise the majority of their capital in US through 144A offerings to QIBs.

c. Benefits of 144A- i. 1. Some liquidity

ii. 2. Avoid some SOX requirementsiii. 3. avoid periodic disclosureiv. 4. Don’t have section 11 liability

d. An issuer cannot use 144A (144A(b)) so they use an Investment Bank as intermediary, under Reg D Rule 506. IB then places with QIBs under 144A. QIB, if they want, can then use 144 to sell into public markets.

e. Key elements of 144Ai. buyers limited to QIBs (much higher threshold than AI)

ii. Certain info must be made availableiii. limitations on eligible securities (“anti-fungibility) can’t be

fungible with securities that are already publicly traded.iv. No resale restrictions (i.e. doesn’t have to be resold under same

exemption, but still have to be exempt in some way or registered.)

4. 4(1 ½) a. 4(1)1/2 comes to play when shares have come to rest with control party,

who places them with purchaser who can fend for selves (sono distributionno underwriter).

b. Akerberg : A bought 12,500 shares from Johnson, a controller. Securities have come to rest with Johnson. 99 page private placement memorandum, unregistered shares. Did Johnson have duty to register securities? 4(2) not available bc issuer not in picture. 4(1)? Issuer is not in picture bc have come to rest. But J sold through a BD, so if A can’t fend for self, 4(1) not available, if he can, exempt. Simple, but Ct instead spends a lot of time worrying about whether J an UW. Ct should have focused on whether BD an UW.

i. Footnote 4: the mere involvement of a broker qua broker is insufficient to destroy 4(1) exemption, even though BD is a “dealer” bc the transaction is not by a dealer. (Basically cts just take “dealer” out of the statute.)

Exxon Captial offerings (aka AB offerings)5. Issuer sells to IB under Rule 506 Reg D, IB sells under Rule 144A to QIBs.

Then, Issuer registers a bunch of shares, and uses them to do an exchange, gives registered shares to QIBs for their 144A shares, QIBs can sell shares into the OTC market. What SEC said in Exxon no action letter, was that even if everyone knows this exchange is going to occur, and going to occur very quickly after 144A transaction, QIB will NOT be considered an UW. Also, SEC has said, by fiat, that this is not an issuer transaction, issuer deemed to be out of picture.

a. Why this is important:

i. QIB doesn’t have UW liability, even if reg statement contains material misrepresentation.

ii. Can raise capital fasteriii. Relaxes 5b2 delivery requirements (don’t need to know details of

this.)iv. Don’t have to name QIBs in reg statement, making prep of reg

statement easier at the margins for the issuer.6. SEC doesn’t like what it created with Exxon Capital, so made limitations, only

eligible now for:a. Non-convertible debt (Most high-yield debt in U.S. done this way)b. Equity of Foreign Issuersc. (SEC made $ amount of registered offerings part of requirement to get

WKSI status)

PIPEs7. Public Issuer places stock in private placement (e.g. Hedge Fund) with 4(2)

exemption. If Hedge Fund wants to sell securities into the market, the Issuer needs to file a “Resale Registration Statement” which registers for sale the securities held by private investors (and issuer very often is contractually bound to file such a resale reg statement.)

a. If you have shares in a company before it goes public, it may also use a resale reg statement to allow you to sell into market after IPO.

Review: Gustafson: SupCt, what is a prospectus for 12a2 purposes? A: a document

used in a public placement of securities. Doesn’t make much sense. Ginsburg footnote, has had force in circuit courts, says a transaction exempt from §5

under §3, can still give rise to 12a2 liability. i.e. offer that is to investors who can’t fend for selves, although exempt under §3.

Pinter v. Dahl analysis of who is deemed to be “seller” and “offeror”- for value =monetary incentive for yourself key factor in making you an offeror. Rule 159A- SEC reacting to its unhappiness that Pinter v. Dahl could insulate issuer from 12a2 liability in a firm commitment underwriting.

Section 11 due diligence issues. (re-read Bar-Chris decision discussion of what constitutes a reasonable investigation. Fact-specific inquiry. Very few decisions discuss this, so Bar-Chris still very influential.) Due diligence is a more burdensome requirement than the reasonable care defense.

§12a1 liability- for offeror or seller that violates §5.

Review of prefiling period: Can’t offer to sell or offer to buy. Prohibitions apply to underwriters, issuers, and dealers. Rules 135, 168, 169, 163, 163A create exceptions, last 3 being the most

important deregulations. Offer to buy does not include preliminary negotiations and agreements with

underwriter.

Waiting Period- 1933 Act (*See slide with this heading), good summary. Review: Section 5b1: any prospectus must be a §10 prospectus. definition of prospectus 2(10) §10a- the full set of disclosures including pricing information, final

prospectus. Rule 430 preliminary prospectus (one of the most common 10b prospectus

forms.) most of what 10a has without pricing info, etc. Two methods SEC tries to ensure delivery of prospectuses:

o Rule 15c2-8 under 34 act- requires prospectus delivered to anyone who makes written request.

o Rule 460- SEC requires prospectus available to public for them to make your reg statement effective

Free Writing Prospectus- o Rule 433- If you meet conditions of 433, a FWP will be deemed to be a

10b prospectus.o Definition of FWP (defined in Rule 405)- written communication,

after reg statement filed (or before for a WKSI), that OFFERS to sell or SOLICITS an offer to buy security. Something sent out to solicit investor interest after reg statement filed, often contains info not in reg statement.

Written communication defined broadly in 405 to include electronic communications.

Although exempt from 5b1, FWP is considered public, which exposes you to 12a2 liability.

A confirmation for sale would be considered a 2(10) prospectus but not a FWP.

o Different treatment of WKSI/S-3 companies v. Unseasoned and non-reporting. Latter must include §10 prospectus with FWP.

Rule 134(d)- You can solicit interest, say “are you interested”, and solicit an offer to buy, if accompanied by a §10 prospectus and boilerplate which says there is no actual deal/offer not accepted and no money received until statement becomes effective.

Oral communications not a prospectus under 2(10) Tombstone ad- not used as much today. But 2(10) exempts such an ad if it

just identifies security and price, say where you can get a written prospectus, etc.

Note: as a practitioner, you ALWAYS include a delaying amendment with your reg statement, so the 20 day effective language in §8 is almost completely irrelevant.

Waiting period- basic prohibition is for U,I,Ds to transmit a “prospectus” unless it contains certain info, 5b. (no prohibition on oral communications.)

2(10) definition of prospectus: paragraph (a) (FWP provision) says that if you give a 10a prospectus (after the effective date), anything sent with or after that is not considered a prospectus

4(3)- dealer must send prospectus on sales within 40 days of reg statement becoming effective or beginning of offering, whichever later.

When do delivery requirements of 5b2 end? See slide. Rule 172(b)- regulatory relief from 5b2 if paragraph c conditions met (10a

filed with SEC). Access = delivery. Rule 172(a)- regulatory relief from 5b1 requirement (i.e. prospectus don’t

have to be §10 prospectuses) for confirmations. SEC v. Manor Nursing- If prospectus so defective, gives rise not only to 12a2

liability but also results in 5b2 requirement not being satisfied (i.e. also giving rise to 12a1 liability).

When does obligation to update/sticker the prospectus in light of post-effective developments also require amendment of reg statement? If it’s a material change in the info contained in reg statement (i.e. a substitution), must amend reg statement too. Murky test.

Item 512(a) of Reg S-K: with respect to shelf registrations, very specific requirements to amend reg statement.

4(3)c = acting qua underwriter, unsold allotment

Review: Definition of Securitieso There will be a Howey question on the exam (i.e. should it be an

investment contract under test?)o In a way, this is an exemption from 33 Act, bc exempt if not a security.o 2(1): notes, stocks, bonds, investment contracts, or any instrument or

interest commonly known as a security.o Major difference in 34 Act def: short term paper is excluded from def

of security (in 33 Act, short term paper is a separate transactional exemption.)

o Howey Test: investment in money, in a common enterprise (vertical or horizontal), in expectation of profits, solely (interp as largely) from efforts of others.

Role of risk in Howey, immaterial, but comes into play in Reves. Howey Ct was focused on whether there was on Offer, not just a purchase/sale.

o Forman: coop “stock” not a security. discusses analysis of stock features in Landreth (voting rights, transfer/pledge, dividends/capital appreciation)

Forman “consumption” idea, motivation was consumption not investment. The reason the Ct concluded the motivation was consumption was bc the ct did not view stock as having any financial return (no dividends/cap apprec), right to subsidized rent was not a financial return as 2nd circ. said.

Forman ct said Howey test applies to all securities, not just investment contracts, but subsequent cts have backed off this.

o Responsible for Forman/Landreth stock test.o Responsible for Reves test.

Reves : farmers coop with 23k members from general public. Marketed promissory notes payable on demand. Are they “notes” for 34 or 33 act?

o Test: 1. Forman consumption idea (investment v. consumer/commercial

motivation) 2. Plan of distribution (e.g. to broad public)23k people. Numbers

are not determinative, but that seems very large. 3. Public expectations (as to securities law protection). Somewhat

circular. (And how likely is it that unsophisticated investors really have any expectations about securities law protections at all?)

4. Existence of Alternative Regulatory Structures (that reduce or minimize risk the investors are bearing.) Cts have looked at things like contractual mechanisms (e.g. collateral in Belmont example) besides regulatory structures.

o Have to have this test, bc a definition of note that is too broad would include things like credit cards, mortgages, etc.

o Another important issue in this case is that the notes payable on demand. Under 3a10 of 34 Act notes having maturity of not more than 9 months excluded from definition of security. But Ct says that’s not sufficient to get an exclusion, might be if the “design of the transaction suggested that both parties contemplated that demand would be made within the statutory period.”

Review: 3 Tests in security def arena: 1. Howey for investment contract 2.

Forman/Landreth for stock 3. Reves for notes. Discussed commercial paper

Discussed Reves Ct treatment of demand notes- do they fall within 9 month period? Reves ct created uncertainty (“if design of transaction contemplated that demand would be made within 9 month period.

Definition of stock- Landreth case. Transfer/sale by sole shareholder to buyer in exchange for cash consideration. Issue in case was whether this was a sale of stock. Circuit cts had said this would not be a sale of a security bc someone buying a control bloc can negotiate for what they need, don’t need protections of securities laws. (Circuit cts also point out that buyer can set up shell corp, structure transaction so as not to trigger securites laws, since econ the same as this, should allow this…? See slides) But SupCt said all the properties of stock were present, so it is stock.

Commonality: Horizontal- interdependence among investors (see slide) Efforts of others- 1) impersonal market forces 2) ministerial/administrative

3) ? .See Slide.

SEC 5 factor test to determine integration:o 1. Single Plan of Financing (the most important factor, along with same

general purpose.) (Livens v. Witter- he really thought each offering would be the last, but kept needing more. not integrated, it’s a subjective test.)

o 2. Same class of security, equity v. debto 3. Time of the offering (two offerings more than 6 months apart,

rebuttable presumption that distinct, 12 months apart, almost certainly distinct, conclusive.

o 4. Type of Consideration, cash is not indicative, non-cash is (not very helpful.)

o 5. General purpose: Donohue. Both offerings had same general purpose, but key was commonality.

Safe Harbors from integrationo Reg D offerings, Rule 502(a)- offerings that occur more than 6 months

before or six months after not integrated.

Review :o Chinese Consolidated- unregistered Chinese bonds, no contractual or other

relationship with Chinese govt and assoc in US. 600k bonds purchased. Was placement and solicitation in violation of securities act? turned on question of whether benevolent assoc an UW (acting for an issuer in connection with a distribution) Yes, they are UW, no 4(1) exemption, they are an integral part of placement of these bonds with the public. [doesn’t this conflict with Pinter v. Dahl requirement of financial stake in outcome?] second holding: even if assoc not an UW, they are still involved in a transaction with an issuer, so 4(1) still wouldn’t be available.

This opinion provides a rather broad definition of an UW.o Suppose securities from an issuer have not come to rest in hands of the

purchaser, and the issuer relied on some exemption from registration. Can purchaser now engage in resale? Have to ask if resales are consistent with

initial exemption issuer relied on, e.g. if 4(2) exemption, resales also have to be to investors who can fend for themselves. Everyone is in the same boat (has to rely on same exemption, and if exemption destroyed, destroyed for everyone, if resale blows exemption, issuer is in trouble too.)

If securities have come to rest, everybody on their own, not in same boat. Resale does not have to rely on same exemption.

o Problem: Registered offering, controller purchases, holds for 10 years. Can controller engage in resales? Mere fact that there was a registered public offering does not get controller off the hook, have to ask whether there was a secondary distribution, which triggers registration requirements again.

If control party sells into the OTC market, the BD is an UW, it’s a secondary distribution, 4(1) is unavailable, must be registered absent another exemption.

Shelf registration can be used to register control party/secondary distributions.

o Restricted Securities- we are worried about resales ruining the exemption (assuming they have not come to rest.) Saw this with 4(2) and with Rule 147 (intrastate offering.)

o Secondary Distributions- control parties are not eligible for issuer-based exemptions for their sales such as: 4(2), Reg D, Rule 147 (all require you to be an issuer.) 4(1) will be available in some cases (Akenberg).

o Definition of restricted securities- Rule 144(a)(3)- i, ii, and iii are the ones we are worried about. securities acquired directly from issuer, Reg D securities, 144A securities.

o Operative provisions of safe harbor Rule 144 are in (b)- if you meet requirements of Rule 144it’s not a distribution, and get benefits of 4(1) exemption.

o 144c basic information requirements (don’t need to know what they are specifically, just that they are there. This requirement gets lifted in some circumstances, when???)

o 144d holding period requiremento 144e volume limitationo 144f manner of saleo 144e3(vii)- The following sales of securities need not be included in

determining the amount of securities sold in reliance on this section: …securities sold in a transaction exempt pursuant to Section 4 of the Act an not involving any public offering.

o Problem 6-26: Registered shares, purchased by controller, come to rest, BD sells into OTC market, and controller will also, w/out BD, directly sell 60k shares to Tom, who is not sophisticated. Are the sales from Controller to Tom exempt (Tom does not resale)? Good argument for 4(1) exemption, no UW, shares have come to rest. In order for it to be a secondary distribution, need 1) a distribution and 2) an UW so not a secondary distribution here. But the exemption could be blown if sale to Tom integrated with sale to OTC market. And they will probably be

horizontally integrated (same time, same plan of financing, etc.) So this question comes down to whether there is integration (five factors).

If integrated, all sales to Tom illegal, and Mary can’t use rule 144 (which she would presumably use to sell into OTC market) bc 144f and g require her to use a broker.

Also creates problems with volume limitation. Because of integration, 144e3(vii) not applicable bc Tom sale not a 4(1), so 60k shares to Tom counted toward volume limits.

Broker- (in re Haupt) 4(4) not available if acting qua UW (which broker is doing here if 144 not available), unless Wolfson exception (so many brokers used that any given broker only seeing small piece of picture and didn’t realized part of a distribution.) (Volume matters for 4(4), deciding if acting or should reasonably know that acting qua underwriter, but volume doesn’t matter for 4(1))

o If securities have come to rest, don’t have to worry whether restricted securities. At that point only worry about 144 if you’re a control party.