Thursday 10 Nov 2005 Next Week Assignment 412-13, 439-43, 424-28, 452-71 Reeves (cont.) -Court tried to summarize the distinction between commercial and investment notes o only investment notes are covered under the Securities Act o commercial notes are not intended to be covered -Adopted the Family Resemblance Test (see top p.371) o Three Step Process (1) Note is assumed to be a security (any written evidence to pay a debt) (2) Exception to General Rule (3) Family Resemblance Test – Four Factors • SEE BUSINESS PLANNING NOTES!!! o Two General Categories (of the 7 exceptions/commercial notes) Personal Notes • Consumer issued notes (used to buy things or bank customer character loans) Notes Evidencing Short-Term Business Obligations • Purchaser of note here is not making a longer term investment in the business of the obligor • does not share in the appreciation of the company as a SH would o Analysis = Does it bear a strong resemblance to one or more of these seven categories using the 4 factors?? cumulative test – don’t have to meet all 4 factors Private Offering Exemptions (starting p.386) -Exemptions in General o Why shouldn’t section 5 apply to every issuance of security?? expense • impediment to the formation of capital, to the formation of business/enterprise • is a barrier identity of offeree important (may not need the protection) should only be imposed where the benefits outweigh the costs o Goal = Exemptions try to take out those situations where the costs outweigh the benefits of being registered generally this plays out on a public v. private offering basis o Registration is required where there is a public offering of some significant size must be a relatively large offering to the public law does not invariably support this public v. private distinction (not always the case) -Exemptions Provisions – Section 3 (see p.5 in the code book) o Entitled “Exempted Securities” There are types of securities that are exempted o Scope 33 Act shall not apply to the classes of securities listed see section 17(c) • section 17 generally provides fraud provisions • “exemptions in section 3 shall not apply to the provisions of this section” o Means fraud provisions DO apply even if have a security that is exempted under section 3 issuer didn’t have to register the securities but are still subject to the fraud provisions some of the exemption provisions in this area really describe transactions • Sections 3(a)(9)-(11) o (9) – Bankruptcy Cases in which securities are issued o (10) – Intra State Exemption Company that is based in one state, registered in that state, and issues stock only to citizens of that state o Section 3(b) (p.8 in code book) Not Nx to register because of the small amount issued allows the SEC to expand upon the exemptions – by a numerical limit • offerings not to exceed $5 million -Section 4 o Entitled “Exempted Transactions” o Scope provisions of section 5 shall not apply to. . . . . antifraud provisions still apply but the registration requirements under section 5 don’t apply o (a)(1) section 5 shall not apply to anyone other than an Issuer, UW, or Dealer will look deeper into who is an UW in later classes o (2) transactions by an issuer not involved in a public offering o (3) delivery of prospectuses in the after market brokers exempt in these circumstances from the requirements of section 5 -Section 28 o commission may conditionally/unconditionally exempt any person/transaction from any rule or regulations of this title if in public interest and consistent with . . . . o allows more exemptions from the registrations provisions of section 5 Private Offering Exemptions -Section 4(2) -covers ONLY issuer transactions – does not cover transactions by a SH -Statutory Language transactions not involving a public offering o most often called “private placements” or private offerings -Ralston Purina Case (see textbook p.397) o issued stock to employees over a period of time stock sold ONLY to employees stock sold only to KEY employees • people who have a future with the company; “sympathetic to management” • not restricted to management – can be anyone at any level in the company o sales were made based on word of mouth – there was no solicitation of the sales No active sales campaign sold over a 5 year period o there were more than 1000 sales made in one year there were more than 500 offers made large number of people involved o Issue Is this a public offering?? Ralston did NOT file a registration with respect to any of these offers/sales Were these transactions not involving a public offering of stock?? o Court did not adopt a quantitative test this is not a numbers game numbers are important – more sales/offers made then more likely to be public offering but it is NOT a quantitative test per se qualitative test o Test Implemented by the Court Here NEED TEST if need the protection of the act then public offering but if don’t need the protection of the act then have a private offering Court looked at the purpose of Section 4(2) • Legislative intent = no need for registration in a private placement • if any of the offerees needed the protection of the act then is a public offering -Regulation D Rule 506 o Safe Harbor Provision if fit within these requirements then are guaranteed to be a private placement designed to provide certainty after the Ralston Case o this is a quantitative test – numerical requirements