NEW RULES (that cover pre filing publicity) • The underlying policy – is that the SEC is to have the authority to make rules in regards to securities (for the public interest and protection to investors) o These new rules exempt transactions and actions that will exempt things from being considered offers (in the electronic age the rules have become to rigid) o They are essentially granting narrow exceptions to the rule of NO OFFERS • 163(a) • 168 • 169 Issuers • Well Known seasoned issuers (already public) • Seasoned Issuer(already public) • Unseasoned reporting issuer(already public) o The filing requirements are reduced for a company that is already public b/c the information is already out there • Non reporting Issuer (IPO) o They are not public yet (500 shareholders and 10M in assets) o Have not filed an IPO before Image advertising = offers Granting interviews = offers o Quiet Period Pre Filing -> Waiting but in the waiting period you can make restrictive offers o 163(a) Safe Harbor period anything before 30 days before the registration is filed (as long as your statements do not reference to a securities offering) (but image and product advertisements is ok 30+ days before registration statement As long as the statement made before the 30 day prior is ok Anything within the 30 day period is not neccessarly suspect but the company needs to use reasonable care in the information that they give out o Statements cannot be made by underwriters /dealers about the company even if not directly about the offer (b/c there is no other reason that UW or dealers would be making statements about the company except to condition the public about an up coming offer RULE 169 • Does not cover companies that are registered under the 34 act • For purposes of 5(a)(c) “NO OFFERS” • The REGULAR release by the issuers of factual business information is not deemed to be an offer o What is Factual Business Information Factual Information about the issuer or financial information about the company Advertisements of the companies business products or services • The Issuer must be the one releasing the information or agent but not an UW or Dealer • You give this information for a period of time • You give this information to creditors and others in order to convince them you are a solid company that they should be doing business with. (it has to be a pattern of release of information – the preexist the thought of going public and cannot be for the purpose of going public) o Regular Releases of information = OK o Not for the purpose of conditioning the public mind o Release used to show creditors + suppliers + customers to view the company as a solid company o No reference to a securities offering in the future RULE 168 • Same as 169 but for publicly traded company • Can be any type of information that is released during the REGULAR course of Business o Factual Business information as required by the 34 Act Regulare o Forward looking information (projections, revenues, income) o Managmeent Plans, objectives o Statements about the economic performace • Cannot be released by UW or Dealer (must be released by the Issuer or agent) • Cannot release information about the offering that is coming • RULE – NO COMMUNICATION OF OFFERS OTHER THAN BY MEANS OF PRELIMINARY PROSPECUTES (OR TELEPHONE OFFERS, FACE TO FACE ORAL OFFERS) (i.e. six hour TV show about 6 hours long of someone reading) RULE 431 • Allows summary prospectues – shall be deeded to be a prospectus under 10b • Is a summary prospectues for a company that is already registered under the 1934 Act • It refers to items by reference to other public documents (it is the equivilant of a preliminary prospectus just abbreviate by referencing information 5 Ways Offers Can be made during the waiting Period Untill December 1st 2006 Oral Offers Tombstone Ads as described in Identifying statement as in Rule 134 Preliminary Prospectuses (rule 430 section 10b) red herring Summary Prospectus (for companies already reporting under the 1934 Act) ANY OTHER OFFERS ARE FORBIDDEN BY THE 1933 ACT Graphic Communication • Road Shows = Oral Offers o You can have slides and charts (but has to be taken away with you) – no handouts = oral communications o You can use a microphone, you can use slides to illustrate your • As long as there are no take aways you have not become a free writing prospectus • However live telephones call and road shows (real time, to a live audience) does not count as graphic communications, thus NOT a free writing prospectus o However if you tape the road show and then retransmitted it by website, dvd, tape record -> will be considered graphic communication and free writing • You want a free writing b/c it will be allowed as of dec 1st and it will allow more information to be given without having to be a full preliminary prospectus and not violate SEC rules ROAD SHOWS (live road shows are not free writing prospectuses) • A road show that is an offering for an issuer • Recorded road shows = a free writing prospectus o Thus needs to be filed and accompanied /preceding preliminary prospectus o EXCEPTION – a recorded road show is a free writing prospectus however you do not need to file is with the SEC in advance o UNLESS – it is in an IPO If your making different pitches to different people you need to file it with the SEC b/c you may be leaving something out If you have only 1 general recorded road show -> you do not have to file Free Writing Prospectus • Allowed to be used during the waiting period • Summarizes information that is in the preliminary prospectus • Free writing Prospectus must be preceded by or accompanied by a preliminary prospectus o Must have a legend o Must be filed with SEC by the first day of its use o Cannot contradict information • If the issuer uses, prepares or refers to -> FWP • If the UW creates a FWP -> o Must be filed with the SEC o Unless there is no broad unrestricted dissemination o If the written material is not intended for broad dissemination then it does not need to be filed A FWP is a permitted as a 6th offering means during the waiting period as long as there is no conflict between the information in the FWP and the preliminary prospectuses /registration statement 6 TYPES OF OFFERS CAN BE MADE DURING THE WAITING PERIOD 1 Oral Offers 2 Identifying Statement 3 tombstone ads 4 Preliminary Prospectus (meeting the requirements of 10 5 Summary Prospectus (only if already public company 6 Free Writing Prospectus • Those are the six ways offers can be made during the waiting period • No sales can be made during the waiting period • Any other Free Writing is prohibited o However if it is an IPO -> you must continue to give Prospectus delivery requirement (90 days) o Hover if IPO & (NYSE or NASDAQ) = 25 days o However companies that are already reporting under the 34 Act = 0 days What do you have to deliver to the Purchaser • When must final prospectus must be delivered when A sells to B o 90 -In an IPO -> 90 days simult /or prior to o 40 -a company that has issued stock to the public and then for some reason is not longer required to register under the 34’ act o 25 -However if IPO is registered with NASDAQ or NYSE -> 25 days o 0 – If already a public company -> 0 days • NEW RULES o Does not change the rules but it changes what it means to delivery a final prospectus (prior to or simultaneously) o You can now delivery up to 2 days after the sale o In lieu of delivery of final prospectus you can delivery a notice that the sale was made pursuant to effective registration statement o Also these notices themselves are exempt from 5b1 • NEW RULES o A purchaser may request that a final prospectus be sent (must be done) • NEW RULE 174 o The requirement to deliver anything with the confirmation has been eliminated o However notice needs to be prior or simultaneously with delivery TRULY REVOLUTIONARY • You cannot make offers or sales during the pre filing period • However WKSI’S can make offers during the pre filing period (re written 5(c)) for wksi’s ESCOTT v. BARCHRIS CONSTRUCTION CORP. 293 F.Supp. 643 (S.D.N.Y. 1968). FACT SUMMARY: Various principals and professionals involved in the preparation of a registration statement on behalf of BarChris (D) contended that they were excused from liability for errors contained therein because they had exercised due diligence in its preparation. RULE: Those responsible for an erroneous registration statement may be excused from liability if they exercised due diligence in its preparation. ISSUE: May those responsible for an erroneous registration statement be excused from liability if they exercised due diligence in its preparation? YES SEC v. W.J. Howey Co FACTS – After Howy sold small strips of land in its citrus groves to purchasers who entered into a simultaneous service contract with Howey D, the SEC sought an injunction preventing Howey’s use of interstate commerce to promote the arrangement on the ground that it constituted the sales of securities unregistered with the SEC RULE – Security = Investment Contract =: • investment of money • in common enterprise • Expectation of profits • with profits to come solely form the efforts of others SEC v. Koscot Interplanetary, Inc FACTS – Company conducted “sales campaign” for beauty products by distributing shares in its enterprise in turn for which purchasers brought in new “sellers” of the products RULE – An investment contract will be found where the efforts of those other than the investor are the essential and significant managerial efforts, which affect the failure or success of the enterprise as a whole. • The critical issue -> is whether the efforts made by others are the “undeniably significant” efforts made by others • The court holds that the friend bring was important but not undeniable significant o The court holds that the sales presentation and the pressure is what are the undeniable services provided. What is Common Enterprise? (based upon jurisdiction – 3 views – to find an investment contract) • Broad Vertical Commonality – o Likely to Hold Commonality Exists is when: Broadest View -> Resulting in finding an investment contract The efforts of the promoter are linked to the fortunes of the investor or investors. (i.e. the promoter is going to make money regardless even if the investor does not) = broad Vertical Commonality • EXAMPLE -> promoter and investors do not share in the net profits overall + the investors do not need to be pooled with other investors (i.e. broad vertical: 1 investor and 1 promoter • Strict Vertical Commonality – o The fortunes of the promoter are linked to the fortunes of the investor (i.e. they share a % of profits and losses with each other) -> Resulting in finding an investment contract • Horizontal Commonality – o Must be a pooling of investors profits (must have more than 1 investor & have them pooled together)-> resulting in finding an investment contract United Housing Foundation, Inc. v. Forman FACTS – United Housing (UHF) (D) the developer of Co-op City, required that prospective purchasers (P) buy shares of stock in order to occupy an apartment in the development RULE – Commercial transactions in stock do not constitute securities under the Securities Acts where the purpose of the transaction is not to invest for profit ISSUE – Do Commercial transactions involving the sale of stock constitute securities where the purpose is not to invest for profit? NO • Commercial transactions do not constitute securities under the Securities Acts where the purpose is not to invest for profit. • HYPO – would this be considered a security if there was the possibility of profit on the sale of the co-op interest (DOES NOT CONSTITUTE A SECURITY IF YOU ARE BUYING “PRIMARLY” FOR A PLACE TO LIVE) STEINHARDT GROUP, INC. v. CITICORP FACT SUMMARY: Assets were highly overvalued in a structured securitization agreement between a corporation (0) and an investor (P) in a limited partnership. RULE OF LAW: Partnership interests in a limited partnership constitute an investment contract only where a partner's rights and powers are limited to those of a passive investor. ISSUE: Does a highly structured securitization transaction negotiated between a corporation and an investor in a limited partnership constitute an investment contract under Howey? NO • Because the Steinhardt Group (P) had pervasive control over the management of the partnership, its rights and powers directly affected the profits received from the partnership. GREAT LAKES CHEMICAL CORPORATION v. MONSANTO COMPANY FACT: Great Lakes Chemical Corporation (Great Lakes) (P) purchased NSC Technologies Company, LLC (NSC) from Monsanto Company and STI (D), and thereafter sued the sellers (D) under the Securities Exchange Act of 1934, alleging that they had failed to disclose material information in conjunction with the sale. The sellers (D) moved to dismiss on the grounds that the interests sold were not "securities." RULE: Interests in a Limited Liability Company (LLC) that are neither stock, investment contracts, nor interests commonly known as securities are not securities as defined in the Securities Exchange Act of 1934. ISSUE: Are interests in a Limited Liability Company (LLC) that are neither stock, investment contracts, nor interests commonly known as securities, securities as defined in the Securities Exchange Act of 1934? NO LANDRETH TIMBER CO. v. LANDRETH FACT: Landreth Timber Company (P) purchased all the stock in a timber mill from Landreth (D), and sued under the securities laws. RULE: A sale of shares of stock will be covered by the securities laws, irrespective of the nature of the stockholder's role in managing the corporation. ISSUE: Will a sale of shares of stock be covered by the securities laws, irrespective of the stockholder's role in managing the corporation? YES • Where a transaction involves the sale of an instrument called "stock," as where a 100% interest in a closely held corporation is transferred, and the stock bears the five common attributes of stock, the transaction is covered by the securities laws. • HOLDING – If it is called a stock with all the rights of a stock then we do not need to look to substance over form, but in fact it is a stock, thus the sale of a security (and you do not need to meet all of the requirements “usual characteristics of stock” to have a stock be a stock) o When you have a traditional stock – that is the end of the analysis o Thus the court rejects the “Sale of Business Doctrine” REVES v. ERNST & YOUNG FACT: Reves (P), on behalf of various purchasers of payable-on-demand notes purchased from an agricultural cooperative, argued that the notes were securities within the meaning of the 1934 Securities Exchange Act. RULE OF LAW: Notes that are payable on demand offered by an organization to support its general operations are securities within the meaning of the 1934 Securities Exchange Act. ISSUE: Are notes that are payable on demand and offered by an organization to support its general operations securities within the meaning of the 1934 Securities Exchange Act? YES Sarbanes Oxley -Bush thought this law went too far -effective July 30, 2002 -market plunge between March 2002 and July 2002 by 27% decline -December 2001 Enron scandal; June 2002 Worldcom scandal o combined with market effect looked like what had happened prior to the great depression -bill passed almost unanimously -Targets of Legislation o top executives – CEOs and CFOs Congress didn’t like that they were in a position to claim that they were defrauded requires them to be part of/know what going on o accounting principles/rules too thin equity investments rules had become too artificial and unrealistic need more oversight of the accounting profession • lack of independence of auditors (were getting majority of info from consultants and not the auditors to find out the consequences) • accountants are supposed to be independent (represent the public) o lawyers who are not counsel but just part of the process inappropriate self limitation of lawyers imposes a positive obligation to go up the ladder – must check with/inform the board, not just the in-house counsel o securities analysts performance found to be deficient b/c were often just shills for the UW department often did not keep their objectivity b/c were also part of the UWs o reform governance of public companies -see p. 3 of the outline (Westlaw document) for goals of the Act -who does the Act apply to o does not apply to all corporations o does not apply to non-profits o applies to public corporations companies registered under the ’34 Act private companies that have filed registration statements with SEC to sell stock to the public • as soon as file the reg. statement then subject to this Act o see p.4 of the handout o not all provisions apply to all public companies some apply only to listed companies -Public Accounting . . . . o see p. 4 handout o new SRO – self regulating organization o SEC appoints the chair -Strengthen Auditor Independence o see fn.24 for an example of the cross-selling that was occurring at this time o this Act prohibited auditing firm from providing 9 different services i.e. book keeping (any accounting related services); financial system information design and implementation; appraisal and value; etc. etc. (see the handout) • none of these may be performed by the auditor • now try to render these services to companies that don’t render auditing services o Taxes auditor may render these services but must be approved by the audit committee of the Board in advance and must disclose this to the SH most tax departments no longer provide their services for audit clients o applies to all companies registered under 34 Act -Reform the Board’s view towards accounting o not doing a good job of protecting SH by policing accountants carefully enough o mandates the establishment of independent audit committees that will have exclusive jurisdiction over audit activities applies to all companies listed on stock exchange will have sole responsibility for audit function company will have two boards – traditional board and a separate committee for auditing purposes • each member of audit committee must be independent o ALL outside directors (not on board, no more than 10% in shares, etc.) • must contain at least one financial expert (see bottom p.7 for definition) o if not then must explain to the SH why have no financial expert o more than just savvy in business – must know accounting, accounting theory, and have accounting experience see p. 8 for what the auditing committee will be responsible for • can hire their own counsel o now have independent auditors AND independent auditor committees -Expanding Professional Responsibility of Corporate Counsel o used to be that professional responsibility was governed by state law o now rules for conduct in representing public companies has become federal regulated by SEC preempts state law CA fighting this o SEE the flowchart handout o Permissive Noisy Withdrawl see p.1909 left hand column 205.3(d)(2) • this is NOT mandatory • may disclose to the extent Nx o (1) prevent future financial injury to the investors o (2) prevent perjury o (3) rectify or repair past harm caused by material violations material need not do this CA has issued an ethics alter to CA lawyers that if do this then may be disciplined by the Bar including being removed from bar • sole option is to quit • inform SEC at your risk until the issue reaches an appellate court that finds the CA law is preempted by the federal legislation Enron Example -E would create a special purpose entity as an independent company -under accounting rules the SPE had to have at least 3% equity investment (outside parties investment); and up to 97% of capital could come from loans -E would sell an asset, take back cash or a note from the SPE, book a profit on the sale and the SPE would own the asset o a number of these assets when sold to SPE lost money, such loss would be on SPE books and not reflected on Enron o losses are realized but not effected (Enron) -If SPE was truly an independent party then this formula would work o however here were guaranteed from loss by Enron and Enron guaranteed the loans Enron on both sides of the deal and is therefore selling to itself not to independent third parties GENERAL OVERVIEW • Lawyers Liability /Responsibilities • 205.3(d)(2) pg 1909 • General Rule of Confidentiality – absent client consent to disclose that information, that rule is without exception (no permitted disclosure even with fraud or harm) (NOW – permit disclosure to non party third parties in the case of harm or fraud) o Attorney may reveal confidential information (d)(2)(1) & (3) – to prevent future injury (report to the SEC) and to rectify past injury o CA lawyer should not make that disclosure until upheld by an appellate court CEO and CFO -> Certification of the statements • This is a direct response to the CEO’s saying that I did not know (that my time is spent doing other things) • The corporate establishment supported Congresses assumption that CEO”s should know the business o No one is suggesting that the certification provisions are to be amended /relaxed /or gotten rid of • 7 items that must be certified o Eyes have run across the report o No omission or misstatement o That the report fairly presents the condition of the company (“Fair Presentment”) broader than GAAP -> you need to give investors a fair picture o Certifying officers are responsible for (I have established and maintained appropriate disclosures processes and procedures) SECTION 404 (Widely despised section) (to show that internal controls are adequate) • Requires internal control report o (1) states management's responsibilities for maintaining adequate internal controls and procedures for financial reporting, and o (2) expresses management's conclusions on the effectiveness of the controls and procedures. Further, the company's auditor must attest to and report on management's evaluation of the controls and procedures. The auditor's report is to be included in the Form 10-K as well. Under proposed SEC rules, "internal controls and procedures" are those relating to the preparation of financial statements for external purposes in accordance with GAAP. • This have proved to be very costly for the companies to do • THE BIG PROBLEM IS THE SMALLER COMPANIES PAYING VERY MUCH IN ORDER TO COMPLY • There is a move to relax the requirements of section 404 for smaller companies (currently these requirements have been deferred for 1 year for smaller companies) o Currently if you have 10M in assets + 500 share holders o If you get under 300 shareholders you do not have to apply for any of these requirements (but must take an affirmative action to de register) SECTION 906 -creates a new criminal statute with certification requirements completely independent of those of Section 302 • Knowing violation – 1M and /or prison for 10 years (I know the # are not right /but I did not know I was violating) • Willful Violation – 5M and /or prison for 20 years (I know the #’s are not right /and I did know I was violating) REVIEW WHAT SHOULD KNOW FOR THE EXAM • Limitation on Accountants (pg 6) o Ancillary services that they may do with the consent • Pg 7 – 8 – Responsibility of the Audit Committee o Establish independent audit committee • Familiar with responsibilities of corporate Counsel (pg 8 and the chart distributed) • Remember Permissive Disclosure Rules • CEO & CFO Certification • SECTION 404 • SECTION 906 Sarbanes only applies to companies that are registered under the 1934 act and from the time they file a registration statements under the 1933 act Evaluation of Sarbanes Oxley