SEC Problems pg 103 – 107 Assumptions 1. IPO 2. Already Public 3. After Dec. 1, 2006 A (1-17) Pre Filing – NO REGISTRATION STATEMENT HAS BEEN FILED YET 1. telephone call from Peoria Ill. to Chicago Ill. opening negations with investment bank to serve as principle underwriter a. It is a oral offer(b/c any step in the selling process) but it is exempted b/c in the pre filing period discussions between the underwriter and issuer are exempted further the matter with UW headquarters by telephoning to N.Y. head office a. almost always an interstate commerce (ALWAYS) – it is an oral offer (b/c any step in the selling process) but is exempted b/c (preliminary negotiations between UW and issuers are exempted) Reached informal agreement that investment banker will serve as principle UW embodied in a letter of intent (signed and mailed back and forth) a. Exemption (preliminary negotiations and agreements between UW and issuer are exempt i. Final binding agreements between UW and Issuers are not offers or sales ii. One aspect of the letter of intent that is binding is certain expenses of the UW are Publishing of a notice announcing that (issuer / Impel) proposed to (1) Register 10,000,000 shares of common and make public offering at a price to be determined (2) Money to be used for purposes stated above and (3) Hazard Co will be the principle underwriter a. offers not allowed, no legend, UW cannot be mentioned i. preliminary can be made if legend, limited in content, UW cannot be mentioned b. NEW RULES – 168,169 i. Not regular dissemination of information -> it is still and offer ii. You cannot talk about up coming offering (168(c))&(169(c)) Assume that #4 was not made by (issuer / Impel) but instead made by (UW / Hazard Co) a. Offer are not allowed by UW on behalf of the ISSUER -> conditioning the public mind i. Offers cannot be made by UW, ISSUERS, DEALERS b. NEW RULES – 168,169 i. Not regular dissemination of information -> it is still and offer ii. You cannot talk about up coming offering (168(c))&(169(c)) iii. + UW / DEALER cannot make the statement on behalf of the Issuer (only an issuers agent i.e. a publicist) UW / Hazard and Co forms an UW syndicate signing an “Agreement among Underwriters” and agree to purchase the stock on specified terms and conditions and authorized Hazard Co to execute the underwriting agreement with Impel on their behalf (using the mail) a. It is legally possible that this happens but this usually happens in the waiting period b. Statute -> regulation/ rule -> sec releases i. Statute -> Sale of stock (b/c executary contracts are sales before the effectiveness of period) ii. Under 2(a) (3) HOWEVER -> it is exempted under preliminary negotiations and agreements between UW, ISSUERS & DEALERS Hazard Co contacts members of the NASD and invites them to become members of the retail selling group as participants in the sale of the stock a. I -> UW (syndacite) -> Public b. I -> Dealer - > Public i. Potential issue -> we have an offer to sell ii. However exception -> preliminary negotiations with UW and agreements are exempt iii. HOWEVER issuers are not in privity with UW with issuers…only UW are in privity with dealers not issuers with dealer iv. Thus this a violation of the 33 act b/c issuer agreement with dealer (if it was an issuer with UW -> would be OK) Mails proxy statement to its shareholders soliciting proxies on behalf of management to be voted in favor of an amendment of the certificate of incorporation splitting the common stock and increasing the authorized common stock at a forthcoming meeting of the stockholders a. A house keeping corporate action b. Not allowed if conditioning the market c. But there allowed to continue business as usual d. However Rule 168 i. Already public companies ii. Proxy statement will not be considered a offer (only can be done by the issuer) iii. If factual information or forward looking business information 1. reports or other information that is filed with the SEC 2. the problem is when you look a specific examples iv. Not considered offers e. Rule 169 non reporting companies i. For private companies f. The real problem you can not refer to the registered public offering that is coming -> you can’t tell them about why you are splitting the stock…b/c if you do you have an offer…but if you don’t you have been misleading of material fact Assume that the common stock will first be offered to existing shareholders and the underwriters have committed themselves to “stand by” until the subscription period has expired, at which time they must take and pay for the shares not subscribed. Impel mails a notice to its common stockholder on April 1, advising them that is proposed to offer to stockholders of record on May 15 the right to subscribe to common stock on a basis of one share for each ten shares held, by means of 30 day warrants at a price of about 9.00 per share and that offering will be made only by means of a prospectuses a. Stand By Offering b. More typical of a public company c. Company selling directly to shareholders i. They are taking a step in the selling process (clearly an offer) ii. Clearly prohibited under 5c d. HOWEVER EXCEPTION rule 135 i. You can give a limited notice with a legend as long as it sates that this in not an offer, does not name the UW, has a legend, and On his way from Peoria to NY, Able stop off at Philadelphia Pa and has lunch with Barton, on of Impel largest shareholders. During lunch, Able asks Barton whether she intends to exercise her warrants in order to give Hazard Co. some indication as to the extent of the underwriters standby commitment a. RULE 135 does not apply b/c not written
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
b. This is an oral offer (a step in the selling process) c. Not allowed A dealer in Chicago having heard of the proposed offering mails a letter to Hazard & Co in N.Y. offering to buy some of the common stock when issued a. A dealer on the rumor mill contacts the issuer (already someone has broken the law) -> b/c the dealer should not know b. Offers to buy and sell are prohibited c. No exception here (b/c it is a dealer not an UW) A customer in Wis. Telephones a dealer in Chicago and offer to buy some of the common stock on a when issued basis. The dealer rejects the offer a. No securities violation b/c the customer is exempted b. The dealer has not violated b/c he has not participated A shareholder of Impel, having been notified of the proposed rights offering writes a dealer and offer to sell it some of the stock on a when issued basis. The dealer accepts and mails a written confirmation of the transactions a. A shareholder contacts a dealer b. Shareholder is exempted under 4a1 c. Dealer did not make an offer to sell and did not make an offer to buy d. We have both an offer and a sale in the prefiling period e. However when the dealer has confirmed the purchase in writing i. Dealer is likely to have squeaked by f. If the shareholder buys the stock with the clear intention of selling to the public (shareholder becomes an UW if it buys shares to sell to the public) i. Not a sale to the public if you sell to one person who is a sophisticated investor Impel’s President, meets in Peiora with a group of 20 security analysis and discusses the state of Impel’s business and competitive conditions in the industry. The meeting was set up by Impel after the signing of the “letter of intent” referred to in Q #3. Supposed that Able reveals material non public information to these analysts a. Taking steps in the selling process b. Could be considered conditioning the market c. If private company -> not allowed b/c of conditioning the market d. If a public company & this is a meeting with analyst that regularly follow the company (could be regular dissemination of business information i. The communication may not contain information about the up coming offering e. Thus not allowed -> b/c this is after the letter of intent is signed i. Likely to be held to be a step in the sales process Impel mails an Annual Report to Shareholders as it customarily does at this time of year, which report contains its usual amount of financial and other information concerning the company’s products and activities during the past year a. Annual report b. OK -> b/c not an offer b/c dissemination of regular business information (rule 168 / rule 169) factual business information (but you still cannot refer to the impending offer Able is invited to appear on CNBC’s evening talk show “Market Update” which does a regular weekly segment on upcoming IPOS. He tentatively accepts and then calls you for legal advice. What do you advise a. He should probably not go on b/c it is “market update” which “regularly” does a segment on upcoming IPO’s b. B/c it is conditioning the market not allowed Suppose Impel during this period decides to open a website (having never done so before). Although Impel’s website says nothi ng about the offering or its future prospects, it does hyperlink to a securities analysis research report, which report discussed Impel’s impressive new business plan a. May be suspicious b/c it is not a regular course of business (b/c first time) i. If allowed -> only factual business information ii. Would an securities analyst report be considered (factual business information) (however generally a securities analysts is for the purpose of analyzing whether to buy, hold, sell the stock
B (18 – 26) AFTER FILING WAITING PERIOD – REGISTRATION STATEMENT HAS BEEN FILED 18. Marjen Co, a securities dealer in Chicago, which is aware of the proposed public offering but does not intend to become a member of the underwriting syndicate or dealer group discusses the prospects of Impel in its weekly market letter distributed to is clientele and recommends Impel common stock as a long term investment a. Either assumption -> private or public b. If it is an offer then there are certain prospectus requirements that must be me c. EXCEPTIONS – as long as there is no compensation and is published during the regular coarse of business then it is ok (for a 3rd party to publish recommendations on the company i. It is a written offer that does not meet the requirement of 10b for a prospectus ii. However Rule 137 allows for 3rd party to disseminate information as long as it is not done for compensation and is published in the regular coarse of business (of the 3rd party) Armitage Co. a securities dealer in Cleveland, Ohio, that intends to accept an invitation to become a member of the underwriting syndicate, in its regularly issued market letter publishes information regarding the Impel preferred stock with a recommendation of its purchase by prudent investors a. Normally be an offer but we don’t get there b/c of Rule 138 b. b/c Rule 138 Armitage Co. also continues to list the Impel common stock in its monthly comprehensive list of securities currently being recommended by is as it has done for the past four years, but changes its previous “hold” recommendation to a “buy” recommendation a. Upgrading the Recommendation (Buy, Hold, Sell) b. Upgrading form a hold to a buy that happens to coincide with an offering of a follow on + a member of the syndicate c. Rule 139 – it is a participating broker who is disseminating information (even though upgrading / still allowed as long as you have been following this company or this industry for a period of time) A sales representative of Hazard Co. in N.Y. telephones a dealer in Chicago and offer to reserve some of the common stock for its account with a view to having it purchase the shares at a discount and re offer them to the public as soon as the registration statement has become effective a. This is an oral offer (permitted in the waiting period) b. Is there an executory contract (b/c that is a sale) c. When the underwriters talk to the dealers you are not trying to get sales…just indications of interest Hazard Co publishers a “tombstone ad” with respect to the forthcoming issuer in the Wall Street Journal a. IPO b. PUBLIC c. AFTER DEC. 1, 2006
19.
20.
21.
22.
23.
24.
25.
26.
Hazard Co. mails the preliminary prospectus to selected dealers throughout the nation, enclosing a card inviting them to indicate to what extent they are interest in purchasing some of the common stock form the underwriting group at a discount and re offering it to the public as soon as the registration statement becomes effective. What if any restriction are imposed upon the solicitation of indication of interest form dealers a. IPO b. PUBLIC c. AFTER DEC. 1, 2006 A dealer writes a letter to one of his customers offering her Impel common stock on a when issued basis, but does not enclose a preliminary prospectus b/c it knows that its customer has already receive one form another source a. IPO b. PUBLIC c. AFTER DEC. 1, 2006 As soon as the price amendment has been filed, a dealer in Chicago telephones its customers in Wis. And offer to sell 100 shares of Impel common stock at the proposed offering price as set forth in the final prospectus. The customer accepts the offer. When the registration state ment becomes effective, the dealer mails a confirmation to is customer who never received a preliminary or final prospectus a. IPO b. PUBLIC c. AFTER DEC. 1, 2006 Able is again invited onto CNBC’s “Market Watch” show. Can he appear? What guidelines should he be careful to observe a. IPO b. PUBLIC c. AFTER DEC. 1, 2006
C (27-38) REGISTRATION HAS BECOME EFFECTIVE 27. A dealer who is a member of the selling group writes a letter to one of its customers offering her Impel common stock. Must t he dealer send a statutory prospectus with his letter or may a Rule 431 summary prospectus be used a. IPO b. PUBLIC c. AFTER DEC. 1, 2006 28. In question 27, assume that the dealer had been told by another broker dealer that is had previously sent a statutory prospectus to the cus tomer, so omitted to enclose any prospectus. Although the dealer is able to prove that a prospectus was mailed to the customer, the customer can establish that she never receive it a. IPO b. PUBLIC c. AFTER DEC. 1, 2006 29. In Q #27 instead of writing a letter, the dealer makes an interstate telephone call to its customer and offers her the stock which the customer accepts. The dealer then mails a confirmation of the sale. Must it enclose a statutory prospectus a. IPO b. PUBLIC c. AFTER DEC. 1, 2006 30. In Q # 29 after the customer accepts the offer, the dealer does not mail a confirmation but puts the stock certificates in an envelope and mails them directly the customer. Must it enclose a statutory prosecutes a. IPO b. PUBLIC c. AFTER DEC. 1, 2006 31. A dealer who is a member of the selling group mails a statutory prospectus to one of his customers and also encloses a brochure prepared by Impel’s public relations dept., which paints a picture of the company future, far more optimistic than the prospectus. Copies of this sales literature were never f iled with the SEC a. IPO b. PUBLIC c. AFTER DEC. 1, 2006 32. Impel, having met the condition of Rule 431, prepared and filed a summary prospectus as a part of the registration statement that has become effective. A dealer who is a member of the selling group mails this summary prospectus to one of its customers. Is this permissible a. IPO b. PUBLIC c. AFTER DEC. 1, 2006 33. Shortly after the public offering is made, Marjen Co. which was not a member of the selling group, solicits one of its customers to buy Impel common stock on the NYSE, and executes a buy order for the customer. The securities are delivered to the customer. Must Marjen Co. enclose a statutory prospectus a. IPO b. PUBLIC c. AFTER DEC. 1, 2006 34. Armitage & Co. failed to honor written requests form institutional investors for an Impel preliminary prospectus during the waiting period and a statutory prospectus after the effective date. What sanctions may the SEC impose against Armitage under these circumstances a. IPO b. PUBLIC c. AFTER DEC. 1, 2006 35. During the Waiting Period Impels posts its preliminary prospectus on its web site on the WWW a. IPO b. PUBLIC c. AFTER DEC. 1, 2006 D (assume utilizing the electronic communication to reach its investor audience) 36. Similarly during the waiting period may Impel posts an unrelated securities analysis favorable evaluation of its securities o n its web site. What result if it alternatively hyperlinks to such a report would any problem arise if Impel compensated the analysts a. IPO b. PUBLIC c. AFTER DEC. 1, 2006 37. Immediately following effectiveness, Impel, as a Form S-3 issuer, electronically sends a copy of its “abbreviated term sheet” to investors who have earlier consented to electronic delivery. What must such an “abbreviated term sheet” disclose? May a broker electronically deliver by email its confirmation of sale? Under what circumstances? a. IPO b. PUBLIC c. AFTER DEC. 1, 2006 38. Assume that Impels abbreviate term sheet” does not disclose the offering price (not the underwriter discount not the final proceeds to the issuer) but the confirmation of its sales does contain such information a. IPO b. PUBLIC c. AFTER DEC. 1, 2006