Securities Regulation: Selected Statutes, Rules, and Forms, 2019 Supplement by James D. Cox, Robert W. Hillman, Donald C. Langevoort, Ann M. Lipton, & William K. Sjostrom (optional)
Securities are primarily regulated under the Securities Act of 1933 and the Security Exchange Act of 1934. The SEC regulates securities with further rules under these acts.
The '33 Act is mainly concerned with the primary market.
The '34 Act is mainly concerned with the secondary market, which is much more prominent.
The Howey test determines whether or not something is an investment contract, a type of security. By extension, this often determines whether or not something is a security.
Invest Money
The motivation should be to invest money, not just exist as a requirement for something else.
Broad vertical commonality is present when there is a connection between the efforts of the promoters and the collective successes and losses of the investors.
This is probably not correct because it is basically the same thing as the "efforts of others" element of the Howey test.
Different states accept different types of commonality.
Expectation of Profits
Efforts of Others
For selling a corporation's "stock" (or other instruments listed in the statute), Landreth says that it will be considered a security as long as it bears the normal indices of that type of instrument.
Despite being largely equivalent, purchasing all of a corporation's assets is not a security sale, but purchasing all of a corporation's stock is a security sale.
Sometimes purchasing just the assets will allow one to escape liabilities but may terminate contracts.
Generally, interests in general partnerships are not securities (unless they don't really have the ability to manage), and interests in limited partnerships are securities.
Purchasing all of an LLC, it's not clear exactly what happens. Purchasing part of an LLC uses the investment contract analysis, and will mostly depend on how active the purchaser is in the business. An active manager will not have a security.
Since notes are listed in the statute, they are securities by default. However, Congress clearly could not have meant all notes. Thus, the courts have come up with the family resemblance test. There are certain families of notes that Congress could not have meant, so to the extent that a note resembles one on the list, it is not a security.
The Supreme Court in Reves identified four factors to consider in comparing similarity and contemplating adding to the list:
The motivations for entering into the contract.
A seller looking to raise money for his business and a buyer looking to make a profit would indicate a security.
Facilitating the purchase of a minor asset or consumer good, correcting for the seller's cash-flow difficulties, or advancing another commercial or consumer purpose is likely to not be a security.
The "plan of distribution" of the instrument to determine if there is a "common trading for speculation or investment."
The reasonable expectations of the investing public.
Whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument.
§ 11 of the Securities Act catches every person who signed the registration statement, director, expert, and underwriter with liability for problems with registration statements.
There must be a material misrepresentation, omission, or half-truth in a registration statement which the plaintiff bought shares in a direct offering.
If the defendant shows that the plaintiff knew of the falsity.
If the plaintiff's case is brought for shares bought after the company released an earning statement covered the year after the registration statement.
Whether people are liable for problems in registration statements depends on whether the person was an expert and whether the portion he wrote purported to be made upon expert authority.
Damages under § 11 are the difference between purchase price and sales price. If it is not sold before filing suit, damages will use either the price at the time the suit was filed or when it was sold, whichever gives less. § 11(e).
As long as it is within the statute of limitations of 1 or 3 years, a purchaser can sue the seller of such a security to get his money back.
§ 12(a)(2) basically copies the protection of § 12(a)(1) to allow purchases to sue sellers for public offerings or sales of securities with communication that includes a misrepresentation or omission unless the seller could not have reasonably known.
A fact is material if there is a substantial likelihood that a reasonable investor would consider it important in making his investment decision. Basic.
A reasonable investor finds a fact important if a reasonable investor would view the fact as significantly altering the "total mix" of information made available. Basic.
The truth on the market defense states that a registration statement is not misleading when the truth of the statement had already been reported otherwise and become known to the market.
When an offering document's forecasts, opinions, or projections are accompanied by meaningful cautionary statements, the forward-looking statements will nto form the basis for a securities fraud claim if those statements did not affect the "total mix" of information the document provided investors.
If one doesn't have a duty to disclose, he can always say "no comment" to avoid admitting material information definitively.
Privity is not required, but you must have actually purchased a security.
The defendant does not have to be a purchaser or seller. Must just be "a fraudulent scheme in which the securities transactions and breaches of fiduciary duty coincide." Zanford.
Focused on keeping out plaintiffs, not defendants.
Control means having the power to control the general affairs of an entity at the time it violated securities law and to have the power to control or influence the policies with resulted in the liability.
After showing control, it is then the defendant's burden to prove he didn't have control. However, how it exactly works is kind of vague.
The four particularly important factors in determining the application of § 4(b)(2) are:
The number of offerees and their relationship to each other and to the issuer
The number of units offered
The size of the offering
The manner of offering
More important than these now though are that potential investors can fend for themselves.
Fend for Yourself
Whether or not an investor can "fend for [himself]" is determined by how much information the investor has and how sophisticated he is.
The information would be the same type of information in a disclosure statement.
Information can either be based on insider access or on disclosure.
People basically never want to rely on the statutory exemptions. They want to hit the associated safe harbors. The exemptions should be known and considered though to try to fit just in case the safe harbor is missed because the exemptions are a bit broader. (Although Rule 506 is somehow broader than § 4(a)(2) by exempting people just because they're rich.)