Securities Regulation

Class Info

Law School: Liberty University School of Law

Course ID: LAW 644

Term: Spring 2020

Instructor: Prof. Chrisman

Books Used
  • Securities Regulation: Cases and Materials by James D. Cox, Robert W. Hillman, Donald C. Langevoort, Ann M. Lipton, & William K. Sjostrom
  • 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.

To see if security regulations apply:

  • Is it a security?
  • Is it not an exempt security?
    • Else, only the anti-fraud laws apply.
  • Is it not an exempt transaction?
    • Else, the anti-fraud laws apply, the exemptions must be complied with, and resale may be restricted.
  • If all so, the full securities regulations apply.

Securities' values are based on their financial (dividend and appreciation) and control rights.


Market efficiency is the degree to which the market price of goods accurately reflects its value.

Fundamental efficiency is specifically how well it reflects some inherent value. This is impossible to know.

Informational efficiency is specifically how well it reflects its correct value based on available information.

The markets have semi-strong efficiency.


Whether or not something is called "stock" or something similar is not enough to determine whether or not it is a security.

  • Although under Landreth, stock will be a security unless it does not bear normal indices of stock.

What is and is not a security is mostly governed by the test from SEC v. W.J. Howey Co.:

Howey Test

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.

  1. Invest Money
    • The motivation should be to invest money, not just exist as a requirement for something else.
  2. Common Enterprise

    For an endeavor to be a common enterprise, there must be one of three types of commonality:

    Different states accept different types of commonality.

  3. Expectation of Profits
  4. 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:

  1. 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.
  2. The "plan of distribution" of the instrument to determine if there is a "common trading for speculation or investment."
  3. The reasonable expectations of the investing public.
  4. 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.

  • Reliance is not needed.
  • The two exceptions are:
    • 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.
      • Then reliance would need to be shown to rebut.
Liability of People Other Than Issuers

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.

Expertised Portion Non-Expertised Portion
Experts No liability if reasonably believed
§ 11(b)(3)(B)
No Liability
Non-Experts No liability if not believed to be false
§ 11(b)(3)(C)
No liability if reasonably believed
§ 11(b)(3)(A)

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).

§ 12(a)(1) allows purchasers to sue sellers for public offerings or sales of non-exempt securities without registering them, in violation of § 5.

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.

Truth on the Market

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.

Bespeaks Caution Doctrine
Kaufman v. Trump's Castle Funding

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.

  1. Any Security
  2. Jurisdictional Nexus
  3. Standing/In Connection With
    • Zanford and especially Bluechip Stamps.
      • 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.
  4. Materiality
  5. Manipulation or Deception
    • Manipulation is, like, pumping stocks.
    • Deception looks something like fraud. Ernst and Ernst.
  6. Scienter
    • Scienter is knowing or having a reckless disregard for the truth. Ernst & Ernst v. Hochfelder.
  7. Reliance
    Fraud on the Market

    Courts have held that people can commit fraud by deceiving the entire marketplace of traders.

    The stock must have been traded between the time of the fraud and the truth coming out.

    Material fraud gives a presumption that changes in a stock's price was caused by the fraud.

    Truth can be a defense in some way.

  8. Causation
  9. Proper Defendants
    • Control Person

      For control person liability under § 20(a) (and also for § 15), there must still be a primary violator.

      Control person liability will then create liability to the same extent in anyone who had control over the primary violator.


      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.

  10. Economic Loss and Damages

Section 4(a)(1) of the Securities Act exempts "transactions by any person other than an issuer, underwriter, or dealer."

Section 4(a)(2) of the Securities Act exempts "transactions by an issuer not involving any public offering."

  • The four particularly important factors in determining the application of § 4(b)(2) are:
    1. The number of offerees and their relationship to each other and to the issuer
    2. The number of units offered
    3. The size of the offering
    4. 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.)

Reg D - Rule 506 is § 4(a)(2)'s safe harbor.

§ 3(a)(11)'s safe harbors are Rules 147 and 147A.

Aggregate Offering Price Manner of Offering Eligible Issuers Eligible Investors Filing/Other Resale Limitations Integration Mandatory Information Perception
§ 4(a)(2) No No general solicitation is allowed. Requires sophisticated investors
Reg D – Rule 506 No No general solicitation is allowed. Up to 35 unaccredited investors
§ 3(a)(11)
Rule 147
Rule 147A