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Chapter 45 - Securities Regulation
45-21
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
information for all investors. Regulation D is about the SEC looking out for the
little investor.
2) Cover the examples in the textbook, which show how easily Regulation FD may
4) Example: Problem Case # 19.
h. Securities Exchange Act Statute of Limitations
1) Note that the Sarbanes-Oxley Act has changed the statute of limitations for Rule
10b-5 to a two-year/five-year scheme.
K. Tender Offer Regulation.
1. Tender offer regulation was a reaction to a great increase in the use of hostile tender
offers in the mid-1960s. Initially, Congress was concerned that tender offers would
corporation dominated by one shareholder. Eventually, Congress recognized that tender
offers provide an effective check on entrenched, inefficient management; therefore,
shareholders in the hope of promoting an auction for the shares, allowing the highest
bidder to win a tender offer battle.
2. Note that the Williams Act does not contain a definition of tender offer. The courts have
compiled a list of factors indicative of a tender offer, which you should cover in class.
(S.D.N.Y. 1979):
a. Active and widespread solicitation of public shareholders;
b. Solicitation made for a substantial percentage of the target’s shares;
maximum number to be purchased;
f. Offer open only for a limited period of time;
g. Offeree subjected to pressure to sell his shares;
3. Note how shareholders are protected by federal tender offer rules:
a. Minimum offering period. Shareholders have at least 20 business days to consider
their decision to sell.
Chapter 45 - Securities Regulation
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
reconsider an imprudent decision and, more importantly, promotes an auction market
for the shares.
c. Proration of purchases. Shareholders need not fear tendering too late if the offer is
oversubscribed, since the purchaser must prorate its purchases among all tenderers.
4. You may note that most shareholders do not sell to the bidder; instead they sell on the
market to arbitrageurs who then sell to the bidder. Arbitrageurs are highly sophisticated
investors who are willing to assume the risk that a tender offer may be withdrawn in
return for high returns on their investments. Arbitrageurs are important to the creation of
an efficient market and perform a vital function in tender offer battles.
5. Private acquisitions of public shares are also regulated by the Williams Act, on the
grounds that such acquisitions may foreshadow a future tender offer. Note the disclosure
obligation is reached when 5% of the shares are held.
Example: Problem Case #20.
L. The Global Business Environment: The Foreign Corrupt Practices Act (p. 1225)
1. Note especially the history of the practices that led to the enactment of the Foreign
Corrupt Practices Act. Ask your students whether they think that such a statute would be
enacted today?
2. Review the payments prohibition. Distinguish between payments that influence
discretionary governmental decisions [which are illegal] and grease payments that
merely facilitate nondiscretionary governmental actions [which are legal].
Example: A corporation may not pay an elected official $10,000 in order to ensure that
it will be granted a government contract. However, the money may be paid to expedite a
government official’s processing of an application to do business in a country, if the
money does not affect the decision whether to grant the corporation the authority to do
business in the country.
3. Note the record keeping and internal control requirements of the FCPA.
M. State Securities Regulation
1. Note that state securities regulation predated federal securities regulation. Although
federal regulation is more important, state securities law remains important as well. The
state securities commissioners tend to be aggressive enforcement officers.
Log On (p. 1226): State commissioners’ websites often have sections that warn investors
of risky or fraudulent securities.
2. Note how merit registration--which exists in many states--is different from the federal
scheme of disclosure-based registration. The states tend to be very paternalistic toward
their investors. Some states even apply a merit standard to exemptions from registration.
3. Registration by coordination. Note how this type of state registration eases an interstate
issuer’s burden of complying with all the securities laws in the United States.
4. Example: Problem Case #21.
IV. RECOMMENDED REFERENCES
A. Acharya, Cooley, Richardson, & Walter, Regulating Wall Street: The Dodd-Frank Act and
the New Architecture of Global Finance (2010). An assessment of the strengths and
weaknesses of the Dodd-Frank Act.
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
substantial portion of the actions by Tschetters were taken after the restaurant had undergone
significant financial losses and its ability to survive under any circumstances was at best,
2. Yes. The Howey test applies. All three Howey elements are met, making the LLC interests
investment contracts. There is an investment of money because each investor made
Chapter 45 - Securities Regulation
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Radical Bunny LLC. Investors did not exercise any control over the loans; only the LLC's
managers had the authority to manage the investments. SEC v. Radical Bunny LLC, 2013
U.S. App. LEXIS 13953 (9th Cir. 2013).
3. AltaVerba may release any information about itself more than 30 days prior to filing the
registration statement provided it does not reference the prospective offering of securities.
writing prospectus may contain any information when used less than 30 days prior to the
filing date, it may be used only by a well-known, seasoned issuer, not a nonpublic issuer like
audience, or if the road show meets the requirements of a free-writing prospectus. After the
effective date, AltaVerba can use a free writing prospectus containing any information that
be OK.
4. $2 billion is not too much for Rule 506, because Rule 506 does not limit the dollar amount of
securities offered. The number of purchasers is not a problem, because Rule 506 is limited
investors and, therefore, accredited. EMG is also a high level insider by being the
controlling shareholder of GME. GME must restrict the transfer of its shares for one year,
5. Yes. It is the right type of issuer for Rule 504, a nonpublic issuer. The $835,000 amount of
disclosure is required by Rule 504. ROI must not make general solicitations to the
investors.
6. No, Podcast may not make the offer in compliance with Rule 147. As an issuer organized
and doing business in Illinois, Podcast must meet three 80% tests to comply with Rule 147.
Illinois). In addition, all the offerees and purchasers must reside in Illinois. Therefore,
Podcast may not offer or sell to the few employees who reside in Missouri, even though they
Chapter 45 - Securities Regulation
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
may work in Illinois. Podcast must also restrict resale of the debentures outside Illinois for at
least nine months.
7. No. The court held that RBS's disclosures satisfied their legal obligations. While the
prospectus did not disclose the percentage of the relevant securitizations that included
previously refused to require more particularized disclosures even though the specific type of
asset at issue allegedly posed "far greater risk[s]" than the general category of assets
App. LEXIS 19571 (2d. Cir. 2013).
8. Facebook amended its registration statement to state among the risk factors of its business
that its users were moving to mobile applications and there was no assurance that Facebook
available at the following URL:
http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm
revenue and financial results.
We had more than 425 million MAUs who used Facebook mobile products in December
2011. We anticipate that the rate of growth in mobile users will continue to exceed the
access our products primarily through mobile devices. We do not currently directly
generate any meaningful revenue from the use of Facebook mobile products, and our
You may want to point out that Facebook went public for $38 a share. Shortly thereafter, the
price fell to around $19 a share as investors held concerns about Facebook's ability to
9. No. The court held that Section 16(b) does not apply to transactions involving separately
traded, nonconvertible stocks with different voting rights. The court refused to find that the
Chapter 45 - Securities Regulation
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similar right with an exercise or conversion privilege at a price related to an equity security,
or similar securities with a value derived from the value of an equity security," 17 C.F.R. §
section 16(b). Gibbons v. Malone, 703 F.3d 595 (2d Cir, 2013).
10. The court found that the vice-president was not an officer for purposes of section 16(b); thus,
he was not liable for buying and selling 3,500 shares of UA in a six-month period. The court
held that an employee’s duties, not his title, determine whether he is an insider. A vice-
president is an officer only if he has access to inside information such as the financial or
Realty Corp. v. Crotty, 878 F.2d 562 (2d Cir. 1989).
11. No. The SEC staff wrote,
We are unable to concur in your view that PNC may exclude the proposal under rule
14a-8(i)(7). In arriving at this position, we note that the proposal focuses on the
significant policy issue of climate change. Accordingly, we do not believe that PNC may
omit the proposal from its proxy materials in reliance on rule 14a-8(i)(7).
Rule 14a-8(i)(7) allows the omission of shareholder proposals relating to the ordinary
ownership of a share that possesses equivalent value at that instant. And the logical link
(2005).
have an established policy as to how they are handled, with actions ranging from sales in
outlet stores to total removal from all shelves into the recycle bin. In the context of the entire
Chapter 45 - Securities Regulation
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
website, the court found it unreasonable to read these statements on the company's website
regarding product quality as guarantees of no product defects.
As to being a leader in technical fabrics and quality construction, the shareholder-plaintiffs
extracted that statement from longer statements in 10-Qs filed on September 7 and December
6, 2012. In both 10-Qs, the company stated, "We believe that our brand is recognized as
premium in our offerings of run and yoga assortment, as well as a leader in technical fabrics
and quality construction." When read in context, this statement is undeniably a reference to
a belief as to what third parties think about the company and its products, not an assertion or
immediately preceding the CEO's reference to quality as a differentiating factor, she noted
(as did the company's website) that while the company's products are "made by humans and
therefore not always perfect, we will do what it takes to make it right when we fall short." In
the April 3, 2013 press release, the CEO's reference to quality as a differentiating factor is
lululemon Securities Litigation, 14 F. Supp. 3d 553 (S.D.N.Y. 2014).
14. Probably. The Supreme Court remanded the case after holding that the Northway materiality
test applied to the Rule 10b-5 context, and therefore the merger negotiations would be
material if they would be important to the ordinary investor, that is, if the merger
sure that premature disclosure didn’t cause its merger partner to withdraw from the
negotiations. Nonetheless, a corporation may not make misleading statements about merger
negotiations. Therefore, Basic’s false statement that it knew of no reasons to explain the
stock’s activity provided another potential grounds for liability. It would have better if Basic,
securities. Because the mere size of an alleged fraud does not create an inference of scienter,
Pension Fund’s repeated allegation concerning the magnitude of the write-downs is
insufficient to plead scienter. Plumbers & Steamfitters Local 733 Pension Fund v. Canadian
Imperial Bank of Commerce, 694 F. Supp. 2d 287 (S.D.N.Y. 2010).
Chapter 45 - Securities Regulation
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
16. No. Applying the safe harbor protections for forward-looking statements under the Private
Securities Litigation Reform Act, the court determined that the defendants were not entitled
to safe harbor protection under the “meaningful cautionary language” prong of the safe
harbor because their cautionary language was vague. However, the court concluded that the
defendants’ allegedly misleading statement was protected by the “actual knowledge” prong
of the safe harbor, because the plaintiffs did not plead facts demonstrating that the statement
was made with actual knowledge that the statement was false or misleading. Slayton v.
American Express Co., 604 F.3d 758 (2d Cir. 2010).
is Forbes's reporting on the jury’s verdict:
http://www.forbes.com/sites/tomvanriper/2013/10/16/mark-cuban-should-be-optimistic-as-
his-insider-trading-case-heads-to-the-jury/
18. Yes. The SEC alleged that Chen misappropriated the information that he knew to be
disgorgement and prejudgment interest of $142,365, and an additional penalty equal to his
profits of $138,068. SEC v. Chen, Securities Exchange Act Litigation Release No. 22958
(March 31, 2014).
19. No. The SEC found that Polizzotto on behalf of First Solar intentionally selectively
6, 2013).
20. The court held that First City failed to make a timely filing of a Schedule 13D. The
requirement to file a Schedule 13D with the SEC is triggered when an investor buys 5% or
more of an issuer’s equity securities registered under the Securities Exchange Act of 1934.
In addition, First City paid the March 4th price for the shares, far below the market price of
March 17 when First City claimed it took ownership. The court refused to accept First City’s
Chapter 45 - Securities Regulation
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
during Christmas time.” Greenberg also testified that if he gave clients a half million dollar
break on stock for which Bear Stearns bore the market risk, he would “go broke within a
week.” He added also that he “does not run that risk for anybody.” The court awarded the
SEC the remedy of disgorgement of profits. SEC v. First City Financial Corp., Ltd., 890
F.2d 1215 (D.C.Cir. 1989).
21. Yes. The court held that the distribution of shares for no monetary or financial consideration
was nonetheless a sale of securities, which because it was unregistered violated the Utah
Securities Act. Generally, an owner of securities may give away shares for free and not be
there any risk of harm to present or future investors due solely to CGC’s giving shares to the
900 other persons? Capital General Corp. v. Utah Dept. of Business Regul., Sec. Div., 777
P.2d 494 (Utah Ct. App. 1989).
