978-1285770178 Lecture Note BL ComLaw 1e IM-Ch07 Part 1

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2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
ADDITIONAL BACKGROUND
Organization of the Securities and Exchange Commission
The Securities and Exchange Commission is composed of the following divisions with the stated
responsibilities.
Corporate Finance: Reviews documents filed by publicly held corporations.
Market Regulation: Oversees the major securities markets participants.
Investment Management: Interprets laws affecting investment companies and supervises mutual fund
companies.
Enforcement: Investigates securities violations, and recommends sanctions, if any, to be pursued and
whether they should be sought in a court or before an administrative law judge.
A. UPDATING THE REGULATORY PROCESS
The SEC now requires companies to
File certain information electronically so that it may be available online in the SEC’s EDGAR
(Electronic Data Gathering, Analysis, and Retrieval) database.
Make disclosures about the potential impacts of climate change on future profitability.
B. THE SEC’S EXPANDING REGULATORY POWERS
The SEC’s authority has increased since the 1930s, most recently through
* The National Securities Markets Improvement Act of 1996 expanded the power of the SEC to
exempt persons, securities, and transactions from the requirements of the securities laws.
* The Sarbanes-Oxley Act of 2002 required the SEC to adopt new rules relating to corporate
disclosure requirements and created an oversight board to regulate public accounting firms.
* Instruments and interests commonly known as securities (common stock, etc.).
* Interests commonly associated with instruments and interests known as securities (stock options,
etc.).
page-pf3
CHAPTER 7: SECURITIES LAW AND CORPORATE GOVERNANCE 3
whole or in part.
page-pf4
4 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
c. Posteffective Period
final prospectus before or at the time they buy the securities.
ADDITIONAL BACKGROUND
Can a Contract Be a Prospectus in a Private Sale of Securities?
Section 12 of the Securities Act of 1933 imposes liability on those who offer securities “by means of a
prospectus” that contains material misrepresentations or omissions of fact. This section clearly applies to
public offerings. Does it also apply to contracts for private sales of securities? Can the terms of a
private contract be considered a “prospectus”?
These were the questions in Gustafson v. Alloyd Co., 513 U.S. 561, 115 S.Ct. 1061, 131 L.Ed.2d 1
(1995). Arthur Gustafson and the other shareholders of the Alloyd Co. contracted to sell their stock to Wind
Point Partners II, Limited Partnership, and others. The price was based in part on an estimated increase in
the value of Alloyd since the end of the previous year. The contract provided that the price would be adjusted
if, at the end of the current year, an audit showed the actual value to be more or less than the estimate. At the
end of the year, according to the audit, the buyers were entitled to an adjustment. Instead, they filed a suit in a
federal district court against the former shareholders, under Section 12(2) of the Securities Act of 1933, to
rescind the deal. The court issued a judgment in favor of the former shareholders, but the U.S. Court of
Appeals for the Seventh Circuit vacated the judgment. The former shareholders appealed.
The United States Supreme Court reversed the ruling of the appellate court and remanded the case. The
contract between the former and current Alloyd shareholders was not a “prospectus,” as the term is used in
the Securities Act of 1933 [W]hatever else ‘prospectus’ may mean, the term is confined to a document that *
* * must include the ‘information contained in the registration statement.’ The Court pointed out that “only
public offerings * * * require the preparation and filing of registration statements. It follows, we conclude, that a
prospectus * * * is confined to documents related to public offerings.” In this case, the contract was not held
out to the public and thus was not a prospectus as the term is used in the 1933 Act.” Because the contract
was not a prospectus, Section 12(2) did not apply.
If the Supreme Court had ruled that the contract was a prospectus, what else, if anything, would
have to be shown before it could be rescinded?
ENHANCING YOUR LECTURE
 WILL INACCURATE INFORMATION IN AN ELECTRONIC
PROSPECTUS INVALIDATE THE REGISTRATION? 
Many companies now submit registration statements, prospectuses, and other information to the
Securities and Exchange Commission (SEC) via the Internet. The SEC’s Electronic Data Gathering, Analysis
and Retrieval (EDGAR) system then posts much of this information online to inform investors about the
page-pf5
CHAPTER 7: SECURITIES LAW AND CORPORATE GOVERNANCE 5
whole or in part.
corporation, the security being sold, and the risk of investing in that security. Some corporations also send
investors a printed prospectus. Theoretically, a corporation should provide the same information in electronic
form as it does in a printed prospectus, but practical difficulties can arise in transmitting digital information.
THE PROBLEM WITH GRAPHICS
As anyone who is familiar with the Internet knows, the graphics, images, and audio files created by one
computer are not always readable by another computer when they are exchanged online. The SEC has
created Rule 304 to deal with this situation.a The first part of the rule states that if graphic, image, or audio
material in a prospectus cannot be reproduced in an electronic form on EDGAR, the electronic prospectus
must include a fair and accurate narrative description of the omitted data. The second part of Rule 304
provides that the graphic, image, and audio material contained in the version of a document delivered to
investors is deemed to be part of the electronic document filed with the SEC.
As a result, a corporation can have two versions of a prospectusa print version that contains graphics
and an electronic version that describes the information shown in the graphics. What if the summary
describing the graphics in an electronic prospectus is inaccurate but the investors received an accurate print
version? That was the issue before a federal appellate court in DeMaria v. Andersen.b
THE ELECTRONIC PROSPECTUS CONTAINED INACCURACIES
In anticipation of an initial public offering (IPO), ILife.com, Inc., filed a registration statement and a
prospectus with the SEC via the EDGAR database. ILife.com also distributed a printed version of the
prospectus to the public. The printed prospectus contained a bar graph that provided historical financial
information about the company, while the EDGAR prospectus contained a table that summarized the bar
graph inaccurately (without mentioning losses). Brian DeMaria and other investors filed a suit against officers
of ILife.com. The investors claimed that because of the inaccurate summary, the securities in the IPO were
“unregistered” and thus were sold in violation of the Securities Act of 1933. The lower court dismissed the
case, and DeMaria appealed.
THE REGISTRATION HELD VALID
Despite the inaccurate summary of the bar graph in the electronic prospectus, the appellate court had no
trouble deciding that the securities sold were still registered as required by the securities act. Federal courts
are bound to follow the SEC’s interpretation of its own regulations unless the interpretations are plainly
erroneous. Here, the SEC had filed a brief explaining that because the graphics in the printed prospectus are
deemed to be part of the electronic registration statement, it did not matter that the narrative description was
inaccurate.
FOR CRITICAL ANALYSIS
Does the part of Rule 304 that deems a printed prospectus to be part of a registration statement
completely eliminate liability for any inaccuracies in the electronic materials filed? Why or why not?
a. 17 C.F.R. Section 232.304.
b. 318 F.3d 170 (2d Cir. 2003).
3. Well-Known Seasoned Issuers
page-pf6
6 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
A well-known seasoned issuer is a firm that has issued at least $1 billion in securities in the
previous three years or has at least $700 million of value of outstanding stock in the public’s hands.
This issuer can offer securities for sale without waiting for SEC review and approval of the
registration statement.
C. EXEMPT SECURITIES
The text lists securities that are exempt from the registration requirements. These include
1. Government-issued securities.
a bankruptcy proceeding.
8. Securities issued in stock dividends and stock splits.
D. EXEMPT TRANSACTIONS
Securities that can be sold without registration include those sold in tin the following transactions.
a. Testing the Waters
A company can “test the waters” for potential interest before preparing a circular.
b. Using the Internet
Some companies have sold securities on the Web under Regulation A.
is the exemption used by most small businesses.
b. Rule 505
Private, noninvestment company offerings up to $5 million in a twelve-month period are
exempt if
page-pf7
CHAPTER 7: SECURITIES LAW AND CORPORATE GOVERNANCE 7
If the sale involves any unaccredited investors, all investors must be given material information
about the company, its business, and the securities. The securities cannot be sold by the
buyers for at least a year.
c. Rule 506Private Placement Exemption
Privatenonpublic and not generally advertisedofferings in unlimited amounts are subject to
essentially the same requirements as Rule 505, except
There is no limit on the amount of the offering and
The issuer must believe that each unaccredited investor has sufficient knowledge or
page-pf8
8 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
Second, until delivery of the final prospectus has been completed, written offers and offers transmitted by
radio and television cannot be made outside of a Section 10 prospectus except in connection with business
combinations. [FN75] After filing the registration statement, two limited exceptions provide some flexibility
to offering participants to publish notices of the offering. [FN76] Following effectiveness, offering
participants may disseminate sales literature and other writings so long as these materials are
accompanied or preceded by a final prospectus. [FN77] Oral offers, in contrast, are permissible as soon as
the registration statement has been filed. Offering participants may use any combination of electronic and
more traditional media, such as paper or the telephone, to communicate with prospective investors,
provided that use of these media is in compliance with the Securities Act.
These key legal principles must underpin the development of appropriate procedures for online offerings.
To date, the Division of Corporation Finance has reviewed numerous procedures in connection with online
distributions of IPOs. The Division also has issued a no-action letter regarding permissible procedures for
the use of the Internet in IPOs. [FN78] We understand, however, that a number of online brokers have
urged that we make additional regulatory accommodations to facilitate online offerings. We appreciate the
benefits that technology brings to the offering process and fully support the need to craft a regulatory
system that maximizes these benefits. We also are mindful of our investor protection mandate and the
fundamental principles established by the Securities Act for the offer and sale of securities. Many of the
procedures urged upon us by online brokers may be properly the subject of regulatory action. Accordingly,
in this release, we do not prescribe any specific procedures that must be followed. Instead, we will continue
to analyze this area as practice, procedures and technology evolve, with a view to possible regulatory
action in the future. Additionally, the Commission staff will continue to review procedures submitted in
connection with online offerings.
[Footnotes:]
FN69. See Division of Corporation Finance no-action letter Wit Capital Corporation (July 14, 1999).
FN70. We are aware that municipal securities issuers and municipal securities underwriters have begun to
evaluate the online offering process and that a limited number of offerings have been conducted over the
Internet. At this time, we are not addressing the implications of online municipal securities offerings, but we
encourage comment on this topic. We remind municipal securities issuers and other municipal securities
market participants, however, of the potential issue that arises if the municipal securities offering also
involves an offering of a separate security that is not being sold pursuant to the exemption from registration
contained in Section 3(a)(2) of the Securities Act, 15 U.S.C. §77c(a)(2). If the municipal securities offering
involves an offering of a separate security that is being sold in reliance on an exemption from registration
contained in Section 4(2) of the Securities Act, 15 U.S.C. §77d(2), or Regulation D, 17 CFR 230.501, et
seq., or in a registered offering, our discussion in Section C.2 below applies. We, therefore, caution
municipal securities offering participants wishing to offer municipal securities online to evaluate carefully
whether any separate security is being sold.
FN71. See Joseph Weber & Peter Elstrom, Transforming the Art of the Deal, Bus. Wk., July 26, 1999, at
96; Shawn Tully, Will the Web Eat Wall Street?, Fortune, Aug. 2, 1999, at 112.
FN72. There also have been numerous reports where investors complained that they did not receive
shares in an online IPO. See Randall Smith, So Far, E- Underwriting” Gets a Slow Start, Wall St. J., Aug.
16, 1999, at C1. See also Randall Smith, Online Brokers to Form Bank in Bid for IPOs, Wall St. J., Nov. 15,
St. J., Aug. 18, 1999, at A1.
page-pf9
CHAPTER 7: SECURITIES LAW AND CORPORATE GOVERNANCE 9
whole or in part.
FN73. Section 5(a) of the Securities Act, 15 U.S.C. §77e(a).
FN74. Securities Act Rule 134(d), 17 CFR 230.134(d).
FN75. See Sections 2(a)(10) and 5(b) of the Securities Act. Section 5(c) of the Securities Act also
proscribes both oral and written offers before the filing of a registration statement or while the registration
statement is subject to a refusal order, stop order or, before effectiveness, any other public proceeding or
examination under Section 8 of the Securities Act, 15 U.S.C. §77h. For a description of the new rules
regarding communications in a business combination context, see n. 62 above. Mutual funds are permitted
to make written offers before delivery of the final prospectus under Securities Act Rule 482 (permitting
advertisements containing only information “the substance of which” is included in the fund’s prospectus)
and Securities Act Rule 498, 17 CFR 230.498 (permitting the use of a “profile,” a summary disclosure
document). Both Rule 482 advertisements and fund profiles are prospectuses under Section 10(b) of the
Securities Act, which permits a prospectus that omits in part or summarizes information to be used to make
offers before delivery of the final prospectus.
FN76. See Securities Act Rules 134 and 135, n. 68 above.
FN77. See Sections 2(a)(10) and 5(b) of the Securities Act. A confirmation of sale is not deemed a non-
conforming prospectus when sent or given after the effective date of a registration statement if a
prospectus satisfying the requirements of Section 10(a) of the Securities Act is sent or given before or with
the confirmation.
FN78. See Wit Capital Corporation, n. 69 above.
3. Resales
Most securities can be resold without registration. Resales of small offerings [Rule 505] and private
offerings [Rule 506] are exempt from registration if, under the following safe harbor rules
a. Rule 144
b. Rule 144A
The securities, on issue, must not have been of the same class as securities listed on a
national securities exchange or a U.S. automated interdealer quotation system.
page-pfa
whole or in part.
Violations include intentionally defrauding investors by misrepresenting or omitting facts in a registration
The SEC may seek an injunction and an order to refund profits. These who buy securities and
suffer harm through a violation of the 19933 act may file a suit for damages.
2. Defenses
Defenses include
information was true and there were no material omissions.
CASE SYNOPSIS
Case 7.1: Litwin v. Blackstone Group, LP
Blackstone Group, LP, manages investments. One of its divisions, or “businesses,” is “Corporate Private
Equity,” which consists of about 40 percent of the assets under management. Before making an initial public
offering (IPO), Blackstone filed a registration statement with the SEC. At the time, Corporate Private Equity’s
investments included FGIC Corp. and Freescale Semiconductor, Inc. In the registration statement, Blackstone
did not mention the impact on its revenue of a substantial drop in value of FGIC and Freescale. Martin Litwin
and others who invested in the IPO filed a suit in a federal district court against Blackstone. The company
filed a motion to dismiss, which the court granted. The plaintiffs appealed.
The U.S. Court of Appeals for the Second Circuit vacated and remanded. The plaintiffs adequately
pleaded that Blackstone omitted material information. The information concerned the extent to which known
events and trends could reasonably be expected to affect Blackstone’s investments and revenue. The
plaintiffs alleged that Blackstone should have disclosed this information. In particular, a reasonable investor
would want to know the expected effect on Corporate Private Equity’s future revenue.
..................................................................................................................................................
Notes and Questions
Would the view of materiality asserted by the plaintiffs in this case require companies like
Blackstone to issue enormous collections of information for the scores of companies and other
assets in which they invest? Including all such information would obviously bury material information in a
flood of unnecessary detail. In fact, the securities laws prohibit this result and protect against by requiring that
information must be material and material information must be disclosed. Not every investment is deemed
2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
ADDITIONAL BACKGROUND
Organization of the Securities and Exchange Commission
The Securities and Exchange Commission is composed of the following divisions with the stated
responsibilities.
Corporate Finance: Reviews documents filed by publicly held corporations.
Market Regulation: Oversees the major securities markets participants.
Investment Management: Interprets laws affecting investment companies and supervises mutual fund
companies.
Enforcement: Investigates securities violations, and recommends sanctions, if any, to be pursued and
whether they should be sought in a court or before an administrative law judge.
A. UPDATING THE REGULATORY PROCESS
The SEC now requires companies to
File certain information electronically so that it may be available online in the SEC’s EDGAR
(Electronic Data Gathering, Analysis, and Retrieval) database.
Make disclosures about the potential impacts of climate change on future profitability.
B. THE SEC’S EXPANDING REGULATORY POWERS
The SEC’s authority has increased since the 1930s, most recently through
* The National Securities Markets Improvement Act of 1996 expanded the power of the SEC to
exempt persons, securities, and transactions from the requirements of the securities laws.
* The Sarbanes-Oxley Act of 2002 required the SEC to adopt new rules relating to corporate
disclosure requirements and created an oversight board to regulate public accounting firms.
* Instruments and interests commonly known as securities (common stock, etc.).
* Interests commonly associated with instruments and interests known as securities (stock options,
etc.).
CHAPTER 7: SECURITIES LAW AND CORPORATE GOVERNANCE 3
whole or in part.
4 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
c. Posteffective Period
final prospectus before or at the time they buy the securities.
ADDITIONAL BACKGROUND
Can a Contract Be a Prospectus in a Private Sale of Securities?
Section 12 of the Securities Act of 1933 imposes liability on those who offer securities “by means of a
prospectus” that contains material misrepresentations or omissions of fact. This section clearly applies to
public offerings. Does it also apply to contracts for private sales of securities? Can the terms of a
private contract be considered a “prospectus”?
These were the questions in Gustafson v. Alloyd Co., 513 U.S. 561, 115 S.Ct. 1061, 131 L.Ed.2d 1
(1995). Arthur Gustafson and the other shareholders of the Alloyd Co. contracted to sell their stock to Wind
Point Partners II, Limited Partnership, and others. The price was based in part on an estimated increase in
the value of Alloyd since the end of the previous year. The contract provided that the price would be adjusted
if, at the end of the current year, an audit showed the actual value to be more or less than the estimate. At the
end of the year, according to the audit, the buyers were entitled to an adjustment. Instead, they filed a suit in a
federal district court against the former shareholders, under Section 12(2) of the Securities Act of 1933, to
rescind the deal. The court issued a judgment in favor of the former shareholders, but the U.S. Court of
Appeals for the Seventh Circuit vacated the judgment. The former shareholders appealed.
The United States Supreme Court reversed the ruling of the appellate court and remanded the case. The
contract between the former and current Alloyd shareholders was not a “prospectus,” as the term is used in
the Securities Act of 1933 [W]hatever else ‘prospectus’ may mean, the term is confined to a document that *
* * must include the ‘information contained in the registration statement.’ The Court pointed out that “only
public offerings * * * require the preparation and filing of registration statements. It follows, we conclude, that a
prospectus * * * is confined to documents related to public offerings.” In this case, the contract was not held
out to the public and thus was not a prospectus as the term is used in the 1933 Act.” Because the contract
was not a prospectus, Section 12(2) did not apply.
If the Supreme Court had ruled that the contract was a prospectus, what else, if anything, would
have to be shown before it could be rescinded?
ENHANCING YOUR LECTURE
 WILL INACCURATE INFORMATION IN AN ELECTRONIC
PROSPECTUS INVALIDATE THE REGISTRATION? 
Many companies now submit registration statements, prospectuses, and other information to the
Securities and Exchange Commission (SEC) via the Internet. The SEC’s Electronic Data Gathering, Analysis
and Retrieval (EDGAR) system then posts much of this information online to inform investors about the
CHAPTER 7: SECURITIES LAW AND CORPORATE GOVERNANCE 5
whole or in part.
corporation, the security being sold, and the risk of investing in that security. Some corporations also send
investors a printed prospectus. Theoretically, a corporation should provide the same information in electronic
form as it does in a printed prospectus, but practical difficulties can arise in transmitting digital information.
THE PROBLEM WITH GRAPHICS
As anyone who is familiar with the Internet knows, the graphics, images, and audio files created by one
computer are not always readable by another computer when they are exchanged online. The SEC has
created Rule 304 to deal with this situation.a The first part of the rule states that if graphic, image, or audio
material in a prospectus cannot be reproduced in an electronic form on EDGAR, the electronic prospectus
must include a fair and accurate narrative description of the omitted data. The second part of Rule 304
provides that the graphic, image, and audio material contained in the version of a document delivered to
investors is deemed to be part of the electronic document filed with the SEC.
As a result, a corporation can have two versions of a prospectusa print version that contains graphics
and an electronic version that describes the information shown in the graphics. What if the summary
describing the graphics in an electronic prospectus is inaccurate but the investors received an accurate print
version? That was the issue before a federal appellate court in DeMaria v. Andersen.b
THE ELECTRONIC PROSPECTUS CONTAINED INACCURACIES
In anticipation of an initial public offering (IPO), ILife.com, Inc., filed a registration statement and a
prospectus with the SEC via the EDGAR database. ILife.com also distributed a printed version of the
prospectus to the public. The printed prospectus contained a bar graph that provided historical financial
information about the company, while the EDGAR prospectus contained a table that summarized the bar
graph inaccurately (without mentioning losses). Brian DeMaria and other investors filed a suit against officers
of ILife.com. The investors claimed that because of the inaccurate summary, the securities in the IPO were
“unregistered” and thus were sold in violation of the Securities Act of 1933. The lower court dismissed the
case, and DeMaria appealed.
THE REGISTRATION HELD VALID
Despite the inaccurate summary of the bar graph in the electronic prospectus, the appellate court had no
trouble deciding that the securities sold were still registered as required by the securities act. Federal courts
are bound to follow the SEC’s interpretation of its own regulations unless the interpretations are plainly
erroneous. Here, the SEC had filed a brief explaining that because the graphics in the printed prospectus are
deemed to be part of the electronic registration statement, it did not matter that the narrative description was
inaccurate.
FOR CRITICAL ANALYSIS
Does the part of Rule 304 that deems a printed prospectus to be part of a registration statement
completely eliminate liability for any inaccuracies in the electronic materials filed? Why or why not?
a. 17 C.F.R. Section 232.304.
b. 318 F.3d 170 (2d Cir. 2003).
3. Well-Known Seasoned Issuers
6 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
A well-known seasoned issuer is a firm that has issued at least $1 billion in securities in the
previous three years or has at least $700 million of value of outstanding stock in the public’s hands.
This issuer can offer securities for sale without waiting for SEC review and approval of the
registration statement.
C. EXEMPT SECURITIES
The text lists securities that are exempt from the registration requirements. These include
1. Government-issued securities.
a bankruptcy proceeding.
8. Securities issued in stock dividends and stock splits.
D. EXEMPT TRANSACTIONS
Securities that can be sold without registration include those sold in tin the following transactions.
a. Testing the Waters
A company can “test the waters” for potential interest before preparing a circular.
b. Using the Internet
Some companies have sold securities on the Web under Regulation A.
is the exemption used by most small businesses.
b. Rule 505
Private, noninvestment company offerings up to $5 million in a twelve-month period are
exempt if
CHAPTER 7: SECURITIES LAW AND CORPORATE GOVERNANCE 7
If the sale involves any unaccredited investors, all investors must be given material information
about the company, its business, and the securities. The securities cannot be sold by the
buyers for at least a year.
c. Rule 506Private Placement Exemption
Privatenonpublic and not generally advertisedofferings in unlimited amounts are subject to
essentially the same requirements as Rule 505, except
There is no limit on the amount of the offering and
The issuer must believe that each unaccredited investor has sufficient knowledge or
8 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
Second, until delivery of the final prospectus has been completed, written offers and offers transmitted by
radio and television cannot be made outside of a Section 10 prospectus except in connection with business
combinations. [FN75] After filing the registration statement, two limited exceptions provide some flexibility
to offering participants to publish notices of the offering. [FN76] Following effectiveness, offering
participants may disseminate sales literature and other writings so long as these materials are
accompanied or preceded by a final prospectus. [FN77] Oral offers, in contrast, are permissible as soon as
the registration statement has been filed. Offering participants may use any combination of electronic and
more traditional media, such as paper or the telephone, to communicate with prospective investors,
provided that use of these media is in compliance with the Securities Act.
These key legal principles must underpin the development of appropriate procedures for online offerings.
To date, the Division of Corporation Finance has reviewed numerous procedures in connection with online
distributions of IPOs. The Division also has issued a no-action letter regarding permissible procedures for
the use of the Internet in IPOs. [FN78] We understand, however, that a number of online brokers have
urged that we make additional regulatory accommodations to facilitate online offerings. We appreciate the
benefits that technology brings to the offering process and fully support the need to craft a regulatory
system that maximizes these benefits. We also are mindful of our investor protection mandate and the
fundamental principles established by the Securities Act for the offer and sale of securities. Many of the
procedures urged upon us by online brokers may be properly the subject of regulatory action. Accordingly,
in this release, we do not prescribe any specific procedures that must be followed. Instead, we will continue
to analyze this area as practice, procedures and technology evolve, with a view to possible regulatory
action in the future. Additionally, the Commission staff will continue to review procedures submitted in
connection with online offerings.
[Footnotes:]
FN69. See Division of Corporation Finance no-action letter Wit Capital Corporation (July 14, 1999).
FN70. We are aware that municipal securities issuers and municipal securities underwriters have begun to
evaluate the online offering process and that a limited number of offerings have been conducted over the
Internet. At this time, we are not addressing the implications of online municipal securities offerings, but we
encourage comment on this topic. We remind municipal securities issuers and other municipal securities
market participants, however, of the potential issue that arises if the municipal securities offering also
involves an offering of a separate security that is not being sold pursuant to the exemption from registration
contained in Section 3(a)(2) of the Securities Act, 15 U.S.C. §77c(a)(2). If the municipal securities offering
involves an offering of a separate security that is being sold in reliance on an exemption from registration
contained in Section 4(2) of the Securities Act, 15 U.S.C. §77d(2), or Regulation D, 17 CFR 230.501, et
seq., or in a registered offering, our discussion in Section C.2 below applies. We, therefore, caution
municipal securities offering participants wishing to offer municipal securities online to evaluate carefully
whether any separate security is being sold.
FN71. See Joseph Weber & Peter Elstrom, Transforming the Art of the Deal, Bus. Wk., July 26, 1999, at
96; Shawn Tully, Will the Web Eat Wall Street?, Fortune, Aug. 2, 1999, at 112.
FN72. There also have been numerous reports where investors complained that they did not receive
shares in an online IPO. See Randall Smith, So Far, E- Underwriting” Gets a Slow Start, Wall St. J., Aug.
16, 1999, at C1. See also Randall Smith, Online Brokers to Form Bank in Bid for IPOs, Wall St. J., Nov. 15,
St. J., Aug. 18, 1999, at A1.
CHAPTER 7: SECURITIES LAW AND CORPORATE GOVERNANCE 9
whole or in part.
FN73. Section 5(a) of the Securities Act, 15 U.S.C. §77e(a).
FN74. Securities Act Rule 134(d), 17 CFR 230.134(d).
FN75. See Sections 2(a)(10) and 5(b) of the Securities Act. Section 5(c) of the Securities Act also
proscribes both oral and written offers before the filing of a registration statement or while the registration
statement is subject to a refusal order, stop order or, before effectiveness, any other public proceeding or
examination under Section 8 of the Securities Act, 15 U.S.C. §77h. For a description of the new rules
regarding communications in a business combination context, see n. 62 above. Mutual funds are permitted
to make written offers before delivery of the final prospectus under Securities Act Rule 482 (permitting
advertisements containing only information “the substance of which” is included in the fund’s prospectus)
and Securities Act Rule 498, 17 CFR 230.498 (permitting the use of a “profile,” a summary disclosure
document). Both Rule 482 advertisements and fund profiles are prospectuses under Section 10(b) of the
Securities Act, which permits a prospectus that omits in part or summarizes information to be used to make
offers before delivery of the final prospectus.
FN76. See Securities Act Rules 134 and 135, n. 68 above.
FN77. See Sections 2(a)(10) and 5(b) of the Securities Act. A confirmation of sale is not deemed a non-
conforming prospectus when sent or given after the effective date of a registration statement if a
prospectus satisfying the requirements of Section 10(a) of the Securities Act is sent or given before or with
the confirmation.
FN78. See Wit Capital Corporation, n. 69 above.
3. Resales
Most securities can be resold without registration. Resales of small offerings [Rule 505] and private
offerings [Rule 506] are exempt from registration if, under the following safe harbor rules
a. Rule 144
b. Rule 144A
The securities, on issue, must not have been of the same class as securities listed on a
national securities exchange or a U.S. automated interdealer quotation system.
whole or in part.
Violations include intentionally defrauding investors by misrepresenting or omitting facts in a registration
The SEC may seek an injunction and an order to refund profits. These who buy securities and
suffer harm through a violation of the 19933 act may file a suit for damages.
2. Defenses
Defenses include
information was true and there were no material omissions.
CASE SYNOPSIS
Case 7.1: Litwin v. Blackstone Group, LP
Blackstone Group, LP, manages investments. One of its divisions, or “businesses,” is “Corporate Private
Equity,” which consists of about 40 percent of the assets under management. Before making an initial public
offering (IPO), Blackstone filed a registration statement with the SEC. At the time, Corporate Private Equity’s
investments included FGIC Corp. and Freescale Semiconductor, Inc. In the registration statement, Blackstone
did not mention the impact on its revenue of a substantial drop in value of FGIC and Freescale. Martin Litwin
and others who invested in the IPO filed a suit in a federal district court against Blackstone. The company
filed a motion to dismiss, which the court granted. The plaintiffs appealed.
The U.S. Court of Appeals for the Second Circuit vacated and remanded. The plaintiffs adequately
pleaded that Blackstone omitted material information. The information concerned the extent to which known
events and trends could reasonably be expected to affect Blackstone’s investments and revenue. The
plaintiffs alleged that Blackstone should have disclosed this information. In particular, a reasonable investor
would want to know the expected effect on Corporate Private Equity’s future revenue.
..................................................................................................................................................
Notes and Questions
Would the view of materiality asserted by the plaintiffs in this case require companies like
Blackstone to issue enormous collections of information for the scores of companies and other
assets in which they invest? Including all such information would obviously bury material information in a
flood of unnecessary detail. In fact, the securities laws prohibit this result and protect against by requiring that
information must be material and material information must be disclosed. Not every investment is deemed

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