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C H A P T E R 2 1
PUBLIC AND PRIVATE OFFERINGS OF SECURITIES
Public “offerings” are heavily regulated by both federal and state securities regulations. This
chapter provides an overview of the federal statutory scheme that regulates the offer and sale of
I. FEDERAL STATUTORY SCHEME holds three primary beliefs: (1) investors should be
provided information; (2) insiders should not gain material advantages over the public;
and (3) mislead investors should have some relief.
A. The 1933 Act: requires registration of securities offerings with the SEC, unless
the offering is exempt; companies must have a prospectus; and creates private
causes of action, in addition to SEC and federal prosecutions.
D. The Securities Litigation Uniform Standards Act of 1998 limits state lawsuits and
forces actions into federal court.
Overhaul of the financial industry includes greater regulation of hedge funds.
II. SEC RULES AND REGULATIONS are promulgated to clarify Congressional law, federal
policy, and exemptions.
III. STATE BLUE SKY LAWS. Prior to federal laws, state laws protected investors from
IV. DEFINITION OF TERMS.
BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT 7TH ED—INSTRUCTOR’S MANUAL
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A. Security.
1. Investment Contract is a transaction involving an investment of money in
a common enterprise with profits to come solely from the efforts of others.
CASE 21.1 SEC v. Edwards, 540 U.S. 389 (2004). HELD: Any
2. Family Resemblance Test. Promissory notes and other evidences of
indebtedness may or may not constitute a security, depending on the
factual context.
V. REGISTRATION OF SECURITIES OFFERINGS. Once a company prepares to offer a
security, they must register the securities and sale. Securities must be registered unless
an exemption is available.
A. The Role of the Underwriter.
B. The Registration Statement.
1. Forms. Issuers must use prescribed forms.
C. Due Diligence.
D. Registration Procedure.
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1. Review. The SEC reviews the registration and can comment to the
company recommending amendments to the registration.
VI. USE OF SOCIAL MEDIA. SEC suggest firms create compliance procedures to prevent
staff from using social media to violate securities laws. In 2012, the SEC brought an
VII. SHELF REGISTRATION. Companies may register securities for later issuance.
Managerial Timeline for a Public Securities Offering
Day 1
Decide upon a public offering of securities to raise capital, and
choose a securities underwriting firm
Day 30-60
With the aid of the underwriter, prepare the forms and
prospectus for the registration statement.
Day 61-90
File the registration statement with the SEC for review, and
submit any amendments to the filing.
groups, distribute copies of the preliminary prospectus, and
solicit offers to sell the securities.
Day 121 +
VIII. REORGANIZATIONS AND COMBINATIONS. There are strict limitations on
communications by corporate officers, to the shareholders and public about mergers.
IX. EXEMPTIONS FOR OFFERINGS BY THE ISSUER. Exemptions from registration: exempt
securities and exempt transactions. State blue sky laws have similar exemptions.
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B. Regulation D: Safe-Harbor Exemptions for Private Offerings. Regulation D
contains three separate exemptions from registration under Rules 504, 505, and
506 (as defined via Rules 501-503).
1. Accredited Investors do not need all the protections afforded by the
securities laws.
C. Integration of Offerings. SEC may treat successive offerings that occur within a
limited period as one sale.
D. Section 4(5) Exemption. The section exempts offers and sales by any issuer to an
E. Regulation A allows issuers to “test the waters” and solicit indications of interest
F. Offerings to Employees, Directors, Consultants, and Advisors.
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X. THE PRIVATE PLACEMENT MEMORANDUM, the private counterpart to the prospectus.
SEC rules determine what the issuer must disclose in the document.
XI. EXEMPTIONS FOR SECONDARY OFFERINGS. Securities issued in a private placement
cannot be sold in a secondary offering, unless registered or exempt from registration.
A. Section 4(1) Exemption. Transactions by “any person other than an issuer,
underwriter, or dealer” are exempt from registration.
XII. OFFSHORE OFFERINGS AND REGULATION S. Offers and sales outside the United
States are not subject to federal registration requirements. Regulation S has made it
XIII. REPORTING REQUIREMENTS OF PUBLIC COMPANIES. A company with registered
securities in a public offering must file periodic reports.
A. Section 12 Reports: requires companies with assets exceeding $5 million to file
various reports:
B. Other Sections of the Act.
1. Proxy Solicitations
BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT 7TH ED—INSTRUCTOR’S MANUAL
4. Schedule 13D. Any person owning more than 5% beneficial ownership
CASE 21.2 CSX Corporation v. The Children’s Investment Fund
Management (UK) LLP, 562 F. Supp. 2d 511 (2008).
CIFM and 3G each purchased less than 5% stock of CSX,
but with a complicated structure “equity swaps” and short
XIV. VIOLATION OF THE REGISTRATION AND PROSPECTUS—DELIVERY REQUIREMENTS
OF THE 1933 ACT: SECTION 12(A) (1). Absent an exemption, all securities must be
registered and sold only after delivery of a prospectus.
A. Elements of Liability. Plaintiff must show that the defendant sold or offered
securities without an effective registration statement (or noncomplying
prospectus) through interstate communication or transportation. Suit must be
filed within one (1) year.
XV. SECTION 11 OF THE 1933 ACT provides remedies for suits alleging misleading
registration statements.
A. Who May Sue.
1. Tracing Requirement. Plaintiff must show that the particular securities
they purchased were tied to a misleading registration statement.
B. Who May be Sued?
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CASE 21.3 In re Lehman Bros Mortgage-Backed Securities Litigation, 650
F.3d 167 (2d Cir. 2011). A variety of ratings agencies including,
Standard and Poors, Moody’s, and Fitch, helped rank and pool a
C. Elements of Liability. Plaintiff must show: (1) the registration statement
contained false or misleading statements or facts; or (2) omitted material facts.
CASE 22.3 Rosenzweig v. Azurix Corp., 332 F.3d 854 (5th Cir. 2003). Azurix
made an initial public offering in 1998. Enron later purchased all
D. Defenses. There are three statutory defenses under section 11 to suits alleging
misrepresentation.
1. No Reliance.
CASE 21.5 Escott v. BarChris Construction Corp., 283 F. Supp. 643
(S.D.N.Y. 1968). The court found that only the outside
4. Bespeaks Caution Doctrine. Courts may determine that sufficient
cautionary statements render immaterial any misrepresentations or
omissions.
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5. Litigation Reform Act Safe Harbor for Forward-Looking Statements.
Congress extends two grounds for defense from liability, (a) use of
precautionary language; and (b) good faith representations.
E. Damages.
XVI. SECTION 12(2)(a) OF THE 1933 ACT provides remedies for any person who purchases a
security of a public offering, by means of a misleading prospectus or oral
XVII. LIABILITY OF CONTROLLING PERSONS. Section 15 imposes liability on anyone who
“controls any person liable under Section 11 or 12.” A controlling person is usually an
officer, director, or major stockholder.
THE RESPONSIBLE MANAGER: TEACHING SUGGESTIONS
1. Discuss the following issues that the legally astute manager should be familiar with to
make sure her company is in compliance with both federal and state securities laws:
• Should be familiar with the four-part Howey test, noting that certain contracts, not
normally thought of as securities-related, may run afoul of the 1933 and 1934 Acts;
CHAPTER 21 PUBLIC AND PRIVATE OFFERINGS OF SECURITIES
2. Discuss the 2008 meltdown of venerable financial institutions such as Freddie Mac,
3. Imagine a hypothetical in which you are the legally astute manager of INvestCO
company with significant investments in Bernard Madoff’s “Madoff Investment Securities”