Securities Act Secondary Distributions

Who is “underwriter”? §2(a)(11)• “purchase … with view to … the distribution”

– come to rest– distribution vs. market transactions

• “offers or sells for issuer icw the distribution”

(last updated 28 Feb 13)

Issuer

Trading market

Underwriter

Firm-commitmentunderwriting

Underwriter

Best-effortsunderwriting

Purchaser Insider

Secondarydistribution

Restricted securities

§ 4(1) – tx not involving I, UW, D § 2(a)(11) – “underwriter”

§ 4 Exempted transactions   

The provisions of section 5 shall not apply to--

    (1) transactions by any person other than an issuer, underwriter, or dealer.

    (2) transactions by an issuer not involving any public offering.

§ 4 Exempted transactions   

The provisions of section 5 shall not apply to--

    (1) transactions by any person other than an issuer, underwriter, or dealer.

    (2) transactions by an issuer not involving any public offering.

§ 2(a)(4) Definitions

The term "issuer" means every person who issues or proposes to issue any security

§ 2(a)(12) Definitions

The term "dealer" means any person who engages … as agent, broker, or principal, in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another person.

§ 2(a)(11) Definitions

The term "underwriter" means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security …

Some hypotheticals …(4 hypotheticals)

Hypothetical #1

The Chinese Consolidated Benevolent Association is a non-profit corporation that seeks to help the Chinese people. It solicits funds from people in the United States for relief in China. 

Toward this end, the Association holds meetings and urges members of the Chinese community to buy Chinese Government bonds.  The Association receives no money for its efforts.  The bonds are not registered under the 1933 Act.

Did the Association do anything wrong? (not in securities business, not take money)

Second Circuit (Augustus Hand):

But the aim of the Securities Act is to have information available for investors. This objective will be defeated if buying orders can be solicited which result in uninformed and improvident purchases. It can make no difference as regards the policy of the act whether an issuer has solicited orders through an agent, or has merely taken advantage of the services of a person interested for patriotic reasons in securing offers to buy. … Wer hold that the defendant acted as an underwriter.

Even if the defendant is not itself "an issuer, underwriter, or dealer" it was participating in a transaction with an issuer, to wit, the Chinese Government.

Judge Learned Hand,first cousin of

Judge Augustus N. Hand

Hypothetical #2

The New York Times runs a story on the Chinese Government raising money in the United States by selling bonds. 

Any problems?

Hypothetical #3

Gilligan returns from his island and buys some unregistered C-C debentures. 

Ten months later he plans another three-hour cruise aboard the "Minnow" and sells the debentures.  He sells because he says C-C does not advertise the way he hoped and it is no longer a good investment.

 

Is Gilligan in trouble?  (what is “change in circumstances”? Holding period?)

Hypothetical #4

Gilligan borrows money from his bank, Howell Trust & Co.  He pledges his C-C debentures as collateral for his loan.

 

Gilligan defaults.  • Howell is shocked and wants to

sell the debentures.  Is registration required?

• Howell expected it and wants to sell the debentures.  Is registration required?

 

The end