Messed Up RegistrationsFraudulent Registrations

Rule 10b-5 12(a)(1) 12(a)(2) [most relevant to waiting period] 11 [most relevant to post-effective period]

Summary"purchase or sale" of securitiesStrict liability for noncompliance with registration rules (i.e., selling unregistered non-exempt securities in violation of 5) Liability for fraudulent registered public offering (i.e., by means of prospectus or oral communication")Liability for fraudulent registration statements.

Documents misrepresentation or omission of material fact "in connection with" purchase or sale of any securityDocs Covered: (1) Preliminary prospectus (2) Free writing prospectus - which is defined super broadly (3) Any other communication super broad [see waiting period]

Docs not covered: (1) Summary prospectus (2) Statements made by individual underwriter only create liability to people who it was addressed to. (e.g. JPMorgan creates Free writing prospectus it is subject to liability but not Goldman. But issuer can be liable - If issuer provided information to JPMorgan, then it would also be liable.) Docs Covered (see also Rule 159A) any document that solicits a sale (see Rule 159A): (1) preliminary prospectus (2) any free writing prospectus (press release, supplements) and (3) any oral other communications that is an offer solicitation to the extent deals in connection with a registered transaction

Docs not covered: (1) in a shelf registration: Rule 424(b) prospectus supplements released after the sale (unlike 11)** [per Rule 159] (2) Form 1-A used in Reg. A sales.

*After Gustafson: private placements under Rule 506 and secondary transactionsUnclear after Gustafson but possibly not covered: intrastate offering, small-issue under Reg A or Rules 504 or 505 under Reg D. Docs Covered: (1) information filed at the time of effectiveness that is part of registration statement or a prospectus (2) amendments to registration statement (3) all 1934 disclosures incorporated by reference into the R.S. before takedown (4) 430A prospectus (i.e., omitting price-related info) (5) 430B shelf registration prospectus supplement (6) Rule 424(b) prospectus supplementsDocs not covered: (1) Oral representations at roadshows (2) Analysts reports (3) Preliminary prospectus under Rule 430 (if errors corrected before the effective date) (4) Tombstone ad under Rule 134 (b/c not filed) (5) Summary prospectus under Rule 431 (b/c not filed) (5) Free writing prospectus b/c not part of registration statement unless filed as part of registration statement] (6) analyst reports.*Forward-looking statements subject to PSLRA safe harbors (EE 247)

TimingTime of saleTime of sale**Rule 159 clarifies that liability attaches to misrep. and omissions at the time of sale, and not to supplements made later. Any changes in prospectus after the sale contract but prior to delivery of a final prospectus not covered.Comment by Lenny: See Another major difference with 11 is timing.See Timing: Gustafson states

Liability arises at the time registration statement becomes effective. Usually this means liability attaches to final prospectus (or supplement), not preliminary.An amendment to the registration restarts the date of effectiveness. (But not an supplement?)**For shelf offerings, liability for issuers & underwriters determined on takedown date (broader), but liability for signing officers, directors and experts determined only as of the effectiveness date of RS or most recent 10-K annual report (narrower). See Rule 430B(f)(1), (4). See also 9 and 16 mo. Rule in 10(a)(3).

Parties

Plaintiff"purchaser" or "seller""Purchaser" of unregistered securitiesOnly plaintiffs who is person who has quasi-privity with a seller.

"purchaser" of unregistered securitiesOnly plaintiffs who is person who has quasi-privity with a seller.

Any person who acquired registered securities (i.e., actual purchasers)For IPO, easy to show that bought directly from underwriter For post-IPO secondary market purchases, need (linear privity) either (1) tracing the securities to those sold in the registered offering, which is impossible or (2) proving that bought directly from the underwriters

Defendantprimary violatorStatutory seller of unregistered securities, including person who "solicits" for personal financial gain. Pinter v. Dahl. Thus, brokers and underwriters covered. Rule 159A says that issuers are always sellers. Unlikely: investment advisors, directors, auditors, expertsStatutory seller of unregistered securities, including person who "solicits" for personal financial gain. Pinter v. Dahl. Thus, brokers and underwriters covered. Rule 159A says that issuers are always sellers. Unlikely: investment advisors, directors, auditors, experts. Issuer, all directors, specified officers who are signers of the registration statement, underwriters participating in offering, and experts who prepared any part of registrations statement. These need not have actually created or disseminated the alleged misinformation. Not broker-dealers.**For shelf offerings, liability for issuers & underwriters determined on takedown date (broader), but liability for signing officers, directors and experts determined only as of the effectiveness date of RS or most recent 10-K annual report (narrower). See Rule 430B(f)(1), (4). See also 9 and 16 mo. Rule in 10(a)(3).

Elements

MisrepresentationXN/A

Misrepresentation or omission in prospectus or oral communication

Misrepresentation or omission in registration statements etc.

MaterialityXN/AXX

Mens Reascienter required (includes recklessness)N/A [i.e., strict liability]N/AAll defendants: Negligence based liability based on the due diligence affirmative defenseN/AIssuer: Strict liability (even if pl. did not read registration statement).Other defendants: Negligence based liability based on the due diligence affirmative defense

Reliancereliance required (unless case involves duty to speak or omissionN/AN/AOnly a defense where plaintiff (1) knew of misstatement at time of sale. Rule 159(c)

N/AOnly a defense where plaintiff (1) knew of misstatement at time acquired security and (2) bought security after issuer released an earnings statement covering 1 year period after the registration statements effective date.

Causationloss causationN/AN/AOnly a negative causation defense that goes to the measure of damages. 12(b)(2)(b)N/AOnly a negative causation defense that goes to the measure of damages. 11(e).

XXX

DefensesOnly practical defense is that security/transaction was exempt.

All defendants (including issuer) (1) Due diligence defense if prove that did not know and in the exercise of reasonable care could not have known of material misrepresentation. i.e., if he proves that if he had exercised reasonable care, he would not have known. No reliance-on-experts defense so reasonable investigation necessary it would seem even for expertised portions (2) Lack of causation (only goes to measure of damages)

**Forward-looking statements subject to PSLRA safe harbors (EE 247)Issuer: (1) Lack of materiality; (2) negative causation (only goes to measure of damages) in 11(e) (3); Trivial defenses in 11(a): (a) where pl. knew of misstatement at time acquired security; (b) pl. bought security after issuer released an earnings statement covering 1 year period after the registration statements effective date.Other defendants: (1) Non-experts after reasonable investigation and reasonable ground for believe and did believe to believe that info true. (2) Experts: after reasonable investigation and reasonable ground for believe and did believe to believe that info true. (3) Non-experts relying on experts: depends if the accounting statements are certified. No reasonable ground to believe that the expert statement not true.

*Standard of reasonableness in 11(c) and factors in Rule 176.**Forward-looking statements subject to PSLRA safe harbors (EE 247)

Remedy/DamagesOut of pocket damages based on intrinsic value.Cant do rescission.(1) Rescission. Plaintiff must make adequate tender if seeking rescission.(2) Rescissionary damages if resold stock(1) Rescission. Plaintiff must make adequate tender if seeking rescission.(2) Rescissionary damages if resold stock, better than 11 damages.Cap: damages capped aggregate offering price per 11(g). Formula: damages formula depends on whether or when plaintiff resold securities. It is a difference b/w purchase price and (e)(1) price at time of suit, if still held (e)(2) sales price, if sold before suit (e)(3) price when sold after suit but before judgment, but no more than amount under (e)(1) Underwriters liability limited only for amount they take up as their allotment and actually sell to the public (unless you got some special benefit not shared with other members of the selling group such as for being a managing underwriter). 11(e)Loss causation is a defense available to defendants. 11(e)

Statute of Limitations period2 years after discovery/5 years after violation1 year after the violation If violation totally hidden, the maximum cut-off is 3 years after securities bona fide offered to the public.

1 year after discovery of misstatement OR 1 year after such discovery shouldve been made in the exercise of reasonable care. (subject to inquiry notice, such as statements in press or securities analysts reports).

If fraud totally hidden, the maximum cut-off is 3 years after the sale for 12(a)(2).

For shelf-registration SEC says it is counted from the first takedown of securities (not the effective date)1 year after discovery of misstatement OR 1 year after such discovery shouldve been made in the exercise of reasonable care. (subject to inquiry notice, such as statements in press or securities analysts reports).

If fraud totally hidden, the maximum cut-off is 3 years after securities bona fide offered to the public.For shelf registrations, SEC says 3 years runs from the first takedown (not effectiveness date).

limited liabilityproportional liability for unknowing violatorsN/AN/AProportional liability for unknowing outside directors. See 11(f)(2)(A)See also above limitations on damages for underwriters

contributionavailableN/AN/Aavailable ("as in cases of contract")