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Registration and Reporting Requirements of the Federal Securities Laws

Registration and Reporting Requirements of the Federal Securities Laws. Matthew C. Dallett Locke Lord LLP Megan Foscaldi Locke Lord LLP. October 26, 2018. The Securities Laws. Q. What is a “Security?”

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Registration and Reporting Requirements of the Federal Securities Laws

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  1. Registration and Reporting Requirements of the Federal Securities Laws Matthew C. Dallett Locke Lord LLP Megan Foscaldi Locke Lord LLP October 26, 2018

  2. The Securities Laws Q. What is a “Security?” A.Either an ownership stake or a creditor’s stake in a company or venture (the “issuer” or the “debtor”) that is intended to produce a profit. • Equity – ownership stake • Debt – creditor’s stake “Security” status governs coverage of the securities laws • Enforcement actions for non-registration or fraud • Private actions for fraud or rescission

  3. The Securities Laws Principal Statutes • Securities Act of 1933 (Securities Act or ’33 Act) • Securities Exchange Act of 1934 (Exchange Act or ’34 Act) Also • Investment Company Act of 1940 (’40 Act) • Investment Advisers Act of 1940 (Advisers Act) • Trust Indenture Act of 1939

  4. The Securities Laws Administration and Enforcement by the Securities and Exchange Commission (SEC) • Adopts regulations to administer the securities laws • Reviews registration statements filed by issuers under the ’33 Act • Reviews issuers’ reports and shareholder disclosures under the ’34 Act • Prosecutes fraud cases and violations of regulatory requirements under all the statutes • Regulates – and approves rule-making of – stock exchanges and PCAOB

  5. Integrated Disclosure System Used for SEC filings under ’33 and ’34 Acts by issuers, shareholders and tender offerors Standardized disclosure information – Core sources: • Regulation S-K (non-financial disclosures) • Regulation S-X (financial disclosures) • Regulation M-A (disclosures re: mergers, other acquisitions and tender offers) Forms for SEC filings cross-reference different parts of these core sources, depending on the disclosure required

  6. Integrated Disclosure System “Basic” Information • Business, markets and competition • Financial statements • Management’s discussion and analysis of financial condition and results of operations (“MD&A”) Other Commonly Required Information • Management and compensation • Board of Directors / corporate governance • Related party (insider) transactions • Material litigation • Market and dividend information • Risk factors

  7. Integrated Disclosure System Incorporation by Reference Electronic Data Gathering, Analysis and Retrieval (EDGAR) filing • EDGAR only applies to SEC filings • Publicly accessible • Prospectuses, tender offer materials, proxy statements, etc., delivered to securityholders and potential investors in paper or electronic format, not by EDGAR • In some cases (e.g., prospectuses, proxy materials), online EDGAR access can equal delivery XBRL • Financial statements filed in interactive-data format to facilitate review and comparison between issuers

  8. Securities Act of 1933 Disclosure focus Any offer or sale of a security (by issuer or securityholder) must be registered with the SEC under the ’33 Act (Section 5) unless: • the security is exempt from registration or • the transaction is exempt from registration. Registration permits SEC review Whether or not an offer is registered: • Issuers usually must disclose material information to investors • Non-issuer sellers must not defraud buyers

  9. Securities Act of 1933 – Registration Issuer registers an offering of securities under the ’33 Act Common Registration Forms: • Form S-1 • IPOs and where issuer not eligible to use another form • Form S-3 • For primary and secondary offerings, incl. shelf registrations • Special eligibility requirements

  10. Securities Act of 1933 – Registration • Form S-4 • For securities issued in business combinations, exchange offers • Form S-8 • For securities issued under employee benefit plans • F Forms (Forms F-1, F-3, F-4, etc.) • For foreign private issuers

  11. Securities Act of 1933 – Registration Registration Statement • Part I – prospectus containing principal information about issuer and offering • Part II – ancillary information • Exhibits – important issuer documents • Includes consents of any experts quoted • Counsel’s opinion re: legality of securities offered • Signed by issuer and its directors • Filing fee based on amount offered

  12. Securities Act of 1933 – Registered Offerings – Stages Pre-filing period (§5(c)) – begins when issuer takes first concrete step • Drafting registration statement • Corporate cleanup; due diligence • “Offers” limited (no gun-jumping) / no “sales” • More latitude for WKSIs (largest issuers) and Emerging Growth Companies (EGCs) File Registration Statement • Initial registrations (including IPOs) and follow-on offerings in next 12 months can be filed confidentially; all others public

  13. Securities Act of 1933 – Registered Offerings – Stages Waiting (pre-effective) period (§5(a),(b)) • SEC (Div. of Corporation Finance) review / no review • Initial comments in about 30 days • Responding to SEC comments • Usually file amendment(s) to registration statement • Road show • No written offers except “statutory prospectuses” • Ordinary course business communications and certain other limited statements OK • Oral offers permitted • No sales

  14. Securities Act of 1933 – Registered Offerings - Stages Effectiveness and amendments (§8) • Form S-3ASR (for WKSI) and Form S-8: • Effective upon filing • Other forms: • Following review (including any necessary amendments in response to SEC comments), issuer requests “acceleration” of effective date

  15. Securities Act of 1933 – Registered Offerings – Stages / Communications Post-effective period (§5(a),(b)) • Pricing, sales, confirming orders / prospectus delivery • Written offers (including sale confirmations) OK if accompanied or preceded by “statutory prospectus” • EDGAR access equals delivery • Ordinary course business communications OK

  16. Securities Act of 1933 – Exempt Securities Registration not required for offering and sale, but anti-fraud rules apply. E.g., • Section 3(a)(2) – Issued by government agencies; banks; charities; certain types of funds • Section 3(a)(9) – Exchanged with existing security holders of the issuer – no compensation for soliciting • Section 3(a)(10) – Issuance approved as fair by court or government agency

  17. Securities Act of 1933 – Exempt Offerings Registration / SEC review not required, but anti-fraud rules apply. A. “General solicitation” not allowed: • A/k/a “private placements” / no SEC review • Resale limits – Rule 144 “restricted securities” • Section 4(a)(2) • Judicially-developed criteria: • Nature of offerees • Ability to obtain information about issuer • Blue Sky registration (unless exempt)

  18. Securities Act of 1933 – Exempt Offerings “General solicitation” not allowed (cont.): • Regulation D, Rule 506(b) – “safe harbor” under Section 4(a)(2) • Unlimited accredited investors • Non-accredited investors limited to 35 • Must be sophisticated (alone or with purchaser rep) • Must receive specific disclosures • No Blue Sky registration

  19. Securities Act of 1933 – Exempt Offerings B. “General solicitation” allowed: • Availability to public issuer, Blue Sky registration, specific disclosure requirements, and resale limits depend on exemption • Regulation A: • Tier 1 (up to $20m) • Tier 2 (up to $50m) (a/k/a Reg A +) • Offering statement reviewed by SEC • Regulation D, Rule 504– Up to $5m

  20. Securities Act of 1933 – Exempt Offerings “General solicitation” allowed (cont.): • Regulation D, Rule 506(c) – Unlimited $$ amount • Sales only to accredited investors • Section 4(a)(6)/ Regulation Crowdfunding • Up to $1.07m • Investment cap per investor income/net worth • Online – use broker or registered funding portal

  21. Securities Act of 1933 – Exempt Offerings • Rule 701 – Issued under compensatory benefit plan by non-public company • Shares are freely tradable after IPO • Regulation S – Offshore issuances (a “safe harbor,” not an exemption) _______________ Note: Blowing any exemption from registration may require rescission offer to investors • E.g., Google IPO

  22. Securities Act of 1933 – Exempt Resales Section 4(1) – “transactions by any person other than an issuer, underwriter or dealer” • Relied on for the vast majority of market transactions • Rule 144 – Safe harbor under §4(1) to avoid “underwriter” status in market resales for: • “Affiliates” (holding “control securities”) • Private placement and Rule 506(c) purchasers (holding “restricted securities”) • Rule 144 sale requirements: • Holding period (restricted securities only) • Current public information • Volume limitations and mechanical requirements (for affiliates)

  23. Securities Act of 1933 – Exempt Resales Section 4(1) (cont.) • Rule 144A – Avoid “underwriter” status in resales to Qualified Institutional Buyers (QIBs) • General solicitation permitted Section 4(1½) (so-called) – SEC recognizes that private resales to wealthy and sophisticated purchasers need not be registered • If seller is affiliate of issuer, buyer starts new Rule 144 restricted holding period

  24. Securities Act of 1933 – Liabilities For protection of purchasers: Section 11 • Civil liability for misstatements / omissions in registration statements • Issuer, directors, underwriters, experts may be liable • Due diligence defense available to underwriters Section 12 • §12(a)(1) civil liability for offers / sales in violation of §5 (i.e., not registered or exempt)

  25. Securities Act of 1933 – Liabilities • §12(a)(2) civil liability for offers / sales by means of misleading prospectus, Reg. A offering statement or oral communication • Issuers, underwriters may be liable • Due diligence defense available to underwriters Section 17 • General anti-fraud provision of ’33 Act • Governs all sales, not just public offerings • No private right of action under Section 17 (SEC enforcement only)

  26. Securities Exchange Act of 1934 Regulates trading in securities already issued and outstanding Requires extensive disclosures by and with respect to public companies Primarily disclosure focus, but Sarbanes Oxley Act of 2002 (SOX) and Dodd-Frank Act of 2010 added governance and compliance requirements Principal source of regulation for stock exchanges and other markets, brokers and related market professionals • Not investment advisers or investment companies

  27. Securities Exchange Act of 1934 Registration of a Class of Securities • Required for: • a class listed on a national securities exchange (Section 12(b)) • a class issued by a company whose assets exceed $10 million if shareholders of record of the class exceed either (i) 499 non-accredited investors or (ii) 1,999 in aggregate (Section 12(g) and Rule 12g-1) • Foreign private issuers (using U.S. jurisdictional means) caught if meet Section 12(g) test and have 300 U.S. beneficial owners • Rule 12g3-2(b) exemption if primary trading market outside U.S. • Section 15(d) reporting requirements for newly public issuer that is not registered under Section 12

  28. Securities Exchange Act of 1934 Consequences of Registration • Public company issuers: • Reporting or “continuous disclosure” requirements (Section 13) • Proxy rules (Section 14) • Tender offer rules (Sections 13 and 14(d)) • Foreign Corrupt Practices Act (Sections 13(b) and 30A) • Audit committee independence and auditor compliance under SOX (Section 10A) • Governance requirements under SOX and Dodd-Frank (principally via the stock exchanges) • Control persons (directors and executives) and principal shareholders: • Disclosures and restrictions re: trading securities

  29. Securities Exchange Act of 1934 –Continuous Disclosure Requirements Size of issuer’s public float determines (i) timing of 10-Ks / 10-Qs and (ii) eligibility for reduced “smaller reporting company” disclosures • Public float is market capitalization excluding shares held by affiliates (control persons) • Large Accelerated Filer = $700m; public at least 1 year • Accelerated Filer = $75m; public at least 1 year • Smaller Reporting Company (SRC) = Below $250m (or below $100m revenues if public float below $700m in prior year)

  30. Securities Exchange Act of 1934 –Continuous Disclosure Requirements Annual Report on Form 10-K • Filed 60 - 90 days after fiscal year-end • Principal contents: • “Business” description • “Management’s Discussion and Analysis” (MD&A) • Financial statements • Evaluation of the effectiveness of the issuer’s “internal control over financial reporting.” • Exhibits • CEO and CFO certifications

  31. Securities Exchange Act of 1934 –Continuous Disclosure Requirements Quarterly Report on Form 10-Q • 40 or 45 days after the end of each of the first three fiscal quarters • Updates Form 10-K with material changes; less detail • Exhibits (material contracts during quarter) • CEO and CFO certifications

  32. Securities Exchange Act of 1934 –Continuous Disclosure Requirements Current Report on Form 8-K • Disclose material events within four business days • Mandatory disclosures include:

  33. Securities Exchange Act of 1934 –Public Disclosures by Issuer Regulation FD prohibits selective disclosure of material nonpublic (“inside”) information to shareholders and market participants • Issuer must make simultaneous public disclosure (or promptly after if initial disclosure was unintentional) Limited regulation of content and timing of other public disclosures • Largely depends on Rule 10b5-1 concerns

  34. Securities Exchange Act of 1934 –Insider Reporting Requirements “Beneficial owners” report ownership of equity securities: • Directors, executive officers and ≥10% shareholders who have a pecuniary interest inthe shares: • Report holdings and transactions on Forms 3, 4 and 5 under §16(a) • Liability for “short-swing” profits under §16(b) • ≥5% shareholders who have voting or investment power over the shares (i.e., the ability to exercise control over the issuer): • Report holdings and transactions on Schedules 13D or 13G under Section 13(d)

  35. Securities Exchange Act of 1934 –Tender Offer Rules Apply to public offers to purchase outstanding securities by either issuer or third party • Begins when a bid is first “published” • Offeror files a Schedule TO – “Tender Offer Statement” with SEC • Issuer files a Schedule 14D-9 – “Tender Offer Solicitation / Recommendation” with SEC • Offer must remain open for at least 20 business days • SEC reviews filings and may require changes

  36. Securities Exchange Act of 1934 –Proxy Solicitation What is a proxy? Why solicit proxies? Section 14 sets disclosure and delivery requirements for all solicitations of public company proxies or written consents • Rule 14a-3 requires: • a written proxy statement and • for annual meetings, an annual report to shareholders

  37. Securities Exchange Act of 1934 –Proxy Solicitation Who are you soliciting? • Record owners (primarily individuals) • “Street name” holders (whose “beneficial owners” actually cast the votes): • Brokers – holding for account owners (usually retail) • Banks – custodians for funds and other institutions • Broker search to identify number of beneficial owners

  38. Securities Exchange Act of 1934 –Proxy Solicitation Proxy statement • Contents specified by Schedule 14A, which refers to Reg. S-K: • Information about meeting and voting rights • If electing directors, corporate and executive compensation information • Other actions (e.g. stock plans or mergers) require specified disclosures Annual Report to Shareholders • Mostly tracks Form 10-K • Glossy or Wrap

  39. Securities Exchange Act of 1934 –Proxy Solicitation Filing Requirements • File preliminary copy of proxy materials with SEC • No preliminary required for routine matters • SEC may comment • File definitive copy with SEC when disseminate to shareholders Dissemination • “E-proxy” / Notice Only (website posting plus notice to shareholders; hard copy sent only on request) • Full Set (website posting and mailing hard copy to shareholders)

  40. Securities Exchange Act of 1934 –Enforcement; Civil Liability Section 10(b) anti-fraud provisions, especially Rule 10b-5 • “In connection with purchase or sale of a security” • Based on: • Fraudulent public statements / omissions • Powerful driver of content and timing of corporate disclosures • Misuse of material, nonpublic (“inside”) information • Includes “tipping” others by corporate insiders • SEC enforcement actions • Private right of action

  41. Securities Exchange Act of 1934 –Enforcement; Civil Liability Controlling person liability prompts companies (and law firms) to adopt and administer insider trading policies Rule 10b5-1 plan permits insiders to buy or sell on prearranged schedule to avoid liability for having inside information at time of sale

  42. Blue Sky Laws State securities laws Predate federal laws Regulate: • Offerings of securities that are not preempted by ’33 Act §18 (e.g., listed shares, Reg A Tier 2, and Rule 506 offerings) • “Merit” regulation of offerings in some states • Activities of broker-dealers • Watch out for unregistered “finders” • Significant source of enforcement against “bad brokers” and investment scams Ignore at your peril! • Enforcement • Rescission

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