The First Amendment and Restrictions on Advertising of Securities Under the Securities Act of 1933
Michael E. Schoeman, 41(2): 377–92 (Feb. 1986)
Under the commercial speech doctrine, restrictions on advertising can be no more extensive than necessary to serve a substantial government interest. This Article analyzes under that test the restrictions on advertising of securities contained in the Securities Act. The restrictions are found not to satisfy the test because other, less burdensome means of achieving the Act's objectives are available.
Integration of Securities Offerings: Report of the Task Force on Integration
Committee on Federal Regulation of Securities, 41(2): 595–643 (Feb. 1986)
This Report examines the fifty-year history of the SEC's integration doctrine and concludes that it is largely outdated because it does not consider the many advances in securities regulation since its adoption in the mid-1930s. The task force proposes some safe harbors designed to free the capital formation process from regulatory obstacles posed by the integration doctrine that provide little or no public benefit.
Report on State Merit Regulation of Securities Offerings
Ad Hoc Subcommittee on Merit Regulation of the State Regulation of Securities Committee, 41(3): 785–852 (May 1986)
State blue sky regulation is currently a subject of intense public debate. This Report attempts to clarify the terms of that debate by providing a systematic analysis of this regulatory system's underlying premises, its institutional contexts, and its variations. After examining the arguments for and against merit regulation, the Report concludes with an agenda for reform.
Installment Payments in Public Offerings of Securities: Recent Changes to the Securities Exchange Act of 1934
Edward L. Pittman, 43(1): 51–77 (Nov. 1987)
Last year the SEC adopted a controversial rule permitting broker-dealers to participate in public offerings of limited partnership securities in which investors have the opportunity to make installment payments. This Article discusses the reasons why issuers have attempted to use installment payments in the past, the problems they have encountered under the margin regulations of the federal securities laws, the significant provisions of the new exemption provided by rule 3a12–9, the structural alternatives made available to issuers under that rule, and recent amendments to the NASAA Real Estate Guidelines that are designed to accommodate offerings with installment payment features.
The Courts Have It Right: Securities Act Section 12(2) Applies Only to Public Offerings
Elliott J. Weiss, 48(1): 1–45 (Nov. 1992)
Professor Weiss argues that the structure and legislative history of the Securities Act indicate Congress intended section 12(2) to apply only to "public offerings" of securities, meaning offerings that are registered, should be registered, or involve sales of securities exempted from registration by section 3 of the Act. The flaws in the arguments courts and commentators have advanced to support a more expansive reading of section 12(2) are explained, and the implications of the Article's conclusion are explored. (Editor's note: Colloquy with Louis Loss, Securities Act Section 12(2): A Rebuttal , 48 BUS. LAW. 47 (1992)).
Securities Act Section 12(2): A Rebuttal
Louis Loss, 48(1): 47–58 (Nov. 1992)
After more than a half-century, section 12(2) of the Securities Act has recently given rise to a basic question of statutory construction: Does that section (which, in contrast to rule 10b-5, does not require scienter) apply to ordinary trading as distinct from distributions? The Third Circuit answered in the negative. Professor Loss, the dean of the American securities bar, has criticized that holding as reflecting a failure to appreciate the drafting style of the statute as well as public-policy considerations. This Article is Professor Loss's rebuttal to the foregoing Article by Professor Weiss. ( Editor's note: Colloquy with Elliott J. Weiss, The Courts Have It Right: Securities Act Section 12(2) Applies Only to Public Offerings , 48 BUS. LAW. 1 (1992)).
Federal Securities Law Issues for the Sticky Offering
Daniel J. Winnike and Christopher E. Nordquist, 48(3): 869–87 (May 1993)
In some public offering situations, the public's reception is so unenthusiastic that the managing underwriter is forced to take some portion of the offered securities into its investment account until market conditions are more favorable. These "sticky" offerings implicate a number of issues under both the Securities Act and the Exchange Act. The authors explore the application of these federal securities laws to the special circumstances involved in sticky offerings.
Securities Act Section 12(2) After Gustafson v. Alloyd Co. : What Questions Remain?
Elliott J. Weiss, 50(4): 1209–29 (Aug. 1995)
In Gustafson v. Alloyd Co., 513 U.S. 561 (1995), the Supreme Court held that Securities Act section 12(2) does not apply to a privately negotiated resale of securities. Although the Court reached the correct result, in the author's view, its opinion is poorly reasoned, largely as a consequence of the Court's decision to rely primarily on section 10 of the Act to define the term "prospectus." Of more consequence are the implications of the Court's opinion, especially for offerings under Regulation D and sales pursuant to rules 144 and 144A. This Article analyzes the probable impact of Gustafson's holding on such transactions and considers some related issues. ( Editor's note: Colloquy with Stephen M. Bainbridge, Securities Act Section 12(2) After the Gustafson Debacle, 50 BUS. LAW. 1231 (1995)).
Securities Act Section 12(2) After the Gustafson Debacle
Stephen M. Bainbridge, 50(4): 1231–71 (Aug. 1995)
In a colloquy held in these pages several years ago, Professors Louis Loss and Elliot Weiss debated the scope of liability under section 12(2) of the Securities Act; in the present colloquy, the author substitutes for Professor Loss as the defender of a broad interpretation of section 12(2). In Gustafson v. Alloyd Co., 513 U.S. 561 (1995), which occasioned the need for revisiting this question, the Supreme Court adopted the core of Professor Weiss's argument, holding that liability under section 12(2) is limited to public offerings of securities. In this Article, the author criticizes the Gustafson decision on a variety of grounds and projects the deleterious effects it is likely to have on the future course of section 12(2) litigation. ( Editor's note: Colloquy with Elliott J. Weiss, Securities Act Section 12(2) After Gustafson v. Alloyd Co.: What Questions Remain?, 50 BUS. LAW. 1209 (1995)).
SEC Registration of Public Offerings Under the Securities Act of 1933
William W. Barker, 52(1): 65–118 (Nov. 1996)
Written from an SEC examiner's perspective, the Article is a comprehensive and practical guide to the SEC registration and comment process for public offerings. The Article walks a reader through the registration process step by step, from the organization of the Division of Corporation Finance to disclosure issues that could be dealt with more effectively at the drafting stage to the process of submitting acceleration requests and going effective. The Article provides examples of common problems that arise in registration statements and at each stage of the registration process. Because most problems are recurring, with this insight, even experienced securities counsel can achieve better disclosure, draw fewer comments from the SEC staff, and spend less time in registration.
Recirculation of a Preliminary Prospectus: Statutory Basis and Analytical Techniques for Resolving Recirculation Issues
John J. Jenkins, 55(1): 135–76 (Nov. 1999)
Deciding whether new information contained in a pre- effective amendment to a registration statement creates a need to recirculate can be one of the most difficult judgments that a securities lawyer is called upon to make. This Article provides a brief overview of the development of the recirculation requirement and discusses several of the statutory provisions that should be considered in deciding whether to recirculate. It also discusses analytical techniques that may be useful in deciding whether recirculation is appropriate. These techniques are premised on the view that, because the key question to be answered is whether the new information is "material," case law and other authority addressing the materiality concept provides helpful guidance on this issue. This Article then applies these suggested analytical techniques to common recirculation scenarios, discusses certain other events that may prompt recirculation, and briefly discusses ways to reduce the risk of recirculation issues arising.
Advising Clients on Using the Internet to Make Offers of Securities in Offshore Offerings
Richard Cameron Blake, 55(1): 177–203 (Nov. 1999)
The use of the Internet in securities offerings is expanding. In offshore offerings, an offer via the Internet is accessible in "primary countries," or those where securities are being sold, as well as "secondary countries," where the securities are not being sold. Issuers, of course, do not want their offering regulated in countries where they are not selling securities. Regulators have issued guidance indicating that, despite the fact that an offer for securities may be accessible in their country via the Internet, they will not regulate the issue if the offering is taking place in other countries and the issuer does not "target" citizens or residents in "secondary countries." This Article summarizes the statements of securities regulators, who have given such guidance, and outlines the key factors they examine to determine that the issuer is not "targeting" secondary country citizens. It assists the lawyer in developing a plan to avoid secondary country regulation. Finally, it suggests that those regulators who have not yet spoken on this issue should do so and conform to the guidance previous regulators have given.
Composing a Balanced and Effective Board to Meet New Governance Mandates
John F. Olson and Michael T. Adams, 59(2): 421–52 (Feb. 2004)
The enactment of the Sarbanes-Oxley Act of 2002 and the recent adoption of new corporate governance listing standards by the major American securities markets have resulted in a number of prescriptions that influence the selection of directors of U.S. public companies. These requirements are in some respects inconsistent with the traditional agency role of the monitoring board and, more important, may conflict with optimal functioning of the board as a group. The authors survey the literature on the role of the board and board dynamics, examine the new constraints and their impact on director qualification and selection, and offer ten practical suggestions for director selection that will help nominating and governance committees of public companies to assemble boards of directors that will effectively perform their critical monitoring functions in the new regulatory environment.
Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms
Henry T. C. Hu and Bernard Black, 61(3):1011–1070 (May 2006)
Most American publicly held corporations have a one-share, one-vote structure, in which voting power is proportional to economic ownership. This structure gives shareholders economic incentives to exercise their voting power well and helps to legitimate managers' exercise of authority over property the managers do not own. Berle-Means' "separation of ownership and control" suggests that shareholders face large collective action problems in overseeing managers. Even so, mechanisms rooted in the shareholder vote, including proxy fights and takeover bids, constrain managers from straying too far from the goal of shareholder wealth maximization.
In the past few years, the derivatives revolution, hedge fund growth, and other capital market developments have come to threaten this familiar pattern throughout the world. Both outside investors and corporate insiders can now readily decouple economic ownership of shares from voting rights to those shares. This decoupling—which we call "the new vote buying"—is often hidden from public view and is largely untouched by current law and regulation. Hedge funds, sophisticated and largely unfettered by legal rules or conflicts of interest, have been especially aggressive in decoupling. Sometimes they hold more votes than economic ownership, a pattern we call "empty voting." That is, they may have substantial voting power while having limited, zero, or even negative economic ownership. In the extreme situation of negative economic ownership, the empty voter has an incentive to vote in ways that reduce the company's share price. Sometimes hedge funds hold more economic ownership than votes, though often with "morphable" voting rights—the de facto ability to acquire the votes if needed. We call this "hidden (morphable) ownership" because under current disclosure rules, the economic ownership and (de facto) voting ownership are often not disclosed. Corporate insiders, too, can use new vote buying techniques.
This article analyzes the new vote buying and its corporate governance implications. We propose a taxonomy of the new vote buying that unpacks its functional elements. We discuss the implications of decoupling for control contests and other forms of shareholder oversight, and the circumstances in which decoupling could be beneficial or harmful to corporate governance. We also propose a near-term disclosure-based response and sketch longer-term regulatory possibilities. Our disclosure proposal would simplify and partially integrate five existing, inconsistent share-ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed; we briefly discuss possible strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.
Cross–Border Tender Offers and Other Business Combination Transactions and the U.S. Federal Securities Laws: An Overview
Jeffrey W. Rubin, John M. Basnage, and William J. Curtin, III, 61(3):1071—1134 (May 2006)
In structuring cross–border tender offers and other business combination transactions, parties must consider carefully the potential application of U.S. federal securities laws and regulations to their transaction. By understanding the extent to which a proposed transaction will be subject to the provisions of U.S. federal securities laws and regulations, parties may be able to structure their transaction in a manner that avoids the imposition of unanticipated or burdensome disclosure and procedural requirements and also may be able to minimize potential conflicts between U.S. laws and regulations and foreign legal or market requirements. This article provides a broad overview of U.S. federal securities laws and regulations applicable to cross–border tender offers and other business combination transactions, including a detailed discussion of Regulations 14D and 14E under the Securities Exchange Act and the principal accommodations afforded to foreign private issuers thereunder.
Independent Directors as Securities Monitors
Hillary A. Sale, 61(4):1375-1412 (August 2006)
This paper considers the role of independent directors of public companies as securities monitors. Rather than engaging in the debate about whether independent directors are good or bad, important or unimportant, the paper takes their existence and basic governance role as a given, focusing instead on what recent statements from Securities and Exchange Commission officials indicating an increased focus on independent directors and their role in preventing securities fraud. The paper notes that the SEC believes that independent directors are on the board to act, at least in part, as securities monitors. This securities monitor role is another aspect of the information-forcing-substance disclosure model that the SEC has used to achieve improved corporate governance. Although directors face heightened risk when they draft or sign disclosure documents, they also have an ongoing responsibility to be informed of developments within the company, ensure good processes for accurate disclosures, and make reasonable efforts to assure that disclosures are adequate. Independent directors with expertise should be involved in reviewing and, sometimes, drafting statements. All directors, however, should be fully aware of the company's press releases, public statements, and communications with security holders and sufficiently engaged and active to question and correct inadequate disclosures. In addition to defining the role of independent directors as securities monitors, the article reviews the liability independent directors might face under private causes of action and contrasts it with the SEC's enforcement powers and remedies. The article describes some of the SEC's prior statements that emphasize the role of independent directors as securities monitors and the importance of their providing both guidance and check and balance.
Void or Voidable?—Curing Defects in Stock Issuances Under Delaware Law
C. Stephen Bigler and Seth Barrett Tillman, 63(4): 1109-1152 (August 2008)
It is not unusual for a Delaware corporation's stock records to have omissions or procedural defects raising questions as to the valid authorization of some of the outstanding stock. Confronted with such irregularities, most corporate lawyers would likely attempt to cure the defect through board and, if necessary, stockholder ratification. However, in a number of leading cases, the Delaware Supreme Court has treated the statutory formalities for the issuance of stock as substantive prerequisites to the validity of the stock being issued, and the court has determined that failure to comply with such formalities renders the stock in question void, i.e., not curable by ratification. Unfortunately, the decisions issued by the Delaware courts have not afforded the necessary certainty to allow practitioners to decide whether a particular defect in stock issuance is a substantive defect that renders stock void or a mere technical defect that renders stock voidable. This Article analyzes the cases giving rise to this lack of clarity and proposes that the Delaware courts apply the policy underlying Article 8 of the Delaware Uniform Commercial Code to validate stock in the hands of innocent purchasers for value in determining whether stock is void or voidable.
Negative Assurance in Securities Offerings (2008 Revision)
Report of the Subcommittee on Securities Law Opinions, Committee on Federal Regulation of Securities, ABA Section of Business Law, 64(2): 395-410 (February 2009)
Disclosure Obligations Under the Federal Securities Laws in Government Investigations
David M. Stuart and David A. Wilson, 64(4): 973-998 (August 2009)
With the prevalence of government investigations into corporate conduct, public companies frequently face decisions about whether, when, how, and where to disclose to investors the existence of such investigations and the facts learned in the course of, or as a result of, those investigations. While the federal securities laws (and the rules and regulations promulgated thereunder) require disclosure of specific events that may arise during an investigation, neither those laws nor the courts that have interpreted them provide clear guidance for many of the disclosure decisions that must be made over the course of an investigation. As a result, counsel must carefully analyze numerous facts and circumstances, understand the company's previous disclosures, make "materiality" assessments, and determine whether to make disclosure in a current report or wait until the next periodic filing. This Article seeks to present, through an analysis of precedent disclosures, caselaw, rules, and practical ramifications, the considerations counsel must take into account in evaluating disclosure decisions in the context of an investigation. These considerations can help counsel avoid having a disclosure decision worsen the already difficult circumstances posed by the investigation itself.
Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency
Henry T. C. Hu; 70(2): 347-406 (Spring 2015)
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (via, e.g., “empty voting”), the control rights of debtholders (via, e.g., “empty crediting” and “hidden interests”/ “hidden non-interests”), and of takeover practices (via, e.g., “morphable ownership” to avoid section 13(d) disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used—the “descriptive mode,” which relies on “intermediary depictions” of objective reality—is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges—a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC—also creates difficulties. This new parallel public disclosure system, developed by bank regulators and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.
As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006−2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012−2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.
As to decoupling, the Article proceeds to analyze some key post- 2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts—and the pressing need for more action by the SEC. At the time the debt decoupling research was introduced, available evidence as to the phenomenon’s significance was limited. This Article helps address that gap.
As to information, the Article begins by outlining the calls for reform associated with the 2012−2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information—consisting of two parallel regulatory universes with divergent ends and means—is unsustainable in the long run and involve certain matters that need statutory resolution. However, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken in the interim.
The Promise of Unfavorable Research: Ramifications of Regulations Separating Research and Investment Banking for IPO Issuers and Investors
Benjamin J. Catalano; 72(1): 31-60 (Winter 2016/2017)
The trend in Securities and Exchange Commission and Financial Industry Regulatory Authority rulemaking and enforcement to insulate research from investment banking influence has led to the removal of research analysts from the underwriting process with adverse consequences for new issuers and their investors. The approach conflicts with the congressional objective under the Jumpstart Our Business Startups (JOBS) Act to incorporate research fully in public offerings for emerging growth companies, which now comprise the vast majority of IPO issuers. Faced with these competing objectives, broker-dealers should have written policies and procedures that are carefully crafted to service their underwriting and investor clients appropriately and to take advantage of the JOBS Act privileges with respect to research.
Securities on Blockchain and the Uniform Commercial Code
Reade Ryan and Mayme Donohue; 73(1): 85-108 (Winter 2017/2018)
This article initially provides a high-level description of blockchain technology intended to be accessible to those without a technical background, and illustratively describes an existing blockchain system that already evidences securities issued and being traded. The article then sets forth and analyzes how Article 8 of the Uniform Commercial Code covers blockchain securities as “uncertificated securities.” Finally, the article provides guidance to corporate lawyers faced with giving a legal opinion relating to the issuance and sale of securities on a blockchain.
State Section 11 Litigation in the Post-Cyan Environment (Despite Sciabacucchi)
Michael Klausner, Jason Hegland, Carin LeVine, and Jessica Shin; 75(2): 1769-1790 (Spring 2020)
In Cyan, Inc. v. Beaver County Employees Retirement Fund, the U.S. Supreme Court held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) preserved state courts’ jurisdiction to adjudicate cases brought under the Securities Act of 1933, with defendants having no right to remove a case to federal court. The result of this decision has been a dramatic increase in section 11 cases litigated in state court, often with a parallel case brought in federal court against the same defendants based on the same alleged misstatements.