Securities Regulation (JD Academic Unit)

# Securities Regulation Study Notes (JD Academic Unit)


## 1. Definition of a Security

### 1.1 The Howey Test for Investment Contracts

**Holding:** An investment contract under Securities Act § 2(a)(1) is defined as: (1) an investment of money; (2) in a common enterprise; (3) with expectation of profits; (4) derived solely from the efforts of a promoter or third party. All four prongs must be satisfied.

**Key Reasoning:** The test is broad and functional, covering instruments beyond traditional stocks and bonds. "Profits" includes capital appreciation and income. "Common enterprise" requires pooling of resources or interdependence of returns. "Solely from the efforts of others" is the critical limiting principle—if the investor performs the work, no security exists.

**Application:** Determines whether novel instruments (cryptocurrency, real estate partnerships, farm plots, oil wells) constitute securities requiring registration or exemption. Courts apply the economic substance test, not form.

**Authority:** *SEC v. W.J. Howey Co.*, **328 U.S. 293** (1946) — foundational Supreme Court case establishing the four-part test for investment contracts.

### 1.2 Notes and Investment Agreements

**Holding:** Notes (promissory notes, negotiable instruments) are securities under § 2(a)(1) if issued in transactions where investors are passive and rely on the issuer's creditworthiness or efforts for return. Not all notes are securities; the determination depends on economic reality.

**Key Distinction:** A note sold to a bank for operating capital (borrowing) differs from a note sold to passive investors (investment). Courts examine: (1) manner of offering, (2) reasonable expectations of the investing public, (3) presence of common characteristics of traditional securities, (4) legislative history.

**Authority:** *Reves v. Ernst & Young*, **494 U.S. 56** (1990) — established the "family resemblance" test for notes: presumed to be securities unless they fit a specific commercial exception (bank loans, equipment financing, etc.).

### 1.3 The Reves Test for Notes (Family Resemblance Test)

**Holding:** Notes are presumed to be securities unless they fit a specific exception based on family resemblance to traditional business loans. Courts examine: (1) manner of offering, (2) reasonable purchaser expectations, (3) existence of alternative regulatory schemes, and (4) other relevant facts.

**Key Exceptions to Securities Treatment (despite being "notes"):**
- Bank loans (operating capital)
- Equipment financing
- Short-term commercial paper (less than 9 months)
- Promissory notes given in employee compensation

**Rationale:** Not all debt instruments require securities registration. Commercial lending between sophisticated parties is governed by different regulatory regimes (UCC, banking law). The test balances investor protection with commercial certainty.

**Authority:** *Reves v. Ernst & Young*, **494 U.S. 56** (1990) — family resemblance test for determining whether notes constitute securities.

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## 2. Securities Act of 1933 — Public Offerings & Registration

### 2.1 Section 5 Registration Process and Gun-Jumping Rules

**Holding:** Section 5 of the Securities Act prohibits any offer or sale of securities unless a registration statement is effective. "Offers" include preliminary communications, written advertisements, and certain conditioning activities. "Gun-jumping" (premature solicitation of interest) violates § 5 even before formal offers.

**Key Timing Rules:**
- Pre-filing period: No offers or sales allowed. Conditioning the market (creating investor interest) violates § 5.
- Waiting period (filing to effectiveness): Limited offers via preliminary prospectus; no sales allowed.
- Post-effective period: Sales allowed only with Rule 430 final prospectus delivered.

**"Offer" Definition is Broad:** Any communication offering securities is covered, including: preliminary discussions, market mailings, analyst reports by the issuer, social media posts, road show presentations, and underwriter marketing materials.

**Authority:** *SEC v. Cavanagh*, **445 U.S. 389** (1980) — § 5 violation established by oral offer before registration, even absent actual sale. *Securities Act § 5(c)* — statutory prohibition.

### 2.2 Shelf Registration (Rule 415) and WKSI Status

**Holding:** Rule 415 allows issuers to register securities for delayed or continuous offering. A WKSI (Well-Known Seasoned Issuer) — defined by SEC rules as public companies meeting float and trading volume thresholds — receives enhanced flexibility: immediate effectiveness and acceleration of registration statements.

**WKSI Advantages:**
- Filing Form S-3 with automatic effectiveness (no SEC review period)
- Ability to use post-effective amendments
- Reduced disclosure requirements in certain contexts
- Underwriter compensation flexibility

**Shelf Limitations:**
- WKSI status can be lost; must reassess quarterly
- Issuer cannot register greater amount than reasonable estimate of offering within 3 years
- Secondary offerings of affiliated persons subject to restrictions

**Rationale:** Shelf registration reduces capital-raising delays for stable, frequently-traded companies. WKSI status leverages SEC's familiarity with the issuer's disclosure to permit faster offerings without sacrificing investor protection.

**Authority:** *Securities Act Rule 415* (shelf registration); *Securities Act Rule 144A and Reg S* provisions; SEC guidance on WKSI determination.

### 2.3 IPO Mechanics and Underwriting

**Holding:** IPOs involve an underwriting agreement between issuer and underwriter(s). Underwriter acts as principal (purchasing securities and reselling) or agent (arranging sales). Underwriter liability under § 11 (registration statement misstatements) and § 12(a)(2) (sales literature) is strict for registration statement, negligence-based for prospectuses.

**IPO Process:**
1. Due diligence: Underwriter conducts reasonable investigation into disclosed facts.
2. Underwriting agreement: Fixed price or firm commitment vs. best efforts.
3. Stabilization: Underwriter may bid for shares post-IPO to stabilize trading (permitted under § 10(b) and Regulation M).
4. Lock-up periods: Insiders and earlier investors restricted from selling for typically 180 days.

**Underwriter Liability § 11:** Underwriter is liable for material misstatements in registration statement unless it proves due diligence defense (reasonable investigation; no red flags).

**Authority:** *Securities Act §§ 11, 12, 17*; *Regulation M* (underwriter conduct and restrictions); *Underwriting Agreements* (standard market practice).

### 2.4 Prospectus Requirements

**Holding:** Prospectus must contain all material information that a reasonable investor would consider important in making an investment decision. § 10(a) specifies required disclosures: issuer business, risk factors, use of proceeds, capitalization, executive compensation, financial statements (audited), and management discussion & analysis (MD&A).

**Form Requirements Vary by Security Type:**
- Form S-1 (most comprehensive): For most issuers, especially IPOs.
- Form S-3 (abbreviated): For WKSI with float > $75M and trading history.
- Form S-2 (intermediate): Historical issuer, but less liquid.

**Liability for Prospectus Misstatements:**
- § 11: Issuer strictly liable; underwriters and experts (auditors, counsel) liable for negligence.
- § 12(a)(2): Seller liable for oral or written misstatements in sales literature; purchaser has rescission right.

**Authority:** *Securities Act § 10* (prospectus content); *SEC Regulations C and S-K* (specific disclosures); *Form S-1, S-3 Instructions*.

### 2.5 Regulation A and Reg A+ (Mini-IPO)

**Holding:** Regulation A permits issuers to offer up to $75 million of securities (Reg A+, post-2015) without full Securities Act registration, using streamlined Offering Statement (Form 1-A) and lighter disclosure requirements. Reg A+ has two tiers: Tier 1 ($20M) and Tier 2 ($75M).

**Key Features:**
- Simplified disclosure vs. S-1 (less financial statement detail)
- No state merit review (federal preemption)
- Testing-the-waters permitted: can gauge investor interest before filing
- Investors generally unlimited (can include non-accredited)
- Reg A+ Tier 2: requires audited financials and MD&A

**Restrictions:**
- Cannot be used by investment companies or development-stage companies (limited exceptions)
- State blue-sky filing still required
- Ongoing reporting obligations (annual reports, current event reports)

**Authority:** *Securities Act Regulation A (Rule 251 et seq.)*; *Jumpstart Our Business Startups (JOBS) Act 2012*.

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## 3. Exemptions from Registration

### 3.1 Section 4(a)(2) Private Placement Exemption

**Holding:** § 4(a)(2) exempts "transactions by an issuer not involving any public offering." The exemption focuses on the nature of the transaction (private vs. public) and the characteristics of offerees. Burden is on issuer to prove exemption by preponderance of evidence.

**Offeree Requirements (from case law):**
- Limited number of purchasers (size of offering group)
- Relationship/access to information: purchasers either have access to issuer's information or represent themselves as having such access
- Sophistication: purchasers can be individual investors, but institutional investors often presumed sophisticated
- Manner of offering: quiet, private negotiations; no general advertising or public solicitation

**Key Distinction from Reg D:** § 4(a)(2) is judge-made common law exemption; Regulation D (Rules 504, 506) provides statutory safe harbor with specified conditions.

**Authority:** *Reg. v. Ralston Purina Co.*, **346 U.S. 119** (1953) — established that exemption depends on nature of offerees and their access to information, not size or dollar amount of offering.

### 3.2 Regulation D (Rules 504, 506(b), 506(c)) — Safe Harbor

**Holding:** Regulation D provides non-exclusive safe harbor for § 4(a)(2). Three rules with different ceilings and investor limits:

**Rule 504:** Up to $10 million in 12 months.
- Unlimited accredited and non-accredited investors.
- Minimal disclosure required if Form D filed.
- State coordination (blue-sky state review may apply).

**Rule 506(b) — Traditional Private Placement:**
- Unlimited amount.
- Up to 35 non-accredited investors + unlimited accredited investors.
- Each non-accredited investor must be "sophisticated" (alone or with adviser) and have access to information.
- No advertising or general solicitation permitted.

**Rule 506(c) — Accredited Investor Only:**
- Unlimited amount.
- Only accredited investors.
- General advertising/solicitation permitted (change from 506(b)).
- Must reasonably verify accredited status.

**Accredited Investor Definition:** Individual with $200k+ income (or $300k+ joint) or $1M+ net worth (excluding primary residence); institutional investors; entities owned entirely by accredited investors; directors/officers/employees of issuer.

**Authority:** *Securities Act Regulation D (Rules 504, 505, 506)*; *SEC Rule 506(c) Amendments (2013, JOBS Act)*.

### 3.3 Regulation CF (Crowdfunding)

**Holding:** Regulation Crowdfunding (Rules 100-503) permits issuers to raise up to $5 million in any 12-month period via crowdfunding platforms (registered securities intermediaries) without full registration, using Form C.

**Key Requirements:**
- Limited offering amount: $5M per year (aggregate across all issuers).
- Investor limits: Individual investor capped at $2k/year or 5% of income/net worth (whichever lower) if income < $100k.
- Intermediary role: All investments must flow through registered funding portal; issuer cannot directly solicit.
- Disclosure: Light—Form C requires business description, risk factors, financial statements (if > $1.5M, must be reviewed by accountant).
- Ongoing reporting: Annual reports for 2 years post-offering or until equity is acquired.

**Crowd Dynamics:** Investors pool small amounts via platform; issuer has access to capital without underwriter gatekeepers; investors have fractional ownership with limited liquidity.

**Authority:** *Securities Act Regulation Crowdfunding (Rules 100 et seq.)*; *JOBS Act Title III (2012)*.

### 3.4 Intrastate Offering Exemptions (Rule 147/147A)

**Holding:** Rule 147 exempts offerings made entirely to residents of a single state (intrastate offering). Purposes: avoid interstate commerce trigger under § 5; reliance on state blue-sky regulation. Rule 147A (post-2016 amendments) provides slightly relaxed requirements.

**Rule 147 Conditions:**
- Issuer: Incorporated/organized in state; principal business operations in state; at least 80% of assets located in state; at least 80% of revenues from state.
- Offerees: All residents of state of incorporation (domicile tested at time of offer and sale).
- Purchasers: Must obtain representations re: residency; cannot be offered to non-residents.
- Resale: 6-month hold period; cannot resell to non-residents without registration or exemption.

**Rule 147A (2016 amendments):** Less stringent residence testing; NSMIA preempts state law; integration analysis applies.

**Limitations:** Narrow exemption; any offer to single non-resident defeats exemption for entire offering; difficult to police resales.

**Authority:** *Securities Act Rule 147 (intrastate offering)*; *Securities Act Rule 147A (amended 2016)*.

### 3.5 Rule 144 Resale of Restricted/Control Securities

**Holding:** Rule 144 is a non-exclusive safe harbor for resale of restricted securities (acquired in non-public offering) or control securities (held by affiliates, i.e., directors, officers, >10% shareholders). Compliance with Rule 144 removes the investment letter/legend requirement.

**Holding Period:**
- Restricted securities: 6-month hold-period (non-reporting company) or 6 months (reporting company, if Form 10-K filed for at least 1 year).
- Post-2008 amendments: uniform 6-month minimum for reporting companies.

**Volume and Manner-of-Sale Restrictions:**
- Volume limit: During any 3-month period, amount sold cannot exceed greater of 1% of outstanding shares of same class or average weekly trading volume for 4 weeks preceding sale.
- Manner of sale: Ordinary brokerage transactions; broker cannot have solicited orders.
- Brokers' transactions exemption: Sales by brokers on behalf of non-affiliates without solicitation may not be subject to volume limits.

**Adequate Information Requirement:**
- Public companies: SEC filings satisfy requirement (no additional disclosure needed).
- Non-public companies: Issuer must make available balance sheet (not more than 120 days old), income statement/cash flow (not more than 120 days), and business description.

**Authority:** *Securities Act Rule 144* (resale of restricted/control securities).

### 3.6 Rule 144A Institutional Resale

**Holding:** Rule 144A exempts resales of restricted securities to "qualified institutional buyers" (QIBs) from registration and holding period restrictions. Creates liquid secondary market for institutional investors without public company disclosure burden.

**Qualified Institutional Buyer (QIB) Definition:** Institutional investor (insurance companies, investment funds, banks) managing/investing $100M+ in securities. Individual QIBs: those managing portfolio worth $100M+. Banks: $100M+ in investments; brokers/dealers: $25M+ in principal and 2-year SEC registration.

**Key Advantages:**
- No Rule 144 holding period restrictions.
- No Rule 144 volume limits.
- No Rule 144 manner-of-sale requirements.
- Rule 144A securities remain restricted (cannot be sold to non-QIBs without registration or exemption); legend remains.

**Use Cases:** Private equity firms, hedge funds, and institutional investors buying and selling late-stage company equity, convertible notes, and non-registered securities.

**Authority:** *Securities Act Rule 144A* (institutional resale).

### 3.7 Regulation S — Offshore Transactions

**Holding:** Regulation S exempts offers and sales of securities to offshore investors (outside the U.S.) from Securities Act registration. No registration required if transaction satisfies conditions of Reg S, even if U.S.-resident investors eventually purchase.

**Key Conditions:**
- Offering: Made to non-U.S. persons in offshore transactions, typically by non-U.S. persons or U.S. issuers with sales by non-U.S. intermediaries.
- Resale: Restricted securities must bear legend prohibiting resale to U.S. persons for specified distribution compliance period (typically 40 days to 2 years).
- Distribution compliance: Issuer must have reasonable belief that purchaser is acquiring for account of non-U.S. person; pricing and selling restrictions apply.

**Integration Risk:** Reg S offerings may be integrated with domestic offerings; if deemed single offering, exemptions may fail.

**Authority:** *Securities Act Regulation S (Rules 901 et seq.)*.

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## 4. Securities Exchange Act of 1934 — Periodic Disclosure & Trading

### 4.1 Section 12 Registration of Securities and Exchange Act Reporting

**Holding:** § 12(b) requires issuers with securities traded on national securities exchange to register class of securities with the SEC. § 12(g) requires issuers with $10M+ in assets and 500+ shareholders of record to register. Once registered, issuer becomes "reporting company" subject to ongoing periodic disclosure (10-K, 10-Q, 8-K) and proxy rules.

**Reporting Obligations:**
- Form 10-K (annual report): Full financial statements (audited), MD&A, risk factors, executive compensation, controls assessment (post-Sarbanes-Oxley § 404).
- Form 10-Q (quarterly report): Unaudited interim financial statements, MD&A; filed within 45 days of quarter-end (accelerated filers: 40 days).
- Form 8-K (current events report): Material events (acquisitions, bankruptcy, executive changes, etc.); filed within 4 business days of event.

**Regulation FD (Fair Disclosure):** Non-selective disclosure required. Material non-public information disclosed to investors/analysts must be simultaneously disclosed to public via SEC filing or broadly-disseminated news.

**Authority:** *Securities Exchange Act §§ 12, 13*; *SEC Rules 10b-5, 13a-11* (periodic reporting).

### 4.2 Periodic Reports (10-K, 10-Q, 8-K) and Regulation FD

**Holding:** SEC rules require detailed disclosure in periodic reports and impose strict timeliness. Regulation FD ensures material information reaches all investors simultaneously, preventing selective disclosure to favored analysts or large shareholders.

**Form 10-K Requirements:**
- Business description (historical development, segments, employees)
- Risk factors (specific forward-looking risks; not generic)
- Financial statements (Consolidated balance sheet, income statement, cash flow statement, statements of stockholders' equity)
- Auditor opinion letter (included in Item 8)
- Management discussion & analysis (MD&A): detailed explanation of financial results, trends, capital resources, liquidity

**Form 10-Q Requirements:**
- Condensed consolidated financial statements (unaudited)
- MD&A for quarter-to-date and year-to-date periods
- Disclosure of material changes
- No auditor opinion (unlike 10-K)

**Form 8-K Triggering Events:**
- Bankruptcy or receivership
- Director/Officer resignation, election, or compensatory arrangements
- Acquisition/disposal of assets
- Bankruptcy/insolvency (Item 1.03)
- Change in underwriter
- Costs of material proceedings
- New accounting standard or auditor change
- Shell company status

**Regulation FD (Item 5.02 & 5.03):**
- Company cannot disclose material non-public information selectively
- Simultaneous or prompt disclosure to public required
- Permitted disclosures: confidential disclosures to attorneys, accountants, lenders (under confidentiality agreements); internal discussions; routine disclosures to customer/supplier with MNPI

**Authority:** *Securities Exchange Act Regulation 13A (periodic reports)*; *SEC Form 10-K, 10-Q, 8-K instructions*; *Regulation FD (Rule 100A-104)*.

### 4.3 Proxy Rules and Section 14 (Schedule 14A)

**Holding:** § 14 of the Exchange Act requires disclosure in proxy statements (Schedule 14A) if shareholder vote is solicited. Proxy statement must contain all material facts necessary for shareholder to make informed decision on matters to be voted (board elections, charter amendments, mergers, executive compensation).

**Proxy Statement Content Requirements:**
- Executive compensation (Item 11): Named executive officers' salary, bonus, equity awards, pension, perquisites (detailed in CD&A section).
- Say-on-Pay vote: Shareholders vote annually on executive compensation (non-binding, but company must respond if rejected).
- Board composition & independence (Item 10): Director biographies, independence analysis, committee composition, risk oversight.
- Audit committee financial expert (post-Sarbanes-Oxley): Must disclose if audit committee includes financial expert; if not, explain.
- Board's role in risk management: Disclosure of how board oversees enterprise risk.

**Proxy Contests:** Dissident shareholder group can solicit proxies if seeking board seats or other control matters. Dissident must file Schedule 14A (or DEF 14A for company response); costs are significant.

**Authority:** *Securities Exchange Act § 14(a)* and *Rule 14a-3 et seq.*; *Schedule 14A (Form DEF 14A)*; *SEC Proxy Rules*.

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## 5. Antifraud Provisions (Securities Act § 12(a)(2), Exchange Act § 10(b) and Rule 10b-5)

### 5.1 Section 12(a)(2) — Antifraud Liability in Sales Literature

**Holding:** § 12(a)(2) imposes strict liability on sellers for material misstatements or omissions in sales literature (prospectuses, research reports, offering materials). Applies to both oral and written misstatements. Purchaser has rescission right (return securities for full refund) or damages (difference between purchase price and actual value).

**Seller Definition:** Any person who solicits or offers securities for sale. Includes underwriters, broker-dealers, issuers; excludes bona fide brokers (if no interest in transaction and no markup).

**Damages:** Purchaser can recover rescission (money plus interest) or damages (purchase price less selling price at time suit brought). Defendant can escape liability only by proving purchaser knew of untruth or omission.

**Authority:** *Securities Act § 12(a)(2)* (Sales literature liability).

### 5.2 Rule 10b-5 — General Antifraud Rule

**Holding:** Rule 10b-5 (promulgated under Exchange Act § 10(b)) prohibits: (a) employment of manipulative and deceptive devices; (b) making untrue statements of material fact or omitting material facts; (c) engaging in fraudulent/deceptive practices in connection with securities transactions. Applies to any person (not just issuers or market professionals) in connection with purchase or sale of securities.

**Elements of 10b-5 Violation:**
1. Material misstatement or omission
2. Scienter (intent to deceive, manipulate, defraud; or at minimum recklessness per *Hochfelder*)
3. Connection with purchase or sale of security
4. Reliance (plaintiff relied on misstatement; may be presumed from public statements)
5. Economic loss & causation (loss caused by fraudulent conduct)

**Material Fact:** Reasonable investor would consider fact important in investment decision; TSC analysis: substantial likelihood of altering decision.

**Scienter:** Knowledge or recklessness; negligence alone insufficient. Post-*Hochfelder* (1976), scienter requires intent or severe recklessness.

**Authority:** *Securities Exchange Act Rule 10b-5*; *SEC v. W.J. Howey Co.*, **328 U.S. 293** (1946) (foundational); *Ernst & Ernst v. Hochfelder*, **425 U.S. 185** (1976) (scienter requirement).

### 5.3 Insider Trading Under Rule 10b-5 — Classical Theory & Misappropriation Theory

**Holding:** Insider trading violates Rule 10b-5 under two theories:

**Classical Insider Trading:** Officer, director, or employee (insider) who trades securities of issuer while in possession of material non-public information owes fiduciary duty to shareholders. Trading while breaching that duty (without disclosure or abstention) is fraudulent.

**Misappropriation Theory:** Person who obtains MNPI through fiduciary relationship with information source (not necessarily issuer) and trades for own account breaches duty to information source. Applies to tippees and misappropriated information (e.g., journalist trading on confidential source's tips).

**Tippee Liability:** Tippee is liable for insider trading if: (1) insider breached duty by tipping; (2) tippee knew of breach; (3) insider received benefit from tip (reputational, pecuniary, or tangible). No requirement that tippee know exact identity of insider or breach details.

**Authority:** *Dirks v. SEC*, **463 U.S. 646** (1983) — tippee liability standard; *United States v. O'Brien*, **391 U.S. 680** (1968) — insider liability; *SEC v. Otsuka*, **465 U.S. 148** (2006) — misappropriation theory refined.

### 5.4 Private Rights of Action & Statutes of Limitations

**Holding:** Private investors can sue for 10b-5 violations. Implied private right of action recognized in *Borak* (1964) and confirmed in *Superintendent v. Bankers Multin. Ins. Co.* (1999). Plaintiffs must establish scienter, materiality, reliance, and damages.

**Statute of Limitations:** Discovery Rule (2005 Sarbanes-Oxley amendments): Claim accrues when plaintiff discovered (or should have discovered with reasonable diligence) facts constituting violation. Absolute bar: 5 years after violation. Claims before/after bar within statute of repose.

**Causation:** Reliance (investor traded in reliance on misstatement) or fraud-on-the-market (public statements, investor relied on market prices formed by those statements). Presumed reliance in efficient markets.

**Authority:** *J.I. Case Co. v. Borak*, **377 U.S. 426** (1964) (implied private right of action); *Stoneridge Invest. Partners v. Scientific-Atlanta*, **552 U.S. 148** (2008) (reliance requirements); *Sarbanes-Oxley Act § 804* (statute of limitations).

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## 6. Insider Trading & Fiduciary Duties

### 6.1 Section 16 Short-Swing Profit Disgorgeement

**Holding:** § 16(b) requires insiders (directors, officers, >10% shareholders, entities controlled by insiders) to disgorge profits from purchases and sales (or sales and purchases) of issuer securities within any 6-month period. Recovery is strict—no scienter or realization of profit required; mechanical disgorgement to issuer.

**Mechanics:** Trader buys and sells within 6 months = any gain is recoverable by issuer. Sequence irrelevant (purchase then sale, or sale then purchase/repurchase). Match-up rule: match lowest purchase to highest sale within 6-month window to maximize disgorgement.

**Exemptions & Exceptions:**
- Officer/director selling within 6 months may be exempt if no profit-seeking intent (e.g., involuntary sales, stock pledges, mergers).
- Smaller acquisitions (< $2M value) may qualify for exemption.
- Margin account transactions have special rules.

**SEC Form 4 Filing:** Insiders must file Forms 4 within 2 business days of transaction; SEC and issuer enforce 16(b) disgorgeement (private right of action in issuer's shareholders).

**Authority:** *Securities Exchange Act § 16(b)* (short-swing profits).

### 6.2 Tender Offer Rules and Section 14(e) — Fraudulent Tender Offer Disclosure

**Holding:** § 14(e) prohibits fraudulent, deceptive, or manipulative conduct in connection with tender offers. Bidder must disclose all material facts in tender offer documents (Schedule TO) filed with SEC. Same antifraud standard as Rule 10b-5 (materiality, scienter, reliance).

**Tender Offer Definition:** Offer to acquire 5%+ of issuer's securities. Regulation 14E requires: (1) Disclosure of material facts; (2) 20-day minimum offeror period (post-SEC amendments); (3) Pro-rata acceptance if oversubscribed; (4) Withdrawal rights.

**Target Company Response:** Target board must respond to tender offer with Schedule 14D-9; advise shareholders whether to accept/reject. Board has fiduciary duty to shareholders (Revlon duties) to maximize value or reject hostile bid.

**Authority:** *Securities Exchange Act § 14(e)* (tender offer fraud); *Regulation 14E (tender offer rules)*; *SEC v. Cavanagh*, **445 U.S. 389** (1980) (antifraud principles).

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## 7. Criminal Liability & Enforcement

### 7.1 Criminal Provisions of Securities Laws

**Holding:** Both Securities Act and Exchange Act include criminal provisions. Violators face imprisonment (up to 20 years for securities fraud) and fines (up to $5M+ for individuals and corporations). SEC refers enforcement to DOJ; criminal prosecution pursued for intentional violations and market manipulation.

**Scienter Requirement:** Criminal violations require intentional conduct or knowing violation. Higher bar than civil scienter (knowledge, not recklessness alone).

**Common Criminal Charges:**
- § 32(a) of Securities Act (fraud in connection with securities registration): 5 years + $5k fine.
- § 32(a) of Exchange Act (fraud in connection with purchase/sale): 20 years + $5M fine (post-Sarbanes-Oxley).
- Conspiracy to commit securities fraud: 5 years.
- Money laundering (if proceeds from securities fraud).

**Authority:** *Securities Act § 32*; *Securities Exchange Act § 32*; *Sarbanes-Oxley Act § 906* (certification liability).

### 7.2 SEC Enforcement and Remedies

**Holding:** SEC has broad enforcement authority: civil injunctions, disgorgement of ill-gotten gains, civil monetary penalties, cease-and-desist orders, and officer-and-director bars. Settlements common; SEC brings 300-500 enforcement actions annually.

**Disgorgement:** Recovery of profits obtained through violation; includes "ill-gotten gains" traceable to violation. Interest added post-disgorgement. Harsh remedy; applied in addition to penalties.

**Penalties:** Ceases civil penalties (CMP) typically 3x gain or 1x loss (whichever greater); enhanced for repeat offenders. Can reach tens of millions for egregious violations.

**Officer/Director Bars:** SEC can bar individual from serving as officer/director of public company. Permanent bar in fraud cases; temporary bars for lesser violations.

**Authority:** *Securities Exchange Act § 21(e)* (SEC enforcement); *Securities Act § 20(b)* (SEC power to issue cease-and-desist orders).

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