Part 10- Corporations, Chapter 45: Securities Regulation, Doc 2

1. Definition of Investment Contracts   The Howey Test determines if a financial arrangement qualifies as an investment contract, meaning: o An investment of money in a common enterprise, o With an expectation of profit derived from the efforts of others. In SEC v. Edwards, the Supreme Court ruled that fixed returns, like ETS’s fixed 14% return on payphones, do not exclude a scheme from being an investment contract. This broad interpretation aims to protect investors from fraud by covering fixed and variable returns under the securities laws. 2. Registration Requirements under the Securities Act of 1933   Primary Purpose: The Act mandates issuers to disclose comprehensive information to enable informed investment decisions. Registration Components: o Registration Statement: Filed with the SEC, detailing the issuer’s business, management, risks, and audited financials. o Prospectus: A document summarizing key registration information for investors, required at or before the point of sale. 3. Communication Rules in the Offering Periods   Section 5 of the 1933 Act establishes three key periods with strict communication rules: o Pre-filing Period: No public offers or sales of securities. Limited safe harbor rules allow factual disclosures without reference to the upcoming offer. o Waiting Period: After filing, offers are allowed but not sales. Issuers may use a preliminary prospectus or limited ads (like tombstone ads) without discussing pricing or underwriting. o Post-effective Period: Sales are allowed once the SEC declares the statement effective. The final prospectus, containing full disclosure including pricing, must be delivered to investors. Free-Writing Prospectus: For well-known seasoned issuers, this can be used even in the waiting period, allowing less formal communication, provided it is consistent with the registration statement. 4. Issuer and Underwriter Responsibilities  Issuers often partner with underwriters for securities sales. The primary forms of underwriting include: o Firm Commitment: Underwriters buy securities directly from the issuer to sell to the public, bearing the market risk. o Best Efforts: Underwriters act as agents, attempting to sell but without guaranteeing sales. o Standby Underwriting: Used in rights offerings, where underwriters agree to purchase unsold shares, typically compensated with options or warrants. 5. Internet and Electronic Communication in Securities Offerings  The SEC allows prospectuses to be posted on the issuer's or SEC’s website, a significant shift from physical distribution. Issuers can communicate with potential investors using digital platforms, provided they comply with SEC rules regarding the timing, content, and manner of such communications. 6. Timing and Safe Harbor Provisions  The SEC provides certain safe harbors for issuers to continue regular business communications even during restricted periods, as long as they do not promote the upcoming offering. For example: o Rule 168 allows public companies to release factual business information and forward-looking statements if consistent with prior communications. o Rule 169 provides similar guidelines for nonpublic companies. For L'Malle LLC, the Act's definitions and provisions mean the Profit Participation Plans (PPPs) are likely investment contracts due to investors’ reliance on L'Malle’s management for profits. Therefore, L'Malle must follow registration or exemption protocols, such as Regulation D exemptions, for selling PPPs to private investors. Additionally, should L'Malle pursue a public offering, strict adherence to Section 5 guidelines will be essential to comply with disclosure and communication rules in the registration process.