University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

181

Pages:

2
Author:

bratrochanter

The passage examines how the Securities Act of 1933 applies to nonpublic corporations like L'Malle LLC when issuing investment products such as Profit Participation Plans (PPPs) and reviews various legal obligations and exemptions for companies raising capital and communicating with investors. Here’s a breakdown of the relevant points for L'Malle's planned PPP issuance and subsequent public offering: 1. Are the PPPs Securities?   Under the Securities Act of 1933, the PPPs are likely considered securities if they meet the "investment contract" criteria of the Howey Test, which requires: o An investment of money, o In a common enterprise, o With expectations of profits from the efforts of others. Since L'Malle will manage all aspects of the project, and PPP owners will passively receive profits, this structure likely qualifies as a security, making the PPPs subject to securities regulations. 2. Possible Registration Exemptions   L'Malle could explore exemptions under Regulation D, particularly Rule 506: o Rule 506(b): Allows private placements to accredited investors without general solicitation. o Rule 506(c): Allows general solicitation but restricts sales to verified accredited investors. Given L'Malle’s investors include institutions and high-net-worth individuals, Rule 506 may offer a suitable path, avoiding the full registration process if investors meet accredited status requirements. 3. Regulation A Offering for PPPs  Should L'Malle choose a Regulation A offering, it would need to comply with specific disclosures and be cautious during investor presentations to avoid misstatements. Liability under Section 12(a)(2) of the 1933 Act and Rule 10b-5 could arise from any misleading or omitted information. As CEO, accurate, transparent responses are critical to avoid securities fraud claims. 4. Public Offering of Common Shares  If L'Malle moves forward with a public offering under the 1933 Act: o Communications During Filing: L'Malle may issue regular updates but must avoid "gunjumping," or making overly promotional statements during the pre-filing and waiting periods.  A roadshow is permissible under SEC guidelines, with limitations on promotional content, as the registration statement is still under SEC review.  Preliminary Prospectus: Can be shared online with FAQs about the offering; however, speculative language should be avoided. Post-Effective Period:  Once the SEC declares the registration effective, L'Malle may confirm sales and direct investors to its corporate site for more information, provided all materials adhere to SEC communication standards, avoiding exaggerated claims.  o 5. Legal Communication Rules for Ongoing Shareholder Relations  After the public offering, L'Malle may continue issuing earnings reports and other communications in line with SEC disclosure requirements, keeping investors informed without violating anti-fraud provisions. In summary, L'Malle’s PPPs likely qualify as securities. To minimize liabilities, L'Malle should consider using a Regulation D exemption or carefully follow Regulation A offering requirements. For the planned public offering, adhering to SEC communication rules is essential to legally manage investor interactions during each stage of the offering.