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Securities Law: An Overview (Series: Securities Law Made Simple (Not Really))

Stocks and bonds are easily recognizable as securities, but did you know that promissory notes may also be securities? So can certain joint venture interests and many other types of investment contracts. Then there are cryptocurrency altcoins, which are sometimes securities and sometimes not. How do you identify a security? What are some of the requirements related to offering and selling securities? How do they differ between private and public companies? What happens if you fail to comply with securities laws? How has legislation like the JOBS Act, the FAST Act changed the way in which companies offer and sell their securities? In this webinar our expert panel provides you with a high-level overview of the federal securities laws as well as tangible examples and practical advice in answer to these and many more questions.

To listen to this webinar on-demand, go to: https://www.financialpoise.com/financial-poise-webinars/securities-law-an-overview-2020/

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Securities Law: An Overview (Series: Securities Law Made Simple (Not Really))

  1. 1. 1
  2. 2. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  3. 3. 3 Thank You To Our Sponsor
  4. 4. Disclaimer The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 5
  5. 5. Meet the Faculty MODERATOR: Vanessa Schoenthaler - Sugar Felsenthal Grais & Helsinger LLP PANELISTS: Alissa Parisi - K & L Gates LLP Julia Vax - Arnold & Porter Kaye Scholer LLP Craig Mordock - Sheppard, Mullin, Richter & Hampton LLP 6
  6. 6. About This Webinar Securities Law: An Overview Stocks and bonds are easily recognizable as securities, but did you know that promissory notes may also be securities? So can certain joint venture interests and many other types of investment contracts. Then there are cryptocurrency altcoins, which are sometimes securities and sometimes not. How do you identify a security? What are some of the requirements related to offering and selling securities? How do they differ between private and public companies? What happens if you fail to comply with securities laws? How has legislation like the JOBS Act, the FAST Act changed the way in which companies offer and sell their securities? In this webinar our expert panel provides you with a high-level overview of the federal securities laws as well as tangible examples and practical advice in answer to these and many more questions. 7
  7. 7. About This Series Securities Law Made Simple (Not Really) The federal securities laws, made up of a interwoven collection of Congressional statutes, rules and regulations promulgated by the Securities and Exchange Commission and federal judicial precedent, play a ubiquitous role throughout a company’s life-cycle, relevant from the first issuance of founder shares at organization, to the use of equity compensation to reward and incentivize directors, employees and consultants, to offerings of equity and debt in corporate finance transactions, to initial, secondary and alternative public offerings, in mergers and acquisitions, strategic transactions and beyond. This webinar series of leading securities law experts discusses both the fundamentals of the federal securities laws and the latest developments in this ever-evolving area of law. Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without much background in these areas, yet is of primary value to attorneys, accountants, and other seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 8
  8. 8. Episodes in this Series #1: Securities Law: An Overview Premiere date: 5/14/20 #2: Private Offering Exemptions and Private Placements Premiere date: 6/4/20 #3: Public Company Reporting Premiere date: 7/16/20 9
  9. 9. Episode #1 Securities Law: An Overview 10
  10. 10. Background on Securities Law  The regulation of securities in the United States is governed by both state and federal legislation.  Sometimes the federal laws preempt state laws.  Sometimes you need to comply with certain aspects of both.  The first federal securities laws were enacted as part of President Roosevelt’s New Deal legislation following the 1929 stock market crash (the market lost a staggering 89% of its value) and an investigation into stock market manipulation.  Before the federal securities laws were enacted, beginning around 1911, most of the states had enacted their own securities laws. 11
  11. 11. What is a Security?  The term “security” is defined in §2(a)(1) of the Securities Act and §3(a)(10) of the Exchange Act in virtually the same way:  “[A]ny note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.” Sec. 2(a) Securities Act of 1933. 12
  12. 12. What is a Security?  On the federal level, the definition of a “security” is covered by the Securities Act of 1933.  It includes obvious things like “stocks” and “bonds”.  It also includes not so obvious things that may require interpretation like “evidence of indebtedness” and “investment contracts”  This often leads to questions like is a promissory note a security?  And what exactly is as an investment contract? 13
  13. 13. What is a Security?  In the case of promissory notes: there are certain types of notes that are exempt or have been found by the courts not fall within the definition of a security, for example:  Notes with a maturity of nine months or less;  Notes secured by a mortgage;  Notes secured by a lien on a business’s assets; or  Notes evidencing a loan by a commercial bank for current operations. 14
  14. 14. What is a Security?  If a given promissory note is not included among the types of notes that are excluded from the definition of a security, there is a four-factor test that is used to analyze whether the note should be considered a security. SHOULD A NOTE BE CONSIDERED A SECURITY? FOUR FACTOR TEST: 1. Motivation:  Is the seller’s purpose to raise money for general business use or to finance substantial investments?  Is the buyer interested primarily in the profit the note is expected to generate, including interest? 15
  15. 15. What is a Security? 2. Plan of Distribution:  Does the plan of distribution for the note resemble the plan of distribution of a security? 3. Reasonable Expectations:  Would the investing public reasonably expect that the note is a security? 4. Regulatory Scheme:  Is there a regulatory scheme that protects the investor other than the securities laws (e.g., Federal Deposit Insurance)? 16
  16. 16. What is a Security?  There is also a four-factor test used to analyze whether a contract is an investment contract. This test was articulated in SEC v. W.J. Howey Co., 328 U.S. 293 (1946):  Investment of Money  Common Enterprise  Expectation of Profits  Substantially from the Efforts of Others 17
  17. 17. What is a Security?  Remember, securities are regulated on both the federal and state levels.  There are a number of states, California being the largest, that use a slightly different test to analyze whether something is a security, so it is possible that while you may not have a security for purposes of the federal securities laws, you might nevertheless have one for purposes of state securities laws.  Accordingly, if you are offering and selling an instrument that might fall within the definition of a security you will need to either register the instrument or ensure that there is an exemption from registration available. 18
  18. 18. Which Laws Govern the Offer and Sale of Securities?  Federal and state laws, rules, regulations and common law.  The first federal securities laws were enacted following the 1929 stock market crash.  The Securities Act of 1933, as amended (Securities Act), regulates offers and sales of securities, generally requiring that all securities either be registered or exempt from registration before being offered and sold.  The Securities Exchange Act of 1934, as amended (Exchange Act), created the Securities and Exchange Commission (SEC) and regulates an issuer’s information disclosure requirements, as well as things like securities exchanges, trading platforms and intermediaries, like broker-dealers. 19
  19. 19. Who is Responsible for Administering & Enforcing the Securities Law?  The SEC is the agency primarily responsible for administering the federal securities laws.  The SEC has an Enforcement Division responsible for prosecuting civil violations of the federal securities laws.  The Department of Justice (DOJ) US Attorneys’ Offices are responsible for prosecuting criminal violations of the federal securities laws.  Each state also has a regulatory body responsible for administrating and enforcing that state’s securities laws. 20
  20. 20. What Does the Registration Process Entail?  The most commonly-known registration process is the initial public offering (IPO), although there are many different types of registration requirements.  Registering securities for sale in an IPO entails:  Preparing a registration statement and filing it with the SEC.  Undergoing a comment and review process.  Simultaneously applying for an exchange listing  Once an IPO registration statement has been declared effective by the SEC, there are ongoing disclosure and reporting requirements under the Exchange Act. 21
  21. 21. What are Some of the Available Exemptions from Registration?  Most federal exemptions from registration requirements fall into two categories:  Exempt securities; and  Exempt transactions.  State-level registration requirements may also apply, unless preempted by federal law:  NSMIA – National Markets Securities Improvement Act – preempts state law for many, but not all, federally-exempt transactions  Watch out for state (“blue sky”) requirements in private placements not covered by NSMIA.  State anti-fraud statutes and notice requirements are still applicable, regardless of preemption. 22
  22. 22. What are Some of the Available Exemptions from Registration?  Federal Exemptions - Common Exempt Securities under the Securities Act:  Government and bank securities – Section 3(a)(2);  Commercial paper – Section 3(a)(3);  Securities issued in bankruptcy – Section 3(a)(7);  Securities issued in exchange with existing security holders – Section 3(a)(9);  Securities issued pursuant to a fairness hearing - Section 3(a)(10); and  Securities offered and sold to persons within a single state – Section 3(a)(11). 23
  23. 23. What are Some of the Available Exemptions from Registration?  Federal Exemptions - Common Exempt Transactions under the Securities Act:  Transactions by an issuer not involving a public offering:  Section 4(a)(2) (and related Regulation D or Regulation S safe harbors)  Rule 701 - employee/service provider equity incentive grants 24
  24. 24. What are Some of the Available Exemptions from Registration?  Federal Exemptions - Common Exempt Transactions under the Securities Act (cont’d):  Transactions by persons other than an issuer, underwriter or dealer:  Section 4(a)(1)  Rule 144  Rule 144A  Section 4(a)(7) – FAST Act 25
  25. 25. How Have the JOBS Act and FAST Act Changed the Securities Law?  Section 4(a)(7)  General Solicitation  Regulation A+  Crowdfunding 26
  26. 26. Failing to Comply With Securities Law  Failure to comply with the securities laws can give rise to liability in a number of different ways, which broadly fall into two categories: Civil Liability and Criminal Liability.  Civil Liability  Investors can bring private civil actions for fraud or inadequate or misleading disclosure;  The SEC can also bring civil enforcement actions for fraud or inadequate or misleading disclosure as well as for things like insider trading (even if you’re a private company; See e.g., the enforcement action against Stiefel Laboratories)  Each of the state level securities regulators has similar authority. 27
  27. 27. Failing to Comply With Securities Law  Remedies generally include things like:  Investors can be awarded damages;  Investors may also have a right of rescission (meaning an issuer would be required to offer to repurchase any securities sold in violation of the securities laws with interest);  The SEC and state securities regulators can seek penalties and fines as well as cease-and-desist orders and injunctions. 28
  28. 28. Failing to Comply With Securities Law  Criminal Liability  The SEC is an administrative agency, so it does not have the authority to prosecute criminal matters.  The SEC can refer matters to the DOJ for investigation and criminal prosecution.  Both the SEC and the DOJ may pursue civil and criminal matters simultaneously. 29
  29. 29. Failing to Comply With Securities Law  Criminal Liability (cont’d)  On the state level, state Attorney Generals’ offices often prosecute violations of the securities laws.  On the state level, securities violations involving Regulation D, Rule 506 offerings are the most commonly pursued enforcement actions. 30
  30. 30. How Do Resale & Secondary Markets Operate?  Private resale exemptions:  Rule 144  Rule 144A  Section 4(a)(1 ½)  Section 4(a)(7) 31
  31. 31. How Do Resale & Secondary Markets Operate?  Secondary market sales:  Examples for registered securities  NASDAQ or NYSE  Examples for unregistered securities:  SharesPost  EquityZen  ForgeGlobal (formerly Equidate) 32
  32. 32. What Happens Once a Company Sells Securities, Whether to Friends and Family or to Other Investors?  Securities issued in an unregistered offering are “restricted securities.”  For a transfer or resale to take place a restricted security must either be registered or exempt from the registration requirements of the Securities Act.  Resales without registration can take place in both privately negotiated transactions and publicly using Rule 144.  Rule 144 generally allows non-affiliate public resales of a private company’s restricted securities following a one-year holding period.  Contractual provisions may also effect transfers or resales, for example, the original purchase agreement or issuance award may be made subject to a right of first refusal. 33
  33. 33. About the Faculty 34
  34. 34. Vanessa Schoenthaler - vschoenthaler@sfgh.com Vanessa Schoenthaler is a partner in the New York office of Sugar Felsenthal Grais & Helsinger. She focuses her practice on corporate and securities matters with an emphasis on private and public securities transactions, compliance and disclosure obligations and corporate governance matters. Her clients rely on her deep experience navigating the complexities of both the public and private securities regulatory environment. Vanessa's corporate finance experience ranges from advising investors and development stage companies in early round financings to representing issuers and intermediaries in registered and exempt offerings of equity and debt securities. She has worked with foreign and domestic issuers on matters such as periodic and ongoing disclosure obligations, corporate governance practices, exchange listing standards, joint ventures, equity compensation arrangements, ESOP transactions and mergers, acquisitions and dispositions. Vanessa counsels foreign and domestic sponsors, private funds and investment managers with regard to formation and operation, investment adviser registration, and periodic and ongoing disclosure obligations. She also guides her clients in structuring investments, compliance with regulatory requirements (including under Section 13, Section 16 and Rule 144) and addressing insider trading issues. . 35 About The Faculty
  35. 35. Alissa Parisi - alissa.parisi@klgates.com Alissa Parisi is a partner in K&L Gates’s Corporate/M&A practice group and resides in the Washington, DC office. Ms. Parisi advises clients on a full range of corporate, securities, governance and compliance matters. Ms. Parisi has significant experience in advising boards and executive management on complex business and operational matters, including in the areas of risk assessment, implementation of governance initiatives and alignment of corporate strategy to achieve corporate goals. She also acts as corporate counsel for companies, advising on a host of general corporate matters, including fiduciary duties, management transitions, relationships with shareholders and effective approaches to the changing regulatory environment. Ms. Parisi advises companies on compliance matters relating to the SEC, NYSE, Nasdaq, state regulators and other authorities. Her compliance experience includes preparing of SEC reports, advising with respect to the timing and substance of disclosure of material events and counseling with respect to shareholder meetings. Ms. Parisi also represents publicly and privately held entities in merger and acquisition transactions. She has broad experience in representing clients in the structure, negotiation, diligence and documentation of transactions ranging from several million dollars to several billion dollars. Ms. Parisi serves as co-chair of the Women in the Profession Committee and the Associate Development Committee. 36 About The Faculty
  36. 36. About The Faculty Julia Vax - julia.vax@arnoldporter.com Julia Vax focuses her practice on corporate and securities laws in representing emerging growth and public companies, primarily in the life sciences and technology sectors, from formation and early-stage capital raising to publicly traded entities. Ms. Vax has advised clients in the biopharmaceutical, genomics, medical device, diagnostics, Internet and digital media, software, IP telephony, telecommunications and financial services sectors in all aspects of their corporate development and in connection with a broad range of financing and strategic transactions. Ms. Vax has extensive experience in IPOs, Rule 144A transactions, shelf registrations, private placements, including PIPE transactions and venture capital financings, as well as in executive compensation, corporate governance and SEC reporting and compliance for public companies. She has been involved in numerous public and private financing transactions representing companies, investors, underwriters and placement agents. Ms. Vax is a faculty member at the Center for International Legal Studies and has taught US corporate securities laws at the University of Tartu, Estonia, School of Law, as a Visiting Professor in the Fall 2017. 37
  37. 37. About The Faculty Craig Mordock - CMordock@sheppardmullin.com Craig Mordock is a partner at Sheppard Mullin, where he maintains a corporate and securities practice with special on private and public securities offerings, corporate governance, and mergers and acquisitions. His corporate finance experience ranges from representing venture capitalists, institutional investors, and start-up companies in early-stage financings to representing issuers and investment banks in public offerings of equity and debt securities. He advises purchasers and sellers of companies in a variety of industries, including software, communications, semiconductors, life sciences, renewable energy, consumer products, and financial services. Craig has extensive experience representing public companies in connection with disclosure and compliance matters under the Securities Act of 1933 and the Securities Exchange Act of 1934 and provides general corporate and business counseling to several privately held companies. He regularly counsels boards of directors and board committees in connection with their duties under state and federal law as well as their compliance with the rules of self-regulatory organizations such as the New York Stock Exchange and NASDAQ. Craig has been a speaker at numerous conferences on securities and corporate governance matters and has published articles on various topics in these areas. 38
  38. 38. Questions or Comments? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 39
  39. 39. About Financial Poise 40 Financial Poise™ has one mission: to provide reliable plain English business, financial, and legal education to individual investors, entrepreneurs, business owners and executives. Visit us at www.financialpoise.com Our free weekly newsletter, Financial Poise Weekly, updates you on new articles published on our website and Upcoming Webinars you may be interested in. To join our email list, please visit: https://www.financialpoise.com/subscribe/

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