Securities Regulation 
Class Outline
III. THE PUBLIC OFFERING - SECURITIES ACT OF 1933
      D. Gun Jumping
            3. Posteffective Period
 

[last updated 10 Sep 01]

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  • Post-effective period
    • sales and deliveries no longer prohibited
    • prohibition of "prospectus" [§5(b)(1)]
      • unless meets requirements of § 10 
        • distinguish § 10(a) and § 10(b) prospectus
        • "preliminary" versus "summary" propsectus
      • meaning of prospectus [§ 2(a)(10)]
        • includes "confirmation"
        • "free writing" permitted [§ 2(a)(10)]  if accompanied by § 10(a) prospectus
    • prospectus delivery requirements [§ 5(b)(2)]
      • no delivery, unless accompanied or preceded by § 10(a) prospectus
      • duration of delivery requirement [§ 4(1)]
        • issuer [§ 4(1)] - indefinite
        • participant's allotment [§ 4(3)(C)] - so long as offering unsold allotment
        • dealers (securities firms / whether or not participating) [§ 4(3)(B)]
        • exemption for brokers [§ 4(4)] - unsolicited customer orders
    • Duty to correct false or misleading prospectus
      • SEC v. Manor Nursing Centers
      • relationship to § 11 liability provisions
     
    Gun Jumping
    (controlled disclosure during registration)
    Pre-filing period
    •  no sales [§ 5(a)(1)]
    •  no deliveries [§ 5(a)(2)]
    •  no offers [§ 5(c)]
    Waiting period
    • no sales [§ 5(a)(1)]
    • no deliveries [§ 5(a)(2)]
    • no prospectus, unless § 10 OK [§5(b)(1)]
    • no offers, if §8 proceeding [§ 5(c)]
    Post-effective period
    • no prospectus, unless § 10 OK [§5(b)(1)]
    • no delivery w/o § 10(a) prospectus [§5(b)(2)]
    • no offers, if §8 stop order [§ 5(c)]
    Filing Date
    Effective Date

    PROBLEMS

    Omega goes public with a registration statement that becomes effective June 1 - 2 million common at an IPO price of $15.

    1. Trout Brothers sends e-mail confirmations to all its customers who had made offers during the waiting period and had agreed to receive electronic disclosures.  Before sending these confirmation, each customer had gotten an e-mail attaching a preliminary prospectus (in .pdf form). Several days after sending the e-mail confirmations, Trout Brothers sends an e-mail  message attaching a final prospectus (in .pdf form) with a notice that the customer is beneficial owner and the stock is held in "street name" by Trout Brothers.
    a.  Are the e-mail messages and attachments an adequate substitute for the paper versions?  See SEC Interpretive Release no. 7856, "Use of Electronic Media".

    b.  Did sending an e-mail confirmation, without an accompanying final prospectus, violate the gun-jumping rules?  Was the preliminary prospectus enough?  See Securities Act § 5(b)(1)    § 2(a)(10)  Rule 430    Securities Act § 10(a), (b).

    c.  Would there be any problem if Trout Brothers had never sent any preliminary prospectuses, but simply confirmed (with an attached final prospectus) immediately when the registration statement became effective?  Release 4968

    2. Joe, who bought from Trout Brothers in the sequence just described, wishes he hadn't.  The price has dipped to $11 and he wants his money back.  Advise Joe.  See Securities Act § 12(a)(1)

    3. In addition to confirming purchases by customers who stated they were ready to buy, Trout Brothers sends many of its customers an e-mail message which has a link to the Omega final prospectus, along with links to websites containing financial analyst reports stating that Omega can expect earnings of $2.50 per share next year and a 25-50% increase in share price over the next 6 months.  These estimates and projections were not in the registration statement.

    a.  Is the hyperlinking an acceptable way to send the prospectus?  See  Securities Act § 5(b)(1)    § 2(a)(10)   § 10(a), (b).  SEC Interpretive Release no. 7856, "Use of Electronic Media".

    b.  Is linking to the analyst reports acceptable?  See  Securities Act § 5(b)(1)    § 2(a)(10)   Securities Act § 5(b)(1) SEC Interpretive Release no. 7856, "Use of Electronic Media".

    4. McMahon & White, an underwriter in the Omega offering, sold its allotment on June 5.  On June 10 Tracie, a M&W broker, suggests that Oscar buy Omega on the market.  Oscar does through M&W.  Must M&W send a prospectus when it confirms the sale?  See Securities Act § 4(3)   Rule 174

    5. Brad, a Trout Brothers broker, mails a preliminary prospectus during waiting period and after effectiveness a price term sheet to Sally when she receives confirmation of her purchase, but Sally says she never got it.

    a.  Can Sally rescind?   See Securities Act § 5(b)(1)   § 10(a), (b). § 2(a)(10)   Rule 434

    b.  Would it make any difference if Trout Brothers had sent an e-mail message attaching these items of information, but Sally claimed she had not received the e-mail?   See SEC Interpretive Release no. 7856, "Use of Electronic Media".

    6. Tom, a self-reliant investor, has Brad buy 300 Omega shares on the market through Nasdaq. Trout Brothers has not yet sold its allotment.  Must Trout Brothers include a prospectus when it confirms Tom's order?   See Securities Act § 4(3), 4(4)   Rule 174

    7. Trout Brothers learns that not all the McMahon & White brokers have received a preliminary and final prospectus.  What are the implications? See Exchange Act 15c2-8

    8. Manor Nursing Homes makes an "all or nothing" offering for cash.  Underwriters work on a best-efforts basis.  Even though 200,000 or the 450,000 offered shares were never sold, Manor Nursing closes on the offering anyway.  Does it have § 5 liability?

    STATUTORY MATERIALS

    § 5  Prohibitions relating to interstate commerce and the mails

       (a) Sale or delivery after sale of unregistered securities.  Unless a registration statement is in effect as to a security, it shall be unlawful for a person, directly or indirectly--
        (1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or
        (2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.
      (b) Necessity of prospectus meeting requirements of section 10 of this Act It shall be unlawful for any person, directly or indirectly--
        (1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to carry or transmit any prospectus relating to any security with respect to which a registration statement has been filed under this title, unless such prospectus meets the requirements of section 10; or
        (2) to carry or cause to be carried through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale, unless accompanied or preceded by a prospectus that meets the requirements of subsection (a) of section 10.
       (c) Necessity of filing registration statement.  It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under section 8.
    § 2  Definitions
       (10) The term "prospectus" means any prospectus, notice, circular,     advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security; except that (a) a communication sent or given after the effective date of the  registration statement (other than a prospectus permitted under subsection (b)  of section 10 shall not be deemed a prospectus if it is  proved that prior to or at the same time with such communication a written  prospectus meeting the requirements of subsection (a) of section 10 at the time of such communication was sent or given to the person to whom the communication was made, and (b) a notice, circular, advertisement, letter, or communication in respect of a security shall not be deemed to be a  prospectus if it states from whom a written prospectus meeting the requirements of section 10 may be obtained and, in addition, does no more than identify the security, state the price thereof, state by whom orders will  be executed, and contain such other information as the Commission, by rules or  regulations deem necessary or appropriate in the public interest and for the  protection of investors, and subject to such terms and conditions as may be  prescribed therein, may permit.
    § 4.  Exempted transactions
       The provisions of section 5  shall not apply to--

       (1) transactions by any person other than an issuer, underwriter, or dealer.
       (2) transactions by an issuer not involving any public offering.
       (3) transactions by a dealer (including an underwriter no longer acting as an underwriter in respect of the security involved in such transaction), except--

        (A) transactions taking place prior to the expiration of forty days after the first date upon which the security was bona fide offered to the public by the issuer or by or through an underwriter,
        (B) transactions in a security as to which a registration statement has been filed taking place prior to the expiration of forty days after the effective date of such registration statement or prior to the expiration of forty days  after the first date upon which the security was bona fide offered to the public by the issuer or by or through an underwriter after such effective date, which ever is later (excluding in the computation of such forty days any time during which a stop order issued under section 8 is in effect as to the security), or such shorter period as the Commission may specify by rules and regulations or order, and
        (C) transactions as to securities constituting the whole or a part of an unsold allotment to or subscription by such dealer as a participant in the distribution of such securities by the issuer or by or through an underwriter.

    With respect to transactions referred to in clause (B), if securities of the issuer have not previously been sold pursuant to an earlier effective    registration statement the applicable period, instead of forty days, shall be   ninety days, or such shorter period as the Commission may specify by rules and  regulations or order.

       (4) brokers' transactions executed upon customers' orders on any exchange or in the over-the-counter market but not the solicitation of such orders.
    Rule 174  Delivery of prospectus by dealers;  exemptions under § 4(3) of the Act.

      The obligations of a dealer (including an underwriter no longer acting as an  underwriter in respect of the security involved in such transactions) to  deliver a prospectus in transactions in a security as to which a registration  statement has been filed taking place prior to the expiration of the 40- or 90-  day period specified in section 4(3) of the Act after the effective date of  such registration statement or prior to the expiration of such period after the  first date upon which the security was bona fide offered to the public by the  issuer or by or through an underwriter after such effective date, whichever is  later, shall be subject to the following provisions:

       (a) No prospectus need be delivered if the registration statement is on Form  F-6 (s 239.36 of this chapter).

       (b) No prospectus need be delivered if the issuer is subject, immediately  prior to the time of filing the registration statement, to the reporting  requirements of section 13 or 15(d) of the Securities Exchange Act of 1934.

       (c) Where a registration statement relates to offerings to be made from time  to time no prospectus need be delivered after the expiration of the initial  prospectus delivery period specified in section 4(3) of the Act following the  first bona fide offering of securities under such registration statement.

      (d) If (1) the registration statement relates to the security of an issuer  that is not subject, immediately prior to the time of filing the registration  statement, to the reporting requirements of section 13 or 15(d) of the  Securities Exchange Act of 1934, and (2) as of the offering date, the security  is listed on a registered national securities exchange or authorized for  inclusion in an electronic inter-dealer quotation system sponsored and governed  by the rules of a registered securities association, no prospectus need be  delivered after the expiration of twenty-five calendar days after the offering  date.  For purposes of this provision, the term "offering date" refers to the  later of the effective date of the registration statement or the first date on which the security was bona fide offered to the public.

       (e) Notwithstanding the foregoing, the period during which a prospectus must  be delivered by a dealer shall be:

     (1) As specified in section 4(3) of the Act if the registration statement was  the subject of a stop order issued under section 8 of the Act;  or
     (2) As the Commission may provide upon application or on its own motion in a  particular case.
    (f) Nothing in this section shall affect the obligation to deliver a  prospectus pursuant to the provisions of section 5 of the Act by a dealer who  is acting as an underwriter with respect to the securities involved or who is  engaged in a transaction as to securities constituting the whole or a part of  an unsold allotment to or subscription by such dealer as a participant in the  distribution of such securities by the issuer or by or through an underwriter.

    (g) If the registration statement relates to an offering of securities of a  "blank check company," as defined in Rule 419 under the Act (17 CFR 230.419),  the statutory period for prospectus delivery specified in section 4(3) of the  Act shall not terminate until 90 days after the date funds and securities are  released from the escrow or trust account pursuant to Rule 419 under the Act.
     

    Rule 15c2-8 Delivery of prospectus.
      (a) It shall constitute a deceptive act or practice, as those terms are used  in section 15(c)(2) of the Act, for a broker or dealer to participate in a  distribution of securities with respect to which a registration statement has  been filed under the Securities Act of 1933 unless he complies with the  requirements set forth in paragraphs (b) through (g) of this section.  For the  purposes of this section, a broker or dealer participating in the distribution  shall mean any underwriter and any member or proposed member of the selling  group.

      (b) In connection with an issue of securities, the issuer of which has not previously been required to file reports pursuant to sections 13(a) or 15(d) of  the Securities Exchange Act of 1934, unless such issuer has been exempted from  the requirement to file reports thereunder pursuant to section 12(h) of the  Act, such broker or dealer shall deliver a copy of the preliminary prospectus  to any person who is expected to receive a confirmation of sale at least 48  hours prior to the sending of such confirmation.

      (c) Such broker or dealer shall take reasonable steps to furnish to any person  who makes written request for a preliminary prospectus between the filing date  and a reasonable time prior to the effective date of the registration statement  to which such prospectus relates, a copy of the latest preliminary prospectus  on file with the Commission.  Reasonable steps shall include receiving an  undertaking by the managing underwriter or underwriters to send such copy to  the address given in the requests.

      (d) Such broker or dealer shall take reasonable steps to comply promptly with  the written request of any person for a copy of the final prospectus relating  to such securities during the period between the effective date of the  registration statement and the later of either the termination of such  distribution, or the expiration of the applicable 40- or 90-day period under  section 4(3) of the Securities Act of 1933.  Reasonable steps shall include receiving an undertaking by the managing underwriter or underwriters to send  such copy to the address given in the requests.  (The 40-day and 90-day periods  referred to above shall be deemed to apply for purposes of this rule  irrespective of the provisions of paragraphs (b) and (d) of s 230.174 of this  Chapter).

      (e) Such broker or dealer shall take reasonable steps (1) to make available a  copy of the preliminary prospectus relating to such securities to each of his  associated persons who is expected, prior to the effective date, to solicit  customers' order for such securities before the making of any such solicitation  by such associated persons and (2) to make available to each such associated  person a copy of any amended preliminary prospectus promptly after the filing  thereof.

      (f) Such broker or dealer shall take reasonable steps to make available a copy  of the final prospectus relating to such securities to each of his associated  persons who is expected, after the effective date, to solicit customers orders  for such securities prior to the making of any such solicitation by such  associated persons, unless a preliminary prospectus which is substantially the  same as the final prospectus except for matters relating to the price of the  stocks, has been so made available.

    (g) If the broker or dealer is a managing underwriter of such distribution, he  shall take reasonable steps to see to it that all other brokers or dealers  participating in such distribution are promptly furnished with sufficient  copies, as requested by them, of each preliminary prospectus, each amended  preliminary prospectus and the final prospectus to enable them to comply with  paragraphs (b), (c), (d), and (e) of this section.   (h) If the broker or dealer is a managing underwriter of such distribution, he  shall take reasonable steps to see that any broker or dealer participating in  the distribution or trading in the registered security is furnished reasonable  quantities of the final prospectus relating to such securities, as requested by him, in order to enable him to comply with the prospectus delivery requirements  of section 5(b)(1) and (2) of the Securities Act of 1933.

      (i) This section shall not require the furnishing of prospectuses in any state  where such furnishing would be unlawful under the laws of such state: Provided,  however, That this provision is not to be construed to relieve a broker or  dealer from complying with the requirements of section 5(b)(1) and (2) of the  Securities Act of 1933.   (j) For purposes of this section, the term preliminary prospectus shall  include the term prospectus subject to completion as used in 17 CFR 230.434(a), and the term final prospectus shall include the term Section 10(a) prospectus  as used in 17 CFR 230.434(a).
     

    Rule 434
    (a) Where securities are offered for cash in a firm commitment underwritten offering .... then
     (1) The prospectus subject to completion and the term sheet described in paragraph (b) of this rule, taken together, .... shall constitute prospectuses that meet the requirement of section 10(a) of the Act for purposes of Section 5(b)2) of the Act and Section 2(10)(a) of the Act.
    § 8-319. Statute of Frauds.

      A contract for the sale of securities is not enforceable by way of action or  defense unless

         (a) there is some writing signed by the party against whom enforcement is sought or by his authorized agent or broker sufficient to indicate that a contract has been made for sale of a stated quantity of described securities at a defined or stated price;  or
         (b) delivery of the security has been accepted or payment has been made but the contract is enforceable under this provision only to the extent of such delivery or payment;  or
          (c) within a reasonable time a writing in confirmation of the sale or purchase and sufficient against the sender under paragraph (a) has been received by the party against whom enforcement is sought and he has failed to send written objection to its contents within ten days after its receipt;  or    (d) the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract was made for sale of a stated quantity of described securities at a defined or stated price.