’WPCI v˜^ŠjjO¼>U’ÕÆõÅŻ6T+£žĢ:;žTyƒ»ˆćĄŅų$ė ĒhٔϙŸāR”OĀķÅXPw0 Mž–mxĻXœĄē±ēœÖ±āČŁö†R€*uKѝfB źŻ°[BPÆ2¦l® Y& ?›÷čĢŪ²™Į#kgQį^FZšå{Nå]K(&ņq¤Vč¹ūuĖŽ]fó"£ŖŻ!sĘSŻ×Į °0MĖQ.Ė8ī¦C˜6‚‡lŒ)hмL)ךucYQNŚ·Äž,«Ģ#Ć#ˆ =”–fŻŃ}‚yĀ'Ģ§ ‡ęŒOŽ*ĀĮ Éī^äęć^`^øąv²ó(•})Ŗ/Q1U×gƒ³­MęžĖܤæs‘ćϱVĶƒwÅӋ9]žŅ…Ɖō]ĆĻ ühuz '’ļō‚Kīō|;šѧÖHģZč½Ų¾čŠg»x&W­ƒÉó'®ln™@‡”‡¶öłóBiė‚{@dņ|%RµļčuäFķL7i"ƘšD±Øk*B%‚°šōÄ~Óą–.łĮ{o÷ŚL’Čļs ¼ä‘Ī“SģŒ|)¢^‰8ƒ:KĘāĮŻ …®ńf©¦xmķµŠ0Ššł ƒ¼ęœABŠi–; #ĮØUNi %· 0:½^ ÷w4* m, C˜HP DeskJet 820C Series Printer,(,,,,,(0(ÖĆ9 Z‹6Times New Roman RegularX(üœ$””ŌUSUS.,Ō½œ¢* ŪZl*ĄįĄįĄįĄį;ž3|x ’U‹’ĄĄĄHĢŻ ƒüœ!ŻŌUSUS.,ŌŻ  ŻŌ_ŌSecurities€RegulationŠ ° ŠProfessor€Steve€BradfordŠ œģ ŠSpring€2001Š ˆŲ ŠĢÓ  Óņ ņŌ‡„ŹÅ„XXŌFINAL€EXAM€ANSWERSŌ#†Xń’X„„ŹÅÄ#Ōó óŠ `° ŠĢĢÓ  Óą  ąYour€preliminary€grade€for€each€question€appears€on€your€blue€book.€€These€grades€areŠ ˜ č Šcalculated€on€the€usual€Law€College€grading€scale€(9=A+€to€0=F).€€Your€overall€score€wasŠ „ Ō Šcalculated€by€computing€a€weighted€average€of€all€eight€questions,€with€the€weight€for€eachŠ p Ą  Šquestion€determined€by€the€amount€of€time€recommended€for€that€question.€€Thus,€Question€1Š \¬  Šcounts€for€35/195€of€the€overall€average,€Question€2€counts€for€15/195,€and€so€on.Š H˜  ŠĢą  ąThe€average€score€for€each€question€and€for€the€exam€as€a€whole€were:Š  p  ŠĢÓ  ÓQuestion€1€€€€€€€€€5.64€(High€9;€Low€2)Š ųH ŠQuestion€2€€€€€€€€€€5.13(High€9;€Low€0)Š ä4 ŠQuestion€3€€€€€€€€€6.00€(High€9;€Low€0)Š Š  ŠQuestion€4€€€€€€€€€4.64€(High€9;€Low€0)Š ¼  ŠQuestion€5ą0 @ ą€€€€€€€€€4.79€(High€9;€Low€0)Š Øų ŠQuestion€6€€€€€€€€€4.87€(High€8;€Low€0)Š ”ä ŠQuestion€7€€€€€€€€€5.51€(High€9;€Low€0)Š €Š ŠQuestion€8€€€€€€€€€5.43€(High€8:€Low€0)Š l¼ ŠĢOverall€Average€€€€€€€€5.24€(High€7.49;€Low€1.90)Š D” ŠÓ  ÓĢą  ąI€have€attached€copies€of€sample€answers.€€These€answers€are€not€perfect,€but€they€coverŠ l Šall€of€the€important€issues.€€No€one€covered€all€the€issues€in€the€outlines,€although€a€couple€ofŠ X Špeople€came€pretty€closeŌ% € Ō.€€The€sample€answers€are€not€always€complete;€some€issues,€particularlyŠ ōD Šinterstate€commerce€requirements,€do€not€appear€on€the€outlines,€even€though€I€gave€you€creditŠ ą0 Šfor€discussing€them.€€The€attached€answers€also€do€not€necessarily€represent€the€š šcorrectššŠ Ģ  Šanswers.€€Some€issues€could€be€argued€either€way;€if€the€answer€contains€a€conclusion€withŠ ø! Šrespect€to€such€an€issue,€it€is€merely€how€I€would€resolve€the€issue.€€If€you€adequately€supportedŠ ¤"ō  Šyour€conclusion,€you€were€not€penalized€for€a€conclusion€contrary€to€mine.Š #ą! ŠĢą  ąI€hope€the€attached€Ō_ŌanswersŌ_Ō€give€you€sufficient€feedback€concerning€what€I€was€lookingŠ h%ø # Šfor.€€Feel€free€to€drop€by€if€you€want€to€discuss€the€exam€with€me.€€The€best€procedure€is€to€dropŠ T&¤!$ Šoff€your€exam€and€make€an€appointment€to€discuss€it€after€Iššve€had€a€chance€to€reread€it.Š  @'"% ŠÓ  Óņ ņQUESTION€ONEŠ ° ŠÓ  Óó óĢĢą  ąSince€the€question€indicates€that€each€of€the€offerings,€considered€separately,€compliedŠ tÄ Šwith€the€relevant€exemption,€the€only€question€is€whether€the€interaction€of€the€three€presents€aŠ `° Šproblem.€€There€is€not€problem€with€the€Regulation€A€offering,€but€the€Rule€505€offering€clearlyŠ L œ Šviolated€section€5,€and€probably€the€Rule€504€offering€as€well.Š 8 ˆ ŠĢą  ąOne€potential€problem€is€integration.€€If€the€five„factor€test€is€applied,€there€is€a€potentialŠ  ` Šproblem.€€The€three€offerings€appear€to€be€for€the€same€purposeš!šthey€all€were€to€finance€the€sameŠ ü L  Šproject.€€And€they€appear€to€be€part€of€a€single€plan€of€financing:€Dazed€had€already€planned€allŠ č 8  Šthree€offerings€when€it€commenced€the€Rule€504€offering€and€all€three€offerings€were€to€financeŠ Ō$  Šthe€same€project.€€The€same€class€of€securities€was€sold€in€all€three€offerings€and€the€same€type€ofŠ Ą  Šconsideration€(cash)€was€received€in€all€three.€€The€first€two€offerings€clearly€were€at€or€about€theŠ ¬ü  Šsame€timeš!štheyššre€only€a€month€apart.€€The€third€offering€is€more€problematic,€since€it€is€sevenŠ ˜č  Šmonths€after€the€second.Š „Ō  ŠĢą  ąHowever,€the€first€two€offerings€are€protected€from€integration€with€each€other€by€theŠ \¬ ŠRegulation€A€safe€harbor€in€Rule€251(c)(1),€which€says€that€prior€offers€š šwill€not€be€integratedŠ H˜ Šwithšš€a€Regulation€A€offering.€€This€language€appears€to€create€a€two„sided€safe€harbor,Š 4„ Šprotecting€both€the€Rule€504€offering€and€the€Regulation€A€offering€from€integration.Š  p ŠĢą  ąThe€Regulation€A€offering€is€also€protected€from€integration€with€the€Rule€505€offeringŠ ųH Šbecause€they€are€more€than€six€months€apart.€€Rule€251(c)(2)(v).€€Again,€this€is€a€two„sided€safeŠ ä4 Šharbor,€so€both€offerings€are€protected,€but€it€doesnššt€matter€because€the€Rule€505€offering€isŠ Š  Šprotected€by€its€own€six„month€safe€harbor€in€Rule€502(a).Š ¼  ŠĢą  ąThe€Rule€504€and€505€offerings€will€not€be€integrated€for€purposes€of€the€Rule€505Š ”ä Šexemption,€but€integration€could€present€a€problem€with€respect€to€the€Rule€504€exemption.€€TheŠ €Š ŠRule€502(a)€safe€harbor€protects€the€Rule€505€offering€from€integration.€€This€is€only€a€one„sidedŠ l¼ Šsafe€harbor,€but€itššs€also€available€for€the€Rule€504€offering.€€However,€it€does€not€protect€theŠ X Ø ŠRule€504€offering€because,€although€the€Rule€505€offering€is€more€than€six€months€after€the€RuleŠ D!” Š504€offering,€there€are€offers€and€sales€of€the€same€class€of€security€during€the€six€month€periodŠ 0"€  Šfollowing€the€Rule€504€offering.€€Thus,€the€Rule€504€offering€is€at€risk€under€the€five„factor€test,Š #l! Šand€only€one€of€those€factors€(timing)€even€arguably€supports€them€being€separate€offering.Š $X" ŠĢą  ąThere€is€another€problem.€€The€aggregate€offering€price€limits€for€all€three€offerings€isŠ ą%0!$ Šreduced€by€certain€other€sales€during€and€in€the€12€months€prior€to€the€offering€at€issue.€€The€RuleŠ Ģ&"% Š504€offering€has€no€problem€under€Rule€504(b)(2)€because€there€were€no€sales€during€or€prior€toŠ ø'#& Šthe€Rule€504€offering.€€The€Regulation€A€aggregate€offering€price€is€reduced€only€prior€salesŠ ¤(ō#' Šunder€Regulation€A,€Rule€251(b),€so€it€has€no€problem.Š )ą$( ŠĢą  ąThere€is,€however,€a€problem€with€the€Rule€505€offering.€€The€available€$5€million€limit€inŠ h+ø&* ŠRule€505(b)(2)(Ō_ŌiŌ_Ō)€must€be€reduced€by€sales€pursuant€to€any€section€3(b)€exemption€in€the€past€12Š T,¤'+ Šmonths.€€Both€Rule€504€and€Regulation€A€are€section€3(b)€exemptions€and€both€occurred€in€theŠ @-(, Š12€months€prior€to€the€Rule€505€offering.€€Therefore,€the€amount€available€at€the€time€of€the€RuleŠ ° Š505€offering€was€$5€million€„€$4€million€„€$1€million€=€0.€€The€Rule€505€exemption€was€notŠ œģ Šavailable,€so€these€sales€violated€section€5.Š  ˆŲ Šņ ņÓ  ÓQUESTION€TWOó óŠ ° ŠÓ®ÓĢĢą  ąTo€qualify€for€the€Rule€147€exemption,€all€of€the€offers€and€sales€in€Yankeeššs€offeringŠ tÄ Šmust€be€made€in€accordance€with€all€of€the€terms€and€conditions€of€Rule€147.€€Rule€147(a).€Š `° ŠYankeeššs€offering€meets€all€but€one€requirement€of€Rule€147.€€To€use€Rule€147,€YankeeššsŠ L œ Šprincipal€office€must€be€located€in€the€state€of€its€incorporation€and€the€sales.€€Rule€147(c)(2)(iv).€Š 8 ˆ ŠYankeeššs€principal€office€is€in€New€Jersey,€not€New€York.Š $ t ŠĢą  ąThe€only€other€potential€problem€arises€under€Rule€147(d)(3).€€Although€the€DelawareŠ ü L  Šcorporations€would€ordinarily€qualify€because€of€their€principal€places€of€business€in€New€York,Š č 8  ŠRule€147(d)(1),€if€they€were€organized€for€the€specific€purpose€of€this€offering,€Rule€147(c)(3)Š Ō$  Šwould€require€that€we€look€through€the€corporations€to€their€beneficial€owners,€and€they€would€allŠ Ą  Šhave€to€be€New€York€residents.Š ¬ü  ŠĢą  ą[The€following€was€not€required€to€answer€the€question,€which€asked€you€to€discuss€onlyŠ „Ō  Šrequirements€that€were€not€met.€€It€is€offered€to€explain€why€other€answers€were€wrong:€€All€ofŠ pĄ Šthe€other€requirements€are€satisfied.€€Yankee€is€a€resident€of€New€York€because€it€is€incorporatedŠ \¬ Šin€New€York.€€Rule€147(c)(1)(Ō_ŌiŌ_Ō).€€Yankee€meets€the€other€š šdoing€businessšš€requirements.€€ItŠ H˜ Šderives€at€least€80€percent€of€its€revenues€from€business€in€New€York.€€Rule€147(c)(2)(Ō_ŌiŌ_Ō).€€MoreŠ 4„ Šthan€80€percent€of€its€assets€are€located€in€New€York.€€Rule€147(c)(2)(ii).€€At€least€80€percent€ofŠ  p Šthe€net€proceeds€with€be€used€in€New€York.€€Rule€147(c)(2)(iii).€€All€of€the€purchases€areŠ  \ Šresidents€of€New€York€within€the€meaning€of€Rule€147(d).€€The€residence€of€corporate€purchasersŠ ųH Šis€where€their€principal€offices€are€located,€in€this€case€New€York.€€Rule€147(d)(1).€€Their€statesŠ ä4 Šof€incorporation€and€where€they€do€business€is€irrelevant.]Š  Š  ŠÓ  Óņ ņQUESTION€THREEó óŠ ° ŠÓ  ÓĢĢą  ąRule€10b„5€applies€to€fraudulent€statements€š šin€connection€with€the€purchase€or€sale€ofŠ tÄ Šany€security.šš€€Larry€has€made€two€materially€false€statements:€(1)€the€statement€that€BrainlessŠ `° Šdebt€securities€were€an€excellent€investment;€and€(2)€the€promise€to€buy€these€securities€for€RichššsŠ L œ Šaccount.€€However,€Rich€must€be€a€purchaser€or€seller€to€have€standing€to€bring€a€Rule€10b„5Š 8 ˆ Šclaim.€€ņņBlue€Chip€Stampóó.€€Larry€did€not€use€the€money€to€buy€any€securities,€so€there€was€noŠ $ t Špurchase€or€sale€in€connection€with€the€fraud.Š   ` ŠÓ  Óņ ņQUESTION€FOURó óŠ ° ŠÓ  ÓĢĢą  ąLulu€may€use€Rule€415€to€register€Fredššs€offering.€€The€only€applicable€condition€is€anŠ tÄ Šundertaking€by€Lulu€to€keep€the€information€updated€as€required€by€Item€512(a)€of€Regulation€Š `° ŠŌ& ģ ŌS„KŌ'ģL ā)Ō.Š L œ ŠĢą  ąA€shelf€registration€must€meet€the€conditions€of€Rule€415(a).€€Rule€415(b)€bars€certainŠ $ t Šissuers€from€using€Rule€415,€but€the€problem€says€Lulu€is€not€an€investment€company€and€LuluŠ  ` Šclearly€is€not€a€foreign€government,€so€Rule€415(b)€does€not€apply.Š ü L  ŠĢą  ąThe€offering€must€be€one€of€those€listed€in€Rule€415(a)(1).€€This€offering€qualifies€becauseŠ Ō$  Šthe€securities€to€be€registered€will€be€offered€and€sold€solely€by€a€person€other€than€the€registrantŠ Ą  Šand€related€companies.€€Rule€415(a)(1)(Ō_ŌiŌ_Ō).Š ¬ü  ŠĢą  ąThe€second€condition€in€Rule€415(a),€a€limitation€on€the€amount€registered,€does€notŠ „Ō  Šapply,€because€it€covers€only€securities€in€paragraphs€(a)(1)(viii)„(x).€€Rule€415(a)(2).Š pĄ ŠĢą  ąThe€third€condition€does€apply;€Lulu€must€furnish€the€undertakings€required€by€ItemŠ H˜ Š512(a)€of€Regulation€S„K.€€Rule€415(a)(3).€€Essentially,€this€is€an€undertaking€to€update€theŠ 4„ Šinformation€in€the€registration€statement.Š  p ŠĢą  ąThe€fourth€condition€also€does€not€apply.€€ņņSeeóó€Rule€415(a)(4).€€Although€Fred€appears€toŠ ųH Šbe€making€an€š šat€the€marketšš€offering,€and€these€are€equity€securities,€the€offering€is€not€š šby€or€onŠ ä4 Šbehalf€of€the€registrantšš,€Lulu.Š  Š  ŠÓ  Óņ ņQUESTION€FIVEó óŠ ° ŠÓ  ÓĢĢą  ąChelseaššs€sales€violate€section€5(a)(1)€of€the€Act€unless€Chelsea€has€the€section€4(1)Š tÄ Šexemption.€€Chelsea€is€not€the€issue€of€this€stock;€Brat€is€the€issuer.€€Securities€Act€šš€2(a)(4).€€TheŠ `° Šproblem€does€not€indicate€that€Chelsea€is€a€dealerš!ša€securities€professional.€€ņņSeeó󀚚€2(a)(12).€€EvenŠ L œ Šif€she€is€a€dealer,€if€she€is€not€also€an€underwriter,€the€section€4(3)€exemption€is€available€becauseŠ 8 ˆ Šover€two€years€has€expired€since€the€effective€date€and€when€the€securities€were€first€offered€toŠ $ t Šthe€public.€€ņņSeeó󀚚€4(3).€€Thus,€Chelsea€has€the€section€4(1)€exemption€unless€her€sales€involve€anŠ  ` Šunderwriter.Š ü L  ŠĢą  ąChelsea€does€not€appear€to€be€an€underwriter€herself.€€She€does€not€appear€to€be€sellingŠ Ō$  Šthese€shares€on€behalf€of€Brat,€the€issuer.€€ņņSeeó󀚚€2(a)(11).€€She€also€does€not€appear€to€haveŠ Ą  Špurchased€from€Brat€with€a€view€to€distribution€of€these€securities.€€ņņSeeó󀚚€2(a)(11).€€Two€years€isŠ ¬ü  Šprobably€enough€time€to€establish€at€least€a€presumption€of€investment€intent,€so€these€securitiesŠ ˜č  Šhave€come€to€rest.€€If€they€have€not€come€to€rest,€š šdistributionšš€is€defined€as€anything€inconsistentŠ „Ō  Šwith€the€issuerššs€original€distribution.€€In€this€case,€the€original€offering€was€registered,€andŠ pĄ ŠChelseaššs€resales€are€consistent€with€that,€so€they€would€probably€not€constitute€a€š šdistribution.ššŠ \¬ ŠĢą  ąIf€someone€were€selling€on€Chelseaššs€behalf,€that€person€could€be€an€underwriter.€€AŠ 4„ Šperson€selling€for€an€š šissueršš€in€connection€with€a€distribution€is€an€underwriter,€and,€for€purposesŠ  p Šof€the€definition,€the€term€š šissueršš€includes€a€control€person.€€šš€2(a)(11).€€Chelsea,€as€a€director€ofŠ  \ ŠBrat,€could€be€a€control€person.€€However,€no€one€is€selling€on€her€behalf.€€The€question€indicatesŠ ųH Šthat€she€resold€the€shares€without€any€assistance.Š ä4 ŠĢą  ąSince€there€is€no€issuer,€underwriter,€or€dealer€involved€in€Chelseaššs€resales,€she€is€entitledŠ ¼  Što€the€section€4(1)€exemption.Š Øų ŠĢą  ą[NOTE:€The€Rule€144€safe€harbor€is€ņ ņņņnotóóó ó€available€because€(1)€the€shares€are€not€sold€inŠ €Š Šbrokersšš€transactions€or€transactions€directly€with€a€market€maker,€as€required€by€Rule€144(f);€(2)Š pĄ Šthe€amount€of€shares€sold€exceeds€the€maximum€of€50,000€under€Rule€144(e)(1);€and€(3)€she€didŠ \ ¬ Šnot€file€the€notice€of€sale€required€by€Rule€144(h).€€Rule€144A€is€not€available€because€ChelseaššsŠ H!˜ Šneighbors,€all€unsophisticated€investors,€are€not€qualified€institutional€buyers.€€Rule€144A(a)(1).]Š  4"„  ŠÓ  Óņ ņQUESTION€SIXó óŠ ° ŠÓ  ÓĢĢą  ąThe€term€š šsecurityšš€in€the€Exchange€Act€includes€š šany€note.šš€€Exchange€Act€šš€3(a)(10).€Š tÄ ŠHowever,€not€all€notes€are€securities.€€ņņŌ_ŌRevesŌ_Ō€v.€Ernst€&€Youngóó.€€ņņŌ_ŌRevesŌ_Ōóó€adopted€the€familyŠ `° Šresemblance€test€to€determine€whether€š šnotesšš€are€securities.€€Notes€are€presumed€to€beŠ L œ Šsecurities.€€ņņŌ_ŌRevesŌ_Ōóó.€€However,€ņņŌ_ŌRevesŌ_Ōóó€identified€a€list€of€instruments€that€are€not€securities.€€TheseŠ 8 ˆ Šnotes€fall€within€one€of€those€non„security€categories:€š šthe€note€delivered€in€consumer€financing.šš€Š $ t ŠņņŌ_ŌRevesŌ_Ōóó.Š  ` ŠĢą  ąThe€question€is€whether€these€notes€retain€their€non„security€character€when€they€areŠ č 8  Šresold€by€Stereo€to€the€investors.€€ņņŌ_ŌRevesŌ_Ōóó€did€not€speak€to€this€issue,€but€ņņGary€Plastic€PackagingóóŠ Ō$  Šindicates€that€an€instrument€that€is€not€a€security,€a€bank€certificate€of€deposit,€may€become€oneŠ Ą  Šwhen€it€is€repackaged€and€sold€to€investors.Š ¬ü  ŠĢą  ąIf€we€apply€the€ņņŌ_ŌRevesŌ_Ōóó€four„part€test€to€the€notes€as€resold,€they€could€be€securities.€€TheŠ „Ō  Šmotivations€of€the€parties€seem€consistent€with€security€status.€€Stereo€is€selling€the€notes€to€raiseŠ pĄ Šmoney€for€the€general€use€of€its€business€and€the€investors€are€buying€the€notes€primarily€becauseŠ \¬ Šof€the€profit€they€will€generate.€€The€plan€of€distribution€also€seems€consistent€with€securityŠ H˜ Šstatus.€€Although€there€doesnššt€appear€to€be€any€common€trading,€the€notes€are€sold€to€manyŠ 4„ Šinvestors€through€a€general€solicitation€of€the€public€on€the€Internet.€€As€to€the€third€factor,€theŠ  p Šreasonable€expectations€of€the€investing€public,€these€are€marketed€as€investments€and€their€resaleŠ  \ Šis€not€consumption„oriented.€€The€final€factor€is€whether€three€are€other€risk„reducing€factors,Š ųH Šsuch€as€federal€insurance€or€collateral.€€The€notes€are€backed€by€collateralš!šthe€stereos.€€However,Š ä4 Šthat€may€not€provide€much€protection€to€the€investors,€since€they€much€collect€delinquent€notesŠ Š  Šthemselves,€the€stereos€are€likely€to€be€geographically€distant€from€the€investors,€and€stereosŠ ¼  Šprobably€lose€much€of€their€value€after€use.€€Considering€all€four€factors,€these€appear€to€beŠ Øų Šsecurities.Š ”ä ŠĢą  ąHowever,€there€is€an€additional€issue€to€consider:€whether€these€notes€are€excluded€fromŠ l¼ Šthe€definition€of€security€by€the€exception€in€section€3(a)(10)€for€notes€with€a€maturity€at€time€ofŠ X Ø Šissuance€of€less€than€nine€months.€€The€maturity€of€these€notes€is€only€six€months,€so€the€basicŠ D!” Šterm€of€the€note€is€within€the€exception.€€Consumers€have€an€option€to€renew,€but€the€SEC€staffŠ 0"€  Šhas€taken€the€position€that€only€automatic€renewals€remove€can€remove€notes€from€the€exception.Š #l! ŠThe€renewal€is€totally€outside€the€control€of€the€investors,€so€the€staff€might€treat€this€like€anŠ $X" Šautomatic€renewal.€€Even€if€the€term€of€these€notes€is€only€6€months,€they€still€might€not€fit€withinŠ ō$D # Šthe€exception€to€the€definition.€The€SEC€has€taken€the€position€that€only€investment€qualityŠ ą%0!$ Šcommercial€paper€is€excepted,€and€these€are€neither€investment€quality€nor€commercial€paper.€Š Ģ&"% ŠHowever,€the€Supreme€Court€has€never€issued€an€opinion€on€that€question€and€several€of€theŠ ø'#& Šjustices€in€ņņŌ_ŌRevesŌ_Ōóó€appear€to€reject€that€idea.€€If€these€notes€fall€within€the€exception,€they€are€notŠ ¤(ō#' Šsecurities€within€the€meaning€of€section€3(a)(10).Š )ą$( ŠĢŠ  h+ø&* Šņ ņÓ  ÓQUESTION€SEVENó óŠ ° ŠÓĄLÓĢĢą  ąSection€5(b)(1)€makes€it€unlawful€to€transmit€any€prospectus€relating€to€any€security€as€toŠ tÄ Šwhich€a€registration€statement€has€been€filed,€unless€it€meets€the€requirements€of€section€10€of€theŠ `° ŠAct.€€This€ad€is€not€a€final,€preliminary,€or€summary€prospectus€that€meets€the€requirements€ofŠ L œ Šsection€10.€€The€registration€statement€has€been€filed.€€Thus,€if€the€ad€is€a€prospectus,€it€violatesŠ 8 ˆ Šsection€5(b)(1).Š $ t ŠĢą  ąThe€term€š šprospectusšš€includes€any€š šadvertisement€.€.€.€,€written€or€by€radio€or€television,Š ü L  Šwhich€offers€any€security€for€sale€or€confirms€the€sale€of€any€security.šš€€šš€2(a)(10).€€This€is€aŠ č 8  Šwritten€advertisement.€€The€term€š šoffer€to€sellšš€includes€š ševery€attempt€or€offer€to€dispose€of,€orŠ Ō$  Šsolicitation€of€an€offer€to€buy,€any€security.šš€€šš€2(a)(3).€€The€SEC€has€taken€a€very€broad€view€ofŠ Ą  Šwhat€constitutes€an€offer€to€sell.€€Virtually€any€communication€likely€to€generate€interest€in€theŠ ¬ü  Šoffering€suffices.€€ņņSee,€e.g.,óó€ņņóóSecurities€Act€Release€No.€3844€(1957).€€Absent€a€regulatoryŠ ˜č  Šexception,€this€ad€appears€to€be€an€offer€to€sell,€and€therefore€a€prospectus.Š „Ō  ŠĢą  ąSection€2(a)(10)(b)€excepts€from€the€definition€of€prospectus,€a€communication€thatŠ \¬ Šincludes€only€limited€information€and€states€from€whom€a€section€10€written€prospectus€may€beŠ H˜ Šobtained.€€This€ad€does€not€qualify€because€it€does€not€state€from€whom€a€prospectus€may€beŠ 4„ Šobtained.€€Rule€134's€expansion€of€this€exception€likewise€does€not€benefit€Husker.€€To€use€RuleŠ  p Š134,€the€ad€must€include€the€disclaimer€in€Rule€134(b)(1)€and€the€information€required€by€RuleŠ  \ Š134(b)(2)€and€(3),€and€it€does€not.€€The€Rule€134(c)€exception€to€that€requirement€does€not€applyŠ ųH Šbecause€(1)€the€ad€goes€beyond€what€Rule€134(c)(1)€allows€and€does€not€state€from€whom€aŠ ä4 Šprospectus€may€be€obtained;€and€(2)€not€everyone€who€saw€the€ad€already€received€a€section€10Š Š  Šprospectus,€as€required€by€Rule€134(c)(2).€€In€addition,€the€ad€contains€information€not€allowedŠ ¼  Šby€Rule€134(a):€the€purpose€of€the€offering€and€the€fact€that€the€offering€is€being€sold€only€toŠ Øų Šemployees.Š ”ä ŠĢą  ąHowever,€the€ad€appears€to€be€excluded€from€the€definition€of€š šoffer€to€sellšš€by€Rule€135.€Š l¼ ŠThe€ad€includes€a€statement€that€it€does€not€constitute€an€offer€to€sell,€as€required€by€RuleŠ X Ø Š135(a)(1).€€The€following€information€included€in€the€ad€are€allowed€by€Rule€135:€the€name€of€theŠ D!” Šissuer,€Rule€135(a)(2)(Ō_ŌiŌ_Ō);€the€type€of€security,€Rule€135(a)(2)(ii);€a€brief€statement€of€the€purposeŠ 0"€  Šof€the€offering,€Rule€135(a)(2)(v);€whether€the€offering€is€limited€to€a€particular€class€ofŠ #l! Špurchasers,€Rule€135(a)(2)(vi);€the€offering€price,€since€this€is€an€offering€limited€to€employees,Š $X" ŠRule€135(a)(2)(viii)(B)(3);€and€which€employees€are€eligible,€Rule€135(a)(2)(viii)(B)(2).€€The€onlyŠ ō$D # Šlanguage€in€the€ad€not€expressly€authorized€by€Rule€135€is€the€description€of€the€employees€asŠ ą%0!$ Šš šhard„workingšš.€€The€SEC€interprets€its€communication€safe€harbors€rather€strictly,€and€thisŠ Ģ&"% Šlanguage€might€be€construed€as€designed€to€get€the€employees€to€favor€the€offering,€so€itššsŠ ø'#& Špossible€that€the€SEC€might€find€this€ad€outside€Rule€135.€€If€the€ad€does€fit€within€Rule€135,€it€isŠ ¤(ō#' Šnot€an€offer€to€sell,€and€therefore€cannot€be€a€prospectus.Š )ą$( ŠĢą  ąThe€ad€does€not€violate€any€other€subsection€of€section€5.€€Rule€5(c)€does€not€applyŠ h+ø&* Šbecause€the€registration€statement€has€already€been€filed.€€Sections€5(a)(2)€and€5(b)(2)€do€notŠ T,¤'+ Šapply€because€no€security€has€been€delivered.€€Rule€5(a)(1)€does€not€apply€because€Husker€hasŠ @-(, Šnot€sold€any€security,€šš€2(a)(3),€only€offered€it€for€sale.Š  ° ŠÓ  Óņ ņQUESTION€EIGHTó óŠ ° ŠÓ  ÓĢĢą  ąBroker€clearly€has€made€a€false€statement€of€fact€to€Wally.€€She€said€Nuts€used€only€blueŠ tÄ Šshipping€containers,€when€in€fact€it€used€yellow€containers€for€at€least€some€shipments.€€Wally€canŠ `° Šeasily€establish€transaction€causation€through€proof€of€relianceš!šbut€for€Brokerššs€misrepresentationŠ L œ Šabout€the€blue€containers,€Wally€would€not€have€purchased€the€stock.€€Furthermore,€the€statementŠ 8 ˆ Šwas€š šin€connection€with€the€purchase€or€sale€of€a€security.šš€€Wally€is€a€purchaser,€meeting€theŠ $ t ŠņņBlue€Chip€Stampóó€test.€€And€the€statement€was€reasonably€calculated€to€influence€the€buyer:Š  ` ŠBroker€directed€the€statement€at€Wally€Ō_ŌŌ_Ōto€influence€him€to€purchase€the€stock.€€Ō_ŌWallyŌ_Ō€will€haveŠ ü L  Šthree€potential€problems€in€recovering€from€Broker€under€Rule€10b„5:€(1)€showing€that€theŠ č 8  Šmisstatement€was€of€a€material€fact;€(2)€showing€that€Broker€acted€with€Ō_ŌscienterŌ_Ō;€and€(3)€showingŠ Ō$  Šloss€causation.Š Ą  ŠĢą  ąŌ_ŌScienterŌ_Ō€should€not€be€difficult€to€establish.€€Broker€did€not€know€whether€her€statementŠ ˜č  Šwas€true,€so€we€cannot€say€she€intended€to€defraud€Wally.€€However,€most€courts€have€held€thatŠ „Ō  Šrecklessness€constitutes€Ō_ŌscienterŌ_Ō.€€A€statement€is€reckless€if€the€danger€of€misleading€the€plaintiffŠ pĄ Šwas€either€known€to€the€defendant€or€so€obvious€the€defendant€must€have€been€aware€of€it.€Š \¬ ŠņņŌ_ŌBackmanŌ_Ō€v.€Polaroid€Corp.óó€€Here,€Broker€knew€that€her€statement€could€mislead€Wally,€butŠ H˜ Šdeliberately€disregarded€that€danger€and€made€the€statement€even€though€she€did€not€know€if€itŠ 4„ Šwas€true.€€Broker€clearly€was€reckless.€€ņņŌ_ŌHochfelderŌ_Ōóó€(and€ņņŌ_ŌBackmanŌ_Ōóó)€indicate€that€Ō_ŌscienterŌ_Ō€is€absentŠ  p Šif€the€defendant€acted€in€good€faith,€but€there€is€no€claim€of€good€faith€here.€€Broker€said€what€sheŠ  \ Šdid,€not€caring€if€it€was€true,€solely€to€complete€the€sale€and€earn€her€commission.Š ųH ŠĢą  ąThe€second€major€issue€is€materiality.€€Ordinarily,€materiality€is€measured€by€an€objectiveŠ Š  Šstandardš!šwhether€there€is€a€substantial€likelihood€that€a€reasonable€investor€would€consider€theŠ ¼  Šinformation€important.€€ņņŌ_ŌTSCŌ_Ō€Industriesóó.€€Although€Wally€considers€the€color€of€the€containersŠ Øų Šimportant,€a€reasonable€investor€would€not,€so€it€is€arguably€not€material.€€However,€there€is€aŠ ”ä Šcomplicationš!šall€blue€containers€are€larger€and€more€stable€and€all€yellow€containers€are€smallerŠ €Š Šand€less€stable.€€A€reasonable€investor€might€consider€the€size€of€the€containers€important€and,Š l¼ Šsince€blue€=€large,€a€statement€that€all€of€Nutsššs€containers€are€blue€is€equivalent€to€a€statementŠ X Ø Šthat€all€of€Nutsššs€containers€are€large.€€This€equivalence€could€make€the€statement€material.€Š D!” ŠAlternatively,€some€authorities€have€argued€that€the€standard€for€materiality€should€be€subjectiveŠ 0"€  Šfor€face„to„face€dealings:€if€the€defendant€knows€the€particular€plaintiff€considers€somethingŠ #l! Šimportant,€it€should€be€material.€€If€this€theory€is€adopted,€Brokerššs€statement€clearly€is€material.€Š $X" ŠHowever,€the€Supreme€Court€in€ņņŌ_ŌTSCŌ_Ō€Industriesóó€and€ņņBasicóó€uses€a€purely€objective€test,€so€it€isnšštŠ ō$D # Šclear€if€this€subjective€test€would€be€accepted.Š ą%0!$ ŠĢą  ąThe€final€major€issue€is€loss€causation,€which€is€required€for€a€successful€Rule€10b„5€claim.€Š ø'#& ŠExchange€Act€šš€21D(b)(4).€€Was€the€loss€related€to€the€subject€of€the€misstatement?€€Obviously,Š ¤(ō#' Šthe€loss€was€not€due€to€the€fact€that€the€containers€were€painted€yellow€rather€than€blue.€€On€aŠ )ą$( Šsuperficial€basis,€there€is€no€loss€causation.€€But€the€same€equivalence€argument€used€with€respectŠ |*Ģ%) Što€materiality€also€works€here.€€All€blue€containers€are€large€and€stable;€all€yellow€containers€areŠ h+ø&* Šnot.€€If€all€of€Nutsšš€containers€were€blue,€as€represented,€the€loss€would€not€have€occurred.€Š T,¤'+ ŠTherefore,€there€is€arguably€loss€causation.