p. vContents

• About the author xii

• Preface xiv

1. 1Introduction and Scope of U.S. Securities Laws 1
   1. 1Federal Securities Laws 1
      1. 1.1Securities Act of 1933 Overview 2
      2. 1.2Securities Exchange Act of 1934 Act Overview 2
      3. 1.3The SEC 3
      4. 1.4Self-Regulation 5
      5. 1.5Private Remedies 5
   2. 2Scope and Reach of Securities Laws 6
      1. 2.1Definition of “Security” 6
      2. 2.2Jurisdictional Provisions 7
      3. 2.3SEC Enforcement Powers 8
      4. 2.4Relation to Other Federal Laws 9
      5. 2.5State Law 11

1. 2Regulating Securities Distributions—Securities Act of 1933 13
   1. 11933 Act Structure 13
      1. 1.1Overview 13
      2. 1.21933 Act Registration 14
   2. 2Going Public 14
      1. 2.1Strict Underwriting 15
      2. 2.2Firm Commitment Underwriting 15
      3. 2.3Best Efforts Underwriting 16
      4. 2.4p. viSpecial Purpose Acquisition Companies 16
   3. 3Section 5 Overview 17
   4. 4Refiling Period 19
   5. 5Waiting Period 21
      1. 5.1Prospectus 21
   6. 6Post-Effective Period 23
      1. 6.1Prospectus Requirements 23
      2. 6.2Shelf Registration 23
      3. 6.3Allocating IPO Shares 24
      4. 6.4Aftermarket Transactions 24
   7. 7Registered Offering Disclosure Requirements 26
      1. 7.1Registration Forms 26
      2. 7.2Adequacy of Disclosures 27

1. 31933 Act Registration Exemptions 29
   1. 1Introduction 29
   2. 2Exempt Securities 30
      1. 2.1Exemptions for Certain Exchanges of Securities: §§3(a)(9) and 3(a)(10) 31
      2. 2.2Intrastate Exemption 31
      3. 2.3Small-Issue Exemptions: Sections 3(b) and 3(c) 32
   3. 3Exempt Transactions 33
      1. 3.1Transactions Not Involving Issuers, Underwriters or Dealers 33
      2. 3.2Transactions Not Involving a Public Offering 36
      3. 3.3The Section “4(1½)” Exemption 38
      4. 3.4Certain Dealer Transactions 39
      5. 3.5Unsolicited Brokers’ Transactions 40
      6. 3.6Regulation D 40
         1. 3.6.1Offerings up to $10 million—Rule 504 42
         2. 3.6.2Safe harbor for nonpublic offerings by issuers—Rule 506 43
      7. 3.7Regulation A 43
      8. 3.8Other Exemptions 44
      9. 3.9General Exemptive Authority 44
      10. 3.10Integration Doctrine 45

1. 4p. vii1933 Act Liabilities 47
   1. 1Criminal and Sec Remedies 47
   2. 2Private Rights of Action 48
      1. 2.1Section 11 48
      2. 2.2Section 12 51
      3. 2.3Section 12(a)(1) 52
      4. 2.4Section 12(a)(2) 53
   3. 3Sec Actions and Criminal Prosecutions: Section 17 54
   4. 4Secondary Liability 55
      1. 4.1Controlling-Person Liability 55
      2. 4.2Aiding and Abetting 55
      3. 4.3Secondary and Primary Liability Compared 56
   5. 5Class Actions 57
      1. 5.1PSLRA 57
      2. 5.2SLUSA 59

1. 51934 Act 61
   1. 11934 Act Coverage 61
   2. 2Anti-Manipulation 63
   3. 3Shareholder Voting 64
      1. 3.1Proxy Regulation Scope 64
      2. 3.2Shareholder Proposals 66
      3. 3.3Antifraud 67
   4. 4Materiality 67
   5. 5Causation 69
   6. 6Culpability 69
   7. 7Remedies 70
   8. 8Williams Act 70

1. 61934 Act Liabilities 77
   1. 1Manipulation 77
   2. 2False Filings and Other Misstatements 78
      1. 2.1Section 18 78
      2. 2.2p. viiiRule 10b-5 79
      3. 2.3Scienter 81
      4. 2.4“In Connection With” 82
      5. 2.5Standing to Sue 83
      6. 2.6Materiality 85
      7. 2.7Reliance 86
      8. 2.8Causation 87
      9. 2.9Statute of Limitations 88
      10. 2.10Cumulative Remedies 88
   3. 3Tender Offers – Section 14(E) 89
   4. 4Additional Rights of Action 90
      1. 4.1Controlling-Person Liability 91
      2. 4.2Aiding and Abetting 91
      3. 4.3The Racketeer Influenced and Corrupt Organizations Act 92
      4. 4.4Mail and Wire Fraud 93

1. 7Insider Trading 95
   1. 1Insider Short-Swing Reporting and Profits: §16 95
      1. 1.1Officers 96
      2. 1.2Directors and Deputization 96
      3. 1.310 Percent Beneficial Owner 97
      4. 1.4Disgorgement 97
      5. 1.5Short Sales 98
   2. 2Insider Trading—Rule 10B-5 98
   3. 3Insider Trading Liability 102
      1. 3.1SEC Actions 102
      2. 3.2Private Rights of Action 102

1. 8Market Regulation 104
   1. 1Overview 104
   2. 2Self-Regulation 105
   3. 3Broker-Dealer Sales Practices 105
   4. 4Securities Markets 109
      1. 4.1Background and History 109
      2. 4.2p. ixMarket Makers 110

1. 9The Trust Indenture Act of 1939 112
   1. 1Overview and Exemptions 112
      1. 1.1Overview 112
      2. 1.2TIA Exemptions 113
   2. 2TIA “Qualification” 113
      1. 2.1Conflicts of Interest 114
      2. 2.2Trustees That Are Also Creditors of the Issuer-Obligor 115
   3. 3Trustee Duties Upon Issuer Default 115
   4. 4Enforcement and Remedies 116

1. 10The Investment Company Act of 1940 117
   1. 1Background and Scope 117
   2. 2Interlocking Ownership of Investment Company Shares—Anti-Pyramiding Provisions 118
   3. 3Definition of “Investment Company”; Inadvertent Investment Companies 119
      1. 3.1Definition 119
      2. 3.2Hedge Funds 119
   4. 4Relationship Between Investment Companies, Investment Advisers and Underwriters 120
   5. 5Ica Coverage 121
      1. 5.1Investment Company Classification 121
      2. 5.2Exchange-Traded Funds 123
   6. 6Distribution and Pricing of Investment Company Shares 123
      1. 6.1Distribution and Pricing of Closed-End Investment Company Shares; Share Repurchases 124
      2. 6.2Distribution and Pricing of Open-End Investment Company Shares 125
      3. 6.3Secondary Markets for Investment Company Shares 127
      4. 6.4Improper Trading and Pricing Practices 127
         1. 6.4.1p. xLate trading 127
         2. 6.4.2Market timing 128
         3. 6.4.3Breakpoint pricing 129
   7. 7Fiduciary Duties; Independent Directors 129
      1. 7.1Independence Requirements 129
      2. 7.2Investment Company Directors’ Duties 130
      3. 7.3Approval of the Advisory Contract 131
   8. 8Transactions Between Investment Companies and Affiliated Persons 132
   9. 9Registration and Disclosure Requirements; Civil Liability 134
      1. 9.1Name 134
      2. 9.2Registration 134
      3. 9.3Reporting 135
      4. 9.4Sales Literature 135
   10. 10Advisory Fees; Modification or Assignment of Investment Advisory Contracts 135
       1. 10.1Advisory Fees 135
       2. 10.2Modification or Assignment of Advisory Contract 137

1. 11The Investment Advisers Act of 1940 139
   1. 1Advisory Contract Terms and Conditions 139
   2. 2Definitions, Exclusions and Exemptions 140
      1. 2.1Definitions 140
      2. 2.2Exclusions 142
         1. 2.2.1Exclusions generally; exemptions distinguished 143
         2. 2.2.2Broker-dealer exclusion 143
         3. 2.2.3Publications 144
         4. 2.2.4Financial planners 144
      3. 2.3Exemptions 145
         1. 2.3.1Local advisers 145
         2. 2.3.2Insurance company advisers 145
         3. 2.3.3Foreign private advisers 145
         4. 2.3.4p. xiState regulated advisers 145
         5. 2.3.5Funds with less than $150 million under management in the United States 145
         6. 2.3.6Foreign private advisers 146
      4. 2.4Private Fund Advisers 146
      5. 2.5Exempt Reporting Advisers; Venture Capital Funds 146
         1. 2.5.1Exempt reporting advisers 147
         2. 2.5.2Venture capital funds 147
      6. 2.6Risk Reporting 148

• Index 149

p. xiiAbout the author

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Thomas Lee Hazen is the Cary C. Boshamer Distinguished Professor of Law at the University of North Carolina at Chapel Hill School of Law. He is a recognized expert in the field of securities law. Professor Hazen is an award-winning author of multi-volume treatises, hornbooks, and casebooks on securities law, commodities law, and corporate law. He has written more than over forty law review articles in law journals including the University of Pennsylvania, Northwestern University, and Virginia law reviews. Professor Hazen’s work has been cited by p. xiiimany courts, including the U.S. Supreme Court. He is also among the most-widely-cited corporate and securities scholars. He has served as an expert witness on numerous occasions. Professor Hazen has served on legislative drafting committees and has lectured at many continuing education programs. He is a graduate of Columbia College and Columbia Law School where he served on the Law Review. Before joining the North Carolina faculty, Professor Hazen was on the law faculty at the University of Nebraska. Prior to that he was in private practice with a major New York City law firm.

p. xivPreface

Securities regulation is highly complex and technical. Securities law once was a specialty practiced only in large Wall Street firms. This is no longer true. Lawyers all over the U.S. and the world often must deal with many aspects of U.S. securities law.

Many lawyers with general corporate and commercial practices must deal with securities laws. No matter how small the business, if it is a corporation, partnership, limited partnership, or limited liability company, the potential applicability of the registration requirements and antifraud provisions and attendant potential civil liabilities loom in the background as something for the corporate planner to keep in mind. Additionally, the widespread possibility of federal remedies for investors injured in the securities markets means that every lawyer should have at least a passing familiarity with securities law. Since the definition of “securities” is an expansive one, many investment opportunities other than the traditional forms of stock or bonds may still be subject to the regulatory and protective provisions of both federal and state securities law. It follows that securities law has become relevant to general practitioners as well as specialists.

This Advanced Introduction to U.S. Federal Securities Law is designed for anyone interested in U.S. business law. It should be especially useful to practitioners and others engaged in the business and securities world looking for a detailed overview of U.S. securities law. It will be especially useful for lawyers, scholars and policy advisors.

p. xvThis book focuses primarily on the Securities Act of 1933 and the Securities Exchange Act of 1934. In addition, there is briefer treatment of the other federal acts: the Trust Indenture Act of 1939, the Investment Company Act of 1940 and the Investment Advisers Act of 1940.

This Advanced Introduction is designed to provide an accessible and basic understanding of this very complex set of rules and regulations. For detailed treatment of the U.S. securities laws’ intricacies, see my Treatise on the Law of Securities Regulation (Thomson Reuters, 7th ed. 2016; 7 volumes, updated twice a year) and my Hornbook on the Law of Securities Regulation (West Academic Publishing, 7th ed. 2020; one volume). This Advanced Introduction is adapted from those materials.

Thomas Lee Hazen

Chapel Hill, North Carolina

p. xvi