biz org class 19

Form S-1 - SEC registration statement

avoiding security registration:
the process is very expensive so there will likely be an argument that its not a security or that it's a private placement offering (an exemption) - there are many exemptions under 1933 act.
first should look at the instrument and determine if its actually a security. becuase if there is then the offering must be registered under s.5 of the 1933 act. if it should be but isn't registered, there will be civil liability under s.12.

doran v. petroleum:
if you offer securities to just a handful of sophisticated people, you may have a private offering.
doran is both an offeree and purchaser. the company's argument is that not only was doran sophisticated, he also had access to information that a person might get from a form S-1 and therefore he didn't need the protection of registration. the court rejected the argument. why? because the company has to determine sophistication in regard to not only the handful of purchasers, but in regards to public offering that happened with respect to all offerees.

what are the arguments and provisions per the 33 ACT?
s. 5 -- requires registration of securities.
whenever s.5 is violated, there's cause of action for recovery, civil liability under s.12
s. 4(2) -- private placement exemption states that a small offering for small money is potentially exempt

the lower court said that this was a private placement because doran had sophisticated knowledge.

4 factors:
1. offerees (number, level of sophistication and access to assess and evaluate the offered securities, relationship between offerees)
2. number of units
3. size of offering
4. manner of offering

escott v. barchris

the document at issue is the registration statement: the statement was filed at the same time the company was going bankrupt and omitted and affirmatively changed and misstated misinformation.
was the statement misleading?
if so, who is liable? anyone who signs the statement including directors, experts who prepared the doc, and also underwriters of the debentures.

what this case clarifies is the identity of the experts. if we say that experts are potentially liable then we have to be clear of who those parties are. in escott v. barchris there's three examples of experts: accountants, appraisers and engineers. what about lawyers?
escott says that they're not.
but why did the defendants argue that the lawyers were experts? what argument did the court reject?
the court says that the only portion that experts prepared is the "expertised portion" prepared by the accountants

due diligence defense, s. 11 of 1933 Act. the burden of proving this for non-experts with respect with the expertised portion is low, and just have to show that counsel did due diligence. barchris is strictly liable and cannot defend against that, but the other parties have responsibilities of due diligence and that defense is available to barchris.

due diligence defense standard for non-experts for the non-expertised portion of the statement.
1. establish reasonable investigation
2. reasonable grounds
3. believed the statement was true

the expert accountants are only responsible for hte expertised portion. their defense is basically the same as the other defendants with respect to the docs that they prepared:
1. had reasonable grounds to believe the statements provided were true
2. reaosnable investigation
3. believed the statements provided were true

but now with respect to the expertised portion, what's the defense for non-experts? they don't have to show reasonable investigation - instead they get to rely on the experts' info and opinion.