Section 11 of the Securities Act of 1933 is a tough express liability provision governing any "untrue statement of a material fact or material omission "in any part of the registration statement" filed with the Commission.
- Defendants under the section include the issuer, every person who signed the registration statement (the principal executive officer, chief financial officer, comptroller or other chief accounting officer, and a majority of directors must sign), every person who was a director, those named as becoming a director, and every accountant, engineer, appraiser or "other person whose profession gives authority to a statement made by him" whose "expertises" or certified a portion of the registartion statement.
- The issuer is strictly liable.
The other defendants have a "due diligence" defense. An individual may escape liability if he or she proves that "he had, after a resonable investigation, reasonable grounds to believe and did believe ... that the statements made therein were true and that there was no omission of a material fact." The due diligence defense is a little easier to prove if the misstatement or omission was contained in an expertised portion of the statement. Early court decision reinforce beliefs as to just how "tough" section 11 is.
Attorneys should advise issuers to retain a well-respected accounting firm which will credibly audit and certify financial statements. Issuers should also retain an attorney to examine the corporation's good standing in all jurisdictions in which it does business, examine all conflict of interest transaction with senior executives or principal sharehodlers, review all the corporation's principal contracts, and perform a myriad of other housekeeping chores. All person connected with the corporation should be warned about the premature offers to sell securities, or any attempts to condition the market to a forthcoming offer to sell securities before a registration statemetn has been filed. Such attempts are konwn as "gun jumping." They violate section 5(c) of the act and traditionally have been considered a major violation in securities practice.
In preparing a draft of teh registation statement, the attorney must follow a detailed series of items and instructions. Some of the items include:
- a description of the company's business
- a financial summary
- an analysis of competition
- a statement defining the proposed use of offering proceeds; and
- a description of the securities being sold
Counsel must ensure that all material information is disclosed. The attorney must also assemble a due diligence file in which to collect corroboration of every substantive statement contained in the registration statement. The due diligence file will support a due diligence defense if a suit is brought later.
Once the registration statement has been filed, the "waiting period" or filing period begins. During this time, broker-dealers in the underwriting syndicate may make oral (but not written) offers to sell but actual sales may not take place. Also, during this time, the preliminary prospectus is circulated to investors. Any necessary amendments to the registration statement are prepared and filed. Once the registration becomes effective then actual sales may occur. The final, or statutory prospectus, must also be delivered to purchasers when the sale is confrimed or the security delivered, whichever occurs first.
Two features of the registration landscape change in 2005.
- 1) The absolute prohibition against "jump jumping," any statements or actions before a registration statement had been filed that could be construed as conditioning the market to a forthcoming offering.
- 2) The absolute prohibition on delivery of promtional or similar products ("free writing") before a final prospectus had been deliverd to the purchaser or prosective purchase
Exemptions from registration - below only present an overview of teh msot widely used exemptions
- intrastate exemption
- private offering exemption
- regulation D exemptions