Securities for the Non-Securities Lawyer Association of Corporate

“Securities for the Non-Securities Lawyer” Association of Corporate Counsel – America August 3, 2006 Presented by: Kurt L. Kicklighter Luce, Forward, Hamilton & Scripps LLP August 3, 2006 3731806

Why Should You Care About Securities Law? • In house counsel concerns in the private company or division of a public company • Pledges of securities? • Promissory notes? • Owner shares? • Securities brokerage/dealers? August 3, 2006 3731806 2

How Do You Know You Have a Securities Issue? • Stocks, bonds. . And • Any “investment contract” or “risk capital” arrangement – – – Promissory notes Condominium rental pool Investment Club Memberships Tenants in Common Interests? Joint Venture profit participation by non-managing partner? General partnership interest of a partner who does not actually participate in management August 3, 2006 3731806 3

What laws regulate securities? • Federal law – “Disclosure” model – – Securities Act of 1933 Securities Exchange Act of 1934 Exemptions – but not exemption from fraud claims Website for all Federal securities statutes and rules: Securities Lawyer’s Deskbook at University of Cincinnati - http: //www. law. uc. edu/CCL/xyz/sldtoc. html August 3, 2006 3731806 4

What laws regulate securities? (continued) • California law – “Substantive fairness” model – Corporate Securities Law of 1968, Corporations Code Sections 25000 through 25707 – Exemptions – Website for California statute: http: //www. leginfo. ca. gov/cal. html; regulations (Title 10: http: //www. calregs. com/linkedslice/default. asp? SP=CCR 1000&Action=Welcome); Guide to CA Securities Law Practice, The Corporations Committee of the Business Law Section of The State Bar of California (2003). August 3, 2006 3731806 5

What laws regulate securities? (continued) • Blue Sky laws of other states – primarily “disclosure” obligations, not “substantive fairness. ” • Foreign securities laws – apply to sales to nationals and in those other jurisdictions. August 3, 2006 3731806 6

Which laws apply to any particular securities transaction? • Federal registration requirements: U. S. , unless intrastate or foreign • State law jurisdiction: Any state that touches a transaction • AIM Stock Exchange – http: //www. londonstockexchange. com/engb/products/companyservices/ourmarkets/aim/ August 3, 2006 3731806 7

Which laws apply to any particular securities transaction? (continued) • Sarbanes-Oxley Act of 2002 • Securities Act Section 18 limited pre-emption of state laws • Stock Exchanges. See http: //www. nasdaq. com/about/Market. Place. Rules. stm August 3, 2006 3731806 8

Private Placements (Note that none of these exemptions exempt the transaction from the securities fraud regulations. ) • Securities Act Section 4(2) – “transactions by an issuer not involving any public offering” • Regulation D – Clear guidance, safe harbor from registrations requirements of the Securities Act if certain requirements are met and filing is made – Accredited Investor definition: Individuals with $200, 000 annual income ($300, 000 jointly) or $1 million net worth; entities with $5 million; banks and other institutions; executive officers and directors of the issuer – Practice Note: If even one non-accredited investor is included in an offering a detailed private placement memo will have to be prepared for all August 3, 2006 3731806 9

Private Placements (continued) (Note that none of these exemptions exempt the transaction from the securities fraud regulations. ) • California exemptions – 25102(f): Sales to 35 plus accredited – 25102(h): Sales of voting common stock in a corporation where there will be only 35 shareholders after the sale – 25102(i): Sales to institutional investors – banks, pension plans, insurance companies – 25102(n): Sales to “qualified” investors (similar to accredited investors) unlimited in number, by California corporation or corporation subject to Section 2115 August 3, 2006 3731806 10

Securities Regulation of “brokers. ” • Federal definition of broker: any person engaged in the business of effecting transactions in securities for the account of others – Guide to Broker-Dealer Registration, Division of Market Regulation, U. S. Securities and Exchange Commission, December 2005 http: //www. sec. gov/divisions/marketreg/bdguide. htm#II August 3, 2006 3731806 11

Securities Regulation of “brokers. ” (continued) • California definition of broker/dealer: Corporation Code Sections 25120 and 25230(a) • California licensing of real estate agents as business brokers • Federal and California “finder” exception August 3, 2006 3731806 12

Becoming “publicly” traded • Securities Exchange Act Section 12(g) • The 500 shareholder threshold (the in-bound regulation) • The 300 shareholder threshold (the out-bound regulation) August 3, 2006 3731806 13

Securities as “security” under the UCC • What is a “security” under the UCC? • How is an interest perfected? • How can a creditor realize on the security? August 3, 2006 3731806 14

Giving employees “securities” • Stock options, California Corporations Code 25102(o), SEC Rule 701 – See Guide to California Securities Law Practice by The Corporations Committee of the Business Law Section of the State Bar of California (June 2004 printing) § 4. 1 (for 25102(f)) and § 4. 4 (for 25102(o)) August 3, 2006 3731806 15

Giving employees “securities” (continued) • • Restricted Stock Performance Stock Phantom Stock (Stock Appreciation Rights) Other compensation schemes? (See definition of “securities” discussion above. ) August 3, 2006 3731806 16

Securities Arising in the M&A Context • • • Issuance of promissory notes Hold back provisions Earn-out provisions Issuance of stock to number of owners Consider purchase of assets alternative Acceleration of stock options August 3, 2006 3731806 17

Securities arising in the Joint Venture/Investment Context • Interests in joint venture are securities • Registration Rights – – – Demand Rights Piggyback Rights Supremacy Clauses “Drag Along” Rights “Tag Along” Rights August 3, 2006 3731806 18

Securities Issues in the IPO Context • SEC will review prior issuances of securities to see if appropriate exemptions apply • Employee plans may have to be reviewed to determine effect of IPO on their securities • Disputed employee stock options/stock rights and economic “blackmail” August 3, 2006 3731806 19

Biggest Trouble Spots for Private Companies • Undocumented or misdocumented stock options • Change of Control bonus arrangements • Deferred compensation arrangements permitting issuance of stock • Unclear agreements among owners regarding stock transfer restrictions, buy-outs, registration rights August 3, 2006 3731806 20

Biggest Trouble Spots for Private Companies(continued) • Too many “private” offerings in short time periods • Allowing non-“accredited” investors to purchase securities August 3, 2006 3731806 21

“Securities for the Non-Securities Lawyer” Association of Corporate Counsel – America August 3, 2006 Presented by: Kurt L. Kicklighter Luce, Forward, Hamilton & Scripps LLP August 3, 2006 3731806