Antifraud Provision

Calder Optics is selling securities in a properly conducted offering that is exempt from registration under the Securities Act. Its offering memorandum overstates the revenue produced by the company largest contract. A purchaser who relied on that figure sues. What effect does the exemption have on the claim?

1. A.The exemption defeats the claim, because unregistered securities are sold on a buyer-beware basis.Wrong. No provision of the Securities Act creates a buyer-beware regime for exempt offerings.
2. B.The exemption limits the purchaser to whatever remedy the subscription agreement gives him.Wrong. Statutory antifraud liability exists independently of anything the subscription documents say.
3. C.The exemption is beside the point, because the antifraud provisions apply to exempt offerings.Correct. Exemption runs to registration only, so a material misstatement remains actionable.
4. D.The exemption is available only if the SEC reviewed the memorandum for accuracy first.Wrong. The SEC reviews no offering document in an exempt offering, and the exemption does not depend on review.

Why: The registration exemptions relieve an issuer of the duty to file a registration statement and have a prospectus delivered. They do not touch the antifraud provisions, which reach any offer or sale of any security whether or not it was registered. Section 17(a) of the Securities Act and Rule 10b-5 under the Exchange Act therefore apply to this offering on the same terms they would apply to a registered one. What would change the outcome is whether the overstatement was material, not whether an exemption was available.

A national bank issues a principal-protected MARKET-LINKED CD whose return is tied to an equity index. Under the Uniform Securities Act, the instrument is:

1. A.Not any kind of financial instrument the Act recognizesWrong. The Act recognizes it - and exempts it.
2. B.An exempt security because of its bank issuer, though sales practices remain regulatedCorrect. The issuer-based exemption plus ever-present antifraud authority.
3. C.A nonexempt security requiring state registrationWrong. The bank exemption forecloses registration requirements.
4. D.Exempt from the antifraud provisions as wellWrong-but-tempting. NOTHING is exempt from antifraud provisions.

Why: Securities issued or guaranteed by banks are exempt securities under Sec. 402(a)(3), covering structured CDs issued directly by banks; abusive sales practices remain reachable through antifraud provisions. Citation: Uniform Securities Act Sec. 402(a)(3). Takeaway: bank issuance confers the exemption - conduct rules still apply.

To create interest in a thinly traded stock, an agent posts quotes he knows reflect prearranged trades between colluding parties rather than genuine supply and demand. This conduct is:

1. A.Prohibited manipulation through fictitious quotationsCorrect. Quotes derived from prearranged trades deceive the market.
2. B.Permissible market-making activityWrong. Bona fide market making rests on genuine two-sided interest.
3. C.A violation only on exchange-listed securitiesWrong. Antifraud provisions cover all securities, listed or not.
4. D.Permissible if the stock later trades at those pricesWrong-but-tempting. Subsequent market coincidence never launders staged quotes.

Why: Circulating quotes based on wash trades or matched orders creates a false appearance of market activity, a manipulative and deceptive practice prohibited by the antifraud provisions and NASAA policy. Citation: Uniform Securities Act Sec. 101; NASAA Statement of Policy (fictitious quotations). Takeaway: quotes must reflect real markets, not staged ones.

Ashgrove Robotics is raising money under Rule 506(b). Twenty-nine of its purchasers are accredited; two are not, though both are sophisticated. Ashgrove is not an Exchange Act reporting company. Which statement about the disclosure it must deliver is correct?

1. A.It must furnish the information to all 31 purchasers, because the exemption is offering-wide.Wrong. Rule 502(b) states expressly that the information need not be furnished to accredited investors.
2. B.It need furnish the information to nobody, since every purchaser is accredited or sophisticated.Wrong. Sophistication qualifies a purchaser to buy; only accreditation switches off the information requirement.
3. C.It must furnish the information to the two non-accredited purchasers once their subscriptions are accepted.Wrong. The rule requires delivery a reasonable time prior to sale, so that the purchaser can use it to decide.
4. D.It must furnish the information to the two non-accredited purchasers a reasonable time before their sale.Correct. The duty is triggered by the presence of a non-accredited purchaser and is owed only to that purchaser.

Why: Rule 502(b) switches the disclosure duty on and off by purchaser rather than by offering. If an issuer relying on Rule 506(b) sells to any purchaser who is not accredited, it must furnish that purchaser the specified non-financial and financial information a reasonable time prior to sale; it is not required to furnish that information to accredited investors, although the antifraud provisions make doing so sensible. Sophistication does not switch the duty off, because sophistication is the separate condition that lets a non-accredited person buy at all. Had Ashgrove sold to accredited investors only, the Rule 502(b) package would not have been required of it.