Registration Exemption

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.

An investment adviser rents a permanent office in State K, from which it serves ONLY insurance companies and registered investment companies. The adviser claims exemption from State K registration because all of its clients are institutions. The adviser:

1. A.Must register in State K, because the institutional exemption requires having no place of business in the stateCorrect. The in-state office defeats the exemption; client sophistication cannot substitute for the no-place-of-business condition.
2. B.Is exempt if it also has fewer than six retail clientsThe de minimis rule likewise requires NO place of business in the state, so it cannot rescue an adviser with a State K office.
3. C.Is exempt, because advisers to institutions never register at the state levelOverstated. The institutional exemption is conditioned on having no in-state place of business — an office changes everything.
4. D.Need only make a notice filing because its clients are federal covered entitiesNotice filing is for FEDERAL COVERED advisers (SEC-registered). Client identity does not make an adviser federal covered.

Why: The exemption for advisers whose clients are exclusively institutional applies only to advisers with no place of business in the state. Maintaining an office in State K requires registration there (unless the adviser is federal covered), regardless of how sophisticated its clients are. Review: IA registration exemptions.

A firm is asked to sell interests in a program offered under a registration exemption rather than through a registered public offering. How does the exemption affect the firm's due diligence obligation?

1. A.It is reduced, because an exempt offering involves fewer regulatory requirementsWrong. Exemption addresses registration of the securities, not the firm's duty to understand them.
2. B.It is undiminished and arguably heightened, since no staff review has occurredCorrect. The firm's own investigation is the only scrutiny the disclosure will get.
3. C.It shifts to the purchasers, who must be sophisticated enough to evaluate the riskWrong. Purchaser sophistication does not transfer the recommending firm's obligation.
4. D.It is discharged by obtaining each investor's representation that she understands the risksWrong. An investor representation cannot substitute for the firm's own review.

Why: The obligation to investigate arises from the firm's own recommendation, so it does not shrink because the offering is exempt from registration. If anything the exempt offering demands more, because there has been no staff review of the disclosure document and the investigation is the only examination the offering will receive before investors see it. Exemption addresses whether the securities must be registered, not whether the firm may recommend them without understanding them. Had the offering been registered, the firm would still owe the same investigation, with the registration statement as an additional source rather than a substitute.

A colleague describes Regulation S as "just another registration exemption, like Regulation D." Is this framing accurate?

1. A.The framing is entirely accurate -- Regulation S and Regulation D are functionally identical exemption mechanisms, differing only in which types of investors each one covers.Wrong. This flattens a meaningful conceptual distinction into a difference of investor type only.
2. B.The framing is backwards -- Regulation D is the safe harbor confirming the Securities Act does not apply, while Regulation S is the exemption from an otherwise-applicable registration requirement.Wrong. This swaps which regime is the safe harbor and which is the exemption.
3. C.Neither Regulation S nor Regulation D relates to the registration requirement at all; both are solely broker-dealer conduct rules unrelated to Securities Act registration.Wrong. Both regimes are squarely about the registration requirement, not broker-dealer conduct.
4. D.Not quite -- Regulation D is an exemption from an otherwise-applicable registration requirement, while Regulation S is a safe harbor confirming registration never applied to a genuinely offshore transaction.Correct. This captures the actual conceptual difference between the two regimes.

Why: Not quite. Regulation D provides an exemption from the Securities Act's registration requirement for a domestic transaction that would otherwise need to be registered. Regulation S functions differently, as a safe harbor confirming that offers and sales made entirely outside the United States, in the manner the rule specifies, are considered outside the territorial reach of the Securities Act's registration requirement in the first place, rather than an exemption from a requirement that would otherwise apply domestically.