The Regulation A Registration Exemption for Small Securities Offerings


Under section 3(b) of the Securities Act of 1933, the Securities and Exchange Commission has established Regulation A to exempt small offerings of securities from registration requirements. While the exemption does not relieve a company from its obligation not to use false or misleading statements or from state law requirements, Regulation A allows companies to issue and sell securities with less burden and expense than normally required.


Under Regulation A, public offerings of securities that do not exceed $5 million in any 12-month period are exempted from registration requirements for a proxy statement and other materials to be reviewed by the Securities and Exchange Commission. However, a company making an offering of less than $5 million still is required to file an offering statement with the Commission for its review. The offering statement contains a notification, an offering circular, and several exhibits.



The offering circular is similar to a prospectus and it must be provided to prospective purchasers. However, financial statements in the offering circular, in contrast to those in a prospectus, do not have to be audited by a certified public accountant.



Stock purchased from a company pursuant to a Regulation A exemption from normal registration requirements is freely transferable. There are no restrictions on further sale of the stock. Another advantage of a Regulation A offering is that if the offering company continues to be a small company after the offering — that is, it does not have more than $10 million in total assets or more than 500 shareholders — there are no further Securities Exchange Act reporting requirements as there are for other securities.



The offering circular to be reviewed by the Securities and Exchange Commission staff may be prepared in one of three formats. One of the formats is a simplified question and answer document. Thus, the offering circular not only needs less information than the normal registration statement but also is easier to complete.



The Securities and Exchange Commission allows companies to “test the water” to determine if an offering pursuant to Regulation A will be successful. Thus, a company may advertise a prospective offering prior to filing an offering statement with the Commission and prior to incurring the expense of legal and accounting services connected with filing an offering statement. If the company finds that there is sufficient interest in its offering, it must then provide the Commission staff with an offering statement which in turn must be delivered to investors following staff review and prior to any acceptance by the company of money for the stock in the offering.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.

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Duty of Loyalty: Confidentiality




The duty of loyalty prohibits a director from using his or her corporate position to obtain a personal profit or to gain a personal advantage. A director is privy to information that may not be known to others outside the corporate sphere. As part of the duty of loyalty, a director cannot take advantage of corporate information for his or her own personal interests.



A director generally must protect the privacy and secrecy of the corporation’s legitimate internal activities. The failure to protect such corporate information from public disclosure may subject the director to a claim of a breach of the duty of loyalty in addition to business tort claims such as trade secrets violations. Directors have frequently pointed to their duty of loyalty and confidentiality in cases where shareholders have sought to make certain confidential corporate information public. In a recent case, Roy Disney fought to disclose publicly certain confidential information he had obtained from the Disney Corporation’s books and records pursuant to a legitimate shareholder demand under Delaware corporation law. Mr. Disney thought the information about executive compensation was vital to shareholders’ and the public’s understanding of the board’s inability to carry out its fiduciary duties. As customarily happens in these kinds of cases, the court fashioned a confidentiality order to prevent “dissemination of confidential business information to ‘curiosity seekers.’”



Corporate best practices dictate that a matter involving the corporation should be treated as confidential unless the corporation’s entrenched policy is to disclose that type of confidential information, the information is already common knowledge, or the information is already of public record. Typically, corporations designate a spokesperson to handle exclusively all publicity about the corporation and all media inquiries. If a director does communicate publicly about corporate matters, he has the duty to communicate honestly. Thus, balancing the duty of honesty and confidentiality when discussing corporate matters can be a difficult and complicated task.



Of course, directors have duties to disclose confidential information under certain circumstances. Under Delaware law, directors have a fiduciary duty to “disclose fully and fairly all material information within the board’s control” when they seek shareholder action. In addition, directors are also required to disclose (or authorize disclosure of) proprietary information to the public under federal securities law.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.


Duty of Care



A corporate director has the duty to act in good faith in pursuit of the company’s best interests and to use the care that an ordinarily prudent person in a like position would use under similar circumstances. The Model Business Corporation Act implies that corporate officers have an even higher duty of care because they intimately are familiar with and knowledgeable about the corporation’s activities and have better access to corporate information than directors have. Most jurisdictions recognize that high-ranking corporate officers have a fiduciary relationship with the corporation.



Duty of Care


Many states have now enacted statutes that protect directors from personal liability under certain circumstances, particularly where the director is subject to a claim for breach of the duty of care. For the most part, these liability shield statutes apply exclusively to directors. There are notable exceptions. For example, Nevada affords corporate officers the same liability protections as those that are authorized for corporate directors. In states that allow a corporation to decide the scope of liability protection for officers and directors, the corporation’s by-laws must be consulted to determine whether the officer is shielded from personal liability and the extent of any protection afforded. Of course, many corporate officers also act as corporate directors. The facts and circumstances surrounding the claim for breach of the duty of care can also dictate whether the officer/director is shielded from liability.



A subset of the duty of care is the obligation of reasonable inquiry. While directors generally may rely in good faith on information provided by officers or employees of the company who are competent to provide such information, officers are not allowed to do so. Officers are presumed to have knowledge about corporate matters. Thus, an officer’s reliance on information provided by other officers or employees may be misplaced and may constitute a breach of the duty of care. Generally, officers may rely only on the information and reports provided by legal counsel or other expert professionals such as certified public accountants and auditors.





Officers of public companies that are required to report pursuant to federal securities laws are held personally responsible for the information contained in those reports under the Sarbanes-Oxley Act of 2002. Reliance on information provided by others can be problematic. Officers must personally certify that information contained in the reports accurately reflects the company’s financial condition during the reporting period. Stiffer administrative and criminal penalties are now available for securities fraud violations.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.


Disclosure of Material Facts



The duty of disclosure is a component of the duty of loyalty, but it also implicates the director’s obligation to act with due care and in good faith. As part of the duty of care, a director should reveal all relevant material information that he possesses about a transaction to all who are in the position of making a decision about that transaction. The director has a duty to make an informed decision because ultimately it will affect the corporate interest and welfare. When the director has a conflict of interest or perceives a conflict of interest relative to a corporate interest or transaction, he must disclose all known material information that relates to the conflict of interest and/or transaction. The duty of disclosure is implicated in any decision-making process, but particularly applies when stockholder action is required. The scope of the information that must be disclosed is any information that a reasonable person would consider important under the particular circumstances when deciding how to vote on the transaction.



A director may be held liable for a breach of the duty of loyalty if he fails to disclose any actual or potential conflicts of interest relative to a transaction. Other directors who participate in the decisionmaking process are also vulnerable if they knew or should have known of the conflict of interest. Courts will look to the timing of the transaction, its structure, and the level of disclosure. If a conflict of interest existed at the time the transaction occurred, the transaction is not necessarily voidable if it was fully disclosed to the board before the decision was rendered. Shareholders’ ratification of a decision following full disclosure may not be voidable if the decision or transaction ultimately proves fair to the corporation and the shareholders.



A plaintiff who alleges a breach of the duty of loyalty by failure to disclose must establish that the failure to disclose would have significantly altered the decision-maker’s process or deliberations. As one court stated, “a faulty disclosure claim must establish a ‘substantial likelihood’ that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable stockholder.” Misleading or partial disclosures have been held insufficient to meet the disclosure requirement because the shareholders did not receive a “total mix” of information to make an informed decision. Where the plaintiff offers sufficient evidence that a director failed to disclose complete and material information regarding a conflict of interest, many courts take the view that the burden of proof shifts to the director to prove the fairness of the transaction. Ultimately, the duty of loyalty is not breached if the plaintiff cannot show actual injury or prejudice as a result of the director’s failure to disclose complete information.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.


Copyrights, Patents, and Trademarks Defined


Copyrights, patents, and trademarks can be among the most valuable assets of a business.





Copyrights protect original artistic or literary works. Federal law protects “original works of authorship” such as literary works, music compositions, and artistic works. Copyrights are registered with the Copyright Office of the Library of Congress. The owners of copyrights may directly or by authorizing others:




    • Make copies of the copyrighted work;


    • Prepare additional works based upon the copyrighted work;


    • Sell or lease copies to the public; and


  • Display or perform the work in public.





Patents protect inventions. The inventor is granted a property right in the invention by the Patent and Trademark Office for a term of 20 years beginning generally from the date that the application for the patent was filed. Countries grant patents that generally are effective within the country granting the patent. Regarding a patent issued by the United States, the patent owner has the right to bar others from making, using, selling, or importing the patented item in the United States.






Trademarks protect the identification of the source of a product or service. The terms “trademark” or “mark” may be used to refer to trademarks and service marks. A trademark is any word, phrase, symbol, or design or group of such items used to identify and distinguish the goods of one person or business from the goods of another person or business. A service mark is an identification of a service in contrast to a trademark’s identification of a product.



Trademark ownership arises upon legitimate use of the mark in commerce. The owners of trademark rights may choose to register their trademarks with the United States Patent and Trademark Office to put others on notice of their ownership of the trademarks and to raise a legal presumption in favor of their ownership of the trademarks.

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