RULE 10b-5: THE HIDDEN DISCLOSURE REQUIREMENT IN REGULATION A

Preparing a Regulation A Offering Circular is as much an art as a science.

An issuer offering securities using Regulation A can choose from several disclosure formats, including Form 1-A, Form S-1, or Form S-11. Each of these SEC forms includes a list of information that must be disclosed. For example, Form 1-A lists 17 items, ranging from the cover page to the Exhibits, each with sub-categories and special rules. Transparency and disclosure have been the touchstones of U.S. securities laws since the 1930s, and each form includes hundreds of pieces of information that must be disclosed to prospective investors. 

But even an issuer that made a list of all those items and completed the form meticulously wouldn’t be finished, because 17 CFR §240.10b-5 effectively imposes a catch-all requirement for disclosure.

Rule 10b-5(b) provides:

“It shall be unlawful for any person, directly or indirectly. . . .[t]o make any untrue statement of a material fact or to omit to state a  material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.”

The first part of that statement is easy:  you’re not allowed to make untrue statements of material facts, i.e., to lie.

It’s the second part that requires some thought. A couple simple examples:

  • You’re raising money for a grocery delivery business and there’s a guy on your board named Jeffrey Bezos. You’d better tell investors he’s not that Jeffrey Bezos.
  • Your Offering Circular describes the patent with which you expect to revolutionize the world of online payments. You’d better mention the letter you received alleging that your patent is invalid.

In practice, Rule 10b-5(b) means that no matter how many times you compare the SEC form (Form 1-A, Form S-1, Form S-11) to your Offering Circular, checking off all the boxes, if investors lose money a plaintiff’s lawyer can snoop around, with the benefit of hindsight, looking for something else that should have been disclosed. 

That’s why preparing a Regulation A Offering Circular is as much an art as a science.

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