Monday, September 16, 2013

Are We Teaching Securities Law Backwards?

It seems like almost everyone, including the President of the United States, has been offering grandiose ideas to reform legal education. Rather than add to that cacophony, I'm thinking on a micro-level, wondering how I might change my favorite course, Securities Regulation. I think we may be teaching securities registration exemptions backwards.

A very quick overview for those not versed in federal securities law: A company raising money by selling securities must register its offering with the SEC unless it has an exemption from the registration requirement. A number of exemptions are available and companies would prefer an exemption, ceteris paribus, because registration is very expensive.

In securities law practice, the analysis typically proceeds in this order:

Offering Details--Universe of Possible Exemptions--Modification of Offering--Particular Exemption.

The client presents the lawyer with a proposed offering. The client has typically already given some thought to the amount of money needed, the proposed offerees, and perhaps even the manner of offering to those people. The lawyer considers those constraints, considers the universe of possible exemptions and, perhaps after a modification to what the client wants, chooses a particular exemption.

This is also how securities professors like me often test their students on the exemptions. We present students with a proposed offering and ask them to advise the client concerning which exemptions, if any, are available for that offering, and what modifications need to be made to the client's proposal to fit those exemptions.

This is not, however, how most of us teach the subject. The leading casebooks typically present the material in this way:

Particular Exemption--Offering Details--Modification of Offering.

Each particular exemption is presented separately (except that the Regulation D exemptions are sometimes considered together). Students are then asked if particular offerings would fit within those exemptions.

Consider this alternative to the typical casebook approach. Begin with a very brief overview of each exemption, not more than a paragraph or two, just so students know where to look. Then, organize the material by offering details:

(1) Amount of the Offering. This issuer proposes to sell $2 million of securities. Which exemptions would be available?

(2) Offerees and Purchasers. This issuer proposes to offer to the general public. Which exemptions are available? This issuer proposes to limit its sales to wealthy investors; which exemptions are available?

(3) Manner of Offering. This issuer proposes to publish an advertising on the Internet. Which exemptions are available?

(4) Disclosure Requirements: This issuer doesn't want any mandatory disclosure. Which exemptions are available?

And so on. This may not be the best sequence, but you get the general idea.

I think this organization would force students to think more like securities lawyers: consider the facts (offering amount; characteristics of the offerees, etc.), look at the universe of possible exemptions, and determine which exemptions, if any are available.

The substance covered would be the same under each approach, but the alternative approach would be truer to the type of analysis required in practice (and on the exam). We would be teaching students how to do the analysis, instead of forcing them to learn it on their own.

This is all tentative thinking on my part, so I would be interested in your views. It always worries me when I disagree with the way everyone else is doing something. (I don't change my mind, but it does worry me.)  It may be that the best solution is just to buy each student one of these. (If my mother had bought one of these, my first reaction would have involved an ax. To the study carrel, not to my mother. I'm no Lizzie Borden.)

In my next post, I will discuss why I think the way we're teaching business associations may also be backwards.

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