10b5 . . .

refers to a provision in the federal securities laws which prohibits fraudulent and misleading activities in securities transactions. State securities acts contain similar prohibitions. All of these provisions prescribe severe penalties for violators. As a result, the use of fraudulent or misleading material, the making of misstatements, or the existence of material omissions in a securities offering can have serious consequences to a company and its management.

The text of the 10b5 provision reads as follows:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,

1. to employ any device, scheme, or artifice to defraud,

2. to make any untrue statement of a material fact or 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,

3. or to engage in any act, practice, or course of business which operates or would operate as fraud or deceit upon any person, in connection with the purchase or sale of any security.

The combined effect of 10b5 and similar state laws is to make it very risky, and potentially costly, to deal in company securities in a way is not honest, straightforward, and in strict compliance with the law.

The securities laws, rules, and regulations are complex, and courts have been expansive in their interpretations of the 10b5 and other antifraud provisions of the securities laws. To avoid problems, legal counsel should always be consulted before offering securities for sale. See: Going Public, Lawyers, Private Placements, Reg D, SEC (Securities and Exchange Commission), 33 Act.