Looking a Gift of Stock in the Mouth: Donative Transfers and Rule 10b-5

This Note explores whether a gift of stock can constitute a “sale” for the purposes of section lO(b) of the 1934 Act and rule lOb-5 promulgated thereunder. Part I reviews the relevant 1934 Act provisions, and concludes that although the statute’s language and legislative history do not mention gifts of stock as such, they support the inclusion of gifts within the statute’s scope. Part II examines a limited line of cases holding that a bona fide charitable gift is not a sale under section 16(b) of the 1934 Act. This Part concludes that section 16(b) cases are not dispositive of the issue under section lO(b) and rule lOb-5 because section 16(b) serves different purposes and has a narrower scope than rule lOb-5. Part III discusses various transactions which courts have analyzed in light of the sale requirement to determine the distinguishing characteristics of a rule lOb-5 sale. This Part asserts that the hallmarks of a rule lOb-5 sale are a transfer of ownership or control of a security, an exchange of value or passing of consideration, and consistency with the remedial purposes of the 1934 Act. This Part also discusses the scienter requirement, which further limits the kinds of transactions subject to rule lOb-5.

Part IV of this Note applies these elements of a rule lOb-5 sale to donative transfers. This Part concludes that in certain circumstances donative transfers of shares will manifest the three characteristics that define a rule lOb-5 sale – an ultimate transfer of ownership or control, some exchange of value or consideration, and consistency with the remedial purposes of the 1934 Act – and will also satisfy the scienter requirement. Finally, Part V evaluates the implications of this conclusion, demonstrating that the actual purchaser-seller requirement of Blue Chip Stamps v. Manor Drug Stores and other related policy considerations do not preclude a gift of stock from constituting a “sale” for rule lOb-5 purposes.