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May 2, 2012
3 Hours and 35 Minutes
1. This is a partially open book exam. You may use the Cox, Hillman,
Langevoort casebook; the required statutory supplement; any handouts
provided by the professor: and any materials, such as notes or outlines,
written and prepared exclusively by you. During the exam, you may not
use or possess any other materials, written, digital, or recorded. You may
not use or possess a cell phone or any other electronic device other than the
computer on which you are taking the exam. You may not consult with or
communicate with any other person during the exam. If you have any other
books, notes, briefcases, book bags, cell phones, electronic devices, or other
items, you must bring them to the front of the room now. You may not take
any of these items to another designated exam room.
2. This exam has eleven (11) pages, including the instructions. The page
numbers appear on the top right-hand corner of each page. Please check to
be sure that this copy has all the pages.
3. You have three hours and thirty-five minutes (3:35) to complete the
exam. You must turn in your answers in this room, even if you are taking the
exam somewhere else in the building. If you finish more than five minutes
early, you may turn in your answers in the Dean’s Office.
4. The exam consists of six (6) questions. The recommended time for each
question is as follows:
Question 1……………………..…….. 40 Minutes
Question 2………………..………….. 40 Minutes
Question 3…………………..……….. 20 Minutes
Question 4..………………………….. 30 Minutes
Question 5…………………………… 40 Minutes
Question 6…………………..……….. 45 Minutes
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Each question will be weighted in accordance with its recommended time.
5. Do not spend all of your time writing. Think about the issues and
organize your answers before writing. Be concise. Be organized. Long,
disorganized, rambling answers will be penalized, as will merely “dumping”
portions of your notes or outline into your answers rather than answering the
6. This exam will require you to interpret and apply many of the statutory
provisions and regulations we have examined. You should not just state
general principles, but should cite the relevant sections and subsections of the
statutes and regulations and explain how the language of those rules applies
to the facts of the question. An answer that doesn’t cite and analyze relevant
statutes or regulations is incomplete and will not receive full credit.
7. If you believe that additional facts are needed to answer a question, state
exactly what those facts are and how they would affect your answer. If you
believe that a question is ambiguous or unclear, note the ambiguity or lack of
clarity and indicate how it affects your answer.
8. The Honor Code is in effect.
EXAM 4 INSTRUCTIONS
9. You must take the exam on a computer that has the latest version of the
Exam 4 software installed. Use the OPEN mode. If you have not previously
installed the Exam 4 software, please notify the exam administrator
10. Be sure to enter your exam number in the Exam ID field. (Do not use
your NU Card ID number or your social security number.) You will be
required to enter your exam number twice. Select the course name from the
drop-down box. Be sure you find the folder for this course, because that is
where your exam will be stored. Verify that the information is correct just
before you select “Begin Exam.”
11. Do not worry about headers, footers, page numbers, or double-spacing
your exam; the software does all that for you when the exam is printed.
12. When you are finished, please submit your exam electronically. A pop-
up box will show the status of your exam. It should show a black bar with
100% in it and a message that says, “Your file has been successfully stored.”
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If you do not get this message, please see Vicki Lill in the Dean’s office
immediately. After successfully submitting your exam, exit Exam 4 before
leaving the classroom.
13. If you have any technical problems during the exam, please report them
immediately to the Dean’s Office; we will assume you had no technical
problems until you reported them. Be prepared to finish your exam by
writing it. (Regular notebook paper is O.K.)
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Zappa Corporation is a Delaware corporation whose common stock is traded
on NASDAQ. It is a reporting company under the Exchange Act. Zappa has
4 million common shares outstanding.
On January 11, 2012, Zappa sold 300,000 shares to Buyer, Inc. in a private
offering for $50 a share. The NASDAQ market price of Zappa shares at the
time was $48. Zappa’s contract with Buyer provided that, if the NASDAQ
market price at the close of trading on April 11 was below $45 a share, Buyer
could buy an additional 1,000,000 shares for a price $10 less than the closing
market price. Such a sale would substantially dilute the value of Zappa’s
outstanding shares. Shortly after Zappa signed this contract, it issued a press
release fully disclosing the contract’s details.
Hearst, LLC is a free-lance public relations firm used by Zappa as an
independent contractor from time to time. Fred Flack is the Hearst vice-
president in charge of the Zappa account.
Between January 11 and April 6, stock prices in the United States fell by an
average of ten percent. (It really didn’t, but assume it did for purposes of this
question.) By April 6, the market price of Zappa’s common stock was only
$44.98 a share. Peter Prez, Zappa’s CEO, was worried that the stock
purchase option in the Buyer contract might be triggered. He called Flack
and told him to think about ways to increase the price of Zappa’s stock.
On April 9, Flack drafted and sent to Prez a proposed press release
announcing a new contract between Zappa and Wizzo Corporation.
According to the release, the new contract would result in $200,000 in
additional sales for Zappa over the next two years, an increase of
approximately one percent a year. The bottom of the press release said
“Released by Zappa Corporation” and included a space for Prez to sign his
approval. Neither Hearst’s nor Flack’s name appeared anywhere on the
Flack told Prez he obtained the information from Victoria Veep, Zappa’s
Vice President for Sales. In fact, Flack just made up the information and
Veep was totally unaware of the press release.
Prez signed the press release and, in the late afternoon of April 10, had his
secretary e-mail it to the financial media and all the financial analysts that
follow Zappa. Neither Prez nor anyone else at Zappa checked with Veep or
Wizzo to verify the news. The news about the Wizzo contract was widely
reported on April 11 and, by the end of the day, the price of Zappa common
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stock had risen from $44.97 to $45.01.
On April 12, Veep heard the news and told Prez that the release was false—
Zappa had not signed a contract with Wizzo. Prez immediately called Buyer
and told it Zappa would honor its option. Veep and Prez then drafted and
publicly released the following statement:
Yesterday’s report of a new contract with Wizzo was incorrect. There
is no such contract. Zappa will no longer be using the public relations
firm that drafted the release.
Zappa acknowledges that, but for the false press release, yesterday’s
closing stock price could have been less than $45 a share, and Buyer’s
right to buy Zappa stock would have been triggered. In settlement of
all claims Buyer might have, Zappa has agreed to allow Buyer to buy
1 million shares of Zappa stock at a price of $35 a share.
On April 12, the market price of Zappa’s common stock fell to $40 a share. It
has remained at approximately that level since.
Discuss the potential liability under Rule 10b-5 and the Exchange Act of (1)
Zappa Corporation and (2) Flack.
Do not discuss liability under the Securities Act.
Do not discuss the liability of any person other than Zappa Corporation or
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You are an associate in the firm Smith, Smith, and Smith. Sandra Smith, one
of the firm’s partners, has asked you to discuss whether Acme Corporation,
one of the firm’s clients, is eligible to sell its Class A common stock in a shelf
registration that is effective immediately upon filing. Smith has provided the
Acme Corporation is a Delaware corporation that provides data
management services to customers throughout the United States. Its
corporate headquarters are located in New York, but its primary data
storage facility is in North Dakota. Acme has no subsidiaries.
Acme is a reporting company under the Exchange Act. It is not and
has never been an investment company, a business development
company, an asset-backed issuer, a shell company, or an ineligible
issuer, as those terms are defined for purposes of federal securities
Acme has two classes of equity outstanding: Class A voting common
stock and Class B non-voting common stock. The Class A stock, but
not the Class B, is traded on the New York Stock Exchange. Acme
has no other outstanding securities.
The market value of Acme’s outstanding Class A stock is $630
million. The market value of its outstanding Class B stock is $95
million. No single person or company owns more than ten percent of
either class of stock.
Acme wants to offer additional Class A common stock for cash. Its
plan is to sell the stock on the New York Stock Exchange at whatever
the market price is at the time of sale. Acme wants to begin selling the
stock immediately upon filing the registration statement and will
continue to offer the stock as it needs cash over the next three years. It
expects to sell a total of $300 million worth of the stock in the
Respond to Smith. If you need more information, tell her in your response
what else, if anything, you need to know, and how it would affect your
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Discuss the relevance and importance of each of the following factors
(considered by itself, in the absence of the other factors) in deciding whether
an investment is a security.
1. The offering brochure indicates that the purchaser is not acquiring an
2. There is only one investor.
3. The investor is promised a fixed rate of return that does not depend
on how well the business performs.
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Broker, Inc., a registered broker-dealer, recently participated as a dealer in an
offering of common stock by Issuer Corporation. Issuer filed a Form S-1
registration statement on January 9, 2012, and the registration statement
became effective on April 16, 2012. (Issuer was not eligible to use Form S-3.)
Broker occasionally publishes reports on publicly traded companies that it
thinks might interest its clients. These reports are posted on a password-
protected web site and are available only to Broker’s clients. Each report is
usually limited to one particular industry, but highlights only a couple of
companies in that industry. The particular companies highlighted vary from
report to report and the reports appear sporadically—sometimes months
apart; sometimes only a few weeks apart.
In November, 2011, before it was contacted by Issuer, Broker posted a report
to its clients discussing interesting companies in the office paper products
industry. Twelve publicly traded companies in the United States produce
office paper products; the November release featured three of them—Issuer,
Alpha Corporation, and Beta Corporation.
Broker’s November office paper products report, like all of its industry
reports, contained three sections:
1. Company background information: A discussion of the history of the
company, the nature of its business, and its officers and directors.
2. Financial information: Summaries of the information in the company’s
latest financial statements.
3. Securities-related information: A description of the company’s
outstanding securities, including their current market price. If the
company is currently offering additional securities, this section also
briefly discusses the details of the offering. (None of the three
companies in the November report were offering securities, so there
was no information about offerings in the November report.)
On April 4, shortly before Issuer’s registration statement became effective,
Broker sent another report on the office paper products industry to its clients.
The April 4 report included the usual three categories of information on three
companies—Issuer, Gamma Corporation, and Delta Corporation. The
securities-related information on Issuer included information about Issuer’s
Discuss whether the April 4 publication violated section 5 of the Securities
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Beta, Inc. is a Delaware corporation. On March 31 of this year, it became
subject to the reporting requirements of the Exchange Act. It recently filed its
first required report with the SEC.
Beta has 500,000 shares of common stock outstanding. The Beta stock is not
listed on a securities exchange or on any automated quotation system, and
almost none of the shares are regularly traded.
Sam Seller is a sophisticated accredited investor. Seller is not a director,
officer, or employee of Beta.
Seller’s relationship with Beta began two years ago when he loaned it a
substantial amount of money. Beta, which needed the money to resolve some
cash flow difficulties and help it avoid bankruptcy, has not repaid the loan.
The loan agreement requires Seller’s approval for Beta to engage in any
transaction involving $100,000 or more in assets and any transaction,
regardless of amount, outside the ordinary course of Beta’s business.
The loan agreement gave Seller an option to buy Beta preferred stock at a
bargain price. Seller exercised that option on September 1, 2010, and
purchased 8,000 shares of preferred stock from Beta in a private offering. On
February 29, 2012, Seller exchanged all of his preferred stock for 20,000
shares of Beta common stock. That exchange complied with section 3(a)(9) of
the Securities Act.
On April 30, Seller sold 5,000 of the Beta common shares to his daughter,
Darla Daughter, for $40,000 cash. The resale was not registered. Daughter,
an unsophisticated, unaccredited investor, has no other relationship of any
kind with Beta.
Discuss whether Seller’s sale to Daughter violated the Securities Act.
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Lone Star Corporation is an Exchange Act reporting company. It is
incorporated in Texas, which is also its principal place of business. All of its
current customers are in Texas and all of its business is conducted there.
Lone Star owns assets with a total value of $50 million. Except for the
Oklahoma facility discussed below, all of those assets are located in Texas.
Seven months ago, Lone Star sold 80,000 shares of common stock for $4
million in an offering pursuant to Rule 505 of Regulation D. That offering
met all of the requirements of Rule 505, except that Lone Star did not file a
Form D. The money was used to begin construction of a second, smaller
manufacturing facility in Oklahoma.
Lone Star wants to sell an additional $3 million of common stock to
complete the construction of the Oklahoma facility. Lone Star’s broker,
Broker Corporation, a New York company, will assist Lone Star in the
offering. Lone Star plans to sell to the following purchasers, all of whom are
existing clients of Broker:
Magna GP, a general partnership consisting of 40 individuals, all of
whom are sophisticated investors. Half of Magna’s partners have a net
worth, excluding the values of their residences, in excess of $1
million. (The other 20 are less wealthy.) Magna was organized one
month ago solely to invest in the proposed Lone Star offering.
Magna’s only office is in Texas and all of the partners are Texas
Carfix, Inc., a Delaware corporation which owns assets worth $20
million. Carfix owns several auto repair shops, all of which are
located in Texas, as is its headquarters. None of the directors, officers,
or employees of Carfix is a sophisticated investor. Carfix has 500
shareholders located across the country. Many of them are neither
wealthy nor sophisticated investors.
Twenty college professors who teach finance and investment at
nationally known universities across the country. None of the
professors has a net worth of $1 million or more and all of their
annual incomes are $150,000 or less.
[Question continues on next page.]
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Lone Star does not want to register the offering. Discuss whether one or
more of the exemptions we have studied would be available for the Lone Star
offering. Confine your analysis to regulatory exemptions and safe harbors.
Lone Star does not want to risk the uncertainty associated with purely
In answering this question:
(1) Limit yourself to the question of whether Lone Star’s offering fits
within the exemption in question. Do not discuss any additional
requirements, such as disclosure requirements or resale restrictions,
that Lone Star would have to fulfill if it actually used the exemption.
(2) Discuss all of the eligibility requirements of each exemption, even if
you think one of those requirements would clearly make Lone Star