CORPORATIONS

1 Securities Regulation Professor Bradford May 4, 2009 8:30 a.m. 3 Hours and 30 Minutes INSTRUCTIONS 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, prepared exclusively by you. You may not use any other materials, written, digital, or recorded. You may not consult with or communicate with any other person during this exam. 2. This exam has seven (7) 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 minutes (3:30) 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 five (5) questions. The recommended time for each question is as follows: Question 1……………………..……..30 Minutes Question 2………………..…………..30 Minutes Question 3…………………..………..35 Minutes Question 4..…………………………..55 Minutes Question 5……………………………60 Minutes 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 question posed. 2 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. 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. 9. Good luck and have a pleasant summer. Instructions Concerning Taking the Exam on a Computer 10. 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 immediately. 11. 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.” 12. 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. 13. 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.” If you do not get this message, please see Vicki Lill in the Dean’s office immediately. 14. 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 when you reported them. Be prepared to finish your exam by writing it. (Regular notebook paper is O.K.) DO NOT TURN THIS PAGE UNTIL YOU ARE GIVEN THE SIGNAL TO BEGIN. 3 Question 1 (30 Minutes) Hercules, Inc. wants to raise $10 million selling common stock. It does not want to register the offering. Hercules has not sold any other securities in the last five years. It is not a reporting company under the Exchange Act. Hercules plans to solicit two groups of potential purchasers: (1) the people on the latest Money magazine list of the 100 wealthiest individuals in the United States (each with a net worth of more than $200 million); and (2) the people on MBA magazine’s list of the top 25 professors teaching finance and investment courses. Discuss whether an exemption from registration is available for this offering if Hercules proceeds exactly as described. (Do not suggest ways Hercules might change the offering to fit an exemption.) 4 Question 2 (30 Minutes) Jupiter Corporation is a reporting company under the Exchange Act. Jupiter is not eligible to use registration Form S-3. Jupiter is not an investment company. Several years ago, Jupiter sold convertible bonds in a registered public offering. The bonds have a 5% nominal interest rate and bond holders have the right to convert the bonds into common stock at any time. Most of the bonds are still outstanding; they are publicly traded on NASDAQ. Jupiter now wants to sell more of the same bonds to raise additional money. Jupiter’s plan is to offer the bonds continuously over the next three years through its web site. The sales price will be the NASDAQ market price at the time of sale. Jupiter expects to be able to sell about $100,000 worth of the bonds each year, so it wants to register $300,000 worth of bonds. Discuss whether Jupiter’s proposed offering qualifies for shelf registration. 5 Question 3 (35 Minutes) Medview, Inc. and Bonebook Corporation are the two biggest manufacturers of handheld medical readers, used by doctors to view x-rays and MRIs. The readers are the only product Medview and Bonebook make; each has a 40% share of the market. The common stock of each company is traded on the New York Stock Exchange. Sam Sales is Medview’s Vice-President for Marketing. On January 5, 2009, Sam was interviewed by Nellie News, a reporter for Newsweek magazine who was working on a story about handheld medical readers. Sam told Nellie that he believed Medview would “soon announce significant improvements” to its reader that would “shake up the market.” Sam knew this was false; Medview had no promising developments in the works. Newsweek published Nellie’s story on February 1. The story included Sam’s quotes and said Medview appeared well-positioned to increase its market share. In the same article, Paula Prez, the CEO of Bonebook, stated that Bonebook was recalling 4,000 of its readers because of a defective battery pack. In the week after the story appeared, the market price of Medview stock rose from $40 to $50 a share and the market price of Bonebook stock dropped from $70 to $60. Tom is a Medview shareholder. On the evening of January 31, Tom called his broker and told him to sell Tom’s Medview stock on the following day. Tom read the Newsweek article early the next morning; he immediately called his broker and cancelled the sale of his Medview stock. Jerry was a shareholder of Bonebook. He sold his Bonebook stock on February 2 for $65 a share. Jerry did not read the Newsweek article before selling his stock. On February 10, Medview announced that Sam’s statements to Newsweek were incorrect and that Medview had no significant improvements to its reader in development. Over the next two days, the market price of Medview’s stock fell from $50 to $35 a share; the market price of Bonebook stock rose from $60 to $68 a share. Tom and Jerry have sued Sam for violating Rule 10b-5. Their claim is based on the false statements in the Newsweek article. Discuss Sam’s possible liability. 6 Question 4 (55 Minutes) Pluto, Inc. is an Exchange Act reporting company; it has been filing reports for nine months. The market value of its outstanding common stock, excluding stock owned by affiliates, is $850 million. Pluto is not an investment company as defined in the Investment Company Act, and it is not an “ineligible issuer’ as defined in the Securities Act regulations. On December 1, 2008, Pluto filed a registration statement with the SEC for a public offering of preferred stock. The offering was a best efforts underwriting. The registration statement became effective on March 1, 2009. On February 15, 2009, Pluto sent an e-mail to its common shareholders; it simultaneously sent a copy of the e-mail to the SEC for filing. The e-mail indicated that Pluto had filed a registration statement to sell 250,000 shares of preferred stock at an approximate price of $40 a share, and that Pluto would use the offering proceeds to build new manufacturing facilities. The e-mail also included Pluto’s revenue and earnings per share for the most recent fiscal year, as well as projections of revenue and earnings per share for the next two years. The e-mail concluded with the following paragraph: Pluto has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other documents Pluto has filed with the SEC for more complete information about Pluto and this offering. You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov. Alternatively, Pluto or any underwriter or dealer participating in the offering will arrange to send you the prospectus if you request it by calling toll-free 1-888SUCKERS. (Assume that everything in the e-mail was truthful.) Callisto is a Pluto shareholder who received the e-mail. She called the toll-free number on February 20 and was sent a copy of the preliminary prospectus. On March 2, after the registration statement became effective, Callisto purchased 1,000 shares of the preferred stock from Pluto. Pluto immediately sent Callisto a confirmation of the purchase and a copy of the final prospectus. Discuss whether Pluto is liable to Callisto under section 12(a)(1) of the Securities Act. (Do not discuss any other possible liability.) 7 Question 5 (60 Minutes) Ulysses is a law professor at Atlas University Law School. He is a wealthy, very sophisticated investor who qualifies as an accredited investor pursuant to Securities Act Rule 501(a)(5). On November 15, 2008, Ulysses purchased 1,000 shares of common stock from Neptune Corporation in an offering exempted from registration by Rule 506 of Regulation D. Neptune, which has 450,000 shares of common stock outstanding, is not an Exchange Act reporting company. Neptune’s shares are not publicly traded. Ulysses is not related to Neptune in any way, other than owning the 1,000 shares, On January 15, 2009, on the first day of his Securities Regulation class, Ulysses offered 100 shares of his Neptune stock as a prize to the student with the highest grade in the class. Atlas University’s semester ended on April 25, 2009. On May 1, Ulysses transferred 100 Neptune shares to Diana, the student with the highest grade. Diana, a political science major as an undergraduate, had never owned any stock before. Prior to receiving the Neptune stock, Diana’s only investment was $200 in a bank savings account. Her net worth is about $10,000 and she has almost no income. On May 15, Ulysses sold 500 shares of the Neptune stock to Saturn Corporation for a 50% profit. Saturn is a huge privately-owned investment firm; it has securities investments worth $300 million. On June 1, 2009, Ulysses sold the remaining 400 Neptune shares to his sister, Leda. Leda is neither sophisticated nor an accredited investor. Discuss whether Ulysses has violated the Securities Act. In your analysis, treat each of Ulysses’ three transactions as separate and do not address whether they should be treated as a single transaction.