May 3, 2005
3 Hours and 15 Minutes
1. This is a partially open book exam. You may use the Cox, Hillman,
Langevoort casebook, the statutory supplement required for this course, 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
2. This exam has six (6) 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 fifteen minutes (3:15) 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 three (3) questions. The recommended time for each
question is as follows:
Question 1…………..……..1 Hour and 5 Minutes
Question 2………………..1 Hour and 20 Minutes
Question 3…………………..………..45 Minutes
An additional five minutes is not allocated to any particular question. 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.
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. You may take the exam in this room, in a typing room if you are typing, or in
the computer lab if you previously reserved a spot.
9. If you are taking the exam on a computer, your answers must be formatted
either for WordPerfect or Microsoft Word, and turned in on a disk. Your exam number
must be on both the disk and the top of your answers. The file name should be your exam
number. For example, if your exam number were 666, the file name would be 666.doc or
666.wpd. Double space. Do not put your name on the disk or anywhere on the answers.
10. Be sure to save a copy of your answers on your computer or on another
disk, just in case it is needed. Do not delete it until the beginning of next semester.
11. If you are typing the exam, your exam number should appear on the top of
each page of typing paper. Double space. Do not put your name anywhere on the
12. 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.)
13. Save your answers often, and set your computer to back up every five
minutes. No allowances will be made for problems you could have avoided by saving
your answers regularly.
14. The Honor Code is in effect.
15. Good luck and have a pleasant summer.
DO NOT TURN THIS PAGE UNTIL YOU ARE GIVEN THE SIGNAL TO
(1 Hour and 5 Minutes)
In the summer of 2003, Alpha, Inc. sold $5 million of its common stock pursuant
to Rule 505 of Regulation D. The offering, which began on July 1, 2003 and was
completed by August 1, 2003, fully complied with all the requirements of Rule 505.
Until his retirement on April 10, 2004, Bob Barker was Alpha’s beloved Vice
President for Public Relations. At Bob’s retirement party on his last day of work, Alpha
gave Bob 1,000 shares of Alpha common stock “in recognition of his 25 years of
meritorious service.” The market value of the stock at the time was approximately
$25,000. Bob had no contractual right to this stock and this was the first time Alpha had
ever done this for a retiring employee. The stock Alpha presented to Bob was not
registered, nor did Alpha file anything with the SEC concerning the shares.
Bob was touched. His net worth was only $500,000 at the time and his income at
the time of retirement was only $150,000 a year, so the stock was a substantial addition to
his wealth. Except for an investment in a mutual fund, Bob had never even owned
corporate stock before. Bob was so proud of his new stock that he folded the stock
certificate and carried it in his wallet from then on.
On May 1, 2005, Bob was in the Oolala Bar in Hawaii with his friend Daphne
Deal, a stock broker. After a significant amount of time in the bar, Bob discovered he
didn’t have enough money to pay his bill. He asked Daphne if she would pay it. “No,”
she replied, “but I think I can help you. You still have that stock certificate, don’t you?
Give it to me and I’ll get you some money for it.”
Daphne went around the bar and finally found a bar employee, Candi Cane, who
was willing to buy the stock for $10,000. Bob sold the stock to Candi in return for her
payment of the bar bill and two checks: one to Daphne for her usual 5% sales commission
and one to Bob for the rest of the price, less the bar bill.
Discuss whether Bob or Alpha have violated the Securities Act.
1. Securities Act Rule 701 does not apply to anything in this question.
2. Alpha has not engaged in any securities transactions, other than those
mentioned, during the time period covered by this question
3. No securities fraud occurred.
(1 Hour and 20 Minutes)
Omega is a well-known public company whose common and preferred stock is
traded on the New York Stock Exchange. Omega files reports pursuant to the Exchange
Act. In late December 2004, Omega decided to sell additional preferred stock to help pay
for a new manufacturing facility.
On January 2, 2005, Omega published a half-page ad in the Wall Street Journal
that stated, in large capital letters: “ANOTHER OMEGA PUBLIC OFFERING. FOR
DETAILS, SEE www.omeganotice.com.” This was all the ad said, except for a small
disclaimer at the bottom: “This ad is not an offer.”
The following appeared at www.omeganotice.com:
NOTICE OF UPCOMING PUBLIC OFFERING
Omega will be selling 100,000 additional shares of preferred stock at a price
of approximately $50/share.
The preferred stock to be issued is convertible into common and has a
dividend preference of $0.50/share. We expect to file a registration statement
around Feb. 1, and to be able to sell the shares around April 15.
The money raised will be used to pay part of the cost of a new manufacturing
facility for Omega.
This is not an offer to sell the preferred stock.
Go to Omega’s Home Page
The link at the bottom of the page took the reader back to Omega’s home page,
which included all kinds of information about the company, its products, its officers and
directors, and its history. Under a “News About Omega” heading, the home page also
included links to media stories about Omega and its prospects. Except for adding recent
news stories, Omega’s home page has looked exactly the same since the beginning of
Larry Law, a wealthy attorney, saw the Wall Street Journal ad and went to the
specified web page for details about the offering. On February 3, 2005, the day after
Omega filed its registration statement with the SEC, Larry called his broker, Barb Broker.
Barb works for Investo Partners, the lead underwriter for Omega’s offering. Barb told
Larry about the upcoming offering and asked if he was interested in buying. She gave
him an honest review of what analysts were saying about Omega and its future prospects,
and expressed her true belief, based on extensive research about Omega, that it was an
Larry said, “As a drug company, Omega must be involved in a lot of medical
research. They don’t do anything involving fetal tissue, do they? I am strongly opposed
to the use of fetal tissue in medical research.”
“No,” Barb replied. “They stay out of that mess.” In fact, as Barb knew from
reading the preliminary prospectus, about 40 percent of Omega’s research involved fetal
tissue and some of their best-selling drugs resulted from that research.
“Then, I’m interested,” Larry told Barb. “Send me a preliminary prospectus.”
Barb sent a preliminary prospectus to Larry the next day. He received it, but
never got a chance to read it.
Omega’s registration statement became effective on April 7. On April 8, Barb
called Larry again and asked if he wanted to buy some of the preferred stock. Larry said
he wanted to purchase 1,000 shares (at the offering price of $48 a share). On April 10,
Barb mailed Larry a confirmation and a copy of the final prospectus.
On May 1, some medical equipment that Omega was using for fetal tissue
research caught fire and exploded. The explosion destroyed a good part of Omega’s
factory and inventory. Omega was underinsured, so it will have to bear some of this loss
itself. On May 2, when Omega announced this to the public, its preferred stock price fell
from $46 a share to $39 a share.
Discuss Larry’s claims, if any, under federal securities law.
Cleanway, Inc. manufactures and sells an industrial-strength cleaning solution
called Super Shine. It only sells the solution in 50-gallon drums. Until recently, all of its
customers were big institutions, such as hotels, hospitals, and office buildings, which do
large amounts of cleaning.
After receiving inquiries from several individuals who were impressed by how
well Super Shine cleaned, Cleanway began selling Super Shine to individuals, but still
only in 50-gallon drums. When some individual purchasers asked if they could resell the
cleaner to their friends, Cleanway set up what it calls its Dealer Program. Any individual
buying a 50-gallon drum may pay a $200 annual fee to become a dealer. Once a person
becomes a dealer, Cleanway will sell the dealer individually labeled small plastic bottles
that can be filled from the large drums. Dealers must agree not to do any advertising,
although they may go door to door.
Cleanway has had a very good response to its Dealer Program. Many people, very
few of whom have past experience with cleaners or the cleaning business, have signed up.
Cleanway advertises in newspapers and magazines and on television and radio.
Each ad says that Super Shine is not sold in stores and gives a phone number and Internet
address for buyers to contact. If institutions contact Cleanway, it sells to them directly. If
individuals contact Cleanway, it asks if they want to buy a 50-gallon drum or a smaller,
consumer size. If they want to buy a smaller size, Cleanway gives them the name and
phone number of the nearest dealer. If they want to buy a drum, Cleanway sells to them
directly, explains the Dealer Program, and asks if they want to be dealers.
Cleanway’s advertisements include a money-back guarantee; customers who are
dissatisfied with Super Shine can get a refund. Cleanway requires dealers to honor the
guarantee and pay for any refunds out of their own pockets.
Discuss whether Cleanway is selling securities to the dealers.