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Securities Regulation
Professor Bradford
April 28, 2011
8:30 a.m.
3 Hours and 10 Minutes
GENERAL 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. If you have any other books, notes, briefcases,
book bags, cell phones, PDAs, 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 twelve (12) 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 ten minutes (3:10) 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 eight (8) questions. The recommended time for
each question is as follows:
Question 1……………………..…….. 10 Minutes
Question 2………………..………….. 35 Minutes
Question 3…………………..……….. 15 Minutes
Question 4..………………………….. 25 Minutes
Question 5…………………………… 30 Minutes
Question 6…………………..……….. 15 Minutes
Question 7..………………………….. 35 Minutes
Question 8…………………………… 25 Minutes
Each question will be weighted in accordance with its recommended time.
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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. 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
immediately.
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 popup 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
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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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Question One
(10 Minutes)
Delta Corporation is offering stock pursuant to Rule 506. One of the
potential purchasers is Sally Simple, a fourth-grade dropout who recently
won $5 million in the lottery. After paying all her debts and buying an
expensive sports car, Sally still has $4.5 million in her savings account. Sally
is being advised by her friend Bridget Bright, who already owns 11% of
Delta’s stock. Bridget teaches investment courses at the Harvard Business
School.
Discuss whether Delta may sell to Sally in the Rule 506 offering.
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Question Two
(35 Minutes)
Gary Green is a wealthy investor who is also the President of Safe Earth, a
non-profit organization that opposes the irradiation of food. Irradiation is a
way of treating food with radiation to kill potentially harmful bacteria.
Dozens of studies show that irradiation is perfectly safe and that irradiated
food has no harmful effects. (Even if you don’t agree this is true, assume it is
for purposes of this question.)
Viande, Inc. is a company that processes meat and sells it to supermarkets.
Viande irradiates some of the meats it sells, but irradiated meat accounts for
only about 3% of Viande’s total sales and total income.
Viande filed its latest Form 10-K on June 1, 2010. It included the following
statements:
“Viande has a treasured reputation for quality, freshness, and safety.
We care about consumers, and we deliver high-quality meats. . . .
Viande has never had a substantiated consumer complaint about the
safety of our food.”
The 10-K did not mention that Viande irradiated some of its meat.
In July, after Viande filed the Form 10-K, it received a few reports of
consumers getting sick after eating Viande’s irradiated meat. A couple of
these cases involved serious, life-threatening illness. A check by Viande’s
scientists revealed that the problem was not irradiation, but that the special
packaging equipment Viande uses only for irradiated meat was contaminated
with a virus. The scientists fixed the problem and there were no further
reports of illness.
On August 1, 2010, after reading Viande’s 10-K, Green contacted Viande’s
CEO about investing in the company. “I have read your 10-K, and I like your
company,” Green said, “but I won’t invest in Viande if you sell irradiated
meat. That would be inconsistent with my position at Safe Earth.”
“No problem,” the CEO replied. “We don’t irradiate any of our meat.”
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Shortly after this conversation, Green bought $1 million of common stock
from Viande in an exempt private offering. Green was not aware that Viande
irradiated meat. Green was also not aware of the reports of illness.
After Green bought the stock, several consumers who had eaten the viruscontaminated meat, and the estate of one person who died, sued Viande.
Viande expects to be held liable, with total damages of approximately $50
million, roughly the same amount as Viande’s annual income. The price of
Viande’s stock has dropped significantly since these lawsuits were filed.
Green has sued Viande alleging a violation of Rule 10b-5. Discuss Viande’s
possible liability. Assume that, at the time of the August 1 conversation,
Viande’s CEO was aware of the illness reports.
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Question Three
(15 Minutes)
Seller Corporation is considering making an offering pursuant to Rule 147.
Seller is incorporated in New York. Its principal office is in New York and
all of its business is in New York.
One of the potential purchasers is Alpha Corporation, a Delaware
corporation. Alpha’s principal office is in New York, but almost all of its
business is done in other states.
Another potential purchaser is Beta Partnership, a general partnership that
has been in the investment business for 20 years. Beta’s principal office is in
New York City, but its three partners all live in New Jersey.
Assume that Seller meets all the issuer requirements of Rule 147. Discuss
whether Rule 147 allows Seller to offer and sell its securities to Alpha and
Beta.
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Question Four
(25 Minutes)
On October 1, 2010, Acme Corporation filed a registration statement for an
initial public offering of common stock. That registration statement became
effective on January 3, 2011, and Acme immediately sold all of the stock it
had registered. Acme is not an Exchange Act reporting company and its
stock is not traded on NASDAQ or any other stock exchange.
Dan Dealer is a registered securities broker. Dealer did not participate in
Acme’s offering in any way.
On March 20, Dealer called one of his customers, Carla Customer, and
suggested she buy some Acme common stock. Customer agreed that it was a
good idea and told Dealer to buy 500 shares for her account. On that same
day, Dealer bought the Acme stock for Customer’s account from another
customer of Dealer.
On March 21, Dealer mailed a confirmation of the sale to Customer. Dealer
did not send Customer a copy of Acme’s final prospectus, even though
Dealer had several copies of that prospectus available in his office. Customer
has never seen a copy of Acme’s final prospectus or any preliminary
prospectus.
Explain why (1) in the absence of any SEC rule, Dealer’s mailing of the
confirmation would violate the Securities Act; and (2) under the applicable
SEC rules, Dealer’s mailing of the confirmation was not a violation of the
Securities Act.
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Question Five
(30 Minutes)
Star, Inc. is a Delaware corporation that manufactures circuit boards for
computers. Star does business only in the United States.
Star has $76 million of common stock outstanding; $16 million of that
amount is held by affiliates of Star. Star has no other securities outstanding.
Star’s common stock is traded on the New York Stock Exchange.
Star has been an Exchange Act reporting company for the last five years;
during that time, all of its required reports have been filed in a timely
manner. Star is in good financial shape; it has never defaulted on any
obligations of any kind.
Star wishes to sell $20 million worth of additional common stock in a public
offering. Rather than sell all the stock at once, Star plans to make a
continuous offering over the period of a year, beginning as soon as the
registration statement is effective. The stock would be sold through the New
York Stock Exchange at the market price at the time of sale.
Discuss whether shelf registration is available for this offering.
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Question Six
(15 Minutes)
In September 2010, Mars Corporation registered a public offering of
preferred stock. The preferred stock is convertible into Mars common stock;
holders of the preferred may exchange each preferred share for four common
shares.
In the spring of 2011, the market price of Mars’s common stock rose
substantially and many of the Mars preferred shareholders converted their
preferred stock into common stock. Mars did not solicit these conversions in
any way; a number of the preferred shareholders just decided that it made
economic sense.
The Mars common stock was never registered. Discuss whether Mars has
violated the Securities Act.
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Question Seven
(35 Minutes)
Nortex, Inc. is a Delaware corporation whose Class A common stock is
traded on the New York Stock Exchange. There are 100 million Class A
shares outstanding. On average, 900,000 shares of the Class A common are
traded on the Exchange each week.
Nortex also has outstanding 20 million shares of Class B common stock that
are not traded on any exchange. Both the Class A and the Class B shares
have one vote per share.
Nortex has been an Exchange Act reporting company for four years; all of its
required reports have been filed on time.
Sam Seller is Nortex’s CEO. He owns 1.1 million Class A common shares of
Nortex. This is 1.1% of the outstanding Class A shares and approximately
.92% of all the outstanding voting stock. Seller acquired his Class A stock
from the issuer 18 months ago in an unregistered offering pursuant to Rule
506. He paid for the stock with a non-recourse promissory note, which he
finished paying off five months ago.
Seller would like to sell all of his Class A shares. He has located five buyers,
each of whom is willing to buy a portion of his stock. Four of the potential
buyers are large manufacturing corporations; each owns more than $150
million worth of securities. The fifth purchaser is a registered securities
brokerage company. It only owns $15 million worth of securities, but its
brokerage clients own another $90 million of securities. None of these
companies’ current investments are in Nortex or its affiliates, and none of
them are affiliates of Nortex or Seller.
Seller will be selling the Class A shares through his broker, who did not
solicit these purchasers in any way. (They were companies with whom Seller
already had contacts.)
Assume that Seller is an affiliate of Nortex. Discuss whether a resale safe
harbor is available for his proposed sale. (Seller does not want to risk using a
statutory exemption for the sales. He is willing to sell only if a safe harbor is
available.)
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Question Eight
(25 Minutes)
Assume that the events in the Chinese Consolidated Benevolent Association case
(p. 340 of the casebook) occurred this year. Shortly after buying the Liberty
Bonds, some of the United States purchasers sue the Association under
section 12(a)(1) of the Securities Act, seeking to recover the amounts they
paid for the bonds. Discuss whether the Association would be liable to them.
(Assume that the bond issue was neither registered nor exempt from
registration.)