Business Law Chapter 42

Players Video Game Centers, Inc., wants to issue stock of $1 million in a single offering. Players must provide all investors with material in-formation about itself, its business, and its securities if

ANY investors are UNaccredited.

Flite Airline Corporation is poised to issue securities in a transaction that, under the Securities Act of 1933, is "exempt." This enables Flite to

AVOID THE COSTS and complications of registration.

Lara is the chief executive officer of Micro, Inc., which is required to file certain financial reports with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Lara must

CERTIFY that the reports are complete and accurate.

Mountain View Corporation is a non-investment company that wants to issue stock of $3 million in a twelve-month period. Mountain View, with less than $20 million in annual sales, qualifies as a small business issuer. Before Mountain View sells the stock, it must provide investors with

an offering circular.

Nouveau Riche Corporation, and its officers, directors, and shareholders, buy and sell securities. SEC Rule 10b-5 applies to

the purchase or sale of ANY security.

Fact Pattern 42-1B. Sid, a director of Tech Software Company, learns that a Tech engineer has developed "Ur Call," a new, exciting video game. Sid buys Tech stock and tells his friend Velma, who also buys Tech stock. When the new game is released three weeks later, Sid and Velma sell their stock for a big profit. Regarding Sid's profits on the purchase and sale of Tech stock, under Section 16(b) of the Securities Exchange Act of 1934 Tech may recapture

ALL of Sid's profits.

RingTone Corporation is a public company whose securities are traded among investors. Under the Securities Act of 1933, a security is

ALMOST ANY STAKE in the ownership or debt of a company.

Kirk is the chief financial officer of Lemon Corporation, which is required to file certain financial statements with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Kirk must personally

CERTIFY that the statements are accurate.

Frothy Beverage Corporation is a public company whose shares are traded in the public securities markets. Under the Securities Act of 1933, Frothy is required to

DISCLOSE FINANCIAL and other information about its securities.

Bild-It-Rite Corporation is a public company that is poised to issue securities that do not qualify for an exemption from registration. This means that Bild-It-Rite must

FILE A REGISTRATION statement with the SEC.

Hometown Shops Retail Company has assets of less than $10 million and fewer than five hundred shareholders. Interstate Outlets, Inc., has assets of more than $10 million and more than five hundred shareholders. The Securities Exchange Act of 1934 applies to

Hometown Shops AND Interstate Outlets.

Heavy Hauling, Inc., is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, to ensure that Heavy Hauling's financial results are accurate and timely, the firm's senior officers must set up and maintain

INTERNAL "disclosure controls and procedures."

Della, an officer for Energy Petrol Corporation (EPC), buys 100 shares of EPC stock. One week later, EPC announces that it will merge with a competitor, Fuel Oil Company, and the price of EPC stock increases. One month later, Della sells her shares for a profit. Under Section 16(b) of the Securities Exchange Act of 1934, Della would not be liable if, after buying the stock, she had waited

MORE THAN SIX MONTHS to sell it.

To raise capital to form Plasticity Corporation with Quinn, Rona sells bonds and stock in other companies, and plans to register an initial public offering under the Securities Act of 1933. SEC Rule l0b-5 covers

MOST forms of securities.

Fact Pattern 42-1A. Fresh Fruits & Veggies, Inc., wants to make an initial public offering of securities. Fresh believes that it qualifies for an exemption under Regulation A from the full registration requirement of the federal Securities Act of 1933. If Fresh is exempt from the federal registration requirement, Fresh is

NOT NECESSARILY EXEMPT under a state registration requirement.

Fact Pattern 42-2A. Dhani, an accountant for Eureka, Inc., learns of undisclosed company plans to market a new laptop. Dhani buys 1,000 shares of Eureka stock. He reveals the company plans to Fay, who buys 500 shares. Fay tells Geoff, who tells Hu, each of whom buy 100 shares. They knows that Fay got her information from Dhani. When Eureka publicly announces its new laptop, Dhani, Fay, Geoff, and Hu sell their stock for a profit. If Dhani is liable under the Securities Exchange Act of 1934, it will be because the information on which he based his purchase of Eureka stock was

NOT YET PUBLIC.

Maple Products Corporation is a public company, which New Hampshire regulates and in which Orin invests. The Sarbanes-Oxley Act of 2002 introduced direct federal corporate governance requirements to

PUBLIC COMPANIES.

Rico, an engineer for Shur-2-Gro Seed Corporation, learns that Shur-2-Gro has developed a corn hybrid to triple the output of any farm. Rico buys 20,000 shares of Shur-2-Gro stock. He tells Taylor, who buys 15,000 shares. After the new hybrid is announced publicly, the price of Shur-2-Gro stock increases. Rico and Taylor sell their shares for a profit. Under the Securities Exchange Act of 1934, liability may be imposed on

Rico AND Taylor ONLY.

Readmore Bookstore Corporation files a registration statement and delivers a prospectus to the appropriate parties. These items are intended to enable the evaluation of certain financial risks by

UNsophisticated investors.

Fact Pattern 42-1A. Fresh Fruits & Veggies, Inc., wants to make an initial public offering of securities. Fresh believes that it qualifies for an exemption under Regulation A from the full registration requirement of the federal Securities Act of 1933. Fresh decides to sell its new securities via the Internet. This offering

WILL AVOID THE PAYMENT of commissions to brokers or underwriters.

Flo-Thru Plumbing Corporation is poised to issue securities that, under the Securities Act of 1933, are "exempt." This means that the securities can be sold

WITHOUT BEING REGISTERED.

Catalina promises high returns to Darby and other investors, who then agree to trust their funds to Catalina. She uses these funds to pay previous investors. This is

a Ponzi scheme.

Celfone Corporation is required to file a registration statement with the Securities and Exchange Commission. This statement must contain

a description of securities being offered for sale.

As part of a stock offering for Equine Corporation, Flem, Equine's accountant, intentionally misrepresents material facts in the prospectus. Gigi buys the stock unaware of the misrepresentation and suffers a loss. Flem may be subject to

a fine, imprisonment, AND damages.

Squeaky Clean Corporation wants to make an offering of securities to the public. This offering is not exempt from registration under the Securities Act of 1933. Before Squeaky sells its securities, it must provide investors with

a prospectus.

Fact Pattern 42-1B. Sid, a director of Tech Software Company, learns that a Tech engineer has developed "Ur Call," a new, exciting video game. Sid buys Tech stock and tells his friend Velma, who also buys Tech stock. When the new game is released three weeks later, Sid and Velma sell their stock for a big profit. Under SEC Rule l0b-5, Sid would not be liable if he had waited to buy Tech stock until

after the PUBLIC RELEASE of the game.

Corner Café Company offers its stock for sale only in a single state. The law in Corner's state is like the law in most states. Corner's offer is subject to state securities statutes that include

antifraud AND disclosure provisions.

Ernie contracts to buy securities from Freda. Later, believing that Freda committed fraud in the deal, Ernie files a suit against her. If Freda is found liable, Ernie may obtain

damages to the extent of Freda's illegal profits OR rescission of Ernie's contract to buy securities from Freda.

Hobie, the chief executive officer of Ideal Gamers, Inc. (IGI), intentionally understates the amount of IGI's debts in information provided to investors as part of an issue of IGI stock. Jack buys the stock and suffers a loss. Hobie may be subject to

government prosecution AND Jack's suit.

To raise $12 million to expand operations, Star Corporation makes a stock offering directly to sixty accredited investors and twenty sophisticated, but unaccredited investors. Star plans to notify the SEC of sales. Under the Securities Act of 1933, this issue may qualify as an "exempt" transaction

if ALL OF THE INVESTORS are also given certain material information.

Fact Pattern 42-2A. Dhani, an accountant for Eureka, Inc., learns of undisclosed company plans to market a new laptop. Dhani buys 1,000 shares of Eureka stock. He reveals the company plans to Fay, who buys 500 shares. Fay tells Geoff, who tells Hu, each of whom buy 100 shares. They knows that Fay got her information from Dhani. When Eureka publicly announces its new laptop, Dhani, Fay, Geoff, and Hu sell their stock for a profit. Under the Securities Exchange Act of 1934, Fay is most likely

liable for INSIDER TRADING.

Lex, a salesperson for Macro Corporation, learns that Macro will increase the dividend it pays to shareholders. Lex buys 1,000 shares of Macro stock. When the price increases, Lex sells his shares for a profit. Lex would not be liable for insider trading if the information about the dividend was

public BEFORE he bought the stock.

Begin Anew Enterprise, Inc., completes its registration process and issues a free-writing prospectus. This tells prospective investors

that they may OBTAIN THE PROSPECTUS at the SEC's Web site.

Dave, an accountant, does not work for Emergent Company, but wrong-fully obtains inside information concerning Emergent. Based on the information, Dave buys and sells Emergent stock for personal gain. The Securities and Exchange Commission prosecutes Dave, arguing that he is liable because he stole information rightfully belonging to another. This argument is

the MISAPPROPRIATION theory.

Ridgeline Sports Gear, Inc., is required to register its securities under Section 12 of the Securities Exchange Act of 1934. Section 16(b) of the act covers

the SHORT-SWING ACTIVITIES of Ridgeline's insiders.

Excel Aviation Corporation is required to register its securities under Section 12 of the Securities Exchange Act of 1934. Section 14(a) of the act regulates

the SOLICITATION of proxies from Excel's shareholders.

GR8 Stuf Company files a registration statement with the SEC before making an offering to the general public. The registration contains false, immaterial statements of which the investors are unaware. GR8 Stuf is charged with violating the Securities Act of 1933. GR8 Stuf's best defense is

the UNTRUE statements were not material.

Flux Corporation is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, Flux is subject to the direct corporate governance requirements of

the federal government.

New Discoveries Corporation, and its officers, directors, and shareholders, buy and sell securities. Section 10(b) of the Securities Exchange Act of 1934 applies to

the purchase or sale of ANY security.

Start-Up Enterprises, Inc., completes its registration process and begins advertising the availability of its new issue of securities. Start-Up places a tombstone ad in the financial papers. This ad tells prospective investors

where to OBTAIN A PROSPECTUS.