Brief Hypotheticals 28.1

Bonner Industries, Ltd., a private company, is considering an initial public offering. If the company goes public, it will be regulated by the:

SEC

the board of directors of Consolidated Freight, Inc., are concerned about the potential for financial mismanagement by executives of the firm. In order to obtain more information about the firm's internal financial reporting processes, the board of directors would most likely rely on the:

audit committee

California has a state law that requires registration and disclosure requirements for securities sold within the state known as a:

blue sky law.

Internet Analytics is a successful search-engine company that wants to become a publicly traded company. As it is an Internet-focused company, company executives want to deliver its prospectus to investors exclusively via the Internet. Internet Analytics may:

deliver its prospectus to investors exclusively via the Internet because it is permitted by the SEC.

The chief executive officer (CEO) and chief marketing officer (CMO) of North Systems Co. filed a statement under Section 906 of the Sarbanes-Oxley Act. This statement certified that filed financial reports fully comply with SEC requirements, and that the information reported fairly represents the financial conditions and operations of the company. Regarding Section 906, the statement:

does not comply, because the chief financial officer (CFO) is missing from the statement.

Marianne makes a false statement about the future earnings potential of her company, DexaCom. Shareholders sue Marianne for securities fraud. These shareholders can file their lawsuit pursuant to:

federal and state securities laws.

Gary is an employee of Thomaston Scientific. Gary learns that the R&D department discovered a new drug that will help treat heart disease better than similar medicines already on the market. Gary tells his friend Patrick about the discovery, discloses where the information came from and asks Patrick to keep it private. Instead, Patrick purchases stock on Thomaston Scientific and profits from the transaction. Patrick will be:

found liable under the Private Securities Litigation Reform Act.

Jackson owns a large apple orchard. Jackson sells buyers a standard plot of land on the orchard for a uniform price. The buyers then lease the land back to Jackson, who completely manages the apple orchards on the buyers' behalf. Buyers then share in the profits of the apples when sold. This arrangement:

is an investment contract, because it satisfies the Howey test.

Acme, Inc., a publicly traded company with a market value of $50 million:

is exempt from filing an auditor's report on management's assessment of internal controls.

Computer Company is planning to make a private stock offering. It hopes to net $4 million from the sale of the stock. It will not advertise the offering and will cap the number of unaccredited investors at thirty-five. It will notify the SEC of the sales and will provide all investors with a prospectus. It will not, however, assess the investment knowledge of the buyers of its stock. Computer Company's sale:

is exempt from the registration requirements of the Securities Act of 1933 under Rule 505

JR Shipment, Inc., a public company, has formed a corporate audit committee in order to monitor the financial operations of the firm. The corporate audit committee has four outside directors and three inside directors on the committee. Under Section 906 of the Sarbanes-Oxley Act, this committee:

is improper, because it has inside directors on the committee.

Jeremy is a director of Cloud Energy. He and his wife, Janice, own a large number of shares of stock in the company. Janice is an attorney in a law firm. She finds out that her firm is planning to file a class-action lawsuit against Cloud Energy. Jeremy and Janice now know that the price of the stock will drop as soon as the lawsuit hits the news. Jeremy and Janice:

must disclose what they know about the lawsuit if they want to sell their stock before news about the lawsuit becomes public knowledge

Modern Investments is a small business that focuses primarily on securities trading in South America. The company wants to issue a securities offering to the public worth $500,000. Modern Investments is:

not exempted from registration requirements under Rule 504.

Irene is a representative of Baroque Minerals, a publicly-traded mining company. Irene states publicly that it has discovered a significant deposit of a rare mineral in China, which promises to substantially increase the long-term revenue of the company. Unbeknownst to Irene, an unexpected earthquake that same day destroys the mine in China and blocks access to the rare mineral for years to come. The company's stock drops as a result. Baroque Minerals will likely be:

not liable under SEC Rule 10b-5, because Irene did not have a wrongful state of mind.

Susan is a potential investor in MegaCo. Susan learns of a press conference held by MegaCo in which the CEO knowingly states that there are no merger negotiations between MegaCo and another company. As a result, Susan decides not to purchase stock in MegaCo. Three weeks later, the public learns that, contrary to what the CEO stated, MegaCo was actually in merger negotiations with another company. The stock price of MegaCo rises as a result and Susan sues MegaCo for violation of SEC Rule 10b-5. Susan will likely:

not win because the misrepresentation did not occur in connection with a purchase or sale of stock.