QUESTION 1.
Gold Mine raised the following defenses. Assess the viability of each defense:
That the offering was a private placement exempt from registration based on Section 4(2) of the Securities Act.
Gold Mine may argue that it is exempt from the registration process. Section 4(a)(2) exempts transactions from registration if they do not involve a public offering. Gold Mines offering through the use of the PPM were directed at particular individuals rather than to the general public. Irving may argue that the over 1,000 professionals constituted a general public offering but likely this will not hold true. The purpose of exempting registration when it does not involve the general public is that investors, other than the general public, are sophisticated enough to use their own expertise to determine the risk of the investment. Gold Mine indicated that the investors he directed the PPM at were educated in the area of mining and thus capable of determining the risk and validity of the investment. Therefore, this could be a valid defense on the part of Gold Mine.
B. That the offering was a private placement exempt from registration based on Reg. D. For purposes of this question, assume that Gold Mine filed a Form D, Notice of Exempt Offering of Securities, on October 1, 2009.
Gold Mine also claims that they are exempt from registration due to Regulation D. Regulation D provides that a transaction is exempt so long material information is provided and it is not misleading.
C. Would your answer to Question 1.B. change if the offering took place post-JOBS Act, which was signed into law in 2012.
The JOBS Act provisions regarding exemption registration may be applicable to Gold Mine and would provide a better defense for Gold Mine because the number of shareholder offers allowed is raised to 2000 before it is considered a public offering. So, if Gold Mine lost on the account of registration being required due to the offer being public, the JOBS Act will make it more apt to not be a public offering just based on the number.
QUESTION 2.
A. Did Smith violate Reg. FD? Explain all elements.
Regulation FD requires full disclosure on nonpublic information to investors prior to making the disclosure to the general public. This is to ensure that those who had the information prior to public disclosure could not use the information to manipulate their investment. In this situation, it was the employees and the Vice President who were aware of the absence of the third loan. The rule does not apply to them. However, Smith did disclose the information to one analyst and one investor that there was only going to be two loans. Regulation FD was triggered when Smith told these two people. Thus, he was obligated at that time to make public disclosure of the information. Material information must be disclosed to investors according to Reg. FD. Also, disclosure of such information must be made public. Information is considered material if a “reasonable” investor would consider the material important when making the decision to invest. The receiving of one of the loan guarantees may could be considered material since it pertains to the company’s financial condition. Smith may be required to simultaneously disclose the information because he intentionally disclosed the information.
B. What corrective action should First Wind Energy Inc. take?
In order to correct this action, Smith should file a Form 8-K or make the disclosure in a manner in which there is a broad distribution of the information to the public.
QUESTION 3. (20 points)
Syracuse Shoe, Inc. is looking for investors. On May 1, 2016, it files with the SEC a registration statement that includes the following statement: “We have procured a contract with the United States Army to provide 500,000 pairs of combat boots.” The same statement appears in the prospectus.
While the foregoing was true on April 15, 2016, the contract with the United States Army was renegotiated (assume the renegotiation was legal, and the resulting contract binding) to 400,000 pairs of combat boots on April 22, 2016. Management knew this, but apparently the news did not reach the board of directors, who at all relevant times believed the contract was for still for 500,000 pairs of combat boots. (Obviously, the registration statement was not edited to reflect the change prior to filing. And assume that the registration statement became effective with the reference to 500,000).
A disgruntled shareholder, Sam, sues the directors pursuant to Section 11 of the Securities Act, claiming a misstatement in the registration statement, and the directors raise the following defenses: (1) Sam should have sued the corporation, not them directly, and (2) that they believed the statement in the registration statement regarding 500,000 combat boots was true.
Discuss the strengths and weaknesses of Sam’s case against the directors.
The director’s defense that Sam should sue the corporation directly may be a valid defense because the directors may have not violated their duty. A director has a duty to refrain from conduct that would impose an unreasonable risk upon Sam the shareholder. In this situation, the directors were not aware of the change in the number of combat boots. Thus, they did not participate in any misconduct. Also, Section 11 of the Securities Act applies to statements that are untrue as well as material. The directors defense that they believed there were 500,000 boots as true is a valid defense. If the directors have reasonable grounds for their belief and actually did believe the statement in the registration was true.
