Liability under the Securities Acts. One of your firm’s clients, Fancy Fashions Inc., is a highly successful, rapidly expanding entity. It is owned predominantly by the Munster family and key corporate officials. Although additional funds would be available on a short-term basis from its bankers, they would represent only a temporary solution of the entity’s needfor capital to finance its expansion plans. In addition, the interest rates being charged are notappealing. Therefore, Chris Munster, Fancy’s chairman of the board, in consultation with theother shareholders, has decided to explore the possibility of raising additional equity capitalof approximately $15 million to $16 million. This will be Fancy’s first public offering.At a meeting of Fancy’s major shareholders, its attorneys and a member of your firmspoke about the advantages and disadvantages of “going public” and registering a stockoffering. One of the shareholders suggested that Regulation D under the Securities Act of1933 might be a preferable alternative.Required:a. Assume that Fancy makes a public offering for $16 million and, as a result, more than1,000 persons own shares of the entity. Following the public offering, what are the implications with respect to the Securities Exchange Act of 1934? (Hint: You can identify thethresholds for being subject to the reporting requirements of the Securities Exchange Actof 1934 through reference to the SEC’s website, www.sec.gov.)b. What federal civil and criminal liabilities under the Securities Act of 1933 could apply inthe event that Fancy sells the securities without registration and a registration exemptionis not available?c. Using the SEC’s website (www.sec.gov) as a reference, define “accredited investor” anddiscuss the exemption applicable to offerings made under Regulation D for accreditedinvestors.
Liability under the Securities Acts. One of your firm’s clients, Fancy Fashions Inc., is a highly successful, rapidly expanding entity. It is owned predominantly by the Munster family and key corporate officials. Although additional funds would be available on a short-term basis from its bankers, they would represent only a temporary solution of the entity’s need
for capital to finance its expansion plans. In addition, the interest rates being charged are not
appealing. Therefore, Chris Munster, Fancy’s chairman of the board, in consultation with the
other shareholders, has decided to explore the possibility of raising additional equity capital
of approximately $15 million to $16 million. This will be Fancy’s first public offering.
At a meeting of Fancy’s major shareholders, its attorneys and a member of your firm
spoke about the advantages and disadvantages of “going public” and registering a stock
offering. One of the shareholders suggested that Regulation D under the Securities Act of
1933 might be a preferable alternative.
Required:
a. Assume that Fancy makes a public offering for $16 million and, as a result, more than
1,000 persons own shares of the entity. Following the public offering, what are the implications with respect to the Securities Exchange Act of 1934? (Hint: You can identify the
thresholds for being subject to the reporting requirements of the Securities Exchange Act
of 1934 through reference to the SEC’s website, www.sec.gov.)
b. What federal civil and criminal liabilities under the Securities Act of 1933 could apply in
the event that Fancy sells the securities without registration and a registration exemption
is not available?
c. Using the SEC’s website (www.sec.gov) as a reference, define “accredited investor” and
discuss the exemption applicable to offerings made under Regulation D for accredited
investors.
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