Four individuals are the collective owners, directors, and shareholders ("principals") of Cool Runnings Manufacturing Company (CRMC), which designs and manufactures snow sports equipment such as snowboards, racing skis, and related products. The principals built the company over a 10-year period from start-up to over $20 million in annual revenue. Six months ago, the principals met and decided to embark on an aggressive expansion plan with the objective of doubling CRMC's production capacity in five years. This plan required approximately $50 million to fund the purchase of real estate, equipment, expanded payroll, additional taxes, and marketing expenses. One reason for this expansion plan was to develop a new snowboard product, the Tectonic Board, which early marketing research indicated would become one of CRMC's best-selling products. The principals were under pressure to develop this new product because of an overall slump in sales. However, given CRMC's current facilities and budget, the product was currently only halfway through the design phase and not expected to be on the market for at least three more years. The demand for CRMC's existing brands of snowboards was slowly, but steadily, declining. In fact, the company's profits had been so stagnant that it could not reasonably afford to borrow the entire amount of the expansion cost given its recently diminishing cash flow. However, because of the development of the Tectonic Board, the principals are hopeful that they can attract capital by selling stock to investors.

Answer for question 3. Question two is for refrence only.

2. Assume that the principals decide to issue stock to the public in order to raise money. They know of five investors that may be interested in this opportunity, so they send each a copy of the business plan for CRMC's expansion along with a cover letter explaining the price of the stock and giving instructions on how to buy the stock. Has CRMC committed a violation of securities laws by sending out the business plan and cover letter? Could that constitute the sale of a security?

3. Suppose that, instead of sending the business plan (as in Question 2 above), the principals consult counsel and inform her that they wish to develop a prospectus and distribute it to a limited number of high-net-worth investors. Must the securities be registered before marketing or selling them? If not, what exemption(s) could they fall into?