SCENARIO:

A group of three friends, Eric, Dave, and Bob, have an idea to start a new wine bar, "KurniWines, Co.," located in a small but wealthy town in Ohio. Their goal is to stock the bar with many types of rare and expensive wines from around the world and allow regular customers to maintain "wine lockers" containing their favorite vintage. The wine bar will also offer a "wine acquisition service" for a monthly fee in which a sommelier (wine specialist) from the wine bar will attend wine auctions around the world on behalf of the customers to acquire their favorite vintage.

In addition to the cost of the build out of the bar, the friends also anticipate needing approximately $5,000,000 to obtain a sufficient stock of rare wine to open the bar. They plan on purchasing the wine from auctions in New York, Paris, and Hong Kong.

Rather than using their own money, or obtaining a bank loan, the friends decide to raise the capital by getting some of the wealthy people they know to invest in the business. However, it is very important to the friends that they are able to maintain control of the business and that they represent the majority stockholders with voting power. Therefore, they decide to file paperwork to form a corporation where they retain all the common stock which has voting rights, and they issue a second class of stock (preferred stock) to raise capital which does not have voting rights but which has the privilege of being paid out first in the event that the company fails financially.

In the process of preparing the paperwork, Eric researches the blue sky laws of Ohio (the state in which they have formed their corporation) and sees the following statutory language:

" 1707.03 Exempt Transactions: The sale of any equity security is exempt from registration with the State of Ohio if all the following conditions are satisfied:

1. The sale is by the issuer of the security.
2. The total number of purchasers in this state of all securities issued or sold during the period of one year does not exceed 10.
3. No advertisement is used in connection with the sale."

QUESTIONS:

1. An investor, who purchased 11 percent of the preferred class of stock during the initial private offering, has been informed that the company is going public, and she wants to sell all of her shares. She has held the shares for eight months. Can she freely sell them once the company goes public?

a. Yes, but she can only sell 1 percent of her shares every three months because they are restricted securities and she has held them for more than six months.

b. Yes, although they would be control securities that are restricted, she has held them for more than six months. However, she may only sell an amount equal to the average weekly trading volume for the prior four weeks or 1 percent of the shares outstanding, whichever is greater.

c. No, because she has not held them for more than one year.

d. Yes, she can sell as many of the securities as she wants because they are control securities and she has held them for more than six months.

2. True or False: Assuming the friends decide to offer the securities publicly, but only in their home state, they need to register the securities.

a. True

b. False

3. What other regulation, besides Regulation D, should the friends consider to raise $5 million within one year?

a. Regulation A, Tier II

b. Initial public offering

c. Regulation A, Tier I

d. Crowdfunding

4. Assume that the wine bar is a huge success and in five years from the initial private offering the company would like to go public. As part of their public offering, one of the initial investors from the private offering decides to sell his shares. Does this stock need to be registered under the Securities Act?

a. No, once a security is exempt, it is always exempt.

b. Yes, any subsequent transfer, whether public or private, must be registered.

c. Yes, even though it was initially exempt under Regulation D, it is now being sold publicly.

d. No, it is an unregistered security.

5. Assume that in the process of making a private offering under Regulation D, one of the friends sends and email to a potential investor while he is on vacation out of state. It reads, "In order to address your concerns about the potential purchase of high-end fake wines at auction, we will employ a forgery expert to attend all auctions with our sommelier to authenticate each bottle prior to purchase." However, the three friends had previously agreed that sending an authentication expert to all the auctions would be costly and therefore they would rather spend the money in other areas. Is the friend liable under the 1933 Act if no expert attends the auctions and the sommelier purchases fake wines?

a. No, private offerings are not subject to liability rules under the 1933 Act.

b. Yes, he is liable under Section 12(a)(2) and may be sued by the purchaser of the stock if the purchaser determines the value of the stock to be less than what he paid.

c. No, the statement was not material to the sale of the security.

d. Yes, he is liable under Section 12(a)(2) and may be sued for fraud by both the SEC and the purchaser of the stock.