THEORY TO PRACTICE

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.

Assume that the principals send the plan to 15 high-net-worth potential investors. During face-to-face and videoconference meetings with the investors, the CEO makes the following statements in response to investor questions:

Question: 1s CRMC's financial position currently sound, or are there threats to your financial well-being? CEO: CRMC's cash flow is expected to increase steadily because the Tectonic Board is the board for a new generation of boarders. Our research shows that it has potential to bring us a sizable return on our investment.

Question: What stage of development is the Tectonic Board in? It all goes well, it will be on store shelves in less than one year. CEO: Is there a current demand for your existing snowboard products?

Question: CEO: We have had very strong sales. However, like every product, they have their ups and downs. They're likely to be on the upside shortly.

4. Based on the CEQ's statements, one investor purchases a substantial amount of stock. If the business venture fails before the Tectonic Board is released, will the investor have any recourse against CRMC and its CEO based on the statements made by the CEO? Why or why not?