Corporation

Question 1

Corporation Overview

Answer 1

A corporation is an artificial legal entity, created by properly filing articles of incorporation with the appropriate state office (secretary of state). It is a separate entity from its owners.

Provides the maximum shelter for owners from corporation’s creditors, as compared to sole proprietorships and general partnerships.

The personal assets of the corporation’s owners cannot be accessed by creditors to satisfy the corporation’s debts, without veil piercing

Because a corporation is not a natural person, it is not sentient and cannot “act.” Acting requires a human.

A corporation acts through its composite human “brain”—that is, through the members of the board of directors, who vote on acts of the corporation.

Amongst those acts of the Board is the selection of officers (CEO, CFO, etc.)—natural persons who are employed by the corporation for various leadership positions, charged with carrying out the Board’s vision for the corporation.

Question 2

Promoters and Pre-Incorporation Contracts

Answer 2

Promoter = purports to act as agent of business before its incorporation
If a promoter makes pre-incorporation contract:
Corporation can become a party to the contract by adopting it expressly or impliedly (accept benefits).
Promoter is liable on the pre-incorporation contract (see MCBA § 2.04)
even if the corporation adopts it
even if the corporation is never formed
unless other party agrees to release promoter from liability (in original contract or later)

Question 3

De facto corporation

Answer 3

De facto corporation: Common law doctrine that treats firm as a corporation (i.e., limited liability) if organizers:
in good faith tried to incorporate,
had a legal right to do so, and
acted as a corporation.

MBCA §2.04: “All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting.”
So persons who do not know there is no incorporation will not be liable (de facto corporation still available for such persons).

Question 4

Corporation by estoppel

Answer 4

Corporation by estoppel: On case-by-case basis, persons who treat an entity as a corporation will be estopped from later claiming it was not a corp.
For person seeking to avoid liability on a contract with a purported corporation, treat firm as though it were a corporation (i.e., limited liability) if person:
thought it was a corporation all along, and
would earn windfall if now allowed to argue it not a corp
Also prohibits an improperly formed corporation from avoiding a contract on the basis of its formation defects.

Question 5

Veil Piercing- alter ego liability

Answer 5

Alter ego liability typically requires:
The corporation was the controlling shareholder’s alter ego, or such unity of interest that the separate personalities of the corporation and the shareholder no longer exist; and
Adherence to limited liability would sanction fraud or promote injustice

Question 6

Veil piercing- enterprise liability

Answer 6

Enterprise liability typically requires:
Such unity of interest between two entities that their separate corporate existences have ceased; and
Treating the entities as separate corporations would sanction fraud or promote injustice

Question 7

Veil Piercing Factors

Answer 7

Factors for analyzing unity of interest:
Commingling of funds or assets
Alter ego doctrine: shareholder treats corporation’s assets as his own
Enterprise liability doctrine: one corporation treats another’s assets as its own
Undercapitalization
Failure to maintain adequate corporate records or to comply with corporate formalities
failure to keep separate accounting books
failure to adopt bylaws, issue stock, etc.
failure to appoint a board
failure to hold board meetings or shareholder meetings
failure to keep minutes of those meetings

Question 8

Direct shareholder litigation

Answer 8

Direct: filed by shareholder in own name
Cause of action belongs to shareholder individually
Arises from direct injury to shareholder
Remedy belongs to shareholder
E.g., changes in stock rights or injunctive claims

Question 9

Derivative shareholder litigation

Answer 9

Derivative: filed by shareholder on corp’s behalf
Cause of action belongs to corporation
Arises from an injury to corporation
Remedy belongs to corporation
E.g., fiduciary duty breaches by directors or enforce corporation’s contract against a third party

Question 10

Short Swing Profits Rule

Answer 10

Company insiders must return any profits resulting from the purchase and sale of company stock—if both the purchase and sale occur within a six-month period.
Rule §16(b) applies regardless of order (sale then purchase, or purchase then sale).

Maximize recovery by matching highest sale and lowest buy regardless of order.

Applies to: Directors and officers (Pres, CEO, CFO, VPs)
Percentage ownership irrelevant
Liable if hold office at the time of purchase OR sale
But not liable for transactions before taking office

10% shareholder (of one class of stock)
Must own 10% at time of purchase and sale
So calculate if 10% shareholder moment before making each trade

Question 11

Short swing profits- policy

Answer 11

§16(b) applies only to
1934 Act registered companies – shares traded on a national exchange, or more than $10 million in assets and a class of securities held by either 2000 persons or 500 persons who are not accredited investors
Only officers, directors, and 10% shareholders
Equity securities only – stocks, options, convertible debt

Recovery
Any recovery goes to the company – courts interpret §16(b) to maximize the gains the company recovers
Shareholders can sue derivatively and lawyer can get contingent fee from any recovery or settlement
S
trict Liability – no proof of use of inside info
But no tipping liability or misappropriation liability

“For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer . . .” Section 16(b).

Who benefits from this Rule?

The company itself.

“[A]ny profit realized . . . shall inure to and be recoverable by the issuer . . .”

Question 12

Standing to bring a Rule 16b (Short swing profits rule)

Answer 12

A suit may be “instituted . . . by the issuer [that is, the company], or by the owner of any security of the issuer in the name and in behalf of the issuer.”
Note: If the suit is instituted by the shareholder, then it is a derivative suit.

Although disgorgement is made to the corporation, the shareholder’s attorney can collect contingent fees.

Question 13

Company insider

Answer 13

Directors and officers (Pres, CEO, CFO, VPs)
Percentage ownership irrelevant
Liable if hold office at the time of purchase OR sale
But not liable for transactions before taking office

Question 14

MBCA Demand

Answer 14

Universal Demand Requirement – MBCA §7.42
If board rejects demand, P must allege with particularity–§7.44(c):
that a majority of the board of directors did not consist of qualified directors
For purposes of 7.44, a qualified director “does not have (i) a material interest in the outcome of the proceeding, or (ii) a material relationship with a person who has such an interest” at the time determination made. MBCA §1.43
Status as a named defendant does not prevent one from being qualified director. MBCA 1.43(c)(3)
that the §7.44(a) requirements have not been met (vote, special lit committee, panel)

Question 15

MBCA 7.44(a)

Answer 15

MBCA §7.44(a): Court may dismiss if a group below has determined in good faith, after conducting a reasonable inquiry that maintenance of the derivative action is not in the corporation’s best interests:
Majority vote of qualified directors if they constitute a quorum – MBCA §7.44(b)(1)
Majority vote of a committee consisting of two or more qualified directors appointed by majority vote of qualified directors regardless of quorum – MBCA §7.44(b)(2)
Panel appointed by court upon motion of corp – MBCA §7.44(e)

Question 16

Delaware Demand Requirement

Answer 16

Delaware law requires demand unless demand is excused as futile.

Zuckerberg: If answer yes to any question below for half or more of the demand board, then demand is excused as futile. For each director, ask:

whether the director received a material personal benefit from the alleged misconduct [in the demand];
whether the director faces a substantial likelihood of liability on any of the claims that would be [in the demand]; and
whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct or who would face a substantial likelihood of liability on any of the claims that [would be in the demand].

Question 17

Business Judgment Rule

Answer 17

Delaware’s Business Judgment Rule is presumption that in making corporate decisions directors acted on an informed basis, in good faith, and in the corporation’s best interests.
Presumption rebutted if plaintiff shows directors breached their fiduciary duties of care, loyalty, or good faith, or shows decision involved fraud, illegality or waste.
If presumption is rebutted, burden shifts to directors to prove that the challenged transaction was entirely fair to the corporation and its shareholders. In re Disney
MBCA §8.31 is similar to the BJR
Starts with presumption against director liability
Does not use the phrase business judgment rule

Question 18

MBCA §8.31 – Standards of Liability

Answer 18

“A director shall not be liable to the corporation or its shareholders for any decision to take or not to take action, or any failure to take any action, as a director, unless the party asserting liability in a proceeding establishes that:”
no defense based on exculpation under §2.02(b)(4) or the protections of §§ 8.61 or 8.70 precludes liability; and
“the challenged conduct consisted or was the result of:

action not in good faith; or

a decision
which the director did not reasonably believe to be in the best interests of the corporation, or

as to which the director was not informed to an extent the director reasonably believed appropriate in the circumstances; or

a lack of objectivity due to the director’s familial, financial or business relationship with, or a lack of independence due to the director’s domination or control by, another person having a material interest ….”

a sustained failure of the director to devote attention to ongoing oversight of the business and affairs of the corporation, or a failure to devote timely attention, by making (or causing to be made) appropriate inquiry, when particular facts and circumstances of significant concern materialize that would alert a reasonably attentive director to the need therefor; or

receipt of a financial benefit to which the director was not entitled or any other breach of the director’s duties to deal fairly with the corporation ….”

Question 19

Exculpation

Answer 19

Exculpation: In articles of incorporation, corporation may limit or eliminate the personal liability of directors for money damages for any action taken or any failure to take action except for (i) improper financial benefits, (ii) intentional infliction of harm on the corporation or shareholders, (iii) an unlawful distribution, or (iv) an intentional violation of criminal law.–MBCA §2.02(b)(4)

Question 20

Reports

Answer 20

Directors may rely on reports and other information from corporate officers or employees, outside experts, or board committee if reasonably believe to be reliable and competent –MBCA §8.30(d-f)

Question 21

Duty of Care & Oversight MBCA

Answer 21

MBCA:
Director must use the care that an ordinarily prudent person in a like position would exercise under similar circumstances – MBCA §8.30(b)
Director liable if
not informed to extent the director reasonably believed appropriate in the circumstances – MBCA §8.31(a)(2)(ii)
or commits a sustained failure to devote attention to oversight of business or fails to devote timely attention by making inquiry when particular facts of significant concern materialize – MBCA §8.31(a)(2)(iv)

Question 22

Duty of Care & Oversight Delaware

Answer 22

Delaware:
Director liable if grossly negligent in failing to inform of “all material information reasonably available.” Van Gorkom

Process due care only, not merits or best practices. Disney

Directors must supervise, read and understand financials, and object to misconduct. Francis

Oversight liability after Stone requires showing
directors utterly failed to implement any reporting or information system or controls; or
having implemented such a system, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.

Question 23

Duty of Good Faith

Answer 23

MBCA:
Directors shall act in good faith –MBCA §8.30(a)
Liable for action not in good faith – MBCA §8.31(a)(2)(i)

Delaware:
2 types of bad faith recognized in In re Disney
conduct motivated by subjective bad faith (i.e., an actual intent to do harm)
“intentional dereliction of duty, a conscious disregard for one’s responsibilities”
But bad faith violates duty of loyalty under Delaware law after Stone v. Ritter

Question 24

Duty of Loyalty

Answer 24

Director liable if plaintiff proves director:
Made decision which director did not reasonably believe to be in corporation’s best interests – MBCA §8.31(a)(2)(ii)(B)
Lacked objectivity due to familial, financial or business relationship with, or director’s domination by, someone having material interest in challenged conduct – MBCA §8.31(a)(2)(iii)
Which relationship or domination reasonably expected to have affected the director’s judgment and director does not show that the challenged conduct was reasonably believed by the director to be in the corporation’s best interests
Received financial benefit to which director was not entitled or breach duty to deal fairly with corporation –MBCA §8.31(a)(2)(v)

Question 25

Duty of LoyaltyConflicted Transactions – MBCA §8.61

Answer 25

“A transaction … may not be the subject [of a suit] on the ground that the director has an interest …, if it is not a director’s conflicting interest transaction.
A director’s conflicting interest transaction may not be the subject of equitable relief, or give rise to an award of damages … on the ground that the director has an interest respecting the transaction, if:
directors’ action respecting the transaction was taken in compliance with section 8.62 at any time; or
shareholders’ action respecting the transaction was taken in compliance with section 8.63 at any time; or
the transaction, judged according to the circumstances at the relevant time, is established to have been fair to the corporation.”

Question 26

Duty of LoyaltyDirectors’ Ratification – MBCA §8.62

Answer 26

“Directors’ action respecting a director’s conflicting interest transaction is effective … if the transaction has been authorized by the affirmative vote of a majority (but no fewer than two) of the qualified directors who voted on the transaction, after required disclosure by the conflicted director … provided that:
the qualified directors have deliberated and voted outside the presence of and without the participation by any other director; and
Where the action has been taken by a committee, all members of the committee were qualified directors, and either (i) the committee was composed of all the qualified directors on the board of directors or (ii) the members of the committee were appointed by the affirmative vote of a majority of the qualified directors on the board of directors.”
“A majority (but no fewer than two) of all the qualified directors on the board …, or on the committee, constitutes a quorum

Question 27

Duty of LoyaltyShareholders’ Ratification – MBCA §8.63

Answer 27

“Shareholders’ action respecting a director’s conflicting interest transaction is effective … if a majority of the votes cast by the holders of all qualified shares are in favor of the transaction after (i) notice to shareholders …, (ii) provision to the corporation of the information referred to in subsection (b), and (iii) communication to the shareholders entitled to vote on the transaction of the information that is the subject of required disclosure ….”

Qualified shares excludes shares “held by (A) a director who has a conflicting interest … or (B) a related person of the director ….”

Question 28

Director’s conflicting interest transaction

Answer 28

: i) director is party, ii) director had knowledge and a material financial interest known to the director, or iii) director knew that a related person was a party or had a material financial interest.

Question 29

Fair to the corporation

Answer 29

“transaction as a whole was beneficial to the corporation, taking into appropriate account whether it was (i) fair in terms of the director’s dealings with the corporation, and (ii) comparable to what might have been obtainable in an arm’s length transaction, given the consideration paid or received by the corporation.”

Question 30

Control

Answer 30

“(i) having the power, directly or indirectly, to elect or remove a majority of the members of the board of directors …, or (ii) being subject to a majority of the risk of loss from the entity’s activities or entitled to receive a majority of the entity’s residual returns.”

Question 31

Required disclosure

Answer 31

: “disclosure of (i) the existence and nature of the director’s conflicting interest, and (ii) all facts known to the director respecting the subject matter of the transaction that a director free of such conflicting interest would reasonably believe to be material in deciding whether to proceed with the transaction.”

Question 32

Related person

Answer 32

“the individual’s spouse;
a child, stepchild, grandchild, parent, step parent, grandparent, sibling, step sibling, half sibling, aunt, uncle, niece or nephew (or spouse of any such person) of the individual or of the individual’s spouse;
a natural person living in same home as the individual;
an entity…controlled by the individual or any person specified above…
a domestic or foreign (A) business or nonprofit corporation … of which the individual is a director, (B) unincorporated entity of which the individual is a general partner or a member of the governing body, or (C) individual, trust or estate for whom or of which the individual is a trustee, guardian, personal representative or like fiduciary; or
a person that is, or an entity that is controlled by, an employer of the individual.”

Question 33

Duty of LoyaltyBusiness Opportunity – MBCA §8.70

Answer 33

MBCA does not define business opportunity
MBCA §8.70(a): Director gets safe harbor if first makes required disclosure of opportunity and corporation’s interest in the opportunity is disclaimed by proper director or shareholder ratification, but no definition of “business opportunity” given.
Delaware defines business opportunity as:
Corp is financially able to take the opportunity
Opportunity is in corp’s line of business
Corp has an interest or expectancy in the opportunity
Embracing the opportunity would create a conflict between director’s self-interest and corp’s interest
No single factor is dispositive; balance all factors. Beam

Question 34

MBCA §8.70 – Business Opportunities

Answer 34

“If a director … takes advantage of a business opportunity directly, or indirectly …, that action may not be the subject of [a suit] …, on the ground that the opportunity should have first been offered to the corporation, if:
Before the director … becomes legally obligated respecting the opportunity the director … brings it to the attention of the corporation and either:
action by qualified directors disclaiming the corporation’s interest in the opportunity is taken in compliance with … section 8.62, or
shareholders’ action disclaiming the corporation’s interest in the opportunity is taken in compliance with … section 8.63, …
… that the director … did not employ the procedure … in subsection (a)(i) or (ii) … shall not create an implication that the opportunity should have been first presented to the corporation or alter the burden of proof ….”

Question 35

Shareholder Fiduciary Duties

Answer 35

Shareholders acting as shareholders typically owe each other no fiduciary duties
Controlling shareholders owe fiduciary duties to minority shareholders
If controlling shareholder received a benefit to the exclusion and at the expense of the minority shareholders, defendant must prove intrinsic fairness. Sinclair Oil v. Levien
If no self-dealing, then BJR applies

Question 36

Shareholder Power

Answer 36

Articles of incorporation – MBCA 10.03
Amend by vote of directors and vote of shareholders
Bylaws
Amend by vote of either directors or shareholders, but
Articles may reserve power to shareholders – 10.20
Shareholders have power to:
Elect directors
Remove director, with or without cause
Modify or repeal bylaws
Approve fundamental corporate changes

Question 37

Director Action

Answer 37

Board of directors has right to manage corporation, unless varied by shareholder agreement–MBCA 8.01.
Management decisions are affected by board votes.
Quorum
MBCA §8.24(a-b): majority of the directors, unless articles or bylaws require a greater or lesser number (but not less than 1/3)
MBCA §8.62(c): In approving a director’s conflicting interest transaction, a “majority (but no fewer than two) of all the qualified directors on the board of directors, or on the committee, constitutes a quorum”
Voting
MBCA §8.24(c): “affirmative vote of a majority of directors present is the act of the board of directors unless articles of incorporation or bylaws require the vote of a greater number of directors ….”
MBCA §8.62(a): Director’s conflicting interest transaction is effective if “authorized by the affirmative vote of a majority (but no fewer than two) of the qualified directors who voted on the transaction” after disclosure.

Question 38

Mandatory Indemnity

Answer 38

Corporation shall indemnify a director who was successful, on the merits or otherwise, for expenses

Question 39

Advance for Expenses

Answer 39

Corporation may advance funds for expenses or reimburse for expenses if director delivers signed written undertaking to repay any funds advanced if (1) not entitled to mandatory indemnification under 8.52 and (2) ultimately determined under 8.54 or 8.55 that she is not entitled to indemnification

Question 40

Insurance

Answer 40

Corporation may buy insurance to indemnify directors even if they would not have been entitled to indemnification under the MBCA provisions

Question 41

Permissive Indemnity

Answer 41

Corporation may indemnify a director against liability and expenses (including attorney fees) if
Director conducted herself in good faith, and director reasonably believed conduct was in best interests of corporation (and no cause to believe conduct unlawful if criminal action), or
Director engaged in conduct for which broader indemnity made permissible or obligatory under articles of incorp.
BUT CANNOT INDEMNIFY director
In derivative shareholder action (Why? Because a derivative action is being brought in the name of the company, for the benefit of the company—so why would you pay for the opposing party’s fees?), except for expenses if it is determined that director met 8.51(a) standard of conduct, or
In action adjudging director liable for receiving an improper financial benefit

Question 42

Indemnity Agreements

Answer 42

By provision in articles of incorp, bylaws, or resolution adopted or contract approved by board or shareholders
Corporation may obligate itself in advance of act giving rise to lawsuit to provide indemnification or to advance expenses (i.e., removes need for authorization after act)
But must be consistent with 8.51 and 8.53
E.g., can’t indemnify if liable for improper benefit
Examples:
Make indemnity mandatory when only permissive in 8.51
Make advance for expenses mandatory when only permissive in 8.53

Question 43

Indemnity in Articles

Answer 43

articles of incorporation may include a provision permitting or making obligatory indemnification of a director, except for:
Receipt of improper financial benefit
Intentional infliction of harm on corporation
Unlawful distribution, or
Intentional violation of criminal law

Question 44

Definition of a security

Answer 44

33 & 34 Acts apply only to a “security”
Both Acts similarly define a “security”
Specific items such as note, bond, stock
Stock—called stock & bearing usual characteristics of stock
Right to receive dividends upon apportionment of profits
Negotiability and ability to be pledged
Conferring voting rights in proportion to shares
Capacity to appreciate in value
33 & 34 Acts apply only to a “security”
Both Acts similarly define a “security”
Specific items such as note, bond, stock
Stock—called stock & bearing usual characteristics of stock
Right to receive dividends upon apportionment of profits
Negotiability and ability to be pledged
Conferring voting rights in proportion to shares
Capacity to appreciate in value

Question 45

Selling Securities under 1933 Act §5

Answer 45

Timeline:
1) no selling activity,
2) registration statement filed with SEC,
3) Offers permitted but no sales
SEC review of registration statement (includes prospectus): adequacy of disclosure, not merits
4) Registration Statement Effective
5) Sales allowed
Prospectus must be delivered before sale

Question 46

Registration Process

Answer 46

1933 Act §12(a)(1): Strict liability for offers or sales in violation of §5 with rescission remedy
1933 Act §11: If registration statement is materially misleading, then all directors, executives who sign reg. stmt., experts, and underwriters face liability unless establish a due diligence defense under §11(b) (but Issuer has no defense)
1933 Act §5: Issuer must register stock issuance with SEC unless exempt
Exempt securities: Never need to be registered
Exempt transactions: One-time exemption
§4(2) Private Placement Exemption (& Reg. D safe harbors)

Question 47

Rule 10b-5 Elements

Answer 47

Jurisdictional nexus
Interstate commerce, mails, or national securities exchange
Transactional nexus
“in connection with the purchase or sale of any security” – so issuer can be liable
Focus is on a sale or purchase by plaintiff, so excludes potential purchasers who did not buy and shareholders who refrained from selling – Blue Chip Stamps

Rule 10b-5: “Employment of manipulative and deceptive devices.”

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a)	To employ any device, scheme, or artifice to defraud,
(b)	To make any untrue statement of a materialfact or to omit to 		state a material fact necessary in order to make the statements 		made, in the light of the circumstances under which they were 		made, not misleading, or
(c)	To engage in any act, practice, or course of business which 			operates or would operate as a fraud or deceit upon any 			person, in connection with the purchase or sale of any security.

Rule 10b-5 is the principal basis for SEC investigations of securities fraud.

It applies to both public offerings and private placements.

While not explicit in the language of Rule 10b-5, courts have interpreted the Rule to create standing for the SEC to bring a criminal enforcement action.

Question 48

Exemptions from Registration

Answer 48

An exemption relieves the issue from the obligation to register a security.

A security can be exempt, or a transaction involving a security can be exempt.

Examples of securities that are exempt include certificates of deposit and federal government-issued securities; think: securities that are essentially “no risk.”

Question 49

private placement exemption

Answer 49

alternative method of raising capital through securities sales, without having to undertake (i) the time, expense and exposure of a public offering; or (ii) the costs and lien-imposition related to a loan.

Question 50

33 Act

Answer 50

The 33 Act promotes disclosure by requiring that the issuer of a “security” sold to persons in the U.S. “register” the issuance of that security, unless such security is “exempt.”

Question 51

Rule 504 Exemption: Limited Offerings/Sales (up to 10MM)

Answer 51

An offer and sale of up to $10MM in securities within a 12 month period generally is exempt from the registration requirement.

Blue Sky Laws may still apply to the transaction.
General solicitation is permitted.

Both accredited and non-accredited investors permitted.

Must file Form D to give notice to SEC fifteen days after first sale.

. . . Form D: Requires disclosure of bare bones: names and 	addresses of company’s promoters and D&Os, and some 	basic information about the offering—but not much else. 

. . . Form D marks the transaction as within the Reg D safe 	harbor.

Question 52

Rule 506(b) Exemption: Unlimited Offerings and Sales (with Some Non-Accredited Investors)

Answer 52

No limit on capital that can be raised.

However, general solicitation/advertising is not permitted.

May sell to an unlimited number of accredited investors, but to no more than 35 non-accredited investors.

Non-accreditor investors must nevertheless be financially sophisticated (sufficient knowledge/experience to be able to evaluate the investment and its risks).

If the securities are being sold to accredited investors, the company has discretion over what it discloses; if it sells to non-accredited investors, stricter disclosure rules kick in (must provide a document similar to a registration statement).

Must file a Form D giving notice to the SEC fifteen days after first sale.

Question 53

Rule 506(c) Exemption: Unlimited Offerings and Sales (with Only Accredited Investors)

Answer 53

President Obama signed into law the Jumpstart Our Business Startups Act of 2012 (JOBS Act), which eased the restrictions on Rule 506(b) private placements, to allow general solicitation under Rule 506(b), provided that all investors are accredited.

The issuer must take steps to verify accredited investor status.

Must file a Form D giving notice to the SEC fifteen days after first sale.

Question 54

Regulation CF Exemption: Crowdfunding (CF) Offerings and Sales

Answer 54

Raise from $5 MM
The JOBS Act authorized equity CF for the first time.

The SEC adopted regulations for an exemption from registration for CF offerings.

Maximum offering period of 12 months and no non-US companies.

Offers and sales must be conducted through registered CF portals.

Some investor limitations based on annual income and net worth.

Must file a Form C with SEC disclosing various information about the security

Question 55

Exemptions/private placement sales policy

Answer 55

An exemption from registration requirement does not relieve an issuer from the obligation not to commit fraud in the solicitation and sale.

A private placement memorandum is a defensive strategy to protect the issuer against fraud concerns.

Private placement sales are subject to resale restrictions; should be purchases by a purchaser with investment intent; issuer responsible for taking precautions against prohibited resales.

Question 56

34 act

Answer 56

The 34 Act created the SEC, which is the independent government agency charged with ensuring enforcement of federal securities laws.

The 34 Act governs the secondary trading of securities—which is usually done on an exchange (such as the NYSE or the NASDAQ), through a broker or other dealer.
The 34 Act requires the filing of additional disclosures:

. . . Form 10-K (annual report)

. . . Form 10-Q (quarterly report)

. . . Form 8-K (episodic report) (to announce significant or material events about which shareholders need to be made aware promptly. E.g., acquisitions, bankruptcy, directors’ resignations, or fiscal year changes).

Question 57

Rule 10B-5 Insider

Answer 57

An insider for purposes of “insider trading” is a person who has access to non-public information about a corporation, or ownership of stock equalingmore than 10% of a firm’s equity. So this would include, amongst others, a company’s officers and directors.

In addition, an insider can include a “second hand” insider—that is, a person (like a family member or friend) who gains knowledge such non-public information through a first-hand insider (like a company director).

Insider trading, in turn, is the buying or selling of a corporation’s stock based on the confidential information of an insider.

Question 58

tipper-tippee insider trading

Answer 58

This type of insider trading occurs when an insider (the tippee passes along confidential information to another person (the “tippee”), who in turn trades on that information.

Both a tipper and a tippee can be held liable for a Rule 10b-5 violation.

Question 59

Tippee liable if

Answer 59

Under Dirks, a tippee who receives confidential inside information is liable if:

(1) 	the tipper received a direct or indirect personal benefit for providing the 		confidential information—the “personal-benefit” test; and 
(2) 	the tippee knows or should know the tipper received such personal benefit. 

Examples of where the personal-benefit test would be met:

when the tipper will reap “a pecuniary gain or a reputational benefit that will translate into future earnings”;
when a tipper makes a gift of confidential information to a trading relative or friend;
when there is a “quid pro quo” relationship between the tipper and the tippee—in other words, a situation in which the tipper is receiving something in return for the information.

Question 60

S-corp

Answer 60

Pass through entity for taxation purposes, such that its profits and losses are divided among shareholders and reported by shareholders on the shareholder’s income tax return.
100 or less shareholders, generally individuals, only one class of stock.
Tax status selection- must be closely held, election to be treated- income and losses divided among shareholders- no tax filing for S corp income. Individual shareholders report income and losses on personal tax return.

Question 61

C corp

Answer 61

Shareholders are taxed separately from the entity (double taxation), unrestricted number of shares

Question 62

Public Benefit Corporation

Answer 62

PBC- Always have shareholders, expect dividends, expect that corporation will make a profit. Committed to conducting business and supporting causes that are for the public good.
PBC- Makes profits, business with particular societal good. Become a PBC because public benefit purpose is so central identity of business that you want to formalize it.
An existing corporation may convert into a PBC (Under Delaware law, need 90% of shareholders approval, and dissenters are entitled to be bought out).
PBC may be a C-Corp for taxation purposes (earnings are subject to double taxation at the corporate and shareholder levels) or as an S Corp.