Question

Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the Securities and Exchange Commission (SEC). He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise, and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Which of the following may allow Bernice to avoid registration with the SEC?

a)The limited exemption
b)The accredited exemption
c)The unadvertised exemption
d)The private placement exemption
e)Section 4(6) of the Securities Exchange Act of 1934

Answer 1

Bernice can likely use the private placement exemption to avoid SEC registration as she intends to offer securities only to a limited number of accredited investors without advertising.

Step-by-step explanation:

Bernice may be able to avoid registration with the SEC by relying on the private placement exemption. This exemption is provided under Regulation D of the Securities Act of 1933 and allows companies to sell securities without the need to register with the SEC, provided that they only offer them to a limited number of sophisticated investors, known as accredited investors. Since Bernice intends to offer securities only to a limited number of wealthy friends, such as Scott who qualifies as an accredited investor due to his net worth, and she does not want to advertise the offering, the private placement exemption seems like a suitable choice.

An accredited investor is typically a person with a net worth exceeding $1 million (excluding the value of their primary residence) or an annual income exceeding $200,000 in the last two years ($300,000 together with a spouse). Although Mary has had financial issues and does not meet the net worth criterion, her professional status as a psychiatrist might still enable her to invest as an accredited investor based on certain professional certifications, designations, or credentials, or her knowledge and experience in financial matters.