1. What are the alternatives for financing this expansion plan? Should CRMC consider a bond? Why or why not? Would selling equity be more or less advantageous than issuing a bond?

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?

Assume that the principals proceed as in Question 3 and 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:Is 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?

CEO: If all goes well, it will be on store shelves in less than one year. 

Question:Is there a current demand for your existing snowboard products?

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 CEO’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?

5. If an investor files a fraud suit against CRMC and its CEO, will his statements alone be sufficient to pass the PSLRA standards for scienter?

6. Do any of the statements themselves constitute the required elements under PSLRA? What type of conduct, if coupled with the statements, could meet the scienter standard? 

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.