[In Trouble] Isaiah, an Issuer of Stock, May Be in Trouble

question 83

Multiple Choice

[In Trouble] Isaiah, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because he was in financial trouble due to other projects. Isaiah thought that the health club venture would be such a success that he would never get caught. Unfortunately, he was wrong. The health club venture has significant problems, and investors are looking for some way to hold Isaiah responsible. Another problem Isaiah has is that he inflated information regarding the prospects of the health club in the prospectus. Rafal, a new lawyer, told Isaiah that as far as he knew, Isaiah could be fined for violations under the Securities Act of 1933, but he could not be sent to prison. Isaiah told Rafal that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Isaiah says that he plans to rely on the due diligence defense. Isaiah also asks Rafal if he is aware of any other defenses. Isaiah says that once before he was held liable for a violation of the Securities Act of 1933, and he does not want to be in trouble again.
-Which of the following is true regarding Isaiah's plan to rely on the due diligence defense?

• A) He will be able to do so only if he can establish that the purchasers would have had reasonable grounds to question the registration statement had they reviewed it with due diligence.
• B) He will be able to do so only if he can establish that the purchasers would have had reasonable grounds to question the prospectus had they reviewed it with due diligence.
• C) He will be able to do so if he can establish that the purchasers would have had reasonable grounds to question either the registration statement or the prospectus had they reviewed them with due diligence.
• D) He will not be able to use that defense unless he can establish that he reviewed the registration statement and the prospectus, and had reasonable grounds to believe that the registration statement was accurate with no omission of material facts.
• E) He will not be able to rely on that defense because he is an issuer.

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Definitions:

Excess Capacity

A situation where a firm is operating below its maximum output capacity, indicating resources are not being used efficiently.

Monopolistic Competition

A market structure characterized by many sellers offering differentiated products, with some degree of market power.

Vacancy Rate

The percentage of all available units in a housing development or commercial property that are unoccupied or not rented at a given time.

Marginal Cost

Represents the cost incurred by producing one additional unit of a product or service.