Managers and the Legal Environment 7th Edition by David Madsen, Constance Bagley

Exercise 6

The SEC brought a civil enforcement action against Platforms Wireless International Corporation and William Martin, Platforms's former chair and CEO, for selling 17.45 million unregistered securities to the public in violation of the registration provisions of section 5 of the 1933 Act. Platforms had transferred the 17.45 million unregistered shares to Intermedia Video Marketing Company as compensation for consulting services. Intermedia then transferred those shares to François Draper and Benefit Consultants. At the time of the transfers, Martin was an officer of Intermedia and represented himself to be its president and CEO. Soon after receiving the stock from Intermedia, Draper and Benefit Consultants sold the shares to the public for more than $1.7 million.
The defendants claimed that the issuance of shares by Platforms to Intermedia qualified for an exemption under section 4(2) because they took reasonable care to ensure that Intermedia was not an underwriter. They further claimed the sale of the Platforms stock by Draper and Benefit Consultants was exempt under section 4(1) and Rule 144(k).
Under section 4(2) of the 1933 Act, "transactions by an issuer not involving any public offering" are exempted from registration. The parties agreed that the transactions would not qualify for the section 4(2) exemption unless Platforms and Martin complied with Rule 502(d) and took reasonable care to assure that Platforms was not issuing securities to an underwriter within the meaning of section 2(11) of the Act. Under Rule 502(d), "reasonable care" can be demonstrated by:
(1) Reasonable inquiry to determine if the purchaser is acquiring the securities for himself or herself or for other persons;
(2) Written disclosure to each purchaser prior to sale that the securities have not been registered under the Act and, therefore, cannot be resold unless they are registered under the Act or unless an exemption from registration is available; and
(3) Placement of a legend on the certificate or other document that evidences the securities stating that the securities have not been registered under the Act and setting forth or referring to the restrictions on transferability and sale of the securities.
Platforms and Martin conceded that they did not take any of these three actions but noted that Rule 502(d) does not list these actions as the exclusive method to demonstrate reasonable care. Rather, it creates a safe harbor. Platforms and Martin claimed that their "reasonable care" could be demonstrated by their reliance on opinion letters written by Platforms's general counsel stating that the transfers complied with a safe harbor from 1933 Act registration requirements. The opinion letters stated that counsel had "relied on" the representation Platforms made to the effect that Intermedia was not an affiliate of Platforms.
Are either the section 4(2) or section 4(1) exemptions available to Platforms and Martin? What could they have done differently to have avoided this lawsuit? [SEC. v. Platforms Wireless International Corp., 617 F.3d 1072 (9th Cir. 2010).]