Fact Pattern 21-1 Joan Enjoys Cross Stitching, and Her Husband, John, Makes Items

Multiple Choice

Fact Pattern 21-1
Joan enjoys cross stitching, and her husband, John, makes items using a woodworking process. They would like to make more items and open a small shop selling their handiwork, but they need additional capital with which to purchase raw materials, rent space, and advertise. Joan and John discuss the idea with their neighbors during the annual neighborhood picnic. A number of the neighbors say that they would like to invest in the project. This was entirely the initial idea of the neighbors, and Joan and John did not coerce them in any way. Joan and John, however, quickly draw up contracts that the neighbors signed providing that each investor would receive a certain interest in the shop. An attorney who lived in the neighborhood and specialized in family law asked if there were some laws that John and Joan needed to satisfy in order to seek investors. The neighborhood consensus, however, was that, so long as no one was misled and acted voluntarily, no problem existed. John and Joan proceeded with the shop and made a significant amount of profit. Disagreements arose among the neighbors, however, regarding exactly who was entitled to what.
-Refer to Fact Pattern 21-1.Which of the following is true regarding the application of federal securities laws to John and Joan's situation?

A) The arrangement with the neighbors was at the suggestion of the neighbors; and federal security law would, therefore, not apply.
B) Contracts such as those involved with the neighbors would not be considered securities and, therefore, federal securities law would not apply.
C) Contracts such as those involved with the neighbors appear to be securities; but state law, not federal law, would apply.
D) Contracts such as those involved with the neighbors would be considered securities; and, therefore, federal securities law would apply.