Describe the two basic types of transaction exemptions

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The VirtualStream Company has developed proprietary server and control software for providing communication and media-on-demand services via the Internet. The company is in the process of collecting prerecorded video and audio content from clients and then digitally transferring and storing the content on network servers. The content then is available for replay by customers via the Internet. VirtualStream's mission is to provide the most dependable and user-friendly multimedia streaming service worldwide.

  • The Internet technology service industry is characterized by rapid revenue growth with industry revenues predicted to exceed $300 billion in three years. Market participants include companies engaged in video and audio teleconferencing, corporate training, computer-based training, and distance learning. VirtualStream is attempting to focus on helping large companies to communicate more effectively, using both archived and live communications content, via the Internet. Video and audio content is digitally stored in a central location and is available on demand to clients. This approach will save time and money required to duplicate and ship materials. The company also offers a service that enables transmission of live broadcasts via the Internet.
  • VirtualStream raised $500,000 in the form of founder's capital last year. The firm is now seeking additional financial capital from investors by issuing or selling "securities" in the form of stock in the firm. The firm is planning to obtain $750,000 as soon as possible from private investors.

Question 1. Discuss whether you would recommend "registering" these "securities" with the Securities and Exchange Commission (SEC).

Question 2. Some "securities" are exempt from the SEC registration requirement. Is it likely that VirtualStream's "stock" would qualify for such an exemption? Why, or why not?

Question 3. Would you recommend that the initial $750,000 be obtained through an "intrastate" offering? Explain.

Question 4. Briefly describe the two basic types of "transaction" exemptions that may be available to VirtualStream that would allow the firm not to have to register its securities with the SEC.

Question 5. The SEC's Regulation D offers a "safe harbor" exemption to firms from having to register their securities with the SEC. Describe how the VirtualStream Company could use Reg D for issuing $750,000 in stock to private investors. In developing your answer, describe the Reg D "rules" that would likely apply to this security issue.

Question 6. Now, assume VirtualStream also is planning to issue an additional $2 million in stock towards the end of the year. Would this decision have an impact on the Reg D "rules" which would govern the issuance of the firm's securities? Describe. [Note: The material in Appendix B may be helpful in developing an answer to this question.]

Question 7. The other alternative is to seek to raise the total $2,750,000 amount now by selling securities to investors. Which Reg D "rules" and/or other securities laws would be "triggered" by such a plan? Describe why and how.

Reference no: EM132826091

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