PART A
Paul and Thomas Geoffries, brothers, are college students and web designers. While at the University of Megalopolis, a private, for-profit college in the "Quad State" area, they started an online chat service called FaceSpace. Paul attended and resided at the college's campus in the State of Quadrahenria. Thomas, who was on probation during college for a low level felony drug conviction, could not be a resident student and took classes at the campus in the Commonwealth of New Guernsey campus. The chat service began by putting information from school's student directory online, and offering blog, chat and message board features. FaceSpace was such a hit that within a year, the school advised the brothers that they had to remove FaceSpace from the university's server as it was utilizing too many resources. This was not a problem as the Geoffries found advertisers, so they were able to move FaceSpace to a private server without charging user fees. In fact, FaceSpace was earning so much revenue that the Geoffries brothers were able to pay themselves, and the six friends that helped them operate it salaries. The Geoffries brothers are graduating from the University of Megalopolis, and will be attending separate graduate programs. Paul will attend Quadrahenria State University, and Thomas the College of New Guernsey. As FaceSpace is so successful, the brothers not only plan to expand it to the two new colleges that they are attending, but to as many other colleges within the four states comprising the "Quad State" area as possible. They even have hopes of "going national." As part of their plan to expand to other campuses, they expect to recruit a student from each of the new schools "to get them in." They wish to formalize FaceSpace by organizing it as a proper business. The brothers would like to maintain a majority interest in the business, give about 20 percent to the six friends from their undergraduate days that helped them run the service, and use the remaining interest in the business to attract other investors and use employee incentives.
The Geoffries seek your advice on (a) the form of business they should use, (b) who might have a claim on the business, and (c) how they might protect themselves from claims regarding a computerized internet platform.
PART B
FaceSpace has been a phenomenal success for over ten (10) years. They are now a worldwide social networking phenomenon. Over the years and the various incarnations of the business enterprise, they are now a corporation with just under 100 shareholders. In anticipation of a public offering, they have just completed a private stock offering and allowed several of the initial equity owners to exercise stock options. The Geoffries brothers each exercised options to purchase 10,000 shares for $5 a share. Also in anticipation of the public offering, pursuant to the early intervention drug plea he made while in college, Thomas Geoffries had his conviction expunged. In addition, FaceSpace sold $10 million in two (2) year advertising contracts, which would allow the clients to backout for a 90 percent refund. These unusual contracts increased their current revenue by fifteen (15%) percent. As FaceSpace is such a phenomenon, the hype regarding the public offering has been enormous. Even college students are attempting to but the stock. Days before the public offering, the following occurred: (a) a broker at their underwriter, Silversmith &Baggs, showed a pension fund director a draft version of the prospectus; (b) Paul sold 1000 shares of the stock that he purchased through the the stock option plan for $45 a share, telling the private investor that the issue price for the public offering would be at least $60 a share; (c) several of the people who bought stock in the private offering sold it at a nice profit. The initial public stock offering had many problems. The NASDAQ computer system could, which was implemented pursuant to a recent regulation change by the Securities And Exchange Commission (SEC) could not keep up with the demand. The system, could not accurately report the price, and many day traders, including Big Profit Hedge Fund, lost money. Big Profit had formally filed its opposition to the SEC's regulation when it was proposed. After the public offering was completed, FaceSpace stock stabilized at $40 a share, well below the initial offering price of $70 a share. In light of the fiasco of the public offering, and the bad press that it generated, users began to drop FaceSpace in favor of a new, upstart rival service offered by TronCom. Fearful that the new advertisers would back out of their contracts, the Geoffries brothers sold a great deal of their stock.
What issues does FaceSpace, its officers and stockholders face under (a) state securities law, (b) the Securities Act of 1933, and (b) the Securities and Exchange Act of 1934.