Invalidation of Securities Registration Exemptions by Fraud
Invalidation of Securities Registration Exemptions by Fraud
Does fraud invalidate securities registration exemptions that might otherwise apply to a securities offering?
Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop with the passage of time. Accordingly, before relying upon this article, care should be taken to verify that the law described herein has not changed.
This article analyzes when fraudulent conduct may invalidate a claimed exemption from registration in connection with a securities offering under the Arizona Securities Act.
First, the Director of the Securities Division (“Director”) may deny or revoke the availability of certain exemptions if the Director determines that there is a reasonable likelihood that the sale of the securities would work or tend to work a fraud or deceit upon the purchasers. See, e.g., A.A.C. R14-4-138(B) (foreign security exemption); A.A.C. R14-4-139(P) (exempt public offerings for qualified purchasers); A.A.C. R14-4-141(I) (solicitation of interest exemption); A.A.C. R14-4-145(F) (electronic venture capital network exemption). In the event the Director makes such a determination, the issuer may be able to request a hearing in accordance with the provisions of Article 11 of the Securities Act by notifying the Arizona Corporation Commission (“Commission”) within 10 days after notice of the Director’s determination. See A.A.C. R14-4-139(P).
Second, certain exemptions are not available to an issuer if the issuer, or any of the issuer’s predecessors, affiliates, directors, officers, general partners, beneficial owners of 10% or more of any class of its equity securities, promoters, or any underwriter of the securities or any partner, director, or officer of such underwriter:
1. Has been convicted within the 10 years preceding the filing of the required notice, or at any time thereafter prior to the termination of the offering, of a felony or misdemeanor involving racketeering or a transaction in securities, or of which fraud is an essential element;
2. Is subject to an order, judgment, or decree of any court of competent jurisdiction entered within five years of the date of filing of the required notice, temporarily, preliminarily, or permanently enjoining or restraining any conduct or practice in connection with the sale or purchase of securities, or involving fraud, deceit, or racketeering;
3. Has been subject to any state or federal administrative order or judgment in connection with the purchase or sale of securities entered within five years preceding the filing of the required notice, or at any time thereafter prior to the termination of the offering;
4. Is subject to the reporting requirements of the Securities Exchange Act of 1934 and not filed all required reports during the 12 calendar months preceding the filing of the required notice;
5. Is subject to an order of any state or federal agency denying or revoking registration or licensure as a broker or dealer in securities under the Securities Exchange Act of 1934 or as an investment adviser or investment adviser representative, or is subject to an order denying or revoking membership in a national securities association registered under the Securities Exchange Act of 1934, or has been suspended for a period exceeding six months or expelled from membership in a national securities exchange registered under the Securities Exchange Act of 1934.
See, e.g., A.A.C. R14-4-126(E)(3)(a)-(e) (limited offerings and sales not exceeding $5 million); A.A.C. R14-4-136(B) (exempt offerings pursuant to compensatory arrangements); A.A.C. R14-4-139(R)(1) (exempt public offerings for qualified purchasers); A.A.C. R14-4-140(M) (accredited investor exemption); A.A.C. R14-4-141(D) (solicitation of interest exemption); A.A.C. R14-4-145(C) (electronic venture capital network exemption); A.A.C. R14-4-148(e) (transactions effected by Canadian dealers or salesmen).
For some exemptions, the Commission may, at its discretion, waive any of the foregoing disqualifications. See A.A.C. R14-4-139(R)(2); A.A.C. R14-4-145(D). Further, any foregoing disqualifications will cease to exist if any of the following occurs:
1. The basis for the disqualification has been removed by the jurisdiction creating it.
2. The jurisdiction in which the disqualifying event occurred issues a written waiver of the disqualification.
3. The jurisdiction in which the disqualifying event occurred declines in writing to enforce the disqualification.
See A.A.C. R14-4-126(E)(3)(f); A.A.C. R14-4-136(C); A.A.C. R14-4-139(R)(3); A.A.C. R14-4-140(N); A.A.C. R14-4-141(E); A.A.C. R14-4-145(E).
Third, all offers and communications made in reliance on certain exemptions may themselves be subject to the anti-fraud provisions of the Arizona Securities Act. See, e.g., A.A.C. R14-4-141(H) (solicitation of interest exemption).
Fourth and finally, even if a security or securities transaction qualifies for an exemption from the registration requirement under A.R.S. § 44-1841, the dealer or salesman may still need to be registered under the Arizona Securities Act, A.R.S. § 44-1842, and the transaction may not violate Arizona’s anti-fraud statutes, A.R.S. § 44-1991, et seq.