"Within or From" under Arizona Securities Laws


“Within or From” under Arizona Securities Laws

When are securities considered to be offered or sold “within or from” Arizona under the Arizona securities laws?

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.
The purpose of this article is to analyze when securities are considered to be offered or sold “within or from” Arizona, thereby triggering the application of Arizona securities laws and granting jurisdiction of the matter to the Arizona Corporation Commission Securities Division.

I. The Applicable Arizona Securities Laws: A.R.S. 44-1841, 44-1842, 44-1991.

A.R.S. 44-1841,[1] 44-1842,[2] and 44-1991[3] are actionable where there has been an offer or sale of a security “within or from” Arizona. The “within or from” language used in all three statutes is intended to have the same meaning. See Chrysler Capital Corp. v. Century Power Corp., 800 F. Supp. 1189, 1192 n.3 (S.D.N.Y. 1992). 

II. The Purpose of Arizona’s “Within or From” Language.

The purpose of the “within or from” language set forth in the Arizona Securities Act, including A.R.S. 44-1841, 44-1842 and 44-1991, is explained as follows:
A major weakness in the blue sky laws of Arizona and other states was that they were evaded by selling across states lines through the mail. Arizona’s 1951 Securities Act contained curative, “within or from” language designed to reach securities violations perpetrated by those who operate across state lines. . . . These [within or from] clauses create the flexibility needed to reach securities violators operating across state lines.
Richard G. Himelrick, Arizona Securities Fraud Liability: Statutory and Common-Law Remedies, State Bar of Arizona 3.1.7.2 (2003) (citations omitted).

III. The Interpretation of Arizona’s “Within or From” Language.

Interpreting Arizona’s “within or from” language is left up to the courts, who have read the language expansively. See Ariz. Corp. Comm’n v. Media Prods., Inc., 158 Ariz. 463, 467, 763 P.2d 527, 531 (Ct. App. 1988); Himelrick, Arizona Securities Fraud Liability, 3.1.7.2. Take, for example, A.R.S. 44-1991(A), which has been interpreted to cover offers and sales of securities from Arizona, to Arizona, and within Arizona:
To prevent Arizona from becoming a base for fraudulent activities, deceptive offers or sales directed from Arizona to residents of other states are prohibited by section 44-1991(A). Conversely, sales directed from other states to Arizona residents are also covered as, of course, are intrastate sales to Arizona residents.
Himelrick, Arizona Securities Fraud Liability, 3.1.7.2 (citations omitted). See also Chrysler Capital, 800 F. Supp. at 1191 (“If the drafters of A.R.S. 44-1991 did not contemplate application of the statute to transactions which occur outside the state, then inclusion of ‘from this state’ would have been nonsensical. Accordingly, the language of 44-1991 indicates that its drafters contemplated application to transactions . . . which occur at least in part outside of Arizona.”).

1. Offers or Sales of Securities Occurring “Within” Arizona.

Arizona courts have jurisdiction over offers or sales of securities made from outside of Arizona to Arizona residents or, in other words, offers or sales of securities that occur “within” Arizona. State ex rel. Corbin v. Goodrich, 151 Ariz. 118, 124, 726 P.2d 215, 221 (Ct. App. 1986). In Corbin, the Arizona Court of Appeals determined that “[t]he application of securities laws against persons soliciting from outside the state does not violate due process. The state, in regulating securities and exercising its police power, need not meet the minimum contacts requirements which apply to disputes between private parties.” Id. at 124, 726 P.2d at 221 (citations omitted). Therefore, Corbin held that the Arizona court had jurisdiction over the offers of gold and silver contracts made by a Michigan company from its Michigan office to Arizona residents, through telephone solicitations and written offers, which violated the registration and licensing requirements contained in A.R.S. 44-1841 and 44-1842. Id. at 124, 726 P.2d at 221.

2. Offers or Sales of Securities Made “From” Arizona.

Arizona courts also have jurisdiction over offers or sales of securities that occur outside of Arizona but are made “from” Arizona because the issuer performed “more than ministerial” actions in connection with the subject transaction from its base of operations in Arizona. See Media Prods., 158 Ariz. at 465, 763 P.2d at 529; Chrysler Capital, 800 F. Supp. at 1193.

a. Ariz. Corp. Comm’n v. Media Prods., Inc.

In Media Prods., the Arizona Corporation Commission brought an action against Media Products, Inc. (“Media”), a Delaware corporation, for failing to register its initial public stock offering in Arizona (although it was registered with the SEC and other states). Id. at 464, 763 P.2d at 528. The first issue on appeal was whether the trial court had erred in interpreting A.R.S. 44-1841 to prohibit the sales of securities by a foreign corporation having a base of operations in Arizona where: (1) all of the sales activities were conducted by out-of-state broker-dealers in states other than Arizona; (2) the offers to purchase were made and accepted out-of-state; and (3) no sale or offer of sale was made to any Arizona resident. Id. at 465, 763 P.2d at 529. Media argued that the trial court erred, and A.R.S. 44-1841 was inapplicable to its offering, because the offers to sell and sales at issue were not made “within or from” Arizona. Id. at 465, 763 P.3d at 529. The appellate court disagreed and affirmed the trial court’s ruling against Media.

The Arizona Court of Appeals acknowledged that Media’s “[s]ales of the entire issue were negotiated out-of-state solely by the out-of-state agent underwriter and its selling out-of-state broker dealers with purchasers who were residents of states where the offerings were duly registered, [and] no sales or offers of sale were made in Arizona or to Arizona residents.” Id. at 464-65, 763 P.2d at 528-29. However, the court held that the offers and sales of Media’s stock were “from” Arizona, and therefore fell within the purview of A.R.S. 44-1841, because of the following actions: (1) Media’s principal place of business and base of operations were in Arizona; (2) the officers and directors operated from and resided in Arizona; (3) the stock certificates were prepared and issued by the transfer agent in Arizona; (4) the Board of Directors’ meetings took place in Arizona; (5) the contract specified that notice was to be in writing and delivered to the company at its Arizona address; (6) the agreement designated an Arizona bank as the escrow agent; and (7) the closing was in Arizona. Id. at 465-66, 763 P.2d at 529-30.

The court in Media Prods. did, however, go on to find that A.R.S. 44-1841 violated the federal commerce clause, as it constituted an improper interference with, and placed a direct and excessive burden on, interstate commerce. Id. at 467-70, 763 P.2d at 531-34. In making that decision, the court heavily relied upon the fact that Media was not incorporated in Arizona, none of the stock purchasers were residents of Arizona, and the purchasers resided in states where the stock had been properly registered in addition to the SEC, and the prospectuses and supplements expressly stated that the offerings were not registered in Arizona. Id. at 469, 763 P.2d at 533. See also Polaris Int’l Metals Corp. v. Ariz. Corp. Comm’n, 133 Ariz. 500, 505, 652 P.2d 1023, 1028 (1982) (“to the extent the statute [A.R.S. 44-1841(A)] regulates the sale of securities outside of Arizona, it conflicts with the federal Commercial Clause. . . . at least that portion of the statute would be unconstitutional under the federal Supremacy Clause.”). Therefore, under certain circumstances, A.R.S. 44-1841(A) may be found unconstitutional under the federal commerce clause and supremacy clause with respect to sales of securities outside of Arizona.

b. Chrysler Capital Corp. v. Century Power Corp.

In Chrysler Capital, the defendants argued, based on a legal opinion from the Arizona Attorney General to the Securities Division of the Arizona Corporation Commission (Opinion No. 56-140, August 24, 1956),[4] that its securities offering was not “from” Arizona within the meaning of A.R.S. § 44-1991 merely because the issuer was an Arizona corporation with its principal place of business in Arizona. 800 F. Supp. at 1192. However, the district court found that the opinion could “also be interpreted to stand for the proposition that where a corporation has a base of operations in Arizona, then the state has an interest to protect when the corporation issues securities; namely, preventing Arizona from being used as a base of operations for crooks marauding outside the state.” Id.[5] Since the plaintiffs alleged that the issuer was an Arizona corporation with its principal place of business in Tucson, Arizona, and the defendant did not contend that a corporation’s principal place of business is not its “base of operations” (which would have been difficult to do since the issuer was an electric utility whose generating facilities were located in Arizona), the court found that nothing in the opinion led to the conclusion that the issuer’s securities were not offered or sold “from” Arizona and did not support the defendants’ position that the issuer’s securities fell outside the ambit of A.R.S. § 44-1991. Id.

The Chrysler Capital court then turned to the Media Prods. holding. Id. at 1193. The defendants argued that the trial court had misapplied Media Prods. because the subject actions only met the first of the seven factors listed in Media Prods.: the issuer’s principal place of business and base of operations were in Arizona. Id. The court, however, determined that the seven factors enumerated in Media Prods. did not constitute a catalogue of conditions necessary for finding that a transaction is “from” Arizona, but were merely an illustration of substantial contacts with Arizona or “more than ministerial” actions that could establish jurisdiction. Id.

The court then held that while the defendants had shown that the transaction at issue was negotiated and closed in New York and the securities were issued and paid for in New York, the defendants had failed to show that “more than ministerial” actions had not taken place in Arizona and therefore were not issued “from” Arizona within the meaning of A.R.S. § 44-1991. Id. at 1193-94. Instead, the court found that the plaintiffs had made a showing, sufficient to withstand a motion to dismiss, that the defendant had performed “more than ministerial” actions in Arizona at the time it issued the relevant securities, including the following facts: (1) the issuer was an Arizona corporation with its principal place of business in Arizona; (2) since the issuer’s principal place of business was in Arizona, it could therefore be inferred that the issuer’s officers and directors operated from Arizona, that many of them resided in Arizona and that directors’ meetings were held in Arizona; (3) the physical assets covered by the securities at issue were located in Arizona; and (4) the agreement governing the transaction required that all notices relating to the securities be sent to the issuer at its Arizona headquarters. Id. at 1193-94.

Chrysler Capital went on to find that A.R.S. § 44-1991 did not violate the federal commerce clause and did not impede, prevent or burden interstate commerce in any way because A.R.S. § 44-1991 is an anti-fraud statute that is not preventative and regulatory in nature (like A.R.S. § 44-1841), but is remedial in nature and merely provides a post-hoc remedy for persons aggrieved by allegedly unlawful conduct. 800 F. Supp. at 1194-95. “A statute proscribing fraud is not discriminatory; it does not prevent or delay commercial transactions; it merely creates liability for behavior deemed undesirable everywhere. If anything, such legislation facilitates commerce far more than it can even be argued to ‘burden’ in any sense . . . because it provides a measure of assurance that commerce will be honestly transacted.” Id. at a1195.

IV. Conclusion.

The application of Arizona securities laws and the jurisdiction of the Arizona Corporation Commission is triggered when securities are offered or sold “within or from Arizona.” Securities are offered or sold “within” Arizona when made to Arizona residents. Securities are offered or sold “from” Arizona when the issuer has its base of operations in Arizona and conducts “more than ministerial” actions in Arizona, which include the following: (1) issuer’s principal place of business is in Arizona; (2) issuer’s officers and directors operate from and/or reside in Arizona; (3) the board of directors meetings take place in Arizona; (4) stock certificates are prepared and issued in Arizona; (5) notices relating to the securities are sent to Arizona; and/or (6) the money for, and/or physical assets related to, the securities are sent to, maintained or located in Arizona. Often the application of particular facts to these legal standards requires careful legal analysis to avoid violation of the Arizona securities laws.

[1] See A.R.S. 44-1841(A) (“It is unlawful to sell or offer for sale within or from this state any securities unless the securities have been registered pursuant to article 6 or 7 of this chapter or are federal covered securities if the securities comply with section 44-1843.02 or chapter 13, article 12 of this title.”) (emphasis added).

[2] See A.R.S. 44-1842(A) (“It is unlawful for any dealer to sell or purchase or offer to sell or buy any securities, or for any salesman to sell or offer for sale any securities within or from this state unless the dealer or salesman is registered as such pursuant to the provisions of article 9 of this chapter.”) (emphasis added).

[3] See A.R.S. 44-1991(A) (“It is a fraudulent practice and unlawful for a person, in connection with a transaction or transactions within or from this state involving an offer to sell or buy securities, or a sale or purchase of securities, including securities exempted under section 44-1843 or 44-1843.01 and including transactions exempted under section 44-1844, 44-1845 or 44-1850, directly or indirectly to do any of the following: 1. Employ any device, scheme or artifice to defraud. 2. Make any untrue statement of material fact, or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. 3. Engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit.”) (emphasis added).

[4] In this opinion, the Arizona Attorney General “found that the words ‘from this state’ were included in the statute [A.R.S. § 44-1841] ‘to prevent the setting up of a base of operations within this state and the selling and offering for sale of securities to people outside of Arizona from within this state’ . . . reasoned that a corporation whose sole contact with Arizona was having a statutory agent in Arizona to maintain its status as an Arizona corporation had no ‘base of operations’ within Arizona from which it might ‘maraud.’ Therefore, securities issued by such a corporation could not affect the interest protected by the ‘from this state’ language of § 44-1841. Accordingly, Opinion 56-140 concluded that the drafts of the section could not have intended that the Arizona blue-sky law required registration in Arizona of securities offered by a corporation whose sole contact with Arizona was its organization and status maintenance under Arizona law.” Chrysler Capital, 800 F. Supp. at 1192.

[5] See also Corbin, 136 Ariz. at 597, 667 P.2d at 1312 (holding that the power of the state is not restricted to protecting only Arizona residents, but may also be used to protect non-residents because “the state has a legitimate interest in redressing the wrongs committed from within Arizona. There is a moral imperative to provide redress for those injured. Further, when out-of-state investors are swindled by Arizona enterprises, the reputations and businesses of the majority of honest business people within the state are harmed.”)
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