Shorey v. Arizona Corporation Commission – 9/17/2015

October 1, 2015

Arizona Court of Appeals Division One holds that: (1) an Arizona company’s sales of securities outside of Arizona are subject to Arizona’s blue-sky securities statutes; (2) those laws are not preempted by federal law; and (3) they do not impose an unconstitutional burden on interstate commerce.

Mr. Shorey formed a company in Arizona and arranged to have companies in Colorado and Spain assist in selling stock.  Shorey agreed to pay those companies a fee and commission totaling 72.5% of the purchase price for the stock.  The offering documents did not disclose this figure.  The stocks were marketed and sold to investors in Europe but Shorey and his company operated from Arizona and received payment in Arizona. 

The Corporation Commission brought an administrative action which found that Shorey and his company violated A.R.S. §§ 44-1841 (prohibiting the sale of unregistered securities), -1842 (prohibiting the sale of securities by unregistered dealers and salesmen), and -1991 (prohibiting fraud in the sale of securities).  Shorey appealed that decision to superior court and then the court of appeals, both of which affirmed.

First, the Court of Appeals affirmed the holding that Shorey sold unregistered securities within or from Arizona, and the sales were fraudulent.  The Spanish company was only an intermediary and Arizona law does not require that the sale itself be made within or from Arizona.  As long as a company has more than a ministerial presence in Arizona, its stocks are subject to Arizona’s registration requirements.  Here, Arizona was the principle place of business so the stocks and the seller needed to be registered under A.R.S. §§ 44-1841, –1842.  Shorey made material misrepresentations under A.R.S. § 44-1991 by omitting that 72.5% of the investment would go to a fee and commission.  

Second, the Court held that Arizona’s blue-sky laws are not preempted.  State blue-sky laws are not expressly preempted but are expressly permitted by federal law.  This explicit provision for the coexistence of state and federal securities regulations means that there is no field preemption.  There is no conflict preemption because it was possible to comply with both state and federal laws.  Arizona’s laws do not create an obstacle to the accomplishment and execution of federal Regulation S.  Regulation S only exempts foreign securities offers and sales from federal registration and Congress did not intend to exempt those from state regulation.

Third and finally, the Court found that the Arizona statutes do not impose an unconstitutional burden on interstate commerce.  The Supreme Court has repeatedly upheld blue-sky laws against Commerce Clause challenges.  Congress preserved state authority over fraud prevention and the benefits of fraud prevention outweigh any “burden” on interstate commerce.  Any incidental burden from registration requirements is outweighed by Arizona’s interest in protecting its business reputation.  The Court distinguished Arizona Corporation Commission v. Media Products., Inc., 158 Ariz. 463 (App. 1988), which found an unconstitutional burden in requiring registration of stocks sold to out-of-state purchasers by a non-Arizona corporation whose stocks were already registered in other states and with the SEC.  Here, Arizona’s business reputation is at stake because Shorey’s company was incorporated in Arizona and actively operated here.

Judge Jones authored the opinion; Presiding Judge Downie and Judge Thompson concurred.