November 23, 2010
1% Ownership Does Not an Issuer Make
The North Dakota Supreme Court recently determined in State v. Hager (here) that a seller of LLC "member units" was not exempt from registering as an agent under North Dakota securities law even though the member units were exempt under Rule 506 of SEC Regulation D. The seller (Hager) in question was selling these securities while serving a suspended prison sentence through electronic home monitoring. Hager had previously been convicted of selling unregistered securities and acting as an unregistered agent.
Hager owned 1% of the member units and claimed that he was an issuer under the National Securities Markets Improvement Act of 1996 (NSMIA), and thus exempt from registration. He argued that as an owner and employee, he was an issuer. However, Hager never did anything other than offer services usually "performed by the those in a sales capacity." The court thus determined he was not an issuer. This seems right -- he did not seem to have any control over the LLC, and appeared to be more of a facilitator than an insider.
Hager then argued that if he wasn't an issuer, he still was not required to register as an agent. The North Dakota Century Code, however, requires agents to register or be otherwise exempt to act as a sales agent. Hager claimed this law only applied to third-party individuals, but the statute covers as an agent, "an individual . . . who represents a . . . an issuer . . .in effecting or attempting to effect purchases or sales of securities." Thus, the court found, Hager thus failed to register when required.
Hager had a tough case from the start. The court below stated that
most troubling of all is the simple fact that the new violations are of the exact kind and nature as the original violations. Clearly, the message was not received. . . .The people who entrust their financial well-being to the people who are selling securities and providing financial advice need to know that they will not be misled. They need to know that the appropriate laws will be followed.
Add to this that "Hager admitted he possessed firearms in violation of the conditions of his probation," it's hard to be surprised that the court was skeptical Hager took his first conviction very seriously.