§ 2.6.1

• Jurisdiction: Arizona

§ 2.6.1 In General

In its first legislative session after statehood, the 1912 legislature enacted a new corporate code²⁵² and the state's first securities-registration act.²⁵³ Both acts were administered by the state's corporation commission.²⁵⁴

The stage was set for the new securities act at the constitutional convention. Article XV of the constitution provided for a corporation commission and empowered it to require reports and to investigate, inspect, and subpoena the records of corporations that sold stock publicly.²⁵⁵ The inspection rights triggered spirited debate among the framers. Some saw it as empowering the commission to "stick[ ] its nose" in private business.²⁵⁶ But the majority, including future Governor Hunt, saw the commission as a vehicle to protect the public from fraudulent stock offerings by what the delegates called wildcat companies.²⁵⁷

In his first message to the 1912 legislature, Hunt urged the Arizona legislature to enact securities laws to stop wildcat promoters and others from selling worthless stock.²⁵⁸ After the proposed legislation passed unanimously, Hunt publicized it as one of his administration's main accomplishments.²⁵⁹

The new securities act was part of a spate of 23 state statutes known colloquially as blue-sky laws²⁶⁰ that were enacted between 1911 and 1913.²⁶¹ The first of these was passed in Kansas in 1911,²⁶² and the second was the blue-sky law that Hunt proposed a year later.²⁶³ Arizona's act was copied almost verbatim from the Kansas act.²⁶⁴

The Arizona Supreme Court, in a 1925 decision, described the Arizona act's purpose as public protection¾"preventing the public from being imposed upon by questionable and unsound financial schemes of fortune dreamers and dishonest promoters, and to reach all get-rich-quick schemes offering to the general public their stocks and securities, under whatever name they may choose to act."²⁶⁵ The paternalistic goals described in this quote are emblematic of the courts' interpretation of blue-sky legislation.²⁶⁶ Similar statements in other Arizona cases²⁶⁷ and blue-sky decisions from other states are pervasive.²⁶⁸

As envisioned by Arizona's 1910 constitution,²⁶⁹ the 1912 Act gave the Commission general supervision and control over all investment companies (i.e., corporations selling stock to the public) including the right to inspect and investigate these companies' records.²⁷⁰ The new legislation required all companies selling securities in Arizona, regardless of where they were incorporated, to obtain a permit from the Corporation Commission and to file periodic-financial reports.²⁷¹ To obtain a permit, an investment company was required to file with the Commission a detailed business plan and itemized information showing its financial condition.²⁷² The Commission could deny a permit to a company if it concluded that the company's plan of business was unfair, unjust, inequitable, or oppressive,²⁷³ or that the company was insolvent and "does not promise a fair return" on the company's securities.²⁷⁴ On similar grounds the Commission was authorized to apply for a receiver or other equitable relief if a company became financially impaired or began conducting business in an unsafe or inequitable manner.²⁷⁵ Selling securities without compliance with statutory requirements was a misdemeanor.²⁷⁶ Knowingly falsifying a company's records or financial filings with the intention of deceiving the Commission was a felony.²⁷⁷

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Notes:

^[252]See Act of May 16, 1912, ch. 49, 1912 Ariz. Sess. Laws 216.

^[253]See 1912 Securities Act, ch. 69, 1912 Ariz. Sess. Laws 338.

^[254] During the nineteenth century, the states used administrative agencies to regulate insurance, banking, railroads, and many other businesses. See Friedman, History, supra note 4, at 415-30. But the use of corporation commissions and other state agencies to regulate the securities industry did not occur until a flurry of blue-sky laws were enacted between 1911 and 1913. See supra note 235, infra note 261, and accompanying text...