§ 5.1.6.2.2

• Jurisdiction: Arizona

§ 5.1.6.2.2 A.R.S. § 44-1998

As part of the 1996 amendments, the legislature enacted § 44-1998,⁷⁴² an Arizona counterpart to § 12(a)(2) of the 1933 Act.⁷⁴³

Until 1995, § 12(a)(2) was an important supplement to Rule 10b-5 fraud. The proof needed under § 12(a)(2) is less demanding than that required under Rule 10b-5. Scienter, for example, is not required under § 12(a)(2).⁷⁴⁴ Nor is reliance needed.⁷⁴⁵

But suits under § 12(a)(2) were sharply limited by the Supreme Court's 1995 decision in Gustafson v. Alloyd Co.⁷⁴⁶ In Gustafson, the Court held that § 12(a)(2) applies only to public offerings, not private offerings or secondary trading in public stocks on stock exchanges and NASDAQ. The decision has been widely criticized.⁷⁴⁷

Section 44-1998 has been interpreted in a number of Arizona district-court decisions. In Orthologic, a 2002 decision,⁷⁴⁸ the district court followed the reasoning of Gustafson and held that a stock-purchase agreement that involved a private sale was not a prospectus under § 44-1998(A).⁷⁴⁹ Gustafson held that under the 1933 Act, a prospectus is a term of art that describes the statutory document used to make a public offering of securities.⁷⁵⁰ This interpretation has generally been considered wrong because it is contrary to the way Congress defined "prospectus" in the statutory definitions.⁷⁵¹ As Professor Loss explained, the 1933 Act's definition of prospectus includes "the universe of offers" listed in § 2(10) of the 1933 Act.⁷⁵² Within this universe, the formal prospectus used to make offers in a public offering is only one of many types of offering documents.⁷⁵³ Under § 2(10)'s definition, any written offer (including any notice, circular, advertisement, or letter) qualifies as a prospectus. Despite Gustafson's flawed conclusion that only prospectuses used in public offerings are covered by § 12(a)(2), Orthologic and later decisions have extended Gustafson to Arizona's statute and dismissed § 44-1998 claims when a public offering is absent.⁷⁵⁴

Section 44-1998 was also interpreted in Allstate Life Insurance, a 2010 decision.⁷⁵⁵ Sections 12(a)(2) and 44-1998 each contain exemptions for securities issued or guaranteed by the United States, the states, or political subdivisions of the states. The language of the exemptions is similar but not identical.⁷⁵⁶ The Allstate defendants moved to dismiss the plaintiffs' § 44-1998 claim on the ground that the securities were issued by a political subdivision of the State of Arizona and were therefore exempt from § 44-1998.⁷⁵⁷ The plaintiffs did not dispute this. Instead, they argued that SEC Rule 131 brought the bonds back within the coverage of § 44-1998.⁷⁵⁸ The district court rejected this. It reasoned that the exceptions under §§ 12(a)(2) and 44-1998 "contemplate somewhat different exceptions or exemptions from liability."⁷⁵⁹ It therefore refused to use a federal regulation (SEC Rule 131) to define the scope of liability under an Arizona statute.⁷⁶⁰

A major issue since Gustafson is whether § 12(a)(2) applies to offerings that claim to be private offerings but are in reality public offerings. Most courts hold that the issuer's characterization of the offering does not control. If the offering is in reality a public offering, § 12(a)(2) will apply.⁷⁶¹

The rationale of these cases is essentially the same as that in cases holding that claiming a private-offering exemption under Rule 506 of SEC Regulation D is not enough to establish federal preemption.⁷⁶² Under these cases, which represent the majority rule, state law is preempted only when the issuer actually satisfies the requirements of Rule 506.⁷⁶³

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Notes:

^[742] A.R.S. § 44-1998 provides:

A. In any case relating to securities offered or sold within or from this state, any person who offers or sells a security by means of a prospectus...