State Blue Sky Laws Not Preempted by NASIMA if Securities Offering does not Actually Qualify for Registration Exemption
In Brown v. Earthboard Sports USA, Inc., the Sixth Circuit Court of Appeals held that securities offerings must actually qualify for a valid federal securities registration exemption in order to enjoy National Securities Markets Improvement Act of 1996 preemption over state blue-sky laws. 2007 US App. LEXIS 6007 (2007).
Earthboard filed for an exemption to federal securities registration pursuant to the Rule 506 of Regulation D limited private placement exemption for 1999; however, it continued to sell subscriptions from 1999 through 2003. Jeffrey Vaughn, a Lincoln Financial Advisor investment advisor, met with Earthboard President Jeffreys -- who was a convicted felon (on a previous fraud charge). Jeffreys told Vaughn that Earthbound was in acquisition negotiations with VANS, a publicly-traded footwear company.
According to the terms of the deal, one share of Earthboard's securities would be exchanged for one share of VANS when the transaction finally closed. At that time, VANS shares were trading at about $12, but Jeffreys offered his company's shares to Vaughn for just $1 apiece.
Vaughn initially purchased $228,000 worth of Earthboard shares and then he purchased several hundred thousand additional shares after inducing some of his friends and acquaintances to invest in Earthboard.
Vaughn introduced Brown, a wealthy prospective client, to Jeffreys and Brown ended up investing in Earthboard. Brown signed the subscription agreement, but he was not provided with the private placement memorandum.
Vaughn then faxed Brown a series of "press releases" from Earthboard that discussed the VANS acquisition and Vaughn and Brown purchased additional Earthboard subscriptions.
Time passed, but the fictitious transaction never closed, and it was finally revealed that the whole scheme was fraudulent.
Brown sued naming Jeffreys, Earthboard, Vaughn, and Lincoln Financial Advisors as defendants. The Federal District Court held Jeffreys and Earthboard jointly and severally liable for the amount that Brown invested, but it dismissed the claims against Vaughn and Lincoln Financial Advisors.
The Sixth Circiut Court of Appeals reversed the lower court's dismissal of Brown's claims against Vaughn (but not against Lincoln Financial Advisors), because the securities were not "covered" becuase they did not actually qualify for a valid federal securities registration exemption and, thus, they were not afforded NASIMA preemption over state blue-sky laws.
Earthboard filed for an exemption to federal securities registration pursuant to the Rule 506 of Regulation D limited private placement exemption for 1999; however, it continued to sell subscriptions from 1999 through 2003. Jeffrey Vaughn, a Lincoln Financial Advisor investment advisor, met with Earthboard President Jeffreys -- who was a convicted felon (on a previous fraud charge). Jeffreys told Vaughn that Earthbound was in acquisition negotiations with VANS, a publicly-traded footwear company.
According to the terms of the deal, one share of Earthboard's securities would be exchanged for one share of VANS when the transaction finally closed. At that time, VANS shares were trading at about $12, but Jeffreys offered his company's shares to Vaughn for just $1 apiece.
Vaughn initially purchased $228,000 worth of Earthboard shares and then he purchased several hundred thousand additional shares after inducing some of his friends and acquaintances to invest in Earthboard.
Vaughn introduced Brown, a wealthy prospective client, to Jeffreys and Brown ended up investing in Earthboard. Brown signed the subscription agreement, but he was not provided with the private placement memorandum.
Vaughn then faxed Brown a series of "press releases" from Earthboard that discussed the VANS acquisition and Vaughn and Brown purchased additional Earthboard subscriptions.
Time passed, but the fictitious transaction never closed, and it was finally revealed that the whole scheme was fraudulent.
Brown sued naming Jeffreys, Earthboard, Vaughn, and Lincoln Financial Advisors as defendants. The Federal District Court held Jeffreys and Earthboard jointly and severally liable for the amount that Brown invested, but it dismissed the claims against Vaughn and Lincoln Financial Advisors.
The Sixth Circiut Court of Appeals reversed the lower court's dismissal of Brown's claims against Vaughn (but not against Lincoln Financial Advisors), because the securities were not "covered" becuase they did not actually qualify for a valid federal securities registration exemption and, thus, they were not afforded NASIMA preemption over state blue-sky laws.
Labels: blue sky laws, federal preemption, securities regulation