Busch v. Carpenter
827 F.2d 653, 56 U.S.L.W. 2148 (1987)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
To qualify for the intrastate offering exemption under Section 3(a)(11) of the Securities Act of 1933, the issuer must conduct a predominant amount of its income-producing activity, including the investment of the offering's proceeds, within the state where the securities are sold.
Facts:
- Sonic Petroleum, Inc. was incorporated in Utah in October 1980, with defendants Carpenter, Jensen, and Burnett as officers and directors.
- In October and November 1980, Sonic conducted a public stock offering exclusively to Utah residents, relying on the federal intrastate offering exemption.
- At the time of the offering, Sonic had no operating history but maintained its corporate office, books, and records in Utah.
- In March/April 1981, Sonic's president, Carpenter, was approached by William Mason, an Illinois oil promoter, about a merger.
- Effective May 25, 1981, Sonic merged with Mason's Illinois-based drilling corporation and was renamed Mason Oil Co., Inc.
- Shortly after the merger, Mason transferred $351,126 of the $435,000 net proceeds from the initial Utah offering to Illinois for use in the new company's operations.
- In May 1981, Carpenter and Mason established Norbil Investments, a brokerage account in Utah, to facilitate stock purchases.
- On June 26, 1981, Paul and Linda Busch, who were California residents, purchased shares of the company's stock through the Norbil account.
Procedural Posture:
- Paul and Linda Busch filed a lawsuit in the U.S. District Court for the District of Utah against Craig Carpenter, George Jensen, and Ronald Burnett.
- The complaint alleged that the defendants sold unregistered securities in violation of federal and state law.
- The parties filed cross-motions for summary judgment.
- The district court granted summary judgment for the defendants.
- The plaintiffs, Paul and Linda Busch, appealed the district court's decision to the U.S. Court of Appeals for the Tenth Circuit.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a company qualify for the intrastate offering exemption from federal registration requirements if it conducts an initial stock offering entirely to residents of one state but then merges with an out-of-state entity and transfers substantially all of the offering proceeds to be used in that other state?
Opinions:
Majority - Seymour, Circuit Judge
No. A company does not qualify for the intrastate offering exemption if it fails to conduct a predominant amount of its income-producing activities, including the use of offering proceeds, within the state of issuance. While the defendants made a prima facie showing that the stock 'came to rest' with Utah residents because the plaintiffs failed to produce evidence that the original purchasers lacked investment intent, a genuine issue of material fact exists regarding the 'doing business' requirement. The exemption is intended for 'local financing for local industries,' and merely maintaining an office and records in a state is insufficient. Because Sonic transferred substantially all of its offering proceeds out of Utah, a reasonable inference arises that it never intended to conduct its primary business in Utah, which would defeat the exemption.
Analysis:
This case significantly clarifies the 'doing business' requirement of the intrastate offering exemption under the Securities Act of 1933. The court's holding establishes that the requirement is substantive, not merely formal; an issuer cannot satisfy it by simply incorporating and maintaining a corporate office in a state. The decision mandates that the proceeds of an intrastate offering must be used for income-producing activities predominantly within that state, reinforcing the principle that the exemption is strictly for 'local financing for local industries.' This precedent makes it more difficult for issuers to use the exemption as a vehicle to raise capital in one state for business ventures primarily located elsewhere, thereby narrowing the exemption's availability and upholding the broad investor-protection goals of the Act.
