- A salesman,
- A bank, savings institution, or trust company,
- A person who has no place of business in this State if
- He effects transactions in this State exclusively with or through (i) the issuers of the securities involved in the transactions, (ii) other dealers, or (iii) banks, savings institutions, trust companies, insurance companies, investment companies as defined in the Investment Company Act of 1940, pension or profit-sharing trusts, or other financial institutions or institutional buyers, whether acting for themselves or as trustees, or
- In the case of a person registered as a dealer with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and in one or more states, during any period of 12 consecutive months he does not effect more than 15 purchases or sales in this State in any manner with persons other than those specified in clause 1, whether or not the dealer or any of the purchasers or sellers is then present in this State, or
- The security is exempted under subdivisions (1), (2), (3), (4), (5), (7), (9), (10), (11), (13), or (14) of G.S. 78A-16, or the security is a security covered under federal law, or the transaction is exempted under G.S. 78A-17, except for G.S. 78A-17(19) if the security is a viatical settlement contract, or the transaction is in a security covered under federal law, and such exemption has not been denied or revoked under G.S. 78A-18, or
- The security is registered under this Chapter and it is offered and sold through a registered dealer, or
- All of the following conditions are met: (i) No commission or other remuneration is paid or given directly or indirectly for soliciting any prospective purchaser in this State; (ii) the total amount of the offering, both within and without this State, does not exceed two million five hundred thousand dollars ($2,500,000); and (iii) the total number of purchasers, both within and without this State, does not exceed 100. Provided, however, the Administrator may by rule or order waive the condition imposed by subdivision (iii) hereof; or
- The security is issued by an open-end management company that is registered under the Investment Company Act of 1940 and so long as no sales load is paid or given, directly or indirectly.
- With respect to certificates of deposit, voting-trust certificates, or collateral-trust certificates, or with respect to certificates of interest or shares in an unincorporated investment trust not having a board of directors or persons performing similar functions or of the fixed, restricted-management, or unit type, the term "issuer" means the person or persons performing the acts and assuming the duties of depositor or manager pursuant to the provisions of the trust or other agreement or instrument under which the security is issued; and
- With respect to certificates of interest or participation in oil, gas, or mining titles or leases or in payments out of production under such titles or leases, there is not considered to be any "issuer."
- With respect to a viatical settlement contract, "issuer" means a person involved in creating, offering, transferring, or selling to an investor any interest in a viatical settlement contract, including, but not limited to, fractional or pooled interests.
- "Sale" or "sell" includes every contract of sale of, contract to sell, or disposition of, a security or interest in a security for value. (8) a. "Sale" or "sell" includes every contract of sale of, contract to sell, or disposition of, a security or interest in a security for value.
- "Offer" or "offer to sell" includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value.
- Any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing is considered to constitute part of the subject of the purchase and to have been offered and sold for value.
- A purported gift of assessable stock or other ownership interest obligating the owner to make future payments is considered to involve an offer and sale.
- Every sale or offer of a warrant or right to purchase or subscribe to another security of the same or another issuer, as well as every sale or offer of a security which gives the holder a present or future right or privilege to convert into another security of the same or another issuer, is considered to include an offer of the other security.
- The terms defined in this subdivision and the term "purchase" as used in this Chapter do not include any of the following:
- Any bona fide loan, pledge, or other transaction creating a bona fide security interest.
- Any stock split and any security dividend or distribution, whether the entity distributing the dividend or distribution is the issuer of the security or not, if nothing of value is given by security holders for the dividend or distribution other than the surrender of a right to a cash or property dividend or distribution when each security holder may elect to take the dividend or distribution in cash or property or in securities.
- , 4. Repealed by Session Laws 2001-201, s. 6, effective October 1, 2001.
- The assignment, transfer, sale, or devise of a death benefit of a life insurance policy or contract made by the viator to an insurance company or to a viatical settlement provider or broker licensed pursuant to the Viatical Settlements Act (Part 5 of Article 58 of Chapter 58 of the General Statutes);
- The assignment of a life insurance policy or contract to a bank, savings bank, savings and loan association, credit union, or other licensed lending institution as collateral for a loan; or
- The exercise of accelerated benefits pursuant to the terms of a life insurance policy or contract and consistent with applicable law.
(1925, c. 190, s. 2; 1927, c. 149, s. 2; 1933, c. 432; 1943, c. 104, ss. 2, 3; 1955, c. 436, s. 1; 1973, c. 1380; 1983, c. 817, ss. 1-3; 1987, c. 849, s. 1; 1989, c. 12, s. 1; 1993 (Reg. Sess., 1994), c. 600, s. 3; 1995, c. 509, s. 35; 1997-419, ss. 1-4; 2001-201, ss. 2, 3, 4, 5, 6; 2001-436, s. 6; 2011-284, s. 61.)
Effect of Amendments. - Session Laws 2011-284, s. 61, effective June 24, 2011, in the introductory paragraph of subdivision (13) and in subdivision (13)a., substituted "or devise" for "devise, or bequest."
CASE NOTES
Meaning of "Sale" - See Lane v. Griswold, 273 N.C. 1 , 159 S.E.2d 338 (1968).
The definition of "sale" under paragraph (8)a of this section does not include the mere signing of a stock certificate by a corporate officer. State v. Williams, 98 N.C. App. 274, 390 S.E.2d 746 (1990).
The legislature has shown no intent to include both principal and agent transactions within the word "sale." Lane v. Griswold, 273 N.C. 1 , 159 S.E.2d 338 (1968).
Sale Not Shown. - Actions of defendant, an attorney who drafted articles of incorporation and served as an original director and officer of corporation, did not constitute a "sale" and defendant was not a "seller," where there was neither evidence at trial that he was the owner of the security, nor that he was the one who successfully solicited the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner. State v. Williams, 98 N.C. App. 274, 390 S.E.2d 746, cert. denied, 327 N.C. 144 , 394 S.E.2d 184 (1990).
Cattle feeding program involving the buying, financings, caring for and sale of cattle for investors, which was open to any interested investors and advertised in national publications, was an investment contract which was not entitled to a private placement exemption and hence a security within the meaning of the applicable federal and state securities laws. Waterman v. Alta Verde Indus., Inc., 643 F. Supp. 797 (E.D.N.C. 1986), aff'd, 833 F.2d 1006 (4th Cir. 1987).
Value of Property Does Not Affect Definition as a Security. - In a prosecution for violation of the Capital Issues Law the fact that the property sold is of little value is irrelevant to the question of whether the property is a security as defined by the statute. State v. Allen, 216 N.C. 621 , 5 S.E.2d 844 (1939).
No Transaction Involving a "Security" Shown. - Where defendant falsely told the victims that he would invest their money in stock options and subsequently falsely told the victims that he had invested their money in stock options when, in fact, defendant never actually purchased or sold a "security" as defined by subdivision (11), the State failed to present evidence linking defendant's offer to invest money for the victims to any participation of defendant in an actual transaction involving a "security" and defendant's misconduct (offering to transact business) did not fall within the scope of G.S. 78A-36 . State v. Clemmons, 111 N.C. App. 569, 433 S.E.2d 748 (1993).
Two managers of a limited liability company were not primarily liable for securities fraud under G.S. 78A-56(a)(2) because nothing showed the managers sold or offered securities, as defined in G.S. 78A-2(8)(b) . Atkinson v. Lackey, - N.C. - , - S.E.2d - (Feb. 27, 2015).
Cited in Teague v. Bakker, 35 F.3d 978 (4th Cir. 1994); Piazza v. Kirkbride, 246 N.C. App. 576, 785 S.E.2d 695 (2016).
§§ 78A-3 through 78A-7: Reserved for future codification purposes.
ARTICLE 2. Fraudulent and Other Prohibited Practices.
§ 78A-8. Sales and purchases.
It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly:
- To employ any device, scheme, or artifice to defraud,
- To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading or,
- To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
Legal Periodicals. - For note, "Skinner v. E.F. Hutton & Co.: North Carolina's Caveat Tipper Exception to the In Pari Delicto Doctrine," see 64 N.C.L. Rev. 1250 (1986).
For article, "The Anti-Fraud Provisions of the North Carolina Securities Act," see 35 Campbell L. Rev. 209 (2013).
CASE NOTES
Federal Law Paralleled. - The North Carolina securities anti-fraud provision closely parallels SEC Rule 10b-5. Among the fundamental purposes underlying § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and SEC Rule 10b-5 are to promote free and open public securities markets, to protect the investing public from inequities in trading, and to insure that the investing public should be subject to identical market risks and allowed equal access to the rewards of participation in securities transactions. These securities laws seek to protect the innocent public who is not privy to selectively disclosed tips. Skinner v. E.F. Hutton & Co., 70 N.C. App. 517, 320 S.E.2d 424, modified on other grounds, 314 N.C. 267 , 333 S.E.2d 236 (1985).
This section closely parallels the S.E.C. Rule 10(b)-5 antifraud provision, which is designed to ensure that investors are aware of market risks. State v. Williams, 98 N.C. App. 274, 390 S.E.2d 746 (1990).
The scope of this section applies only to those persons who sell or offer to sell a security. State v. Williams, 98 N.C. App. 274, 390 S.E.2d 746, cert. denied, 327 N.C. 144 , 394 S.E.2d 184 (1990).
"Purchase". - Although "purchase" is not defined in this Chapter, it is generally defined as obtaining merchandise by paying money or its equivalent. State v. Williams, 98 N.C. App. 274, 390 S.E.2d 746, cert. denied, 327 N.C. 144 , 394 S.E.2d 184 (1990).
Stock Options Are Securities. - The term "security" includes the offer, sale, or purchase of stock options. State v. Davidson, 131 N.C. App. 276, 506 S.E.2d 743 (1998).
Applicability of Subdivision (2). - Subdivision (2) of this section applies only when the alleged material statements are made or omitted in connection with the offer, sale or purchase of any security. State v. Williams, 98 N.C. App. 274, 390 S.E.2d 746, cert. denied, 327 N.C. 144 , 394 S.E.2d 184 (1990).
"Tipper" and "Tippee" Defined. - Federal law has defined a "tipper" as a person who has possession of material inside information and who makes selective disclosure of such information for trading or other personal purposes. A "tippee" is one who receives such information from a "tipper." Skinner v. E.F. Hutton & Co., 70 N.C. App. 517, 320 S.E.2d 424, modified on other grounds, 314 N.C. 267 , 333 S.E.2d 236 (1985).
Use of Securities Laws to Stop Both Tippers and Tippees. - Although heretofore securities laws promulgated to protect against the disclosure of "inside information" have primarily been used to stop tippers, so as to most effectively insure that the innocent investing public is protected, the unscrupulous tippee as well as the tipper must be deterred. Skinner v. E.F. Hutton & Co., 70 N.C. App. 517, 320 S.E.2d 424, modified on other grounds, 314 N.C. 267 , 333 S.E.2d 236 (1985).
The concept of selective disclosure of inside information assumes the fact that the tipper will tell a tippee who will act on the information and unfairly profit by it at the public's expense. The investing public will more readily be protected if those tippees are discouraged from acting on any inside information illegally disclosed. It is also more probable that inside trading will stop if tippers realize the senselessness of risking criminal prosecution for disclosing inside information to a tippee who will not use the information. Moreover, there should be no opportunity in the scheme of securities laws' enforcement for the tippee to weigh the reliability and the value of the tip against the amount he may be able to recover in a lawsuit against the tipper for his disclosure of false inside information, especially when that tippee could conceivably recover treble damages under the Unfair Trade Practice Act. Skinner v. E.F. Hutton & Co., 70 N.C. App. 517, 320 S.E.2d 424, modified on other grounds, 314 N.C. 267 , 333 S.E.2d 236 (1985).
Investor's Involvement in Constructing Offer Made to Him Did Not Bar Recovery. - Fact that investor in limited partnership was somehow involved in the construction of the terms of the offer made to him did not bar recovery in suit for recession of securities, violation of registration requirements and fraud. Walker v. Montclaire Hous. Partners, 736 F. Supp. 1358 (M.D.N.C. 1990).
Cattle feeding program involving the buying, financings, caring for and sale of cattle for investors, which was open to any interested investors and advertised in national publications, was an investment contract which was not entitled to a private placement exemption and hence a security within the meaning of the applicable federal and state securities laws. Waterman v. Alta Verde Indus., Inc., 643 F. Supp. 797 (E.D.N.C. 1986), aff'd, 833 F.2d 1006 (4th Cir. 1987).
To determine if an omitted fact is material under this section, evidence must be presented that there is a substantial likelihood that a reasonable purchaser would consider it important in deciding whether or not to purchase. State v. Williams, 98 N.C. App. 274, 390 S.E.2d 746, cert. denied, 327 N.C. 144 , 394 S.E.2d 184 (1990).
Claims Not Barred by Statute of Limitations. - Investors' claims under the North Carolina Securities Act, G.S. 78A-1 to G.S. 78A-66 , were not barred by the Act's statute of limitations, G.S. 78A-56(f) , because the investors not only asserted claims under G.S. 78A-24 and G.S. 78A-36 , but also brought a claim for securities fraud under G.S. 78A-8 and G.S. 78A-56 , which were subject to the three-year limitations period, G.S. 78A-56(f) ; the jury's finding that the agent violated G.S. 78A-8 and G.S. 78A-56 , which were subject to the three-year statute of limitations, supported its verdict. Latta v. Rainey, 202 N.C. App. 587, 689 S.E.2d 898 (2010).
Motion to Dismiss Denied. - Motion to dismiss was denied because plaintiffs plausibly alleged that defendants violated 17 C.F.R § 240.10b-5 (Rule 10b-5) and G.S. 78A-8 by representing to the trustee that the annuities would have guaranteed annual returns of five percent. Thorpe v. Ameritas Inv. Corp., - F. Supp. 2d - (E.D.N.C. Sept. 19, 2012).
Evidence Sufficient for Conviction. - The evidence supported defendant's conviction for making material misrepresentations and omissions in connection with the sale of securities, where the defendant convinced elderly investors to withdraw funds from a legitimate investment company and placed the funds in his own accounts and used them for risky investments. State v. Davidson, 131 N.C. App. 276, 506 S.E.2d 743 (1998).
Cited in Bache Halsey Stuart, Inc. v. Hunsucker, 38 N.C. App. 414, 248 S.E.2d 567 (1978); Weft, Inc. v. G.C. Inv. Assocs., 630 F. Supp. 1138 (E.D.N.C. 1986); Simms Inv. Co. v. E.F. Hutton & Co., 688 F. Supp. 193 (M.D.N.C. 1988); Simpson v. Specialty Retail Concepts, Inc., 149 F.R.D. 94 (M.D.N.C. 1993); Teague v. Bakker, 35 F.3d 978 (4th Cir. 1994); Jay Group, Ltd. v. Glasgow, 139 N.C. App. 595, 534 S.E.2d 233 (2000), cert. denied, 353 N.C. 265 , 546 S.E.2d 100 (2000); Piazza v. Kirkbride, 246 N.C. App. 576, 785 S.E.2d 695 (2016).
§ 78A-9. Misleading filings.
It is unlawful for any person to make or cause to be made, in any document filed with the Administrator or in any proceeding under this Chapter, any statement which is, at the time and in the light of the circumstances under which it is made false or misleading in any material respect.
§ 78A-10. Unlawful representations concerning registration or exemption.
- Neither (i) the fact that an application for registration under Article 5 or a registration statement under Article 4 has been filed nor (ii) the fact that a person or security is effectively registered constitutes a finding by the Administrator that any document filed under this Chapter is true, complete, and not misleading. Neither any such fact nor the fact that an exemption or exception is available for a security or a transaction means that the Administrator has passed in any way upon the merits or qualifications of, or recommended or given approval to, any person, security, or transaction.
- It is unlawful to make, or cause to be made, to any prospective purchaser, customer, or client any representation inconsistent with subsection (a).
§ 78A-11. Unlawful telephone rooms.
It is unlawful for any person to willfully manage, supervise, control, or own, directly or indirectly, either alone or in association with others, any telephone room in this State. For purposes of this section, "telephone room" means an enterprise in which two or more persons engage in telephone communications with members of the public using two or more telephones at one location, or more than one location in a common scheme or enterprise, in violation of G.S. 78A-8 or G.S. 78A-12 . It is an affirmative defense to a prosecution under this section that the person acted in good faith and did not directly or indirectly induce an act or acts constituting a violation of G.S. 78A-8 or G.S. 78A-12 .
§ 78A-12. Manipulation of market.
- In addition to the prohibitions of G.S. 78A-8, it is unlawful for any person to do any of the following:
- Willfully quote a fictitious price with respect to a security.
- Effect a transaction in a security which involves no change in the beneficial ownership of the security, for the purpose of creating a false or misleading appearance of active trading in a security, or a false or misleading appearance of activity with respect to the market for the security.
- Enter an order for the purchase of a security with the knowledge that, at substantially the same time, an order of substantially the same size, and at substantially the same price, for the sale of the security has been, or will be, entered by or for the same person, or an affiliated person, for the purpose of creating a false or misleading appearance of active trading in a security, or a false or misleading appearance of activity with respect to the market for the security.
- Enter an order for the sale of a security with knowledge that, at substantially the same time, an order of substantially the same size, and at substantially the same price, for the purchase of the security has been, or will be, entered by or for the same person, or an affiliated person, for the purpose of creating a false or misleading appearance of active trading in a security, or a false or misleading appearance of activity with respect to the market for the security.
- Employ any other deceptive or fraudulent device, scheme, or artifice to manipulate the market in a security, including the issuance, with the intent to deceive or defraud, of analyses, reports, or financial statements that are false or misleading in any material respect.
(1991, c. 456, s. 1; 2003-413, s. 1.)
§ 78A-13. Disclosures required in offer and sale of viaticals.
- Disclosures Required Prior to Signing of Purchase Agreement or Transfer of Consideration. - The following disclosures shall be required in the offer and sale of viatical settlement contracts, whether such offer and sale is pursuant to an exemption from registration or pursuant to the registration of such securities, and shall be conspicuously displayed in each viatical settlement purchase agreement or in a separate document signed by the viatical settlement purchaser and by the issuer or its sales agent:
- Disclosures prior to payment of consideration. - On or before the date the viatical settlement purchaser remits consideration pursuant to the purchase agreement, the viatical settlement purchaser shall be provided the following written disclosures:
- The name, principal business, and mailing addresses, and telephone number of the issuer;
- The suitability standards for prospective purchasers as set forth by rule or order promulgated by the Administrator;
- A description of the issuer's type of business organization and the state in which the issuer is organized or incorporated;
- A brief description of the business of the issuer;
- If the issuer retains ownership or becomes the beneficiary of the insurance policy, an audit report from an independent certified public accountant together with a balance sheet and related statements of income, retained earnings, and cash flows that reflect the issuer's financial position, the results of the issuer's operations, and the issuer's cash flows as of a date within six months before the date of the initial issuance of the securities described in this subdivision. The financial statements shall be prepared in conformity with generally accepted accounting principles. If the date of the audit report is more than 120 days before the date of the initial issuance of the securities described in this subdivision, the issuer shall provide unaudited interim financial statements;
- The names of all directors, officers, partners, members, or trustees of the issuer;
- A description of any order, judgment, or decree that is final as to the issuing entity of any state, federal, or foreign governmental agency or administrator, or of any state, federal, or foreign court of competent jurisdiction (i) revoking, suspending, denying, or censuring, for cause, any license, permit, or other authority of the issuer or of any director, officer, partner, member, trustee, or person owning or controlling, directly or indirectly ten percent (10%) or more of the outstanding interest or equity securities of the issuer, to engage in the securities, commodities, franchise, insurance, real estate, or lending business or in the offer or sale of securities, commodities, franchises, insurance, real estate, or loans, (ii) permanently restraining, enjoining, barring, suspending, or censuring any such person from engaging in or continuing any conduct, practice, or employment in connection with the offer or sale of securities, commodities, franchises, insurance, real estate, or loans, (iii) convicting any such person of, or pleading nolo contendere by any such person to, any felony or misdemeanor involving a security, commodity, franchise, insurance, real estate, or loan, or any aspect of the securities, commodities, franchise, insurance, real estate, or lending business, or involving dishonesty, fraud, deceit, embezzlement, fraudulent conversion, or misappropriation of property, or (iv) holding any such person liable in a civil action involving breach of a fiduciary duty, fraud, deceit, embezzlement, fraudulent conversion, or misappropriation of property. This subdivision does not apply to any order, judgment, or decree that has been vacated or overturned or is more than 10 years old;
- Notice of the purchaser's right to rescind or cancel the investment and receive a refund;
- A statement to the effect that any projected rate of return to the purchaser from the purchase of a viatical settlement contract or any fractionalized or pooled interest therein is based on an estimated life expectancy for the person insured under the life insurance policy; that the return on the purchase may vary substantially from the expected rate of return based upon the actual life expectancy of the insured that may be less than, may be equal to, or may greatly exceed the estimated life expectancy; and that the rate of return would be higher if the actual life expectancy were less than, and lower if the actual life expectancy were greater than, the estimated life expectancy of the insured at the time the viatical settlement contract was closed;
- A statement that the purchaser should consult with his or her tax advisor regarding the tax consequences of the purchase of the viatical settlement contract or any fractionalized or pooled interest therein; and
- Any other information as may be prescribed by rule or order of the Administrator.
- The name, address, and telephone number of the issuing insurance company and the name, address, and telephone number of the state or foreign country regulator of the insurance company;
- The total face value of the insurance policy and the percentage of the insurance policy the purchaser will own;
- The insurance policy number, issue date, and type;
- If a group insurance policy, the name, address, and telephone number of the group and, if applicable, the material terms and conditions of converting the policy to an individual policy, including the amount of increased premiums;
- If a term insurance policy, the term and the name, address, and telephone number of the person who will be responsible for renewing the policy if necessary;
- Whether the insurance policy is beyond the state statute for contestability and the reason therefor;
- The insurance policy premiums and terms of premium payments;
- The amount of the purchaser's money that will be set aside to pay premiums;
- The name, address, and telephone number of the person who will be the insurance policy owner and the person who will be responsible for paying premiums;
- The date on which the purchaser will be required to pay premiums and the amount of the premium, if known;
- A statement of risk factors associated with investment in viatical settlement contracts, including, but not limited, to the following:
- The purchaser will receive no returns (i.e., dividends and interest) until the insured dies.
- The actual annual rate of return on a viatical settlement contract is dependent upon an accurate projection of the insured's life expectancy, and the actual date of the insured's death. An annual "guaranteed" rate of return is not determinable.
- The viaticated life insurance contract should not be considered a liquid purchase since it is impossible to predict the exact timing of its maturity and the funds probably are not available until the death of the insured. There is no established secondary market for resale of these products by the purchaser.
- The purchaser may lose all benefits or may receive substantially reduced benefits if the insurer goes out of business during the term of the viatical investment.
- The purchaser is responsible for payment of the insurance premium or other costs related to the policy, if required by the terms of the viatical purchase agreement. These payments may reduce the purchaser's return. If a party other than the purchaser is responsible for the payment, the name and address of that party also shall be disclosed.
- If the purchaser is responsible for payment of the insurance premiums or other costs related to the policy or if the insured returns to health, the amount of the premiums, if applicable.
- The name and address of any person providing escrow services and the relationship to the issuer.
- The amount of any trust fees or other expenses to be charged to the viatical settlement purchaser shall be disclosed.
- Whether the purchaser is entitled to a refund of all or part of his or her investment under the settlement contract if the policy is later determined to be null and void.
- A disclosure that group policies may contain limitations or caps in the conversion rights; that additional premiums may have to be paid if the policy is converted; the name of the party responsible for the payment of the additional premiums; and, if a group policy is terminated and replaced by another group policy, that there may be no right to convert the original coverage.
- A disclosure of the risks associated with policy contestability including, but not limited to, the risk that the purchaser will have no claim or only a partial claim to death benefits should the insurer rescind the policy within the contestability period.
- A disclosure of whether the purchaser will be the owner of the policy in addition to being the beneficiary, and if the purchaser is the beneficiary only and not also the owner, the special risks associated with that status, including, but not limited to, the risk that the beneficiary may be changed or the premium may not be paid.
- The experience and qualifications of the person who determines the life expectancy of the insured, i.e., in-house staff, independent physicians, and specialty firms that weigh medical and actuarial data; the information this projection is based on; and the relationship of the projection maker to the viatical settlement provider, if any.
- Disclosure to an investor shall include distribution of a brochure describing the process of investment in viatical settlements. The NAIC's form for the brochure shall be used unless the Administrator prescribes one by rule or order.
- Disclose all the life expectancy certifications obtained by the provider in the process of determining the price paid to the viator.
- State whether premium payments or other costs related to the policy have been escrowed. If escrowed, state the date upon which the escrowed funds will be depleted; whether the purchaser will be responsible for payment of premiums thereafter and, if so, the amount of the premiums; and the name and address of the escrow agent.
- State whether premium payments or other costs related to the policy have been waived. If waived, disclose whether the investor will be responsible for payment of the premiums if the insurer that wrote the policy terminates the waiver after purchase and the amount of those premiums.
- Disclose the type of policy offered or sold, i.e., whole life, term life, universal life, or a group policy certificate, any additional benefits contained in the policy, and the current status of the policy.
- If the policy is term insurance, disclose the special risks associated with term insurance including, but not limited to, the purchaser's responsibility for additional premiums if the viator continues the term policy at the end of the current term.
- State whether the policy is contestable.
- State whether the insurer that wrote the policy has any additional rights that could negatively affect or extinguish the purchaser's rights under the viatical settlement contract, what these rights are, and under what conditions these rights are activated.
- State the name and address of the person responsible for monitoring the insured's condition. Describe how often the monitoring of the insured's condition is done, how the date of death is determined, and how and when this information will be transmitted to the purchaser.
CASE NOTES
Cited in Piazza v. Kirkbride, 246 N.C. App. 576, 785 S.E.2d 695 (2016).
§ 78A-14. Advertising of Viatical Settlement Contracts.
- The purpose of this section is to provide prospective viatical settlement purchasers with clear and unambiguous statements in the advertisement of viatical settlement contracts and to assure the clear, truthful, and adequate disclosure of the benefits, risks, limitations, and exclusions of any contract or purchase agreement offered or sold. This purpose is intended to be accomplished by the establishment of guidelines and standards of permissible and impermissible conduct in the advertising of viatical settlement contracts to assure that product descriptions are presented in a manner that prevents unfair, deceptive, or misleading advertising and is conducive to accurate presentation and description of viatical settlement contracts through the advertising media and material used by issuers of viatical settlement contracts and their sales agents.
- This section shall apply to any advertising of viatical settlement contracts intended for dissemination in this State, including Internet advertising viewed by persons located in this State. Where disclosure requirements are established pursuant to federal regulation, this section shall be interpreted so as to minimize or eliminate conflict with federal regulation wherever possible.
- Every person offering or selling viatical settlement contracts shall establish and, at all times, maintain a system of control over the content, form, and method of dissemination of all advertisements of these securities. All advertisements, regardless of by whom written, created, designed, or presented, shall be the responsibility of the issuer. A system of control shall include regular routine notification, at least once a year, to agents and others authorized by the issuer who disseminate advertisements of the requirements and procedures for approval before the use of any advertisements not furnished by the issuer.
- Advertisements shall be truthful and not misleading in fact or by implication. The form and content of an advertisement of a contract or purchase agreement, product, or service shall be sufficiently complete and clear so as to avoid deception. It shall not have the capacity or tendency to mislead or deceive. Whether an advertisement has the capacity or tendency to mislead or deceive shall be determined by the Administrator from the overall impression that the advertisement may be reasonably expected to create upon a person of average education or intelligence within the segment of the public to which it is directed.
- Certain viatical settlement contract advertisements are deemed false and misleading on their face and are prohibited. False and misleading viatical settlement advertisements include, but are not limited to, the following representations:
- "Guaranteed", "fully secured", "100 percent secured", "fully insured", "secure", "safe", "backed by rated insurance companies", "backed by federal law", "backed by state law", or "state guaranty funds", or similar representations;
- "No risk", "minimal risk", "low risk", "no speculation", "no fluctuation", or similar representations;
- "Qualified or approved for individual retirement accounts (IRAs), Roth IRAs, 401(k) plans, simplified employee pensions (SEP), 403(b), Keogh plans, TSA, other retirement account rollovers", "tax deferred", or similar representations;
- Utilization of the word "guaranteed" to describe the fixed return, annual return, principal, earnings, profits, investment, or similar representations;
- "No sales charges or fees" or similar representations;
- "High yield", "superior return", "excellent return", "high return", "quick profit", or similar representations;
- Purported favorable representations or testimonials about the benefits of contracts or purchase agreements as an investment, taken out of context from newspapers, trade papers, journals, radio and television programs, and all other forms of print and electronic media.
- Omit material information or use words, phrases, statements, references, or illustrations if the omission or use has the capacity, tendency, or effect of misleading or deceiving purchasers or prospective purchasers as to the nature or extent of any benefit, loss covered, premium payable, or state or federal tax consequence. The fact that the contract or purchase agreement offered is made available for inspection before consummation of the sale, or an offer is made to refund the payment if the purchaser is not satisfied or that the contract or purchase agreement includes a "free look" period that satisfies or exceeds legal requirements, does not remedy misleading statements.
- Use the name or title of a life insurance company or a policy unless the insurer has approved the advertisement.
- Represent that premium payments will not be required to be paid on the policy that is the subject of a contract or purchase agreement in order to maintain that policy, unless that is the fact.
- State or imply that interest charged on an accelerated death benefit or a policy loan is unfair, inequitable, or in any manner an incorrect or improper practice.
- State or imply that a contract or purchase agreement, benefit, or service has been approved or endorsed by a group of individuals, society, association, or other organization unless that is the fact and unless any relationship between an organization and the seller or its agents is disclosed. If the entity making the endorsement or testimonial is owned, controlled, or managed by the seller or its agents, or receives any payment or other consideration from the seller or its agents for making an endorsement or testimonial, that fact shall be disclosed in the advertisement.
- Contain statistical information unless it accurately reflects recent and relevant facts. The source of all statistics used in an advertisement shall be identified.
- Disparage insurers, providers, brokers, dealers, salesmen, insurance producers, policies, services, or methods of marketing.
- Use a trade name, group designation, name of the parent company of an issuer, name of a particular division of the issuer, service mark, slogan, symbol, or other device or reference without disclosing the name of the issuer, if the advertisement would have the capacity or tendency to mislead or deceive as to the true identity of the issuer, or to create the impression that a company other than the issuer would have any responsibility for the financial obligation under a contract or purchase agreement.
- Use any combination of words, symbols, or physical materials that by their content, phraseology, shape, color, or other characteristics are so similar to a combination of words, symbols, or physical materials used by a government program or agency or otherwise appear to be of such a nature that they tend to mislead prospective purchasers into believing that the solicitation is in some manner connected with a government program or agency.
- Create the impression that the issuer, its financial condition or status, the payment of its claims, or the merits, desirability, or advisability of its contracts or purchase agreement forms are recommended or endorsed by any government entity.
- Any issuer or its business practices or methods of operation;
- The merits, desirability, or advisability of any contract or purchase agreement;
- Any contract or purchase agreement; or
- Any policy or life insurance company.
CASE NOTES
Cited in Piazza v. Kirkbride, 246 N.C. App. 576, 785 S.E.2d 695 (2016).
§ 78A-15: Reserved for future codification purposes.
ARTICLE 3. Exemptions.
§ 78A-16. Exempt securities.
The following securities are exempted from G.S. 78A-24 and 78A-49(d):
- Any security (including a revenue obligation) issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency or corporate or other instrumentality of one or more of the foregoing; or any certificate of deposit for any of the foregoing;
- Any security issued or guaranteed by Canada, any Canadian province, any political subdivision of any such province, any agency of one or more of the foregoing, or any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor;
- Any security issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state;
- Any security issued by and representing an interest in or a debt of, or guaranteed by, any federal savings and loan association, or any building and loan or similar association organized under the laws of any state and authorized to do business in this State;
- Any security issued by and representing an interest in or a debt of, or guaranteed by, any insurance company organized under the laws of any state and authorized to do business in this State; but this exemption does not apply to an annuity contract, investment contract, or similar security under which the promised payments are not fixed in dollars but are substantially dependent upon the investment results of a segregated fund or account invested in securities unless the issuing or delivering company has satisfied the Commissioner of Insurance that it is in compliance with G.S. 58-7-95;
- Any security issued or guaranteed by any federal credit union or any credit union, industrial loan association, or similar association organized and supervised under the laws of this State;
- Any security issued or guaranteed by any railroad, other common carrier, public utility, or holding company of one of the foregoing which is (i) subject to the jurisdiction of the Interstate Commerce Commission; (ii) a registered holding company under the Public Utility Holding Company Act of 1935 or a subsidiary of such a company within the meaning of that act; (iii) regulated in respect of its rates and charges by a governmental authority of the United States or any state; or (iv) regulated in respect of the issuance or guarantee of the security by a governmental authority of the United States, any state, Canada, or any Canadian province;
- Repealed by Session Laws 2001-149, s. 1.
- Any security issued by any person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association provided, however, that the Administrator may by rule or order impose conditions upon this exemption either generally or in relation to specific securities or transactions;
- Any commercial paper which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which evidences an obligation to pay cash within nine months of the date of issuance, exclusive of days of grace, or any renewal of such paper which is likewise limited, or any guarantee of such paper or of any such renewal;
- Any interest in an employees' stock or equity purchase, option, savings, pension, profit-sharing or other similar benefit plan;
- Any bond or note secured by lien on vessels shown by policies of marine insurance taken out in responsible companies to be of value, after deducting any and all other indebtedness secured by prior lien, of not less than one hundred twenty-five percent (125%) of the par amount of such bonds or notes;
- Any capital stock issued by a professional corporation organized pursuant to the provisions of the Professional Corporation Act, Chapter 55B;
- Any security issued by (i) any mutual association or agricultural marketing association organized or domesticated and existing under Subchapter IV or Subchapter V, respectively, of Chapter 54 of the General Statutes of North Carolina; or (ii) any electric or telephone membership corporation organized or domesticated and existing under Chapter 117 of the General Statutes of North Carolina.
- Any security listed or approved for listing upon notice of issuance on an exchange registered with the United States Securities and Exchange Commission or quoted or approved for quotation upon notice of issuance on an automated quotation system operated by a national securities association registered with the United States Securities and Exchange Commission, provided such security or class of securities, exchange or system is approved by rule of the Administrator; any other security of the same issuer which is of senior or substantially equal rank; any security called for by subscription rights or warrants so listed or approved; or any warrant or right to purchase or subscribe to any of the foregoing.
(1925, c. 190, s. 3; 1927, c. 149, s. 3; 1931, c. 243, s. 5; 1955, c. 436, s. 2; 1967, c. 1233, s. 1; 1973, c. 1380; 1981, c. 624, s. 1; 1983, c. 817, ss. 4, 5; 1989 (Reg. Sess., 1990) c. 803, s. 1; 2001-149, s. 1; 2001-201, s. 7.)
CASE NOTES
Questions of Fact. - The questions of whether debentures of a finance company sold to individuals in this State in a given case are exempted securities and of whether such sales were transactions exempted from the operation and of whether the debentures sold to individuals in this State in a given case were of a class that should have been registered before being offered for sale or sold within this State are questions of fact. State v. Franks, 262 N.C. 94 , 136 S.E.2d 623 (1964).
Questions of Law. - The questions of what securities are exempted securities and of what transactions are exempted from the operation of the Securities Law, and of what securities cannot be offered for sale or sold unless registered are questions of law. State v. Franks, 262 N.C. 94 , 136 S.E.2d 623 (1964).
§ 78A-17. Exempt transactions.
Except as otherwise provided in this Chapter, the following transactions are exempted from G.S. 78A-24 and G.S. 78A-49(d) :
- Any isolated nonissuer transaction, whether effected through a dealer or not.
- Any nonissuer distribution other than by a controlling person of an outstanding security if
- A recognized securities manual contains the names of the issuer's officers and directors, a balance sheet of the issuer as of a date within 18 months, and a profit and loss statement for either the fiscal year preceding that date or the most recent year of operations, or
- A registered dealer files with the Administrator such information relating to the issuer as the Administrator may by rule or order require, or
- The security has a fixed maturity or a fixed interest or dividend provision and there has been no default during the current fiscal year or within the three preceding fiscal years, or during the existence of the issuer and any predecessors if less than three years, in the payment of principal, interest, or dividends on the security.
- Any housing project with respect to which a mortgage is insured or guaranteed under section 221(d)(3) or 221(d)(4) or 236 of the National Housing Act, or any housing project financed or assisted by direct loan, mortgage insurance or guaranty, or tax abatement under similar provisions of federal, State or local laws, whether now existing or hereafter enacted; or
- Any housing project, some or all of the units of which are available for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of other federal, State or local law authorizing similar levels of subsidy for lower income families, whether now existing or hereafter enacted; or
- Any housing project with respect to which a loan is made, insured or guaranteed under Title V, section 515, of the Housing Act of 1949, or under similar provisions of other federal, State or local laws, whether now existing or hereafter enacted.
- The underlying viatical settlement transaction with the viator was not in violation of any applicable state or federal law; and
- The offer and sale of such contract or interest therein is conducted in accordance with such conditions as the Administrator requires by rule or order, including conditions governing advertising, suitability standards, financial statements, the investor's right of rescission, and the disclosure of information to offerees and purchasers.
The Administrator may establish a fee to recover costs for any filing required by such rules, not to exceed five hundred dollars ($500.00).
(1925, c. 190, s. 4; 1927, c. 149, s. 4; 1935, cc. 90, 154; 1955, c. 436, s. 3; 1959, c. 1185; 1967, c. 1233, ss. 2, 3; 1971, c. 572, s. 1; 1973, c. 1380; 1977, c. 162; c. 610, s. 1; 1979, c. 647, s. 1; 1981, c. 624, s. 2; 1981 (Reg. Sess., 1982), c. 1263, ss. 1, 2; 1983, c. 509, ss. 1, 2; c. 817, ss. 6, 7; 1997-419, s. 5; 2001-197, s. 1; 2001-201, ss. 8, 9, 10, 11, 12; 2001-436, s. 8; 2002-126, ss. 29A.22, 29A.23; 2004-203, s. 6; 2016-103, s. 1.)
Effect of Amendments. - Session Laws 2004-203, s. 6, effective August 17, 2004, inserted "G.S." preceding "78A-49(d)" in the introductory paragraph; and made minor punctuation changes throughout the section.
Session Laws 2016-103, s. 1, effective July 22, 2016, added subdivision (20).
Legal Periodicals. - For comment on limited offerings, the federal securities code and increased burdens on the North Carolina Securities Act, see 15 Wake Forest L. Rev. 506 (1979).
CASE NOTES
Questions of Fact. - The questions of whether debentures of a finance company sold to individuals in this State in a given case are exempted securities, and of whether such sales were transactions exempted from the operation, and of whether the debentures sold to individuals in this State in a given case were of a class that should have been registered before being offered for sale or sold within this State are questions of fact. State v. Franks, 262 N.C. 94 , 136 S.E.2d 623 (1964).
Questions of Law. - The questions of what securities are exempted securities and of what transactions are exempted from the operation of the Securities Law and of what securities cannot be offered for sale or sold unless registered are questions of law. State v. Franks, 262 N.C. 94 , 136 S.E.2d 623 (1964).
Integration Doctrine Applicable to Sale of Securities. - The integration doctrine, a method used to combine two or more otherwise exempt securities sales into a single offering, was applicable to a sale of securities where initial purchaser was offered securities through a special arrangement with his broker and was classified as the sole preliminary limited partner, and where the other North Carolina purchasers were 1985 limited partners admitted pursuant to an offering about a month later. Walker v. Montclaire Hous. Partners, 736 F. Supp. 1358 (M.D.N.C. 1990).
Initial Offering Violated G.S. 78A-24 Registration Requirements and Precluded Subdivision (9) Protection. - Where it was clear that offering of securities initially to one purchaser and to five other purchasers a month later was part of a single financing plan since the second offering was contemplated at the time of the initial offering and it was apparent that the offering memorandum would not be published until sellers were sure initial offering was purchased and the consideration for all the offerings was the same, the initial offering violated the registration requirements of G.S. 78A-24 and such violation precluded protection under subdivision (9) and subjected the sellers to the civil liabilities provision of G.S. 78A-56(a)(1) , even though the proceeds of the initial offering were for use as seed money while the proceeds of the second offering were for use as general operating expenses, and the profit and losses between the two types of offerings were allocated differently and each had different tax deduction consequences. Walker v. Montclaire Hous. Partners, 736 F. Supp. 1358 (M.D.N.C. 1990).
Cattle feeding program involving the buying, financings, caring for and sale of cattle for investors, which was open to any interested investors and advertised in national publications, was an investment contract which was not entitled to a private placement exemption and hence a security within the meaning of the applicable federal and state securities laws. Waterman v. Alta Verde Indus., Inc., 643 F. Supp. 797 (E.D.N.C. 1986), aff'd, 833 F.2d 1006 (4th Cir. 1987).
Investments Not Exempt From Registration Requirements. - Because a sales agent's testimony at trial raised a triable issue of fact concerning the number of investors in a corporation's mobile billboard advertising in North Carolina, the trial court properly submitted the issue to the jury to determine whether the agent met his burden of proof under the North Carolina Securities Act, G.S. 78A-18(b) ; the corporation, through its sales agents, was the actual "offeror" of the securities at issue, and the agent failed to cite any authority for his position that the registration exemption in the Act, G.S. 78A-17(9) , applied to the investments because he sold them to only "11 or 12" people in North Carolina. Latta v. Rainey, 202 N.C. App. 587, 689 S.E.2d 898 (2010).
§ 78A-17.1. Invest NC exemption.
- Exemption. - Except as otherwise provided in this Chapter, an offer or sale of a security by an issuer is exempt from G.S. 78A-24 and G.S. 78A-49(d) if the offer or sale is conducted in accordance with each of the following requirements:
- The issuer of the security is a business entity formed under the laws of the State and/or registered with the Secretary of State.
- The transaction meets the requirements of the federal exemption for intrastate offerings in section 3(a)(11) of the Securities Act of 1933, 15 U.S.C. § 77c(a)(11), and/or SEC rule 147, 17 C.F.R. § 230.147.
- The sum of all cash and other consideration to be received for all sales of the security in reliance upon this exemption does not exceed the cap provided in this subdivision:
- One million dollars ($1,000,000), less the aggregate amount received for all sales of securities by the issuer made in reliance upon this exemption within the 12 months before the first offer or sale made in reliance upon this exemption, if the issuer has not undergone and made available to each prospective investor and the Administrator the documentation resulting from a financial audit or review with respect to its most recently completed fiscal year and meeting generally accepted accounting principles.
- Two million dollars ($2,000,000), less the aggregate amount received for all sales of securities by the issuer made in reliance upon this exemption within the 12 months before the first offer or sale made in reliance upon this exemption, if the issuer has undergone and made available to each prospective investor and the Administrator the documentation resulting from a financial audit or review with respect to its most recently completed fiscal year and meeting generally accepted accounting principles.
- A notice of claim of exemption from registration, specifying that the issuer will be conducting an offering in reliance upon this exemption, accompanied by the filing fee as specified in this section.
- A copy of the disclosure statement to be provided to prospective investors in connection with the offering, containing the following:
- A description of the company, its type of entity, the address and telephone number of its principal office, its history, its business plan, and the intended use of the offering proceeds, including any amounts to be paid, as compensation or otherwise, to any owner, executive officer, director, managing member, or other person occupying a similar status or performing similar functions on behalf of the issuer.
- The identity of all persons owning more than ten percent (10%) of the ownership interests of any class of securities of the company.
- The identity of the executive officers, directors, managing members, and other persons occupying a similar status or performing similar functions in the name of and on behalf of the issuer, including their titles and their prior experience.
- The terms and conditions of the securities being offered and of any outstanding securities of the company, the minimum and maximum amount of securities being offered, if any, and either the percentage ownership of the company represented by the offered securities or the valuation of the company implied by the price of the offered securities.
- The identity of any person who has been or will be retained by the issuer to assist the issuer in conducting the offering and sale of the securities, including any Web sites, but excluding persons acting solely as accountants or attorneys and employees whose primary job responsibilities involve the operating business of the issuer rather than assisting the issuer in raising capital, and for each person identified in response to this sub-sub-subdivision, a description of the consideration being paid to such person for such assistance.
- A description of any litigation or legal proceedings involving the company or its management.
- The names and addresses, including URL, of any Web sites that will be used in connection with the offering.
- I am investing in a high-risk, speculative business venture. I may lose all of my investment, and I can afford the loss of my investment.
- This offering has not been reviewed or approved by any state or federal securities commission or other regulatory authority and that no such person or authority has confirmed the accuracy or determined the adequacy of any disclosure made to me relating to this offering.
- The securities I am acquiring in this offering are illiquid, that there is no ready market for the sale of such securities, that it may be difficult or impossible for me to sell or otherwise dispose of this investment, and that, accordingly, I may be required to hold this investment indefinitely.
- I may be subject to tax on my share of the taxable income and losses of the company, whether or not I have sold or otherwise disposed of my investment or received any dividends or other distributions from the company.
- Prior to the offer of an investment opportunity to residents of this State through a Web site, the issuer shall provide to the Web site and to the Administrator evidence that the issuer is organized under North Carolina law or that it is authorized to do business within the State.
- The issuer shall obtain from each purchaser of a security under this section evidence that the purchaser is a resident of North Carolina and, if applicable, an accredited investor.
- The Web site operator shall register with the Administrator by filing a statement that it is a business entity that is organized under North Carolina law or that it is authorized to do business within the State and that it is being utilized to offer and sell securities pursuant to this exemption. As part of the registration, the Web site shall notify the Administrator of its and the issuer's identity, location, and contact information.
- The issuer and the Web site must keep and maintain records of the offers and sales of securities effected through the Web site and must provide ready access to the records to the Administrator, upon request. The Administrator may access, inspect, and review any Web site and its records.
- It does not offer investment advice or recommendations.
- It does not solicit purchases, sales, or offers to buy the securities offered or displayed on the Web site.
- It does not compensate employees, agents, or other persons for the solicitation or based on the sale of securities displayed or referenced on the Web site.
- It is not compensated based on the amount of securities sold, and it does not hold, manage, possess, or otherwise handle investor funds or securities.
- It does not engage in such other activities as the Administrator, by rule, determines appropriate.
- Compensation received by each director and executive officer, including cash compensation earned since the previous report and on an annual basis and any bonuses, stock options, other rights to receive securities of the issuer or any affiliate of the issuer, or other compensation received.
- An analysis by management of the issuer of the business operations and financial condition of the issuer.
"IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME."
Editor's Note. - Session Laws 2016-103, s. 4(a) and (b), provides: "4.(a) Notwithstanding any provision of Article 2A of Chapter 150B of the General Statutes, within 12 months of the effective date of this act [Session Laws 2016-103 was effective July 22, 2016], the Secretary of State shall adopt rules to implement the provisions of this act in accordance with the following procedure:
"(1) At least 15 business days prior to adopting a rule, submit the rule and a notice of public hearing to the Codifier of Rules. The Codifier of Rules shall publish the proposed rule and the notice of public hearing on the Internet within five business days.
"(2) At least 15 business days prior to adopting a rule, notify persons on the mailing list maintained pursuant to G.S. 150B-21.2(d) and any other interested parties of the Secretary's intent to adopt a rule and of the public hearing.
"(3) Accept written comments on the proposed rule for at least 15 business days prior to adoption of the rule.
"(4) Hold at least one public hearing on the proposed rule no less than five days after the rule and notice have been published.
"A rule adopted in accordance with this section becomes effective on the first day of the month following the month the Secretary adopts the rule and submits the rule to the Codifier of Rules for entry into the North Carolina Administrative Code.
"(b) Any rule adopted more than 12 months after the effective date of this act [Session Laws 2016-103 was effective July 22, 2016] shall comply with the requirements of Article 2A of Chapter 150B of the General Statutes."
Session Laws 2016-103, s. 10, made this section effective July 22, 2016.
§ 78A-18. Denial and revocation of exemptions.
- The Administrator may by order deny or revoke any exemption specified in subdivision (9), (11), or (15) of G.S. 78A-16 or in 78A-17 with respect to a specific security or transaction. No such order may be entered without appropriate prior notice to all interested parties, opportunity for hearing, and written findings of fact and conclusions of law, except that the Administrator may by order summarily deny or revoke any of the specified exemptions pending final determination of any proceeding under this section. Upon the entry of a summary order, the Administrator shall promptly notify all interested parties that it has been entered and of the reasons therefor and that within 20 days of the receipt of a written request the matter will be scheduled for hearing in accordance with Chapter 150B of the General Statutes. If no hearing is requested and none is ordered by the Administrator, the order will remain in effect until it is modified or vacated by the Administrator. If a hearing is requested or ordered, the Administrator, after notice of an opportunity for hearing to all interested persons, may not modify or vacate the order or extend it until final determination. No order under this subsection may operate retroactively. No person may be considered to have violated G.S. 78A-24 or 78A-49(d) by reason of any offer or sale effected after the entry of an order under this subsection if he sustains the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the order.
- In a civil or administrative proceeding brought under this Chapter, the burden of proving an exemption or an exception from a definition is upon the person claiming it. In a criminal proceeding brought under this Chapter, the State has no initial burden of producing evidence to show that the defendant's actions do not fall within the exemption or exception; however, once the defendant introduces evidence to show that his conduct is within the exemption or exception, the burden of persuading the trier of fact that the exemption or exception does not apply falls upon the State.
(1925, c. 190, ss. 5, 11; 1927, c. 149, ss. 5, 11; 1973, c. 1380; 1975, c. 19, s. 20; 1987, c. 849, s. 2; 1989 (Reg. Sess., 1990), c. 803, s. 2; 2001-126, s. 1; 2001-149, s. 2.)
Legal Periodicals. - For comment on limited offerings, the federal securities code and increased burdens on the North Carolina Securities Act, see 15 Wake Forest L. Rev. 506 (1979).
CASE NOTES
Investments Not Exempt From Registration Requirements. - Because a sales agent's testimony at trial raised a triable issue of fact concerning the number of investors in a corporation's mobile billboard advertising in North Carolina, the trial court properly submitted the issue to the jury to determine whether the agent met his burden of proof under the North Carolina Securities Act, G.S. 78A-18(b) ; the corporation, through its sales agents, was the actual "offeror" of the securities at issue, and the agent failed to cite any authority for his position that the registration exemption in the Act, G.S. 78A-17(9) , applied to the investments because he sold them to only "11 or 12" people in North Carolina. Latta v. Rainey, 202 N.C. App. 587, 689 S.E.2d 898 (2010).
§§ 78A-19 through 78A-23: Reserved for future codification purposes.
ARTICLE 4. Registration and Notice Filing Procedures of Securities.
§ 78A-24. Registration requirement.
It is unlawful for any person to offer or sell any security in this State unless (i) it is registered under this Chapter, (ii) the security or transaction is exempted under G.S. 78A-16 or 78A-17 and such exemption has not been denied or revoked under G.S. 78A-18 , or (iii) it is a security covered under federal law.
(1925, c. 190, s. 6; 1927, c. 149, s. 6; 1955, c. 436, s. 4; 1973, c. 1380; 1997-419, ss. 6, 7.)
CASE NOTES
"Sale". - The definition of "sale" under G.S. 78A-2(8) a does not include the mere signing of a stock certificate by a corporate officer. State v. Williams, 98 N.C. App. 274, 390 S.E.2d 746 (1990).
Integration Doctrine Was Applicable to Sale of Securities. - The integration doctrine, a method used to combine two or more otherwise exempt securities sales into a single offering, was applicable to a sale of securities where initial purchaser was offered securities through a special arrangement with his broker and was classified as the sole preliminary limited partner, and where the other North Carolina purchasers were 1985 limited partners admitted pursuant to an offering about a month later. Walker v. Montclaire Hous. Partners, 736 F. Supp. 1358 (M.D.N.C. 1990).
Sale Not Shown. - Actions of defendant, an attorney who drafted articles of incorporation and served as an original director and officer of corporation, did not constitute a "sale" and defendant was not a "seller," where there was neither evidence at trial that he was the owner of the security, nor that he was the one who successfully solicited the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner. State v. Williams, 98 N.C. App. 274, 390 S.E.2d 746, cert. denied, 327 N.C. 144 , 394 S.E.2d 184 (1990).
Invalidation of Indemnity Agreement Between Broker and Issuer. - If a jury should find that an issuer of securities knowingly participated in the illegal sales of securities by a broker, public policy would prohibit enforcement of the indemnity agreement between the broker and the issuer. Premier Corp. v. Economic Research Analysts, Inc., 578 F.2d 551 (4th Cir. 1978).
Questions of Fact. - The questions of whether debentures of a finance company sold to individuals in this State in a given case are exempted securities and of whether such sales were transactions exempted from the operation and of whether the debentures sold to individuals in this State in a given case were of a class that should have been registered before being offered for sale or sold within this State are questions of fact. State v. Franks, 262 N.C. 94 , 136 S.E.2d 623 (1964).
Questions of Law. - The questions of what securities are exempted securities and of what transactions are exempted from the operation of the Securities Law and of what securities cannot be offered for sale or sold unless registered are questions of law. State v. Franks, 262 N.C. 94 , 136 S.E.2d 623 (1964).
Claims Not Barred by Statute of Limitations. - Investors' claims under the North Carolina Securities Act, G.S. 78A-1 to G.S. 78A-66 , were not barred by the Act's statute of limitations, G.S. 78A-56(f) , because the investors not only asserted claims under G.S. 78A-24 and G.S. 78A-36 , but also brought a claim for securities fraud under G.S. 78A-8 and G.S. 78A-56 , which were subject to the three-year limitations period, G.S. 78A-56(f) ; the jury's finding that the agent violated G.S. 78A-8 and G.S. 78A-56 , which were subject to the three-year statute of limitations, supported its verdict. Latta v. Rainey, 202 N.C. App. 587, 689 S.E.2d 898 (2010).
Initial Securities Offering Violated This Section. - Where it was clear that offering of securities initially to one purchaser and to five other purchasers a month later were part of a single financing plan since the second offering was contemplated at the time of the initial offering and it was apparent that the offering memorandum would not be published until sellers were sure initial offering was purchased and the consideration for all the offerings was the same, the initial offering violated the registration requirements of this section and such violation precluded protection under G.S. 78A-17(9) and subjected the sellers to the civil liabilities provision of G.S. 78A-56(a)(1) , even though the proceeds of the initial offering were for use as seed money while the proceeds of the second offering were for use as general operating expenses, and the profit and losses between the two types of offerings were allocated differently and each had different tax deduction consequences. Walker v. Montclaire Hous. Partners, 736 F. Supp. 1358 (M.D.N.C. 1990).
Cited in Waterman v. Alta Verde Indus., Inc., 643 F. Supp. 797 (E.D.N.C. 1986); Piazza v. Kirkbride, 246 N.C. App. 576, 785 S.E.2d 695 (2016).
§ 78A-25. Registration by notification.
- The following securities may be registered by notification whether or not they are also eligible for registration by coordination under G.S. 78A-26:
- Any security whose issuer and any predecessors have been in continuous operation for at least five years if
- There has been no default during the current fiscal year or within the three preceding fiscal years in the payment of principal, interest, dividends, or distributions on any security of the issuer (or any predecessor) with a fixed maturity or a fixed interest or dividend or distribution provision, and
- The issuer and any predecessors during the past three fiscal years have had average net earnings, determined in accordance with generally accepted accounting principles, (i) which are applicable to all securities without a fixed maturity or a fixed interest or dividend or distribution provision outstanding at the date the registration statement is filed and equal at least five percent (5%) of the amount of such outstanding securities (as measured by the maximum offering price or the market price on a day, selected by the registrant, within 30 days before the date of filing the registration statement, whichever is higher, or book value on a day, selected by the registrant, within 90 days of the date of filing the registration statement to the extent that there is neither a readily determinable market price nor a cash offering price), or (ii) which, if the issuer and any predecessors have not had any security of the type specified in clause (i) outstanding for three full fiscal years, equal at least five percent (5%) of the amount (as measured in clause (i)) of all securities which will be outstanding if all the securities being offered or proposed to be offered (whether or not they are proposed to be registered or offered in this State) are issued;
- A statement demonstrating eligibility for registration by notification;
- With respect to the issuer and any significant subsidiary: its name, address, and form of organization; the state (or foreign jurisdiction) and the date of its organization; and the general character and location of its business;
- With respect to any person on whose behalf any part of the offering is to be made in a nonissuer distribution: his name and address; the amount of securities of the issuer held by him as of the date of the filing of the registration statement; and a statement of his reasons for making the offering;
- A description of the security being registered;
- The information and documents specified in subdivisions (8), (10) and (12) of G.S. 78A-27(b); and
- In the case of any registration under G.S. 78A-25(a)(2) which does not also satisfy the conditions of G.S. 78A-25(a)(1), a balance sheet of the issuer as of a date within four months prior to the filing of the registration statement, and a summary of earnings for each of the two fiscal years preceding the date of the balance sheet and for any period between the close of the last fiscal year and the date of the balance sheet, or for the period of the issuer's and any predecessors' existence if less than two years.
(1927, c. 149, s. 8; 1955, c. 436, s. 6; 1973, c. 1380; 1975, c. 144, s. 1; 2001-201, s. 13; 2003-413, s. 2.)
§ 78A-26. Registration by coordination.
- Any security for which a registration statement has been filed under the Securities Act of 1933 in connection with the same offering may be registered by coordination.
- A registration statement under this section shall contain the following information and be accompanied by the following documents in addition to the information specified in G.S. 78A-28(c) and the consent to service of process required by G.S. 78A-63(f):
- One copy of the latest form of prospectus filed under the Securities Act of 1933;
- A copy of the articles of incorporation and bylaws or their substantial equivalents currently in effect, a copy of any agreements with or among underwriters, a copy of any indenture or other instrument governing the issuance of the security to be registered, and a specimen or copy of the security;
- If the Administrator requests, any other information or copies of any other documents filed under the Securities Act of 1933; and
- An undertaking to forward all future amendments to the federal prospectus, other than an amendment which merely delays the effective date of the registration statement, promptly and in any event not later than the first business day after they are forwarded to or filed with the Securities and Exchange Commission, whichever first occurs.
(1925, c. 190, s. 6; 1927, c. 149, s. 6; 1955, c. 436, s. 4; 1973, c. 1380; 1981, c. 624, s. 6.)
§ 78A-27. Registration by qualification.
- Any security may be registered by qualification upon the following conditions.
- A registration statement under this section shall contain the following information and be accompanied by the following documents in addition to the information specified in G.S. 78A-28(c) and the consent to service of process required by G.S. 78A-63(f):
- With respect to the issuer and any significant subsidiary: its name, address, and form of organization; the state or foreign jurisdiction and date of its organization; the general character and location of its business; a description of its physical properties and equipment; and a statement of the general competitive conditions in the industry or business in which it is or will be engaged;
- With respect to every director and officer of the issuer or person occupying a similar status or performing similar functions: his name, address, and principal occupation for the past five years; the amount of securities of the issuer held by him as of a specified date within 30 days of the filing of the registration statement; the amount of the securities covered by the registration statement to which he has indicated his intention to subscribe; and a description of any material interest in any material transaction with the issuer or any significant subsidiary effected within the past three years or proposed to be effected;
- With respect to persons covered by subdivision (2): the remuneration paid during the past 12 months or fiscal year and estimated to be paid during the next fiscal year, directly or indirectly, by the issuer (together with all predecessors, parents, subsidiaries, and affiliates) to all those persons in the aggregate;
- With respect to any person owning of record or beneficially if known, ten percent (10%) or more of the outstanding shares of any class of equity security of the issuer: the information specified in subdivision (2) other than his occupation;
- With respect to every promoter if the issuer was organized within the past three years: the information specified in subdivision (2), any amount paid to him within that period or intended to be paid to him, and the consideration for any such payment;
- With respect to any person on whose behalf any part of the offering is to be made in a nonissuer distribution: his name and address; the amount of securities of the issuer held by him as of the date of the filing of the registration statement; a description of any material interest in any material transaction with the issuer or any significant subsidiary effected within the past three years or proposed to be effected; and a statement of his reasons for making the offering;
- The capitalization and long-term debt (on both current and a pro forma basis) of the issuer and any significant subsidiary including a description of each security outstanding or being registered or otherwise offered, and a statement of the amount and kind of consideration (whether in the form of cash, physical assets, services, patents, goodwill, or anything else) for which the issuer or any subsidiary has issued any of its securities within the past three years or is obligated to issue any of its securities;
- The kind and amount of securities to be offered; the proposed offering price or the method by which it is to be computed; any variation therefrom at which any proportion of the offering is to be made to any person or class of persons other than the underwriters, with a specification of any such person or class; the basis upon which the offering is to be made if otherwise than for cash; the estimated aggregate underwriting and selling discounts or commissions and finders' fees (including separately, cash, securities, contracts, or anything else of value to accrue to the underwriters or finders in connection with the offering) or, if the selling discounts or commissions are variable, the basis of determining them and their maximum and minimum amounts; the estimated amounts of other selling expenses, including legal, engineering, and accounting charges; the name and address of every underwriter and every recipient of a finder's fee; a copy of any underwriting or selling-group agreement pursuant to which the distribution is to be made, or the proposed form of any such agreement whose terms have not yet been determined; and a description of the plan of distribution of any securities which are to be offered otherwise than through an underwriter;
- The estimated cash proceeds to be received by the issuer from the offering; the purposes for which the proceeds are to be used by the issuer; the amount to be used for each purpose; the order or priority in which the proceeds will be used for the purposes stated; the amount of any funds to be raised from other sources to achieve the purposes stated; the sources of any such funds; and, if any part of the proceeds is to be used to acquire any property (including goodwill) otherwise than in the ordinary course of business, the names and addresses of the vendors, the purchase price, the names of any persons who have received commissions in connection with the acquisition, and the amounts of any such commissions and any other expense in connection with the acquisition (including the cost of borrowing money to finance the acquisition);
- A description of any stock options or other security options outstanding, or to be created in connection with the offering, together with the amount of any such options held or to be held by every person required to be named in subdivisions (2), (4), (5), (6), or (8) and by any person who holds or will hold ten percent (10%) or more in the aggregate of any such options;
- The dates of, parties to, and general effect concisely stated of, every management or other material contract made or to be made otherwise than in the ordinary course of business if it is to be performed in whole or in part at or after the filing of the registration statement or was made within the past two years, together with a copy of every such contract; and a description of any pending litigation or proceeding to which the issuer is a party and which materially affects its business or assets (including any such litigation or proceeding known to be contemplated by governmental authorities);
- A copy of any prospectus, pamphlet, circular, form letter, advertisement, or other sales literature intended as of the effective date to be used in connection with the offering; if the security is a viatical settlement contract, the prospectus and advertising shall comply with G.S. 78A-13 and G.S. 78A-14 relating to the offering of viatical settlement contracts;
- A specimen or copy of the security being registered; a copy of the issuer's articles of incorporation and bylaws, or their substantial equivalents, as currently in effect; and a copy of any indenture or other instrument covering the security to be registered;
- A signed or conformed copy of an opinion of counsel as to the legality of the security being registered (with an English translation if it is in a foreign language), which shall state whether the security when sold will be legally issued, fully paid, and nonassessable, and, if a debt security, a binding obligation of the issuer;
- The written consent of any accountant, engineer, appraiser, or other person whose profession gives authority to a statement made by him, if any such person is named as having prepared or certified a report or valuation (other than a public and official document or statement) which is used in connection with the registration statement;
- A balance sheet of the issuer as of a date within four months prior to the filing of the registration statement; a profit and loss statement and analysis of surplus for each of the three fiscal years preceding the date of the balance sheet and for any period between the close of the last fiscal year and the date of the balance sheet, or for the period of the issuer's and any predecessors' existence if less than three years; and, if any part of the proceeds of the offering is to be applied to the purchase of any business, the same financial statements which would be required if that business were the registrant; and
- Such additional information as the Administrator requires by rule or order.
(1927, c. 149, s. 9; 1955, c. 436, s. 7; 1973, c. 1380; 1975, c. 19, s. 21; 2001-436, s. 9.)
Legal Periodicals. - For article, "Cracking the Problem of Finders - An Empirical and Computational Analysis," see 51 Wake Forest L. Rev. 1021 (2016).
§ 78A-28. Provisions applicable to registration generally.
- A registration statement may be filed by the issuer, any other person on whose behalf the offering is to be made, or a registered dealer.
- Every person filing a registration statement shall pay a filing fee of two thousand dollars ($2,000). When a registration statement is withdrawn before the effective date or a pre-effective stop order is entered under G.S. 78A-29, the Administrator shall retain the filing fee. A registration statement relating to redeemable securities to be offered for a period in excess of one year, other than securities covered under federal law, must be renewed annually by payment of a renewal fee of one hundred dollars ($100.00) and by filing any documents or reports that the Administrator may by rule or order require.
- Every registration statement shall specify (i) the amount of securities to be offered in this State; (ii) the states in which a registration statement or similar document in connection with the offering has been or is expected to be filed; and (iii) any adverse order, judgment, or decree entered in connection with the offering by the regulatory authorities in each state or by any court or the Securities and Exchange Commission.
- Any document filed under this Chapter or a predecessor law within five years preceding the filing of a registration statement may be incorporated by reference in the registration statement to the extent that the document is currently accurate.
- The Administrator may by rule or otherwise permit the omission of any item of information or document from any registration statement.
- In the case of a nonissuer distribution, information may not be required under G.S. 78A-27 or 78A-28(i) unless it is known to the person filing the registration statement or to the persons on whose behalf the distribution is to be made, or can be furnished by them without unreasonable effort or expense.
- The Administrator may by rule or order require as a condition of registration by qualification or coordination (i) that any security issued within the past three years or to be issued to a promoter for a consideration substantially different from the public offering price, or to any person for a consideration other than cash, be deposited in escrow; and (ii) that the proceeds from the sale of the registered security in this State be impounded until the issuer receives a specified amount from the sale of the securities either in this State or elsewhere. The Administrator may by rule or order determine the conditions of any escrow or impounding required hereunder, but he may not reject a depository solely because of location in another state.
- Except during the time a stop order is in effect under G.S. 78A-29, a registration statement relating to redeemable securities to be offered for a period in excess of one year, other than securities covered under federal law, expires on December 31 of each year or some other date not more than one year from its effective date as the Administrator may by rule or order provide. Every other registration statement is effective for one year from its effective date, or any longer period during which the security is being offered or distributed in a nonexempted transaction by or for the account of the issuer or other person on whose behalf the offering is being made or by any underwriter or dealer who is still offering part of an unsold allotment or subscription taken by him as a participant in the distribution, except during the time a stop order is in effect under G.S. 78A-29. All outstanding securities of the same class as a registered security are considered to be registered for the purpose of any nonissuer transaction (i) so long as the registration statement is effective and (ii) between the thirtieth day after the entry of any stop order suspending or revoking the effectiveness of the registration statement under G.S. 78A-29 (if the registration statement did not relate in whole or in part to a nonissuer distribution) and one year from the effective date of the registration statement. A registration statement may not be withdrawn for one year from its effective date if any securities of the same class are outstanding. A registration statement may be withdrawn otherwise only in the discretion of the Administrator.
- So long as a registration statement is effective, the Administrator may by rule or order require the person who filed the registration statement to file reports, not more often than quarterly, to keep reasonably current the information contained in the registration statement and to disclose progress of the offering.
- A registration statement filed in accordance with subsection (b) of this section may be amended after its effective date to increase the securities specified as proposed to be offered. Such an amendment becomes effective when the Administrator so orders. Every person filing such an amendment shall pay a filing fee of fifty dollars ($50.00) with respect to the additional securities proposed to be offered.
(1973, c. 1380; 1979, 2nd Sess., c. 1148, s. 1; 1981, c. 452; c. 624, s. 3; c. 682, s. 14; 1983, c. 713, ss. 45-47; 1998-212, s. 29A.9(b).)
CASE NOTES
Cited in Piazza v. Kirkbride, 246 N.C. App. 576, 785 S.E.2d 695 (2016).
§ 78A-29. Denial, suspension, and revocation of registration.
- The Administrator may issue a stop order denying effectiveness to, or suspending or revoking the effectiveness of, any registration statement if he finds
- That the order is in the public interest and
- That:
- The registration statement as of its effective date or as of any earlier date in the case of an order denying effectiveness, or any amendment under G.S. 78A-28(j) as of its effective date, or any report under G.S. 78A-28(i) is incomplete in any material respect or contains any statement which was, in the light of the circumstances under which it was made, false or misleading with respect to any material fact; or
- Any provision of this Chapter or any rule, order, or condition lawfully imposed under this Chapter has been willfully violated, in connection with the offering, by (i) the person filing the registration statement, (ii) the issuer, any partner, officer, or director of the issuer, any person occupying a similar status or performing similar functions, or any person directly or indirectly controlling or controlled by the issuer, but only if the person filing the registration statement is directly or indirectly controlled by or acting for the issuer, or (iii) any underwriter; or
- The security registered or sought to be registered is the subject of an administrative stop order or similar order or a permanent or temporary injunction of any court of competent jurisdiction entered under any other federal or state act applicable to the offering; but (i) the Administrator may not institute a proceeding against an effective registration statement under paragraph c more than one year from the date of the order or injunction relied on, and (ii) he may not enter an order under paragraph c on the basis of an order or injunction entered under any other state act unless that order or injunction was based on facts which would currently constitute a ground for a stop order under this section; or
- The issuer's enterprise or method of business includes or would include activities which are illegal where performed; or
- The offering has worked or tended to work a fraud upon purchasers or would so operate; or
- The offering has been or would be made with unreasonable amounts of underwriters' and sellers' discounts, commissions, or other compensation, or promoters' profits or participation, or unreasonable amounts or kinds of options; or
- When a security is sought to be registered by notification, it is not eligible for such registration; or
- When a security is sought to be registered by coordination, there has been a failure to comply with the undertaking required by G.S. 78A-26(b)(4); or
- The applicant or registrant has failed to pay the proper fees; but the Administrator may enter only a denial order under this paragraph and he shall vacate any such order when the deficiency has been corrected.
- The Administrator may not enter a stop order against a registration statement based on one or more of the grounds set forth in paragraph f of G.S. 78A-29(a)(2) if the offering, or the dealer, or any dealers, making or participating in the offering, is subject to rules, promulgated by any national securities association registered with the Securities and Exchange Commission pursuant to section 15A of the Securities Exchange Act of 1934, providing safeguards against unreasonable profits or unreasonable rates or commissions or other charges, and such rules are complied with.
- The Administrator may by rule or order require such evidence of compliance with such rules as he may deem advisable.
The Administrator may not institute a stop-order proceeding against an effective registration statement on the basis of a fact or transaction known to him when the registration statement became effective unless the proceeding is instituted within the next 30 days.
(1973, c. 1380; 2001-126, s. 2.)
Opinions of Attorney General
The statutory standards embodied in this section, G.S. 78A-39(a) and G.S. 78C-28(b) are the public health, safety or welfare criteria which must be considered prior to and upon which a summary suspension must be founded. G.S. 78A-39(c) requires the summary suspension order to include the reasons for its entry. See opinion of the Attorney General to Mr. Stephen M. Wallis, Deputy Securities Administrator (acting), 58 N.C.A.G. 76 (1988).
Requirements of G.S. 150B-3(c) Do Not Conflict with This Section. - The requirements in G.S. 150B-3(c) that an agency make a finding that the "public health, safety, or welfare requires emergency action" prior to a summary suspension of a license or an occupational license, and that the agency incorporate such finding in its order of suspension, are not in any way in conflict with the findings required to be made by the securities administrator by G.S. 78A-39(a) prior to denying, suspending, or revoking the registration of a securities dealer or salesman and by this section prior to denying, suspending, or revoking the effectiveness of a securities registration statement. See opinion of the Attorney General to Mr. Stephen M. Wallis, Deputy Securities Administrator (acting), 58 N.C.A.G. 76 (1988).
§ 78A-30. Application to exchange securities.
- When application is made for approval to issue securities or to deliver other consideration (whether or not the security or transaction is exempt from registration or qualification other than by the provisions of G.S. 78A-17(16) or not required to be qualified) in exchange for one or more bona fide securities, claims, or property interests, or partly in such exchange and partly in cash, the Administrator is expressly authorized to approve the terms and conditions of such issuance and exchange or such delivery and exchange and the fairness of such terms and conditions, and is expressly authorized to hold a hearing upon the fairness of such terms and conditions, at which all persons to whom it is proposed to issue securities or to deliver such other consideration in such exchange have the right to appear. Notice of such hearing shall be mailed by United States Mail, Postage Prepaid, to all persons to whom it is proposed to issue securities or to deliver such other consideration in such exchange, not less than 10 days prior to such hearing, and such notice shall be effective upon mailing. The application for approval to issue securities or to deliver other consideration shall be in such form, contain such information and be accompanied by such documents as shall be required by rule or order of the Administrator.
- The Administrator shall be required to hold a hearing on an application for approval within 30 days after the filing of the application and supporting documents required by rule of the Administrator. Provided, however, if the securities or the transaction regarding which the fairness hearing is sought are otherwise exempt from the registration provisions of this Chapter: (1) the Administrator shall have until 45 days after the filing of the application and supporting documents to hold a hearing on the application for approval; and (2) the hearing on the application shall not be held until at least 10 business days after the filing of the application.
- Within 10 business days after holding the hearing under subsection (a), the Administrator shall issue his approval or a statement that his approval will not be forthcoming.
- The Administrator's authority under this section shall extend to the issuance or the delivery of securities or other consideration:
- By any entity organized under the laws of this State; or
- In any transaction which is subject to the registration or qualification requirements of this Chapter or which would be so subject except for the availability of an exemption under G.S. 78A-16 or G.S. 78A-17, or by reason that the security is a security covered under federal law.
(1979, c. 647, ss. 2, 3; 1987, c. 849, s. 8; 1997-419, s. 8; 1998-212, s. 29A.9(c); 2001-201, s. 14.)
§ 78A-31. Notice filings for securities covered under federal law.
- The Administrator, by rule or order, may require the filing of any of the following documents with regard to a security (i) issued by an investment company that is registered or has filed a registration statement under the Investment Company Act of 1940 and (ii) covered under section 18(b)(2) of the Securities Act of 1933 (15 U.S.C. § 77r(b)(2)):
- Prior to the initial offer of the security in this State, all documents that are part of a federal registration statement filed with the Securities and Exchange Commission under the Securities Act of 1933, or, in lieu thereof, a form prescribed by the Administrator, together with a consent to service of process signed by the issuer and with the payment of a notice filing fee equal to the sum of one thousand seven hundred twenty-five dollars ($1,725) and two hundred seventy-five dollars ($275.00) for each series, fund, or portfolio offered in this State and listed in the federal registration statement.
- After the initial offer of the security in this State, all documents that are part of an amendment to a federal registration statement filed with the Securities and Exchange Commission under the Securities Act of 1933, or, in lieu thereof, a form prescribed by the Administrator, which shall be filed concurrently with the Administrator.
- A report of the value of securities covered under federal law that are offered or sold in this State.
- A notice filing pursuant to this section shall expire on December 31 of each year or some other date not more than one year from its effective date as the Administrator may by rule or order provide. A notice filing of the offer of securities covered under federal law that are to be offered for a period in excess of one year shall be renewed annually by payment of a renewal fee equal to the sum of one thousand seven hundred twenty-five dollars ($1,725) and two hundred seventy-five dollars ($275.00) for each series, fund, or portfolio offered in this State and listed in the federal registration statement and by filing any documents and reports that the Administrator may by rule or order require consistent with this section. The renewal shall be effective upon the expiration of the prior notice period.
- A notice filed in accordance with this section may be amended after its effective date to increase the securities specified as proposed to be offered. An amendment becomes effective upon receipt by the Administrator. Every person submitting an amended notice filing shall pay a filing fee of fifty dollars ($50.00) with respect to the additional securities proposed to be offered.
(1997-419, s. 9; 1998-212, s. 29A.9(d); 2002-126, ss. 29A.24, 29A.37; 2002-189, s. 4; 2003-284, s. 35B.2(a); 2008-107, s. 29.3(a); 2011-145, s. 31.27A(a).)
Editor's Note. - Session Laws 2003-284, s. 48.1, provides: "Parts 32 through 47 of this act do not affect the rights or liabilities of the State, a taxpayer, or another person arising under a statute amended or repealed by those parts before the effective date of its amendment or repeal; nor do they affect the right to any refund or credit of a tax that accrued under the amended or repealed statute before the effective date of its amendment or repeal."
Effect of Amendments. - Session Laws 2008-107, s. 29.3(a), effective July 20, 2008, substituted "two thousand dollars ($2,000)" for "two hundred fifty dollars ($250.00)" in subdivision (a)(4).
Session Laws 2011-145, s. 31.27A(a), effective July 1, 2011, and applicable to fees for filings due on or after that date, in the introductory paragraph of subsection (a), inserted "(i) issued by an investment company that is registered or has filed a registration statement under the Investment Company Act of 1940 and (ii)"; and in subdivisions (a)(1) and (a)(4), substituted the language "filing fee equal to the sum of one thousand seven hundred twenty-five dollars ($1,725)" through to the end for "filing fee of two thousand dollars ($2,000)."
§§ 78A-32 through 78A-35: Reserved for future codification purposes.
ARTICLE 5. Registration of Dealers and Salesmen.
§ 78A-36. Registration requirement.
- It is unlawful for any person to transact business in this State as a dealer or salesman unless he is registered under this Chapter. No dealer shall be eligible for registration under this Chapter, or for renewal of registration hereunder, unless such dealer is at the time registered as a dealer with the Securities and Exchange Commission under the Securities Exchange Act of 1934.
- It is unlawful for any dealer to employ a salesman unless the salesman is registered. The registration of a salesman is not effective during any period when he is not associated with a particular dealer registered under this Chapter. When a salesman begins or terminates those activities which make him a salesman, the salesman as well as the dealer shall promptly notify the Administrator.
- Every registration expires on the thirty-first day of March of each year (or such other date not more than one year from its effective date as the Administrator may by rule or order provide) unless renewed.
The Administrator may by rule or order require the return of a salesman's license upon the termination of those activities which make him a salesman or, if such return is impossible, require a bond or evidence satisfactory to the Administrator of such impossibility. No salesman may be registered with more than one dealer.
(1925, c. 190, s. 19; 1927, c. 149, s. 19; 1955, c. 436, s. 9; 1959, c. 1122; 1971, c. 831, s. 1; 1973, c. 1380; 1975, c. 144, s. 2; 1979, 2nd Sess., c. 1148, s. 2; 1981, c. 624, s. 4; 1983, c. 817, s. 8; 2001-182, s. 1.)
CASE NOTES
Where defendant did not "sell" unregistered security in question, he was not a "salesman" (or a dealer), and therefore was not subject to the requirements of this section. State v. Williams, 98 N.C. App. 274, 390 S.E.2d 746, cert. denied, 327 N.C. 144 , 394 S.E.2d 184 (1990).
Claims Not Barred by Statute of Limitations. - Investors' claims under the North Carolina Securities Act, G.S. 78A-1 to G.S. 78A-66 , were not barred by the Act's statute of limitations, G.S. 78A-56(f) , because the investors not only asserted claims under G.S. 78A-24 and G.S. 78A-36 , but also brought a claim for securities fraud under G.S. 78A-8 and G.S. 78A-56 , which were subject to the three-year limitations period, G.S. 78A-56(f) ; the jury's finding that the agent violated G.S. 78A-8 and G.S. 78A-56 , which were subject to the three-year statute of limitations, supported its verdict. Latta v. Rainey, 202 N.C. App. 587, 689 S.E.2d 898 (2010).
Cited in Piazza v. Kirkbride, 246 N.C. App. 576, 785 S.E.2d 695 (2016).
Opinions of Attorney General
Registration with Secretary of State. - This section makes it unlawful to engage in the business of affecting transactions in securities without being registered with the Secretary of State. That registration is encompassed by the definition of "occupational license" at G.S. 150B-2 (4a) in that registration confers the right or privilege to engage in a field of endeavor regulated by an occupational licensing agency. See opinion of Attorney General to Mr. Stephen M. Wallis, Deputy Securities Administrator (acting), 58 N.C.A.G. 76 (1988).
§ 78A-36.1. Limited registration of Canadian dealers and salesmen.
- A dealer that is a resident of Canada and that has no office or other physical presence in this State may effect transactions in securities with or for, or induce or attempt to induce the purchase or sale of any security by:
- A person from Canada who is residing in this State temporarily and with whom the Canadian dealer had a bona fide dealer-client relationship before the person entered the United States; or
- A person from Canada who is a resident of this State and whose transactions are in a self-directed tax advantaged retirement plan in Canada of which the person is the holder or contributor.
- The dealer files an application in the form required by the jurisdiction in which it has its head office.
- The dealer files a consent to service of process.
- The dealer is registered as a dealer in good standing in the jurisdiction from which it is effecting transactions into this State and files evidence thereof.
- The dealer is a member of a self-regulatory organization, the Bureau des services financiers or a stock exchange in Canada.
- The salesman files an application in the form required by the jurisdiction in which the dealer has its head office.
- The salesman files a consent to service of process.
- The salesman is registered in good standing in the jurisdiction from which the salesman is effecting transactions into this State and files evidence thereof.
- The dealer maintains its provincial or territorial registration and its membership in a self-regulatory organization, the Bureau des services financiers or a stock exchange in good standing.
- The dealer provides the Administrator, upon request, with its books and records relating to its business in this State as a dealer.
- The dealer informs the Administrator forthwith of any criminal action taken against it or of any finding or sanction imposed on the dealer as a result of any self-regulatory or regulatory action involving fraud, theft, deceit, misrepresentation, or similar conduct.
- The dealer discloses to its clients in this State that the dealer and its agents are not subject to the full regulatory requirements under this Article.
- The salesman maintains the salesman's provincial or territorial registration in good standing.
- The salesman informs the Administrator forthwith of any criminal action taken against the salesman or of any finding or sanction imposed on the salesman as a result of any self-regulatory or regulatory action involving fraud, theft, deceit, misrepresentation, or similar conduct.
- As permitted in subsection (a) or (b) of this section, and
- With or through:
- The issuers of the securities involved in the transactions;
- Other dealers; and
- Banks, savings institutions, trust companies, insurance companies, investment companies, as defined in the Investment Company Act of 1940, pension or profit-sharing trusts, or other financial institutions or institutional buyers, whether acting for themselves or as trustees.
This subsection only applies to dealers that are registered in accordance with this section.
§ 78A-37. Registration procedure.
- A dealer or salesman may obtain an initial or renewal registration by filing with the Administrator an application together with a consent to service of process pursuant to G.S. 78A-63(f). The application shall contain whatever information the Administrator by rule requires concerning such matters as (i) the applicant's form and place of organization; (ii) the applicant's proposed method of doing business; (iii) the qualifications and business history of the applicant; in the case of a dealer, the qualifications and business history of any partner, officer, or director, any person occupying a similar status or performing similar functions, or any person directly or indirectly controlling the dealer, and a representation that the applicant dealer is duly registered as a dealer under the Securities Exchange Act of 1934; (iv) any injunction or administrative order or conviction of a misdemeanor involving a security or any aspect of the securities business and any conviction of a felony; and (v) the applicant's financial condition and history. If no denial order is in effect and no proceeding is pending under G.S. 78A-39, registration becomes effective at noon of the thirtieth day after an application is filed. The Administrator may by rule or order specify an earlier effective date and may by order defer the effective date until noon of the thirtieth day after the filing of any amendment. Registration of a dealer automatically constitutes registration of any salesman who is a partner, executive officer, or director, or a person occupying a similar status or performing similar functions. After the Administrator institutes a proceeding under G.S. 78A-39 to postpone or deny an application for registration, withdrawal of the application shall be allowed only at such time and under such conditions as the Administrator may by order determine.
- Every applicant for initial or renewal registration shall pay a filing fee of three hundred dollars ($300.00) in the case of a dealer and one hundred twenty-five dollars ($125.00) in the case of a salesman. The Administrator may by rule reduce the registration fee proportionately when the registration will be in effect for less than a full year.
- A registered dealer may file an application for registration of a successor, whether or not the successor is then in existence, for the unexpired portion of the year. There shall be no filing fee.
- The Administrator may by rule require registered dealers to post surety bonds in amounts up to one hundred thousand dollars ($100,000) and salesmen to post surety bonds in amounts up to ten thousand dollars ($10,000), and may determine their conditions. Any appropriate deposit of cash or securities shall be accepted in lieu of any bond so required. No bond may be required of any registrant whose net capital, which may be defined by rule, exceeds one hundred thousand dollars ($100,000). Every bond shall provide for suit thereon by any person who has a cause of action under G.S. 78A-56 and, if the Administrator by rule or order requires, by any person who has a cause of action not arising under this Chapter. Every bond shall provide that no suit may be maintained to enforce any liability on the bond unless brought within two years after the sale or other act upon which it is based.
(1925, c. 190, s. 19; 1927, c. 149, s. 19; 1955, c. 436, s. 9; 1959, c. 1122; 1971, c. 831, s. 1; 1973, c. 1380; 1983, c. 713, s. 48; c. 817, ss. 9, 10; 1987, c. 566, s. 1; 1991 (Reg. Sess., 1992), c. 965, s. 2; 2002-126, s. 29A.34; 2003-413, s. 3; 2009-451, s. 24.1(a).)
Effect of Amendments. - Session Laws 2009-451, s. 24.1(a), effective August 15, 2009, substituted "one hundred twenty-five dollars ($125.00)" for "seventy-five dollars ($75.00)" in the first sentence of subsection (b).
Opinions of Attorney General
Registration of Securities Dealers and Salesmen Constitutes Granting a License. - The registration of securities dealers and salesmen by the Securities Division pursuant to this section constitutes the granting of an "occupational license" within the meaning of G.S. 150B-2 (4a). See opinion of the Attorney General to Mr. Stephen M. Wallis, Deputy Securities Administrator (acting), 58 N.C.A.G. 76 (1988).
§ 78A-38. Post-registration provisions.
- Every registered dealer shall make and keep such accounts, correspondence, memoranda, papers, books, and other records as the Administrator by rule prescribes, subject to the limitations of section 15 of the Securities Exchange Act of 1934 (15 U.S.C. § 78o).
- Every registered dealer shall file such financial reports as the Administrator by rule prescribes, subject to the limitations of section 15 of the Securities Exchange Act of 1934 (15 U.S.C. § 78o).
- If the information contained in any document filed with the Administrator is or becomes inaccurate or incomplete in any material respect, the registrant shall promptly file a correcting amendment unless notification of the correction has been given under G.S. 78A-36(b).
- All the records referred to in subsection (a) of this section are subject at any time or from time to time to such reasonable periodic, special, or other examinations by representatives of the Administrator, within or without this State, as the Administrator deems necessary or appropriate in the public interest or for the protection of investors. For the purpose of avoiding unnecessary duplication of examinations, the Administrator, insofar as he deems it practicable in administering this subsection, may cooperate with the securities administrators of other states, the Securities and Exchange Commission, and any national securities exchange or national securities association registered under the Securities Exchange Act of 1934.
(1925, c. 190, ss. 14, 15; 1927, c. 149, ss. 14, 15; 1973, c. 1380; 1997-419, s. 10.)
§ 78A-39. Denial, revocation, suspension, censure, cancellation, and withdrawal of registration.
- The Administrator may by order deny, suspend, or revoke any registration in whole or in part or restrict or limit as to any person, office, function, or activity or censure the registrant if he finds
- That the order is in the public interest and
- That the applicant or registrant or, in the case of a dealer, any partner, officer, or director, any person occupying a similar status or performing similar functions, or any person directly or indirectly controlling the dealer:
- Has filed an application for registration which as of its effective date, or as of any date after filing in the case of an order denying effectiveness, was incomplete in any material respect or contained any statement which was, in light of the circumstances under which it was made, false or misleading with respect to any material fact; or
- Has willfully violated or willfully failed to comply with any provision of this Chapter or a predecessor law or any rule or order under this Chapter or a predecessor law or any provision of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisors Act of 1940, or the Commodity Exchange Act; or
- Has been convicted, within the past 10 years, of any misdemeanor involving a security or any aspect of the securities business, or any felony; or
- Is permanently or temporarily enjoined by any court of competent jurisdiction from engaging in or continuing any conduct or practice involving any aspect of the securities business; or
- Is the subject of an order of the Administrator denying, suspending, or revoking registration as a dealer or salesman; or
- Is the subject of an order entered within the past five years by the securities administrator of any state or by the Securities and Exchange Commission denying or revoking registration as a dealer or salesman, or the substantial equivalent of those terms as defined in this Chapter, or is the subject of a final order suspending or expelling him from a national securities exchange or national securities association registered under the Securities Exchange Act of 1934, or is the subject of a United States post office fraud order; but (i) the Administrator may not institute a revocation or suspension proceeding under subdivision (2)f of subsection (a) more than one year from the date of the order relied on, and (ii) the Administrator may not enter an order under subdivision (2)f of subsection (a) on the basis of an order under another state act unless that order was based on facts which would currently constitute a ground for an order under this section; or
- Has engaged in dishonest or unethical practices in the securities business; or
- Is insolvent, either in the sense that his liabilities exceed his assets or in the sense that he cannot meet his obligations as they mature; but the Administrator may not enter an order against a dealer under this paragraph without a finding of insolvency as to the dealer; or
- Is not qualified on the basis of such factors as training, experience, and knowledge of the securities business, except as otherwise provided in subsection (b).
- That the order is in the public interest and
- That the applicant or registrant:
- Has failed reasonably to supervise his salesmen if he is a dealer; or
- Has failed to pay the proper filing fee; but the Administrator may enter only a denial order under this clause, and he shall vacate any such order when the deficiency has been corrected.
- The Administrator may not enter an order against a dealer on the basis of the lack of qualification of any person other than (i) the dealer himself if he is an individual or (ii) a salesman of the dealer.
- The Administrator may not enter an order solely on the basis of lack of experience if the applicant or registrant is qualified by training or knowledge or both or, in the case of a dealer if he is registered and in good standing under the Securities Exchange Act of 1934.
- The Administrator shall consider that a salesman who will work under the supervision of a registered dealer need not have the same qualifications as a dealer.
- The Administrator may by rule provide for an examination which may be written or oral or both, to be taken by any class of or all applicants.
The Administrator may not institute a suspension or revocation proceeding on the basis of a fact or transaction known to him when registration became effective unless the proceeding is instituted within the next 120 days.
(1925, c. 190, s. 19; 1927, c. 149, s. 19; 1955, c. 436, s. 9; 1959, c. 1122; 1971, c. 831, s. 1; 1973, c. 1380; 1983, c. 817, ss. 11-15; 1997-456, s. 27; 1997-462, ss. 1, 2; 2001-126, s. 3.)
Editor's Note. - The latter portion of former subsection (a) was redesignated as subsection (a1) pursuant to Session Laws 1997-456, s. 27, which authorized the Revisor of Statutes to renumber or reletter sections and parts of sections having a number or letter designation that is incompatible with the General Assembly's computer database.
Opinions of Attorney General
The statutory standards embodied in this section, G.S. 78A-29(a) and G.S. 78C-28(b) are the public health, safety or welfare criteria which must be considered prior to and upon which a summary suspension must be founded. This section requires the summary suspension order to include the reasons for its entry. See opinion of the Attorney General to Mr. Stephen M. Wallis, Deputy Securities Administrator (acting), 58 N.C.A.G. 76 (1988).
Requirements of G.S. 150B-3(c) Do Not Conflict with This Section. - The requirements in G.S. 150B-3(c) that an agency make a finding that the "public health, safety, or welfare requires emergency action" prior to a summary suspension of a license or an occupational license, and that the agency incorporate such finding in its order of suspension, are not in any way in conflict with the findings required to be made by the securities administrator by this section prior to denying, suspending, or revoking the registration of a securities dealer or salesman and by G.S. 78A-29(a) prior to denying, suspending, or revoking the effectiveness of a securities registration statement. See opinion of the Attorney General to Mr. Stephen M. Wallis, Deputy Securities Administrator (acting), 58 N.C.A.G. 76 (1988).
Article 3A of Chapter 150B Does Not Restrict or Modify This Section. - Even though the Securities Division is an "occupational licensing agency" within the meaning of G.S. 150B-2 (4b), the provisions of Article 3A of Chapter 150B , G.S. 150B-38 et seq., relating to the procedure for conduct of administrative hearings by occupational licensing agencies, in no way restrict or modify the provisions of subsections (a), (c), (e) and (f) of this section or G.S. 78A-45 or G.S. 78A-46(b) . See opinion of the Attorney General to Mr. Stephen M. Wallis, Deputy Securities Administrator (acting), 58 N.C.A.G. 76 (1988).
§ 78A-40. Alternative methods of registration.
- The Administrator may by rule or order provide an alternative method of registration by which any dealer or salesman acting in that capacity or as a principal may satisfy the requirements of this Article by furnishing the information otherwise required to be filed pursuant to this Article. The Administrator may provide for, among other things, alternative filing periods for dealers or salesmen, elimination of the issuance of a paper license and alternative methods for the payment and collection of initial or renewal filing fees, which shall be known as "alternative filing fees". The alternative filing fees shall be the same as provided in G.S. 78A-37(b).
- The Administrator may not adopt an alternative method of registration unless its purpose is to facilitate a central registration depository whereby dealers or salesmen can centrally or simultaneously register and pay fees for all states in which they plan to transact business that require registration. The Administrator may enter into an agreement with or otherwise facilitate an alternative method of registration with any national securities association registered with the Securities and Exchange Commission pursuant to Section 15A of the Securities Exchange Act of 1934, any national securities exchange registered under the Securities Exchange Act of 1934, or any national association of state securities Administrators or similar association to effectuate the provisions of this section.
- Nothing in this section shall be construed to prevent the exercise of the authority of the Administrator as provided in G.S. 78A-39.
(1981, c. 624, s. 5; 1983, c. 817, s. 16; 1987, c. 849, s. 3.)
§§ 78A-41 through 78A-44: Reserved for future codification purposes.
ARTICLE 6. Administration and Review.
§ 78A-45. Administration of Chapter.
- This Chapter shall be administered by the Secretary of State. The Secretary of State as Administrator may delegate all or part of the authority under this Chapter to the Deputy Securities Administrator including, but not limited to, the authority to conduct hearings, make, execute and issue final agency orders and decisions. The Secretary of State may appoint such clerks and other assistants as may from time to time be needed. The Secretary of State may designate one or more hearing officers for the purpose of conducting administrative hearings.
- It is unlawful for the Administrator or any of his officers or employees to use for personal benefit any information which is filed with or obtained by the Administrator and which is not made public. No provision of this Chapter authorizes the Administrator or any of his officers or employees to disclose any such information except among themselves or when necessary or appropriate in a proceeding or investigation under this Chapter. No provision of this Chapter either creates or derogates from any privilege which exists at common law or otherwise when documentary or other evidence is sought under a subpoena directed to the Administrator or any of his officers or employees.
- It is the policy of this State that an investor's financial information should be treated as confidential and unavailable for inspection or examination by members of the public under G.S. 132-6.
- All fees provided for under this Chapter shall be collected by the Administrator and shall be paid over to the State Treasurer to go into the general fund.
(1925, c. 190, ss. 20, 21; 1927, c. 149, ss. 20, 21; 1973, c. 1380; 1983, c. 817, s. 17; 2001-126, s. 9; 2020-74, s. 23(a).)
Effect of Amendments. - Session Laws 2020-74, s. 23(a), effective July 1, 2020, added subsection (b1).
Opinions of Attorney General
Article 3A of Chapter 150B Does Not Restrict or Modify This Section. - Even though the Securities Division is an "occupational licensing agency" within the meaning of G.S. 150B-2 (4b), the provisions of Article 3A of Chapter 150B , G.S. 150B-38 et seq., relating to the procedure for conduct of administrative hearings by occupational licensing agencies, in no way restrict or modify the provisions of G.S. 78A-39(a) , (c), (e) and (f), this section or G.S. 78A-46(b) . See opinion of the Attorney General to Mr. Stephen M. Wallis, Deputy Securities Administrator (acting), 58 N.C.A.G. 76 (1988).
§ 78A-46. Investigations and subpoenas.
- The Administrator in his discretion
- May make any investigation within or outside of this State as the Administrator deems necessary to determine whether any person has violated or is about to violate any provision of this Chapter or any rule or order hereunder, or to aid in the enforcement of this Chapter or in the prescribing of rules and forms hereunder,
- May require or permit any person to file a statement in writing, under oath or otherwise as the Administrator determines, as to all the facts and circumstances concerning the matter to be investigated,
- May publish information concerning any violation of this Chapter or any rule or order hereunder, and
- May appoint employees of the Securities Division as securities law enforcement agents and as other enforcement personnel.
- Subject matter jurisdiction -. The responsibility of an agent shall be enforcement of this Chapter and Chapters 78C and 78D of the General Statutes.
- Territorial jurisdiction -. A securities law enforcement agent is a State officer with jurisdiction throughout the State.
- Service of orders of the Administrator -. Securities law enforcement agents may serve and execute notices, orders, or demands issued by the Administrator for the surrender of registrations or relating to any administrative proceeding. While serving and executing such notices, orders, or demands, securities law enforcement agents shall have all the power and authority possessed by a law enforcement officer.
(1925, c. 190, s. 16; 1927, c. 149, s. 16; 1973, c. 1380; 1977, c. 610, s. 2; 1987, c. 849, s. 4; 1991, c. 456, s. 2; 1997-462, s. 3.)
Opinions of Attorney General
Article 3A of Chapter 150B Does Not Restrict or Modify This Section. - Even though the Securities Division is determined to be an "occupational licensing agency" within the meaning of G.S. 150B-2 (4b), the provisions of Article 3A of Chapter 150B , G.S. 150B-38 et seq., relating to the procedure for conduct of administrative hearings by occupational licensing agencies, in no way restrict or modify the provisions of G.S. 78A-39(a) , (c), (e) and (f), G.S. 78A-45 or this section. See opinion of the Attorney General to Mr. Stephen M. Wallis, Deputy Securities Administrator (acting), 58 N.C.A.G. 76 (1988).
This section and G.S. 78C-27(b) are the equivalent of grand jury proceedings. So long as the exercise of these powers does not result in action on a registration without an opportunity to be heard under G.S. 78A-39 , it is not a function to which Chapter 150B has any application. See opinion of the Attorney General to Mr. Stephen M. Wallis, Deputy Securities Administrator (acting), 58 N.C.A.G. 76 (1988).
§ 78A-47. Injunctions; cease and desist orders.
- Whenever it appears to the Administrator that any person has engaged or is about to engage in any act or practice constituting a violation of any provision of this Chapter or any rule or order hereunder, he may in his discretion bring an action in any court of competent jurisdiction to enjoin the acts or practices and to enforce compliance with this Chapter or any rule or order hereunder. Upon a proper showing a permanent or temporary injunction, restraining order, or writ of mandamus shall be granted and a receiver or conservator may be appointed for the defendant or the defendant's assets. In addition to any other remedies provided by this Chapter, the Administrator may apply to the court hearing this matter for an order of restitution whereby the defendant in such action shall be ordered to make restitution of those sums shown by the Administrator to have been obtained by him in violation of any of the provisions of this Chapter. Such restitution shall be payable, in the discretion of the court, to the Administrator or receiver appointed pursuant to this section for the benefit of those persons whose assets were obtained in violation of this Chapter, or directly to those persons. The court may not require the Administrator to post a bond.
- If the Administrator determines after giving notice of and opportunity for a hearing, that any person has engaged in or is about to engage in, any act or practice constituting a violation of any provision of this Chapter or any rule or order hereunder, he may order such person to cease and desist from such unlawful act or practice and take such affirmative action as in the judgment of the Administrator will carry out the purposes of this Chapter. (b) (1) If the Administrator determines after giving notice of and opportunity for a hearing, that any person has engaged in or is about to engage in, any act or practice constituting a violation of any provision of this Chapter or any rule or order hereunder, he may order such person to cease and desist from such unlawful act or practice and take such affirmative action as in the judgment of the Administrator will carry out the purposes of this Chapter.
- If the Administrator makes written findings of fact that the public interest will be irreparably harmed by delay in issuing an order under G.S. 78A-47(b)(1), the Administrator may issue a temporary cease and desist order. Upon the entry of a temporary cease and desist order, the Administrator shall promptly notify in writing the person subject to the order that such order has been entered, the reasons therefor, and that within 20 days after the receipt of a written request from such person the matter shall be scheduled for hearing in accordance with Chapter 150B of the General Statutes to determine whether or not the order shall become permanent and final. If no request for a hearing, other responsive pleading, or submission is received by the Administrator within 30 business days of receipt of service of notice of the order upon the person subject to the order and no hearing is ordered by the Administrator, the order shall become final and remain in effect unless it is modified or vacated by the Administrator. If a hearing is requested or ordered, the Administrator, after giving notice of an opportunity for a hearing to the person subject to the order, shall by written findings of fact and conclusion of law, vacate, modify, or make permanent the order.
- No order under subsection (b), except an order issued pursuant to G.S. 78A-47(b)(2), may be entered without prior notice of an opportunity for hearing. The Administrator may vacate or modify an order under this subsection (b) upon his finding that the conditions which required such an order have changed and that it is in the public interest to so vacate or modify.
- A final order issued pursuant to the provisions of subsection (b) shall be subject to review as provided in G.S. 78A-48.
- Imposing a civil penalty of up to two thousand five hundred dollars ($2,500) for a single violation or of up to twenty-five thousand dollars ($25,000) for multiple violations in a single proceeding or a series of related proceedings; and
- Requiring reimbursement of the costs of investigation.
The clear proceeds of civil penalties imposed under this subsection shall be remitted to the Civil Penalty and Forfeiture Fund in accordance with G.S. 115C-457.2 . Any reimbursement imposed under this subsection shall be paid into the General Fund. No order under this subsection may be entered without prior notice and an opportunity for a hearing conducted pursuant to Article 3 of Chapter 150B of the General Statutes.
(1925, c. 190, s. 16; 1927, c. 149, s. 16; 1973, c. 1380; 1983, c. 817, s. 18; 1991, c. 456, ss. 3, 4; 1997-462, s. 4; 1998-215, s. 120; 2001-126, s. 4.)
Legal Periodicals. - For article, "The Anti-Fraud Provisions of the North Carolina Securities Act," see 35 Campbell L. Rev. 209 (2013).
CASE NOTES
Cited in Bache Halsey Stuart, Inc. v. Hunsucker, 38 N.C. App. 414, 248 S.E.2d 567 (1978).
§ 78A-48. Judicial review of orders.
- Any person aggrieved by a final order of the Administrator may obtain a review of the order in the Superior Court of Wake County by filing in court, within 30 days after a written copy of the decision is served upon the person by personal service or by registered or certified mail, a written petition praying that the order be modified or set aside in whole or in part. A copy of the petition shall be forthwith served upon the Administrator, and thereupon the Administrator shall certify and file in court a copy of the filing and evidence upon which the order was entered. When these have been filed, the court has exclusive jurisdiction to affirm, modify, enforce, or set aside the order, in whole or in part. The findings of the Administrator as to the facts, if supported by competent, material and substantial evidence, are conclusive. If either party applies to the court for leave to adduce additional material evidence, and shows to the satisfaction of the court that there were reasonable grounds for failure to adduce the evidence in the hearings before the Administrator, the court may order the additional evidence to be taken before the Administrator and to be adduced upon the hearing in such manner and upon such conditions as the court considers proper. The Administrator may modify his findings and order by reason of the additional evidence and shall file in court the additional evidence together with any modified or new findings or order. The judgment of the court is final, subject to review by the Court of Appeals.
- The commencement of proceedings under subsection (a) does not, unless specifically ordered by the court, operate as a stay of the Administrator's order.
(1925, c. 190, s. 18; 1927, c. 149, s. 18; 1973, c. 1380; 1977, c. 610, s. 3; 1983, c. 817, s. 19; 1987, c. 849, s. 5.)
§ 78A-49. Rules, forms, orders, and hearings.
- The Administrator may from time to time make, amend, and rescind such rules, forms, and orders as are necessary to carry out the provisions of this Chapter, including rules and forms governing registration statements, applications, and reports, and defining any terms, whether or not used in this Chapter, insofar as the definitions are not inconsistent with the provisions of this Chapter. For the purpose of rules and forms the Administrator may classify securities, persons, and matters within his jurisdiction, and prescribe different requirements for different classes. In order to protect the investing public, the Administrator may by rule or order prescribe suitability standards for investments in viatical settlement contracts.
- No rule, form, or order may be made, amended, or rescinded unless the Administrator finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of this Chapter. In prescribing rules and forms the Administrator may cooperate with the securities administrators of the other states and the Securities and Exchange Commission with a view to effectuating the policy of this statute to achieve maximum uniformity in the form and content of registration statements, applications, and reports wherever practicable.
- The Administrator may by rule or order prescribe (i) the form and content of financial statements required under this Chapter, (ii) the circumstances under which consolidated financial statements shall be filed, and (iii) whether any required financial statements shall be certified by independent or certified public accountants. All financial statements required to be filed with the Administrator shall be audited and shall be prepared in accordance with generally accepted accounting principles, except where the Administrator may by rule or order provide otherwise. In determining whether to permit the filing of financial statements that have not been audited, the Administrator shall consider all of the following factors:
- Whether lesser standards for financial statements will impair investor protection.
- The cost of preparation of audited financial statements relative to the proposed offering amount.
- Whether recently audited financial statements of the issuer are available in addition to current interim statements.
- Whether the issuer has commenced significant business operations.
- Any other factors that are relevant to the protection of the investing public.
(1925, c. 190, s. 11; 1927, c. 149, s. 11; 1973, c. 1380; 1987, c. 849, s. 6; 1997-419, s. 11; 2001-436, s. 10; 2003-413, s. 4; 2016-103, s. 3.)
Editor's Note. - Session Laws 2016-103, s. 4(a) and (b), provides: "4.(a) Notwithstanding any provision of Article 2A of Chapter 150B of the General Statutes, within 12 months of the effective date of this act [Session Laws 2016-103 was effective July 22, 2016], the Secretary of State shall adopt rules to implement the provisions of this act in accordance with the following procedure:
"(1) At least 15 business days prior to adopting a rule, submit the rule and a notice of public hearing to the Codifier of Rules. The Codifier of Rules shall publish the proposed rule and the notice of public hearing on the Internet within five business days.
"(2) At least 15 business days prior to adopting a rule, notify persons on the mailing list maintained pursuant to G.S. 150B-21.2(d) and any other interested parties of the Secretary's intent to adopt a rule and of the public hearing.
"(3) Accept written comments on the proposed rule for at least 15 business days prior to adoption of the rule.
"(4) Hold at least one public hearing on the proposed rule no less than five days after the rule and notice have been published.
"A rule adopted in accordance with this section becomes effective on the first day of the month following the month the Secretary adopts the rule and submits the rule to the Codifier of Rules for entry into the North Carolina Administrative Code.
"(b) Any rule adopted more than 12 months after the effective date of this act [Session Laws 2016-103 was effective July 22, 2016] shall comply with the requirements of Article 2A of Chapter 150B of the General Statutes."
Effect of Amendments. - Session Laws 2016-103, s. 3, effective July 22, 2016, substituted "G.S. 78A-16 and G.S. 78A-17 (except G.S. 78A-17(9) , (17), (19), and (20))" for "G.S. 78A-16 or 78A-17 (except 78A-17(9), (17), and (19))" in subsection (d).
CASE NOTES
Cited in Piazza v. Kirkbride, 246 N.C. App. 576, 785 S.E.2d 695 (2016).
§ 78A-50. Administrative files and opinions.
- A document is filed when it is received by the Administrator.
- The Administrator shall keep a register of all applications for registration and registration statements which are or have been effective under this Chapter and all denial, suspension, or revocation orders which have been entered under this Chapter. The register shall be open for public inspection.
- The information contained in or filed with any registration statement, application, or report may be made available to the public under such rules as the Administrator prescribes.
- The files and records of the Administrator relating to criminal investigations and enforcement proceedings undertaken pursuant to this Chapter are subject to the provisions of G.S. 132-1.4.
- The files and records of the Administrator relating to noncriminal investigations and enforcement proceedings undertaken pursuant to this Chapter shall not be subject to inspection and examination pursuant to G.S. 132-6 until the investigations and proceedings are completed and cease to be active.
- Any information obtained by the Administrator from any law enforcement agency, administrative agency, or regulatory organization on a confidential or otherwise restricted basis in the course of an investigation or proceeding undertaken pursuant to this Chapter shall be confidential and exempt from G.S. 132-6 to the same extent that it is confidential in the possession of the providing agency or organization.
- Notwithstanding subsections (c1) and (c2) of this section, any records obtained by the Administrator in connection with an examination under G.S. 78A-38(d), an investigation under G.S. 78A-46, or an action under G.S. 78A-47 or G.S. 78A-39 shall not be a public record available for public examination.
- A record that is not required to be provided to the Administrator or filed under this act and is provided to and accepted by the Administrator only on the condition that the information will not be subject to public examination or disclosure is not a public record that is available for public examination.
- The Administrator may disclose a record obtained in connection with an examination under G.S. 78A-38(d), an investigation under G.S. 78A-46, or an action under G.S. 78A-47 or G.S. 78A-39 if disclosure is for the purpose of a civil, administrative, or criminal investigation, action, or proceeding or to a securities regulator of one or more states, Canada or one or more of its provinces or territories, one or more foreign countries; the United States Securities and Exchange Commission, the United States Department of Justice, the Commodity Futures Trading Commission, the Federal Trade Commission, the Securities Investor Protection Corporation, a self-regulatory organization, a national or international organization of securities regulators, federal or state banking and insurance regulators, and any governmental law enforcement agency, in order to effectuate greater uniformity in securities matters among the federal government, self-regulatory organizations, and state and foreign governments.
- Upon request and at such reasonable charges as the administrator prescribes, the Administrator shall furnish to any person photostatic or other copies (certified under the seal of office if requested) of any entry in the register or any document which is a matter of public record. In any proceeding or prosecution under this Chapter, any copy so certified is prima facie evidence of the contents of the entry or document certified.
- The Administrator may honor requests from interested persons for interpretative opinions. When an exemption is claimed in writing, cites the section relied upon, and is considered eligible upon the showing made, a "no action" letter will be furnished upon request and upon the payment of a fee of one hundred fifty dollars ($150.00).
(1925, c. 190, s. 17; 1927, c. 149, s. 17; 1955, c. 436, s. 8; 1973, c. 1380; 1979, 2nd Sess., c. 1148, s. 3; 1987, c. 566, s. 2; 1997-462, s. 5; 2020-74, s. 23(b).)
Effect of Amendments. - Session Laws 2020-74, s. 23(b), effective July 1, 2020, added subsections (c4) through (c6).
§§ 78A-51 through 78A-55: Reserved for future codification purposes.
ARTICLE 7. Civil Liabilities and Criminal Penalties.
§ 78A-56. Civil liabilities.
- Any person who:
- Offers or sells a security in violation of G.S. 78A-8(1), 78A-8(3), 78A-10(b), 78A-13, 78A-14, 78A-24, or 78A-36(a), or of any rule or order under G.S. 78A-49(d) which requires the affirmative approval of sales literature before it is used, or of any condition imposed under G.S. 78A-27(d) or 78A-28(g), or
- Offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of the untruth or omission), and who does not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission,
- Every person who directly or indirectly controls a person liable under subsection (a), (b), or (b1) of this section, every partner, officer, or director of the person, every person occupying a similar status or performing similar functions, and every dealer or salesman who materially aids in the sale is also liable jointly and severally with and to the same extent as the person, unless able to sustain the burden of proof that the person did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist. (c) (1) Every person who directly or indirectly controls a person liable under subsection (a), (b), or (b1) of this section, every partner, officer, or director of the person, every person occupying a similar status or performing similar functions, and every dealer or salesman who materially aids in the sale is also liable jointly and severally with and to the same extent as the person, unless able to sustain the burden of proof that the person did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist.
- Unless liable under subdivision (1) of this subsection, every employee of a person liable under subsection (a), (b), or (b1) of this section who materially aids in the transaction giving rise to the liability and every other person who materially aids in the transaction giving rise to the liability is also liable jointly and severally with and to the same extent as the person if the employee or other person actually knew of the existence of the facts by reason of which the liability is alleged to exist.
- There is contribution among the several persons liable under subdivisions (1) and (2) of this subsection as provided among tort-feasors pursuant to Chapter 1B of the General Statutes.
- No purchaser may sue under this section if, before suit is commenced, the purchaser has received a written offer stating the respect in which liability under this section may have arisen and fairly advising the purchaser of his rights; offering to repurchase the security for cash payable on delivery of the security equal to the consideration paid, together with interest at the legal rate as provided by G.S. 24-1 from the date of payment, less the amount of any income received on the security or, if the purchaser no longer owns the security, offering to pay the purchaser upon acceptance of the offer an amount in cash equal to the damages computed in accordance with subsection (a); and stating that the offer may be accepted by the purchaser at any time within 30 days of its receipt; and the purchaser has failed to accept such offer in writing within the specified period. (g) (1) No purchaser may sue under this section if, before suit is commenced, the purchaser has received a written offer stating the respect in which liability under this section may have arisen and fairly advising the purchaser of his rights; offering to repurchase the security for cash payable on delivery of the security equal to the consideration paid, together with interest at the legal rate as provided by G.S. 24-1 from the date of payment, less the amount of any income received on the security or, if the purchaser no longer owns the security, offering to pay the purchaser upon acceptance of the offer an amount in cash equal to the damages computed in accordance with subsection (a); and stating that the offer may be accepted by the purchaser at any time within 30 days of its receipt; and the purchaser has failed to accept such offer in writing within the specified period.
- No seller may sue under this section if, before suit is commenced, the seller has received a written offer stating the respect in which liability under this section may have arisen and fairly advising the seller of his rights; offering to return the security plus the amount of any income received thereon upon payment of the consideration received, or, if the purchaser no longer owns the security, offering to pay the seller upon acceptance of the offer an amount in cash equal to the damages computed in accordance with subsection (b); and providing that the offer may be accepted by the seller at any time within 30 days of its receipt; and the seller has failed to accept such offer in writing within the specified period.
- Offers shall be in the form and contain the information the Administrator by rule prescribes. Every offer under subsection (g) of this section shall be delivered to the offeree or sent by certified mail addressed to the offeree at the offeree's last known address. The person making the offer shall file a copy of the rescission offer with the Administrator at least 10 days before delivering the offer to the offeree. If an offer is not performed in accordance with its terms, suit by the offeree under this section shall be permitted without regard to this subsection.
is liable to the person purchasing the security from him, who may sue either at law or in equity to recover the consideration paid for the security, together with interest at the legal rate from the date of payment, costs, and reasonable attorneys' fees, less the amount of any income received on the security, upon the tender of the security, or for damages if the purchaser no longer owns the security. Damages are the amount that would be recoverable upon a tender less the value of the security when the purchaser disposed of it and interest at the legal rate as provided by G.S. 24-1 from the date of disposition.
No person may sue under this section for any other violation of this Chapter more than three years after the person discovers facts constituting the violation, but in any case no later than five years after the sale or contract of sale, except that if a person who may be liable under this section engages in any fraudulent or deceitful act that conceals the violation or induces the person to forgo or postpone commencing an action based upon the violation, the suit may be commenced not later than three years after the person discovers or should have discovered that the act was fraudulent or deceitful.
(1925, c. 190, s. 23; 1927, c. 149, s. 23; 1955, c. 436, s. 10; 1971, c. 572, s. 2; 1973, c. 1380; 1975, c. 19, s. 22; c. 144, s. 3; 1977, c. 781, s. 2; 1983, c. 817, ss. 20, 21; 1987, c. 282, s. 9; 1991, c. 456, s. 5; 2001-183, s. 1; 2001-436, s. 11; 2003-413, ss. 5-10.)
Legal Periodicals. - For survey of 1974 case law on securities fraud, see 53 N.C.L. Rev. 1104 (1975).
For article discussing applicable statute of limitations in actions under the Federal Racketeer Influenced and Corrupt Organizations Act, see 7 Campbell L. Rev. 299 (1985).
For note, "Skinner v. E.F. Hutton & Co.: North Carolina's Caveat Tipper Exception to the In Pari Delicto Doctrine," see 64 N.C.L. Rev. 1250 (1986).
For article, "The Anti-Fraud Provisions of the North Carolina Securities Act," see 35 Campbell L. Rev. 209 (2013).
CASE NOTES
Punitive damages are not included in the relief available under this section. Hunt v. Miller, 908 F.2d 1210 (4th Cir. 1990).
Applicability to Federal Claims. - The proper limitations period for G.S. 10(b) and Rule 10b-5 federal security claims is the two year limitations period under subsection (f) of this section. Cooke v. Manufactured Homes, Inc., 998 F.2d 1256 (4th Cir. 1993).
Construction. - Because this section parallels § 12(2) of the Securities Act of 1933, cases construing § 12(2) should be considered when interpreting this section. Venturtech II v. Deloitte Haskins & Sells, 790 F. Supp. 576 (E.D.N.C. 1992), aff'd, 993 F.2d 228 (4th Cir. 1993).
G.S. 1-22 Tolled Two-Year Limitations Period of Subsection (f). - Since this section is a statute of limitations and not a statute of repose in action seeking recession of purchase of securities, the two-year statute of limitations provided for in subsection (f) was tolled by operation of G.S. 1-22 because plaintiffs brought their claim within the one-year extension provided by that section. Walker v. Montclaire Hous. Partners, 736 F. Supp. 1358 (M.D.N.C. 1990).
Claims Not Barred by Statute of Limitations. - Investors' claims under the North Carolina Securities Act, G.S. 78A-1 to G.S. 78A-66 , were not barred by the Act's statute of limitations, G.S. 78A-56(f) , because the investors not only asserted claims under G.S. 78A-24 and G.S. 78A-36 , but also brought a claim for securities fraud under G.S. 78A-8 and G.S. 78A-56 , which were subject to the three-year limitations period, G.S. 78A-56(f) ; the jury's finding that the agent violated G.S. 78A-8 and G.S. 78A-56 , which were subject to the three-year statute of limitations, supported its verdict. Latta v. Rainey, 202 N.C. App. 587, 689 S.E.2d 898 (2010).
Claims Time-Barred. - Plaintiffs' G.S. 78A-56 claims were subject to a three-year limitations period, which began running at the time of discovery under G.S. 78A-56 (f); plaintiffs failed to present sufficient evidence of a timeline to submit their claims to the jury. Orr v. Calvert, 212 N.C. App. 254, 713 S.E.2d 39 (2011), rev'd 365 N.C. 320 , 720 S.E.2d 387, 2011 N.C. LEXIS 989 (2011).
Investor's securities fraud claim against limited liability companies and the companies' managers were time-barred as to two investments because the investors did not file suit within three years of being put on inquiry notice as to allegedly false representations. Atkinson v. Lackey, - N.C. - , - S.E.2d - (Feb. 27, 2015).
Scienter. - In light of the North Carolina Securities Act's plain language, legislative history, and comparison to federal § 12(a)(2), 15 U.S.C. § 77l(a)(2), claims, the Court of Appeals of North Carolina holds that a G.S. 78A-56(a)(2) civil plaintiff need not prove scienter. Further, the Court of Appeals holds a materially false or misleading statement or omission made in connection with a security offer or sale is actionable even if the person making the statement or omission did not know it was false so long as the person was negligent under G.S. 78A-56(a)(2) in making the statement or omission. Piazza v. Kirkbride, 246 N.C. App. 576, 785 S.E.2d 695 (2016), aff'd and modified in part, 372 N.C. 137 , 827 S.E.2d 479, 2019 N.C. LEXIS 379 (2019).
Integration Doctrine Applicable to Sale of Securities. - The integration doctrine, a method used to combine two or more otherwise exempt securities sales into a single offering, was applicable to a sale of securities where initial purchaser was offered securities through a special arrangement with his broker and was classified as the sole preliminary limited partner, and where the other North Carolina purchasers were 1985 limited partners admitted pursuant to an offering about a month later. Walker v. Montclaire Hous. Partners, 736 F. Supp. 1358 (M.D.N.C. 1990).
Initial Offering Violated G.S. 78-24 Registration Requirements and Subjected Sellers to Liability. - Where it was clear that offering of securities initially to one purchaser and to five other purchasers a month later were part of a single financing plan since the second offering was contemplated at the time of the initial offering and it was apparent that the offering memorandum would not be published until sellers were sure initial offering was purchased and the consideration for all the offerings was the same, the initial offering violated the registration requirements of G.S. 78A-24 and such violation precluded protection under G.S. 78A-17(9) and subjected the sellers to the civil liabilities provision of subdivision (a)(1), even though the proceeds of the initial offering were for use as seed money while the proceeds of the second offering were for use as general operating expenses, and the profit and losses between the two types of offerings were allocated differently and each had different tax deduction consequences. Walker v. Montclaire Hous. Partners, 736 F. Supp. 1358 (M.D.N.C. 1990).
"Control Persons". - Controlling shareholders, officers and directors were "control persons" within the meaning of this section. Waterman v. Alta Verde Indus., Inc., 643 F. Supp. 797 (E.D.N.C. 1986), aff'd, 833 F.2d 1006 (4th Cir. 1987).
For purposes of G.S. 78A-56(a)(2)(c) , an arbitration panel's imposition of control person liability on two stock purchasers' claims against the president and two directors of a brokerage firm manifestly disregarded the law and facts; there was no evidence that the president or directors were involved in the allegedly unsuitable and unauthorized transactions in the stock purchasers' accounts with the brokerage firm or in the misrepresentations of fraud by a defrauding broker, and the task of supervising the operations of the brokerage firm was not in the hands of the president or the directors. Wallace v. Buttar, 239 F. Supp. 2d 388 (2003).
Summary judgment holding two managers of a limited liability company secondarily liable for securities fraud under G.S. 78A-56(c)(1) was inappropriate because there were material fact issues as to the managers' control of those allegedly making false representations and as to the managers' knowledge of such misrepresentations. Atkinson v. Lackey, - N.C. - , - S.E.2d - (Feb. 27, 2015).
A cause of action for aiding and abetting a securities violation is comprised of three elements. The plaintiff must prove (1) a primary violation by another person; (2) the aider and abettor's "knowledge" of the primary violation; and (3) substantial assistance by the aider and abettor in the achievement or consummation of the primary violation. Venturtech II v. Deloitte Haskins & Sells, 790 F. Supp. 576 (E.D.N.C. 1992), aff'd, 993 F.2d 228 (4th Cir. 1993).
Plain language of G.S. 78A-56(a)(2) imposes liability on any person who is a seller or offeror, not just brokers and other securities professionals. Accordingly, a defendant may be liable as a seller or offeror under the North Carolina Securities Act, even though he did not act or solicit an investment as a securities professional or broker, and did not act with scienter. Piazza v. Kirkbride, 246 N.C. App. 576, 785 S.E.2d 695 (2016), aff'd and modified in part, 372 N.C. 137 , 827 S.E.2d 479, 2019 N.C. LEXIS 379 (2019).
Aider and Abettor's Intent. - As to the second element in a cause of action for aiding and abetting a securities violation, absent a duty owed to the plaintiff by the alleged aider and abettor, the defendant aider and abettor must possess a high conscious intent and a conscious and specific motivation to aid the fraud. Venturtech II v. Deloitte Haskins & Sells, 790 F. Supp. 576 (E.D.N.C. 1992), aff'd, 993 F.2d 228 (4th Cir. 1993).
Because investment firms failed to prove that public accounting firm possessed a "high conscious intent" to assist company in soliciting investors by untrue and misleading statements, and that public accounting firm substantially assisted such a violation, the investment firms could not establish a claim for aiding and abetting a violation of G.S. 78A-56 . Venturtech II v. Deloitte Haskins & Sells, 790 F. Supp. 576 (E.D.N.C. 1992), aff'd, 993 F.2d 228 (4th Cir. 1993).
Cattle feeding program involving the buying, financings, caring for and sale of cattle for investors, which was open to any interested investors and advertised in national publications, was an investment contract which was not entitled to a private placement exemption and hence a security within the meaning of the applicable federal and state securities laws. Waterman v. Alta Verde Indus., Inc., 643 F. Supp. 797 (E.D.N.C. 1986), aff'd, 833 F.2d 1006 (4th Cir. 1987).
Finance Company Held Liable. - Finance company, the sole purpose of which was to provide financing to investors in cattle program which was found to be an investment contract and hence a security within the meaning of the federal and North Carolina securities laws and which was never properly registered, was liable to plaintiff as a matter of law under this section as an aider and abettor. Waterman v. Alta Verde Indus., Inc., 643 F. Supp. 797 (E.D.N.C. 1986), aff'd, 833 F.2d 1006 (4th Cir. 1987).
Valid Rescission Offer Shown. - Investment firm, which employed broker who engaged in fraudulent activity, nevertheless made a valid rescission offer under the terms of subdivision (g)(1) of this section and therefore plaintiff was precluded from maintaining action seeking damages for breach of contract, fraud and negligence. Mashburn v. First Investors Corp., 111 N.C. App. 398, 432 S.E.2d 869 (1993).
Invalidation of Indemnity Agreement Between Broker and Issuer. - If a jury should find that an issuer of securities knowingly participated in the illegal sales of securities by a broker, public policy would prohibit enforcement of the indemnity agreement between the broker and the issuer. Premier Corp. v. Economic Research Analysts, Inc., 578 F.2d 551 (4th Cir. 1978).
Investor's Involvement in Constructing Offer Made to Him Did Not Bar Recovery. - Fact that investor in limited partnership was somehow involved in the construction of the terms of the offer made to him did not bar recovery in suit for recession of securities, violation of regulation requirements and fraud. Walker v. Montclaire Hous. Partners, 736 F. Supp. 1358 (M.D.N.C. 1990).
Evidence of Liability Sufficient. - Evidence that broker discussed realty partnership and various securities of his security firm employer in the same conversation with one investor, that he was an employee and representative of the firm that whole time, that he operated out of firm's office in his dealings with the investors, received mail there concerning the realty partnership and in at least one case transferred money for the realty investment out of an investor's firm account, that the transfer was recorded on the firm's computer system but was never questioned by its managers, who were responsible for monitoring all transactions and who admitted that broker required more supervision than any other employee in the firm's office, was more than sufficient to sustain verdict finding firm liable as a controlling person of broker. Hunt v. Miller, 908 F.2d 1210 (4th Cir. 1990).
No Error in Holding Firm Jointly and Severally Liable with Employee. - In action against securities firm and broker employee of firm for securities fraud, evidence was sufficient to establish that firm as controlling party and breached a duty owed investers by permitting employee to engage in fraudulent conduct that was within the scope of his apparent authority as an employee of the securities firm and of the same general nature as that authorized or incidental to the conduct authorized by the firm; therefore, it was not error to hold the firm jointly and severally liable with employee for attorneys' fees. Hunt v. Miller, 908 F.2d 1210 (4th Cir. 1990).
Proofing Prima Facie Case. - When a plaintiff successfully proves a prima facie case under G.S. 78A-56(a)(2) , the burden of proof shifts to the defendant to prove that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission. Therefore, if a plaintiff proves a prima facie case, a defendant will be liable unless he brings forward evidence to prove that his statement or omission was made with reasonable care as set out in G.S. 78A-56(a)(2) . Piazza v. Kirkbride, 246 N.C. App. 576, 785 S.E.2d 695 (2016), aff'd and modified in part, 372 N.C. 137 , 827 S.E.2d 479, 2019 N.C. LEXIS 379 (2019).
Failure to Establish Active Misstatement of Any Material Facts - Grant of summary judgment to the employing corporation and its stockholder on the former employee's G.S. 78A-56(b) claim was proper as the employee, who sold his stock in the corporation to the stockholder upon the employee's leaving the corporation because he had signed an agreement stating that only employees could own stock, did not establish that the corporation or the stockholder actively misstated any material facts regarding the sale of the stock. Sullivan v. Mebane Packaging Group, Inc., 158 N.C. App. 19, 581 S.E.2d 452 (2003), cert. denied, 357 N.C. 511 , 588 S.E.2d 473 (2003).
Amendment to Complaint Held Prejudicial. - When plaintiff's new counsel filed motion to amend plaintiff's complaint to include a cause of action under subsection (a)(2) almost two years after the filing of the original complaint and approximately 9 months prior to trial, the trial court denied plaintiff's motion on the basis that it would be unfairly prejudicial to the defendant. Freese v. Smith, 110 N.C. App. 28, 428 S.E.2d 841 (1993).
Failure to Give Instruction Regarding Controlling Firm's Culpable Participation Not Error. - In action by investors against securities firm and its employee for securities fraud, since it is only required of a controlling person that he maintain an adequate system of internal control in a diligent manner, jury instruction which contained this language was adequate to permit the jury to find that firm had failed to adequately supervise its employee; failure to give instruction regarding culpable participation was not error. Hunt v. Miller, 908 F.2d 1210 (4th Cir. 1990).
Acknowledgments Held Void. - To extent that acknowledgments signed by stock purchasers could be seen as releases of securities claims, they were void under subsection (1) of this section. Signature of waiver stating that purchasers received all necessary information, when they may not have, constituted anticipatory waiver of duty to disclose, and purchasers could not have known of any misrepresentation or omission at time of signing. Jadoff v. Gleason, 140 F.R.D. 330 (M.D.N.C. 1991).
Jury Question. - Where it was shown that plaintiffs had reason to know of their securities claims based on the alleged fraud in the financial projections and real estate appraisal from the beginning of their investment due to the cautionary language in a confidential offering memorandum, remaining securities claims had to be resolved by a jury. Andrews v. Fitzgerald, 823 F. Supp. 356 (M.D.N.C. 1993).
Motion to Dismiss Claims as Barred by This Section Denied. - Since the dates for the sale or contract for sale of securities could not be determined from the face of the complaint, plaintiffs' claims were not barred on their face by the North Carolina Securities Act's two-year statute of limitations, and defendant's motion to dismiss the North Carolina Securities Act claims as barred by that statute was denied. Liner v. DiCresce, 905 F. Supp. 280 (M.D.N.C. 1994).
Statute of limitations defense failed where count related back to the original complaint which was filed well within the two-year period of subsection (f). Simpson v. Specialty Retail Concepts, Inc., 908 F. Supp. 323 (M.D.N.C. 1995).
Summary Judgment Inappropriate. - When investors sued a limited liability company's managers and the company's managing limited liability company (LLC) for securities fraud, summary judgment was inappropriate as to claims under G.S. 78A-56(a)(2) because the managing LLC was an offeror of securities based on a manager's solicitation of investments, and fact issues existed as to alleged misrepresentations. Atkinson v. Lackey, - N.C. - , - S.E.2d - (Feb. 27, 2015).
Summary Judgment Appropriate. - Two managers of a limited liability company were not primarily liable for securities fraud under G.S. 78A-56(a)(2) because nothing showed the managers offered securities, as defined in G.S. 78A-2(8)(b) . Atkinson v. Lackey, - N.C. - , - S.E.2d - (Feb. 27, 2015).
Business court did not err in granting summary judgment in favor of sellers and a real estate company on purchasers' secondary liability claims because the purchasers failed to offer proof that either the sellers or the company provided material aid with the requisite actual knowledge under the North Carolina Securities Act; the sellers and company had no duty to disclose anything directly to the purchasers, and there was no proof they knew of the alleged misrepresentations a bidder made. NNN Durham Office Portfolio 1, LLC v. Highwoods Realty Ltd., 261 N.C. App. 185, 820 S.E.2d 322 (2018), review denied, 373 N.C. 59 , 832 S.E.2d 719 (2019).
Deceptive Practices Claim Dismissed. - Investor's deceptive practices claims, alleging limited liability company managers committed constructive fraud when persuading the investors to invest in and become members of a limited liability company, failed because (1) G.S. 75-1.1 did not apply to securities fraud claims, (2) the constructive fraud claim failed as a matter of law, and (3) the gravamen of the constructive fraud claim was securities fraud. Atkinson v. Lackey, - N.C. - , - S.E.2d - (Feb. 27, 2015).
Motion for New Trial Based on Inconsistent Verdict Denied. - Director of a corporation who was held liable to investors in the corporation, for selling securities by means of false and misleading statements of material fact, was not entitled to a new trial because the verdict was not inconsistent as the evidence justified a finding that the statements of the corporation's chief executive officer, taken in context and as a whole, were not materially false and misleading, while the same could not be said for the director's statements. Piazza v. Kirkbride, 372 N.C. 137 , 827 S.E.2d 479 (2019).
Applied in Umstead v. Durham Hosiery Mills, Inc., 578 F. Supp. 342 (M.D.N.C. 1984); Heath v. Craighill, Rendleman, Ingle & Blythe, 97 N.C. App. 236, 388 S.E.2d 178 (1990); Andrews v. Fitzgerald, 823 F. Supp. 356 (M.D.N.C. 1993).
Cited in Lindner v. Durham Hosiery Mills, Inc., 761 F.2d 162 (4th Cir. 1985); McGarity v. Craighill, Rendleman, Ingle & Blythe, 83 N.C. App. 106, 349 S.E.2d 311 (1986); Weft, Inc. v. G.C. Inv. Assocs., 630 F. Supp. 1138 (E.D.N.C. 1986); Simms Inv. Co. v. E.F. Hutton & Co., 688 F. Supp. 193 (M.D.N.C. 1988); Simpson v. Specialty Retail Concepts, Inc., 149 F.R.D. 94 (M.D.N.C. 1993); Tierney v. Garrard, 124 N.C. App. 415, 477 S.E.2d 73 (1996), cert. granted, 345 N.C. 760 , 485 S.E.2d 309 (1997), aff'd, 347 N.C. 258 , 490 S.E.2d 237 (1997); Jay Group, Ltd. v. Glasgow, 139 N.C. App. 595, 534 S.E.2d 233 (2000), cert. denied, 353 N.C. 265 , 546 S.E.2d 100 (2000).
§ 78A-57. Criminal penalties.
- Any person who willfully violates any provision of this Chapter except G.S. 78A-8, 78A-9, 78A-11, 78A-12, 78A-13, or 78A-14 is guilty of a Class I felony.
- Any person who willfully violates any rule or order under this Chapter is guilty of a Class I felony. No person may be imprisoned for the violation of any rule if the person proves that the person had no knowledge of the rule. It is an affirmative defense to a charge of violating an order under this Chapter that the person had no knowledge of the order.
- Any person who willfully violates G.S. 78A-8, 78A-11, 78A-13, or 78A-14 is guilty of a felony. If the losses caused by a single act or a series of related acts in a common scheme or plan are one hundred thousand dollars ($100,000) or more, the person is guilty of a Class C felony. If the losses caused by a single act or a series of related acts in a common scheme or plan are less than one hundred thousand dollars ($100,000), the person is guilty of a Class H felony.
- Any person who willfully violates G.S. 78A-9 knowing the statement made to be false or misleading in any material respect is guilty of a Class H felony. Any other willful violation of G.S. 78A-9 constitutes a Class 2 misdemeanor.
- Any person who willfully violates G.S. 78A-12 is guilty of a Class H felony.
- The Administrator may refer such evidence as is available concerning violations of this Chapter or of any rule or order hereunder to the proper district attorney, who may, with or without such a reference, institute the appropriate criminal proceedings under this Chapter. Upon receipt of a reference, the district attorney may request that a duly employed attorney of the Administrator prosecute or assist in the prosecution of the violation or violations on behalf of the State. Upon approval of the Administrator, the employee may be appointed a special prosecutor for the district attorney to prosecute or assist in the prosecution of the violations without receiving compensation from the district attorney. Such a special prosecutor shall have all the powers and duties prescribed by law for district attorneys and such other powers and duties as are lawfully delegated to the special prosecutor by the district attorney for violations of this Chapter.
- Nothing in this Chapter limits the power of the State to punish any person for any conduct which constitutes a crime by statute or at common law.
(1925, c. 190, s. 23; 1927, c. 149, s. 23; 1955, c. 436, s. 10; 1971, c. 572, s. 2; 1973, c. 47, s. 2; c. 1380; 1987, c. 849, s. 7; 1991, c. 456, s. 6; 2001-436, s. 12; 2003-413, s. 11.)
Legal Periodicals. - For article, "The Anti-Fraud Provisions of the North Carolina Securities Act," see 35 Campbell L. Rev. 209 (2013).
CASE NOTES
Corporate Officers and Agents May Be Held Criminally Liable Individually. - Any officers, directors, or agents of a corporation actively participating in a violation of the provisions of this section in the conduct of the company's business, or which such conduct they have actively directed, may be held criminally liable individually therefor. State v. Franks, 262 N.C. 94 , 136 S.E.2d 623 (1964).
Cited in State v. Clemmons, 111 N.C. App. 569, 433 S.E.2d 748 (1993).
§ 78A-58. Obstruction of investigation.
A person is guilty of a Class H felony if the person willfully does any of the following for the purpose of interfering with the performance of any audit, examination, or investigation by the Administrator under this Chapter:
- Makes or causes to be made to the Administrator or the Administrator's designated representative any false or misleading oral or written statement.
- Creates, causes to be made, or delivers any record, report, or document knowing that it is false or misleading in any material respect.
- Destroys or alters any record, report, or document.
- Conceals or secretes any record, report, or document.
§§ 78A-59 through 78A-62: Reserved for future codification purposes.
ARTICLE 8. Miscellaneous Provisions.
§ 78A-63. Scope of the Chapter; service of process.
- G.S. 78A-8, 78A-10, 78A-13, 78A-14, 78A-24, 78A-31, 78A-36(a), and 78A-56 apply to persons who sell or offer to sell when (i) an offer to sell is made in this State, or (ii) an offer to buy is made and accepted in this State.
- G.S. 78A-8, 78A-10, 78A-36(a) and 78A-56(b) apply to persons who buy or offer to buy when (i) an offer to buy is made in this State, or (ii) an offer to sell is made and accepted in this State.
- G.S. 78A-12 applies when any act instrumental to effecting prohibited conduct is done in this State.
- For the purpose of this section, an offer to sell or to buy is made in this State, whether or not either party is then present in this State, when the offer (i) originates from this State or (ii) is directed by the offeror to this State and received at the place to which it is directed (or at any post office in this State in the case of a mailed offer).
- For the purpose of this section, an offer to buy or to sell is accepted in this State when acceptance (i) is communicated to the offeror in this State and (ii) has not previously been communicated to the offeror, orally, or in writing, outside this State; and acceptance is communicated to the offeror in this State, whether or not either party is then present in this State when the offeree directs it to the offeror in this State reasonably believing the offeror to be in this State and it is received at the place to which it is directed (or at any post office in this State in the case of a mailed acceptance).
- An offer to sell or to buy is not made in this State when (i) the publisher circulates or there is circulated on his behalf in this State any bona fide newspaper or other publication of general, regular, and paid circulation which is not published in this State, or which is published in this State but has had more than two thirds of its circulation outside this State during the past 12 months, or (ii) a radio or television program originating outside this State is received in this State.
- Every applicant for registration under this Chapter and every issuer who proposes to offer a security in this State through any person acting on an agency basis in the common-law sense shall file with the Administrator, in such form as he by rule prescribes, an irrevocable consent appointing the Administrator or his successor in office to be his attorney to receive service of any lawful process in any noncriminal suit, action or proceeding against him or his successor, executor or administrator which arises under this Chapter or any rule or order hereunder after the consent has been filed, with the same force and validity as if served personally on the person filing the consent. A person who has filed such a consent in connection with a previous registration or notice filing need not file another. Service may be made by leaving a copy of the process in the office of the Administrator, but it is not effective unless (i) the plaintiff, who may be the Administrator in a suit, action, or proceeding instituted by him, forthwith sends notice of the service and a copy of the process by registered mail to the defendant or respondent at his address on file with the Administrator, and (ii) the plaintiff's affidavit of compliance with the subsection is filed in the case on or before the return day of the process, if any, or within such further time as the court allows.
- When any person, including any nonresident of this State, engages in conduct prohibited or made actionable by this Chapter or any rule or order hereunder, and he has not filed a consent to service of process under subsection (f) and personal jurisdiction over him cannot otherwise be obtained in this State, that conduct shall be considered equivalent to his appointment of the Administrator or his successor in office to be his attorney to receive service of any lawful process in any noncriminal suit, action, or proceeding against him or his successor executor or administrator which grows out of that conduct and which is brought under this Chapter or any rule or order hereunder with the same force and validity as if served on him personally. Service may be made by leaving a copy of the process in the office of the Administrator, and it is not effective unless (i) the plaintiff, who may be the Administrator in a suit, action, or proceeding instituted by him, forthwith sends notice of the service and a copy of the process by registered mail to the defendant or respondent at his last known address or takes other steps which are reasonably calculated to give actual notice, and (ii) the plaintiff 's affidavit of compliance with this subsection is filed in the case on or before the return day of the process, if any, or within such further time as the court allows.
- When process is served under this section, the court, or the Administrator in a proceeding before him, shall order such continuance as may be necessary to afford the defendant or respondent reasonable opportunity to defend.
- Interest charged by a broker or dealer registered under the Securities Exchange Act of 1934, as amended, or registered under this Chapter, as now or hereafter amended, on a debit balance in an account for a customer, shall be exempt from the provisions of Chapter 24 of the North Carolina General Statutes if such debit balance is payable at will without penalty and is secured by securities as defined in G.S. 25-8-102.
(1927, c. 149, s. 24; 1955, c. 436, s. 10; 1973, c. 1380; 1975, c. 144, s. 4; 1997-181, s. 27; 1997-419, ss. 12, 13; 2001-436, s. 13; 2003-413, ss. 13-15.)
Legal Periodicals. - For article, "The Anti-Fraud Provisions of the North Carolina Securities Act," see 35 Campbell L. Rev. 209 (2013).
CASE NOTES
The scope of G.S. 78A-8 applies only to those persons who sell or offer to sell a security. State v. Williams, 98 N.C. App. 274, 390 S.E.2d 746, cert. denied, 327 N.C. 144 , 394 S.E.2d 184 (1990).
Applied in Simms Inv. Co. v. E.F. Hutton & Co., 688 F. Supp. 193 (M.D.N.C. 1988).
Cited in Waterman v. Alta Verde Indus., Inc., 643 F. Supp. 797 (E.D.N.C. 1986).
§ 78A-64. Statutory policy.
This Chapter shall be so construed as to effectuate its general purpose to make uniform the law of those states which enact it and to coordinate the interpretation and administration of this Chapter with the related federal regulation.
§ 78A-65. Repeal and saving provisions.
- The Securities Law of the State of North Carolina, G.S. 78-1 through 78-25, is repealed except as saved in this section.
- Prior law exclusively governs all suits, actions, prosecution, or proceedings which are pending or may be initiated on the basis of facts or circumstances occurring before April 1, 1975, except that no civil suit or action may be maintained to enforce any liability under prior law unless brought within any period of limitation which applied when the cause of action accrued and in any event within two years after April 1, 1975.
- All effective registrations under prior law, all administrative orders relating to such registrations, and all conditions imposed upon such registrations remain in effect so long as they would have remained in effect if this Chapter had not been passed. They are considered to have been filed, entered, or imposed under this Chapter, but are governed by prior law.
- Prior law applies in respect to any offer or sale made within one year after the effective date of this Chapter pursuant to an offering begun in good faith before April 1, 1975, on the basis of an exemption available under prior law.
- Judicial review of all administrative orders as to which review proceedings have not been instituted by April 1, 1975, are governed by G.S. 78A-48, except that no review proceeding may be instituted unless the petition is filed within any period of limitation which applied to a review proceeding when the order was entered and in any event within 60 days after April 1, 1975.
CASE NOTES
Cited in Teague v. Bakker, 35 F.3d 978 (4th Cir. 1994).
§ 78A-66. Jurisdictional limitations.
Nothing in this Chapter affects the Viatical Settlements Act or the jurisdiction of the North Carolina Department of Insurance.
- Any security whose issuer and any predecessors have been in continuous operation for at least five years if
- Disclosures prior to payment of consideration. - On or before the date the viatical settlement purchaser remits consideration pursuant to the purchase agreement, the viatical settlement purchaser shall be provided the following written disclosures: