Burden Of Proving An Exemption

Ilmington Reach Advisers has its only office in State N. Over the past twelve months it has advised exactly three individual retail clients who reside in State P, has no office, telephone listing or advertising in State P, and satisfies the de minimis standard there. Its compliance officer asks what the firm must file with the State P Administrator to claim the exemption. The correct answer is:

1. A.A notice filing consisting of the firm's Form ADV and a consent to service of process.Incorrect. Notice filings are the mechanism for federal covered advisers, not for state-exempt advisers.
2. B.An application for exemption, together with the state's standard filing fee.Incorrect. The Act requires no exemption application here.
3. C.A written request for a no-action determination from the State P Administrator.Incorrect. No determination is needed for a self-executing exemption.
4. D.Nothing need be filed, because the exemption is self-executing; the firm should nevertheless document that its conditions were met.Correct. No application, notice filing or fee is required to rely on the de minimis exemption.

Why: The de minimis exemption is self-executing. A person who satisfies its conditions is simply not required to register, and the Act does not condition the exemption on an application, a notice filing or a fee. What the firm should do is keep records establishing that the conditions were met, because the burden of proving an exemption lies with the person claiming it.

The State L Administrator brings a proceeding alleging that Quillard Advisory transacted business as an unregistered investment adviser in State L. Quillard answers that it had no place of business in the state and that its only State L clients were institutional. The Administrator's staff has produced no evidence about Quillard's client list. At the hearing, the question of who must establish the facts supporting the claimed exclusion is resolved as follows:

1. A.Quillard must prove the facts establishing the claimed exclusion, because the burden of proving an exemption or exception rests on the person claiming it.Correct. The Act places that burden on the claimant.
2. B.The burden shifts to the Administrator once Quillard asserts the exclusion in its answer.Incorrect. Asserting an exclusion does not shift the burden away from the claimant.
3. C.The Administrator must prove that no exclusion was available before any sanction may be imposed.Incorrect. The Administrator need not disprove exclusions.
4. D.Neither party bears a burden, because exclusions are determined by the Administrator as a matter of discretion.Incorrect. It is an evidentiary question with an allocated burden.

Why: Under the Uniform Securities Act the burden of proving an exemption, or an exception from a definition, rests on the person claiming it. Quillard, not the Administrator, must produce the evidence that it had no place of business and that every State L client was on the statutory list.

Norwood Fabrication sold unregistered stock in an offering that failed a condition of the exemption it relied on. A purchaser whose investment has lost value sues under Section 12(a)(1). What must that purchaser prove about the issuer state of mind?

1. A.That the issuer acted with scienter when it failed to register the offering.Wrong. Scienter is an element of a Rule 10b-5 claim, not of a Section 5 claim.
2. B.That the offering memorandum contained a material misstatement on which he relied.Wrong. That is a Section 12(a)(2) or Rule 10b-5 theory, and Section 12(a)(1) requires no misstatement.
3. C.That the issuer knew at the time of sale that this purchaser was not accredited.Wrong. The purchaser status may defeat the exemption, but it is not an element the plaintiff has to prove.
4. D.Nothing about state of mind; the Section 5 violation itself supports rescission.Correct. Liability turns on the unregistered non-exempt sale, not on the seller intent.

Why: Section 12(a)(1) creates liability for offering or selling a security in violation of Section 5. As to the seller state of mind it is effectively strict: the plaintiff shows that a non-exempt security was sold without an effective registration statement and that he bought it. Scienter, reliance and even a misstatement are not elements, and the remedy is rescission, meaning return of the consideration with interest less income received. The seller escape is to establish an available exemption, and the burden of proving the exemption sits on the person claiming it.

The Administrator brings an action alleging that Sable Ridge Foundation sold unregistered securities. The Foundation responds that its bonds were exempt as securities of a nonprofit organization. At the hearing, neither side introduces complete documentation of the Foundation's organizational status. Under the Uniform Securities Act, this evidentiary gap means:

1. A.The Administrator loses, because the Administrator bears the burden of disproving any exemption a respondent assertsThis reverses the allocation. The Act places the burden on the person claiming the exemption.
2. B.The exemption is presumed valid, because nonprofit issuers are exempt by statute without further proofThe statutory category exists, but qualifying for it is a factual matter the claimant must establish.
3. C.The Foundation loses on the exemption issue, because the burden of proving an exemption rests on the person claiming itCorrect. An incomplete record defeats the party who bore the burden, which is the party asserting the exemption.
4. D.The hearing must be continued until the Administrator subpoenas the Foundation's organizational recordsThe Administrator has subpoena power but no obligation to develop the respondent's exemption defense.

Why: The burden of proving an exemption or an exception from a definition rests on the person claiming it. Where the record is incomplete, the party asserting the exemption loses, because it never carried its burden.