In March of this year, Marvin Richards, an Arizona resident, was found in violation of the Securities Act of Arizona, A.R.S. § 44-1801 et seq, by offering to sell securities that were not registered with the Arizona Corporation Commission. In fact, Mr. Richards himself was not registered with the state as a securities dealer or salesman.
From August 2019 to October 2019, Mr. Richards used the website Craigslist.com to advertise the opportunity to purchase a passive membership interest in his real estate development companies. The stated purpose of the proposed investment was constructing and flipping houses, using investment money to fund the construction, purchase and restoration of the properties. Mr. Richards claimed that this strategy would provide investors 20% returns.
In August 2019, Mr. Richards met with an undercover investigator from the Securities Division of the Arizona Corporation Commission and offered to sell the aforementioned investment opportunity to the investigator. Mr. Richards falsely represented the investment as essentially risk free, failed to disclose that the houses pictured on his website were not completed development projects, and failed to disclose that he owed hundreds of thousands of dollars on the property he would develop with investor money.
So how does Arizona law come into play and what steps need to be taken by individuals seeking investors for real estate projects? Pursuant to A.R.S. § 44-1841, it is unlawful to sell or offer for sale within or from this state any securities unless the securities have been registered. Because Mr. Richards offered to sell securities that were neither registered nor exempt from registration, he was found to have violated this statute.
Pursuant to A.R.S. § 44-1842, it is unlawful for any dealer to sell or purchase or offer to sell or buy any securities within or from this state unless the dealer or salesman is registered. Mr. Richards violated this statute because he was neither registered as a dealer or salesman nor exempt from registration.
Finally, pursuant to A.R.S. § 44-199, it is unlawful for a person in connection with a transaction involving an offer to sell or buy securities within or from this state to: (i) employ any device or scheme to defraud; (ii) make any untrue statement of material fact or omit to state any material fact; and (iii) engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit. By omitting material facts necessary in order to make statements made not misleading in connection with his offer to sell securities, Mr. Richards was also found to have violated A.R.S. § 44-1991.
Based on his actions, Mr. Richards agreed via Consent Order to permanently cease and desist from violating the Securities Act and pay a $4,000 administrative penalty.
Although real estate investments often prove profitable, Mr. Richards’ story serves as a reminder that investors seeking to raise capital for real estate investments must carefully comply with the Securities Act of Arizona, and ensure that all registration requirements have been met.
Scott M. Drucker, Esq., a licensed Arizona attorney, is General Counsel & Assistant CEO for the Arizona REALTORS® serving as the primary legal advisor to the association. This article is of a general nature and reflects only the opinions of the author at the time it was drafted. It is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.