On Petitions for Review of an Order of the Securities and Exchange Commission
Before: Henderson, Randolph, and Garland, Circuit
The opinion of the court was delivered by: Randolph, Circuit Judge
As a general rule, issuers of securities must register their securities with the Securities and Exchange Commission before offering or selling them to the public. The Commission, finding that Gene C. Geiger and Charles F. Kirby improperly sold to the public unregistered securities, or participated in such a sale, sanctioned them for violating § 5 of the Securities Act, 15 U.S.C. § 77e(a) & (c).*fn1 In these petitions for judicial review, Geiger and Kirby claim the transactions were exempt from the registration requirement and that the sanctions the Commission imposed were improper.
In 1995, Ron Knittle and Mary Erickson were the controlling shareholders and, respectively, the president and CEO, and the secretary and treasurer, of Beneficial Capital Financial Services Corporation, then a shell corporation. That year they changed the corporation's name to Golden Eagle International, Inc. The newly-named company intended to acquire, develop, and operate mines. In three transactions, nearly 3 million unregistered shares of Golden Eagle ended up in the hands of the investing public.
The transactions consisted of three blocks of shares. The first two blocks, totaling 633,000 shares, were nominally held by Kimi Hunsaker. Knittle and Erickson actually controlled these shares. Hunsaker, a clerical employee of Golden Eagle, never paid for the shares and, at least initially, did not know they were in her name. The certificate representing 500,000 of the Hunsaker shares bore a restrictive legend stating that the shares could not be sold without registration. The certificate representing the remaining 133,000 Hunsaker shares also once bore a restrictive legend, but a new, unrestricted certificate had been issued when Knittle and Erickson acquired the company.
The third block consisted of 2.3 million shares held by David Hills, a former Golden Eagle executive. Hills' severance agreement required him to return 2.1 million of these shares to Golden Eagle once the company satisfied certain obligations. The certificates representing Hills' shares bore restrictive legends.
A. The Kirby–Hunsaker Transaction
In June 1995, Knittle approached petitioner Gene C. Geiger, then a salesman at the Colorado-based brokerage firm of Spencer Edwards, Inc. He asked Geiger to find a buyer for the 133,000 Hunsaker shares whose certificate did not have a restrictive legend. Geiger offered the shares to petitioner Charles F. Kirby, the head trader at Spencer Edwards. Kirby agreed to buy the shares for $25,000 for the account of CKC Partners, a partnership jointly owned by Kirby and a trust he administered on behalf of his children. When Kirby sought to pay for the shares, Geiger told him he was "unclear as to who the seller was or who the check was to be made out to." Kirby therefore left the payee's line on his check blank. Geiger later filled in the line, making the check payable to Erickson. In short order, Kirby resold the shares to the public for $56,000.
That the shares Kirby sold were unregistered did not necessarily render the transaction unlawful. The Securities Act focuses primarily on initial offerings, rather than on secondary transactions among members of the public. See 1 THOMAS LEE HAZEN, THE LAW OF SECURITIES REGULATION § 1.1 (4th ed. 2002); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 752 (1975). Section 4(1) of the Act thus exempts from registration "transactions by any person other than an issuer, underwriter, or dealer." 15 U.S.C. § 77d(1). The exemption did not apply, the Commission decided, because Kirby was an "underwriter." Kirby had the burden of proving otherwise. SEC v. Ralston Purina, 346 U.S. 119, 126 (1953).
Section 2(11) of the Act defines "underwriter" as "any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates . . . . in any such undertaking[.]" 15 U.S.C. § 77b(11). The term "issuer" includes not only the issuing company, but also "any person directly or indirectly controlling or controlled by the issuer." Id. The statute does not define "distribution."
Kirby purchased the shares from a "person . . . . controlling . . . . the issuer," and he intended to sell those shares to the public, as he did. His argument is that he was not an "underwriter" excluded from the § 4(1) exemption because his sale was not a "distribution" within the meaning of § 2(11). The sale was not a "distribution," he claims, because he sold only 0.5 percent of Golden Eagle's more than 12 million shares. According to Kirby, a sale qualifies as a "distribution" only if it involves a "substantial" or "significant" percentage of the issuer's outstanding shares.
Registration of securities protects "investors by promoting full disclosure of information thought necessary to informed investment decisions." Ralston Purina, 346 U.S. at 124. To the purchaser of securities, the potential loss – and the need for disclosure – is the same regardless whether the securities represent one percent, five percent, or ten percent of the outstanding shares. The applicability of the § 4(1) exemption turns not on the percentage of shares involved, but "on whether the particular class of persons affected need the protection of the Act." Id. at 125. In Ralston Purina, the Supreme Court relied on this reasoning to reject the notion that the term "public offering," as used in another exemption to the registration requirement, 15 U.S.C. § 77d(2), contemplated any particular quantity of stock. The same reasoning applies to "distributions" under § 2(11). Every court to consider this question has ...