PRESENT: Hassell, C.J., Lacy, Koontz, Kinser, and Lemons, JJ., 

and Carrico and Stephenson, S.JJ. 

DAVID R. TANNER, JAMES C. PERRY, 

AND BRIAN W. KREIDER 

v. Record Nos. 020938, 020939, OPINION BY 

 and 020940 SENIOR JUSTICE ROSCOE B. STEPHENSON, JR.

 June 6, 2003 

STATE CORPORATION COMMISSION 

UPON REHEARING FROM THE STATE CORPORATION COMMISSION 

 On January 10, 2003, we rendered an opinion in these 

consolidated appeals in which we determined whether the State 

Corporation Commission (the Commission) erred in finding that 

David R. Tanner, James C. Perry, and Brian W. Kreider violated 

certain sections of the Virginia Securities Act, Code § 13.1-501 

et seq. (the Act). We affirmed, in part, and reversed, in part, 

the Commission's judgments and remanded the case to the 

Commission for further consideration of penalties. Tanner v. 

State Corporation Commission, 265 Va. 148, 574 S.E.2d 525 

(2003). 

 Thereafter, the Commission, pursuant to Code § 8.01-675.2 

and Rule 5:39, petitioned this Court for a rehearing to 

reconsider and withdraw the portions of the opinion that 

reversed its judgments. By order entered February 28, 2003, we 

granted the petition as it relates to Parts V and VI of the 

opinion. 

I 
 In Part V of the opinion in Tanner, we considered whether 

certain instruments entitled "Accounts Receivable Purchase and 

Sales Agreement" (the Agreements) issued by Kennsington Holding 

Corporation (Kennsington) and sold by Tanner, Perry, and Kreider 

are investment contracts as defined in Securities and Exchange 

Com'n v. W.J. Howey Co., 328 U.S. 293 (1946), and, therefore, 

securities subject to the registration requirements of the Act. 

The Commission contends that, in deciding that the Agreements 

are not securities, we based our decision on a mistake of fact. 

 The Act defines a "security" to include an "investment 

contract." Code § 13.1-501. In W.J. Howey Co., the Supreme 

Court ruled that "an investment contract for purposes of the 

Securities Act [of 1933] means a contract, transaction or scheme 

whereby a person invests his money in a common enterprise and is 

led to expect profits solely from the efforts of the promoter or 

third party." 328 U.S. at 298-99. 

 In Tanner, we rejected the Commission's contention that the 

purchasers of the Agreements were led to expect profits solely 

from the efforts of others. 265 Va. at 155, 574 S.E.2d at 529. 

We noted that, under the terms of the Agreements, Kennsington 

"sells, sets over and assigns" to the purchasers certain 

accounts receivable; that the purchasers "shall be the absolute 

owner[s] of the accounts;" that Kennsington agreed to deliver to 

the purchasers "a detailed listing of all of the accounts [and] 

2
the work folder for each account, as available, containing all 

supporting documents;" and that the purchasers have "the right 

to assign the collection of the Accounts Receivable . . . to the 

Collection Company of their choice." Id. at 154, 574 S.E.2d at 

528. 

 With respect to the operation of the Agreements, we said 

the following: 

 The sole evidence relating to the operation of 

the Agreements was the testimony of Harold J. Bailey, 

who had purchased accounts receivable owed to an 

entity called "The Legal Society." Bailey received a 

UCC-1 financing statement related to his purchase that 

showed the legal name of the debtor. He was furnished 

an information packet, including an explanation of 

"how the entire system [of accounts receivable 

financing] works." Although Bailey, by a separate 

agreement, engaged Summit Financial Services to be his 

collection agent, nothing in the record suggests that 

Bailey was not free to proceed directly against The 

Legal Society to collect the accounts receivable. 

Id. at 155, 574 S.E.2d at 528-29. 

 Upon rehearing, the Commission contends that we mistakenly 

"relied on the fact that . . . Bailey had received a UCC-1 

financing statement related to his investment." The Commission 

so contends notwithstanding that Bailey testified that he "got a 

financing statement." Further, the record contains the 

information packet furnished to Bailey informing him that, 

"[o]nce the receivables have been verified, Kennsington then 

files a UCC-1 on them in the name of the client." (Emphasis 

added.) 

3
 Nonetheless, the Commission, in an attempt to vitiate this 

evidence in the record, attached to its petition for rehearing a 

copy of an alleged letter from Kennsington to Bailey.1 This 

document is not a part of the record, and we will not consider 

it. Upon rehearing, as with original appeals, we consider and 

make decisions based upon the record that has been brought to 

us. Accordingly, we reaffirm our decision in Part V of the 

opinion in Tanner. 

II 

 In Part VI of the opinion in Tanner, we considered whether 

certain promissory notes, which were issued pursuant to Rule 504 

Regulation D, are exempt from registration under the Act. The 

Commission contends that our ruling that the notes are exempt 

from registration was based upon a mistake of law. We agree. 

 We erred in concluding that Rule 504 Regulation D was 

issued under the authority of § 4(2) of the Securities Act of 

1933 (the Securities Act), 15 U.S.C. § 77d(2) (2000). Based 

upon this erroneous conclusion, we held that the notes were 

exempt from the Act's registration requirements pursuant to 

§ 18(b)(4) of the Securities Act, 15 U.S.C. § 77r(b)(4). 

 1

 In this letter, Kennsington purportedly informed Bailey 

that "a UCC-1 has been filed in the name of Kennsington." 

Therefore, according to the Commission, "the investors had to 

depend entirely upon Kennsington" to collect on their 

investments. 

4
 We are persuaded now that Rule 504 Regulation D was issued 

under the authority of § 3(b) of the Securities Act, 15 U.S.C. 

§ 77c(b). 2 Indeed, the Rule itself references § 3(b), and the 

adopting release for Regulation D states that Rule 504 "provides 

an exemption under section 3(b) of the Securities Act." 

Securities Act Release No. 33-6389, 47 Fed. Reg. 11251 (March 

16, 1982). Further, we are persuaded that § 18(b)(4) of the 

Securities Act does not preempt state law with respect to 

transactions exempt from registration pursuant to rules issued 

under § 3(b). In other words, securities issued under § 3(b) 

are not "covered securities" and, therefore, must be registered 

under Code § 13.1-507. 3

III 

 For the reasons stated above, Part VI of the opinion in 

Tanner will be modified. The remainder of the opinion will be 

reaffirmed. 

Reaffirmed, as modified. 

 2

 Although the Commission made the argument, in Tanner, that 

securities issued under Rule 504 are not "covered securities," 

it did not cite § 3(b) of the Securities Act as authority to 

support its argument until it filed its petition for rehearing. 

3

 The appellants contend that, even if the notes should have 

been registered, they should not be held accountable due to the 

complexity of the issue. While we agree that the issue is 

complex, especially to a lay person, our function is limited to 

correctly construing the applicable statutes, rules, and 

regulations. It well may be, however, that, when the Commission 

5
 

reconsiders penalties on remand, it will take into account the 

appellants' contention. 

6