Opinion ID: 1133329
Heading Depth: 1
Heading Rank: 8

Heading: WHETHER THE LOWER COURT ERRED IN APPLYING GUYNN v. SHULTERS TO A SECURITIES MATTER INSTEAD OF THE MISSISSIPPI SECURITIES ACT.

Text: ¶ 12. The question to be answered is whether the Mississippi Blue Sky Laws applies to organizers of a corporation who, prior to the incorporation of the business, agree to subscribe to stock and later organize and bring the corporation into being. Few cases have arisen in which it has been determined whether certain security transactions are exempt under statutory provisions of the Mississippi Securities Act. This question is largely addressed by statutes of the various states. ¶ 13. The appellants assert that the trial court erred in its application of the law when it relied on Guynn v. Shulters, 223 Miss. 232, 78 So.2d 114 (1955). Guynn held that preincorporation stock certificates did not have to be registered if they were sold to the incorporators of a to be formed corporation. Appellants argue that the Mississippi Securities Act of 1981 should have been applied and that such law imposes liability on one who sells preincorporation stock that is not registered with the Secretary of State or otherwise exempted from registration under Article 3 of the statute. ¶ 14. The appellants proceed on the theory that Guynn predates the current Blue Sky statutes, and thus the case has no application. Appellants' main contention is that the Mississippi Code of 1942 has been repealed or superceded by the Mississippi Securities Act of 1981, and thus Guynn contradicts the current securities regulations. Appellants continue this argument by inferring the legislative intent is to require the registration of preincorporation stock. Due to the fact the definition of stock in the Mississippi Code of 1942 did not include preorganization subscriptions nor a means for its registration, the appellants contend the wrong law was applied. ¶ 15. However, the appellees note that the Court addressed this concern in Guynn by stating that other jurisdictions have carved an exception to the registration requirements by quoting the Kentucky Supreme Court decision in Gannon v. Grayson Water Co ., as follows: Though the act provides that `security' shall include `preorganizaton subscriptions'; it is at once apparent that, when subscriptions are taken prior to the filing of articles of incorporation, no method is provided for the registration of such subscriptions. 78 So.2d at 119 (quoting Gannon v. Grayson Water Co., 254 Ky. 251, 71 S.W.2d 433 (1934)). Additionally, the court quoted 14 Fletcher, Cyclopedia Corporations, § 6747, at 192, Subscriptions to stock are to be distinguished from sales of stock by a corporation. 78 So.2d at 119. The court went on to say, But in other states the statute does not apply to a subscription to stock made before the corporation is created, or at least not to subscriptions by one interested in the promotion of the corporation. 78 So.2d at 119. ¶ 16. The Court in Guynn, as well as the chancellor in the case at hand, homed in on the primary issue which was not whether the code definition was inclusive but whether the Mississippi Securities Act afforded incorporators of preincorporation stocks protection. ¶ 17. Guynn held preorganization stock subscribers, who later procured a charter, organized the corporation, and attended stockholders' meetings, had no right of action against the person who induced them to purchase stock where there was a failure of the corporation to comply with Blue Sky laws. Id. ¶ 18. The appellees contend Guynn is the controlling case in this matter. They argue the appellants are incorporators and as such have no standing to sue for failure to register the stock under the Securities Act. Blue Sky laws are to protect the weak, uninformed investor. ¶ 19. In determining this issue today, the same inquiry should be made, the intention and the purpose of the legislature in enacting the Blue Sky laws. State legislative bodies have sought to protect the potential investor from becoming the prey of promoters of worthless securities. John C. Williams, Annotation,  What Constitutes Public or Private Offering Within Meaning of State Securities Regulation, 84 A.L.R.3d 1009, 1012 (1978). Thus, the laws seeking to afford protection against these schemes were termed Blue Sky Law. Id. These promoters were said to have designed speculative schemes which had no more basis than so many feet of blue sky. Id. An important area regulated by state Blue Sky Laws is the registration of securities. Id. By requiring that securities offered to the general public for sale be registered, states have sought to insure that the securities so offered are not part of a fraudulent enterprise that may lead the investor into a financial loss. Id. It is the general public which benefits from protection afforded by these laws; it is the public offering of these securities that is the subject of regulation. Id. Therefore, Blue Sky Laws are not applicable to offerings to insiders, those persons who can fend for themselves and who are informed and sophisticated members of the general public. Id. ¶ 20. The Guynn Court applied these concepts to the following facts. Owners of a small chicken business met and discussed the desirability of purchasing stock and organizing their business with some potential investors. 78 So.2d at 117. Inspections were made by the investors and stock purchased. Id. A meeting was held where the investors obligated themselves to subscribe to a number of shares to be created with a capitol stock of $25,000. Id. It was decided to incorporate and to proceed to procure the charter. Id. ¶ 21. At the first meeting of the stockholders, a committee was appointed to draft bylaws and provisions made for four additional directors to be elected. Id. at 118. Subscribers paid for their stock and certificates were issued. Id. The business began losing money when a disease infected the chickens killing thousands. Id. The business continued to lose money until the plaintiffs filed an action. Id. at 119. The Court ruled the law was not intended to apply to such a situation. Id. at 120. This was not a case of engaging in the sale of stock of an existing corporation. Id. All agreed to take stock for the purpose of forming the corporation. Id. ¶ 22. The Court elaborated by saying: Men in all parts of this State get together, in varying numbers, and discuss the prospects of successful operation of a corporation they propose to form and the advantage to them of investing in its stock if and when it is created .... they agree to subscribe for stock in the future corporation. Later the charter is obtained and the corporation created and organized by these very subscribers and the stock is issued. Either from mismanagement, or lack of demand for its output, or misfortune ..., the corporate business is not a success. Id. The Court then asked, Can one subscriber recover from a fellow subscriber the price he pays for his stock simply because the prospective corporation and the enthusiastic subscriber have not complied with the requirements of the Blue Sky Laws? Id. The court answered no. Id. ¶ 23. The facts presented in the record of this case at hand are very much analogous to Guynn. The appellants associated themselves together to form a corporation. They were involved in the initial start-up of the business and when the business started experiencing problems, the appellants took control. Additional funds were invested to insure the business's success. Nevertheless, the business failed, and the appellants now seek to rescind their investment. The appellants contend the signing of the articles of incorporation was a mere formality. The appellees state convincingly, not a single appellant presented evidence to show that he was misled, or deceived. Even withstanding this argument, this one factor would not exclude the appellants from being associated as an insider to the corporation. ¶ 24. In Durham v. Firestone Tire & Rubber Co., 47 Ariz. 280, 55 P.2d 648, 650-51 (1936), it was held all persons who before the formal organization of the corporation had aided and assisted in or advised and encouraged its organization with the definite intention and expectation that they should become stockholders are not subjected to the Arizona Blue Sky Law. In Ayers v. Wolfinbarger, 491 F.2d 8 (5th Cir.1974), the court stated the acquisition of the original issue of stock was nothing more than organizational stock. The sale of stock to the promoters was a private offering and, therefore, exempt from the registration requirements of the Federal Securities Act. Id. at 16. ¶ 25. In S.E.C. v. Ralston Purina Co., 346 U.S. 119, 125, 73 S.Ct. 981, 97 L.Ed. 1494, 1498-99 (1953), the Court held the applicability of the registration requirement in the federal Securities Act should turn on whether the particular class of persons affected need the protection of the Act. As this Court held in Guynn and the chancellor also ruled here, the appellants did not need the protection of the Mississippi Securities Act nor was it the statute's intent to afford this group protection. Guynn, at 120. ¶ 26. In summary, considering the clear purpose of the Act is to protect the general public, the trial court found the appellants were insiders. Appellants were appraised of all material data, and they had access to information. There was a limited number of subscribers, having a privileged relationship with the corporation. Their present knowledge, involvement in forming the corporation, and ability to acquire information would not afford them protection under the Act. Guynn is not overruled. ¶ 27. Contrary to the appellants' argument, this decision does not allow sellers to avoid compliance with the Mississippi Securities Act. This ruling recognizes the purpose and intent of the legislature which is to protect the public and not insiders. Thus, the Mississippi Securities Act did not apply to this issue before this Court.