Shorey v. Arizona Corp. Commission, 238 Ariz. 253

Background

Westcap Energy, an Arizona corporation, and its CEO David Shorey contracted with unregistered foreign intermediaries (Litchfield and Intuition) to solicit investors for a $1,000,000 offering of convertible preferred stock; intermediaries were to receive ~72.5% of proceeds as commissions/finders’ fees.
Offer materials (subscription agreement and private placement memorandum) reserved the right to pay commissions/finders’ fees but did not disclose the 72.5% figure; the PPM listed only 10% for "offering expenses."
Intuition solicited European investors under Regulation S; investors executed documents and wired funds to a Tucson, Arizona bank account; Shorey forwarded funds to intermediaries per agreements.
The Arizona Corporation Commission found Westcap and Shorey sold unregistered securities within or from Arizona, acted as unregistered dealers/salesmen, and made material misrepresentations/omissions in violation of A.R.S. §§ 44-1841, -1842, and -1991; ordered rescission offers and penalties.
The superior court affirmed; appellants appealed to the Arizona Court of Appeals challenging statutory application, federal preemption (Regulation S), and a Commerce Clause violation.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Applicability of ASA (were sales "within or from" Arizona and by sellers?)	Sales were made overseas by Intuition; not within/from Arizona; Shorey/Westcap didn’t personally sell.	Westcap used Arizona as its base: incorporated/operated in AZ, documents sent from AZ, funds wired to AZ, transactions closed by Shorey — sales occurred within/from Arizona.	Court held sales were made within/from Arizona by Westcap/Shorey; ASA §§ 44-1841 and -1842 apply.
Fraud/Materiality under A.R.S. § 44-1991	The commission amounts were not material; no proof of investor harm or what commissions are typical overseas.	Withholding that 72.5% figure and misrepresenting use of proceeds was objectively material and misleading to a reasonable investor.	Court held the 72.5% commissions and misleading PPM disclosures were material omissions/misrepresentations in violation of § 44-1991.
Federal preemption (Regulation S bars state regulation)	Regulation S exempted the offshore offering from federal registration/disclosure and thus preempts state law here.	Regulation S only exempts federal registration; Preliminary Note 4 preserves state law compliance; Congress saved state blue-sky laws.	Court held no express, field, or conflict preemption; ASA provisions are not preempted by federal law (Regulation S does not displace state securities laws).
Commerce Clause challenge	Applying Arizona law to an offering to foreign investors impermissibly burdens interstate/foreign commerce.	Arizona has legitimate local interests (protecting residents, business reputation, policing fraud); statute applies even‑handedly and any burden is incidental and justified.	Court held no unconstitutional burden: anti-fraud statute poses no impermissible burden; registration rules’ incidental burden is outweighed by Arizona’s interests.

Key Cases Cited

Ariz. Corp. Comm’n v. Media Prods., Inc., 158 Ariz. 463 (App. 1988) (analyzing when an offering is made within or from Arizona and Commerce Clause limits)
Hirsch v. Ariz. Corp. Comm’n, 237 Ariz. 456 (App. 2015) (standard for viewing facts in support of agency findings)
Edgar v. MITE Corp., 457 U.S. 624 (1982) (Congressional preservation of state blue-sky laws)
N. Star Int’l v. Ariz. Corp. Comm’n, 720 F.2d 578 (9th Cir. 1983) (state review of offering merits does not conflict with federal scheme)
SEC v. Levine, 671 F. Supp. 2d 14 (D.D.C. 2009) (large undisclosed commission percentages are material to investors)
CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69 (1987) (standards for conflict preemption)
Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) (balancing test for incidental burdens on commerce)
State ex rel. Corbin v. Goodrich, 151 Ariz. 118 (App. 1986) (state interest in policing Arizona-based securities operations)