Margrave Celmins, P.C. Quarterly Newsletter

     The Conference Room  |  August 2015 Edition

Grand Canyon Monsoon

Monsoon season has not been kind in equal measure to all parts of the valley, so keep practicing your rain dance!

We have a lot of photos of firm activities this month. Check out our furry visitors for Take Your Dog to Work Day, as well as news items on Lat Celmins, Chris Lonn and Rick DePonte. And be sure to read the article on the definition of a security by Chris Lonn.

We’ll soon be adding another blog area to our website: Securities Litigation and Arbitration. Christopher Lonn practices in this area, and he will add topical content under this heading from time to time. Please continue to check out our website at where we update our “News/Blog” information regularly, and a click on that tab will give you a choice of Articles, Blog, News and Newsletters.  All are by most recent date entry.

Blogs are also broken down by practice for your convenience: Business & Commercial Law; Probate, Estate Planning & Guardianship; Litigation; Personal Injury; Real Estate.  And look for our newest addition, Securities Litigation & Arbitration, soon.

Also, keep an eye out for announcements about forthcoming concert events: there are some big ones coming before the end of the year!  Meanwhile, enjoy our latest newsletter and the continued monsoon weather.
Patty Copeland, Editor

                                                    Take Your Dog to Work Day
We at Margrave Celmins have plenty of canine family members that faithfully wait for us at home. No matter how tough our day at work, we know we can expect a wagging tail, a lick on the face and plenty of affection once home. They are Gracie, Bazil, Tommy, Jasmine, Samantha, Cobie, Lily, Max, Kaya, Roxie, Casey, Greta, Dingo, Shotzie, Cooper and Kal. We had almost all of the above at our office on Take Your Dog to Work Day on June 26th. Unfortunately, we did not get a photo of all the dogs together, but here is a sample of our furry friends: (1) hanging out and (2) corralled in the conference room.

Our attorneys Lat Celmins and Chris Lonn played in the Scottsdale Bar Association 33rd Annual Spring Scramble at the Champions Course at the TPC Scottsdale.They played with clients of Chris, Steve Schmenk and John Glatz. The Margrave Celmins team tied for third place in the event.

Rick Deponte is involved with the Phoenix Camelback Rotary Club. Recently they held their annual fundraiser, Boots & Saddles, at The Ritz Carlton in Phoenix with everyone dressed in cowboy/cowgirl attire. There was a silent auction, a live auction, a raffle, a meal and live music. Although final numbers are not in, it is believed they raised approximately $80,000. Beneficiaries of these funds include Arizona Burn Foundation, Gift of Life, St. Mary’s Food Bank and St. Vincent DePaul. Rick is on the board of Gift of Life where they raise money for and arrange heart surgeries for children at a reduced price. So far, 303 heart surgeries have taken place.

                            WHAT IS A "SECURITY" AND HOW DOES IT AFFECT ME?

You may be thinking to yourself: I know what a “security” is because I have an investment account full of stocks, bonds and mutual funds. If you thought that you are, of course, correct. But, a “security” is both obvious and mysterious under Arizona and Federal law. The purpose of this article is to generally discuss the rudiments of what a “security” is and to briefly caution you on how this legal concept can impact your business or soon to-be formed business.  

For purposes of this article, I will spare you the complete statutory definition of what is a “security.” For those of you who are bold enough to seek this out on your own, you can find it in the Arizona Securities Act (the “Act”), A.R.S. §44-1801(26). The Act’s definition of a “security” is substantially similar to the definition of securities in both the Securities Act of 1933 and the Securities Exchange Act of 1934.  Arizona courts often look to the federal courts for guidance in interpreting the definition of a “security.” 

The statutory definition in the Act spells out a laundry-list of legal instruments that constitute a “security.” The single most important instrument to focus on is the “investment contract” as it is included in the definition in the Arizona Act, 1933 Act and the 1934 Act.  The “investment contract,” as it turns out, has generated some of the most significant securities cases before the U.S. Supreme Court and in the highest courts of each state. In SEC v. W.J. Howey Co. (1946), the U.S. Supreme Court developed a test to determine whether an investment contract exists. Under the Howey test, an investment contract is (1) an investment of money, (2) in a common enterprise, (3) with an expectation of earning a profit and (4) solely through the efforts of others. 

The Howey test (of course) spawned a lot of litigation to establish the contours of what an investment contract is and what it is not. The most litigated prong of the test is the fourth prong. In Arizona, the fourth prong has been modified to mean the “significant efforts” of others. This modification to the “efforts of others” prong has the effect of bringing more activity within the scope of an investment contract. Many pages of discussion could be devoted to the fourth prong alone, but suffice it to say that if you are an active participant in a business in which you also invested money, then the “efforts of others” prong is usually not satisfied. 

You might now be asking, “What does this mean for me?” The answer is that many individuals form partnerships and limited liability companies and give little to no thought about whether they are creating a “security” in the form of an investment contract.  It is unlawful in Arizona to sell unregistered securities or to sell a “security” without being a properly licensed dealer or salesperson. Violating these particular statutes can give rise to civil and felony criminal liability. This is one of the many reasons to consult with legal counsel when you commence a business or raise capital of any kind. 

Some common areas of legal entanglement can arise when individuals form various partnership and joint-venture interests. How those relationships are structured and set up can mean the difference between the securities laws coming into play or not coming into play. The same holds true with the ever-popular limited liability company (“LLC”).  This is a hybrid business entity designed to offer its owners (members) the limited liability protection of a traditional corporation and the tax advantages of a partnership. Presently, all 50 states and the District of Columbia allow for LLCs to be formed. But, caution is the watchword because the structure of the LLC will speak volumes as to whether or not the state and federal securities laws come into play. It should also be noted that regulators and judges will look past the structure and examine how the business actually operates. 

I hope this article has given you some food for thought. If you have any questions about the content of this article, please contact me.
Christopher D. Lonn

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