A well-used sales technique is to offer prospective purchasers a free meal. In fact, the North American Securities Administrators Association has issued this alert to seniors about the dangers associated with a “free lunch”. I’ve sometimes wondered whether securities regulators should adopt a prohibition similar to the no swimming within one hour of eating rule – no sales within X days of a free meal provided by the issuer.
A California administrative decision illustrates how a simple dinner party can get suddenly veer from a purely social gathering to arguably a public offering of securities. It seems that the party began innocently enough. When a woman moved into a rural residential community, the local women organized a dinner party to welcome the new arrival. The guests and the hostesses were friends. All of the guests were, according to the administrative law judge “educated, professional and spiritual” women. Only eight women attended the dinner.
It turns out, however, that the new neighbor had plans to build an alcohol and drug rehabilitation facility in the community. Thus, she saw this dinner party as more than an opportunity to meet her neighbors; she saw it as an opportunity to win support for her project. In fact, she brought a copy of a prospectus for her project. Later, she sent the following e-mail note to the guests:
Hi girls,
Thank you all for your company last night and the great conversation. You are definitely “my kind of people.” Even more wonderful that you’re in my backyard. Thank you so much Colleen for preparing such a healthy dinner.
I look forward to seeing you all again soon. . . . If you wish to view the Business Prospectus, it is available online at [address].
Suzy
Eventually opposition to the project developed and one of the guests, a stockbroker, even supplied a declaration in support of an unsuccesful motion for an injunction. None of the guests invested in the project.
Interestingly, the Department of Corporations decided to issue a desist and refrain order based on the alleged failure to qualify the offer and sale as required by Corporations Code Section 25110. The respondents requested a hearing to contest the order.
Administrative Law Judge Timothy Thomas referred to the six factors discussed Commissioner’s Release 5-C, Guidelines For Determining When Securities Are Being Offered To The Public, and concluded that no public offering occurred at the dinner party. He noted that the group was small and did not come together as a result of public or indiscriminate advertising. He also noted that the guests had a preexisting relationship with each other and by virtue of their education and background could be assumed to have the capacity to protect their own interests. The Commissioner, however, rejected the ALJ’s proposed decision and decided the case pursuant to Government Code Section 11517(c)(2)(E). After submission of argument, the Commissioner rescinded the order.
One wonders why the Department decided to issue a desist and refrain order in the first place. The line between as private placement and public offering is not clear. However, it beggars belief to claim that a public offering is triggered by a discussion of a project at a single private party of fewer than 10 people who know each other. Reading between the lines, it may be that this case arose more from opposition to construction of an alcohol and drug rehabilitation facility than any real securities law violation.
