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The SEC opinion In the Matter of Joseph P. Doxey examines compliance with Rule 506 in an alleged unlawful offering of stock totaling $57,654.

The administrative law judge on summary disposition determined that Mr. Doxey had violated the registration provisions of the Securities Act when he orchestrated unregistered offers and sales of Pure H20 stock to Observation Capital. William J. Daniels was Observation Capital’s sole owner, officer, and director.

On appeal, the SEC noted the definition of an “accredited investor” under Rule 501(a) includes persons “who the issuer reasonably believes comes within” the specified criteria. The Commission noted there is evidence in the record that, when viewed in the light most favorable to Mr. Doxey, suggests that Mr. Doxey could have reasonably believed that Observation Capital had accredited investor status. For example, in the subscription agreements Observation Capital represented and warranted that “it is an ‘accredited investor’ under Rule 501 of Regulation D.” And among the evidence submitted by Doxey was an investor questionnaire apparently completed by Mr. Daniels attesting that he satisfies the criteria of an accredited investor. According to the SEC this is enough to raise a triable issue of fact on whether Doxey reasonably believed Observation Capital was an accredited investor.

The SEC also noted there was insufficient evidence to determine as a matter of law that Mr. Doxey engaged in general solicitation or general advertising. The SEC directed the administrative law judge to consider the nature of the relationship, if any, between Doxey and Daniels prior to the offers and sales in 2008. In Doxey’s reply to the Division’s motion for summary disposition, Doxey referred to two contracts between Pure H20 and Observation Capital that pre-date the period of offers and sales—a contract to pay third party debt and a consulting agreement. The SEC noted those contracts suggest that there may have been a pre-existing substantive relationship between Doxey and Daniels. The SEC stated if such a relationship is found to have existed prior to the offers and sales at issue, that would be a means of demonstrating compliance with the limitation on the manner of offering found in Rule 502(c).

None of the above is particularly startling. What is startling is this had to go all the way to the Commission to direct that black letter law be applied.


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