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Legislative Awareness

Written by Jeffrey R. Armstrong – President/Owner of Armstrong Capital

Your favorite Master Note Buyer – Straightforward, Honest, Fair…

Having been in the note business since 1991 and have gone through many ups and downs in the note business as well as seeing new legislation come and go, you start to kind of take anything you hear with a grain of salt.  There’s a letter going around again that’s scaring note investors and note brokers.  Bill Mencarow of wrote and provided some information regarding this particular letter in his June Newsletter that I thought needed to be shared with you this month to put your minds at ease.

The letter is dated Nov. 8, 2006 and signed by Wayne Klein, then the Director of the Securities Division of the Utah Department of Commerce. He is responding to Lorelei Stevens who asked if Utah requires note brokers to be licensed.  Klein claims that “notes are securities” and therefore “in most cases” selling and brokering them without licensure is a felony and that he “expect(s) that the same or similar answers would be given by other states or the SEC.”

I am amazed that the head of a state securities department could be so misinformed. Because the letter is being circulated again, I asked a friend for his comments. He is a prominent securities attorney, a member of the ABA Business Law Section. Excerpts from Klein’s letter are in italics. Here is my friend’s letter:


The Letter paints with too-broad a brush. Any 1st year securities lawyer could poke holes in the arguments:

1.“Because many of these notes are offered publicly on web sites or other networks, it is deemed a public offering of the securities and few exemptions are available.

Dead Wrong. The existing Regulation A, Rule 504 of Regulation D, the 2012 JOBS Act allowing crowd funding (although the letter was written before the JOBS Act).

2. “If notes are securities, anyone selling notes must be licensed as a broker-dealer or an agent. In fact, the law requires a license before securities can even be offered, whether or not securities are sold.”

Dead Wrong. Issuers are not broker-dealers or agents.

3. “Whenever securities are offered or sold, the law requires the seller to give complete disclosure about the securities, the broker, and the seller.”

Dead Wrong. Disclosure rules do not apply to accredited investors:

§ 230.502(b) of Reg. D: Information requirements —(1) When information must be furnished. If the

issuer sells securities under § 230.505 or § 230.506 to any purchaser that is not an accredited

investor, the issuer shall furnish the information specified in paragraph (b)(2) of this section to

such purchaser a reasonable time prior to sale. The issuer is not required to furnish the specified

information to purchasers when it sells securities under § 230.504, or to any accredited investor.

4. “Conclusion: I expect that the same or similar answers would be given by other states or the SEC.”

Wrong. I seriously doubt that a person who works and is an expert in this industry would give such cavalier and generalized statements that are misleading.

“There are other problems with the letter, but why waste further time. It is true that an enormous amount of wrong doing and fraud is perpetrated in the unregistered securities market, and state governments are ill-equipped to try to address all of it, let alone stop it. We have seen over the past 10 years how the SEC has abjectly failed to police wrong-doing on a grand scale. Wherever there is money, there are people trying to part it from their owners, often by breaking the rules. It is a shame that this person supposedly serving the public interest, at taxpayer expense, is so eager to throw the baby out with the bath water.”

Now you are aware my fellow note brokers and cash flow consultants.  Being aware of these things floating around is part of being in the note business. And actually knowing what really affects us and does not affect us makes it easier for us all to just do what we love, the note business!  Remember, success demands action! Keep on marketing, it’s going to work! TWITA! (That’s What I’m Talking About!) J

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