Historical Note

Former Order S-0; Amended effective July 18, 1985 (Supp. 85-4).

R14-4-101. Exempt Transactions -- Existing Stockholders and Employees

A. An offering of securities within or from Arizona that is exclusively to bona fide employees or existing security holders of the issuer or a subsidiary of the issuer, or if the issuer is a subsidiary, is exclusively to the bona fide employees or existing security holders of the issuer and/or its parent, is added to the class of transactions exempt under A.R.S. § 44-1844. An issuer relying on this Section shall comply with all of the following conditions:

1. The aggregate amount of all offerings made by an issuer under this exemption within or from Arizona shall not exceed $500,000.

2. The issuer shall pay no commission or remuneration of any kind, other than transfer agent's fees, directly or indirectly, to any person in connection with the distribution or sale of such securities.

3. At least 10 business days before the offering is made, the issuer shall file with the Commission a verified statement of the details and purposes of the offering and the financial condition of the issuer. The issuer shall not make any material change in the details of the offering without the Commission's consent.

4. The issuer shall obtain Commission approval of any subscription contract calling for deferred payments.

5. An issuer that is not domiciled in Arizona or is not incorporated under the laws of this state shall file a consent to service (Uniform Form U-2) with the verified statement prescribed in subsection (A)(3) above.

B. This exemption shall not apply to an offering made in connection with or integrated with an offering otherwise subject to A.R.S. §§ 44-1841 and 44-1842. This Section is not available to any issuer for any transaction or any chain of transactions that, although in technical compliance with the Section, is part of a plan or scheme to evade the registration provisions of the Securities Act of Arizona.

C. The same issuer may file successive notices under this Section until the total amount encompassed in such filings equals $500,000.

D. The verified statement is not a prescribed form, but shall be executed by an authorized officer of the issuer whose signature shall be verified under oath and shall include all of the following:

1. The title "Notice of Intention to Sell Securities Under A.A.C. R14-4-101."

2. In the caption, the issuer's full name, the issuer's type of organization, and the state in which the issuer was organized.

3. The details and purposes of the offering, including but not limited to a description of the securities to be sold, the number of units and selling price per unit, the method of offering, and the allocation of proceeds

4. A statement of financial condition prepared in accordance with R14-4-123.

5. A recitation of the facts clearly indicating that all conditions affecting eligibility for this exemption exist.

6. A statement that the issuer has taken appropriate action to authorize the issuance of securities.

7. The issuer's principal business address and mailing address if different from the principal business address.

8. Below the verification of signature, the following form for acknowledgment by the Commission:

"Receipt of the foregoing Notice of Intention to Sell Securities is acknowledged as of the date indicated. The Commission enters no objection to the offering described therein, and such offering may be commenced __________________,20___.

ARIZONA CORPORATION COMMISSION

Securities Division

____________________"

E. Filing of notice, exhibits, and fee.

1. The issuer shall file two originally executed copies of the verified statement, except that only one copy of the financial statement is required if such statement is attached to, rather than included in, the verified statement. The Commission shall acknowledge one copy of the verified statement and return it to the issuer as evidence of filing.

2. The issuer shall file one copy of any subscription form or written material describing, or to be used in connection with, the offering.

3. The issuer shall file a nonrefundable fee as prescribed by A.R.S. § 44-1861(G).

F. The Commission may deny or revoke this exemption to any issuer for the reasons listed in A.R.S. §§ 44-1921(1) through 44-1921(6). The Securities Division shall notify the issuer of such denial or revocation. Such notice shall be given by certified mail.

G. This exemption shall be effective for one year from the date the Director acknowledges the Notice of Intention to Sell Securities.

Historical Note

Former Order S-1; Amended effective May 16, 1978 (Supp. 78-3). Amended subsection (E) effective August 4, 1982 (Supp. 82-4). Amended effective July 18, 1985 (Supp. 85-4). Amended by final rulemaking at 7 A.A.R. 729, effective January 17, 2001 (Supp. 01-1).

R14-4-102. Exempt Transactions -- Restricted Public Offering

A. An offering of securities within or from Arizona made to not more than 10 persons is added to the class of transactions exempt under A.R.S. § 44-1844. An issuer relying on this Section shall comply with all of the following conditions.

1. The aggregate amount of all offerings made by an issuer under this exemption within or from Arizona shall not exceed $100,000.

2. The issuer shall pay no commission or remuneration of any kind, other than transfer agent's fees, directly or indirectly to any person in connection with the distribution or sale of such securities.

3. At least 10 business days before the offering is made, the issuer shall file with the Commission a verified statement of the details and purposes of the offering and the financial condition of the issuer. The issuer shall not make any material change in the details of the offering without the Commission's consent.

4. The issuer shall obtain Commission approval of any subscription contract calling for deferred payments.

5. An issuer that is not domiciled in Arizona or is not incorporated under the laws of this state shall file a consent to service (Uniform Form U-2) with the verified statement prescribed in subsection (A)(3) above.

6. The issuer and any person acting on its behalf shall reasonably believe prior to making any sale that the investment is suitable for the purchaser. For the limited purpose of this condition only, the investment is deemed suitable if it does not exceed 20% of the investor's net worth (excluding principal residence, furnishings therein, and personal automobiles).

B. This exemption shall not apply to an offering made in connection with or integrated with an offering otherwise subject to A.R.S. §§ 44-1841 and 44-1842. This Section is not available to any issuer for any transaction or any chain of transactions that, although in technical compliance with the Section, is part of a plan or scheme to evade the registration provisions of the Securities Act of Arizona.

C. The same issuer may file successive notices under this Section until the total amount encompassed in such filings equals $100,000.

D. The verified statement is not a prescribed form, but shall be executed by an authorized officer of the issuer whose signature shall be verified under oath and shall include all of the following:

1. The title "Notice of Intention to Sell Securities Under A.A.C. R14-4-102."

2. In the caption the issuer's full name, the issuer's type of organization, and the state in which the issuer was organized.

3. The details and purposes of the offering, including but not limited to a description of the securities to be sold, the number of units and selling price per unit, the method of offering, and the allocation of proceeds.

4. A statement of financial condition prepared in accordance with R14-4-123.

5. A recitation of the facts clearly indicating that all conditions affecting eligibility for exemption exist

6. A statement that the issuer has taken appropriate action to authorize the issuance of securities.

7. The issuer's principal business address and mailing address if different from the principal business address.

8. Below the verification of signature, the following form for acknowledgment by the Commission:

"Receipt of the foregoing Notice of Intention to Sell Securities is acknowledged as of the date indicated. The Commission enters no objection to the offering described therein, and such offering may be commenced __________________, 20___.

ARIZONA CORPORATION COMMISSION

Securities Division

____________________"

E. Filing of notice, exhibits, and fee:

1. The issuer shall file two originally executed copies of the verified statement, except that only one copy of the financial statement is required if such statement is attached to, rather than included in, the instrument. The Commission shall acknowledge one copy of the verified statement and return it to the issuer as evidence of filing.

2. The issuer shall file one copy of any subscription form or written material describing, or to be used in connection with, the offering.

3. The issuer shall file a nonrefundable fee as prescribed by A.R.S. § 44-1861(G).

F. The Commission may deny or revoke this exemption to any issuer for the reasons listed in A.R.S. §§ 44-1921(1) through 44-1921(6). The Securities Division shall notify the issuer of such denial or revocation. Such notice shall be given by certified mail.

G. This exemption shall be effective for one year from the date the Director acknowledges the Notice of Intention to Sell Securities.

Historical Note

Former Order S-2; Amended effective May 16, 1978 (Supp. 78-3). Amended subsection (E) effective August 4, 1982 (Supp. 82-4). Amended effective July 18, 1985 (Supp. 85-4). Amended by final rulemaking at 7 A.A.R. 729, effective January 17, 2001 (Supp. 01-1).

R14-4-103. Advertising and Sales Literature

A. Any advertising, communication, prospectus or sales literature of any kind, published, exhibited, broadcast for radio or television, or used directly or indirectly in connection with the purchase or sale of any securities registered or subject to registration under A.R.S. §§ 44-1871 or 44-1891, shall be filed with the Commission at least three days prior to its proposed use.

B. No advertising, communication, prospectus, or sales literature of any kind shall contain:

1. Any untrue statement of material fact nor any omission to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.

2. Any statement or inference that the securities offered are without risk, that dividend returns are assured, or that failure or loss is not possible.

3. Any comparison with alleged analogous situations, nor statistics or statements relating to the financial condition, growth or business success of other companies or the appreciation of or returns from the securities of other companies except that a statutory prospectus meeting the requirements of A.R.S. § 44-1894 may contain financial and business information concerning subsidiaries or affiliates and statistics or statements concerning an issuer's competitive position in its industry.

C. Any advertising, communication, prospectus, or sales literature of any kind shall contain:

1. The name of the issuer and of the person circulating or publishing the same.

2. A statement showing the connection between the issuer or dealer and every person whose name is used or from whom quotations are made.

3. A statement clearly indicating the source and authority of all reports, statements, or claims used in whole or in part or in any manner referred to therein relating to oil, gas or mineral occurrence, or production potentials of any kind.

4. Other than in a statutory prospectus meeting the requirements of A.R.S. § 44-1894, substantially the following legend: "THIS IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES DESCRIBED HEREIN. THE OFFERING IS MADE ONLY BY THE PROSPECTUS." If printed, the legend shall appear on the face of the advertisement, communication, prospectus, or sales literature in type as large as that used generally in the body thereof.

D. The body of all printed advertisements, communications, prospectuses or sales literature shall be in Roman type at least as large as 10-point modern type. However, to the extent necessary for convenient presentation, financial statements and other statistical or tabular data and the notes thereto may be in Roman type at least as large as 8-point modern type. All type shall be leaded at least 2 points.

E. No advertising, communication, prospectus or sales literature of any kind shall be published in the same issue of a newspaper, magazine or other periodical on the same page as or on a page opposite to, nor be broadcast from or on the same radio station or television channel, immediately before or immediately after a separate advertisement or communication of or concerning the issuer that is unrelated to the sale of its goods or services but is related to the financial condition, growth or business success of the issuer or other companies.

F. The full text of any report, statement or claim relating to oil, gas, or mineral occurrence, or production potentials, used in whole or in part or in any manner referred to in any advertising, communication, prospectus or sales literature of any kind, shall be filed with the Commission at least three days prior to its proposed use.

G. Oral statements made by salesmen or other persons in connection with the purchase or sale of a security registered or subject to registration under A.R.S. §§ 44-1871 or 44-1891, supplementing, interpreting or explaining any advertising, communication, prospectus or sales literature are subject to all applicable provisions of this rule and no person shall make any statement contrary to the provisions hereof.

H. No advertising, communication, prospectus, or sales literature not filed with the Commission shall be used, nor shall any advertising, communication, prospectus, or sales literature filed with the Commission be used after entry of an Order by the Commission prohibiting its use.

I. The provisions of subsections (A) through (H) of this rule shall not apply to advertising, communication, prospectus or sales literature of any kind, published, exhibited, or broadcast for radio or television, meeting the requirements of the Securities and Exchange Commission Rule 156 [17 CFR 230.156] relating to advertising and sales literature used in the sale of investment company shares registered pursuant to the Investment Company Act of 1940.

Historical Note

Former Order S-3; Amended effective August 4, 1982 (Supp. 82-4). Amended subsection (I) effective July 18, 1985 (Supp. 85-4).

R14-4-104. Registration Required of Dealers and Salesmen Otherwise Exempt under A.R.S. §§ 44-1843 and 44-1844

Notwithstanding A.R.S. §§ 44-1843 and 44-1844, a dealer or salesman shall register under A.R.S. Title 44, Chapter 12, Article 9 before engaging in transactions in any of the following:

1. Securities exempt from registration under A.R.S. § 44-1843(A)(1), except a dealer or salesman shall not be required to register before engaging in transactions in securities issued or guaranteed by the United States.

2. Securities exempt from registration under A.R.S. § 44-1843(A)(7). However, a dealer or salesman shall not be required to register before engaging in transactions directed to existing securities holders, to employees of the issuer, or to employees of a wholly owned subsidiary of the issuer if the subsidiary was not created to avoid the registration provisions of the Securities Act, and in which either of the following apply:

a. The offering is made by the issuer.

b. The offering is made by a dealer or salesman acting without compensation, other than a reasonable standby charge authorized under the distribution agreement concerning any remaining balance of the offering not purchased or subscribed by existing securities holders or employees of the issuer or its wholly owned subsidiary.

3. Securities exempt from registration under A.R.S. § 44-1843(A)(9).

4. Securities transactions exempt from registration under A.R.S. § 44-1844(A)(1), R14-4-126(E), or R14-4-126(F) if the dealer or salesman is engaged principally and primarily in the business of making a series of private offerings. For the purposes of this Section, "series" means in excess of four private offerings within, from, or outside Arizona in any consecutive 12-month period.

5. Securities transactions exempt from registration under A.R.S. § 44-1844(A)(4) if the dealer or salesman receives compensation or engages or offers to engage in repeated or successive transactions of a similar character. "Repeated or successive transactions of similar character" include transactions that occur sufficiently close in time to reasonably indicate continuity or association, whether the transactions are made on behalf of one or more securities owners, and whether the securities are of the same or different issuers.

6. Securities transactions exempt from registration under A.R.S. § 44-1844(A)(11).

7. Securities transactions exempt from registration under A.R.S. § 44-1844(A)(18).

Historical Note

Former Order S-4; Amended effective August 20, 1976 (Supp. 76-4). Amended effective June 15, 1978. Amended as an emergency pursuant to A.R.S. § 41-1003, valid for only 90 days, to postpone effective date until July 17, 1978 (Supp. 78-3). Amended effective July 14, 1978 to postpone effective date until November 1, 1978 (Supp. 78-4). Amended paragraph (3) effective August 4, 1982 (Supp. 82-4). Amended effective July 18, 1985 (Supp. 85-4). Amended effective May 18, 1990 (Supp. 90-2). Citations to A.R.S. §§ 44-1843 and 44-1844 corrected to refer to subsection (A) (Supp. 00-1). Amended by final rulemaking at 6 A.A.R. 4498, effective November 7, 2000 (Supp. 00-4).

R14-4-105. Promotional Securities; Definitions

A. Promotional securities, held by promoters of a promotional stage corporation that proposes to make a public offering of its securities pursuant to A.R.S. Title 44, Chapter 12, Article 7, except pursuant to A.R.S. § 44-1901, shall be subject to a restrictive sales agreement in accordance with the provisions of this Section.

B. As used in this Section, the following terms have the meaning indicated.

1. "Consideration" includes cash, services rendered, and tangible or intangible property.

2. "Earnings per share" means fully diluted earnings computed in accordance with generally accepted accounting principles.

3. "Promoters" means any person who meets any one of the following conditions. Promoter does not include an unaffiliated institutional investor or a person who receives either securities or proceeds solely as underwriting compensation and who is not a promoter under subsection (B)(3)(a), (c), (d), or (e).

a. Alone or in conjunction with one or more persons, directly or indirectly, founded, organized, or controls the issuer;

b. Directly or indirectly receives, as consideration for service and property rendered, 5% or more of any class of the issuer's equity securities or 5% or more of the proceeds from the sale of any class of the issuer's equity securities;

c. Is an officer, or director of the issuer;

d. Directly or indirectly, legally or beneficially owns 10% or more of the issuer's outstanding shares before or immediately following the public offering;

e. Directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, a promoter as defined in subsections (B)(3)(a) through (d).

4. "Promotional stage corporation" means a corporation that has no public market for its shares and has no significant earnings.

5. "Promotional securities" means securities issued to a promoter, at any time during the three-year period prior to the proposed public offering date, that meet the conditions of subsection (C). Promotional securities shall be limited to common stock unless securities other than common stock were issued for the primary purpose of evading this Section.

6. "Public market" means a public place of exchange where securities are bought and sold, directly or through intermediaries. Public market excludes "thin markets" that do not result in reliable prices. To determine if the securities trade in a public market, the Commission may consider the market history, the public trading volume, the spread between the bid and asked prices, the number of market makers, the public float, the pricing formula, the marketplace in which the securities trade, the length of time the securities have been traded in that marketplace, and other relevant factors.

7. "Restrictive sales agreement" means an agreement between a promotional stage corporation and a promoter, for the benefit of the shareholders of the corporation, entered into prior to the proposed public offering of the promotional stage corporation's securities, subjecting the promotional securities to a sales restriction for up to three years following the proposed public offering and including the terms contained in subsection (H). As a condition of registration, the issuer shall submit the agreement to the Commission for review.

8. "Significant earnings" means earnings per share, based upon the issuer's shares outstanding immediately before the proposed public offering, of at least one of the following. Such test shall not be deemed the exclusive test for the determination of "significant earnings."

a. 5% of the public offering price per common share for the prior fiscal year, or the period of the issuer's existence if less than one fiscal year;

b. 4% of the public offering price per common share for each of the prior two fiscal years; or

c. 3% of the public offering price per common share for each of the prior three fiscal years.

9. "Unaffiliated institutional investor" means any unaffiliated bank; investment company registered under the Investment Company Act of 1940, 15 U.S.C. 80a-1 to 80a-64 (1994), as amended; business development company as defined in Section 2(a)(48) of the Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(48) (1994 & Supp. II 1996), incorporated by reference; small business investment company licensed by the U.S. Small Business Administration under Section 301 of the Small Business Investment Act of 1958, 15 U.S.C. 681 (1994), as amended; employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, 29 U.S.C. 1002(3) (1994), incorporated by reference; insurance company; private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940, 15 U.S.C. 80b-2(a)(22) (1994), incorporated by reference; or comparable business entity engaged as a substantial part of its business in the purchase and sale of securities and that owns less than 20% of the securities to be outstanding at the completion of the proposed public offering. Copies of documents incorporated by reference do not contain any later amendments or editions, are on file in the Office of the Secretary of State, and are available from the Securities Division of the Corporation Commission and from the Superintendent of Documents, Government Printing Office, Washington, D.C. 20402.

C. Securities that are issued to promoters for consideration valued at less than the following percentages of the proposed public offering price, in an amount that represents an ultimate right of participation in excess of 15% of the securities to be outstanding at the completion of the proposed public offering, shall be promotional securities. The value of consideration other than cash received by the issuer for shares shall be established to the Commission's satisfaction by appraisals, evidence of amounts paid by others for substantially similar services or property, evidence of a bona fide offer to purchase such services or property, evidence of significant services rendered or contractually required to be rendered to the issuer, which may take into account the relevant experience, special skills, and other qualifications of the person rendering the service, or any other evidence. The value of noncash consideration that cannot be established to the satisfaction of the Commission shall be 0.

1. For all securities issued to a promoter within one year prior to and including the date of the offering of securities to the public: 85%.

2. For all securities issued to a promoter within two years but not less than one year prior to and including the date of the offering of securities to the public: 75%.

3. For all securities issued to a promoter within three years but not less than two years prior to and including the date of the offering of securities to the public: 65%.

D. A summary of the sales restriction terms shall be included in the offering documents, and a legend evidencing the sales restriction shall appear on each certificate representing the shares subject to the restriction.

E. In the event that any of the following occurs during the term of the restrictive sales agreement, the promotional securities shall be released in accordance with subsection (G):

1. For 60 consecutive trading days commencing at least 90 days after the date of the offering of the securities to the public, the issuer's securities trade in a public market at a price of not less than 150% of the offering price per share.

2. For 90 consecutive trading days commencing at least 12 months after the date of the offering of the securities to the public, the issuer's securities trade in a public market at a price of not less than 110% of the offering price per share.

3. For any fiscal years ending after the date of the offering of the securities to the public, the issuer has earnings per share of at least:

a. 5% of the public offering price per common share for that fiscal year;

b. 4% of the public offering price per common share for that fiscal year and for the prior fiscal year, calculated independently, whether or not such prior fiscal year ended after the date of the offering of the securities to the public; or

c. 3% of the public offering price per common share for that fiscal year and for each of the two prior fiscal years, calculated independently, whether or not such prior fiscal years ended after the date of the offering of the securities to the public.

4. The securities become covered securities as that term is defined in subsection 18(b)(1)(A) of the Securities Act of 1933 (15 U.S.C. 77r(b)(1)(A) (Supp. II 1996)), incorporated by reference.

5. A bona fide tender offer or an offer to merge or otherwise acquire the issuer's equity securities by an unaffiliated purchaser, pursuant to a vote by the majority of the shareholders and in accordance with the following:

a. If the transaction occurs within 24 months of the effective date of the offering registered with the Commission, all public shareholders of the issuer will receive cash in the amount of at least two times the public offering price per share of equity securities at the effective date of the tender offer, merger, or other acquisition, or securities--listed or to be listed, or qualified in all respects for listing, on the New York Stock Exchange, the American Stock Exchange, or the National Market System of the National Association of Securities Dealers Automated Quotations System--in value equal to at least two times the public offering price per share of equity securities at the effective date of the tender offer, merger, or other acquisition.

b. If the transaction occurs more than 24 months after the effective date of the offering registered with the Commission, all public shareholders of the issuer will receive cash in the amount of at least 1 1/2 times the public offering price per share of equity securities, or securities in value equal to at least 1 1/2 times the public offering price per share of equity securities.

6. The securities are transferred by will or pursuant to the laws of descent and distribution or by court order. In all such cases, only the securities so transferred shall be released from the terms of the restrictive sales agreement.

F. If the promotional securities, or any part thereof, have not been released pursuant to subsections (E)(1) through (6), then at the end of the first 12-month period after the date of commencement of the restrictive sales agreement, over each of the next eight calendar quarters, 1/8 of the promotional shares shall be released from the restrictive sales agreement and the restrictive legend may be removed from the certificates representing such shares. There is no filing requirement in connection with the securities released under this subsection.

G. Promotional securities shall automatically be released from the restrictive sales agreement and the restrictive legend may be removed from the share certificates upon the filing with the Commission of any one of the following:

1. With respect to subsections (E)(1), (2), or (4), a written representation from the promoter indicating compliance with the applicable subsection;

2. With respect to subsection (E)(3), a written representation from the promoter indicating compliance with such subsection accompanied by financial statements, prepared in accordance with generally accepted accounting principles and audited and reported upon by an independent certified public accountant, that indicate compliance with the subsection;

3. With respect to subsection (E)(5), a written representation from the promoter indicating compliance with such subsection accompanied by any offering materials relating to the specified transaction; or

4. With respect to subsection (E)(6), a certified copy of an order issued by a court of competent jurisdiction that orders the release or transfer of promotional securities, a certified copy of an instrument of distribution filed with a court of competent jurisdiction, or a written representation from the issuer stating that the securities were transferred pursuant to a will or the laws of descent and distribution.

H. The restrictive sales agreement shall include the following terms and conditions:

1. Except as otherwise provided in the agreement, the promotional securities shall not be transferred, sold, pledged, hypothecated, or encumbered nor shall the issuer recognize any attempted transfer, sale, pledge, hypothecation, or encumbrance for three years following the conclusion of the proposed offering;

2. The number of promotional securities subject to the restriction;

3. The identity of owners of the promotional securities;

4. The terms of release under subsections (E), (F), and (G);

5. Any profits realized by a promoter who sells promotional securities in violation of the restrictive sales agreement shall inure to and be recoverable by the issuer;

6. Promotional securities may be transferred by gift to family members, not more remote than first cousins, or to trusts or similar instruments of which the promoter is the beneficiary for estate-planning purposes, provided the securities remain subject to the terms of the restrictive sales agreement;

7. Promotional securities may be transferred by any method or transaction approved by a majority of the shareholders other than the promoters, provided the securities shall remain subject to the terms of the restrictive sales agreement;

8. Holders of promotional securities shall continue to have all voting and other rights to which they are entitled by ownership of the promotional securities; and

9. All certificates representing stock dividends from promotional securities and all securities resulting from stock splits from promotional securities shall be subject to the terms of the restrictive sales agreement.

I. A breach of the restrictive sales agreement by a promoter shall be deemed a violation of this Section by such promoter.

Historical Note

Former Order S-5; Former Section R14-4-105 repealed, new Section R14-4-105 adopted effective July 30, 1986 (Supp. 86-4). Amended by final rulemaking at 5 A.A.R. 1437, effective April 19, 1999 (Supp. 99-2).

R14-4-106. Options, Warrants, and Rights to Purchase

A. The grant of options, warrants and rights to purchase to officers, directors and other employees in the form of incentive stock options, warrants or rights to purchase in accordance with Sec. 422A of the Internal Revenue Code of 1954, as amended, will be considered justified.

B. The grant of options, warrants and rights to purchase to officers, directors and promoters not in accordance with Sec. 422A of the Internal Revenue Code of 1954, as amended, will be considered justified if all of the following conditions are met:

1. A certificate or instrument in evidence thereof is issued prior to the commencement of the proposed public offering.

2. The number of shares covered thereby does not exceed 20% of the number of securities to be outstanding at the completion of the proposed public offering.

3. The initial exercise price is reasonably related to the public offering price.

4. They do not exceed 10 years in duration.

5. The prospectus to be used in connection with the proposed public offering contains a full disclosure as to the terms and reasons for their grant.

Historical Note

Former Order S-6; Amended effective July 18, 1985 (Supp. 85-4).

R14-4-107. Promoters Equity

A. An amount equal to the following percentages of a proposed public offering shall, before new stock is offered to the public, be paid in or contributed in cash, or other tangibles by the organizers and promoters, except in unusual instances and the burden shall rest on the applicant to justify its exclusion from the following schedule:

10% of the first $200,000.00

5% of the second $200,000.00

1% of the balance

B. The value placed on any non-cash assets so paid in or contributed must be fully substantiated.

Historical Note

Former Order S-7

R14-4-108. Sales Commission and Expenses

A. No issuer shall incur a liability which must be paid by the issuer as a selling expense in connection with the sale of a public issuance greater than 15% of the amount of said issue actually sold to the public.

B. Selling expense shall include commissions, salaries, advertising and all other expense directly or indirectly incurred in connection with the sale of securities, excluding, however:

1. Attorneys' fees for services in connection with the issue and sale of the securities and their qualification for sale under applicable laws and regulations;

2. The cost of prospectuses, circulars and other documents required to comply with such laws and regulations;

3. Other expenses incurred in connection with such qualification and compliance with such laws and regulations;

4. Cost of authorizing and preparing the securities and documents relating thereto, including issue taxes and stamps; and

5. Charges of transfer agents, registrars, indenture trustees, escrow holders, depositories, auditors, and of engineers, appraisers and other experts.

Historical Note

Former Order S-8.

R14-4-109. Examination of Prospective Dealers and Salesmen

A. Prior to the registration of a dealer or salesman the Commission may require that each applicant take a written examination at a time and place specified by the Commission to determine whether the business experience of the applicant is sufficient to justify the registration of the said applicant.

B. The provisions as stated above shall not apply to those dealers or salesmen whose names appear in the register of dealers and salesmen as of the date of the adoption of these rules.

Historical Note

Former Order S-9.

R14-4-110. Installment Sales

A. Marginal sales of securities will be permitted on an installment basis with approximately 50% paid down at the time of subscription and the balance payable within 10 months.

B. Subsection (A) will not apply:

1. To sales of partnership interests, or joint venture interests, the issuer having made other installment arrangements acceptable to the Director of Securities.

2. To securities registered under the Investment Company Act of 1940.

3. In other unusual instances and the burden shall rest on the applicant to justify its exclusion from said provision.

Historical Note

Former Order S-10. Subsection numbering corrected to conform to Secretary of State guidelines (Supp. 00-1).

R14-4-111. Commissions to Officers and Directors

No commission or sales fee will be allowed either directly or indirectly to officers, directors or promoters of an issuer, when such issuer is a dealer in its own securities, for sale of such securities, unless such officers, directors, or promoters receive no other salary or remuneration from such issuer and do not sell securities in more than one issue at the same time.

Historical Note

Former Order S-11.

R14-4-112. Impoundment of Funds

Funds held in a depository as a condition to registration shall be deposited in a national bank or a bank organized pursuant to an Act of Congress and supervised by an agency of the United States or by a state bank which is supervised and regulated by an agency of this state or of the United States. Funds so held may only be released by order of the Commission.

Historical Note

Former Order S-12.

R14-4-113. Impound Dates -- Application to Extend

A period of one year from the date of effective registration of securities by an issuer shall ordinarily be the maximum time allowed to such issuer to obtain the funds necessary to finance the proposed enterprise outlined in the issuer's prospectus. The request of any issuer seeking a longer period of time will be looked upon with disfavor.

Historical Note

Former Order S-13.

R14-4-114. Recognized Manuals of Securities

A. For purposes of A.R.S. § 44-1844(A)(11), each of the following publications is approved by the Commission as a recognized manual of securities.

1. Mergent's Industrial Manual.

2. Mergent's Municipal and Government Manual.

3. Mergent's Transportation Manual.

4. Mergent's Public Utility Manual.

5. Mergent's Bank and Finance Manual.

6. Standard & Poor's Corporation Records.

B. A "publication" for purposes of this Section includes electronic publication formats that are as readily available to the general public as the printed version, including CD-ROM and electronic dissemination over the Internet.

Historical Note

Former Order S-14; Amended effective May 16, 1978 (Supp. 78-3). Amended effective July 18, 1985 (Supp. 85-4). Amended paragraph (7) effective November 19, 1987 (Supp. 87-4). Citation to A.R.S. § 44-1844 corrected to refer to subsection (A) (Supp. 00-1). Amended by final rulemaking at 7 A.A.R. 5381, effective November 5, 2001 (Supp. 01-4).

R14-4-115. Listing of National Securities Exchanges Registered under the Securities Exchange Act of 1934, As Used in A.R.S. § 44-1843(A)(7)

Each of the following national exchanges is approved by the Commission as a recognized securities exchange within the meaning of that term as used in A.R.S. § 44-1843(A)(7):

1. New York Stock Exchange

2. American Stock Exchange

3. Midwest Stock Exchange

4. Pacific Coast Stock Exchange

5. Philadelphia Stock Exchange

6. Chicago Board Options Exchange

Historical Note

Former Order S-15; Amended effective August 20, 1976 (Supp. 76-4). Amended effective July 18, 1985 (Supp. 85-4). Citation to A.R.S. § 44-1843 corrected to refer to subsection (A) (Supp. 00-1).

R14-4-116. NASAA Statements of Policy

A. Unless otherwise provided in A.R.S. Title 44, Chapter 12, Article 7, transactions that fall within one or more of the following North American Securities Administrators Association (NASAA) statements of policy shall comply with the requirements of those statements of policy to qualify for registration or renewal under A.R.S. Title 44, Chapter 12, Article 7. This Section shall not apply to the registration of securities under A.R.S. § 44-1901.

1. Statement of policy regarding loans and other material affiliated transactions, amended November 18, 1997.

2. Registration of asset-backed securities, adopted October 25, 1995.

3. NASAA mortgage program guidelines, adopted September 10, 1996.

4. Registration of commodity pool programs, adopted September 21, 1983, effective January 1, 1984; amended and adopted August 30, 1990.

5. Equipment programs, adopted November 20, 1986, effective January 1, 1987; amended April 22, 1988, and October 24, 1991.

6. Registration of oil and gas programs, adopted on September 22, 1976; amended October 12, 1977, October 31, 1979, April 23, 1983, July 1, 1984, September 3, 1987, September 14, 1989, and October 24, 1991.

7. Statement of policy regarding real estate investment trusts, revised and adopted September 29, 1993.

8. Real estate programs, last revised September 29, 1993.

9. Statement of policy regarding unequal voting rights, adopted and effective October 24, 1991.

10. Omnibus Guidelines, adopted March 29, 1992.

11. Statement of policy regarding church extension fund securities, adopted April 17, 1994, entitled guidelines for general obligation financing by religious denominations; amended April 18, 2004.

12. Statement of policy regarding church bonds, adopted April 14, 2002.

B. The material listed in subsection (A) is incorporated by reference and on file with the Commission. The incorporated material does not contain later editions or amendments. The material is published in NASAA Reports by Commerce Clearing House, Inc., 4025 West Peterson Avenue, Chicago, Illinois 60646. Copies are available from NASAA, 10 G Street, N.E., Suite 710, Washington D.C. 20002, and the Commission.

Historical Note

Former Order S-16. Section repealed; new Section adopted by final rulemaking at 6 A.A.R. 1902, effective May 3, 2000 (Supp. 00-2). Amended by final rulemaking at 9 A.A.R. 3043, effective August 17, 2003 (Supp. 03-2). Amended by final rulemaking at 11 A.A.R. 2025, effective July 4, 2005 (Supp. 05-2).

R14-4-117. Requirement for Registration of a Debt Offering; Definitions

A. As a condition of registration of debt securities under A.R.S. Title 44, Chapter 12, Article 7, except pursuant to § 44-1901, an issuer must demonstrate its ability to service its debt obligations as they become due, including the obligations under the debt securities to be offered.

B. An offering of investment grade debt securities that have been rated BBB or higher by Standard & Poor's or Fitch Investors Service, Inc., or Baa or higher by Moody's Investors Service will be considered to have complied with the requirements of this Section.

C. For purposes of this Section, the following definitions shall apply.

1. "Fixed charges" means the sum of interest expensed and capitalized; amortized premiums, discounts, and capitalized expenses related to indebtedness; an estimate of the interest within rental expense; and preference security dividend requirements of consolidated subsidiaries.

2. "Earnings" is the amount resulting from subtracting the sum of the items in subsection (C)(2)(b) from the sum of the items in subsection (C)(2)(a).

a. Pretax income from continuing operations before adjustment for minority interests in consolidated subsidiaries or income or loss from equity investees, fixed charges; amortization of capitalized interest, distributed income of equity investees, and the issuer's share of pretax losses of equity investees for which charges arising from guarantees are included in fixed charges.

b. Interest capitalized, preference security dividend requirements of consolidated subsidiaries, and the minority interest in pretax income of subsidiaries that have not incurred fixed charges.

3. "Equity investees" means investments for which the issuer accounts by using the equity method of accounting.

4. "Pro forma ratio" means a ratio that reflects the application of proceeds from the proposed offering to repay any outstanding debt or to retire other securities.

D. The issuer's demonstration of its ability to service its debt obligations shall include all of the following.

1. Statement of the issuer's current cash flow prepared in conformity with generally accepted accounting principles and adjusted on a pro forma basis to reflect:

a. The elimination of interest and fees on debt or debt securities and of cash dividends on preferred stock that are to be retired with the proceeds of the offering.

b. The effect of any acquisitions or capital expenditures that were made by the issuer after its last fiscal year, or that are proposed or required for the current fiscal year, that materially affect the issuer's cash flow.

c. The effect of interest and fees on debt or debt securities or cash dividends paid after the issuer's last fiscal year.

d. The effect of any interest and fees on debt or debt securities and of cash dividends on preferred stock or common stock that were issued during the issuer's last fiscal year, but that were outstanding for only a portion of such fiscal year, as if such debt, debt securities, preferred stock, or common stock had been outstanding for entire fiscal year.

e. The effect of imputed or deferred charges of zero-coupon debt or debt securities for the issuer's last fiscal year and any additional charges on such debt or debt securities issued after the issuer's last fiscal year.

f. The effect of accrued dividends on preferred stock for the issuer's last fiscal year and any additional dividends on such preferred stock issued after the issuer's last fiscal year.

g. The effect of any other material changes to the issuer's future cash flow.

2. Detailed explanation of the facts and assumptions underlying the pro forma statement of cash flow.

3. A ratio of earnings to fixed charges for each of the last five fiscal years and the latest interim period.

a. If a ratio indicates less than one-to-one coverage, disclose the dollar amount of the deficiency.

b. If the proceeds from the proposed sale of securities will be used to repay any of the issuer's outstanding debt or to retire other securities and the change in the ratio would be 10 percent or greater, include a pro forma ratio. Use the net change in interest or dividends from the refinancing to calculate the pro forma ratio.

4. A calculation using the amounts and captions used by the issuer to calculate the ratio of earnings to fixed charges.

5. Copies of written agreements, contracts, or other instruments material to the issuer's ability to service its obligations under the debt securities to be offered.

6. Detailed information regarding all guarantee obligations of or to the issuer in connection with any debt. Any financial statements provided to the Commission to satisfy this subsections shall be prepared in conformity with generally accepted accounting principles.

7. Other material or information the issuer desires to include to support its demonstrations.

E. If the Commission deems it necessary for investor protection, the Commission may require that the issuer establish a sinking fund or redemption requirements.

Historical Note

Former Order S-17. Repealed effective December 21, 1995, under an exemption from the Attorney General approval requirements of the Arizona Administrative Procedure Act (Supp. 95-4). New Section adopted by final rulemaking at 7 A.A.R. 1308, effective March 1, 2001 (Supp. 01-1).

R14-4-118. Statements Required in Prospectus

A. This Section applies to securities subject to A.R.S. Title 44, Chapter 12, Articles 6 and 7.

B. The outside front cover page of every prospectus shall include, in a concise and conspicuous manner, a disclosure that neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities or determined if the prospectus is truthful or complete, and that any representation to the contrary is a criminal offense.

C. If any of the following apply to an issuer, the outside front cover page of the prospectus also shall include, in a concise and conspicuous manner, a disclosure regarding the speculative or high-risk nature of the securities:

1. The issuer has not been in the business described in the prospectus for at least three years.

2. The issuer has not had net income in any of its last three fiscal years.

3. The value of the security offered is materially dependent on the fulfillment or accomplishment of a future condition, promotion, or development instead of the issuer's present tangible assets or conditions.

4. A significant portion of the issuer's assets are intangible assets that have not been assigned a value in an audited financial statement according to generally accepted accounting principles.

5. The issuer intends to exchange a significant portion of the securities for intangible assets at a per-unit price that is substantially lower than the per-unit price offered in the prospectus.

6. The securities are issued as part of any project or plan for the sale, development, or exploration of any interest in unimproved or undeveloped land or oil, gas, or other mineral right.

D. Issuers may comply with subsection (C) by using either of the following disclosures or other clear, plain language.

1. "These are speculative securities. You should purchase these securities only if you can afford a complete loss of your investment."

2. "This investment involves a high degree of risk. You should purchase these securities only if you can afford a complete loss of your investment."

Historical Note

Former Order S-18. Amended by final rulemaking at 6 A.A.R. 1902, effective May 3, 2000 (Supp. 00-2).

R14-4-119. Additional Registration Requirements for Preferred Stock

A. This Section applies to a person proposing to register preferred stock under A.R.S. Title 44, Chapter 12, Article 7. This Section shall not apply to the registration of securities under A.R.S. § 44-1901.

B. As used in this Section, the terms "promoter" and "unaffiliated institutional investor" shall have the same meaning indicated in Section R14-4-105. As used in this Section, the following terms have the meaning indicated.

1. "Adjusted net earnings" means, after subtracting interest and dividends charges, the issuer's net earnings adjusted on a pro forma basis to reflect all of the following:

a. The elimination of any required charges for debt, debt securities, or preferred stock that are to be redeemed or retired from the proceeds derived from the public offering of preferred stock.

b. The effect of any acquisitions or capital expenditures made by the issuer after its last fiscal year, or proposed or required to be made during the current fiscal year that materially affect the issuer's net earnings.

c. The effect of charges or dividends on debt, debt securities, or preferred stock issued after the issuer's last fiscal year.

d. The effect of any charges or dividends on debt, debt securities, or preferred stock issued during the issuer's last fiscal year, but outstanding for only a portion of the year. The effect of the charges or dividends shall be treated as if the debt, debt securities, or preferred stock had been outstanding for the entire last fiscal year.

e. The effect of any other material changes to an issuer's future net earnings.

2. "Net earnings" means the issuer's after-tax earnings that are derived from its normal operations, exclusive of extraordinary and nonrecurring items, determined according to generally accepted accounting principles.

C. The Commission may deny an application if the issuer's adjusted net earnings for the last fiscal year or its average adjusted net earnings for the last three fiscal years prior to the public offering were not sufficient to pay its fixed charges and preferred stock dividends, whether or not accrued, and to meet the redemption requirements, if applicable, of the preferred stock being offered.

D. As an alternative to subsection (C), the Commission may consider the issuer's "statement of cash flows," prepared in conformity with generally accepted accounting principles, if the statement demonstrates that the issuer has had positive "net cash provided by operating activities" for its last fiscal year. If the issuer will be redeeming or retiring debt securities using the proceeds from the public offering, the issuer shall make a pro forma adjustment for the elimination of the related interest charges, net of applicable income taxes. The Commission may require that the issuer submit a financial statement demonstrating an average positive "net cash provided by operating activities" for the last three fiscal years prior to the public offering. In either instance there must be sufficient cash to cover the preferred stock dividend whether or not declared.

E. Subsections (C) and (D) shall not apply to the registration of convertible preferred stock that is superior in right to payment of dividends, interest, and liquidation proceeds to any convertible debt and preferred stock that are legally or beneficially, directly or indirectly, owned by promoters. The issuer shall disclose the risks of failure to declare or pay dividends and the equity characteristics of the convertible preferred stock in the prospectus or offering document.

Historical Note

Former Order S-19; repealed effective July 30, 1986 (Supp. 86-4). New Section adopted by final rulemaking at 6 A.A.R. 1902, effective May 3, 2000 (Supp. 00-2).

R14-4-120. Financial Statements

A. Qualification of accountants

1. The Commission will not recognize any person as a certified public accountant who is not duly registered and in good standing as such under the laws of the place of his residency or principal office.

2. The Commission will not recognize any person as a public accountant who is not in good standing and entitled to practice as such under the laws of the place of his residency or principal office.

3. The Commission will not recognize any certified public accountant or public accountant as independent who is not in fact independent. An accountant will not be considered independent with respect to any person or any affiliate thereof in whom he has any financial interest direct or indirect or with whom he is or was during the period of the report connected as a promoter, underwriter, voting trustee, attorney, director, officer, or employee.

B. Accountants -- report:

1. The accountant's report shall be dated, shall have a conformed signature, shall indicate the city and state where issued, and shall identify without detailed enumeration the financial statements covered by the report.

2. The accountant's report shall state whether the audit was made in accordance with generally accepted auditing standards and shall designate any auditing procedures generally recognized as normal or deemed necessary by the accountant under the circumstances of a particular case which have been omitted and the reasons for their omission.

3. Any matters to which the accountant takes exception shall be thoroughly identified; the exception thereto specified and thoroughly stated, and to the extent practicable, the effect of such exception on the related financial statements given.

4. If, with respect to the report of the financial statements, the principal accountant relies on a financial statement by another accountant, the report of such other accountant shall be filed as part of the applicant's financial statement.

C. Opinion to be expressed. The accountant's report shall state clearly:

1. The opinion of the accountant with respect to the financial statements covered by the report and the accounting principles and practices reflected therein; and

2. The opinion of the accountant as to the consistency of the application of the accounting principles, or, as to any changes in such principles which have a material effect on the financial statements.

D. Consents. If any accountant or other professional expert has prepared or audited any report or opinion for use in connection with an application for registration or an exemption for which a filing is required, such accountant or expert must file a copy of a signed consent in connection with such filing. The consent shall be dated within 90 days of the application or filing, unless the Securities Division waives this requirement for good cause shown.

Historical Note

Former Order S-20; Amended effective August 4, 1982 (Supp. 82-4).

R14-4-121. Limitation on Activities of Securities Salesmen; Definitions

A. As used in this Section, the following terms have the meaning indicated:

1. "Affiliate" means a person that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with the person specified.

2. "Registered salesman" means an individual registered to sell securities pursuant to A.R.S. Title 44, Chapter 12, Article 9.

B. A registered salesman shall not sell securities for more than one dealer in Arizona during the same time period unless one of the following applies:

1. The dealers for which the registered salesman sells securities are affiliates.

2. The dealers have filed with the Commission a copy of a written agreement that the registered salesman may sell securities for each of the dealers, which is signed by all of the dealers.

Historical Note

Former Order S-21. Amended by final rulemaking at 9 A.A.R. 90, effective February 15, 2003 (Supp. 02-4).

R14-4-122. Fingerprinting of Salesmen

A. Prior to the registration or renewal of registration of a salesman, pursuant to the provisions of the Securities Act, the Commission may require the applicant to be fingerprinted, at a time and place specified by the Commission, in order for the Commission to specifically check into the background of the applicant.

B. Persons registered pursuant to the Arizona Securities Act continuously for the past five consecutive years preceding July 1, 1965 shall be exempt from this rule.

Historical Note

Former Order S-22; Amended subsection (A) effective July 18, 1985 (Supp. 85-4).

R14-4-123. Financial Information Required by Applicants for Exemptions

To a petition filed pursuant to A.R.S. § 44-1846, or as part of a Notice of Intention to Sell Securities pursuant to rule R14-4-101 or Rule R14-4-102, there shall be attached as an exhibit financial statements consisting of a balance sheet as of a date within 90 days of the petition and statements of operations, stockholders' equity and retained earnings, and changes in financial position for each of the preceding three years or for such lesser period as the issuer has been engaged in business. Such financial statements shall be prepared in accordance with generally accepted accounting principles and shall be:

1. Verified under oath, upon information and belief, by an officer, a general partner, a joint venturer, a trustee, or the sole proprietor of the issuer, whichever is appropriate depending upon its form of organization, by a statement which shall include the statements that:

a. The accompanying financial statements present fairly the issuer's financial position on the dates indicated and the results of the issuer's operations and changes in financial position for the periods indicated; and that

b. Such person has no knowledge of any material fact which would adversely affect the financial condition, results of operations and changes in financial position of such issuer as disclosed in such financial statements; or

2. Audited by an independent public or certified independent public accountant, in which case such statements need not be as of a date within 90 days of the petition but may be as of a date within one year of the petition, provided that such audited statements are accompanied by unaudited interim statements as of the date within 90 days of the date of the petition.

Historical Note

Former Order S-23; Amended effective July 18, 1985 (Supp. 85-4).

R14-4-124. Net Worth Requirements for Registration by Description of Commodity Investment Contracts or Commodity Option Contracts

A. An applicant for registration by description of commodity investment contracts or commodity option contracts pursuant to A.R.S. § 44-1871, shall file a financial statement, prepared within 90 days of the date of application, which indicates to the satisfaction of the Arizona Corporation Commission a net worth of not less than $75,000.00. Any money, property or other thing of value utilized by the applicant in order to comply with the bonding requirements of A.R.S. § 44-1943, relating to registration as a Dealer in securities, shall be excluded from the computation of net worth.

B. The net worth requirements prescribed herein shall be maintained throughout the period of registration by description and shall be considered a condition thereof.

Historical Note

Former General Order S-24 not in original publication, correction (Supp. 75-1).

R14-4-125. Commodities Exchanges Recognized for Purposes of A.R.S. § 44-1844(A)(13)

Commodities exchanges recognized by the Arizona Corporation Commission for purposes of the exemption prescribed by A.R.S. § 44-1844(A)(13), are as follows:

1. Domestic

a. Coffee, Sugar and Cocoa Exchange

4 World Trade Center

New York, NY 10048

b. Commodity Exchange Inc. CMX

4 World Trade Center

New York, NY 10048

c. New York Mercantile Exchange

4 World Trade Center

New York, NY 10048

d. Chicago Mercantile Exchange & International Money Market

444 West Jackson Blvd.

Chicago, IL 60606

e. Chicago Board of Trade

141 W. Jackson Blvd.

Chicago, IL 60604

f. MidAmerica Commodity Exchange

175 West Jackson Blvd.

Chicago, IL 60604

2. Foreign

a. The London Metals Exchange

Plantation House, Fenchurch Street

EC3 LONDON, ENGLAND

b. The United Terminal Sugar Market Association

58 Mark Lane

EC3R 7NE LONDON, ENGLAND

c. The London Cocoa Terminal

58 Mark Lane

EC3R 7NE LONDON, ENGLAND

d. The Coffee Terminal Market Association

58 Mark Lane

EC3R 7NE LONDON, ENGLAND

Historical Note

Former General Order S-25 not in original publication, correction, Amended effective June 3, 1975 (Supp. 75-1). Amended effective July 18, 1985 (Supp. 85-4). Citation to A.R.S. § 44-1844 corrected to refer to subsection (A) (Supp. 00-1).

R14-4-126. Limited Offerings; Definitions

A. The following Section relates to transactions exempted from the registration requirements of A.R.S. §§ 44-1841 and 44-1842.

1. Attempted compliance with any part of this Section does not act as an exclusive election. This Section is not available to any issuer for any transaction or chain of transactions that, although in technical compliance with the Section, is part of a plan or scheme to evade the registration provisions of the Securities Act of Arizona (the "Securities Act"). The Section may be used for business combinations that involve sales by virtue of Rule 145(a) under the Securities Act of 1933 or otherwise.

2. Securities may be offered and sold outside the United States in accordance with Regulation S under the Securities Act of 1933 and pursuant to an applicable registration or exemption under the Securities Act even if coincident offers and sales are made inside the United States in accordance with Regulation D and this Section. Thus, for example, persons who are offered and sold securities from Arizona in accordance with Regulation S would not be counted in the calculation of the number of purchasers under this Section if the securities are registered or otherwise exempt under the Securities Act (such as exempt under A.R.S. § 44-1844(A)(19)). Similarly, proceeds from such sales would not be included in the aggregate offering price. These provisions, however, do not apply if the issuer elects to rely solely on Regulation D and this Section for offers or sales to persons made outside the United States.

3. Incorporation by reference. The following statutes, rules, and regulations are incorporated herein by reference and on file with the office of the Secretary of State. The incorporated material contains no later editions or amendments.

a. Under the Securities Act of 1933: Section 2(13), 15 U.S.C. 77b(a)(13) (Supp. II 1996) ("Section 2(13) of the Securities Act of 1933"); Section 3(a)(2), 15 U.S.C. 77c(a)(2) (1994) ("Section 3(a)(2) of the Securities Act of 1933"), and Section 3(a)(5)(A), 15 U.S.C. 77c(a)(5)(A) (1994) ("Section 3(a)(5)(A) of the Securities Act of 1933").

b. Section 2(a)(48) of the Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(48) (1994 & Supp. II 1996) ("Section 2(a)(48) of the Investment Company Act of 1940").

c. Section 202(a)(22) of the Investment Advisers Act of 1940, 15 U.S.C. 80b-2(a)(22) (1994) ("Section 202(a)(22) of the Investment Advisers Act of 1940").

B. Definitions and terms. As used in this Section, the following terms have the meaning indicated:

1. "Accredited investor" means any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:

a. Any bank as defined in Section 3(a)(2) of the Securities Act of 1933, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act of 1933 whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934; any insurance company as defined in Section 2(13) of the Securities Act of 1933; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;

b. Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940;

c. Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;

d. Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;

e. Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of that person's purchase exceeds $1,000,000;

f. Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

g. Any trust, with total assets in excess of $5,000,000 not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in subsection (F)(2)(b) of this Section; and

h. Any entity in which all of the equity owners are accredited investors.

2. "Affiliate." An "affiliate" of, or person "affiliated" with, a specified person means a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.

3. "Aggregate offering price" means the sum of all cash, services, property, notes, cancellation of debt, or other consideration to be received by an issuer for issuance of its securities. Where securities are being offered for both cash and noncash consideration, the aggregate offering price is based on the price at which the securities are offered for cash. Any portion of the aggregate offering price attributable to cash received in a foreign currency is translated into United States currency at the currency exchange rate in effect at a reasonable time prior to or on the date of the sale of the securities. If securities are not offered for cash, the aggregate offering price is based on the value of the consideration as established by bona fide sales of that consideration made within a reasonable time, or, in the absence of sales, on the fair value as determined by generally accepted accounting principles. Such valuations of noncash consideration shall be reasonable at the time made.

4. "Business combination" means any transaction of the type specified in paragraph (a) of Rule 145 under the Securities Act of 1933 and any transaction involving the acquisition by one issuer, in exchange for all or a part of its own or its parent's stock, of stock of another issuer if, immediately after the acquisition, the acquiring issuer has control of the other issuer (whether or not it had control before the acquisition).

5. "Calculation of number of purchasers." For purposes of calculating the number of purchasers under subsections (E) and (F) of this Section, the following apply. The issuer shall satisfy all of the other provisions of this Section for all purchasers whether or not they are included in calculating the number of purchasers. Clients of an investment adviser or customers of a broker or dealer are considered the "purchasers" under this Section regardless of the amount of discretion given to the investment adviser or broker or dealer to act on behalf of the client or customer.

a. The following purchasers are excluded:

i. Any relative, spouse, or relative of the spouse of a purchaser who has the same principal residence as the purchaser;

ii. Any trust or estate in which a purchaser and any of the persons related to the purchaser as specified in subsections (B)(5)(a)(i) or (iii) collectively have more than 50% of the beneficial interest (excluding contingent interests);

iii. Any corporation or other organization of which a purchaser and any of the persons related to the purchaser as specified in subsections (B)(5)(a)(i) or (ii) collectively are beneficial owners of more than 50% of the equity securities (excluding directors' qualifying shares) or equity interests; and

iv. Any accredited investor.

b. A corporation, partnership, or other entity is counted as one purchaser. If, however, that entity is organized for the specific purpose of acquiring the securities offered and is not an accredited investor under subsection (B)(1)(h), then each beneficial owner of equity securities or equity interests in the entity counts as a separate purchaser for all provisions of this Section except to the extent provided in subsection (B)(5)(a).

c. A noncontributory employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 counts as one purchaser where the trustee makes all investment decisions for the plan.

6. "Executive officer" means the president, any vice president in charge of a principal business unit, division, or function (such as sales, administration, or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the issuer. Executive officers of subsidiaries may be deemed executive officers of the issuer if they perform such policy-making functions for the issuer.

7. "Issuer" is as defined in A.R.S. § 44-1801.

8. "Purchaser representative" means any person who satisfies all of the following conditions or who the issuer reasonably believes satisfies all of the following conditions:

a. Is not an affiliate, director, officer, or other employee of the issuer, or beneficial owner of 10% or more of any class of the equity securities or 10% or more of the equity interest in the issuer, except where the purchaser is:

i. A relative of the purchaser representative by blood, marriage, or adoption and not more remote than a first cousin;

ii. A trust or estate in which the purchaser representative and any persons related to the purchaser representative as specified in subsections (B)(8)(a)(i) or (iii) collectively have more than 50% of the beneficial interest (excluding contingent interest) or of which the purchaser representative serves as trustee, executor, or in any similar capacity; or

iii. A corporation or other organization of which the purchaser representative and any persons related to the purchaser representative as specified in subsections (B)(8)(a)(i) or (ii) collectively are the beneficial owners of more than 50% of the equity securities (excluding directors' qualifying shares) or equity interests;

b. Has such knowledge and experience in financial and business matters that the purchaser representative is capable of evaluating, alone or together with other purchaser representatives of the purchaser or together with the purchaser, the merits and risks of the prospective investment;

c. Is acknowledged by the purchaser in writing, during the course of the transaction, to be the purchaser's purchaser representative in connection with evaluating the merits and risks of the prospective investment; and

d. Discloses to the purchaser in writing a reasonable time prior to the sale of securities to that purchaser any material relationship between the purchaser representative or the purchaser representative's affiliates and the issuer or its affiliates that then exist, that is mutually understood to be contemplated, or that has existed at any time during the previous two years, and any compensation received or to be received as a result of such relationship.

e. A person acting as a purchaser representative should consider the applicability of the registration and anti-fraud provisions:

i. Relating to dealers under the Securities Act (see R14-4-104 with respect to dealer registration in Arizona), and

ii. Relating to investment advisers under the Arizona Investment Management Act, A.R.S. § 44-3101 et seq.

f. The acknowledgment required by subsection (B)(8)(c) and the disclosure required by subsection (B)(8)(d) shall be made with specific reference to each prospective investment. Advance blanket acknowledgment, such as for "all securities transactions" or "all private placements," is not sufficient.

g. Disclosure of any material relationships between the purchaser representative or the purchaser representative's affiliates and the issuer or its affiliates does not relieve the purchaser representative of the obligation to act in the interest of the purchaser.

C. General conditions to be met. Except as otherwise provided, the following conditions are applicable to offers and sales made under this Section:

1. Integration. All sales that are part of the same Section R14-4-126 offering shall meet all of the terms and conditions of this Section. Offers and sales that are made more than six months before the start of a Section R14-4-126 offering or are made more than six months after completion of a Section R14-4-126 offering will not be considered part of that Section R14-4-126 offering, so long as during those six-month periods there are no offers or sales of securities by or for the issuer that are of the same or a similar class as those offered of sold under this Section, other than those offers or sales of securities under any written purchase, savings, option, bonus, appreciation, profit sharing, thrift, incentive, pension, or similar plan, or written compensation contract, solely for employees, directors, general partners, trustees (where the issuer is a business trust), officers, or consultants or advisors, provided that bona fide services shall be rendered by consultants or advisors, and such services must not be in connection with the offer or sale of securities in a capital-raising transaction.

a. The term "offering" is not defined in the Securities Act or in this Section. If the issuer offers or sells securities for which the safe harbor rule in subsection (C)(1) is unavailable, the determination as to whether separate sales of securities are part of the same offering (i.e., are considered "integrated") depends on the particular facts and circumstances.

b. Generally, transactions otherwise meeting the requirements of an exemption will not be integrated with simultaneous offerings being made outside the United States that are in compliance with Regulation S and are registered or otherwise exempt under the Securities Act.

c. The following factors should be considered in determining whether offers and sales should be integrated for purposes of the exemptions under this Section:

i. Whether the sales are part of a single plan of financing;

ii. Whether the sales involve issuance of the same class of securities;

iii. Whether the sales have been made at or about the same time;

iv. Whether the same type of consideration is received; and

v. Whether the sales are made for the same general purpose.

2. Information requirements.

a. When information shall be furnished. If the issuer sells securities to any purchaser that is not an accredited investor, the issuer shall furnish the information specified in subsection (C)(2) to such purchaser a reasonable time prior to sale. The issuer is not required to furnish the specified information to any accredited investor.

b. Type of information to be furnished if the issuer is not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. At a reasonable time prior to the sale of securities the issuer shall furnish to the purchaser, to the extent material to an understanding of the issuer, its business, and the securities being offered:

i. Nonfinancial statement information. If the issuer is eligible to use Regulation A, the same kind of information as would be required in Part II of Form 1-A. If the issuer is not eligible to use Regulation A, the same kind of information as required in Part I of a registration statement filed under the Securities Act of 1933 on the form that the issuer would be entitled to use.

ii. Financial statement information for offerings up to $2,000,000. The information required in Item 310 of Regulation S-B, except that only the issuer's balance sheet, which shall be dated within 120 calendar days of the start of the offering, shall be audited.

iii. Financial statement information for offerings up to $7,500,000. The financial statement information required in Form SB-2. If an issuer, other than a limited partnership, cannot obtain audited financial statements without unreasonable effort or expense, then only the issuer's balance sheet, which shall be dated within 120 calendar days of the start of the offering, shall be audited. If the issuer is a limited partnership and cannot obtain the required financial statements without unreasonable effort or expense, it may furnish financial statements that have been prepared on the basis of federal income tax requirements and examined and reported on in accordance with generally accepted auditing standards by an independent public or certified accountant.

iv. Financial Statement information for offerings over $7,500,000. The financial statement as would be required in a registration statement filed under the Securities Act of 1933 on the form that the issuer would be entitled to use. If an issuer, other than a limited partnership, cannot obtain audited financial statements without unreasonable effort or expense, then only the issuer's balance sheet, which shall be dated within 120 calendar days of the start of the offering, shall be audited. If the issuer is a limited partnership and cannot obtain the required financial statements without unreasonable effort or expense, it may furnish financial statements that have been prepared on the basis of federal income tax requirements and examined and reported on in accordance with generally accepted auditing standards by an independent public or certified accountant.

v. Information from a foreign private issuer. If the issuer is a foreign private issuer eligible to use Form 20-F under the