44-1901

44-1901. Registration of certain securities by
qualification; definitions

A. Subject to the limitations provided in subsections G and I of this section,
securities shall be registered by qualification at the time prescribed in subsection K of
this section if the requirements of subsections B, E and F of this section are met.

B. To be registered by qualification under this section, securities must satisfy
either of the following:

1. An offering of shares, warrants, options or other rights to purchase shares must
meet all of the following conditions:

(a) The offering must be made through a firm commitment underwriting by one or more
securities broker-dealers who are all of the following:

(i) Members of a national securities association registered under the securities
exchange act of 1934.

(ii) Registered as dealers in this state.

(iii) Not affiliates of the issuer.

(b) If the offering is of shares, or units, whose direct or indirect constituents
are shares or warrants, options or other rights to purchase shares, both of the following
must be true:

(i) The initial offering price for each share, after attributing all consideration
paid in the initial offering to the shares, is not less than five dollars.

(ii) The exercise or conversion price for each share, for all warrants, options or
other rights to purchase shares, is not less than five dollars.

(c) No securities may be sold in units for the purpose of avoiding the requirements
of subdivision (b) of this paragraph.

(d) The total amount of securities offered and sold, in or out of this state, is
not less than three million dollars.

(e) The issuer shall provide to the commission undertakings that for four years
after the registration:

(i) The issuer will not engage in any transaction with a promoter or an affiliate
of a promoter unless the transaction is approved by a majority of the outside directors
after full disclosure or is on terms no less favorable to the issuer than would be
available from an unaffiliated third party.

(ii) The issuer will not issue to any promoter or an affiliate of any promoter any
shares, options, warrants or other rights to purchase shares at a price per share less
than the market price as of the close of business on the day before the proposed issuance
of the shares, options, warrants or other rights to purchase shares. Nothing in this item
alters corporate or other law with respect to fiduciary duties, conflicts of interest or
the duty of officers and directors to a corporation and its shareholders.

(f) The issuer's most recent audit report on its financial statements filed with
its registration statement or the footnotes accompanying the financial statements do not
express reservations about the issuer's ability to continue in business as a going
concern and the most recent financial statements filed with its registration statement do
not show that the issuer has both negative shareholders' equity and negative working
capital.

2. Except as provided in subsection D of this section, an offering of limited
partnership interests may be made under this paragraph if:

(a) All securities sold to purchasers in this state are sold only to purchasers who
represent in writing that the investment represents not more than ten per cent of the
purchaser's net worth less the value of the purchaser's other investments in limited
partnership interests and the purchaser has any of the following:

(i) An annual gross income of at least seventy-five thousand dollars and a net
worth of at least seventy-five thousand dollars, exclusive of home, car and home
furnishings.

(ii) A net worth of at least two hundred twenty-five thousand dollars exclusive of
home, car and home furnishings.

(iii) In the case of sales to qualified pension or profit sharing plans or trusts,
keogh plans or individual retirement accounts, that the net worth and income requirements
set forth in item (i) or (ii) of this paragraph are met by the fiduciary account or by
the donor who directly or indirectly supplies the monies for the purchase of the
securities.

(b) The issuer has a reasonable basis to believe that each purchaser in this state,
along or with one or more representatives, advisors or agents has the knowledge and
experience in financial and business matters to be capable of evaluating the merits and
risks of the offering.

(c) The issuer, the general partners of the issuer and the general partners or
other persons liable directly or indirectly for the obligations of the general partners,
in the aggregate, have a net worth of not less than one million dollars, as demonstrated
by audited financial statements in the case of the issuer or any other entity and by
reviewed financial statements in the case of an individual.

C. Nothing in subsection B, paragraph 2 of this section changes the duties
enumerated in any rule adopted by a national securities association or national
securities exchange registered under the securities exchange act of 1934.

D. The commission may prescribe greater income and net worth requirements than
those set forth in subsection B, paragraph 2 of this section if it appears to the
commission that the different limitations are in the public interest or in the interest
of investors. The income and net worth requirements of subsection B, paragraph 2, of
this section are presumptively appropriate and may be raised only if the commission finds
that unusual circumstances, such as the speculative nature of the securities, require an
increase. If the commission intends to require an increase, the commission shall notify
the issuer of that fact and of the maximum increase the commission may require within
fifteen business days after the filing of the issuer's initial application under this
section or within six business days after the filing of an amendment pursuant to
subsection K, paragraph 2 of this section.

E. The issuer or underwriter of the securities shall make an application for
registration pursuant to this section by filing with the commission the following:

1. An application for registration of the securities by qualification, in the form
prescribed by the commission pursuant to section 44-1892, demonstrating eligibility for
registration under this section.

2. The documents required for registration of securities by qualification pursuant
to section 44-1892.

3. One copy of the prospectus on file with the SEC in its most recent form as of
the date of the filing under this section.

4. One copy of all amendments or any supplements to the prospectus.

5. A final prospectus.

F. The front cover or a sticker attached to the front cover, or the inside front
cover, of any prospectus delivered to a purchaser in this state shall contain a
conspicuous notice as follows or a notice that is substantially equivalent in plain and
concise language:

These securities are registered under the securities act of Arizona, but the
fact of the registration is not to be deemed a finding by the Arizona
corporation commission or the director of the securities division that this
prospectus is true or accurate, nor does the registration mean that the
commission or the director has passed on the merits of or otherwise approved
the securities described in this prospectus.

G. Except as provided in subsection H of this section, a registration pursuant to
this section is not available for the securities of an issuer if the issuer or any of its
predecessors, affiliates, directors, officers, general partners or beneficial owners of
ten per cent or more of any class of its equity securities, or the managing underwriter
of the securities:

1. Has been convicted of a felony involving racketeering or a transaction in
securities or of which fraud is an essential element or offenses listed in section
13-2301, subsection D, paragraph 4.

2. Has been convicted within the ten years before the filing of the application
under this section, or at any time thereafter, of a misdemeanor involving racketeering or
a transaction in securities or of which fraud or dishonesty is an essential element.

3. Is subject to an order, judgment or decree of a court of competent jurisdiction
entered within ten years of the date of filing of the application under this section
enjoining or restraining him from engaging in or continuing any conduct or practice in
connection with the sale or purchase of securities or involving fraud, deceit,
racketeering or consumer protection laws.

4. Has been subject to any state or federal administrative order or judgment in
connection with the purchase or sale of securities entered within five years before the
filing of the application under this section or at any time thereafter.

5. Is subject to the reporting requirements of the securities exchange act of 1934
and has not filed all required reports during the twelve calendar months before the
filing of the application under this section.

6. Is subject to an order of an administrative tribunal, an SRO or the SEC denying,
suspending or revoking membership or registration as a broker or dealer in securities or
an investment adviser or investment adviser representative for at least six months.

H. The commission may by order allow registration pursuant to this section if, in
the opinion of the commission, the only reason for disqualification is that the applicant
is disqualified pursuant to subsection G of this section and the commission finds that
the circumstances do not justify disqualification. A disqualification under subsection G
of this section ceases to exist if the basis for the disqualification has been removed by
the jurisdiction creating it.

I. An offering of securities pursuant to this section is subject to section 44-1876
only if the offering is made pursuant to subsection B, paragraph 1 and either:

1. The issuer has negative shareholders' equity or negative working capital as
shown on its most recent financial statements filed with its registration statement.

2. The issuer has no public market for its shares and has no significant earnings.

J. An offering of securities pursuant to this section is not subject to sections
44-1877 and 44-1878.

K. Unless the commission or the director of the division declares registration
under this section effective at an earlier time, a registration of securities under this
section becomes effective on the latter of the following:

1. Twenty business days after filing the documents required by subsection E,
paragraphs 1, 2 and 3 of this section, except that if an application is filed with the
commission more than ten days after the initial registration statement is filed with the
SEC, this period shall be extended by the number of days between ten days after the
filing of the initial registration statement with the SEC and the filing of an
application with the commission.

2. In the case of an offering of limited partnership interests, ten business days
after filing any amendment under subsection E, paragraph 4 of this section, containing
such material changes to the registration statement that recirculation of the prospectus
would be required if a preliminary prospectus was circulated.

3. Concurrently with effectiveness of the registration statement under the
securities act of 1933.

4. A later date as the issuer requests.

L. No registration of securities pursuant to this section may be denied, revoked or
suspended pursuant to article 8 of this chapter. The commission may enter an order, after
a hearing or notice of and opportunity for a hearing, denying, suspending or revoking a
registration under this section if it finds that either:

1. The conditions established in this section are not met, the application for
registration, prospectus or any financial statement or any document or exhibit filed with
the application or any amendment or supplement to the application is incomplete,
inaccurate or misleading or the issuer has failed or refused to furnish information
required to establish that the conditions of this section are met.

2. Grounds exist for denial of registration under section 44-1921, paragraph 2 or
44-1991.

The commission shall promptly send notice to the issuer of any order entered under this
subsection.

M. For the purposes of this section:

1. "Firm commitment underwriting" means that the dealers contract in a principal
capacity to purchase at least the minimum amount of securities if any are purchased.

2. "Promoter" means any person who is an officer, director or owner, directly or
indirectly, of ten per cent or more of the issuer's outstanding shares before, or on the
day of, the registration of the offering, but does not include an affiliated
institutional investor which owns less than twenty per cent of the shares to be
outstanding upon completion of the proposed offering.

3. "Significant earnings" include earnings per share over the issuer's past two
years of operations, or the shorter period of its operations, equal to not less than five
per cent per annum of the per share total of stated and additional paid in capital of the
issuer during the period. A calculation of significant earnings shall be submitted to the
commission and may be computed by the issuer's chief financial officer based on the
issuer's financial statements.

4. "Unaffiliated institutional investor" means any unaffiliated bank, investment
company registered under the investment company act of 1940, business development company
as defined in section 2(a)(48) of the investment company act of 1940, small business
investment company licensed by the United States small business administration under
section 301 of the small business investment act of 1958, employee benefit plan within
the meaning of title I of the employee retirement income security act of 1974, insurance
company, private business development company as defined in section 202(a)(22) of the
investment adviser act of 1940 or comparable business entity engaged as a substantial
part of its business in the purchase and sale of securities.