. . | ¥ ." 4 _. 44' f .,; 1 MM M MM M M M MMI M IM \\ M M M MM; MMMM MM l BEFORE THE ARIZONA CORPORATION 2 COMMISSIONERS 3 TOM FORESE, Chairman BOB BURNS 4 ANDY TOBIN 5 BOYD w. DUNN JUSTIN OLSON 6
7 In the matter of: Docket No. S-20932A- l5-0220 8 LOAN GO CORPORATION, a Uta 9 corporation,
10 MMELTMnNG§1;EBy'LhL'NmG3LEMw??§ HEATHE
11 JEFFREY SCOTT PETERSON, an unmarried 12 man, Arizona Corporation Commission JOHN KEITH AYERS and JENNIFER ANN 13 BRINKMAN-AYERS, husband and wife, DOCKETED
14 Respondents. NOV 27 2017
15 DOC BY 16 17 18 19 APPLICATION FOR REHEARINC ON BEHALF OF 20 JUSTIN AND HEATHER BILLINGSLEY ¢.1 . 21 November 27, 2017 A.- c . : 22 3 1 23 . ' ; \ 24 18 c i v 25 w 26 27 TABLE OF CONTENTS l
2 1. The Commission should not "bring down the hammer" on a startup just because it 3 4 11. Heather Billingsley is an innocent out-of-state spouse, and no liability startupshould be assessed against her 5 111. The Commission should not have found registration violations, because 6 the Loaf Go notes were exempt from registration ....8 7 A. The notes are exempt from registration under SEC Regulation D and 8 A.A.C. R14-4-126. 8
9 l. The subscription agreements demonstrate that Regulation D 10 l l 2. Definition of Accredited Investor under Regulation 8 12 3. The Commission's conclusion that the investors were not accredited . 13 is 9
14 4. The Commission erred as a matter of law in disregarding the investor's 15 certifications that they were accredited investors
16 5. Further evidence shows that the investors were accredited 10 17 6. The Commission erred in considering hearsay testimony on accredited 18 investor l l
19 7. The Regulation D, Rule 505 exemption applies 12 20 8. The Regulation D, Rule 506 exemption applies 13 21
22 9. A Form D filing is not required to claim the exemption...... 14
23 B. The notes are exempt firm registration under the private offering 15 24
25 IV. No fraud finding should be made against Justin Billingsley 15
26 A. Mr. Billingsley acted in good faith reliance on legal and 27 professional 15
1 B. The documents show that the note holders knew the notes were l h h k 17 2 c. The Commission should follow the U.S. Supreme Court and adopt the 3 Central Bank of Denver test for omissions violations 19 4 D. Cash out of loans by founders 5 E. Payment 6
7 F. Promissory note for Mr. Jordon - alleged failure to disclose alleged prior defaults 22 8 9 v. The Commission failed to respond to issues raised in exceptions 23
. 10 VI. l l Attachment .- Declaration of Justin C. Billingsley 12
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2 1 Justin and Heather Billingsley (the "Billingsleys") submit this Application for 2 Rehearing in accordance with A.R.S. § 44-1974, A.A.C. R14-3-l ll and the penultimate
3 ordering paragraph of Decision No. 76450 (November 7, 2017). This Application is 4 supported by the attached Declaration of Justin Billingsley, submitted in accordance with
5 A.A.C. R14-3-111(F).
6 I. The Commission should not "brim down the hammer" on a starts 'use because it Aile . 7 Loaf Go was based on an intriguing idea-extending mobile and online technology 8 to the payday loan sector. This would eliminate a major cost of the traditional payday 9 lenders (the "brick and mortar" retail loan stores), and would allow much of the process to 10 be automated. Further, computers and mobile devices would enable the company to reach a l l vast potential market. Understandably, Justin Billingsley was excited to be involved in this 12 promising venture. 13 But startups have a high failure rate. As with any startup, the risks were high. The 14 five investors who purchased the Loaf Go promissory notes knew as much. They were 15 wealthy, high net worth individuals. The very word "startup" screams risk. The very high 16 interest rates (18-24%) also clearly showed that this was a risky investment. And the 17 Private Placement Memorandum ("PPM") received by each investor clearly spelled out the 18 risks. Thus, the five investors knew they were getting into a "high risk" investment with a 19 corresponding high potential payoff 20 Like most startups, Loaf Go failed. That is not a reason to bring Loaf Go before this 21 Commission. Justin and Heather Billingsley now face crippling economic sanctions 22 (restitution and penalties) and the devastating finding of "securities fraud." This is 23 unwarranted. The evidence is clear that Justin tried to do everything properly: 24 An experienced securities attorney, Gary Agron, was involved throughout, 25 including in the preparation of the PPM and the Subscription Agreement; 26
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3 1 Loaf Go worked closely with Gilford Securities, an experienced full-service 2 investment bank based in New York. Gilford completed extensive due
3 diligence about Loaf Go, including review of the PPM and speaking with and
4 qualifying each of the investors.
5 Loaf Go co-founder Jeffrey Peterson was an experienced securities broker and
6 was the founder and CEO of a Quepasa Corporation, a successful internet
7 startup that raised more than $100 million in its IPO. 8 All of the usual paperwork involved in a "Regulation D" exempt offering was 9 prepared, including a PPM and Subscription Agreements. 10 Each of the investors submitted an investor questionnaire warranting in l 1 writing that they were "accredited investors" under Regulation D. 12 Thus, the Commission should have treated the Loaf Go notes for what they were-exempt 13 securities under SEC Regulation D and its Arizona counterpart. This Application explains 14 in detail why the Loaf Go notes were exempt securities. But even if they are not-if 15 Loaf Go in good faith made some technical mistake-why impose such a harsh order? 16 It is well known that Arizona has little start up activity. That is not an accident. A 17 key factor is the draconian policies of this Commission in securities cases. Indeed, the 18 advice to startups is often to go anywhere but Arizona. Governor Ducey often touts 19 Arizona's favorable regulatory climate, especially as compared to California. But for 20 startups, the roles are reversed-it is Arizona where businesses must fear to tread, at least if 21 they are startups looking to raise money. This case presents the Commission with an 22 opportunity to change that message-to show that a failed business is no reason to be 23 hauled before regulators-and that a business that tries to do everything properly, with 24 securities lawyers and an investment bank involved, has nothing to fear. 25 The Commission should therefore grant rehearing on the following issues: 26 1) Liability of innocent, out-of-state spouse. Heather Billingsley had no 27 involvement in this case, but she has been named for community property purposes. But
4 1 the Billingsleys moved to Connecticut in September 201 l, before any of the promissory
2 notes were sold (between 2011 and 2012) and long before this case was filed (2015).
3 Connecticut is not a community property state, so there is simply no marital community to
4 be bound here. Thus, Heather Billingsley should not be found liable by the ACC.
5 2) Regulation D exemptions. LoanGo's notes were intended as a private
6 placement offering exempt under SEC Regulation D and its Arizona equivalents. For
7 example, there was a private placement memorandum, as well as signed subscription
8 agreements, and investor questionnaires documenting the "accredited investor" status of the
9 note holders. Thus, the notes are exempt under Regulation D and its Arizona equivalents.
10 The Commission's decision to the contrary was based on a finding that the five investors l l were not accredited. This finding was erroneous because:
12 • Each of the investors signed an investor questionnaire expressly stating-
13 indeed, warranting-that they were an accredited investor. The Commission
14 is required, as a matter of law, to credit these signed certifications.
15 • Each of the investors was vetted by Noah Apron of Gilford Securities, who
16 confined that they were accredited investors.
17 • The notes were only offered in one of the most exclusive RV parks in the
18 nation, the home of $300,000+ luxury motor coaches. Each of the note
19 holders was part of this high-end community, and they typically had invested
20 substantially more in safe, secure annuities before they took a flyer on the
21 Loaf Go notes.
22 • Three of the investors did not testify; for them the only evidence that they
23 were not accredited investors was hearsay testimony. Here, it was not
24 reasonable to rely on hearsay when each of the investors signed a certification
25 that they were accredited investors. And even if evidence beyond the
26 certifications is considered, more reliable evidence existed that was not
27 considered.
5 l 3) Private Offering exemption. Further, only five promissory notes were issued, 2 so the statutory "private offering" exemption should apply, especially because the investors
3 are clearly wealthy, sophisticated investors.
4 4) No fraud. The Commission should not have made a fraud finding against 5 Justin Billingsley. The main issue is whether the investors should have known the notes 6 were risky. The investors were well aware that the Loaf Go notes were a high-risk
7 investment, because:
8 • Loaf Go was a startup, and startups are inherently risky,
9 • The interest rates of 18-24% showed that this was a high-risk investment, and
10 • The PPM contained numerous clear statements of risk, including that the l l investor should not invest if they cannot lose their entire investment 12 5) Failure to respond to issues. The Commission has also committed legal error 13 in failing to respond, in its written decision, to issues raised in the Billingsleys' Exceptions. 14 Administrative agencies are required to state the reasons for their decision on all issues, and
15 to respond to the relevant evidence and arguments. The Commission failed to respond to 16 the following issues raised in Exceptions:
17 • That the Regulation D exemption applies,
18 • That the Private Offering exemption applies, and
19 • That Heather Billingsley must be dismissed because the marital community
20 ceased to exist prior to this case being filed. 21 By failing to offer an explanation of its decision on these points, the Commission has 22 committed reversible error.
23 n. Heather Billingslev is an innocent out-of-state spouse. and no liability should be assessed against liner. 24
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6 1 Heather Billingsley had absolutely no involvement with Loaf Go or the promissory
2 notes. Further, Heather and Justin Billingsley moved to Connecticut in September 2011.1 3 The move is a permanent move that changed their domicile.2 Connecticut is not a 4 community property state, so there is no marital community to establish liability against. 5 Heather Billingsley has been named solely for community property purposes under
6 A.R.S. § 44-2031(c).3 This statute provides that "[t]he commission may join the spouse in
7 any action authorized by this chapter to determine the liability of the marital community." 8 Thus, the statute requires that a marital community exist before liability can be determined. 9 Further, the statute provides that "[t]his subsection does not authorize the commission to 10 join any individual who is divorced from the defendant at the time an action authorized by l l this chapter is filed." This confirms that a marital community must exist at the time the 12 administrative charges are filed. Here, while there was no divorce, the marital community 13 ceased to exist once the Billingsleys moved to a non-community property state. See Ag. 14 Lorenz~Auxier Fin. Group, Inc. v. Bidewell, 160 Ariz. 218, 220 (App. l989)("Arizona 15 community property law" does not apply to couple domiciled in non-community property
16 state),see also Internal Revenue Manual, § 25. lb. l .3.4 (noting that "A community property 17 estate, having been created, is tenninated when spouses change their domicile from a
18 community property state to a common law state.")4 19 The Billingsleys moved in 2011, long before this case was filed in June 2015.
20 Indeed, even if the time of the investment-rather than the time of the administrative 21 charges-controlled, the promissory notes were issued in December 20] l and March 2012, 22 alter the move. Thus, no marital community exists for the Commission to assess liability
23 against under A.R.S. § 44-203l(C). The Commission cannot award any restitution or
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25 1 See attached Declaration of Justin C. Billingsley 113. 26 2 Attached Declaration of Justin C. Billingsley 113. 3 See Decision No. 76450 at pages 29-31 . 27 4 Available at https://www.irs.gov/irm/part25/irm_25-018-001 .
7 l administrative penalties against a marital community that does not exist. Accordingly, 2 Heather Billingsley should be dismissed from this proceeding.
3 ml. The Commission should not have found registration violations., because the Loaf Go notes were elem tfrom re castration. 4 A. The notes are exempt from registration under SEC Regulation D and A.A.C. 5 R14-4-126. 6 The SEC has established a rule, Regulation DO, that provides a "safe harbor" 7 narrower than the related statutory exemptions. Arizona has enacted a parallel rule, Rl4~4- 8 126. Because the SEC and Arizona rules are largely identical, these exceptions will address 9 them together, and where applicable, "Regulation D" includes the parallel Arizona rule.
10 I. The subscription agreements demonstrate that Regulation D applies. l l The subscription agreements specifically state that the signer understands that 12 Regulation D applies:
13 The undersigned acknowledges his, or its understanding that the Offering 14 and sale of the Notes is intended to be exempt from registration under the Securities Act of 1933, as amended (the "Securities Act") by virtue of 15 Section 4(2) of the Securities Act and the Provisions of Regulation D
16 promulgated thereunder ("Regulation D").6 17 Thus, both the Respondents and the note holders were operating under the assumption that
18 registration was not required because the Regulation D exemption applied.
19 2. Definition ofAeeredited Investor under Regulation D.
20 The key reason that the exemption applies is that the note holders were "accredited 21 investors. The SEC and Arizona rules have different definitions. In Arizona, the definition 22 of "accredited investor" includes: Any natural person whose individual net worth, or joint net worth with that 23 person's spouse, at the time of that person's purchase exceeds $1,000,000, 24
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26 5 17 C.F.R. § 230.500 et seq. 6 See Exhibits S-5 through S-13 (notes and subscription agreements), the quoted language is from 27 Paragraph 3(b) of the subscription agreements.
8 1 and 2 Any natural person who had an individual income in excess of $200,000 in
3 each of the two most recent years or joint income with that person's spouse in
4 excess of $300,000 in each of those years and has a reasonable expectation of
5 reaching the same income level in the current year.
6 A.A.C. R14-4-l26(B)(e),(t). In 201 l, the SEC amended the definition of accredited 7 investor to exclude the value of an individual's primary residence.7 The Commission has 8 not revised its definition. The revised SEC rule did not take effect until February 27, 2012, 9 and would not have applied to any of the notes except for Mr. Jordan's March l, 2012 note.
10 3. The Commission's eonelusion that the investors were not accredited 11 is unsupported The Commission's Decision concludes that "[t]he evidence of record filrther proves 12 that none of the investors were qualified as accredited investors." Decision No. 76450 13 (Nov. 7, 2017) at 24:4-5. The only explanation for this conclusion is the statement that 14 "[t]he evidence of record proves that none of the investors had a net worth in excess of $1 15 million at the time of investment." Id. at 24:3-4. This statement, even if it was correct, is
16 not a sufficient basis to conclude that an investor is not an accredited investor. First, 17 married investors could qualify if they had an income of more than $300,000. Second, 18 single investors could qualify if their income was more than $200,000. Third, it is not clear
3 whether the Commission considered the value of the home.
4. The Commission erred as a matter of law in disregarding the 21 investor's eertyications that they were accredited in vectors.
22 Further, and critically, the note holders submitted subscription agreements that
23 included investor questionnaires demonstrating that they were accredited investors, as well
24 as subscription agreements representing and warranting that the Questionnaire "is true and
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26 7 See Net Worth Standard for Accredited Investors, SEC Release No. 33-9287 (Dec. 21 , 201 l) [76 Fed. Reg. 81793] available at https://www.sec.gov/mles/Hnal/20l l/33-9287.pdf and 27 https:// [email protected]/fdsvs/pkg/FR-20l l -l2-29/pdf/201 l -33333.pdf#pa2e=l .
9 l accurate in all respects" and that the signer "is an "accredited investor," as that term is 2 defined in Rule 50l(a) of Regulation D."8 Mr. Billingsley was entitled to rely on these
3 express representations by the note holders. See e.g., Wright v. Nat'l Warranty Co., 953
4 F.2d 256, 260 (6th Cir. l992)(relying on representations and warrantees in subscription
5 agreement to demonstrate investors were accredited), In re Enron Corp. Sec., Derivative &
6 ERISA Litig., 761 F. Supp. ad 504, 533 (S.D. Tex. 201 l)(finding registration not required
7 because investment was a private placement, because the "relevant Certificate Purchase 8 Agreements are conditioned on Plaintiffs' warranty and representation that they were
9 "accredited investors""), Supernova Sys., Inc. v Great Am. Broadband, Inc., 1:10-CV-319, 10 2012 WL 425552, at *5 (N.D. Ind. Feb. 9, 2012)("greater weight of authority" supports 11 reliance on investor's representation that they were an accredited investor). It was therefore 12 legal error for the Commission to disregard these investor certifications. 13 5. Further evidence shows that the investors were accredited.
14 Moreover, there is further evidence that the investors were accredited. They were 15 each located at a very high-end RV park, where the typical RV is a luxury motor coach 16 costing between $300,000 and $400,000.9 They also held significant investments in 17 annuities I0:
18 Patricia Rowley and her husband were wealthy investors.l 1 In fact, they owned their
19 own island that they lived on when they were not travelling in their luxury Rv." They also
20 owned a private plane.l3 Indeed, Mrs. Rowely testified that the funds for their investment
21 in Loaf Go came from the sale of their plane." They also invested approximately $400,000
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23 8 See Exhibits S-4 through S-l5. The quoted language is from Paragraph 3(c) of the Subscription Agreements. 24 9 Attached Declaration of Justin C. Billingsleyl] 6. 10 Attached Declaration oflustin C. Billingsley 11116-13. 25 ll Attached Declaration of Justin C. Billingsley 11 8. 26 12 Attached Declaration oflustin C. Billingsley 1] 8 is Attached Declaration of Justin C. Billingsleyll 8. 27 14 Tr. at 25.
10 1 to $500,000 in an equity-indexed annuity thorough Mr. Billingsley." Mr. Rowley was
2 focused on returns, not safety, in his investments.'6 3 Robin Erickson was a sophisticated and informed investor." She repeatedly asked 4 about higher risk investments, including real estate.I8 She had well over $400,000 invested 5 in her IRA that she invested in an annuity, her husband did the same with well over
6 $100,000.19 She also had an equity-indexed life insurance policy with a death benefit of
7 $700,000 to $800,000, as well as a very nice Rv." 8 Richard Goble was very interested in greater risk and greater earnings." He
9 invested approximately $300,000 to $400,000 in annuities."
10 Donald Smeltzerinvested approximately $500,000 to $600,000 in annuities." l l John C. Jordan invested about $300,000 in an annuity.24 He also owned a large
12 yacht that he lived in when he was not living in his luxury motor coach.25
13 Considering the ownership of a home, a luxury RV, and substantial holdings in
14 annuities, it is reasonable to find that each of the investors was accredited. Indeed, these 15 were the kinds of people who owned, variously, a yacht, a private plane, and a personal
16 island.
17 6. The Commission erred in considering hearsay testimony on accredited IN vector status. 18 Further, for three of the investors, the only evidence they were not accredited was 19 hearsay testimony offered by the Division investigator. While in an administrative hearing, 20
21 15 Attached Declaration of Justin C. Billingsley 118. 22 16 Attached Declaration of Justin C. Billingsleyl] 8. 17 Attached Declaration of Justin C. Billingsley 1]9. 23 18 Attached Declaration of Justin C. Billingsley 11 9. 19 Attached Declaration of Justin C. Billingsley 119. 24 20 Attached Declaration of Justin C. Billingsley 1] 9. 21 Attached Declaration of Justin c. Billingsley 1110. 25 22 Attached Declaration oIIJustin c. Billingsley 11 10 26 23Attached Declaration of Justin C. Billingsley 11 ll. 24 Attached Declaration of Justin C. Billingsley 11 12. 27 25 Attached Declaration of Justin C. Billingsley 1] 12.
l l 1 "[h]earsay may be given probative weight in some circumstances," Brown v. Arizona Dept. 2 of Real Estate, 181 Ariz. 320, 328 (App. 1995), it is not necessarily substantial evidence, 3 and the reliability and nature of the hearsay must be considered. Further, "an agency
4 decision should not be based upon unreliable hearsay" and "[r]eliable hearsay must be of 5 the kind reasonable persons rely upon in serious matters." Plowman v. Arizona Stale 6 Liquor Bd., 152 Ariz. 331, 337 (App. 1986). 7 Here, the certifications signed by the investors themselves is more probative than the
8 hearsay testimony to the contrary. Moreover, if evidence beyond the certifications is 9 considered, the Division typically prepares interview notes and interview memorandums 10 when interviewing an investor, and it sometimes records interviews. Here, the notes,
11 interview memorandums and any recordings were not disclosed and were not admitted into
12 evidence. If they exist, they should have been disclosed so that the investigator's hearsay
13 testimony could be checked for accuracy and reliability. And if such records do not exist- 14 when the Division's normal practice is to have them-then the question is why did the 15 Division avoid making a record? Further, "reasonable persons" in "serious matters" would 16 rely on contemporaneous records of a conversation, such as recordings, interview notes, or
17 interview memorandums, rather than hearsay testimony offered years later.
18 Moreover, relying on hearsay prevents follow up questions, such as about assets, the
19 value of homes, experience in investing, and the like. In short, hearsay evidence is inferior
20 to the investor's own statements in the investor certifications, and it should be disregarded
21 here. 22 Z The Regulation D, Rule 505 exemption applies. 23 For all of these reasons then, the Commission should have found the investors to be
24 accredited investors. This, in tum, leads to the conclusion that the Regulation D, Rule 505 25 and 506 exemptions from registration apply. Accredited investors do not count towards the 26 numerical caps in Regulation D, Rules 505(b) and 506(b), and the parallel Arizona rules.
27 17 C.F.R. § 230.50l(e)(iv); A.A.C. R14-4-l26(B)(5)(iv).
12 1 Regulation D, Rule 505 and its Arizona counterpart provide an exemption for sales
2 in an annual amount of up to $5 million. 17 C.F.R. § 230.505(b)(2)(i); A.A.C. Rl4-4- 3 l26(E)(2)(b). Up to 35 non-accredited investors may purchase the product. 17 C.F.R. § 4 230.505(b)(2)(ii), A.A.C. R14-2-l26(E)(2)(c). Here, the total amount raised was $250,000,
5 and there were only five note holders, who were the only offerees.2° Thus. even if the note
6 holders were not accredited, the Rule 505 exemption would apply. The Decision simply 7 does not address this issue.
8 8. The Regulation D, Rule 506 exemption applies.
9 Regulation D, Rule 506(b) and its Arizona counterpart provide a separate exemption
10 that is unlimited in the amount raised. 17 C.F.R. § 230.506(b), A.A.C. R14-4-l26(F). Up l l to 35 non-accredited investors may purchase the product. 17 C.F.R. § 230.506(b)(2)(i),
12 A.A.C. R14-4-l26(F)(2)(a). However, unlike Rule 505, under Rule 506(b), the non~
13 accredited investors must be what are usually called "sophisticated" investors, although that
14 term is not used in the rule. Under Rule 506(b), "Each purchaser who is not an accredited
15 investor either alone or with his purchaser representative(s) has such knowledge and
16 experience in financial and business matters that he is capable of evaluating the merits and
17 risks of the prospective investment, or the issuer reasonably believes immediately prior to 18 making any sale that such purchaser comes within this description." 17 C.F.R. §
19 230.506(b)(2)(ii); A.A.C. R14-4-l26(F)(2)(b).
20 Here, each of the note holders was an accredited investor, as explained above. But
21 even if the Commission was correct that the investors were not accredited, they were
22 certainly "sophisticated." As shown above, each of the investors was wealthy and had
23 substantial holdings in annuities and substantial assets. Thus, each investor was, at the very
24 least, "sophisticated." And because there were only five investors (who were the only
25 offerer), the provisions of Rule 506 have been met.
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27 26 Attached Declaration of Justin C. Billingsley 11 17.
13 1 9. A Form D/iling is not required to claim the exemption. 2 The Division argues that these exemptions are not available because a "Form D" was
3 not Med." This argument was not discussed or adopted in the Decision. In any event, 4 filing a Form D is not a strict requirement to claim the exemption, as the SEC has made
5 clear. Indeed, the "S.E.C. has explicitly stated that filing a Form D is not a condition to 6 obtaining an exemption under Rules 504-506." Hamby v. Clearwater Consulting Concepts, 7 LLLP, 428 F. Supp. 2d 915, 920 (E.D. Ark. 2006)(citing SEC Release No. 6,825 (Mar. 14, 8 l989)). The SEC itself clearly states that "[W]hile the filing of Form D has been retained,
9 it will no longer be a condition to any exemption under Regulation D." SEC Release No.
10 6,825 (Mar. 14, 1989). 11 Thus, filing a Form D is not a requirement for an exemption. Given the close 12 similarity between federal securities law and Arizona securities law, the Commission
13 should follow the SEC's lead here. And in any event, the state registration requirements are
14 preempted for all Federal covered securities. 15 U.S.C. § 77r(a)(1). A covered security
15 includes any securities issued under the rules related to the "private offering" exemption in
16 15 U.S.C. § 77(d)(2). 15 U.S.C. § 77r(b)(4)(F).28 Rule 506 of Regulation D is such a rule,
17 and therefore any state registration requirement is preempted if Rule 506 is satisfied. And
18 as noted above, the SEC does not require a Form D to be filed to claim the Regulation D
19 exemptions. Thus, Arizona may not insist on a Form D filing where the SEC does not.
20 In short, the exemptions to registration in SEC Regulation D, Rules 505 and 506, 21 and the parallel ACC state rules, apply. Thus, the Commission should not find any 22 registration violations in this case.
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24 27 See Decision No. 76450 at l9:l0-12. 28 There is an exception for notice filing requirements, but only to the extent they are "substantially 25 similar to those required by rule or regulation under" 15 U.S.C. § 77d(2) "that are in effect on 26 September l, l996." The SEC release removing the Form D as a condition for claiming a Regulation D exemption was enacted in 1989. SEC Release No. 6,825 (Mar. 14, 1989). Thus, 27 Arizona may require a Form D filing, but may not condition the exemption upon it.
14 B. The notes are exempt from registration under the private offering exemption. l Because Regulation D is a "safe harbor" rule, it is narrower than the corresponding 2 statutory exemptions it implements. The same is true for Rule 14-4~126. Thus, it is still 3 possible to meet the related statutory exemption, even if the rule is not satisfied. For Rule 4 506, the statutory exemption is the private offering exemption in Section 4(a)(2) of the 5 Securities Act of 1933, 15 U.S.C. § 77d(a)(2). This statutory exemption applies to 6 "transactions by an issuer not involving any public offering." Arizona has the same 7 exemption in A.R.S. §44~1844(A)(1). 8 An offering is "private" if the "offering [is] to those who are shown to be able to 9 fend for themselves." S.E.C. v. Ralston Purina Co., 346 U.S. 119, 125 (1953). The 10 Arizona Court of Appeals applied Ralston Purina to the Arizona Securities Act in Butler v. l l Am. Asphalt & Contracting Co., 25 Ariz. App. 26, 29 (1975). "Stated another way, a 12 limited distribution to highly sophisticated investors rather than a general distribution to the 13 public, is not a public offering." S.E.C. v. Platforms Wireless lnt'l Corp., 617 F.3d 1072, 14 1090-91 (9th Cir. 2010). 15 Here, as shown above, the note holders were all accredited investors, as they 16 themselves represented. At the very least, they were wealthy, sophisticated investors. 17 Further, there were only five notes issued. It strains the statutory language beyond 18 recognition to find that an offering to only five people is somehow a "public offering." The 19 Commission should thus find that the notes were part of a private offering, and that they are 20 therefore exempt from registration. 21 Iv. No fraud finding should be made against Justin Billingslev. 22 A. M r . Billingsley acted in good faith reliance on legal and professional advice. 23 Justin Billingsley has a hard-eamed reputation as a business person. He has a 24 successful 20-year career in marketing and executive management roles. From 2001 to 25 2013, he was President and CEO of Compass Financial in Phoenix, which he grew to 26 annual revenues of $20 million. He has consulted for Fortune 1000 companies in risk 27
15 1 management and financial planning. He has also taught financial and tax planning at the
2 University of Phoenix, and he hosted a financial talk radio show on 1510 KFNN. In 2013,
3 he became President of Mobile Corporation, a technology company based in Boston. In
4 2015, he became CEO of Mobil Agency, a wholesale real estate brokerage based in New
5 York. As a successful, job-creating entrepreneur, his reputation is very important to him.
6 Therefore, Justin Billingsley is very concerned about the proposed fraud findings, and the
7 Commission should not make fraud findings against him.
8 Mr. Billingsley took numerous steps to ensure that things were done properly. He 9 insisted that Loaf Go retain a "top rated securities & corporate finance attorney,"29 Gary
10 Agron, and paid for the legal fees. He ensured that an experienced and qualified investment l l bank, Gilford Securities, reviewed everything.3° He did not knowingly violate any 12 regulations, and the Commission should not make a fraud finding against him. 13 For example, securities attorney Gary Apron was closely involved in all steps of 14 raising capital. Mr. Agron was the securities lawyer for LoanGo.3l Gary Agron draf'ted the 15 Private Placement Memorandum ("PPM").32 He oversaw all elements of the PPM." He 16 was involved in preparing organizational minutes and bylaws.34 He also advised Loaf Go 17 no the subscription agreements and investor certifications." 18 LoanGo's investment Bank, Gilford Securities, was also closely involved in the 19 investment process. Gilford conducted extensive due diligence of LoanGo.36 Gilford was
20 involved in distributing the PPM" and in editing the PPM." Noah Agron at Gilford was
21
22 29 https://profiles.superlawvers.com/colorado/en2lewood/lawver/2arv-agron/ l00e l e24-7e26-45bb- 9039-fe4fb0652 I d7.html. 23 30See e.g. Exhibit S-20 (Letter of Intent with Gilford Securities Incorporated). 31 Tr. at 386:10-12. 24 32 Tr. at 389:16-25. 33 Attached Declaration of Justin C. Billingsley at Attachments A, D. 25 34 Attached Declaration of Justin C. Billingsley at Attachments B, C. 26 35 Attached Declaration of Justin C. Billingsley at 1] 14. 36 Exhibit L-13. 27 31 Exhibit L-21 .
16 1 their primary contact, and Mr. Billingsley "took direction from him as the representative of
2 Gilford as to how to raise money."39 Noah Agron personally vetted each investor to ensure 3 that they were accredited investors.4° Indeed, at the hearing, Mr. Billingsley related a 4 conversation he had with Noah Apron, who stated that "I have to be real direct with these
5 people [the investors].", Mr. Billingsley replied "I said fine, you know, if it is not for them 6 it is not for them...."4I These are not the words of a fraudsters, they are the words of
7 someone trying his best to do everything properly.
8 In addition to Noah Agron and Gary Agron, Mr. Billingsley also relied on Mr.
9 Peterson's extensive knowledge and experience." Mr. Peterson had been a broker at
10 Lehman Brothers and knew the securities industry." Mr. Peterson was also the founder of l l Quepasa Corporation, which he took public, raising over $100 million in a NASDAQ
12 Ipo.4" Clearly, Mr. Peterson knew about raising money from investors.
13 B. The documents show that the note holders knew the notes were high risk. 14 The fraud charges against Mr. Billingsley do not hold up to scrutiny. The primary 15 charge is that he told note holders that the notes would be low risk.45 If that were true, it 16 would certainly be fraudulent, because Loaf Go was a risky startup. But that's not what Mr. 17 Billingsley told the note holders. This is home out by the Private Placement Memorandum 18 ("PPM"), which clearly states that "We are an early stage company and are subject to all
19 the risks of a startup business, which reduces the likelihood of our success."46 Likewise, 20 the PPM warned that "We have no revenue, have incurred operating losses and have a
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22 38 Tr. at 377-78. 23 39 Attached Declaration of Justin C. Billingsleyl] 15. 40 Attached Declaration of Justin C. Billingsley 1] 15. 24 41 Tr. at 413-414. 42 Attached Declaration of Justin C. Billingsleyl] 18. 25 43 Attached Declaration of Justin C. Billingsley 1] 18. 26 44 Attached Declaration of Justin C. Billingsley 1] 18. 45 Decision No. 76450, page 21, lines 9-17. 27 46 Exhibit S-3, at page 4 (emphasis in original).
17 1 negligible net worth."47 Further, the PPM makes clear that "The notes are unsecured and 2 are not guaranteed by any party."48 The PPM Summary also stated "[t]his Offering 3 involves a high degree of risk and the Notes should only be purchased by those capable of 4 losing their entire investment." Each note holder certified that he or she received and 5 reviewed the PPM.49 The notes also carried high interest rates of 18% or more, showing
6 that they were risky. 7 Further, the subscription agreements signed by the note holders clearly stated that the
8 holder "understands and acknowledges that his, her or its purchase of the Notes is a 9 speculative investment that involves a high degree of risk and the potential loss of their 10 entire investment and has carefully read and considered the matters set forth in the l l Memorandum and in particular the matters under the caption 'Special Note Regarding
12 Forward-Looking Statements' and 'Risk Factors' therein."5° The note holders also certified 13 that "No oral or written representations have been made, or oral or written information 14 filmished, to the undersigned or his, her or its Advisors, if any, in connection with the 15 Offering of the Notes which are in any way inconsistent with the information contained in 16 the Memorandum."5 |
17 The note holders should be taken at their word-they understood that this was a high
18 risk investment in a startup. These contemporaneous statements by the note holders are far
19 more reliable than remarks made years later. The intervening years have caused memories
20 to fade. This testimony, which occurred years after the investment, should be given less
21 weight than the written statements made by the note holders at the actual time they loaned
22 the money to Loaf Go.
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24 47 Exhibit S-3, at page 4 (emphasis in original) 25 48 Exhibit S-3, at page 6 (emphasis in original). 26 49 See subscription agreements, e.g. Exhibit S-4 at Paragraph 3(b)(iv) and 3(e). 50 See e.g. Exhibit S-4 at paragraph 3(h). 27 5 | See e.g.Exhibit S-4 at paragraph 3(q).
18 1 Additional evidence points to the investors being aware that the notes were risky.
2 The interest rates were 18% to 24%, very far beyond what is available in safe (albeit not 3 risk-free) investments like CDs or money market funds. It is well known that the higher the 4 risk, the higher the return. So the high interest rates clearly denoted a risky investment, a 5 message that would be obvious to the average person, much less the wealthy, sophisticated 6 investors in the exclusive, high-end RV park. 7 In short, the evidence shows that this was an obviously high risk investment in a 8 startup, and the note holders were well aware of the high risk nature of the notes.
9 c . The Commission should follow the U.S. Supreme Court and adopt the Central Bank of Denver test for omissions violations.
10 The remaining fraud allegation are all "omissions" allegations under A.R.S. § 44- l l 1991(A)(2). To prove an "omission" allegation, the Division must show that the
12 respondent "omit[ted] to state any material fact necessary in order to make the statements 13 made, in the light of the circumstances under which they were made, not misleading."
14 A.R.S. § 44-199l(A)(2). There were no statements that were rendered "misleading" by the
15 alleged omissions. Further, as the Supreme Court has observed, for securities fraud,
16 "[w]hen an allegation of fraud is based upon nondisclosure, there can be no fraud absent a 17 duty to speak." Cent. Bank of Denver, NA. v. First Interstate Bank of Denver, N.A., 511
18 U.S. 164, 174 (1994). The Commission should heed this wise decision, which was based
19 on the statutory text, rather than the contrary, contextual Arizona lower court decisions like 20 Aaron v. Fromkin, 196 Ariz. 224, 227, 1] 15 (App. 2000), which blindly followed a pre- 21 Central Bank of Denver line of cases.
22 Central Bank of Denver is especially compelling because it concerned federal
23 securities fraud, and Arizona's securities fraud statute, A.R.S. § 44-1991 is "almost 24 identical to the antifraud provisions of the 1933 Securities Act, 15 U.S.C. § 77q." Grand v. 22 Naccnio, 225 Ariz. 171, 173-74, 1] 11 (2010).
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19 1 Further, the Arizona Supreme Court states that the Arizona Securities Act should be
2 interpreted by "following settled federal securities law unless there is a good reason to
3 depart from that authority." Sell v. Gama, 231 Ariz. 323, 327, 1] 18 (2013). Indeed, the
4 Arizona Legislature specifically pointed to federal court interpretations as a guiding factor.
5 1996 Laws ch. 197 § ll(c)(statement of legislative intent), as cited in Sell at 1] 18.52 This
6 legislative policy is wise, because it promotes investment and startup activity in Arizona by 7 preventing state law from imposing unexpected liability, which would occur if the Arizona 8 Securities Act is interpreted in surprising and different ways than the parallel provisions of 9 federal statutes. Thus, both the text of the Arizona statute, the guidance by the Legislature, 10 and the clear holding from the U.S. Supreme Court on the parallel federal statute support
l l requiring a "duty to speak" for any "omissions" liability. The Division does not point to
12 any duty to speak on these specific topics, so the omissions allegations must all fail.
13 D. Cash out of loans by founders.
14 The first omissions allegation is that Mr. Billingsley failed to tell the note holders
15 that some of the proceeds would be used to pay off ("cash out") $20,000 in loans to the
16 company by Mr. Billingsley and Mr. Peterson. But the PPM summary clearly states that
17 the "Use of Proceeds" includes "working capital," which includes payment of expenses
18 including repayment of loans.53 The "Use of Proceeds" section of the PPM also clearly
19 stated that $100,000 of the proceeds would be "to fund our operating expenses and
20 overhead."54 Thus, note holders were aware that some of the proceeds would be used for
21 these purposes. Further, as noted above, the note holders were clearly warmed that the notes
22 were high risk and they should only invest if they were capable of losing their entire
23 investment. Additional disclosures would simply be gilding the lily-and indeed, could
24 52 See also Securities Division Post Hearing Brief at page 21 1] 72 (noting that the "Legislature 25 intends that court interpretations of substantially similar federal securities provisions be used as 26 interpretive guide for the Act"). 53 Exhibit s-3 at 3. 27 54 Exhibit s-3 at 7.
20 1 distract from this core waring-that the notes were high risk and you could lose your
2 entire investment.
3 E. Payment of commission. 4 Yet another fraud allegation is that Mr. Billingsley should have disclosed an alleged 5 commission.55 But Mr. Billingsley testified that the $15,000 payment was reimbursement 6 for office and travel expenses.56 Mr. Rosov, who was in charge of administrative matters 7 for Loaf Go, also testified that this was an expense reimbursement." Mr. Billingsley paid 8 these and other expenses of this startup company out of his own pocket. It was not
9 improper for the company to reimburse him. Indeed, Mr. Billingsley has a considerable 10 financial loss from his investment in LoanGo.58 11 Further, even if the $15,000 was a commission, there is no showing of fraud. It is 12 not fraudulent to not disclose commissions. A well-known case is the Obama-era SEC's
13 failed case against Texas Attorney General Ken Paxton. The SEC's theory was that
14 Attorney General Paxton committed securities fraud by failing to disclose his commission
15 when he sold investors a security. That's nonsense, of course, because people know that
16 when someone is selling them something, there's probably a commission. The court rightly
17 rejected the SEC's novel theory, dismissing claims that Mr. Paxton should have disclosed
18 commissions he was receiving as the promoter of a stock. SEC v. Maps, 4:16-CV-246,
19 2016 WL 5870576, at *7 (E.D. Tex. Oct. 7, 2016)(noting that SEC could find no cases to
20 support claim that a non-broker has a duty to reveal their compensation in promoting a
21 stock). When the SEC tried to salvage the case against Paxton by amending the complaint,
22 the court again rejected the claims, noting that even if the compensation information would
23 have been material to investors, there was no fraud by omission for failure to disclose
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25 55 See Decision No. 76450 at 22-24. 26 56 See Tr. at 360:15-361 :16. 57 Tr. at 384. 27 58 Attached Declaration of Justin C. Billingsley 1] 6.
21 1 commissions. SEC v. Maps, 240 F. Supp. ad 569, 581 (E.D. Tex. 2017). In short, the
2 Commission should not adopt this failed theory of the Obama-era SEC.
3 Moreover, the evidence supports the common-sense idea that investors assume there
4 will be a commission when something is sold. Indeed, investor John Jordan testified that "I
5 assumed that he would take his cut."59 6 Likewise, in a securities fraud case, the Second Circuit explained that there is simply 7 no requirement for "the registered representatives who deal with the customers to disclose
8 their own compensation," so a fraud finding cannot be made on that basis. United States v.
9 Skelly, 442 F.3d 94, 97 (2d Cir. 2006).
10 In short, the $15,000 was a reimbursement for expenses. And even if it was a l l commission, it just isn't fraud to fail to disclose a commission-indeed people expect that
12 salespeople are on commission.
13 F. Promissory note for Mr. Jordon alleged failure to disclose alleged prior defaults. 14 The final fraud allegation pertains only to the promissory note sold to the last note 15 holder, Mr. Jordon. This allegation was that Mr. Billingsley failed to disclose that the other 16 four notes were in default." It is not clear from the Decision what evidence there may have 17 been of a default. Nor does there appear to be any allegation that Mr. Billingsley was 18 aware of any default on the prior notes. The testimony was that Mr. Billingsley did not
19 have access to the bank account, so he would not have known if payments were made or
20 not. 21 Moreover, the timing does not support this allegation. Mr. Jordan's promissory note i i is dated March l, 2012.61 The other four promissory notes were signed on December 9,
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26 59 Tr. at 102. 60 See Decision No. 76450 at 24:6_17. 27 61 Exhibit S-16.
22 l 2011.62 The notes provide that no principal payments are due for one year. Thus, as of the 2 date of Mr. Jordan's note in March 2012, the other four notes could not have been in default 3 of any principal payments because those payments were not due. The notes also required 4 "simple, non-compounded" interest payments, "commencing 60 days from the date 5 hereoti"63 Further, default would occur if "[m]aker fails to make any payment within ten 6 (10) days of when due." Thus, the earliest the notes could have been in default is 70 days 7 from December 9, 201 l, which was February 17, 2012. This is very close to the date of
8 Mr. Jordan's promissory note. Thus, if any interest payments were made-which is not 9 clear-the other four notes would not be in default. Further, even if no payments were 10 made, the notes would not necessarily be in default on March 1 if a reasonable cure period l l is implied. Moreover, a missed payment of only a few weeks is not necessarily material, 12 especially in the context of a very high risk, high interest promissory note in a startup.
13 v . The Commission failed to respond to issues raised in exceptions.
14 An agency must "provide a reasonable explanation" for its actions, or its decision
15 must be overturned as arbitrary and capricious. County of Los Angeles v. Shalom, 192 F.3d
16 1005, 1021 (D.C. Cir. 1999). Under this standard, "the agency must examine the relevant
17 data and articulate a satisfactory explanation for its action including a "rational connection
18 between the facts found and the choice made." Motor Vehicle Mars. Ass'n of US., Inc. v.
19 State Farm Mat. Auto. Ins. Co., 463 U.S. 29, 43 (l983)(quotation marks and citation
20 omitted). In other words, "an agency must articulate an explanation for its action.... [it is] a
21 fundamental requirement of administrative law... that an agency set forth its reasons for
22 decision, an agency's failure to do so constitutes arbitrary and capricious agency action."
23 Ameryet Int'l, Inc. v. Pistole, 753 F.3d 1343, 1350 (D.C. Cir. 2014)(quotation marks and 24 citation omitted). Further, the agency must provide reasoning, not simply recite
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26 62 See Exhibits S-5 through S-13 (notes and subscription agreements, where the notes were undated we have used the dates of the subscription agreements). 27 63 Exhibit s-5, s-9, s-1 1, and s-13.
23 1 conclusions. Id. This Commission has violated these core requirements of any regulatory 2 decision by failing to address arguments raised in the Billingsleys' Exceptions in several
3 areas. 4 First, the Decision states that "The Respondents have not asserted the applicability of 5 any exemption. Accordingly, we find that none of the notes were exempt from registration 6 requirements." (Decision at 19:19-20). Although this statement was correct with the 7 Recommended Opinion and Order was prepared, it was no longer correct at the time the 8 Commission adopted the order. The Billingsleys' Exceptions clearly raised the issue of the 9 exemptions under Regulation D, Rules 505 and 506, the parallel Arizona rules, and the
10 private offering exemption. Thus, the Commission is obligated to provide a reasoned l I explanation for rejecting these claims. 12 Second, the Decision states that "Respondents do not contest the liability of their 13 marital communities in connection with this action." (Decision at 30:13-14). Again, while 14 correct when the Decision No. 76450 was written, this statement was no longer correct with 15 the decision that was adopted. The Exceptions explained how Justin and Heather 16 Billingsley moved to a non-community property state-thus terminating the marital 17 community-before the notes were sold and certainly before this case was filed. Again, the 18 Commission has failed to provide a reasoned explanation for its decision on this point.
19 Third, the Exceptions explained why the fraud findings were inaccurate. While the
20 Decision does offer some discussion of fraud, it fails to address the key arguments made in
21 the Exceptions and repeated here above.
22 VI. Conclusion.
23 The Commission should grant rehearing, and on rehearing, it should reject the 24 charges against Justin and Heather Billingsley. 25 First, Heather Billingsley is an innocent spouse. She is named only to establish 26 liability over their marital community. The Billingsleys moved to Connecticut--not a 27 community property state-in September 2011, before the notes were signed and long
24 1 before this case was filed. Thus, the marital community no longer exists, and there are
2 simply no grounds to keep Heather Billingsley in this case.
3 Second, the securities fraud allegations against Justin Billingsley should be rejected.
4 He tried to do everything correctly, such as by bringing in an experienced securities
5 attorney and working with a securities brokerage firm. The reputation of this entrepreneur
6 should not be besmirched by a fraud finding. The main fraud allegation is that Mr.
7 Billingsley said this was a low risk investment. This charge is flatly contradicted by the
8 documents, such as the PPM and the subscription agreements, which make clear that this
9 was a high risk investment in a startup that did not have any revenue. While startups are
10 risky, they also bring great benefits to the economy, and the Commission should not be l l unduly harsh to a startup founder who tried to do everything properly.
12 Third, the registration violations should be rejected, because the notes were exempt
13 under "Regulation D" and its Arizona counterparts, as the note holders themselves
14 acknowledged in their subscription agreements. Further, the notes are exempt under the
15 statutory private offering exemption. Indeed, how could an offering to five people possibly
16 be a "public offering" requiring registration?
17 Thus, the Commission should grant rehearing and find that no violations should be
18 found against Justin and Heather Billingsley, and find that they should not be liable for any
19 restitution or penalties.
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25 1 RESPECTFULLY submitted this 27th day of November, 2017.
2 SNELL & WILMER L.L.P.
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5 By Don Bive 6 Timothy J. Sabo One Arizona Center 7 400 East Van Buren Street Phoenix, Arizona 85004 8
9 Attorneys for Justin and Heather Billingsley
10 Original + 13 copies of the foregoing l l filed this 27th day of November, 20 7, with:
12 Docket Control ARIZONA CORPORATION COMMISSION 13 1200 West Washington Phoenix, Arizona 85007 14 Copies of the foregoing hand-delivered/mailed 15 this 215 day ofNovem er, 2017, to:
16 Mark Preny . Administrative Law Judge 17 Arizona Cooration Commission 1200 West washington 18 Phoenix, Arizona 85007
19 Matthew Neubert, Director Securities Division 20 Arizona Corporation Commission 1200 West Washier ton Street 21 Phoenix, Arizona 85007 [email protected] 22 kitchen azcc. av wco c azcc. av 23 kh azcc. av Consented to Service by Email 24 Jeffrey Scott Peterson 25 607 Boylston Street, Unit 399L Boston, Massachusetts 02116 26
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26 Loaf Go Corporation l c/o Jeffrey Scott Peterson 607 Boylston Street, Unit 399L 2 Boston, Massachusetts 02116
3 Kevin Fallon McCarthy McCarthy Law, PLC 4 4250 North Drinkwater Boulevard, Suite 320 Scottsdale, Arizona 8525 l 5 Attorney for Ayers [email protected] 6 Consented to Service by Email
7 J 8 444 - 4 4 \ 4828 4673878 I 9
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27 l BEFORE THE ARIZONA CORPORATION COMMISSION
2 COMMISSIONERS 3 TOM FORESE, Chairman BOB BURNS 4 ANDY TOBIN 5 BOYD w. DUNN JUSTIN OLSON 6
7 In the matter of: Docket No. S-20932A-15-0220 8 LOAN GO CORPORATION, a Utah corporation, DECLARATION OF JUSTIN c. 9 BILLINGSLEY IN SUPPORT OF JUSTIN c. BILLINGSLEY and HEATHER APPLICATION FOR 10 BILLINGSLEY, husband and wife, REHEARING I I JEFFREY SCOTT PETERSON, an unmarried man, 12 JOHN KEITH AYERS and JENNIFER ANN 13 BRINKMAN-AYERS, husband and wife,
14 Respondents. 15
16 Pursuant to Rule 80(0) of the Arizona Rules of Civil Procedure, as incorporated by A.A.C.
17 RI4-3-lOl(A), Justin C. Billingsley states the following:
18 I. My name is Justin C. Billingsley. I am a respondent in this docket. I am making
19 this declaration in support of the Application for Rehearing being filed by our attorneys on behalf
20 of myself and my wife Heather.
21 2. Heather and I live in Danbury, Connecticut with our three children.
22 3. Heather and I moved to Connecticut in approximately September 201 I. The move
23 was permanent, and Connecticut is our home and domicile.
24 4. I hold a Connecticut driver's license that was issued on August 29, 2012.
25 5. Heather had absolutely no involvement with Loaf Go or the promissory notes at
26 issue in this case.
27 l 6. The Commission's Opinion and Order in this case, Decision No. 76450 (November
2 7, 2017), makes several references to the RV Park in Casa Grande where I met the five individuals
3 who agreed to lend money to Loaf Go through Promissory Notes. It is important to understand that
4 this particular RV park is an extremely unique RV park. The park, Casa Grande Desert Shadows
5 RV Park, is a very high end park that serves a very wealthy clientele. The pan-time residents who
6 come to the park do not own ordinary RVs. The typical RV at this park is a luxury motor coach
7 costing between $300,000 and $400,000. The high end of RVs at this park are custom RVs that
8 cost between $800,000 and $l,200,000. During this timeframe l would travel to upwards of 60 or
9 70 RV parks selling annuities and providing seminars. The Casa Grande Desert Shadows RV Park
10 is the only park where l offered Loaf Go notes. This is because I knew the wealthy people at this
I I park would be the kind of sophisticated investor who could consider an investment in a risky start
12 up as part of their portfolio.
13 7. During the hearing, the Administrative Law Judge asked me several questions about
14 annuities I sold to the Loaf Go noteholders. l answered to the best of my recollection.
15 Subsequently, I was able to recall additional information that will allow me to provide more
16 accurate information about each of the Loaf Go noteholders.
17 8. Patricia Rowley and her husband were obviously wealthy. They owned their own
18 island that they lived on for part of the year. They also owned a nice plane and a very nice RV.
19 Mr. Rowley would always push me for investment ideas that could earn more; he was not focused
20 on safety. I met with them for several years, before they became annuity clients of mine for several
21 years. They invested $400,000 to $500,000 in an equity indexed annuity.
22 9. Robin Erickson purchased several annuities was very interested in and well
23 informed about investments. She was analytical, and was always asking about real estate and other
24 ways to earn more. She had well over $400,000 invested in her IRA that she invested in an annuity
25 and well over $l00,000 in her husband's IRA that was likewise invested in an annuity. She also
26 had an equity indexed life insurance policy with a death benefit of $700,000 to $800,000. She and
27 her husband also had a very nice RV.
2 1 10. Richard Goble was well known in the park. He had a significant appetite for greater
2 earnings. He also invested $300,000 to $400,000 in equity indexed annuities.
3 l I. Donald Smeltzer came to the Casa Grande Desert Shadows RV park for many years
4 and he invested about $500,000 to $600,000 in annuities.
5 12. John C. Jordan invested around $300,000 in an annuity. He also showed me
6 pictures of his large yacht that he lived on when he was not in his nice motor coach.
7 13. It was clear to me, therefore, that these five note holders were wealthy and
8 sophisticated investors. However, I was not their financial advisor, and l did not have a complete
9 picture of their financial positions. It is likely that they had additional assets that I was not aware
10 of
I l 14. When l discussed the notes with the five people who ultimately invested, l thought
12 that everything was being done properly. I relied heavily on the involvement of professionals who
13 we brought in to help us with the securities issues. For example, we retained Gary Apron who is an
14 experienced securities attorney in Colorado who came highly recommended to us. Mr. Agron was
15 involved in advising us on securities law issues, including our Private Placement Memorandum and
16 related documents like subscription agreements and investor certifications. Mr. Apron's
17 involvement is substantiated by several exhibits admitted at the hearing, Exhibits L-I, L-2, and L-5.
18 His involvement is also confirmed by additional documents, whichare attached to this Declaration:
19 a) Attachment A June 20, 201 I email exchange between Gary Agron
20 and Jeffrey Peterson discussing draft of the Private Placement Memorandum ("PPM").
21 b) Attachment B. June 28, 201 I email exchange between Gary Apron
22 and Jeffrey Peterson regarding organizational minutes.
23 c) Attachment C. June 28, 201 I email from Gary Apron regarding
24 Loaf Go bylaws.
25 d) Attachment D. July 25, 201 l email from Gary Agron, noting that "As
26 for the Loaf Go PPM, just let me know if there's anything else l need to do. If it's good to
27
3 I go, I'll hook you up with a printer here who can file the Form D with the SEC (it's
2 electronic now) for the ppm."
3 15. In addition to Gary Agron, his son Noah Agron and Noah's firm Gilford Securities
4 wereclosely involved in the offering of the Loaf Go promissory notes, as shown by the Gilford due
5 diligence materials (Exhibit L-13), the PPM listing Gilford Securities as placement agent (Exhibit
6 S-3), the dealt Engagement Letter with Gilford (Exhibit S-20), the introduction by Noah Agron
7 (Exhibit L-5) and Noah's email about distributing the PPM to his contacts (Exhibit L-21). Noah
8 Apron was closely involved in our efforts and we took direction from him as the representative
9 from Gilford as to how to raise money. Before we completed any promissory notes, Noah Agron
10 contacted the potential investor to verify that all regulatory requirements were met, including that l l they were accredited investors. In addition, as directed by Gary and Noah Apron, l provided each
12 prospective investor in the notes with a copy of the PPM.
13 16. My experience was in annuities, not securities. Accordingly, I relieved heavily on
14 the advice of Gary Apron and Noah Agron regarding Loaf Go.
15 17. LoanGo's efforts at capital raising were very limited and preliminary. A broader
16 effort would have taken place once an engagement letter with Gilford or another investment bank
17 was signed. The only actual, formal offers to invest were made to potential investors whose
18 qualifications were confirmed by Noah Agron. Jeff Peterson, John Ayers and I all had various
19 informal and preliminary discussions with potential investors, but formal offers were not made
20 until the potential offeree was screened and qualified by Noah Agron, including confirming that
21 they were an "accredited investor." Thus, the five investors in the Loaf Go notes were the only
22 formal offerer of the notes. In my case, all of the informal discussions regarding potential
23 investments in Loaf Go were limited to wealthy individuals located in the same RV park who
24 shared similar characteristics to the five investors who invested.
25 18. In addition to relying on our securities attorney, Gary Agron, and our investment
26 bank, Gilford Securities and Noah Agron, I also relied on the experience of LoanGo's leadership
27 team. Jeff Peterson had significant experience in the securities world as a broker for many years
4 1 with Lehman Brothers. At the time, I checked his record and he had no regulatory issues despite a
2 lengthy tenure as a broker. llc was also the founder and initial CEO of Ouepasa Corporation, the
3 owner ofQucpasa.corn. He took successfully took Quepasa public, raising over S100 million inan
4 Initial Public Offering on NASDAQ. I therefore believed that he had the experience and
5 knowledge in securities and raising investment that was needed.
O 19. In addition. John Ayers was successful in the payday loan market and was known as i
7 an expert on payday loans. He owned one al' the largest lead generating firms in the payday loan
8 market. Overall, l believed that John Ayers and Jeff Peterson had the backgrounds to make
9 l.oanGo a success as an online payday loan company. I 10 20. Overall, l suffered a considerable financial loss due to my association with Loaf Go
l l 21. I declare under penalty of perjury that the foregoing is true and correct
12 EXECUTED this 27"' day of November 2017.
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14 / By: 15 J tip(. Billing cy
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N ATTACHMENT A Outlook.com Print Message 11/10/14 1:41 AM
Print .I s
Re: notes regarding LOANGO first draft
From: gaa@_ Sam: Mon 6/20/11 6:13 PM lb: Jeff Peterson Gpjp@_;Gary Apron (gaa@_
All good help Jeff. I'll call you tomorrow to discuss your questions.
Sent via BlackBerry by AT&T
From: Jeffrey Peterson Gary, please see the following notes regarding the first draft of the LOANGO PPM. 1. MANAGEMENT POSITIONS. This will be our initial management configuration: Chairman of the Board of Directors and CEO: Jeffrey Peterson President and member of Board of Directors: John Ayers Vice President and member of Board of Directors: Justin Billingsley 2. QUESTIONS re initial ownership of the Corporation: 1,000,000 Shares were sold for ? cents per share. https://bayl69.maiI.live.com/oI/mail.mvc/PrintMessages?mkt=en-us Page 1 of 3 Outlook.com Print Message 11/10/14 1:41 AM lnterl23 Corporation, a Nevada Corporation controlled by Jeffrey Peterson, purchased 666,667 shares for what price? Justin Billingsley purchased 333,333 shares for ? 3. CHANGE TO USE OF PROCEEDS. In addition to the $100,000 to be used for working capital , expenses of the offering , up to $35,000, will be reimbursed from investor funds. (Such as the fees paid to attorneys for the preparation of the selling document) 4. OFFICES. REMOVE THE OLD CHANDLER/RAY ROAD OFFICE ADDRESS. The Utah mailing address for LOANGO is: SALT LAKE CITY 1 UT, 84106 Do we have to list square footage/lease terms? If we need to list an Arizona office, that office address will be: Tempe, AZ 85281 5. PPM LANGUAGE FOR POSSIBLE FUTURE UNANTICIPATED SALE OF INVESTOR NOTE. The PPM should be written bearing in mind the possible future need to transfer a note between an investor in a private transaction. Although we do not anticipate such transactions, it is possible that if faced with an emergency need for cash, an investor may sell their note to another investor, in a private transaction. Please httpszl/bayl69.mail.live.com/oI/mail.mvc/prlntMessages?mkt-en-us Page 2 of 3 Outlook.com Print Message 11/10/14 1:41 Am include any necessary language that would help with such a possible transaction, if applicable . 6. INTEREST PAYMENTS TO NOTE HOLDERS. Interest payments to note holders will commence starting 60 days from the receipt of investor funds. This is because it will take some time for LOANGO to place payday loans with its customers using the investor funds. So, the payments, and the APR computation, should start 60 days from receipt of investor funds. 7. QUESTION REGARDING TIMING OF OFFERING. How long can the offering remain open? We would prefer to keep the offering open for as long as legally possible. 8. PROHIBITED PAYDAY LOAN STATES. Add ARIZONA to the list of states where payday loans are prohibited 9. MANAGEMENT BIOS. Working on this. Bios will be forthcoming. 10. RELATED TRANSACTIONS - I don't think there are related transactions. Just that I paid $10,000 legal fees from my personal funds and expect to be reimbursed from investor funds. ll. STATE LAW ON SUB DOCS. The subscription documents talk about using Arizona law. is this correct? Or should we switch everything to Utah? hnpsz//bayl69.maiI.live.com/oI/mail.mvc/printMessages?mkt=en-us Page 3 of 3 ATTACHMENT B Outlook.com Print Message 11/10/14 1:44 AM Print I . FW: Loaf Go Corporation From 1 Jeffrey Peterson (jpjp@_ Sent: Tue 6/28/11 2:35 PM To: Rebecca@_ 2 attachments Loaf Go Corporation Oigaunizaitioltzil i\'1inutes.dnc (45.7 KB) ..fertificalion....htm 1.0.2 KI31 From: gaa@ To: jpjp@ CC: Noah.apron @ Subject: FW: Loan o or'-p oration Date: Tue, 28 Jun 2011 15:13:37 -0600 .lell---here arc your Organizational Minutes. Bylaws will be forwarded in the morning. latest. From: Janice Puder [mailto:jbp@_ Sent: Tuesday, June 28, 2011 3:10 PM To: gaa@_ Subject:Loaf Go Corporation Gary: The revised Organizational Minutes are attached . Information from ESET NOD32 Antivirus, version of virus signature database 6248 (20110628) The message was checked by ESET NOD32 Antivirus. http://wwwv.cset.com httpszl/bayl69.maiI.live.com/ol/mail.mvc/printMessages?mkt=en-us Page 1 of 2 Outlook.com Print Message 11/10/14 1:44 AM --Forwarded Message Attachment-- No virus found in this message. Checked by AVG - w w w . \ v m Version: 10.0.1388 / Virus Database: 1516/3731 - Release Date: 06/28/ l --Forwarded Message Attachment-- No virus found in this message. Checked by AVG - www.avg.com Version: 10.0.1388 / Virus Database: 1516/3731 - Release Date: 06/28/1 l https://bay169.malI.Iive.com/ol/mail.mvc/PrlntMessages?mkt=en-us Page 2 of 2 ATTACHMENT c Outlook.com Print Message 11/10/14 1:44 AM Pei in is FW: Loaf Go Corporation Bylaws From : Gary Apron (gaa@_ Sent: Tue 6/28/11 2:58 PM "I o 3 Jeff Peterson [email protected]); Noah apron (noah.agron@ ) 2 attachments lo:in(..»u (Q`orporzition l%vluw~.doc (145.7 KB) . Ck'rti!i¢;itio1i .him (0.* KB) The bylaws are attached. From: Janice Puder [mailto:jbp@- Sent: Tues d a Ju n e28 2011 3:41 PM To: gaa@ Subject: Loaf Go Corporation Bylaws Gary: The Loaf Go Corporation Bylaws are attached . Information from ESET NOD32 Antivirus, version of virus signature database 6248 (20110628) The message was checked by ESET NOD32 Antivirus. http://www.esct.com --Forwarded Message Attachment-- No virus found in this message. Checked by AVG - \\'\V\V.¢ V 1 Version: 10.0.1388 / Virus Database: 1516/3731 - Release Date: 06/28/ httpszl/bay169.malI.Iive.com/ol/mail.mvc/PrintMessages?mkt=en-us Page 1 of 2 ATTACHMENT D Oiuoon95in Print Mnssaqe l1lloil. l;48 AM Print Close Re: From: gaa@ Sent: Mon 7/25/11 11:01 AM To; John A ere at. 'ors@ ); Gary Apron (gaa@- n ); Jeff Peterson (ipJp@ ) John. You can sign the version Stephan sent to mc last week. Please send me a signed copy by scan or fax . The fax is 303 770 7257 . As for the Loaf go PPM, just jct me know if there's anything else I need to do. If it's good to go, l'll book you up with a printer here who can file the Form D with the SEC (it's electronic now) for the ppm. That is a required tiling and there is a few days lead time on it. Sent via BlackBerry by AT&T From: John Ayers Ok perfect. Do you want to send It over or can we sign the same version we have on file On 7/25/11 10:28 AM, "Gary Apron" Oh and by the way, the Leaplab agreement with Stephan Demuth's additions is approved by me and ready to sign too. Gary A. Agron - u n . - n u n , co- Office : Cell EXHIBIT Fax : g 8188181 F r o m : John Ayers [m 1j49J°ly_<_r5@_] hupsrllbayI69malLlive.comlol/malI.mvc/PrintMessages7rnkt=er\-us Page 1 of 2 Hilln.ii< ;1 Punt Mv>.I'e 1=»i\;i1a 1.46 AM Sent: Monday, July 25, 2011 10:40 AM To: Gary Agron Subject: Re: Great to hear Gary! Did we get the final PPM draft ? John On 7/25/11 9:38 AM, "Gary Apron" No virus found in this menage. Checked by AVG - www.avg.com LEAPlab@ John Ayers Founder Barista a. Chairman direct; Q-us( ) free: skye: - CONNECT with me: twitlerz Lirikedlnz ht!ps/Ibay169.mail.llve.com/ol/mail.mvc/prlntMessa9esrmk1-en-us Page z al z