I.  FINDINGS OF FACT

II.  CONCLUSIONS OF LAW

The Department seeks a stop order denying effectiveness to Respondent’s business opportunity registration pursuant to Section 36b-68(a) of the Act.  The Department contends that Respondent filed the Application which is incomplete in a material respect but has not been deemed abandoned by the Commissioner or contains statements which, in light of the circumstances under which they were made, are false or misleading with respect to material facts.  The Department further contends that such filing of an application for registration forms a basis for a stop order denying effectiveness to a business opportunity registration under Section 36b-68(a)(3) of the Act.

Respondent argues, as a preliminary matter, that Section 36b-68(a) of the Act does not authorize the Department to issue a stop order denying effectiveness to the Application.  Respondent argues, based on the language of Section 36b-68 of the Act, that the Commissioner only has the authority to issue stop orders denying effectiveness to business opportunities that have been registered by the Commissioner.  Respondent contends that Section 36b-68 of the Act confers two distinct sets of powers to the Department.  Under Respondent’s interpretation, the Department first has the power to request information from applicants pursuant to Section 36b-68(e) of the Act.  Respondent contends that the prescribed process in Section 36b-68(e) of the Act applicable to applications is mandatory not optional.  Under Respondent’s interpretation, the second layer of Section 36b-68 of the Act’s scheme is the Department’s power to seek a stop order denying effectiveness to a business opportunity registration pursuant to Section 36b-68(a) of the Act.  Respondent contends that this power to seek a stop order denying effectiveness explicitly only extends to registrations not to applications for registration and that registration is a condition precedent for issuance of a stop order denying effectiveness.

According to the Department, Respondent’s argument presupposes two foundational elements, which the Department contends are unsubstantiated, in particular:  (1) applications for registration of a business opportunity were meant to be excluded from Section 36b-68 of the Act and handled differently by the Act than registrations; and (2) that a registration must be issued by the Department then subsequently denied effectiveness.  The Department further contends that applying principles of statutory construction, this interpretation is inconsistent with the Act’s statutory scheme, legislative history and agency precedent.

A.  Authority to Issue a Stop Order Denying Effectiveness
Pursuant to Section 36b-68(a) of the Act

These conflicting interpretations of Section 36b-68(a) of the Act raise an issue of statutory interpretation.

Jim’s Auto Body v. Commissioner of Motor Vehicles, 285 Conn. 794, 806-07 (2008) (internal quotation marks omitted) (citation omitted).

Section 1-2z of the Connecticut General Statutes precludes resorting to extratextual sources, such as legislative history, if the statutory text yields an unambiguous meaning.  “The test to determine ambiguity is whether the statute, when read in context, is susceptible to more than one reasonable interpretation.”  Felician Sisters of St. Francis of Conn., Inc. v. Historic Dist. Comm’n of Enfield, 284 Conn. 838, 847 (2008)  (internal quotation marks omitted) (citation omitted). “Under § 1-2z, the ambiguity determination is not limited to the statute itself, but requires us to view the statute at issue in the context of other related statutes.”  Id. at 848.

1.  Text of the Statute and Relationship to Other Statutes

In accordance with Section 1-2z of the Connecticut General Statutes, determining the meaning of Section 36b-68(a) of the Act begins with an examination of the language of the statute.  Section 36b-68(a) of the Act provides that:

(Emphasis added.)

The term “business opportunity registration” is not defined in the Act, and Section 36b-68(a) of the Act is the only place in the Act that uses this exact term and it is only used once.  The Act also uses the terms “registration”, “application”, “application for registration”, “registration statement” and “registration fee” without defining these terms.  Since the term “business opportunity registration” is not defined in the Act, Section 1-1(a) of the Connecticut General Statutes requires that we construe the term “in accordance with the commonly approved usage of the language . . . .”  Pasquariello v. Stop & Shop Cos., 281 Conn. 656, 665 (2007) (internal quotation marks omitted).  “If a statute or regulation does not sufficiently define a term, it is appropriate to look to the common understanding of the term as expressed in a dictionary.”  Jim’s Auto Body, 285 Conn. at 808 (internal quotation marks omitted) (citation omitted).

The term “registration” is defined by Black’s Law Dictionary (8th ed. 2004), in part, as “1.  [t]he act of recording or enrolling . . . .  2.  Securities.  The complete process of preparing to sell a newly issued security to the public . . . .”  In addition, Merriam-Webster’s Collegiate Dictionary (10th ed. 2001) defines “registration”, in part, as “1 : the act of registering 2 : an entry in a register . . . 5 : a document certifying an act of registering”.  The term “application” is defined by Black’s Law Dictionary (8th ed. 2004), in part, as “1.  [a] request or petition.”  In addition, Merriam-Webster’s Collegiate Dictionary (10th ed. 2001) defines “application”, in part, as “1 : an act of applying . . . 2 a : REQUEST, PETITION . . . b : a form used in making a request”.

As Respondent points out, dictionaries distinguish between the terms “registration” and “application”.  Respondent contends that there is no reason to believe that the term “business opportunity registration” could include within its meaning an application for registration of a business opportunity that has not been registered by the Commissioner.  “[T]he use of the different terms . . . within the same statute suggests that the legislature acted with complete awareness of their different meanings . . . and that it intended the terms to have different meanings . . . .”  Felician Sisters of St. Francis of Conn., Inc., 284 Conn. at 850 (internal quotation marks omitted) (citation omitted).  However, there is support for the Department’s position that the term “business opportunity registration” in Section 36b-68(a) of the Act includes within its meaning an application for registration of a business opportunity.  Section 36b-68(a) of the Act refers to the “registration of the business opportunity” being incomplete but not abandoned or containing false or misleading statement with respect to a material fact.  If the term “registration” in Section 36b-68(a) of the Act does not include applications for registration, the “registration” could never be incomplete, contain a false or misleading statement, or be abandoned.  The application for registration of a business opportunity filed by an applicant is the document that could be incomplete, contain false or misleading statements, or be abandoned pursuant to Section 36b-68(e) of the Act, not the certificate of registration issued by the Commissioner pursuant to Section 36b-65(c) of the Act.  In addition, other subsections of Section 36b-68 of the Act would not provide for notice to an applicant if the Commissioner was only authorized to issue stop orders denying effectiveness against those business opportunities that had been registered by the Commissioner.  Therefore, in the context of Section 36b-68(a) of the Act there is reason to believe that the term “registration” includes an application for registration of a business opportunity.

a.  Registered and Effective

According to Respondent, there is a two-step registration process and the Commissioner can only issue a stop order denying effectiveness to a business opportunity that the Commissioner has registered.  Therefore, an analysis of the Act is necessary to determine whether the statutory scheme supports Respondent’s interpretation.

There are two sections of the Act, Sections 36b-62 and 36b-65, that address the requirements for registration and when a business opportunity is registered by the Commissioner.  Section 36b-62 of the Act provides, in pertinent part, that:

(Emphasis added.)

However, Section 36b-65(c) of the Act provides that:

(Emphasis added.)

There appears to be a conflict between Sections 36b-62 and 36b-65 of the Act.  Section 36b-65(c) of the Act does not reference Section 36b-62 of the Act.  Section 36b-65(c) of the Act requires the Commissioner to issue a certificate stating that the business opportunity has been registered upon satisfactory submission of the information and documents required by subsections (a) and (b) of Section 36b-65 of the Act and Section 36b-64 of the Act, and the payment of the registration fee.  However, the requirements in Section 36b-65 of the Act are only part of the mandatory list contained in Section 36b-62(a) of the Act that the seller of a business opportunity is required to complete in order to register pursuant to Section 36b-62 of the Act.

According to Respondent, a two-step registration process for business opportunities requires that a seller of a business opportunity receive a certificate that the business opportunity has been registered pursuant to Section 36b-65(c) of the Act and subsequently declared effective pursuant to Section 36b-62(d) of the Act.  There is a problem with attempting to harmonize Sections 36b-62 and 36b-65 of the Act in this manner.  Section 36b-62(a) of the Act states that a seller “shall register said business opportunity”.  (Emphasis added.)  Thus interpreting Section 36b-62(a) of the Act as setting forth the requirements for effective registrations would require the term “register” in this context to mean “effectively register”.

The Department asserts that there is no practical purpose for the Commissioner to issue a certificate stating that the business opportunity has been registered only to subsequently issue a stop order to deny its effectiveness when the Commissioner intends to deny the application.  The Department asserts that a two-step registration process would confuse both purchaser-investors and sellers, and that such registration would be meaningless since Section 36b-67 of the Act requires that no sales can be made of a business opportunity unless it is registered and declared effective.  The Department contends that the only interpretation of the Act that would avoid a bizarre result is one that allows the Commissioner to issue a stop order denying effectiveness to an application for registration of a business opportunity at the outset of the registration process.

In addition, a two-step registration process is not expressly required by Sections 36b-67 and 36b-69(a) of the Act.  Section 36b-67 of the Act provides, in pertinent part, that:

Section 36b-67 of the Act requires that a business opportunity be registered and declared effective in accordance with the provisions of Section 36b-62 of the Act.  Although Section 36b-67 of the Act does not require that the business opportunity be registered pursuant to Section 36b-65 of the Act, Section 36b-62(a) of the Act requires the seller to provide a sworn and certified statement containing the information required by Section 36b-65 of the Act.

In addition, Section 36b-69(a) of the Act provides that:

(Emphasis added.)

Section 36b-69(a) of the Act specifically references an “application for registration” under Section 36b-62 of the Act and a registration of a business opportunity under Section 36b-62 of the Act being effective on order of the Commissioner.  However, Section 36b-62 of the Act does not reference a business opportunity that is registered pursuant to Section 36b-65(c) of the Act but not declared effective.  A rule of statutory construction that applies when a statute expressly states one thing and omits another is that:

Felician Sisters of St. Francis of Conn., Inc., 284 Conn. at 850-51 (internal quotation marks omitted) (citation omitted).

If there is a two-step registration process, then the Commissioner issuing a certificate stating that the business opportunity has been registered but not declared effective would not be included in the meaning of Section 36b-69(a) of the Act and, therefore, would imply that the commissioner has passed upon the merits of, or recommended or given approval to any business opportunity until such time as the business opportunity was effectively registered.

In conclusion, while a two-step registration process presents difficulties in harmonizing provisions of the Act, the Act allows for a two-step registration process since there are two separate sections of the Act that address the requirements for registration and when a business opportunity is registered by the Commissioner.  However, even if the Act is interpreted to allow for a two-step registration process, this does not answer the fundamental question of whether the Commissioner is required to register a business opportunity pursuant to Section 36b-65(c) of the Act before issuing an order denying effectiveness to the business opportunity registration pursuant to Section 36b-68(a) of the Act.

b.  Section 36b-68

Returning to the language of Section 36b-68(a) of the Act which authorizes stop orders denying effectiveness, Respondent argues that if the legislature thought that “applications” were a proper subject matter for stop orders denying effectiveness then subdivision (a) of Section 36b-68 of the Act would have referenced “applications”.  Respondent further contends that the distinction between “applications” and “registrations” is supported by Section 36b-68(e) of the Act, since subsection (e) expressly refers only to “applications”.

Respondent contends that Section 36b-68(a) of the Act includes as one of the findings that the Commissioner must make in order to issue a stop order denying effectiveness is:

However, Section 36b-68(a) of the Act uses the term “or” in the list of findings that the Commissioner may use as a basis to issue a stop order denying effectiveness to a business opportunity registration.  The use of the term “or” in the four findings listed in Section 36b-68(a) of the Act indicates that these findings are in the disjunctive.  Therefore, while subdivision (3) of Section 36b-68(a) of the Act is one of the findings that the Commissioner may make, the Commissioner is not required to make all of the findings listed in Section 36b-68(a) in order to issue a stop order denying effectiveness to any business opportunity registration pursuant to this section.

An interpretation of the term “business opportunity registration” in Section 36b-68(a) of the Act that restricts the meaning to applications for registration of a business opportunity that have been registered by the Commissioner would violate another “basic tenet of statutory construction that the legislature [does] not intend to enact meaningless provisions. . . . [I]n construing statutes, we presume that there is a purpose behind every sentence, clause, or phrase used in an act and that no part of a statute is superfluous.”  Small v. Going Forward, Inc., 281 Conn. 417, 424 (2007) (internal quotation marks omitted).

Section 36b-68(b) of the Act provides that:

(Emphasis added.)

Section 36b-68(c) of the Act provides that:

(Emphasis added.)

The language of subsections (b) and (c) of Section 36b-68 of the Act references providing notice to “registrants” or “applicants”.  However, the hearing requirement in Section 36b-68(c) of the Act does not apply to abandonment of an application pursuant to Section 36b-68(e) of the Act.  Therefore, if Section 36b-68(a) of the Act only authorizes the Commissioner to seek a stop order denying effectiveness against those business opportunities that have been registered by the Commissioner, then this would effectively render the word “applicant” in subsections (b) and (c) of Section 36b-68 of the Act meaningless.  This outcome would be fundamentally at odds with the basic tenet of statutory construction that the legislature does not intend to enact meaningless provisions.  The only way to provide meaning to the requirement for notice to an “applicant” of a business opportunity in subsections (b) and (c) of Section 36b-68 of the Act is to conclude that the term “registration of a business opportunity” in Section 36b-68(a) of the Act includes applications for registration of a business opportunity.

Respondent contends that Section 36b-68(e) of the Act sets forth the first layer of the regulatory scheme, and provides a simple and effective process for dealing with applications for registration of a business opportunity that the Department believes are deficient.  Respondent asserts that the procedures set forth in Section 36b-68(e) of the Act require the Commissioner to seek additional information from applicants if the application is deemed deficient through the directed use of a “comment letter”.  Respondent further contends that if the deficiencies are not addressed to the Commissioner’s satisfaction, the Commissioner can deny the application or deem the application abandoned if no timely response is received.

Section 36b-68(e) of the Act provides that:

(Emphasis added.)

The Connecticut Supreme Court has stated that:

Golden Hill Paugussett Tribe of Indians v. Town of Southbury, 231 Conn. 563, 579 n.12 (1995) (citation omitted) (internal quotation marks omitted).

The Connecticut Supreme Court has consistently held that “as opposed to ‘[d]efinitive words, such as must or shall, [which] ordinarily express legislative mandates of a nondirectory nature’; the word ‘may’ imports permissive conduct and the conferral of discretion.”  State v. Bletsch, 281 Conn. 5, 17 (2007) (citation omitted).

The legislature’s use of the term “may” rather than “shall” in Section 36b-68(e) of the Act indicates that the Commissioner is permitted, but not required, to deem an application for registration of a business opportunity to be abandoned if the applicant fails to respond to any request by the Commissioner for information required under Sections 36b-60 to 36b-80, inclusive, of the Act or any regulations adopted pursuant to said sections.  See, Cantoni v. Xerox Corp., 251 Conn. 153, 165-66 (1999).  Respondent contends that Section 36b-68(e) of the Act contemplates that the Department must seek additional information from applicants if the application for registration of a business opportunity is deemed deficient.  However, the express language of Section 36b-68(e) of the Act does not require that the Commissioner deem an application abandoned or request information.  Only in a case where the Commissioner has requested information required under Sections 36b-60 to 36b-80, inclusive, of the Act or any regulations adopted pursuant to said sections and the Commissioner intends to deem an application for registration of a business opportunity abandoned is the requirement to notify the applicant in writing triggered.  The Commissioner has the authority to request information, and such a request is a prerequisite to the Commissioner deeming an application for registration of a business opportunity to be abandoned.  Therefore, the notice to the applicant in Section 36b-68(e) of the Act is only part of the procedure that the Commissioner must follow if the Commissioner intends to deem an application for registration of a business opportunity abandoned.

The legislature specifically provided that the Commissioner may issue a stop order denying effectiveness to any business opportunity registration if the registration of the business opportunity is incomplete in any material respect but is not abandoned pursuant to Section 36b-68(e) of the Act.  Subsection (e) of Section 36b-68 of the Act sets forth the Commissioner’s authority and the procedures pursuant to which the Commissioner may deem an application for registration of a business opportunity to be abandoned.  By excluding only applications for registration of a business opportunity abandoned pursuant to subsection (e) of Section 36b-68 of the Act, but no other applications, in subsection (a) of Section 36b-68 of the Act, the presumption is that the legislature did not intend to exclude other applications for registration of a business opportunity in Section 36b-68(a) of the Act.  See, Felician Sisters of St. Francis of Conn., Inc., 284 Conn. at 850-51.  If applications for registration of a business opportunity were not included in subsection (a) of Section 36b-68 of the Act, the legislature would not have specifically excluded applications abandoned pursuant to subsection (e) of Section 36b-68 of the Act.  In addition, if the legislature had wanted to exclude all applications for registration of a business opportunity, it could have done so.  Thus, the exclusion of applications for registration of a business opportunity abandoned pursuant to subsection (e) of Section 36b-68 of the Act signifies that applications for registration were meant to be encompassed by the use of the term “registration” in subsection (a) of Section 36b-68 of the Act.

In conclusion, neither the dictionary definitions nor the text of Section 36b-68 of the Act and its relationship to other statutes provide definitive guidance as to the legislature’s intended breadth of the term “business opportunity registration”.  While Respondent’s interpretation of Section 36b-68(a) of the Act to exclude applications for registration of a business opportunity violates certain rules of statutory construction, the Departments interpretation to include applications does not explain the subsection’s use of term “business opportunity registration”.  As noted previously, while the use of different terms suggests that the legislature intended the terms to have different meanings there is reason to believe that the term “business opportunity registration” includes an application for registration based on the text of the statute itself and its relationship to other statutes.

Since the meaning of the statutory text at issue in the present case is not plain and unambiguous, Section 1-2z of the Connecticut General Statutes not does preclude consideration of extratextual evidence of the meaning of the statute.  Accordingly, it is appropriate to examine the related statutes, legislative history and past practice of the Department to ascertain whether they provide assistance in the construction of the term “business opportunity registration”.

2.  Legislative History

A review of the legislative history of Section 36b-68 of the Act reveals that Public Act 98-161 added subsection (e) and made conforming changes to subsection (a), and was enacted to streamline the Department’s procedure for dealing with abandoned applications for registration of a business opportunity.  The Department drafted the proposed legislation, “An Act Concerning The Connecticut Business Opportunity Investment Act.”  The statement of purpose for the proposed legislation was “[t]o permit the Commissioner of Banking to deem applications for business opportunity registration to be abandoned, with leave to reapply without prejudice, where the applicant fails to respond to any request for required information within sixty days of written notification by the commissioner.”  Conn. Joint Standing Committee Hearings, 1998 Sess., p. 72.  Part of the reason for the proposal given by the Commissioner was that “[c]urrent law requires the Department to go through a formal administrative proceeding and provide and opportunity for hearing in order to dispose of such [abandoned] applications.  This amendment would allow the Department to dispose of these applications, after notifying the application of its intended action.”  Conn. Joint Standing Committee Hearings, 1998 Sess., p. 73.

Representative Malone commenting on H.B. 5278, which became P.A. 98-161, stated that:

41 H.R. Proc., Pt. 2, 1998 Sess., p. 611.

In addition, Senator Fonfara stated that:

41 S.R. Proc., Pt. 9, 1998 Sess., p. 2701

The Office of Legislative Research explained the lengthy procedure required under Section 36b-68 of the Act to dispose of an application for registration of a business opportunity which has been abandoned as follows:  “[u]nder current law, in order to dispose of an abandoned application, the banking commissioner must issue a stop order denying effectiveness, provide an opportunity for a hearing, and issue written findings of fact and conclusions of law.”  Conn. Joint Standing Committee Hearings, 1998 Sess., p. 232.

Therefore, the language in Section 36b-68(a) of the Act was always interpreted as authorizing a stop order denying effectiveness against an application for a business opportunity registration.  In fact, prior to the enactment of Public Act 98-161 the only way for the Commissioner to dispose of an abandoned application, was to issue a stop order denying effectiveness, give appropriate notice, provide an opportunity for a hearing, and issue written findings of fact and conclusions of law.  Thus, the legislative history of Section 36b-68 of the Act supports the Department’s position that the Commissioner’s authority to issue a stop order denying effectiveness to a business opportunity registration pursuant to Section 36b-68(a) of the Act encompasses an application for registration of a business opportunity that has not been registered.

3.  Past Practice

This interpretation is also consistent with the practice of the Department.  The Department issues orders granting effectiveness to business opportunity registrations stating that the business opportunity is registered pursuant to Section 36b-62(d) of the Act and that the order constitutes the certificate of registration contemplated by Section 36b-65(c) of the Act, and providing an effective date of the registration.

The Connecticut Supreme Court has recently reviewed the deference that should be given to an agency’s interpretation of a statute.  Longley v. State Employees Ret. Comm’n, 284 Conn. 149, 163-66 (2007).  The Connecticut Supreme Court reaffirmed “the principal that courts should accord deference to an agency’s formally articulated interpretation of a statute when that interpretation is both time-tested and reasonable.”  Id. at 166.

From at least 1989 the Department has consistently interpreted Section 36b-68(a) of the Act (formerly Section 36-511 before it was transferred to Section 36b-68 in 1995) as authorizing the Commissioner to issue stop orders denying effectiveness against pending applications for registration of a business opportunity.  This interpretation of the statute has been articulated in Department statements to the General Assembly and in the administrative actions that the Commissioner has initiated against pending applications, some of which have resulted in the Commissioner issuing a stop order denying effectiveness to the registration of pending applications which have not been registered.  As noted above, prior to the enactment of Public Act 98-161 issuing a stop order denying effectiveness to the registration of pending applications pursuant to 36b-68(a) of the Act was the only way for the Commissioner to deny an application for registration of a business opportunity.  There are many examples of the Commissioner issuing a stop order denying effectiveness to pending applications for registration of a business opportunity.  See, e.g, In the Matter of:  Beverly Hills Concepts, Inc., 1989 Conn. Sec. LEXIS 79, August 7, 1989; In the Matter of:  Value Investments, Ltd., 1990 Conn. Sec. LEXIS 51, April 27, 1990; In the Matter of:  Vendx Marketing, Inc., 1991 Conn. Sec. LEXIS 28, April 8, 1991; In the Matter of:  National Mortgage Network of America, Inc., 1991 Conn. Sec. LEXIS 62, November 26, 1991; In the Matter of:  Jetstarr International, 1998 Conn. Sec. LEXIS 20, September 2, 1998; In the Matter of:  Community Network Association, Inc., 1999 Conn. Sec. LEXIS 15, April 5, 1999; In the Matter of:  Communications Marketing Associates, Inc., 2001 Conn. Sec. LEXIS 17, February 27, 2001; In the Matter of:  AMERI P.O.S. INC., a/k/a AMERIPOS INC., 2004 Conn. Sec. LEXIS 10, February 17, 2004; In the Matter of:  Debit Corporation Of America, Inc., 2004 Conn. Sec. No-Act. LEXIS 20, March 18, 2004; and In the Matter of:  Power Internet Terminals, Inc., 2005 Conn. Sec. LEXIS 27, June 29, 2005.

As noted above, Section 36b-68(e) of the Act provides the Commissioner’s authority and the procedures pursuant to which the Commissioner may deem an application for registration of a business opportunity to be abandoned.  The Department’s past practice has been to address the significant insufficiencies in the documentation and disclosures provided to Department after the applicant’s initial submission.  Pursuant to Section 36b-68(e) of the Act, the Commissioner is permitted, but not required, to deem an application for registration to be abandoned if the applicant fails to respond to any request for information required under sections 36b-60 to 36b-80, inclusive, or any regulations adopted pursuant to said sections.  Although the stop orders denying effectiveness that the Commissioner issued in Beverly Hills Concepts, Inc., Vendx Marketing, Inc., Jetstarr International and Community Network Association, Inc., were for post-sale registrations, no distinction is made in construing the applicability of Section 36b-68 of the Act to such pending applications for registrations.  In addition, the legislative history indicates that the legislature was well aware of this interpretation and the past practice of the Department when Section 36b-68 of the Act was amended in 1998.  Therefore, the Department’s interpretation of the law is both time-tested and reasonable and therefore should be given deference.  See, Longley, 284 Conn. at 166.  Accordingly, the Commissioner is authorized by Section 36b-68(a) of the Act to issue a stop order denying effectiveness to a business opportunity registration based on an application for registration of a business opportunity that has not been registered by the Commissioner that is incomplete in a material respect but not abandoned pursuant to Section 36b-68(e) of the Act or contains statements which, in the light of the circumstances under which they were made, false or misleading with respect to material facts.

B.  Application for Registration that is Incomplete in a
Material Respect or Contains a False or Misleading
Statementwith Respect to any Material Fact

The Notice asserted that Respondent filed the Application which is incomplete in a material respect, but has not been deemed abandoned by the Commissioner or contains statements which, in light of the circumstances under which they were made, are false or misleading with respect to material facts.  The Notice further asserted that such filing of the Application forms a basis for a stop order denying effectiveness to a business opportunity registration under Section 36b-68(a)(3) of the Act.

The Department asserts that the Disclosure Document:  (1) fails to summarize the principal factors that make the business opportunity one of high risk or of a speculative nature, as required pursuant to Section 36b-63(b)(27) of the Act, including those particular to the nature of Blue Coast Business, such as the competitiveness of the industry, the likelihood of failing to uncover errors and overcharges and the dependence of the business on qualified individuals to conduct the premium audits; (2) fails to disclose the complete business experience for the past five years of the Hulls and Loughmiller, and makes no disclosure of the business experience of several individuals on Respondent’s management team, as required pursuant to Section 36b-63(b)(2) of the Act; (3) fails to identify the Hulls as respondents in the Washington Consent Order; and (4) fails to disclose the Connecticut Order and Connecticut Consent Order.  Accordingly, the Department contends the Application is incomplete in a material respect or contains statements which, in light of the circumstances under which they were made, are false or misleading with respect to material facts pursuant to Section 36b-68(a)(3) of the Act.

Respondent contends that the Disclosure Document was not deficient in any material respect under all of the facts and circumstances of this case.  Respondent further contends that the Department failed to produce any evidence that the alleged deficiencies were material.  Additionally, Respondent argues that any alleged deficiencies in the Disclosure Document were resolved by the Amended Disclosure Document.

The term “material fact” has not been construed in the business opportunity context by Connecticut courts.  There are many definitions of the term “material”.  The term “material” is defined by Black’s Law Dictionary (8th ed. 2004), in part, as “2.  [h]aving some logical connection with the consequential facts . . . .  3.  Of such a nature that knowledge of the item would affect a person’s decision-making; significant; essential . . . .”  Merriam-Webster’s Collegiate Dictionary (10th ed. 2001) defines “material”, in part, as “2 : having real importance or great consequences”.  In addition to looking to the dictionary definition to determine the meaning of “material fact”, the term is defined in the Federal Trade Commission rule entitled “Disclosure Requirements and Prohibitions Concerning Business Opportunities” codified at 16 C.F.R. § 437.2.  The Federal Trade Commission rule states that “[t]he term material, material fact, and material change shall include any fact, circumstance, or set of conditions that has a substantial likelihood of influencing a reasonable business opportunity purchaser in the making of a significant decision relating to a named business opportunity business or that has any significant financial impact on a business opportunity purchaser of prospective business opportunity purchaser.”  16 C.F.R. § 437.2(n) (2008).

The Connecticut Uniform Securities Act also uses the term “material fact”, which has been interpreted by Connecticut courts.  According to Connecticut courts:

Lehn v. Dailey, 77 Conn. App. 621, 628 (2003) (internal quotation marks omitted) (citations omitted).

“[T]he standard for determining whether a particular omission involved a material fact is an objective rather than a subjective one . . . .”  Id. at 629.  In addition the United States Supreme Court has held that an omitted fact or untrue statement is material if it would have assumed significance in the investment deliberations of a reasonable investor.  Basic Inc. v. Levinson, 485 U.S. 224 (1988).  “It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change . . . [the investment decision]. . . . Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”  TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (alteration in original).  As opposed to common law fraud, there is no requirement in Section 36b-68(a) of the Act for reliance by an investor or scienter.

The record reveals that as part of its Application, Respondent filed the Disclosure Document that it intended to subsequently distribute to Connecticut purchaser-investors.  The Disclosure Document includes a heading of “Risk Factors” and sections entitled:  “ITEM 2 BUSINESS EXPERIENCE OF SELLER’S DIRECTORS AND EXECUTIVE OFFICERS”; “ITEM 3 BUSINESS EXPERIENCE OF THE SELLER”; and “ITEM 4 LITIGATION HISTORY”.  The Business Experience of Seller’s Directors and Executive Officers section of the Disclosure Document states that the Hulls were involved as principals of Taxback.  The Business Experience of the Seller section of the Disclosure Document indicates that Respondent has offered for sale and sold Taxback business opportunities.  The Litigation History section of the Disclosure Document states, in pertinent part, that:

The record further reveals that Respondent has offered for sale and sold Taxback business opportunities.  Taxback had several regulatory agency orders issued against it, including the Washington Consent Order.  The Hulls, who are officers of Respondent, are subject to the Washington Consent Order.  On January 10, 2005, the Commissioner issued the Connecticut Order against Taxback for offering and selling an unregistered business opportunity in Connecticut from at least April 2004.  The Connecticut Order became permanent on January 29, 2005.  On June 7, 2005, the Commissioner entered into the Connecticut Consent Order with Taxback and Taxback Opportunities.  The sanctions in the Connecticut Consent Order included the following:  (1) a requirement that Taxback and Taxback Opportunities, and their respective officers, agents, representatives and employees, cease and desist from any violation of the Act; (2) termination of the registration of Taxback Opportunities’ business opportunity; and (3) authorized the Commissioner, in his discretion, to condition any registration of future business opportunities in Connecticut by Taxback and/or Taxback Opportunities upon their submission of two written compliance audits to be conducted by independent legal counsel.

1.  Washington Consent Order

The Department contends that Respondent naming only Taxback as a respondent in its discussion of the Washington Consent Order and failing to identify the Hulls as respondents makes the Disclosure Document incomplete in a material respect and constitutes a statement which is, in the light of the circumstances under which it was made, false or misleading with respect to any material fact.  In addition, the Department contends that disclosure that the Hulls are subject to the Washington Consent Order is required pursuant to Section 36b-63(b)(4)(C) of the Act.  The Department asserts that administrative actions have been deemed to be material facts under securities laws.

Respondent contends that the Litigation History section of the Disclosure Document establishes that a full disclosure of all material facts was made with regard to the Washington proceedings.  Respondent contends that the fact that the Hulls were respondents subject to the Washington Consent Order is self-evident from the other disclosures made within the Disclosure Document, since the Business Experience of Seller’s Directors and Executive Officers section states that the Hulls were involved as principals of Taxback from the time of its inception, which necessarily includes the time period of the Washington proceedings involving Taxback.  Respondent states that the language describing the Washington Consent Order in the Litigation History section of the Disclosure Document had been approved by the State of Washington.  Respondent contends that this approval alone is dispositive of the Department’s claim that the language in question comprises a “material misrepresentation or omission”.  Therefore, Respondent concludes that no reasonable purchaser-investors could have been misled with regard to such matters.

The record reveals that the Hulls are named as respondents in the Washington Consent Order and that Respondent did not disclose that the Hulls are named as respondents in the Washington Consent Order.  The Disclosure Document states that the Hulls were officers of Taxback and makes an affirmative statement that the officers of Respondent were not subject to any currently effective state or federal agency or court injunctive or restrictive order.  There would be no way for purchaser-investors to know that the Hulls are named as respondents in the Washington Consent Order, without reading the Washington Consent Order.  Therefore, the fact that the State of Washington may have approved language addressing the Washington Consent Order is not relevant to the fact that Respondent affirmatively stated that the Hulls are not subject to the Washington Consent Order.  Given Respondent’s affirmative statement, not only is it not self-evident from the other disclosures that the Hulls are respondents in the Washington Consent Order, the only conclusion that could be reached from reading the Disclosure Document by itself is that the Hulls are not respondents in the Washington Consent Order.

Section 36b-63(b)(4)C) of the Act requires that the Disclosure Document contain a statement disclosing who, if any, of the persons listed in subdivisions (1) and (2) of subsection (b) of Section 36b-63:

Therefore, Respondent is required to disclose that the Hulls are respondents in the Washington Consent Order, pursuant to Section 36b-63(b)(4)(C) of the Act.  In addition, administrative actions have been deemed to be material facts under securities laws.  For example, in SEC v. Merchant Capital, LLC, 483 F.3d 747, (11th Cir. 2007), a securities case concerning the disclosure of a cease and desist order, the Eleventh Circuit stated:

Id. at 771-72.

The fact that officers of Respondent, specifically the Hulls, were subject to the Washington Order is clearly relevant to a reasonable purchaser-investor, who is naturally interested in whether Respondent’s management has violated statutes regulating business opportunities.  Therefore, the existence of the Washington Consent Order is a material fact under the Act and full disclosure of all material facts was not made in the Disclosure Document with regard to the Washington Consent Order.  The failure to make a disclosure required by statute makes the Application incomplete in a material respect.  In addition, Respondent’s affirmative statement in the Disclosure Document that the officers of Respondent were not subject to any currently effective state or federal agency or court injunctive or restrictive order is false and misleading to a reasonable purchaser-investor and constitutes a false or misleading statement with respect to a material fact.  Therefore, the Application is incomplete in a material respect but is not abandoned pursuant to 36b-68(e) of the Act and contains a statement which was, in the light of the circumstances under which it was made, false or misleading with respect to any material fact.

2.  Connecticut Order and Connecticut Consent Order

The Department also contends that the Disclosure Document contains a misleading statement concerning Respondent’s disclosure of matters initiated by the Commissioner against Taxback and Taxback Opportunities.  Specifically, the Department contends that the Litigation History section of the Disclosure Document only discusses a compliance letter issued by the Department to Taxback Opportunities months before the administrative proceedings, and fails to disclose the Connecticut Order and Connecticut Consent Order.  The Department asserts that the omission of the Connecticut Order and Connecticut Consent Order makes the Disclosure Document incomplete in a material respect.  The Department also asserts that only discussing the compliance letter issued by the Department to Taxback Opportunities is a false or misleading statement with respect to a material fact, and disclosure of the Connecticut Order and Connecticut Consent Order is required pursuant to Section 36b-63(b)(4)(C) of the Act.

Respondent, on the other hand, contends that the Disclosure Document does in fact disclose the existence of the prior Connecticut proceedings.  Respondent contends that there was no attempt to hide from purchaser-investors the prior Connecticut proceedings related to a single sale that had been rescinded voluntarily by Taxback Opportunities prior to any action by the Department.  Respondent further contends that any reasonable purchaser-investor would have been fully informed of the fact that prior enforcement proceedings had taken place in Connecticut, and would have been apprised that further investigation could be appropriate if a purchaser-investor felt that such information was of material importance to him or her.

The Business Experience of the Seller section of the Disclosure Document states that Respondent “has offered and sold business opportunities in one other line of business.  Such opportunities were offered by Taxback, LLC, beginning in 2004.”  The Disclosure Document, which was filed on January 16, 2007, discloses the compliance letter received by Taxback Opportunities from the Department on November 4, 2004.  The Litigation History section of the Disclosure Document states that prior to the issuance of the compliance letter Taxback Opportunities had voluntarily refunded the business opportunity fee to the consumer on September 28, 2004.  The Disclosure Document does not disclose the Connecticut Order and the Connecticut Consent Order.  There is no other information regarding any other actions taken by the Commissioner provided in the Disclosure Document that was filed more than two years after the issuance of the compliance letter.  Therefore, a reasonable purchaser-investor would not be informed that other enforcement proceedings had taken place in Connecticut prior to the filing of the Disclosure Document.  Given the amount of time between the compliance letter and the Disclosure Document, listing the compliance letter followed by the statement that the fee had previously been refunded without listing the Connecticut Order and the Connecticut Consent Order is false or misleading because it fails to indicate that enforcement proceedings followed the compliance letter.  In fact, a reasonable conclusion would be that no enforcement proceedings followed the compliance letter.  Respondent’s characterization of the actions taken by Connecticut against Taxback and Taxback Opportunities as a “compliance letter”, in the light of the circumstances under which it was made, is false and misleading with respect to a material fact because it minimizes the sanctions taken by the Commissioner against Taxback and Taxback Opportunities.  In addition, Section 36b-63(b)(4)(C) of the Act requires that Respondent disclose the Connecticut Order and Connecticut Consent Order.  Therefore, the record establishes that the registration is incomplete in a material respect but is not abandoned pursuant to 36b-68(e) of the Act and contains statements which, in the light of the circumstances under which they was made, false or misleading with respect to any material fact as a result of Respondent’s failure to disclose the Connecticut Order and Connecticut Consent Order as required by statute.

3.  Risk Factors

Respondent also failed to disclose any of the risk factors affecting the Blue Coast Business.  Section 36b-63(b)(27) of the Act requires:

The Notice alleges that the Disclosure Document fails to summarize the principal factors that make the business opportunity one of high risk or of a speculative nature, as required pursuant to Section 36b-63(b)(27) of the Act, including those particular to the nature of Blue Coast Business, such as the competitiveness of the industry, the likelihood of failing to uncover errors and overcharges and the dependence of the business on qualified individuals to conduct the premium audits.

The Department contends that the Respondent failed to make complete disclosure of the risk factors affecting the Blue Coast Business within the Disclosure Document.  The Department contends that there is no discussion of the absence of profitable operations or anything concerning the particular nature of the business in which the seller is engaged under the heading “Risk Factors” of the Disclosure Document and that the failure to disclose these risk factors constitutes a material omission.

The Respondent contends that disclosure of risk factors relating to any business opportunity is entirely subjective, and that Respondent believes that the risk factors disclosed in the Disclosure Document fully disclose all material information relating to such risk factors to prospective buyers of the Blue Coast Business.  Respondent further contends that because the risks inherent in a business opportunity are subjective, the Department customarily issues a comment letter setting forth its position on risks.  Respondent asserts that the Department never stated what its position was with regard to any such risks even after Respondent requested in a letter dated June 26, 2007, that the Department identify the risks which should be identified.  Respondent contends that it made a good faith effort to address the situation and to reach a reasonable resolution by submitting to the Department an Amended Disclosure Document on July 31, 2007, within which Respondent revised and expanded on the risk factors.  Respondent further contends that the Department refused to review the Amended Disclosure Document, and that such a refusal was simply unreasonable and improper given that Respondent had every right under the Act to amend its application.

The record reveals that under the heading “Risk Factors” of the Disclosure Document there is a disclaimer that all disagreements between Respondent and purchasers must be arbitrated in Arizona and, therefore, may not provide the same protections and benefits as local law, that there may be other risks concerning this business opportunity, and that the registration of the business opportunity within any state does not constitute approval, recommendation or enforcement by any state.  Respondent contends that risk factors are subjective.  However, Section 36b-63(b)(27) of the Act clearly requires that a disclosure document contain a section entitled “risk factors” that includes a series of short concise captioned paragraphs summarizing the principal factors which make the business opportunity one of high risk or of a speculative nature.  Section 36b-63(b)(27) of the Act further lists specific factors that are required to be included in a section entitled “risk factors” of a disclosure document.  Respondent failed to include a series of short concise captioned paragraphs summarizing the principal factors which make the business opportunity one of high risk or of a speculative nature or any of the factors specified in Section 36b-63(b)(27) of the Act.  Therefore, the registration of the business opportunity is incomplete in a material respect since the Disclosure Document fails to contain any of the information required by Section 36b-63(b)(27) of the Act to be contained in a section entitled “risk factors”.

4.  Business Experience

The Notice alleges that the Disclosure Document fails to disclose the complete business experience for the past five years of the Hulls and Loughmiller, and makes no disclosure of the business experience of several individuals on Respondent’s management team as required pursuant to Section 36b-63(b)(2) of the Act.

Section 36b-63(b)(2) of the Act requires disclosure of:

The Department contends that Respondent failed to disclose the Hulls’ affiliation with Taxback Opportunities and Ms. Hull’s experience with the franchise Glove Lady, LLC in the Disclosure Document.  In addition, the Department contends that the Disclosure Document fails to state the titles and positions that Loughmiller held with previous employers.  The Department further contends there are also several individuals identified on Respondent’s website as being part of its management team who were not mentioned in the Disclosure Document.  The Department contends that at a minimum a brief description of Felderstein’s business experience should have been included in the Disclosure Document, and both Ms. Hull and Attorney Farrell acknowledged that a brief description of Felderstein’s business experience should have been included in the Disclosure Document.

Respondent contends that a review of the disclosures set forth in the Business Experience of Seller’s Directors and Executive Officers section of the Disclosure Document will show that there are no material omissions or misrepresentations. Respondent contends that the disclosures provided within the Business Experience of Seller’s Directors and Executive Officers section of the Disclosure Document clearly meet the requisites of the statutory standard.  Respondent contends that the information provided in the Disclosure Document does not comprise false information, or fail to provide information comprising a “substantial material misrepresentation”.  Respondent points to the fact that the Department presented no evidence that any consumer anywhere, including Connecticut, has been induced, or misled in any material way, by the factual representations that have been provided by Respondent in the Disclosure Document as a reason this claim of the Department of material misrepresentation must fail.

The Business Experience of Seller’s Directors and Executive Officers section of the Disclosure Document references the business experience of the Hulls and Loughmiller.  Although the Business Experience of Seller’s Directors and Executive Officers section of the Disclosure Document states that Ms. Hull “served as director of a leading tax review and recovery business, Coral Edge, LLC dba Taxback LLC” it does not mention Taxback Opportunities.  In addition, from March 2005 to June 2007 Ms. Hull co-founded the Glove Lady, LLC, a company that was selling franchises for the operation of businesses by franchisees providing direct sales of gloves and personal safety products to the construction and manufacturing industries.  Ms. Hull’s association with Glove Lady, LLC was not discussed in the Business Experience of Seller’s Directors and Executive Officers section of the Disclosure Document.

The Business Experience of Seller’s Directors and Executive Officers section of the Disclosure Document states that Loughmiller’s efforts were instrumental in developing over $75 million of business for Taxback, and that she brings her considerable sales marketing and business development strengths to Respondent, working with the same members of the team responsible for the success of Taxback.  The Business Experience of Seller’s Directors and Executive Officers section of the Disclosure Document does not disclose Loughmiller’s titles or positions held with Paychex or Taxback, nor the locations of Paychex and Taxback.

Finally, the Business Experience of Seller’s Directors and Executive Officers section of the Disclosure Document does not discuss the business experience of Felderstein and other individuals listed on Respondent’s website listed as management.  The record reveals that the individuals other than Felderstein that were listed on Respondent’s website as management, who were not included in the Disclosure Document were not persons charged with responsibility for the seller’s business and, therefore, were not required to be included in the Disclosure Document.  Felderstein, according to Respondent’s website as of March 1, 2007 and Ms. Hull’s testimony, was at all times part of Respondent’s management team.  Therefore, information regarding Felderstein’s business experience during the past five years was required to be provided in the Disclosure Document.

Accordingly, the Disclosure Document fails to list all of the persons charged with responsibility for the seller’s business activities and fails to disclose the business experience during the past five years of each of the Respondent’s current directors, executive officers, trustees, general partners, general managers, and any other persons charged with responsibility for the seller’s business activities, including but not limited to, the chief operating officer and the financial, marketing, training and service officers as required by Section 36b-63(b)(2) of the Act.  Therefore, the registration of the business opportunity is incomplete in a material respect.

C.  Right to Amend

Respondent contends that the Department’s refusal to review the Amended Disclosure Document was unreasonable and improper given that Respondent had every right under the Act to amend its Application.  As noted previously, the Act authorizes, but does not require, the Department to request information under the Act.  On January 16, 2007, Respondent filed the Application with the Commissioner and on May 4, 2007, the Commissioner issued the Notice against Respondent.  Respondent’s attempts to resolve this matter by requesting that the Department identify the “risks” which should be identified and submitting an Amended Disclosure Document occurred after the Commissioner issued the Notice.

A review of the Act does not reveal any express right for applicants to remedy an application that is incomplete in any material respect or contains any statement which was, in light of the circumstance under which it was made, false or misleading with respect to any material fact.  Respondent has asserted a deprivation of due process as a result of the Department’s failure to send a comment letter prior to the issuance of the Notice.  A written request for information, while often a part of the registration process, is not required by statute and the Department has asserted that it is not appropriate in a case such as this because the Application is incomplete in a material respect and contains statements which were, in light of the circumstance under which they were made, false or misleading with respect to any material fact.  As noted earlier, besides notice to an applicant or registrant in connection with enforcement proceedings, the only other provision that requires notice to an applicant is Section 36b-68(e) of the Act.  Section 36b-68(e) of the Act requires the Commissioner to notify an applicant prior to deeming an application abandoned.  In this case, the Application was not deemed abandoned by the Commissioner therefore no such notice was required.

The only reference to amendments within the Act is contained in Section 36b-65(f) of the Act which states, “[t]he seller shall immediately notify the commissioner of any material change in information contained in the application for registration, amend financial statements not less than quarterly and make appropriate amendment of the disclosure document.”  Section 36b-65(f) of the Act does not provide applicants and registrants a right to amend an application, rather, in part, it requires a seller of a business opportunity to notify the Commissioner of any material change in the application for registration.  The additional information Respondent included in the Amended Disclosure Document was not a result of a material change in information contained in the Application, but rather resulted from Respondent’s failure to include information in the Disclosure Document that is required by the Act.  Nowhere in the Act does it state that false or misleading statements with respect to any material fact made in a document filed with the Commissioner can be withdrawn or supplemented.  In this case, the Application is not only incomplete in a material respect but not abandoned, but also contains statements which are false or misleading with respect to a material fact.

Respondent contends that the Amended Disclosure Document would resolve the issues cited by the Department in the Notice.  Not only is there no right for Respondent to amend a disclosure document filed with the Department which contains false or misleading statements, but the Amended Disclosure Document also contains false and misleading statements.  The Litigation History section of the Amended Disclosure Document contains the same statement as the Litigation History section of the Disclosure Document that:

In addition, the Litigation History section of the Amended Disclosure Document also contains the statement that Taxback was registered in Oklahoma, a fact which Ms. Hull admitted was false during the hearing.  Moreover, with respect to the Connecticut administrative actions taken against Taxback and Taxback Opportunities, the Litigation History section of the Amended Disclosure Document once again fails to disclose the Connecticut Order.  Therefore, even if the Amended Disclosure Document is considered, the registration of the business opportunity is incomplete in a material respect but is not abandoned pursuant to Section 36b-68(e) of the Act and contains a statement which was, in the light of the circumstances under which it was made, false or misleading with respect to any material fact.

D.  Notice

Section 36b-68(c) of the Act, provides, in pertinent part, that “[n]o stop order may be entered under . . . [Section36b-68 of the Act] except as provided in subsection (b) of . . . [Section36b-68 of the Act] without:  (1) Appropriate prior notice to the applicant or registrant of a business opportunity; (2) opportunity for a hearing; and (3) the issuance of written findings of fact and conclusions of law by the commissioner.

Section 4-177 of the Connecticut General Statutes provides, in pertinent part, that:

The Notice issued by the Commissioner complied with Section 36b-68(c) of the Act and Section 4-177 of the Connecticut General Statutes.

Section 36b-68(a)(3) of the Act authorizes the Commissioner to issue a stop order denying effectiveness to a business opportunity registration based on an application for registration of a business opportunity that has not been registered by the Commissioner that is incomplete in a material respect but not abandoned pursuant to Section 36b-68(e) of the Act or contains statements which, in the light of the circumstances under which they were made, false or misleading with respect to material facts.

The Commissioner finds that Respondent’s application for registration of a business opportunity is incomplete in a material respect, and is not abandoned pursuant to Section 36b-68(e) of the Act and contains a statement which was, in the light of the circumstances under which it was made, false or misleading with respect to any material fact.

The Commissioner finds that the record requires the issuance of a stop order denying effectiveness to the business opportunity registration of Respondent.

III.  ORDER

Having read the record, I hereby ORDER, pursuant to Section 36b-68(a) of the Act, that:

Dated at Hartford, Connecticut
this 5th day of May 2008.                  ________/s/_________
                                                     Howard F. Pitkin
                                                     Banking Commissioner

This Order was mailed by registered mail,
return receipt requested, to Respondent
on May 5, 2008.

Richard W. Farrell, Esq.                        Registered Mail No. RB027867505US
The Farrell Law Group
4900 Falls of Neuse Road, Suite 212
Raleigh, NC 27609

Administrative Orders and Settlements