## Facts

- IBC Arabian Investments, Inc. and related individuals formed Malaga Arabian Limited Partnership and offered limited-partnership interests connected to the Spanish Arabian horse industry.
- Multiple NASD-member broker-dealers marketed the interests; FSC Securities Corp. and its parent sold an interest to James E. Mark and his wife.
- Mrs. Mark was an FSC registered representative and executed the sale to herself and her husband.
- The transaction total was about $66,552 (including interest), funded by a down payment and promissory notes due in later years; FSC received a due-diligence fee and Mrs. Mark received a sales commission.
- The Marks sought rescission, alleging the interests were sold without required registration under federal and Ohio securities laws.
- FSC relied heavily on subscription agreements and investor questionnaires in which purchasers represented income and sophistication.
- Trial testimony indicated the issuer’s general partner did not meaningfully review subscription materials and lacked knowledge about purchasers’ actual sophistication.

## Issues

1. Whether FSC carried its burden to prove the Malaga offering was exempt from Ohio securities registration requirements.
2. Whether the evidence supported an exemption analysis grounded in the federal private-offering exemption (§ 4(2) of the Securities Act) and Regulation D, Rule 506.
3. Whether boilerplate subscription documents, without evidence about the number and nature of offerees and their access to information, could sustain a finding of a nonpublic/private offering.

## Decision

- The Sixth Circuit reversed the judgment entered on the jury verdict for FSC and remanded.
- The court held FSC failed to present legally sufficient evidence that the offering qualified for an exemption from registration under Ohio law.
- The record lacked proof regarding the number and nature of persons solicited and what information offerees had, defeating the private-offering theory.
- Evidence supporting Rule 506 was insufficient because FSC did not show a reasonable, functional process establishing purchaser sophistication (or purchaser representative qualification) and access to information.

## Legal Principles

- The seller claiming a securities-registration exemption bears the burden of proving the exemption’s applicability.
- Whether an offering is nonpublic depends on evidence about the number and nature of offerees, the manner of solicitation, and offerees’ access to information comparable to registration disclosures.
- Rule 506 requires more than signed sophistication representations; the proponent must show a reasonable basis to believe purchasers (or their representatives) meet qualification standards and had appropriate access to information.
- Under Ohio’s rescission statute for unregistered sales, failure to prove a valid exemption defeats the defense to liability and requires further proceedings on the rescission claim.

## Conclusion

The Sixth Circuit set aside a defense verdict because FSC did not substantiate, with concrete evidence, that the limited-partnership offering satisfied private-offering or Rule 506 requirements incorporated into Ohio exemption analysis, and it remanded for further proceedings on the state-law rescission theory.


Mark v. FSC Sec. Corp., 870 F.2d 331 (6th Cir. 1989)