Hands ready to fill a cheque

This can be a crucial question.  U.S. Securities laws are manageable with guidance from an experienced U. S. Securities lawyer, but if you are involved in a transaction and do not realize it is subject to the U. S. Securities laws, you are headed for big trouble.

Recent Cases Provide Insight Into Applicability of United States Securities Laws to International Transactions

In recent years, the question of when the United States’ securities laws may apply to international transactions has been a prominent topic for various United States courts.  Until a few years ago, questions of whether United States Securities laws apply to international transactions were primarily determined by two tests:

(1) the “effects test,” which asked whether any wrongful conduct, like fraud, had a substantial effect in the United States or upon United States citizens; and

(2) the “conduct test,” which asked whether the wrongful conduct had taken place in the United States.

In 2010, however, the Supreme Court of the United States propounded entirely new methodology for determining whether United States Securities laws are applicable to international transactions in Morrison v. National Australia Bank Ltd.[1] Continue reading

As previously noted in this blog (see “Private Placement Brokers Await Attention by SEC” June 6, 2017) and in this firm’s sister blog (see “Private Placement Brokers Should be Legalized along with M&A Brokers” in the RIA Compliance Blog, Jan. 21, 2015), there has long been a large gray market of unregistered private placement brokers. Also see “Report and Recommendations of the Task Force on Private Placement Broker-Dealers” (American Bar Association Business Law Task Force, 2005). This cadre, often call themselves “finders,” in the vain hope that such self-description will enable them to escape regulation as a securities Broker/Dealer, which they clearly are by definition. Finders have continued to operate in plain sight, with little response from the SEC other than the issuance of a few inconsistent no-action letters and an occasional enforcement action against such brokers whose conduct was egregious in other ways.

Hester Peirce, the newest Republican commissioner at the SEC, has called on the agency to address this malfunction in our securities laws at a recent Practicing Law Institute program. Commissioner Peirce proposes establishing a new regulatory scheme for finders in small business capital formation transactions that “works for them.” We would hasten to add that any solution to this problem must also work for the small businesses that use finders and those that invest through finders.

Congress has previously approached the comparable problem of M&A Brokers by establishing an exemption rather than a new regulatory structure. We would urge the Commission to explore a similar approach to finders before creating an entire new regulatory scheme and the bureaucracy to operate that scheme. Such an exemption must create protections for both investors and the businesses raising capital, such as a prohibition on the finder taking possession of the investment or making any representations that were not contained in a written Private Placement Memorandum approved by the issuer. The process of developing any such regulatory scheme or exemption will hopefully involve active participation by persons who participate in this market.

On October 3, 2017, the South Dakota Division of Insurance- Securities Regulation published proposed rules which would establish notice filing requirements for federal regulation crowdfunding and Regulation A, Tier 2 offerings.  According to the Division, these rules are being proposed “so the Division may monitor these types of offerings by receiving information about the issuer and the offering.”

The proposed rules governing notice filings for federal crowdfunding offerings would require an issuer who offers and sells securities pursuant to the federal crowdfunding registration exemption to make a notice filing in South Dakota if the following conditions are met: (1) the issuer’s principal place of business must either be in South Dakota or (2) the issuer must plan to sell 50 percent or more of the total offering to South Dakota residents.  As part of the initial notice filing, the issuer would need to include either a completed Uniform Notice of Federal Crowdfunding Offering form or copies of every document filed with the Securities and Exchange Commission.  If the issuer does not use the Uniform Notice of Federal Crowdfunding Offering Form, it would also need to file a consent to service of process form (“Form U-2”), along with a $250 fee.  The notice filing would be effective for a period of twelve months beginning with the filing date.  To renew the notice filing, the issuer would need to file with the Division a Uniform Notice of Crowdfunding Offering form marked “renewal” together with a cover letter asking for renewal, along with a $250 fee. Continue reading

On October 11, 2017, the Iowa Insurance Division announced that it has adopted amendments to the Iowa Administrative Code, adding notice filing requirements for federal crowdfunding offerings and updates to the notice filing requirements for Regulation A, Tier 2 offerings.  In addition, the amendments adopt two policy statements published by the North American Securities Administrators Association (“NASAA”).  The amendments went into effect on November 15, 2017.

Under the amendments, an issuer who plans to make a crowdfunding offering under the federal Securities Act must file notice in Iowa if the issuer has its principal place of business in Iowa or plans to sell 50 percent or more of the total offering to residents of Iowa.  The issuer’s notice filing must include either a completed Uniform Notice of Federal Crowdfunding Offering form (“Form U-CF”) or a Uniform Consent to Service of Process form (“Form U2”).  The issuer must also pay a filing fee of $100.  If the issuer’s principal place of business is in Iowa, the notice filing must be completed as soon as the issuer files its initial Form C filing with the Securities and Exchange Commission.  If the issuer’s principal place of business is not in Iowa but Iowa residents have bought 50 percent or more of the offering’s total amount, the notice filing should be completed “when the issuer becomes aware that such purchases have met this threshold and in no event later than 30 days from the date of completion of the offering.” Continue reading

If you build it, will they come? In the movie Field of Dreams, Kevin Costner’s character Ray Kinsella was promised by a mysterious Voice that if he built a baseball field in the middle of an Iowa cornfield, “they”- ghost baseball players which ultimately included his deceased father – would come. As the formerly cynical, suspicious sportswriter Terrance Mann (James Earl Jones) promised would happen, Ray’s faith in the Voice was rewarded. [1]

The same question might be asked about Crowdfunding Portals, although with decidedly less fantasy and romanticism and no sign of James Earl Jones: If you build it, will they come?

So far, 36 portals have registered with FINRA under Regulation CF, which went effective on May 16, 2016. Two registrations have already been withdrawn, leaving 34 portals in various stages of activity and levels of success.

Parker MacIntyre has recently published a whitepaper entitled Forming a Hedge Fund or other Private Investment Fund: A Top 10 List for the Entrepreneurial Fund Manager.  If you are a money management or other financial services professional currently giving some serious thought to setting-out on your own as an entrepreneurial private investment fund manager, this publication is the right place to start.  In it you will find a roadmap for entrepreneurial fund managers which aims to identify and discuss the top 10 areas of attention/concern relevant to a fund launch.  Our whitepaper address such areas as:

  • Basic structure and formation considerations for managers, including compensation.
  • Service providers and partners needed for a successful start-up fund.

The Georgia Securities Commissioner’s office recently held a fairness hearing pursuant to a request by two merging local banks seeking to facilitate their merger by forgoing the need to register newly issued securities at both the state and federal levels. The hearing, which is Georgia’s second in the last four years, was held on July 26, 2017. A copy of the Commissioner’s Order of Approval is available on the Georgia Secretary of State’s web site.

The fairness hearing process is a unique statutorily-codified transactional registration exemption which exists in a number of states—mostly those states having enacted some form of the model Uniform Securities Act of 2002. While not widely used historically, the fairness hearing process generally provides an exemption from registering securities at the state level for certain mergers and acquisitions (“M&A”) transactions where the state securities regulator passes on the “fairness” of the terms of the merger after conducting an evidentiary administrative hearing. What makes the fairness hearing process especially appealing is that the federal Securities Act of 1933 contains a sister provision at Section 3(a)(10), which provides a federal registration exemption for securities issued in certain M&A transactions where “the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions” by any state or federal governmental authority “expressly authorized by law to grant such approval.” This effectively means that a successful fairness proceeding conducted at the state level not only entitles the applicant to a state “Blue-Sky” registration exemption—but also a federal registration exemption as well.

In Georgia, the fairness hearing exemption is codified at Section 10-5-11(9) of the Georgia Uniform Securities Act of 2008, which exempts M&A transactions where the “fairness of the terms and conditions have been approved by the Commissioner after a hearing.” The Georgia Securities Commissioner’s office has promulgated administrative rules setting forth the roadmap for making an application pursuant to Section 10-5-11(9) as well as the conduct of the actual hearing. These rules, which were implemented in mid-2014, require, among other things, that the transaction have a significant nexus to the state of Georgia (residency of securities holders, place of business of the applicants, etc.), that the applicants submit a detailed application package containing specific transaction documentation, and that the applicants pay a filing fee and a processing fee and undertake to reimburse the Commissioner’s office for its out-of-pocket costs.

In his first public speech as the newly-appointed head of the SEC, Chairman Jay Clayton delivered an outline of the “guiding principles” that he will look to in guiding his leadership of that agency going forward. Clayton delivered his remarks on July 12th to the Economic Club of New York in New York City. The full text of Clayton’s speech may be found on the SEC’s website.

The primary takeaway from Clayton’s speech is that under his tenure, capital formation issues will likely take a higher profile, and, in turn, the concerns of businesses seeking ways to raise capital will likely be given a heavier weight of consideration than in the past.

In what was generally a bullish speech for the advancement of capital formation, Clayton first and foremost reiterated the SEC’s three-part mission to: (1) protect investors, (2) maintain fair, orderly, and efficient markets, and (3) facilitate capital formation. However, Clayton specifically noted that “each tenet of that mission is critical,” stating that “if we stray from our mission, or emphasize one of the canons without being mindful of the others, investors, companies (large and small), the U.S. capital markets, and ultimately the economy will suffer.”

Approximately 35 states have created exemptions in their securities acts or rules in order to allow businesses seeking relatively small amounts of capital to raise funds locally without undergoing an expensive and complicated registration process. Offerings under these exemptions – typically called intrastate “crowdfunding” exemptions – have usually required compliance with the federal intrastate offering exemption under either Section 3(a)(11) of the 1933 Securities Act, or SEC Rule 147, which allows issuers to avoid the burdens of federal registration as well.

A key element of most of these newly-adopted state provisions has been to allow issuers to use general solicitation to seek investors. However, the federal exemption, together with restrictive historical SEC staff guidance, effectively operated to prohibit internet advertising, and restrict other types of solicitation. The federal intrastate exemption prohibited out-of-state offers of securities, even when those offers were deemed such solely because of their being visible to non-home state residents on the internet. The federal rules also prohibited an issuer formed in another state from availing itself of the intrastate exemption in its “home” state for all other purposes. Other constraints dealing with the issuer’s business activity (such as determining the percentage of its revenue derived from the home state) sometimes complicated the determination about whether an issuer would qualify for the federal, and therefore the state, exemption.

These restrictions, which had not been significantly changed in many years, led to widespread criticism that changing business and legal practices, not to mention the rise of the internet as a marketing tool, had made the intrastate exemption largely obsolete.

As previously noted in this firm’s sister blog (see “Private Placement Brokers Should be Legalized along with M&A Brokers” in the RIA Compliance Blog, Jan. 21, 2015), there has long been a large gray market of unregistered private placement brokers. Also see “Report and Recommendations of the Task Force on Private Placement Broker-Dealers” (American Bar Association Business Law Task Force, 2005). This cadre, often calling themselves “finders,” have continued to operate in plain sight, with little response from the SEC other than the issuance of a few inconsistent no-action letters and an occasional enforcement action against such brokers whose conduct was egregious in other ways.

The SEC’s Advisory Committee on Small and Emerging Companies (the “Committee”) has twice weighed-in on this subject urging SEC action.

The Committee first reported on this subject September 23, 2015, noting that: