Articles Posted in State Exemptions

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

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.

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.

Last October, the Securities and Exchange Commission adopted amended rules in several areas designed to facilitate capital formation by small businesses, in large part by coordinating federal requirements with requirements of state “crowdfunding” statutes and rules adopted by approximately 35 states since 2011.

Specifically, the SEC amended Rule 504 of Regulation D to raise the offering limit from $1,000,000 to $5,000,000, and created new Rule 147A, broadening the parameters under which intrastate offerings under existing Rule 147 could be conducted. Rule 147A, among other things, allows unlimited solicitation of offerings, including on the Internet, loosens requirements for issuers to qualify as “doing business in” a state, and allows corporate entities formed out-of-state to conduct intrastate offerings in the state where they primarily do business. Also, the previous requirement that intrastate offerings could only be offered to residents of a single state has been eliminated; the single-state restriction now considers only actual sales.

The effective date for the Rule 504 changes was January 20. However, the effective date of the new Rule 147A does not occur until April 20. Most states’ small business crowdfunding exemptions, whether adopted by statute or by rule, are conditioned upon compliance with Section 3(a)(11) of the 1933 Act or Rule 147. In order for issuers in those states to be able to fully utilize the new Rule 147A, those states will have to amend their exemptions to remove that condition.