Amendments to Reg. A & Coordinated Review
Faith Anderson, Esq.Chief of Registration & Regulatory AffairsWashington Securities Division
NASAA Annual ConferenceSeptember 29, 2015 | San Juan, Puerto Rico
BackgroundTitle IV of JOBS Act of 2012 added new Section 3(b)(2) to the Securities Act of 1933
Sec. 3(b)(2) directed the SEC to adopt a new exemption from registration by rule for public offerings of up to $50 million (aka Reg. A+)
Final rules were adopted March 25, 2015
Eligible IssuersRules are available to entities organized and principally located in the U.S. or Canada
Not available to:◦ Companies reporting under Sec. 13 or 15(d) of Exchange Act
◦ Blank check companies
◦ Investment companies and business development companies
◦ Companies offering interests in oil & gas/other mineral rights
◦ Companies subject to denial/suspension/revocation of registration under Sec. 12(j) of Exchange Act in past 5 years
◦ Companies involving “bad actors”
◦ Companies delinquent in Reg. A reporting in past 2 years
Eligible SecuritiesAvailable to offerings of:
◦ Equity securities
◦ Debt securities
◦ Securities convertible into equity
Not available for:◦ Asset backed securities as defined in Reg. AB
Two-Tiered ApproachTier 1:
◦ Offerings up to $20 million
◦ No ongoing reporting requirements
◦ No preemption of state “blue sky” requirements, but coordinated review is available
Tier 2:◦ Offerings up to $50 million
◦ Reporting requirements while the offering is ongoing or where there are more than 300 investors (1,200 for banks and bank holding companies)
◦ Preemption of state “blue sky” registration requirements, except for filings and fees
Preemption of State “Blue Sky” LawsJOBS Act provided “covered security” status under Sec. 18(b)(4) of Securities Act to Sec. 3(b)(2) securities where offered and sold:
◦ On a national securities exchange; or
◦ To a “qualified purchaser.”
Commission preempted state registration requirements by defining “qualified purchaser” under Sec. 18(b)(3) as “any person to whom securities are offered or sold” in a Tier 2 offering.
States may continue to require filings, including fees, for Tier 2 offerings.
Selling Securityholder LimitationsTier 1: No more than $6 million offered by selling securityholders that are affiliates
Tier 2: No more than $15 million offered by selling securityholders that are affiliates
Secondary sales subject to 30% cap in an issuer’s first Reg. A offering and any subsequent Reg. A offerings within 12 months thereof (whether affiliated or not)
Secondary sales included in aggregate offering amount caps (whether affiliated or not)
Investor QualificationsTier 1:
◦ No investor qualifications
Tier 2:◦ No investor qualifications if the securities will be listed on a national
securities exchange
◦ Otherwise, investors must either:◦ Be accredited investors; or
◦ Limit investment to 10% of greater of annual income or net worth (“loss limitation standard”)
Continuous or Delayed OfferingsPermitted if:
◦ Offering commences within 2 days of qualification and is reasonably expected to be completed within 2 years; and
◦ Issuer is current in filing reports under Reg. A.
Issuer may refile to continue the offering before the 3rd anniversary of prior qualification
Also permitted for securities offered in:◦ Non-issuer offerings
◦ DRIPs or an employee benefit plan of the issuer
◦ Exercise of outstanding options/warrants
◦ Conversions of other outstanding securities
◦ Pledge as collateral
Testing the WatersSolicitation of interest permitted prior to filing or qualification of offering statement
Disclaimers required:◦ No money will be accepted
◦ No offer to purchase will be accepted prior to qualification
◦ Indications of interest are not binding
Rules address integration of solicitations in abandoned Reg. A offerings with subsequently registered offerings
QualificationDocuments must be publicly filed on EDGAR at least 21 days prior to qualification
No sales permitted prior to qualification
Authority to qualify the offering is delegated to the SEC’s Division of Corporation Finance
Division of Corporation Finance will issue a “Notice of Qualification”
Filing BasicsIssuer must file Form 1-A, including exhibits
No filing fee
Consent to service of process required from Canadian issuers
Filings must be made through EDGAR
Issuer may make non-public submissions (first time only)
Confidential treatment may be requested
NOTE: Documents, including those in non-public submissions, are not exempt from public disclosure under FOIA unless an exemption would otherwise apply.
Offering Circular (Form 1-A)Part 1:
◦ Basic information about the issuer and offering
◦ Completed online through EDGAR (XML format)
Part 2:◦ Offering circular (Form 1-A format or Part 1 of S-1 or S-11)
◦ Financial statements
◦ Submitted as text file attachments (HTML or ASCII)
◦ Incorporation by reference permitted
Part 3:◦ Exhibits and index thereto
◦ Signature (typed)
◦ Submitted as text file attachments (HTML or ASCII)
◦ Incorporation by reference permitted
Financial StatementsFinancial statements prepared in accordance with U.S. GAAP required for two previous fiscal years (or shorter period since inception).
IFRS financial statements accepted for Canadian issuers
Interim financial statements required if annual statements are more than 9 months old from date of qualification
Audit requirements:◦ Tier 1: Not required to be audited (but states may require)
◦ Tier 2: Must be audited in accordance with auditing standards of either AICPA or PCAOB
Amendments and SupplementsAmendments and supplements to Form 1-A are required in continuous or delayed offerings
Annual amendments to Form 1-A are required and must include updated financial statements
Supplements may otherwise be used to update information contained in the Form 1-A
◦ Exception for “fundamental change”
Ongoing Reporting for Tier 2 OfferingsAnnual reports (Form 1-K)
Semiannual report (Form 1-SA)
Current reports (Form 1-U)
Exit report (Form 1-Z)◦ To exit reporting regime if the offering has terminated and securities are held
of record by less than 300 persons (1,200 for banks or bank holding companies)
◦ Issuer must be current in reporting for most recent three fiscal years (or period since issuer became subject to reporting requirements)
Exemption From 12(g) RegistrationRules provide an exemption for Reg. A issuers from securities registration requirements under Sec. 12(g) of Exchange Act
To qualify for exemption, issuer must:◦ Engage a registered transfer agent;
◦ Remain subject to Tier 2 reporting requirements;
◦ Be current in annual and semiannual reporting at fiscal year end; and
◦ Have a public float of <$75 million or, in absence of public float, have annual revenues of <$50 million
Other Matters Addressed by RulesOffering circular delivery requirements
Integration safe harbor
Transition guidance for existing Reg. A offerings and filings
Tier 2 reporting satisfies broker-dealer quotation requirements in Rule 15c2-11
Insignificant deviations
NASAA’s Coordinated Review ProgramLaunched in May 2014
Nearly universal participation by NASAA U.S. member jurisdictions
Filing submitted by e-mail to Washington
Review conducted pursuant to review protocol within set timeframes
Info. available on NASAA’s website
Review Protocol - TimingLead merit and disclosure examiners appointed within 3 business days
Leads draft comment letter and circulate to states within 10 business days from appointment
States have 5 business days to review
Leads finalize comment letter within 3 business days
Review Protocol – Merit Standards
The review protocol contains the following relief from the NASAA policy statements:
SOP Regarding Promoters Equity Investment shall not apply
SOP Regarding Promotional Shares shall apply except that 50% of the promotional shares required to be locked-in/escrowed shall be released on the 1st and 2nd anniversary date of the completion of the offering
Representation by counsel concerning due diligence is not required
CoordinatedReview.org
NASAA 2015 ANNUAL CONFERENCE CORPORATION FINANCE FORUM
CoordinatedReview.org
CoordinatedReview.org
CoordinatedReview.org is designedto expedite the state registration process, saving issuers time and money, in addition to establishing uniform state review standards.
CoordinatedReview.org
CoordinatedReview.org includes:
Coordinated Review-SCOR
Coordinated Review – Direct Participation Programs
Coordinated Review – EQUITY
Coordinated Review – Section 3(b) Offerings (CR-3(b) for Regulation A offerings)
Coordinated Review-SCOR
What’s Inside:
Mid-Atlantic
Midwest
Southwest
West
Coordinated Review-Direct Participation Program Offerings
What’s Inside:
Overview
Protocol
Form CR-DPP1
NASAA Statements of Policy
Coordinated Review-Equity
What’s Inside:
Overview
Protocol
Form CR-Equity-1
Commonly Asked Questions
Coordinated Review-Section 3(b) Offerings (CR-3(b) for Regulation A offerings)
What’s Inside:
Program Resources
Review Protocol
Coordinated Review Application Sec 3(b)
Illustrated Timeline
State Filing Requirements
Other Resources
NASAA Statements of Policy
Small Business and the SEC (contains information about Regulation A)
CoordinatedReview.org
NASAA’s Coordinated Review program is available here:
www.coordinatedreview.org
NASAA Fall Conference 2015Corporation Finance Forum
State Crowdfunding
Michael S. Pieciak, Deputy Commissioner of Securities | Vermont Department of Financial Regulation| [email protected]
Anya Coverman, Deputy Director of Policy| North American Securities Administrators Association (NASAA)| [email protected]
This information provided herein is for your convenience only, is illustrative and is not intended as legal advice.
What is intrastate crowdfunding?
32
198
4
201
5
201
2
201
1
First State-Only
Public Offering
Kansas – Invest in Kansas
Exemption (IKE)
JOBS ACT
Title III Final
Rules???
200
9
Advent of Non-
Equity
Crowdfunding
Kickstarter
199
1
World Wide
Web
199
6
NASAA Statement of
Policy on Internet Offerings
An Evolution:
200
5
Advent of Peer to Peer Lending
Zopa (United Kingdom)
201
4
State Based Crowd-
funding in 30 states
200
0
VSBOE
50 person/500K
What is intrastate crowdfunding?
33
“Get a Scoop of the
Action!”
• In 1984 Ben & Jerry’s conducted the firstdirect public offering available only toresidents of Vermont• State Registration – Vermont• Federal Exemption - Rule 147
• Looked to raise $750,000 in order toexpand into a larger plant to expand theirdistribution
• Shares priced at $10.50 and minimumpurchase of 12 shares
• 1,800 Vermonters purchasing shares• Ben & Jerry’s conduct national public
offering in 1985 for $5,800,000.• “If you can’t afford to lose it, don’t do it”
What is intrastate crowdfunding?
34
1986 Catamount Brewery – Vermont’s First Brewery
2000 Closed– but cited as an inspiration for many participants in
Vermont’s current craft brewery industry
Vermont: more breweries per capita then any other state,
including the #1 Hill Farmstead Brewery was named the 2013
Best Brewery in the World craft beer in the world, that
employees 2,200 individuals
1985 Earth’s Best Baby Food – first nationally distributed
organic food product company in the country
1996, purchased by H.J. Heinz Company
2000, purchased by the Hain Celestial Group
What is intrastate crowdfunding?
Before the JOBS Act – IKE (Invest Kansas Exemption)
• Purpose of Exemption: Accommodate community-based offerings, not broad-based internet offerings.
• The Challenge: Allow general solicitation without violating federal law.
• The Method: Build state crowdfunding exemption to coordinate with federal intrastate offering exemption.
35
Conditions of Early Exemptions
• Tied to federal intrastate offering exemption
• Issuers and investors must be in-state
• Offering cap of $1 million per year
• Investment limits of $2,000 to $10,000
• Notice filing required, but no specific disclosure document mandated
• No compensation of intermediaries unless registered as broker-dealers
• Bad actor disqualification
36
After the JOBS Act: Conditions of Exemptions
• New Feature in Exemptions: Internet!
• Internet-based offerings are allowed (and mandated in some states)
• Compensation of internet platforms is allowed
• The platforms must notice file or are subject to “registration lite”
• Issuers must give short quarterly reports to investors
37
Conditions of Later Exemptions
• Tied to federal intrastate exemption or Rule 504 of Regulation D
• Offering cap of $100,000 to $5 million during 12 month period
• Investment limits of $100 to $100,000 unless accredited
• Notice filing including short-form disclosure document
• Website portal (intrastate broker-dealer) or registered broker-dealer
• Bad actor disqualification
• Quarterly reports to investors
38
Intrastate Equity Crowdfunding Exemptions(as of September 16, 2015)
39
Snapshot as of September 16, 2015
40
State Effective Date
1. Kansas 8/12/2011
2. Georgia 12/8/2011
3. Idaho 1/20/2012
4. Michigan 12/26/2013
5. Alabama 4/8/2014
6. Wisconsin 6/1/2014
7. Washington 6/12/2014
8. Vermont 6/16/2014
9. Indiana 7/1/2014
10. Maryland 10/1/2014
11. District of Columbia 10/24/2015
12. Texas 11/17/2014
13. Maine 1/1/2015
14. Massachusetts 1/15/2015
15. Oregon 1/15/2015
16. Mississippi 5/26/2015
17. Kentucky 6/24/2015
18. South Carolina 6/26/2015
19. Virginia 7/1/2015
20. Montana 7/1/2015
21. Arizona 7/3/2015
22. Colorado 8/5/2015
23. Nebraska 9/1/2015
24. Florida 10/1/2015
25. Iowa 12/30/2015
26. Illinois 1/1/2016
* Filings may not be currently approved/cleared if the notice filing is incomplete, and filings may have been withdrawn by the issuer for reasons including the availability of other limited offering exemptions or a voluntary business decision. States continue to receive several inquiries about the new exemptions.
Total Number of Offerings Filed: 119
Total Number of Filings Approved/Cleared: 102
State Effective Date
27. New Jersey Awaiting Governor’s Signature
28. New Mexico Awaiting Governor’s Signature
29. Minnesota Pending Final Rulemaking
30. Tennessee Pending Final Rulemaking
Types of Businesses Using Intrastate Crowdfunding
• Breweries and spirit producer
• Grocery store and deli
• General store
• Exercise studio / gym
• Software companies (gaming, etc.)
• Night club, music/real estate venue
• Farmers (family-run farm, dairy farm, farming coop)
• Retail electronics store
• Medical device/technology company
• Family-run manufacturing business
• Real estate firms (micro-financing, commercial property)
• Product inventions
• Hair salon
• Entertainment groups (movie, album, media platforms)
• Over-the-air digital TV station
• Electronic/gaming pub
• Dog groomer
• Sushi restaurant
• Ice cream maker
• Baseball bat maker
• Angel fund
• Defense contractor/consultant
• Manufacturer of lawn mower parts
• Food and beverage platform/restaurants
• Senior care facility
• Education technology company
• Small sale solar garden project
41
Next Steps?
•Continued outreach to local businesses and investors
•Monitor effectiveness of intrastate crowdfunding
•Use of Rule 504 of Regulation D for inter-state crowdfunding
•Discuss federal challenges with U.S. Securities and Exchange Commission
Takeaway?If you are interested in capital raising tools and opportunities,
talk to your state securities regulator to craft a workable solution.
43
Visit NASAA’s Intrastate Crowdfunding Resource Center
www.nasaa.org/industry-resources/corporation-finance/intrastate-crowdfunding-resource-center/
Franchise and Business Opportunity Project Group
Economic Impact of Franchising (U.S.)
• 800,000 franchise units
• 9 Million Jobs in franchising
• $500 Billion GDP in franchise sector
Quick Serve Restaurants
Personal Services
Retail/Products
Business Services
Federal Trade Commission Franchise Rule
– Delivery of Franchise Disclosure Document
– No Registration/Filing
– No Review of FDD
– Views Sale as Consumer Transaction
– Limited Enforcement
State Franchise Registration Laws
– Registration or Filing
– Delivery of Franchise Disclosure Document
– Review/Comment on FDD
– Anti-Fraud Provisions
– View Sale as Investment
Franchise offering as investment
• Trademark
• Prescribed Marketing Plan
• Training
• Operations Manual
• Expectation of Profit
Benefits
• Initial (start-up) costs
• Ongoing royalties and advertising fees (% of gross revenue)
• 10 year contract term
• Personal time/effort
• Control
Costs
Franchise Project Group 2015-16 Tasks:
• Financial Performance Representation (“FPR”) Commentary
Franchise Project Group 2015-16 Tasks (continued):
• Risk Factor Guidance
• Franchise Resource Guide
• Multi-Unit Commentary
• Franchise and Business Opportunity Training Program
• Uniform Deficiency Comments
• EFD-Franchise
• Update of State Cover Page
The Sky is Falling!
National Labor Relations Board Ruling
Franchisor as “Joint Employer” with Franchisee