Small Business Investments

The Invest Georgia Exemption and Intrastate Capital Formation (Part 2)

December 7, 2022 | Charlie Jarrett

While designed as a capital formation alternative to going public or conducting a private placement offering under Section 4(a)(2), use of the intrastate offering exemption has not been widely used since the SEC revised the regulation in 2016. Sometimes referred as “crowdfunding” due to the ability to raise smaller amounts from more investors, the intrastate offering exemption differs greatly from Regulation Crowdfunding, also known as Regulation CF.

North American Securities Administrators Association (NASAA), the group of state securities administrators tracks the state jurisdictions that have implemented an intrastate offering exemption. In total, 35 jurisdictions have adopted some form of an intrastate exemptions with the regulatory requirements differing from state-to-state. While not widely used by Issuers in the majority of jurisdictions, other states such as Texas, Michigan, and Georgia have seen numerous filers take advantage of the exemption.

The Invest Georgia Exemption and Intrastate Capital Formation (Part 1)

December 1, 2022 | Charlie Jarrett

Organizations seeking to raise capital have multiple options at their disposal – each with their own benefits, limitations, and regulatory obligations. As part of the JOBS Act, the SEC was tasked with reviewing an almost century old regulatory structure with the goal of easing and modernizing aspects of the federal securities regulations concerning capital formation. One of these such areas that the SEC reviewed and modernized was the traditional intrastate offering exemption.

The intrastate offering exemption, codified as Section 3(a)(11) of the Securities Act of 1933, customarily has been used in conjunction with the safe harbor contained in Rule 147. Under this framework, offerings conducted by an Issuer, that are only offered or sold within the same state jurisdiction as the Issuer, solely to residents within the same state jurisdiction as the Issuer, are exempt from registration with the SEC, and instead only have to comply with the respective state’s securities laws.

SEC Issues “Concept Release” Seeking Public Comment on Potential Overhaul of Commission’s Securities Registration Exemptions

August 8, 2019 | Steve Parker

Signaling an interest in potentially overhauling its current securities offering exemption structure, the SEC has published a Concept Release, seeking public comments on a broad host of topics centering around the Commission’s current registration exemption regime. Clearly, the impetus for these potential changes comes from SEC Chairman Jay Clayton, who has declared the rationalization and democratization of capital formation to be a major goal of his tenure at the SEC.

A “Concept Release” is an infrequently-used administrative proceeding that enables the SEC to potentially commence the process of regulatory reform by first soliciting opinions from interested parties. In announcing the publication of its new Concept Release, the SEC aims to “simplify, harmonize, and improve” its current exemption regime in an effort to balance the goals of promoting capital formation and protecting investors. Continue reading ›

SEC Adopts Temporary Rules to Extend Filing Deadlines in Response to Hurricane Michael

October 19, 2018 | Steve Parker

On October 16, 2018 the Securities and Exchange Commission announced that it is implementing temporary rules for issuers who are making offerings pursuant to Regulation Crowdfunding and Regulation A in order to assist issuers who were directly or indirectly impacted by Hurricane Michael. These temporary rules will postpone the filing deadlines for certain reports and forms which must be filed under Regulation Crowdfunding and Regulation A to a later date, provided that Hurricane Michael affected the issuer filing the reports and forms. The rules are set to be effective through November 23, 2018.

Regulation Crowdfunding and Regulation A allow issuers to offer and sell securities that have not been registered under the Securities Act, provided that the issuers follow specified conditions. One of those conditions is that the issuer in question must comply with continual reporting requirements. According to the SEC, the reporting requirements improve investor protection and reduce the likelihood that there will be information disparities between issuers and investors. Ongoing reporting also requires issuers to update their information, which allows investors to base their investment decisions on the most current information available.

When Hurricane Michael made landfall, numerous businesses in the area, including those of issuers making offerings pursuant to Regulation Crowdfunding or Regulation A, experienced disruptions. The SEC expects that the shortage in communications, electricity, facilities, and professional advisors in areas affected by Hurricane Michael could delay companies’ ability to meet their reporting requirements. However, the SEC also acknowledges that those who invest in securities offered pursuant to Regulation Crowdfunding and Regulation A would like for information about the companies that offer those securities to be readily available. In particular, investors will likely have an interest in knowing of any material adverse effects that Hurricane Michael had on the issuer or its business. The SEC found that the most appropriate solution to this dilemma would be to issue temporary relief pursuant to Section 28 of the Securities Act, which permits the SEC to, by rule or regulation, to make exemptions for any person, security, or transaction, provided that the exemption in question is in the public interest and is in harmony with the protection of investors.

Do U.S. Securities Laws Apply to Your Transaction?

August 27, 2018 | Steve Parker

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 ›

An SEC Commissioner Hears and Heeds the Call to Rationalize the Private Placement Broker (“Finder”) Industry

March 7, 2018 | Steve Parker

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.

South Dakota Proposes Rules Governing Federal Regulation Crowdfunding and Regulation A Notice Filings

November 21, 2017 | Steve Parker

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 ›

Iowa Adopts Amendments Implementing Notice Filings for Federal Crowdfunding and Regulation A Offerings

November 16, 2017 | Steve Parker

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 ›

Crowdfunding Portals – If You Build It, Will They Come?

October 18, 2017 | Steve Parker

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 Publishes Whitepaper on Private Investment Fund Formation

October 3, 2017 | Steve Parker

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.