In our continuing series of state law provisions exempting issuers from selling their own securities, we visit California! California Administrative Code (10 CCR Section 260.004.1) adopts the US federal issuer exemption under Rule 3a4-1 of the Exchange Act.
“The term “broker-dealer,” as defined in section 25004 of the Corporate Securities Law of 1968, does not include an associated person of an issuer who is deemed not to be a broker pursuant to Rule 3a4-1 under the Securities Exchange Act of 1934 as amended (17 C.F.R. 240.3a4-1) (“Rule 3a4-1”)(50 FR 27946, July 9, 1985).”
Here is a long post about Florida and private Rule 506(c) offerings in my ongoing series about whether you must use a broker-dealer to sell securities in a Rule 506(c) offering. For new readers, remember that issuers of securities must abide by both US federal and state securities laws.
Regarding the registration rules, Florida does not require any notice filing fee, or consent to service for Rule 506 offerings, whether it is a Rule 506(b) or Rule 506(c) offering. See Chapter 517.07(1) of the Florida Statutes.
Now on to the issue of who may sell the securities? Chapter 517.12(1) of the Florida Statutes provides that no issuer shall sell securities unless the person has been registered as a securities dealer with the State of Florida and its Office of Financial Regulation. Chapter 517.12(3), however, provides that the registration requirements do not apply, among other things, to transactions exempted by Chapter 517.016(19) of the Florida Statutes. Under Chapter 517.016(19) (and also Chapter 517.021(6)(b)6 and Rule 69W-500.016 of Florida Administrative Code), an issuer may sell its securities without the use of a dealer provided that the sale is made by a bona fide employee of the issuer, and that employee has not participated in the distribution or sale of any securities within the preceding 12 months. Also, the employee must primarily perform, or is intended to perform at the end of the distribution, substantial duties for, or on behalf of, the issuer other than in connection with transactions in securities. Without this exemption, the use of advertising in a Rule 506(c) would have required that a private issuer only sell its securities through a registered broker-dealer. See Chapter 517.016(11)(a) of the Florida Statutes which says “[n]either the issuer nor any person acting on behalf of the issuer offers or sells securities pursuant to this subsection by means of any form of general solicitation or general advertising in this state.”
Whew! I think I have addressed New York, Texas, and Florida — now only 47 more to go!
I almost hesitate to talk to people about being finders in Texas, because according to one Texas State Securities Board regulator, the list of registered finders in Texas is the TSSB’s “hunting ground”. After that caveat, if you still want to be a finder in Texas, please see this handy Texas Finder Registration guide. As always, call with questions!
In an SEC Order Instituting Cease-and-Desist Proceedings, California attorney Mark A. Ivener agreed to disgorge transaction-based compensation that he had received in connection with referring clients to an EB-5 Regional Center. Interesting to me, the Order provides that “[w]hile some of Respondents’ activities overlapped with legal services, for which they earned fees, Respondents earned transaction-based compensation for facilitating the investor’s transactions in EB-5 securities.” I wonder if this would have been any different if their entire fees were based on a percentage of the size of the deal? The Order notes that the law firm received fees for their legal services separately from the transaction-based compensation.
Mark Roderick is an expert in this area, but I do question some of his assertions in my comments to his article. It sounds like he is saying that because of the ability to use advertising with Rule 506(c) offerings, issuers no longer can sell their own securities (without using a broker). He suggests that this will arise in a securities litigation context where a hapless widow’s attorney makes the novel argument that Securities Act Section 18(a)(1) doesn’t preempt states from regulating broker activity. The New York Bar Association disagrees.
For offerings conducted under Securities Act Section 4(a)(6) (i.e., the “crowdfunding” exemption), the JOBS Act amended Section 18(b)(4) of the Securities Act to add to the list of covered securities for which preemption applies, securities that are the subject of crowdfunding offerings exempt under Section 4(a)(6) of the Securities Act. At the federal level, the issuer will file a Form C with the SEC.
For state-level compliance, in Texas at least, under Texas Administrative Code Section 114.4, an issuer of a federal covered security must file page 1 of Form U-1, Uniform Application to Register Securities, with items 1-6 completed, or a document providing substantially the same information, and pay a required fees associated with the filing. I am going to contact the Securities Board to confirm, but Rule 114.4(b) provides for the “special circumstances” applicable to offerings under Rule 506. This rule allows for the POST-SALE filing.
UPDATE: The filing of the Form C for federal compliance is a pre-sale filing, so in all likelihood, the pre-sale filing of the Form C with the TSSB will constitute “a document providing substantially the same information” as the Form U-1.
What is an “Issuer”?
An “issuer” is any “person” who sells and issues its own securities. A common example is a corporation that sells its stock to investors to raise money to fund its business operations. If a corporation owned stock in another company, it could theoretically sell that stock to raise money to fund its operations, but in that instance, the corporation would not be the “issuer” of the stock that it sold. As an “issuer”, you are able to print stock certificates representing interests (i.e., “securities”) in your own company, and sell them in exchange for real money (i.e., cash) from investors, subject of course in all respects to the US federal and state securities laws.
What is a “Security”?
Under US federal securities laws, the definition of a “security” is derived from the “economic realities” test first espoused by the U.S. Supreme Court in 1946 in the case, SEC v. W.J. Howey Co., 328 U.S. 293. Under the Howey Test, an economic interest in a business will be classified as a security only if the following three elements are present:
- an investment of money has been made,
- in a common enterprise, and
- the investor has the expectation of profits, which profits are expected to arise solely, or substantially, from the efforts of the promoter or third party.
An important term that I use frequently is “issuer”. An “issuer” is the “person” who sells and issues its own securities. This is different from a business, like a broker-dealer, that buys and sells securities of other businesses. In the definition of “security” above, the issuer is the business that owns the “common enterprise”, and can be thought of as the “promoter or third party”.
What Is An Accredited Investor?: Part 1
“Accredited investor” is term used in the US federal securities laws specifically in connection with the sale and issuance of private securities pursuant to a regulatory exemption under the Securities Act of 1933. The regulatory exemption is known as “Regulation D” and is found at 17 C.F.R. § 230.501 through 508. Very basically, an accredited investor is a wealthy individual or business entity whose wealth indicates to securities regulators and judges that they possess sufficient financial resources to hire attorneys to enforce obligations and analyze investments for legal risks. The US federal securities laws were enacted in part to prevent fraudulent practices in connection with the sale of securities. The idea is that people who do not have the resources to enforce their legal obligations and undertake analysis of investments should not invest in private securities because the issuer of the private securities has reduced disclosure obligations relative to a issuer of securities who files a registration statement with the SEC, and becomes subject to continuing reporting obligations under the Securities Exchange Act of 1934, as amended. These continuing reporting obligations include the filing of 10Ks and 10Qs, which are public annual and quarterly reports of financial results.
What Are Private Securities?
Section 5 of the United States federal Securities Act of 1933 generally provides that it is unlawful for any person to sell its securities unless there is a “registration statement” in effect. The process of filing a registration statement with the SEC is long, arduous, and expensive. At the end, your securities are traded on an exchange like the NYSE or NASDAQ, and you are a company like Apple or Exxon. Fortunately, there are exemptions in the securities laws that allow for the sale of securities other than pursuant to a registration statement. These securities are “private”, and the general rule under Section 4(a)(2) of the Securities Act is that Section 5 does not apply to “transactions by an issuer not involving any public offering.” Filing a registration statement with the SEC might cost $1 million in legal fees alone. A good securities attorney can help you lawfully raise money for your business for a fraction of that cost.