Exemptions from securities registration requirements. (FE)

Security exemption.

Under current law, certain securities are exempt from registration with the division, including a security issued by certain banks or other depository institutions, if the security represents an interest in or direct obligation of the bank or other depository institution or if the security is guaranteed by the bank or other depository institution. This bill also exempts a security issued by a bank or savings and loan holding company, as defined under federal law, if the security represents an interest in or direct obligation of the holding company or if the security is guaranteed by the holding company. In addition, to qualify for the exemption, the holding company must have no significant assets other than securities issued by banks or other depository institutions that are exempt from registration under current law.

Exempt transactions under current law.

Under current law, certain securities transactions are exempt from registration with the division. Among these exempt transactions is a sale or offer to sell to an accredited investor, as defined under federal law. For purposes of this registration exemption, "accredited investor" includes, among others, banks or other financial institutions; federally registered broker-dealers; insurance companies; investment companies; private business development companies; certain persons having designated positions with the securities issuer; certain trusts with assets of more than $5,000,000; and entities in which all of the equity owners are accredited investors. For purposes of this registration exemption, an "accredited investor" also includes any person who comes within any of the following categories, or whom the securities issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person: 1) any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; or 2) any natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1,000,000. For purposes of calculating net worth, the person's primary residence is generally not included as an asset and indebtedness secured by the residence is generally not included as a liability, but there are exceptions.

For purposes of securities registration exemptions, this bill creates a state law definition of "accredited investor" and changes the criteria for being an accredited investor as described in items 1) and 2), above. The bill lowers the individual income threshold in item 1), above, from $200,000 to $100,000 and lowers the joint income threshold in item 1), above, from $300,000 to $150,000. The bill also lowers the net worth threshold in item 2), above, from $1,000,000 to $750,000 and specifies that the net worth calculation includes the person's primary residence as both an asset and a liability.

Under current law, another securities transaction that is exempt from registration with the division is a sale or offer to sell to an institutional investor, as defined under state law. Current law defines "institutional investor" to include, among others, banks and other financial institutions; insurance companies;

investment companies; federally registered broker-dealers; private business development companies meeting certain standards; certain qualified institutional buyers, as defined under federal law; and other entities of institutional character with assets of more than $10,000,000.

This bill modifies this definition of "institutional investor," lowering the asset threshold for other entities of institutional character from $10,000,000 to $2,500,000. This change affects this registration exemption and also provisions in which: a broker-dealer is exempt from registration with the division if it engages in only certain transactions, including transactions with institutional investors;

and, a federal covered investment adviser without a place of business in this state is exempt from notice filing with the division if it has only certain types of clients in this state, including institutional investors.

Another securities transaction that is exempt from registration with the division under current law is a transaction pursuant to an offer directed to not more than 25 persons in this state, not including accredited investors and institutional investors, during a 12-month period if certain requirements are met, including that general solicitation or advertising is not made. The division may modify this registration exemption, including increasing or decreasing the number of offerees permitted. This bill modifies this registration exemption to increase the number of offerees permitted from 25 persons to 50 persons.

Under current law, another securities transaction that is exempt from registration with the division is an offer or sale by a securities issuer having its principal office in this state of its securities if the aggregate number of persons holding all of the issuer's securities, after the securities to be issued are sold, does not exceed 25, not including accredited investors and institutional investors, and if certain other requirements are met, including that no advertising is published. This bill modifies this registration exemption to increase the aggregate number of persons who may hold the issuer's securities from 25 persons to 50 persons.

Additional exempt transactions.

This bill creates two additional transaction exemptions to securities registration. Under the first exemption, an offer or sale of a security by an issuer is exempt from registration if the offer or sale is conducted in accordance with specified requirements, including the following: 1) the issuer of the security is a business entity organized under the laws of this state and authorized to do business in this state; 2) the transaction meets exemption requirements under federal law and rules of the federal Securities and Exchange Commission (SEC) for intrastate securities offerings; 3) with certain exceptions, the amount of money to be received for sales of the security in reliance on the exemption does not exceed either $2,000,000 or $1,000,000, adjusted every five years for inflation, depending on whether the issuer has or has not, respectively, undergone a financial audit and made it available; 4) the issuer does not accept more than $5,000 from any single purchaser unless the purchaser is an accredited investor under state law; 5) the offering is made exclusively through an Internet site and the Internet site is registered with the division; 6) the issuer pays a $50 fee and files notice of the offering with the division at least ten days before commencing the offering and the notice contains specified information, including a copy of a disclosure statement to be provided to prospective investors and an escrow agreement with a financial institution chartered in this state in which the investor funds will be deposited; 7) the issuer is not an investment company or an SEC reporting company; 8) the issuer informs all prospective purchasers that the securities have not been registered and are subject to limitations on resale, includes a specified legend conspicuously on the cover page of the disclosure document, requires each purchaser to sign a written or electronic acknowledgment containing certain information, and obtains from each purchaser evidence that the purchaser is a resident of this state; 9) all payments for purchase of securities are held by the issuer in the financial institution identified in the above escrow agreement; 10) a copy of the disclosure document provided to the division is given to each prospective investor at the time of the offer; and 11) the issuer has not made an offer or sale of a different class or series of security under either of these two additional transaction exemptions during the immediately preceding 12-month period. The bill also requires the securities issuer to file a quarterly report with the division, and make it available to investors, for so long as securities issued under the exemption are outstanding.

In addition, all Internet sites through which the securities are offered are required to be registered with the division. Registration is accomplished by the Internet site operator paying a $100 fee and filing a statement with the division that contains specified information. Also, the bill exempts the Internet site operator from registration with the division as a broker-dealer if all of the following apply with respect to the Internet site and its operator: 1) it does not offer investment advice or recommendations; 2) it does not solicit purchases, sales, or offers to buy securities;

3) it does not compensate persons for the solicitation or based on the sale of securities;

4) it is not compensated based on the amount of securities sold, and it does not hold, manage, possess, or otherwise handle investor funds or securities; 5) the fee it charges for securities offerings satisfies specified requirements; 6) it complies with specified advertising restrictions; and 7) it does not engage in other activities prohibited by the division. The Internet site operator and the securities issuer must also maintain records of all offers and sales of securities effected through the Internet site and provide the division with access to these records on request.

The second transaction exemption to securities registration created by the bill is similar to the first. Under the second exemption, an offer or sale of a security by an issuer is exempt from registration if the offer or sale is conducted in accordance with specified requirements, including the following: 1) the issuer of the security is a business entity organized under the laws of this state and authorized to do business in this state; 2) the transaction meets exemption requirements under federal law and rules of the SEC for intrastate securities offerings; 3) with certain exceptions, the amount of money to be received for sales of the security in reliance on the exemption does not exceed either $2,000,000 or $1,000,000, adjusted every five years for inflation, depending on whether the issuer has or has not, respectively, undergone a financial audit and made it available; 4) the issuer does not accept more than $5,000 from any single purchaser unless the purchaser is an accredited investor under state law; 5) no commission or other remuneration is paid for any person's participation in the offer or sale of securities unless the person is registered as a broker-dealer or securities agent; 6) unless permitted by the division, no general solicitation or general advertising is made for the securities; 7) all funds received from investors are deposited into a financial institution chartered in this state, and all the funds are used in accordance with representations made to investors; 8) before the 100th sale of the security, the issuer pays a $50 fee and provides a notice of the offering to the division containing specified information; 9) the issuer is not an investment company or an SEC reporting company; 10) the issuer informs all purchasers that the securities have not been registered and makes disclosures required by SEC rule, including disclosures related to limitations on resale of the securities; and 11) the issuer has not made an offer or sale of a different class or series of security under either of these two additional transaction exemptions during the immediately preceding 12-month period.