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| michael.pieciak@state.vt.us

Anya Coverman, Deputy Director of Policy| North American Securities Administrators Association (NASAA)| ac@nasaa.org

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