Capital Formation

MontanaMontanaMoney SchoolMoney School

State Auditor John Morrison

State Auditor’s Goals

Protect investors Promote uniformity of securities laws

among the states Encourage, promote and facilitate

capital investment in Montana

Securities Department

Register securities Register salespeople and firms in the

securities industry Living trusts Multi-level marketing companies

Securities Department

Consumer complaints Registration violations Enforcement Inquiries about brokerage firms and

sales representatives

Capital Formation

Raises capital to start or grow a business.

Typically, companies offer securities as a way of raising capital.

They can raise capital through debt or equity offerings.

Business Plan Statement of funding requirements Executive summary Description of business The market for product or service that you are providing Marketing strategy Business location Licenses/permits/registrations Insurance/bonding/employee benefits Management Personnel Financial data

Factors to Consider when Planning a Securities Offering What is your primary objective in raising capital? How much capital must you raise to meet your

primary objective? To whom do you want to offer your securities –

family, friends, employees or the general public? How many shareholders do you want? Who will serve as a salesperson and make the

offers to investors? Do you want to advertise your securities offering? Do you want to offer your securities in more than

one state?

Securities – Two types of offerings:

Debt securities, such as loans, bonds and debentures, raise money by obtaining loans from investors. Companies set fixed interest rates and establish a repayment schedule.

Equity securities, such as shares of stock, give investors ownership interest in the company. Investors can share in the company’s appreciation and/or receive dividend payments.

Securities Regulation

The offer and sale of securities must comply with state and federal securities laws.

Consult your attorney.

Salespeople Anyone offering or selling securities must

be registered with state and federal securities agencies or must qualify for an exemption.

To register, fill out an application and pay the $50 fee. The department waives the test requirement.

Issuers are allowed two to three appointed salespeople to offer their securities.

Exemptions No more than 10 people are offered the security.

– No commission can be earned.

– Investors purchase security for investment purposes only (not as a tax shelter).

– Limited to 10 offers, not 10 sales. No more than 25 people are offered the security.

– Same criteria as above.

– Must file a notification and pay a fee to the State Auditor’s Office before offers are made.

Myrna and Joe Walker Organic fertilizer business Business funded so far by couple’s savings and

business proceeds Operating out of small building on property Annual sales of $175,000 High demand for products and have had to limit

customers’ orders Transportation issues Needs new or additional space Estimate that business needs $250,000 to grow

The Walkers’ Plan Consult Small Business Administration Create business plan Consult with attorney and accountant Determine funding source(s) – bank loans,

stock offering Prepare disclosure document Securities offering must comply with state

and federal securities laws

The Walkers Gain Capital Obtain $75,000 SBA grant Offer securities to 10 people, raising

$175,000 through a self-executing exemption

Provide investors with information about the risks of the investment

James Johnson Specialty store – huckleberry products and

jewelry Operating out of home Funded business by selling shares of stock Obtained $50,000 in stock sales to 13 people Able to meet current demand for products Sees potential growth in Montana’s tourist

towns Requires facility, equipment and marketing

State Securities Law Violation Johnson made the offer to more than 10

people without the benefit of an exemption He did not file any notice with the Montana

Securities Department so he can’t use the exemption for 25 or fewer offers

He can’t raise any more money until he resolves the violation

Resolving Johnson’s Problem

Works with State Auditor’s Office Offers rescission to his 13 existing

shareholders Agrees to make sure he complies with

securities laws in the future Creates a document that provides full

disclosure about his business and the risks of investing

Pays fine Proceeds with plan to raise additional capital

Other Exemptions

Offers to employees in stock ownership plans

Offers by cooperative associations Offers by certified Montana capital

companies Offers to existing shareholders

Prospectus Risks of the investment A description of the security A description of your company Names and salaries of company officers Current audited financial statements A list of your company’s capitalization, long-term

debt and other securities outstanding An estimate of the proceeds to be received from

the offering Previous experience of the management

Reminder

Your company’s business plan should not be used as your disclosure statement or prospectus when offering securities.

Intra and Interstate Offerings If you make offers or sales to people in

other states, you must comply with the securities laws of that state as well as those of the federal government.

Offerings conducted intrastate generally are federally exempt and our securities department is the sole regulator.

Pre-filing Conference

What to expect Time lines Escrow procedures The conference may be conducted in

person or by telephone

Web Siteswww.discoveringmontana.com/sao - State Auditor’s Office www.sec.gov - SEC home page www.sec.gov/investor/broker.htm - SEC page for checking

on broker, salesperson, investment advisers www.nasdr.com/2000.asp - Public access to CRD www.nasaa.org - North American Securities Administrators

Association  

www.iard.com - Information on registration of investment advisers, investment adviser representatives

Montana State AuditorJohn Morrison

840 Helena Avenue

Helena, MT 59601

1-800-332-6148

(406) 444-2040

www.discoveringmontana.com/sao