TITLE 7. BANKING AND SECURITIES
PART 7. STATE SECURITIES BOARD
CHAPTER 113. REGISTRATION OF SECURITIES
7 TAC §113.5
The Texas State Securities Board proposes an amendment to §113.5, concerning financial statements. The amendment would permit certain issuers whose previous sales of securities did not exceed $1 million to file reviewed financial statements for a registered offering that does not exceed $5 million.
Section 7.A(1)(f)(2) of the Texas Securities Act permits the Board to define the term "small business issuer" and prescribe the circumstances under which such an issuer can submit reviewed (rather than audited) financial statements for a registration of securities by qualification. Currently, certain issuers whose previous sales of securities did not exceed $500,000 can file reviewed financial statements for a registered offering that does not exceed $500,000. These dollar caps, set in 1995, need to be updated.
As §139.25, the new crowdfunding exemption being concurrently proposed, would allow public solicitation or advertising, the exemption is included in the list of types of prior securities offerings that would not disqualify an issuer from being eligible to file reviewed financial statements in a subsequent registered offering.
Patricia Loutherback, Director, Registration Division, has determined that for the first five-year period the rule is in effect, there will be no foreseeable fiscal implications for state or local government as a result of enforcing or administering the rule.
Ms. Loutherback also has determined that for each year of the first five years the rule is in effect the public benefit anticipated as a result of enforcing the rule will be to facilitate the capital raising efforts of more small business issuers by allowing the use of reviewed financial statements in conjunction with a registered securities offering. There will be no effect on micro- or small businesses. Since the rule will have no adverse economic effect on micro- or small businesses, preparation of an economic impact statement and a regulatory flexibility analysis is not required. There is no anticipated economic cost to persons who are required to comply with the rule as proposed. There is no anticipated impact on local employment.
Comments on the proposal to be considered by the Board should be submitted in writing within 30 days after publication of the proposed section in the Texas Register. Comments should be sent to Marlene K. Sparkman, General Counsel, State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167 or sent by facsimile to (512) 305-8336.
The amendment is proposed under Texas Civil Statutes, Articles 581-7.A. and 581-28-1. Section 7.A(1)(f)(2) provides the Board with the authority to define and provide requirements for small business issuers permitted to submit reviewed financial statements. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes.
The proposal affects Texas Civil Statutes, Articles 581-7 and 581-10.
§113.5.Financial Statements.
(a) - (b) (No change.)
(c) Small business issuer. For purposes of subsection (b) of this section, the term "small business issuer" shall mean any corporation:
(1) that has not previously sold securities by means of an offering involving public solicitation or advertising unless such offering was made in compliance with:
(A) §139.25 of this title (relating to Intrastate Crowdfunding Exemption);
(B) §139.16 of this title (relating to Sales to Individual Accredited Investors);[,]
(C) §139.19 of this title (relating to Accredited Investor Exemption);[,]
(D) §109.4 of this title (relating to Securities Registration Exemption for Sales to Financial Institutions and Certain Institutional Investors;[,] or
(E) the Texas Securities Act, §5.H;
(2) - (6) (No change.)
(7) whose previous sales of securities (exclusive of debt financing with banks and similar commercial lenders) does not exceed $1 million [$500,000].
(d) (No change.)
(e) Small business offering. For purposes of subsection (b) of this section, the term "small business offering" shall mean that the amount of the offering must not exceed $5 million [$500,000].
The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.
Filed with the Office of the Secretary of State on April 25, 2014.
TRD-201401988
John Morgan
Securities Commissioner
State Securities Board
Earliest possible date of adoption: June 8, 2014
For further information, please call: (512) 305-8303
CHAPTER 115. SECURITIES DEALERS AND AGENTS
7 TAC §§115.1, 115.3, 115.19
The Texas State Securities Board proposes amendments to §115.1, concerning general provisions, and §115.3, concerning examination. New §115.19, concerning Texas crowdfunding portal registration and activities, is also proposed.
The amendment to §115.1 would add a definition for "Texas crowdfunding portal" and provide a restricted dealer registration category as such.
The amendment to §115.3 would provide an examination waiver to an applicant applying for restricted dealer registration as a Texas crowdfunding portal.
New §115.19 would set out the registration process and permitted activities of a dealer registered as a Texas crowdfunding portal.
A Texas crowdfunding portal would be a Texas-only dealer, able to utilize the exclusion from federal registration available to dealers whose business is exclusively intrastate. The portal's activities would be limited to operating an Internet website for §139.25 exempt offerings. It could not participate in secondary market transactions or engage in the activities in subsection (c).
To preserve the intrastate character of the dealer's activities and the offering, the Internet website must contain appropriate disclaimers and obtain evidence of Texas residency before allowing access to the offering materials or permitting a sale to be made.
Prior to offering securities on the Internet website, the portal conducts background and regulatory checks on the issuer and each of the issuer's control persons. Additionally, the portal must obtain affirmative acknowledgments of certain disclosures common to all crowdfunding offerings from investors before a sale can be made.
Records required to be kept by the portal are specified in subsection (e), rather than the more extensive, and mostly inapplicable, list of records required of other securities dealers. A portal is also not required to maintain a supervisory system. A portal's records are subject to inspection and must be furnished on request of the Securities Commissioner.
A Texas crowdfunding portal would apply for registration by filing new Form 133.15, which is being concurrently proposed. It would also provide its organizational documents to establish its status as a Texas entity. It would be subject to the same registration fee as other dealers registered in Texas. New Form 133.15 would also be used for filing amendments. The portal is subject to the post-registration reporting requirements in §115.9. When the portal withdraws its registration, it would use new Form 133.16, which is also being proposed.
Tommy Green, Director, Inspections and Compliance Division, Patricia Loutherback, Director, Registration Division, and Joe Rotunda, Director, Enforcement Division, have determined that for the first five-year period §115.1 and §115.3 are in effect, there will be no foreseeable fiscal implications for state or local government as a result of enforcing or administering the rule. However, there will be fiscal implications as a result of enforcing or administering new §115.19 on state, but not local government.
The effect on state government for the first five-year period §115.19 will be in effect is a potential increase in revenue in the form of fees paid by entities registering in Texas as crowdfunding portals and by their agents. Under existing Texas law and regulations, a third party operating a website to effect the purchase and sale of securities for the account of others would normally be required to register as a general dealer and comply with the laws and regulations applicable thereto. A person operating such a website merely for the purchase of securities of startups and small businesses, however, may find it impractical in view of the limited nature of that person's activities and business to register as a general dealer and operate under the full set of regulatory obligations that apply to dealers. The restricted registration provided by the new rule is expected to encourage the formation of third-party portals. The increase in state revenue from these potential new registrants would be $275 for each firm and $285 for each agent that registers in Texas and thereafter would be $270 and $275, respectively, for each annual renewal.
Mr. Green, Ms. Loutherback, and Mr. Rotunda also have determined that for each year of the first five years the rules are in effect the public benefit anticipated as a result of enforcing the rules will be to allow persons restricting their activities as provided by new §115.19 to use a simplified registration process and keep activity-specific records. The creation of these Texas crowdfunding portals would facilitate the capital raising efforts of small business issuers who utilize the Texas intrastate crowdfunding exemption.
Evaluating the potential economic impact of the proposed rules on small and micro-business requires a degree of speculation as both the business and regulatory models involved are new. Also, the potential economic impact needs to be considered from two different angles: the impact on small business as crowdfunding portals and small business as securities issuers.
Portals, as envisioned by §115.19, do not currently exist, but if and when they do, it is likely that they will be small businesses. Crowdfunding portals can support smaller capital raises without performing all of the ordinarily costly duties associated with a full-service securities dealer. For example, portals will not be able to offer investment advice or recommendations, conduct business valuations, or hold, manage, possess or otherwise handle investor funds or securities. The result will be a simpler cost structure with lower fees than those typically associated with an equity investment offering. Lower costs for the portal result in lower fees for issuers. This means that small businesses can act as portals and make it easier for small and micro-business to raise capital, which is the aim of the proposal.
There is an anticipated economic cost to entities that are required to comply with §115.19 as proposed, including designing and maintaining a website, conducting background and regulatory checks on potential issuers and their control persons, and maintaining records of offerings made and communications concerning the offerings. Registration and renewal fees are also required. While such costs are not insignificant, they are less than the costs associated with being a registered general dealer. Therefore, the effect on micro- or small businesses will most likely be a positive one. The anticipated impact on local employment is also expected to be positive. Since the rules will have no adverse economic effect on micro- or small businesses, preparation of an economic impact statement and a regulatory flexibility analysis is not required.
Comments on the proposal to be considered by the Board should be submitted in writing within 30 days after publication of the proposed sections in the Texas Register. Comments should be sent to Marlene K. Sparkman, General Counsel, State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167 or sent by facsimile to (512) 305-8336.
The amendments to §115.1 and §115.3 and new rule §115.19 are proposed under Texas Civil Statutes, Article 581-28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes.
The proposals affect Texas Civil Statutes, Articles 581-12, 581-13, 581-14, 581-15, and 581-18.
§115.1.General Provisions.
(a) Definitions. Words and terms used in this chapter are also defined in §107.2 of this title (relating to Definitions). The following words and terms, when used in this chapter, shall have the following meanings, unless the context clearly indicates otherwise.
(1) - (9) (No change.)
(10) Texas crowdfunding portal--Any person registered as a Texas dealer pursuant to §115.19 of this title (relating to Texas Crowdfunding Portal Registration and Activities) that utilizes an Internet website to offer or sell securities that are exempt from securities registration solely pursuant to §139.25 of this title (relating to Intrastate Crowdfunding Exemption).
(b) (No change.)
(c) Types of registrations.
(1) (No change.)
(2) Restricted registration. The restricted registrations are as follows:
(A) - (M) (No change.)
(N) registration to deal exclusively in investment banking; [and]
(O) registration to act exclusively as a Texas crowdfunding portal; and
(P) [(O)] registration with other restrictions which the Securities Commissioner may impose based upon the facts.
(3) (No change.)
(d) (No change.)
§115.3.Examination.
(a) - (b) (No change.)
(c) Waivers of examination requirements.
(1) (No change.)
(2) A full waiver of the examination requirements of the Texas Securities Act, §13.D, is granted by the Board to the following classes of persons:
(A) - (E) (No change.)
(F) a person who completed the required examinations, but whose registration has lapsed for more than two years and who has been continually employed in a securities-related position with an entity which was not required to be registered; [and]
(G) a person who completed the required examinations and whose registration with FINRA and with another state securities regulator has not lapsed for more than two years; and[.]
(H) a Texas crowdfunding portal and its agents.
(3) - (4) (No change.)
(d) (No change.) §115.19.Texas Crowdfunding Portal Registration and Activities.
(a) Intrastate portal. A Texas crowdfunding portal:
(1) must be an entity incorporated or organized under the laws of Texas, authorized to do business in Texas, and engaged exclusively in intrastate offers and sales of securities in Texas;
(2) must limit its activities to operating an Internet website utilized to offer and sell securities exempt from registration pursuant to §139.25 of this title (relating to Intrastate Crowdfunding Exemption); and
(3) does not operate or facilitate a secondary market in securities.
(b) Internet website. The Internet website operated by the Texas crowdfunding portal must meet the following requirements:
(1) the website must contain a disclaimer that reflects that access to securities offerings on the website is limited to Texas residents and offers and sales of the securities appearing on the website are limited to persons that are Texas residents;
(2) evidence of residency within Texas is required as a condition of entry before viewing securities-related offering materials on the website and before sale is made to a prospective purchaser. An affirmative representation made by a prospective purchaser that the prospective purchaser is a Texas resident and proof of at least one of the following would be considered sufficient evidence that the individual is a resident of this state:
(A) a valid Texas driver license or official personal identification card issued by the State of Texas;
(B) a current Texas voter registration; or
(C) general property tax records showing the individual owns and occupies property in this state as his or her principal residence;
(3) prior to offering an investment opportunity to residents of Texas and throughout the term of the offering, the portal shall give the Securities Commissioner access to the Internet website; and
(4) prior to permitting an investment in any securities listed on the Internet website, the portal shall obtain an affirmative acknowledgment from the investor of the following:
(A) There is no ready market for the sale of the securities acquired from this offering; it may be difficult or impossible for an investor to sell or otherwise dispose of this investment. An investor may be required to hold and bear the financial risks of this investment indefinitely;
(B) The securities have not been registered under federal or state securities laws and, therefore, cannot be resold unless the securities are registered or qualify for an exemption from registration under federal and state law;
(C)In making an investment decision, investors must rely on their own examination of the issuer and the terms of the offering, including the merits and risks involved; and
(D) No federal or state securities commission or regulatory authority has confirmed the accuracy or determined the adequacy of the disclosure statement or any other information on this Internet website.
(c) Prohibited activities. A Texas crowdfunding portal shall not:
(1) offer investment advice or recommendations;
(2) compensate employees, agents, or other persons not registered with the Securities Commissioner for soliciting offers or sales of securities displayed or referenced on its platform or portal;
(3) hold, manage, possess or otherwise handle investor funds or securities;
(4) be affiliated with or under common control with an issuer whose securities appear on the Internet website;
(5) hold a financial interest in any issuer offering securities on the portal's Internet website; or
(6) receive a financial interest in an issuer as compensation for services provided to or on behalf of an issuer.
(d) Background and regulatory checks. Prior to offering securities to residents of Texas, the Texas crowdfunding portal shall conduct a reasonable investigation of the background and regulatory history of each issuer whose securities are offered on the portal's Internet website, and of each of the issuer's control persons. "Control persons" for purposes of this subsection means the issuer's officers; directors; or other persons having the power, directly or indirectly, to direct the management or policies of the issuer, whether by contract or otherwise; and persons holding more than 20% of the outstanding equity of the issuer. The portal must deny an issuer access to its Internet website if the portal has a reasonable basis for believing that:
(1) the issuer or any of its control persons is subject to a disqualification under §139.25 of this title (relating to Intrastate Crowdfunding Exemption);
(2) the issuer has engaged in, is engaging in, or the offering involves any act, practice, or course of business that will, directly or indirectly, operate as a fraud or deceit upon any person; or
(3) it cannot adequately or effectively assess the risk of fraud by the issuer or its potential offering.
(e) Recordkeeping.
(1) A Texas crowdfunding portal is not required to maintain the records listed in §115.5 of this title (relating to Minimum Records) or to maintain a supervisory system under §115.10 of this title (relating to Supervisory Requirements).
(2) A portal shall maintain and preserve for a period of five (5) years from either the date of the document or communication or the date of the closing or termination of the securities offering, whichever is later, the following records related to offers and sales made through the Internet website and to transactions where the portal receives compensation:
(A) records of compensation received for acting as a portal, including the name of the payor, the date of payment, name of the issuer, and name of the investor;
(B) copies of information provided by the portal to issuers offering securities through the portal, prospective purchasers, and investors;
(C) any agreements and/or contracts between the portal and an issuer, prospective purchaser, or investor;
(D) any information used to establish that an issuer, prospective purchaser, or investor is a Texas resident;
(E) any information used to establish that a prospective purchaser or investor is an accredited investor as defined in §107.2 of this title (relating to Definitions);
(F) any correspondence or other communications with issuers, prospective investors, and/or investors;
(G) any information made available through the portal's Internet website relating to an offering;
(H) ledgers (or other records) that reflect all assets and liabilities, income and expense, and capital accounts; and
(I) any other records relating to the offers and/or sales of securities made through the Internet website.
(3) A portal shall maintain and preserve a copy of the Form 133.15 (relating to Texas Crowdfunding Portal Registration), Form 133.16 (relating to Texas Crowdfunding Portal Withdrawal of Registration), and the Form U-4 (Uniform Application for Securities Industry Registration or Transfer) used to register the portal and its designated officer, and any amendments thereto, for a period of five (5) years from the termination of the portal's registration.
(4) The records required to be maintained and preserved under this subsection may be archived if they are over two years old.
(5) A portal shall, upon written request of the Securities Commissioner, furnish to the Commissioner any records required to be maintained and preserved under this subsection.
(6) The portal shall provide to the Commissioner access, inspection, and review of any Internet website operated by a portal and records maintained by the portal; and
(7) The records required to be kept and preserved under this subsection must be maintained in a manner, including by any electronic storage media, that will permit the immediate location of any particular document so long as such records are available for immediate and complete access by representatives of the Commissioner. Any electronic storage system must preserve the records exclusively in a non-rewriteable, non-erasable format; verify automatically the quality and accuracy of the storage media recording process; serialize the original and, if applicable, duplicate units of storage media, and time-date for the required period of retention the information placed on such electronic storage media; and can download indexes and records preserved on electronic storage media to an acceptable medium. In the event that a records retention system commingles records required to be kept under this subsection with records not required to be kept, representatives of the Commissioner may review all commingled records.
(f) Filings.
(1) Application. In lieu of the application requirements in §115.2 of this title (relating to Application Requirements), a complete application for a Texas crowdfunding portal consists of the following and must be filed with the Securities Commissioner:
(A) Form 133.15, including all applicable schedules and supplemental information;
(B) Form U-4, for the designated officer and a Form U-4 for each agent to be registered (officers of a corporation or partners of a partnership shall not be deemed agents solely because of their status as officers or partners);
(C) a copy of the articles of incorporation or other documents which indicate the form of organization, certified by the Texas Secretary of State or by an officer or partner of the applicant;
(D) any other information deemed necessary by the Commissioner to determine the financial responsibility, business repute, or qualifications of the portal; and
(E) the appropriate registration fee(s).
(2) Post-reporting requirements. A portal is subject to the dealer and agent requirements in §115.9 of this title (relating to Post-Registration Reporting Requirements).
(3) Renewal. Registration as a portal expires at the close of the calendar year, but subsequent registration for the succeeding year shall be issued upon written application and upon payment of the appropriate renewal fee(s), without filing of further statements or furnishing any further information unless specifically requested by the Commissioner.
The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.
Filed with the Office of the Secretary of State on April 25, 2014.
TRD-201401989
John Morgan
Securities Commissioner
State Securities Board
Earliest possible date of adoption: June 8, 2014
For further information, please call: (512) 305-8303
CHAPTER 133. FORMS
7 TAC §§133.15 - 133.17
The Texas State Securities Board proposes three new rules, concerning forms adopted by reference. Specifically, the State Securities Board proposes §133.15, which would adopt by reference the Texas Crowdfunding Portal Registration form; §133.16, which would adopt by reference the Texas Crowdfunding Portal Withdrawal of Registration form; and §133.17, which would adopt by reference the Crowdfunding Exemption Notice form. The portal forms are tailored to the limited activities performed by a portal and eliminate the need for a portal to use the more comprehensive dealer forms.
Tommy Green, Director, Inspections and Compliance Division, and Patricia Loutherback, Director, Registration Division, have determined that for the first five-year period the forms are used, there will be no foreseeable fiscal implications for state or local government as a result of using the forms.
Mr. Green and Ms. Loutherback also have determined that for each year of the first five years the forms are used the public benefit anticipated as a result will be that Texas crowdfunding portals will be able to use simplified forms to register and amend their registration (Form 133.15) and to withdraw their registration (Form 133.16). Issuers will be able to claim the intrastate crowdfunding exemption in §139.25 by filing Form 133.17. There will be no effect on micro- or small businesses. Since the forms will have no adverse economic effect on micro- or small businesses, preparation of an economic impact statement and a regulatory flexibility analysis is not required. There is no anticipated economic cost to persons who are required to use the forms as proposed. There is no anticipated impact on local employment.
Comments on the proposal to be considered by the Board should be submitted in writing within 30 days after publication of the proposed sections in the Texas Register. Comments should be sent to Marlene K. Sparkman, General Counsel, State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167 or sent by facsimile to (512) 305-8336.
The new rules are proposed under Texas Civil Statutes, Article 581-28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes.
The proposals regarding §133.15 and §133.16 affect Texas Civil Statutes, Articles 581-12, 581-13, 581-14, 581-15, and 581-18. The proposal regarding §133.17 affects Texas Civil Statutes, Article 581-7.
§133.15.Texas Crowdfunding Portal Registration.
This form is available from the State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167 and at www.ssb.state.tx.us.
§133.16.Texas Crowdfunding Portal Withdrawal of Registration.
This form is available from the State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167 and at www.ssb.state.tx.us.
§133.17.Crowdfunding Exemption Notice.
This form is available from the State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167 and at www.ssb.state.tx.us.
The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.
Filed with the Office of the Secretary of State on April 24, 2014.
TRD-201401990
John Morgan
Securities Commissioner
State Securities Board
Earliest possible date of adoption: June 8, 2014
For further information, please call: (512) 305-8303
CHAPTER 139. EXEMPTIONS BY RULE OR ORDER
7 TAC §139.25
The Texas State Securities Board proposes new §139.25, concerning intrastate crowdfunding exemption. The new rule would provide a registration exemption for securities offered in an intrastate crowdfunding offering. The filing used to claim the exemption is new Form 133.17, which is being concurrently proposed. New §115.19, concerning Texas crowdfunding portal registration and activities, is also being proposed to allow offers and sales of the exempt securities to be made using a Texas crowdfunding portal's Internet website.
During the development of these proposals, the staff had discussions with a number of firms and individuals who are interested and have expertise in the area so their insight and concerns could be considered. Federal crowdfunding proposals and provisions in other states were also reviewed.
Under the proposal, the offering must comply with the federal intrastate offering exemption and Securities and Exchange Commission ("SEC") Rule 147, so the securities do not have to be registered at the federal level. Accordingly, the issuer must be a Texas entity and the offers and sales limited to Texas residents. Some Rule 147 requirements have been incorporated into the proposed exemption to assist issuers in determining if they qualify for the exemption. Rule 147 also places restrictions on resale of the securities and requires certain precautions against interstate offers. These are noted in subsection (k) of the proposal.
The proposal is designed to assist small issuers conducting offerings that are local in nature where many investors are likely to be part of the company's customer base or from the surrounding community that will benefit from the growth of local businesses and the jobs they provide. Accordingly, subsection (b)(2) excludes certain issuers from the exemption, including: (1) investment companies, which engage primarily in the business of investing in other securities; (2) SEC reporting companies; and (3) blind pool and blank check companies.
The offering amount would be capped at $1 million in a 12-month period. This cap would be reduced by the amount received for sales of the issuer's securities that occur within six months before, during, or within six months after any offers or sales made in reliance upon the exemption.
The issuer cannot accept more than $5,000 from a single purchaser unless the purchaser is an accredited investor. Funds raised must be placed in an escrow account until the minimum target offering amount specified in the disclosure statement is reached.
The proponents of crowdfunding argue that the hard work of making investment decisions--filtering out the best investments and limiting fraud--can be addressed in part by tapping the "wisdom of the crowd" over the Internet. Individuals interested in the crowdfunding campaign (members of the "crowd") share information about the project or business with each other and use the information to decide whether to fund the campaign based on the collective "wisdom of the crowd." To facilitate this aspect of crowdfunding, subsection (h) of the proposal requires that information about the offering be posted on the Internet website for a minimum of 21 days before the securities may be sold. During this time, and for the course of the offering, all communications between the issuer, prospective purchasers, or investors must occur on the Internet website. The site must provide channels for potential purchasers and investors to communicate with each other, and those communications must be visible to others on the site.
To alert interested persons to an offering, an issuer may distribute a limited notice stating the issuer is conducting an offering, giving the name of the general dealer or Texas crowdfunding portal and a link to the Internet website. To keep the issuer from inadvertently converting an intrastate offering to an interstate one, thereby losing the federal exemption, the proposal restricts distribution of the notice to within Texas and requires it to contain a disclaimer reflecting that the offering is limited to Texas residents and that offers and sales on the Internet website are made only to Texas residents. A similar disclaimer is required on the Internet website for the same reason. The site also must require evidence of Texas residency before allowing a person to view securities offering materials. As with securities, there is also an exclusion from federal registration available to dealers whose business is exclusively intrastate. The disclaimer, evidence of residency requirement, and regulatory approach taken in the proposal appear adequate for purposes of characterizing the dealer's activities, as well as the securities offering, as one conducted intrastate.
Subsection (i) requires that a disclosure statement be provided to each prospective purchaser on the Internet website. Material information and risk factors must be disclosed and topics to be addressed in the document noted. Additional guidance for content of the disclosure statement will be in a document prepared by the staff and posted on the Agency's website with other small business and crowdfunding information. Required disclosures, common to crowdfunding offerings generally, are in subsection (i)(2). These disclosures also appear in concurrently proposed §115.19, which requires a Texas crowdfunding portal to obtain an affirmative acknowledgment from the investor regarding the disclosures before investment is permitted.
Many proponents of small business incentives cite the requirement to provide audited or reviewed financial statements prepared in accordance with generally accepted auditing standards and generally accepted accounting principles as too costly for small businesses. Subsection (i)(3) allows the issuer's financial statements to be certified by its principal executive officer. However, if the issuer has audited or reviewed financial statements prepared within the last three years, such financial statements must also be provided.
Payments to unregistered persons are prohibited by subsection (l), which also prohibits certain compensation arrangements and affiliations between an issuer and the general dealer or Texas crowdfunding portal operating the website on which its offering appears.
To ensure that the exemption is not misused, subsection (m) contains two types of disqualifications. Bad actor disqualifications are addressed in subsections (m)(2) and (m)(3). Issuers should be aware that, although a prior incident may not be a disqualification under this proposal, it may still need to be disclosed to potential purchasers and investors if it is material information under subsection (i)(1). Subsection (m)(4) prohibits offerings within a 12-month period by different issuers with common control persons or where the proceeds of offerings by different issuers will be combined in a single plan of financing.
Offerings made pursuant to the proposed exemption will not have to meet the filing requirements in the Texas Securities Act, §22.A, and Chapter 137 of the Board Rules (relating to Administrative Guidelines for Regulation of Offers) since those provisions do not apply to transactions exempt under §5, but a notice on new Form 133.17 must be filed with the Securities Commissioner along with a copy of the issuer's disclosure statement and the summary of the offering that appear on the Internet website.
Patricia Loutherback, Director, Registration Division, and Joe Rotunda, Director, Enforcement Division, have determined that there will be fiscal implications as a result of enforcing or administering the rule on state, but not local government.
The effect on state government for the first five-year period the rule will be in effect is a potential decrease in revenue. Some issuers currently relying on the intrastate limited offering exemption available in §109.13(l) may choose instead to use the proposed exemption. While §109.13(l) requires the payment of a notice filing fee (the lesser of $500 or 1/10 of 1.0% of the aggregate amount of securities offered), new §139.25 does not. The number of filings made pursuant to §109.13(l) fluctuates every year. Therefore, how much revenue might be lost as a result of issuers switching to the new exemption is unknown, but it is not likely to be significant. Since 2011, 17 issuers filed the notice to claim the exemption in §109.13(l) for offerings of $1 million or less, amounting to $6,036.50 in total revenue. The majority of these fees--$3,416.50--were paid in 2012 when 10 notice filings were made. Only four filings for offerings of $1 million or less were made in 2011, two filings were made in 2013, and one filing has been made so far this year. Several other self-executing private offering exemptions are also used by small issuers under current law. However, these self-executing exemptions do not require payment of any fee so if an issuer opts to pursue crowdfunding instead of using one of these exemptions, there would be no impact on revenue collected by the Agency.
Ms. Loutherback and Mr. Rotunda also have determined that for each year of the first five years the rule is in effect the public benefit anticipated as a result of enforcing the rule will be to spur small business development in the state by allowing entrepreneurs and start-ups to raise capital through crowdfunding using the Internet.
The proposed rule is designed to help grow startups and small businesses by making relatively low dollar offerings of securities less costly. Securities offerings in Texas are generally required to be registered, unless an exemption is available, and be sold by registered dealers or agents. The costs of conducting a registered offering, including legal, accounting, and registration fees, can be significant. Offering securities through a private placement exemption can also be complicated and costly. Legal counsel is often needed to ensure that restrictions on general solicitation and general advertising are not violated and purchaser qualification requirements are met. An exempt offering may also have notice filing requirements and fees associated therewith.
There is an anticipated economic cost to entities that are required to comply with the crowdfunding exemption as proposed, including preparing offering documents and disclosure statements, providing current, certified financial statements, and compensating portals for their listing services. Although there is no fee, a notice filing with the Securities Commissioner is also required. While such costs are not insignificant, they are less than the costs associated with registered or private offerings. Therefore, the effect on micro- or small businesses will most likely be a positive one. The anticipated impact on local employment is also expected to be positive. These small businesses, able to raise capital through crowdfunding, may be able to expand and provide additional jobs in the local community. Since the rule will have no adverse economic effect on micro- or small businesses, preparation of an economic impact statement and a regulatory flexibility analysis is not required.
Comments on the proposal to be considered by the Board should be submitted in writing within 30 days after publication of the proposed section in the Texas Register. Comments should be sent to Marlene K. Sparkman, General Counsel, State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167 or sent by facsimile to (512) 305-8336.
The new rule is proposed under Texas Civil Statutes, Articles 581-5.T, 581-12.C, and 581-28-1. Section 5.T provides that the Board may prescribe new exemptions by rule. Section 12.C provides the Board with the authority to prescribe new dealer, agent, investment adviser, or investment adviser representative registration exemptions by rule. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes.
The proposal affects Texas Civil Statutes, Articles 581-7, 581-12, 581-13, 581-14, 581-15, and 581-18.
§139.25.Intrastate Crowdfunding Exemption.
(a) General. The State Securities Board, pursuant to the Texas Securities Act (Act), §5.T, exempts from the securities registration requirements of the Act, any offer or sale of securities of an issuer through a registered general dealer or a registered Texas crowdfunding portal, provided that all offers and sales made pursuant to the offering are made to Texas residents, completed solely within this state, and all the requirements of this section are satisfied.
(b) Issuer.
(1) The issuer is an entity that has filed a certificate of formation with the Texas Secretary of State, is organized under the laws of Texas, and is authorized to do business in Texas and:
(A) At least 80% of the issuer's gross revenues during its most recent fiscal year prior to the offering are derived from the operation of a business in Texas;
(B) At least 80% of the issuer's assets at the end of its most recent semiannual period prior to the offering are located in Texas;
(C) The issuer will use at least 80% of the net proceeds of this offering in connection with the operation of its business within Texas; and
(D) The principal office of the issuer is located in Texas.
(2) The issuer is not, either before or because of the offering:
(A) A company, that engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities;
(B) Subject to the reporting requirements of the Securities and Exchange Act of 1934, §13 or §15(d), 15 U.S.C. §78m and §78o(d); or
(C) a company that has not yet defined its business operations, has no business plan, has no stated investment goal for the funds being raised, or that plans to engage in a merger or acquisition with an unspecified business entity.
(c) Coordination with federal securities laws. The transaction meets the requirements of the federal exemption for intrastate offerings in the Securities Act of 1933, §3(a)(11), 15 U.S.C. §77c(a)(11), and Securities and Exchange Commission Rule 147, 17 CFR §230.147.
(d) Offering. The offering must be made exclusively through an Internet website operated by a registered general dealer or registered Texas crowdfunding portal. All consideration received for all sales of the securities in reliance on this exemption shall not exceed $1 million in a 12-month period. This amount is reduced by the aggregate amount received for all sales of securities by the issuer in another offering that does not take place prior to the six month period immediately preceding or after the six month period immediately following any offers or sales made in reliance upon this section.
(e) Individual investments. The issuer will not accept more than $5,000 from any single purchaser unless the purchaser is an accredited investor as defined in §107.2 of this title (relating to Definitions). The issuer must have a reasonable basis for believing that the purchaser of a security under this section is a Texas resident and, if applicable, an accredited investor.
(f) Escrow. All payments for purchase of securities offered under this section are directed to and deposited in an escrow account with a bank or other depository institution located in Texas and organized and subject to regulation under the laws of the United States or under the laws of Texas, and will be held in escrow until the aggregate capital raised from all purchasers is equal to or greater than the minimum target offering amount specified in the disclosure statement as necessary to implement the business plan. Investors will receive a return of all their subscription funds if the target offering amount is not raised by the time stated in the disclosure statement.
(g) Communications.
(1) All communications between the issuer, prospective purchasers, or investors taking place during the offer of securities pursuant to this section must occur on the Internet website of the registered general dealer or Texas crowdfunding portal. During the time the offering appears on the Internet website, the website must provide channels through which potential purchasers and investors can communicate with one another and with representatives of the issuer about the offering. These communications must be visible to all those with access to the offering materials on the Internet website.
(2) Notwithstanding the foregoing, the issuer may distribute a notice within Texas limited to a statement that the issuer is conducting an offering, the name of the registered general dealer or portal through which the offering is being conducted and a link directing the potential investor to the dealer or portal's Internet website. The notice must contain a disclaimer that reflects that the offering is limited to Texas residents and offers and sales of the securities appearing on the Internet website are limited to persons that are Texas residents.
(h) Internet website.
(1) The Internet website operated by a registered general dealer or the Texas crowdfunding portal must meet the following requirements:
(A) the website must contain a disclaimer that reflects that access to securities offerings on the website is limited to Texas residents and offers and sales of the securities appearing on the website are limited to persons that are Texas residents;
(B) evidence of residency within Texas is required as a condition of entry before viewing securities-related offering materials on the website and before sale is made to a prospective purchaser. An affirmative representation made by a prospective purchaser that the prospective purchaser is a Texas resident and proof of at least one of the following would be considered sufficient evidence that the individual is a resident of this state:
(i) a valid Texas driver license or official personal identification card issued by the State of Texas;
(ii) a current Texas voter registration; or
(iii) general property tax records showing the individual owns and occupies property in this state as his or her principal residence; and
(C) prior to offering an investment opportunity to residents of Texas and throughout the term of the offering, the registered general dealer or registered portal shall give the Securities Commissioner access to the Internet website.
(2) Information about the issuer and the offering posted on the Internet website, entry onto which is conditioned upon evidence of Texas residency, operated by the registered general dealer or registered portal consists of:
(A) a copy of the disclosure statement required by subsection (i) of this section;
(B) a summary of the offering, including:
(i) a description of the entity, its form of business; principal office, history, business plan, and the intended use of the offering proceeds, including compensation paid to any owner, executive officer, director, or manager;
(ii) the identity of the executive officers, directors, and managers, including their titles and their prior experience and the identity of all persons owning more than 20% of the ownership interests of any class of securities of the company; and
(iii) a description of the securities being offered and of any outstanding securities of the company, the amount of the offering, and the percentage ownership of the company represented by the offered securities.
(3) The information required by paragraph (2) of this subsection must be made available on the Internet website to the Commissioner and potential investors for a minimum of 21 days before any securities are sold in the offering.
(i) Disclosure statement. A disclosure statement must be made readily available and accessible to each prospective purchaser at the time the offer of securities is made to the prospective purchaser on the Internet website. The disclosure statement must contain all of the following:
(1) Material information and risk factors. All information material to the offering, including, where appropriate, a discussion of significant factors that make the offering speculative or risky. Guidance on the categories of information to include can be found by reviewing the small business offering information provided by the Texas State Securities Board on its Internet website. Topics to be addressed include, but are not limited to:
(A) general description of the issuer's business;
(B) history of the issuer's operations and organization;
(C) management of the company and principal stockholders;
(D) how the proceeds from the offering will be used;
(E) financial information about the issuer;
(F) description of the securities being offered; and
(G) litigation and legal proceedings.
(2) Disclosures. The issuer shall inform all prospective purchasers and investors of the following:
(A) There is no ready market for the sale of the securities acquired from this offering; it may be difficult or impossible for an investor to sell or otherwise dispose of this investment. An investor may be required to hold and bear the financial risks of this investment indefinitely;
(B) The securities have not been registered under federal or state securities laws and, therefore, cannot be resold unless the securities are registered or qualify for an exemption from registration under federal and state law.
(C) In making an investment decision, investors must rely on their own examination of the issuer and the terms of the offering, including the merits and risks involved; and
(D) No federal or state securities commission or regulatory authority has confirmed the accuracy or determined the adequacy of the disclosure statement or any other information on this Internet website.
(3) Financial statements. Issuers must provide current financial statements certified by the principal executive officer to be true and complete in all material respects. If the issuer has audited or reviewed financial statements prepared within the last three years, such financial statements must also be provided to investors.
(j) Notice filing. At least 21 days before an offer of securities is made in reliance on this section or use of any publicly available Internet website in an offering of securities in reliance on this section, the issuer shall file with the Securities Commissioner:
(1) Form 133.17, Crowdfunding Exemption Notice;
(2) the disclosure statement, required by subsection (i) of this section; and
(3) the summary of the offering, required by subsection (h)(2)(B) of this section.
(k) Resales of securities. The issuer and all its officers, directors, and employees shall make the disclosures required by SEC Rule 147(e) and (f), 17 CFR §230.147(e) and (f). The issuer must place a legend on the certificate or other document evidencing that the securities have not been registered and setting forth the limitations on resale contained in SEC Rule 147(e), including that for a period of nine months from the date of last sale by the issuer of the securities in the offering, all resales by any person, shall be made only to Texas residents.
(l) Commissions and remuneration. A commission or other remuneration shall not be paid or given, directly or indirectly, for the offer or sale of the securities unless the person receiving such compensation is registered in Texas as a dealer or agent or as a Texas crowdfunding portal. The issuer may not list its securities on the Internet website of a general dealer or portal that holds an interest in the issuer. The issuer may not compensate a general dealer or a portal by providing a financial interest in the issuer as compensation for services provided to or on behalf of the issuer. A general dealer or portal may not be affiliated with or under common control with an issuer whose securities appear on its Internet website.
(m) Disqualifications.
(1) For purposes of this subsection, "control person" means an officer; director; other person having the power, directly or indirectly, to direct the management or policies of the issuer, whether by contract or otherwise; or a person that owns 20% or more of any class of the outstanding securities of the issuer.
(2) This exemption is not available if the issuer, the issuer's predecessors, any affiliated issuer, or any control person of the issuer:
(A) within the last five years, has filed a registration statement which is the subject of a currently effective registration stop order entered by any state securities administrator or the United States Securities and Exchange Commission;
(B) within the last five years, has been convicted of any criminal offense in connection with the offer, purchase, or sale of any security, or involving fraud or deceit;
(C) is currently subject to any state or federal administrative enforcement order or judgment, entered within the last five years, finding fraud or deceit in connection with the purchase or sale of any security; or
(D) is currently subject to any order, judgment, or decree of any court of competent jurisdiction, entered within the last five years, temporarily, preliminarily, or permanently restraining or enjoining such party from engaging in or continuing to engage in any conduct or practice involving fraud or deceit in connection with the purchase or sale of any security.
(3) Paragraph (2) of this subsection shall not apply if:
(A) the party subject to the disqualification is licensed or registered to conduct securities-related business in the state in which the order, judgment, or decree creating the disqualification was entered against such party;
(B) before the first offer under this exemption, the state securities administrator, or the court or regulatory authority that entered the order, judgment, or decree, waives the disqualification; or
(C) the issuer establishes it did not know and exercising reasonable care, based on a factual inquiry, could not have known that a disqualification existed under this subsection.
(4) This exemption is not available to an issuer if:
(A) a control person of the issuer is also a control person of another issuer that has made a securities offering in Texas within the previous 12-month period;
(B) a control person of the issuer is also a control person of another issuer that is concurrently conducting a securities offering in Texas; or
(C) the proceeds of the offering will be combined with the proceeds of a securities offering by another issuer as part of a single plan of financing.
The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.
Filed with the Office of the Secretary of State on April 25, 2014.
TRD-201401991
John Morgan
Securities Commissioner
State Securities Board
Earliest possible date of adoption: June 8, 2014
For further information, please call: (512) 305-8303