NASAA's Model Crowdfunding Exemption - the Internal DraftBy http://profile.typepad.com/1237764140s22740 // February 7, 2012 in Crowdfunding
Today's the day by which the NASAA requested that its members - state securities regulators - give it feedback on the model crowdfunding exemption it circulated last month.
The model exemption had been posted to NASAA's site, at least for a time, but was taken down, possibly due to the fact that it had been disccovered and was being accessed outside the membership (I am speculating; I do not really know why it was taken down).
Since NASAA circulated its draft, the crowdfunding movement has gotten a lift from the announcement of White House support.
The President, as far as I know, has not announced support for any one of the three crowdfunding bills before Congress; nor has he, as far as I know, expressly excluded that idea that state regulators might control the policing of a crowdfunding exemption. But the NASAA's sense of urgency about pulling together a viable, state-run alternative - "in light of the speed with which Congress may proceed on these issue" - would appear to have been validated by the White House announcement.
For future reference, here is the initial NASAA model crowdfunding exemption, as submitted to member regulators for comment:
Rule XXX. Model Crowdfunding Exemption.(a) Definitions. For purposes of this rule, the following definitions shall apply:(1) “Executive officer” shall mean the president; any vice president in charge of a principal business unit, division or function (such as sales, administration or finance); any other officer who performs a policy making function; or, any other person who performs similar policy making functions for the issuer.(2) “Institutional investors” shall have the same meaning as provided in Section XXX [Section 102(11) of USA 2002].(3) “Intermediary” shall mean an entity that facilitates the offer and sale of securities by issuers to investors through an internet-based system that is open to and accessible by the general public.(4) “Management” shall mean the issuer’s directors, executive officers, or the persons that perform such functions for the issuer.(5) “Qualified custodian” shall mean one of the following entities that is not affiliated with the issuer by any direct or indirect common control and has not had a material business relationship with the issuer in the previous two years:(A) A bank or savings association that has deposits insured by the Federal Deposit Insurance Corporation; or(B) A registered broker-dealer other than the intermediary.(b) Transactional exemption from securities registration requirements. The offer or sale of a security by an issuer in a transaction that meets the requirements of this rule is exempted from Sections XXX through XXX [Sections 301 through 306 of USA 2002] and Section XXX [Section 504 of USA 2002] and is subject to the limitations contained herein.(1) Aggregate sales limit. The aggregate amount of securities sold to all investors by the
issuer during the 12-month period preceding the date of the offer or sale, including any
amount sold in reliance upon this exemption, shall not exceed $500,000, other than:(A) Securities sold to institutional investors; and(B) Securities sold to the issuer’s management.(2) Individual investment limitation. The aggregate amount sold to any investor in
reliance upon this exemption within the previous 12-month period shall not exceed $1,000.
For purposes of this individual investment limitation, the following investors shall be
treated as one investor:(A) Any relative, spouse or relative of the spouse of an investor who
has the same principal residence as the investor;(B) Any trust or estate in which an investor and any related person as specified in paragraph (b)(2)(A) or (b)(2)(C) collectively have more than 50 percent of the beneficial interest (excluding contingent interests); and(C) Any corporation or other organization of which an investor and any related person as specified in paragraph (b)(2)(A) or (b)(2)(C) collectively are beneficial owners of more than 50 percent of the equity securities (excluding directors' qualifying shares) or equity interests.(3) Use of an intermediary. All offers and sales of securities in reliance upon this exemption shall be made through an intermediary’s website in compliance with the provisions of this rule.(4) Notice to home state Administrator. Prior to the offer of any security in this state in reliance upon this exemption, the issuer shall file a notice electronically or in writing on Form CF. The notice shall be filed with the Securities Administrator of the state in which the issuer maintains its principal place of business, and an amended notice shall be filed within 30 days of any change in the information provided on the Form CF.(5) Disclosure to investors. Prior to any offer of securities, the issuer shall provide the following materials to the intermediary, and these materials shall be made available to each offeree through the intermediary’s website:(A) The information required in Parts 2 and 3 of Form CF; and(B) Information describing the financial condition of the issuer, including, at a minimum, unaudited financial statements prepared in accordance with generally accepted accounting principles in the United States.(6) Restrictions on advertising and communications. The issuer shall not advertise the specific details of the offering, except for notices which direct investors to the intermediary’s website. Potential investors that have reviewed the information maintained on the intermediary’s website shall have the opportunity to ask questions and receive answers concerning the terms and conditions of the offering and to obtain any additional information which the issuer possesses or can acquire without unreasonable effort or expense that is necessary to verify the accuracy or clarify the information provided on the intermediary’s website. If such additional information is material, the issuer and the intermediary shall immediately amend the information contained on the intermediary’s website to provide such information. The intermediary may also maintain a forum on its website whereby potential investors may ask questions of and receive answers from the issuer. Such forum shall be available to all potential investors as well as state securities regulators as provided in paragraph (c)(5).(7) Target amount, offering period, and escrow requirements. The issuer shall establish a target offering amount and an offering period of not more than 12 months from the date of filing the notice as set forth in paragraph (b)(4). All offering proceeds shall be held in an escrow account maintained by a qualified custodian until offering proceeds (less any offering proceeds from the issuer, its management or affiliates) totaling at least the target offering amount are received. If the target offering amount is not received by the end of the offering period, the proceeds shall be returned to the investors within thirty days. All investors shall have the right to withdraw their investment, without deduction of any kind, until such time as offering proceeds (less any offering proceeds from the issuer, its management or affiliates) totaling at least the target offering amount are received and the offering proceeds are released by the qualified custodian from the escrow account to the issuer.(8) Compensation restrictions. Neither the issuer nor the intermediary may employ or compensate promoters, finders, lead generators, or other persons to attract or provide the personal information of any potential investor.(9) Disqualification. This exemption shall not be available if any of the following persons is subject to a disqualifying event as described in the regulations adopted in accordance with section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act:(A) The issuer or its management; or(B) The intermediary or any of its executive officers or directors, or persons occupying similar roles.(10) Restricted securities. A security issued in a transaction that is exempt under this rule may not be sold by the purchaser during the 12 month period beginning on the date of purchase, unless the security is sold:(A) to the issuer, an institutional investor, or a family member of the purchaser;(B) as part of a registered offering; or(C) in connection with the death of the purchaser.(11) Exclusions. This exemption shall be available only to business organizations duly organized and registered under the laws of a state. This exemption shall not be available to any of the following:(A) A foreign issuer;(B) An investment company, as defined in Section 3 of the Investment Company Act of 1940;(C) A development stage company that either has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person; or(D) A company with a class of securities registered under the Securities Exchange Act of 1934.(12) Sales Reports. Upon request from the Administrator, the issuer shall provide a sales report detailing the amount of securities sold in this state from the beginning of the offering to the most recently completed fiscal quarter, unless the issuer has already provided this information to the Securities Administrator in the state in which the issuer filed its notice under paragraph (b)(4).(13) Offering Price. The offering price of the securities offered and sold pursuant to this exemption shall be the same for all investors, and shall not be increased during the offering period. The offering price may be lowered, but only if all previous investors in the particular offering are notified of the change and allowed to rescind their previous investment and participate at the lower offering price.(c) Requirements for intermediaries in connection with offerings of securities pursuant to this exemption. An intermediary shall comply with each of the following requirements.(1) Investor screening. Before a security is sold through the intermediary, the intermediary shall ensure that the investor does all of the following:(A) Reviews the information provided in Part 3 of Form CF; and(B) Positively affirms that the investor understands that the investor is risking the loss of the entire investment, and that the investor has the capacity to bear such a loss.(2) Reduction of fraud risk. The intermediary shall take reasonable measures to reduce the risk of fraud in connection with the offer or sale of the securities. Such measures shall include obtaining a criminal background check and securities enforcement regulatory check on the issuer and the issuer’s management, and notifying the issuer of any information that may disqualify the issuer from using this exemption pursuant to paragraph (b)(9). Upon request from the Administrator, the intermediary shall provide the results of the background check and securities enforcement regulatory check, unless the intermediary has already provided this information to the Securities Administrator in the state in which the issuer filed its notice under paragraph (b)(4).(3) Enforcement of investment limits. The intermediary shall take reasonable measures to ensure that no investor exceeds the investment limits set forth in subsection (b)(2). In addition, the intermediary shall take reasonable measures to ensure that no investor has
purchased securities in multiple offerings conducted in reliance upon this exemption that, in the aggregate, would exceed the greater of:(A) $2,000, if the investor has an annual income of less than $50,000;(B) Four percent of the annual income of the investor, if the investor has an annual income of at least $50,000 but less than $100,000; or(C) Eight percent of the annual income of the investor, if the investor has an annual income of at least $100,000.(4) Conflicts of interest. The intermediary and its management shall have no ownership or other financial interest in the issuer.(5) Administrator access. The intermediary shall provide the Administrator with continuous investor-level access to the intermediary’s website.(d) Registration requirements for intermediaries. An intermediary is a broker-dealer that is subject to the registration requirements of [Section 401 of the 2002 USA], but if an intermediary’s activity as a broker-dealer is limited to offerings conducted in accordance with this rule, the intermediary is exempt from the requirements of the following rules:(1) Rule XXX [any rule that incorporates by reference or is the substantial equivalent of section 15(b)(8) of the Securities Exchange Act of 1934, which pertains to membership in a self-regulatory organization];(2) Rule XXX [any rule that incorporates by reference or is the substantial equivalent of section 15(e) of the Securities Exchange Act of 1934, which pertains to customer notices regarding short sales];(3) Rule XXX [any rule that incorporates by reference or is the substantial equivalent of section 15(h) of the Securities Exchange Act of 1934, which pertains to sales of penny stocks];(4) Rule XXX [paragraph 1.c. of the NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which requires a determination of suitability]; and(5) Rule XXX [paragraph 1.j. of the NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which requires prospectus delivery].
Picture: Jarek Tuszynsk/Wikimedia Commons.