Wednesday, April 06, 2016

NASAA Proposes Amendments to CorpFin Policies, Forms U-1 and U-2

By John M. Jascob, J.D., LL.M.

NASAA has released for public comment proposed amendments to four of NASAA’s corporation finance statements of policy. The proposal comes in response to NASAA’s newly adopted Coordinated Review Program for Regulation A Offerings as well as to comments received from the Regulation A+ Working Group of the ABA’s Business Law Section. Separately, NASAA has proposed amending Uniform Forms U-1 and U-2 to facilitate the registration of securities offerings in multiple jurisdictions and to modernize the consent to service of process.

Corporation finance statements of policy. Specifically, NASAA’s Corporation Finance Section has proposed amendments to the following statements of policy:
  • Statement of Policy Regarding Preferred Stock
  • Statement of Policy Regarding Promoter’s Equity Investment
  • Statement of Policy Regarding Specificity In Use of Proceeds
  • Statement of Policy Regarding Unequal Voting Rights
Preferred Stock. This policy statement has been compressed into fewer sections to increase clarity. In addition, the policy has been revised to clarify that analysis may be based on either the last fiscal year or the last three fiscal years. The revised policy states that the failure to make certain disclosures regarding an offering of preferred stock constitutes grounds for denial of an application.

Promoter’s Equity Investment. In response to concerns from the ABA Working Group that promoters have difficulty in meeting the current requirements of this policy, the formula for determining the required amount of the promoter’s equity investment (PEI) has been reduced by a change in the percentages and by a cap. In addition, state administrators are provided greater flexibility in approving offerings by permitting consideration of: (1) accumulated earned surplus; (2) goodwill and intellectual property; (3) proof that the promoters worked at a reduced salary or without a salary; and (4) in other non-cash contributions, in calculating whether the promoter has an acceptable PEI.

Specificity In Use of Proceeds. In response to comments from the ABA Working Group that policy should be more flexible, especially for mature companies, the limit for working capital or other unspecified uses has been increased to 20 percent for best efforts offerings. In addition, a new higher tier has been added that allows up to 35 percent if the offering is firmly underwritten. Changes have also been made to eliminate disclosure of the names and addresses of vendors and persons who receive commissions if the transactions are immaterial.

Unequal Voting Rights. The proposed amendments provide more flexibility for administrators to approve securities offerings with disproportionate voting rights per share where the issuer has a compelling rationale for issuing shares with lesser voting rights to public investors. The proposal sets forth specific disclosure requirements to assure that investors understand the applicable risks and have the material information they need to make an informed investment decision.

Forms U-1 and U-2. The proposed new uniform securities registration form, Multistate Form U-1, has been designed to assist issuers in registering offerings in multiple states, particularly with regard to approval through the coordinated review program. The new form will be made available as a fillable PDF, with the Consent to Service of Process built into the form. The form will also provide an electronic signature option with instructions and will eliminate the notarization requirement. The new uniform consent to service of process, Form U-2, includes updates to information pertaining to the listed service of process agencies to ensure accuracy.

Request for comments. Comments on each proposal are due by May 1, 2016. After the comment period has closed, NASAA will make the comments available for public viewing on its website.

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