Wednesday, November 22, 2017

Oregon’s proposed crowdfunding amendments will enhance capital formation

By Jay Fishman, J.D.

The Oregon Finance and Securities Regulation Division has proposed amendments to its crowdfunding rules to better align them with federal requirements, and to capture changes providing small businesses with more leeway to raise capital from permitted investors without lessening investor protections.

Public comments. Interested persons may submit written comments about the rule proposals to Karen Winkel at the Department of Consumer and Business Services, Finance and Securities Regulation Division, Labor and Industries Building, 350 Winter St NE, Salem, Oregon 97301. Alternatively, comments may be emailed to karen.j.winkel@oregon.gov. Comments must be received by 5:00 pm on December 11, 2017.

Proposed crowdfunding rule changes. Highlights of the proposed rule amendments would include the following:

Exemption from registration. The “Oregon Intrastate Offering Exemption” (OIO) would provide Oregon businesses with an exemption from securities registration to facilitate investment by Oregon residents while simultaneously protecting investors. To be exempt:
  • the sale would be made by an issuer comprising an existing Oregon business that complies with all Oregon Secretary of State requirements for doing business in Oregon; 
  • the offer and sale would be conducted in accordance with SEC Rule 147A; note that issuers having properly filed an OIO offering before July 7, 2017 under federal Securities Act, Section 3(a)(11) and SEC Rule 147 would notify the Director that the continued offer and sale will comply with this subsection (2) [SEC Rule 147(A)]; 
  • OIO securities would be offered or sold only to natural persons who the issuer, salesperson, or broker-dealer reasonably believes are Oregon residents (and otherwise qualify under the OIO rules); and 
  • the issuer, salesperson or broker-dealer, before any sale under the OIO exemption occurs, would obtain reasonable documentary evidence that the prospective purchaser’s principal residence is in Oregon (reasonable documentary evidence proving Oregon residency could include a current Oregon-issued driver’s license or personal identification card, or a current voter registration, or evidence of Oregon principal residence ownership or occupancy, or official business mail from a state or federal agency); note that a signed statement without additional evidence does not sufficiently create a reasonable belief in a purchaser’s Oregon residency.
Aggregate offering amounts. An issuer could engage in multiple OIOs subject to integration, but the total amount raised in any 12-month offering period (or 24-month period if the issuer applies to extend the offering) would not exceed $250,000. The OIO could be used to raise a maximum aggregate amount of $500,000.

Single investor limit. The amount the issuer could accept from any individual investor would not exceed $2,500 unless the following alternative maximum investment (AMI) applies: A person whose income exceeded $100,000 for the two consecutive years and who reasonably expects their income to exceed $100,000 for the current year, and who has a $200,000 net worth, excluding their principal residence, may invest up to $10,000. For AMI purposes, an issuer, salesperson or broker-dealer must have formed a reasonable belief based on document review and the prospective purchaser’s signed declarations that the prospective purchaser meets the income and net worth thresholds. An issuer that sells a security under the AMI would be permitted to engage only in a single transaction at the AMI limit per spousal unit. The AMI-subject securities could be held jointly or individually.

Securities limitation. OIO securities would be limited to notes, stocks and/or debentures.

Notification of first sale. An issuer would notify the Director within five days of the first sale of an OIO security.

Duration of offering. An OIO offering would not exceed 12 months from the date the security is first sold under the OIO exemption. An OIO offering could be extended for one additional, consecutive 12-month period, but an offering period would not exceed 24 months from the date of the initial sale. An issuer could apply to extend the offering by submitting to the Director an amended filing on a Director-approved form that conforms with the OIO rules.

Offering proceeds. OIO sale proceeds would be used in accordance with both the issuer’s representations made to investors and with OIO rule disclosures.

Issuers must meet with business technical service provider. Issuers, before advertising, offering or selling OIO securities, would need to have reviewed their business plan in person with a business technical service provider.

Notice filing. Issuers would send the Director a written notice of the OIO offering not less than 15 days before any advertising, offer or sale of an OIO security occurs, whichever of the three events comes first. The notice filing requirement could be met by an issuer submitting either a Director-approved form or all the above-required numbered items individually.

The notice, accompanied by a $200 fee payable to the Department of Consumer and Business Service, would contain:
  1. the issuer’s name and address, as well as the names and addresses of the directors’, officers’ principals’, managing members’, and shareholders’ having a 20 percent (or more) interest in the Oregon business; 
  2. a copy of the proposed advertising template (including a URL if a website will be used for the offering) and the name of the third party platform provider (if applicable); 
  3. a brief description of the business and specific project comprising the offering; 
  4. the minimum amount needed to release funds to the issuer, and the maximum *offer amount; 
  5. a copy of the offering documents and a sample of the certificate or other evidence of the security; and 
  6. a Director-approved form verifying the issuer’s in-person meeting with a business technical service provider to review the issuer’s business plan, or an approved waiver. The filing would be signed by the issuer or by the issuer’s duly authorized representative verifying the filing’s material accuracy and completeness. 
* “Offer” would include every attempt to dispose of an OIO security for value. The publication of any information and statements, and publicity efforts—including any advertising materials—in advance or in connection with an OIO that contributes to the conditioning of the public mind or arousing public interest in the issuer or is intended to arouse public interest investing in the issuer or purchasing its securities—even though it does not contain an express offer—is an offer of OIO securities for purposes of this OIO exemption.

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