Wednesday, November 07, 2018

NASAA proposes amending policy on small company offering registrations

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

NASAA has released for public comment a proposal to update its statement of policy governing state registration of small company offerings. The proposed amendments to the SCOR Statement of Policy would increase the offering limit from $1 million to $5 million and incorporate many of the investor protections mandated under state and federal crowdfunding laws, including requirements pertaining to investment limits, sales reports, and ongoing reporting. Proposed amendments to the SCOR Form (Form U-7) include updates drawn from intrastate crowdfunding forms, federal Form C, word processing features, and changes in federal law.

SCOR Statement of Policy. NASAA’s current SCOR Statement of Policy seeks to provide for the uniform treatment of registrations of small company offerings which are exempt from federal registration under Rule 504 of Regulation D, Regulation A, or Rule 147 of the Securities Act. Forty-four U.S. jurisdictions have, either officially or unofficially, adopted the SCOR registration program or recognize the filing of Form U-7.

NASAA's proposing release, however, notes that the current policy statement was last updated in 1996, prior to the widespread use of the Internet for capital formation, while the SCOR Form was last updated in 1999. Importantly, the SEC amended federal Rule 504 to increase the offering amount limitation from $1 million to $5 million, effective January 20, 2017. In addition, the SEC amended the intrastate offering exemption in federal Rule 147 and adopted a new intrastate exemption as Rule 147A

SCOR availability and investment limits. In light of these changes, the proposal amends the types of federally exempt offerings that can be registered at the state level under the SCOR Statement of Policy. The offering amount limit in the amended Statement of Policy would be increased from $1 million to $5 million to reflect the increase in the federal offering amount limit under Rule 504. Further, the proposal would allow SCOR registration of intrastate offerings exempt under new federal Rule 147A. Regulation A offerings would no longer be permitted under the Statement of Policy, however, because offerings made under Regulation A must now be made using the federal Form 1-A and the offering amount is no longer capped at $5 million.

The proposed amended SCOR Statement of Policy would incorporate the individual investment limits from federal Regulation Crowdfunding. NASAA believes that this limitation is appropriate to balance investor protection concerns with the simplified disclosure and financial statement requirements provided for in SCOR offerings.

Financial statement requirements. Among the other updates, the proposed amended Statement of Policy institutes three important changes regarding requirements for financial statements. First, the amended policy statement would require the issuer’s CEO and CFO to certify that the annual financial statements are true and complete in all material respects. Second, interim financial statements must be provided if the annual financial statements are dated more than 120 days prior to the date of filing. Third, the proposed amended Statement of Policy provides tiered compilation, review, and audit requirements for the financial statements based on the amount of the offering:
  • $0 to $500,000: Unaudited
  • $500,001 to $999,999: Compilation
  • $1,000,000 to $1,999,999: Review
  • $2,000,000 to $5,000,000: Audit
Although the tired approach to financial statements is based in part on the approach required under federal Regulation Crowdfunding, the release observes that NASAA’s proposed tiered requirements are less onerous because offerings under the SCOR Statement of Policy would be registered and subject to review and comment by state examiners, as opposed to federal crowdfunding offerings that are not reviewed by SEC staff.

Bad actor disqualification. The amended policy statement would also include a more complete bad actor disqualification provision that merges aspects of the federal bad actor provisions applicable to Rule 506 and Rule 504 offerings with the bad actor disqualification under the existing SCOR Statement of Policy. The release notes that the new disqualification provision seeks to capture individuals materially participating in the offering or the issuer’s operations, as well as events that may indicate the potential for fraud, given the nature of the offerings. Unlike similar federal provisions, however, the proposed provision does not grandfather any bad acts that occurred prior to the adoption of the SCOR Statement of Policy.

Sales reports and ongoing reporting requirements. The proposed policy statement would incorporate a sales reporting requirement similar to that contained in intrastate crowdfunding laws and federal Regulation Crowdfunding. The proposal would also require an issuer to provide annual financial statements to the issuer’s security holders, and upon request to the jurisdictions where the offering was registered, no later than 120 days after the end of the issuer’s fiscal year. The financial statements, which must be be certified by the issuer’s CEO and CFO, could be posted to the issuer’s website. While the financial statements would not be required to be audited, the issuer would be required to provide reviewed or audited financial statements if otherwise available.

Request for comments. Comments on the proposed updated SCOR Statement of Policy and SCOR Form are due December 3, 2018. After the comment period has closed, NASAA will post to its website the comments it receives as submitted by the authors.