law similar, see sec.gov on Securities Acts of 1933 and 1934, htm#fsl

Transcription

1 1/12/2016 o General: Raising money from members of the public, usually via an Internet portal Non-Equity: All Kickstarter funders to date, most IndieGoGo paid in t-shirts, recognition, product: not equity Equity: SEC v Howey (1938): A Security is an opportunity to make money (in that case, from part ownership in orange groves) from the efforts of others. Cf. Illinois Securities Law of 1953, 815 ILCS 5/2.1 1

2 - Federal 1/12/2016 cø General: 815 ILCS 5/12(G) and federal anti-fraud rules NOT repealed by new crowdfunding rules, state or federal 12G requires that all material risks be communicated to potential investors before they buy a security c New 815 [CS 5/4(1) law section helps define what disclosure parts are needed, as do new rules, but these are a start, not a full definition of adequate disclosure General rule, 815 ILCS 5/5: All securities except those exempt under Sections 2a, 3, or 4 must be registered (public offerings rules, costs about $1 million/offering and Sarbanes-Oxley compliance thereafter.) law similar, see sec.gov on Securities Acts of 1933 and 1934, htm#fsl 2

3 1/12/ ILCS 5/4 exempts securities sales from public offerings requirements: A. Sales for own account by non-issuer; B. Sales of warrants or options without commission; C. Pension fund purchases, direct or through institutions; D. Sales defined bysecretaryof State rules as conformingto federal exempt transaction types; E. Estate or bankruptcy sales; F. Sales by broker-dealers at market prices; G. Private intrastate offerings to up to 35 investors and up to $1 million total equity in a year, with no commission over 20%, and reports required to Secretary of State; 815 ILCS 5/4 exemptions continued: H. Private sales to accredited investors; I. Sales based on merger or consolidation or sale of entity transfers of interests; J. Sales pursuant to settlements of claims approved by a court; K. Sales for patronage or under marketing agreements with agricultural co-ops; L. Sales pursuant to pending registration statements (federal or state); M. Private sales by preorganization subscription agreement to not more than 25 investors; 3

4 1/12/2016 Li IL Sec. 4 Exemptions Pt. 3 r 815 ILCS 5/4 exemptions continued: N. Sale through broker-dealers as agents for purchasers; 0. Sale of majority interest in issuer (commission limited to 15%) P. Blighted area redevelopment company sales limited to $5,000 per buyer and 4% ownership in selling entity; Q. Isolated transactions, whether or not through dealers; R. Private sale of $150,000 or more for cash or debt forgiveness to an individual (purchase price less than 20% of entity worth); S. Sales to an director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer. L New crowdiundinglaw cc 815 ILCS 5/4 exemption T(new subsection, added by P.A , effective January 1, 2016) T. Offer and sale by Illinois organized entity in good standing to persons and organizations who are Illinois residents, if: (1) Meets federal intrastate offerings exemption requirements; (2) Not more than $1 million of securities sold in 12 month period if no CPA audited financials, otherwise $4 million if CPA and officer audited and certified financials to each prospective purchaser and to Secretary of State directly or through Internet portal: limits not applicable to sales to accredited investors or persons who are officers or directors or over 10% owners of issuer; (3) Not more than $5,000 to any non-accredited or insider buyer in 12 month period; 4

5 1/12/2016 New Crowdftrnding Law I 815 ILCS 5/4 (T) Exemption, continued: (4) Secretary of State to issue rules for issuer disclosure and filing requirements, treatment of escrow funds and agreements, production of financial statements, and other requirements; (5) Officer certified financial statements to be provided to each prospective purchaser; (6) No commission for soliciting buyers except to registered dealers and salespersons licensed in Illinois; (7) Filing with Secretary of State required minimum 15 days before any sale or general solicitation; (8) All payments for securities subject to escrow until minimum amount (set by issuer) raised. New Crowdiunding Law m 815 ILCS 5/4 (T) Exemption, continued: (9) Disclosures to prospective buyers, in person or via online access, must include: (a) a description of the issuer, its type of entity, the address, and telephone number of its principal office; (b) a reasonably detailed description of the intended use of the offering proceeds, including any amounts to be paid, as compensation or otherwise, to any owner, executive officer, director, managing member, or other person occupying a similar status or performing similar functions on behalf of the issuer; (c) the identity of all persons owning more than 10% of the voting capital securities of the issuer; 5

6 1/12/ ILCS 5/4 (T) Exemption, continued: (9) Disclosures to prospective buyers, in person or via online access, must include: (d) the identity of the executive officers, directors, managing members, and other persons occupying a similar status or performing similar functions in the name of and on behalf of the issuer, including their titles and a reasonably detailed description of their prior experience: (e) the identity of any person or entity who has been or will be retained by the issuer to assist the issuer in conducting the offering and sale of the securities (including all registered Internet portals but excluding persons acting solely as accountants or attorneys and employees whose primary job responsibilities involve the operating business of the issuer rather than assisting the issuer in raising capital) and a description of the consideration being paid to each such person or entity for such assistance; New Crowdiunding Law c 815 ILCS 5/4 (T) Exemption, continued: (9) Disclosures to prospective buyers, in person or via online access, must include: (f) any additional information material to the offering, including a description of significant factors that make the offering speculative or risky for the purchaser; and (g) The items required by Secretary of State rules pursuant to 815 ILCS 5/4 (T) (4) concerning disclosure and filing requirements, treatment of escrow funds and agreements, production of financial statements, and other requirements. 6

7 1/12/2016 New Crowdiunding Law o 815 ILCS 5/4 (T) Exemption, continued: (10) Issuers must require that purchasers certify, in person or online, that the purchaser: (a) is a resident of the State of Illinois; (b) understands that he or she is investing in a high-risk, highly speculative, business venture, that he or she may lose all of his or her investment, and that he or she can afford such a loss of his or her investment; L New Crowdluuding Law r- 815 ILCS 5/4 (T) Exemption, continued: (10) Issuers must require that purchasers certify, in person or online, that the purchaser: (c) understands that the securities being offered are highly illiquid, that there is no ready market for the sale of such securities, that it may be difficult or impossible for purchaser to sell or otherwise dispose of such securities, and (where applicable) that purchaser may be required to hold the securities for an indefinite period of time; and (d) understands that purchaser may be subject to the payment of certain taxes with respect to the securities being purchased whether or not purchaser has sold, or otherwise disposed of, such securities or whether purchaser has received any distributions or other amounts from the issuer. 7

8 1/12/2016 rc 815 ILCS 5/4 (T) Exemption, continued: (11) Issuers must obtain evidence (could be state license or ID card) showing purchaser is resident of Illinois, and also of accredited status if accredited; (12) Issuers must keep records of all offers and sales (on or offline) and must provide access to such records to Secretary of State; (13) Issuers are not to be investment companies under Investment Companies Act of 1940 or public companies (subject to reporting under Sections 13 and 15 of federal 1934 Act.) (14) Issuer and persons associated with same and the offering are not to be subject to state or federal disqualification unless made reasonable inquiry and could not discover the disqualification crowdbmding Rules Rules draft still to be submitted for review by Secretary of State to Joint Committee on Administrative Rules; Illinois Register publication to follow r Rules based both on P.A and the October 15, 2015 crowdfunding rules issued by the US. Securities Exchange Commission, (17 CFR part 227). 8

9 1/12/2016 New Crowdfundmg Rules Two sets of rules: o (1) Crowdfunding Issuers o (2) Crowdfunding Portals Crowdfunding Issuers: Proposed 14 III. Adm. Code Section o In general, rule follows 815 ILCS 5/4(T), details per rule text, included in materials o Issuer to file form CF 15 days before general solicitation or first sale and renew annually, with final report 15 days after final sale. Fee $100. 9

10 1/12/2016 Additional Resources 1. My slideshare.net presentation on new federal rules defining crowdfunding for accredited investors under Rule 506(c) available at it/privateofferings-after-the-jobs-act 2. SEC website for small business: nfo/smallbus/gasbsec. ht Ifl 3. Secretary of State Securities Department: riveilli nois.com/depa rtments /secu rities/ 10

11 Joint Committee on Administrative Rules ADMINISTRATIVE CODE TITLE 14: COMMERCE SUBTITLE A: REGULATION OF BUSINESS CHAPTER I: SECRETARY OF STATE PART 130 REGULATIONS UNDER ILLINOIS SECURITIES LAW OF 1953 SECTION CR0WDFUNDING PURSUANT TO SECTION 4.T OF THE ACT Section Crowdfunding Pursuant to Section 4.T of the Act - Issuers a) Duties of the Issuer. For purposes of this section investor shall mean a purchaser or prospective purchaser, and internet portal shall mean a registered internet portal as required pursuant to Section 4.T of the Act and Section of these rules. 1) Filing requirements and forms. A) Notice filing. The issuer shall file a notice on Form CF (Crowdfunding Issuer Form) with the Secretary of State and provide to investors and the relevant internet portal a copy of the Fonn CF not less than 15 days before the earlier of the first sale of securities or the use of any general solicitation with respect to the offering. The Form CF must include the offering statement and all required information and documentation specified on the form. B) Annual Renewal. The notice filed pursuant to this subsection shall be effective for up to 12 months, subject to annual renewal. The annual renewal shall be filed on Form CF within 30 days of the expiration of the original filing, and include a sales report indicating the number and investors in the offering and the number of and value of securities sold. C) Terniination of offering. The issuer shall file Form CF-T with the Secretary of State, and provide a copy to the relevant internet portal, within 15 days of the termination of the offering. Termination shall include those offering that are completed for purposes of this exemption.

12 D) Filing fees. The filing of Form CF, including the filing of a renewal Form CF and an amended Form CF, shall include the payment of the filing fee of$ 100 pursuant to Section 18.1 of the Act. 2) Escrow agreements and accounts. The issuer shall enter into an escrow agreement with a qualified escrowee, providing that, at a minimum: (i) all funds to be received in connection with the proposed offering shall be delivered to, and held by, the qualified escrowee pursuant to the terms of the escrow agreement; and (ii) the issuer shall not have access to the escrow funds, or any portion thereof, until the aggregate funds received by the qualified escrowee in connection with the proposed offering equal or exceed the minimum amount of securities to be sold as established by the issuer. Investors shall receive a return of the entirety of their investment funds if the target offering amount is not raised by the deadline date established in the offering materials. 3) Required Disclosures. In additional to all other material disclosures that are required by law or rules, the issuer must disclose the following to investors: A) Offering Maximum and Minimum Amounts. The issuer shall establish a maximum amount and a minimum amount of securities to be sold and a deadline date for selling the designated minimum amount of securities. This information shall be conspicuously disclosed in any agreement evidencing the investor s subscription agreement to purchase the securities. The minimum amount designated for sale shall be no less than 50% of the maximum amount. B) Cancellation rights. An investor may cancel, without penalty, an investment commitment until 48 hours prior to the deadline identified in the issuer s offering materials. The issuer shall conspicuously disclose in the investor s subscription agreement this right of cancellation. Upon receipt of the notice of cancellation, the intermediary shall direct the refund of investor funds within 5 business days. 4) Early completion of offering. If an issuer reaches the target offering amount prior to the deadline identified in its offering materials, the issuer may close the offering on a date earlier than the deadline identified in its offering materials. 5) Material Changes of the offering. If there is a material change to the terms of the offering or to the information provided by the issuer, the issuer must provide notice of the material changes to the Secretary of State, the relevant internet portal and the investors (communication to investors may occur through the internet portal).

13 6) Return of funds if offering is not completed. If an issuer does not complete an offering, the internet portal must within 5 business days: A) Notify each investor of the cancellation, disclosing the reason for the cancellation and the amount of funds that the investor is expected to receive; B) Direct the refund of investor funds; C) Prevent investors from making investment commitments with respect to that offering on its internet platfonm 7) Investor qualification. A) Each time before accepting any investment commitment (including any additional investment commitment from the same person), an issuer must have a reasonable basis for believing that the investor satisfies the requirements of Section 4.T of the Act and the rules thereunder. B) The issuer may rely on an investor s representations regarding compliance with the investment limitation requirements concerning the investor s annual income, net worth, and the amount of the investor s other investments made pursuant to Section 4.T of the Act, unless the issuer has reason to question the reliability of the representation. The issuer may obtain the required investor affirmations through the internet portal. C) The issuer may establish Illinois residency by relying on: a valid Illinois driver s license or official personal identification card issued by the Illinois Secretary of State; or a current Illinois voter registration; or general property tax records showing the investor owns and occupies property in Illinois as his or her principal residence. b) Disqualifications. No exemption under Section 4.T of the Act and these rules shall be available for a sale of securities if the issuer, any predecessor of the issuer, any affiliated issuer, any director, officer, general partner or managing member of the issuer, any beneficial owner of 20% or more of the issuer s outstanding voting equity securities, calculated on the basis of voting power, any promoter connected with the issuer in any capacity at the time of such sale, any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with such sales of securities, or any general partner, director, officer or managing member of any such solicitor: 1) Is or has been subject to any of the statutory disqualification provisions set forth in the Illinois Securities Act, Section 8E(l); or,

14 2) Has filed a registration statement within the last 5 years which is the subject of a currently effective registration stop order entered by any state securities administrator or the U.S. Securities and Exchange Commission.

15 Joint Committee on AdmInistrative Rules ADMINISTRATIVE CODE TITLE 14: COMMERCE SUBTITLE A: REGULATION OF BUSINESS CHAPTER I: SECRETARY OF STATE PART 130 REGULATIONS UNDER ILLINOIS SECURITIES LAW OF 1953 SECTION CR0 WDFUNDING PURSUANT TO SECTION 4.T OF THE ACT Section Crowdfunding Pursuant to Section 4.T of the Act Internet Portals a) Internet Portals. Internet portals serving as platfornis for crowdfunding activity as described in Section 4.T of the Act must be registered with the Secretary of State. 1) Filing requirements, forns and fees. A) Internet portals shall file Form IP with the Secretary of State in accordance with the instructions on the fonm The registration shall be effective for one year. B) The Form IP, including a renewal application or amended form, shall be accompanied by all relevant documentation required by the fonti and a filing fee of $300 pursuant to Section 18.1 of the Act. C) Annual renewal applications shall be filed within 30 days of the expiration of the one year registration period by filing Form IP. D) Amendments or modifications to Form IP shall be filed within 10 days of any information previously submitted on Form IP becoming inaccurate. E) Withdrawals of registration shall be filed promptly on From IP-W in accordance with the instructions on the form upon ceasing to operate as a funding portal. Withdrawal will be effective on the later of 30 days after receipt by the Secretary of State (after the internet portal is no longer operational), or within such longer period of time as to which the internet portal consents or which the Secretary of State by order may determine as necessary in the public interest or for the protection of investors. If a Secretary of State proceeding is pending pursuant to Section 11 of the Act when the application is filed or a proceeding is instituted within 30 days after the application is filed, withdrawal

16 becomes effective at such time and upon such conditions as the Secretary of State by order determines. The Secretary of State may deny the withdrawal application if the internet portal s registration is revoked or canceled by the Secretary of State. 2) The internet portal shall make and preserve the following records for 5 years, the first 2 years in an easily accessible place: A) All records related to any investor who purchases or attempts to purchase securities through the internet portal; B) All records related to issuers who offer and sell or attempt to offer and sell securities through the internet portal and the control persons of such issuers; C) Records of all communications that occur on or through the internet portal s platform; D) All records required to demonstrate compliance with the Act and the these rules; E) All notices provided to issuers and investors through the platform or otherwise; F) All written agreements (or copies thereof) entered into by the internet portal relating to its business as such; G) Summaries of transactions effected through the internet portal; H) A log reflecting the progress of each issuer offering, including total dollar amounts raised toward meeting the target offering amount; I) Organizational documents and such other documents as are relevant to the business of the portal. The records required pursuant to this section may be prepared and maintained by a third party on behalf of the internet portal. 3) Communication channels. An internet portal must provide on its platform, communication channel(s) by which persons can communicate with one another and with representatives of the issuer about offerings made available on the internet portal s platform, provided: A) The internet portal does not participate in these communications other than to establish guidelines for communication and remove abusive or potentially fraudulent communications;

17 B) The internet portal pen-nits public access to view the discussions made in the communication channels; C) The internet portal restricts posting of comments in the communication channels to those persons who have opened an account with the internet portal on its platform; and D) The internet portal requires that any person posting a comment in the communication channels clearly and prominently disclose with each posting his or her full name and whether he or she is a founder or an employee of an issuer engaging in promotional activities on behalf of the issuer, or is otherwise compensated, whether in the past or prospectively, to promote the issuer s offering. 4) Notice of Investment Commitment. An internet portal must promptly, upon receipt of an investment commitment from an investor, give or send to the investor a notification disclosing: A) the dollar amount of the commitment; B) the price and amount of the securities, if known; C) the name of the issuer; and the date and time by which the investor may cancel the investment commitment. 5) Confirmation of Transaction. An internet portal must, at or before the completion of a transaction in a security in reliance on Section 4.T of the Act, provide to each investor a notification disclosing: A) the date of the transaction; B) the type of security the investor is purchasing; C) the identity, price, and number of securities purchased by the investor; D) the number of securities sold by the issuer in the transaction and the price(s) at which the securities were sold; E) if a debt security, the interest rate and the yield to maturity calculated from the price paid and the maturity date; F) if a callable security, the first date the security can be called by the issuer; and G) the source, form and amount of an remuneration received or to be received by the internet portal in connection with the transaction,

18 including an remuneration received or to be received by the intermediary from persons other than the issuer. b) Payments to third parties. An internet portal may not compensate any person for providing the internet portal with the personally identifiable information of any investor or potential investor in securities offered or sold in reliance on Section 4.T of the Act.