COMMONWEALTH OF VIRGINIA STATE CORPORATION COMMISSION AT RICHMOND, JULY 20, 2015 ORDER ADOPTING AMENDED RULES

Transcription

1 COMMONWEALTH OF VIRGINIA STATE CORPORATION COMMISSION AT RICHMOND, JULY 20, 2015 SI 111 COMMONWEALTH OF VIRGINIA, ex rel. " " P njul 20 P 3b «STATE CORPORATION COMMISSION jf Pr/e: In the mtter of Adopting Revision to the Rules Governing the Virgini Securities Act CASE NO. SEC ORDER ADOPTING AMENDED RULES By Order to Tke Notice ("Order") entered on Mrch 30, 2015,' ll interested persons were ordered to tke notice tht the Stte Corportion Commission ("Commission") would consider the doption of revisions to Chpters 20, 40, 45 nd 80 of Title 21 of the Virgini Administrtive Code. On April 1, 2015, the Commission's Division of Securities nd Retil Frnchising ("Division") miled nd e-miled the Order of the proposed rules to interested persons pursunt to the Virgini Securities Act ("Act"), et seq. of the Code of Virgini. The Order described the proposed revisions nd fforded interested persons n opportunity to file comments nd requests for hering with the Clerk of the Commission on or before My 22, The Order provided tht requests for hering shll stte why hering is necessry nd why the issues cnnot be dequtely ddressed in written comments. The Commission received written comments from Crrie Roth of the Virgini Biotechnology Reserch Prtnership Authority, which supported dopting the proposed rules. Michel Koffler, Esquire, of the lw firm of Sutherlnd Asbill & Brennn LLP, submitted written comments on behlf of their broker-deler clients, which supported the proposed mendments to rule 21 VAC A 10. Doc. Con. Cen.No

2 si The Commission lso received two written comments objecting to certin portions of I>J p proposed new rule 21 VAC relting to the proposed intrstte crowdfunding exemption (0 ("ICE") pssed by the 2015 Virgini Generl Assembly. J. Thoms O'Brien, Jr., Chirmn, Business Lw Council, Business Lw Section of the Virgini Br Assocition ("Business Lw H Section"), submitted written comments on behlf of the Business Lw Section. 2 The Business Lw Section discussed its concerns nd requested chnges regrding two spects of the proposed rules: (1) the requirement for reviewed nd udited finncils for offerings of more thn $100,000 nd $500,000; nd (2) the qurterly reporting requirements for so long s ny shres sold in crowdfunding offering remin outstnding. Kirk T. Schroder, Esquire, of the lw firm of Schroder Fidlow, PLC, submitted written comments nd request for hering. Mr. Schroder's comments sserted tht the proposed rules should: (1) require tht intrstte crowdfunding exempt offerings occur only through registered Virgini funding portls; (2) give the funding portl the necessiy uthority to mnge the crowd for the benefit of investors nd offerors nd to monitor complince; (3) provide the funding portl sfe hrbor from disputes between the investor nd the offeror; nd (4) estblish more pproprite cp of investor offerings t $3 million. By Order dted June 1, 2015, 3 the Commission directed the Division to provide written response to the comments submitted by the Business Lw Section nd Mr. Schroder regrding ICE nd provided the Business Lw Section nd Mr. Schroder n opportunity to reply to the Division's comments. On June 8, 2015, the Division filed its response ("Response"). Among other comments, the Division stted tht the proposed rules provide for the development of funding portls but do ' The Business Lw Section filed its comments out of time on My 27, Doc. Con. Cen.No

3 not mndte their use. In ddition, the Division provided sttisticl informtion from other sttes un W P regrding their crowdfunding rules, including those sttes tht mndte funding portls. 4 The (o W Division noted tht only four of the 39 sttes tht hve dopted crowdfunding rules hve mndted the use of funding portls, nd nine dditionl sttes hve pending rules tht would mndte such portls. 3 The Division lso responded to comments regrding the mximum offering mount suggested by Mr. Schroder nd his request tht the proposl include sfe hrbor for funding portls. 6 The Division recommended tht the Commission not dopt the chnges requested by Mr. Schroder. In ddressing the Business Lw Section's comments, the Division suggested severl chnges to the proposed ICE rules. 7 These chnges include: (1) dopting the Business Lw Section's requested chnges to the proposed rules' requirements concerning finncil sttements; (2) chnging the reporting requirements from qurterly to nnully; nd (3) limiting the time period for this reporting to period of three yers fter n offering closes. With these chnges the Division recommended tht the Commission dopt the proposed rules with the proposed revisions. On June 19, 2015, Mr. Schroder filed reply to the Division's Response ("Reply"). 8 Mr. Schroder submitted dditionl informtion nd rgument supporting his requested chnges to the proposed rules. He concluded tht "[f]unding [pjortls, not individul offerors, crete, enhnce nd enble communities to positively ffect crowdfunding efforts," nd tht "[wjithout such 4 Doc. Con. Cen. No Id t 3. 6 Response t 4. 7 Id. t Doc. Con. Cen. No

4 model, the proposed Virgini ICE rules will provide lower thn expected benefit to potentil P offerors nd investors nd my open unintended consequences from new experimentl <J0 pproch tht, while sounding good in theory, hs no estblished trck record." 9 lso requested tht the Commission provide sfe hrbor for funding portls. 10 Mr. Schroder Finlly, Mr. Schroder contemporneously filed letter with the Commission's Clerk, stting tht "[t]his letter serves to mend my request in letter to you, dted My 21, 2015, for hering on the bove referenced mtter nd insted to request for orl rgument on the mtter," citing Rule 5 VAC of the Commission's Rules of Prctice nd Procedure ("Commission Rules"). 11 The Business Lw Section did not file reply to the Division's response. NOW THE COMMISSION, upon considertion of this mtter, is of the opinion nd finds tht the proposed mendments s recommended by the Division should be dopted. The Commission notes tht Mr. Schroder requests orl rgument s permitted by 5 VAC of the Commission's Rules. Pursunt to this Rule, orl rgument is discretionry, not mndtory. In this instnce, bsed on the considertion of the comments filed in this mtter, we find tht orl rgument is not necessry in order to promulgte the ICE rules herein. The Commission hs provided for initil nd responsive comments to be filed in this mtter, nd this hs given interested persons n opportunity to present ll of their rguments supporting their requests. We find tht the requested orl rgument is neither required s mtter of lw nor is it necessry to consider nd rule on this mtter. 9 Reply t Reply t 7. " Virgini Pilot Ass'n. v. Commonwelth, 145 V. 757, 765 (V. 1926).

5 The Commission hs fully considered Mr. Schroder's requests nd finds tht, t this time, the proposed rules should not mndte the use of funding portls. Rther, we conclude tht it is SJ Jjjjjj P (fl M resonble to llow the use of such portls to remin discretionry for the new crowdfunding business model. The Commission further observes tht only four of 39 sttes tht hve decided this question mndte the use of funding portls, nd only nine dditionl sttes currently hve mndtes pending. Moreover, without ny further empiricl evidence, the potentil cost to issuers of funding portl ws fctor in dopting the rules without mndting such portls. Since the rules re dopted without mndting funding portls, the Commission need not ddress the request for sfe hrbor for sid funding portls. The Commission recognizes tht the initil estblishment of n investor offering cp of $2 million is consistent with the Virgini crowdfunding legisltion s well s with mximum offering cps estblished by other sttes with crowdfunding legisltion. 12 For the foregoing resons, we find it resonble to dopt the proposed mended rules s recommended by the Division. Accordingly, IT IS ORDERED THAT: (1) The proposed rules re ttched hereto, mde prt hereof, nd hereby re ADOPTED effective July 31, (2) AN ATTESTED COPY hereof, together with copy of the dopted rules, shll be sent by the Division in cre of Ronld W. Thoms, Director, who forthwith shll give further notice of the dopted rules by miling or e-miling copy of this Order to ll interested persons. 12 See, e.g., Response t 4.

6 si (3) The Commission's Division of Informtion Resources forthwith shll cuse copy of P this Order, together with the dopted rules, to be forwrded to the Virgini Registrr of CO Regultions for pproprite publiction in the Virgini Register of Regultions. (4) This cse is dismissed from the Commission's docket, nd the ppers herein shll be plced in the file for ended cuses.

7 p Pge 1 of 54 yn < sj STATE CORPORATION COMMISSION, DIVISION OF SECURITIES AND RETAIL jg P FRANCHISING 03 M Securities Rule Chnges VAC Limited Cndin broker-deler registrtion. A. A broker-deler tht is resident in Cnd nd hs no office or other physicl presence in the Commonwelth of Virgini my, provided the broker-deler is registered under this section, effect trnsctions in securities: 1. With or for person from Cnd who is temporrily residing in or visiting the Commonwelth with whom the Cndin broker-deler hd bon fide business-client reltionship before the person entered this Commonwelth; or 2. With or for person present in this Commonwelth whose trnsctions re in Cndin self-directed tx dvntged retirement ccount of which the person is the holder or contributor. B. Appliction for registrtion s broker-deler under this section shll be filed with the commission t its Division of Securities nd Retil Frnchising or such other entity designted by the commission on nd in full complince with forms prescribed by the commission nd shll include ll informtion required by such forms. C. An ppliction for registrtion s broker-deler under this section shll be deemed incomplete for purposes of pplying for registrtion unless the following executed forms, fee nd informtion re submitted to the commission: 1. An ppliction in the form required by the jurisdiction in which the broker-deler mintins its principl plce of business.

8 Pge 2 of 54 m 2. Sttutory fee pyble to the Tresurer of Virgini in the mount of $200 United Sttes currency pursunt to F of the Act. 3. Evidence tht the pplicnt is registered s broker-deler in the jurisdiction from which it is effecting the trnsctions. 4. Evidence tht the pplicnt is member of self-regultory orgniztion or stock exchnge in Cnd. 5. Any other informtion the commission my require. D. A broker-deler registered under this section shll: 1. Mintin its provincil or territoril registrtion nd its membership in self-regultory orgniztion or stock exchnge in good stnding; 2. Provide the commission upon request with its books nd records relting to its business in the Commonwelth of Virgini s broker-deler; 3. Immeditely notify the commission of ny criminl ction tken ginst it T or of ny finding or snction imposed on the broker-deler s result of ny self-regultory or regultory ction involving frud, theft, deceit, misrepresenttion or similr conduct; 4. Disclose to its clients in the Commonwelth of Virgini tht the broker-deler nd its gents re not subject to the full regultory requirements of the Act. E. A broker-deler's registrtion under this section, nd ny renewl thereof, shll expire nnully t midnight on the 31st dy of December unless renewed in ccordnce with subsection F of this section. F. To renew its registrtion, broker-deler registered under this section shll file with the commission t its Division of Securities nd Retil Frnchising division the most recent renewl ppliction, if ny, filed in the jurisdiction in which the broker-deler mintins its principle plce

9 Pge 3 of 54 of business, or if no such renewl ppliction is required, the most recent ppliction filed pursunt to subdivision C 1 of this section long with the sttutory fee in the mount of $200 United Sttes currency pursunt to F of the Act. H w sj Jj*jj KJ G. A Cndin broker-deler registered under this section nd cting in ccordnce with the limittions set out in this section is exempt from ll other rules pplicble to broker-delers except 21VAC the nti-frud provisions of the Act nd the requirements set out in this section. 21VAC Limited Cndin broker-deler gent registrtion. A. An gent of Cndin broker-deler who hs no office or other physicl presence in the Commonwelth of Virgini my, provided the broker-deler gent is registered under this section, effect trnsctions in securities s permitted for broker-deler registered under 21VAC B. Appliction for registrtion s broker-deler gent under this section shll be filed with the commission t its Division of Securities nd Retil Frnchising or such other entity designted by the commission on nd in full complince with forms prescribed by the commission nd shll include ll informtion required by such forms. C. An ppliction for registrtion s broker-deler gent under this section shll be deemed incomplete for purposes of pplying for registrtion unless the following executed forms, fee nd informtion re submitted to the commission: 1. An ppliction in the form required by the jurisdiction in which the broker-deler mintins its principl plce of business. 2. Sttutory fee pyble to the Tresurer of Virgini in the mount of $30 United Sttes currency pursunt to G of the Act.

10 Pge 4 of Evidence tht the pplicnt is registered s broker-deler gent in the jurisdiction from which it is effecting the trnsctions. 4. Any other informtion the commission my require. tfi '-J to D. A broker-deler gent registered under this section shll: 1. Mintin his provincil or territoril registrtion in good stnding; 2. Immeditely notify the commission of ny criminl ction tken ginst him T or of ny finding or snction imposed on him s result of ny self-regultory or regultory ction involving frud, theft, deceit, misrepresenttion or similr conduct. E. A broker-deler gent's registrtion under this section, nd ny renewl thereof, shll expire nnully t midnight on the 31st dy of December unless renewed in ccordnce with subsection F of this section. F. To renew the registrtions of its gents, broker-deler registered under this section shll file with the commission t its Division of Securities nd Retil Frnchising division the most recent renewl ppliction, if ny, filed in the jurisdiction in which the broker-deler mintins its principl plce of business, or if no such renewl ppliction is required, the most recent ppliction filed pursunt to subdivision C 1 of this section long with the sttutory fee in the mount of $30 United Sttes currency pursunt to G of the Act. G. A Cndin broker-deler gent registered under this section nd cting in ccordnce with the limittions set out in this section is exempt from ll other rules pplicble to brokerdeler gent except 21VAC the nti-frud provisions of the Act nd the reguirements set out in this section.

11 Pge 5 of 54 p 21VAC Prohibited business conduct. p A. Every broker-deler is required to observe high stndrds of commercil honor nd just W nd equitble principles of trde in the conduct of its business. The cts nd prctices described below re considered contrry to such stndrds nd my constitute grounds for denil, suspension, or revoction of registrtion or such other ction uthorized by the Act. No brokerdeler who is registered or required to be registered shll: 1. Engge in pttern of unresonble nd unjustifible delys in the delivery of securities purchsed by ny of its customers or in the pyment upon request of free credit blnces reflecting completed trnsctions of ny of its customers, or tke ny ction tht directly or indirectly interferes with customer's bility to trnsfer his ccount; provided tht the ccount is not subject to ny lien for moneys owed by the customer or other bon fide clim, including, but not limited to, seeking judicil order or decree tht would br or restrict the submission, delivery or cceptnce of written request from customer to trnsfer his ccount; 2. Induce trding in customer's ccount which is excessive in size or frequency in view of the finncil resources nd chrcter of the ccount; 3. Recommend to customer the purchse, sle or exchnge of ny security without resonble grounds to believe tht the recommendtion is suitble for the customer. The resonble bsis to recommend ny such trnsction to customer shll be bsed upon the risks ssocited with prticulr security, nd the informtion obtined through the diligence nd inquiry of the broker-deler to scertin the customer's investment profile. A customer's investment profile includes, but is not limited to, the customer's investment objectives, finncil sitution, risk tolernce nd needs, tx sttus, ge, other investments, investment experience, investment time horizon, liquidity needs, nd ny

12 Pge 6 of 54 other relevnt informtion known by the broker-deler or of which the broker-deler is otherwise mde wre in connection with such recommendtion; ui W CI 4. Execute trnsction on behlf of customer without uthority to do so or, when securities re held in customer's ccount, fil to execute sell trnsction involving those securities s instructed by customer, without resonble cuse; 5. Exercise ny discretionry power in effecting trnsction for customer's ccount without first obtining written discretionry uthority from the customer, unless the discretionry power reltes solely to the time or price for the execution of orders; 6. Execute ny trnsction in mrgin ccount without securing from the customer properly executed written mrgin greement promptly fter the initil trnsction in the ccount, or fil, prior to or t the opening of mrgin ccount, to disclose to noninstitutionl customer the opertion of mrgin ccount nd the risks ssocited with trding on mrgin t lest s comprehensively s required by FINRA Rule 2264; 7. Fil to segregte customers' free securities or securities held in sfekeeping; 8. Hypothecte customer's securities without hving lien thereon unless the brokerdeler secures from the customer properly executed written consent promptly fter the initil trnsction, except s permitted by Rules of the SEC; 9. Enter into trnsction with or for customer t price not resonbly relted to the current mrket price of security or receiving n unresonble commission or profit; 10. Fil to furnish to customer purchsing securities in n offering, no lter thn the dte of confirmtion of the trnsction, either finl prospectus or preliminry prospectus nd n dditionl document, which together include ll informtion set forth in the finl prospectus, either by the following mens: (i) hrd copy prospectus delivery or (ii) electronic prospectus deliveryr

13 Pge 7 of 54 When broker-deler delivers prospectus electroniclly, it must first llow its clients to yi ) M Ui ffirmtively opt-in to the progrm. The cknowledgment of the opt-in my be by ny written or electronic mens, but the broker-deler is required to cknowledge the opt-in. For ny client tht chooses not to opt in to electronio delivery, the broker-deler shll continue to deliver to the client hrd copy of the prospectus; 11. Introduce customer trnsctions on "fully disclosed" bsis to nother broker-deler tht is not exempt under B 6 of the Act; 12.. Chrge unresonble nd inequitble fees for services performed, including miscellneous services such s collection of moneys due for principl, dividends or interest, exchnge or trnsfer of securities, pprisls, sfekeeping, or custody of securities nd other services relted to its securities business; b. Chrge fee bsed on the ctivity, vlue or contents (or lck thereof) of customer ccount unless written disclosure pertining to the fee, which shll include informtion bout the mount of the fee, how imposition of the fee cn be voided nd ny consequence of lte pyment or nonpyment of the fee, ws provided no lter thn the dte the ccount ws estblished or, with respect to n existing ccount, t lest 60 dys prior to the effective dte of the fee; 13. Offer to buy from or sell to ny person ny security t stted price unless the broker-deler is prepred to purchse or sell t the price nd under such conditions s re stted t the time of the offer to buy or sell; 14. Represent tht security is being offered to customer "t mrket" or price relevnt to the mrket price unless the broker-deler knows or hs resonble grounds to believe tht mrket for the security exists other thn tht mde, creted or controlled by the broker-deler, or by ny person for whom he is cting or with whom he is

14 Pge 8 of 54 ssocited in the distribution, or ny person controlled by, controlling or under common *** p um control with the broker-deler; M 15. Effect ny trnsction in, or induce the purchse or sle of, ny security by mens of ny mnipultive, deceptive or frudulent device, prctice, pln, progrm, design or contrivnce, which my include but not be limited to:. Effecting ny trnsction in security which involves no chnge in the beneficil ownership thereof; b. Entering n order or orders for the purchse or sle of ny security with the knowledge tht n order or orders of substntilly the sme size, t substntilly the sme time nd substntilly the sme price, for the sle of ny security, hs been or will be entered by or for the sme or different prties for the purpose of creting flse or misleding ppernce of ctive trding in the security or flse or misleding ppernce with respect to the mrket for the security; however, nothing in this subdivision shll prohibit broker-deler from entering bon fide gency cross trnsctions for its customers; or c. Effecting, lone or with one or more other persons, series of trnsctions in ny security creting ctul or pprent ctive trding in the security or rising or depressing the price of the security, for the purpose of inducing the purchse or sle of the security by others; 16. Gurntee customer ginst loss in ny securities ccount of the customer crried by the broker-deler or in ny securities trnsction effected by the broker-deler with or for the customer; 17. Publish or circulte, or cuse to be published or circulted, ny notice, circulr, dvertisement, newspper rticle, investment service, or communiction of ny kind

15 Pge 9 of 54 which purports to report ny trnsction s purchse or sle of ny security unless the broker-deler believes tht the trnsction ws bon fide purchse or sle of the ui sj W security; or which purports to quote the bid price or sked price for ny security, unless the broker-deler believes tht the quottion represents bon fide bid for, or offer of, the security; 18. Use ny dvertising or sles presenttion in such fshion s to be deceptive or misleding. An exmple of such prctice would be distribution of ny nonfctul dt, mteril or presenttion bsed on conjecture, unfounded or unrelistic clims or ssertions in ny brochure, flyer, or disply by words, pictures, grphs or otherwise designed to supplement, detrct from, supersede or defet the purpose or effect of ny prospectus or disclosure; 19. Fil to mke resonbly vilble upon request to ny person expressing n interest in solicited trnsction in security, not listed on registered securities exchnge or quoted on n utomted quottion system operted by ntionl securities ssocition pproved by regultion of the commission, blnce sheet of the issuer s of dte within 18 months of the offer or sle of the issuer's securities nd profit nd loss sttement for either the fiscl yer preceding tht dte or the most recent yer of opertions, the nmes of the issuer's proprietor, prtners or officers, the nture of the enterprises of the issuer nd ny vilble informtion resonbly necessry for evluting the desirbility or lck of desirbility of investing in the securities of n issuer. All trnsctions in securities described in this subdivision shll comply with the provisions of of the Act; 20. Fil to disclose tht the broker-deler is controlled by, controlling, ffilited with or under common control with the issuer of ny security before entering into ny contrct with or for customer for the purchse or sle of the security, the existence of control to

16 yi SA W KJ Pge 10 of 54 the customer, nd if disclosure is not mde in writing, it shll be supplemented by the giving or sending of written disclosure t or before the completion of the trnsction; 21. Fil to mke bon fide public offering of ll of the securities llotted to brokerdeler for distribution, whether cquired s n underwriter, selling group member, or from member prticipting in the distribution s n underwriter or selling group member; 22. Fil or refuse to furnish customer, upon resonble request, informtion to which the customer is entitled, or to respond to forml written request or complint; 23. Fil to clerly nd seprtely disclose to its customer, prior to ny security trnsction, providing investment dvice for compenstion or ny mterilly relted trnsction tht the customer's funds or securities will be in the custody of n investment dvisor or contrcted custodin, in mnner tht does not provide Securities Investor Protection Corportion protection, or equivlent third-prty coverge over the customer's ssets; 24. Mrket broker-deler services tht re ssocited with finncil institutions in mnner tht is misleding or confusing to customers s to the nture of securities products or risks; 25. In trnsctions subject to brekpoints, fil to:. Utilize dvntgeous brekpoints without resonble bsis for their exclusion; b. Determine informtion tht should be recorded on the books nd records of member or its clering firm, which is necessry to determine the vilbility nd ppropriteness of brekpoint opportunities; or

17 Pge 11 of 54 c. Inquire whether the customer hs positions or trnsctions wy from the member W iq tht should be considered in connection with the pending trnsction T nd pprise the customer of the brekpoint opportunities; 26. Use certifiction or professionl designtion in connection with the offer, sle, or purchse of securities tht indictes or implies tht the user hs specil certifiction or trining in dvising or servicing senior citizens or retirees in such wy s to misled ny person.. The use of such certifiction or professionl designtion includes, but is not limited to, the following: (1) Use of certifiction or designtion by person who hs not ctully erned or is otherwise ineligible to use such certifiction or designtion; (2) Use of nonexistent or self-conferred certifiction or professionl designtion; (3) Use of certifiction or professionl designtion tht indictes or implies level of occuptionl qulifictions obtined through eduction, trining, or experience tht the person using the certifiction or professionl designtion does not hve; or (4) Use of certifiction or professionl designtion tht ws obtined from designting or certifying orgniztion tht: () Is primrily engged in the business of instruction in sles or mrketing; (b) Does not hve resonble stndrds or procedures for ssuring the competency of its designees or certificnts; (c) Does not hve resonble stndrds or procedures for monitoring nd disciplining its designees or certificnts for improper or unethicl conduct; or

18 Pge 12 of 54 (d) Does not hve resonble continuing eduction requirements for its designees or certificnts in order to mintin the designtion or certificte. H1 un CI P KJ b. There is rebuttble presumption tht designting or certifying orgniztion is not disqulified solely for purposes of subdivision 26 (4) of this subsection, when the orgniztion hs been ccredited by: (1) The Americn Ntionl Stndrds Institute; (2) The Institute for Credentiling Excellence (formerly the Ntionl Commission for Certifying Agencies); or (3) An orgniztion tht is on the United Sttes Deprtment of Eduction's list entitled "Accrediting Agencies Recognized for Title IV Purposes" nd the designtion or credentil issued therefrom does not primrily pply to sles or mrketing. c. In determining whether combintion of words (or n cronym stnding for combintion of words) constitutes certifiction or professionl designtion indicting or implying tht person hs specil certifiction or trining in dvising or servicing senior citizens or retirees, fctors to be considered shll include: (1) Use of one or more words such s "senior," "retirement," "elder," or like words, combined with one or more words such s "certified," "chrtered," "dviser," "specilist," "consultnt," "plnner," or like words, in the nme of the certifiction or professionl designtion; nd (2) The mnner in which those words re combined. d. For purposes of this section, certifiction or professionl designtion does not include job title within n orgniztion tht is licensed or registered by stte or federl finncil services regultory gency when tht job title:

19 Pge 13 of 54 w (1) Indictes seniority within the orgniztion; or O H (2) Specifies n individul's re of speciliztion within the orgniztion. <Xj For purposes of this subdivision d, "finncil services regultory gency" includes, but is not limited to, n gency tht regultes broker-delers, investment dvisers, or investment compnies s defined under 3 ()(1) of the Investment Compny Act of 1940 (15 USC 80-3()(1)). p w e. Nothing in this regultion shll limit the commission's uthority to enforce existing provisions of lw; 27. Represent tht securities will be listed or tht ppliction for listing will be mde on securities exchnge or the Ntionl Assocition of Securities Delers Automted Quottions (NASDAQ) system or other quottion system without resonble bsis in fct for the representtion; 28. Flsify or lter so s to mke flse or misleding ny record or document or ny informtion provided to the commission; 29. Negotite, fcilitte, or otherwise execute trnsction on behlf of n investor involving securities issued by third prty pursunt to clim for exemption under subsection B of of the Act unless the broker-deler intends to report the securities owned nd the vlue of such securities on t lest qurterly bsis to the investor; 30. Offer or sell securities pursunt to clim for exemption under subsection B of of the Act without hving first verified the informtion relting to the securities offered or sold, which shll include, but not be limited to, scertining the risks ssocited with investing in the respective security;

20 Pge 14 of Allow ny person to represent or utilize its nme s trding pltform without Jjj conspicuously disclosing the nme of the registered broker-deler in effecting or ttempting to effect purchses nd sles of securities; or 32. Engge in ny conduct tht constitutes dishonest or unethicl prctice including, but not limited to, forgery, embezzlement, nondisclosure, incomplete disclosure or mteril omissions or untrue sttements of mteril fcts, mnipultive or deceptive prctices, or frudulent course of business. p in H M B. Every gent is required to observe high stndrds of commercil honor nd just nd equitble principles of trde in the conduct of his business. The cts nd prctices described below re considered contrry to such stndrds nd my constitute grounds for denil, suspension, or revoction of registrtion or such other ction uthorized by the Act. No gent who is registered or required to be registered shll: 1. Engge in the prctice of lending or borrowing money or securities from customer, or cting s custodin for money, securities or n executed stock power of customer; 2. Effect ny securities trnsction not recorded on the regulr books or records of the broker-deler which the gent represents, unless the trnsction is uthorized in writing by the broker-deler prior to execution of the trnsction; 3. Estblish or mintin n ccount contining fictitious informtion in order to execute trnsction which would otherwise be unlwful or prohibited; 4. Shre directly or indirectly in profits or losses in the ccount of ny customer without the written uthoriztion of the customer nd the broker-deler which the gent represents; 5. Divide or otherwise split the gent's commissions, profits or other compenstion from the purchse or sle of securities in this stte with ny person not lso registered s n

21 Pge 15 of 54 gent for the sme broker-deler, or for broker-deler under direct or indirect common control; yi CI SAJ <& 6. Engge in conduct specified in subdivision A 2, 3, 4, 5, 6, 10, 15, 16, 17, 18, 23, 24, 25, 26, 28, 30, 31, or 32 of this section; 7. Fil to comply with the continuing eduction requirements under 21VAC C; or 8. Hold oneself out s representing ny person other thn the broker-deler with whom the gent is registered nd, in the cse of n gent whose norml plce of business is not on the premises of the broker-deler, filing to conspicuously disclose the nme of the broker-deler for whom the gent is registered when representing the deler in effecting or ttempting to effect the purchses or sles of securities. C. No person shll publish, give publicity to, or circulte ny notice, circulr, dvertisement, newspper rticle, letter, investment service or communiction which, though not purporting to offer security for sle, describes the security, for considertion received or to be received, directly or indirectly, from n issuer, underwriter, or deler, without fully disclosing the receipt, whether pst or prospective, of such considertion nd the mount thereof. D. The purpose of this subsection is to identify prctices in the securities business tht re generlly ssocited with schemes to mnipulte nd to identify prohibited business conduct of broker-delers or sles gents who re registered or required to be registered. 1. Entering into trnsction with customer in ny security t n unresonble price or t price not resonbly relted to the current mrket price of the security or receiving n unresonble commission or profit.

22 Pge 16 of Contrdicting or negting the importnce of ny informtion contined in prospectus foj > or other offering mterils with intent to deceive or misled or using ny dvertising or sles presenttion in deceptive or misleding mnner. 3. In connection with the offer, sle, or purchse of security, flsely leding customer to believe tht the broker-deler or gent is in possession of mteril, nonpublic informtion tht would ffect the vlue of the security. hi 4. In connection with the solicittion of sle or purchse of security, engging in pttern or prctice of mking contrdictory recommendtions to different investors of similr investment objective for some to sell nd others to purchse the sme security, t or bout the sme time, when not justified by the prticulr circumstnces of ech investor. 5. Filing to mke bon fide public offering of ll the securities llotted to brokerdeler for distribution by, mong other things, (i) trnsferring securities to customer, nother broker-deler, or fictitious ccount with the understnding tht those securities will be returned to the broker-deler or its nominees or (ii) prking or withholding securities. 6. Although nothing in this subsection precludes ppliction of the generl ntifrud ntifrud provisions ginst nyone for prctices similr in nture to the prctices discussed below, the following subdivisions through f specificlly pply only in connection with the solicittion of purchse or sle of over the counter (OTC) unlisted non-nasdaq equity securities:. Filing to dvise the customer, both t the time of solicittion nd on the confirmtion, of ny nd ll compenstion relted to specific securities trnsction to be pid to the gent including commissions, sles chrges, or concessions.

23 Pge 17 of 54 M b. In connection with principl trnsction, filing to disclose, both t the time of W solicittion nd on the confirmtion, short inventory position in the firm's ccount of more thn 3.0% of the issued nd outstnding shres of tht clss of securities of the issuer; however, subdivision 6 of this subsection shll pply only if the firm is mrket mker t the time of the solicittion. c. Conducting sles contests in prticulr security. M d. After solicited purchse by customer, filing or refusing, in connection with principl trnsction, to promptly execute sell orders. e. Soliciting secondry mrket trnsction when there hs not been bon fide distribution in the primry mrket. f. Engging in pttern of compensting n gent in different mounts for effecting sles nd purchses in the sme security. 7. Effecting ny trnsction in, or inducing the purchse or sle of, ny security by mens of ny mnipultive, deceptive, or other frudulent device or contrivnce including but not limited to the use of boiler room tctics or use of fictitious or nominee ccounts. 8. Filing to comply with ny prospectus delivery requirements promulgted under federl lw or the Act. 9. In connection with the solicittion of sle or purchse of n OTC unlisted non- NASDAQ security, filing to promptly provide the most current prospectus or the most recently filed periodic report filed under 13 of the Securities Exchnge Act when requested to do so by customer. 10. Mrking ny order tickets or confirmtions s unsolicited when in fct the trnsction ws solicited.

24 Pge 18 of For ny month in which ctivity hs occurred in customer's ccount, but in no event W O less thn every three months, filing to provide ech customer with sttement of ccount with respect to ll OTC non-nasdaq equity securities in the ccount, contining vlue for ech such security bsed on the closing mrket bid on dte certin; however, this subdivision shll pply only if the firm hs been mrket mker in the security t ny time during the month in which the monthly or qurterly sttement is issued. 12. Filing to comply with ny pplicble provision of the FINRA Rules or ny pplicble fir prctice, privcy, or ethicl stndrd promulgted by the SEC or by self-regultory orgniztion pproved by the SEC. 13. In connection with the solicittion of purchse or sle of designted security:. Filing to disclose to the customer the bid nd sk price, t which the brokerdeler effects trnsctions with individul, retil customers, of the designted security s well s its spred in both percentge nd dollr mounts t the time of solicittion nd on the trde confirmtion documents; or b. Filing to include with the confirmtion, the notice disclosure contined under 21VAC , except the following shll be exempt from this requirement: (1) Trnsctions in which the price of the designted security is $5.00 or more, exclusive of costs or chrges; however, if the designted security is unit composed of one or more securities, the unit price divided by the number of components of the unit other thn wrrnts, options, rights, or similr securities must be $5.00 or more, nd ny component of the unit tht is wrrnt, option, right, or similr securities, or convertible security must hve n exercise price or conversion price of $5.00 or more.

25 (2) Trnsctions tht re not recommended by the broker-deler or gent. Pge 19 of 54 gm < si (3) Trnsctions by broker-delen- (i) whose commissions, commission W M equivlents, nd mrk-ups from trnsctions in designted securities during ech of the preceding three months, nd during 11 or more of the preceding 12 months, did not exceed 5.0% of its totl commissions, commission-equivlents, nd mrk-ups from trnsctions in securities during those months; nd (ii) who hs not executed principl trnsctions in connection with the solicittion to purchse the designted security tht is the subject of the trnsction in the preceding 12 months. (4) Any trnsction or trnsctions tht, upon prior written request or upon its own motion, the commission conditionlly or unconditionlly exempts s not encompssed within the purposes of this section. c. For purposes of this section, the term "designted security" mens ny equity security other thn security: (1) Registered, or pproved for registrtion upon notice of issunce, on ntionl securities exchnge nd mkes trnsction reports vilble pursunt to 17 CFR 11 A3-1 under the Securities Exchnge Act of 1934; (2) Authorized, or pproved for uthoriztion upon notice of issunce, for quottion in the NASDAQ system; (3) Issued by n investment compny registered under the Investment Compny Act of 1940; (4) Tht is put option or cll option issued by The Options Clering Corportion; or (5) Whose issuer hs net tngible ssets in excess of $4 million s demonstrted by finncil sttements dted within no less thn 15 months tht the broker-deler hs

26 Pge 20 of 54 u-i reviewed nd hs resonble bsis to believe re true nd complete in reltion to the dte of the trnsction with the person, nd t*j () In the event the issuer is other thn foreign privte issuer, re the most recent finncil sttements for the issuer tht hve been udited nd reported on by n independent public ccountnt in ccordnce with the provisions of 17 CFR under the Securities Exchnge Act of 1934; or (b) In the event the issuer is foreign privte issuer, re the most recent finncil sttements for the issuer tht hve been filed with the SEC; furnished to the SEC pursunt to 17 CFR g3-2(b) under the Securities Exchnge Act of 1934; or prepred in ccordnce with generlly ccepted ccounting principles in the country of incorportion, udited in complince with the requirements of tht jurisdiction, nd reported on by n ccountnt duly registered nd in good stnding in ccordnce with the regultions of tht jurisdiction. 21VAC Intrstte crowdfunding exemption. A. In ccordnce with B 21 of the Act, n offer or sle of security by n issuer is exempt from the securities, broker-deler nd gent registrtion requirements of the Act if the offer or sle meets ll of the following requirements: 1. The issuer of the security is business entity:. Formed under the lws of the Commonwelth; b. Authorized to do business in the Commonwelth; nd c. Tht hs its principl plce of business in the Commonwelth.

27 Pge 21 of 54 yn SI 2. The offering is sold only to residents of the Commonwelth in complince with the US O requirements for the federl exemption for intrstte offerings under 3()(11) of the 10 Securities Act of USC 77c()(11), nd SEC Rule CFR The securities offered nd sold pursunt to this exemption re eguity securities of the issuer. This exemption is not vilble to debt offerings. 4. The sum of ll csh nd other considertion to be received for ll sles of the securities in relince on this exemption does not exceed $2 million, less the ggregte mount received for ll sles of securities by the issuer within 12 months before the first offer or sle mde in relince upon this exemption, nd if the offering is:. [$100,000 $500,0001 or less, if the issuer hs finncil sttements prepred the previous yer tht hve been certified by the principl executive officer of the issuer to be true nd complete in ll mteril respects; b. More thn r$4 QQQ $500,0001 but less thn r$500,000 $1.000,0001, if the issuer hs undergone finncil review of the finncil sttements of its most recently completed fiscl yer, conducted by n independent certified public ccountnt in ccordnce with generlly ccepted ccounting principles; or c. [$500,000 $1,000,0001 or more, if the issuer hs undergone n udit of the finncil sttements of its most recently completed fiscl yer, conducted by n independent certified public ccountnt in ccordnce with generlly ccepted ccounting principles. 5. The issuer hs not ccepted more thn $10,000 from ny single purchser unless the purchser is n ccredited investor s defined by Rule 501 of SEC Regultion D, 17 CFR

28 Pge 22 of At lest 20 dys before n offer of securities is mde in relince on this exemption or W the use of ny publicly vilble Internet website in connection with n offering of securities in relince on this exemption, the issuer files with the commission in writing or in electronic form, ll of the following:. A notice of clim of exemption from registrtion on Form ICE specifying tht the issuer intends to conduct n offering in relince on this exemption, ccompnied by nonrefundble filing fee of $250 pyble to the Tresurer of Virgini. b. A copy of the disclosure sttement or Form ICE to be provided to prospective investors in connection with the offering. The disclosure sttement or Form ICE shll contin ll of the following: (1) A description of the issuer, including type of entity, the ddress nd telephone number of its principl office, its formtion history, nd its business pln; w H 10 (2) A description of the intended use of the offering proceeds, including ny mounts to be pid, s compenstion or otherwise, to ny owner, executive officer, director, mnging member, or other person occupying similr sttus or performing similr functions on behlf of the issuer; (3) The identity of ech person tht owns more thn 10% of the ownership interests of ny clss of securities of the issuer nd the mount of sid securities held by such person; (4) The identity of the executive officers, directors, or mnging members of the issuer nd ny other individuls who occupy similr sttus or perform similr functions in the nme of nd on behlf of the issuer, including their titles nd their prior business experience; (5) The terms nd conditions of the securities being offered including:

29 () The type nd mounts of ny outstnding securities of the issuer; (b) The minimum nd mximum mount of securities being offered, if ny; Pge 23 of 54 p y-j Q iuj P CO W (c) Either the percentge ownership of the issuer represented by the offered securities or the vlution of the issuer implied by the price of the offered securities; (d) The price per shre, unit, or interest of the securities being offered; (e) Any restrictions on trnsfer of the securities being offered; nd (f) A disclosure of ny nticipted future issunce of securities tht might dilute the vlue of the securities being offered; (6) The identity of ny person tht the issuer hs or intends to retin to ssist the issuer in conducting the offer nd sle of the securities, including the owner of ny websites, if known, but excluding ny person cting solely s n ccountnt or ttorney nd ny employees whose primry job responsibilities involve the operting business of the issuer rther thn ssisting the issuer in rising cpitl; (7) For ech person identified s reguired in subdivision 6 b (6) of this subsection, description of the considertion being pid to the person for such ssistnce; (8) A description of ny litigtion or legl proceedings involving the issuer or ny executive officer, director, or mnging member or other person occupying similr sttus or performing similr functions on behlf of the issuer; (9) The issuer's finncil sttements for the three most recent fiscl yers or for s much time s the issuer hs been in existence, if less thn three yers; (10) The nme nd ddress, including the uniform resource loctor, of ech Internet website tht will be used by the issuer to offer or sell securities under n exemption under this section; nd

30 Pge 24 of 54 H m *J (11) Any dditionl informtion mteril to the offering, including, if pproprite, W <3 LSI discussion of significnt risk fctors tht mke the offering specultive or risky. This discussion shll be concise nd orgnized logiclly nd my not be limited to risks tht could pply to ny issuer or ny offering. c. An escrow greement with bnk or other depository institution locted in this Commonwelth, in which the purchser funds will be deposited. At minimum the escrow greement shll provide tht ll offering proceeds will be relesed to the issuer only when the ggregte cpitl rised from ll purchsers is egul to or greter thn the minimum trget offering mount specified in the disclosure sttement s necessry to implement the business pln nd ll purchsers will receive return of their subscription funds if tht trget offering mount is not rised by the time stted in the disclosure sttement. The depository institution my contrct with the issuer to collect resonble fees for its escrow services regrdless of whether the trget offering mount is reched; however such fees shll not be deducted from purchser funds if the trget offering mount is not rised by the time stted in the disclosure sttement. The issuer shll disclose in its disclosure sttement or Form ICE whether ny interest erned on escrowed purchser funds will be pid to purchsers on pro rt bsis if the minimum trget mount, s described bove, is not rised. 7. The issuer is not, either before or s result of the offering:. A compny tht is engged or proposes to engge in the business of investing, reinvesting, owning, holding or trding in securities, including n investment compny s defined by 15 USC 80-3, or hedge fund, commodity pool, or similr investment vehicle;

31 Pge 25 of 54 b. Subject to the reporting requirements of 13 or 15(d) of the Securities Exchnge w 0 K- wi <D Act of 1934, 15 USC 78m nd 78o(d); M c. A compny tht hs not yet defined its business opertions, hs no business pln, hs no stted investment gol for the funds being rised, or tht plns to engge in merger with or cquisition of n unspecified business entity or entities, or without n lloction of proceeds to sufficiently identifible properties or objectives; or d. A compny tht is engged in or proposes to engge in petroleum explortion or production, mining, or other extrctive industries. 8. The issuer informs ech prospective purchser tht the securities re not registered under federl or stte securities lws nd tht the securities re subject to limittions on trnsfer or resle nd displys the following legend conspicuously on the cover pge of the disclosure sttement: THESE SECURITIES ARE BEING SOLD IN RELIANCE ON AN EXEMPTION TO THE FEDERAL SECURITIES REGISTRATION REQUIREMENTS UNDER SECTION 3()(11) OF THE SECURITIES ACT OF 1933 AND UNDER SECTION OF THE VIRGINIA SECURITIES ACT. THESE SECURITIES CAN ONLY BE SOLD TO RESIDENTS OF VIRGINIA AND ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AS CONTAINED IN SUBSECTIONS (e) AND (f) OF SEC RULE 147, 17 CFR INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME AND THAT THEY MAY LOSE ALL OF THE INVESTMENT AND CAN AFFORD THE LOSS OF THE INVESTMENT.

32 Pge 26 of 54 m IN MAKING AN INVESTMENT DECISION, INVESTORS SHOULD RELY ON THEIR W OWN EXAMINATION OF THE ISSUER AND THE TERMS REVEALED IN THESE CO 1 0 OFFERING DOCUMENTS, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE AUTHORITY OR REGULATORY COMMISSION NOR HAVE THESE ENTITIES CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 9. If the offer nd sle of securities under this section is mde through the Internet, ll of the following reguirements re met:. Any person cting s the Internet website opertor shll be n issuer, registered broker-deler, or funding portl tht is in complince with ll commission, SEC, nd FINRA reguirements, including, if it is funding portl, mking ny reguired notice filings with the commission; b. Internet website opertors shll comply with ll commission, SEC, nd FINRA requirements pplicble to intrstte offerings through the Internet; c. Internet website opertors shll mintin records of ll offers nd sles of securities effected through its Internet website for five yers from the close of the offering; nd d. The issuer nd the Internet website opertor shll keep nd mintin records of the offers nd sles of securities mde through the Internet website for five yers from the close of the offering. The issuer nd the Internet website opertor shll promptly provide redy ccess to the records to the commission on reguest. The