Form D Review Faith L. Anderson NASAA Corporate Finance Training Ft. Lauderdale, FL July 9, 2011
Overview • Basics of Rule 506 • Preemption [and preservation] of state law • Background checks • Broker-dealer/representative registration • Investment adviser registration • Other issues • Q&A
Basics of Rule 506 • Prohibition on general solicitation • Limitation on number of non-accredited purchasers: ≤35 • Sophistication of investors: • Any non-accredited investor must have “such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.”
Rule 506, cont’d • Non-accredited investors must be provided: • Information required in a registration statement; and • Financial statements • Up to $2,000,000: Audited balance sheet dated w/in 120 days and unaudited statements of income, cash flows, and changes in stockholders’ equity for the last two fiscal years • Up to $7,500,000: Full set of audited statements for last two fiscal years • Over $7,500,000: Audited statements as would be required in a registration statement for the offering
Rule 506, cont’d • Restrictions on transferability • Notice to prospective investors • Form D filings • Initial • Corrections/updates and annual filings • Insignificant deviation • “Bad actor” disqualification rules proposed
Preemption of State Law • Preemption of state laws: • Requiring registration or qualification of covered securities • Imposing requirements on offering documents relating to covered securities • Imposing conditions based on merits of offering or issuer of covered securities
Preservation of State Law • Anti-fraud authority • States “retain jurisdiction under the laws of such State to investigate and bring enforcement actions with respect to fraud or deceit, or unlawful conduct by a broker or dealer, in connection with securities or securities transactions.” Section 18(c)(1).
Preservation of State Law, cont’d • Preservation of filing requirements • “Nothing…prohibits the…State from requiring the filing of any document filed with the Commission pursuant to this title, together with annual or periodic reports of the value of securities sold or offered to be sold to persons located in the State (if such sales data is not included in documents filed with the Commission), solely for notice purposes and the assessment of any fee, together with a consent to service of process and any required fee.” Section 18(c)(2)(A).
Preservation of State Law, cont’d • Preservation of fees • “[F]iling or registration fees with respect to securities or securities transactions shall continue to be collected in amounts determined pursuant to State law.” Section 18(c)(2)(B).
Preservation of State Law, cont’d • On the same schedule • State filings “shall be reported on the same schedule as would have been applicable” prior to the enactment of NSMIA. Section 18(c)(2)(B)(ii). • Preservation of state enforcement authority • “Nothing…shall prohibit the…State from suspending the offer or sale of securities within such State as a result of the failure to submit any filing or fee required under law and permitted under this section.” Section 18(c)(3).
Background Checks • Who? • Issuer and previous names (Item 1) • Executive officers, directors, promoters (Item 3) • Signer (Signature and submission section) • Where? • CRD/IARD • Internal enforcement database
Background Checks, cont’d • Follow-up with filer regarding disciplinary problems: • Selling in your state? • How supervised? • Disclosure in offering materials? • Possible satisfactory responses: • Removed from offering • Not selling in your state • Supervisory procedures in place
Broker-dealer/Representative Registration • Related persons (Item 3) • Sales Compensation (Item 12)
Investment Adviser Registration • Advisers to pooled investment vehicles may be required to register as an investment adviser. • Where to look: • Issuer name • Name of related persons • Industry group (investing, pooled investment fund) • Aggregate NAV • Indefinite offering amount
Investment Adviser Registration, cont’d • Common responses re: registration of adviser to fund: • Private fund adviser exemption • Repealed by Dodd-Frank • New exemption pursuant to § 408 for private fund advisers with AUM of less than $150 million • National de minimis exemption • “Client” = Fund • Not affected by Dodd-Frank
I believe the Securities Division is operating under the mistaken assumption that the Fund, the General Partner, and / or I am an “investment adviser.” Your search of records in the Investment Adviser Registration Depository yielded no results because the Fund, its manager and/or related persons and entities are not investment advisers and do not hold themselves out to be investment advisers as that term is defined in section 202(a)(11) of the federal Investment Advisers Act of 1940 and in RCW 21.20.005(6). The Fund issues securities via private offerings and its General Partner, Bernett Capital Management, LLC invests the monies obtained from the sale of the securities. The Fund is an issuer of securities; it is not a broker-dealer and therefore it does not have to register as a broker-dealer or as an investment adviser with Washington State.
Other issues • Clarification of response • Attempts at non-answers • References to NSMIA • General solicitation • Internet search • If issues arise, state may request offering documents.
Q&A • Contact info: • Direct line: 360-725-7825 • E-mail: firstname.lastname@example.org