RIA Compliance Blog

The Georgia Securities Commissioner’s office recently held a fairness hearing pursuant to a request by two merging local banks seeking to facilitate their merger by forgoing the need to register newly issued securities at both the state and federal levels. The hearing, which is Georgia’s second in the last four years, was held on July 26, 2017. A copy of the Commissioner’s Order of Approval is available on the Georgia Secretary of State’s web site.

The fairness hearing process is a unique statutorily-codified transactional registration exemption which exists in a number of states—mostly those states having enacted some form of the model Uniform Securities Act of 2002. While not widely used historically, the fairness hearing process generally provides an exemption from registering securities at the state level for certain mergers and acquisitions (“M&A”) transactions where the state securities regulator passes on the “fairness” of the terms of the merger after conducting an evidentiary administrative hearing. What makes the fairness hearing process especially appealing is that the federal Securities Act of 1933 contains a sister provision at Section 3(a)(10), which provides a federal registration exemption for securities issued in certain M&A transactions where “the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions” by any state or federal governmental authority “expressly authorized by law to grant such approval.” This effectively means that a successful fairness proceeding conducted at the state level not only entitles the applicant to a state “Blue-Sky” registration exemption—but also a federal registration exemption as well.

In Georgia, the fairness hearing exemption is codified at Section 10-5-11(9) of the Georgia Uniform Securities Act of 2008, which exempts M&A transactions where the “fairness of the terms and conditions have been approved by the Commissioner after a hearing.” The Georgia Securities Commissioner’s office has promulgated administrative rules setting forth the roadmap for making an application pursuant to Section 10-5-11(9) as well as the conduct of the actual hearing. These rules, which were implemented in mid-2014, require, among other things, that the transaction have a significant nexus to the state of Georgia (residency of securities holders, place of business of the applicants, etc.), that the applicants submit a detailed application package containing specific transaction documentation, and that the applicants pay a filing fee and a processing fee and undertake to reimburse the Commissioner’s office for its out-of-pocket costs.

In his first public speech as the newly-appointed head of the SEC, Chairman Jay Clayton delivered an outline of the “guiding principles” that he will look to in guiding his leadership of that agency going forward. Clayton delivered his remarks on July 12^th to the Economic Club of New York in New York City. The full text of Clayton’s speech may be found on the SEC’s website.

The primary takeaway from Clayton’s speech is that under his tenure, capital formation issues will likely take a higher profile, and, in turn, the concerns of businesses seeking ways to raise capital will likely be given a heavier weight of consideration than in the past.

In what was generally a bullish speech for the advancement of capital formation, Clayton first and foremost reiterated the SEC’s three-part mission to: (1) protect investors, (2) maintain fair, orderly, and efficient markets, and (3) facilitate capital formation. However, Clayton specifically noted that “each tenet of that mission is critical,” stating that “if we stray from our mission, or emphasize one of the canons without being mindful of the others, investors, companies (large and small), the U.S. capital markets, and ultimately the economy will suffer.”

Approximately 35 states have created exemptions in their securities acts or rules in order to allow businesses seeking relatively small amounts of capital to raise funds locally without undergoing an expensive and complicated registration process. Offerings under these exemptions – typically called intrastate “crowdfunding” exemptions – have usually required compliance with the federal intrastate offering exemption under either Section 3(a)(11) of the 1933 Securities Act, or SEC Rule 147, which allows issuers to avoid the burdens of federal registration as well.

A key element of most of these newly-adopted state provisions has been to allow issuers to use general solicitation to seek investors. However, the federal exemption, together with restrictive historical SEC staff guidance, effectively operated to prohibit internet advertising, and restrict other types of solicitation. The federal intrastate exemption prohibited out-of-state offers of securities, even when those offers were deemed such solely because of their being visible to non-home state residents on the internet. The federal rules also prohibited an issuer formed in another state from availing itself of the intrastate exemption in its “home” state for all other purposes. Other constraints dealing with the issuer’s business activity (such as determining the percentage of its revenue derived from the home state) sometimes complicated the determination about whether an issuer would qualify for the federal, and therefore the state, exemption.

These restrictions, which had not been significantly changed in many years, led to widespread criticism that changing business and legal practices, not to mention the rise of the internet as a marketing tool, had made the intrastate exemption largely obsolete.