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Tennessee’s new “Invest Tennessee Exemption” to the state’s securities registration requirements went into effect on January 1, 2015. Like other securities exemption laws recently adopted by other states, Tennessee’s exemption allows for the intrastate offerings of certain securities that do not exceed $1 million. The law sets out the rules for issuers to use this exemption as an alternate way to raise capital.

Under the Invest Tennessee Exemption, securities offerings meeting the following requirements will be exempt from state registration:

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In an effort to inform investors about common fraudulent activities involving individual retirement accounts (“IRAs”), the North American Securities Administrators Association (“NASAA”) has issued an Advisory on third-party custodians of self-directed IRAs and other qualified plans. The advisory was issued to describe the roles and responsibilities a third-party custodian of a self-directed IRA has and to hopefully dispel some of the common misconceptions investors have about third-party custodians. In particular, NASAA warns investors that IRA custodians’ duties are limited to report information to the IRS, and such custodians do not provide any assurance that the IRA owner’s investments are protected against loss.

When creating an IRA, an investor must find an IRS-approved custodian for the account. Custodians are typically banks or brokerage firms. Once the account is opened, investors can deposit funds into the account and invest in opportunities available through the custodian. With a self-directed IRA, the investor has full control over what the funds in the account are invested in, unlike mutual funds or other types of savings accounts.
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In a speech given at The New York Times Dealbook Opportunities for Tomorrow Conference in New York at the end of 2014, SEC Chair Mary Jo White detailed an extensive plan to increase the agency’s scrutiny of asset managers. Her speech highlighted many of the important issues currently facing the SEC in regulating the asset management industry and its planned response to those issues.

Chair White began by noting the evolution of the asset management industry and the tools currently utilized to protect investors and their assets. In 1940, when the Investment Advisers Act was first passed, there were a total of $4 billion in assets under management at 51 firms, compared to the now over $63 trillion of assets under management at over 22,000 firms. Chair White also noted that almost half of all U.S. households own mutual funds. In addition to mutual funds, asset managers also increasingly recommend modern, sophisticated products like ETFs and derivatives. Registered funds have significantly increased the size and complexity of derivates used in asset management.
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On February 3, 2015, H.R. 686, a bill creating a registration exemption for M&A Brokers, was introduced in the House of Representatives and referred to the Committee on Financial Services. This new bill is identical to Section 401 of H.R. 37, which included other financial regulations and had passed the House on January 14, 2015. H.R. 686 essentially duplicates the M&A Broker section – Section 401 of H.R. 37. Introducing this M&A Broker proposal as its own bill could signal a possible lack of confidence of behalf of lawmakers that an adequate amount of votes are available to pass H.R. 37 in the Senate and a hope that Section 401 can make it on its own and become law.

As discussed in previous posts, the M&A Broker exemption proposed by Congress in H.R. 37 – and now in H.R. 686 – fails to address the “grey area” of unregistered actors who participate in private placement of securities that are not M&A transactions. These Private Placement Brokers play an important and integral part for smaller businesses trying to raise capital. Having the M&A Broker exemption on its own in H.R. 686, and not with other significant financial regulations, may allow for amendments to be added more easily. Hopefully one of those amendments would be a Private Placement Broker exemption.

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The Broker-Dealer section of the North American Securities Administrators Association (“NASAA”) recently sent out a notice of request for comment on a proposed uniform state model rule (“Model Rule”) that would exempt merger and acquisition brokers (“M&A Brokers”) from state securities registration if certain requirements were met. While NASAA’s proposed Model Rule is similar to the recent SEC No-Action letter concerning M&A Brokers and the exemption for M&A Brokers provided by HR 37, there are some notable differences. Comments on the Model Rule must be submitted to NASAA by February 16, 2015.

First, this post will lay out the three current proposals by SEC staff, Congress, and NASAA to create an M&A Broker registration exemption. Second, a comparison between all three will be made in order to highlight how each body plans to regulate and define the scope of the exemption for M&A Brokers. Each comparison will be broken up into key aspects of each proposal’s efforts to create an exemption for M&A Brokers. Third, this post will emphasize the need to create an exemption, along with M&A Brokers, that will encompass other important unregistered actors: Private Placement Brokers.
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On October 22, 2014, Michigan took a significant step to increase investment crowdfunding opportunities for Michigan businesses by becoming the first state to establish an intrastate market where broker-dealers can sell securities of Michigan-based companies. While “crowdfunding” can have different meanings, including rewards-based fundraising campaigns on sites like Kickstarter and Indiegogo, “investment crowdfunding” generally refers to small businesses seeking investment capital in small amounts from a large number of investors.

The signing of House Bill 5273 by Governor Rick Snyder, along with the state’s preexisting registration exemption for securities issued by Michigan businesses under the Michigan Invests Locally Exemption (“MILE Act”), allows Michigan business to raise capital over the Internet or though general solicitation by selling the exempt securities within a newly-created alternative intrastate market.
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In a settlement that underscores the SEC’s increased scrutiny of crowdfunding sites and whether they are acting as broker-dealers, the SEC agreed to a settlement with Eureeca Capital SPC (“Eureeca”), on November 10, 2014, over charges alleging willful violations of Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act. The settlement involves Eureeca’s failure to register as a broker-dealer and to conform with the exemption from securities registration provided by Rule 506(c). According to the terms of the settlement, Eureeca, while neither admitting nor denying the SEC’s allegations, consented to the cease and desist order and the accompanying sanctions.

Eureeca is a crowdfunding portal organized in the Cayman Islands. The site connects issuers with potential investors looking to invest in businesses in exchange for equity. Eureeca receives a percentage of the funds raised in successful offerings as compensation. During the period of time covered by the settlement agreement, the offerings of securities listed on Eureeca’s website were neither registered with the SEC nor did they meet the registration exemption of Rule 506(c) that allows for the sale of unregistered securities for which general solicitation occurs.
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On December 15, 2014, the North American Securities Administrators Association (“NASAA”) launched an online electronic filing system to be used for issuers filling Form D, Rule 506 offerings with state securities regulators. The purposes of this new electronic filing depository (“EFD”) website, according to NASAA president William Beatty, are to provide an efficient and streamlined process for regulatory filings and to allow for increased transparency for investors.

Issuers seeking an exemption under Rule 506 must meet certain requirements in order to avoid having to register their public or private offerings with the SEC or state regulators. However, those issuers must still file a notice of exempt offering of securities, or “Form D,” with the SEC and state securities regulators. Instead of the longer and more tedious process of registering with securities regulators, Form D requires only limited information about the issuer, the investors, and the securities offered.
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In 2005, an American Bar Association task force published an exhaustively researched report that highlighted a huge “gray market” of unregistered brokerage activity, conducted by people that sometimes refer to themselves as “finders,” that is critical to the development of early stage companies, but operating in technical violation of the Securities Exchange Act of 1934 (“ABA Report”). Other than occasional enforcement actions against bad actors, the SEC did little to address this problem until early 2014, when it issued a No-Action letter which blessed certain restricted activities of merger and acquisition brokers (“M&A Brokers”). The SEC’s approach to other private placement brokers has been to restrict their activities even further. Compare Paul Anka, SEC No-Action Letter (July 24, 1991) (granting legal “finder” status) with Brumberg, Mackey & Wall, PLC., SEC No-Action Letter (May 17, 2010) (restricting “finder” status). Courts have not always agreed with the SEC. See SEC v. Kramer, 778 F.Supp.2d 1320 (M.D. Fla. 2011) (proposing a non-exhaustive six-factor test for registration).

On January 6th, the first day of the 114th Congress’s new session, the House of Representatives considered H.R. 37. This bill proposes again multiple pieces of legislation that passed the House in the previous congress but were not taken up by the Senate. The bill has now been remanded to the House Committee process. H.R. 37 contains eleven separate items which would affect the current financial regulatory landscape. One of the proposed provisions responds to concerns about financial intermediaries such as finders that participate in mergers and acquisitions. This blog post advocates that Congress, while considering legalization of M&A Brokers, should also legalize a limited class of private placement brokers.
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During the January 7th Practising Law Institute conference on Hedge Fund Compliance and Regulatory Challenges, the Director of the SEC Office of Compliance Inspections and Examinations (“OCIE”), Andrew Bowden, previewed some of the new priorities on which the SEC will focus in 2015. Some of the areas of focus include protecting investors, specifically those in or close to retirement, cyber security, and the use of data analytics to identify potential wrongdoers. One of the other priorities discussed was OCIE’s new initiative to use “presence exams” to examine certain investment advisers that have never been examined. Investment advisers who have been registered with the SEC for three or more years will potentially be selected for a presence exam.

Presence exams are less intensive, shorter exams, taking up about two-thirds the time of a regular SEC examination. These exams tend to be more narrow in scope and focus on specific areas of concern that the SEC may have. In October 2012, SEC staff created presence exams for investment advisers who were required to register with the SEC for the first time because of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). These newly required SEC registrants under Dodd-Frank included, for example, hedge fund advisers with more than $150 million in assets under management. Bowden stated that the SEC performed close to 400 of these exams and that OCIE’s goal to examine 25% of the investment advisers required to register with the SEC under Dodd-Frank by 2014 was met.
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