Exemptions Used by Small Business Issuers
Businesses that raise money are called “issuers” because they issue securities to their investors. Regardless of the entity form (e.g. partnership or corporation), all capital raising is by “issuers.” Like federal law, Washington State requires that the securities being “issued” be either “registered” or “exempt.” Since registration is expensive and time-consuming, issuers first look to see if there is an applicable statutory exemption from registration. What follows is a general description of exemptions which are potentially available to issuers in Washington State. Experienced legal advice is necessary to determine if one of these exemptions fits your facts and circumstances.
Isolated Transactions – Issuer Exemption for up to 3 sales of an outstanding security during the prior 24 months by or on behalf of the issuer. There is no filing requirement. The issuer is not requi
red to register as a broker-dealer. Commissions may be paid to licensed salespersons or broker-dealers. Registration as a salesperson or broker-dealer is not required if no commission is paid. Washington informally allows finders fees if the investor is accredited. RCW 21.20.320(1); WAC 460-44A-050(1)(d); Interpretive Statement 9
Non-public Offering Exemption – Permits sales not involving a public offering consistent with Section 4(2) of the federal Securities Act of 1933. There is no filing requirement. The offering must qualify for exemption from federal registration pursuant to Section 4(2) of the federal Securities Act of 1933 and Securities and Exchange Commission Securities Act Release No. 4552 The issuer is not required to register as a broker-dealer. Commissions may be paid to salespersons or broker-dealers. Registration as a salesperson or broker-dealer is not required if no commission is paid. Washington informally allows finders fees if the investor is accredited. RCW 21.20.320(1) WAC 460-44A-050(2) Federal Rules: Section 4(2) Release 33-4552
Sales of whole loans secured by real estate – This exemption applies to any transaction in a bond or other evidence of indebtedness secured by real estate if the entire mortgage, deed of trust, or agreement, together with all the bonds is offered and sold as a unit There is no filing requirement. This exemption is not available if the transaction involves: (a) a partial interest in one or more bonds, (b) one of multiple bonds sold to more than one purchaser as part of a single plan of financing, or (c) a security including an investment contract other than the bond. The issuer is not required to register as a broker-dealer. Commissions may be paid to licensed salespersons or broker-dealers. Registration as a salesperson or broker-dealer is not required if no commission is paid. Washington informally allows finders fees if the investor is accredited. RCW 21.20.320(5) WAC 460-44A-075
Sales to financial institutions – Washington law provides an exemption for sales to financial institutions, broker-dealers, or institutional buyers whether the purchaser is acting for itself or in some fiduciary capacity. Financial institutions include banks, savings institutions, trust companies, insurance companies, investment companies as defined in the Investment Company Act of 1940, and pensions or profit-sharing trusts. The issuer is not required to register as a broker-dealer. Commissions may be paid to licensed salespersons or broker-dealers. Registration as a salesperson or broker-dealer is not required. Washington informally allows finders fees if the investor is accredited. RCW 21.20.320(8) Interpretive Statement
Rule 504 Small Offering Exemption (SOE) – This exemption allows offerings of up to $1 million made in reliance on federal Rule 504 of Regulation D or Rule 147 Issuers are required to file a notice at least 10 business days prior to the first sale or delivery of signed subscription agreement from resident of WA. If relying on federal Rule 504, file the following: Form D; Form U-2; and the$50 filing fee. If relying on federal Rule 147, file the following: Notice; Form U-2; and – $50 filing fee. No general solicitation is permitted. Sales limited to 20 non-accredited investors from Washington and unlimited accredited investors. Issuer and related parties cannot be subject to any of the disqualification provisions set forth in WAC 460-44A-505(2)(d). Securities certificate must state restrictions on resale and transferability in a legend, and indicate the securities have not been registered. If sales are limited to accredited investors, broker-dealer registration not required. The issuer is not required to register as a broker-dealer. No commissions may be paid. WAC 460-44A-504 Also: WAC 460-44A-500 through 505 and WAC 460-44A-508 Federal Rules: Regulation D; Rule 147
Rule 505 Uniform Limited Offering Exemption (ULOE) – This exemption allows offerings up to $5 million made in reliance on federal Rule 505 of Regulation D. Form D must be filed with the Department of Financial Institutions within 15 days of first sale or delivery of signed subscription agreement from resident of Washington. Form D; – Form U-2; and – $300 filing fee. No general solicitation is allowed. Sales are limited to 35 non-accredited investors and unlimited accredited investors. Issuer and related parties cannot be subject to any of the disqualification provisions set forth in WAC 460-44A-505(2)(d). Securities certificate must state restrictions on resale and transferability in a legend, and indicate the securities have not been registered. If sales are limited to accredited investors, broker-dealer registration not required. If commissions are to be paid for soliciting non-accredited investors, recipients must be licensed as broker-dealer salespersons. RCW 21.20.320(17) WAC 460-44A-505 Also: WAC 460-44A-500 through 504 and WAC 460-44A-508 Federal Rules: Regulation D
Rule 506 of Regulation D – States are pre-empted from regulating this exemption but can apply state anti-securities fraud laws and investigative powers. Washington informally allows finders fees if the investor is accredited.
Sales to accredited investors pursuant to public solicitation Model Accredited Investor Exemption (MAIE) – This exemption provides for offerings limited to accredited investors. Issuer must be relying upon an exemption from federal registration pursuant to Section 3(b) of the Securities Act of 1933 which provides for public solicitation. To be filed within 15 days of first sale or delivery of signed subscription agreement from resident of Washington: – MAIE form; Form U-2; and the $300 filing fee. The only corresponding federal exemption, that does not require an extensive federal filing, is Rule 504 of Regulation D, which is capped at $1 million. Therefore, this exemption is also effectively capped at $1 million. The issuer must reasonably believe that all purchasers are purchasing for investment purposes only, not for resale. Issuer and related parties cannot be subject to any of the disqualification provisions set forth in WAC 460-44A-300(5)(a). The issuer is not required to register as a broker-dealer. Commissions may be paid to licensed salespersons or broker-dealers. Registration as a salesperson or broker-dealer is not required. Washington informally allows finders fees if the investor is accredited. RCW 21.20.320(17) WAC 460-44A-300 WAC 460-44A-501(1)
Preorganization Certificates Exemption – This exemption allows up to 10 sales of preorganization certificates if no commissions are paid and no payment is made by the subscribers. There are no filing requirements This exemption is available to issuers incorporating in certain states that require a minimum number of subscribers to “incorporate.” It is not available to Washington corporations because Washington does not require a minimum number of subscribers. The issuer is not required to register as a broker-dealer. No commissions may be paid. Registration as a salesperson or broker-dealer is not required. RCW 21.20.320(10)
Existing security holders – This exemption allows any transactions pursuant to an offer to existing security holders of the issuer There are no filing requirements unless a commission will be paid, in which case the issuer must file a notice specifying the terms of the offer at least 5 business days prior to any sale. The sale may move forward after five business days if the Director does not disallow the exemption. Existing security holders include persons who at the time of the transaction are holders of convertible securities, nontransferable warrants, or transferable warrants exercisable within not more than 90 days of their issuance. The issuer is not required to register as a broker-dealer. If a notice is filed first, commissions may be paid to licensed salespersons or broker-dealers. Registration as a salesperson or broker-dealer is not required. RCW 21.20.320(11) Interpretive Statement 12 Interpretive Statement 13; Interpretive Statement 14
Stock Dividends – This exemption provides for the issuance of any stock dividend by a corporation. No filing is required. The corporation distributing the stock does not necessarily have to be the issuer of the stock. Nothing of value may be given by the stockholders in consideration for the stock dividend. Stockholders can elect to receive the dividend in cash or stock. The issuer is not required to register as a broker-dealer. Since no payment may be made in connection with a stock dividend, no commission may be paid. RCW 21.20.320(13)
Mergers/ Reorganizations – This exemption provides for any transaction incident to a right of conversion or a statutory or judicially approved reclassification, recapitalization, reorganization, quasi reorganization, stock split, reverse stock split, merger, consolidation, or sale of assets. There are no filing requirements The transactions must be conducted pursuant to the statutory provisions in the state in which the issuer is incorporated or pursuant to judicial approval. The issuer is not required to register as a broker-dealer. Commissions may be paid to licensed salespersons or broker-dealers. Registration as a salesperson or broker-dealer is not required. RCW 21.20.320(14)
Transactions by cooperative associations – This exemption allows transactions by a mutual or cooperative association that involves a non-transferable instrument or interest that qualifies its holder to be a member or is issued in connection the holder’s membership There are no filing requirements if the offering does not involve public solicitation or if the association is an employee cooperative and identifies itself as an employee cooperative in advertising or public solicitation. Otherwise, for transactions which involve public solicitation, the issuer must file a Cooperative/Mutual Association Notification of Claim of Exemption specifying the terms of the offer at least 10 business days prior to any solicitation. The issuer may begin soliciting investors after 10 business days if the Director does not disallow the exemption. The transaction must involve an instrument or interest that is nontransferable except in the case of death, operation of law, and in other limited circumstances. The instrument or interest must either: (A) qualify its holder to be a member or patron of the association; (B) represent a contribution of capital to the association by a person who is or intends to become a member or patron; (C) represent a patronage dividend or other patronage allocation; or (D) represent the terms or conditions by which a member or patron purchases, sells, or markets products, commodities, or services from, to, or through the association. The issuer is not required to register as a broker-dealer. Commissions may be paid to licensed salespersons or broker-dealers. Registration as a salesperson or broker-dealer is not required. RCW 21.20.320(16)
Word of warning: Unless you are an experienced professional, it is difficult to interpret Washington State securities law exemptions correctly.