AB350: Bill Text

Analysis by the Legislative Reference Bureau

Under the Wisconsin Uniform Securities Law (WUSL), a person may not offer or sell any security in this state unless the security is registered with the Division of Securities in the Department of Financial Institutions (division), the security or transaction is exempt from registration, or the security is a federal covered security. Certain notice filing requirements may apply to federal covered securities. A "security" is defined broadly under the WUSL and includes stocks, notes, bonds, investment contracts, limited partnership interests, and certain other financial interests. This bill creates an exemption from registration for certain securities, revises requirements under current law regarding certain exempt transactions, and exempts additional transactions from registration.

Security exemption. Under current law, certain securities are exempt from registration with the division, including a security issued by certain banks or other depository institutions, if the security represents an interest in or direct obligation of the bank or other depository institution or if the security is guaranteed by the bank or other depository institution. This bill also exempts a security issued by a bank or savings and loan holding company, as defined under federal law, if the security represents an interest in or direct obligation of the holding company or if the security is guaranteed by the holding company. In addition, to qualify for the exemption, the holding company must have no significant assets other than securities issued by banks or other depository institutions that are exempt from registration under current law.

Exempt transactions under current law. Under current law, certain securities transactions are exempt from registration with the division. Among these exempt transactions is a sale or offer to sell to an accredited investor, as defined under federal law. For purposes of this registration exemption, "accredited investor" includes, among others, banks or other financial institutions; federally registered broker-dealers; insurance companies; investment companies; private business development companies; certain persons having designated positions with the securities issuer; certain trusts with assets of more than $5,000,000; and entities in which all of the equity owners are accredited investors. For purposes of this registration exemption, an "accredited investor" also includes any person who comes within any of the following categories, or whom the securities issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person: 1) any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; or 2) any natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1,000,000. For purposes of calculating net worth, the person's primary residence is generally not included as an asset and indebtedness secured by the residence is generally not included as a liability, but there are exceptions.

For purposes of securities registration exemptions, this bill creates a state law definition of "accredited investor" and changes the criteria for being an accredited investor as described in items 1) and 2), above. The bill lowers the individual income threshold in item 1), above, from $200,000 to $100,000 and lowers the joint income threshold in item 1), above, from $300,000 to $150,000. The bill also lowers the net worth threshold in item 2), above, from $1,000,000 to $750,000 and specifies that the net worth calculation includes the person's primary residence as both an asset and a liability.

Under current law, another securities transaction that is exempt from registration with the division is a sale or offer to sell to an institutional investor, as defined under state law. Current law defines "institutional investor" to include, among others, banks and other financial institutions; insurance companies; investment companies; federally registered broker-dealers; private business development companies meeting certain standards; certain qualified institutional buyers, as defined under federal law; and other entities of institutional character with assets of more than $10,000,000.

This bill modifies this definition of "institutional investor," lowering the asset threshold for other entities of institutional character from $10,000,000 to $2,500,000. This change affects this registration exemption and also provisions in which: a broker-dealer is exempt from registration with the division if it engages in only certain transactions, including transactions with institutional investors; and, a federal covered investment adviser without a place of business in this state is exempt from notice filing with the division if it has only certain types of clients in this state, including institutional investors.

Another securities transaction that is exempt from registration with the division under current law is a transaction pursuant to an offer directed to not more than 25 persons in this state, not including accredited investors and institutional investors, during a 12-month period if certain requirements are met, including that general solicitation or advertising is not made. The division may modify this registration exemption, including increasing or decreasing the number of offerees permitted. This bill modifies this registration exemption to increase the number of offerees permitted from 25 persons to 50 persons.

Under current law, another securities transaction that is exempt from registration with the division is an offer or sale by a securities issuer having its principal office in this state of its securities if the aggregate number of persons holding all of the issuer's securities, after the securities to be issued are sold, does not exceed 25, not including accredited investors and institutional investors, and if certain other requirements are met, including that no advertising is published. This bill modifies this registration exemption to increase the aggregate number of persons who may hold the issuer's securities from 25 persons to 50 persons.

Additional exempt transactions. This bill creates two additional transaction exemptions to securities registration. Under the first exemption, an offer or sale of a security by an issuer is exempt from registration if the offer or sale is conducted in accordance with specified requirements, including the following: 1) the issuer of the security is a business entity organized under the laws of this state and authorized to do business in this state; 2) the transaction meets exemption requirements under federal law and rules of the federal Securities and Exchange Commission (SEC) for intrastate securities offerings; 3) with certain exceptions, the amount of money to be received for sales of the security in reliance on the exemption does not exceed either $2,000,000 or $1,000,000, adjusted every five years for inflation, depending on whether the issuer has or has not, respectively, undergone a financial audit and made it available; 4) the issuer does not accept more than $5,000 from any single purchaser unless the purchaser is an accredited investor under state law; 5) the offering is made exclusively through an Internet site and the Internet site is registered with the division; 6) the issuer pays a $50 fee and files notice of the offering with the division at least ten days before commencing the offering and the notice contains specified information, including a copy of a disclosure statement to be provided to prospective investors and an escrow agreement with a financial institution chartered in this state in which the investor funds will be deposited; 7) the issuer is not an investment company or an SEC reporting company; 8) the issuer informs all prospective purchasers that the securities have not been registered and are subject to limitations on resale, includes a specified legend conspicuously on the cover page of the disclosure document, requires each purchaser to sign a written or electronic acknowledgment containing certain information, and obtains from each purchaser evidence that the purchaser is a resident of this state; 9) all payments for purchase of securities are held by the issuer in the financial institution identified in the above escrow agreement; 10) a copy of the disclosure document provided to the division is given to each prospective investor at the time of the offer; and 11) the issuer has not made an offer or sale of a different class or series of security under either of these two additional transaction exemptions during the immediately preceding 12-month period. The bill also requires the securities issuer to file a quarterly report with the division, and make it available to investors, for so long as securities issued under the exemption are outstanding.

In addition, all Internet sites through which the securities are offered are required to be registered with the division. Registration is accomplished by the Internet site operator paying a $100 fee and filing a statement with the division that contains specified information. Also, the bill exempts the Internet site operator from registration with the division as a broker-dealer if all of the following apply with respect to the Internet site and its operator: 1) it does not offer investment advice or recommendations; 2) it does not solicit purchases, sales, or offers to buy securities; 3) it does not compensate persons for the solicitation or based on the sale of securities; 4) it is not compensated based on the amount of securities sold, and it does not hold, manage, possess, or otherwise handle investor funds or securities; 5) the fee it charges for securities offerings satisfies specified requirements; 6) it complies with specified advertising restrictions; and 7) it does not engage in other activities prohibited by the division. The Internet site operator and the securities issuer must also maintain records of all offers and sales of securities effected through the Internet site and provide the division with access to these records on request.

The second transaction exemption to securities registration created by the bill is similar to the first. Under the second exemption, an offer or sale of a security by an issuer is exempt from registration if the offer or sale is conducted in accordance with specified requirements, including the following: 1) the issuer of the security is a business entity organized under the laws of this state and authorized to do business in this state; 2) the transaction meets exemption requirements under federal law and rules of the SEC for intrastate securities offerings; 3) with certain exceptions, the amount of money to be received for sales of the security in reliance on the exemption does not exceed either $2,000,000 or $1,000,000, adjusted every five years for inflation, depending on whether the issuer has or has not, respectively, undergone a financial audit and made it available; 4) the issuer does not accept more than $5,000 from any single purchaser unless the purchaser is an accredited investor under state law; 5) no commission or other remuneration is paid for any person's participation in the offer or sale of securities unless the person is registered as a broker-dealer or securities agent; 6) unless permitted by the division, no general solicitation or general advertising is made for the securities; 7) all funds received from investors are deposited into a financial institution chartered in this state, and all the funds are used in accordance with representations made to investors; 8) before the 100th sale of the security, the issuer pays a $50 fee and provides a notice of the offering to the division containing specified information; 9) the issuer is not an investment company or an SEC reporting company; 10) the issuer informs all purchasers that the securities have not been registered and makes disclosures required by SEC rule, including disclosures related to limitations on resale of the securities; and 11) the issuer has not made an offer or sale of a different class or series of security under either of these two additional transaction exemptions during the immediately preceding 12-month period.

For further information see the state fiscal estimate, which will be printed as an appendix to this bill.

The people of the state of Wisconsin, represented in senate and assembly, do enact as follows:

AB350,1 Section 1. 227.01 (13) (zz) of the statutes is created to read:

AB350,5,3 227.01 (13) (zz) Adjusts, under s. 551.206, the amounts specified in s. 551.202 (26) (c) 1. a. and 1. b. and (27) (c) 1. a. and 1. b.

AB350,2 Section 2. 551.102 (1g) of the statutes is created to read:

AB350,5,10 551.102 (1g) "Accredited investor," except as provided in ss. 551.401 (2) (cm), 551.403 (2) (a) 2m., and 551.405 (2) (a) 2m., has the meaning given in Rule 501 (a) (1), (2), (3), (4), (7), and (8) adopted under the Securities Act of 1933 (17 CFR 230.501 (a) (1), (2), (3), (4), (7), and (8)) and also means any person who comes within any of the following categories, or whom the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:

AB350,5,12 (a) 1. Subject to subd. 2., any natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $750,000.

AB350,6,2 2. For purposes of calculating net worth under subd. 1., the person's primary residence shall be included as an asset and indebtedness secured by the primary residence shall be included as a liability. This subdivision does not apply to any calculation of a person's net worth made in connection with a purchase of securities in accordance with a right to purchase the securities if the right was held by the person on July 20, 2010, the person qualified as an accredited investor under 17 CFR 230.501 (a) (5) on the basis of net worth at the time the person acquired the right, and the person held securities of the same issuer, other than this right, on July 20, 2010.

AB350,6,6 (b) Any natural person who had an individual income in excess of $100,000 in each of the two most recent years or joint income with that person's spouse in excess of $150,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.

AB350,3 Section 3. 551.102 (11) (o) of the statutes is amended to read:

AB350,6,10 551.102 (11) (o) Any other person, other than an individual, of institutional character with total assets in excess of $10,000,000 $2,500,000 not organized for the specific purpose of evading this chapter.

AB350,4 Section 4. 551.201 (3) (d) of the statutes is created to read:

AB350,6,15 551.201 (3) (d) A bank holding company, as defined in 12 USC 1841 (a), or savings and loan holding company, as defined in 12 USC 1467a (a) (1) (D), with no significant assets other than securities of one or more entities specified in par. (a), (b), or (c).

AB350,5 Section 5. 551.202 (13) (am) (intro.) of the statutes is amended to read:

AB350,6,24 551.202 (13) (am) (intro.) An accredited investor, as defined in Rule 501 (a) adopted under the Securities Act of 1933 (17 CFR 230.501 (a)), provided that prior to the sale in this state to an accredited investor described in Rule 501 (a) (5) or (6) adopted under the Securities Act of 1933 s. 551.102 (1g) (a) or (b), the seller files a consent to service of process with the administrator in the form required under s. 551.611. Failure to file the consent as required is a cause for administrative action by the administrator under s. 551.604 but does not result in the loss of this exemption. This consent is not required to be filed if any of the following apply:

AB350,6 Section 6. 551.202 (14) (a) (intro.) of the statutes is amended to read:

AB350,7,5 551.202 (14) (a) (intro.) Subject to par. (b), any transaction pursuant to an offer directed by the offeror to not more than 25 50 persons in this state excluding those persons designated in sub. (13) but including persons exempt under sub. (24), during any period of 12 consecutive months whether or not the offeror or any of the offerees is then present in this state if all of the following apply:

AB350,7 Section 7. 551.202 (24) of the statutes is amended to read:

AB350,7,13 551.202 (24) Any offer or sale of its securities by an issuer, having its principal office in this state, if the aggregate number of persons holding directly or indirectly all of the issuer's securities, after the securities to be issued are sold, does not exceed 25 50, exclusive of persons under sub. (13), if no commission or other remuneration is paid or given directly or indirectly for soliciting any person in this state, except to broker-dealers and agents licensed in this state, and if no advertising is published unless it has been permitted by the division of securities.

AB350,8 Section 8. 551.202 (26) of the statutes is created to read:

AB350,7,16 551.202 (26) An offer or sale of a security by an issuer if the offer or sale is conducted in accordance with all of the following requirements:

AB350,7,18 (a) The issuer of the security is a business entity organized under the laws of this state and authorized to do business in this state.

AB350,7,21 (b) The transaction meets the requirements of the federal exemption for intrastate offerings in section 3 (a) (11) of the Securities Act of 1933 (15 USC 77c (a) (11)) and Rule 147 adopted under the Securities Act of 1933 (17 CFR 230.147).

AB350,7,25 (c) 1. Except as provided in subd. 2., the sum of all cash and other consideration to be received for all sales of the security in reliance on the exemption under this subsection, excluding sales to any accredited investor or institutional investor, does not exceed the following amount:

AB350,8,7 a. If the issuer has not undergone and made available to each prospective investor and the administrator the documentation resulting from a financial audit of its most recently completed fiscal year which complies with generally accepted accounting principles, $1,000,000 subject to adjustment under s. 551.206, less the aggregate amount received for all sales of securities by the issuer within the 12 months before the first offer or sale made in reliance on the exemption under this subsection.

AB350,8,13 b. If the issuer has undergone and made available to each prospective investor and the administrator the documentation resulting from a financial audit of its most recently completed fiscal year which complies with generally accepted accounting principles, $2,000,000 subject to adjustment under s. 551.206, less the aggregate amount received for all sales of securities by the issuer within the 12 months before the first offer or sale made in reliance on the exemption under this subsection.

AB350,8,18 2. An offer or sale to an officer, director, partner, trustee, or individual occupying similar status or performing similar functions with respect to the issuer or to a person owning 10 percent or more of the outstanding shares of any class or classes of securities of the issuer does not count toward the monetary limitation in subd. 1. a. and 1. b.

AB350,8,20 (d) The issuer does not accept more than $5,000 from any single purchaser unless the purchaser is an accredited investor.

AB350,8,23 (e) The offering under this subsection is made exclusively through one or more Internet sites and each Internet site is registered with the division under s. 551.205 (1) (b).

AB350,9,3 (f) Not less than 10 days prior to the commencement of an offering of securities in reliance on the exemption under this subsection, the issuer files a notice with the administrator, in writing or in electronic form as prescribed by the administrator, which the administrator shall make available as an electronic document on the department of financial institutions Internet site, containing all of the following:

AB350,9,6 1. A notice of claim of exemption from registration, specifying that the issuer will be conducting an offering in reliance on the exemption under this subsection, accompanied by the filing fee specified in s. 551.614 (1m).

AB350,9,8 2. A copy of the disclosure statement to be provided to prospective investors in connection with the offering, containing all of the following:

AB350,9,14 a. A description of the company, its type of entity, the address and telephone number of its principal office, its history, its business plan, and the intended use of the offering proceeds, including any amounts to be paid, as compensation or otherwise, to any owner, executive officer, director, managing member, or other person occupying a similar status or performing similar functions on behalf of the issuer.

AB350,9,16 b. The identity of all persons owning more than 10 percent of the ownership interests of any class of securities of the company.

AB350,9,19 c. The identity of the executive officers, directors, managing members, and other persons occupying a similar status or performing similar functions in the name of and on behalf of the issuer, including their titles and their prior experience.

AB350,9,24 d. The terms and conditions of the securities being offered and of any outstanding securities of the company, the minimum and maximum amount of securities being offered, if any, and either the percentage ownership of the company represented by the offered securities or the valuation of the company implied by the price of the offered securities.

AB350,10,5 e. The identity of any person who has been or will be retained by the issuer to assist the issuer in conducting the offering and sale of the securities, including any Internet site operator but excluding persons acting solely as accountants or attorneys and employees whose primary job responsibilities involve the operating business of the issuer rather than assisting the issuer in raising capital.

AB350,10,7 f. For each person identified as required under subd. 2. e., a description of the consideration being paid to the person for such assistance.

AB350,10,9 g. A description of any litigation or legal proceedings involving the company or its management.

AB350,10,12 h. The names and addresses, including the Uniform Resource Locator, of each Internet site that will be used by the issuer to offer or sell securities under this subsection.

AB350,10,16 i. Any additional information material to the offering, including, if appropriate, a discussion of significant factors that make the offering speculative or risky. This discussion shall be concise and organized logically and may not be limited to risks that could apply to any issuer or any offering.

AB350,10,24 3. An escrow agreement with a bank, savings bank, savings and loan association, or credit union chartered under the laws of this state in which the investor funds will be deposited, providing that all offering proceeds will be released to the issuer only when the aggregate capital raised from all investors is equal to or greater than the minimum target offering amount specified in the business plan as necessary to implement the business plan and that all investors may cancel their commitments to invest if that target offering amount is not raised by the time stated in the disclosure document.

AB350,11,6 (g) The issuer is not, either before or as a result of the offering, an investment company, as defined in section 3 of the Investment Company Act of 1940 (15 USC 80a-3), or an entity that would be an investment company but for the exclusions provided in section 3 (c) of the Investment Company Act of 1940 (15 USC 80a-3 (c)), or subject to the reporting requirements of section 13 or 15 (d) of the Securities Exchange Act of 1934 (15 USC 78m or 78o (d)).

AB350,11,11 (h) The issuer informs all prospective purchasers of securities offered under this subsection that the securities have not been registered under federal or state securities law and that the securities are subject to limitations on resale. The issuer shall display the following legend conspicuously on the cover page of the disclosure document:

AB350,12,3 IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR DIVISION OR OTHER REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED BY SUBSECTION (e) OF SEC RULE 147 (17 CFR 230.147 (e)) AS PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.

AB350,12,5 (i) The issuer requires each purchaser to certify in writing or electronically as follows:

AB350,12,6 I UNDERSTAND AND ACKNOWLEDGE THAT:

AB350,12,8 I am investing in a high-risk, speculative business venture. I may lose all of my investment, and I can afford the loss of my investment.

AB350,12,12 This offering has not been reviewed or approved by any state or federal securities commission or division or other regulatory authority and that no such person or authority has confirmed the accuracy or determined the adequacy of any disclosure made to me relating to this offering.

AB350,12,16 The securities I am acquiring in this offering are illiquid, that there is no ready market for the sale of such securities, that it may be difficult or impossible for me to sell or otherwise dispose of this investment, and that, accordingly, I may be required to hold this investment indefinitely.

AB350,12,19 I may be subject to tax on my share of the taxable income and losses of the company, whether or not I have sold or otherwise disposed of my investment or received any dividends or other distributions from the company.

AB350,12,20 .... (Signature)

AB350,12,23 (j) The issuer obtains from each purchaser of a security offered under this subsection evidence that the purchaser is a resident of this state and, if applicable, is an accredited investor.

AB350,13,2 (k) All payments for purchase of securities offered under this subsection are directed to and held by the financial institution specified in par. (f) 3. The bank or depository institution shall notify the administrator of the receipt of payments for securities. This information shall be confidential as provided in s. 551.607 (2) (g).

AB350,13,6 (L) The issuer of securities offered under this subsection provides a copy of the disclosure document provided to the administrator under par. (f) 2. to each prospective investor at the time the offer of securities is made to the prospective investor.

AB350,13,9 (m) No offer or sale of a different class or series of security has been made by the issuer in reliance on the exemption under this subsection or sub. (27) during the immediately preceding 12-month period.

AB350,9 Section 9. 551.202 (27) of the statutes is created to read:

AB350,13,12 551.202 (27) An offer or sale of a security by an issuer if the offer or sale is conducted in accordance with all of the following requirements:

AB350,13,14 (a) The issuer of the security is a business entity organized under the laws of this state and authorized to do business in this state.

AB350,13,17 (b) The transaction meets the requirements of the federal exemption for intrastate offerings in section 3 (a) (11) of the Securities Act of 1933 (15 USC 77c (a) (11)) and Rule 147 adopted under the Securities Act of 1933 (17 CFR 230.147).

AB350,13,21 (c) 1. Except as provided in subd. 2., the sum of all cash and other consideration to be received for all sales of the security in reliance on the exemption under this subsection, excluding sales to any accredited investor or institutional investor, does not exceed the following amount:

AB350,14,3 a. If the issuer has not undergone and made available to each prospective investor and the administrator the documentation resulting from a financial audit of its most recently completed fiscal year which complies with generally accepted accounting principles, $1,000,000 subject to adjustment under s. 551.206, less the aggregate amount received for all sales of securities by the issuer within the 12 months before the first offer or sale made in reliance on the exemption under this subsection.

AB350,14,9 b. If the issuer has undergone and made available to each prospective investor and the administrator the documentation resulting from a financial audit of its most recently completed fiscal year which complies with generally accepted accounting principles, $2,000,000 subject to adjustment under s. 551.206, less the aggregate amount received for all sales of securities by the issuer within the 12 months before the first offer or sale made in reliance on the exemption under this subsection.

AB350,14,14 2. An offer or sale to an officer, director, partner, trustee, or individual occupying similar status or performing similar functions with respect to the issuer or to a person owning 10 percent or more of the outstanding shares of any class or classes of securities of the issuer does not count toward the monetary limitation in subd. 1. a. and 1. b.

AB350,14,16 (d) The issuer does not accept more than $5,000 from any single purchaser unless the purchaser is an accredited investor.

AB350,14,19 (e) No commission or other remuneration is paid or given, directly or indirectly, for any person's participation in the offer or sale of securities for the issuer unless the person is registered as a broker-dealer or agent under this chapter.

AB350,14,21 (f) No general solicitation or general advertising is made in connection with the offer to sell or sale of the securities unless it has been permitted by the administrator.

AB350,14,24 (g) All funds received from investors are deposited into a bank, savings bank, savings and loan association, or credit union chartered under the laws of this state, and all the funds are used in accordance with representations made to investors.

AB350,15,6 (h) Before the 100th sale of the security, the issuer provides a notice to the administrator in writing or in electronic form, accompanied by the filing fee specified in s. 551.614 (1m). The administrator shall prescribe the form required for the notice and make the form available as an electronic document on the department of financial institutions Internet site. Notwithstanding s. 551.204 (1) and (3), the notice shall be limited to all of the following:

AB350,15,8 1. Stating that the issuer is conducting an offering in reliance on the exemption under this subsection.

AB350,15,9 2. Identifying the names and addresses of all of the following persons:

AB350,15,10 a. The issuer.

AB350,15,12 b. All persons who will be involved in the offer or sale of securities on behalf of the issuer.

AB350,15,14 c. The bank, savings bank, savings and loan association, or credit union in which investor funds will be deposited.

AB350,15,18 (i) The issuer is not, either before or as a result of the offering, an investment company, as defined in section 3 of the Investment Company Act of 1940 (15 USC 80a-3), or subject to the reporting requirements of section 13 or 15 (d) of the Securities Exchange Act of 1934 (15 USC 78m or 78o (d)).