Legislature(2015 - 2016)BARNES 124
04/15/2016 10:00 AM House LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| SB126 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 126 | TELECONFERENCED | |
| + | SB 206 | TELECONFERENCED | |
SB 126-SMALL SECURITY OFFERINGS
[Contains discussion of HB 194]
10:05:54 AM
CHAIR OLSON announced that the first order of business would be
CS FOR SENATE BILL NO. 126(L&C), "An Act establishing an
exemption for the offering and sale of certain securities."
10:06:56 AM
SENATOR MIA COSTELLO stated that [CSSB 126(L&C)] has been under
consideration for several years while related federal securities
regulations were drafted. Alaska is following other states that
have taken this action and are having success in this regard.
The bill allows businesses, entrepreneurs, and innovators to
access capital by soliciting donations on a portal or a web
site, in a manner similar to Kickstarter or GoFundMe. However,
[CSSB 126(L&C)] directs the following: contributions go through
the Department of Commerce, Community & Economic Development
(DCCED); the amount of a contribution by an investor is limited;
and the contributions are held by a bank until accessed by the
business. Senator Costello said the bill would spur the economy
because small business growth has a significant effect on the
economy, as has been established by governmental and private
research [documents not provided]. She noted the foregoing
concept is also included in other proposed legislation, and is
an exciting opportunity for Alaskans to equity-invest in
Alaskan-owned businesses.
10:09:55 AM
WESTON EILER, Staff, Senator Mia Costello, informed the
committee that [CSSB 126(L&C)] utilizes a concept new to Alaska
of equity "crowdinvesting" in which small businesses and
entrepreneurs can solicit investments of up to $7,500 per year
each from a large group of people. Present options such as
GoFundMe and Kickstarter do not allow for equity ownership in
the new business, however, [CSSB 126(L&C)] provides an exemption
from the Alaska Securities Act that will allow small businesses
to give equity ownership to investors, and also provides
safeguards to protect investors. The exemption is required
because the investments are on a very small scale. Mr. Eiler
paraphrased from the following sectional analysis [original
punctuation provided]:
Section 1. Amends the Alaska Securities Act (AS 45.55)
by adding a new section. Sec. 45.55.l75(a) exempts the
sale of securities through crowdinvesting between
Alaska businesses and residents from the requirements
of AS 45.55.070 - 45.55.120 (registration of
securities) and AS 45.55.150 (sales and advertising
literature). Sets new limitations and requirements on
the offer and sale of this type of securities
including:
(1) issuer's organizational entity must be for-
profit, and located and licensed in Alaska,
(2) securities under this section may only be
sold to Alaska residents and must be in compliance
with federal law's (Securities Act of 1933) residency
requirements for interstate sale of securities,
(3) sale of securities under this section by a
for-profit entity are capped at $1,000,000,
(4) investments by an individual in a business
under this exemption are capped at $7,500 during a 12-
month period,
(5) issuer of securities under this section must
have a reasonable belief that the purchase of
securities is for investment not resale,
(6) commissions for persons participating in the
offer or sale for the issuer are prohibited,
(7) requires escrow account deposit of investor
funds until the minimum target for the issuer is met,
(8) notice to the department about solicitation
of sale of securities under this section,
(9) restrictions on who may issue securities
under this section,
(10) disclosures to investors about this type of
securities exemption in statute and restriction on
resale,
(11) requires signed investor acknowledgement of
investment risk,
(12) exemption for sale of this type of
securities may not be used along with other exemptions
to the Alaska Securities Act,
(13) sale of this type of securities are covered
by anti-fraud statutes and other provisions under AS
45.55.010 - 45.55.028.
Sec. 45.55.175(b). Allows the department to deny or
revoke an exemption under this section if the sale
would lead to a fraud on purchasers. Sec.
45.55.l75(c). Requires the Department of Commerce,
Community, & Economic Development to charge an
applicant a filing fee for an exemption under this
section. Sec. 45.55.l75(d). Prohibits an issuer from
using the exemption under this section if the entity
or its officers are subject to a disqualifier under
the Dodd-Frank Wall Street Reform and Consumer
Protection Act - U.S.C. 78c(a)(39). Sec. 45.55.175(e).
Defines terms for the section.
Section 2. Adds a sec. 45.55.175 exempting
transactions under this bill to the list of
transactions that are exempt from basic security
registration requirements under AS 45.55.070 and AS
45.55.075 (the section addressing federal covered
securities).
10:16:20 AM
MR. EILER further explained that the bill establishes a
different set of regulations for a small-scale securities
offering in that the business would apply to the Division of
Banking and Securities, DCCED, for authorization to issue and
solicit investments, and the safeguards in the bill ensure
certain protections to investors. This is a way to help
economic development - especially in rural areas - by removing
traditional barriers, and has garnered positive results in over
24 states.
REPRESENTATIVE HUGHES expressed her support for economic
development. She asked how Alaska residency would be
established.
MR. EILER deferred to DCCED.
REPRESENTATIVE HUGHES directed attention to [page 2, lines 4-7
which read]:
(3) the sum of all cash and other consideration to be
received for all sales of the security in reliance on
this exemption may not exceed $1,000,000, 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 this exemption;
REPRESENTATIVE HUGHES asked whether the cap of $1 million is
overall, or per year.
MR. EILER read from [paragraph] 3 [text previously provided].
He said he would confirm whether it is $1 million per year.
REPRESENTATIVE HUGHES directed attention to [page 2, lines 18-25
which read]:
(7) the issuer of the security shall deposit in an
escrow account in a bank or other depository
institution authorized to do business in this state
all funds received from investors until the minimum
target dollar amount for the security offering is met;
the issuer shall file the escrow agreement with the
administrator, and the contents of the escrow
agreement must include a statement that the proceeds
of the sale under this section will not be released
from the escrow account until the minimum target
dollar amount for the security offering is met; all
funds shall be used in accordance with representations
made to investors;
REPRESENTATIVE HUGHES asked who determines the minimum target,
and whether the minimum is based on a case-by-case basis.
MR. EILER advised that the intention was to create a bill with
safeguards for investors and which also could accommodate new
types of investment. Although the escrow account is a statute
of the bill, the web site or portals would be handled in
regulation. A small business or entrepreneur must make an
application to the division, and at that time the business plan
would be assessed, thus the division is involved throughout the
process to provide oversight.
10:22:46 AM
REPRESENTATIVE LEDOUX referred to similar legislation in another
proposed bill, and said there should be consistency between both
bills. She cautioned against a possible conflict.
SENATOR COSTELLO said the sponsors are aware of the other
legislation; if both bills pass, the related section would be
removed from the other bill.
REPRESENTATIVE LEDOUX questioned whether the crowdfunding
investment amount is the same in both bills.
MR. EILER confirmed that the two bills currently differ in the
following ways: the investment amount; the placement of the
escrow account in statute or regulation; and additional
safeguards.
10:25:52 AM
KEVIN ANSELM, Director, Anchorage Office, Division of Banking
and Securities, Department of Commerce, Community & Economic
Development, offered to explain the differences between [CSSB
126(L&C)] and [HB 194]. In response to Representative Hughes'
question on residency, she said residency in [CSSB 126(L&C)] is
established by employment, living conditions, and the intent to
remain, but is not based upon the receipt of an Alaska permanent
fund dividend (PFD) received through the Permanent Fund Dividend
Division, Department of Revenue.
REPRESENTATIVE HUGHES surmised residency requires physical
residency.
MS. ANSELM said the participant has to be a citizen in Alaska.
Regarding the $1 million amount per year that could be used by
one of the crowdfunded businesses, she explained that if the
business accrues more than $1 million, the provision exceeds a
federal exemption, and "kicks into federal laws relating to
securities." Regarding escrow, in [CSSB 126(L&C)] escrow is
addressed in regulation. Currently, when the division needs to
put funds in escrow because of other securities provisions in
the law, the division looks at the investment and sometimes
disburses funds in stages. The division would also consider the
background of the business, or of the entrepreneur, to determine
the escrow requirement. Ms. Anselm said, "There'll be a lot of
information that needs to be provided, but not near the
information that would be provided for a regular securities
registration prospectus which, as you know, can be quite thick."
REPRESENTATIVE TILTON asked Ms. Anselm to define "other
depository institution authorized" as found on [page 2, line 19]
[text previously provided].
MS. ANSELM stated other depository institutions would be credit
unions. In further response to Representative Tilton, she said
her understanding from the bill's sponsors is the banks and
credit unions would be chartered in Alaska.
REPRESENTATIVE LEDOUX asked for the current investment limit in
[HB 194].
10:30:43 AM
MS. ANSELM stated that HB 194 proposed a $5,000 limit, was
amended in the House Judiciary Standing Committee to $10,000; in
further response to Representative LeDoux, she said there were
no changes made in the House Finance Committee.
REPRESENTATIVE KITO directed attention to page 2, beginning on
line 11 which read:
(5) the issuer reasonably believes that all purchasers
of securities are purchasing for investment and not
for sale in connection with a distribution of the
security;
REPRESENTATIVE KITO asked how the issuer would ensure that its
investors would not resell their investment.
MS. ANSELM responded:
First, the issuer is responsible for determining that
and typically, and this is true in other exemption
sorts of securities investments, the issuer would
typically have a written assertion from the investor,
that they have no intent to, to sell the securities.
The other issue here is that these securities are, are
really, they're not easily tradable, in other words,
if someone wants to sell the security, or bequeath it
to someone, there are certain, it has to fall under
another exemption, otherwise it has to be registered.
... Investors need to know that they are not easily
alienable, so to speak, so they're not going to be
trading these on a market.
REPRESENTATIVE KITO surmised the investment is not similar to
receiving a stock certificate; there is not actually ownership
by the investor until the crowdfunding activity has been
realized.
MS. ANSELM advised the investor would receive a stock
certificate or a note, however, the document would state that
the securities are not transferable unless there is a further
exemption.
REPRESENTATIVE HUGHES asked how marijuana businesses would be
handled, given federal restrictions on banking.
MS. ANSELM observed that rules related to marijuana require the
residency of investors to be established by receipt of a PFD,
which is a higher status of residency than required by [CSSB
126(L&C)]. Otherwise, there is no prohibition on investing in
securities related to marijuana businesses; in fact, larger
businesses have begun registering with the U.S. Securities and
Exchange Commission.
10:35:44 AM
REPRESENTATIVE LEDOUX returned to her understanding that if both
bills pass, crowdfunding would be removed from the omnibus
securities bill; however, there is substantive inconsistency
between the bills related to the investment amount.
MS. ANSELM stated that in addition to HB 194, its companion
bill, SB 108, is held in the Senate Finance Committee (SFIN),
and if HB 194 passes from the House, it would also advance to
SFIN, where a committee substitute would be drafted to remove
crowdfunding from HB 194. At that time, the crowdfunding
provisions in [CSSB 126(L&C)] would prevail.
CHAIR OLSON suggested the revisor of statutes would resolve the
question.
MS. ANSELM was unsure.
REPRESENTATIVE KITO stated that if the bills reflected different
investment amounts it would be difficult for the revisor to
glean legislative intent.
CHAIR OLSON surmised one bill would precede the other.
MS. ANSELM offered that two bills cannot apply to the same
statute. In further response to Chair Olson, she restated that
SB 108 is held in SFIN.
REPRESENTATIVE HUGHES noted that HB 194 originally set the
investment amount at $5,000, and she inquired as to the original
intent.
MS. ANSELM explained that since the bill was first proposed,
almost two years ago, there has been more experience in other
states; in fact, $10,000 is the federal limit allowed for
crowdfunding. In further response to Representative Hughes, she
said the amount is set at the will of the legislature.
REPRESENTATIVE LEDOUX questioned how to propose a friendly
amendment raising the investment limit to $10,000, since
Alaskans "tend to have a higher income."
CHAIR OLSON suggested proposing an amendment on the floor.
10:43:04 AM
CHAIR OLSON opened public testimony. After ascertaining no one
wished to testify, public testimony was closed.
10:43:15 AM
REPRESENTATIVE HUGHES moved to report CSSB 126(L&C), Version 29-
LS1284\W, out of committee with individual recommendations and
the accompanying zero fiscal notes. There being no objection,
CSSB 126(L&C) was reported from the House Labor and Commerce
Standing Committee.