On November 1, 2018, the North American Securities Administrators Association, Inc. (“NASAA”) released for public comment proposed updates to the SCOR Statement of Policy and the SCOR Form (Form U-7). According to the NASAA, the proposed updates are meant to incorporate many of the investor protections that have been put in place under state and federal crowdfunding laws in light of the evolution and availability of methods to raise capital in small offerings.
Changes to the SCOR Statement of Policy (last updated in 1996)
- Application of SCOR: The proposed updates amend the types of federal exempt offerings that can be registered at the state level under the SCOR Statement of Policy. Specifically, SCOR will no longer apply to Regulation A offerings, but will apply to the registration of intrastate offerings exempt under new federal Rule 147A. Additionally, the proposed updates increase the offering amount limitation from $1 million to $5 million, in line with the Rule 504 offering amount limitation increase.
- Issuer Eligibility: The proposed updates remove the existing requirement that the offering price for securities offered be greater than or equal to $1.00 per share or unit of interest.
- Financial Statements: The proposed updates revise the financial statement requirements to provide for tiered compilation, review, and audit requirements based on the amount of the offering. In addition to the tiered approach, the proposed updates require (1) an issuer’s CEO and CFO to certify that annual financial statements are true and complete in all material respects and (2) an issuer provide interim financial statements if annual financial statements are dated more than 120 days prior to the date of filing. The proposed updates to the financial statement requirements are based on Regulation Crowdfunding.
- Bad Actor Disqualifications: The proposed updates revise the bad actor disqualification provisions to merge aspects of federal bad actor provisions applicable to Rule 506 and Rule 504 offerings and to capture individuals materially participating in the offering or the operations of the issuer, as well as events that may include the potential for fraud. The proposed updates, however, veer from related federal provisions and do not grandfather any bad acts that occurred prior to the adoption of the SCOR Statement of Policy.
- Investment Limits: The proposed updates incorporate the individual investment limits set forth in federal Regulation Crowdfunding and require that in each sale of securities in a SCOR offering, an issuer must reasonably believe that the aggregate amount of securities sold to any investor by one or more issuers offering or selling securities under a SCOR offering during the twelve-month period preceding the date of sale, together with the securities sold by the issuer to the investor, does not exceed:
- The greater of $2,000 or 5% of the lesser of the investor’s annual income or net worth if either the investor’s annual income or net worth is less than $100,000; or
- 10% of the lesser of the investor’s annual income or net worth, not to exceed an amount sold of $100,000, if both the investor’s annual income and net worth are equal to or more than $100,000.
- Sales Reporting Requirement: The proposed updates incorporate a sales reporting requirement similar to that contained in intrastate crowdfunding laws and federal Regulation Crowdfunding, which would require an issuer to file a sales report no later than 30 days after the termination or completion of an offering or, if the offering has not been terminated or completed within 12 months, file a sales report containing the information required in Section VIIIA for the initial 12 months.
- Ongoing Reporting Obligations: The proposed updates incorporate ongoing reporting requirements based on those required under Regulation Crowdfunding. An issuer would be subject to the ongoing reporting requirements until the earlier of (1) the securities issued in connection with the SCOR offering are no longer outstanding or (2) the issuer liquidates or dissolves its business.
- Review Standards: The proposed updates include a new provision related to review standards and, unlike the proposed updates set forth above, is optional. In jurisdictions that choose to adopt this provision, offerings will be reviewed for disclosure and for compliance with applicable Statements of Policy with certain modifications incorporated from NASAA’s Coordinated Review Protocol for Regulation A offerings. Specifically, (1) the Statement of Policy Regarding Promoters’ Equity Investment will not apply and (2) the Statement of Policy Regarding Promotional Shares will apply except that one-half of any promotional shares required to be locked-in or escrowed may be released on the first and second anniversary of the date of completion of the offering, such that all shares may be released from lock-in or escrow by the second anniversary of the date of completion of the offering.
Changes to the SCOR Form (Form U-7) (last updated in 1999)
- The proposed updates to the SCOR Form are meant to streamline the form by removing duplicative or unnecessary items and to make the form more user friendly.
Comments on the proposed updates to the SCOR Statement of Policy and SCOR Form are due by December 3, 2018.