Analysis of Increased Costs: The survey results indicated that the proposed rule amendments, i.e., switching from paper notice filing to electronic submissions would create greater costs for some respondents than for others. Because the survey responses ranged widely, the securities division discusses the range of responses for each type of cost category below.

The survey results indicated that approximately twelve percent (eight of sixty-three) of the survey respondents believed that the proposed rule amendments would increase additional professional services. However, only five respondents provided quantitative estimates, which ranged between $10,000 and $50,000, and the $50,000 estimate was excluded from the range due to the lack of information regarding employee numbers. The quantitative estimates for those respondents that provided their number of employees and independent contractors indicated an average of $2,142.86 per employee for professional services. The nonquantitative estimates provided by respondents were: "not much," a "small amount" and "additional time for our accounting department since [the EFD system] do not take credit cards."

The securities division found the quantitative cost increase estimates surprising because the proposed rule amendments merely change the manner in which Rule 506 notice filers submit notices; the proposed rule amendments do not change the underlying filing requirements.

As Rule 506 is a federal exemption from registration, Rule 506 notice filers are required to first file their Form D online using the Securities and Exchange Commission's EDGAR system. The EFD system automatically digests the notices that are filed on EDGAR, and then the filer affirmatively selects the jurisdictions in which it seeks to file. In addition, for those filing notices in multiple states, fourteen other states already require that such notices be submitted through the EFD system. Although notice filers are required by the EFD system to pay an additional system use fee, it is difficult to see how a filer might incur, for example, an additional professional cost of $50,000. We speculate that some businesses might be required to expend efforts to facilitate ACH payments, rather than credit card or check payments, and that this may increase professional costs for them.

In contrast to these few respondents, a majority of survey respondents (thirty-four of sixty-three, or fifty-four percent) affirmatively indicated that the amount of increased costs was "$0" (others stated "N/A" or failed to respond). One respondent expressly indicated that it would incur no additional legal fees in changing the method of Rule 506 notice filings from paper to filing online. Another indicated that most of its filings are already submitted through the EFD system, so it would save the cost of writing a separate check and mailing a paper package to the securities division. The respondent further indicated that it would save costs to move to filing on EFD only. When averaged against all respondents, the estimated increased costs would be an average of $4.79 per employee. Accordingly, the securities division believes that it would not significantly increase professional costs to comply with the proposed rule amendments.

The survey results indicated that approximately three percent (two of sixty-three) of the survey respondents believed that the proposed rule amendments would result in increased equipment expenses. Of the respondents that anticipated the proposed rule amendments would increase costs, these cost estimates ranged from $500 to $2,000 for an average per-employee increase of $178.57. It is unclear the basis for the estimated increased equipment costs. The primary manner of filing the Rule 506 notice filing with the Securities and Exchange Commission is already electronic. Accordingly, the securities division speculates that Rule 506 notice filers might incur additional costs to set up ACH payments.

In contrast, fifty percent of survey respondents (thirty-two of sixty-three) expressly indicated that there would be $0 in increased equipment costs (the remainder stated "N/A" or failed to respond), and on a whole would result in an average increase of $0.20 per employee. The securities division believes that the proposed rule amendments would not significantly increase equipment costs for Rule 506 notice filers. Rather, we anticipate that filers may save costs in printing, postage, and administrative time to file notices online.

The survey results indicated that approximately two percent (one of sixty-three) of the respondents believed that the proposed rule amendments would result in increased supply costs. That respondent estimated that the proposed rule would increase costs in an amount of $300, for an average increase of $75 per employee. However, the respondent did not explain the basis for the increased supply costs.

In contrast, fifty-two percent of survey respondents (thirty-three of sixty-three) expressly indicated that there would be $0 in increased supplies costs (others stated "N/A" or failed to respond). When averaged against the remainder of the respondents, the expenses result in an average increase of $0.02 per employee on a whole. Accordingly, the securities division believes that the proposed rule amendments would not significantly increase supply costs for Rule 506 notice filers. Rather, we anticipate that businesses may save costs in printing and postage supplies they would otherwise incur to make paper filings with the securities division.

The survey results indicated that approximately five percent (three of sixty-three) of the respondents believed that the proposed rule amendments would result in increased labor costs. Of the three percent of respondents that anticipated the proposed rule amendments would increase costs, the individual estimates ranged from $150 to $10,000, for an average cost increase of $6.80 per employee. Although the primary manner of filing the Rule 506 notice filing with the Securities and Exchange Commission is electronic, the securities division speculates that Rule 506 notice filers might incur additional labor costs to set up ACH payments, or familiarize themselves with the EFD system.

In contrast, forty-nine percent of survey respondents (thirty-one of sixty-three) expressly indicated that there would be $0 in increased labor costs (others stated "N/A," "unknown," or failed to respond). When all responses are averaged together, the proposed rule amendments result in an average increase of $0.82 per employee for labor costs. As such, the securities division believes that the proposed rule amendments would not significantly increase labor costs for Rule 506 notice filers. Rather, we anticipate that filers (and the persons who work for them and/or make filings on their behalf) may save costs in printing, postage, and labor in filing all notices online.

The survey results indicated that approximately five percent (three of sixty-three) of the respondents believed that the proposed rule amendments would result in increased administrative costs. For the five percent that anticipated that the proposed rule amendments would increase administrative costs, those costs included an average of $517.50 per employee. In calculating this average, for those that simply indicated the EFD system use fees would result in increased administrative costs, but did not provide quantitative estimates, the securities division calculated the fees based on the number of new and amended EFD filings the respondent estimated that it would make per year, multiplied by $155. The quantitative responses ranged from $1,800 to $10,000.

In contrast, fifty percent of survey respondents (thirty-two of sixty-three) expressly indicated that there would be $0 in increased administrative costs (others stated "N/A" or failed to respond). One respondent stated that there would be less administrative costs associated with a move to EFD filings. When all respondents are averaged together, the respondents anticipate that the proposed rule amendments will result in an increase of $0.99 per employee. Accordingly, the securities division believes that the proposed rule amendments would not significantly increase administrative costs for Rule 506 notice filers. Rather, we anticipate that filers may save costs in the time it takes to file notices online, and the time spent printing and mailing notice filings.

In addition to professional services, equipment, supplies, labor, and administrative costs to comply with the proposed rule amendments, the securities division also requested respondents to explain any other compliance costs associated with the draft rule. Three of sixty-four respondents identified the EFD system use fee as a source of additional compliance costs. One of these three clarified that the EFD system use fee is fine when the filer is making a filing in several states at once, but if the filer is only seeking to file in Washington, then the system use fee could be costly. In contrast, two other respondents indicated that it would be more cost-effective to file Rule 506 notices through the EFD system than to make paper filings, the savings of which may be passed on to their clients. One additional respondent identified the "blue sky filing fee" as an additional compliance cost; however, the filing fee imposed by the securities division is $300, regardless of the manner of notice filing. The proposed rule amendments do not change the filing fee. The remaining respondents indicated that additional costs were not applicable, or would equal "$0."

The rule making is unlikely to result in lost sales or revenue for businesses that file Rule 506 notice filings through the EFD system. Of the sixty-three respondents, only two indicated that the proposed rule amendments might cause a loss in sales or revenues, or three percent of the respondents. The survey requested a free form answer regarding which specific provisions in the proposed rule amendments might result in lost sales or revenue. One of the two respondents who stated "Yes" to lost sales or revenue stated "N/A" with respect to the estimated amount of lost revenue, and further stated "N/A" when prompted to identify the particular provision that would result in lost revenue. Accordingly, this respondent may have answered "Yes" to the initial question in error. The other respondent estimated lost revenue in the amount of $10,000, and further explained, "As a Coamony [sic] operating in Canada the EFD is NOT set up to allow for the bank on this side – thus I cannot use the system." This respondent is correct in that not all financial institutions allow ACH payments. However, Canadian companies do successfully file Rule 506 notice filings currently with the states through the EFD system, and therefore we believe that this issue may be remedied.

In contrast, fifty-eight respondents (ninety-two percent of the respondents surveyed) indicated that they did not believe that the proposed rule amendments would result in lost sales or revenues. One respondent further opined that requiring Rule 506 notice filings to be made through the EFD system would save law firms the time and costs associated with creating letters, ordering checks, and preparing paper filing packages, compared to clicking through the EFD system.

The survey also asked whether the proposed rule amendments might result in the addition or elimination of any jobs. Only one respondent indicated that the proposed rule amendments may cause its business to eliminate any jobs, and estimated that one job might be eliminated. However, this same respondent is the same that has difficulties facilitating ACH payments as a Canadian company, and the division believes that these issues can be remedied. In contrast, sixty (ninety-five percent of all respondents) respondents indicated that they believed the proposed rule would not cause their businesses to eliminate any jobs.

None of the respondents indicated that the proposed rule amendments would cause them to add any jobs.

Based on the survey results, the securities division estimates that the average person or company filing Rule 506 notice filings, or the average attorney or paralegal advising Rule 506 notice filing issuers, would not eliminate or add any jobs as a result of the proposed rule amendments.

RCW 19.85.040 requires the securities division to determine whether compliance with the proposed rule amendments will have a disproportionate impact on small business by comparing the cost[s] of compliance for small business[es] with the costs of compliance for the ten percent of businesses that are the largest businesses.

The securities division categorized each survey response based on whether it came from a small business, or whether it represented the ten percent of businesses that were the largest businesses that responded. The two categories were then compared to each other. Generally, the survey results tended to show that the increased costs per employee of small businesses were disproportionately greater than the increased costs per employee of the largest businesses.

The results may be impacted by the fact that the survey pool included both persons/companies that file Rule 506 notice filings and attorneys/paralegals that advise Rule 506 notice filers. The respondents that qualified as small businesses were comprised of issuers, law firms, and compliance firms with a small number of employees. Meanwhile, the largest ten percent of businesses surveyed were international law firms, with thousands of employees. The expenses to comply with the proposed rule amendments would naturally tend to be higher for a small business issuer that is likely filing a limited number of notice filings in a limited number of states, and may incur the EFD system use fee. They may also rely on legal and accounting services. In contrast, large law firms are merely assisting issuers in preparing or filing the notices. When surveyed, several respondents that were larger law firms indicated that electronic filings are more cost-effective than paper filings, the savings of which may be passed on to these issuers.

The following chart compares the average cost increase per employee associated with the proposed rule amendments for both the largest ten percent of businesses required to comply and small businesses. Small businesses are defined as fifty or fewer employees. The largest ten percent of businesses were likewise determined by the number of employees. These charts include only data from respondents who provided quantitative answers to cost categories (including $0) and disclosed the number of employees or independent contractors the respondent had. For example, one respondent indicated a "small amount" of additional professional services costs would be incurred, and therefore was not included in calculating the average figures presented below. Unlike the table of increased costs per employee displayed above, the tables below express per-employee averages for all small businesses, and all of the ten percent of the largest businesses, regardless of whether they estimated increases or not.

For those that simply indicated the EFD system use fees would result in increased administrative costs, but did not provide quantitative estimates, the securities division calculated these costs based on the number of new and amended EFD filings the respondent estimated that it would make per year, multiplied by $155, and included this figure in arriving at the average administrative cost increase per employee.

In their survey responses, the largest ten percent of businesses indicated that they would not lose any sales or revenue as a result of the proposed rule amendments. In contrast, one small business indicated that it would loss [lose] sales or revenue in the amount of $10,000 because of the draft rules, averaging to an amount of $5,000 of lost revenue per employee. However, this same respondent indicated that it has difficulties facilitating ACH payments as a Canadian company, which we believe can be remedied without substantial expense.

None of the respondents indicated that the proposed rule amendments would cause them to add any jobs. However, one small business indicated that the proposed rule amendments might cause its business to eliminate jobs, and estimated that one job might be eliminated. However, this same respondent indicated that it has difficulties facilitating ACH payments as a Canadian company, which we believe can be remedied without substantial expense. In contrast, sixty (ninety-five percent of all respondents) respondents indicated that the proposed rule would not cause their businesses to eliminate any jobs, which includes all of the ten percent [of] largest businesses.

The securities division carefully considered all of the survey responses submitted, as well as a number of potential methods to reduce the impact of the proposed rule amendments on small businesses. Based on the survey results discussed above, the securities division determined not to make any modifications to its proposed rule amendments. We discuss the methods considered and the reasons for not making modifications to the proposed rule amendments below.

The securities division received several comments in its economic impact survey which indicated that the proposed rule amendments may increase costs to comply. However, the overwhelming number of survey respondents indicated that the proposed rule amendments impose no additional costs. Several respondents even indicated that it would save them time and money to make filings through the EFD system. Indeed, since the creation of the EFD system, the securities division has heard informal feedback from state securities regulators, filers, and other interested parties that the electronic filing system has streamlined the process to file and process such documents. The securities division believes that mandating filings through the EFD system will ultimately save printing, packaging, and mailing costs, which will result in cost and time efficiencies. It is important to note that many notices that are filed in hard copy are submitted by overnight courier at significant expense to ensure timely submission. With electronic filing, filings are made in a matter of minutes and avoid the expense of overnight couriers.

Although the EFD system charges a separate per-offering system use fee, the securities division notes that smaller businesses will only incur the one-time system use fee in connection with offerings to raise capital, which are unlikely to occur with any frequency. In addition, the time saved by attorneys who file on behalf of issuers can be expected to be passed on to those issuers.

Lastly, the securities division notes that it issues acknowledgments to these hard copy Rule 506 notice filings, and in certain instances, may issue follow-up correspondence. The submission of paper notice filings requires the securities division to manually receive, process and scan the filings, which may result in delays to the filer receiving any follow-up correspondence or an acknowledgment of the filing itself. Requiring filings to be made through the EFD system will eliminate inefficiencies and result in a streamlined process for both filers and the securities division. Issuers can confirm the receipt of the filing through EFD without requiring an acknowledgment from the division. Accordingly, the securities division made no changes to the proposed rule amendments.

The proposed rule amendments would only impact the manner in which Rule 506 notice filings are made with the securities division. As such, there are no recordkeeping or reporting requirements to simplify, reduce, or eliminate. Based on feedback received from survey respondents, it appears that switching to electronic submissions through the EFD system may decrease costs and increase efficiencies by eliminating printing, packaging, and the mailing of separate paper notice filings.

The securities division does not inspect or otherwise examine the filers who submit Rule 506 notice filings. Rather, the primary responsibility of issuers making offerings in reliance on federal Rule 506 is to file notice of such offering and to pay the filing fee with the securities division. Accordingly, the securities division is unable to reduce the frequency of inspections.

The securities division will allow filers and other interested persons adequate time to adjust to the proposed rule amendments through existing processes, including following the timing and notice procedures required in connection with proposed rule making. The securities division understands that it may take time for filers to familiarize themselves with the EFD system, or set up accounts to facilitate ACH payments, and that this may require input from attorneys or accountants. The securities division will publish notice on its website, distribute such notices to interested persons, and offer assistance to filers that have difficulties navigating the EFD system. In addition, the securities division is considering implementing a limited grace period in which it will continue to accept paper filings after the proposed rule amendments become effective.

There are no fines associated with a filer's failure to comply with the proposed rule amendments. However, the securities division is also considering implementing a limited grace period in which it will continue to accept paper filings after the proposed rule amendments become effective.

Because the proposed rule amendments may have an increased impact on small businesses, the securities division determined to take additional mitigation steps to reduce overall burden of compliance. The securities division outlines these steps below.

First, in connection with the proposed rule amendments, the securities division will publish and distribute notice of proposed rule making, and adoption of proposed amendments, to its interested persons list and to those who have made Rule 506 filings in the most recent three years. The securities division will also publish notice of our rule making on our website, and further revise our website to add a direction to file through the EFD system, wherever Rule 506 offerings are discussed.

The securities division will also offer support to filers navigating the EFD system. If filers have questions regarding the EFD system, or its requirements, the securities division will endeavor to provide answers to such questions, or will direct the filer to the appropriate EFD system administrator. The securities division will also direct filers to the frequently asked questions section of the EFD website. The company that developed the EFD system also provides a user helpdesk that is available from 9 a.m. to 6 p.m. eastern time, and the securities division will take care to ensure that filers are aware of this resource.

The securities division is also considering a limited grace period in which it will continue to accept paper filings after the proposed rule amendments become effective. If the securities division receives paper filings during this grace period, then we will notify the filer of the new filing requirements and accept the paper filing.

Beyond the steps outlined above, the securities division does not believe that it can reduce costs further.

Since the beginning of the rule-making process, the securities division has involved interested persons, including small businesses, in the development of the proposed rules.

On March 6, 2018, the securities division filed a preproposal statement of inquiry (CR-101) concerning the rule making. The securities division distributed the CR-101 notice to its interested persons list for securities registration matters. This group of recipients included many small businesses and those that advise small businesses. The CR-101 notice invited interested persons to participate in the rule-making process by submitting comments to the securities division.

The securities division next prepared a survey to determine the economic impact of the proposed rule amendments. The survey, along with a copy of the draft proposed amendments, was sent to a survey pool consisting of every person that had made a Rule 506 notice filing in the last three years. The securities division reasoned that these persons might be likely to rely on Rule 506 exemptions in the future, or file amendments or renewals to current Rule 506 notice filings. In addition, the securities division reasoned that this group might have current insights about the impact of the proposed rule amendments on small businesses. The securities division will continue to seek the feedback of interested parties as the rule-making process continues.

Companies electing to conduct securities offerings in reliance on federal Rule 506 in this state will be required to comply with the proposed rule amendments, i.e., file notices of such offerings through the EFD system. Similarly, attorneys and/or paralegals that elect to assist issuers with making such filings will likewise be required to comply with the proposed rule amendments.

A copy of the statement may be obtained by contacting Michelle Webster, Esq., 150 Israel Road S.W., Tumwater, WA 98501, phone 360-902-8736, fax 360-902-0524, TTY 360-664-8126, email michelle.webster@dfi.wa.gov.

October 9, 2019

Charlie Clark

Director