Washington State

House of Representatives

Office of Program Research

BILL

ANALYSIS

Business & Financial Services Committee

HB 2023

This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.

Brief Description: Allowing crowdfunding for certain small securities offerings.

Sponsors: Representatives Habib, Ryu, Zeiger and Maxwell.

Brief Summary of Bill

  • Exempts certain small securities offerings through a registered portal from registration under the Securities Act of Washington.

  • Grants rulemaking authority to the Department of Financial Institutions to govern the exempted offerings.

Hearing Date: 1/17/14

Staff: David Rubenstein (786-7153).

Background:

The Securities Act of Washington, operating as a supplement to federal law, requires registration of securities offerings and certain persons and businesses engaged in securities transactions, and creates penalties for false or misleading filings. Certain offerings are defined as "securities" requiring registration.

Certain securities offerings, transactions, and persons are exempt from registration. Examples include:

Under the Securities Act of Washington, the Department of Financial Institutions (DFI) is responsible for the regulation of the purchase and sale of securities in Washington. Under the Securities Act of Washington, DFI is tasked with protecting Washington residents from dishonest or fraudulent practices by people selling investments. To accomplish these goals, DFI uses registration of securities offerings, licensing of broker-dealers and investment advisers, and investigations of complaints. Additionally, DFI manages securities registration and investigation and enforcement of violations of the Securities Act of Washington.

Securities Act of 1933

The federal Securities Act of 1933 also requires registration of securities offerings. However, the federal act exempts transactions between issuers and purchasers who are residents of the same state (known as the “intrastate offering exemption”). The exemption is clarified by Rule 147, a “safe harbor” rule issued by the Securities and Exchange Commission (SEC). Under another rule, known as Regulation D, securities offerings are exempt if, among other things, the issuer files SEC Form D, which requires basic information about the company and the offering.

JOBS Act

Title III of the federal Jumpstart Our Business Startups Act of 2012 (JOBS Act) created an exemption from the Securities Act of 1933 for certain small securities offerings. Offerings are exempt if they meet various criteria, including a cap on the aggregate amount of securities offered by any issuer, a cap on the amount a given purchaser may invest, and a requirement that the offering be made through a broker or funding portal.

Under the JOBS Act, the SEC is tasked with promulgating rules to carry out Title III. As of January 15, 2014, the SEC had issued a notice of proposed rulemaking, but formal rules had not been adopted.

Summary of Bill:

An exemption is created for certain small securities offerings from registration under the Securities Act of Washington. An offering is exempt if:

A 5% excise tax is imposed on each investment, to be paid by the buyer and collected by the seller. The collected tax must be paid to the Department of Revenue.

The issuer must also provide a quarterly report to shareholders and make the report publicly available.

Shareholders are prohibited from transferring their shares for a period of one year, unless the shares are transferred back to the issuer, they are transferred to an accredited investor, the transfer is part of a registered offering, or to a family member in connection with death, divorce, or other similar circumstances.

Issuers of securities exempt from registration under this act may also claim other exemptions.

DFI may adopt rules to protect investors purchasing securities issued under this exemption.

Appropriation: None.

Fiscal Note: Available.

Effective Date: The bill takes effect 90 days after adjournment of the session in which the bill is passed.