Bar News - December 16, 2015
Business Law & Business Litigation: New State Securities Law Overhauls Offering Practices in NH
By: Michael Drooff
On July 27, New Hampshire Governor Maggie Hassan signed into law a comprehensive revision to New Hampshire’s securities laws, which will take effect Jan. 1, 2016.
The new securities law repeals and replaces the current securities law, RSA 421-B, in its entirety and is based on the 2002 Uniform Securities Act (2002 RUSA) developed by the Uniform Law Commission. The new law brings New Hampshire generally into line with 18 other jurisdictions in the US, including Maine and Vermont, which have adopted versions of 2002 RUSA. Although the New Hampshire version of 2002 RUSA contains a large number of variances from the 2002 RUSA prototype, it promises to substantially change offering practices in New Hampshire and facilitate capital-raising by small- and medium-sized companies.
Many corporate practitioners believe that the current securities statute, which is based on the 1956 Uniform Securities Act, is seriously deficient. The structure of the statute is outdated, and various provisions were retrofitted into the statute over the years following the growth in offering activity under federal Regulation D under the Securities Act of 1933, the federal preemption of state offering restrictions introduced with the National Securities Markets Improvements Act of 1996 (NSMIA), and many other innovations in the securities markets.
In perhaps the most important provisions of the existing state law, the exemptions from the general requirement to register the offer and sale of securities, the current law is arguably dysfunctional. The current set of exemptions include a pre-incorporation subscriptions exemption, RSA 421-B:17,II,(k), which does not cover most founders’ stock issuances and an isolated sales exemption, RSA 421-B:17,II(a)(2), which is far too limited to be of use to dynamic early-stage companies. The current statute is widely perceived by out-of-state lawyers and influential investment managers who provide capital to early-stage companies as being odd and a significant deterrent to capital formation in the Granite State.
One factor that delayed the repeal of the current statute was the way in which the federal National Securities Markets Improvement Act (NSMIA) preemption allowed corporate practitioners to bypass the state statute by conducting offerings under federal Rule 506, for which a preemption applies under Section 18(b)(4)(D) of the Securities Act.
Under the NSMIA preemption rules, a company is not required to secure a state registration exemption as long as the offering complies with the Rule 506 requirements and a preemption claim and short-form issuer-dealer license application is filed with the Bureau of Securities Regulation within 15 days after the first sale of securities in the offering. One significant disadvantage to claiming the federal preemption is that the required filing fees in New Hampshire are greater than $600, not including renewal fees.
To remedy the negative perception of New Hampshire’s securities laws, the governor’s Live Free and Start Advisory Council formed a committee of state officials, private practitioners and academics to adapt 2002 RUSA to New Hampshire practice and prepare a bill for the legislature.
Following several months of drafting work, the bill was introduced in the Senate as SB 266 in February 2015, where it received broad bipartisan support. Broad support for the bill continued through its passage in the House. The new law goes into effect on Jan. 1, although offerings commenced under the current statute will be required to comply with the current rules through the duration of the offering.
The new offering rules, and in particular the new registration exemptions and the revised state licensure requirements, will significantly change offering procedures for early-stage companies in New Hampshire in several respects:
- The current pre-incorporation subscriptions exemption will be repealed and effectively replaced with a much more user-friendly limited-offering exemption, which appears in Section 202(14) of the new law. An issuer of securities will have the ability to sell securities to up to 25 purchasers as part of the same offering in any 12-month period, provided that the offering does not involve a general solicitation of investors, no commissions are paid, and the issuer reasonably believes that the investors are purchasing for investment purposes. If a different offering takes place within the same 12-month period, involving different securities or to raise capital for different purposes, the new offering may involve up to 25 additional purchasers.
- The current isolated issuer sales exemption will also be repealed and will be effectively replaced with the much more user-friendly limited offering exemption described above.
- Issuances of securities to certain significant institutional investors will be exempt under Section 202(13).
- Issuers will be able to take advantage of a new extraterritorial exemption from the New Hampshire registration requirements under Section 202(20) of the new law, if the offers and sales are solely to out-of-state residents and the offering complies with the rules of the states in which the investors are present.
- Issuers will need to make disclosures to investors of certain “bad acts” by any partner, officer, director or similar person in any offering relying on a New Hampshire registration exemption. This requirement roughly parallels the “bad actor” disqualification contained in Rule 506(d) in federally-preempted offerings. This new requirement will lead issuers to institute additional procedures, such as circulating questionnaires to company insiders, as part of offerings relying on state law.
- The New Hampshire issuer-dealer license requirements will be repealed, in favor of a much more limited registration provision under Section 402 of the new law for “agents.” The new agent registration provisions will not apply to an offering conducted by the issuer through its officers and directors, as long as the issuer is not paying a commission in connection with the offering.
Under the new statute, issuers will still be able to rely on the federal preemption for offerings conducted under Rule 506, if they are prepared to make the required preemption claim filing and pay the same filing fees. Over time, it is likely that many early-stage companies will learn to take advantage of the liberalized state exemption rules and rely on the federal preemption less than they currently do.
Michael Drooff is a shareholder in Sheehan Phinney Bass + Green, practicing in the firm’s Manchester office. His practice concentrates on private company finance, general securities matters, mergers & acquisitions and investment management. He served on the Live Free and Start Advisory Council’s drafting committee for the new law. He can be reached at (603) 627-8167 or by email.