REPORT TITLE:
Small Business; Financing


DESCRIPTION:
Allows small companies to raise capital through small corporate
offerings registration (SCOR), a uniform registration system that
allows financing by selling common stock; establishes accredited
investor exemption to raise capital through private placement to
qualified higher net worth individuals and institutions.  (SD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        830
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 1
TWENTIETH LEGISLATURE, 1999                                S.D. 1
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________
 

                   A  BILL  FOR  AN  ACT

RELATING TO SECURITIES.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  The legislature finds that many small businesses
 
 2 in Hawaii with significant potential are unable to obtain access
 
 3 to equity capital.  Small businesses, particularly new business
 
 4 start-ups, often find it difficult to secure venture capital for
 
 5 financing in their early stages.  Relatively few venture
 
 6 capitalists, for example, are willing to invest in early-stage
 
 7 financing opportunities.  Furthermore, initial public offerings
 
 8 may not be right for most small companies.  The major sources of
 
 9 financing for average new small businesses are owners' savings,
 
10 loans from commercial banks, and funds from relatives and
 
11 friends.
 
12      Many states, however, have allowed a new kind of equity
 
13 financing, the Small Corporate Offerings Registration (SCOR), a
 
14 uniform registration system that allows a company to raise up to
 
15 $1,000,000 by selling common stock directly to the public for at
 
16 least $5 per share.  The legislature finds that SCOR offerings,
 
17 which are registered with the State, cut through many of the
 
18 existing barriers that prevent small companies from obtaining
 
19 financing.  Offerings may be sold to anyone, including family
 

 
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 1 members, acquaintances, and other interested investors, in
 
 2 amounts as little as $1,000, and shares may be easily resold.
 
 3      The legislature further finds that SCOR provides an
 
 4 additional means by which new capital may be brought to Hawaii.
 
 5 The Small Business Administration will allow the use of SCOR
 
 6 documents to establish the Angel Capital Electronic Network
 
 7 (ACE-Net) in Hawaii.  This is a nationwide directory of "angels"
 
 8 or high net worth individual investors who are seeking
 
 9 investments in high growth companies.  SCOR and the accredited
 
10 investor exemption set forth in this Act will supplement and
 
11 complement the small business investment program, reduce the
 
12 amount of disclosure required of larger and more complicated
 
13 public offerings, and attract additional private sector
 
14 investment.
 
15      Existing state securities laws, however, may prevent the
 
16 implementation of the SCOR uniform registration system.  The
 
17 federal securities laws governing the private sale of securities
 
18 are collectively known as "Regulation D".  The State's response
 
19 to Regulation D is the Uniform Securities Act (Modified), which
 
20 is contained in chapter 485, Hawaii Revised Statutes.  Pursuant
 
21 to the Small Business Incentive Act of 1980, the North American
 
22 Securities Administrators Association has developed "Form U-7", a
 
23 question and answer disclosure document for small companies that
 

 
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 1 seek to provide a complete listing of all disclosure issues that
 
 2 could apply in any small company offering exempt from the
 
 3 Securities and Exchange Commission registration under Rule 504 of
 
 4 Regulation D.
 
 5      The legislature finds that Form U-7 satisfies the prospectus
 
 6 required for registration by qualification under the Uniform
 
 7 Securities Act; provided that all of the qualifications in the
 
 8 instructions for use of the form are fulfilled.  The legislature
 
 9 further finds that allowing SCOR registration will assist
 
10 Hawaii's businesses to obtain needed financing and is consistent
 
11 with the Hawaii State Planning Act's economic priority guidelines
 
12 under section 226-103(a), Hawaii Revised Statutes, to seek "a
 
13 variety of means to increase the availability of investment
 
14 capital for new and expanding enterprises" to "stimulate economic
 
15 growth and encourage business expansion and development to
 
16 provide needed jobs for Hawaii's people and achieve a stable and
 
17 diversified economy."
 
18      SECTION 2.  Chapter 485, Hawaii Revised Statutes, is amended
 
19 by adding a two new sections to be appropriately designated and
 
20 to read as follows:
 
21      "485-A  Prospectus; small corporate offerings registration
 
22 form.  (a)  The prospectus required for registration by
 
23 qualification under section 485-10(b)(3) may be satisfied by the
 

 
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 1 Small Corporate Offerings Registration Form (Form U-7) adopted by
 
 2 the North American Securities Administrators Association;
 
 3 provided that all of the qualifications in the instructions for
 
 4 use of the form are fulfilled.
 
 5      (b)  The commissioner shall adopt rules pursuant to chapter
 
 6 91 to implement this section.
 
 7      485-B  General announcements of proposed offerings to
 
 8 accredited investors.  (a)  No transaction shall be exempt under
 
 9 section 485-6(16) unless it complies with this section.  A
 
10 general announcement of a proposed offering for which the issuer
 
11 is claiming the exemption under section 485-6(16), may be made by
 
12 any means and shall include only the following information unless
 
13 specifically permitted by the commissioner:
 
14      (1)  The name, address, and telephone number of the issuer
 
15           of the securities;
 
16      (2)  The name, a brief description, and price, if known, of
 
17           any security to be issued;
 
18      (3)  A brief description of the business of the issuer in
 
19           twenty-five words or less;
 
20      (4)  The type, number, and aggregate number of securities
 
21           being offered;
 
22      (5)  The name, address, and telephone number of the person
 
23           to contact for additional information; and
 

 
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 1      (6)  A statement that:
 
 2           (A)  Sales will only be made to accredited investors;
 
 3           (B)  No money or other consideration is being solicited
 
 4                or will be accepted by way of this general
 
 5                announcement; and
 
 6           (C)  The securities have not been registered with or
 
 7                approved by any state securities agency or the
 
 8                U.S. Securities and Exchange Commission and are
 
 9                being offered and sold pursuant to an exemption
 
10                from registration.
 
11      (b)  Dissemination of the general announcement of the
 
12 proposed offering to persons who are not accredited investors
 
13 shall not disqualify the issuer from claiming the exemption under
 
14 section 485-6(16).
 
15      (c)  The issuer, in connection with an offer, may provide
 
16 information in addition to the general announcement under
 
17 subsection (a), if such information:
 
18      (1)  Is delivered through an electronic database that is
 
19           restricted to persons who have been prequalified as
 
20           accredited investors; or
 
21      (2)  Is delivered after the issuer reasonably believes that
 
22           the prospective purchase is an accredited investor.
 
23      (d)  No telephone solicitation shall be permitted unless
 

 
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 1 prior to placing the call, the issuer reasonably believes that
 
 2 the prospective purchaser to be solicited is an accredited
 
 3 investor.
 
 4      (e)  For the purposes of this section, "accredited investor"
 
 5 shall have the same meaning as provided in 17 Code of Federal
 
 6 Regulations section 230.501(a)."
 
 7      SECTION 3.  Section 485-6, Hawaii Revised Statutes, is
 
 8 amended to read as follows:
 
 9      "485-6 Exempt transactions.  The following transactions
 
10 are exempted from sections 485-4.5, 485-8, and 485-25(a)(7):
 
11      (1)  Any isolated nonissuer transaction, whether effected
 
12           through a dealer or not;
 
13      (2)  Any nonissuer distribution of an outstanding security
 
14           if the manual of Hawaiian securities or any other
 
15           recognized securities manual contains the names of the
 
16           issuer's officers and directors, a balance sheet of the
 
17           issuer as of a date within eighteen months, and a
 
18           profit and loss statement for either the fiscal year
 
19           preceding that date or the most recent year of
 
20           operations, or the security has a fixed maturity or a
 
21           fixed interest or dividend provision and there has been
 
22           no default during the current fiscal year or within the
 
23           three preceding fiscal years (or during the existence
 

 
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 1           of the issuer and any predecessors if less than three
 
 2           years) in the payment of principal, interest, or
 
 3           dividends on the security;
 
 4      (3)  Any nonissuer transaction effected by or through a
 
 5           registered dealer pursuant to an unsolicited order or
 
 6           offer to buy;
 
 7      (4)  Any transaction between the issuer or other person on
 
 8           whose behalf the offering is made and an underwriter,
 
 9           or among underwriters;
 
10      (5)  Any transaction in a bond or other evidence of
 
11           indebtedness secured by a real or chattel mortgage or
 
12           deed of trust, or by an agreement for the sale of real
 
13           estate or chattels, if the entire mortgage, deed of
 
14           trust, or agreement, together with all the bonds or
 
15           other evidences of indebtedness secured thereby, is
 
16           offered and sold as a unit;
 
17      (6)  Any transaction by a personal representative, sheriff,
 
18           marshal, receiver, trustee in bankruptcy, guardian, or
 
19           conservator;
 
20      (7)  Any transaction executed by a bona fide pledgee without
 
21           any purpose of evading this chapter;
 
22      (8)  Any offer or sale to a bank, savings institution, trust
 
23           company, insurance company, investment company as
 

 
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 1           defined in the Investment Company Act of 1940, pension
 
 2           or profit-sharing trust, or other financial institution
 
 3           or institutional buyer, or to a dealer, whether the
 
 4           purchaser is acting for itself or in some fiduciary
 
 5           capacity;
 
 6      (9)  Any transaction pursuant to an offer directed by the
 
 7           offerer to not more than twenty-five persons (other
 
 8           than those designated in paragraph (8)) in the State
 
 9           during any period of twelve consecutive months, whether
 
10           or not the offerer or any of the offerees is then
 
11           present in the State, if all buyers represent that they
 
12           are purchasing for investment (rather than with a
 
13           present view to resale) and the seller reasonably
 
14           accepts their representations as true, and no
 
15           commission or other remuneration is paid or given
 
16           directly or indirectly for soliciting any prospective
 
17           buyer;
 
18     (10)  Any offer or sale of a preorganization certificate or
 
19           subscription for any security to be issued by any
 
20           person if no commission or other remuneration is paid
 
21           or given directly or indirectly for soliciting any
 
22           prospective subscriber, and the number of subscribers
 
23           does not exceed twenty-five;
 

 
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 1     (11)  Any transaction pursuant to an offer to existing
 
 2           security holders of the issuer, including persons who
 
 3           at the time of the transaction are holders of
 
 4           convertible securities, nontransferable warrants, or
 
 5           transferable warrants exercisable within ninety days of
 
 6           their issuance, if no commission or other remuneration
 
 7           (other than a standby commission) is paid or given
 
 8           directly or indirectly for soliciting any security
 
 9           holder in the State;
 
10     (12)  Any offer (but not a sale) of a security for which
 
11           registration statements have been filed under both this
 
12           chapter and the Securities Act of 1933, if no stop
 
13           order or refusal order is in effect and no public
 
14           proceeding or examination looking toward the order is
 
15           pending under either this chapter or the Act;
 
16     (13)  Any offer or sale by or through a real estate broker or
 
17           real estate salesperson licensed under the laws of the
 
18           State, of a security issued on or after July 1, 1961,
 
19           by a corporation organized under the laws of the State,
 
20           the holder of which is entitled solely by reason of the
 
21           holder's ownership thereof, to occupy for dwelling
 
22           purposes, or to a lease which entitles the holder to
 
23           occupy for dwelling purposes a house, or an apartment
 

 
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 1           in a building, owned or leased by the corporation,
 
 2           subject, however, to section 485-7;
 
 3     (14)  Any offer or sale by or through a real estate broker or
 
 4           real estate salesperson licensed under the laws of the
 
 5           State of an apartment in a condominium project, and a
 
 6           rental management contract relating to the apartment,
 
 7           including an interest in a general or limited
 
 8           partnership formed for the purpose of managing the
 
 9           rental of apartments if the rental management contract
 
10           or the interest in the general or limited partnership
 
11           is offered at the same time as the apartment is
 
12           offered.  The words "apartment", "condominium", and
 
13           "project" are defined as they are defined in section
 
14           514A-3; [and]
 
15     (15)  Any transactions not involving a public offering, and
 
16           in addition, any categories of transactions effected in
 
17           accordance with any rules the commissioner may issue
 
18           under chapter 91 pursuant to this paragraph with a view
 
19           to uniformity with federal law[.]; and
 
20     (16)  Any offer or sale of a security by an issuer in a
 
21           transaction that meets the following requirements:
 
22           (A)  Sales of securities shall be made only to persons
 
23                who are or the issuer reasonably believes are
 

 
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 1                accredited investors.  "Accredited investor" is
 
 2                defined in title 17 Code of Federal Regulations
 
 3                section 230.501(a);
 
 4           (B)  This exemption is not available to an issuer that
 
 5                is in the development stage, that either has no
 
 6                specific business plan or purpose, or has
 
 7                indicated that its business plan is to engage in a
 
 8                merger or acquisition with an unidentified company
 
 9                or companies, or other entity or person;
 
10           (C)  The issuer reasonably believes that all purchasers
 
11                are purchasing for investment and not with the
 
12                view to or for sales in connection with a
 
13                distribution of the security.  Any resale of a
 
14                security sold in reliance on this exemption within
 
15                twelve months of sale shall be presumed to be with
 
16                a view to distribution and not for investment,
 
17                except a resale pursuant to a registration
 
18                statement effective under section 485-8, or to an
 
19                accredited investor pursuant to an exemption
 
20                available under chapter 485;
 
21           (D)  The exemption is not available to an issuer if the
 
22                issuer, any of the issuer's predecessors, any
 
23                affiliated issuer, any of the issuer's directors,
 

 
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 1                officers, general partners, beneficial owners of
 
 2                ten per cent or more of any class of its equity
 
 3                securities, any of the issue's promoters presently
 
 4                connected with the issuer in any capacity, any
 
 5                underwriter of the securities to be offered, or
 
 6                any partner, director, or officer of the
 
 7                underwriter:
 
 8                (i)  Within the last five years, has filed a
 
 9                     registration statement that is the subject of
 
10                     a currently effective registration stop order
 
11                     entered by any state securities administrator
 
12                     or the United States Securities and Exchange
 
13                     Commission;
 
14               (ii)  Within the last five years, has been
 
15                     convicted of any criminal offense in
 
16                     connection with the offer, purchase or sale
 
17                     of any security, or involving fraud or
 
18                     deceit;
 
19              (iii)  Is currently subject to any state or federal
 
20                     administrative enforcement order or judgment,
 
21                     entered within the last five years, finding
 
22                     fraud or deceit in connection with the
 
23                     purchase or sale of any security; or
 

 
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 1               (iv)  Is currently subject to any order, judgment,
 
 2                     or decree of any court of competent
 
 3                     jurisdiction, entered within the last five
 
 4                     years, temporarily, preliminarily, or
 
 5                     permanently restraining or enjoining the
 
 6                     party from engaging in or continuing to
 
 7                     engage in any conduct or practice involving
 
 8                     fraud or deceit in connection with the
 
 9                     purchase or sale of any security;
 
10           (E)  Subparagraph (D) shall not apply if the party
 
11                subject to the disqualification is licensed or
 
12                registered to conduct securities related business
 
13                in the state in which the order, judgment, or
 
14                decree creating the disqualification was entered
 
15                against the party;
 
16           (F)  The issuer, in connection with an offer, may
 
17                provide information in addition to the general
 
18                announcement under section 485-B, if the
 
19                information:
 
20                (i)  Is delivered through an electronic database
 
21                     that is restricted to persons who have been
 
22                     prequalified as accredited investors; or
 
23               (ii)  Is delivered after the issuer reasonably
 

 
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 1                     believes that the prospective purchase is an
 
 2                     accredited investor;
 
 3           (G)  No telephone solicitation shall be permitted
 
 4                unless prior to placing the call the issuer
 
 5                reasonably believes that the prospective purchaser
 
 6                to be solicited is an accredited investor;
 
 7           (H)  Dissemination of the general announcement of the
 
 8                proposed offering to persons who are not
 
 9                accredited investors shall not disqualify the
 
10                issuer from claiming the exemption under this
 
11                rule; or
 
12           (I)  The issuer shall file with the division a notice
 
13                of transaction, a consent to service of process, a
 
14                copy of the general announcement, and a $200
 
15                filing fee within fifteen days after the first
 
16                sale in this State."
 
17      SECTION 4.  In codifying the new sections added to chapter
 
18 485, Hawaii Revised Statutes, by section 2 of this Act, the
 
19 revisor of statutes shall substitute appropriate section numbers
 
20 for the letters used in designating the new sections in this Act.
 
21      SECTION 5.  Statutory material to be repealed is bracketed.
 
22 New statutory material is underscored.
 
23      SECTION 6.  This Act shall take effect upon its approval.