REPORT TITLE:
Securities


DESCRIPTION:
Authorizes small companies to raise capital through small
corporate offerings registration (SCOR), a uniform registration
system that allows small companies to obtain equity financing by
selling common stock directly to the public.  Establishes a
complementary program, the accredited investor exemption, which
utilizes SCOR documents and provides a vehicle to raise capital
through a private placement to qualified higher net worth
individuals and institutions.  (SB1071 HD2)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        1071
THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 1999                                H.D. 2
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 (ACE-
 
 7 Net) in Hawaii.  This is a nationwide directory of "angels" or
 
 8 high net worth individual investors who are seeking investments
 
 9 in high growth companies.  SCOR and the accredited investor
 
10 exemption set forth in this bill will supplement and complement
 
11 the small business investment program, reduce the amount of
 
12 disclosure required of larger and more complicated public
 
13 offerings, and attract additional private sector investment.
 
14      Existing state securities laws, however, may prevent the
 
15 implementation of the SCOR uniform registration system.  The
 
16 federal securities laws governing the private sale of securities
 
17 are collectively known as "Regulation D".  The State's response
 
18 to Regulation D is the Uniform Securities Act (Modified), which
 
19 is contained in chapter 485, Hawaii Revised Statutes.  Pursuant
 
20 to the Small Business Incentive Act of 1980, the North American
 
21 Securities Administrators Association has developed "Form U-7", a
 
22 question and answer disclosure document for small companies that
 
23 seek to provide a complete listing of all disclosure issues that
 

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

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

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

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

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

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

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

 
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 1                (i)   The issuer reasonably believes that the sale
 
 2                      is to persons who are accredited investors;
 
 3               (ii)   The issuer is not in the development stage,
 
 4                      without specific business plan or purpose;
 
 5              (iii)   The issuer has not indicated that the
 
 6                      issuer's business plan is to engage in a
 
 7                      merger or acquisition with an unidentified
 
 8                      company or companies, or other entity or
 
 9                      person; and
 
10               (iv)   The issuer reasonably believes that all
 
11                      purchasers are purchasing for investment
 
12                      purposes and not with the view to, or for
 
13                      sales in connection with, a distribution of
 
14                      the security.  Any resale of a security sold
 
15                      in reliance of this exemption within twelve
 
16                      months of sale shall be presumed to be made
 
17                      with a view to distribute and not to invest,
 
18                      except a resale pursuant to a registration
 
19                      statement effective under section 485-8, or
 
20                      to an accredited investor pursuant to an
 
21                      exemption available under chapter 485;
 
22           (B)  The exemption under this paragraph shall not apply
 
23                to an issuer if the issuer; any affiliated issuer;
 

 
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 1                any beneficial owner of ten per cent or more of
 
 2                any class of the issuer's equity securities; any
 
 3                issuer's predecessor, director, officer, general
 
 4                partner, or promoter presently connected in any
 
 5                capacity with the issuer; and any underwriter or
 
 6                partner, director, or officer of the underwriter
 
 7                of the securities to be offered:
 
 8                (i)   Within the last five years has filed a
 
 9                      registration statement that is the subject
 
10                      of a currently effective registration stop
 
11                      order entered by any state securities
 
12                      administrator or the United States
 
13                      Securities and Exchange 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 such
 
 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           (C)  Subparagraph (B) shall not apply if:
 
11                (i)  The party subject to the disqualification is
 
12                     licensed or registered to conduct securities-
 
13                     related business in the state in which the
 
14                     order, judgment, or decree creating the
 
15                     disqualification was entered against such
 
16                     party;
 
17               (ii)  Before the first offer under this exemption,
 
18                     the commissioner, or the court or regulatory
 
19                     authority that entered the order, judgment,
 
20                     or decree waives the disqualifications; or
 
21              (iii)  The issuer establishes that the issuer did
 
22                     not know and in the exercise of reasonable
 
23                     care, based on a factual inquiry, could not
 

 
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 1                     have known that a disqualification existed
 
 2                     under this paragraph;
 
 3           (D)  An issuer claiming the exemption under this
 
 4                section, within fifteen days after the first sale
 
 5                in this state, shall file with the commissioner a
 
 6                notice of transaction, a consent to service of
 
 7                process, a copy of the general announcement as
 
 8                required by section 485-C, and a $200 filing fee;
 
 9                and
 
10           (E)  For the purposes of this paragraph, "accredited
 
11                investor" shall have the same meaning as provided
 
12                in 17 Code of Federal Regulations section
 
13                230.501(a)."
 
14      SECTION 4.  In codifying the new sections added to chapter
 
15 485, Hawaii Revised Statutes, by section 2 of this Act, the
 
16 revisor of statutes shall substitute appropriate section numbers
 
17 for the letters used in designating the new sections in this Act.
 
18      SECTION 5.  Statutory material to be repealed is bracketed.
 
19 New statutory material is underscored.
 
20      SECTION 6.  This Act shall take effect upon its approval.