texas house committee on investments and financial services

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Written Statement of John Morgan, Texas Securities Commissioner Page 1House Investments and Financial Services -- Interim Charge No. 3May 14, 2014

In the Texas House Commit tee on Investments and Financial Services

Hearing on Interim Committee Charge No. 3Intrastate Crowdfunding

Written Statement of John MorganSecurities CommissionerTexas State Securities Board

May 14, 2014

I. Background

Last year, the staff of the Texas State Securities Board ("TSSB") began closelyreviewing recent initiatives to develop "equity crowdfunding" exemptions from the

securities registration requirements of federal and state laws.

Crowdfunding is generally described as the process of financing a particularventure through small contributions from the public using the internet. Thecrowdfunding process has been used to fund popular non-profit causes, financeartistic endeavors, and provide startup funding for entrepreneurs to developpromising products or services. Kickstarter.com and Indegogo.com are two well-known websites that have specialized in facilitating such funding.

Because of the possible application of federal and state securities laws,compensation, if any, paid to members of the public who contributed tocrowdfunded ventures has typically been limited to a token of value related to theproject (e.g.,a music album or one of the entrepreneur's new products.)

Equity crowdfunding allows for the sale to the public, generally through anintermediary known as a funding portal, of shares or interests in the ownership,financial returns, or profits of the issuer pursuant to an exemption from thesecurities registration requirements of the law.

The federal and state securities laws are constructed to generally require thatsecurities are registered unless a narrowly-construed exemption fromregistration is applicable. Such exemptions have developed over time wheresafeguards are in place to adequately protect the public, such as transactions inwhich certain restrictions are placed on the seller or issuer.

The TSSB staff analyzed the equity crowdfunding initiatives of the states thathave taken action in this area as well as the recent proposed rulemaking by theU.S. Securities and Exchange Commission (SEC) to implement the crowdfundingprovisions of the federal Jumpstart Our Business Startups Act, ("JOBS Act"),passed by Congress in 2012. The staff also obtained information from firms and


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individuals with interest and expertise in crowdfunding, including industryattorneys, consultants, control persons of an existing crowdfunding portal, boardmembers of the national advocacy organization known as CFIRA, other stateregulators, and senior legal counsel at the SEC's Division of Trading andMarkets.

Based on the staff's work, in April, the governing Board of the TSSB issuedproposed rules to create an exemption from the securities registrationrequirements of the Texas Securities Act for Texas-based firms seeking to raisecapital from the public through equity crowdfunding (attached as "Appendix A.")

The proposed rules have been published in the Texas Registerand the staff iscurrently receiving public comment on them. The objective is to work withmembers of the bar, industry, and others to identify and address any arearequiring clarification or modification to ensure that the funding mechanisms forthese rules operate as efficiently and effectively as possible to benefit small

business issuers and the investing public in Texas. The Board will meet toconsider adoption of the rules at its next meeting, likely to be in August orSeptember of 2014.

II. Appropriateness, Benefits, and Potential Costs of Implementing anIntrastate Equity Crowdfunding System in Texas

Given the pending status of the federal crowdfunding law, as discussed morefully below, and its preemptive effect on state authority, there was an initialquestion concerning the utility of a state exemption that must limit sales to onlyresidents of the state. Other states delayed or indefinitely postponed plans tomove forward with an intrastate exemption, awaiting the results of theimplementation of the federal exemption. However, the TSSB staff consistentlyheard from industry representatives and others that the large size of the capitalmarket in Texas, coupled with appropriately-tailored rulemaking, would likelyensure that an intrastate exemption would be used by small businesses in Texas.

The benefit most often articulated by advocates for equity crowdfunding is thatsuch an exemption provides startups and small businesses with a low-costavenue for capital that does not currently exist -- sales to the general publicthrough a public website. More far-reaching benefits accrue with the successand eventual profitability of the business, resulting in the potential for job creationand eventual economic reward to investors.

It is important to note that nationally, the volume of securities offerings made inall transactions exempt from registration now exceeds those of registeredofferings. There are a number of securities registration exemptions in Texasbeing used by small and medium size businesses to raise capital, however these


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often focus on sales to accredited investors1. One offering type, made pursuantto federal Regulation D 506, which preempts state registration requirements,allows an unlimited amount of money to be raised from an unlimited number ofaccredited investors. The Texas State Securities Board receives approximately100 such filings a week -- collectively totaling billions of dollars.

While it is apparent that the proposed Texas equity crowdfunding rules will createanother useful tool for small business to raise capital, the feature of crowdfundingseen by its advocates as it's primary benefit, also highlights its greatest potentialcost -- the risk of loss to the unaccredited investors who participate in theseofferings. Unaccredited investors, with lower income and net worth levels, maybe less able to afford the complete loss of their investment. Given the reportedconsistently high failure rate of the business segment most likely to use the newexemption, it is important to include some basic structure regarding disclosureguidelines, method of sale, and resources available to issuers to help facilitatethe long-term success and utility of the exemption.

The exemption created in the proposed rules is designed to help startups andsmall businesses by making relatively low dollar offerings of securities lesscostly. The costs of conducting a registered offering, including legal, accounting,and registration fees, can be significant. Offering securities through a privateplacement exemption can also be complicated and costly. Legal counsel is oftenneeded to ensure that restrictions on general solicitation and general advertisingare not violated and purchaser qualification requirements are met. There is ananticipated economic cost to entities that are required to comply with thecrowdfunding exemption as proposed, including preparing offering documentsand disclosure statements, providing current, certified financial statements, andcompensating portals for their listing services. Although there is no fee, a noticefiling with the TSSB is also required. While such costs are not insignificant, theyare less than the costs associated with registered or private offerings. Therefore,the effect on micro or small businesses and anticipated impact on localemployment is expected to be positive.

Other costs that have been identified in connection with the rulemaking are apotential minimal decrease (about $6,000 over a five-year period) in state feerevenue collected by the TSSB for issuers that formerly relied on the intrastatelimited offering exemption (ILOE) who may choose instead to use the proposedexemption. While the ILOE requires the payment of a notice filing fee (the lesserof $500 or 1/10 of 1.0% of the aggregate amount of securities offered), theproposed issuer crowdfunding exemption does not.

1Generally, an accredited investor is a natural person with a net worth exceeding$1 million or with an annual income of more than $200,000 (or $300,000 whencombined with the spouses income) or an entity with more than $5 million inassets.


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Because under the proposed rules crowdfunding offerings may be made onlythrough a website maintained by a registered Texas crowdfunding portal, thereare anticipated costs for these entities. Costs include the payment to the TSSBof an annual registration fee, designing and maintaining a website, conductingbackground and regulatory checks on potential issuers and their control persons,

and maintaining records of offerings made and communications concerning theofferings. While such costs are not insignificant, they are generally less than thecosts associated with being a registered general dealer. Therefore, the effect onmicro or small businesses will most likely be a positive one.

III. Federal and State Init iatives

The federal JOBS Act was a package of legislation signed into law by PresidentObama on April 5, 2012 designed to assist small businesses by easing securitiesregulations and thereby encourage the formation of capital. Title III, known asthe "Crowdfund Act," established an exemption from federal securities

registration requirements for crowdfunding transactions subject to qualifications,including: limitations on the amount raised by an issuer in a 12-month period;limitations on individual investments based on certain net worth and incomecriteria; and a requirement that transactions must be conducted through anintermediary that either is registered as a broker or registered as a funding portal.The SEC was directed in the JOBS Act to issue new rules to fully implement thelaw.

Importantly, under Title III of the JOBS Act, states are expressly preempted fromrequiring registration of any offering made pursuant to the federal exemption.

The SEC's 175-page release of the proposed rules was published in the FederalRegisteron November 5, 2013. The period for public comment ended onFebruary 3, 2014. There is some indication that final rules may be issued by theSEC by the end of this year.

Unfavorable public comments concerning the JOBS Act provisions and theSEC's proposed rules have addressed the requirement of audited financialstatements for issuers, restrictions on compensation paid to funding portals, thecreation of unnecessary liability for funding portals, complex disclosurerequirements for issuers and funding portals, and burdensome ongoingdisclosure requirements.

There are presently nine states that have adopted some form of equitycrowdfunding exemption: Alabama, Georgia, Idaho, Indiana, Kansas, Maine,Michigan, Washington, and Wisconsin. Common features of these exemptionsinclude: sales made exclusively within the state; annual offering limits for issuers;simplified limits on amounts that may be invested by persons who are notaccredited investors; requirements for sales to be made through internet funding


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portals or registered dealers; escrow of offering proceeds; and disqualification forissuers controlled by persons with criminal or regulatory disciplinary history.

Kansas holds the distinction of being the first to implement such a measure -- inAugust 2011. Of the eight other states that have adopted an equity crowdfunding

exemption, four have done so in just the last few months.

The Texas proposals create a structure that will minimize burdens on smallbusiness issuers while maintaining basic investor protections necessary for thelong-term success of the exemption as a vehicle to raise capital for legitimatebusinesses. Key features are:

1. The issuer is an entity organized under the laws of the state ofTexas; authorized to do business in the state; maintains its principaloffice is in Texas; and meets specified standards for intrastateofferings.

2. The issuer may not be an investment company, SEC reportingcompany, company with no business plan, or with a business planto merge with an undetermined entity.

3. The offering is made exclusively through an internet websitemaintained by a registered Texas crowdfunding portal and allcommunications between the issuer, prospective purchasers orinvestors during the offering occur on the Internet website.

4. The offering does not exceed $1 million in a 12-month period;

5. Individual investments are limited to no more than $5,000 for anoffering unless the purchaser is an accredited investor

6. Investor funds are deposited directly in a regulated depositoryinstitution in Texas and held until the minimum target amount of theoffering is raised;

7. Specified disclosures are provided on the portal website and toprospective investors and steps are taken by the Portal operators toensure that only Texas residents are viewing the information;

8. Information is posted on the website and a notice is filed with theTSSB by the issuer 21 days in advance of sales being made in theoffering; and

9. The exemption is not available to an Issuer that has a controlperson with a criminal conviction for investment-related offenses inthe last five years or who is the subject of certain regulatory


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disciplinary actions within the last five years. The exemption is alsonot available if the proceeds will be combined with other offeringsas part of a single plan of financing or if there is commonality ofcontrol persons among issuers using the exemption in the last 12months.

The framework for the proposed rules also includes important provisions forcrowdfunding portals:

1. The portal will register with the State Securities Board.

2. The portal must be organized under the laws of the state of Texas,authorized to do business in the state, and engaged exclusively inthe intrastate offer and sale of securities in Texas;

3. The portal must maintain a website that meets specified

requirements concerning disclosure to the public and access toinformation on the website;

4. The portal is prohibited from offering investment advice,compensating unregistered persons for soliciting or making sales ofsecurities, handling customer funds, being affiliated with or sharingcontrol of an issuer, or receiving a financial interest in an issuer ascompensation;

5. The portal must perform background and regulatory checks on theissuer and its control persons, meet certain recordkeepingrequirements, and remain subject to periodic examination by TSSBstaff in same manner as other dealers registered in Texas.

6. The portal must maintain specified records and is subject to onsiteexamination by the State Securities Board in the same manner asother registered dealers.

IV. Changes Necessary to Implement Equity Crowdfunding

As indicated, the proposed rules issued by the TSSB to implement equitycrowdfunding in Texas are expected to become final in August or September ofthis year. The staff of the Agency is also presently developing the content for aninternet website designed to assist small business issuers. The website willbecome operational at or before the time the rules become final. It will include acomprehensive disclosure guide, resources to assist in compliance withsecurities laws and other Texas statutes, and links to tools for businessvaluation, business planning, and other important information. The TSSB willalso seek out partnerships with other agencies to link to additional resources thatmay be of assistance to small businesses.


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Appendix A

Texas State Securities BoardPublished Texas Intrastate Crowdfunding Rule Proposals


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CHAPTER115. SECURITIESDEALERSAND

AGENTS

7TAC115.1,115.3,115.19

The

Texas

State

Securities

Board

proposes

amendments

to

115.1,

concerning

general

provisions,

and

115.3,

concerning

examination. New 115.19, concerning Texas crowdfundingportal

registration

and

activities,

is

also

proposed.

The

amendment

to

115.1

would

add

a

denition

for

"Texas

crowdfundingportal"andprovidearestricteddealerregistrationcategory

as

such.

The

amendment

to

115.3

would

provide

an

examination

waiver

to an applicant applying for restricted dealer registration as aTexas

crowdfunding

portal.

New

115.19

would

set

out

the

registration

process

and

permit-ted

activities

of

a

dealer

registered

as

a

Texas

crowdfunding

por-tal.

A

Texas

crowdfunding

portal

would

be

a

Texas-only

dealer,

able

toutilizetheexclusionfromfederalregistrationavailabletodeal-ers

whose

business

is

exclusively

intrastate.

The

portal's

activi-ties

would

be

limited

to

operating

an

Internet

website

for

139.25

exempt offerings. It couldnot participate in secondarymarkettransactions

or

engage

in

the

activities

in

subsection

(c).

To

preserve

the

intrastate

character

of

the

dealer's

activities

and

theoffering, the Internetwebsitemustcontainappropriatedis-claimers

and

obtain

evidence

of

Texas

residency

before

allowing

accesstotheofferingmaterialsorpermittingasaletobemade.

PriortoofferingsecuritiesontheInternetwebsite,theportalcon-

ducts

background

and

regulatory

checks

on

the

issuer

and

each

of

the

issuer's

control

persons.

Additionally,

the

portal

must

ob-tain

afrmative

acknowledgments

of

certain

disclosures

common

to

all

crowdfunding

offerings

from

investors

before

a

sale

can

be

made.

Records

required

to

be

kept

by

the

portal

are

specied

in

subsec-tion

(e),

rather

than

the

more

extensive,

and

mostly

inapplicable,

listofrecordsrequiredofothersecuritiesdealers.Aportalisalsonot

required

to

maintain

a

supervisory

system.

A

portal's

records

aresubjecttoinspectionandmustbefurnishedonrequestoftheSecurities

Commissioner.

A

Texas

crowdfunding

portal

would

apply

for

registration

by

l-ingnewForm133.15,whichisbeingconcurrentlyproposed. Itwould

also

provide

its

organizational

documents

to

establish

its

status

as

a

Texas

entity.

It

would

be

subject

to

the

same

reg-

istration

fee

as

other

dealers

registered

in

Texas.

New

Form

133.15

would

also

be

used

for

ling

amendments.

The

portal

is

subjecttothepost-registrationreportingrequirementsin115.9.When

the

portal

withdraws

its

registration,

it

would

use

new

Form

133.16,

which

is

also

being

proposed.

Tommy

Green,

Director,

Inspections

and

Compliance

Division,

Patricia Loutherback, Director, Registration Division, and JoeRotunda,

Director,

Enforcement

Division,

have

determined

that

fortherstve-yearperiod115.1and115.3areineffect,therewill

be

no

foreseeable

scal

implications

for

state

or

local

govern-mentasaresultofenforcingoradministeringtherule.However,there

will

be

scal

implications

as

a

result

of

enforcing

or

admin-istering

new

115.19

on

state,

but

not

local

government.

The

effect

on

state

government

for

the

rst

ve-year

period

115.19 will be in effect is a potential increase in revenuein

the

form

of

fees

paid

by

entities

registering

in

Texas

as

crowdfunding

portals

and

by

their

agents.

Under

existing

Texaslaw

and

regulations,

a

third

party

operating

a

website

to

effect

the purchase and sale of securities for the account of otherswould

normally

be

required

to

register

as

a

general

dealer

and

comply

with

the

laws

and

regulations

applicable

thereto.

A

person operating such a website merely for the purchase ofsecurities

of

startups

and

small

businesses,

however,

may

nd

it

impracticalinviewofthelimitednatureofthatperson'sactivitiesand

business

to

register

as

a

general

dealer

and

operate

under

the

full

set

of

regulatory

obligations

that

apply

to

dealers.

The

restricted registration provided by the new rule is expected toencourage

the

formation

of

third-party

portals.

The

increase

in

state revenue from these potential new registrants would be$275

for

each

rm

and

$285

for

each

agent

that

registers

in

Texas

and

thereafter

would

be

$270

and

$275,

respectively,

for

eachannualrenewal.

Mr.

Green,

Ms.

Loutherback,

and

Mr.

Rotunda

also

have

de-termined

that

for

each

year

of

the

rst

ve

years

the

rules

are

in

effect thepublicbenetanticipatedasaresultofenforcing therules

will

be

to

allow

persons

restricting

their

activities

as

pro-vided by new 115.19 to use a simplied registration processand

keep

activity-specic

records.

The

creation

of

these

Texas

crowdfunding

portals

would

facilitate

the

capital

raising

efforts

of

small business issuers who utilize the Texas intrastate crowd-funding

exemption.

Evaluating

the

potential

economic

impact

of

the

proposed

rules

onsmallandmicro-businessrequiresadegreeofspeculationasboth

the

business

and

regulatory

models

involved

are

new.

Also,

thepotentialeconomicimpactneedstobeconsideredfromtwodifferent

angles:

the

impact

on

small

business

as

crowdfunding

portals

and

small

business

as

securities

issuers.

Portals,asenvisionedby115.19,donotcurrentlyexist,butifand

when

they

do,

it

is

likely

that

they

will

be

small

businesses.

Crowdfunding

portals

can

support

smaller

capital

raises

with-outperformingalloftheordinarilycostlydutiesassociatedwitha

full-service

securities

dealer.

For

example,

portals

will

not

be able to offer investment advice or recommendations, con-duct

business

valuations,

or

hold,

manage,

possess

or

otherwise

handle

investor

funds

or

securities.

The

result

will

be

a

simpler

coststructurewithlowerfeesthanthosetypicallyassociatedwithan

equity

investment

offering.

Lower

costs

for

the

portal

result

inlowerfeesforissuers.Thismeansthatsmallbusinessescanact

as

portals

and

make

it

easier

for

small

and

micro-business

to

raise

capital,

which

is

the

aim

of

the

proposal.

There

is

an

anticipated

economic

cost

to

entities

that

are

re-quired

to

comply

with

115.19

as

proposed,

including

designing

and

maintaining

a

website,

conducting

background

and

regula-torychecksonpotential issuersand theircontrolpersons,andmaintaining

records

of

offerings

made

and

communications

con-cerning the offerings. Registration and renewal fees are alsorequired.

While

such

costs

are

not

insignicant,

they

are

less

39TexReg3652 May9,2014 TexasRegister

PAGE 1


9/32

thanthecostsassociatedwithbeingaregisteredgeneraldealer.Therefore,

the

effect

on

micro- or

small

businesses

will

most

likely be a positive one. The anticipated impact on local em-ployment

is

also

expected

to

be

positive.

Since

the

rules

will

have

no

adverse

economic

effect

on

micro- or

small

businesses,

preparationofaneconomic impactstatementandaregulatoryexibility

analysis

is

not

required.

Comments

on

the

proposal

to

be

considered

by

the

Board

should

be submitted in writing within 30 days after publication of theproposed

sections

in

the

Texas

Register.

Comments

should

be

senttoMarleneK.Sparkman,GeneralCounsel,StateSecurities

Board,

P.O.

Box

13167,

Austin,

Texas

78711-3167

or

sent

byfacsimile

to

(512)

305-8336.

The amendments to 115.1and115.3 and new rule 115.19areproposedunderTexasCivilStatutes,Article581-28-1. Sec-tion

28-1

provides

the

Board

with

the

authority

to

adopt

rules

and

regulationsnecessarytocarryoutandimplementtheprovisionsof

the

Texas

Securities

Act,

including

rules

and

regulations

gov-erningregistrationstatementsandapplications;deningterms;classifying

securities,

persons,

and

matters

within

its

jurisdiction;

and

prescribing

different

requirements

for

different

classes.

TheproposalsaffectTexasCivilStatutes,Articles581-12,581-13,581-14,581-15,and581-18.

115.1. GeneralProvisions.

(a) Denitions.Wordsandtermsusedinthischapterarealsodened

in

107.2

of

this

title

(relating

to

Denitions).

The

following

wordsandterms,whenusedinthischapter,shallhavethefollowingmeanings,unlessthecontextclearlyindicatesotherwise.

(1)- (9) (Nochange.)

(10)

Texas

crowdfunding

portal--Any

person

registered

as

aTexasdealerpursuantto115.19ofthistitle(relatingtoTexasCrowd-fundingPortalRegistrationandActivities)thatutilizesanInternetweb-site

to

offer

or

sell

securities

that

are

exempt

from

securities

registration

solelypursuant to139.25ofthis title(relatingtoIntrastateCrowd-funding

Exemption).

(b)

(No

change.)

(c) Typesofregistrations.

(1)

(No

change.)

(2) Restrictedregistration. Therestrictedregistrationsareas

follows:

(A)

- (M)

(No

change.)

(N) registrationtodealexclusivelyininvestmentbank-ing;[and]

(O) registration to act exclusively as a Texas crowd-funding

portal;

and

(P) [(O)]registrationwithotherrestrictionswhichtheSecuritiesCommissionermayimposebaseduponthefacts.

(3)

(No

change.)

(d)

(No

change.)

115.3.

Examination.

(a)- (b) (Nochange.)

(c) Waiversofexaminationrequirements.

(1)

(No

change.)

(2) Afullwaiveroftheexaminationrequirementsof thTexas

Securities

Act,

13.D,

is

granted

by

the

Board

to

the

followinclassesofpersons:

(A)- (E) (Nochange.)

(F) apersonwhocompletedtherequiredexaminationbut

whose

registration

has

lapsed

for

more

than

two

years

and

whhasbeencontinuallyemployedinasecurities-relatedpositionwithaentity

which

was

not

required

to

be

registered;

[and]

(G)

a

person

who

completed

the

required

examinationandwhoseregistrationwithFINRAandwithanotherstatesecuritie

regulator

has

not

lapsed

for

more

than

two

years;

and[.]

(H)

a

Texas

crowdfunding

portal

and

its

agents.

(3)

- (4)

(No

change.)

(d) (Nochange.)

115.19. TexasCrowdfundingPortalRegistrationandActivities.

(a)

Intrastate

portal.

A

Texas

crowdfunding

portal:

(1) mustbeanentityincorporatedororganizedunderthlawsofTexas,authorizedtodobusinessinTexas,andengagedexclusively

in

intrastate

offers

and

sales

of

securities

in

Texas;

(2) mustlimititsactivitiestooperatinganInternetwebsitutilizedtoofferandsellsecuritiesexemptfromregistrationpursuantt139.25

of

this

title

(relating

to

Intrastate

Crowdfunding

Exemption

and

(3) doesnotoperateorfacilitateasecondarymarketinsecurities.

(b)

Internet

website.

The

Internet

website

operated

by

thTexascrowdfundingportalmustmeetthefollowingrequirements:

(1) thewebsitemustcontainadisclaimerthatreectsthaccess

to

securities

offerings

on

the

website

is

limited

to

Texas

resdentsandoffersandsalesof thesecuritiesappearingonthewebsitare

limited

to

persons

that

are

Texas

residents;

(2)

evidence

of

residency

within

Texas

is

required

as

a

conditionofentrybeforeviewingsecurities-relatedofferingmaterialsothe

website

and

before

sale

is

made

to

a

prospective

purchaser.

Aafrmative representation madeby aprospectivepurchaser that thprospectivepurchaserisaTexasresidentandproofofatleastoneo

the

following

would

be

considered

sufcient

evidence

that

the

individualisaresidentofthisstate:

(A) a valid Texas driver license or ofcialpersonidentication

card

issued

by

the

State

of

Texas;

(B) acurrentTexasvoterregistration;or

(C) generalpropertytaxrecordsshowingtheindividuownsandoccupiesproperty in thisstateashisorherprincipalresdence;

(3) priortoofferinganinvestmentopportunitytoresidenofTexasandthroughoutthetermoftheoffering,theportalshallgivthe

Securities

Commissioner

access

to

the

Internet

website;

and

(4) priortopermittinganinvestmentinanysecuritieslisteontheInternetwebsite,theportalshallobtainanafrmativeacknowedgment

from

the

investor

of

the

following:

(A) Thereisnoreadymarketforthesaleofthesecuritiesacquiredfromthisoffering;itmaybedifcultorimpossiblefoan

investor

to

sell

or

otherwise

dispose

of

this

investment.

An

investomayberequiredtoholdandbearthenancialrisksofthisinvestmenindenitely;

PROPOSEDRULES May9,2014 39TexReg365

PAGE 2


10/32

(B) Thesecuritieshavenotbeenregisteredunderfed-eral

or

state

securities

laws

and,

therefore,

cannot

be

resold

unless

the

securitiesareregisteredorqualifyforanexemptionfromregistrationunder

federal

and

state

law;

(C)

In

making

an

investment

decision,

investors

must

relyontheirownexaminationoftheissuerandthetermsoftheoffering,includingthemeritsandrisksinvolved;and

(D)

No

federal

or

state

securities

commission

or

regula-toryauthorityhasconrmedtheaccuracyordeterminedtheadequacyof thedisclosurestatementoranyother informationon thisInternetwebsite.

(c) Prohibitedactivities. ATexascrowdfundingportalshallnot:

(1)

offer

investment

advice

or

recommendations;

(2)

compensate

employees,

agents,

or

other

persons

not

registered with the Securities Commissioner for soliciting offers orsales

of

securities

displayed

or

referenced

on

its

platform

or

portal;

(3)

hold,

manage,

possess

or

otherwise

handle

investor

fundsorsecurities;

(4) beafliatedwithorundercommoncontrolwithanis-suer

whose

securities

appear

on

the

Internet

website;

(5)

hold

a

nancial

interest

in

any

issuer

offering

securities

ontheportal'sInternetwebsite;or

(6)

receive

a

nancial

interest

in

an

issuer

as

compensation

for

services

provided

to

or

on

behalf

of

an

issuer.

(d) Backgroundandregulatorychecks.Priortoofferingsecu-ritiestoresidentsofTexas,theTexascrowdfundingportalshallconducta

reasonable

investigation

of

the

background

and

regulatory

history

of

eachissuerwhosesecuritiesareofferedontheportal'sInternetwebsite,and

of

each

of

the

issuer's

control

persons.

"Control

persons"

for

pur-posesofthissubsectionmeanstheissuer'sofcers;directors;orotherpersonshavingthepower,directlyorindirectly,todirectthemanage-ment

or

policies

of

the

issuer,

whether

by

contract

or

otherwise;

and

personsholdingmorethan20%oftheoutstandingequityoftheissuer.The

portal

must

deny

an

issuer

access

to

its

Internet

website

if

the

por-talhasareasonablebasisforbelievingthat:

(1) theissueroranyofitscontrolpersonsissubjecttoadis-

qualication

under

139.25

of

this

title

(relating

to

Intrastate

Crowd-fundingExemption);

(2) theissuerhasengagedin,isengagingin,ortheofferinginvolvesanyact,practice,orcourseofbusinessthatwill,directlyorindirectly,operateasafraudordeceituponanyperson;or

(3) it cannot adequately or effectively assess the risk offraudbytheissueroritspotentialoffering.

(e)

Recordkeeping.

(1)

A

Texas

crowdfunding

portal

is

not

required

to

main-tain the records listed in 115.5 of this title (relating to MinimumRecords)

or

to

maintain

a

supervisory

system

under

115.10

of

this

title(relatingtoSupervisoryRequirements).

(2) Aportalshallmaintainandpreserveforaperiodofve

(5)

years

from

either

the

date

of

the

document

or

communication

or

the

dateoftheclosingorterminationofthesecuritiesoffering,whicheverislater,thefollowingrecordsrelatedtooffersandsalesmadethroughthe

Internet

website

and

to

transactions

where

the

portal

receives

com-pensation:

(A) records of compensation received for acting as aportal,

including

the

name

of

the

payor,

the

date

of

payment,

name

of

theissuer,andnameoftheinvestor;

(B) copiesofinformationprovidedbytheportaltois-suers

offering

securities

through

the

portal,

prospective

purchasers,

and

investors;

(C) anyagreementsand/orcontractsbetweentheportaland

an

issuer,

prospective

purchaser,

or

investor;

(D)

any

information

used

to

establish

that

an

issuer,

prospectivepurchaser,orinvestorisaTexasresident;

(E)

any

information

used

to

establish

that

a

prospective

purchaser

or

investor

is

an

accredited

investor

as

dened

in

107.2

of

thistitle(relatingtoDenitions);

(F) anycorrespondenceorothercommunicationswithissuers,

prospective

investors,

and/or

investors;

(G)

any

information

made

available

through

the

portal's

Internetwebsiterelatingtoanoffering;

(H) ledgers(orotherrecords)thatreectallassetsandliabilities,

income

and

expense,

and

capital

accounts;

and

(I)

any

other

records

relating

to

the

offers

and/or

sales

ofsecuritiesmadethroughtheInternetwebsite.

(3) AportalshallmaintainandpreserveacopyoftheForm133.15

(relating

to

Texas

Crowdfunding

Portal

Registration),

Form

133.16

(relating

to

Texas

Crowdfunding

Portal

Withdrawal

of

Registra-tion),

and

the

Form

U-4

(Uniform

Application

for

Securities

Industry

RegistrationorTransfer)usedtoregistertheportalanditsdesignatedofcer,andanyamendmentsthereto,foraperiodofve(5)yearsfromthe

termination

of

the

portal's

registration.

(4) The records required tobemaintainedandpreservedunderthissubsectionmaybearchivediftheyareovertwoyearsold.

(5)

A

portal

shall,

upon

written

request

of

the

Securities

Commissioner, furnish to theCommissioneranyrecordsrequired tobemaintainedandpreservedunderthissubsection.

(6) Theportalshallprovide to theCommissioneraccess,inspection,andreviewofanyInternetwebsiteoperatedbyaportalandrecordsmaintainedbytheportal;and

(7)

The

records

required

to

be

kept

and

preserved

under

this

subsection

must

be

maintained

in

a

manner,

including

by

any

elec-tronicstoragemedia, thatwillpermit the immediate locationofanyparticular

document

so

long

as

such

records

are

available

for

immedi-ateandcompleteaccessbyrepresentativesoftheCommissioner.Anyelectronicstoragesystemmustpreserve therecordsexclusively inanon-rewriteable,non-erasableformat;verifyautomaticallythequalityandaccuracyofthestoragemediarecordingprocess;serializetheorig-inal

and,

if

applicable,

duplicate

units

of

storage

media,

and

time-date

fortherequiredperiodofretentiontheinformationplacedonsuchelec-tronic

storage

media;

and

can

download

indexes

and

records

preserved

onelectronicstoragemediatoanacceptablemedium.Intheeventthatarecordsretentionsystemcomminglesrecordsrequiredtobekeptun-der

this

subsection

with

records

not

required

to

be

kept,

representatives

oftheCommissionermayreviewallcommingledrecords.

(f)

Filings.

(1) Application. Inlieuoftheapplicationrequirementsin115.2

of

this

title

(relating

to

Application

Requirements),

a

complete

applicationforaTexascrowdfundingportalconsistsofthefollowingand

must

be

led

with

the

Securities

Commissioner:


PAGE 3


11/32

(A) Form 133.15, including all applicable schedulesand

supplemental

information;

(B) FormU-4,forthedesignatedofcerandaFormU-4foreachagenttoberegistered(ofcersofacorporationorpartnersofa

partnership

shall

not

be

deemed

agents

solely

because

of

their

status

asofcersorpartners);

(C) acopyofthearticlesofincorporationorotherdoc-uments

which

indicate

the

form

of

organization,

certied

by

the

Texas

SecretaryofStateorbyanofcerorpartneroftheapplicant;

(D) any other information deemed necessaryby the

Commissioner

to

determine

the

nancial

responsibility,

businessrepute,orqualicationsoftheportal;and

(E) theappropriateregistrationfee(s).

(2) Post-reportingrequirements. Aportalissubjecttothedealer

and

agent

requirements

in

115.9

of

this

title

(relating

to

Post-RegistrationReportingRequirements).

(3) Renewal.Registrationasaportalexpiresatthecloseofthe

calendar

year,

but

subsequent

registration

for

the

succeeding

year

shallbeissueduponwrittenapplicationanduponpaymentoftheappro-priaterenewalfee(s),withoutlingoffurtherstatementsorfurnishinganyfurtherinformationunlessspecicallyrequestedbytheCommis-sioner.

The agency certies that legal counsel has reviewed the pro-posal

and

found

it

to

be

within

the

state

agency's

legal

authority

to

adopt.

Filed

with

the

Ofce

of

the

Secretary

of

State

on

April

25,

2014.

TRD-201401989

JohnMorgan

SecuritiesCommissioner

State

Securities

Board

Earliestpossibledateofadoption: June8,2014

Forfurtherinformation,pleasecall: (512)305-8303

CHAPTER133. FORMS

7TAC133.15- 133.17

The

Texas

State

Securities

Board

proposes

three

new

rules,

concerning

forms

adopted

by

reference.

Specically,

the

State

SecuritiesBoardproposes133.15,whichwouldadoptbyrefer-ence

the

Texas

Crowdfunding

Portal

Registration

form;

133.16,

which

would

adopt

by

reference

the

Texas

Crowdfunding

Por-talWithdrawalofRegistration form; and133.17,whichwouldadopt

by

reference

the

Crowdfunding

Exemption

Notice

form.

Theportalformsaretailoredto the limitedactivitiesperformedby

a

portal

and

eliminate

the

need

for

a

portal

to

use

the

more

comprehensive

dealer

forms.

TommyGreen, Director, InspectionsandComplianceDivision,and

Patricia

Loutherback,

Director,

Registration

Division,

have

determined

that

for

the

rst

ve-year

period

the

forms

are

used,

therewillbenoforeseeablescalimplicationsforstateorlocal

government

as

a

result

of

using

the

forms.

Mr.

Green

and

Ms.

Loutherback

also

have

determined

that

for

each year of the rst ve years the forms are used the publicbenet

anticipated

as

a

result

will

be

that

Texas

crowdfunding

portalswillbeabletousesimpliedformstoregisterandamendtheir

registration

(Form

133.15)

and

to

withdraw

their

registration

(Form133.16). Issuerswillbeabletoclaimtheintrastatecrowdfunding

exemption

in

139.25

by

ling

Form

133.17.

There

wbe

no

effect

on

micro- or

small

businesses.

Since

the

forms

whavenoadverseeconomiceffectonmicro- orsmallbusinessespreparation

of

an

economic

impact

statement

and

a

regulatorexibilityanalysis isnotrequired. There isnoanticipatedeconomic

cost

to

persons

who

are

required

to

use

the

forms

as

proposed.

There

is

no

anticipated

impact

on

local

employment.

CommentsontheproposaltobeconsideredbytheBoardshoube

submitted

in

writing

within

30

days

after

publication

of

thproposed

sections

in

theTexasRegister. Commentsshouldb

sent

to

Marlene

K.

Sparkman,

General

Counsel,

State

SecuritieBoard,

P.O.

Box

13167,

Austin,

Texas

78711-3167

or

sent

bfacsimileto(512)305-8336.

ThenewrulesareproposedunderTexasCivilStatutes,Articl581-28-1.

Section

28-1

provides

the

Board

with

the

authority

tadopt rules and regulations necessary to carry out and implement

the

provisions

of

the

Texas

Securities

Act,

including

ruleand

regulations

governing

registration

statements

and

applications;deningterms;classifyingsecurities,persons,andmatterwithin

its

jurisdiction;

and

prescribing

different

requirements

fodifferentclasses.

Theproposalsregarding133.15and133.16affectTexasCivStatutes,

Articles

581-12,

581-13,

581-14,

581-15,

and

581-18Theproposalregarding133.17affectsTexasCivilStatutes,Aticle

581-7.

133.15. TexasCrowdfundingPortalRegistration.

ThisformisavailablefromtheStateSecuritiesBoard,P.O.Box13167Austin,

Texas

78711-3167

and

at

www.ssb.state.tx.us.

133.16. TexasCrowdfundingPortalWithdrawalofRegistration.


Texas

78711-3167

and

at


133.17. CrowdfundingExemptionNotice.


Texas

78711-3167

and

at


The

agency

certies

that

legal

counsel

has

reviewed

the

proposalandfoundittobewithinthestateagency'slegalauthoritto

adopt.

Filed

with

the

Ofce

of

the

Secretary

of

State

on

April

24,

2014

TRD-201401990

JohnMorgan

SecuritiesCommissioner

StateSecuritiesBoard



CHAPTER139. EXEMPTIONSBYRULEOR

ORDER

7

TAC

139.25

The

Texas

State

Securities

Board

proposes

new

139.25,

concerning

intrastate

crowdfunding

exemption.

The

new

rule

wouprovide

a

registration

exemption

for

securities

offered

in

an

intrastatecrowdfundingoffering. Thelingused toclaimtheexemption

is

new

Form

133.17,

which

is

being

concurrently

proposed.New115.19,concerningTexascrowdfundingportalregistration

and

activities,

is

also

being

proposed

to

allow

offers

an


PAGE 4
http:///reader/full/www.ssb.state.tx.ushttp:///reader/full/www.ssb.state.tx.ushttp:///reader/full/www.ssb.state.tx.ushttp:///reader/full/www.ssb.state.tx.ushttp:///reader/full/www.ssb.state.tx.ushttp:///reader/full/www.ssb.state.tx.us


12/32

salesoftheexemptsecuritiestobemadeusingaTexascrowd-funding

portal's

Internet

website.

During

the

development

of

these

proposals,

the

staff

had

dis-cussionswithanumberofrmsand individualswhoare inter-ested

and

have

expertise

in

the

area

so

their

insight

and

con-cernscouldbeconsidered.Federalcrowdfundingproposalsandprovisionsinotherstateswerealsoreviewed.

Under

the

proposal,

the

offering

must

comply

with

the

federal

in-trastate

offering

exemption

and

Securities

and

Exchange

Com-mission ("SEC")Rule147,so thesecuritiesdonothave toberegistered

at

the

federal

level.

Accordingly,

the

issuer

must

be

a

Texas

entity

and

the

offers

and

sales

limited

to

Texas

residents.

Some

Rule

147

requirements

have

been

incorporated

into

the

proposedexemptiontoassistissuersindeterminingiftheyqual-ifyfortheexemption.Rule147alsoplacesrestrictionsonresaleof

the

securities

and

requires

certain

precautions

against

inter-stateoffers.Thesearenotedinsubsection(k)oftheproposal.

Theproposalisdesignedtoassistsmallissuersconductingof-ferings

that

are

local

in

nature

where

many

investors

are

likely

to

bepartofthecompany'scustomerbaseorfromthesurroundingcommunity

that

will

benet

from

the

growth

of

local

businesses

and thejobs they provide. Accordingly, subsection (b)(2) ex-cludescertainissuersfromtheexemption,including: (1)invest-ment

companies,

which

engage

primarily

in

the

business

of

in-vestinginothersecurities;(2)SECreportingcompanies;and(3)blind

pool

and

blank

check

companies.

The

offering

amount

would

be

capped

at

$1

million

in

a

12-month

period. Thiscapwouldbereducedbytheamountreceivedforsales

of

the

issuer's

securities

that

occur

within

six

months

be-fore,during,orwithinsixmonthsafteranyoffersorsalesmadeinrelianceupontheexemption.

The

issuer

cannot

accept

more

than

$5,000

from

a

single

pur-chaser

unless

the

purchaser

is

an

accredited

investor.

Funds

raisedmustbeplacedinanescrowaccountuntiltheminimumtarget

offering

amount

specied

in

the

disclosure

statement

is

reached.

The proponents of crowdfunding argue that the hard work ofmaking

investment

decisions--ltering

out

the

best

investments

andlimitingfraud--canbeaddressedinpartbytappingthe"wis-

dom

of

the

crowd"

over

the

Internet.

Individuals

interested

in

thecrowdfunding

campaign

(members

of

the

"crowd")

share

infor-mation about the project or business with each other and usethe

information

to

decide

whether

to

fund

the

campaign

based

onthecollective"wisdomofthecrowd."Tofacilitatethisaspectof

crowdfunding,

subsection

(h)

of

the

proposal

requires

that

in-formationabouttheofferingbepostedontheInternetwebsiteforaminimumof21daysbeforethesecuritiesmaybesold.Duringthis

time,

and

for

the

course

of

the

offering,

all

communications

between the issuer, prospectivepurchasers, or investorsmustoccur

on

the

Internet

website.

The

site

must

provide

channels

forpotentialpurchasersandinvestorstocommunicatewitheachother,

and

those

communications

must

be

visible

to

others

on

the

site.

Toalertinterestedpersonstoanoffering,anissuermaydistrib-

ute

a

limited

notice

stating

the

issuer

is

conducting

an

offering,giving

the

name

of

the

general

dealer

or

Texas

crowdfunding

por-talandalinktotheInternetwebsite.Tokeeptheissuerfromin-advertently

converting

an

intrastate

offering

to

an

interstate

one,

therebylosingthefederalexemption,theproposalrestrictsdis-tribution

of

the

notice

to

within

Texas

and

requires

it

to

contain

a

disclaimer

reecting

that

the

offering

is

limited

to

Texas

resi-dentsandthatoffersandsalesontheInternetwebsitearemadeonly

to

Texas

residents.

A

similar

disclaimer

is

required

on

the

Internet website for the same reason. The site also must re-quire

evidence

of

Texas

residency

before

allowing

a

person

to

view

securities

offering

materials.

As

with

securities,

there

is

alsoanexclusion from federal registrationavailable todealerswhose

business

is

exclusively

intrastate.

The

disclaimer,

evi-denceofresidencyrequirement,andregulatoryapproachtakenin

the

proposal

appear

adequate

for

purposes

of

characterizing

the

dealer's

activities,

as

well

as

the

securities

offering,

as

one

conductedintrastate.

Subsection

(i)

requires

that

a

disclosure

statement

be

provided

to

each

prospective

purchaser

on

the

Internet

website.

Material

informationandriskfactorsmustbedisclosedandtopicstobeaddressed

in

the

document

noted.

Additional

guidance

for

con-tentofthedisclosurestatementwillbeinadocumentpreparedby

the

staff

and

posted

on

the

Agency's

website

with

other

small

business

and

crowdfunding

information.

Required

disclosures,

commontocrowdfundingofferingsgenerally,areinsubsection(i)(2).

These

disclosures

also

appear

in

concurrently

proposed

115.19, whichrequiresaTexascrowdfundingportal toobtainan

afrmative

acknowledgment

from

the

investor

regarding

the

disclosures

before

investment

is

permitted.

Manyproponentsofsmallbusinessincentivescitetherequire-ment

to

provide

audited

or

reviewed

nancial

statements

pre-

pared

in

accordance

with

generally

accepted

auditing

standardsand generally accepted accountingprinciplesas too costly for

small

businesses.

Subsection

(i)(3)

allows

the

issuer's

nancial

statementstobecertiedbyitsprincipalexecutiveofcer.How-ever,

if

the

issuer

has

audited

or

reviewed

nancial

statements

prepared

within

the

last

three

years,

such

nancial

statements

mustalsobeprovided.

Payments

to

unregistered

persons

are

prohibited

by

subsection

(l),

which

also

prohibits

certain

compensation

arrangements

and

afliationsbetween an issuer and thegeneraldealer or Texascrowdfunding

portal

operating

the

website

on

which

its

offering

appears.

Toensurethattheexemptionisnotmisused,subsection(m)con-tains

two

types

of

disqualications.

Bad

actor

disqualications

are

addressed

in

subsections

(m)(2)

and

(m)(3).

Issuers

should

be

aware

that,

although

a

prior

incident

may

not

be

a

disquali-cation

under

this

proposal,

it

may

still

need

to

be

disclosed

to

potentialpurchasersandinvestorsifitismaterialinformationun-der

subsection

(i)(1).

Subsection

(m)(4)

prohibits

offerings

within

a12-monthperiodbydifferentissuerswithcommoncontrolper-sons

or

where

the

proceeds

of

offerings

by

different

issuers

will

be

combined

in

a

single

plan

of

nancing.

Offerings made pursuant to the proposed exemption will nothave

to

meet

the

ling

requirements

in

the

Texas

Securities

Act,

22.A,

and

Chapter

137

of

the

Board

Rules

(relating

to

AdministrativeGuidelines forRegulationofOffers)since thoseprovisions

do

not

apply

to

transactions

exempt

under

5,

but

anoticeonnewForm133.17mustbeledwith theSecuritiesCommissioner

along

with

a

copy

of

the

issuer's

disclosure

statement

and

the

summary

of

the

offering

that

appear

on

theInternetwebsite.

Patricia

Loutherback,

Director,

Registration

Division,

and

Joe

Rotunda,

Director,

Enforcement

Division,

have

determined

that

therewillbescalimplicationsasaresultofenforcingoradmin-istering

the

rule

on

state,

but

not

local

government.


PAGE 5


13/32

Theeffectonstategovernmentfortherstve-yearperiodtherule

will

be

in

effect

is

a

potential

decrease

in

revenue.

Some

issuerscurrentlyrelyingontheintrastatelimitedofferingexemp-tion

available

in

109.13(l)

may

choose

instead

to

use

the

pro-posed

exemption.

While

109.13(l)

requires

the

payment

of

a

noticelingfee(thelesserof$500or1/10of1.0%oftheaggre-gate

amount

of

securities

offered),

new

139.25

does

not.

The

numberoflingsmadepursuant to109.13(l)uctuateseveryyear.

Therefore,

how

much

revenue

might

be

lost

as

a

result

of

issuers

switching

to

the

new

exemption

is

unknown,

but

it

is

not

likely tobe signicant. Since 2011, 17 issuers led the noticeto

claim

the

exemption

in

109.13(l)

for

offerings

of

$1

million

or

less,

amounting

to

$6,036.50

in

total

revenue.

The

majority

of

these

fees--$3,416.50--were

paid

in

2012

when

10

notice

lings

were

made.

Only

four

lings

for

offerings

of

$1

million

or

less

weremadein2011,twolingsweremadein2013,andonel-ing

has

been

made

so

far

this

year.

Several

other

self-executing

privateofferingexemptionsarealsousedbysmall issuersun-der

current

law.

However,

these

self-executing

exemptions

do

not

require

payment

of

any

fee

so

if

an

issuer

opts

to

pursue

crowdfunding instead ofusing one of these exemptions, therewould

be

no

impact

on

revenue

collected

by

the

Agency.

Ms.

Loutherback

and

Mr.

Rotunda

also

have

determined

that

foreachyearoftherstveyearstheruleisineffectthepublicbenet

anticipated

as

a

result

of

enforcing

the

rule

will

be

to

spur

small businessdevelopment in the state by allowing entrepre-neurs

and

start-ups

to

raise

capital

through

crowdfunding

using

the

Internet.

Theproposedruleisdesignedtohelpgrowstartupsandsmallbusinesses

by

making

relatively

low

dollar

offerings

of

securi-ties

less

costly.

Securities

offerings

in

Texas

are

generally

re-quiredtoberegistered,unlessanexemptionisavailable,andbesold

by

registered

dealers

or

agents.

The

costs

of

conducting

a

registeredoffering, includinglegal,accounting,andregistrationfees,

can

be

signicant.

Offering

securities

through

a

private

placement

exemption

can

also

be

complicated

and

costly.

Legal

counselisoftenneededtoensurethatrestrictionsongeneralso-licitation

and

general

advertising

are

not

violated

and

purchaser

qualicationrequirementsaremet.Anexemptofferingmayalsohave

notice

ling

requirements

and

fees

associated

therewith.

There

is

an

anticipated

economic

cost

to

entities

that

are

required

to

comply

with

the

crowdfunding

exemption

as

pro-posed,

including

preparing

offering

documents

and

disclosure

statements,

providing

current,

certied

nancial

statements,

and compensating portals for their listing services. Althoughthere

is

no

fee,

a

notice

ling

with

the

Securities

Commissioner

is also required. While such costs are not insignicant, theyare

less

than

the

costs

associated

with

registered

or

private

offerings. Therefore, the effect on micro- or small businesseswill

most

likely

be

a

positive

one.

The

anticipated

impact

on

local

employment

is

also

expected

to

be

positive.

These

small

businesses,abletoraisecapitalthroughcrowdfunding,maybeable

to

expand

and

provide

additional

jobs

in

the

local

commu-nity. Since the rule will have no adverse economic effect onmicro- or

small

businesses,

preparation

of

an

economic

impact

statement

and

a

regulatory

exibility

analysis

is

not

required.

Comments

on

the

proposal

to

be

considered

by

the

Board

should

be submitted in writing within 30 days after publication of theproposed

section

in

theTexasRegister. Commentsshouldbe

senttoMarleneK.Sparkman,GeneralCounsel,StateSecuritiesBoard,

P.O.

Box

13167,

Austin,

Texas

78711-3167

or

sent

by

facsimileto(512)305-8336.

The

new

rule

is

proposed

under

Texas

Civil

Statutes,

Article581-5.T,581-12.C,and581-28-1. Section5.TprovidesthatthBoard

may

prescribe

new

exemptions

by

rule.

Section

12.C

provides

the

Board

with

the

authority

to

prescribe

new

dealer,

ageninvestmentadviser,or investmentadviserrepresentativeregistration

exemptions

by

rule.

Section

28-1

provides

the

Board

wittheauthority toadoptrulesandregulationsnecessarytocarrout

and

implement

the

provisions

of

the

Texas

Securities

Act,

including

rules

and

regulations

governing

registration

statementandapplications;deningterms;classifyingsecurities,personsand

matters

within

its

jurisdiction;

and

prescribing

different

requirementsfordifferentclasses.

TheproposalaffectsTexasCivilStatutes,Articles581-7,581-12581-13,

581-14,

581-15,

and

581-18.

139.25. IntrastateCrowdfundingExemption.(a) General.TheStateSecuritiesBoard,pursuanttotheTexa

Securities

Act

(Act),

5.T,

exempts

from

the

securities

registration

requirementsoftheAct,anyofferorsaleofsecuritiesofanissuerthrougaregisteredgeneraldealeroraregisteredTexascrowdfundingportaprovided

that

all

offers

and

sales

made

pursuant

to

the

offering

are

madtoTexasresidents,completedsolelywithinthisstate,andalltherequirements

of

this

section

are

satised.

(b)

Issuer.

(1) TheissuerisanentitythathasledacerticateoffomationwiththeTexasSecretaryofState,isorganizedunderthelaw

of

Texas,

and

is

authorized

to

do

business

in

Texas

and:

(A) Atleast80%oftheissuer'sgrossrevenuesdurinitsmost recentscalyearprior to theofferingarederived from thoperation

of

a

business

in

Texas;

(B)

At

least

80%

of

the

issuer's

assets

at

the

end

of

imostrecentsemiannualperiodpriortotheofferingarelocatedinTexa

(C) Theissuerwilluseatleast80%ofthenetproceedof

this

offering

in

connection

with

the

operation

of

its

business

withiTexas;and

(D) TheprincipalofceoftheissuerislocatedinTexa

(2) Theissuerisnot,eitherbeforeorbecauseoftheoffeing:

(A)

A

company,

that

engaged

or

proposes

to

engage

ithe

business

of

investing,

reinvesting,

owning,

holding,

or

trading

isecurities;

(B) SubjecttothereportingrequirementsoftheSecuritiesandExchangeActof1934,13or15(d),15U.S.C.78man78o(d);

or

(C) acompanythathasnotyetdeneditsbusinessoperations,hasnobusinessplan,hasnostatedinvestmentgoalfor thfunds

being

raised,

or

that

plans

to

engage

in

a

merger

or

acquisitiowithanunspeciedbusinessentity.

(c) Coordinationwithfederalsecuritieslaws.Thetransactiomeets

the

requirements

of

the

federal

exemption

for

intrastate

offeringin theSecuritiesActof1933,3(a)(11),15U.S.C.77c(a)(11),anSecurities

and

Exchange

Commission

Rule

147,

17

CFR

230.147.

(d)

Offering.

The

offering

must

be

made

exclusively

througanInternetwebsiteoperatedbyaregisteredgeneraldealerorregistereTexas

crowdfunding

portal.

All

consideration

received

for

all

sales

othesecuritiesinrelianceonthisexemptionshallnotexceed$1millioina12-monthperiod.Thisamountisreducedbytheaggregateamounreceived

for

all

sales

of

securities

by

the

issuer

in

another

offering

th


PAGE 6
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14/32

doesnottakeplacepriortothesixmonthperiodimmediatelyprecedingor

after

the

six

month

period

immediately

following

any

offers

or

sales

madeinrelianceuponthissection.

(e) Individual investments. The issuerwillnotacceptmorethan

$5,000

from

any

single

purchaser

unless

the

purchaser

is

an

ac-creditedinvestorasdenedin107.2ofthistitle(relatingtoDeni-tions). TheissuermusthaveareasonablebasisforbelievingthatthepurchaserofasecurityunderthissectionisaTexasresidentand,ifap-plicable,anaccreditedinvestor.

(f) Escrow.Allpaymentsforpurchaseofsecuritiesofferedun-derthissectionaredirectedtoanddepositedinanescrowaccountwith

a

bank

or

other

depository

institution

located

in

Texas

and

organized

and

subject

to

regulation

under

the

laws

of

the

United

States

or

under

thelawsofTexas,andwillbeheldinescrowuntiltheaggregatecapitalraisedfromallpurchasersisequaltoorgreaterthantheminimumtar-getofferingamountspeciedinthedisclosurestatementasnecessarytoimplementthebusinessplan. Investorswillreceiveareturnofalltheir

subscription

funds

if

the

target

offering

amount

is

not

raised

by

thetimestatedinthedisclosurestatement.

(g) Communications.

(1) All communicationsbetween the issuer, prospectivepurchasers,

or

investors

taking

place

during

the

offer

of

securities

pursuant to this section must occur on the Internet website of theregistered

general

dealer

or

Texas

crowdfunding

portal.

During

the

time the offering appears on the Internet website, the website must

provide

channels

through

which

potential

purchasers

and

investors

cancommunicatewithoneanotherandwithrepresentativesoftheissuer

abouttheoffering.Thesecommunicationsmustbevisibletoallthosewith

access

to

the

offering

materials

on

the

Internet

website.

(2)

Notwithstanding

the

foregoing,

the

issuer

may

distrib-uteanoticewithinTexaslimitedtoastatementthattheissueriscon-ducting

an

offering,

the

name

of

the

registered

general

dealer

or

portal

throughwhichtheofferingisbeingconductedandalinkdirectingthepotentialinvestortothedealerorportal'sInternetwebsite.Thenoticemustcontainadisclaimer thatreects that theoffering is limited toTexasresidentsandoffersandsalesofthesecuritiesappearingontheInternet

website

are

limited

to

persons

that

are

Texas

residents.

(h)

Internet

website.

(1) TheInternetwebsiteoperatedbyaregisteredgeneral

dealer

or

the

Texas

crowdfunding

portal

must

meet

the

following

re-quirements:

(A) thewebsitemustcontainadisclaimerthatreectsthataccess tosecuritiesofferingson thewebsite is limited toTexasresidents

and

offers

and

sales

of

the

securities

appearing

on

the

website

arelimitedtopersonsthatareTexasresidents;

(B) evidenceofresidencywithinTexas isrequiredasa

condition

of

entry

before

viewing

securities-related

offering

materi-alsonthewebsiteandbeforesaleismadetoaprospectivepurchaser.An

afrmative

representation

made

by

a

prospective

purchaser

that

the

prospectivepurchaserisaTexasresidentandproofofatleastoneofthefollowingwouldbeconsideredsufcientevidencethattheindivid-ual

is

a

resident

of

this

state:

(i) avalidTexasdriver licenseorofcialpersonal

identication

card

issued

by

the

State

of

Texas;

(ii) acurrentTexasvoterregistration;or

(iii) generalpropertytaxrecordsshowingtheindi-vidualownsandoccupiespropertyinthisstateashisorherprincipalresidence;and

(C) priortoofferinganinvestmentopportunitytoresi-dentsofTexasandthroughoutthetermoftheoffering,theregisteredgeneraldealerorregisteredportalshallgivetheSecuritiesCommis-sioneraccesstotheInternetwebsite.

(2) Informationabouttheissuerandtheofferingpostedonthe

Internet

website,

entry

onto

which

is

conditioned

upon

evidence

of

Texasresidency,operatedbytheregisteredgeneraldealerorregisteredportal

consists

of:

(A)

a

copy

of

the

disclosure

statement

required

by

sub-section(i)ofthissection;

(B)

a

summary

of

the

offering,

including:

(i) adescriptionoftheentity, itsformofbusiness;principalofce,history,businessplan,andtheintendeduseoftheof-feringproceeds,includingcompensationpaidtoanyowner,executiveofcer,

director,

or

manager;

(ii) theidentityoftheexecutiveofcers,directors,andmanagers,includingtheirtitlesandtheirpriorexperienceandtheidentity

of

all

persons

owning

more

than

20%

of

the

ownership

interests

ofanyclassofsecuritiesofthecompany;and

(iii) adescriptionofthesecuritiesbeingofferedandof

any

outstanding

securities

of

the

company,

the

amount

of

the

offer-ing,andthepercentageownershipofthecompanyrepresentedbytheofferedsecurities.

(3)

The

information

required

by

paragraph

(2)

of

this

sub-section

must

be

made

available

on

the

Internet

website

to

the

Com-missionerandpotentialinvestorsforaminimumof21daysbeforeanysecurities

are

sold

in

the

offering.

(i) Disclosurestatement.Adisclosurestatementmustbemadereadilyavailableandaccessible toeachprospectivepurchaserat thetime

the

offer

of

securities

is

made

to

the

prospective

purchaser

on

theInternetwebsite. Thedisclosurestatementmustcontainallofthefollowing:

(1)

Material

information

and

risk

factors.

All

information

materialtotheoffering,including,whereappropriate,adiscussionofsignicant

factors

that

make

the

offering

speculative

or

risky.

Guidance

onthecategoriesofinformationtoincludecanbefoundbyreviewingthesmallbusinessofferinginformationprovidedbytheTexasStateSe-curities

Board

on

its

Internet

website.

Topics

to

be

addressed

include,

but

are

not

limited

to:

(A) generaldescriptionoftheissuer'sbusiness;

(B) historyoftheissuer'soperationsandorganization;

(C)

management

of

the

company

and

principal

stock-holders;

(D) howtheproceedsfromtheofferingwillbeused;

(E) nancialinformationabouttheissuer;

(F) descriptionofthesecuritiesbeingoffered;and

(G)

litigation

and

legal

proceedings.

(2)

Disclosures.

The

issuer

shall

inform

all

prospective

purchasersandinvestorsofthefollowing:

(A)

There

is

no

ready

market

for

the

sale

of

the

secu-rities

acquired

from

this

offering;

it

may

be

difcult

or

impossible

for

aninvestortosellorotherwisedisposeofthisinvestment.Aninvestormay

be

required

to

hold

and

bear

the

nancial

risks

of

this

investment

indenitely;


PAGE 7


15/32

(B) Thesecuritieshavenotbeenregisteredunderfed-eral

or

state

securities

laws

and,

therefore,

cannot

be

resold

unless

the

securitiesareregisteredorqualifyforanexemptionfromregistrationunder

federal

and

state

law.

(C)

In

making

an

investment

decision,

investors

must

relyontheirownexaminationoftheissuerandthetermsoftheoffering,includingthemeritsandrisksinvolved;and

(D)

No

federal

or

state

securities

commission

or

regula-toryauthorityhasconrmedtheaccuracyordeterminedtheadequacyof thedisclosurestatementoranyother informationon thisInternetwebsite.

(3) Financialstatements. Issuersmustprovidecurrent-nancialstatementscertiedbytheprincipalexecutiveofcertobetrueand

complete

in

all

material

respects.

If

the

issuer

has

audited

or

re-viewednancialstatementspreparedwithinthelastthreeyears,suchnancial

statements

must

also

be

provided

to

investors.

(j)

Notice

ling.

At

least

21

days

before

an

offer

of

securities

is

madeinrelianceonthissectionoruseofanypubliclyavailableInternetwebsite

in

an

offering

of

securities

in

reliance

on

this

section,

the

issuer

shalllewiththeSecuritiesCommissioner:

(1) Form133.17,CrowdfundingExemptionNotice;

(2) thedisclosurestatement,requiredbysubsection(i)ofthis

section;

and

(3)

the

summary

of

the

offering,

required

by

subsection

(h)(2)(B)

of

this

section.

(k) Resalesofsecurities.Theissuerandallitsofcers,direc-tors,

and

employees

shall

make

the

disclosures

required

by

SEC

Rule

147(e)and(f),17CFR230.147(e)and(f).Theissuermustplacealeg-end

on

the

certicate

or

other

document

evidencing

that

the

securities

havenotbeenregisteredandsettingforththelimitationsonresalecon-tainedinSECRule147(e),includingthatforaperiodofninemonthsfrom

the

date

of

last

sale

by

the

issuer

of

the

securities

in

the

offering,

allresalesbyanyperson,shallbemadeonlytoTexasresidents.

(l) Commissionsandremuneration.Acommissionorotherre-muneration

shall

not

be

paid

or

given,

directly

or

indirectly,

for

the

offer

orsaleofthesecuritiesunlessthepersonreceivingsuchcompensationis

registered

in

Texas

as

a

dealer

or

agent

or

as

a

Texas

crowdfunding

portal. TheissuermaynotlistitssecuritiesontheInternetwebsiteof

a

general

dealer

or

portal

that

holds

an

interest

in

the

issuer.

The

issuer

may

not

compensate

a

general

dealer

or

a

portal

by

providing

a

nan-cialinterestintheissuerascompensationforservicesprovidedtooron

behalf

of

the

issuer.

A

general

dealer

or

portal

may

not

be

afliated

withorundercommoncontrolwithanissuerwhosesecuritiesappearonitsInternetwebsite.

(m)

Disqualications.

(1)

For

purposes

of

this

subsection,

"control

person"

means

anofcer; director; otherpersonhaving thepower, directlyor indi-rectly,

to

direct

the

management

or

policies

of

the

issuer,

whether

by

contractorotherwise;orapersonthatowns20%ormoreofanyclassoftheoutstandingsecuritiesoftheissuer.

(2)

This

exemption

is

not

available

if

the

issuer,

the

issuer's

predecessors,anyafliatedissuer,oranycontrolpersonoftheissuer:

(A) within the last ve years, has led a registrationstatement

which

is

the

subject

of

a

currently

effective

registration

stop

orderenteredbyanystatesecuritiesadministratorortheUnitedStatesSecuritiesandExchangeCommission;

(B) withinthelastveyears,hasbeenconvictedofancriminal

offense

in

connection

with

the

offer,

purchase,

or

sale

of

ansecurity,orinvolvingfraudordeceit;

(C) iscurrentlysubject toanystateorfederaladministrativeenforcementorderorjudgment, enteredwithin the lastvyears,ndingfraudordeceitinconnectionwiththepurchaseorsaofanysecurity;or

(D) iscurrentlysubjecttoanyorder,judgment,ordecree

of

any

court

of

competent

jurisdiction,

entered

within

the

last

vyears,temporarily,preliminarily,orpermanentlyrestrainingorenjoining

such

party

from

engaging

in

or

continuing

to

engage

in

any

condu

or

practice

involving

fraud

or

deceit

in

connection

with

the

purchase

osaleofanysecurity.

(3)

Paragraph

(2)

of

this

subsection

shall

not

apply

if:

(A)

the

party

subject

to

the

disqualication

is

licenseorregisteredtoconductsecurities-relatedbusinessinthestateinwhicthe

order,

judgment,

or

decree

creating

the

disqualication

was

entereagainstsuchparty;

(B) beforetherstofferunderthisexemption,thestatsecurities

administrator,

or

the

court

or

regulatory

authority

that

enteretheorder,judgment,ordecree,waivesthedisqualication;or

(C) theissuerestablishesitdidnotknowandexercisinreasonable

care,

based

on

a

factual

inquiry,

could

not

have

known

thadisqualicationexistedunderthissubsection.

(4)

This

exemption

is

not

available

to

an

issuer

if:

(A) acontrolpersonoftheissuerisalsoacontrolpersoof

another

issuer

that

has

made

a

securities

offering

in

Texas

within

thprevious12-monthperiod;

(B) acontrolpersonoftheissuerisalsoacontrolpersoof

another

issuer

that

is

concurrently

conducting

a

securities

offerininTexas;or

(C) theproceedsoftheofferingwillbecombinedwitthe

proceeds

of

a

securities

offering

by

another

issuer

as

part

of

a

singlplanofnancing.

The agency certies that legal counsel has reviewed the proposalandfoundittobewithinthestateagency'slegalauthoritto

adopt.

Filed

with

the

Ofce

of

the

Secretary

of

State

on

April

25,

2014

TRD-201401991

JohnMorgan

Securities

Commissioner

StateSecuritiesBoard




PAGE 8


16/32

Form 133.15

Texas State Securities BoardP.O. Box 13167

Austin, Texas 78711-3167

Texas Crowdfunding Portal Registration

(115.19)

Notice: This form is for use in filing an original application for registration as a Texas crowdfunding portalthat acts as

texas house committee on investments and financial services

Documents