Insight New, Loosened Restrictions on Securities Offerings by Small Idaho Businesses

The Idaho Department of Finance (DOF) recently approved a new exemption from securities registration requirements to make it easier for small businesses to access capital without running afoul of securities laws. The new exemption allows small businesses to offer securities using general advertising and public solicitation, while maintaining appropriate investor protections.

Owners of small local businesses often look to family and friends for capital for startup costs and initial operational needs, inadvertently violating Idaho securities laws in the process. The Idaho Uniform Securities Act (Securities Act) mandates that the offer and sale of securities – which include corporate stock, limited liability membership interests, and unsecured promissory notes – as well as persons involved in the offer and sale of those securities be registered with the DOF unless the statutory requirements of an exemption from registration requirements are satisfied. Most of these exemptions prohibit general advertising of the offering and limit the number of small, unsophisticated investors.

The exemption is available for offerings to an unlimited number of investors if the following requirements are satisfied:

• The issuer is an organization formed under Idaho law and registered with the Idaho Secretary of State. Sole proprietorships and general partnerships are not eligible for the exemption.
• The proceeds of the sale of the securities (in reliance upon this exemption), together with the proceeds of the sale of securities during the twelve months before the offering, must not exceed $2,000,000.
• The offering of the issuer’s securities must be made only to Idaho residents in compliance with the requirements of the federal exemption for intrastate offerings in Section 3(a)(11) of the Securities Act of 1933 and SEC Rule 147.
• The maximum allowable investment by any single unaccredited investor is limited to $2,500. The maximum allowable investment by any single investor, whether accredited or unaccredited, must not exceed ten percent (10%) of the investor’s liquid net worth.
• No commission or other remuneration may be paid, directly or indirectly, to any person for participation in the offer or sale of the securities unless the person is registered with the Idaho Department of Finance as a broker-dealer or agent under the Securities Act.
• Neither the issuer nor any of its organizers or other affiliates are subject to disqualification under the “bad boy” provisions of certain state and federal rules.
• Before general solicitation or the first sale of securities, the issuer must notify the Department of its intent to rely on this exemption and request an exemption order by the Director. The notice must include contact information for the issuer and any salespersons.
• The issuer must have a business plan and must submit copies of advertising materials and an offering memorandum to the Department for disclosure review. The offering memorandum must include the usual disclosures, including a balance sheet and income statement prepared in accordance with Generally Accepted Accounting Principles (GAAP), information about the issuer, its governance, its business plan, use of proceeds, description of the offered securities, risk factors, and the requirements of the SEC Rule 147 exemption. In addition, the offering memorandum must inform all investors that the issuer’s securities have not been registered under the federal or Idaho Securities Acts and therefore cannot be resold unless the securities are registered or qualify for an exemption from registration.
• The investment funds must be deposited in an escrow account with a bank or other depository institution authorized to transact business in Idaho until the amount of the escrowed funds reaches the minimum offering amount necessary to allow the issuer to meaningfully advance its business plan. The issuer must use the proceeds of the offering only in accordance with the representations made to investors in the offering memorandum.

These requirements are intended to protect investors, while permitting general advertising to expand the pool of potential investors. Although designed to enable small businesses to appeal to local investors, the exemption can also be used in broader-based offerings to angel investors and other accredited investors.

If you would like more information about this topic, or other legal issues, please contact a member of our Business Group or call 208.344.6000.