Rules & Regulations of the State of Tennessee
Title 0780 - Commerce and Insurance
Subtitle 0780-04 - Division of Securities
Chapter 0780-04-02 - Securities Registration and Exemptions
Section 0780-04-02-.06 - STANDARDS OF FAIRNESS AND REASONABLENESS
Universal Citation: TN Comp Rules and Regs 0780-04-02-.06
Current through September 24, 2024
(1) General Rule.
All securities covered by this Rule shall be offered upon such terms and conditions that the potential rewards to the investors and to the promoter or issuer of the securities bear a reasonable relation to the risks assumed by each.
(2) Applicability.
(a) Unless different criteria
for a specific type of security are set forth elsewhere in these Rules, this
Rule shall apply to:
1. All offerings filed
for registration in this state pursuant to T.C.A. §48-1-105, except as
provided in paragraph (3) of Rule 0780-04-02-.01; and
2. All offerings filed for registration in
this state pursuant to T.C.A. §48-1-106.
(b) With respect to offerings registered by
coordination or by qualification, if there is any conflict between the
disclosure or accounting requirements of this Rule and those of the SEC, the
Division may accept compliance with the SEC requirements in lieu of compliance
with this Rule.
(3) Variances.
The standards set forth in this Rule are intended to furnish guidelines for the determination that an application for registration meets the requirement of paragraph (1) of this Rule. These standards are not meant to preclude the application of more liberal or more stringent standards if the circumstances of a particular application for registration so justify. The Division may modify or waive any of the standards set forth in paragraph (4) of this Rule where good cause is shown or where the goal sought to be achieved by these guidelines can be accomplished by other means. Good cause may be shown by a demonstration of adequate alternative safeguards built into a particular offering that bring that offering within the spirit of paragraph (1) of this Rule.
(4) Standards.
(a) An offering which meets the applicable
provisions of this paragraph (4) will be deemed to meet the standard of
paragraph (1) of this Rule.
(b) The
following definitions shall apply to this Rule except as expressly provided
otherwise herein:
1. "Earnings Per Share"
means net profits determined on a per share basis after taxes but before
extraordinary items, calculated in accordance with generally accepted
accounting principles consistently applied on a fully diluted basis.
2. "Equity Investment of Promoters" means the
total of all cash, together with the reasonable value of all assets contributed
to the issuer as determined by qualified independent appraisals acceptable to
the assistant commissioner, and may be adjusted by the earned surplus or
deficit of the issuer subsequent to the dates of contribution.
3. "Equity Security" means any common stock
or similar security; or any instrument convertible, with or without
consideration, into such a security, or carrying a warrant, option, or right to
subscribe to or purchase such a security, or any such warrant, option, or
right.
4. "Firm Market" means a
market in which quoted prices are those at which a security can actually be
bought and sold currently, and are not quotes that are merely based on
historical prices.
5. "Person"
means any individual, corporation, partnership, trust, or other legal entity,
or any unincorporated association or organization, and includes the following:
(i) any relative, spouse, or relative of the
spouse of the specified person;
(ii) any trust or estate in which the
specified person or any of the persons specified in (i) collectively own five
percent (5%) or more of the total beneficial interest or of which any of such
persons serve as trustee, executor, or in any similar capacity; and
(iii) any corporation or other organization
(other than the issuer corporation) in which the specified person or any of the
persons specified in (i) are the beneficial owners collectively of five percent
(5%) or more of any class of equity securities or five percent (5%) or more of
the equity interest.
6.
"Promoter" means:
(i) any person who, acting
alone or in conjunction with one (1) or more persons, directly or indirectly,
takes the initiative in founding and organizing the business or enterprise of a
corporation;
(ii) any person who,
in connection with the founding or organizing of the business or enterprise of
a corporation, directly or indirectly, receives in consideration of services or
property or both services and property five percent (5%) or more of any class
of equity security of the corporation or five percent (5%) or more of the
proceeds from the sale of any class of equity security of the corporation;
provided, however, that a person who receives such securities or proceeds
solely as underwriting commissions shall not be deemed a promoter within the
meaning of this clause if such person does not otherwise take part in founding
and organizing the enterprise;
(iii) any person who is an officer, director,
or who beneficially owns, directly or indirectly, more than five percent (5%)
of any class of equity security of a corporation, excluding any unaffiliated
institutional investor that purchased its shares more than two (2) years prior
to the filing date of the proposed offering; and
(iv) any person who is an affiliate of a
person specified under clause (i), (ii), or (iii), of this part 6.
7. "Promotional or Development
Stage Corporation" means a corporation which has no public market for its
shares and has no significant earnings. All other corporations shall be deemed
"Seasoned Corporations".
8.
"Promotional Shares" means those equity securities which were issued within
three (3) years prior to the filing date or are to be issued to promoters for a
consideration valued at less than eighty-five percent (85%) of the proposed
public offering price excluding the number of such securities calculated by
dividing eighty-five percent (85%) of the public offering price per share into
the total consideration paid by promoters for their shares. Equity securities
which were, or are to be, issued for services rendered, patents, copyrights, or
other intangibles are presumed to be promotional shares unless the value of
such intangibles has been established to the satisfaction of the Division. In
determining the consideration paid or the value of property under this
definition, the Division may recognize as consideration any property, including
patents, copyrights, or other intangibles (except goodwill) to the extent that
the fair market value of such assets is established to the Division's
satisfaction. Consideration for equity securities may include the fair market
value of such assets if the fair market value can be determined by an
independent appraisal (according to recognized standards of valuation) that is
acceptable to the Division and may also include verifiable out-of-pocket
development or marketing expenses (excluding promoters' salaries) paid by
promoters to the extent such expenses are not reimbursed by the issuer.
Excluded from this definition shall be any shares issued to promoters at the
same price paid by unaffiliated persons in offerings made pursuant to SEC
Regulation D.
EXAMPLE: Calculations of number of promotional shares.
9. "Public Market" means, with respect to the
equity securities of an issuer, that one of the following criteria is met:
(i) The security is traded on a national or
regional stock exchange registered under the 1934 Act;
(ii) The security is designated on the Nasdaq
National Market; or
(iii) Each of
the following criteria is met:
(I) There were
at least three hundred (300) holders of the security at the beginning and end
of the six (6) month period preceding the date of the filing;
(II) At least two hundred thousand (200,000)
shares of the security are publicly outstanding (exclusive of securities held
by officers, directors, and five percent (5%) holders);
(III) At least two (2) broker-dealers
regularly make a market in the security;
(IV) At least one (1) financial publication
regularly quotes the market price;
(V) Trading of the security in the six (6)
month period preceding the date of the filing averaged at least one hundred
(100) transactions or at least five percent (5%) of the outstanding securities
(not including securities held by officers, directors, and five percent (5%)
security holders) per month; and
(VI) The bid price and the asking price
represent quotations in a firm market.
10. "Significant Earnings" shall be deemed to
exist if the corporation's earnings record over the last five (5) years (or
such shorter period of the corporation's existence, but in no event less than
three (3) years) demonstrates that it would have met either of the earnings
tests set forth in items (4)(f)4.(i)(I-II) of this Rule based upon its shares
outstanding immediately before the proposed public offering.
11. "Unaffiliated Institutional Investor"
includes any unaffiliated: bank; investment company registered under the
Investment Company Act or a business development company as defined in Section
2(a)(48) of the Investment Company Act; small business investment company
licensed by the U.S. Small Business Administration under Section 301 of the
Small Business Investment Act of 1958; employee benefit plan within the meaning
of Title I of the Employee Retirement Income Security Act of 1974; insurance
company; private business development company as defined in Section 202(a)(22)
of the Investment Advisers Act or comparable business entity engaged as a
substantial part of its business in the purchase and sale of securities and
which owns less than twenty percent (20%) of the securities to be outstanding
at the completion of the proposed public offering.
(c) Options and Warrants.
The amounts and kinds of options and warrants to purchase securities issued or sold, other than ratably in connection with a proposed offering of equity securities or securities convertible into equity securities, shall be reasonable. The amounts and kinds of options and warrants are presumed to be reasonable if they satisfy the following conditions:
1. With respect to options or warrants to
underwriters:
(i) The options or warrants are
issued to the managing underwriters under a firm commitment underwriting
agreement only after the entire issue has been sold, provided that the options
and warrants are not assignable or transferable except among or to the
partners, or officers and directors of the managing underwriters;
(ii) The exercise price of the options or
warrants is at least equal to the public offering price with a step-up of the
exercise price of either seven percent (7%) each year such options and warrants
are outstanding, or in the alternative, an overall twenty percent (20%) step-up
at any time after one (1) year from the date of issuance. The step-up shall
commence twelve (12) months after the grant of the options or warrants. The
election as to either step-up alternative must be made by the underwriters at
the time that the options or warrants are issued;
(iii) The options or warrants are issued by a
relatively small company other than a seasoned issuer with a public market, or
where it appears from all of the facts and circumstances that the issuance of
options or warrants is necessary to obtain competent investment banking
services, provided that the direct commissions to the underwriters are lower
than the usual and customary commissions would be in the absence of such
options and warrants;
(iv) The
securities covered by the options and warrants consist solely of securities of
the same class and of the same issuer as those securities proposed to be sold
to the public in the offering under consideration;
(v) The number of shares covered by all
options or warrants does not exceed twelve percent (12%) of the securities
proposed to be sold to the public in the offering under
consideration;
(vi) The options or
warrants do not exceed five (5) years in duration and are exercisable no sooner
than one (1) year after issuance; and
(vii) The value of the options or warrants
shall be included in the computation of underwriting commissions and discounts.
The market value of such options or warrants, if any, shall be used, and where
no market value exists, a presumed fair value of not less than twenty percent
(20%) of the public offering price of the stock to which the options or
warrants relate shall be used, unless evidence indicates that a different value
exists.
2. With respect
to options or warrants issued to persons other than underwriters in connection
with financing arrangements made by the issuer, the options or warrants are
issued as a result of bona fide negotiations between the issuer and persons not
affiliated with the issuer, and upon terms and conditions which are reasonable
in light of the proposed public offering.
3. The total amount of options and warrants
issued or reserved for issuance at the date of the public offering, excluding
those issued in connection with acquisitions, does not exceed either twelve
percent (12%) of the shares to be outstanding upon completion of the offering
or twelve percent (12%) of the shares outstanding during the twelve (12) month
period commencing with the effective date of the registration. The number of
options and warrants issued or reserved for issuance may be disregarded if the
issuer states in the prospectus that the amount of outstanding options and
warrants shall not exceed the above amount during the period the registration
statement is effective with the Division.
4. All options and warrants except those
issued to financing institutions other than underwriters shall be issued at not
less than eighty-five percent (85%) of fair market value on the date of
issuance, or where no market exists, at not less than eighty-five percent (85%)
of book value on the date of issuance, and the exercise price shall not be
subject to change by the issuer except in accordance with anti-dilution
provisions in effect on the date of issuance.
(d) Offering Price.
1. The offering price of equity securities of
seasoned corporations may be deemed unfair to the purchasers unless at least
one (1) of the following conditions is met:
(i) The price for the equity security does
not exceed thirty-three (33) times the issuer's net earnings per share for the
last twelve (12) months, or does not exceed thirty-three (33) times its average
annual net earnings per share for the last three (3) years prior to the
proposed offering date;
(ii) The
price of the equity security is based on a public market; or
(iii) If there is no public market, the
issuer may show that the proposed price-earnings ratio is justified in relation
to price earnings ratios of comparable companies by means of published industry
guides that include key business ratios. Comparable companies shall mean
companies similar in terms of size, history of operations, industry and
products, and other relevant factors. Key business ratios include but are not
limited to liquidity ratios, activity ratios, leverage ratios, profitability
ratios, and common stock ratios.
2. The offering price of equity securities of
promotional or development stage corporations shall be reasonably related to
the price paid for the stock by promoters or controlling persons of the issuer
except as permitted by subparagraph (4)(f) of this Rule regarding promotional
shares. Facts and circumstances to be considered shall include, but are not
limited to, the following: the price paid for the equity securities by
promoters or controlling persons of the issuer in transactions effected within
three (3) years prior to the public offering; the book value of the equity
security; the market value of the corporation's assets; and the sophistication
of the proposed purchasers.
(e) Selling Commissions and Expenses.
1. The aggregate amount of underwriters' and
sellers' discounts, commissions, and other compensation shall be reasonable.
Such compensation is presumed reasonable if the total of all underwriters' or
sellers' compensation and other expenses in connection with the offering does
not exceed fifteen percent (15%) of the gross proceeds of the offering, except
that in the case of securities which qualify for registration on Forms S-B1 or
S-B2 under the 1933 Act or which qualify for exemption pursuant to Regulation A
under the 1933 Act, the total underwriters' and sellers' compensation and all
other expenses will be presumed reasonable if not in excess of twenty percent
(20%) of the gross proceeds of the offering. See also subpart (4)(c)1.(vii) of
this Rule.
2. Compensation to be
received by underwriters or sellers shall include, but is not limited to, the
following:
(i) Underwriter's discounts,
commissions, or concessions;
(ii)
Non-accountable expense allowances;
(iii) Expenses incurred by an underwriter or
related person payable by the issuer or from the proceeds of the offering to or
on behalf of an underwriter or related person;
(iv) Finder's fees known to be payable at the
commencement of the offering;
(v)
Wholesaler's fees;
(vi) Financial
consulting and advisory fees, whether in the form of cash, securities, or any
other item of value which are connected with or related to the offering unless
an ongoing financial consulting or advisory relationship between the proposed
issuer or affiliate and the proposed underwriter or related person has been
established at least twelve (12) months prior to the filing of the registration
statement;
(vii) Stock, options,
warrants, and other securities, the options and warrants to be valued in
accordance with subpart (4)(c)1.(vii) of this Rule;
(viii) Special sales incentive
items;
(ix) A right provided to an
underwriter or related person to require the issuer upon demand to register
securities on behalf of the underwriter or person in the future at the expense
of the issuer, which shall be valued at one percent (1%) of the gross proceeds
of the offering, unless the demand is for only one (1) such registration in
which event the right to demand registration shall be valued at one-half of one
percent (.5%) of the gross proceeds of the offering; provided, however, that a
right to "piggyback" on a non-demand registration shall be valued at
one-quarter of one percent (.25%) of the gross proceeds of the offering unless
the underwriter agrees to pay its pro rata share of offering expenses incurred
as a result of such securities being included in the offering;
(x) Commissions, expense reimbursements, or
other compensation to be received by an underwriter or related person as a
result of the exercise of the conversion within twelve (12) months following
the effective date of the offering of warrants, options, convertible
securities, or similar securities distributed as part of the offering;
and
(xi) If promotional shares are
issued to an underwriter, the difference between the consideration paid and the
public offering price shall be considered compensation to the
underwriters.
3. All
underwriter compensation set forth in part (4)(e)2. of this Rule, when added to
all other marketing expenses, such as printing costs, registration fees, filing
fees, issuer's attorneys and accounting fees, fees and expenses of
underwriters' counsel, accountable expense allowances paid to underwriters, and
miscellaneous marketing expenses, shall not exceed the limit imposed in part
(4)(e)1. of this Rule.
4. If the
securities are sold under a deferred or installment plan, the underwriters' or
sellers' commissions payable in cash shall be payable pro rata over the life of
the plan.
5. In the case of the
sale to the public of outstanding securities held by existing security holders
to be sold alone or in conjunction with the sale of securities by the issuer,
the selling security holders shall pay, as the case may be, all of their
equitable portion of the selling commissions and expenses.
(f) Promotional Shares.
1. Maximum Amount of Promotional Shares. If
the maximum amount of promotional shares exceeds thirty-three percent (33%) of
the outstanding shares of stock of the issuer after the completion of the
offering, the promotional shares will be subject to part (4)(f)3. of this
Rule.
2. Mergers,
Recapitalizations, Reorganizations, and Stock Splits.
(i) If the maximum amount of dilution to
public investors exceeds seventy-five percent (75%) of the public offering
price after the completion of the offering, the promotional shares will be
subject to part (4)(f)3. of this Rule; and
(ii) Even if the amount of dilution to public
investors does not exceed seventy-five percent (75%) of the public offering
price after the completion of the offering, all shares owned by officers,
directors, and parties owning five percent (5%) or more of the outstanding
shares of the corporation before the public offering that cause dilution in
excess of forty percent (40%) of the public offering price after the completion
of the offering shall be subject to escrow pursuant to part (4)(f)3. of this
Rule.
3. Escrow of
Promotional Shares. The assistant commissioner may require as a condition of
registration that all or part of any promotional shares be deposited in escrow
absent adequate justification that escrow of such shares is not in the public
interest and not necessary for the protection of investors.
4. Release Provisions.
(i) Promotional shares which are to be
escrowed shall remain in escrow until the sixth anniversary of the effective
date of the registration. On the sixth, seventh, eighth, and ninth anniversary
dates, twenty-five percent (25%) of each promoter's shares shall be released
from escrow. Shares may also be released from escrow upon the achievement by
the issuer of any of the following tests during the escrow period:
(I) After two (2) consecutive fiscal years
from the date of effectiveness, during which the issuer has minimum average
annual earnings per share equal to six percent (6%) of the public offering
price.
(II) After five (5) fiscal
years from the date of effectiveness, the average earnings per share are equal
to five percent (5%) or more of the public offering price.
(III) After one (1) year, for a term of at
least ninety (90) consecutive trading days following such one (1) year period,
and for the thirty (30) trading days prior to the requested termination date of
the escrow, the shares of the issuer are trading in a reliable public market at
a price at least one-hundred seventy-five percent (175%) of the initial public
offering price.
(ii) A
request for termination of an escrow based on satisfaction of either of the
tests set forth in items (4)(f)4.(i)(I-II) of this Rule shall be accompanied by
an earnings per share calculation audited and reported on by an independent
certified public accountant.
5. Terms of Escrow.
(i) The shares in escrow may be transferred
by will or pursuant to the laws of descent and distribution or through
appropriate legal proceedings without the consent of the assistant
commissioner, but in all such cases the shares shall remain in escrow and
subject to the terms of the escrow agreement. In addition, upon the death of a
promoter, such promoter's escrowed shares may be hypothecated, subject to all
of the terms of the escrow agreement, to the extent necessary to pay the
expenses of the estate; otherwise, the escrowed shares may not be pledged to
secure a debt. The securities in escrow may be transferred by gift to family
members, provided that the shares remain subject to the terms of the escrow
agreement.
(ii) The shares required
to be held in escrow as a condition to registration of a public offering shall
not have any right, title, interest, or participation in the assets of the
issuer in the event of dissolution, liquidation, merger, consolidation,
reorganization, sales of assets, exchange, or any other transaction or
proceeding which contemplates or results in the distribution of the assets of
the issuer, until the holders of all shares not escrowed have received, or had
irrevocably set aside for them, an amount equal to the purchase price per share
in the public offering, adjusted for stock splits and stock dividends.
Subsequently, the holders of the escrowed shares shall be entitled to receive
an amount per share equal to the amount received by or set aside for the
holders of the non-escrowed shares, on a per share basis, plus any dividends
and interest set aside for the escrowed shares, to the extent any such cash
dividends plus interest are not necessary to meet the issuer's obligation of
payment to holders of shares not escrowed, and thereafter all shares shall
participate on a pro rata basis. However, a merger, consolidation, or
reorganization may proceed on terms and conditions different than those stated
above if a majority of shares held by persons other than promoters approve the
terms and conditions by vote at a meeting held for such purpose.
(iii) Shares held in escrow shall continue to
have all voting rights to which those shares are entitled. Any dividends paid
on such shares shall be paid to the escrow agent and held pursuant to the terms
of the escrow agreement. The escrow agent shall treat such dividends as assets
available for distribution as provided under subpart (4)(f)5.(ii) of this Rule.
The escrow agent shall place any cash dividends in an interest bearing account.
The cash dividends and any interest earned thereon will be disbursed in
proportion to the number of shares released from escrow. All certificates
representing stock dividends and shares resulting from stock splits of escrowed
shares shall be delivered to the escrow agent to be held pursuant to the escrow
agreement.
(iv) A summary of the
terms of the escrow shall be included in the prospectus and, during the term of
the escrow agreement and until the release of all shares from escrow, in
subsequent prospectuses, annual reports to shareholders, proxy statements, or
other disclosure materials used by shareholders or investors in making
decisions with respect to the issuer.
(v) The escrow agent must be satisfactory to
the assistant commissioner and may not be affiliated with any promoter of the
issuer. The issuer shall not bear any of the fees or expenses associated with
the escrow.
(g) Promoters' Investment. The offering of an
issuer that is a promotional or development stage corporation shall be presumed
unfair unless the equity investment of the promoters equals at least ten
percent (10%) of the tangible net worth of the issuer adjusted for the proposed
offering.
(h) Alternative
Guidelines for Promotional Shares and Promoters' Investment:
1. In lieu of the guidelines set forth above
in part (4)(d)2. and subparagraphs (4)(f-g) of this Rule, an issuer may comply
with the standards of this subparagraph (4)(h).
2. An offering of equity securities of a
promotional or a development stage corporation may be deemed to be unfair if
the ratio of equity capital to equity ownership of the public investors buying
pursuant to the proposed offering on a per share basis is more than ten (10)
times the ratio of the equity capital to equity ownership of promoters, on a
per share basis. For purposes of this part:
(i) With respect to public investors, "equity
capital" shall mean the tangible consideration paid by the public
investors.
(ii) With respect to
promoters, "equity capital" shall mean the greater of the tangible
consideration contributed to the equity of the issuer on a fully diluted basis,
or the net worth of the issuer demonstrated by the most recent audited balance
sheet furnished by the issuer in the registration statement and all interim
unaudited balance sheets.
(iii)
With respect to promoters, "equity ownership" shall mean the total number of
shares owned on a fully diluted basis.
(iv) With respect to public investors,
"equity ownership" shall mean the total number of shares to be offered to the
public.
EXAMPLE: Calculation of the Ratio of Equity Capital to Equity Ownership on a Per Share Basis.
(The example assumes that there are no outstanding options, warrants, or convertible securities.)
|
Total # of Shares |
Issuer's Net Worth |
Proposed Price Per Share |
Total Tangible Consideration |
|
|
Promoters' |
880,000 |
$500,000 |
$300, 000 |
|
|
Public Investors' |
200,000 |
$10.00 |
$2,000,000 |
|
|
Totals |
1,080,000 |
$500,000 |
$2,300,000 |
CONCLUSION : THE ALTERNATIVE TEST IS NOT MET.
$10.00>$3.40 OR 5.70
(i) Voting Rights.
1. Unless either preferential treatment as to
dividends and liquidation is provided with respect to the publicly offered
securities or a public market exists for the securities, the offering of equity
securities of an issuer having more than one class of equity securities
outstanding will be deemed unfair to public investors if the class of equity
securities offered to the public has no voting rights or less than equal voting
rights in proportion to the number of shares of each class outstanding in all
matters, including the election of members to the board of directors of the
issuers.
2. If at the time of a
proposed offering the issuer has authorized preferred stock issued or issuable
with rights, preferences, or privileges to be determined by the issuer's board
of directors without further action by stockholders, the offering document
shall include a disclosure to the effect that a subsequent determination by the
board of directors with respect to the rights, preferences, or privileges of
the preferred stock may adversely affect the rights of common
stockholders.
(j)
Preferred Stock and Debt Securities.
1. The
net earnings of the issuer for its last fiscal year prior to the offering or
for the average of its last three (3) fiscal years prior to the offering must
be sufficient to cover adequately the dividends and redemption requirements, if
any, on the preferred stock proposed to be offered. Net earnings shall be
determined exclusive of non-recurring items and shall be adjusted for any debt
securities or preferred stock to be redeemed with the proceeds of the offering,
less applicable income tax effects.
2. The net earnings of the issuer for its
last fiscal year prior to the offering, or for the average of its last three
(3) fiscal years prior to the offering, must be sufficient to cover adequately
its debt service requirements on all debt securities issued subsequent to its
last fiscal year (including all securities proposed to be offered). Net
earnings shall be determined before taxes, depreciation, and extraordinary
items and shall be adjusted for any debt securities to be redeemed with the
proceeds of the offering and for applicable tax effects.
3. Upon completion of the offering, the total
amount of debt of the issuer must be reasonable in proportion to the amount of
equity of the issuer. Reasonableness is to be determined in relation to the
prevailing debt-equity ratios for comparable companies in the issuer's
industry.
4. If the issuer has made
or proposes to make any material acquisitions subsequent to the last year
specified in parts (4)(j)1.-3. of this Rule, the earnings for each year shall
be restated on a pro-forma basis to reflect such acquisition.
5. The sale of preferred stock or debt
securities by promotional or development stage corporations is presumed not to
meet the standard in paragraph (1) of this Rule unless a variance is granted
pursuant to paragraph (3) of this Rule.
6. The issuer may not bind itself to purchase
debt securities or preferred stock at the request of the holder prior to
maturity except pursuant to sinking fund provisions or pursuant to some other
reasonable method fully disclosed in the prospectus.
(k) Loans to Company Officials.
1. The sale of securities by an issuer may be
deemed unfair if the issuer or its affiliates have made, or may make, loans or
forbearances to company officers, directors, or controlling persons, other than
as described below:
(i) Advances for travel,
business expense, relocation, and similar ordinary operating
expenditures.
(ii) Any other loans
or forbearances for specific purposes directly related to the ordinary course
of the issuer's business, or for bona fide personal emergencies, provided the
loans or forbearances are approved by a majority of disinterested members of
the issuer's board of directors.
(iii) Any other loans or forbearances
approved by a majority of disinterested shareholders (excluding all company
officials and controlling persons) pursuant to a proxy solicitation conforming
to the proxy rules set by the SEC.
(iv) An issuer or affiliate whose primary
business is that of making loans may make loans to the officers, directors, or
controlling persons of the issuer or affiliate provided that the loans:
(I) Will be evidenced by a promissory note
naming the lender as payee, and contain an annual percentage rate which is
reasonably comparable to that normally charged to non-affiliates by other
commercial lenders for similar loans made in the lender's locale;
(II) Will be repaid pursuant to appropriate
amortization schedules and contain default provisions comparable to those
normally used by other commercial lenders for similar loans made to
non-affiliates in the lender's locale;
(III) Will be made only if credit reports and
financial statements, or other reasonable investigation appropriate in the
light of the nature and terms of the loan and which meet the loan policies
normally used by other commercial lenders for similar loans made to
non-affiliates in the lender's locale show the loan to be collectible and the
borrower a satisfactory credit risk; and
(IV) The purpose of the loan and the
disbursement of proceeds are reviewed and monitored in a manner comparable to
that normally used by other commercial lenders for similar loans made in the
lender's locale.
2. All loans except those described in part
(4)(k)1. of this Rule shall be repaid in full prior to the offering. The
Division may waive this requirement if:
(i)
The issuer is a going concern and repayment of such loan will be made pursuant
to appropriate amortization schedules; or
(ii) Any portion of the offering is, by, or
on behalf of any company official to whom a loan or forbearance has been made,
and such person undertakes to effect repayment from the proceeds of the
offering and repayment to the extent of such proceeds will be made immediately
upon completion of the offering.
3. If the issuer or its affiliates has or
will make loans or forbearances to officers, directors, or controlling persons,
the prospectus or offering circular shall disclose the terms and details of the
loans or forbearances.
(l) Impoundment of Proceeds. The Division may
require that as a condition to registration that all proceeds of sales of
securities be impounded in escrow until such time that a sufficient amount has
been realized to accomplish the purpose of the offering.
(m) Future Self-Dealing Transactions. The
prospectus shall contain a statement to the effect that all future transactions
with affiliates of the issuer are to be on terms no less favorable than could
be obtained from an unaffiliated third party and must be approved by a majority
of the directors including the majority of disinterested directors.
(n) Standards for Specific Issuers.
1. Applicability.
(i) The Statements of Policy referred to in
this subparagraph (4)(n) apply to the indicated specific type of security and
will, by analogy, be applied to securities in other forms. Deviations from
these guidelines may be permitted by the Division where good cause is shown in
accordance with paragraph (3) of this Rule.
(ii) The Division may grant effectiveness to
any offering that is subject to review under guidelines below on a basis other
than that permitted in such guidelines where the offering requires each
investor in this state (including transferees) to have a minimum net worth of a
least two hundred fifty thousand dollars ($250,000) exclusive of home, home
furnishings, and automobiles and to have had during the last tax year, and be
expected to have during the current tax year a gross income of at least
sixty-five thousand dollars ($65,000) or, in the alternative, a minimum net
worth of at least five hundred thousand dollars ($500,000) exclusive of home,
home furnishings, and automobiles. In the case of such offerings, the Division
may require a statement signed by each investor in this state acknowledging how
the offering varies from the standards set forth in the guidelines
below.
(iii) The term
"Administrator" as used in these guidelines shall mean the assistant
commissioner.
(iv) Copies of these
guidelines may be obtained from the Division upon request and payment in
advance of a reasonable charge for copying.
2. Cattle-Feeding Programs.
The Statement of Policy on Registration of Publicly Offered Cattle-Feeding Programs adopted by NASAA, as reported at CCH NASAA Reports ¶601, as it may be amended from time to time, is incorporated herein by reference.
3. Church Bonds.
The Statement of Policy on Church Bonds adopted by NASAA, as reported at CCH NASAA Reports ¶1001, as it may be amended from time to time, is incorporated herein by reference.
4. Commodity Pool Programs.
The Statement of Policy on Registration of Commodity Pool Programs adopted by NASAA, as reported at CCH NASAA Reports ¶1201, as it may be amended from time to time, is incorporated herein by reference.
5. Equipment Programs.
The Statement of Policy on Registration of Equipment Programs adopted by NASAA, as reported at CCH NASAA Reports ¶1601, as it may be amended from time to time, is incorporated herein by reference.
6. Finance Company Debt
Securities.
The Statement of Policy on Finance Company Debt Securities adopted by the Central Securities Administrators Council, as reported at CCH Blue Sky Reporter ¶5431, as it may be amended from time to time, is incorporated herein by reference.
7. Health Care Facility Offerings.
The Statement of Policy on Health Care Facility Offerings adopted by NASAA, as reported at CCH NASAA Reports ¶2001, as it may be amended from time to time, is incorporated herein by reference.
8. Oil and Gas Programs.
The Statement of Policy on Registration of Oil and Gas Programs adopted by NASAA, as reported at CCH NASAA Reports ¶2621, as it may be amended from time to time, is incorporated herein by reference.
9. Real Estate Investment Trusts.
The Statement of Policy on Real Estate Investment Trusts adopted by NASAA, as reported at CCH NASAA Reports ¶3401, as it may be amended from time to time, is incorporated herein by reference.
10. Real Estate Programs.
The Statement of Policy on Real Estate Programs adopted by NASAA, as reported at CCH NASAA Reports ¶3601, as it may be amended from time to time, is incorporated herein by reference.
11. Miscellaneous Direct Participation
Programs.
In order to provide consistency in its review, the Division will use, to the extent appropriate, the NASAA Statement of Policy on Real Estate Programs, and particularly Sections II, III, and V through IX, as a reference in determining whether types of direct participation programs other than those specifically referenced in parts (4)(n)1.-10. of this Rule meet the standard set forth in paragraph (1) of this Rule.
12. Religious Denominations.
The Guidelines for General Obligation Financing by Religious Denominations adopted by NASAA, as reported at CCH NASAA Reports ¶¶1951-1957, as it may be amended from time to time, is incorporated herein by reference.
(5) Coordinated Review - Equity.
(a) An offering of equity securities which is
submitted pursuant to a coordinated review process agreed to by the Division
and other states, will be deemed to meet the standard of paragraph (1) of this
Rule if it meets all of the terms and conditions of such coordinated review
process, as well as meets the following guidelines:
1. The Statement of Policy Regarding
Corporate Securities Definitions adopted by NASAA, as reported at CCH NASAA
Reports ¶3811 et seq., as it may be amended from time to time, is
incorporated herein by reference.
2. The Statement of Policy Regarding the
Impoundment of Proceeds adopted by NASAA, as reported at CCH NASAA Reports
¶2151, as it may be amended from time to time, is incorporated herein by
reference.
3. The Statement of
Policy Regarding Loans and Other Affiliated Transactions adopted by NASAA, as
reported at CCH NASAA Reports ¶371, as it may be amended from time to
time, is incorporated herein by reference.
4. The Statement of Policy Regarding Options
and Warrants adopted by NASAA, as reported at CCH NASAA Reports ¶2801, as
it may be amended from time to time, is incorporated herein by
reference.
5. The Statement of
Policy Regarding Preferred Stock adopted by NASAA, as reported at CCH NASAA
Reports ¶3001, as it may be amended from time to time, is incorporated
herein by reference.
6. The
Statement of Policy Regarding Promoters Equity Investment adopted by NASAA, as
reported at CCH NASAA Reports ¶3101, as it may be amended from time to
time, is incorporated herein by reference.
7. The Statement of Policy Regarding
Promotional Shares adopted by NASAA, as reported at CCH NASAA Reports
¶3201, as it may be amended from time to time, is incorporated herein by
reference.
8. The Statement of
Policy Regarding Specificity in Use of Proceeds adopted by NASAA, as reported
at CCH NASAA Reports ¶¶3831-3837, as it may be amended from time to
time, is incorporated herein by reference.
9. The Statement of Policy Regarding
Underwriting Expenses and Underwriter's Warrants, Selling Expenses, and Selling
Security Holders adopted by NASAA, as reported at CCH NASAA Reports
¶¶3813-3820, as it may be amended from time to time, is incorporated
herein by reference.
10. The
Statement of Policy Regarding Unsound Financial Condition adopted by NASAA, as
reported CCH NASAA Reports ¶¶3821-3827, as it may be amended from
time to time, is incorporated herein by reference.
11. The Statement of Policy Regarding Unequal
Voting Rights adopted by NASAA, as reported at CCH NASAA Reports ¶2401, as
it may be amended from time to time, is incorporated herein by
reference.
12. The Statements of
Policy referenced in subparagraph (4)(n) of this Rule will apply to the
indicated specific type of security and will, by analogy, be applied to
securities in other forms.
(b) Copies of these guidelines and terms and
conditions of the coordinated review process may be obtained from the Division
upon request and payment in advance of a reasonable charge for
copying.
Authority: T.C.A. §§ 48-1-105, 48-1-106, 48-1-107, 48-1-115, 48-1-116, §2(a)(48) of the Investment Company Act of 1940, §301 of the Small Business Investment Act of 1958, Employee Retirement Income Security Act of 1974, Title I, and §202(a)(22) of the Investment Advisers Act of 1940.
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