Presentation on theme: "Capital Formation Montana Money School State Auditor John Morrison."— Presentation transcript:
Capital Formation Montana Money School State Auditor John Morrison
State Auditor’s Goals Protect investors Promote uniformity of securities laws among the states Encourage, promote and facilitate capital investment in Montana
Securities Department Register securities Register salespeople and firms in the securities industry Living trusts Multi-level marketing companies
Securities Department Consumer complaints Registration violations Enforcement Inquiries about brokerage firms and sales representatives
Capital Formation Raises capital to start or grow a business. Typically, companies offer securities as a way of raising capital. They can raise capital through debt or equity offerings.
Business Plan Statement of funding requirements Executive summary Description of business The market for product or service that you are providing Marketing strategy Business location Licenses/permits/registrations Insurance/bonding/employee benefits Management Personnel Financial data
Factors to Consider when Planning a Securities Offering What is your primary objective in raising capital? How much capital must you raise to meet your primary objective? To whom do you want to offer your securities – family, friends, employees or the general public? How many shareholders do you want? Who will serve as a salesperson and make the offers to investors? Do you want to advertise your securities offering? Do you want to offer your securities in more than one state?
Securities – Two types of offerings: Debt securities, such as loans, bonds and debentures, raise money by obtaining loans from investors. Companies set fixed interest rates and establish a repayment schedule. Equity securities, such as shares of stock, give investors ownership interest in the company. Investors can share in the company’s appreciation and/or receive dividend payments.
Securities Regulation The offer and sale of securities must comply with state and federal securities laws. Consult your attorney.
Salespeople Anyone offering or selling securities must be registered with state and federal securities agencies or must qualify for an exemption. To register, fill out an application and pay the $50 fee. The department waives the test requirement. Issuers are allowed two to three appointed salespeople to offer their securities.
Exemptions No more than 10 people are offered the security. –No commission can be earned. –Investors purchase security for investment purposes only (not as a tax shelter). –Limited to 10 offers, not 10 sales. No more than 25 people are offered the security. –Same criteria as above. –Must file a notification and pay a fee to the State Auditor’s Office before offers are made.
Myrna and Joe Walker Organic fertilizer business Business funded so far by couple’s savings and business proceeds Operating out of small building on property Annual sales of $175,000 High demand for products and have had to limit customers’ orders Transportation issues Needs new or additional space Estimate that business needs $250,000 to grow
The Walkers’ Plan Consult Small Business Administration Create business plan Consult with attorney and accountant Determine funding source(s) – bank loans, stock offering Prepare disclosure document Securities offering must comply with state and federal securities laws
The Walkers Gain Capital Obtain $75,000 SBA grant Offer securities to 10 people, raising $175,000 through a self-executing exemption Provide investors with information about the risks of the investment
James Johnson Specialty store – huckleberry products and jewelry Operating out of home Funded business by selling shares of stock Obtained $50,000 in stock sales to 13 people Able to meet current demand for products Sees potential growth in Montana’s tourist towns Requires facility, equipment and marketing
State Securities Law Violation Johnson made the offer to more than 10 people without the benefit of an exemption He did not file any notice with the Montana Securities Department so he can’t use the exemption for 25 or fewer offers He can’t raise any more money until he resolves the violation
Resolving Johnson’s Problem Works with State Auditor’s Office Offers rescission to his 13 existing shareholders Agrees to make sure he complies with securities laws in the future Creates a document that provides full disclosure about his business and the risks of investing Pays fine Proceeds with plan to raise additional capital
Other Exemptions Offers to employees in stock ownership plans Offers by cooperative associations Offers by certified Montana capital companies Offers to existing shareholders
Prospectus Risks of the investment A description of the security A description of your company Names and salaries of company officers Current audited financial statements A list of your company’s capitalization, long-term debt and other securities outstanding An estimate of the proceeds to be received from the offering Previous experience of the management
Reminder Your company’s business plan should not be used as your disclosure statement or prospectus when offering securities.
Intra and Interstate Offerings If you make offers or sales to people in other states, you must comply with the securities laws of that state as well as those of the federal government. Offerings conducted intrastate generally are federally exempt and our securities department is the sole regulator.
Pre-filing Conference What to expect Time lines Escrow procedures The conference may be conducted in person or by telephone
Web Sites www.discoveringmontana.com/sao - State Auditor’s Office www.sec.gov - SEC home page www.sec.gov/investor/broker.htm - SEC page for checking on broker, salesperson, investment advisers www.nasdr.com/2000.asp - Public access to CRD www.nasaa.org - North American Securities Administrators Association www.iard.com - Information on registration of investment advisers, investment adviser representatives
Montana State Auditor John Morrison 840 Helena Avenue Helena, MT 59601 1-800-332-6148 (406) 444-2040 www.discoveringmontana.com/sao