TITLE 7. BANKING AND SECURITIES

PART 7. STATE SECURITIES BOARD

CHAPTER 115. SECURITIES DEALERS AND AGENTS

7 TAC §115.19

The Texas State Securities Board adopts an amendment to §115.19, concerning Texas crowdfunding portal registration and activities, without changes to the proposed text as published in the July 1, 2016, issue of the Texas Register (41 TexReg 4751).

The rule permits a registered portal to handle investor funds if the funds are held in a segregated account pursuant to §139.25(f), which is being concurrently adopted. Mandatory recordkeeping requirements apply when a segregated account is used by a portal.

Texas crowdfunding portals will be allowed to handle investor funds for certain small securities offerings where engaging an escrow agent may be difficult or cost prohibitive.

A comment letter dated August 22, 2016, was received from MassVenture Inc., joined by truCrowd Inc., and TEN. All the signatories are registered Texas crowdfunding portals. The commenters expressed strong support for the proposals that would allow a portal to handle investor funds through a segregated account, establish guidelines and obligations for the portal in conducting its client-fund activities, and require registration of all persons with signature authority over the segregated account.

The commenters requested additional clarity to the portal's disbursement obligations when using a segregated account that requires the portal to "act to the advantage of and in the best interests of the investors and the issuer," indicating that it may be a problem to simultaneously fulfill the best interest of both parties. Staff responded that when a general dealer or Texas crowdfunding portal handle funds in a segregated account, it must avoid conflicts of interest or self-dealing and remain objective and neutral and act at all times to the advantage of and in the best interests of all parties to the transaction.

Since the dealer or portal closes the offering, it is responsible for prudent processing, safeguarding, and accounting for funds raised in the offering and entrusted to them by prospective purchasers and investors, and is responsible for seeing that all requirements relating to the use of the segregated account set out in Rule 115.19 and Rule 139.25 are met, all instructions in the segregated account agreement are followed, and any other conditions met before funds are disbursed from the segregated account.

The funds in a segregated account can be disbursed only to those persons entitled to receive them by the segregated account agreement and §139.25(f)(1). If a dispute arises concerning all or part of the funds, the portion in dispute should be kept separate until the dispute is resolved while the undisputed portion is distributed appropriately to the person entitled to receive it. However, if it is unclear to whom funds belong, or a dispute among claimants exists, then the dealer or portal should hold the disputed funds until the dispute is resolved and disburse any undisputed portions. If the dispute ultimately cannot be resolved among the claimants, then the dealer or portal may need to submit the issue of ownership to a court for resolution.

Given the foregoing, the Board declined to make any changes suggested by the commenters and adopted the subsection as proposed.

The amendment is adopted under Texas Civil Statutes, Article 581-28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes.

The adopted amendment affects Texas Civil Statutes, Articles 581-12, 581-13, 581-14, 581-15, and 581-18.

The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on September 30, 2016.

TRD-201605074

John Morgan

Securities Commissioner

State Securities Board

Effective date: October 20, 2016

Proposal publication date: July 1, 2016

For further information, please call: (512) 305-8301

CHAPTER 139. EXEMPTIONS BY RULE OR ORDER

7 TAC §139.25

The Texas State Securities Board adopts an amendment to §139.25, concerning intrastate crowdfunding exemption, without changes to the proposed text as published in the July 1, 2016, issue of the Texas Register (41 TexReg 4752).

The rule permits a segregated account to be used in lieu of an escrow account when the maximum offering amount in a crowdfunding offering is $100,000 or less; defines "escrow account" and "segregated account"; sets requirements for handling funds in a segregated account; mandates additional disclosure statements when a portal handles funds in a segregated account; and requires a written agreement between the issuer and the dealer/portal when a segregated account is used; requires a filing by the issuer; and requires all signatories on the segregated account to be registered with the Securities Commissioner.

The rule facilitates certain small securities offerings by businesses in the state by removing a potential obstacle to using the intrastate crowdfunding exemption.

A comment letter dated August 22, 2016, was received from MassVenture Inc., joined by truCrowd Inc., and TEN. All the signatories are registered Texas crowdfunding portals. The commenters expressed strong support for the proposal that would allow a portal to handle investor funds through a segregated account, establish guidelines and obligations for the portal in conducting its client-fund activities, and require registration of all persons with signature authority over the segregated account. The commenters noted that the proposals would provide a number of advantages over the use of an escrow account to companies choosing to make their offerings pursuant to the Texas intrastate crowdfunding exemption while still ensuring investor funds are protected.

The commenters requested that the Board consider raising the $100,000 cap for use of a segregated account to somewhere in the $250,000 to $495,000 range. Staff responded that the published proposal was designed to overcome the difficulty smaller offerings (ones well under the $100,000 cap) were encountering in obtaining escrow account services from financial institutions, which was preventing these small issuers from using the existing rules to raise capital. Of the states that have adopted some type of intrastate crowdfunding, two-thirds require the investor funds be deposited into an escrow account. The national crowdfunding provisions enacted by Congress and the Securities and Exchange Commission also require funds be deposited into escrow. Given the foregoing, the Board disagreed with the commenters but may re-visit this suggestion in the future.

The amendment is adopted under Texas Civil Statutes, Articles 581-5.T and 581-28-1. Section 5.T provides that the Board may prescribe new exemptions by rule. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Texas Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes.

The adopted amendment affects Texas Civil Statutes, Articles 581-7 and 581-14.

The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on September 30, 2016.

TRD-201605075

John Morgan

Securities Commissioner

State Securities Board

Effective date: October 20, 2016

Proposal publication date: July 1, 2016

For further information, please call: (512) 305-8301