TITLE 7. BANKING AND SECURITIES

PART 7. STATE SECURITIES BOARD

Chapter 115. SECURITIES DEALERS AND AGENTS

7 TAC §115.20

The Texas State Securities Board proposes new §115.20, concerning Texas crowdfunding portal registration and activities of small business development entities. New §115.20 would implement Section 44 of the Texas Securities Act, which was added by House Bill 1629 passed during the last legislative session. The bill permits an authorized small business development entity to register and operate an intrastate crowdfunding portal ("Section 44 portal").

New §115.20 would provide for registration and operation of Texas crowdfunding portals by authorized small business development entities (a variety of governmental entities, political subdivisions, and nonprofits) specified in the statute and in subsection (a)(1) of the proposal. The last category, in (a)(1)(F), is for a nonprofit community development financial institution ("CDFI") certified by the Community Development Financial Institutions Fund. A CDFI certification is a designation conferred by the CDFI Fund (part of the United States Department of the Treasury) and is a requirement for accessing financial and technical award assistance from the CDFI Fund through the CDFI Program, Native American CDFI Assistance Program, and certain benefits under the BEA Program to support an organization's established community development financial programs. On February 28, 2015, there were 33 CDFIs in Texas, consisting of loan funds, credit unions, banks or thrifts. It is not known how many of these are organized as nonprofits that would be eligible to register to operate a Texas crowdfunding portal.

These Section 44 portals would generally be subject to the same conditions and requirements as other Texas crowdfunding portals with a few exceptions, also specified in Section 44. These exceptions permit a Section 44 portal to: (1) list on its web portal an offering of securities by an issuer in which the portal is financially interested, and (2) subcontract the operations of its crowdfunding web portal to a third party as permitted by Board rule. The first of these exceptions is addressed in subsection (d) of the proposal; the second exception is addressed in subsection (h).

Unlike other types of portals, a Section 44 portal would be required to limit offerings of securities on its web portal to securities of issuers located within the service area of the authorized small business development entity. This requirement appears in subsection (b) of the proposal.

To avoid confusion, since there would be two different intrastate crowdfunding portal rules, this proposal uses the term "registered small business development entity" (defined in (a)(2)) to refer to the Section 44 category of registered portals, rather than "Texas CF portals" (the term used throughout the other portal rule, §115.19).

To make it clear that these Section 44 portals are subject to most of the same requirements as the other registered intrastate crowdfunding portals, throughout this proposal there are numerous cross-references to the requirements in §115.19. This should also make future changes to portal requirements easier to implement since it may be possible in most instances to only amend §115.19 to have the requirements applicable to both types of portals.

Instead of filing a Form 133.15, a new Form 133.20 would be filed by these Section 44 portals. Staff determined that different information would be needed when the applicant is a nonprofit, political subdivision, or government agency. This new form is being concurrently proposed.

Section 44 permits the portal operations to be subcontracted out to a third party, as permitted by Board rule. Subsection (h) imposes certain conditions on such a subcontracting arrangement. First, since the Third Party Operator will be performing certain portal functions and will likely have required records, it should be located in the state so the Agency has ready access to the records. (Since the Third Party Operator is not registered with us as a dealer, the Agency would lack inspection authority over them.)

Second, there must be a written agreement between the Registered Small Business Development Entity and the Third Party Operator that specifies certain terms, including: (1) the scope of work to be performed by the Third Party Operator; (2) business offices and records reflecting the activities of the portal must be located in Texas and identified in the agreement; and (3) the division of responsibility between the Registered Small Business Development Entity and the Third Party Operator for maintaining records and instituting procedures to comply with requirements imposed by rule upon the portal. A copy of this written agreement must be filed with the Securities Commissioner at least 10 days before the Third Party Operator can begin work operating the web portal. When registering a crowdfunding portal under §115.19, the Registration Division looks at how the portal functions will be performed. Accordingly, if a Third Party Operator is used, it will need to be identified during the registration process and the functioning of the website available for review by Staff as is the case with portals registered under §115.19. The Section 44 portal would be responsible for providing the Commissioner access to the records and website.

Patricia Loutherback, Director, Registration Division, has determined that for the first five-year period the rule is in effect there may be fiscal implications as a result of enforcing or administering new §115.20 on state, but not local government.

The effect on state government for the first five-year period §115.20 will be in effect is a potential increase in revenue in the form of fees paid by small business development entities registering in Texas as crowdfunding portals and by their agents. Currently no small business development entities are registered in Texas as crowdfunding portals. It is anticipated that the exceptions granted in §115.20, that are not otherwise available to other Texas crowdfunding portals, would encourage the formation of Section 44 portals. The result would be a minor increase in state revenue from these potential new registrants, specifically: $75 for each firm and $35 for each agent that registers in Texas; and $40 and $20, respectively, thereafter for each annual renewal by these registrants.

Ms. Loutherback also has determined that for each year of the first five years the rule is in effect the public benefit anticipated as a result of enforcing the rule will be to allow persons restricting their activities as provided by new §115.20 to use a simplified registration process. There will be no effect on micro- or small businesses. Since the rule will have no adverse economic effect on micro- or small businesses, preparation of an economic impact statement and a regulatory flexibility analysis is not required. There is no anticipated economic cost to persons who are required to comply with the rule as proposed. There is no anticipated impact on local employment.

Comments on the proposal must be in writing and will be accepted for 30 days following publication of the proposed section in the Texas Register. Written comments should be submitted to Marlene K. Sparkman, General Counsel, State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167 or faxed to (512) 305-8336. Comments may also be submitted electronically to proposal@ssb.texas.gov. In order to be considered by the Board at adoption, comments must be received no later than 30 days following publication.

The new rule is proposed under Texas Civil Statutes, Articles 581-28-1 and 581-44. 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. Section 44 provides the Board with the authority to adopt rules to regulate and facilitate online intrastate crowdfunding by authorized small business development entities.

The proposal affects Texas Civil Statutes, Articles 581-12, 581-13, 581-14, 581-15, 581-18, and 581-44.

§115.20.Texas Crowdfunding Portal Registration and Activities of Small Business Development Entities.

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Authorized small business development entity--An entity incorporated or organized under the laws of Texas and authorized to do business in Texas that is:

(A) a Type A corporation authorized under the Texas Local Government Code, Chapter 504;

(B) a Type B corporation authorized under Texas Local Government Code, Chapter 505;

(C) a Texas nonprofit organization authorized by an agency or authority of the federal government to distribute housing and community development block grants;

(D) a Texas municipal corporation;

(E) the Texas Veterans Commission; or

(F) a Texas nonprofit community development financial institution certified by the Community Development Financial Institutions Fund.

(2) Registered Small Business Development Entity--An Authorized Small Business Development Entity registered as a Texas crowdfunding portal under this section.

(3) Crowdfunding Web Portal--The Internet website of a Registered Small Business Development Entity through which offers and sales of securities exempt from registration pursuant to §139.25 of this title (relating to Intrastate Crowdfunding Exemption) are made.

(4) Third Party Operator--A third party that a Registered Small Business Development Entity subcontracts with pursuant to subsection (h) of this section.

(b) Securities offered and sold. A Registered Small Business Development Entity must limit the securities offered and sold on its Crowdfunding Web Portal to those of issuers located within its service area. Such securities must be exempt from securities registration pursuant to §139.25 of this title (relating to Intrastate Crowdfunding Exemption).

(c) Internet website. The Crowdfunding Web Portal must meet the requirements in §115.19(b) of this chapter (relating to Texas Crowdfunding Portal Registration and Activities).

(d) Prohibited activities. A Registered Small Business Development Entity shall not engage in the activities listed in §115.19(c) of this chapter (relating to Texas Crowdfunding Portal Registration and Activities), except that a Registered Small Business Development Entity is permitted to hold a financial interest in an issuer offering securities on its Crowdfunding Web Portal. A Registered Small Business Development Entity may not operate or facilitate a secondary market in securities offered and sold through its Crowdfunding Web Portal.

(e) Background and regulatory checks. A Registered Small Business Development Entity must meet the requirements in §115.19(d) of this chapter (relating to Texas Crowdfunding Portal Registration and Activities).

(f) Recordkeeping. A Registered Small Business Development Entity must meet the requirements in §115.19(e) of this chapter (relating to Texas Crowdfunding Portal Registration and Activities). In lieu of a copy of Form 133.15 (relating to Texas Crowdfunding Portal registration), the Registered Small Business Development Entity must maintain a copy of Form 133.20 (relating to Texas Crowdfunding Portal Registration by an Authorized Small Business Development Entity).

(g) Filings.

(1) Application. In lieu of the application requirements in §115.2 of this title (relating to Application Requirements), a complete application of an Authorized Small Business Development Entity registering as a Texas crowdfunding portal consists of the following and must be filed with the Securities Commissioner:

(A) Form 133.20, including all applicable schedules and supplemental information;

(B) Form U-4, for the designated officer and a Form U-4 for each agent to be registered (officers of a corporation or partners of a partnership shall not be deemed agents solely because of their status as officers or partners);

(C) a copy of the articles of incorporation or other documents which indicate the form of organization, certified by the Texas Secretary of State or by an officer or partner of the applicant;

(D) any other information deemed necessary by the Commissioner to determine the financial responsibility, business repute, or qualifications of the applicant; and

(E) the appropriate registration fee(s).

(2) Post-reporting requirements. A Registered Small Business Development Entity is subject to the dealer and agent requirements in §115.9 of this title (relating to Post-Registration Reporting Requirements).

(3) Renewal. The registration of a Registered Small Business Development Entity expires at the close of the calendar year, but subsequent registration for the succeeding year shall be issued upon written application and upon payment of the appropriate renewal fee(s), without filing of further statements or furnishing any further information unless specifically requested by the Commissioner.

(h) Subcontracting of portal operations. A Registered Small Business Development Entity may subcontract with a Third Party Operator to operate its Crowdfunding Web Portal under the following conditions:

(1) The Third Party Operator is located in Texas and authorized to do business in Texas;

(2) A written agreement is executed between the Registered Small Business Development Entity and the Third Party Operator specifying:

(A) the scope of work to be performed by the Third Party Operator;

(B) that the business offices and records reflecting the activities of the Crowdfunding Web Portal are located in Texas and those locations are identified in the written agreement; and

(C) the division of responsibility between the Registered Small Business Development Entity and the Third Party Operator for maintaining records and instituting procedures to comply with subsections (c), (d), and (e) of this section; and

(3) A copy of the written agreement required by paragraph (2) is filed with the Securities Commissioner a minimum of 10 days prior to the commencement of operations by the Third Party Operator of the Crowdfunding Web Portal;

(4) A Registered Small Business Development Entity registered as a Texas Crowdfunding Portal pursuant to this section is responsible for ensuring the Securities Commissioner is provided with access to the records and website as required by subsection (f) of this section and §115.19(e) of this chapter.

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 4, 2016.

TRD-201600549

John Morgan

Securities Commissioner

State Securities Board

Earliest possible date of adoption: March 20, 2016

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

CHAPTER 123. ADMINISTRATIVE GUIDELINES FOR REGISTRATION OF OPEN-END INVESTMENT COMPANIES

7 TAC §123.3

The Texas State Securities Board proposes an amendment to §123.3, concerning conditional exemption for money market funds. The amendment would align the Texas rule for money market funds to the federal definition of money market fund in SEC Rule 2a-7 under the Investment Company Act of 1940. The federal rule was updated as part of the SEC's money market fund reforms enacted in July 2014 in Release IC-31166. The amendment was requested by a representative of the Investment Company Institute who represented that the proposed amendment would not result in a fiscal impact to Texas because all existing money market funds that will continue to be offered to investors must qualify under the revisions to SEC Rule 2a-7.

Patricia Loutherback, Director, Registration Division, has determined that for the first five-year period the rule is in effect there will be no foreseeable fiscal implications for state or local government as a result of enforcing or administering the rule.

Ms. Loutherback also has determined that for each year of the first five years the rule is in effect the public benefit anticipated as a result of enforcing the rule will be that money market funds meeting SEC Rule 2a-7 may continue to take advantage of the fee relief provided by the Texas rule. There will be no effect on micro- or small businesses. Since the rule will have no adverse economic effect on micro- or small businesses, preparation of an economic impact statement and a regulatory flexibility analysis is not required. There is no anticipated economic cost to persons who are required to comply with the rule as proposed. There is no anticipated impact on local employment.

Comments on the proposal must be in writing and will be accepted for 30 days following publication of the proposed section in the Texas Register. Written comments should be submitted to Marlene K. Sparkman, General Counsel, State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167 or faxed to (512) 305-8336. Comments may also be submitted electronically to proposal@ssb.texas.gov. In order to be considered by the Board at adoption, comments must be received no later than 30 days following publication.

The amendment is proposed 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 proposal affects Texas Civil Statutes, Articles 581-5, 581-7, and 581-35.

§123.3.Conditional Exemption for Money Market Funds.

(a) (No change.)

(b) Definition. In this section, a "money market fund" or "fund": is an open-end investment company which must meet all of the following conditions.

(1) (No change.)

(2) The fund must hold itself out to be a money market fund or an equivalent to a money market fund and must be in compliance with the Investment Company Act of 1940, Rule 2a-7, as revised [made effective] in Securities and Exchange Commission Release Number IC-31166 [IC-13380 and as amended in Release Numbers IC-14606, IC-14983, IC-18005, IC-18177, and IC-21837].

(3) - (7) (No change.)

(c) - (j) (No change.)

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 4, 2016.

TRD-201600548

John Morgan

Securities Commissioner

State Securities Board

Earliest possible date of adoption: March 20, 2016

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

CHAPTER 133. FORMS
7 TAC §133.20

The Texas State Securities Board proposes new §133.20, which adopts by reference a form concerning Texas crowdfunding portal registration by an authorized small business development entity. The form would be used by an authorized small business development entity to apply for registration as a Texas intrastate crowdfunding portal under new §115.20, which is being concurrently proposed.

The form is very similar to Form 133.15, used by an applicant for intrastate crowdfunding portal registration under §115.19 with the following exceptions: (a) Item 2, forms of organization are limited to those permitted to pursue portal registration pursuant to Section 44(C) of the Texas Securities Act; (b) Items 3, 4, and 5, and related Schedules A and B, would be required only of applicants that are nonprofit organizations; (c) Item 6, collects information about any subcontract for portal operations rather than for non-securities related businesses engaged in by the applicant; and (d) Schedule D has been added to collect information about any third party operator for the portal.

Patricia Loutherback, Director, Registration Division, has determined that for the first five-year period the form is used, there will be no foreseeable fiscal implications for state or local government as a result of using the form.

Ms. Loutherback also has determined that for each year of the first five years the form is used the public benefit anticipated as a result will be that authorized small business development entities will be able to use a simplified form to register and amend their registration as Texas crowdfunding portals. There will be no effect on micro- or small businesses. Since the form will have no adverse economic effect on micro- or small businesses, preparation of an economic impact statement and a regulatory flexibility analysis is not required. There is no anticipated economic cost to persons who are required to use the form as proposed. There is no anticipated impact on local employment.

Comments on the proposal must be in writing and will be accepted for 30 days following publication of the proposed section in the Texas Register. Written comments should be submitted to Marlene K. Sparkman, General Counsel, State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167 or faxed to (512) 305-8336. Comments may also be submitted electronically to proposal@ssb.texas.gov. In order to be considered by the Board at adoption, comments must be received no later than 30 days following publication.

The new rule is proposed under Texas Civil Statutes, Articles 581-28-1 and 581-44. 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. Section 44 provides the Board with the authority to adopt rules to regulate and facilitate online intrastate crowdfunding by authorized small business development entities.

The proposal affects Texas Civil Statutes, Articles 581-12, 581-13, 581-14, 581-15, 581-18, and 581-44.

§133.20.Texas Crowdfunding Portal Registration by an Authorized Small Business Development Entity.

This form is available from the State Securities Board, P.O. Box 13167, Austin, Texas 78711-3167 and at www.ssb.texas.gov.

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 4, 2016.

TRD-201600550

John Morgan

Securities Commissioner

State Securities Board

Earliest possible date of adoption: March 20, 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 proposes an amendment to §139.25, concerning intrastate crowdfunding exemption. Subsection (l) of the intrastate crowdfunding exemption would be amended to take into account new Section 44 of the Texas Securities Act. The amendment to §139.25 and new §115.20, which is being concurrently proposed, would permit certain small business development entities registered as Texas intrastate crowdfunding portals to have a financial interest in an issuer listed on its Internet web portal.

Patricia Loutherback, Director, Registration Division, has determined that for the first five-year period the rule is in effect there will be no foreseeable fiscal implications for state or local government as a result of enforcing or administering the rule.

Ms. Loutherback also has determined that for each year of the first five years the rule is in effect the public benefit anticipated as a result of enforcing the rule will consistency with a related statute. There will be no effect on micro- or small businesses. Since the rule will have no adverse economic effect on micro- or small businesses, preparation of an economic impact statement and a regulatory flexibility analysis is not required. There is no anticipated economic cost to persons who are required to comply with the rule as proposed. There is no anticipated impact on local employment.

Comments on the proposal must be in writing and will be accepted for 30 days following publication of the proposed section in the Texas Register. Written comments should be submitted to Marlene K. Sparkman, General Counsel, State Securities Board, P.O. Box 13167, Austin, Texas 78711 3167 or faxed to (512) 305 8336. Comments may also be submitted electronically to proposal@ssb.texas.gov. In order to be considered by the Board at adoption, comments must be received no later than 30 days following publication.

The amendment is proposed under Texas Civil Statutes, Articles 581-5.T, 581-12.C, 581-28-1, and 581-44. Section 5.T provides that the Board may prescribe new exemptions by rule. Section 12.C provides the Board with the authority to prescribe new dealer, agent, investment adviser, or investment adviser representative registration 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. Section 44 provides the Board with the authority to adopt rules to regulate and facilitate online intrastate crowdfunding by authorized small business development entities.

The proposal affects Texas Civil Statutes, Articles 581-7, 581-12, 581-13, 581-14, 581-15, 581-18, and 581-44.

§139.25.Intrastate Crowdfunding Exemption.

(a) - (k) (No change.)

(l) Commissions and remuneration. A commission or other remuneration shall not be paid or given, directly or indirectly, for the offer or sale of the securities unless the person receiving such compensation is registered in Texas as a dealer or agent or as a Texas crowdfunding portal. The issuer may not list its securities on the Internet website of 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 financial interest in the issuer as compensation for services provided to or on behalf of the issuer. A general dealer or portal may not be affiliated with or under common control with an issuer whose securities appear on its Internet website. Nothwithstanding the foregoing, a Registered Small Business Development Entity, as defined in §115.20 of this title (relating to Texas Crowdfunding Portal Registration and Activities of Small Business Development Entities), may have a financial interest in an issuer listed on its Crowdfunding Web Portal, as defined in §115.20.

(m) (No change.)

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 4, 2016.

TRD-201600551

John Morgan

Securities Commissioner

State Securities Board

Earliest possible date of adoption: March 20, 2016

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