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 proposes an amendment to §115.19, concerning Texas crowdfunding portal registration and activities. Subsection (c)(3) would be amended to permit a registered portal to handle investor funds if the funds are held in a segregated account pursuant to a corresponding amendment to §139.25(f), which is being concurrently proposed.

When a portal maintains a segregated account, it must make certain disclosures to investors. These disclosures are not required of general dealers who use segregated accounts in connection with crowdfunding offerings since an equivalent disclosure provision would not be included in §139.25. Additionally, subsection (e) of §115.19 would be amended to add mandatory recordkeeping requirements when a segregated account is used by a portal. The more comprehensive recordkeeping rule (§115.5) applicable to general dealers already requires a general dealer to keep these records.

Clint Edgar, 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.

Mr. Edgar 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 Texas crowdfunding portals to handle investor funds for certain small securities offerings where engaging an escrow agent may be difficult or cost prohibitive. 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, 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 proposal affects Texas Civil Statutes, Articles 581-12, 581-13, 581-14, 581-15, and 581-18.

§115.19.Texas Crowdfunding Portal Registration and Activities.

(a) - (b) (No change.)

(c) Prohibited activities. A Texas crowdfunding portal shall not:

(1) - (2) (No change.)

(3) hold, manage, possess or otherwise handle investor funds or securities, except through the use of a segregated account if permitted under §139.25(f) of this title (relating to Intrastate Crowdfunding Exemption). When a segregated account is used to hold investor payments, the portal must disclose this to prospective purchasers and investors along with a statement that the portal, in administering the segregated account, must:

(A) be responsible for the prudent processing, safeguarding, and accounting for funds entrusted to the portal by the investors and the issuer;

(B) act to the advantage of and in the best interests of the investors and the issuer; and

(C) ensure that all requirements of the Account Agreement between the portal and the issuer are met before funds are disbursed from the segregated account;

(4) - (6) (No change.)

(d) (No change.)

(e) Recordkeeping.

(1) (No change.)

(2) A portal shall maintain and preserve for a period of five (5) years from either the date of the document or communication or the date of the closing or termination of the securities offering, whichever is later, the following records related to offers and sales made through the Internet website and to transactions where the portal receives compensation:

(A) - (B) (No change.)

(C) any agreements and/or contracts between the portal and an issuer, prospective purchaser, [or] investor, bank or other depository institution;

(D) - (G) (No change.)

(H) ledgers (or other records) that reflect all assets and liabilities, income and expense, [and] capital accounts, and escrow or segregated accounts; and

(I) (No change.)

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

(f) (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 June 15, 2016.
 
TRD-201603031
 
John Morgan
 
Securities Commissioner
 
State Securities Board
 
Earliest possible date of adoption: July 31, 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 (f) would be amended to permit 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. Definitions for "escrow account" and "segregated account" are included as well as requirements for how registered dealers or crowdfunding portals would handle the funds in the segregated accounts. If a portal is involved in the segregated account, additional disclosure statements would be mandated by an amendment to §115.19(c)(3), which is being concurrently proposed.

When a segregated account is created in connection with a securities offering, the proposed amendment to subsection (j) would require the issuer to file with the Securities Commissioner a copy of the written agreement between it and the dealer or portal that governs the segregated account. This filing would occur when the issuer makes its other notice filings to claim the exemption. The agreement defines the responsibilities of the parties with respect to the segregated account. It must identify the bank or other depository institution where the funds will be held and provide the account number. All authorized signatories on the segregated account must be persons registered with the Securities Commissioner.

The funds in the segregated account must be separate from any other account used by the dealer or portal. To prohibit commingling of funds from different offerings or other monies, a separate segregated account must be set up for each securities offering in which such an account is used. Guidance on the recordkeeping requirements for segregated accounts will be added to the agency's website.

Clint Edgar, 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.

Mr. Edgar 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 facilitate certain small securities offerings by businesses in the state by removing a potential obstacle to using the intrastate crowdfunding exemption. 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 581-7 and 581-14.

§139.25.Intrastate Crowdfunding Exemption.

(a) - (e) (No change.)

(f) Escrow or segregated account to safeguard investor and issuer funds.

(1) All payments for purchases of securities offered under this section are directed to and deposited in an escrow account or a segregated account, if a segregated account is permitted under paragraph (2) of this subsection. The payments must [with a bank or other depository institution located in Texas and organized and subject to regulation under the laws of the United States or under the laws of Texas, and will] be held in an escrow account or a segregated account until the aggregate capital raised from all purchasers is equal to or greater than the minimum target offering amount specified in the disclosure statement as necessary to implement the business plan. Investors will receive a return of all their subscription funds if the target offering amount is not raised by the time stated in the disclosure statement.

(2) A segregated account may be used in lieu of an escrow account if the maximum offering amount is $100,000 or less.

(3) For purposes of this subsection:

(A) An "escrow account" is one administered by an independent escrow agent who is a bank or other depository institution.

(B) A "segregated account" is one established by a registered general dealer or a Texas crowdfunding portal pursuant to a written agreement ("Account Agreement") with the issuer and provides that the registered general dealer or portal will act on behalf of the issuer and investors to hold funds raised from investors in a specific securities offering until such time as those funds can be disbursed in accordance with paragraph (1) of this subsection. The Account Agreement must identify the bank or other depository institution and account number where the funds will be held. All signatories on the segregated account must be persons registered with the Securities Commissioner.

(4) The escrow account or segregated account must be in a bank or other depository institution located in Texas and organized and subject to regulation under the laws of the United States or under the laws of Texas.

(5) A separate account must be set up for each securities offering in which a segregated account is used in lieu of an escrow account. The Account Agreement entered into in connection with a segregated account, shall include requirements that the dealer or portal must, and the account shall be administered in accordance with the following principles requiring the dealer or portal to:

(A) be responsible for prudent processing, safeguarding, and accounting for funds entrusted to it by investors and the issuer;

(B) act to the advantage of and in the best interests of the investors and the issuer; and

(C) ensure that all requirements of the Account Agreement between the portal and issuer are met before funds are disbursed from the segregated account.

(6) The issuer shall inform all prospective purchasers and investors if a segregated account is to be used to hold investor payments. Additionally, a portal must make the disclosures mandated by §115.19(c)(3).

(g) - (i) (No change.)

(j) Notice filing. Before using any publicly available Internet website in an offering of securities in reliance on this section, the issuer shall file with the Securities Commissioner:

(1) Form 133.17, Crowdfunding Exemption Notice;

(2) the disclosure statement, required by subsection (i) of this section; [and]

(3) the summary of the offering, required by subsection (h)(2)(B) of this section; and[.]

(4) if investor funds are to be deposited into a segregated account as permitted by subsection (f) of this section, a copy of the written Account Agreement entered into between the issuer and the registered general dealer or Texas crowdfunding portal that will hold investor funds in the securities offering.

(k) - (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 June 15, 2016.

TRD-201603032

John Morgan

Securities Commissioner

State Securities Board

Earliest possible date of adoption: July 31, 2016

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