Securities Offerings for Cooperatives May 31, 2019 David P. Swanson Dorsey & Whitney Phone: (612) 343-8275 Email: Swanson.Dave@Dorsey.com Ronald D. McFall Stoel Rives LLP Phone: (612) 801-1820 Email: ron.mcfall@stoel.com

Topics: Is it a Security? Basic Exemptions Disclosure Requirements Recent Exemptions

Is It a Security? Coop membership interests may not be a security. Foreman Case: Not a security if: Purchase motivated by desire for goods/services provided by the cooperative No appreciation in value Not negotiable Dividends on basis of patronage, rather than investment Voting on basis of membership—1 member, 1 vote No pledge of membership shares

Is It a Security? (cont.) Coop Promissory Notes may not be a security. Reves Case: Notes may not be securities depending on “family resemblance” test – More like a commercial transaction or More like an investment transaction? If buyer is interested primarily in profit and seller seeks general financing, more likely a security; if note to facilitate purchase/sale of minor asset or consumer good, not a security. Plan of Distribution  trading for speculation and investment? Public Expectations and Alternate Regulatory Protections?

Is It a Security? (cont.) There are numerous SEC no-action letters and several other cases that offer guidance, but there are gray areas, particularly defining what constitutes a profit intent v. a benefits of membership intent Real Estate Investment Coops Analysis of merger transactions if patronage equity if issued in an exchange

Securities Implications Offer and Sale of Securities will require compliance with federal and state laws Securities laws impose two basic requirements: I. Register securities or claim exemption from registration AND II. Provide adequate disclosure: Information that a reasonably prudent investor would find material to their investment decision

Basic Cooperative Securities Exemptions Potential exemptions for different purposes and situations Agricultural Cooperatives have a special exemption: “3(a)(5)” a/k/a “521 Exemption” Based on tax status obtained by adopting specific governance & operating provisions Provides exemption for securities, not just transaction Also a “federal covered security,” pre-empting state registration requirements

Basic Cooperative Securities Exemptions A Note About the Intra-State Offering Exemption Risky(?) but often used especially by natural food coops Offer only to residents of a single state (self-certification probably works) Many states also have specific exemptions for cooperative securities offerings to members Need to look at securities agent or advisor licensing exemptions, and advertising regulations

Basic Cooperative Securities Exemptions (cont.) Multi-State Offering Exemptions Most commonly used exemptions for Multi-State offerings are “Private Placement” a/k/a “Regulation D” Three primary types of Regulation D exemptions: Rule 504, for offers & sales up to $5M, in 12-month period (requires state law registration or exemption and the state rules vary considerably, and does not permit general solicitation or advertising) Rule 506(b), for offers & sales in unlimited dollar amount Rule 506(c), for offers & sales in unlimited dollar amount

Rule 506 Exemptions Accredited investors—Individuals with i) net worth in excess of $1M or ii) annual income in excess of $200K individually or $300K with spouse and iii) entities with total assets in excess of $5M Rule 506(b)—offers and sales to i) up to 35 non-accredited investors and ii) unlimited number of accredited investors—BUT CANNOT INVOLVE PUBLIC SOLICITATION Contacts with investors through connections and referrals, NOT through PUBLIC ADVERTISING OR MASS MAILING—Work the contact list!

Rule 506 Exemptions (Cont.) Rule 506(c)—offers and sales to unlimited number of accredited investors OFFER CAN INVOLVE PUBLIC SOLICITATION: advertising, mass mailings, etc. BUT SALES ONLY TO ACCREDITED INVESTORS Verification of investor’s accredited status is REQUIRED—tax returns, financial statements, certification from investor’s broker, accountant, lawyer Limitations on resale

Disclosure Requirements No specified form of disclosure if offers/sales only to accredited investors or intra-state exemption is used BUT OBLIGATION TO PROVIDE MATERIAL INFORMATION CONTINUES AND NEED TO THINK ABOUT COMMITMENTS BEING MADE IN THE OFFERING DOCUMENT THAT MIGHT CREATE PROBLEMS IF CIRCUMSTANCES CHANGE If offers/sales to non-accredited investors, specified disclosure based on what would be required for Regulation A offering or registration

Recent Securities Exemptions JOBS Act modified Regulation A, often referred to as “Reg A+” Regulation A, Tier I $20M limit in 12-month period General Solicitation IS permitted No investor requirements/limitations Does Not pre-empt state filing Regulation A, Tier II $50M limit in 12-month period Non-accredited investors subject to investment limits On-going annual and semi-annual filings Pre-empts state requirements

Recent Securities Exemptions (cont.) Regulation Crowdfunding $1.07M limit in 12 months General Solicitation, with some limits after filing Investment limitations based on annual income and net worth Annual reports 12-month restrictions on re-sale Pre-empts state registration MUST BE CONDUCTED THROUGH A REGISTERED INTERNET PLATFORM

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