1. Securities Offerings for Cooperatives May 31, 2019
David P. Swanson
Dorsey & Whitney
Phone: (612)
Ronald D. McFall
Stoel Rives LLP
Phone: (612)

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

3. 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

4. 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?

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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!

11. 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

12. 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

13. 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

14. 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

15. Q&A