1. Capital Formation Montana Money School State Auditor John Morrison

2. State Auditor’s Goals  Protect investors  Promote uniformity of securities laws among the states  Encourage, promote and facilitate capital investment in Montana

3. Securities Department  Register securities  Register salespeople and firms in the securities industry  Living trusts  Multi-level marketing companies

4. Securities Department  Consumer complaints  Registration violations  Enforcement  Inquiries about brokerage firms and sales representatives

5. Capital Formation  Raises capital to start or grow a business.  Typically, companies offer securities as a way of raising capital.  They can raise capital through debt or equity offerings.

6. Business Plan  Statement of funding requirements  Executive summary  Description of business  The market for product or service that you are providing  Marketing strategy  Business location  Licenses/permits/registrations  Insurance/bonding/employee benefits  Management  Personnel  Financial data

7. Factors to Consider when Planning a Securities Offering  What is your primary objective in raising capital?  How much capital must you raise to meet your primary objective?  To whom do you want to offer your securities – family, friends, employees or the general public?  How many shareholders do you want?  Who will serve as a salesperson and make the offers to investors?  Do you want to advertise your securities offering?  Do you want to offer your securities in more than one state?

8. Securities – Two types of offerings:  Debt securities, such as loans, bonds and debentures, raise money by obtaining loans from investors. Companies set fixed interest rates and establish a repayment schedule.  Equity securities, such as shares of stock, give investors ownership interest in the company. Investors can share in the company’s appreciation and/or receive dividend payments.

9. Securities Regulation  The offer and sale of securities must comply with state and federal securities laws.  Consult your attorney.

10. Salespeople  Anyone offering or selling securities must be registered with state and federal securities agencies or must qualify for an exemption.  To register, fill out an application and pay the $50 fee. The department waives the test requirement.  Issuers are allowed two to three appointed salespeople to offer their securities.

11. Exemptions  No more than 10 people are offered the security. –No commission can be earned. –Investors purchase security for investment purposes only (not as a tax shelter). –Limited to 10 offers, not 10 sales.  No more than 25 people are offered the security. –Same criteria as above. –Must file a notification and pay a fee to the State Auditor’s Office before offers are made.

12. Myrna and Joe Walker  Organic fertilizer business  Business funded so far by couple’s savings and business proceeds  Operating out of small building on property  Annual sales of $175,000  High demand for products and have had to limit customers’ orders  Transportation issues  Needs new or additional space  Estimate that business needs $250,000 to grow

13. The Walkers’ Plan  Consult Small Business Administration  Create business plan  Consult with attorney and accountant  Determine funding source(s) – bank loans, stock offering  Prepare disclosure document  Securities offering must comply with state and federal securities laws

14. The Walkers Gain Capital  Obtain $75,000 SBA grant  Offer securities to 10 people, raising $175,000 through a self-executing exemption  Provide investors with information about the risks of the investment

15. James Johnson  Specialty store – huckleberry products and jewelry  Operating out of home  Funded business by selling shares of stock  Obtained $50,000 in stock sales to 13 people  Able to meet current demand for products  Sees potential growth in Montana’s tourist towns  Requires facility, equipment and marketing

16. State Securities Law Violation  Johnson made the offer to more than 10 people without the benefit of an exemption  He did not file any notice with the Montana Securities Department so he can’t use the exemption for 25 or fewer offers  He can’t raise any more money until he resolves the violation

17. Resolving Johnson’s Problem  Works with State Auditor’s Office  Offers rescission to his 13 existing shareholders  Agrees to make sure he complies with securities laws in the future  Creates a document that provides full disclosure about his business and the risks of investing  Pays fine  Proceeds with plan to raise additional capital

18. Other Exemptions  Offers to employees in stock ownership plans  Offers by cooperative associations  Offers by certified Montana capital companies  Offers to existing shareholders

19. Prospectus  Risks of the investment  A description of the security  A description of your company  Names and salaries of company officers  Current audited financial statements  A list of your company’s capitalization, long-term debt and other securities outstanding  An estimate of the proceeds to be received from the offering  Previous experience of the management

20. Reminder  Your company’s business plan should not be used as your disclosure statement or prospectus when offering securities.

21. Intra and Interstate Offerings  If you make offers or sales to people in other states, you must comply with the securities laws of that state as well as those of the federal government.  Offerings conducted intrastate generally are federally exempt and our securities department is the sole regulator.

22. Pre-filing Conference  What to expect  Time lines  Escrow procedures  The conference may be conducted in person or by telephone

23. Web Sites www.discoveringmontana.com/sao - State Auditor’s Office www.sec.gov - SEC home page www.sec.gov/investor/broker.htm - SEC page for checking on broker, salesperson, investment advisers www.nasdr.com/2000.asp - Public access to CRD www.nasaa.org - North American Securities Administrators Association www.iard.com - Information on registration of investment advisers, investment adviser representatives

24. Montana State Auditor John Morrison 840 Helena Avenue Helena, MT 59601 1-800-332-6148 (406) 444-2040 www.discoveringmontana.com/sao