Securities Offerings for Cooperatives May 31, 2019

1. Securities Offerings for Cooperatives May 31, 2019

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 • General Solicitation IS permitted • 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