Securities The Sale of Securities in Alaska General Information Definition of a Security Laws Governing the Sale of Securities in Alaska Deciding to Go Public Advantages of a Public Securities Offering Disadvantages of a Public Securities Offering General Information This is a very general overview of an extremely complex area of law. This page is designed to acquaint the lay reader with the securities registration process and some of the more popular transactional exemptions from the registration requirements. To accomplish this objective, it has necessarily required the sacrifice of technical accuracy. However, as is stressed later in the discussion, technical compliance with the requirements of state and federal securities law is necessary in order to avoid exposure to criminal, civil, or administrative liabilities. Thus, you should not engage in any securities-related activities until you have discussed your intended course of action with competent legal counsel, and the appropriate state and federal securities regulator. You should keep in mind that before you make any offers or sales of securities in Alaska, the securities must either be registered under the Alaska Securities Act (the Act), exempt from registration under one of the Act’s or its regulations’ exemption provisions, or preempted by federal law as a Federal Covered Security that is defined at AS 45.55.075. You should keep in mind also that registration, exemption from registration, and preemption of Federal Covered Securities does not exempt or preempt a seller of securities from the antifraud provisions of the Act. Definition of a Security Before discussing the laws governing the offer and sale of securities in Alaska, it is appropriate to devote some space to the question of what things fall within the definition of a security. The term security is very broadly defined under state and federal law. There are, however, some differences among the various definitions contained in state and federal statutes. Alaska’s definition of security, found at AS 45.55.990(12), includes any . . .note; stock; treasury stock; bond; debenture; evidence of indebtedness; certificate of interest or participation in any profit-sharing agreement; a limited liability company interest under AS 10.50, notwithstanding the limitations of AS 45.08.103(c); collateral-trust certificate; preorganization certificate or subscription; transferable share; investment contract; voting-trust certificate; certificate of deposit for a security; a certificate of interest or participation in an oil, gas, or mining title or lease or in payments out of production under the title or lease or in any sale of or indenture or bond or contract for the conveyance of land or any interest in land; an option on a contract for the future delivery of agricultural or mineral commodities or any other commodity offered or sold to the public and not regulated by the Commodity Futures Trading Commission; however, the contract or option is not subject to the provisions of AS 45.55.070 if it is sold or purchased on the floor of a bona fide exchange or board of trade and offered or sold to the public by a broker-dealer or agent registered under this chapter; investment of money or moneys worth including goods furnished or services performed in the risk capital of a venture with the expectation of some benefit to the investor where the investor has no direct control over the investment or policy decision of the venture; or, in general, any interest or instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing; security does not include an insurance or endowment policy or annuity contract under which an insurance company promises to pay a fixed or variable sum of money either in a lump sum or periodically for life or for some other specified period; . . . Many of these terms, particularly investment contract, have been expanded by judicial decision to encompass a variety of money raising ventures. When applying the definition of a security to a particular transaction, courts routinely ignore the labels applied to the form of the transaction and, instead, focus on the economic realities of the relationship between the parties. Thus, if you create a general partnership (general partnership interests are usually not considered to be securities), but structure the transaction so that all other general partners, apart from yourself, will play a passive role in the operation of the partnership, the general partnership interests may be treated as securities. That is one reason why legal counsel is a good idea. Capitalizing a new or existing business almost invariably involves the offer and sale of securities. The next section presents an overview of the legal and regulatory framework governing the sale of securities in Alaska. Laws Governing the Sale of Securities in Alaska Securities laws were first enacted at the state level during the period immediately preceding World War I. State governments wanted to protect their citizens from fly-by-night promotions and other fraudulent investment schemes which followed on the coattails of this country’s industrial revolution. These laws were, in the words of one commentator, designed to protect the public from speculative schemes which have no more basis than so many feet of blue sky. Thus, these early state statutes came to be called Blue Sky Laws, a term still used to refer to state securities statutes. The major federal securities laws were enacted in 1933, 1934, and 1940. The United States Securities and Exchange Commission (SEC) is the federal agency charged with administering federal securities laws. The focus of the SEC’s regulatory effort is directed toward national securities offerings and the integrity of national financial markets. The two major federal securities laws are the Securities Act of 1933 (1933 Act) and the Securities Exchange Act of 1934 (1934 Exchange Act). The 1933 Act provides for the registration of securities and creates certain exemptions from registration. The 1934 Exchange Act establishes periodic reporting requirements for publicly held companies, regulates proxy solicitation of shareholders, regulates tender offers and confers regulatory authority over securities industry professionals. All federal securities laws contain antifraud provisions that impose a duty to disclose material information in connection with the offer and sale of securities. The jurisdiction of the SEC includes almost all securities sales in or from the United States. Finally, the Investment Advisers Act of 1940 provides the SEC with the legal framework for the regulation of large investment advisers (assets under management exceeding $25 million). In the mid-1950s, the National Conference of Commissioners on Uniform State Laws developed a model securities statute called the Uniform Securities Act. In 1959, our Legislature enacted the model law, called the Alaska Securities Act of 1959. Over the years, new securities statutes superseded the original law and various amendments were enacted to accommodate legitimate business interests and to cope with new forms of investment fraud. In 1999, the Legislature passed HB 83 amending the Alaska Securities Act (the Act) to comply with federal law (the National Securities Markets Improvement Act (NSMIA) of 1996), and made a number of substantial changes to sections of the Act dealing with exemption from securities registration and with civil liability of sellers. The Alaska Securities Act is administered by the Division of Banking, Securities and Corporations, a division of the Department of Commerce, Community, and Economic Development. The Act contains four major parts: The antifraud provisions that require a seller of securities to disclose material information to prospective investors. The registration and notice of securities industry professionals (brokerage firms, securities salespersons, investments advisory firms, and investment adviser representatives). The registration and notice of securities which will be publicly offered to investors. Exemptions from the securities registration and notice provisions (although some exemptions require notices to be filed). Deciding to Go Public A public offering of securities involves a change from a closely held corporation with a limited number of shareholders to a publicly owned corporation with a larger number of shareholders. Many corporations have more than 500 shareholders. A corporation goes public by selling its securities to the public after the securities have been registered or noticed at the state level and registered at the federal level. Under the Alaska Securities Act, the process of registering securities that are not Federal Covered Securities under the 1933 Act and are not eligible for an exemption from registration under the Act, is initiated by filing with the division a registration statement, an application for registration (NASAA (North American Securities Administrators Association) Form U-1), and appropriate fees. A registration statement consists of a prospectus and supplemental information in the form of exhibits to the prospectus. The prospectus contains material information about the issuer (the company whose securities are being registered) and its securities. The prospectus normally is prepared in a brochure or booklet format. It contains, under separate topical headings, a discussion of the following items: The kind and amount of securities being registered The distribution costs associated with the securities offering The risks associated with the purchase of the securities The use of proceeds from the securities offering A description of the company’s business Background information on the company’s officers and directors A description of outstanding options or warrants for the firms securities Audited financial statement Other material information After the registration statement is filed with the division, it will be reviewed by a securities examiner for compliance with the Alaska Securities Act and Regulations adopted under the Act. If the securities examiner has questions about the registration statement, a comment letter will be sent to the issuer’s legal counsel. After all comments have been satisfied, a registration order covering the securities will be issued by the administrator of securities (the division director). Thereafter, the securities can be sold in Alaska. In addition to compliance with the Alaska Securities Act, if the securities are being registered at the federal level, the registration statement must also be declared effective (registered) by the SEC. The registration will not be effective in Alaska until it is effective federally. Registration will also be necessary in most other states where the securities will be sold. There are several factors that should be considered before deciding whether going public is the appropriate method of raising capital. Several of the more significant advantages and disadvantages of becoming a publicly held company are described below. Advantages of a public securities offering New Capital. A successful public offering will result in a significant amount of additional capital for growth and development of your business. A public offering may enable you to retain more control over your company than in the case of an investment by a venture capitalist. However, as noted below, going public will necessarily entail a loss of some control and flexibility in running your business. Negotiability of Your Company’s Securities. As a result of a public offering, your securities may be traded and have a readily ascertainable market value. Name Recognition and Prestige. After going public, your company may become more widely known in the financial and business community. Future Financing on Favorable Terms. A public stock offering will improve your company’s balance sheet by increasing equity and cash, and may enable your firm to obtain loans on more favorable terms. If your company’s securities perform well in the secondary market, future public offerings can offer a continuing source of additional capital. Disadvantages of a Public Securities Offering Loss of Flexibility and Control. After a public offering, if a large percentage of your company is owned by public investors, you may lose some control over your company’s affairs. You will also lose some flexibility in directing your company’s affairs in those areas requiring shareholder approval. After going public, your firm may also be subject to the risk of being acquired in a hostile tender offer. Reporting Obligations. After going public, federal securities laws (primarily the 1934 Exchange Act) impose a continuing duty on certain companies (those with more than 500 shareholders) to disclose information to their shareholders and the SEC. Fulfilling this disclosure obligation is expensive and time consuming. Inaccurate or misleading disclosures may expose a company’s officers and directors to various civil and criminal liabilities. Cost of Going Public. While the cost of registering securities at the state level is relatively insignificant (usually less than one percent of the total offering), it is nevertheless quite substantial in real terms. The cost of registering securities at the federal level is very substantial and can easily exceed $100,000 when legal, accounting and printing expenses are included. Apart from the advantages and disadvantages listed above, as a practical matter, it is only when a company establishes a position in its particular line of business, reaches a certain size, and requires millions of dollars in additional capital that a public offering registered at the federal level becomes a realistic undertaking. There are, however, various exemptions that enable a company to sell its securities without registering them at the state or federal level. Some of the more significant exemptions under the Alaska Securities Act are discussed on the exemptions from registration page.