Ask the Expert: Securities laws get an upgrade
For startups and investors in New Hampshire, the process for raising capital recently improved significantly. A sweeping rewrite of New Hampshire’s securities statute, which became effective on Jan. 1, simplified the process for raising capital and brought New Hampshire in line with several other states that have modernized their securities laws.
Generally, the Revised New Hampshire Uniform Securities Act (the “Revised Securities Act,” RSA 421-B) regulates the offer and sale of securities to investors. Both state and federal law require companies that offer and sell their securities to either register the transaction or securities, or comply with an available exemption from the registration requirement.
The Revised Securities Act has several positive implications for startups and other businesses in the Granite State. Overall, startups benefit from a reduction in certain regulatory hurdles without sacrificing important investor protections.
One of the most significant changes is the expansion of New Hampshire’s limited offering exemption. Under the prior version of New Hampshire’s Securities Act, this exemption allowed an issuer to sell securities to up to 10 purchasers in any 12-month period (inclusive of all offerings by an issuer during a 12-month period), with an aggregate limitation of 25 purchasers over the life of the issuer. Under the Revised Securities Act, this exemption has been increased to up to 25 purchasers in an offering over a 12-month period (applies to each offering during a 12-month period and does not aggregate all offerings during such period), with no lifetime cap on the total number of investors.
The exemption still prohibits general solicitation and unlicensed brokers and requires that issuers reasonably believe that the investors are purchasing for investment. This change will be particularly helpful for new companies, as it is unlikely that many startups will seek to issue securities to more than 25 investors in New Hampshire in a single transaction.
Other exemptions have also been added or expanded under the Revised Securities Act. For example, the issuance of securities to certain institutional investors, including insurance companies, certain investment companies and federally registered broker-dealers, is now exempt. Additionally, a new extraterritorial exemption may be relied upon so long as the offer and sale of securities is solely to out-of-state residents and does not violate the laws of the state in which the investors are present.
Another change pertains to the unusual requirement in the recently replaced Securities Act that certain issuer-dealers obtain a license in connection with issuing securities. Because this requirement was uncommon, many issuers failed to obtain the license, causing issues with securities offerings.
The Revised Securities Act eliminates this requirement altogether. Agents of issuers still must register, but this requirement does not apply if an offering is conducted through the issuer’s officers, directors or employees, and they are not paid a commission in connection with the offering. With this change, issuers may avoid the issuer-dealer license filing fee and will no longer be required to file financial statements or file for renewal with New Hampshire’s Bureau of Securities Regulation. Ultimately, this will help issuers to avoid filing requirements that did not provide any measurable benefit, as well as unnecessary fees and penalties.
While the expanded exemptions in the Revised Securities Act will significantly reduce the risk that an initial offering of securities to friends and family or angel investors will result in a violation of the State’s securities laws, issuers also benefit from a shorter statute of limitation.
Under the Revised Securities Act, the statute of limitation for investors’ rescission rights resulting from the failure to register securities was reduced from six years to two years, measured from the date the unregistered securities are sold to the investor. This change also limits the period during which a disgruntled investor may exercise rescission rights.
In the past, access to capital has been a general concern for local startups, due in part to the outdated provisions of New Hampshire securities laws. The recent overhaul of New Hampshire’s Securities Act will make the state’s capital-raising process much more efficient and straightforward, while maintaining important investor protections.
Companies now benefit from simplified securities laws and expanded exemptions, striking a more favorable balance between allowing legitimate offerings to go forward without undue restrictions. Ultimately, these updates will encourage investment in New Hampshire’s early-stage companies and will facilitate the growth and success of local businesses.
Emily Bolton is a corporate attorney at Cook, Little, Rosenblatt & Manson in Manchester. She advises entrepreneurial clients on a variety of business matters, including mergers and acquisitions, equity and debt offerings, trademarks, and corporate governance. Emily can be reached at firstname.lastname@example.org.