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Can I offer equity to investors without violating securities laws in Rhode Island? What are the requirements?

Here are the requirements for offering equity to investors in Rhode Island without violating securities laws:

Exemption for Qualifying Securities

Rhode Island law provides an exemption for qualifying securities [1.1]" >(RIGL 44-43-8). To qualify for this exemption, the following conditions must be met:

  • The securities must be transferred from a qualified retirement plan or sold, transferred, or exercised by a qualifying taxpayer.
  • The corporation issuing the securities must be a qualifying corporation.
  • The taxpayer must be a current or former employee of the qualifying corporation employed for three consecutive months as a full-time employee in accordance with corporate policy, and the estate, heirs, and successors of that individual.

A qualifying corporation is any corporation that meets the following criteria:

  • Any of the securities issued by the corporation are traded publicly on a recognized exchange.
  • Its headquarters or principal office in North America is located in the state of Rhode Island.
  • It has at least one hundred full-time employees in the state of Rhode Island or, if greater, at least fifty percent of its full-time employees in North America are based in Rhode Island, at the time it elects to be a qualifying corporation.
  • The average annual rate of growth in the number of full-time employees of the corporation in Rhode Island over the five fiscal years preceding the year of the election by the corporation has been at least ten percent per annum or if the period is shorter, the period of time prior to the election by the corporation that its headquarters or principal office has been located in Rhode Island, has been at least ten percent per annum.
  • The amount of the capital stock of the corporation covered by qualified and non-qualified stock options issued by the corporation and the amount of capital stock of the corporation owned by any qualified retirement plan organized for the employees of the corporation equals in the aggregate at least five percent of the authorized capital stock of the corporation and at least fifty percent of the non-executive employees of the corporation are the holders of options or are eligible to participate in a qualified retirement plan.
  • Prior to the end of the fiscal year in which it elects to be a qualifying corporation, it shall own any facility it is occupying in the state.
  • It shall state at the time it files its election to be a qualifying corporation that it intends to maintain its headquarters or principal office in the state of Rhode Island and that at least fifty percent of its full-time employees in North America will be based in the state of Rhode Island for at least ten years.
  • During the year in which the corporation files its election to be treated as a qualifying corporation and in the four fiscal years following that year, the number of Rhode Island based full-time employees of the corporation has either increased on the average by at least fifteen percent per annum over or in the aggregate has increased by at least seventy-five percent the level of Rhode Island based full-time employees on the first day of the fiscal year in which the election is filed.

Federal Covered Securities

Rhode Island law also provides requirements for filing documents with respect to a covered security under § 18(b)(2) of the Securities Act of 1933, 15 U.S.C. § 77r(b)(2) [2.2]" >(RIGL 7-11-307). The director may require the filing of certain documents, including a current federal registration statement filed with the U.S. Securities and Exchange Commission, a notice, and a consent to service of process. The issuer must pay a nonrefundable fee of one-tenth of one percent of the maximum aggregate offering price at which the federal covered securities are to be offered in Rhode Island, but not less than three hundred dollars or more than one thousand seven hundred fifty dollars.

Exempt Broker-Dealers and Sales Representatives

Rhode Island law provides exemptions for certain broker-dealers and sales representatives [2.3]" >(RIGL 7-11-202). The following broker-dealers are exempt from licensing requirements:

  • A broker-dealer who either is registered or is not required to be registered under the Securities Exchange Act of 1934 and who has no place of business in Rhode Island if the transactions effected by the broker-dealer in Rhode Island are exclusively with the issuer of the securities involved in the transactions, other broker-dealers licensed or exempt under this chapter, and financial or institutional investors.
  • Other broker-dealers the director exempts by rule or order.

The following sales representatives are exempt from licensing requirements:

  • A sales representative acting for a broker-dealer exempt under the above provision.
  • A sales representative acting exclusively for an issuer in effecting transactions in a security exempted by § 7-11-401(1) — (4) and (10) — (12).
  • A sales representative acting for an issuer effecting offers or sales of securities in transactions exempted by § 7-11-402.
  • A sales representative acting for an issuer effecting transactions with employees, partners, officers, or directors of the issuer, a parent or a wholly owned subsidiary of the issuer, if no commission or other similar compensation is paid or given directly or indirectly to the sales representative for soliciting an employee, partner, officer, or director in Rhode Island.
  • A sales representative acting for an issuer effecting offers or sales of securities that are covered securities under § 18(b)(3) or § 18(b)(4)(D) of the Securities Act of 1933, provided that no commission or other remuneration is paid or given directly or indirectly for soliciting any person in Rhode Island.
  • A sales representative whose transactions in Rhode Island are limited to only those transactions set forth in § 15(h)(2) of the Securities Exchange Act of 1934.
  • Other sales representatives that the director exempts by rule or order.

Based on the above, if you meet the requirements for the exemption for qualifying securities, you may offer equity to investors without violating securities laws in Rhode Island. If you do not meet these requirements, you may need to comply with the filing requirements for federal covered securities or obtain a license as a broker-dealer or sales representative, unless you qualify for an exemption. Additionally, certain securities are exempt from registration requirements under Rhode Island law [2.1]" >(RIGL 7-11-401), and certain transactions are exempt from registration requirements [2.4]" >(RIGL 7-11-402).

Source(s):
Jurisdiction

Rhode Island