Source: https://www.pabulletin.com/secure/data/vol48/48-2/89.html
Timestamp: 2019-07-16 00:44:41
Document Index: 434645034

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PA Bulletin, Doc. No. 18-89>
Title 10—BANKING
[ 10 PA. CODE CHS. 1, 102, 202, 203, 204, 205, 206, 207, 208, 209, 210, 211, 301, 302, 303, 304, 305, 401, 404, 501, 504, 513, 601, 602, 603, 604, 605, 606, 609, 610, 701, 901 and 1001 ]
[48 Pa.B. 389]
The Department of Banking and Securities (Department) amends Chapters 1, 102, 202, 203, 204, 205, 206, 207, 208, 209, 210, 211, 301, 302, 303, 304, 305, 401, 404, 501, 504, 513, 601, 602, 603, 604, 605, 606, 609, 610, 701, 901 and 1001 to read as set forth in Annex A. This final-form rulemaking replaces terminology made obsolete by the 2012 merger of the former Securities Commission (Commission) with the former Department of Banking (2012 merger), corrects formatting and word choice issues, deletes statements of policy, reduces compliance requirements, permits electronic format submissions and electronic filings, and aligns the language of the regulations with the North American Securities Administrators Association (NASAA) model rules and the Securities and Exchange Commission (SEC) rules and regulations.
For further information, contact Scott A. Lane, Senior Deputy Chief Counsel, (717) 787-1471, slane@pa.gov, or Leo Pandeladis, Chief Counsel, (717) 787-1471, lepandelad@pa.gov.
This final-form rulemaking is authorized under section 202.C of the Department of Banking and Securities Code (71 P.S. § 733-202.C), section 609(a) of the Pennsylvania Securities Act of 1972 (1972 Act) (70 P.S. § 1-609(a)) and section 9(b) of the Takeover Disclosure Law (70 P.S. § 79(b)).
Replace terminology
This final-form rulemaking replaces references to ''Commission'' relating to the former Commission with ''Department'' to reflect the 2012 merger. A definition of ''Commission'' has been added to § 1.1 (relating to definitions) consistent with the adjudicatory role of the Banking and Securities Commission for the entire Department. References to ''by order of'' provide discretion for the Department as to how to act, such as by letter, which is consistent with the other areas of the Department. Sections 601.010, 601.020, 602.060, 606.041, 610.010 and 901.011, which indirectly referenced a procedure of the former Commission, are rescinded.
The terminology in the former securities regulations was inaccurate because it referred to the former Commission and its policies and procedures. The regulated community as a whole will benefit from this final-form rulemaking reflecting the Department's incorporation of the former Commission and the changes to policies and procedures as a result of the incorporation.
Conform to the Pennsylvania Code & Bulletin Style Manual
The former securities regulations were not drafted in a manner consistent with the Pennsylvania Code & Bulletin Style Manual, likely because of numerous amendments at different time periods. Because amendments are needed to most of the sections to reflect the 2012 merger, the Department also updated the formatting and word choice to conform to the Pennsylvania Code & Bulletin Style Manual. For example, this final-form rulemaking: 1) rescinds § 602.022, regarding denial for abandonment, and divides the former regulation into §§ 208.010 and 303.016 (relating to denial for abandonment; and considered as abandoned); and 2) relocates the definitions formerly throughout Part VII (relating to securities) into § 102.021 (relating to definitions) for ease of reading and to adhere to Independent Regulatory Review Commission (IRRC) and Legislative Reference Bureau (LRB) standards.
Amendments to formatting and word choice issues make the regulations more user friendly for the regulated community as intended by the Pennsylvania Code & Bulletin Style Manual. In addition, this final-form rulemaking deletes formatting and phrasing that could be read two different ways by the regulated community.
Rescind Chapter 604
The Department reviewed the statements of policy (SOP) in Chapter 604 and determined that all of the SOPs needed to be deleted as obsolete because of the merger, could be better reflected in other sections or should be placed on the Department's web site as guidance rather than as SOPs. The former Commission adopted the SOPs. Upon review of the SOPs, the Department determined that the SOP format was not the best manner of disseminating the remaining relevant information to the regulated community. The regulated community will benefit from the Department consolidating information into either this final-form rulemaking or on the Department's web site where appropriate.
Sections 604.011, 604.017 and 604.022 are rescinded as obsolete. Rescinded §§ 604.010, 604.016, 604.019, 604.020, 604.021 and 604.023 may be included on the Department's web site or in a future rulemaking concerning rules of practice. Rescinded § 604.012 has been incorporated into § 504.060(e) (relating to rescission offers).
Reduce compliance requirements
This final-form rulemaking reduces compliance requirements on the regulated community by rescinding § 206.020, which removes the tax opinion requirement for limited partnership interests because the requirement only applied in narrow instances and was applied too broadly, and § 302.060, as this section is no longer applicable to the industry because since 1979 it applied to one individual. In addition, the Department amends §§ 210.010, 609.010 and 609.034 (relating to retroactive registration of certain investment company securities; use of prospective financial statements; and financial statements) to delete certain unnecessary filing requirements.
The Department and the regulated community will benefit from the reduction in compliance requirements. The reduction will provide a minimal monetary benefit, reduce paperwork requirements and remove some compliance hurdles for the regulated community. The Department will benefit from the reduction in compliance checks that are no longer necessary.
Permit electronic format/filing
Sections 701.010a, 701.011 and 701.020 (relating to filing of registration forms; filing of exemption forms; and electronic filing) are added to permit the Department to handle filings in a manner better reflecting technology used by the regulated community.
The Department and the regulated community will benefit from the inclusion of sections regulating electronic format and electronic filing. At this time, the Department has the technology to accept forms filed in electronic format. This reduces mailing fees and filing time frames for the regulated community. It also reduces paperwork being housed by the Department. The Department does not currently have a dedicated electronic filing platform, but considers it to be a future option. Including the electronic filing section will permit the Department to make that technology available to the regulated community in the future without requiring an additional rulemaking.
Align language with NASAA and SEC
The Department works closely with NASAA and the SEC to develop consistent policies and procedures for the securities industry. Multiple amendments align the securities regulations with NASAA or the SEC, or both. This preamble details the NASAA or SEC rule after which the Department is modelling specific sections.
The regulated community will benefit from this final-form rulemaking. Consistency in regulatory treatment is important to the success of the industry as a whole because the securities industry frequently operates across states and countries.
Notice of proposed rulemaking was published at 46 Pa.B. 3420 (July 2, 2016), with a 30-day public comment period. The Department received comments from trade associations representing the interests of certified public accountants (Pennsylvania Institute of Certified Public Accountants) and certain members from the independent financial services industry (Financial Services Institute). Both trade associations expressed general support. The Department received extensive comments from G. Philip Rutledge, Esq. (Attorney Rutledge), an attorney with Bybel Rutledge and the former Chief Counsel of the Commission. IRRC submitted comments. The House Commerce Committee and the Senate Banking and Insurance Committee did not submit comments.
The comments received from Attorney Rutledge and IRRC and the Department's responses to the comments are set forth in detail in a separate comment and response document. A summary of the comments and responses follows.
The final-form rulemaking relocated all definitions formerly throughout Part VII to § 102.021 for ease of reading and to adhere to IRRC and LRB standards. The majority of the comments to the existing definitions, and the changes made in response, clarify either the language of a definition or the specific regulation to which it applies. For example, in the definition of ''advertisement,'' ''refers to'' is revised to ''means.'' Definitions for terms that include multiple requirements (such as ''independent party'') are revised to make clear that the person shall meet all of those requirements.
Definitions that refer to terms used in different contexts have been revised to clarify the different contexts. For example, the definition of ''principal place of business'' refers to both § 203.187 (relating to small issuer exemption) and the place of business of an investment adviser. The definition has been revised to refer to both contexts.
Likewise, ''beneficial ownership'' is used in §§ 203.184, 302.070, 304.012, 305.019, 404.011 and 609.012. This definition has been revised to address these sections.
Attorney Rutledge suggested multiple additional defined terms. IRRC's comments recommended many, but not all, of Attorney Rutledge's suggested definitions. Accordingly, the Department adds the following definitions suggested by Attorney Rutledge and IRRC: ''aggregate indebtedness,'' ''auditor's report,'' ''commission,'' ''direct participation program,'' ''EFD,'' ''financial statements,'' ''Nationally recognized statistical rating organization,'' ''PCAOB'' and ''self-regulatory organization.'' The Department also adds definitions of ''National securities association'' and ''National securities exchange,'' which were included in the definition of ''exchange,'' which has been deleted. In §§ 303.042(d)(2), 304.041(b), 305.011(a)(1)(i) and (ii) and (c) and 603.031(e)(3), the capitalization of ''National securities exchange'' is corrected to be consistent with the capitalization of this term throughout the regulations.
The Department did not add the following terms suggested by Attorney Rutledge but not by IRRC: ''Form ADV,'' ''Form ADV-W,'' ''Form BD,'' ''Form BD-W,'' ''Form D,'' ''Form NF,'' ''Form U-1,'' ''Form U-4,'' ''Form U-5,'' ''Form U-SB,'' ''generally accepted accounting principles,'' ''limited partnership'' and ''Series 7, 24, 63, 65, and 66,'' which refer to specific examinations. The Department asserts that any benefit from defining these terms would be outweighed by the confusion of having a large number of defined terms, particularly when many of these terms refer to the multitude of forms used by the Department and exams available to the securities industry.
While the Department agrees with Attorney Rutledge's comment to include ''direct participation program'' (DPP) as a defined term, the Department adds ''real estate investment trusts'' (REIT) as an example of a DPP. Attorney Rutledge's suggested definition is based upon Financial Industry Regulatory Authority (FINRA) Rule 2310, which excludes REITs from the definition. FINRA rules, which are essentially conduct rules for its membership consisting of broker-dealers, address REITs separately from DPPs.
In contrast, the only reference to DPPs is in § 207.091 (relating to subscription contracts), which requires the filing of subscription contracts proposed to be used in an offering pursuant to the registration of the securities. The regulations do not address REITs separately from DPPs, and practitioners consistently file subscription contracts for REIT offerings with the Department in compliance with § 207.091.
In addition, NASAA members, including the Department, participate in a coordinated review program for the registration of DPPs. According to the NASAA guidelines on the coordinated review program, it includes the review of REITs. See http://www.coordinatedreview.org/cr-dpp/.
Clarification of substantive provisions
Most of the amendments to substantive provisions are either the inclusion of the additional defined terms or stylistic changes to add clarity. For example, several sections have been amended to include ''all of the following conditions'' or similar language to make clear that compliance with all criteria is required to satisfy the exemption, including §§ 202.094, 203.041, 203.161, 203.188 and 203.203.
Other amendments to substantive provisions include the deletion of the requirement for private fund advisers exempt from investment adviser registration to pay a fee, as section 602.1 of the 1972 Act (70 P.S. § 1-602.1) does not authorize the Department to impose a filing fee for persons exempt from registration under section 301 of the 1972 Act (70 P.S. § 1-301).
In addition, in response to comments from Attorney Rutledge and IRRC, § 305.019(b) (relating to dishonest and unethical practices) has been revised to include ''within the previous 10 years'' to be consistent with the 10-year limitations period in section 305 of the 1972 Act (70 P.S. § 1-305).
Section 609.034(h) (relating to financial statements) is added in this final-form rulemaking to clarify that financial statement requirements regarding offerings made in reliance to Tier 2 of SEC Regulation A do not apply if the issuer is relying on section 203(u) of the 1972 Act (70 P.S. § 1-203(u)). Under a recent SEC rulemaking, state securities registration requirements are pre-empted for offerings under Tier 2 of Regulation A (offerings up to $50 million).
The Department reviewed the SOPs in Chapter 604 and determined that all of the SOPs needed to be deleted as obsolete because of the merger, could be better reflected in other sections or should be placed on the Department's web site as guidance rather than as SOPs. The former Commission adopted the SOPs. Upon review of the SOPs, the Department determined that the SOP format was not the best manner of disseminating the remaining relevant information to the regulated community.
Attorney Rutledge's comments included a general recommendation that the SOPs not be rescinded and specific comments regarding two SOPs.
SOP in former § 604.018
Former § 604.018 provided for the general policy of the original Commission to not impose monetary penalties when a respondent had already been assessed monetary penalties by FINRA or the SEC for the same conduct. This SOP did not preclude the Commission from issuing an order pursuant to a settlement that imposed a monetary penalty. The comment recommended that this SOP be retained, as it was originally raised by a senator when the Commission made its original request to be granted the authority to impose monetary penalties for violations of the 1972 Act.
The Department believes that this SOP is no longer relevant because the 2012 merger put new adjudicatory processes in place. Specifically, pre-merger Commission final orders were issued by the Commission comprised of the three Commissioners who acted as heads of the Commission. In the post-merger Department, final orders are issued by the Banking and Securities Commission, comprising of five individuals, four of whom are independent from the Department.
Additionally, while Department staff would take into consideration an SEC or FINRA penalty when recommending a sanction to the Hearing Officer and to the Banking and Securities Commission, the Department does not believe it is appropriate to limit the Department's authority, even by way of a guideline. The evidence of a particular case may indeed warrant an administrative assessment in addition to a monetary fine or penalty imposed by the SEC or FINRA, or both.
It should be noted that neither the SEC nor FINRA have similar limitations in their respective rules.
SOP in former § 604.022
Former § 604.022 related to the fact that neither the Department nor its staff have authority or responsibility for instituting, conducting, settling or otherwise disposing of a criminal proceeding, and that a settlement entered into by the Department may not address any of these proceedings. In the proposed rulemaking the Department asserted that sections 302 and 404 of the Department of Banking and Securities Code (71 P.S. §§ 733-302 and 733-404) address this issue. Attorney Rutledge's comment points out that the definition of ''licensee'' in section 2 of the Department of Banking and Securities Code (71 P.S. § 733-2) excludes persons licensed or registered under the 1972 Act.
While the Department agrees with the comment that sections 302 and 404 of the Department of Banking and Securities Code exclude persons licensed or registered under the 1972 Act, under the Commonwealth Attorneys Act (71 P.S. §§ 732-101—732-506) the Department does not have authority or responsibility to institute, conduct, settle or otherwise dispose of a criminal proceeding.
§ 211.010. Notice filings for Federally covered securities
Section 211.010 (relating to notice filings for Federally covered securities) relates to the notice filing of Federally covered securities. Federally covered securities are securities defined as ''covered securities'' under section 18(b) of the Securities Act of 1933 (15 U.S.C.A. § 77r(b)) for which state securities registration requirements are pre-empted. However, states are allowed to require short-form ''notice'' filings.
The Jumpstart Our Business Startups Act (JOBS Act) (Pub.L. No. 112-106) directed the SEC to issue a rule which exempts securities up to $50 million under section 3(b)(2) of the Securities Act of 1933 (15 U.S.C.A. § 77c(b)(2)), under Regulation A. In anticipation of SEC rules regarding Regulation A, section 203(u) of the 1972 Act was added in 2014. Section 203(u) of the 1972 Act, which exempts an offer or sale which is in good faith reliance on section 3(b)(2) of the Securities Act of 1933 and the rules adopted thereunder, provides that the issuer files with the Department all documents filed with the SEC.
The SEC's final rule under Regulation A provided for a two-tier system. The SEC determined that sales to offerees under Tier 2 are deemed to be transactions involving qualified purchasers, which are covered securities under section 18(b)(3) of the Securities Act of 1933, thereby pre-empting state registration requirements.
In response, the Department proposed adding § 211.010(d), which read as follows:
(d) Department orders. The Department may issue an order requiring the following with respect to a Federally covered security under section 18(b)(3) of the Securities Act of 1933 (15 U.S.C.A. § 77r(b)(3)):
(1) The filing of documents filed with the Securities and Exchange Commission under the Securities Act of 1933 (15 U.S.C.A. §§ 77a—77aa) or any notice filing form that has been adopted by the Department.
(2) The payment of fees prescribed to section 602(b.1) of the act.
Attorney Rutledge raised two issues with proposed § 211.010(d). First, section 203(u) of the 1972 Act requires the filing of documents filed with the SEC. There is no specific authority for the Department to require a ''notice'' filing under section 211 of the 1972 Act (70 P.S. § 1-211). Second, section 602(b.1) of the 1972 Act (70 P.S. § 1-602(b.1)) does not address the payment of fees associated with 18(b)(3) covered securities.
The comment suggested the inclusion of an additional section in this final-form rulemaking which would waive the filing requirement under section 203(u) of the 1972 Act so long as the issuer files a notice with the Department. Attorney Rutledge's suggested section also waives the filing under section 203(u) of the 1972 Act for offers which meet SEC Rule 251(d)(1) (no offers until the offering materials have been filed with the SEC) and SEC Rule 255 (solicitation of interest), and also would allow issuers to file a notice in Tier 1 offerings similar to Tier II offerings.
The Department does not agree with the suggestion that it does not have the authority to issue an order requiring the filing of documents filed with the SEC or, in the alternative, the filing of a notice form adopted by the Department.
Section 203(u) of the 1972 Act requires the filing of documents filed with the SEC, which would include, among other things, the filing of audited financial statements. Proposed § 211.010(d) merely added the less burdensome option of filing a notice filing instead. Further, NASAA has already adopted a Uniform Notice of Regulation A—Tier 2 Offering, a two-page form which includes the following statement: ''The documents filed with the SEC under the file number for this offering indicated above are hereby incorporated by reference with this notice.''
The NASAA notice form does not request any information in addition to SEC requirements, and merely allows for an easier method of providing the information to the Department than that contemplated by section 203(u) of the 1972 Act. However, in response to this comment, the Department revised § 211.010(d) to reflect that the notice form, if ordered by the Department, may not request any information or documents in addition to SEC requirements.
The Department agrees with the comment with respect to the payment of fees under section 602(b)(1) of the 1972 Act.
The Department revised § 211.010(d) accordingly.
Additional IRRC comments
§ 102.201. Definitions
IRRC suggested that in the instances when proposed definitions referred to a term defined in section 102 of the 1972 Act (70 P.S. § 1-102) or Federal statutes or rules, those definitions be included in language added by the Department to assist a reader in understanding the full meaning of the definitions.
The Department appreciates this suggestion but believes that including the definition from the statute or Federal rule would not be appropriate for a number of reasons. First, statutory and rule definitions are subject to change. This is particularly true with respect to Federal securities statutes and SEC rules. For example, in the past 6 years two major laws have been passed by Congress (the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. No. 111-203) and the JOBS Act) that significantly impacted securities regulation and authorized (and in some cases mandated) SEC rulemaking. The Department's final-form rulemaking uses citations when referring to Federal statutes and rules; accordingly, in the event the language is amended, the Department would not need to amend the regulation. If the entire statutory or rule definition is used in a definition, the definition would need to be amended every time there is an amendment to the Federal or State statutory definitions and Federal regulatory definitions.
Second, securities regulation in general is comprised of coordinated layers of state and Federal laws and regulations and FINRA rules. State securities laws are intended to be construed to be uniform, and their interpretation to be coordinated with related Federal legislation. See section 703(a) of the 1972 Act (70 P.S. § 1-703(a)). In furtherance of uniformity, state securities laws are adopted from either the model Uniform Securities Act of 1956 or 2002.
Rulemaking, on the other hand, is often consistent with model rules adopted by the NASAA. NASAA model rules, like securities regulations in general, use citations to refer to statutory definitions. See the NASAA Model Rule on the definition of an investment adviser representative (http://www.nasaa.org/wp-content/uploads/2011/07/IA-Model-Rule-Definition-Under-2002-Act.pdf) and the NASAA Model Exemption for Investment Advisers to Private Funds (http://www.nasaa.org/wp-content/uploads/2011/07/NASAA-Registration-Exemption-for-Investment-Advisers-to-Private-Funds-Model-Rule-Amended-Oct.-8-2013.pdf).
Lastly, there are already over 100 definitions in § 102.201, some of which are voluminous. The inclusion of statutory or Federal rule definitions, which are often extensive, would likely create confusion to the reader.
Chapter 701. Service of process administrative provisions
Sections 701.010a, 701.011, 701.020 and 701.030, regarding the filing of registration forms, exemption forms, electronic filing and fees, are adopted in this final-form rulemaking. IRRC's comments included a concern with these sections because they do not include specific instructions for the filing of these forms. Instead, these sections refer to General Instructions included in forms available on the Department's web site. IRRC believes that this approach circumvents the regulatory review process because it does not provide interested parties the opportunity to comment on the General Instructions, which would be equivalent to a regulation. The Department would be able to amend the General Instructions at any time without initiating a rulemaking. IRRC recommended that the final-form rulemaking be revised to include specific details.
The Department appreciates IRRC's concern, but disagrees with the suggestion based on the nature and purpose of the General Instructions themselves. Securities offered and sold in this Commonwealth shall be registered with the Department, exempt from registration or Federally covered securities. The registration process can be by qualification, under section 205 of the 1972 Act (70 P.S. § 1-205), or by coordination with an SEC filing, under section 206 of the 1972 Act (70 P.S. § 1-206). Exemptions from registration are numerous and include exemptions that must comply with Federal law. Offerings that are Federally covered securities must comply with specific Federal law. The Department's web site includes links to the numerous forms that are required for these types of offerings. The General Instructions section of each form includes standard filing procedures such as where to file, the number of copies to be filed and the filing fee specific to that form, and also includes references to other requirements in the 1972 Act and regulations, such as a requirement to attach a copy of the offering prospectus. The General Instructions do not include requirements that are not already in the 1972 Act and regulations, or under Federal law or regulations. No new forms are required under this final-form rulemaking and all of the Department's current forms are available at http://www.dobs.pa.gov/Businesses/Securities/Pages/Securities-Offerings.aspx.
Additionally, the inclusion of the General Instructions in the regulations would cause confusion given the large number of forms used by the Department and the length of the General Instructions for each. Further, similar to the discussion regarding definitions, including the General Instructions language in the regulations would necessitate an amendment to the regulations every time a Federal or State requirement changes for a particular offering.
Finally, it should be noted that § 2.12(a) of the Pennsylvania Code & Bulletin Style Manual (relating to forms) does not recommend the codification of forms.
F. Fiscal Impact
This final-form rulemaking will have a de minimus impact on the Department, as this final-form rulemaking involves minor changes to a regulatory structure which already exists. This final-form rulemaking will not impact the Commonwealth and its political subdivisions.
This final-form rulemaking will have a de minimus impact on the regulated community. Some of the amendments will reduce costs to the regulated community through simplification of filing requirements.
The final-form rulemaking will have a de minimus impact on paperwork for the regulated community and the Department. The final-form rulemaking includes provisions which permit electronic filing and electronic recordkeeping instead of paper filing and paper records to reduce paperwork for the regulated community and the Department. This final-form rulemaking does not require the submission of new forms and all current forms are available at http://www.dobs.pa.gov/Businesses/Securities/Pages/Securities-Offerings.aspx.
This final-form rulemaking does not have a sunset date because the Department will periodically review the effectiveness of the regulations.
Under section 5(a) of the Regulatory Review Act (71 P.S. § 745.5(a)), on June 9, 2016, the Department submitted a copy of the notice of proposed rulemaking, published at 46 Pa.B. 3420, to IRRC and the Chairpersons of the House Commerce Committee and the Senate Banking and Insurance Committee for review and comment.
Under section 5.1(j.2) of the Regulatory Review Act (71 P.S. § 745.5a(j.2)), on October 11, 2017, the final-form rulemaking was deemed approved by the House and Senate Committees. Under section 5.1(e) of the Regulatory Review Act, IRRC met on October 12, 2017, and approved the final-form rulemaking.
(1) Public notice of the proposed rulemaking was given under sections 201 and 202 of the act of July 31, 1968 (P.L. 769, No. 240) (45 P.S. §§ 1201 and 1202) and the regulations thereunder, 1 Pa. Code §§ 7.1 and 7.2.
(2) A public comment period was provided as required by law, and all comments received during the public comment period were considered.
(3) This final-form rulemaking does not enlarge the purpose of the proposed rulemaking published at 46 Pa.B. 3420.
(4) This final-form rulemaking is necessary and appropriate for the administration and enforcement of the 1972 Act.
(a) The regulations of the Department, 10 Pa. Code Chapters 1, 102, 202, 203, 204, 205, 206, 207, 208, 209, 210, 211, 301, 302, 303, 304, 305, 401, 404, 501, 504, 513, 601, 602, 603, 604, 605, 606, 609, 610, 701, 901 and 1001, are amended in Annex A as follows:
Adding §§ 102.021, 208.010, 302.070, 302.071, 303.016, 304.071, 305.020, 404.014, 601.030, 701.010a, 701.011, 701.020 and 701.030.
Deleting §§ 102.031, 102.041, 102.050, 102.060, 102.111, 102.112, 102.201, 102.202, 102.241, 202.041, 202.052, 203.091, 203.131, 203.171, 206.020, 207.140, 302.060, 305.012, 404.013, 601.010, 601.020, 602.022, 602.060, 604.010—604.012, 604.016—604.023, 606.041, 609.032, 610.010 and 901.011.
Amending §§ 1.1, 202.010, 202.030, 202.091, 202.092, 202.093, 202.094, 202.095, 203.011, 203.041, 203.101, 203.141, 203.151, 203.161, 203.183, 203.184, 203.185, 203.186, 203.187, 203.188, 203.189, 203.190, 203.191, 203.192, 203.201, 203.202, 203.203, 204.010, 204.011, 204.012, 205.021, 205.040, 206.010, 207.050, 207.071, 207.072, 207.091, 207.101, 207.130, 209.010, 210.010, 211.010, 301.020, 302.061, 302.063, 302.064, 302.065, 303.011, 303.012, 303.013, 303.014, 303.015, 303.021, 303.031, 303.032, 303.041, 303.042, 303.051, 304.011, 304.012, 304.021, 304.022, 304.041, 304.051, 304.061, 305.011, 305.019, 305.061, 401.020, 404.010, 404.011, 404.012, 501.011, 504.060, 513.010, 603.011, 603.031, 603.040, 605.020, 606.011, 606.031, 609.010, 609.011, 609.012, 609.031, 609.033, 609.034, 609.036, 609.037 and 1001.010.
(b) The Secretary of the Department shall submit this order and Annex A to the Office of General Counsel and the Office of Attorney General for review and approval as to legality and form as required by law.
(c) The Secretary of the Department shall submit this order and Annex A to IRRC and the Senate and House Committees as required by the Regulatory Review Act (71 P.S. §§ 745.1—745.14).
(d) The Secretary of the Department shall certify this order and Annex A and deposit them with the LRB as required by law.
(Editor's Note: See 47 Pa.B. 6790 (October 28, 2017) for IRRC's approval order.)
Fiscal Note: Fiscal Note 3-54 remains valid for the final adoption of the subject regulations.
TITLE 10. BANKING AND SECURITIES
CHAPTER 1. PRELIMINARY PROVISIONS
§ 1.1. Definitions.
(a) The following words and terms, when used in this title, have the following meanings, unless the context clearly indicates otherwise:
Banking Code—The Banking Code of 1965 (7 P.S. §§ 101—2204).
Commission—The Banking and Securities Commission of the Commonwealth, as established under sections 1121-A and 1122-A of the Department of Banking and Securities Code (71 P.S. §§ 733-1121-A and 733-1122-A).
Department—The Department of Banking and Securities of the Commonwealth.
(b) Words and terms not otherwise defined in this title have the meanings specified in the Banking Code or the Department of Banking and Securities Code (71 P.S. §§ 733-1—733-1203).
PART VII. SECURITIES
Subpart A. DEFINITIONS
CHAPTER 102. DEFINITIONS
§ 102.021. Definitions.
(a) The following words and terms, when used in this part, have the following meanings, unless the context clearly indicates otherwise:
3(c)(1) fund—A qualifying private fund that is eligible for exclusion from the definition of ''investment company'' in section 3(c)(1) of the Investment Company Act of 1940 (15 U.S.C.A. § 80a-3(c)(1)).
203(d) restricted securities—Securities purchased under section 203(d) of the act (70 P.S. § 1-203(d)) if the purchaser is subject to the restriction not to resell the security for 12 months after the date of the purchase.
Accountant's report—A document prepared by an independent certified public accountant indicating the scope of the audit with either of the following:
(i) An opinion regarding the financial statements taken as a whole.
(ii) An assertion that an overall opinion cannot be expressed and the reason why.
Accredited investor—As defined in Rule 501 of Regulation D (17 CFR 230.501) (relating to definitions and terms used in Regulation D).
Act—The Pennsylvania Securities Act of 1972 (70 P.S. §§ 1-101—1-703.1).
(i) As defined in section 102(a) of the act (70 P.S. § 1-102(a)) wherein the term:
(A) Communication includes, without limitation, letters, brochures, pamphlets, displays, sales literature and any form of electronic communication, including e-mail, which is used in connection with a sale or purchase, or an offer to sell or purchase a security.
(B) Publicly disseminated means communication directed to or communicated to more than 50 persons in this Commonwealth.
(ii) For purposes of § 404.010 (relating to advertisements by investment advisers and investment adviser representatives), any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication, by radio or television, or by electronic means, which offers:
(A) An analysis, report or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell.
(B) A graph, chart, formula or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell.
(C) Other investment advisory service with regard to securities.
Agent—As defined in section 102(c) of the act:
(i) Including a person considered an officer, director, partner or employee of an issuer, or an individual occupying a similar status or performing similar functions, if the designation is applied for the purpose of avoiding registration as an agent under the act.
(ii) Excluding persons acting as transfer agents and registrars on behalf of issuers or performing only ministerial duties in handling securities and maintaining lists of securityholders.
Aggregate indebtedness—As defined in 17 CFR 240.15c3-1 (relating to net capital requirements for brokers or dealers), promulgated under the Securities Exchange Act of 1934 (15 U.S.C.A. §§ 78a—78qq).
Agricultural cooperative association—
(i) An association which admits to membership only persons engaged in agriculture and is organized and operated to engage in a cooperative activity for persons engaged in agriculture in connection with:
(A) Producing, assembling, marketing, buying, selling, bargaining or contracting for agricultural products; harvesting, preserving, drying, processing, manufacturing, blending, canning, packing, ginning, grading, storing, warehousing, handling, transporting, shipping or utilizing the products; or manufacturing or marketing the by-products of agriculture.
(B) Manufacturing, processing, storing, transporting, delivering, handling, or buying for or furnishing supplies to its members and patrons.
(C) Performing or furnishing business, educational, recreational or other services, including the services of labor, buildings, machinery, equipment, trucks, trailers and tankers, or other services connected with the purposes in this subparagraph and subparagraph (ii) on a cooperative basis.
(ii) A federation of individual agricultural cooperative associations if the federation does not possess greater powers or purposes and engages in operations no more extensive than an individual agricultural cooperative association.
Agricultural cooperative association member—A patron, to the extent that the organic law or another law to which the agricultural cooperative association is subject requires the patron to be treated as a member.
Amount—A quantity, which for the purpose of:
(i) Evidence of indebtedness is the principal amount.
(ii) Shares is the number of shares.
(iii) Any other kind of security is the number of units.
Any credit union—An institution organized as a credit union under the applicable laws of the Commonwealth, the business of which is:
(i) Confined substantially to the credit union business (the receipt of deposits from and the making of loans to bona fide members of the credit union).
(ii) Supervised and examined as a credit union by the appropriate Commonwealth authorities having supervision over that institution.
Audit—The examination of historical financial statements by an independent certified public accountant in accordance with generally accepted auditing standards for the purpose of expressing an opinion thereon.
Auditor's report—A written report by an independent certified public accountant which contains either an expression of opinion on an entity's financial statements, taken as a whole, or an assertion that an opinion cannot be expressed.
(i) As defined in section 102(d) of the act.
(A) A holding company for a bank.
(B) A bank-in-organization if the state or Federal regulator with primary authority over the bank-in-organization determines that it is not a bank under the law governing that bank-in-organization.
Bank holding company—A person engaged, either directly or indirectly, primarily in the business of owning securities of one or more banks for the purpose, and with the effect, of exercising control.
Beneficial ownership—
(i) For purposes of §§ 203.184 and 609.012 (relating to offers and sales to principals; and computing the number of offerees, purchasers and clients) and section 203(s)(v) and (t)(v) of the act, as defined in 17 CFR 240.13d-3 (relating to determination of beneficial owner).
(ii) For purposes of § 302.070 (relating to registration exemption for investment advisers to private funds), as defined in 17 CFR 270.2a51-2 (relating to definitions of beneficial owner for certain purposes under sections 2(a)(51) and 3(c)(7) and determining indirect ownership interests).
(iii) For purposes of §§ 304.012, 305.019 and 404.011 (relating to investment adviser required records; dishonest and unethical practices; and investment adviser brochure disclosure), as defined in 17 CFR 275.204A-1 (relating to investment adviser codes of ethics).
Bona fide distribution—A distribution not made solely to avoid the registration provisions of section 201 of the act (70 P.S. § 1-201).
Bona fide pledgee—
(i) A secured party who takes securities in pledge to secure a bona fide debt.
(ii) The term does not include a secured party who takes securities in pledge under either of the following circumstances:
(A) Without any intention or expectation that they will be redeemed but merely as a step in the distribution to the public.
(B) Without having secured knowledge, in the exercise of reasonable diligence, before the consummation of the pledge that the securities taken in pledge are lawfully owned by the party making the pledge.
(i) A debt obligation, including a note, debenture or other evidence of indebtedness.
(ii) For purposes of § 202.092 (relating to guaranties of certain debt securities exempt), an exempt security under section 3(a)(2) of the Securities Act of 1933 (15 U.S.C.A. § 77c(a)(2)) when either of the following applies:
(A) The issuer of the security is located in this Commonwealth.
(B) The guaranty issued in connection with the bond, note, debenture or other evidence of indebtedness is considered to be a separate security under Securities and Exchange Commission Rule 131 (17 CFR 230.131) (relating to definition of security issued under governmental obligations).
Branch office—As defined in FINRA Rule 3110(e) or any successor rule.
Broker-dealer—
(i) As defined in section 102(e) of the act.
(ii) The term does not include persons:
(A) Acting as transfer agents and registrars on behalf of issuers.
(B) Performing only ministerial duties in handling securities and maintaining lists of securityholders.
CRD—The Central Registration Depository operated by FINRA, and any successor thereto.
Class of a series—Equity securities of an issuer of substantially similar character, the holders of which enjoy substantially similar rights and privileges.
(i) A person to whom an investment adviser or investment adviser representative has provided investment advice for which the investment adviser or investment adviser representative received compensation.
(ii) For purposes of § 404.012 (relating to cash payment for client solicitation), the term includes a prospective client.
(iii) For purposes of § 404.011, the term includes each limited partner of a limited partnership, each member of a limited liability company and each beneficiary of a trust if the investment adviser is the general partner of the limited partnership, manager of the limited liability company or trustee of the trust.
Commission—Any form of compensation received by any person for effecting the purchase or sale of a security.
Comparative financial statement—A document which includes financial statements for 2 years or more presented in adjacent columnar form.
Compensation—Receipt, directly or indirectly, of any payment or consideration, whether or not in the form of cash, or any economic benefit.
Confidential information—Records and other information in the Department's possession which are not available for public inspection and copying under the Right-to-Know Law (65 P.S. §§ 67.101—67.3104) or section 603(c) of the act (70 P.S. § 1-603(c)).
(i) As defined in section 102(g) of the act.
(ii) For purposes of § 304.012 and § 404.014 (relating to custody requirements for investment advisers), the term includes the power, directly or indirectly, to direct the management or policies of a person whether through ownership of securities, by contract, or otherwise, including the following presumptions:
(A) Each of the investment adviser's officers, partners or directors exercising executive responsibility (or persons having similar status or functions) is presumed to control the investment adviser.
(B) A person is presumed to control a corporation if either of the following apply:
(I) The person directly or indirectly has the right to vote 25% or more of a class of the corporation's voting securities.
(II) The person has the power to sell or direct the sale of 25% or more of a class of the corporation's voting securities.
(C) A person is presumed to control a partnership if the person has the right to receive on dissolution, or has contributed, 25% or more of the capital of the partnership.
(D) A person is presumed to control a limited liability company if any of the following apply:
(I) The person directly or indirectly has the right to vote 25% or more of a class of the interests of the limited liability company.
(II) The person has the right to receive on dissolution, or has contributed, 25% or more of the capital of the limited liability company.
(III) The person is an elected manager of the limited liability company.
(E) A person is presumed to control a trust if the person is a trustee or managing agent of the trust.
Convicted—A verdict, judgment or plea of guilty, or a finding of guilt on a plea of nolo contendere if the verdict, judgment, plea or finding has not been reversed, set aside or withdrawn, whether or not a sentence has been imposed.
Cooperative business association—A person organized exclusively as a retail or wholesale cooperative which admits to membership only persons that legitimately engage, in whole or in part, in the line of business for which the cooperative was organized.
(i) For purposes of a person, directly or indirectly holding client funds or securities, with authority to obtain possession of them or the ability to appropriate them.
(ii) For purposes of an investment adviser, if a related person holds directly or indirectly, client funds or securities, or has authority to obtain possession of them, in connection with advisory services the investment adviser provides to clients.
(iii) For purposes of subparagraphs (i) and (ii), the term includes:
(A) Possession of client funds or securities, unless the investment adviser receives them inadvertently and returns them to the sender promptly but in any case within 3 business days of receiving them.
(B) Any arrangement (including a general power of attorney) under which the investment adviser is authorized or permitted to withdraw client funds or securities maintained with a custodian on the investment adviser's instruction to the custodian.
(C) Any capacity (such as general partner of a limited partnership, managing member of a limited liability company or a comparable position or another type of pooled investment vehicle, or trustee of a trust) that gives the investment adviser or its supervised person legal ownership of or access to client funds or securities.
(iv) For purposes of subparagraphs (i) and (ii), the term does not include:
(A) An investment adviser that has inadvertently held or obtained a client's securities or funds and returned them to the client within 3 business days or has forwarded third-party checks within 24 hours, provided that the adviser keeps a ledger or other listing of all securities or funds held or obtained in this manner as required under § 304.012(a)(22).
(B) An investment adviser acting as a trustee for a beneficial trust in which the beneficial owners of the trust are a parent, step-parent, grandparent, step-grandparent, spouse, brother, step-brother, sister, step-sister, grandchild or step-grandchild of the investment adviser if the investment adviser maintains the records required under § 304.012(c)(8).
(i) As defined in 17 CFR 240.15c3-3 (relating to customer protection—reserves and custody of securities).
(ii) For the purpose of §§ 303.041 and 304.061 (relating to broker-dealer capital requirements; and free credit balances), every person other than the broker-dealer.
Date of filing—The date on which an application, registration statement, notice filing, financial statements, reports, correspondence or other documents filed or required to be filed directly with the Department, or any material amendment thereto, are received in the Harrisburg office of the Department.
Development stage company—A company devoting substantially all of its efforts to establishing a new business if planned principal operations have not commenced, or have commenced, but there has not been significant revenue therefrom.
Direct participation program—A program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution including, but not limited to, oil and gas programs, real estate programs, real estate investment trusts, agricultural programs, cattle programs, condominium securities and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof, except tax qualified pension and profit sharing plans under sections 401 and 403(a) of the Internal Revenue Code of 1986 (26 U.S.C.A. §§ 401 and 403(a)) and individual retirement plans under section 408 of the Internal Revenue Code of 1986 (26 U.S.C.A. § 408), tax sheltered annuities under section 403(b) of the Internal Revenue Code of 1986, and any company including separate accounts, registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C.A. §§ 80a-1—80a-64).
Discretionary power—Effecting a transaction or placing a trade order without specific authorization from the client, not including discretion as to the price at which or the time when a transaction is or is to be effected, if, before the order is given by the investment adviser, the client has directed or approved the purchase or sale of a definite amount of the particular security.
EFD—The electronic filing depository operated by NASAA, and any successor thereto.
Engaged in agriculture—Farming, dairying, livestock raising, poultry raising, floriculture, mushroom growing, beekeeping, horticulture and allied occupations.
Entity—A corporation, partnership, association, joint stock company, limited liability company, trust, estate or unincorporated association.
Equity security—
(i) A stock or similar security (including interests in a limited liability company).
(ii) A security convertible, with or without consideration, into a stock or similar security, or carrying a warrant or right to subscribe to or purchase a security described in subparagraph (i); or a warrant or right.
(iii) For purposes of § 203.091, the term includes:
(A) Common stock, preferred stock and nondebt securities convertible into common or preferred stock.
(B) Nontransferable warrants to purchase any of the foregoing.
(C) Transferable warrants exercisable within not more than 90 days of issuance to purchase any of the foregoing.
Equity securityholder—
(i) Persons who at the time of offers and sales under the exemption in section 203(n) of the act are holders of equity securities.
(ii) The term does not include persons who are holders of equity securities issued in violation of or without compliance with the act and the regulations adopted under the act.
Examination—When used in regard to financial information, the review or verification of financial and other information by an independent certified public accountant for the purpose of expressing an opinion thereon.
Executive officer—Each person serving as chief executive officer, chief operating officer or chief financial officer of a person.
Experienced private placement investor—An individual, or spouse purchasing as a joint tenant or tenant by the entireties, who purchased a minimum of $450,000 of securities within the past 3 years in private placement offerings exclusive of the purchase of securities of an issuer of which the individual, or spouse, was an affiliate at the time of purchase.
FINRA—The Financial Industry Regulatory Authority, Inc., and any successor thereto.
Fair value—The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, as set forth and interpreted in Financial Accounting Standards Board Accounting Standards Codification Topic 820.
Feasibility study—An analysis of a proposed investment or course of action which may involve the preparation of a financial forecast or a financial projection.
Financial forecast—A prospective financial statement which:
(i) Presents, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations and changes in financial position.
(ii) Is based on the responsible party's assumptions reflecting conditions it expects to exist and the course of action it expects to take.
Financial institution—A Federal or State chartered bank, savings and loan association, savings bank or credit union, and any service corporation affiliated with these entities.
Financial projection—A prospective financial statement which:
(ii) Is based on the responsible party's assumptions reflecting conditions it expects would exist and the course of action it expects would be taken, given one or more hypothetical assumptions.
Financial statements—A balance sheet, statement of income, statement of stockholders' equity and statement of cash flow and accompanying notes.
Firm member—All partners and principals in the firm and all professional employees participating in an audit or located in an office of the firm participating in a significant part of an audit.
(i) The annual accounting period when a closing date is adopted.
(ii) The calendar year ending on December 31 when a closing date is not adopted.
Franchise—An agreement involving a continuing commercial relationship by which a person (franchisee) is permitted by another person (franchisor) the right to offer the goods manufactured, processed or distributed by the franchisor, or the right to offer services established, organized, directed or approved by the franchisor, under circumstances when the franchisor continues to exert any control over the method of operation of the franchisee, particularly, but not exclusively, through trademark, trade name or service mark licensing, or structural or physical layout of the business of the franchisee.
Going concern disclosure—The disclosure of substantial doubt in the auditor's report, based on the criteria in the Statement on Auditing Standard 126 promulgated by the American Institute of Certified Public Accountants, regarding the ability of the issuer to continue as a going concern during the ensuing fiscal year.
Guarantor—A person who executes a guaranty.
Guaranty—A duly executed written agreement, which cannot be bought, sold or traded as a security or otherwise realized on by a bondholder separately from the bondholder's interest in the bonds, wherein a person, not the issuer, in connection with offer and sale of bonds in this Commonwealth, guarantees the prompt payment of the principal of, and interest on, the bonds whether at the stated maturity, at redemption before maturity or otherwise, and premium, if any, when and as the principal and interest shall become due.
IARD—The Internet-based Investment Adviser Registration Depository operated by FINRA, and any successor thereto.
Impersonal investment advisory services—As defined in 17 CFR 275.206(4)-3(d)(3) (relating to cash payments for client solicitations).
Independent—As defined in Rule 101 of the Code of Professional Ethics of the American Institute of Certified Public Accounts, Inc. or the interpretations adopted thereunder, regardless of whether the person is a certified public accountant or not.
Independent certified public accountant—As set forth in section 2-01(b) and (c) of Regulation S-X (17 CFR 210.2-01(b) and (c)) (relating to qualifications of accountants).
Independent party—A person who meets all of the following:
(i) Is engaged by an investment adviser with respect to payment of fees, expenses or capital withdrawals from a pooled investment vehicle in which the investment adviser has custody solely as a result of serving as a general partner, manager of a limited liability company or a person occupying a similar status or performing a similar function which gives the investment adviser or its supervised person legal ownership or access to client funds or securities.
(ii) Does not control, is not controlled by and is not under common control with the investment adviser.
(iii) Did not derive 5% or more of its gross revenues from the investment adviser who hired the person to be an independent party, including the amount to be received from the investment adviser under the terms of the independent party engagement, within the preceding consecutive 12-month period.
Independent representative—A person who:
(i) Acts as agent for an advisory client, including in the case of a pooled investment vehicle, for limited partners or a limited partnership, members of a limited liability company, or other beneficial owners of another type of pooled investment vehicle and by law or contract is obliged to act in the best interest of the advisory client or the limited partners, members or other beneficial owners.
(ii) Does not control, is not controlled by and is not under common control with investment adviser.
(iii) Does not have, and has not had within the past 2 years, a material business relationship with the investment adviser.
Individuals controlling—A general partner and, in the case of a corporation, the president and other officers responsible for making investment decisions with respect to the purchase of the securities described in subparagraph (iv) of the definition of ''institutional investor,'' if the person is currently engaged in that capacity.
Industrial loan association—For purposes of section 202(d) of the act (70 P.S. § 1-202(d)), an institution organized as an industrial loan association under the applicable laws of the Commonwealth, the business of which is:
(i) Substantially confined to the industrial loan business.
(ii) Examined and supervised as an industrial loan association by the appropriate Commonwealth authorities having supervision over the institution.
Industrial loan business—The making and discounting of secured and unsecured loans to bona fide members of the association.
Insolvent or insolvency—Except in the case of entities required under law or regulation to submit an auditor's report if the auditor's report does not contain a going concern disclosure, the terms mean either of the following:
(i) The inability to pay debts as they fall due in the person's usual course of business.
(ii) Liabilities in excess of the fair value of the person's assets.
Institutional investor—As defined in section 102(k) of the act, including the following:
(i) A corporation, partnership, trust, estate or other entity (excluding individuals), or a wholly-owned subsidiary of the entity, which has been in existence for at least 18 months and which had a tangible net worth on a consolidated basis of $25 million or more.
(ii) A college, university or other public or private institution which has received exempt status under section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C.A. § 501(c)(3)) and which has a total endowment or trust funds, including annuity and life income funds, of $5 million or more according to its most recent audited financial statements; provided that the aggregate dollar amount of securities being sold to the person under the exemption in section 203(c) of the act and this title may not exceed 5% of the endowment or trust funds.
(iii) A wholly-owned subsidiary of a bank as defined in section 102(d) of the act.
(iv) A person, except an individual or an entity whose securityholders consist entirely of one individual or group of individuals who are related, which is organized primarily to purchase, in nonpublic offerings, securities of corporations or issuers engaged in research and development activities in conjunction with a corporation and which complies with one of the following:
(A) Has purchased $5 million or more of the securities excluding both of the following:
(I) A purchase of securities of a corporation in which the person directly or beneficially owns more than 50% of the corporation's voting securities, unless the purchase occurred under a leveraged buyout financing in which the person does not intend to provide direct management to the issuer.
(II) A dollar amount of a purchase of securities of a corporation which investment represents more than 20% of the person's net worth.
(B) Is capitalized at $2.5 million or more and is controlled by a person which meets the criteria in clause (A).
(C) Is capitalized at $10 million or more and has purchased $500,000 or more of the securities, excluding a purchase of securities of a corporation in which the person directly or beneficially owns more than 50% of the corporation's voting securities.
(D) Is capitalized at $250,000 or more and is a side-by-side fund.
(v) A small business investment company as the term is defined in section 103 of the Small Business Investment Act of 1958 (15 U.S.C.A. § 662) which either:
(A) Has a total capital of $1 million or more.
(B) Is controlled by institutional investors as defined in section 102(k) of the act or this section.
(vi) A seed capital fund as defined in section 2 and authorized in section 6 of the Small Business Incubators Act (73 P.S. §§ 395.2 and 395.6).
(vii) A business development credit corporation as authorized by the Business Development Credit Corporation Law (7 P.S. §§ 6040-1—6040-16).
(viii) A person whose securityholders consist solely of institutional investors or broker-dealers.
(ix) A person as to which the issuer reasonably believed qualified as an institutional investor under this section at the time of the offer or sale of the securities on the basis of written representations made to the issuer by the purchaser.
(x) A qualified institutional buyer as defined in 17 CFR 230.144A (relating to private resales of securities to institutions) or any successor rule.
(xi) A qualified pension and profit sharing and stock bonus plan under section 401 of the Internal Revenue Code of 1986 and all plans under section 408 of the Internal Revenue Code of 1986 if the plan has either of the following:
(A) Plan assets of $5 million or more.
(B) Investments of $500,000 or more in securities and retained, on an ongoing basis, the services of an investment adviser registered under section 301 of the act (70 P.S. § 1-301) or a Federally covered adviser to give professional investment management advice.
Insurance holding company—A person engaged, either directly or indirectly, primarily in the business of owning securities of one or more insurance companies for the purpose and with the effect of exercising control.
Investment adviser representative—
(i) As defined in section 102(j.1) of the act.
(ii) For purposes of § 304.012(a)(12), the term includes:
(A) A partner, officer or director of the investment adviser.
(B) An employee who participates in any way in the determination of which recommendations shall be made.
(C) An employee of the investment adviser who, in connection with assigned duties, obtains information concerning which securities are being recommended before the effective dissemination of the recommendations.
(D) Any of the following individuals who obtain information concerning securities recommendations being made by the investment adviser before the effective dissemination of the recommendations:
(I) An individual in a control relationship to the investment adviser.
(II) An affiliated individual of a controlling person.
(III) An affiliated individual of an affiliated person.
(iii) For purposes of § 304.012(a)(13), when used in connection with a company primarily engaged in a business or businesses other than advising investment advisory clients:
(A) A partner, officer, director or employee of the investment adviser who participates in any way in the determination of which recommendations shall be made.
(B) An employee who, in connection with assigned duties, obtains information concerning which securities are being recommended before the effective dissemination of the recommendations.
(C) Any of the following individuals who obtain information concerning securities recommendations being made by the investment adviser before the effective dissemination of the recommendations as follows:
Investment supervisory services—The giving of continuous advice as to the investment of funds on the basis of the individual needs of each client.
Majority-owned subsidiary—A subsidiary more than 50% of whose outstanding voting shares is owned by its parent or the parent's other majority owned subsidiaries, or both.
Most recent audited financial statements—Audited financial statements dated not more than 16 months before the date of the transaction in which the person proposed to purchase securities in reliance on the exemption in section 203(c) of the act.
NASAA—The North American Securities Administrators Association, Inc.
National securities association—An association of brokers and dealers registered with the Securities and Exchange Commission under section 15A of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78o-3).
National securities exchange—Any exchange as defined in section 3(a)(1) of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78c) which is registered with the Securities and Exchange Commission under section 6 of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78f).
Nationally recognized statistical rating organization— As defined in section 3(a)(62) of the Securities Exchange Act of 1934.
Net capital—As defined in 17 CFR 240.15c3-1, promulgated under the Securities Exchange Act of 1934.
Net worth—The excess of assets over liabilities as determined by generally accepted accounting principles reduced by:
(i) Prepaid expenses except items properly classified as current assets under generally accepted accounting principles.
(ii) Deferred charges.
(iii) Goodwill, franchises, organizational expenses, patents, copyrights, marketing rights, unamortized debt discount and expense, and all other intangible assets.
(iv) Home furnishings, automobiles and any other personal items not readily marketable in the case of an individual.
(v) Advances or loans to:
(A) Stockholders and officers in the case of a corporation.
(B) Members and managers in the case of a limited liability company.
(C) Partners in the case of a partnership.
(vi) Receivables from any affiliate, unless enforceable by contract.
Networking arrangement or brokerage affiliate arrangement—A contractual agreement between a broker-dealer registered under section 301 of the act and a financial institution by which the broker-dealer effects transactions in securities for the account of customers of the financial institution and the general public which transactions are effected on, or emanate from, the premises of a financial institution.
Nonbranch office—A location at which a broker-dealer is conducting a securities business that does not come within the definition of ''office of supervisory jurisdiction'' or ''branch office.''
Note or footnote—A clear and concise disclosure of information, including information necessary to make an item or entry in the financial statement not misleading, cross-referenced specifically, if practicable, to an item or entry in a financial statement.
Office of supervisory jurisdiction—As defined in FINRA Rule 3110(e) or any successor thereto.
PCAOB—The Public Company Accounting Oversight Board, and any successor thereto.
Parent—An affiliate controlling a specified person directly or indirectly through one or more intermediaries.
Pooled investment vehicle—
(i) A limited partnership, limited liability company or an entity with a similar legal status and performing similar functions.
(ii) The term does not include an investment company that has filed a registration statement under the Investment Company Act of 1940.
Portfolio management—The process of determining or recommending securities transactions for any part of a client's portfolio.
Prime quality—A description for commercial paper rated in one of the top three rating categories by a Nationally recognized statistical rating organization.
(i) The chairperson, president, chief executive officer, general manager, chief operating officer, chief financial officer, vice president or other officer in charge of a principal business function (including sales, administration, finance, marketing, research and credit), secretary, treasurer, controller and any other natural person who performs similar functions of one of the following:
(A) The issuer.
(B) A wholly-owned subsidiary of the issuer.
(C) A corporation, partnership or other entity which owns the voting stock or other voting equity interest of the issuer.
(D) A corporation, partnership or other entity which serves as a general partner of the issuer.
(ii) A director, general partner or comparable person charged by law with the management of one of the following:
(iii) A beneficial owner of 10% or more of an outstanding class of voting stock or other voting equity interest of one of the following:
(B) A corporation, partnership or other entity which serves as a general partner of the issuer.
(C) A promoter of the issuer as defined in section 102(o) of the act.
(D) A relative of a person specified in clauses (A)—(C), if ''relative'' means one of the following:
(I) A spouse.
(II) A parent.
(III) A grandparent.
(IV) An aunt, uncle, child, child of a spouse, sibling, mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law or daughter-in-law.
Principal place of business—The executive office of the business from which the officers, partners or managers of the business direct, control and coordinate the activities of the business.
Private fund adviser—An investment adviser who provides advice solely to one or more qualifying private funds.
Private placement offering of securities—An offering of securities made in reliance on an exemption from the registration provisions of section 5 of the Securities Act of 1933 (15 U.S.C.A. § 77e) under section 3(b) of the Securities Act of 1933 or section 4(a)(2) of the Securities Act of 1933 (15 U.S.C.A. § 77d(a)(2)).
Pro rata—
(i) An offering made in this Commonwealth proportionately on the basis of the number of shares owned by the existing equity securityholder or the equity security- holder's percentage ownership interest in the issuer.
(ii) The term includes the issuer offering:
(A) Its existing equity securityholder an opportunity to purchase one new share of stock for each five shares owned as of a record date.
(B) An existing equity securityholder owning 3% of the issuer's stock as of a record date the opportunity to purchase 3% of the issuer's current offering.
Professional corporation—
(i) The term includes either of the following:
(A) A corporation incorporated under the 15 Pa.C.S. Part II, Subpart B (relating to Business Corporation Law of 1988) or a corporation included within the scope of that act by virtue of 15 Pa.C.S. § 2904 or § 2905 (relating to election of an existing business corporation to become a professional corporation; and election of professional associations to become professional corporations).
(B) A professional association organized under the 15 Pa.C.S. Chapter 93 (relating to Professional Association Act of 1988), if ''shares'' includes the interest of an associate in a professional association.
(ii) The term does not include an entity which has as a principal purpose, object or activity, whether expressed in its articles of incorporation or other organic documents, that is other than the rendition of the professional services for which the professional corporation is organized and activities which are in fact incidental thereto.
Promotional securities—The term includes any of the following:
(i) Securities issued:
(A) Within the 5-year period immediately preceding the date of the filing of a registration statement for a consideration substantially different from the proposed public offering price and for which price differential there is no commensurate change in the earnings or financial position of the issuer.
(B) In consideration for services.
(C) In consideration for tangible or intangible property, such as patents, copyrights, licenses or goodwill.
(D) Within the 5-year period immediately preceding the date of the filing of a registration statement to a promoter or proposed to be issued to a promoter at a price substantially lower than or on terms and conditions substantially more favorable than those on which securities of the same or a similar class or series have been or are to be sold to public investors.
(ii) Securities subject to an order by the Department finding that the securities are promotional securities.
Prospective financial statement—A financial forecast or financial projection, including the summaries of significant assumptions and accounting policies.
Publish—As defined in section 102(p) of the act, together with any form of electronic communication, including Internet and e-mail.
Purchase of securities by an experienced private placement investor—The sale of securities for cash or for an unconditional obligation to pay cash which obligation is to be discharged within 5 years from the date of the sale of the securities to the experienced private placement investor.
Qualified custodian—The term includes:
(i) A bank as that term is defined in section 102(d) of the act.
(ii) A Federally covered adviser as that term is defined in section 102(f.1) of the act.
(iii) A broker-dealer registered with the Securities and Exchange Commission and the Department under section 301 of the act.
(iv) A futures commission merchant registered under section 4f(a) of the Commodity Exchange Act (7 U.S.C.A. § 6f(a)), holding the client assets in customer accounts, but only with respect to clients' funds and security futures, or other securities incidental to transactions in contracts for the purchase or sale of a commodity for future delivery and options thereon.
(v) A foreign financial institution that customarily holds financial assets for its customers, provided that the foreign financial institution keeps the advisory clients' assets in customer accounts segregated from its proprietary assets.
Qualifying private fund—A private fund as defined in section 202(a)(29) of the Investment Advisers Act of 1940 (15 U.S.C.A. § 80b-2(a)(29)) that meets the definition of ''qualifying private fund'' in Securities and Exchange Commission Rule 203(m)-1 (17 CFR 275.203(m)-1) (relating to private fund adviser exemption).
Registrant—The issuer of the securities for which an application, a registration statement or a report is filed.
Related—A relative by marriage residing in the same household or a blood relative.
Related parties—
(i) The registrant and its affiliates, principal owners (the owners of record or known beneficial owners of more than 10% of the voting interests of the reporting entity), management (a person having responsibility for achieving the objectives of the organization and the concomitant authority to establish the policies and to make the decisions by which the objectives are to be pursued) and members of their immediate families.
(ii) Entities for which investments are accounted for by the equity method.
(iii) Any other party with which the reporting entity may deal when one party has the ability to significantly influence the management or operating policies of the other to the extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
(iv) Another entity with the ability to significantly influence the management or operating policies of the transacting parties.
(v) Another entity with an ownership interest in one of the transacting parties and the ability to significantly influence the other to the extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Related person—A person that is an affiliate of an investment adviser.
Rental pool arrangement—The term includes:
(i) A device by which a person, whether or not the seller, undertakes to rent the property on behalf of the owner during periods of time when the property is not in use by its owner, the rents received from all properties participating in the pool and the expenses attributable to the rents being combined with each property owner receiving a ratable share of the rental proceeds regardless of whether his particular property actually was rented.
(ii) Other devices having like attributes.
Review—An analysis of the financial statements by a certified public accountant in accordance with the Statements on Standards for Attestation Engagements promulgated by the American Institute of Certified Public Accountants.
Review report—An accountant's document in which the certified public accountant indicates that a review has been performed and, on the basis of that review, the accountant is not aware of any material modifications that should be made to the financial statements for the financial statements to be in conformity with generally accepted accounting principles, except for those modifications, if any, described in the review report.
Securities and Exchange Commission—The United States Securities and Exchange Commission.
Securities issued by a credit union—For the purpose of section 202(d) of the act, securities issued by a credit union means only those securities which are issued by an entity directly engaged in the credit union business and may not include securities issued by a credit union holding company or other similar entity.
Securities issued by an industrial loan association—
(i) Securities issued by an entity directly engaged in the industrial loan business.
(ii) The term does not include securities issued by an industrial loan holding company or other similar entity.
Security or securities—
(i) As defined in section 102(t) of the act, including:
(A) The offer and sale of real property if any of the following exists:
(I) The purchaser of the property is required under the terms of the purchase or by reason of acquiring title to do either of the following:
(-a-) Use the seller to perform services in connection with a sale, lease or license of the property purchased.
(-b-) Hold the property available to persons other than the purchaser for the other person's lease, license or other use for a specified period of time or for a period of time when the property is not in use by the owner.
(II) The purchaser is required under the terms of the purchase or by reason of acquiring title to participate in a rental pool arrangement.
(B) A franchise where the arrangement between the franchisor and the franchisee:
(I) Is such that the right to engage in the business of offering, selling or distributing goods or services is exercised under a marketing plan or system prescribed in substantial part by the franchisor.
(II) Is such that the franchisee is not required to make significant managerial efforts in the operation of the business that may be expected to affect the success or failure of the franchisee's business.
(III) Arises as a result of an investment of money, notes or other things of value by or on behalf of the franchisee.
(ii) For purposes of § 203.183 (relating to agricultural cooperative associations), membership agreements, capital stock, membership certificates and an instrument or form of advice which evidences either of the following:
(A) A member's equity in a fund, capital investment or other asset of the agricultural cooperative association.
(B) The apportionment, distribution or payment to a member or patron of the net proceeds or savings of the agricultural cooperative association.
(iii) For purposes of § 203.188 (relating to Cooperative Business Associations Exemption), an equity or debt security, membership agreement, membership certificate, patronage dividend or form of advice which evidences either of the following:
(A) A member's interest in a fund, capital investment or other asset of a cooperative business association.
(B) The apportionment, distribution or payment to a member of the net proceeds or savings of a cooperative business association.
Self-regulatory organization—As defined in section 3(a)(26) of the Securities Exchange Act of 1934.
Share—Stock in a corporation or unit of interest in an unincorporated person.
Side-by-side fund—A person which is:
(i) Promoted and controlled by individuals controlling a person meeting the criteria in subparagraph (iv)(A), (B) or (C) of the definition of ''institutional investor.''
(ii) Formed exclusively to purchase securities of issuers in various amounts and on the same terms and conditions as the person described in subparagraph (i).
Significant subsidiary—A subsidiary, or a subsidiary and its subsidiaries meeting any of the conditions in subparagraphs (i)—(iii) based on the most recent annual financial statements including consolidated financial statements of the subsidiary which would be required to be filed if the subsidiary were a registrant and the most recent annual consolidated financial statements of the registrant being filed.
(i) The parent's and its other subsidiaries' investments in and advances to, or their proportionate share based on their equity interests of the total assets of, the subsidiary exceed 10% of the total assets of the parent and its consolidated subsidiaries.
(ii) The parent's and its other subsidiaries' proportionate share based on their equity interests of the total sales and revenues, after intercompany eliminations, of the subsidiary exceeds 10% of the total sales and revenues of the parent and its consolidated subsidiaries.
(iii) The parent's and its other subsidiaries' equity in the income before income taxes and extraordinary items of the subsidiary exceeds 10% of the income of the parent and its consolidated subsidiaries. If the income of the parent and its consolidated subsidiaries is at least 10% lower than the average of the income for the last 5 fiscal years, the average income may be substituted in the determination.
Solicitor—A person or entity who receives direct or indirect compensation for soliciting a client for, or referring a client to, an investment adviser.
Sponsor—An investment adviser that is compensated under a wrap fee program for either of the following:
(i) Administering, organizing or sponsoring the program.
(ii) Selecting or providing advice to clients regarding the selection of other investment advisers in the program.
Standby commission—The commission payable to a broker-dealer registered under the act for its firm commitment to purchase securities offered to existing secur- ityholders which are not purchased by the securityholders.
Subsidiary of a specified person—An affiliate controlled by the person directly or indirectly through one or more intermediaries.
Supervised person—As defined in section 202(a)(25) of the Investment Advisers Act of 1940.
Tangible book value of a company's common shares—The excess of total assets over total liabilities as determined by generally accepted accounting principles of the company reduced by the following:
(i) Liquidating value, including any premium of excess over par or stated value, payable on involuntary liquidation, of any capital obligations, preferred shares or shares having a seniority in rank, or any degree of preference or priority over the issue of common shares for which book value is being computed, including accrued and unpaid dividends to the extent entitled to recognition and preference in the event of liquidation.
(ii) An amount equal to any appraisal capital from revaluation of properties or any similar account title to the extent that the appraisal increase has not been fully depreciated in the accounts.
(iii) Deferred charges including debt issue costs.
(iv) Prepaid expenses except as to items properly classified as current assets under generally accepted accounting principles.
(v) All other intangible assets including goodwill, patents, copyrights, franchises, distribution rights, intellectual property rights, leasehold improvements, licensing agreements, noncompete covenants, customer lists, trade names, trademarks and organization costs.
Tangible net worth—Net worth less the amount of all items of goodwill, preoperating, deferred or development expenses, patents, trademarks, licenses or other similar accounts.
Totally-held subsidiary—A subsidiary:
(i) Whose parent or the parent's other totally-held subsidiaries, or both, owns substantially all of the subsidiary's outstanding equity securities.
(ii) Not indebted to any person other than its parent or the parent's other totally-held subsidiaries, or both, in an amount which is material in relation to the particular subsidiary, excluding indebtedness:
(A) Incurred in the ordinary course of business which is not overdue and which matures within 1 year from the date of its creation, whether evidenced by securities or not.
(B) Secured by its parent by guarantee, pledge, assignment or otherwise.
Trade or professional association—
(i) For purposes of section 202(e) of the act, an association of persons having some common business or professional interest, the purpose of which is to promote, on behalf of the association's members generally, the common interest and not to engage in a regular business or profession of a kind ordinarily carried on for profit.
(ii) The term includes an association where the activities of the association are specifically directed to the improvement, on behalf of the association's members generally, of business or professional conditions of one or more lines of business or professions as distinguished from the performance of particular services for individuals or entities.
(iii) The term does not include an association whose purpose is to engage in a regular business of a kind ordinarily carried on for profit, even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining.
Trustee for the bondholders—The person designated in the trust indenture, mortgage, deed of trust or similar agreement to act as trustee for the bonds.
Venture capital fund—A private fund meeting the definition of ''venture capital fund'' in Securities and Exchange Commission Rule 203(l)-1 (17 CFR 275.203(l)-1).
Voting shares—The sum of either of the following:
(i) All rights, other than as affected by events of default, to vote for election of directors of an incorporated person.
(ii) All interests in an unincorporated person.
Wholly-owned subsidiary—A subsidiary substantially all of whose outstanding voting shares are owned by its parent or the parent's other wholly-owned subsidiaries, or both.
Wrap fee program—A program under which a client is charged a specified fee or fees not based directly on transactions in a client's account for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and execution of client transactions.
(b) Words and terms not otherwise defined in this part have the meanings specified in the act.
§ 102.031. (Reserved).
§ 102.041. (Reserved).
§ 102.050. (Reserved).
§ 102.060. (Reserved).
§ 102.111. (Reserved).
§ 102.112. (Reserved).
§ 102.201. (Reserved).
§ 102.202. (Reserved).
§ 102.241. (Reserved).
Subpart B. REGISTRATION OF SECURITIES
CHAPTER 202. EXEMPT SECURITIES
§ 202.010. Securities issued by a governmental unit.
(a) The exemption contained in section 202(a) of the act (70 P.S. § 1-202(a)) is available for a security described in that section which is an exempt security under section 3(a)(2) of the Securities Act of 1933 (15 U.S.C.A. § 77c(a)(2)).
(b) The exemption in paragraph (a) does not apply to any part of an obligation evidenced by a bond, note, debenture or other evidence of indebtedness issued by a governmental unit specified in section 3(a)(2) of the Securities Act of 1933 that is considered to be a separate security under Securities and Exchange Commission Rule 131 (17 CFR 230.131) (relating to definition of security issued under governmental obligations).
§ 202.030. Commercial paper.
(a) The exemption contained in section 202(c) of the act (70 P.S. § 1-202(c)) is available for any security which is a Federally covered security by reason of being an exempt security under section 3(a)(3) of the Securities Act of 1933 (15 U.S.C.A. § 77c(a)(3)) as interpreted by Release 33-4412 (26 FR 9158 (September 20, 1961)) issued by the Securities and Exchange Commission which provides that:
(1) The commercial paper is prime quality of a type not ordinarily purchased by the general public.
(2) The commercial paper is of a type eligible for discounting by banks which are members of the Federal Reserve System.
(3) The commercial paper is not payable on demand and does not contain a provision for an automatic ''rollover.''
(4) The commercial paper is issued to facilitate current operational business requirements.
(5) The commercial paper proceeds are not used to:
(i) Discharge existing indebtedness unless the indebtedness is itself exempt under section 3(a)(3) of the Securities Act of 1933.
(ii) Purchase or construct a plant facility.
(iii) Purchase durable machinery or equipment.
(iv) Fund commercial real estate development or financing.
(v) Purchase real estate mortgages or other securities.
(vi) Finance mobile homes or home improvements.
(vii) Purchase or establish a business enterprise.
(b) If commercial paper is being issued by a holding company for a bank, as that term is defined in section 102(d) of the act (70 P.S. § 1-102(d)), the commercial paper must bear a prominent legend in bold face type of at least 12 points in size indicating that the commercial paper:
(1) Has not been issued by the bank for which the issuer is the holding company.
(2) Is not a deposit of the bank covered by Federal deposit insurance.
(c) General solicitation through public media advertisement, mass mailing, the Internet or other means in connection with soliciting offers or sales of commercial paper is prohibited; provided that this section does not limit mailings to institutional investors or broker-dealers, as those terms are defined in the act and this subpart.
§ 202.041. (Reserved).
§ 202.052. (Reserved).
§ 202.091. Shares of professional corporations.
(a) Under the authority contained in section 202(i) of the act (70 P.S. § 1-202(i)), the Department finds that it is not in the public interest or necessary for the protection of investors to require the registration under section 201 of the act (70 P.S. § 1-201) of shares issued by a professional corporation.
(b) The exemption contained in this section may not apply to a transaction entered into primarily to avoid the provisions of section 201 of the act or made in violation of the antifraud provisions in sections 401—409 of the act (70 P.S. §§ 1-401—1-409) and Subpart D (relating to fraudulent and prohibited practices).
§ 202.092. Guaranties of certain debt securities exempt.
(a) The exemption established by this section applies to a guaranty of a bond that is offered or sold in this Commonwealth.
(b) Under the authority contained in section 202(i) of the act (70 P.S. § 1-202(i)), the Department finds that it is not in the public interest or necessary for the protection of investors to require the registration under section 201 of the act (70 P.S. § 1-201) of the guaranty of a bond if all of the following conditions are met:
(1) The official statement or other disclosure document being used in connection with the offer and sale of the bonds contains either of the following:
(i) An audited balance sheet and statement of income of the guarantor dated within 120 days before the commencement of the offering in this Commonwealth.
(ii) Both of the following:
(A) An audited balance sheet and statement of income of the guarantor for either of the following:
(I) The most recent completed fiscal year.
(II) The previous most recent completed fiscal year if the fiscal year of the guarantor ended within 90 days before the commencement of the offering in this Commonwealth.
(B) A statement by a certified public accountant or the guarantor detailing any adverse material changes in the financial condition of the guarantor which occurred from the date of the audited balance sheet submitted in compliance with clause (A) within 5 days of the commencement of the offering in this Commonwealth.
(2) The proceeds from the sale of the bonds are to be used for the benefit of a facility which is owned or operated by either of the following:
(i) A nonprofit corporation or other nonprofit entity which has been determined by the Internal Revenue Service to be an exempt organization described in section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C.A. § 501(c)(3)) or has received an opinion of counsel that it is so exempt, and the combined net assets of the user and guarantor are not less than 25% of the amount of the securities being offered.
(ii) An organization which has not been determined by the Internal Revenue Service or by an opinion of counsel to be an exempt organization under section 501(c)(3) of the Internal Revenue Code of 1986, and the combined net worth of the user and guarantor is not less than 50% of the amount of securities being offered.
(3) The guaranty requires the guarantor to do the following:
(i) File with the trustee for the bondholders a copy of its audited balance sheet and statement of income within 120 days after the completion of its fiscal year.
(ii) Be responsible for expenses incurred by the trustee for the bondholders in complying with paragraph (4)(ii) and (iii) unless there are specific provisions to the contrary in the relevant financing documents.
(iii) Notify the trustee for the bondholders within 24 hours after it becomes insolvent.
(4) The trust indenture, mortgage, deed of trust or other similar agreement requires the trustee for the bondholders to do all of the following:
(i) Maintain a current list of the names and addresses of all of the bondholders.
(ii) Provide, to a bondholder, within 30 days of receipt of a written request from a bondholder, a copy of the guarantor's most recent audited balance sheet and statement of income.
(iii) Notify the bondholders of the occurrence of any of the following events no later than 30 days after an occurrence and inform the bondholders that a copy of the bondholders list described in subparagraph (i) will be provided within 30 days of receipt of a written request for the list:
(A) The date the guarantor failed to comply with paragraph (3)(i).
(B) The date the trustee receives a copy of the auditor's report to the guarantor containing going concern disclosure.
(C) The date on which the trustee is informed that the guarantor is insolvent. There is no independent duty by the trustee to determine the insolvency of the guarantor.
(c) If the guarantor is a natural person, the guarantor may satisfy the requirements of this section relating to audited balance sheets and statements of income by providing a Statement of Financial Condition prepared utilizing the criteria contained in the Personal Financial Statements Guide promulgated by the American Institute of Certified Public Accountants and accompanied by a Review Report.
§ 202.093. Charitable contributions to pooled income funds exempt.
(a) Under the authority contained in section 202(i) of the act (70 P.S. § 1-202(i)), the Department finds that it is not in the public interest or necessary for the protection of investors to require registration under section 201 of the act (70 P.S. § 1-201) of any securities issued or created in connection with contributions or transfers of property to, or certificates of interest or participation in, pooled income funds if the following conditions are met:
(1) A pooled income fund (Fund) as defined in section 642(c)(5) of the Internal Revenue Code of 1986 (26 U.S.C.A. § 642(c)(5)) is established to permit donors to make irrevocable remainder interest gifts to the Fund.
(2) The Fund is afforded a tax deduction under section 642(c)(3) of the Internal Revenue Code of 1986.
(3) The Fund is in compliance with the Solicitation of Funds for Charitable Purposes Act (10 P.S. §§ 162.1—162.23) and amendments and successor statutes.
(4) A prospective donor is provided written disclosure which fully and fairly describes:
(i) The consequences of a contribution or transfer of property to the Fund.
(ii) The nature, operation and financial condition of the Fund.
(5) A person responsible for solicitation of contributions to the Fund will not receive commissions or other special compensation based on the amount of property transferred except that this prohibition does not apply if the person receiving the commissions or special compensation is registered with the Department as a broker-dealer under section 301 of the act (70 P.S. § 1-301) or is registered with the Department under section 301 of the act as an agent of the broker-dealer.
(6) A person receiving compensation for advising the charitable organization as to the advisability of investing in, purchasing or selling securities, including interests in the Fund, or otherwise performing as an investment adviser is either of the following:
(i) An investment adviser registered with the Department under section 301 of the act.
(ii) A Federally covered adviser that is in compliance with section 303(a) of the act (70 P.S. § 1-303(a)).
(b) If permitted by § 606.031 (relating to advertising literature), advertising literature may be used by the Fund in connection with the solicitation of contributions subject to the antifraud provisions of sections 401—409 of the act (70 P.S. §§ 1-401—1-409) and Subpart D (relating to fraudulent and prohibited practices).
§ 202.094. World class issuer exemption.
Under the authority contained in section 202(i) of the act (70 P.S. § 1-202(i)), the Department finds that it is not in the public interest or necessary for the protection of investors to require registration under section 201 of the act (70 P.S. § 1-201) of any security meeting all of the following conditions:
(1) The securities are one of the following:
(i) Equity securities except options, warrants, preferred stock, subscription rights, securities convertible into equity securities or any right to subscribe to or purchase the options, warrants, convertible securities or preferred stock.
(ii) Units consisting of equity securities permitted by subparagraph (i) and warrants to purchase the same equity security being offered in the unit.
(iii) Nonconvertible debt securities that are rated in one of the four highest rating categories of Standard and Poor's, Moody's, Dominion Bond Rating Services or Canadian Bond Rating Services or another rating organization designated by the Department. For purposes of this subsection, nonconvertible debt securities means securities that cannot be converted for at least 1 year from the date of issuance and then only into equity shares of the issuer or its parent.
(iv) American Depository Receipts representing securities described in subparagraphs (i)—(iii).
(2) The issuer is not organized under the laws of the United States, or of any state, territory or possession of the United States, or of the District of Columbia or Puerto Rico.
(3) The issuer meets all of the following conditions:
(i) At the time an offer or sale is made in reliance on this section, the issuer has been a going concern engaged in continuous business operations for the immediate past 5 years.
(ii) During the 5-year period, the issuer has not been the subject of a proceeding relating to insolvency, bankruptcy, involuntary administration, receivership or similar proceeding.
(iii) If an issuer otherwise meets the conditions of subparagraphs (i) and (ii), the issuer may, for purposes of this paragraph, use the operating history of any predecessor that represented more than 50% of the value of the assets of the issuer toward the 5-year requirement.
(4) The issuer, at the time an offer or sale is made in reliance on this section, has a public float of $1 billion or more. For purposes of this paragraph:
(i) Public float means the market value of all outstanding equity shares owned by nonaffiliates.
(ii) Equity shares means common shares, nonvoting equity shares and subordinated or restricted voting equity shares but does not include preferred shares.
(iii) An affiliate of a person is anyone who beneficially owns, directly or indirectly, or exercises control or direction over, more than 10% of the outstanding equity shares of the person.
(5) The market value of the issuer's equity shares, as defined in paragraph (4)(ii), at the time an offer or sale is made in reliance on this section, is $3 billion or more.
(6) The issuer, at the time an offer or sale is made in reliance on this section, has a class of equity securities listed for trading on or through the facilities of a foreign securities exchange or recognized foreign securities market included in 17 CFR 230.901 (relating to general statement) or successor rule promulgated under the Securities Act of 1933 (15 U.S.C.A. §§ 77a—77aa) or designated by the Securities and Exchange Commission under 17 CFR 230.902(a)(2) (relating to definitions) promulgated under the Securities Act of 1933.
§ 202.095. Charitable gift annuities.
(a) Under the authority contained in section 202(i) of the act (70 P.S. § 1-202(i)), the Department finds that it is not in the public interest or necessary for the protection of investors to require registration under section 201 of the act (70 P.S. § 1-201) of securities issued or created in connection with the offer or sale of charitable gift annuities if the following conditions are met:
(1) The charitable gift annuity (annuity) meets the terms and conditions of being exempt from the laws of the Commonwealth regulating insurance under the Charitable Gift Annuity Exemption Act (10 P.S. §§ 361—364).
(2) A prospective annuitant is provided written disclosure which fully and fairly describes the consequences of a contribution or transfer of property to the qualified charity, as that term is defined in the Charitable Gift Annuity Exemption Act.
(3) The persons responsible for solicitation of purchasers of annuities will not receive commissions or other special compensation based on the amount of the annuity purchased unless the person receiving the commissions or special compensation is registered with the Department as a broker-dealer under section 301 of the act (70 P.S. § 1-301) or is registered with the Department under section 301 of the act as an agent of the broker-dealer.
(4) A person receiving compensation for advising the qualified charity as to the advisability of investing in, purchasing or selling securities, including annuities, or otherwise performing as an investment adviser is either of the following:
(b) If permitted by § 606.031(a) (relating to advertising literature), advertising literature may be used by the qualified charity in connection with the solicitation of contributions subject to the antifraud provisions of sections 401—409 of the act (70 P.S. §§ 1-401—1-409) and Subpart D (relating to fraudulent and prohibited practices).
CHAPTER 203. EXEMPT TRANSACTIONS
§ 203.011. Nonissuer transactions.
(a) The exemption contained in section 203(a) of the act (70 P.S. § 1-203(a)) is available for transactions in a security which are not directly or indirectly for the benefit of the issuer or an affiliate of the issuer of the subject security. By way of illustration, an offering of securities is indirectly for the benefit of the issuer or an affiliate if any part of the proceeds of the transaction will be received indirectly by the issuer or an affiliate.
(b) A transaction that is part of a single plan of distribution which involves a distribution by an issuer of its securities to the public will not be considered a nonissuer transaction for purposes of section 203(a) of the act.
§ 203.041. Limited offerings.
(a) The notice required under section 203(d) of the act (70 P.S. § 1-203(d)) shall be filed with the Department within the time period specified on Form E in accordance with the General Instructions.
(b) The Department will not consider the requirement of section 203(d)(i) of the act to be met unless the issuer meets all of the following:
(1) Enters into a written agreement by which the purchaser agrees not to sell the securities purchased under the exemption within 12 months after the date of purchase, except in accordance with § 204.011 (relating to waivers of the 12-month holding period), and a copy of the agreement to be signed has been filed with the Department.
(2) Places a legend on the security restricting its transferability for 12 months after the date of purchase except in accordance with § 204.011.
(3) Instructs its transfer agent, if any, that no transfer of the securities is permitted except in accordance with section 203(d) of the act, § 204.011 and this section.
(c) Except if the promoters, as defined in section 102(o) of the act (70 P.S. § 1-102(o)), are registered under section 301 of the act (70 P.S. § 1-301), the condition contained in section 203(d)(iii) of the act is met only if a promoter does not receive an underwriting, selling or finder's fee or commission or other remuneration directly or indirectly for the sale of securities under the exemption.
(1) A promoter is considered to have received indirect remuneration if money or property is paid to an affiliate of a promoter as compensation for the sale of securities.
(2) The fact that the value of a promoter's investment in the issuer is increased as a result of the offering or that the promoter will receive remuneration from the issuer for services given to the issuer in the ordinary course of its business or for the sale of property to it does not, of itself, preclude the availability of the exemption.
(d) During the period of the offering, the issuer shall take steps necessary to ensure that the material information contained in its notice remains current and accurate in all material respects. If a material statement made in the notice, or an attachment thereto, becomes materially incorrect or inaccurate, the issuer shall file an amendment with the Department in accordance with § 609.011 (relating to amendments to filings with Department) within 5 business days of the occurrence of the event which required the filing of the amendment.
§ 203.091. (Reserved).
§ 203.101. Mortgages.
(a) For the purpose of section 203(j) of the act (70 P.S. § 1-203(j)), the exemption is available only if:
(1) The entire bond or other evidence of indebtedness, together with the real or chattel mortgage, deed of trust, agreement of sale or other instrument securing the same is offered and sold as one unit.
(2) The purchaser of the unit is not offered, as part of the offer of the unit or in connection therewith, a property interest that would itself be considered to be a security under section 102(t) of the act (70 P.S. § 1-102(t)) or under other regulations adopted under the act.
(3) The outstanding principal amount of all bonds or other evidences of indebtedness that are secured by the real or chattel mortgage, deed of trust or agreement of sale on the same property (including bonds and other evidences of indebtedness issued in the transaction) does not exceed the fair value of the property at the time of the transaction.
(4) General solicitation through public media advertisement, mass mailing, the Internet or other means does not occur in connection with soliciting the transaction.
(5) Compensation is not paid or given directly or indirectly for soliciting any person in this Commonwealth in connection with the transaction.
(6) The issuer, at the time of the transaction, is in compliance with any applicable licensing requirements of the Department.
(b) The exemption contained in section 203(j) of the act may not be available for a transaction entered into primarily to avoid the provisions of section 201 of the act (70 P.S. § 1-201) or made in violation of the antifraud provisions of sections 401—409 of the act (70 P.S. §§ 1-401—1-409).
§ 203.131. (Reserved).
§ 203.141. Sales to existing equity securityholders.
(a) The exemption contained in section 203(n) of the act (70 P.S. § 1-203(n)) is only available for the offer and sale of equity securities when all of the following exist:
(1) The offer is made to existing equity securityholders of a class of a series of the issuer's issued and outstanding equity securities, although the offer does not need to be made to all the classes or series.
(2) The offer is made pro rata to all the equity securityholders who are, of record, residents of this Commonwealth.
(3) The solicitation of an equity securityholder in this Commonwealth does not result in the payment of a commission or other remuneration, other than a standby commission.
(b) The exemption contained in section 203(n) of the act is only available for the offer and sale of debt securities when all of the following exists:
(2) The solicitation of an equity securityholder in this Commonwealth does not result in the payment of a commission or other remuneration, other than a standby commission.
(c) For purposes of subsection (a)(2), an offer will be considered to have been made pro rata when all of the following exists:
(1) The initial offer is made pro rata.
(2) After the expiration of a reasonable period of time following the initial offer, an identified equity securityholder acquires securities in an amount exceeding a pro rata share on terms and conditions fully disclosed to the affected equity securityholders.
§ 203.151. Proxy materials.
(a) Except as provided in subsection (b), in a transaction requiring the filing of proxy materials with the Department for review under section 203(o) of the act (70 P.S. § 1-203(o)), the materials must conform to Rule 14A, 17 CFR 240.14a-1—240.14b-2 (relating to solicitations of proxies) promulgated under the Securities Exchange Act of 1934 (15 U.S.C.A. §§ 78a—78qq).
(b) In a transaction subject to the filing requirements of section 203(o) of the act, filing is not required if the number of persons to whom securities are offered and sold in this Commonwealth does not exceed 25, exclusive of principals of the entities whose securityholders are voting or providing written consent.
(c) Except for transactions described in subsection (b), notice shall be given to the Department for a transaction requiring the filing of proxy materials with the Department under section 203(o) of the act by filing:
(1) Form 203-O in accordance with the General Instructions.
(2) The exemption filing fee specified in section 602(b.1)(v) of the act (70 P.S. § 1-602(b.1)(v)).
(d) Proxy materials filed under this section may not be distributed to securityholders until the Department determines that the materials are in compliance with this section and communicates that determination to the person who filed the proxy materials.
§ 203.161. Debt securities of nonprofit organizations.
(a) A person proposing to offer debt securities under section 203(p) of the act (70 P.S. § 1-203(p)) shall:
(1) Complete and file with the Department two copies of Form 203-P in accordance with the General Instructions.
(2) File Form 203-P no later than 5 business days before the earlier of either the issuer receiving from any person:
(i) An executed subscription agreement or other contract to purchase the securities being offered.
(ii) Consideration for the subscription agreement or other contract to purchase the securities being offered.
(b) Except if the delivery of an offering document is not required by the Department, every offering of debt securities under section 203(p) of the act shall be made by an offering document containing all material information about the securities being offered and the issuer.
(1) An offering document will be considered to meet the requirements of this section if it includes the information that is elicited by Part VII of the Statement of Policy Regarding Church Bonds adopted April 14, 2002, by NASAA and any successor policy thereto (NASAA Guidelines) and is in the format set forth therein.
(2) A copy of the offering document and any offering literature to be used in connection with the offer or sale of securities under section 203(p) of the act shall be filed with the Department at the same time the notice required under subsection (a) shall be filed.
(c) The offering document required under subsection (b) must meet all of the following conditions:
(1) Contain a notice of a right to withdraw that complies with § 207.130 (relating to notice to purchasers under section 207(m)).
(2) Contain financial statements of the issuer that comply with § 609.034(b) (relating to financial statements).
(3) Demonstrate compliance with the trust indenture standards and trustee qualification standards and associated disclosure requirements as set forth in Parts V and VI of the NASAA Guidelines if the total amount of securities to be offered exceeds $250,000.
(4) Include whatever data may be necessary to establish all of the following:
(i) The investors will receive a first lien on real estate of the issuer.
(ii) The issuer has not defaulted on prior obligations.
(iii) The total amount of securities offered does not exceed 75% of the current fair market value of the real property covered by the securities.
§ 203.171. (Reserved).
§ 203.183. Agricultural cooperative associations.
Under the authority contained in section 203(r) of the act (70 P.S. § 1-203(r)), the Department finds that it is not in the public interest or necessary for the protection of investors to require the registration under section 201 of the act (70 P.S. § 1-201) of securities issued by an agricultural cooperative association in transactions when all of the following conditions are met:
(1) The securities are issued by the agricultural cooperative association.
(2) The securities are offered and sold only to persons who are, at the time of an offer and sale, agricultural cooperative association members or to persons who, on sale of securities to them, thereby become members of the agricultural cooperative association.
(3) The transfer of the securities for value is restricted to agricultural cooperative association members.
(4) A person does not receive any commission or other compensation as a result of or based on the sale of the securities other than in connection with the solicitation of nonmembers for membership in the agricultural cooperative association.
§ 203.184. Offers and sales to principals.
(a) Under the authority contained in section 203(r) of the act (70 P.S. § 1-203(r)), the Department finds that it is not in the public interest or necessary for the protection of investors to require the registration under section 201 of the act (70 P.S. § 1-201) of securities offered and sold by an issuer to:
(1) A principal.
(2) A corporation, the outstanding voting stock of which is beneficially owned by one or more principals.
(3) A general partnership or a limited partnership, the interest in which is beneficially owned by one or more principals.
(4) A trust, the trustees of which are principals.
(5) Any other person, the interest in which is beneficially owned by one or more principals.
(b) The exemption set forth in this section does not apply to any offer or sale to a person who has been appointed or elected a principal primarily to obtain the exemption or to an offer or sale to a relative of this person.
(c) A person who is appointed or elected a principal in good faith for a purpose other than to obtain the exemption set forth in this section to whom, or to whose relative, securities are sold without registration following the designation or election in reliance on the exemption set forth in this section will not be considered to have been designated or elected a principal primarily to obtain the exemption set forth in this section.
§ 203.185. Offers before effectiveness of registration by qualification exempt.
(a) Under section 203(r) of the act (70 P.S. § 1-203(r)), the Department finds that it is not in the public interest or necessary for the protection of investors to require the registration under section 201 of the act (70 P.S. § 1-201) for securities to be offered but not sold to an applicant filing a registration statement for its securities under section 206 of the act (70 P.S. § 1-206) before the effectiveness of the registration statement if all of the following criteria are met:
(1) The applicant has done all of the following:
(i) Filed a registration statement under section 206 of the act to register the securities for which offers will be made.
(ii) Filed a written opinion of management which states that all of the following conditions apply to the applicant:
(A) The business, including any predecessor, is an existing business which possesses a history of operations of 4 years or more.
(B) The business, including any predecessor, maintains and will continue to maintain a place of business in this Commonwealth which employs at least 25 persons.
(C) The business, including any predecessor, has averaged annual gross revenues of at least $500,000 for the past 2 years.
(D) The business, including any predecessor, possesses at least 4 years of historical financial information.
(iii) Filed an intention to comply with paragraph (3) and subsections (b)—(d).
(2) The minimum amount of the proceeds from the securities to be sold under the registration statement described in paragraph (1)(i) is $500,000.
(3) There is a withdrawal procedure as follows:
(i) Nonbinding subscription agreements received in connection with the offer but not sale of securities made under this section must contain withdrawal rights which permit the investor to withdraw moneys tendered under the nonbinding subscription agreements with accrued interest under one of the following circumstances:
(A) Investors may withdraw moneys tendered under a nonbinding subscription agreement with accrued interest at any time before the effectiveness of the registration statement described in paragraph (1)(i).
(B) Investors may withdraw moneys tendered under a nonbinding subscription agreement with accrued interest within 2 business days from the date of receipt of notification of effectiveness of the registration statement described in paragraph (1)(i), as set forth in subsection (d).
(ii) Investors are considered automatically to have withdrawn any moneys tendered under a nonbinding subscription agreement and the moneys with accrued interest shall be returned to the investors on the occurrence of any of the following:
(A) The registration statement described in paragraph (1)(i) does not become effective within 150 days from the date of filing with the Department, unless extended by the Department.
(B) The registration statement described in paragraph (1)(i) is withdrawn by the applicant.
(C) The Department denies the registration statement described in paragraph (1)(i), regardless of whether the denial was a result of a hearing or rehearing requested by the applicant unless the Department permits, in its Denial Order, that the moneys remain in escrow pending any request for a rehearing on the Denial Order.
(b) Moneys tendered under nonbinding subscription agreements as a result of offers made under this section shall be placed in interest-bearing escrow accounts in a bank and are subject to the investor withdrawal rights set forth in subsection (a)(3).
(1) If, before the effectiveness of the registration statement described in subsection (a)(1)(i), the nonbinding subscription agreement is withdrawn under subsection (a)(3), the deposit and accrued interest is payable to the investor.
(2) After the effectiveness of the registration statement described in subsection (a)(1)(i), the deposit plus accrued interest is payable to the applicant except if the investor withdraws under subsection (d), in which event the investor shall receive the deposit plus accrued interest.
(c) All offers for securities made under this section must be accompanied by the delivery of a preliminary prospectus which has been prepared and filed to satisfy the requirements of section 206(b) of the act and § 206.010(c) (relating to registration by qualification).
(d) All persons whose moneys have been placed in escrow as a result of the making of offers for the securities that are the subject of the registration statement described in subsection (a)(1)(i) shall:
(1) Be notified of the effectiveness of the registration statement either by certified mail or by direct delivery of the information.
(2) Receive a copy of the final prospectus concurrent with the notification of the effectiveness of the registration statement unless the Department permits a supplement to the preliminary prospectus setting forth all changes and modifications to be used for these purposes.
(e) The following do not constitute the sale of a security:
(1) Receipt by the applicant of a nonbinding subscription agreement which is subject to the withdrawal provision of subsection (a)(3).
(2) Deposit of moneys under subsection (b).
(f) The exemption contained in this section may not be available for a transaction entered into primarily to avoid the provisions of section 201 of the act.