Montana Money School State Auditor John Morrison Capital

Montana Money School State Auditor John Morrison Capital Formation

State Auditor’s Goals ¨ Protect investors ¨ Promote uniformity of securities laws among the states ¨ Encourage, promote and facilitate capital investment in Montana

Securities Department ¨ Register securities ¨ Register salespeople and firms in the securities industry ¨ Living trusts ¨ Multi-level marketing companies

Securities Department ¨ Consumer complaints ¨ Registration violations ¨ Enforcement ¨ Inquiries about brokerage firms and sales representatives

Capital Formation ¨ Raises capital to start or grow a business. ¨ Typically, companies offer securities as a way of raising capital. ¨ They can raise capital through debt or equity offerings.

Business Plan ¨ ¨ ¨ Statement of funding requirements Executive summary Description of business The market for product or service that you are providing Marketing strategy Business location Licenses/permits/registrations Insurance/bonding/employee benefits Management Personnel Financial data

Factors to Consider when Planning a Securities Offering ¨ What is your primary objective in raising capital? ¨ How much capital must you raise to meet your ¨ ¨ ¨ primary objective? To whom do you want to offer your securities – family, friends, employees or the general public? How many shareholders do you want? Who will serve as a salesperson and make the offers to investors? Do you want to advertise your securities offering? Do you want to offer your securities in more than one state?

Securities – Two types of offerings: ¨ Debt securities, such as loans, bonds and debentures, raise money by obtaining loans from investors. Companies set fixed interest rates and establish a repayment schedule. ¨ Equity securities, such as shares of stock, give investors ownership interest in the company. Investors can share in the company’s appreciation and/or receive dividend payments.

Securities Regulation ¨ The offer and sale of securities must comply with state and federal securities laws. ¨ Consult your attorney.

Salespeople ¨ Anyone offering or selling securities must be registered with state and federal securities agencies or must qualify for an exemption. ¨ To register, fill out an application and pay the $50 fee. The department waives the test requirement. ¨ Issuers are allowed two to three appointed salespeople to offer their securities.

Exemptions ¨ No more than 10 people are offered the security. – No commission can be earned. – Investors purchase security for investment purposes only (not as a tax shelter). – Limited to 10 offers, not 10 sales. ¨ No more than 25 people are offered the security. – Same criteria as above. – Must file a notification and pay a fee to the State Auditor’s Office before offers are made.

Myrna and Joe Walker ¨ Organic fertilizer business ¨ Business funded so far by couple’s savings and business proceeds ¨ Operating out of small building on property ¨ Annual sales of $175, 000 ¨ High demand for products and have had to limit customers’ orders ¨ Transportation issues ¨ Needs new or additional space ¨ Estimate that business needs $250, 000 to grow

The Walkers’ Plan ¨ Consult Small Business Administration ¨ Create business plan ¨ Consult with attorney and accountant ¨ Determine funding source(s) – bank loans, stock offering ¨ Prepare disclosure document ¨ Securities offering must comply with state and federal securities laws

The Walkers Gain Capital ¨ Obtain $75, 000 SBA grant ¨ Offer securities to 10 people, raising $175, 000 through a self-executing exemption ¨ Provide investors with information about the risks of the investment

James Johnson ¨ Specialty store – huckleberry products and ¨ ¨ ¨ jewelry Operating out of home Funded business by selling shares of stock Obtained $50, 000 in stock sales to 13 people Able to meet current demand for products Sees potential growth in Montana’s tourist towns Requires facility, equipment and marketing

State Securities Law Violation ¨ Johnson made the offer to more than 10 people without the benefit of an exemption ¨ He did not file any notice with the Montana Securities Department so he can’t use the exemption for 25 or fewer offers ¨ He can’t raise any more money until he resolves the violation

Resolving Johnson’s Problem ¨ Works with State Auditor’s Office ¨ Offers rescission to his 13 existing shareholders ¨ Agrees to make sure he complies with securities laws in the future ¨ Creates a document that provides full disclosure about his business and the risks of investing ¨ Pays fine ¨ Proceeds with plan to raise additional capital

Other Exemptions ¨ Offers to employees in stock ownership plans ¨ Offers by cooperative associations ¨ Offers by certified Montana capital companies ¨ Offers to existing shareholders

Prospectus ¨ Risks of the investment ¨ A description of the security ¨ A description of your company ¨ Names and salaries of company officers ¨ Current audited financial statements ¨ A list of your company’s capitalization, long-term debt and other securities outstanding ¨ An estimate of the proceeds to be received from the offering ¨ Previous experience of the management

Reminder ¨ Your company’s business plan should not be used as your disclosure statement or prospectus when offering securities.

Intra and Interstate Offerings ¨ If you make offers or sales to people in other states, you must comply with the securities laws of that state as well as those of the federal government. ¨ Offerings conducted intrastate generally are federally exempt and our securities department is the sole regulator.

Pre-filing Conference ¨ What to expect ¨ Time lines ¨ Escrow procedures ¨ The conference may be conducted in person or by telephone

Web Sites www. discoveringmontana. com/sao - State Auditor’s Office www. sec. gov - SEC home page www. sec. gov/investor/broker. htm - SEC page for checking on broker, salesperson, investment advisers www. nasdr. com/2000. asp - Public access to CRD www. nasaa. org - North American Securities Administrators Association www. iard. com - Information on registration of investment advisers, investment adviser representatives

Montana State Auditor John Morrison 840 Helena Avenue Helena, MT 59601 1 -800 -332 -6148 (406) 444 -2040 www. discoveringmontana. com/sao