REPORT TITLE:
Small Bus.; Capital Financing

DESCRIPTION:
Enables small businesses to obtain increased access to growth
capital by allowing a new form of equity financing, the Small
Corporate Offerings Registration (SCOR) system. (SD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        1071
THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO SECURITIES.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  The legislature finds that many small
 
 2 businesses in Hawaii with great potential are unable to obtain
 
 3 access to equity capital.  Small businesses, particularly new
 
 4 business start-ups, often find it difficult to secure venture
 
 5 capital for financing in their early stages.  Relatively few
 
 6 venture capitalists, for example, are willing to invest in early
 
 7 stage financing opportunities, and initial public offerings may
 
 8 not be right for most small companies.  The major sources of
 
 9 financing for average new small businesses are owners' savings,
 
10 loans from commercial banks, and funds from relatives and
 
11 friends.
 
12      Many states, however, have allowed a new kind of equity
 
13 financing--the Small Corporate Offerings Registration (SCOR), a
 
14 uniform registration system that allows a company to raise up to
 
15 $1,000,000 by selling common stock directly to the public for at
 
16 least $5 per share.  The legislature finds that SCOR offerings,
 
17 which are registered with the State, cut through many of the
 
18 existing barriers that prevent small companies from obtaining
 
19 financing.  Offerings may be sold to anyone, including family
 

 
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 1 members, acquaintances, and other interested investors, in
 
 2 amounts as little as $1,000, and shares may be easily resold.
 
 3      The federal securities laws governing the private sale of
 
 4 securities are collectively known as "Regulation D".  The State's
 
 5 response to Regulation D is the Uniform Securities Act
 
 6 (Modified), contained in chapter 485, Hawaii Revised Statutes.
 
 7 Pursuant to the Small Business Incentive Act of 1980, the North
 
 8 American Securities Administrators Association has developed
 
 9 "Form U-7", a question and answer disclosure document for small
 
10 companies that seeks to provide a complete listing of all
 
11 disclosure issues that could apply in any small company offering
 
12 exempt from SEC registration under Rule 504 of Regulation D.
 
13      The legislature finds that Form U-7 satisfies the prospectus
 
14 required for registration by qualification under the Uniform
 
15 Securities Act, if all of the qualifications in the instructions
 
16 for use of the form are fulfilled.  The legislature further finds
 
17 that allowing SCOR registration will assist Hawaii's small
 
18 businesses in obtaining needed financing and is consistent with
 
19 the Hawaii State Planning Act's economic priority guidelines
 
20 under section 226-103(a), Hawaii Revised Statutes, to seek "a
 
21 variety of means to increase the availability of investment
 
22 capital for new and expanding enterprises" in order to "stimulate
 
23 economic growth and encourage business expansion and development
 

 
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 1 to provide needed jobs for Hawaii's people and achieve a stable
 
 2 and diversified economy".
 
 3      SECTION 2.  Section 485-10, Hawaii Revised Statutes, is
 
 4 amended by amending subsection (b) to read as follows:
 
 5      "(b)  The commissioner of securities shall receive and act
 
 6 upon applications for registration of securities by qualification
 
 7 and may prescribe forms upon which the commissioner may require
 
 8 the applications to be submitted.  Applications shall be in
 
 9 writing and shall be duly signed by the applicant and sworn to by
 
10 any person having knowledge of the facts and shall be filed in
 
11 the office of the commissioner and may be made either by the
 
12 issuer of the securities for which registration is applied for,
 
13 or by any registered dealer desiring to sell the same within the
 
14 State.  Application for registration of securities by
 
15 qualification shall be made by the filing in the office of the
 
16 commissioner of the following:
 
17      (1)  An application for registration which, in the case of
 
18           an offering or distribution by or in whole or in part
 
19           for the account of an issuer, shall include the
 
20           information specified in subparagraphs (A) through (E)
 
21           of this paragraph (1), and in the case of a nonissuer
 
22           offering or distribution shall contain such of the
 
23           information specified in subparagraphs (A) through (E)
 

 
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 1           [of this paragraph (1)] as the commissioner may
 
 2           prescribe, together, in every case, with such other
 
 3           information as the commissioner prescribes:
 
 4           (A)  Name and address of issuer and address of issuer's
 
 5                principal office in the State, if any;
 
 6           (B)  Title of securities to be registered and total
 
 7                amount of each class of the securities to be
 
 8                offered in the State and elsewhere;
 
 9           (C)  Amount of each class of securities to be offered
 
10                in the State, offering price per unit and in the
 
11                aggregate and the amount of the registration fee;
 
12           (D)  If a registration statement as to the securities
 
13                has been filed under the Securities Act of 1933,
 
14                the effective date of registration statement, if
 
15                effective, and a statement as to whether any stop
 
16                order has been made with respect thereto pursuant
 
17                to the Securities Act of 1933, or whether any
 
18                notice of intent to issue a stop order has been
 
19                given or to the best knowledge of the applicant is
 
20                threatened;
 
21           (E)  The states, territories, or other jurisdiction, if
 
22                any, which have refused by order or otherwise to
 
23                authorize the sale of the securities to the public
 

 
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 1                or have revoked or suspended the right to sell the
 
 2                securities or in which any proceeding for the
 
 3                revocation or suspension of such right is pending,
 
 4                or in which an application for qualification has
 
 5                been withdrawn.
 
 6      (2)  In the case of an offering or distribution by or in
 
 7           whole or in part for the account of an issuer, a copy
 
 8           of each of the following, and in the case of a
 
 9           nonissuer offering or distribution, copies of such of
 
10           the following as the commissioner prescribes:
 
11           (A)  The issuer's charter or articles of association or
 
12                other instrument of organization, together with
 
13                all amendments thereto, certified by the officer
 
14                of the State of the issuer's incorporation or
 
15                organization having custody thereof, if not
 
16                already on file in the office of the commissioner;
 
17           (B)  The issuer's bylaws, together with all amendments
 
18                thereto, certified by the secretary or any other
 
19                duly authorized officer of the issuer;
 
20           (C)  The indenture, if any, and all supplements
 
21                thereto, under which the securities are to be
 
22                issued;
 
23           (D)  The basic underwriting agreement, if any, and any
 

 
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 1                agreement or agreements among underwriters and
 
 2                dealers pertaining to the distribution of the
 
 3                securities within the State;
 
 4           (E)  An opinion or opinions of counsel as to the
 
 5                legality and validity of the securities and their
 
 6                issuance;
 
 7           (F)  A specimen copy of each certificate to be
 
 8                registered.
 
 9                Any of the foregoing documents may be submitted in
 
10           preliminary form, clearly marked as such, in which case
 
11           a definitive copy of each shall be filed promptly after
 
12           execution, adoption or filing, as the case may be.
 
13      (3)  A prospectus which shall have set forth on the outside
 
14           front cover page, in capital letters in type as large
 
15           as that used generally in the body of the prospectus,
 
16           the statement that "NEITHER THIS PROSPECTUS NOR THE
 
17           SECURITIES DESCRIBED HEREIN HAVE BEEN APPROVED OR
 
18           DISAPPROVED BY THE COMMISSIONER OF SECURITIES OF THE
 
19           STATE OF HAWAII NOR HAS THE COMMISSIONER PASSED UPON
 
20           THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS", and in
 
21           the case of an offering or distribution by or in whole
 
22           or in part for the account of an issuer shall include
 
23           the information specified in subparagraphs (A) through
 

 
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 1           (P) of this paragraph (3), or in the case of a
 
 2           nonissuer offering or distribution shall contain such
 
 3           of the information specified in subparagraphs (A)
 
 4           through (P) of this paragraph (3) as the commissioner
 
 5           may prescribe, together, in every case, with such other
 
 6           information as the commissioner may prescribe:
 
 7           (A)  The name and address of the issuer, the name of
 
 8                the jurisdiction under the laws of which it was
 
 9                organized, and the date of its organization;
 
10           (B)  A statement in tabular form of the following
 
11                information on a per share or other unit basis:
 
12                offering price to the public; underwriting
 
13                discounts or commissions; and proceeds to the
 
14                issuer or other persons;
 
15           (C)  A statement of the amount of securities offered,
 
16                the aggregate offering price to the public, the
 
17                aggregate underwriting discounts or commissions,
 
18                an estimate of the amount of expenses of the
 
19                issuer and the amount of expenses of the
 
20                underwriters to be borne by the issuer, and the
 
21                aggregate proceeds to the issuer or securities
 
22                holders for whose accounts the securities are
 
23                offered;
 

 
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 1           (D)  If any of the securities are to be offered for the
 
 2                account of any person other than the issuer, the
 
 3                name and address of each such security holder, the
 
 4                total amount the security holder owns, and the
 
 5                amount to be offered for the security holder's
 
 6                account;
 
 7           (E)  If the securities are not to be offered for cash,
 
 8                a statement of the basis on which the offering is
 
 9                to be made;
 
10           (F)  A brief description of the method by which the
 
11                securities are to be offered and if the offering
 
12                is to be made by or through underwriters, the name
 
13                and address of each underwriter and the amount of
 
14                the participation of each underwriter, with a
 
15                statement of any material relationship between the
 
16                issuer and such underwriter;
 
17           (G)  A reasonably itemized statement of the purposes
 
18                for which the net cash proceeds to the issuer from
 
19                the sale of the securities are to be used and the
 
20                amount to be used for each such purpose,
 
21                indicating in what order of priority the proceeds
 
22                will be used for the respective purposes;
 
23           (H)  A description of any arrangements for the return
 

 
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 1                of funds to subscribers if all of the securities
 
 2                to be offered are not sold, or if there are no
 
 3                such arrangements, a statement to that effect;
 
 4           (I)  A brief description of the securities to be
 
 5                offered, including:
 
 6                (i)  In the case of shares the par or stated
 
 7                     value, if any; the rate of dividend, if
 
 8                     fixed, and whether cumulative or
 
 9                     noncumulative; the preference, if any; and if
 
10                     convertible, the conversion rate;
 
11               (ii)  In the case of debt securities, the rate of
 
12                     interest; the date of maturity or, if the
 
13                     issue matures serially, a brief indication of
 
14                     the serial maturities; if the issue is
 
15                     redeemable before maturity, a brief statement
 
16                     of the redemption date or dates and price or
 
17                     prices; if payment of principal or interest
 
18                     is contingent, an indication of the
 
19                     contingency; a brief indication of the
 
20                     priority of the issue; and if convertible,
 
21                     the conversion rate;
 
22              (iii)  In the case of any other kind of security,
 
23                     appropriate information of a comparable
 

 
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 1                     character;
 
 2           (J)  A brief description of the business or proposed
 
 3                business of the issuer, including:
 
 4                (i)  The nature of the issuer's present or
 
 5                     proposed products or services, the principal
 
 6                     market therefor, and the length of time the
 
 7                     issuer has been in commercial production;
 
 8               (ii)  The location and general character of the
 
 9                     plants or other physical properties held or
 
10                     proposed to be acquired by the issuer and the
 
11                     nature of the title under which such
 
12                     properties are held or proposed to be held;
 
13              (iii)  If the issuer intends to exploit or develop
 
14                     any new invention or process, a statement of
 
15                     how the invention or process is to be applied
 
16                     commercially and whether or not it is covered
 
17                     by any patent, issued or pending, identifying
 
18                     by date and serial number any such patent or
 
19                     patent application;
 
20           (K)  The names and residence addresses of all directors
 
21                and officers of the issuer and of any person or
 
22                persons controlling the issuer and, if the issuer
 
23                was organized within the last three years, the
 

 
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 1                names and addresses of all promoters of the
 
 2                issuer;
 
 3           (L)  A description of all direct and indirect
 
 4                interests, by security holdings or otherwise, of
 
 5                each director and officer of the issuer and, if
 
 6                the issuer was organized within the last three
 
 7                years, of each promoter of the issuer:
 
 8                (i)  In the issuer or its affiliates;
 
 9               (ii)  In any material transactions within the past
 
10                     two years or in any material proposed
 
11                     transactions to which the issuer or any of
 
12                     its predecessors or affiliates was or is to
 
13                     be a party, stating the cost to such persons
 
14                     of any property or services for which payment
 
15                     by or for the account of the issuer has been
 
16                     or is to be made;
 
17           (M)  If the issuer was organized within the last three
 
18                years, a statement of the percentage of
 
19                outstanding securities of the issuer which will be
 
20                held by directors, officers, and promoters as a
 
21                group, and the percentage thereof which will be
 
22                held by the public if all of the securities to be
 
23                offered are sold, and the respective amounts of
 

 
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 1                cash (including cash expended for property
 
 2                transferred to the issuer) paid therefor by such
 
 3                group and by the public;
 
 4           (N)  A brief description of all options or warrants
 
 5                presently outstanding or proposed to be granted to
 
 6                purchase securities of the issuer, including the
 
 7                names of the holders thereof, the cost thereof to
 
 8                the holders, the terms and conditions on which
 
 9                they may be exercised, and the price at which the
 
10                securities may be acquired pursuant thereto;
 
11           (O)  A balance sheet of the issuer at the close of the
 
12                issuer's last fiscal year preceding the date of
 
13                filing of the prospectus and a profit and loss
 
14                statement and analysis of surplus for the fiscal
 
15                year ended at the date of the balance sheet, all
 
16                certified by a public accountant, together with a
 
17                balance sheet of the issuer as of a date within
 
18                ninety days prior to the date of filing of the
 
19                prospectus and a statement of profit and loss for
 
20                the period from the close of the last preceding
 
21                fiscal year to the date of the balance sheet, both
 
22                verified by a duly authorized officer of the
 
23                issuer, or, if the issuer has been in existence
 

 
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 1                for less than one year, a balance sheet of the
 
 2                issuer as of a date within ninety days prior to
 
 3                the date of filing and a statement of profit and
 
 4                loss for the period from the date of the issuer's
 
 5                organization to the date of the balance sheet,
 
 6                both certified by a public accountant;
 
 7           (P)  No prospectus filed pursuant hereto shall set
 
 8                forth in any manner any estimate or projection of
 
 9                future income, earnings, or profits of the issuer
 
10                or any subsidiary, parent, or affiliate of the
 
11                issuer, unless clearly identified as an estimate
 
12                and unless the basis of estimation is clearly set
 
13                forth.
 
14      (4)  If the securities for which application for
 
15           registration is being made have been or are to be
 
16           registered under the Securities Act of 1933, there may
 
17           be filed in lieu of the prospectus prescribed by
 
18           paragraph (3) of subsection (b) of this section, the
 
19           definitive prospectus of the issuer filed under the
 
20           Securities Act of 1933, if the same shall be dated
 
21           within one hundred and twenty days of the application
 
22           for registration under this section.
 
23      (5)  The prospectus required for registration by
 

 
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 1           qualification under paragraph (3) may be satisfied by
 
 2           the Small Corporate Offerings Registration Form (Form
 
 3           U-7) adopted by the North American Securities
 
 4           Administrators Association if all of the qualifications
 
 5           in the instructions for use of the form are fulfilled.
 
 6           The commissioner shall adopt rules pursuant to chapter
 
 7           91 to implement this paragraph."
 
 8      SECTION 3.  New statutory material is underscored.
 
 9      SECTION 4.  This Act shall take effect upon its approval.