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NOTIFICATION OF EXEMPTION
UNDER 32 M.R.S.A. §16202(15)
Revised December 31, 2005
Title 32, section 16202(15) of the Maine Revised Statutes Annotated provides an exemption from the registration requirements of section 16301. The exemption applies if the following conditions are met:
1) The securities being sold are those of:
a corporation, limited
partnership or limited liability company organized under the laws of
any other issuer determined
by the Securities Administrator, by order, to have its principal place of
2) The transaction is part of a single issue in which not more than 25 purchasers are present in Maine during any 12 consecutive months, excluding those designated in 32 M.R.S.A. §16202(13);
3) The securities have not been offered to the public by general advertisement or general solicitation;
4) A commission or other remuneration has not
been paid or given, directly or indirectly, to a person other than a
broker-dealer or agent licensed to solicit a prospective purchaser in
5) The issuer reasonably believes that all
the purchasers in
Anyone relying on the exemption is required to file with the Securities Administrator a form, "Notification of Exemption for Maine Issuers” under 32 M.R.S.A. §16202(15). In addition, a copy of the Notification of Exemption, in its final form, must be provided to all persons to whom offers are made. For this reason, it is important that the information on the form be as accurate, complete, and current as possible.
The Office of Securities cannot tell you exactly how to complete the Notification form for your particular company because we are not familiar with your business. In addition, the role of this office is to enforce the Maine Uniform Securities Act, and it is not appropriate for us to provide legal advice to you. However, the following information may be useful as you complete the Notification form.
The Importance of Disclosure
When it issues securities, a company assumes certain legal responsibilities and obligations under state and federal laws. The company must tell potential investors about itself, its owners, its securities, its business, and the risks involved in investing in the company. This is known as disclosure.
Disclosure is how potential investors learn important information about your company. It is how your company tells its story. Potential investors will use this information to decide whether to invest in your company.
A buyer can test drive a used car and take it to a mechanic. The car is a tangible asset. You can see it and touch it. But a security is an intangible asset. The value of the security depends on how the company performs and on how the market evaluates the company’s possible future performance.
Of course, companies have tangible assets, such as buildings, equipment, contracts, books, or records. But investors usually don’t get to look at those assets or to interview the company’s management. Instead, they rely on the company to disclose all “material information” to them before they make a decision to invest in the company. “Material information” is the facts and data that a reasonable person would need to know to make an informed investment decision.
Both federal and state securities laws require the company to provide complete and accurate disclosures about the company to potential investors. If the company makes material misstatements or omits material information, an investor can sue the company and can also complain to federal and state regulators.
Preparing your disclosure documents is one of the most important parts of your offering. It demands time and concentration, as each component must be presented clearly enough so that the average person can understand it. When a company relies on the securities exemption in 32 M.R.S.A. §16202(15), the “Notification of Exemption for Maine Issuers under 32 M.R.S.A. §16202(15)” is one of the disclosure documents you will give to potential investors.
Well-prepared disclosure documents may protect the company, and its officers and directors, from possible lawsuits by dissatisfied investors who may later claim that the company made material misrepresentations or inadequate disclosure. For this reason, disclosure should always be in writing.
Federal Securities Law
Have you determined how your plans for raising capital comply with the federal securities laws? If securities are sold in violation of those laws, purchasers may be able to take legal action against the company.
Although we cannot give you advice regarding federal law, we would note that what is known as Securities and Exchange Commission Rule 504 generally exempts securities offerings not exceeding $1,000,000 from the federal registration requirements. For more information about federal law in general and Rule 504 in particular, you should contact:
Office of Small Business Policy
Telephone number: 202-551-3460
Mechanics of Completing the Notification Form
As you complete the form, feel free to use attachments, where necessary, and to refer to the appropriate attachment in your response to the item on the form itself.
Scope of the Exemption
The exemption under 32 M.R.S.A. §16202(15) provides an exemption for a transaction that is part of a single issue in which not more than 25 purchasers are present in Maine during any 12 consecutive months. You must complete the Notification form and claim the exemption for each separate offering of securities by your company.
For each individual offering, complete the Notification form to disclose the amount of securities your company is offering currently, the unit price of those securities, and the then-current information about the company.
Use of Proceeds – Section I
In Item I(3) of the Notification form, provide potential investors with specific information about how your company plans to use the proceeds it receives from the offering. Disclose as much information as possible, including an explanation of how the company will spend the money if it raises less than the maximum amount it is seeking. You may need to attach a separate sheet for this item.
You will need to decide whether to establish a minimum offering amount that the company must raise before it can use any of the money raised in the offering. If you establish a minimum offering amount, disclose information about the minimum offering in Item I(4) of the Notification form. The company should escrow all offering proceeds until it raises the minimum amount. If your company is not able to raise the minimum offering amount by a specified date, you will need to return all offering proceeds to the investors. Establish a minimum offering amount if your company will not have a reasonable chance for success unless it raises a certain amount of capital.
Perhaps the most important area of disclosure on the form is the risk factor section. Adequate disclosure of the risks involved in an investment in the company is important for two reasons: 1) the securities laws require full and complete risk disclosure to potential purchasers so that they can make an informed decision; and 2) accurate disclosure is a means to protect you in future actions by unhappy purchasers.
Describe the significant risks involved in an investment in your company in Section K of the Notification form. This is where you disclose warnings about the things that could go wrong and cause an investment in your company to not do well. While the Office of Securities cannot tell you exactly what risks are relevant to your company, the following are some questions that may help you in developing risk factors. After each set of questions are some sample risk factors, which commonly appear in offering documents. They are intended for illustration only.
1) Item K(1). How extensive is management's experience? Is its experience in the same type of business? Is this a start-up company? If yes, does management have experience managing a start-up company? If yes, how extensive is that experience?
What you place on the form will depend on your answers to these questions. The following are some sample answers. Please note that these are not necessarily mutually exclusive; for example, the fifth may apply even if the second, third, or fourth also applies.
The success of the company is dependent upon the efforts of its management. The management of the company does not have experience managing a business.
The success of the company is dependent upon its current management, John Smith and Mary Jones. While the company has been in business since 1980, it has concentrated on its product line for only the past three years. Mr. Smith and Ms. Jones do not have prior experience managing a product company.
While management has extensive management experience in the same type of business, it does not have experience managing a start-up enterprise.
While management has extensive management experience, it does not have experience managing this type of business or managing a start-up enterprise.
The success of this enterprise will be dependent on the efforts of its management. The future inability of management to participate in managing the enterprise could have a significant impact on its chances for success.
2) Item K(2). Here you should discuss existing competition for your company and the ease of entry into this type of business. Also, what specific economic factors would affect the success of your company? Is the success of your company dependent upon economic factors beyond its control?
What you place on the form will depend on your answers to these questions. The following are some sample risk factors. Again, please note that these may not necessarily be mutually exclusive.
Currently, the company has few competitors in its business. However, other enterprises with greater resources may start similar businesses and have a significant impact on the company's chances for success.
The product business is highly competitive. Many of the company's competitors are substantially larger and have substantially greater financial resources than the company.
The success of the company is dependent upon general economic conditions that are beyond its control. A decline in the general economy could have a significant impact on the company's ability to market its products.
The success of the company is somewhat dependent upon economic factors beyond its control. In general, the product business has declined in the past two years.
The company markets its products to consumers through mail order catalogs and specialty stores. There is no assurance that these catalogs and stores will continue to carry the company's products.
3) Item K(3). Does the company have a low net worth in relation to the resources it will need to operate profitably? Does the company have earnings? If the company has earnings, you will need to state that there is no guarantee of the future earning potential of the company. If the company does not have earnings, state that fact and that there is no way to predict whether the company will ever be profitable.
Sample risk factors:
The company has a low net worth. As of 12/31/0X its net worth was $ , and as of 6/30/0X it was $ .
The company has limited capitalization which has inhibited its ability to grow. The company is dependent upon the receipt of funds from this offering for its growth.
The company's indebtedness is significant. It has short-term indebtedness of $ , which it expects to repay with the proceeds of this offering, and long-term indebtedness of $ , which it hopes to reduce to $ with the offering proceeds.
The company is still in the development stage, and there can be no assurance that it will ever achieve profitability.
The company has operated profitably in only one of the three years in which it has concentrated on its products business. In 200X the company incurred losses of $ . In 200X the company incurred losses of $ . In 200X, the company made a profit of $ . For the first six months of 200X the company has made a profit of $ . There is no assurance that the company will operate profitably in the future.
The company has limited operating revenues. In addition, most of the company's sales have come in the third and fourth quarters of the year, which has caused cash flow problems for its operations.
4) Item K(4). There should be a statement that there is currently no market for the company's securities and one is not expected to develop.
Sample risk factors:
The securities are being offered and sold pursuant to exemptions from registration under the U.S. Securities Act of 1933 and the Maine Uniform Securities Act. The securities may not be resold unless they are registered or an exemption from registration exists under each of those Acts.
These are illiquid securities. There is no market for the company's securities and none is expected to develop. A purchaser of these securities should expect to hold them indefinitely and should not expect to be able to sell them and use the proceeds for his or her immediate needs.
5) Item K(5). Any other significant risk factors should be discussed here.
Sample risk factors:
An investment in the company involves a high degree of risk and is suitable only for persons who can afford to lose their entire investment.
The company is not required to raise a specified minimum amount in this offering before it can use the offering proceeds. If the company raises less than the full amount being offered, its ability to successfully pursue its business plans may be adversely affected.
If the company does not raise the full offering amount, it will be unable to accomplish the major strategies of its management plan.
The company is an S Corporation for tax purposes. The United States Internal Revenue Code provides for beneficial tax treatment for S Corporations, but restricts the types of persons to whom shares may be sold. If shares are sold to persons who do not qualify, whether intentionally or inadvertently, the company could lose its beneficial tax treatment.
Substantial voting control of the company will be retained by management. Mr. Smith and Ms. Jones will own % of the outstanding common stock after the offering and will thus effectively control the company.
The company has not paid any dividends to date, and there is no assurance that it will be able to do so in the future.
The company's business is regulated by the . There have been initiatives in Congress (or the State Legislature) to impose more stringent requirements on the manufacture of . If one of those initiatives is successful, the company might not be able to comply with the new regulations, causing a decrease in the demand for the company's products.
If the company does not raise $ from this offering, it estimates that it will have only enough capital to meet its operating needs for the next _____ months.
With the proceeds from this offering, the company estimates that it will have enough capital to fund its operating needs for the next ____ months. At that time, the company will need to find additional sources of capital to fund its continued operations if it has generated income from its operations. There is no guarantee that the company will then be able to find sufficient funding at reasonable rates.
In 200X, 25% and 13%, respectively, of the company's income was from sales to two customers. The loss of either or both of these customers would significantly impact the company's profitability.
The company has a sole source contract with one supplier for , an essential raw material in the manufacture of . The inability of that supplier to provide the company with adequate, timely shipments of would have a significant impact on the company's business.
We are attaching the following items that may help you in drafting risk factors for your offering:
· Excepts from the NASAA SCOR Manual for issuers using the Form U-7, providing general instruction regarding disclosure which is relevant to small issuers;
· Appendix A from the NASAA SCOR Manual, providing specific examples of disclosures which may be relevant to small issuers; and
· A sample risk factor section from a company that claimed an exemption from registration similar to the one in §16202(15).
Finally, our suggestions cannot substitute for a review of your Notification form by an attorney hired by your company to ensure compliance with both federal and state securities laws. Your own attorney would know more about your company and have a better understanding of its business.
PURPOSE. The purpose of risk factors is twofold:
• To warn investors of the risks involved in purchasing the security; and
• To protect the Company from later claims that investors were not told all of the material risks.
AVOID GENERALIZED STATEMENTS. You should avoid generalized statements and include risk factors that are specific to the Company and the offering. No specific number of risk factors is required to be identified. Do not respond to Item 1 with a statement that there are no risks to purchasing securities in the offering. Every offering of securities involves risks. Additionally, do not qualify statements of risk in any manner that is intended to minimize the importance of the risks.
RISK FACTORS COMMON TO SMALL COMPANIES. There are several risks that are common to most small companies, especially those in the development stage. These risks include:
• cash flow and liquidity problems;
• inadequate capitalization;
• inexperience of management;
• absence of operating history;
• absence of a market for the company’s products or services; and
• absence of a market for its stock or other securities.
OTHER RISK FACTORS. Other risk factors commonly appearing in connection with a securities offering address absence of profitable operations in recent periods, an erratic financial history, the overall financial position of the Company, the nature of the business in which the Company is engaged or proposes to engage, conflicts of interest between the Company and Management, arbitrary establishment of offering price, and reliance on the efforts of a single individual for success in operating the business. This listing is not intended to be inclusive as risks vary according to the nature of the Company’s business and the type of security offered.
SPECIAL RISK FACTORS RELATED TO SALES OF PREFERRED STOCK OR DEBT. When a Company sells preferred stock or a debt security, generally the purchaser expects to receive a preference on payments of dividends or interest. Consequently, additional risk factors are required addressing the ability of the Company to pay the preference or repay the debt and the possibility that the preference may not be paid or the debt repaid at all. These risks may be the most important risks disclosed in connection with the offering and you should place them in an appropriate position.
PLACEMENT OF RISK FACTORS. Each risk factor should be stated in a separate concise paragraph. The title of the paragraph should state in specific language the risk discussed in the risk factor. The risk factors should appear in order of importance with the most important risk factors appearing first. If the Company has no operating history or a limited operating history, generally, risks addressing the Company’s financial condition should appear first. This is especially true in a debt or preferred stock offering.
You should include cross-references at the end of each risk factor to the place in the Disclosure Document where the risk is discussed in detail. You may find it helpful to write your risk factors and determine their priority after you have completed all the other Items in the Disclosure Document.
risk factors can be found in Appendix A.
Excerpt from SCOR Issuers Manual, Revised: September 28, 1999, pages 98 to 101
These examples are intended to aid the Company in developing risk factor disclosure for the Company’s own offering. These examples should not be copied word for word nor will they apply to every offering. An offering may require risk factor disclosure for which an example is not included in this list. Each risk factor should summarize the potential impact of the risk on the investor and not simply state a fact.
For a company with a limited operating history:
We have a limited operating history.
We were incorporated on xx/xx/xx and have been operating only since xx/xx/xx. Because we have been operating for only a short period of time, we have not produced a profit. There is no assurance that we will ever produce a profit. As a new enterprise, we are likely to be subject to risks our management has not anticipated. We have limited resources and will not be able to continue operating without the proceeds from this offering. It is possible that the proceeds from this offering and our other resources may not be sufficient for us to continue to finance our operations.
For a company that has a history of losses with no expectation for immediate profits:
We have incurred losses since inception and may incur future losses.
We have not yet generated a profit from operations. As of the date of our most recent financial statements, we had an accumulated deficit of $_____________. We expect to continue to experience losses from operations and we cannot predict when or if we will become profitable. If we achieve profitability, we may not be able to sustain it.
For a company competing in a highly technical area where products rapidly become obsolete:
The (insert description) business is highly technical and our failure to introduce new products to the market may harm our business.
We operate in a highly technical industry, which is characterized by frequent introductions of new products and services into the market. Our success will depend, in part, on our ability to improve our present products, to develop new products and to provide necessary services and support. The proceeds of this offering may not provide us with sufficient funds to finance our research and development needs.
For a company that competes against larger and better financed companies in a competitive business:
We may not have sufficient financial resources to successfully compete in the (insert description) business.
A large number of enterprises provide products or services similar to ours. We will be competing with established businesses that have an operating history, and greater financial resources, management experience and market share than we have. There can be no assurance that we will be able to compete or capture adequate market share. We will not be profitable if we cannot compete successfully with other businesses.
For a company that depends on the services of a limited number of key persons:
We depend on the services of key employees, whose knowledge of (insert description) would be difficult to replace.
Our success depends substantially on the services of (insert names and title of key persons). Our business may be harmed if we lose the services of these people and we are not able to attract and retain qualified replacements.
For a company with inexperienced management:
Our officers and directors have no experience managing a company in the (insert description) business.
None of our officers and directors has managed a company in the (insert description) business nor has experience in managing a development stage enterprise. Our ability to operate successfully may depend on our ability to attract and retain qualified technical personnel, who may be in great demand.
For a company whose management has been involved in other business ventures that have not been successful:
Our officers and directors have been involved in other business ventures that have not been successful.
Prior to organizing the Company, (insert name of appropriate officers and directors) operated a business similar to ours in which shareholders lost part or all of their investment. (Insert name of appropriate officers and directors) operated a company in the (insert description) business, which while not similar to our business, also resulted in losses to investors. Our ability to operate successfully may be determined by the ability of our officers and directors to succeed where they have failed before.
For a company whose business is highly regulated:
Our failure to comply with government rules and regulations may harm our business.
Our business must comply with local, state and federal rules and regulations. (BRIEFLY identify type of regulations, e.g., taxation, environmental, licenses.) We believe that we comply with the rules and regulations with which we are required to comply. If we fail to comply with a rule or regulation we may be subject to fines, or other penalties, or our permit or license may be lost or suspended. We may have to stop operating and our investors may lose their entire investment.
For a company whose officers, directors or key persons own a substantial number of promotional shares and options:
Our officers, directors and key persons will continue to have substantial control over the Company after the offering.
Officers, directors and key persons own (insert number) shares of common stock, which will represent (insert number) % of outstanding common stock. Consequently, they will be able to elect all of the directors and control the direction of the Company. They paid an average price of $_______ per share as compared with the public offering price of $______ per share. In addition, they own (insert number) options or warrants which are exercisable to purchase additional shares of common stock at an average price of $______ during the next (insert number) years. See Item 105, Principal Stockholders.
For a Company that has significant dilution between the offering price and book value:
The price of a share in this offering is significantly higher than the book value of the stock.
If we sell only the minimum number of shares in this offering, the book value per share will be $___. This is (insert number) % of the offering price. As a result, investors participating in this offering will incur immediate and substantial dilution. To the extent outstanding options or warrants to purchase our shares are exercised, new investors will incur further dilution. Book value is determined by subtracting liabilities from tangible assets and dividing the answer by the number of outstanding shares.
For shares that have no existing market:
Because there is no market for our common stock, you may not be able to sell your shares.
You may never be able to sell your shares and recover any part of your investment, unless we are able to complete a subsequent public offering or we are able to sell the Company for cash or merge with a public company.
For an arbitrary offering price:
The offering price of our shares is arbitrary.
The offering price of $___ per share bears no relationship to established value criteria such as net tangible assets, or a multiple of earnings per share and accordingly should not be considered an indication of the actual value of the Company.
For a debt offering where no sinking fund will be established:
We have not established a sinking fund for the purpose of accumulating funds for retiring the (insert name of debt instrument).
A sinking fund provides for periodic accumulation of funds over the life of the obligation with an independent trustee for the purpose of retiring the (insert name of debt instrument) at maturity. We will not maintain a sinking fund for the retirement of the (insert name of debt instrument) offered here and may not have the ability to retire the obligations when they mature.
For a debt offering where there will be no independent trustee:
We have not retained an independent trustee to act on investors’ behalf in the event of default of our obligation to repay the (insert name of debt instrument).
We have not retained an independent trustee to act on investors’ behalf in the event of default. Therefore, there is no independent third-party to protect investors’ interests in the event the Company fails to meet any of the agreements contained in the trust indenture.
For an offering to be sold by company employees:
We have not retained an independent party to sell the offering and the failure of our officers to sell the offering may result in a shortage of operating funds.
Officers of the Company are offering our shares on a “best-efforts” basis. We have not contracted with an underwriter, placement agent, or other person to purchase or sell all, or a portion, of our shares and there is no assurance that we can sell all or any of the shares. Further, if we had hired an underwriter, placement agent, or other independent person to sell the offering, that person would have conducted an independent due diligence examination into our business.
SAMPLE RISK FACTORS FROM AN ACTUAL OFFERING THAT CLAIMED AN EXEMPTION SIMILAR TO THE §16202(15) EXEMPTION
1. Start-Up Venture. Since its incorporation in 1990, the issuer has been engaged in research and development activities and to date has no stock. The issuer is in the process of building prototype products and has no firm commitments for orders of its products.
2. Proprietary Technology. The issuer’s primary asset is its proprietary information concerning a method of monitoring channel selection by individual customers of cable television systems. The inventor of this technology is ______________, the founder and Chair of the Board of Directors of the issuer. ____________ has recently been awarded a patent on certain aspects of this technology, and he has assigned his rights in that patent to the issuer. The issuance of the patent does not necessarily ensure that the issuer will be able to protect the patent against infringement by others, nor does it ensure that the validity of the patent would be upheld if it were to be challenged in court.
3. Competition. The Company’s product monitors channel selection by cable television customers. A number of other companies already manufacture or are attempting to develop devices to monitor or control channel selection. Although the issuer believes that its technology has many important technical and marketing advantages over alternative technologies known to it, there is no assurance that the issuer’s technology will find widespread acceptance within the cable industry. Even assuming successful completion of the present stock offering, the issuer will have very limited assets as compared to other competitors in the business of providing CATV monitoring or control equipment. Several competing companies already offer extensive product lines and have well-established relationships with cable television companies. As a result of its small size, the issuer may be more vulnerable than its competitors to technological or marketplace shifts affecting the demand for its products.
4. Regulatory and Economic Factors. The issuer’s business will be subject to a number of economic and regulatory factors which are beyond its control and which could reduce or eliminate potential demand for its technology. For example, it is possible that industry-wide standards could develop (or be imposed through regulation) that are inconsistent with the approach of monitoring cable television usage through technologies like those of the issuer. The issuer believes that it has a relatively limited window of opportunity to gain acceptance of its technology for use by the cable television industry.
5. Dependence on Key Personnel. At its current stage of development and with its current resources, the issuer is substantially dependent upon the continued services of ___________, the inventor of the issuer’s technology, and on the services of ____________, the issuer’s President and Chief Executive Officer.
6. Capital Requirements. The issuer’s business strategy is to manufacture prototypes using its technology and then, on the basis of these prototypes, seek large orders of the devices from cable television companies. If the issuer is successful in this strategy, its business could grow very rapidly, thereby requiring substantial infusions of additional capital until such time as the cash generated from operations is sufficient to fund continued growth of the business. It is anticipated that proceeds from the issuer’s current stock offering will not be sufficient to cover the issuer’s capital requirements for more than 9 to 12 months, and the issuer currently plans to engage in another stock offering early in 2002. Failure to raise capital as required would severely hamper the Company’s prospects.
7. Balance Sheet. The issuer had negative returned earnings of approximately $210,540 (unaudited) as of February 28, 2001. As noted above, the issuer is a development stage company and has not yet received any revenues from operations.
8. Dilution. From a book value standpoint, purchasers of the stock being offered will experience immediate and substantial dilution based upon the difference between the offering price ($1,000 per share) and the book value per share of fully-diluted stock after the offering (estimated to be approximately $125 per share assuming the sale of 1,500 shares pursuant to this offering and assuming the exercise of all outstanding stock options and warrants). After completion of this offering, current shareholders of the issuer will beneficially own at least 85% of the outstanding shares of stock (assuming the exercise of all options and warrants and the sale of the maximum number of shares being offered). The Company is contemplating future stock offerings to raise additional capital, and also plans to make a limited number of shares available to new employees and certain consultants in return for services. The issuance of shares for services would further dilute the book value per share.
9. Absence of Public Market for Stock. There presently is no trading market for the issuer’s stock, and no active trading market is expected to arise in the foreseeable future. In order to meet projected capital requirements, the issuer might engage in a public offering of stock in the future. However, there is no assurance that a public offering will occur or that an active trading market for the stock would result. Moreover, the current offering of stock is being made on reliance on various exemptions from state and federal securities registration requirements. Resales of such stock would generally also be subject to substantial restrictions under applicable securities laws. In view of all of these factors, prospective purchasers should assume that an investment in the issuer’s stock would remain highly illiquid for an indefinite period of time.
10. Determination of Offering Price. The valuation of development stage companies like the issuer is subject to substantial uncertainty. The offering price of the issuer’s stock has been determined in part through negotiation with certain prior investors, but does not necessarily bear any relationship to established criteria of value. The issuer’s projections of future income and cash flow are likewise subject to considerable uncertainty and should not be relied upon as a basis for valuing of the stock.
No Assurance of Special Tax Benefits. Persons who purchase the issuer’s stock
through this offering and who hold that stock for at least five years may be in
a position to qualify for certain capital gains tax exclusions under the
Revenue Reconciliation Act enacted in 1993.
These potential tax benefits are subject to numerous conditions and
limitations, and the issuer makes no representations concerning the
availability of the capital gains tax exclusion in particular cases. In addition, residents of