Securities Act Interpretive Statement 23

Submitted by lushenejj on Thu, 2018-07-05 13:50

Non-Profit Exemption at RCW 21.20.310(11) – Restricted Offering Class

The Securities Division frequently receives inquiries regarding the interpretation of the non-profit exemption at RCW 21.20.310(11). This Interpretive Statement addresses two inquiries regarding the provision in RCW 21.20.310(11) that states that the exemption only applies to securities issued by non-profit organizations that are offered or sold “to persons who, prior to their solicitation for the purchase of said securities, were members of, contributors to, or listed as participants in, the organization, or their relatives.”

Questions Presented:

1. If a church or other non-profit organization offers and sells securities to persons who are not members of, contributors to, or listed as participants in the organization prior to their solicitation, but who are members of, contributors to, or participants in related organizations, or organizations that have similar beliefs or purposes, can the church or other non-profit organization use the non-profit exemption at RCW 21.20.310(11) for the offer and sale of securities to those persons?

Brief Answer: No, prior to their solicitation, the offerees and purchasers must be members of, contributors to, or listed as participants in the non-profit organization that issues the securities.

2. If a church extension fund offers and sells securities to a “limited class of investors” as defined in Section II.D of the NASAA Statement of Policy Regarding Church Extension Fund Securities, will the church extension fund satisfy the restricted offering class requirement of RCW 21.20.310(11)?

Brief Answer: No, the “limited class of investors” under Section II.D of the NASAA Statement of Policy Regarding Church Extension Fund Securities is too broad to satisfy the non-profit exemption. The Securities Division applies the Statement of Policy only to registered offerings of church extension fund securities.

Statute and Rules:

RCW 21.20.310(11) provides an exemption for “any security issued by any person organized and operated as a non-profit organization as defined in RCW 84.36.800(4) exclusively for religious, educational, fraternal, or charitable purposes and which non-profit organization also possesses a current tax exempt status under the laws of the United States, which security is offered or sold only to persons who, prior to their solicitation for the purchase of said securities, were members of, contributors to, or listed as participants in, the organization, or their relatives[.]” Issuers generally use this exemption in conjunction with the federal non-profit exemption at Section 3(a)(4) of the Securities Act of 1933. While the exemption at RCW 21.20.310(11) limits to whom an issuer may offer securities, the federal exemption contains no such limitation.

RCW 21.20.005(13) defines “relatives” for the purposes of RCW 21.20.310(11) to include:

(a) A member’s spouse;
(b) Parents of the member or the member’s spouse;
(c) Grandparents of the member or the member’s spouse;
(d) Natural or adopted children of the member or the member’s spouse;
(e) Aunts and uncles of the member or the member’s spouse; and
(f) First cousins of the member or the member’s spouse.

If an offering of securities does not qualify for the non-profit exemption or an alternate exemption, the issuer must register the offering under RCW 21.20.180 or RCW 21.20.210. The Securities Division has adopted various NASAA Statements of Policy in order to promote the uniform regulation of registered securities offerings. Pursuant to WAC 460-16A-205(1)(y), the Securities Division applies the NASAA Statement of Policy Regarding Church Extension Fund Securities (“Statement of Policy”) to registered offerings of church extension fund securities. Section II.D of the Statement of Policy requires that church extension funds sell their securities to a “limited class of investors.” The Statement of Policy suggests the following form for a limited class:

PERSONs who are, prior to the receipt of the OFFERING CIRCULAR, members of, contributors to (including previous INVESTORs), or participants in the DENOMINATION, the CHURCH EXTENSION FUND or in any program, activity, or organization which constitutes a part of the DENOMINIATION or the CHURCH EXTENSION FUND, or in other religious organizations that have a programmatic relationship with the DENOMINATION or the CHURCH EXTENSION FUND.

Discussion:

The Securities Act of Washington exempts certain securities from registration where registration may not be necessary for the protection of investors. Between 1959 and 1975, the Securities Act of Washington provided a broad exemption from securities registration for non-profit organizations consistent with the exemptions found in the Uniform Securities Act of 1956 and the Securities Act of 1933 ¹. The exemption did not restrict to whom an issuer relying on the non-profit exemption could sell securities. However, in 1975, the Washington Legislature repealed the exemption following several state and federal securities fraud cases that involved offerings by non-profit organizations.

In 1977, the Legislature adopted a new exemption at RCW 21.20.310(11) for sales of securities issued by non-profit organizations. This exemption restricts the availability of the exemption to offers and sales of securities by a non-profit organization to persons (or their relatives) who were members of, contributors to, or listed as participants in the non-profit organization prior to the solicitation of securities (“restricted offering class”).

The Securities Act of Washington is a remedial statute whose primary purpose is the protection of investors. Therefore, exemptions from registration are narrowly construed. Additional factors that support a narrow interpretation of the exemption at RCW 21.20.310(11) include the clear legislative intent to adopt a more restrictive non-profit exemption, the lack of regulatory review of the disclosure document in offerings conducted under the exemption, and the absence of any additional mandatory investor qualifications for these offerings (such as net worth requirements or investor sophistication).

The restricted offering class under RCW 21.20.310(11) ensures that investors have familiarity with the non-profit organization based on a preexisting relationship. The investor must establish such relationship with the non-profit organization prior to and independent of the investment opportunity. Non-profit organizations that wish to offer and sell their securities more broadly must register their offerings, or utilize an alternate exemption.

In order to give effect to legislative intent, the Securities Division takes the position that the non-profit exemption at RCW 21.20.310(11) exempts only those sales of securities made to persons who have a prior relationship with the non-profit organization that issues the securities. A person’s prior association with a related organization does not satisfy the restricted offering class requirements of RCW 21.20.310(11). Similarly, a person’s prior association with an organization with a similar goal, philosophy, belief, or purpose as the non-profit organization will not satisfy the restricted offering class requirement. Persons in such an expanded offering class may have no knowledge of or familiarity with the non-profit organization issuing the securities. Further, an offering class under such an expanded definition could grow quite large. The expanded offering class would be akin to a public offering and inconsistent with legislative intent.

The Securities Division has received inquiries regarding whether a “limited class of investors” as defined in Section II.D of the NASAA Statement of Policy Regarding Church Extension Fund Securities will satisfy the restricted offering class requirements in RCW 21.20.310(11). The “limited class of investors” as defined in Section II.D includes persons who are members of, contributors to, or participants in organizations of the same religious denomination and organizations with programmatic relationships to the issuer. Because this “limited class of investors” in Section II.D includes persons in addition to the members of, contributors to, or participants in the issuer, this “limited class of investors” does not satisfy the requirements of RCW 21.20.310(11). Pursuant to WAC 460-16A-205(1)(y), the “limited class of investors” in Section II.D applies only for the purposes of church extension fund securities registered under RCW 21.20.180 or RCW 21.20.210.

Adopted: July 2, 2018

William M. Beatty
Securities Administrator
Prepared by: Jill Vallely, Esq.

¹ Section 3(a)(4) of the Securities Act of 1933 exempts “Any security issued by a person organized and operated exclusively for religious, educational, benevolent, fraternal, charitable, or reformatory purposes and not for pecuniary profit, and no part of the net earnings of which inures to the benefit of any person, private stockholder, or individual, or any security of a fund that is excluded from the definition of an investment company under section 3(c)(10)(B) of the Investment Company Act of 1940.” 15 U.S.C. 77c(a)(4).