DFI plans to seek legislation that would repeal the debenture company laws from the Securities Act of Washington, chapter 21.20 RCW, in order to facilitate capital formation.
The Securities Act of Washington was enacted in 1959 and is largely based on the original Uniform Securities Act promulgated by the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) in 1956. In the 1970s and 1980s, however, the Legislature amended the Securities Act of Washington to add a number of provisions applicable to “debenture companies” in response to issues that arose with Washington-based companies that sold debt securities to investors to fund various investment-related activities. The debenture company provisions contained in the Act impose a restrictive safety and soundness regulatory regime on these companies and are unique to Washington.
A lot has changed since the Legislature enacted the debenture company provisions. The last company to register an offering with the Securities Division that was subject to these provisions terminated its offering in 2005. Since that time, changes in federal securities laws have significantly decreased the likelihood that a company planning a traditional debenture offering would seek registration under the Securities Act of Washington.
At the same time, these restrictive debenture company provisions have imposed a barrier to registration for the sale of low-interest rate notes by non-profit organizations that use the funds for social impact investing and loans to religious organizations. These organizations typically cannot satisfy all of the debenture company provisions that have been codified in the Securities Act of Washington. Due to these restrictions, these issuers restrict the sale of their debentures in our state to comply with one or more exemptions from registration or simply do not offer their securities to Washington residents.
In consideration of the changes in federal law and in light of other regulatory tools applicable in registered offerings, the Securities Division believes the debenture company provisions are no longer necessary to protect investors in our state. With the repeal of these provisions, non-profit organizations could pursue registration in Washington. In the context of registration, the staff of the Securities Division would apply a number of regulatory tools to ensure an appropriate level of investor protection for investors in these offerings.
These tools include a requirement to show the issuer has sufficient earnings to make the required payments on the debt to be issued. With this requirement and other protections in place, the Securities Division believes it is appropriate in the interest of capital formation and the protection of investors to remove the impediments to registration that the debenture company provisions present.