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Securities: An Important Consideration in Ownership Structure
Any entity, no matter how small or large, that attempts to raise capital by issuing securities (i.e. offering or selling stock, membership units, partnership interests or other types of interests) may only do so by registering the offering with the Securities Exchange Commission (SEC) or by complying with the provisions of one of the specifically-defined exemptions from the registration requirements. Registration can be a time-consuming and expensive process that requires filing a formal registration statement with the SEC. As such, registration is not a process particularly well suited for community-scale projects, and is generally undesirable in this context. In order to reduce the risk of SEC oversight, a Community Solar project organizer should seek legal consultation on the ownership and participation structure.
While many exemptions from registration are possible, many smaller-scale projects tend to offer private placements of securities to investors under exemption provisions known as Regulation D. Under Rule 506 of Regulation D, a company can raise an unlimited amount of investment capital from an unlimited number of investors, provided that all of the investors are “accredited investors” as defined in the rules promulgated by the SEC. An “accredited investor” is an individual (or entity owned exclusively by individuals) that meets one of the following criteria:
1. has a net worth (assets minus liabilities), individually or jointly with spouse, of at least $1,000,000
2. has an individual income in excess of $200,000 or joint income with spouse in excess of $300,000 in each of the two preceding years and reasonably expects to reach the same income level in the current year
3. is an executive officer or director of the issuing company.
An accredited investor can also be an entity with total assets in excess of $5 million not formed for the purpose of acquiring the securities offered.
Under Regulation D, there is a prohibition on general solicitation, which means that the offering should not be made to the general public, but instead only to individuals or entities with which the issuer has an existing business relationship. One sometimes hears reference to a company that can sell to up to thirty-five unaccredited investors under Regulation D. While this true, as a practical matter the ability to make such an offering is severely limited. If the company offers or sells shares to even a single unaccredited investor, it triggers additional, far-more-detailed information requirements (such as a formal private placement memorandum), which can substantially increase the complexity and cost of the transaction.
If an offering does not meet the requirements of Rule 506, there may still be alternative ways to offer securities under Regulation D or other exemptions, but these methods also tend to be substantially more expensive and complicated (much like registering the offering).
An issuer also should keep in mind that it will need to comply with the securities laws of all states where the securities are being offered or issued. Most states’ securities laws have parallels to the federal requirements, but many states require additional filings, even if their exemptions are similar in substance to the federal exemptions.
A full review of state and federal securities requirements related to small offerings is beyond the scope of this website. Therefore, whenever offering securities, the project team should consult with experienced securities counsel.
For further understanding of this issue, download: Securities Law Issues Relating to Community Solar Projects, a memorandum prepared by Stoel Rives LLP for the National Renewable Energy Laboratory.
