Indiana's New Securities Law: Implications for Companies Raising Private Capital and For Investment Consultants and Advisers

The new Indiana Uniform Securities Act, which became effective July 1, 2008, in most respects does not represent a dramatic or fundamental change from the securities law that it replaced. However, certain provisions could be significant for:

· companies that desire to raise capital through securities offerings in Indiana (particularly in exempt “private offerings”);

· business consultants and financial advisors that seek to collect transaction-based compensation in respect of their role in Indiana securities transaction as “finders” without having registered as broker-dealers or agents with the Indiana Securities Division; and

· pooled investment fund managers with a place of business in Indiana, such as managers of venture capital funds, that under prior law operated in Indiana without registration with the Indiana Securities Division investment advisers.

Below is a summary identifying issues that we believe represent some of the most significant changes from the current law as to these types of capital markets participants.

When reviewing this summary, keep in mind that (generally speaking):

· The Act, like the prior law, makes it unlawful for a person who offers or sells or purchases securities (or who advises others for compensation as to securities) to make false or misleading statements, or to engage in acts, practices, and courses of business that "would operate as a fraud or deceit upon another person." Certain courts have interpreted similar provisions of the prior Indiana law as making offerors or sellers of securities liable for such statements or such acts, practices, and courses of business, without any requirement that the plaintiffs show that the defendants had any actual evil fraudulent intent. The Act (like the prior law) specifies that the terms "fraud" and "deceit" are not limited to their strict common law meanings.

· An entity or individual can violate the Act indirectly, such as by employing (or contracting or otherwise associating with) third parties that engage in business in violation of the Act, or paying them commissions, fees or other remuneration.

· Noncompliance with the Act can entail serious consequences, including:

○ Private civil suits for damages (plus interest and their attorneys fees) by persons who have purchased, or have sold, securities, in transactions in violation of the Act.

○ Private civil suits for damages (plus interest and their attorneys fees) by persons who have received advice about securities from persons who have provided such advice in violation of the Act.

○ Administrative and civil enforcement proceedings by the Indiana Securities Division (which may seek civil money penalties, asset freezes, restitution and injunctions), and criminal proceedings by county prosecutors.

· Entities or individuals who control others who violate the Act, or who are directors, officers, managers, or similar officials of entities that violate the Act, can be held jointly and severally responsible in damages for that conduct, even if they act in good faith, unless they can prove that they paid attention to Indiana securities law compliance at the time of any violation by the controlled party; this is a far more strict standard of personal liability than under federal securities laws, and this standard was reinforced by an Indiana Supreme Court decision in November 2007 under the similar provisions of the prior law.

Selected Changes Applicable to Regulation of Securities Offering Activities and Investment Advisory Activities Under the Indiana Uniform Securities Act

Regulated Activity	Selected Requirements	Key Definitions	Key Changes from Prior Law
Offers and sales of securities in Indiana.	Registration by the issuer of the offers and the sales (unless the issuer can prove that an exemption specified by the Act applies or federal securities law preempts the state law) is required with the Division. An issuer is prohibited from compensating agents on a transaction-based basis in connection with offers and sales of the issuer’s securities, unless such agents are registered as such with the Division (or exempt). The making of factual misstatements or misleading statements, and the engaging in acts, practices, and courses of business that "would operate as a fraud or deceit upon another person," in connection with such offers and sales, is prohibited.	"Security," "issuer," "broker–dealer," "agent," "fraud,” “federal covered securities”	The term "security" is defined to include limited liability company interests, without exception. However, the official study commission has adopted a Comment that would continue the prior law’s interpretations regarding those limited circumstances under which an LLC interest might not be a security. The prior law’s Byzantine private offering exemption was replaced with a simplified offering exemption for limited offerings. This exemption, which does not require the use of any specified written offering materials or the making of any notice filings with the Securities Division, offers greater flexibility for those financings that cannot qualify as exempt offerings of “federal covered securities” by reason of the offering’s compliance with Rule 506 of the SEC’s Regulation D. So-called "finders" may be out of (lawful) business in the State of Indiana in connection with transactions involving the issuance of securities, if they expect to receive commissions or other transaction-based compensation for their efforts, unless they are registered with the Indiana Securities Division. This prohibition against an issuer’s paying (or an unregistered finder’s receiving) transaction-based compensation applies even to SEC Rule 506 offerings that are not required to be registered with the Division due to the federal securities law preemption of state law registration requirements.
Advising others, for compensation, as to value of securities or advisability of investing in, purchasing or selling securities.	Persons or firms who engage in this activity in Indiana for compensation are required to register as an "investment adviser" with the Indiana Securities Division (unless they are registered as advisers with the SEC or another exemption or exception applies). Indiana representatives of an Indiana-registered investment adviser or of a federal covered investment adviser must register as “investment adviser representatives” after taking and passing a securities examination (Series 65). In addition (and regardless of registration requirements), a person who advises others, for compensation, as to value of securities or advisability of investing in, purchasing or selling securities, may not lawfully make factual misstatements or misleading statements in connection with the offer, sale or purchase of securities, and may not engage in acts, practices, and courses of business that "would operate as a fraud or deceit upon another person," in connection with its advisory activity.	"Investment adviser," "federal covered investment adviser", "investment adviser representative," "fraud".	The de minimis exemption from Indiana investment adviser registration requirements for investment advisers with fewer than six clients in Indiana now applies only to those advisers that have no place of business in Indiana. One consequence of this change is that investment managers with offices in Indiana that advise or manage the securities portfolios of collective investment vehicles (like hedge funds, private equity funds and venture capital funds) for compensation might now be required to be registered with the Division as advisers, unless they are SEC-registered. Registration of these firms would also entail individual registration and securities exam (Series 65) testing for individuals active in their businesses. The Indiana Securities Commissioner, effective July 1, 2008, has issued a temporary “no-action” policy statement with respect to the application of Indiana’s registration requirements to advisers to certain types of these funds, but that no-action policy does not affect the rights of clients of those advisers to sue in respect of such provisions, as described below. Persons who give investment advice for compensation (and, on a joint and several basis, their officers, directors, managers, and controlling persons) can be held civilly liable in damages to their clients for lack of compliance with any applicable registration requirement, and also for misstatements or misleading statements or other wrongful conduct in connection with the advisory activity.

Regulated Activity

Selected Requirements

Key Definitions

Key Changes from Prior Law

Offers and sales of securities in Indiana.

Registration by the issuer of the offers and the sales (unless the issuer can prove that an exemption specified by the Act applies or federal securities law preempts the state law) is required with the Division.

An issuer is prohibited from compensating agents on a transaction-based basis in connection with offers and sales of the issuer’s securities, unless such agents are registered as such with the Division (or exempt).

The making of factual misstatements or misleading statements, and the engaging in acts, practices, and courses of business that "would operate as a fraud or deceit upon another person," in connection with such offers and sales, is prohibited.

"Security," "issuer," "broker–dealer," "agent," "fraud,” “federal covered securities”

The term "security" is defined to include limited liability company interests, without exception. However, the official study commission has adopted a Comment that would continue the prior law’s interpretations regarding those limited circumstances under which an LLC interest might not be a security.

The prior law’s Byzantine private offering exemption was replaced with a simplified offering exemption for limited offerings. This exemption, which does not require the use of any specified written offering materials or the making of any notice filings with the Securities Division, offers greater flexibility for those financings that cannot qualify as exempt offerings of “federal covered securities” by reason of the offering’s compliance with Rule 506 of the SEC’s Regulation D.

So-called "finders" may be out of (lawful) business in the State of Indiana in connection with transactions involving the issuance of securities, if they expect to receive commissions or other transaction-based compensation for their efforts, unless they are registered with the Indiana Securities Division. This prohibition against an issuer’s paying (or an unregistered finder’s receiving) transaction-based compensation applies even to SEC Rule 506 offerings that are not required to be registered with the Division due to the federal securities law preemption of state law registration requirements.

Advising others, for compensation, as to value of securities or advisability of investing in, purchasing or selling securities.

Persons or firms who engage in this activity in Indiana for compensation are required to register as an "investment adviser" with the Indiana Securities Division (unless they are registered as advisers with the SEC or another exemption or exception applies). Indiana representatives of an Indiana-registered investment adviser or of a federal covered investment adviser must register as “investment adviser representatives” after taking and passing a securities examination (Series 65).

In addition (and regardless of registration requirements), a person who advises others, for compensation, as to value of securities or advisability of investing in, purchasing or selling securities, may not lawfully make factual misstatements or misleading statements in connection with the offer, sale or purchase of securities, and may not engage in acts, practices, and courses of business that "would operate as a fraud or deceit upon another person," in connection with its advisory activity.

"Investment adviser," "federal covered investment adviser", "investment adviser representative," "fraud".

The de minimis exemption from Indiana investment adviser registration requirements for investment advisers with fewer than six clients in Indiana now applies only to those advisers that have no place of business in Indiana. One consequence of this change is that investment managers with offices in Indiana that advise or manage the securities portfolios of collective investment vehicles (like hedge funds, private equity funds and venture capital funds) for compensation might now be required to be registered with the Division as advisers, unless they are SEC-registered. Registration of these firms would also entail individual registration and securities exam (Series 65) testing for individuals active in their businesses. The Indiana Securities Commissioner, effective July 1, 2008, has issued a temporary “no-action” policy statement with respect to the application of Indiana’s registration requirements to advisers to certain types of these funds, but that no-action policy does not affect the rights of clients of those advisers to sue in respect of such provisions, as described below.

Persons who give investment advice for compensation (and, on a joint and several basis, their officers, directors, managers, and controlling persons) can be held civilly liable in damages to their clients for lack of compliance with any applicable registration requirement, and also for misstatements or misleading statements or other wrongful conduct in connection with the advisory activity.

We encourage those of you with questions to contact Steve Hackman.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.