Solid Law Practice Solid Law Practice

In urgent legal matters you need professionals that are responsive, shoot straight, and find creative solutions.

Creative Thinking Creative Thinking

Our legal team thinks outside the box to make sure you get more than just the status quo.

Dedicated to Success Dedicated to Success

Kennedy Sutherland LLP is driven by our clients' success. Whether your business is a start-up, small or mid-sized family owned, or large complex financial institution – we want to see you succeed.

Monthly Archives:' August 2014

CFPB Names Community Bank Advisory Council Appointees

The Consumer Financial Protection Bureau (CFPB) names nine new appointees to its Community Bank Advisory Council, as charged under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Board will advise and consult with the Bureau’s Director on a variety of consumer financial issues. New members to Community Bank Advisory Councils will serve two-year terms.

“These new additions to the CFPB’s leadership team show the importance we place on identifying and securing the best talent available to serve on behalf of consumers,” said CFPB Director Richard Cordray. “Additionally, these new members of our advisory board and councils will provide valuable input to help us better understand the consumer financial marketplace.”

The new Community Bank Advisory Council Members are:

  • Angela Beilke, Vice President, Mortgage Department, American Bank & Trust, Huron, SD
  • Michael Gallagher, Senior Vice President, Risk Management Director, Enterprise Bank & Trust Company, Lowell, Mass.
  • Paul Mackin, President and Chief Executive Officer, Think Mutual Bank, Rochester, Minn.
  • Lynda Messick, President and Chief Executive Officer, Community Bank Delaware, Lewes, Del.
  • John Motley, President, Colonial Savings, Fort Worth, Texas
  • David Reiling, Chief Executive Officer, Sunrise Banks, Minneapolis, Minn.
  • Monica Thomas, Executive Vice President, Illinois Service Federal, Chicago, Ill.
  • Christopher Triplett, President, Chief Executive Officer and Chief Financial Officer, Newport Federal Bank, Newport, Tenn.
  • Kathryn Underwood, President and Chief Executive Officer, Ledyard National Bank, Hanover, N.H.

New Capital Source for Small Business

As author Thomas L. Friedman discusses in his book The World Is Flat, the instantaneity and pervasiveness of the Internet has created a “flatter” world. This impact has now rippled through the world’s startups and small businesses in the form of crowdsourcing and crowdfunding.

  • Crowdsourcing is the practice of obtaining needed services from a large group of people and especially from the online community rather than from traditional employees or suppliers.
  • Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the Internet.

Crowdfunding came about as form of crowdsourcing, which grew rapidly in the mid- to late-2000’s and utilized the reach of the Internet and social media to leverage the power of the masses to complete complex projects, build new products, or fund social impact investments that could not be accomplished by a small, geographically constrained group of people. Specifically, crowdfunding initially allowed inventors or innovators to develop a product idea and obtain small portions of funding from a much larger group in order to capitalize the product development. In return for their investment, the investors would receive the item produced or some other non-monetary reward as their return on investment. As the potential for crowdfunding became apparent, many began to call for a framework in which startups and small businesses could access capital through securities offerings utilizing crowdfunding. Startups and small businesses were given this chance on April 5, 2012, when the Jumpstart Our Business Act of 2012 (the JOBS Act) was signed into law by President Obama.

Authorizing Legislation and Rulemaking

Title III of the JOBS Act (Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012” or Crowdfund Act) amended Section 4 of the Securities Act of 1933 by creating a new registration exemption in situations where an issuer meets specific requirements with regard to the size of the offering and the financial status of investors, and the sale is conducted through a broker or funding portal. Below is a summary of what is required to obtain the exemption provided by the Crowdfund Act:

  • The aggregate amount of securities sold to all investors by the issuer, including any amounts sold in reliance on the exemption provided under this paragraph during the 12-month period preceding the date of such transaction is not more than $1 million;
  • The aggregate amount of securities sold to any investor by an issuer does not exceed –
    • The greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and
    • 10 percent of the annual income or net worth of such investor up to a maximum of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000;
  • The transaction is conducted through a broker or funding portal that complies with the Crowdfund Act and subsequent rulemaking.

The Securities and Exchange Commission (SEC) did not meet their initial rulemaking deadline of December 31, 2012, and the Crowdfund Act proposed rules (Regulation Crowdfunding) were not issued until October 23, 2013. Regulation Crowdfunding implements the exemption established under Section 4(a)(6) of the Securities Act, establishes the required forms to be filed and timelines to be met, and imposes some additional conditions.

Texas Crowdfunding Update

During the delay in rulemaking by the SEC, many states moved forward with the adoption of their own rules permitting crowdfunding on an interstate basis, which is not regulated by the SEC.

The Texas Securities Board under the leadership of Commissioner John Morgan has recently published a proposed crowdfunding rule that would permit Texas businesses to raise up to $1 million during any 12 month period from investors who seek to purchase securities through authorized portals registered with the Texas Securities Commissioner. Individuals may invest no more than $5,000 through the portals in a single business, unless they are “accredited investors” who meet statutory and regulatory guidelines, including minimum net worth of $1 million, annual income of at least $200,000, and other sophistication or experience guidelines.

Offerings under the proposed rule must comply with the federal intrastate offering exemptions under Section 3(a)(11) of the Securities Act and Rule 147 promulgated thereunder. Following Rule 147, the proposed rule requires that:

  • the issuer is organized in and has its principal place of business in Texas;
  • at least 80% of the issuer’s gross revenues during its most recent fiscal year prior to the offering are derived from the operation of a business in Texas;
  • at least 80% of the issuer’s assets at the end of its most recent semiannual period prior to the offering are located in  Texas;
  • the issuer will use at least 80% of the net proceeds of the offering in connection with the operation of its business within Texas; and
  • the issuer is not an investment company, an SEC reporting company, or a company with no business plan or a plan to merge with an undetermined entity.

In addition to these requirements imposed on issuers and investors, the proposed rule requires that offerings exempt under this rule must be made exclusively through an Internet website operated by a registered general dealer, or a registered Texas crowdfunding portal. These crowdfunding portals will be required to register with the Texas Securities Board and will be subject to the following regulations:

  • the portals must contain a disclaimer that offerings are limited to Texas residents;
  • evidence of residency within Texas is required as a condition prior to viewing offering materials or completing a sale of securities;
  • the Securities Commissioner has access to the portal prior to the offerings; and
  • prior to permitting investments in securities listed on the portal, certain disclosures regarding lack of marketability of securities and other financial risks are made.

The portals are prohibited from the following activities:

  • offering investment advice or recommendations;
  • compensating employees or agents for soliciting sales of securities offered through a portal;
  • holding, managing, possessing, or otherwise handling investors funds;
  • being affiliated with or under common control with an issuer whose securities appear on the portal;
  • holding a financial interest in any issuer offering securities through a portal;
  • or receiving a financial interest in an issuer as compensation for services provided to an issuer.

Under the proposed rule, portals are also required to conduct background and regulatory investigations of the issuers and “control persons” (officers, directors and individuals holding more than 20% of the outstanding equity of the issuer) prior to offering an issuer’s securities for sale.

The Texas Securities Board has continued to move forward with its proposal that would authorize such activity in Texas. Commissioner Morgan has thoughtfully engaged the banking industry, community and business leaders, and others in developing a workable, business-friendly model that should provide a new source of capital for small businesses throughout the state of Texas. The proposed rules will particularly benefit small and rural communities that typically do not attract the attention of the investment community, but whose businesses and communities nevertheless have growth development needs and opportunities that crowdfunding may be able to address. The Board is presently scheduled to consider the proposed rules in its meeting on August 28th.  If adopted, the rules will become effective in late September after publication in the Texas Register.  The Board will maintain a website that will provide detailed information on the rules and other topics affecting issuers, portals, and investors.  A list of registered portals will be included on the website. 

Several firms are preparing to file regulatory applications for the creation of crowdfunding portals which would review business proposals from entities seeking to raise capital utilizing this new exemption.  The portals will manage websites through which the securities would be issued. The proposed rules outline straightforward and relatively simple disclosure requirements for the portals, referred to as an issuer in the proposed rules, as well as the businesses seeking to raise capital from the public.

Presumably, most candidates for crowdfunding would be local businesses, which would be well known to people in a community and, in fact, could provide goods and services that an “investor” might know, understand, and utilize, themselves. Examples of such local investments could include a local restaurant, health clinic, contractor, or even a bank; however, an investment could come from anywhere in the state of Texas under the proposed rule.

The Texas rule provides that funds invested through the portals in a particular company must be escrowed in a Texas-based state or national bank until the offering is completed under the announced terms and conditions. The issuer will contract with a bank for escrow services and direct the bank to transfer the funds to the business seeking the funds once the offering is complete. If the offering were to fail under its terms, the funds would be returned to the investors according to the terms of the offering. A bank serving in this role is performing a ministerial function and is not responsible for qualifying the proposed investment or the underlying business.

While the current proposal provides for a maximum offering of $1 million, we are hopeful that the rule will be expanded to increase the size of exempt offerings as well as the maximum amount of a single investor’s investment, as the crowdfunding model and its investors mature and gain experience. It is estimated that over $30 billion has been raised nationwide by crowdfunding among accredited investors. As such, this appears to be a tremendous new and modern way to raise capital using the internet.

Texas bankers need to be aware of this fast-approaching phenomenon. In addition to serving as escrow agent, banks could potentially offer crowdfunding solutions as a new source of capital for their customers.

Next Steps for Crowdfunding Candidates

Texas businesses, new or existing, who desire to access capital funding via a crowdfunding portal will need to prepare written materials as required by the rules which will be posted on a portal at least 21 days before an offering can commence.  The disclosure statement required by the rule contains very specific categories of information including, among other things, a summary of the offering terms, a description of the entity, its business plan, history, use of proceeds, directors, officers, principal shareholders, financials, and any other material information and risk factors. The rule is intended to permit an abbreviated, and potentially less costly, form of disclosure document than would be typical for a private placement under Regulation D, for example. Nevertheless, the same obligations under the Texas Securities Act apply to an offering under the crowdfunding rules. Issuers must provide accurate and complete information that is not misleading and does not omit information which could be considered material in light of certain circumstances under which they were made.  Liability for misstatements is nevertheless significant, and as such, counsel experienced in securities law and preparation of public and private offering documents should be engaged by the issuer.

Written by Patrick J. Kennedy, Jr. and William Sutherland, VIFeatured on August 28th in the San Antonio Express News

Kennedy Sutherland to Speak at Bank Holding Company Association's Seminar

Patrick J. Kennedy, Jr., managing partner of Kennedy Sutherland LLP, will be speaking at the Bank Holding Company Association’s Fall Seminar scheduled for October 6-7 at the Minneapolis Airport Marriott Hotel. Mr. Kennedy will be speaking at the Breakout session on Tuesday on Access to Capital and other Subchapter S Bank Issues for bank holding companies. You can register for the conference here.

BHCA FALL SEMINAR 2014 AGENDA

MONDAY, Oct. 6, 2014

5:00 p.m. to 6:30 p.m.   ~   Registration and reception
6:30 p.m. to 8:30 p.m.   ~   Dinner and program

“Leadership Lessons from Two World Series” Al Newman played for the Minnesota Twins from 1987 to 1991, just long enough to play in two World Series. The switch-hitter filled in where needed, including second base, third base, shortstop and left field. In 1990, he was part of a record-setting two triple plays in a single game. Also playing for the Expos and Rangers, Newman concluded his career as a coach. In addition to stories from the baseball diamond, Newman will share ideas for converting his experiences into useful leadership lessons.

TUESDAY, Oct. 7, 2014   ~    General Session

7:30 a.m. to 8:30 a.m.   ~   Registration/breakfast
8:15 a.m. to 8:30 a.m.   ~   Annual BHCA Business Meeting

8:30 a.m. to 9:30 a.m.             

“Behind the M&A Headlines” Steven P. Kent, president of River Branch Capital, LLC, Chicago, will take us beyond the press releases and newspaper stories in a comprehensive look at the bank mergers and acquisitions scene. Planning to buy or sell a bank, branch or holding company? Kent will describe the current market, analyze the trends and offer ideas about how to succeed in an M&A marketplace that seems to be heating up. Prior to joining River Branch Capital, Kent was Managing Director at Keefe, Bruyette & Woods, Inc., for 13 years.

9:30 a.m. to 10:30 a.m.           

“The Tech-Savvy Board: Helping Directors Understand Technology” Jack Vonder Heide, president of Technology Briefing Centers, Inc., Chicago, leads this information-packed session designed for your directors and senior management. IT risk and strategy has become more consequential as customers migrate to electronic delivery channels. New laws, guidance and regulations require a higher level of board and senior management focus on IT. Vonder Heide provides an easy-to-understand overview of current and emerging bank technology issues with a practical assessment of their benefits and risks.

11:00 a.m. to Noon  ~   Breakout Sessions: Choose from four timely topics listed below.

12:15 p.m. to 12:45 p.m.  ~   Lunch

1:00 p.m. to 1:45 p.m.              

“Surveying the Economic Landscape” Laura Kalambokidis, the new state economist for Minnesota, will share her thoughts on current economic conditions, including taxes, labor markets, interest rates and more from a national, regional and state perspective. Kalambokidis, a professor in the Department of Applied Economics with the University of Minnesota, is an expert on public sector economics and tax policy issues.

2:00 p.m. to 3:00 p.m.            

“Forecast for Weathering Today’s Business Environment” Paul Douglas, former KARE 11 and WCCO television personality, is a nationally respected meteorologist at WeatherNation TV, a new 24/7 weather channel. Founder of Media Logic Group, Douglas and his colleagues provide weather services for a variety of media outlets. A scientist and an entrepreneur, Douglas will share insights based on his experience working in a high-visibility, drastically-changing industry, as well as starting his own businesses.

TUESDAY’S Breakout Sessions

Session A       “Turn Risk into Rewards: How to Avoid Regulatory-Inspired Mediocrity”
New regulatory requirements are fundamentally changing the way bank managers develop risk/reward strategies for their organizations. Bart Smith of Performance Trust Capital Partners, Chicago, will share insights into the regulatory process and discuss keys for managing regulatory issues. Smith is a former senior manager with the FDIC.

Session B      “Bitcoin: Opportunity, Risk or Fad?
We’ve all heard of Bitcoin, but how many of us can explain what it is and how it works? In this session, George Meinz and Hailey Hollenhorst of the Gray Plant Mooty (St. Cloud, Minn.) law firm will provide a primer, with comments about how this open-source payments system might affect your bank.

Session C       “Deal Closed, Now What?”
The accounting and legal work in a bank merger or acquisition transaction is not complete at the end of the closing. What happens as the acquirer begins to merge two sets of books into one? What balance sheet implications should be considered before a potential buyer even considers a deal? Douglas Winn and Brenda Lidke of the Wilary Winn Risk Management firm in St. Paul, walk us through the post-merger accounting implications of a bank M&A transaction.

Session D      “Access to Capital and Other Subchapter S Issues”
While offering tax advantages, subchapter S incorporation status raises unique issues which can affect an organization’s ability to raise capital. Patrick J. Kennedy, Jr. of the Kennedy Sutherland LLP law firm of San Antonio, Texas, will look at the issues specific to subchapter S bank holding companies and banks.

Federal Reserve Board Request Comment on Proposed Repeal of Regulation AA

The Federal Reserve Board (FRB) has requested comment on a proposal to repeal its Regulation AA, 12 CFR part 227, which was issued pursuant to its
rule writing authority under section 18(f)(1) of the Federal Trade Commission Act. Section 1092(2) of the Dodd-Frank Act repealed section 18(f)(1) of the FTC Act, thus
eliminating the Board’s authority to write rules that address unfair or deceptive acts or practices, which are contained in Regulation AA.  Regulation AA includes the Board’s “credit practices rule,” which prohibits banks from using certain remedies to enforce consumer credit obligations and from including these remedies in their consumer credit contracts.

In connection with the Fed proposal, interagency guidance was issued clarifying that the repeal of the credit practices rules applicable to banks, savings associations, and federal credit unions is not a determination that the prohibited practices contained in those rules are permissible. The regulators believe the practices described in the former credit practices rules could potentially violate the prohibition against unfair or deceptive practices under the Federal Trade Commission Act and Dodd-Frank Act, even in the absence of a specific regulation governing the conduct.

OCC Issues Merchant Processing Booklet

On August 20, the Office of the Comptroller of Currency (OCC) released an updated booklet providing guidance to examiners and bankers on assessing and managing the risks associated with merchant processing activities. The booklet replaces the earlier version issued in December 2001. The booklet addresses a variety of topics including:

  • Selection of third-party organizations and due diligence.
  • Technology service providers.
  • On-site inspections, audits, and attestation engagements, including the “Statement on Standards for Attestation Engagement” (SSAE 16) and the “International Standard on Assurance Engagements” (ISAE 3402).
  • Data security standards in the payment card industry for merchants and processors.
  • member alert to control high-risk merchants (MATCH) list.
  • Bank Secrecy Act/Anti-Money Laundering compliance programs and appropriate policies, procedures, and processes to monitor and identify unusual activity.
  • Appropriate capital for merchant processing activities.

Updated Booklet.

Congressmen Urge SEC to Implement Crowdfunding Rules

On August 8, 2014, twenty-six Congressmen sent a letter to Securities and Exchange Commission (SEC) Chair Mary Jo White urging her to complete the “crowdfunding” rulemaking process as soon as practicable. The JOBS Act, which passed both houses of Congress with broad bipartisan support and was signed into law by President Obama on April 5, 2012, required the SEC to promulgate rules relating to these “crowdfunding” provisions by the end of 2012. The letter was constructed by Representatives Jared Polis (CO), Darrell Issa (CA), Scott Peters (CA) and Vern Buchanan (FL), co-chairs of the House Innovation and Entrepreneurship Caucus.

“A key feature of the JOBS Act was Title III, which was supposed to reduce the burdens and hurdles for US startups and entrepreneurs to gain access to critical new sources of capital from more modest investors,” the Representatives wrote. “Due in large part to the lack of finalized federal rulemaking, states are now leading the way, harnessing the power of new technologies to connect entrepreneurs with investors.”

“Crowdfunding” is a method of raising capital that aggregates many small contributions from donors who believe in the idea or business. This often allows innovative, disruptive start-ups and businesses access to funding that would have been more difficult or impossible to obtain from traditional sources. The SEC has now missed their legal deadline to promulgate these rules by more than 500 days.

Currently, at least seven states have enacted crowdfunding legislation and many others are considering such legislation, relying on the Securities Act intrastate exemption.

The signed letter is available here.

CDFI Fund Opens 2014 New Markets Tax Credit Program

The Community Devleopment Financial Institutions (CDFI) Fund today released the notice of allocation availability (NOAA) opening the next round of competition under the New Markets Tax Credit (NMTC) program. Electronic applications must be received by 5:00 pm ET on October 1, 2014. Through this NOAA, the CDFI Fund announces the availability of up to $5.0 billion of NMTC investment authority, subject to Congressional authorization. The CDFI Fund will not provide NMTC allocation authority to Applicants that are not certified as CDEs or to entities that are certified as Subsidiary CDEs. If an Applicant that has already been certified as a CDE wishes to change its designated CDE service area, it must submit its request for such change to the CDFI Fund, and the request must be received by the CDFI Fund by 5:00 pm ET on August 22, 2014. The CDFI Fund announced it will conduct two one-hour conference calls to answer applicant questions on Aug. 12 and 14. They further state that, “Applicants must be aware that success in a prior application or allocation round of any of the CDFI Fund’s programs is not indicative of success under this NOAA.”

Learn more on how to qualify and criteria for allocation