S.D. Admin. R. 20:08:07:27 - Testing-the-waters exemption

Solicitations of interest prior to filing with the division is allowed if there is compliance with this section.

(1) An offer, but not a sale, of a security made by or on behalf of an issuer for the sole purpose of soliciting an indication of interest in receiving a disclosure document or prospectus (or its equivalent) for such security is exempt from SDCL 47-31B-301 if all of the following conditions are satisfied:

(a) The issuer intends to conduct its offering in this state pursuant to the intrastate limited offering rule, § 20:08:07:25.

(b) Ten business days prior to the initial solicitation of interest under this rule, the issuer files with the director a Solicitation of Interest Form along with any other materials to be used to conduct solicitations of interest, including the script of any broadcast to be made and a copy of any notice to be published,

(c) Five business days prior to usage, the issuer files with the director any amendments to the foregoing materials or additional materials to be used to conduct solicitations of interest, except for materials provided to a particular offeree pursuant to a request by that offeree.

(d) No Solicitation of Interest Form, script, advertisement, or other material which the issuer has been notified by the director not to distribute is used to solicit indications of interest.

(e) Except for scripted broadcasts and published notices, the issuer does not communicate with any offeree about the contemplated offering unless the offeree is provided with the most current Solicitation of Interest Form at or before the time of the communication or within five days from the communication.

(f) During the solicitation of interest period, the issuer does not solicit or accept money or commitment to purchase securities.

(g) No sale is made until seven days after delivery to the purchaser of a final disclosure document or prospectus, or in those instances in which delivery of a preliminary prospectus is allowed hereunder, a preliminary prospectus.

(h) The issuer does not know, and in the exercise of reasonable care could not know that the issuer or any of the issuer's officers, directors, ten percent shareholders, or promoters:

(1) Has filed a registration statement which is the subject of a currently effective registration stop order entered pursuant to any federal or state securities law within five years prior to the filing of the Solicitation of Interest Form.

(2) Has been convicted within five years prior to the filing of the Solicitation of Interest Form of any felony or misdemeanor in connection with the offer, purchase, or sale of any security or any felony involving fraud or deceit, including forgery, embezzlement, obtaining money under false pretense, larceny, or conspiracy to defraud.

(3) Is currently subject to any federal or state administrative enforcement order or judgment entered by any state securities administrator or the Securities and Exchange Commission within five years prior to the filing of the Solicitation of Interest Form or is subject to any federal or state administrative enforcement order or judgment entered within five years prior to the filing of the Solicitation of Interest Form in which fraud or deceit, including making untrue statements of material facts and omitting to state material facts, was found.

(4) Is subject to any federal or state administrative enforcement order or judgment which prohibits, denies, or revokes the use of any exemption from registration in connection with the offer, purchase, or sale of securities.

(5) Is currently subject to any order, judgment, or decree of any court of competent jurisdiction temporarily or preliminarily restraining or enjoining, or is subject to any order, judgment, or decree of any court of competent jurisdiction, permanently restraining or enjoining, such party from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of any false filing with the state entered within five years prior to the filing of the Solicitation of Interest Form. The prohibitions listed above do not apply if the person subject to the disqualification is duly licensed or registered to conduct securities related business in the state in which the administrative order or judgment was entered against such person or if the broker-dealer employing such party is licensed or registered in this state and the form B-D filed with this state discloses the order, conviction, judgment, or decree relating to such person. No person disqualified under this subsection may act in a capacity other than that for which the person is licensed or registered. Any disqualification caused by this section is automatically waived if the agency which created the basis for disqualification determines upon a showing of good cause that it is not necessary under the circumstances that the exemption be denied.

(2) A failure to comply with any condition of subsection (1) of this rule will not result in the loss of the exemption from the requirements of SDCL 47-31B-301 for any offer to a particular individual or entity if the issuer shows:

(a) The failure to comply did not pertain to a condition directly intended to protect that particular individual or entity;

(b) The failure to comply was insignificant with respect to the offering as a whole; and

(c) A good faith and reasonable attempt was made to comply with all applicable conditions of subsection (1).

If an exemption is established only through reliance upon this subsection (2), the failure to comply shall nonetheless be actionable as a violation of SDCL chapter 47-3IB by the director under SDCL 47-31B-603 and constitutes grounds for denying or revoking the exemption as to a specific security or transaction.

(3) The issuer shall comply with the requirements of this subsection (3)(a) and (b), inclusive. Failure to comply will not result in the loss of the exemption from the requirements of SDCL 47-31B-301, but shall be a violation of SDCL chapter 47-31B, be actionable by the director under SDCL 47-31B-603, and constitute grounds for denying or revoking the exemption as to a specific security or transaction.

(a) Any published notice or script for broadcast must contain at least the identity of the chief executive officer of the issuer, a brief and general description of its business and products, and the following legends:

(1) NO MONEY OR OTHER CONSIDERATION IS BEING SOLICITED AND NONE WILL BE ACCEPTED;

(2) NO SALES OF THE SECURITIES WILL BE MADE OR COMMITMENT TO PURCHASE ACCEPTED UNTIL DELIVERY OF A DISCLOSURE DOCUMENT OR PROSPECTUS THAT INCLUDES COMPLETE INFORMATION ABOUT THE ISSUER AND THE OFFERING;

(3) AN INDICATION OF INTEREST MADE BY A PROSPECTIVE INVESTOR INVOLVES NO OBLIGATION OR COMMITMENT OF ANY KIND; and

(4) THIS OFFER IS BEING MADE PURSUANT TO THE INTRASTATE EXEMPTION FROM REGISTRATION. NO SALE MAY BE MADE UNTIL THE DISCLOSURE DOCUMENT IS QUALIFIED PURSUANT TO SDCL CHAPTER 47-3 IB.

(b) All communications with prospective investors made in reliance on this rule must cease after a registration statement is filed in this state, and no sale may be made until at least 20 calendar days after the last communication made in reliance on this rule.

(4) The director may waive any condition of this exemption in writing, upon application by the issuer and cause having been shown. Neither compliance nor attempted compliance with this rule, nor the absence of any objection or order by the director with respect to any offer of securities undertaken pursuant to this rule, shall be deemed to be a waiver of any condition of the rule or deemed to be a confirmation by the director of the availability of this rule.

(5) Offers made in reliance on this rule will not result in a violation of SDCL 47-31B-301 by virtue of being integrated with subsequent offers or sales of securities unless such subsequent offers and sales would be integrated under federal securities laws.

(6) All communications made in reliance on this rule are subject to the anti-fraud provisions of SDCL chapter 47-3 IB.

(7) The director may or may not review the materials filed pursuant to this rule. Materials filed, if reviewed, will be judged under anti-fraud principles. Any discussion in the disclosure documents of the potential rewards of the investment must be balanced by a discussion of possible risks.

(8) Any offer effected in violation of this rule may constitute an unlawful offer of an unregistered security for which civil liability attaches under SDCL 47-31B-509. Likewise any misrepresentation or omission may give rise to civil liability. Under SDCL chapter 47-3 IB, a subsequent registration of the security for the sale of the security does not cure the previous unlawful offer. Only a rescission offer made in accordance with the provisions of SDCL 47-31B-510 can accomplish such a cure.

(9) Issuers on whose behalf indications of interest are solicited under this rule may not make offers or sales in reliance on SDCL 47-31B-202(14), until six months after the last communication with a prospective investor made pursuant to this rule.

(10) There is no fee required for the filing of notice for this section.

Notes

S.D. Admin. R. 20:08:07:27

28 SDR 48, effective October 10, 2001; 30 SDR 211, effective July 1, 2004; 43 SDR 80, effective 12/6/2016

General Authority: SDCL 47-31B-203, 47-3IB-605(a)(1), 47-31B-605(a)(3), 47-31B-605(b).

Law Implemented: SDCL 47-31B-203.