Capital Raising in Florida — It’s a New Ballgame
For many years, Florida-based businesses seeking to raise capital within Florida were faced with a Florida securities statute that was out of date and far too limiting for intrastate capital-raising opportunities. Fortunately, thanks to a multi-year collaboration between the Business Law Section of The Florida Bar and Florida’s Office of Financial Regulation (OFR), legislation enacted in 2023 and 2024[1] significantly amended Ch. 517, the Florida Securities and Investor Protection Act, Florida’s securities statutes. Effective October 1, 2024, Ch. 517 allows for both increased opportunities for Florida-based businesses to raise capital within Florida and strengthened licensing and anti-fraud provisions.
Drawing from the best capital funding legislative concepts from other states, the Uniform Securities Act of 2002, and rules of the Securities and Exchange Commission, the statutory amendments fall into three principal areas: 1) registration, licensing, and regulatory reform; 2) expanded registration exemptions and marketing opportunities; and 3) additional investor protection and enforcement measures. The reform effort also updated language and citations throughout the chapter and consolidated certain sections to make the chapter easier to navigate. This article briefly describes reform measures, with the caveat that such descriptions are not a substitute for examination of the statutes themselves.
Administrative and Registration Changes
• Securities Issuers — Florida’s securities statute was cemented in the late 1980’s and early 1990’s to stop penny stock fraud and abusive offerings to the senior citizen population. While arguably successful in its aim, such measures also prevented small company capital formation, investment opportunities, and job growth. For example, Florida required some securities issuers and certain associated persons of issuers to be registered with the OFR as dealers and associated persons, respectively.[2] Such registration requirements were not mandated in most states and were duplicative for issuers conducting registered offerings in Florida. Another restriction aimed at smaller issuers required issuers to impound securities contingent on a milestone being reached, such as the receipt of a patent.[3] The reform legislation removed such impediments.
The legislation also reduced the filing fee for Florida’s small company offering registration (SCOR) registration from $1,000 to $200.[4] The SCOR offering limit remains unchanged at $5 million. However, SCOR registrants are no longer required to submit annual financial reports or audited financial statements to the OFR.[5] These requirements were costly for small issuers and illogically incentivized the use of non-registered offerings that did not impose reporting requirements.
• Registration of Investment Advisers and Associated Persons — A most significant change to the registration requirements is the reduction to six Florida-resident clients in the preceding 12 months as the threshold for investment adviser registration.[6] Chapter 517 previously contained an exemption from registering as an investment adviser if such person had no more than 15 clients in 12 consecutive months.[7] This change brings Florida closer to a majority of states that have reduced their client threshold requirement to register. Private fund advisers are exempted from the registration requirement,[8] and government entities providing investment adviser services are exempted from the definition of “investment adviser.”[9]
Modeled after similar industry requirements for associated persons of dealers, a continuing education requirement is now imposed on the associated persons of investment advisers and federally covered advisers.[10] Twelve education credits are required annually. Of these, six credits must address ethical and regulatory obligations and six credits must address product knowledge and industry practices. The effect of the new statutory continuing education requirement is amplified by new administrative regulations issued by Florida’s Financial Services Commission. Compliance with the education requirement enables an associated person in good standing with the OFR to extend for five years the time that they must take a qualifying examination after a termination of employment from their most recent investment adviser.[11] Without the education-based time extension, investment adviser associated persons had a two-year window to gain employment with a registered investment adviser and place one’s license.
The grounds for revocation, denial, or suspension of registration dealers, investment advisers, intermediaries, or associated persons have also been modified. The vague standards of “unworthiness to transact business” and “of bad business repute” are no longer bases for regulatory sanctions.[12] However, F.S. §517.161 was amended to add failure to pay, or attempting to avoid paying, certain final judgments, arbitration awards, fines, civil penalties, orders of restitution and disgorgement, or similar monetary payment obligations, as grounds for denying, suspending, or revoking a registration.
Registration Exemptions and Marketing Opportunities
The most far-reaching reform measures involved expanded capital-raising opportunities within the state, particularly for small and developing business. Prior to the current amendments, a Florida-based business seeking to raise capital locally faced severe constraints under Florida’s securities statute. The only registration exemptions available were: 1) an exemption limited to accredited investors and no more than 35 non-accredited investors that prohibited general advertising or solicitation;[13] or 2) a so-called “crowdfunding” exemption so loaded with technical requirements that it was never used.[14] Florida’s securities statute was mired in outdated and restrictive provisions that substantially hampered Florida businesses from raising capital exclusively within Florida under the federal intrastate registration exemption.
Reform proposals over the years by the Business Law Section of The Florida Bar to ease the restrictions on capital-raising were uniformly met with resistance from state administrators who argued against enlarging the opportunity for potential abusive offerings aimed at our senior population. A new day dawned when new leadership in the OFR advocated for both improving the capital-raising opportunities for local businesses, as well as meeting investor protection concerns.[15] A multi-year process of analysis and cooperation between the OFR and the Business Law Section led to the substantial reform measures.[16]
• The New Limited Offering Exemption — Florida’s useless crowdfunding exemption was scrapped in favor of a newly named Limited Offering Exemption that allows a $5 million intrastate offering open to an unlimited number of accredited and non-accredited investors.[17] The principal elements of the exemption are:
1) An offering up to $2.5 million may, but is not required, to be conducted through a registered dealer or registered intermediary.[18]
2) Issuers may engage in general advertising and solicitation, with any material misstatements or omissions being subject to the statute’s antifraud enforcement provisions.
3) There is no limit on the number of accredited and non-accredited investors.
4) Non-accredited investors can purchase up to $10,000 of the securities in a 12-month period. There is no investment limitation for accredited investors.
5) A disclosure document, including financial statements, must be submitted in advance to the OFR and to all prospective investors.
6) A target amount of investments must be set and disclosed. All investor funds must be deposited in a federally-insured bank authorized to do business in Florida until the target amount has been reached. The offering must be terminated, with the return of all investor funds, if the target amount is not reached within one year.
7) The exemption can be used only by for-profit entities except so-called “blank-check” companies with undefined business operations.[19]
• The New Invest Local Exemption — For businesses seeking small amounts of capital, a “micro-offering” intrastate exemption for offerings up to $500,000 was created.[20] The principal elements include:
1) The offering may but need not be conducted through a registered dealer or intermediary.
2) Issuers may engage in general advertising and solicitation, with any material misstatements or omissions being subject to the statute’s antifraud enforcement provisions.
3) There is no limit on the number of accredited and non-accredited investors.
4) Non-accredited investors can purchase up to $10,000 of the securities in a 12-month period. There is no investment limitation for accredited investors.
5) A disclosure document must be submitted in advance to the OFR and to all prospective investors.
6) A target amount of investments must be set and disclosed. All investor funds must be deposited in a federally-insured bank authorized to do business in Florida until the target amount has been reached. The offering must be terminated, with the return of all investor funds, if the target amount is not reached within 180 days.
7) The exemption can be used only by for-profit entities except so-called “blank-check” companies with undefined business operations.
• The New Accredited Investor Exemption — Florida businesses may now undertake a simplified intrastate offering limited to accredited investors.[21] The exemption is based on the model developed by the North American Securities Administrators Association and adopted by a majority of states. The principal elements of the exemption are:
1) Offers and sales are made only to persons who are, or who the issuer reasonably believes are, accredited investors.[22]
2) The issuer reasonably believes that all purchasers are purchasing for investment purposes and not for selling or transferring the securities within 12 months.
3) The issuer can engage in general advertising of the offering and general solicitation to persons reasonably believed to be accredited investors. The fact that a general announcement may be disseminated to persons who are not accredited investors does not invalidate the exemption.
4) The exemption is not available to so-called “blank-check” companies with undefined business operations.
• Testing the Waters — Florida will now allow companies to test the waters before undertaking an offering to determine whether the time, expense, and scope of an offering would be worthwhile.[23] The testing can only be done prior to the start of an offering and solely for the purpose of determining whether there may be any potential investor interest if the company subsequently engages in a securities offering. The statutory requirements for the testing process are:
1) The solicitation or acceptance of money or other consideration or of any commitment, binding or otherwise, from any person is prohibited.
2) Any written or oral statements made by the issuer are subject to antifraud enforcement provisions.
3) The company can provide a means by which a person can indicate a potential interest, including the person’s name and contact information, but any communication must state that a person’s indication of interest does not involve an obligation or commitment of any kind.
4) Communications made in accordance with the rules are not deemed to constitute general advertising or solicitation of a securities offering.
• “Demo-Day” Presentations —The reform legislation adopted the substance of federal Rule 148 that allows issuers to participate in carefully structured seminars and meetings at which they can describe their offerings.[24] This can be an important way for companies to get their names before potential investors. The principal elements of this opportunity are:
1) The seminar or meeting must be sponsored by an institution of higher learning, a state or local government entity, a nonprofit organization, or an angel investor group.
2) Advertising for the meeting cannot reference any specific securities offering.
3) More than one issuer participates.
4) The meeting’s sponsor cannot make any investment recommendations or advice or receive any compensation for making introductions between issuers and attendees.
5) An issuer can only communicate that it is in the process of planning or offering a security, the type and amount of securities offered, the intended use of proceeds, and the unsubscribed amount of an offering.
• Revision to Integration of Offerings Provisions — The integration concept in securities offerings can be a difficult problem for small businesses that often need to raise capital on a frequent and unplanned schedule.[25] Fortunately, the integration problem at the federal level was significantly eased by adoption of federal Rule 152.[26] The Florida legislation substantially adopted the Rule 152 provisions and created integration safe harbors for most Florida-based offerings.[27]
• Revision of the Three-Day Voidability Provision — Florida’s unusual voidability provision contained in its principal registration exemption allowed investors to rescind their investment within three days of the latter of 1) the first tender of consideration made by such purchaser, or 2) the availability of the rescission privilege being communicated to such purchaser. This was an enormous trap for the unwary. For an issuer that failed to advise a purchaser of the rescission right, the purchaser’s right to rescind continued indefinitely. If the investment turned out to be less than ideal, many investors could demand their money back based on this rescission provision. The reform legislation remedied this draconian result by limiting the purchaser’s right to rescind the purchase to within three days of the first tender of consideration.[28]
The above descriptions explain the major changes to the exemption and marketing provisions. Many other changes in clarification and substance were made. For example, an exemption was created for the sale and transfer of securities in any cooperative organized under state law or recognized as a cooperative under the Internal Revenue Code.[29] Previously, registration exemptions existed only for agricultural and residential cooperatives. One exemption was deleted from the statute, namely for notes of $25,000 or more with a maturity not exceeding nine months.[30] Experience showed that this exemption had been used abusively in some circumstances and is not necessary given the existence of other more protective exemptions.
Investor Protection and Enforcement Provisions
• Securities Guaranty Fund — Florida’s Securities Guaranty Fund (the fund) provides financial assistance to persons who are adjudged by a court to have suffered monetary damages as a result of a violation of F.S. Ch. 517’s securities registration or anti-fraud provisions, §§517.07 and 517.301, committed by a dealer, investment adviser, or associated person who was licensed by the OFR at the time the act was committed.[31] Section 517.131 was amended and clarified to require that a person meet the following conditions to be eligible for payment from the fund:
1) The person holds an unsatisfied final judgment in which a wrongdoer was found to have violated §§517.07 or 517.301;
2) the person has applied any amounts recovered from the judgment debtor or from any other source to the damages awarded by the court or arbitrator; and
3) the person is a natural person who was a resident of this state, or is a business entity that was domiciled in this state, at the time of the violation giving rise to the claim.[32]
The statute was also amended to prohibit a person from being eligible for payment from the fund if the person 1) participated or assisted in a violation of F.S. Ch. 517; 2) attempted to commit or committed a violation of F.S. Ch. 517; or 3) profited from a violation of F.S. Ch. 517.[33]
The application process was amended to require that an eligible person, or a receiver on behalf of an eligible person, seeking payment from the fund must file a written application with the OFR within one year after the date of the final judgment, the date on which restitution order has been ripe for execution, or the date of any appellate decision thereon.[34] The OFR must make a determination on an application for payment from the fund within 90 days of receiving a complete application.[35] The OFR must submit authorization for payment to Florida’s chief financial officer within 30 days after the approval of an eligible person for payment from the fund.[36]
The amount that an eligible person may recover from the fund was increased from $10,000 to $15,000, or $25,000 if the victim is a natural person 65 years of age or older or a specified vulnerable adult.[37] The aggregate limit on claims against one wrongdoer was increased from $100,000 to $250,000.[38] The statute was also amended to provide that a claimant seeking payment from the fund who knowingly and willfully files or causes to be filed an application or documents supporting the application, any of which contain false, incomplete, or misleading information in any material aspect, forfeits all payments from the Securities Guaranty Fund and commits a violation of Florida’s anti-fraud statute.[39]
• Enforcement by the Office of Financial Regulation — The new legislation increased the maximum civil and administrative penalty for a natural person found to be in violation of F.S. Ch. 517, or the rules promulgated thereunder, from $10,000 to $20,000, and that such penalty is the greater of the specified amount or the amount of any pecuniary loss to the investor or pecuniary gain to a business entity.[40] Further, the penalty will be twice the amount that would otherwise be imposed if a specified adult is a victim of such violation.[41] The statute now allows the OFR to recover any costs and attorneys’ fees related to the office’s investigation or enforcement in civil cases.[42] This section was also amended to hold aiders, abettors, and any other person who knowingly or recklessly provides substantial assistance liable to the extent they have been found in violation of F.S. Ch. 517.[43] Section 517.211 was revised to hold control persons liable to the same extent as their controlled persons.[44] The antiquated definition of “boiler room” was modernized beyond telephone communications to include electronic mail, text messages, social media, chat rooms, and other electronic means of communication.[45]
Conclusion
The Florida Securities and Investor Protection Act sets forth important requirements for companies raising capital in this state and for dealers and investment advisers doing business in Florida. The reform measures adopted in the past two legislative sessions have significantly improved and clarified exemption, registration, and enforcement standards. As securities lawyers know, however, the securities industry is a constantly changing set of standards and interpretations. The amendments to F.S. Ch. 517 are highly beneficial, but the Florida Securities and Investor Protection Act will require continuing evaluation and reform.
[1] Florida Senate bills 180 and 532, signed by Gov. DeSantis in 2023 and 2024, respectively, amend Ch. 517, Laws of Fla., Florida Securities and Investor Protection Act.
[2] Prior Fla. Stat. §§517.12(1) and 517.021(6)(a)2.
[3] Prior Fla. Stat. §517.181.
[4] Fla. Stat. §517.081.
[5] Id.
[6] Fla. Stat. §517.021(16)(b)(7).
[7] Prior Fla. Stat. §517.021(14)(b)(7).
[8] Fla. Stat. §517.12(22).
[9] Fla. Stat. §517.021(9).
[10] Fla. Stat. §517.1214.
[11] Fla. Admin. Code R. 69W-600.0024(6)(e) (2024).
[12] Fla. Stat. §517.161.
[13] Prior Fla. Stat. §517.061(11). As part of the reform measures, the statutory numbering of registration exemptions was revised into a more subject-matter manner, e.g., issuer exemptions that do not raise capital, followed by issuer capital-raising exemptions, followed by securities sales by non-issuers. The exemption formerly in §517.061(11) is now in §517.061(10).
[14] Prior Fla. Stat. §517.0611. A federal crowdfunding exemption allowing for internet solicitation and marketing to numerous smaller investors was adopted in 2012 by adding §4(a)(6) to the Securities Act of 1933. Despite hopes that the exemption would provide a viable means for small companies to raise capital, the federal exemption is fraught with numerous technical requirements and limitations. As a result, many states have adopted their own intrastate crowdfunding exemption which allow for internet solicitations and avoid some of the more onerous federal requirements. Florida’s intrastate crowdfunding exemption and intermediary requirement adopted in 2015 simply mirrored the federal exemption with all of its requirements and limitations. As a result, the Florida exemption has never been used.
[15] The OFR, among its other responsibilities, regulates the securities industry within Florida. Commissioner Russell C. Weigel III, practiced securities law as a private attorney. He was well aware of the problems with Florida’s securities statute and made statutory reform a major project for the OFR.
[16] The Business Law Section of The Florida Bar formed a task force in 2022 to assist the OFR in the development of reform legislation. The OFR and the Business Law Section task force developed legislative proposals enacted in 2023 that dealt principally with administrative issues. In the following legislative session, the OFR and the Business Law Section task force drafted proposed legislation that set forth numerous substantive reform measures to Ch. 517. This piece of the reform legislation became effective October 1, 2024.
[17] Fla. Stat. §517.0611, as amended effective October 1, 2024. The term “crowdfunding” is not used to describe this exemption, although it has elements similar to a crowdfunding offering, such as use of the internet to attract a large number of small investors. However, to avoid any confusion with the prior amended exemption and the federal crowdfunding exemption, the revised exemption is referred to as a limited offering exemption.
[18] Offerings in excess of $2.5 million under this exemption are required to use a state registered dealer or intermediary. Fla. Stat. §517.0611(12)-(13) sets forth an intermediary’s duties. Fla. Stat. §517.12(19) sets forth an intermediary’s registration requirements.
[19] Fla. Stat. §517.0611(4)(d) (may not be a business entity that has an undefined business operation, lacks a business plan, lacks a stated investment goal for the funds being raised, or plans to engage in a merger or acquisition with an unspecified business entity).
[20] Fla. Stat. §517.0612.
[21] Fla. Stat. §517.061(11).
[22] The statute defines accredited investors consistent with the definition contained in federal Regulation D, Rule 501(a). For most small and developing businesses, the most likely accredited investors they might attract are 1) the issuer’s directors, executive officers, LLC managers or partners; 2) persons with a net worth, including their spouse or spousal equivalent, exceeding $1 million; 3) persons whose annual net income exceeds $200,000 or, with spouse or spousal equivalent, $300,000; and 4) entities, such as angel investor groups, all of whose members are accredited investors.
[23] Fla. Stat. §517.0615(b).
[24] Fla. Stat. §517.0615(a). The provision mirrors federal Rule 148, 17 C.F.R. 230.148, and provides that sponsorship or participation in the seminar or meeting does not by itself require state registration as a dealer.
[25] The integration doctrine, if applied, regards two or more offerings made within a general time frame and for similar purposes as one offering, and that one offering must meet all the requirements of a single exemption. The doctrine posed a substantial legal problem for companies that had to raise capital frequently and often in various disparate ways.
[26] SEC Rule 152, 17 C.F.R. §230.152.
[27] Fla. Stat. §517.0614.
[28] Mandatory disclosure to all investors of the rescission right was added to the exemption in Fla. Stat. §517.0610, the limited offering exemption in Fla. Stat. §517.0611, and the invest local exemption in Fla. Stat. §517.0612.
[29] Fla. Stat. §517.051(9).
[30] Prior Fla. Stat. §517.051(8).
[31] Fla. Stat. §517.131.
[32] Fla. Stat. §517.131(3).
[33] Fla. Stat. §517.131(4).
[34] Fla. Stat. §517.131(5).
[35] Fla. Stat. §517.131(6).
[36] Fla. Stat. §517.141(5).
[37] Fla. Stat. §517.141(2). A “specified adult” is defined in Fla. Stat. §517.34 as a natural person 65 years of age or older. A “vulnerable adult” is defined in Fla. Stat. §415.102(28) as a person 18 years of age or older whose ability to perform the normal activities of daily living or to provide for his or her own care or protection is impaired due to a mental, emotional, sensory, long-term physical, or developmental disability or dysfunction, or brain damage, or the infirmities of aging.
[38] Fla. Stat. §517.141(3).
[39] Fla. Stat. §517.141(9).
[40] Fla. Stat. §517.191(4)(a).
[41] Fla. Stat. §517.191(4)(b).
[42] Id.
[43] Fla. Stat. §517.191(5)-(6).
[44] Fla. Stat. §517.211.
[45] Fla. Stat. §517.021.
This column is submitted on behalf of the Business Law Section, Manny Farach, chair, and Daniel Etlinger and Kathleen L. DiSanto, editors.