U.S. Department of Energy Energy Efficiency and Renewable Energy

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March 05, 2013
Q.

Why can't people in Arizona participate in Solar Mosaic or similar crowd funding options for solar when folks in NY and California can? -Bruce

SunShot Solar Outreach Partnership

The SunShot Solar Outreach Partnership has been tasked with helping accelerate adoption of photovoltaic (PV) solar at the local level by providing timely and actionable information to local governments.

A.

The term crowd funding encompasses a number of scenarios for compiling a large number of relatively small investors or donors to fund various types of projects. Crowd funding or micro-funding often uses an online platform that enables community organizations to solicit funds from online communities. Crowd funding has been successfully deployed to raise funds for a variety of causes, including entrepreneurs (www.40billion.com), artists (www.kickstarter.com), local volunteers (www.ioby.org), and educational initiatives (www.donorschoose.org) to name a few. These types of programs can be donation based, non-profit based, or offer a return on investment. If these programs aim to offer their participants a return on investment, then state and federal securities laws will be triggered.

In January, 2013, Solar Mosaic offered a crowd funding opportunity for PV projects. Solar Mosaic offers investors an estimated 4.5% return on their investment and attracted four hundred investments within the first 24 hours of its launch – enough to fund three solar projects in California. The Company's SEC filing only allowed it to offer the first round of projects to unaccredited investors in New York and California (accredited investors from any state could participate). This geographic restriction on investment in Solar Mosaic appears to be a product of how the company has chosen to comply with applicable regulations of the U.S. Securities and Exchange Commission (SEC). Investments in Solar Mosaic projects are represented by "Solar Power Notes," which meet the definition of a "security" under the Securities Act of 1933 [see §2(a)(1)] and are therefore subject to SEC rules.[1] For public offerings, this Act generally requires the company file a registration statement containing information about itself, the securities it is offering, and the offering. Registration can be a burdensome and costly process, and it is therefore in a company’s interest to avoid it when they can.

The SEC offers several options for exempting a company from the registration process. Solar Mosaic offers its notes without registration according to an exemption granted by Rule 504 of Regulation D of the Act.[2] Also known as the "seed capital" exemption, Rule 504 provides an exemption from registration for the offer and sale of up to $1,000,000 of securities in a 12-month period. In general, this exemption (1) prohibits solicitation or advertising of the securities offered by the company, and; (2) requires that purchasers receive "restricted" securities, meaning they cannot resell them without registering with the SEC themselves. However, under certain circumstances, a company may advertise their offerings and sell non-restricted securities. Rule 504 does allow companies to sell securities that are not restricted, if one of the following circumstances is met: [3]

  1. "The company registers the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors;
  2. A company registers and sells the offering in a state that requires registration and disclosure delivery and also sells in a state without those requirements, so long as the company delivers the disclosure documents required by the state where the company registered the offering to all purchasers (including those in the state that has no such requirements); or
  3. The company sells exclusively according to state law exemptions that permit general solicitation and advertising, so long as the company sells only to "accredited investors.""[4]

Solar Mosaic appears to be operating under option 2 above. The State of California has its own securities laws and regulations, including a requirement that companies making offerings under Rule 504 register with the state. Under state rules, notes purchased by California residents are subject to restrictions on transfer [as per §260.141.11 of the California Code of Regulations]. In addition, California residents may only invest up to $2,500 before they become subject to state income or net worth requirements.[5] Given that Solar Mosaic is headquartered in California and that this state is the largest solar market in the nation, it makes sense that they have chosen California to satisfy the first geographic criterion above (i.e., "a state that requires registration and disclosure delivery"). As for the second geographic criterion, "a state without those requirements," only New York and the District of Columbia do not require registration of Rule 504 offerings.[6] We assume that New York was chosen over the District of Columbia because of its comparatively larger population.

Investors outside of CA and NY are theoretically able to purchase Solar Mosaic notes so long as they are an "accredited investor," [7] defined by the SEC as someone who has:

  • Income that exceeded $200,000 in each of the last two years or joint income with a spouse that exceeded $300,000 in each of those years, and has a reasonable expectation of reaching the same income level this year; or
  • Net worth (excluding equity in the primary residence), individually or jointly with a spouse that exceeds $1 million.

 

It remains to be seen whether Solar Mosaic or other similar organizations will make a solar crowd funding offering in Arizona or other states. In theory an organization could do so, so long as the offering is in compliance with applicable state and federal securities laws.

 

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