New Rules Under the Colorado Securities Act Now Effective

By Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C.

I. Introduction

The Colorado Securities Act, C.R.S. § 11-51-101 et seq. (“CSA”),is administered by the Securities Commissioner (C.R.S. § 11-51-701) subject to the oversight of the Colorado Securities Board (C.R.S. § 11-51-702.5(4)). The CSA, like securities acts in many other states has a broad applicability to “securities”and requires the availability of a registration or an exemption from registration before securities are offered or sold to investors in or from Colorado; it requires the licensing of broker-dealers, investment advisers, and their representatives involved in securities transactions in Colorado; and the CSA provides significant enforcement powers to the Commissioner including bringing cease and desist actions (C.R.S. § 11-51-606(1.5)), or civil or administrative enforcement actions (C.R.S. § 11-51-601, -602, and -606).  Under C.R.S. § 11-51-603, the Commissioner may refer evidence of a violation of the CSA that constitutes a felony or misdemeanor to the attorney general’s office or the appropriate district attorney for consideration of prosecution.

The Commissioner recently adopted rules interpreting the CSA which are found at 3 CCR 704-1, available through the Colorado Secretary of State’s website. C.R.S. § 24-4-103(11) requires that the Secretary of State maintain the official publication of the state’s administrative rules. The Securities Division has also maintained its “Notice of Proposed Rulemaking,” and “Draft Statement of Basis and Purpose” for the rulemaking (dated March 6, 2017), and the redlined rule changes as originally proposed on the Division of Securities website (Rulemaking Combined Notice_3-31-17.pdf, available at colorado.gov/pacific/dora/rulemaking-notices-opinions (last reviewed August 7, 2017).

On July 15, 2017, the new rules under the CSA became effective. While the republication included many unchanged rules, there were substantive updates as discussed below.

II. Rules Governing Exemptions from Registration of Securities

• C.R.S. § 11–51–308(1)(B)(l) provides an exemption for nonissuer transactions in securities which are listed in recognized securities manuals. Rule § 51–3.9 (Transactional Securities Exemption for Non-Issuer Distribution of Outstanding Security) identified a list of manuals for which the nonissuer transaction was available. In the amended rules:


• Standard & Poor’s Standard Corporation Descriptions was removed


• OTC Markets Group Inc. (with respect to securities included in the OTCQX and OTCQB markets) was included.


• C.R.S. § 11–51–308(1)(p) provides exemptions from registration for securities being issued under certain SEC regulations. Rule § 51–3.13 now includes a state exemption from registration for offerings made under Tier 2 of federal Regulation A and Section 18(b)(3) of the Securities Act of 1933. The new rule also updates initial filing requirements and submissions for any Reg A Tier 2 offerings, adds provisions allowing for additional twelve-month period renewals of Reg A Tier 2 offerings, and adds provisions allowing for amendments to increase the amount of securities offered under Reg A Tier 2.

III. Crowdfunding in Colorado

• When the Colorado Crowdfunding Act was adopted in 2015 ((H.B. 15-1246; amended H.B. 16-1049), it limited offerings to $1,000,000 (or $2,000,000 if audited financial statements were available for the issuer). C.R.S. § 11-51-308.5(3)(a)(XI) prohibits the crowdfunding exemption from being used in conjunction with other exemptions from registration under the CSA which offerings are part of a “single plan of financing.” Rule § 51–3.24(K) defines the term “single plan of financing” and lists factors to be considered when determining whether offers and sales should be regarded as part of a single plan of financing in a manner very similar to Rule 502(a) of Regulation D — providing clarity to the Colorado Crowdfunding Act.


• As originally adopted, the Colorado Crowdfunding Act required that offerings be made in accordance with SEC Rule 147 for intrastate offerings. In October 2016 the SEC adopted an additional rule for intrastate offerings, Rule 147A. Rule § 51-3.24(L) expanded the Colorado Crowdfunding Act to include offerings under federal Rule 147A.


• Federal Regulation CF (crowdfunding) is now available. While securities issued under the federal Rule (enacted pursuant to the JOBS Act of 2012) are “covered securities” and thus exempt from state review, states can require informational filings and payment of a fee. Rule § 51–3.31 imposes a filing requirement, the ability to renew a filing after twelve months, and a filing fee for federal crowdfunding offerings.

IV. Electronic Delivery of Offering Documents and Signatures.

• The Colorado rules, through the addition of § 51–3.32, now allows for delivery of offering documents over the Internet and allows for use of electronic signatures.

V. Broker-Dealer Regulation — Business Brokers and M&A Brokers and Cybersecurity Practices.

• Colorado has Rule § 51-2.1.1(B) exempting business brokers dealing in a closely-held corporation with no more than a single buyer from the broker-dealer registration requirements of the CSA found in C.R.S. § 11-51-401. In the new rules, the Commissioner added Rule § 51–3.33 defining and exempting merger and acquisition brokers (“M&A Brokers”) from the CSA’s licensing requirements provided the M&A Broker limits its activities as described in the new rule.


• Colorado has now adopted Rule § 51–4.8 which imposes general guidelines for reasonable cybersecurity practices, and mandates a number of specific practices on broker-dealers doing business in Colorado. Brokers must now protect “confidential personal information,” “establish and maintain written procedures reasonably designed to ensure cybersecurity,” incorporate cybersecurity in annual risk assessments, use secure (encrypted) email and dual factor authentication, and disclose to clients the risk of using electronic communications. These rules are less prescriptive than the rules recently adopted by the New York Department of Financial Services which impose obligations on most national broker-dealers. Compliance with the NYFDS rules likely equal compliance with the Colorado rules.

VI. Investment Adviser Rules

• C.R.S. § 11-51-401(1.5) prohibits a person from acting as an investment adviser or an investment adviser representative in Colorado unless licensed or exempt from licensing.  To provide greater definition to the licensing requirement, the new rules include Rule § 51–4.3(J)(IA) which discusses four acts or practices which require licensing as an investment adviser and compliance with statutes and rules pertaining thereto. The rule now makes it clear that


• Lawyers, accountants, engineers or teachers are subject to licensing if the investment advice they render is not “solely incidental to the professional’s regular professional practice with respect to clients.”


• Broker-dealers and broker-dealer agents must be licensed if, for a fee, the broker-dealer or broker-dealer agent “provides investment advice to clients if the investment advice is not solely incidental to the conduct of business as a broker-dealer or broker-dealer agent.”


• Insurance agents who, for a fee, provide investment advice to a client, must be licensed as an investment advisor or investment advisor representative. There is no “solely incidental” exception.


• Others (not described above) must be licensed as investment advisers or investment adviser representatives if they advertise or hold themselves out as a provider of investment advice, if they publish an article which (for a fee) gives investment advice based upon the specific investment situations of clients, or receive a fee from an investment adviser for customer referrals.


• The new rules add § 51–4.4(J)(IA) which increases the obligations on a person applying for licensing as an investment adviser representative if the person has unpaid FINRA arbitration awards.


• The new rules update the books and records requirements for licensed investment advisers in Rule § 51–4.6(A)(19)(IA) and now requires an annual review and certain supervisory procedures.


• New Rule § 51–4.11(IA) discusses requirements and conditions for a private fund advisers to exempt themselves from investment adviser licensing requirements, including imposing further requirements for exemption for private fund advisers who advise at least one (3)(c)(1) fund that is not a venture capital fund.


• New Rule § 51–4.12(IA) requires investment advisers to engage in business continuity and succession planning in the case of a loss of, or relocation of an office, or the death of the adviser.


• New Rule § 51–4.13(IA) requires that investment advisers must maintain a positive net worth of from $10,000 to $35,000, depending on various factors discussed in the rule.  Investment advisers with discretionary authority or custody who do not meet the minimum net worth requirements must also maintain a surety bond.


• New Rule § 51–4.14(IA) imposes cybersecurity requirements on investment advisers similar to the requirements imposed on broker-dealers discussed in Rule § 51-4.8, above.


• New Rule § 51–4.15(IA) which requires that any licensed investment adviser who wishes to charge a fee based on a share of the capital gains or the capital appreciation of the funds or any portion of the funds of a client must comply with 17 CFR § 275.205–3. The federal rule only permits the use of such fee if the client is a “qualified client” as defined therein.


• The rule amendments for investment advisers is also discussed in Law Week Colorado (July 31, 2017) in an article by Kaley Laquea on page 8 entitled “Colorado Division of Securities Changes Licensing Rules.”

VII. Conduct of Hearings by the Colorado Securities Board and the Office of Administrative Courts

• The new rules update and add to Chapter 6 which governs procedures for hearings conducted by the Colorado Securities Board and the Office of Administrative Courts. The rules include provisions discussing:


• Hearings to review either summary stop orders or summary orders suspending an exemption under C.R.S. § 11-51-606(3)(a) or (b) [Rule § 51–6.1, not substantively amended];


• Hearings on orders to show cause why a securities license should not be summarily suspended under C.R.S. § 11-51-606(4) [Rule § 51-6.2, not substantively amended];


• Hearings on orders to show cause why a cease and desist order should not enter under C.R.S. § 11-51-606(1.5) [Rule § 51–6.3, amended and reorganized];


• Hearings on the denial, suspension or revocation of a registration statement and the denial or revocation of exemption from registration under C.R.S. § 11-51-310 [Rule § 51-6.4, a new rule addressing the described issues]; and


• Hearings on the denial of an applicant or suspension, revocation, censure, limit or other conditions on the securities activities of a broker-dealer, sales representative, investment adviser or investment adviser representative under C.R.S. § 11-51-410 [Rule § 51–6.5, a new rule addressing the described issues].

VIII. Local Government Investment Pool Trust Funds

• Includes additions to Rule § 51–9.3 dealing with registration, reports and bookkeeping of the Local Government Investment Pool (“LGIP”) Trust Funds.

The End of LIBOR

By Andrew Spruiell, Moye White LLP

In July, the UK Financial Conduct Authority announced that the London interbank offered rate, or LIBOR, will end in 2021. LIBOR, which represents an average rate of inter-bank borrowing submitted daily by a panel of lenders, is used globally as the benchmark interest rate for trillions of dollars in debt and derivative transactions.

Scandal and manipulation have tainted LIBOR in recent years, resulting in around $9 billion in fines, high profile terminations of bank executives and even several criminal convictions. So even if LIBOR’s demise may not be surprising, regulators, financial institutions and their attorneys must now confront what happens when LIBOR is gone.

Financial institutions and regulators have discussed alternatives for some time. The U.S. Treasury Department, through its Office of Financial Research, has published two LIBOR alternatives. The first is a secured repo rate, which is based on interest charged on a secured loan made with the promise of repurchase at a set price. The second is the Overnight Bank Funding Rate, which is published by the New York Fed. In the UK, the Bank of England has recommended the adoption of the Sterling Overnight Index Average, or Sonia. All of these are intended to approximate the short-term cost of funds. As the search for a replacement benchmark continues, financial institutions will also need to address existing transactions for which LIBOR is used.

Finance attorneys will likely have a significant role to play as LIBOR comes to an end. Lenders and issuers are likely to require advice and assistance on (a) reviewing existing documents to determine the consequences of LIBOR’s unavailability, (b) amending documents that fail to address LIBOR’s unavailability, (c) examining the legal implications of a replacement benchmark, and (d) drafting transaction documents using a replacement benchmark. Until a replacement benchmark is identified, a lender wanting to continue with LIBOR may want to use a clause addressing alternatives if LIBOR is unavailable, such as the following:

Alternate Interest Rate. If, for any reason, on the date for determining the LIBOR Rate, Bank determines (which determination will be conclusive in the absence of manifest error) that the LIBOR Rate is no longer available, or adequate and fair means do not exist for ascertaining LIBOR Rate, or that it is unlawful for Bank to make or maintain the Loan at the LIBOR Rate, Bank will promptly give to Borrower telephonic notice (confirmed as soon as practicable in writing) of the nature and effect of such circumstances. After receipt of such notice and during the existence of such circumstances, the interest rate applicable to the outstanding principal balance will be determined based upon an alternate index selected by Bank, in its discretion, reasonably comparable to that of LIBOR Rate, intended to generate a return substantially the same as that generated by the LIBOR Rate.

Though many documents currently address the unavailability of LIBOR (like the sample language above), borrowers and their attorneys may soon put those provisions to the test to assert leverage over lenders or issuers.

It is unclear what the consensus replacement benchmark will be. It is clear, however, that regulators, financial institutions and their attorneys will stay busy over the next four years addressing the myriad issues raised by the end of LIBOR.

The Accidental Franchise

By Craig J. Knobbe, Moye White LLP

The applicability of state and federal franchise law to a business relationship depends on whether the relationship has all the definitional elements of a “franchise.” It is irrelevant that the parties do not call their business relationship a franchise, never intended to create a franchise relationship or have otherwise expressly disclaimed the existence of a franchise relationship. If the relationship satisfies the elements of the federal or state definition of a franchise, it is a franchise and subject to regulation.

Franchises are defined in the Federal Trade Commission (“FTC”) franchise disclosure law (the “FTC Franchise Rule”) and at the state level in various state franchise disclosure and registration laws. The FTC Franchise Rule and state franchise disclosure and registration laws regulate pre-sale franchise disclosures to be made to prospective franchisees. Similar to laws regulating the offer of securities, the franchise disclosure and registration laws require a party to make pre-sale disclosures to the prospective franchisee pursuant to a Franchise Disclosure Document to allow the prospective franchisee to make an informed investment decision.

What is a Franchise?

Under the FTC Franchise Rule, a “franchise” is “any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:

1. The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;
2. The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and
3. As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.” (16 CFR § 436.1(h)).

A relationship will fall outside the scope of regulation under the FTC Franchise Rule if one of these three prongs is eliminated. Further, a business relationship that satisfies all three definitional elements may not be regulated under the FTC Franchise Rule if the relationship satisfies an exemption or exclusion specifically described in the FTC Franchise Rule.

The FTC Franchise Rule does not preempt state franchise laws, except to the extent such state laws are inconsistent with the FTC Franchise Rule. A state law is not inconsistent with the FTC Franchise Rule if it provides prospective franchisees with equal or greater protection than that provided under federal law. As such, relationships that resemble a franchise must be examined under the various state franchise registration, disclosure and relationship laws, which often include a broader definition of what constitutes a franchise.  The majority of the fifteen states with franchise registration and/or disclosure laws (Colorado is not among these 15 states) define a franchise as a contract or agreement between two or more parties where:

1. the franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by the franchisor (“Marketing Plan Element”);
2. the operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, advertising, or other commercial symbol designating the franchisor or its affiliate; and
3. the franchisee is required to pay, directly or indirectly, a franchise fee.

The New York franchise definition materially differs from the definitions in other states because the imposition of a fee in connection with just one of the other two elements will satisfy New York’s definition of a franchise. Additionally, a minority of state franchise laws substitute a “community of interest” prong for the Marketing Plan Element of the franchise definition. The Wisconsin Supreme Court identified the following two guidelines to determine whether a community of interest exists between the parties to a business relationship: (1) the business relationship between the parties must have a “continuing financial interest,” and (2) there must be interdependence which includes a “likeness or similarity of interest in the common business” in which the parties are engaged.

Similar to the FTC Franchise Rule, a business relationship will not be subject to regulation if the franchise definition is not satisfied or an exemption is available. However, falling outside the scope of regulation under the state franchise laws can be more difficult than avoiding coverage under the FTC Franchise Rule.

Some final words of caution on the franchise definitions under federal and state law: The franchise disclosure laws are consumer protection laws that were created to combat widespread deception in the sale of business ventures. Consequently, each of the prongs under the FTC Franchise Rule and state franchise laws are interpreted broadly and can be very easy to satisfy. Although the state franchise definitions may be similar, the interpretation varies from state to state. Lastly, even if you successfully structured a business relationship to avoid the franchise definition, a change at a later date (for instance, payment of a fee) could turn the relationship into a franchise.

Does It Matter?

Franchise-related claims or issues can arise in a variety of situations, such as: (1) when the putative franchisee is disgruntled and brings an action against the other party for violation of the franchise regulations, (2) when a competitor reports your accidental franchise to state franchise regulators, (3) when a state franchise regulator independently discovers your accidental franchise as a consumer, in an advertisement, on the internet or in another manner, or (4) when you attempt to terminate a relationship which is an accidental franchise and inadvertently violate a state’s franchise relationship laws (a franchise relationship law does not exist under Colorado or federal law).

If an existing relationship is at risk of being deemed a franchise, it is important to determine whether a state franchise relationship law exists which governs the termination or renewal of your agreement. Additionally, many of these “relationship” laws prohibit franchisors from engaging in various practices, including, for example, requiring or prohibiting any change in management of the franchisee without reasonable cause and requiring the franchisee to agree to any kind of release which would relieve the franchisor from liability under applicable laws.

In addition to state franchise relationship laws, the FTC has a variety of remedies it can pursue in connection with violations of the FTC Franchise Rule.  The FTC can seek injunctive relief and initiate civil actions to pursue remedies including rescission of the contract, refunds, payment of damages, or public notification of the unlawful acts. The FTC may also pursue fines in connection with such civil actions for each violation of the FTC Franchise Rule.

At the state level, franchise regulators also have broad powers to address franchise law violations. For instance, franchise regulators can pursue civil actions against those who violate franchise disclosure and registration laws and, in contrast to federal law, individuals can pursue private causes of action. Potential penalties for violating state franchise laws can include monetary fines, damages, injunctions, rescission, and termination of the entity’s right to conduct business within the state, among other significant consequences. Lastly, state franchise laws may also provide for criminal penalties for violations of state franchise law.

Overall, the network of federal and state franchise regulations (not to mention, the related case law) is complex, far-reaching, and inconsistent. Since the consequences for violations of the franchise laws can be significant, it is important to conduct a detailed analysis of the business relationship and make an informed decision.

Business Law Section Activities

September 2017

The CBA Financial Institutions, International Transactions and M&A Subsections will not hold CLE programs in September, and they encourage you to attend the September 13–14, 2017 Business Law Institute, Grand Hyatt, Denver.

Save the Dates: Upcoming CBA Subsection CLE Programs

Financial Institutions Subsection Luncheon Program
Wednesday, October 18, noon – 1 p.m.

M&A Subsection Breakfast CLE Series
Tuesday, October 3, 8 – 9 a.m.

CBA-CLE Upcoming Programs

2017 Business Law Institute

Co-sponsored by the CBA Business Law and Tax Law Sections
Wednesday and Thursday, September 13–14
Grand Hyatt Hotel, Denver
Special price for CBA Business Law Section Members!

Featured presentation: Colorado’s Economic Outlook: Powerhouse on the Range in 2018? Implications for You, Your Clients and Potential Clients
Speaker: Dr. Richard Wobbekind, Senior Associate Dean for Academic Programs, Associate Professor of Business Economics and Finance, and Executive Director of the Business Research Division at the Leeds School of Business, University of Colorado at Boulder.

Institute Highlights Include:

• Case Law, Legislative and Secretary of State Updates
• Staying out of the In-House Dog House! An In-House Counsel Panel Presentation
• Improve Your Skill at the Bargaining Table!
• Third Party Legal Opinions and Customary Practice: Offering Advice to One Not Your Client

Choose from the following breakout sessions:

• Choice of Entity: A Contrarian Approach
• Data Privacy and Cybersecurity: The Important Legal Issues, and Practical Tips for Businesses
• LLC and Partnerships in Bankruptcy: Pick Your Partner Versus the U.S. Bankruptcy Code
• Protecting Your Client’s Intellectual Property and Confidential Information
• Warning: Employer Agreements to Fix Employee Wages or Not to Poach Employees is Now a Criminal Offense of the US Antitrust Laws
• Business Law Vignettes (From the Perspective of Occasional Expert Witnesses)
• Drafting Buy-Sell Agreements
• How to Shut Down a Distressed Business Successfully, and Without Bankruptcy
• Qualified Small Business Stock Under IRC Section 1202: A Business Lawyer’s Guide to the “Wild West”
• Employment-Related Agreements and Forms
• Selected Topics in Small Business Purchase and Sale Transactions
• Drafting LLC Essential Documents
• Essentials of Marijuana and Industrial Hemp Businesses
• Negotiating and Structuring Your Next M&A Deal
• Securities Law Survival Guide
• Drafting Clauses for Alternative Dispute Resolution, Out- of- Court Procedures and More
• Protecting Owners, Members and Shareholders from Personal Liability
• Practical Areas of Consideration When Your Client is Contracting with a Foreign Entity
• What Should the Buyer’s Lawyer Look For, and Ask About, in Regard to the Target’s Financial Statements?

Be prepared for Denver Startup Week in late September! Several of the breakout sessions will help you better advise startup clients.
Materials and audio files provided for all breakout sessions after the Institute.

Submitted for 14 General CLE credits, including .5 Ethics credits.

Judicial Local Bankruptcy Rules Review

Revised Local Bankruptcy Rules to Take Effect in Late 2017!
Sponsored by the Bankruptcy Subsection of the CBA Business Law Section, and in cooperation with the U.S. Bankruptcy Court for the District of Colorado
Tuesday, October 3, 2017
CBA-CLE Classroom, 1900 Grant Street, Suite 300, Denver, CO 80203

The CBA Bankruptcy Subsection is presenting a Local Bankruptcy Rules Review with bankruptcy judges as presenters. With the annual changes to the Federal Bankruptcy Rules, and a recent overhaul of the Local Bankruptcy Rules in Colorado to take effect at the end of 2017, the judges will cover the recent revisions of the Local Bankruptcy Rules.

Attend to learn about the changes to the rules before they are implemented, and share your ideas, suggestions, questions, issues and concerns, as the judges are seeking input from attendees.

Submitted for 2 General CLE credits.

CBA-CLE Business Law Homestudies

2017 Securities Conference — Learn more
2017 Institute on Advising Nonprofit Organizations 2017 — Learn more
Bankruptcy Case Law Update Know — Learn more
Business Contracts: The Fundamentals — Learn more
2017 Cannabis Symposium — Learn more
Ethical Issues for Attorneys Serving on Nonprofit Boards — Learn more
Limited Liability Companies in Colorado — Learn more
Why Are Banks Reluctant to Touch Cannabis Cash? — Learn more

View our complete catalog of CLE Homestudies on our website and search by practice area or credits!

Contributions for future newsletters are welcome.
Contact Ed Naylor at [email protected], 303-292-2900.
This newsletter is for information only and does not provide legal advice.