Legal Perspective

Securities Laws and Biodiesel Projects
By Todd J. Guerrero | April 06, 2007
Our firm is regularly engaged in providing advice and counsel regarding the financing of biodiesel facilities. Compliance with state and federal securities laws is an important consideration that project developers must be aware of in financing biodiesel projects.

Intended to protect investors, federal and state securities laws apply whenever a project offers and sells securities to raise money for the business. The category of "securities" generally includes corporate stock, units issued by a limited liability company and many debt instruments. The basic requirement of both the federal and state securities laws is that a company intending to offer and sell its securities must either register its securities with the U.S. Securities and Exchange Commission (SEC) and state authorities in the states where the securities will be offered or fit within an exemption from registration.

Registered Offering
The registration process can take several months and involve significant effort from all members of the project team. Therefore companies will generally try to fit within one of the exemptions from securities registration. However, the benefit of registration is that the project can seek investment from an unlimited number of investors in those states where the offering has been registered, including unlimited numbers of non-accredited investors (accredited investors are generally individuals with more than $1 million in net worth or more than $200,000 in annual income). A registered offering also provides more flexibility in a project's ability to reach investors through advertisements, radio pronouncements, etc.

In the registration process, the company will work with its attorney and accountants to prepare a prospectus that describes, among other things, the business, the terms of the shares or units to be sold to investors, and the risks of investing in the project. That document will then be filed with the SEC and the appropriate state officials for their review and comments. Only after responding to their comments by modifying the prospectus will the project be authorized to actually accept investment. Detailed requirements governing what one must disclose about a project may restrict the project's ability to include projections of anticipated financial results.

Another alternative is provided by the intrastate exemption from federal securities registration. Under that exemption, it isn't necessary to register your offering with the SEC if the offering is conducted entirely within the state where the business is located and all of the investors are residents of that state. However, it may be necessary to register with the securities officials in that state, which is a process that is expected to be less expensive and time-consuming than registering with the SEC. These intrastate offerings can involve public advertising within the state where the business is located and, depending on the particular state rules, may also include projections of expected financial results.

Private Placement
A private placement offering is another regularly used alternative in biofuels projects that is generally less expensive and time consuming, provided the project can raise the investment from a smaller group. An offering that doesn't involve public advertising and in which securities are sold to fewer than 35 nonaccredited investors is exempt from the registration requirements of the SEC. A private placement offering isn't reviewed by the SEC, but is simply prepared by the project team. Private placement offerings can also include projections, although that step should be taken with caution.

Regardless of whether the offering is registered or exempt, it is important that the project disclose all material information to the prospective investors, and otherwise comply with all applicable federal and state securities laws.

Todd Guerrero is a member of the Agribusiness & Energy Practice Group of Lindquist & Vennum PLLP, a leading provider of legal assistance on biofuels projects throughout the country. For more information, visit or call (612) 371-3211.
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