Legal Perspective

The Impact of Securities Laws on Biodiesel Projects
By Mark Hanson & Todd Guerrero | November 01, 2005
As reported in this magazine, the number of biodiesel plants recently constructed, being constructed or in the feasibility stage has been rising sharply. These plants employ different technologies, feedstocks and ownership structures. However, they have one major thing in common: They each require a great deal of capital, and most will require investors in addition to the project developer. When a project reaches the point of finding investors, it enters the land of securities laws.
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 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 offerings
Because the registration process can take several months and involve significant effort from all members of the project team, 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 from an unlimited number 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 the 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 comment. Only after responding to their comments by modifying the prospectus will the project be authorized to actually accept investment from investors. Detailed requirements governing what you must disclose about your 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, 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

Another alternative would be less expensive and time consuming if the project is able raise the necessary investment from a small group of investors. Such an offering can be conducted under a "private placement" exemption. An offering that does not involve public advertising and in which securities are sold to fewer than 35 non-accredited investors does not have to be registered with 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, the project will need to disclose all material information about the project to the prospective investors, and must comply with all applicable federal and state securities laws.

Mark Hanson and Todd Guerrero are members of the Agribusiness and Alternative Energy Practice Group of Lindquist & Vennum PLLP, a leading provider of legal assistance on bioenergy projects throughout the country. They can be reached at (612) 371-3211. Ron McFall, a senior securities partner in the group, contributed to this article.
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