Analyzes state merit review for non-covered securities offerings, applying NASAA Statements of Policy to cheap stock, promoter equity investment, voting rights, and promoter compensation. Produces examiner-ready comment responses with cap table analysis and negotiation strategy. Use when filing Reg A, Rule 504, intrastate, or direct public offerings in merit review states, responding to Blue Sky examiner comments, structuring offerings to avoid conditioning, or analyzing NASAA SOPs. Also trigger on cheap stock analysis, promoter equity tests, unequal voting rights review, state examiner correspondence, or phrases like "merit review issues" or "the state examiner sent comments."
Analyzes state merit review for non-covered securities offerings, applying NASAA Statements of Policy to cheap stock, promoter equity investment, voting rights, and promoter compensation. Produces examiner-ready comment responses with cap table analysis and negotiation strategy. Use when filing Reg A, Rule 504, intrastate, or direct public offerings in merit review states, responding to Blue Sky examiner comments, structuring offerings to avoid conditioning, or analyzing NASAA SOPs. Also trigger on cheap stock analysis, promoter equity tests, unequal voting rights review, state examiner correspondence, or phrases like "merit review issues" or "the state examiner sent comments."
Produces pre-filing risk analysis and examiner-ready comment responses for non-covered securities offerings subject to state merit review. Covers cheap stock, promoter equity investment, voting rights, and promoter compensation under NASAA Statements of Policy.
Quick Start
Confirm offering is NOT a covered security under 15 U.S.C. Section 77r
Gather intake documents (offering doc, charter, cap table, state list)
Run analysis steps 1-6 below
Draft comment response package or pre-filing memo
Prepare negotiation fallback positions per issue area
Intake (Mandatory)
Gather before analysis unless user says "use defaults" or "just draft":
Offering document — Form 1-A, prospectus, PPM, or offering circular
Charter documents — Articles/certificate of incorporation, bylaws, amendments
Cap table — All issuances with dates, prices, consideration type, vesting, holder identity (Promoter vs. Non-Promoter)
Issuance chronology — Board consents, subscription agreements, service agreements
Historical financials — Balance sheets for promoter equity calculation
Target state list — Filing pathway per state
Federal exemption — Reg A Tier 1/2, Rule 504, intrastate, direct registration
Prior examiner correspondence — Deficiency/comment letters if any
Defaults if user doesn't respond: NASAA SOP standards applied; Rule 405 promoter definition; 10% promoter equity investment benchmark.
Threshold Questions
Are securities "covered securities" under 15 U.S.C. Section 77r? (If yes, stop — no merit review)
Shares issued for nominal cash or services within 36 months of filing?
Promoters received equity disproportionate to cash/tangible asset contributions?
Voting or control rights deviate from economic ownership?
Offering proceeds repay insiders?
State informally flagged issues?
Step 1: Confirm Merit Review Applicability
Covered (No Merit Review)
Not Covered (Merit Review Applies)
Listed on national exchange (NYSE, NASDAQ)
Reg A Tier 1 & 2 in merit states
Rule 506(b) / 506(c)
Rule 504
Sold only to "qualified purchasers"
Intrastate offerings
Direct public offerings not on national exchange
Produce short posture memo: pathway, why merit review applies, verified citations. Flag risks to covered status (general solicitation, bad actor, integration).
Step 2: Map Jurisdictional Standards
For each target state, verify:
Factor
Source
Denial standard ("unfair, unjust, or inequitable")
Common remedies: Escrow until earnings milestones, lock-ups, cancellations/reverse splits, operational use-of-proceeds conditions, enhanced dilution disclosure.
Step 4: Analyze Promoter's Equity Investment
NASAA benchmark: promoter equity >= 10% of total aggregate offering price.
Calculation (NASAA methodology, not GAAP):
Count: cash, tangible assets at documented fair value
Exclude: imputed services value, goodwill
State-specific: verify whether personal guarantees count
Shortfall strategy: Document tangible asset contributions, personal guarantees if permitted. Note: cheap stock + inadequate promoter investment is the highest-risk combination.
Step 5: Review Voting Rights and Governance
NASAA SOP: voting rights proportionate to equity unless compelling justification.
Issue
Risk
Dual-class super-voting shares
High — most merit states reject for retail
Blank check preferred stock
High
Minority shareholder elects majority of board
High
No class vote on mergers/liquidations/asset sales
Medium
No sunset on control provisions
Medium
Mitigation: Sunset provisions, independent directors, class votes on major transactions, plain-English disclosure.
Verify "Description of Securities" matches actual charter/bylaws exactly.
Step 6: Review Promoter Compensation
Build schedule: cash comp, equity grants, consulting fees, bonuses, company loans, related-party leases, IP payments, reimbursements. Connect each to use of proceeds.
Flag if proceeds repay insiders. Promoter definition may be broader than expected — examiners may classify control persons, significant consultants, or paid finders as promoters.
Drafting Comment Response Package
Components:
Cover letter — point-by-point response to each examiner comment
Redline of offering document
Supporting exhibits (revised charter, escrow/lock-up agreements, updated cap table)
Per-comment structure:
Quote examiner comment verbatim
Cite applicable NASAA SOP or state admin code
Explain compliance or justify deviation
Reference specific redline page/section for remedy
Tone: Respectful, solution-oriented, legally precise. Not a litigation brief.
Consistency: Every factual assertion cites the record. Every legal assertion has verified citation or [VERIFY]. Restrictions promised must appear in binding agreements AND offering document.
Negotiation Strategy
Issue
Primary Position
Fallback 1
Fallback 2
Cheap stock
Dilution disclosure + time-based lock-up
Lock-up + repurchase on bad acts
Milestone-based escrow
Promoter investment
Tangible assets + guarantees
Defer insider comp until minimum raise
Restructure founder equity
Voting rights
Sunset + independent directors
Reduce super-voting + class vote on majors
Eliminate dual-class
Promoter comp
Full disclosure + market comparables
Cap reimbursements + defer consulting
Escrow promotional shares
Cross-state: concession in one state may require disclosure updates for all states. Don't concede early without knowing other states' positions.
Post-Draft Alignment
After delivering initial analysis, confirm:
Cap table and issuance chronology reconciled to charter authority?
Examiner indicated priority concerns or informal guidance?
Pursue coordinated review (CR-3(b))?
Concessions client has already decided to accept or reject?
Quality Checklist
Preemption determination confirmed with verified citation
NASAA methodology (not GAAP) for promoter equity
Cap table reconciles to charter authority, matches "Principal Shareholders" and "Dilution" sections
All promoters identified under merit review definition (broader than typical)
Cheap stock covers all issuances within 36-month look-back
Voting rights match actual charter/bylaws, not just offering document
Every citation verified or flagged [VERIFY]
Adversarial scrub: would examiner find inconsistencies?
Negotiation fallbacks prepared per issue area
Assumptions and open items listed prominently
Pitfalls
Never fabricate citations. All NASAA policy text, statutory sections, and case citations must be verified via research or flagged [VERIFY].
Separate strategy from response. Comment response letters become public records in many states; keep privileged analysis in internal memos.
Anti-fraud overlay. Never obscure a merit issue — disclose cheap stock, promoter comp, and unequal voting plainly.
NASAA SOPs are not uniform. Always verify state-specific adoption before citing.
Recommend CR-3(b) coordinated review where available.
Cap table errors: Excluding intangible-property shares, not reconciling to charter authority, omitting derivatives, conclusory justifications without documentation.
Ethics: Model Rules 1.1 (competence), 1.3 (diligence), 1.4 (communicate concession impact), 3.3/4.1 (candor to examiners).
Attorney review required. All output requires review by a licensed securities attorney before submission.
