Regional Center Designation: Applying, Amending and Reporting

A regional center is designated on an application, but the application is the smallest part of the obligation. What follows is an annual statement, a fee that must be paid on time, notice before the business changes hands, five years of record retention, and an audit cycle. Designation is better understood as entry into a reporting regime than as a license granted once.

What the designation application must establish

The center must operate within a defined, contiguous and limited geographic area, described in the application and consistent with the purpose of concentrating pooled investment within it. The proposal must show that the pooled investment will have a substantive economic impact on that area. Size is judged against the scale of the proposed activity, so an area drawn wider than the economic case supports is a defect in itself.

Beyond the map, the application carries reasonable predictions supported by economically and statistically valid and transparent forecasting tools: how much investment will be pooled, what kinds of enterprises will receive it, what jobs will be created directly and indirectly, and what other positive economic effects will follow. It must also describe the policies and procedures for monitoring enterprises and job-creating entities for compliance with federal and state law, including securities law, and separate procedures designed to ensure program compliance.

Who has to be vetted

Every person involved with the center, the new commercial enterprise or an affiliated job-creating entity must be covered by a bona fides filing and is subject to background checks, including fingerprints submitted to the Federal Bureau of Investigation. Involvement is defined by authority over money rather than by job title.

The disqualifications are specific. They include a criminal or civil offense involving fraud or deceit within the previous ten years, a civil fraud or deceit finding producing liability above one million dollars, a conviction carrying a sentence of more than a year, and a range of final orders from securities, banking, insurance and commodities regulators. A person must also be a national or lawful permanent resident and not in rescission or removal proceedings. Where a center learns that a prohibited person is involved, it has fourteen days to take commercially reasonable steps to end the involvement or to notify the Department.

Changes that need notice first

The Department must be notified no later than one hundred and twenty days before implementing significant proposed changes to the center's organizational structure, ownership or administration, including a sale, or any other arrangement that would bring in people not previously subject to the bona fides requirements. Where exigent circumstances exist, notice may instead be given within five business days after the change.

Adjudication does not stop during the notice period. Project applications and investor petitions continue to be decided as long as the amendment does not negatively affect program eligibility. Separately, an approved project application may be amended to reflect specified changes to the offering, and the statute contemplates that amendment being filed within thirty days of the change. An approved amendment can then be taken into account in deciding pending investor petitions in that offering.

What the annual statement has to say

The statement is an accounting, not a narrative. It certifies continuing compliance with the bona fides and securities provisions, describes material litigation or bankruptcy proceedings pending or resolved in the preceding fiscal year, and accounts for all individual investor capital in the center, the enterprises and the job-creating entities.

For each enterprise it must show the aggregate capital invested for each project, how that capital is being used to execute the filed business plan, evidence that all of it has been committed to the project, detailed evidence of progress toward completion, and an accounting of direct jobs created or preserved. It must also list every fee collected from investors — administrative fees, loan monitoring and management fees, commissions and similar transaction-based compensation — identify who received them, and state why they were collected. The fee disclosure line is where the offering's economics become visible, and it connects directly to the registration questions raised by transaction-based compensation.

Records, audits and what follows a lapse

Books, ledgers, records and supporting documentation from the center, the enterprise and the job-creating entity must be preserved for five years running from the last day of the fiscal year in which the transactions occurred. The Department must audit each center at least once every five years, reviewing that documentation and the flow of investor capital into projects. Refusing to consent to an audit, or deliberately impeding one, requires termination.

Failures short of those draw a graduated set of sanctions rather than automatic termination. The ladder runs from a fine, through temporary suspension, to permanent bars on named individuals and finally to termination of the designation itself, and the sequence, the notice procedure and the appeal route are set out in the grounds and procedure for terminating a center's designation. Which rung applies turns on factors the agency weighs case by case rather than on a schedule.

A center facing a notice of intent to sanction usually has a short window in which to respond, and the response is the substantive defense rather than a step before one. Centers in that position often retain a regional center compliance lawyer alongside their securities counsel, because the same documents are being read by two regulators for different reasons and an answer that satisfies one can create exposure with the other.