Over the past several years, Minnesota has experienced significant growth in “Community Solar Gardens.” This increase is largely thanks to legislation passed in 2013 that required Xcel Energy to obtain higher percentages of their electric power from solar energy. In January 2018, Minnesota’s Community Solar Garden program had already hit nearly 250 megawatts of operational capacity. Moreover, data published by Xcel Energy indicated that 88% of all subscribers were seeing savings on their energy bills thanks to a shared solar subscription. The program continues to grow, with an additional 400 megawatts worth of community solar projects in the queue to be developed in the coming years.
(myself enthusiastically included) see the growth in community solar as a
positive development for Minnesota. However, some consumers have raised
concerns about aggressive marketing techniques used to promote
community solar subscriptions. In reaction
to these concerns, both the Minnesota
Office of the Attorney General and the Minnesota
Department of Commerce have issued guidance encouraging consumers
to ask questions of Developers before subscribing.
Consumer protection concerns surrounding the growth of community solar also highlight a persistent legal question that has vexed solar Developers and regulators alike in recent years: are subscriptions in community solar projects “securities” subject to federal and state securities laws?
This article delves into that question by providing an overview of community solar, how federal and state securities laws may be interpreted to apply (or not) to a Community Solar Garden subscription, and what options a Developer has to comply with securities regulations. The article concludes with 6 tips Developers can follow to reduce their risk of violating securities laws.
The Rise of Community Solar
Solar,” as a concept, describes an opportunity for individual members of a
common community to jointly fund and benefit from the development of a
centrally-located solar photovoltaic (PV) system. Rather than installing solar
panels on their own roofs, such individuals subscribe to a community solar
project by paying a monthly subscription fee.
The subscription fees are pooled together to fund the development and
maintenance of the solar array, which is located on a third party’s property
and maintained by the owner of the system (the “Developer”). Such systems are commonly referenced as a
“Community Solar Garden” or “CSG.”
to Minn. Stat. § 216B.1641,
Xcel Energy is required to operate a community solar program, whereby it
purchases all energy generated by qualifying CSGs to introduce into the
electrical grid serving Xcel customers.
Subscribers in CSGs, who are also Xcel customers, then receive a credit
on their energy bill that is proportionate to the subscriber’s share of energy
produced by the CSG. This means
there are three contractual relationships at play in a Community Solar Garden:
Developer-Xcel. The Developer enters into a contract with
Xcel Energy, whereby Xcel agrees to purchase energy purchased through the
Developer-Subscriber. The Developer enters into a
contract with each individual Subscriber, whereby the Subscriber agrees to pay
for its subscription in exchange for a pro-rata share of the energy produced by
Xcel-Subscriber. Finally, the Subscriber, as
an Xcel customer, is contractually bound to pay Xcel for Subscriber’s energy
use. Ideally, the amount the Subscriber pays to the Developer is less than the
amount Xcel credits to the Subscriber, allowing the Subscriber to save money on
their energy bill.
The Securities Law Concern (from a
Here is how securities law could come into play:
often solicit subscribers to join their Community Solar Garden by highlighting
both the “green” benefits associated with use of solar energy and the potential cost savings
associated with subscribing. Some Developers
have included very specific financial projections in mailers, pamphlets and
other marketing materials sent to Minnesota residents highlighting the amount
of money subscribers can expect to save over time. Subscribers who buy into Community Solar
Gardens based on over-optimistic cost-savings projections or incomplete
information may be surprised and frustrated should the CSG not perform as described. That frustration will grow if the subscriber
is also surprised to find it is difficult to cancel or transfer their subscription,
which likely involves a contract with a multi-year term. This frustration may prompt some subscribers
to file a regulatory complaint (or a lawsuit) alleging that the Developer
provided misleading or incomplete information to the subscriber at the time the
subscription was sold, and that the subscriber experienced financial harm as a
The regulatory agency receiving the subscriber’s complaint will investigate whether it has jurisdiction over the Developer. If a complaint is filed with the Minnesota Department of Commerce, eventually the question will arise as to whether the community solar subscription sold was a “security” subject to oversight by Commerce. If Commerce determines that the subscription was a security, and that the Developer failed to properly register the security or qualify for an exemption, Commerce may fine the Developer. The Developer may also be obligated to offer rescission to the subscriber (and all other subscribers in the CSG)—i.e., the Developer may need to return the full amount of all subscribers’ investments in the CSG.
What would a securities analysis look
To determine whether and how securities regulations apply to the offer or sale of community solar subscriptions, a regulator would likely begin with a three-part analysis. First, does the subscription meet the legal definition of “security”? Second, if the subscription is a security, was it registered or exempt from registration under federal law? And third, if the subscription is a security, was it registered or exempt from registration under state law?
1) Does the subscription meet the definition of security?
federal law, the term “security” is defined in Section 2(a)(1) of the
Securities Act of 1933.
In Minnesota, the term is defined very similarly in Minnesota Statutes,
Both definitions are written very broadly and include well-known types of
securities (e.g., stocks and bonds) as well as “investment contracts.” Courts have further interpreted the meaning
of “investment contract” to determine when such a contract is subject to
securities laws. In its well-known SEC v. Howey decision, the U.S.
Supreme Court created a four-part test for determining when an “investment
contract” triggers Securities Act requirements. Namely, an investment contract
(and thus a security) exists where there is: 1) an investment of money; 2) in a
common enterprise; 3) with the expectation of profits; 4) based solely on the
efforts of others.
is room for debate as to whether a Community Solar Garden subscription is an
investment contract under the Howey Test. Surely subscribers meet the first two
prongs of the test: they invest money in the “common enterprise” of a shared
solar array. But whether the third and fourth elements are met is less
clear. Does an expectation of profits also include an expectation of savings? What if a subscriber’s
motivation to invest is based more on the desire to utilize green energy than
to make or save money? Further, is an investor’s expectation of savings “based
solely on the efforts of others” if the amount of savings hinges, at least in
part, on the subscriber’s own energy consumption?
to the subjectivity of these questions, Commerce officials have been reluctant
to make definitive statements as to whether community solar subscriptions are,
or are not, securities. (Other state regulators have taken a more direct
approach to this question—see Colorado
Vermont. The Securities and Exchange Commission, too,
has issued a “No-Action
Letter” in at least once instance involving this question.)
That said, the lack of clear answers to these questions is precisely why they warrant further thought from Developers interested in remaining legally compliant. If a Minnesota Developer is challenged by a regulator or a private litigant over an alleged securities violation, the regulator/litigant will not have to prove the subscription was a security; rather, the Developer will have the burden to show that the CSG subscription was not a security subject to Minnesota’s securities regulations. (See Minn. Stat. 80A.70.) There is a good chance this will put the Developer in the driver’s seat of arguing that the subscription did not meet the Howey test. Developers should keep this in mind as they go to market with their CSG subscriptions.
2) If the subscription is a security, was
it registered or exempt from registration under federal law?
Generally speaking, federal law requires securities offered or sold in U.S. States or Territories to first be registered with the Securities and Exchange Commission (SEC). The registration process is an expensive, time-consuming undertaking. Thankfully, there are many exemptions from the federal securities registration requirements, and the vast majority of securities offerings conducted today are conducted pursuant these exemptions. If a CSG subscription is a security, the Developer offering the subscription will likely want to ensure the subscription is exempt form federal securities registration requirements. Examples of common federal exemptions are summarized here:
Rule 506(b) of Regulation D. Rule 506(b) allows a Developer to raise an unlimited amount of money in a private offering from accredited investors and up to 35 non-accredited investors, so long as they are “sophisticated.” Accredited investors include individuals with an income of $200,000 or more (or $300,000 if income is joint with a spouse), or a net worth of $1 million or more, excluding the value of a primary residence. Rule 506(b) prohibits general advertising and solicitation, meaning the Developer could not advertise the solar garden subscription to anyone with whom the Developer does not have a “significant, preexisting relationship.” A Developer relying on this rule must file a “Form D” with the SEC and state regulators where sales occur.
Rule 506(c) of Regulation D. Rule 506(c) allows a Developer to raise an unlimited amount of money from investors located throughout the U.S., so long as it takes “reasonable steps” to ensure all investors purchasing securities are “accredited investors.” Unlike 506(b), Rule 506(c) permits general advertising and solicitation (so long as such advertising/solicitation is otherwise done in compliance with federal securities laws). A Developer relying on this rule must file a “Form D” with the SEC and state regulators where sales occur.
Rule 504 of Regulation D. Rule 504 allows a Developer to raise up to $5 million from investors located throughout the U.S., so long as the Developer complies with state law in states where offers and sales are made. Specifically, Rule 504 prohibits general advertising and solicitation, unless the offers and sales comply with state laws that permit it. Many states, including Minnesota, have adopted a registration process, called Small Company Offering Registration (“SCOR”) as a companion law to Rule 504. The SCOR process is described in more detail below. A Developer relying on this rule must file a “Form D” with the SEC and must otherwise meet state-specific requirements.
Regulation Crowdfunding. Regulation Crowdfunding permits a Developer to raise up to $1.07 million from investors located throughout the U.S., so long as the Developer conducts the offering through a Funding Portal registered with FINRA. The law permits limited advertising and solicitation, so long as it directs investors to the portal hosting the offering. The law also imposes limitations on how much the Developer can raise from each individual investor, depending on the investor’s net worth and annual income. A Developer relying on this exemption must file a “Form C” with the SEC and make disclosure documents available to prospective investors via the portal hosting the offering.
Intrastate Offerings. Securities Act section 3(a)(11) and Rule 147A create an “intrastate exemption” from federal registration requirements for sales of securities that occur entirely within the borders of a single state. Developers relying on this exemption must meet certain criteria demonstrating their ties to that state, and must comply with applicable state securities requirements. Developers are not required to file notice of their reliance on this exemption with the SEC, but may need to register the offering or file a notice of exemption with the state regulator having jurisdiction over the offering. If Developers relying on this exemption wish to sell securities to non-accredited investors, or engage in general advertising or solicitation, they will need to comply with state securities requirements that permit those activities.
3) If the subscription is a security, was it registered or exempt from registration under state law?
Even if a security is exempt from federal registration requirements, it still must meet state registration requirements in each state where the security is offered. As with federal law, state securities laws also include numerous exemptions from state registration requirements. Some federal exemptions, including Rules 506(b), 506(b), and Regulation Crowdfunding also preempt state law requirements, meaning a securities offering complying with one of those federal exemptions is excluded from state registration requirements. Examples of common exemptions from Minnesota registration requirements are summarized below. Remember, Developers relying on these state exemptions must also rely on an exemption from federal registration requirements, such as the Rule 504 or Intrastate Offering exemptions described above.
Sales to Accredited and Institutional Investors. Minn. Stat. 80A.46(13) exempts from state registration requirements offers and sales made only to accredited investors or institutional investors. In addition to the individuals meeting the income or net worth thresholds described above, business entities may be “accredited investors” if they meet certain criteria. (See here for more guidance on what it means to be an accredited investor.) “Institutional investors” include, but are not limited to, corporations, LLCs, trusts, non-profits, or partnerships with total assets in excess of $10 million. This exemption permits general advertising and solicitation, so long as final sales are made only to accredited or institutional investors.
Isolated Sales. Minn. Stat. 80A.46 (14) exempts from state registration requirements offers and sales made to accredited investors or institutional investors and up to 35 non-accredited investors, so long as the Developer does not engage in general advertising or solicitation, and does not pay someone to find investors on behalf of the Developer. A Developer relying on this exemption must file a notice with Commerce if it sells securities to over 10 non-accredited investors.
MNvest Crowdfunding. Minn. Stat. 80A.461 (or the “MNvest” exemption) permits Developers to utilize crowdfunding to raise up to $2 million from Minnesota residents. Developers relying on MNvest must conduct the offering through an intermediary portal registered with the Department of Commerce. MNvest also imposes some limitations on how much money Developers can raise from non-accredited investors, and how the Developer can advertise the offering outside of the portal. Finally, Developers relying on MNvest must file detailed disclosure documents, together with a $300 fee, with Commerce, and make those documents available to investors through the portal.
Small Company Offering Registration (SCOR). Minn. Stat. 80A.50(b) permits a Developer to raise up to $5 million from Minnesota residents, so long as it follows a simplified registration process with the Department of Commerce. The SCOR statute permits general advertising and solicitation (so long as it otherwise complies with anti-fraud provisions and other restrictions) and allows the Developer to raise money from non-accredited investors. Developers are also permitted to utilize a registered MNvest portal to facilitate a SCOR offering. SCOR offerings are typically paired with the Rule 504 exemption under federal law.
Nonprofits. Minn. Stat. 80A.45(7) exempts securities issued by an entity organized and operated exclusively for “religious, educational, benevolent, fraternal, charitable, social, athletic, or reformatory purposes” and meeting certain other conditions. Issuers relying on this exemption must file a notice, together with a $50 fee, meeting the requirements of section 80A.45(7) with Commerce.
Cooperatives. Minn. Stat. 80A.46(25) exempts securities issued by cooperatives organized under Minnesota law, so long as the securities are issued only to the cooperatives’ members. This exemption includes certain disclosure and notice filing requirements that a Developer should carefully review before relying on it to issue securities.
If you are a Developer developing a Community Solar Garden, be proactive in identifying how you can avoid potential liability for failing to comply with federal and state securities regulations. To do this, I suggest the following steps:
1) Do your homework first, not after you receive a subpoena. It may be tempting to just assume, without a careful analysis, that your solar garden subscriptions are not securities. Making such an assumption is dangerous. Remember, if you are subject to a regulatory investigation (or private lawsuit) alleging securities violations, the burden will likely be on you to demonstrate why you are exempt or excluded from securities laws. It is much easier to meet this burden if you have done your homework ahead of time, not under the pressure of a looming investigation or lawsuit
2) Do not over-emphasize potential financial savings without also disclosing potential risks. Securities regulations are primarily intended to give consumers all of the information they need to make an informed decision about an investment. In order to be fully informed, they need to understand the risks associated with the investment, as well as the potential rewards. It is best to expose these risks openly and early, even if it means losing some potential customers. You should also never “guarantee” cost savings or make other puffed-up claims that may ultimately prove to be misleading if something goes wrong.
3) Be careful about how, and to whom, you advertise and offer subscriptions. If you plan to solicit residential subscribers through mailings, social media posts, PowerPoint presentations, and leave-behinds left by door-to-door salesman, keep in mind that you are leaving a paper trail showing you have engaged in general advertising and solicitation. If you are also accepting subscriptions from non-accredited investors, you have closed off many federal and state exemptions that permit you to avoid securities registration requirements, should the subscription be deemed a security.
4) Don’t ask for large up-front payments. Some community solar models require subscribers to make large, up-front payments for their subscription. Such payments likely look more like a security than smaller, monthly payments made over a long period of time. Plus, a consumer is more likely to complain to a regulator (or a plaintiff’s attorney) if something goes wrong causing them to lose one large sum of money paid upfront as opposed to numerous smaller sums.
5) Design your subscription model to fit within federal and state securities exemptions. Even if there is doubt as to whether your subscription meets the statutory definitions of “security,” a Developer can protect itself by complying with federal and state securities registration exemptions. Doing so will help you avoid potential consequences of engaging in an unregistered security offering and will force you to take certain actions that likely enhance consumer protections surrounding sales and marketing of the CSG subscriptions.
6) Call an attorney. This article presents only a high-level overview of securities regulations, and how they might apply to a Community Solar Garden subscription. An experienced attorney can help guide you through these, and other complex issues. As a former securities regulator, I am well-versed in the nuances of securities regulations and how they interplay with developments in Minnesota’s Community Solar Garden programs. I would love to help. You can reach me at 612-584-3407 or firstname.lastname@example.org.
Brian Edstrom is a Shareholder and Attorney at Avisen Legal, P.A. He brings to Avisen seven years of experience working for federal and state regulators.
Rachell Henning is a second-year student in Mitchell-Hamline School of Law's innovative Hybrid program. Rachell is an Avisen Fellow who enjoys spending time with her husband and two young daughters when she is not working or studying.