Shared Solar Sunnyside Up: Avoiding the Pitfalls of Securities Regulation
By Laurel Passera
Senior Renewables Analyst for Keyes, Fox & Wiedman LLP, attorneys for the Interstate Renewable Energy Council
Across the country, shared and community renewables arrangements are as varied as the communities they serve.
For starters, energy production can be valued in a number of ways. Participants can receive benefits through on-bill credits, check or other methods. Administrative structures vary depending on who owns and operates the facility, whether participants can buy in, sign a lease agreement or participate in other ways. The list goes on and on. But community and shared renewables programs are all driven by a fundamental principle – to allow electric customers to participate in a common, shared system and, in return, receive a benefit from their participation.
As these programs have developed over the past few years, many have faced an important regulatory question: to securitize or not to securitize? While there isn’t a one-size-fits-all approach, typically the answer lies in the design and structure of the arrangement. In many cases, those designing these programs seek to avoid securitization in order to avoid the onus of complying with securities laws, which is typically expensive and can undermine the economics of the program.
Simply put, a security is a proof of ownership or debt that has been assigned a value so that it can be easily sold or traded. In other words, securities allow you to own the underlying asset without taking possession (à la stocks, bonds and mutual funds). The Securities Act of 1933 deemed that securities regulation was in the public interest and, in 1934, the Securities and Exchange Commission (SEC) was created to regulate these arrangements and protect investors.
Securities laws come into play any time a business is taking money up front for the promise of future revenue streams. In that sense, they are relevant to many types of business decisions, including shared renewables arrangements. However, because shared renewables programs are so diverse, it has been very difficult for the SEC or anyone else to generalize about the potential application of securities laws to shared renewables on the whole.
Recently, the National Renewable Energy Laboratory (NREL) released a technical report titled Shared Solar: Current Landscape, Market Potential, and the Impact of Federal Securities Regulation, which sheds a bit more light on the issue. This report includes a discussion of a No-Action Letter issued by the SEC in 2011 in response to an advice letter filed by CommunitySun, LLC, based in Austin, TX. From this discussion it is clear that a program’s design and overarching goals matter to decisions about the application of securities laws. In essence, the closer a particular shared solar arrangement adheres to offsetting participants’ personal consumption, the less likely it is that securities laws will apply.
The NREL report also discusses ways to structure a shared renewables program in order to avoid SEC regulation and federal oversight altogether. In cases where shared renewables offerings do classify as securities, the report notes several exemptions that may enable a project to avoid SEC registration.
Because securities laws can impact the benefit that participants receive from their financial contributions, and if and how a project will be marketed to the public, developers should carefully consider these aspects and seek the advice of experts when designing a program. For further information, the SEC has produced a guidebook for small businesses on raising capital and complying with federal securities laws.
In addition to federal oversight, every state has its own securities laws known as “Blue Sky Laws.” Oregon, for example, has taken a proactive stance to promote renewable energy development by exempting “renewable energy cooperative corporations” from registering membership shares or capital stock as securities. Vermont has a similar law in place with its SUN Exemption. Massachusetts and Michigan have also produced helpful guides to shared and community renewables considerations that include discussions of securities laws.
Ignoring securities considerations could amount to a costly mistake that could quickly flip a project’s otherwise sunny financial outlook. The NREL report notes that, with a supportive regulatory environment, the shared solar market could represent between 5.5 and 11 gigawatts of PV deployment. Given this tremendous growth potential and the value proposition it holds for consumers, we expect there will be more to come on this topic soon.
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