806 KAR 24:010.

Information required during incorporation and subsequent issue of equity

securities.

 

      RELATES TO: KRS

304.3-150, 304.26-090

      STATUTORY AUTHORITY:

KRS 304.2-110

      NECESSITY, FUNCTION,

AND CONFORMITY: KRS 304.2-110 provides that the Executive Director of

Insurance may make reasonable rules and administrative regulations necessary

for or as an aid to the effectuation of any provision of the Kentucky Insurance

Code. This administrative regulation requires submission of certain materials

during the incorporation of a domestic insurer. Additionally, this

administrative regulation sets forth procedures to be followed by a domestic

insurer when it makes a subsequent issue of equity securities.

 

      Section 1.

Incorporation and Promotion of New Insurance Companies. In addition to the

requirements and conditions expressly prescribed in KRS Chapter 304 relative to

the organization and promotion of new insurance companies, the executive

director will require that the incorporators of the new company

submit to him, in duplicate, authenticated copies of the following items, to

the extent that they are involved or used in the corporation or promotion

procedures, namely:

      (1) Any and all

contracts, letters, memoranda, plans, resolutions, or other documents pertaining

in any way to the organization or promotion of the subject company or to the

rights and duties of the organizers inter se or in relation to the company, or

pertaining to the gain or profits the organizers contemplate receiving from the

corporate venture.

      (2) An affidavit in

the form prescribed by and obtainable from the Department of Insurance, herein

filed by reference, is to be submitted by each organizer, promoter,

incorporator, director, trustee, officer, proposed management personnel or

other person similarly situated, if a company being formed. The affidavit shall

be typewritten.

      (3) Copies of equity

security subscription agreements, equity security certificates to be used, per

value of same, sale price to general public, sale price to organizers,

promoters, incorporators and proposed officers or managers, the number of

shares to be offered in the first issue, prospects, and any other promotional

literature or exhibits for use in selling equity securities.

      (4) An estimate of

the maximum expense of issuing and selling equity securities of the first issue

and in accomplishing all other organization procedures.

      (5) Monies received

from organizers, Prospective policyholders, and prospective subscribers, not

subject to impounding by requirements of the Office of Banking and Securities

shall be impounded and held in escrow upon such terms and conditions as the executive

director may prescribe.

      (6) An agreement

executed by all the incorporators obligating the incorporators to submit

promptly to the Office of Insurance any items of information specifically or

generally described in the foregoing enumeration which come into existence

during the period of organization.

      (7) A questionnaire

and check list, on a form prescribed by the executive director,

showing compliance with this section and the sections of the Kentucky Revised

Statutes to which this administrative regulation relates.

      (8) After the

requirements of subsection (1) of this section have been complied with to the

satisfaction of the executive director, he will examine such

persons referred to in this section concerning the data and documents above

referred to and other pertinent and necessary matters; and on the basis of the

items enumerated above, together with other information available to him from

his examination, he will, prior to approving the Articles of Incorporation for

filing with the Secretary of State and completion of the company's

incorporation, advise the incorporators whether or not such filed material can

meet the requirements necessary for a certificate of authority.

 

      Section 2. Second or

Subsequent Issues of Equity Securities by an Insurance Company Heretofore or

Hereafter Organized. (1) A second or subsequent issue of equity securities by a

stock insurance company heretofore or hereafter organized (equity securities

issued as a dividend excepted) shall be cleared with the executive

director through the identical process described above in

relation to a company in the process of incorporation, except that the executive

director will not require the submission of information already

in his files.

      (2) With respect to

a second or subsequent issue of equity securities by a company which has been

in existence for a period less than six (6) hears, the information and

agreements described in paragraphs (a) and (b) of this subsection shall be

submitted to the executive director in addition to the data

required in subsection (1) of this section, namely:

      (a) A statement

showing in parallel columns the names and addresses of the directors, officers,

and the ten (10) largest security holders of the company, of any related or

subsidiary company, and the number of shares of the company or companies,

respectively, owned by each of such persons.

      (b) An agreement on

the part of each director, officer or security holder owning, in the case of

the latter, ten (10) percent or more of the respective equity securities

described above, to the effect that such director, officer, or security holder

will not, during the period the equity securities are being offered and for the

period of six (6) months following the termination of the offering period, sell

or offer for sale any equity securities he may own or which he controls in such

company or companies at a price higher than the price at which same was

acquired by him or by any other person for his use and benefit. In applying

this paragraph to any director, officer or security holder, he shall be

regarded as owning equity securities in which he has a beneficial interest or

which, regardless of discernible beneficial interest, are registered in the

name of his wife, child, father, or mother, or any or all of same.

      (3) The executive

director’s approval of a second or subsequent issue of equity

securities will not be granted if it appears from all the facts and

circumstances presented to the executive director that

the notification of such issue is the personal advantage of directors, officer,

or security holders as distinguished from a need of the company for additional

capital.

 

      Section 3.

Collaboration with Executive Director of Department of

Financial Institutions. The executive director,

in administering the administrative regulations propounded above, will be

mindful of the requirements and administrative procedures under the Kentucky

Securities Law; and he may consult with the Executive Director of

Financial Institutions relative to decisions which both officers are respectively

required to make pursuant to law or this administrative regulation.

 

      Section 4. Rules and

Principles. The Executive Director of Insurance, in

considering questions relating to the organization of a new stock insurance

company, or relating to the enlargement of the capital of an established stock

company, will be guided by the following concepts, rules and principles, among

others:

      (1) The organization

and promotion of new insurance companies on a sound basis is to be commended

and encouraged.

      (2) The business of

insurance, because of its direct and vital effect upon security holders,

policyholders, and the economy generally, is vital to the public interest and

welfare.

      (3) The organization

and capitalization of insurance companies should be carefully scrutinized in

keeping with the concepts, rules, and principles therein enunciated.

      (4) Organization and

promotion expenses, inclusive of commissions paid for the sale of equity

securities, legal expenses, and statutory organization fees and charges, should

not under any circumstances exceed fifteen (15) percent of the sale price of

equity securities actually sold.

      (5) In the event a

new equity securities issue is approved by the office within a period of five

(5) years immediately subsequent to the date of the company's original license

to do an insurance business, the sale price for the new issue shall be subject

to the executive director’s approval and may not

exceed 200 percent of the lowest price at which any shares were previously

issued, except that a higher price may be fixed for a new issue, if in the

opinion of the executive director the condition of the

company justifies it, taking into considerate the company's financial

condition, business in force, and facts relating to the equity security's

history, such as splits, dividends, changes in par value, and the like.

      (6) The sale price

of equity securities shall be paid in cash or approved assets.

      (7) With respect to

stock companies hereafter organized, any arrangement, devise, plan or scheme,

however contrived or formulated, having as its end or purpose a diversion,

either directly or indirectly of the company's funds, other than in payment of

legitimate dividends or costs of doing business to any officer(s), director(s),

organizer(s), promoter(s) or equity holder(s) of ten (10) percent or more of

the company, or to any association, corporation, partnership, or trust owned or

controlled by any officer(s), director(s), organizer(s), promoter(s), or equity

security holder(s) of ten (10) percent or more of the company, as in violation

of this administrative regulation and the insurance laws of this state.

      (8) No domestic stock

insurer will be granted a certificate of authority if the funds used for its

formation have come, in any part, from an organization in which there was a

difference in the net price per share paid by the organizers as compared to

other equity security holders during the first two (2) years of its business

operation.

 

      Section 5. This

administrative regulation, representing as it does implementation of the

workings of the insurance law in a specific area, shall not be regarded either

as a contraction or enlargement of insurance law, but rather, as an

administrative application or interpretation of such law.

 

      Section 6. This

administrative regulation does not apply to changes in corporate structure,

amendments to articles of incorporation, mergers, consolidations, or other

corporate changes which do not involve the public offering of equity

securities. (I-24.01; 1 Ky.R. 1084; eff. 7-2-75; TAm eff. 8-9-2007.)