Special Solari Report: In-State Equity Crowdfunding Offerings as an Alternative to Federal Jobs Act

~The following article and accompanying table are intended for use as reference tools and as indications of the types of requirements and restrictions that may be found in various state statutes and regulations. They should not be relied upon, may not be current, accurate or complete and do not constitute legal advice for readers. Any small business interested in conducting a state crowdfunding offering should consult competent legal counsel in the applicable home state before taking any action.~

[CAF Note: Whenever I am interested in a highly complex legal and regulatory issue, I turn to our attorney Carolyn Betts to research and write something that distills the material down so that a serious entrepreneur can get the lay of the land before finding the right attorney. The goal is to take a very important issue and reduce the task of defining options to something a busy person can handle. As the federal government has declined to create a regulatory pathway for crowdfunding to serve as a legitimate tool for entrepreneurs to raise equity capital, the states are proceeding to take action. If using crowdfunding to invest or raise capital with securities is of interest, do check out what is happening in your state. Here it is – another tour de force from Carolyn Betts.]

By Carolyn A. Betts, Esq.

Many held out hope that the USA JOBS Act crowdfunding exemption would stimulate participation by investors of moderate means in new business formation. Unfortunately, due to the prohibitions in federal law on “general solicitation” as a marketing tool for capital raising by start-up businesses, there were very few circumstances under which an offering could be conducted over the Internet pre-JOBS Act. As we have seen, Title II of the JOBS Act loosened these restrictions for securities offerings to “accredited” investors.

Title III of the JOBS Act purports to provide issuers an affordable means to offer securities to non-accredited investors. On April 23, 2012 the Securities and Exchange Commission issued a warning to any who might attempt to bring offerings to the market under the new legislation — declaring it illegal to offer securities under the new exemption before final federal regulations are issued. While the statute mandates that the SEC issue regulations no later than 270 days after enactment, this requirement is long past and, at the date of this publication, only proposed regulations have been issued. What experienced market participants know is that even when final regulations are issued, the exemption in all likelihood will not offer the hoped-for relief, because regulations cannot be less restrictive than the Congressionally-enacted statute under which they are issued. The statute itself is largely unworkable because:

  • It requires the issuer to produce audited financial statements as part of mandatory disclosure to prospective investors for offerings over $500,000.
  • It requires the use of an Internet “portal,” which must be operated by a registered broker-dealer.
  • It establishes hard-to-implement safe-harbor hoops that issuers and Internet portal operators must jump through to assure that their screening of investors excludes those who the law decrees are not of sufficient means to afford the investment.

For these and other reasons, the cost of conducting a Title III offering may be prohibitive, even for relatively large offerings. The SEC and Congressional sponsors of the JOBS Act give lip service to the goal of the federal crowdfunding exemption to finally give start-up businesses access to the middle-class investor marketplace and provide middle-class investors an investment option that does not require participation in the public stock markets. The unfortunate fact is that in the name of protecting the general public from unscrupulous boiler-room operations and investment scams (and in order to satisfy the broker-dealer lobby that its franchise will be protected), the conditions for investment in crowdfunding offerings may close out issuers in modest-sized offerings.

The Federal Intrastate Exemption

Federal securities law preempts contrary state laws that might be more flexible except in the context of “intrastate” offerings with sufficient exclusive single-state attributes. This is because under the Securities Act of 1933 all securities offered by the use of the mails or by any means or instruments of transportation or communication in interstate commerce must be registered with the SEC. Effectively, the federal regulation raison d’etre in the context of securities offerings is that the offerings cross state lines and, therefore, interstate commerce is implicated and the US Constitution allows the federal government to intervene in what would otherwise be a matter of state law.

If the issuer establishes sufficient state contacts in its home state, under Securities Act § 3(a)(11) federal law does not apply. Rule 147 under the Securities Act of 1933 is a safe harbor for issuers to establish such state contacts. Being a safe harbor rule and not a regulation implementing a statutory provision, however, means that, in theory, there may be additional ways an issuer may establish that its offering satisfies the intrastate offering exemption of the Securities Act. In order to qualify for an intrastate exemption under Rule 147, the offering must have the following characteristics:

  1. The issuing entity must be organized under the laws of the implicated state. This means that if it is a corporation or limited liability company, the issuer’s articles of incorporation or articles of organization are filed in the state. A Delaware corporation or LLC will not, therefore, qualify except for intrastate offerings in Delaware.
  2. The issuer derived at least 80% of its gross revenues from sales of products and services or other conduct in and at least 80% of its assets are located within the implicated state. For this purpose, the relevant time period is measured back from the first offer of securities under the exemption and extends for up to 12 months, depending upon the length of operations, timing within the fiscal year relative to the first offer and whether the issuer has gross revenues of at least $5,000 for the previous 12 months.
  3. The issuer intends to use and in fact uses at least 80% of the net proceeds of the offering under this exemption in connection with the operation of the business or purchase of property or rendering of services in the implicated state.
  4. The principal office of the issuer is located within the implicated state.
  5. Offers and sales of securities are limited to residents of the implicated state. For this purpose, an entity is a resident of the state in which it is organized and an individual is a resident of the state in which he or she maintains a principal residence.
  6. For a period of nine months following the last sale of securities under the exemption, any resales must be limited to state residents.
  7. Certain precautions must be taken to prevent out-of-state resale of the securities. These precautions take the form of disclosure to offerees of restrictions on resale, restrictive legends on certificates for securities stating restrictions on resale, stop transfer instructions or limits on transfer in the issuer’s stock records and written residency representations from investors.

In short, under this safe harbor, the intrastate offering exemption is available only to an issuer that is organized in the state where it does most of its business and in which its main office is located, and provided that the issuer raises capital only from residents of that same state and uses most of the offering proceeds in the state. Clearly, satisfying these conditions according to the letter of the law can be difficult or impossible, particularly for issuers located near the border of one or more other states, issuers that conduct business over the Internet, issuers that invest in properties located in multiple states and partnerships among partners who live in multiple states. There is guidance for interpreting these requirements in the form of no-action letters and SEC rules, but in all cases, application of the rule is tricky and a risk-averse issuer is well-advised to pay careful attention in documenting how it satisfies each condition.

Getting beyond legal niceties and stepping into the realm of expedience, informed risk-taking and practicality, the sophisticated and well-informed businessperson wishing to take advantage of an intrastate exemption as a means of capital-raising may find the following relevant to the decision whether to abandon the offering because of a minor deviation from the conditions set forth in Rule 147:

  1. The SEC staff is over-burdened with matters of greater importance in the scheme of things than to investigate relatively small offerings largely within a single state by generally law-abiding businesses to individuals who are sophisticated enough to make informed investment decisions and able to bear the risk of loss of their investments. It probably would require a highly abusive scheme to raise significant funds from vulnerable populations in more than one state for the SEC to take notice of claimed intrastate offering exemptions.
  2. Rule 147 is merely a federal safe harbor rule. Under certain circumstances an issuer might argue that its offering is an intrastate offering under Securities Act § 3(a)(11) even though all of the requirements of the safe harbor rule have not been satisfied.
  3. It may make a difference within a given state whether:
    • The state securities regulator is particularly supportive of small business formation and crowdfunding or, on the other hand, has taken a wary stance with respect to Internet securities offerings or has attempted through regulation to place significant limits on Internet offerings.
    • The state has a particularly active and well-funded securities regulation agency and a complex state securities regulation and/or statute or, on the other hand, is more laissez-faire in such matters.
    • The issuer’s activities are generally non-controversial and non-threatening to powerful state interests or, conversely, its principals have encountered community resistance, regulatory heavy-handedness, legal scrutiny or negative press coverage in the past.
    • The state crowdfunding-friendly regulation or statute places particular emphasis on conforming to the requirements of Rule 147 in particular or instead has attempted in its statute to establish what in-state contacts it will focus upon with little regard to federal requirements.
  4. As in all matters involving the establishment of new businesses involving heavily-regulated activities, entrenched business interests and strong competition from “old model” businesses, issuer discretion is in order. An issuer may risk greater regulatory scrutiny if it seeks out or allows widespread media coverage of its business with little regard to the possibility that naïve and unsophisticated enthusiasts may be inspired to take more investment risk than is appropriate in their own particular situations.

Status of Intrastate Crowdfunding in the States

At the date of this writing, research indicates that Internet offerings of securities in-state under the federal intrastate offering exemption are possible in fourteen states: Alabama, Alaska, Colorado, Georgia, Idaho, Indiana, Kansas, Maine, Maryland, Michigan, Tennessee, Texas, Washington and Wisconsin. According to Wikipedia, there are or have been efforts to adopt crowdfunding statutes in thirteen US jurisdictions: Arkansas, California, Connecticut, District of Columbia, Illinois, Kentucky, Missouri, New Mexico, Pennsylvania, South Carolina, Utah, and Virginia. Crowdfunding regulations have been proposed in the District of Columbia and New Mexico, and a crowdfunding bill may still be pending in the legislature of Oregon. We also found evidence of crowdfunding legislative activity in Florida, Pennsylvania, North Carolina and New Jersey. The states that allow Internet securities offerings appear to have grassroots business and government leaders who have inspired legislators and securities regulatory agencies in their states to jump on the Internet bandwagon as a means of stimulating their economies and attracting new business. Notably, the Pennsylvania and California legislatures have not been able to agree on crowdfunding laws that have been introduced. The accompanying Excel table (which can be accessed by clicking on the icon at the end of this article) includes some of the provisions of a crowdfunding bill that was introduced in California but reportedly died in the appropriations committee.

Characteristics of State Statutes, Regulations and Exemptive Orders in the Fourteen States

A. State Regulatory Vehicle for Conducting Legal Internet Securities Offerings

New Statute Enacted by Legislature: Alabama, Alaska, Georgia, Maine, Maryland, Michigan, Tennessee, Wisconsin (some of which have since issued enabling regulations)

Regulatory Exemption Only, Promulgated by State Securities Regulatory Agency: Indiana (emergency rule), Kansas (modification by special order), Texas, Washington

Case-by-Case Exemption by Application and Agency Order: Idaho.

State Securities Registration and Review: Colorado, Maine

B. Maximum Offering Amount in 12-Month Period

The maximum offering amount for a JOBS Act Title III offering is $1MM. The maximum offering amounts under state intrastate Internet offering provisions range from $100,000 to $2MM (with most at $1MM or $2MM), in some cases without limit as to the proceeds that may be raised from accredited investors (Indiana, Wisconsin), and insiders (Alabama, Kansas, Tennessee). The state with the lowest limit is Maryland, at $100,000. In one state the maximum offering amount is net of costs of the offering. In other states, the maximum offering amount is reduced by the amount raised by the issuer for any securities, or any securities offered under an exemption, within a specified period of time (Maine, 12 months).

Whether two or more offerings will be “integrated” (with the result that the maximum offering amount includes the aggregate raised in all of the integrated offerings) is largely determined according to federal Rule 502 under Regulation D (the federal exemption for limited offerings by issuers), with the following factors considered in determining whether two offerings are integrated:

  1. Whether the offerings are part of a single plan of financing
  2. Whether the offerings are of the same class or similar classes of the issuer’s securities
  3. Whether the same type of consideration is paid in the offerings
  4. Whether the offerings are for the same general purpose
  5. Whether the offerings were conducted at around the same time

Under Rule 502, an offering will not be integrated with another if completed at least six months before or started six months after the offering at issue. Some state integration provisions have a longer look-back period (Indiana, Maine, Michigan, Texas, Wisconsin – 12 months). Some state provisions ban the use of the crowdfunding exemption “in conjunction with” or “in connection with” any other offering or any other exempt offering, although sales to insiders and sales of the different classes of securities may be excluded from this limit (Alabama, Georgia, Maryland, Tennessee). Also, there may be a state-imposed integration of offerings by affiliates of the issuer.

C. Requirements Relating to Investors and Individual Investment Limits

None of the existing intrastate crowdfunding provisions expressly requires the issuer or Internet portal operator to examine the investment or financial sophistication of prospective purchasers, although targeting an offering at unsophisticated investors may be a risky move in most cases, given the antifraud laws in effect in every state and federally. The Alaska statute limits intrastate crowdfunding offerings to accredited investors, however.

For all state Internet offerings, state laws limit the offerings to residents of the state, but the lengths to which an issuer or portal operator must go to in order to confirm state residency vary and required actions to prevent investment by non-state residents vary from state to state. At one end of the spectrum, state law requires the exclusion of non-state residents from the website (Indiana), the use of a legend explaining restrictions on resales to non-residents, the use of a specific state-issued boilerplate warning that the offering is open only to state residents, the use of an investor certification of residency (Georgia, Indiana) and an examination of documentary evidence of residency (Michigan). At the other end of the spectrum are states where there are no significant specified precautions and/or where the state securities regulatory agency has somehow indicated that the residency requirement may not be strictly enforced in the state (e.g., Alabama, Colorado, Kansas, Maine). Any state provision that expressly requires compliance with federal Rule 147 can be expected to require legends on physical securities (or other evidence of investment) that disclose the applicable limitations on resale to state residents. Michigan’s crowdfunding statute imposes a penalty for an out-of-state resale. There, if an investor subsequently sells its interest in the issuer to a non-resident of Michigan within nine months of closing of the offering, the investment agreement between the investor and the issuer is void and the issuer can recover damages from the investor.

With the exception of the outlier state exemption (Maryland’s), individual investment limits for non-accredited investors (in states where there are such limits) range from $2,000 (with a cap of 5% of income or net worth) to $10,000. In Maryland, the limit is $100 (and, importantly, the exemption is available for only debt offerings). The Maryland exemption, however, came into being under an order issued by the Maryland Securities Division pursuant to a statute authorizing the Division to create transactional exemptions, and the crowdfunding order itself contemplates that the Maryland Securities Division will expand the types of securities covered and make other exceptions that are in the interests of the public. There appears to have been a move in Alabama to increase the limit to $15,000.

D. Required Disclosure and Disclosure Documents

Required disclosure in intrastate crowdfunding offerings about the issuer and its operations, risks of investment, terms of the offering and securities, etc. varies widely from state to state and is beyond the scope of this article. The accompanying Excel table (which can be accessed by clicking on the icon at the end of this article) provides a summary of some of the disclosure requirements, but that summary may not be complete, accurate or current at any given time. It is essential that prospective issuers carefully review the disclosure requirements in applicable statutes, regulations, mandated forms and agency orders in the context of other state requirements and the specific fact situation. The following are some random observations, which may or may not cover the most important features of a given law or rule.

Alaska, Georgia, Kansas and Tennessee have no or limited express disclosure document requirements. In the case of Alaska, Georgia and Tennessee, this may be due, in part, to their regulatory agencies’ having not yet issued regulatory guidance. Thus, additional disclosure document requirements may be incorporated in future administrative agency guidance. Colorado requires more disclosure for offerings not satisfying certain state-contacts requirements than for those that do. State-provided fill-in forms comprise the mandatory disclosure documents in Maine (where the form is still in proposed form), Maryland and Washington.

In most states that impose disclosure document requirements, the issuer must provide the type of information as is required in a JOBS Act offering or a federal Regulation A offering, although generally not as extensive as under Regulation A. Some states, like Texas, require the issuer to disclose all information material to the offering, so the sky is the limit on what the issuer may need to disclose and a great deal more effort may go into preparing the disclosure document than is the case where, for example, the state provides a fill-in form or requires only a few simple items of information. Management of an issuer may be particularly interested to know that some states require detailed information about executive officers and directors of the issuer, promoters of the offering, existing shareholders and portal operators, including, for example, their conflicts of interest, existing securities holdings, previous business experience and other businesses.

Whatever a particular state securities division requires in the way of disclosure for an Internet offering, the issuer and all other participants in the offering and sale of securities must keep in mind the following:

  • Any investor in securities is entitled to all information that would affect the investor’s decision whether or not to purchase the security.
  • Federal securities laws (and in particular, Section 10(b)(5) of the Securities Exchange Act) and similar state securities laws, as well as general anti-fraud laws and case law, support an investor’s claim for damages if the investor loses his or her investment in an offering where misstatements were made, misleading information was provided or material negative information was withheld. “Material” in this context means anything that may affect the investor’s decision whether or not to invest. If an investor has received virtually no information about the business, financial status and prospects, key management, use of proceeds, conflicts of interest, etc., what argument does the issuer have that all material information was disclosed?
  • The adequacy of disclosure in a securities offering should be viewed in the context of the financial and business sophistication of the prospective investor, as well as the consequences to the particular investor in case of failure or lower-than-anticipated profits. The less sophisticated and financially stable the investor, the more important is the obligation to disclose the risks of investment in a way that the investor can understand at the investor’s level.
  • Any issuer of securities must be prepared for failure or financial difficulties, no matter how rosy the outlook when the securities are issued. Information that may not seem material when the issuer anticipates that the business will be successful, in hindsight, may prove significant when the inevitable unanticipated developments occur.
  • Not only the issuer, but any other participant in an offering of securities may be held liable for damages, and punitive damages may be awarded in extreme cases.
  • The “bad boy” provisions of both state and federal law disqualify a host of individuals and companies from participating in any significant capacity in many types of securities offerings, and this disqualification may last five or ten years into the future. Thus, depending upon the circumstances, anyone who has engaged in conduct resulting in certain sanctions by governmental authorities may be barred for a period of years from acting as a promoter, issuer, underwriter, executive officer or director of an issuer or holder of a significant equity interest in an issuer.

E. Issuer Financial Statements

Title III of the JOBS Act requires that issuers provide audited financial statements for offerings of more than $500,000. With the exception of Maine, no state requires audited issuer financial statements for intrastate Internet offerings of less than $1MM. Maine’s cut-off for audited financial statement is the same as under the JOBS Act. At the other extreme, some states have no express financial statement requirement under current law (Alaska, Georgia, Maryland, Kansas, Tennessee, Indiana for offerings of less than $1MM, Wisconsin for offerings of less than $2MM). In between, mandatory issuer financial disclosure ranges from current balance sheets (Colorado) to financial statements prepared in accordance with generally accepted accounting principles or “GAAP” (Alabama, Michigan, Texas, Washington, Wisconsin for offerings over $2MM), financial statements reviewed by an independent accountant (Maine for offerings between $100,000 and $500,000) and financial statements certified to be materially accurate and complete by an executive officer of the issuer (Maine for offerings less than $100,000, Texas). A cautious securities attorney may recommend the issuer provide some form of financial statements and/or projections to prospective investors for any Internet offering in order to lower the risk of an investor claim of inadequate disclosure amounting to fraud in the event the issuer’s business is not successful. Also, state securities regulatory agencies may in the future promulgate regulations or administrative orders that require more financial disclosure.

Title III of the JOBS Act also requires ongoing communication by the issuer with investors after closing of the offering. This is not an express requirement for any state intrastate offering, but four states (Indiana, Michigan, Washington, Wisconsin) require ongoing quarterly reports that include some type of financial information.

F. Role of Portals

The JOBS Act requires that securities sold in Internet offerings under Title III be offered through an intermediary that is either a registered broker dealer or a registered funding portal. The intermediary has various duties, including conducting background checks on every issuer listing securities on the intermediary’s website.

There are six states that recognize (and therefore in some manner regulate) Internet crowdfunding portals: Georgia, Indiana, Michigan, Texas, Washington and Wisconsin. So far, Indiana and Texas appear to be the only states to require the use of a portal for Internet offerings. Georgia’s statute acknowledges and approves the use of Internet portals but makes their use discretionary. Some other states’ provisions (e.g., Tennessee’s) do not mention Internet portals.

Most states that expressly recognize the existence of Internet portals require that the securities offered on the Internet be offered by state-registered broker dealers and that the portal limit access to residents of the state. Indiana, Michigan and Wisconsin have Internet portal registration requirements. Other states require administrative filings by Internet portals. One state’s securities regulatory agency (Colorado’s) reportedly has indicated that Internet offerings have been permitted under that state’s statutes and regulations in existence before enactment of the JOBS Act.

A state may or may not require that the Internet portal perform due diligence on an issuer applying for listing on its site (Texas does) or assume other duties for which it may be answerable to investors and state securities regulators (see, e.g., Indiana). The Texas statute requires that all communications with potential investors take place on the Internet website and that the operator of the website make available a facility for potential investors to pose questions that must be visible to all other potential investors and receive answers to those questions. Texas also appears to have the most detailed and comprehensive requirements for site recordkeeping (e.g., a portal operator must maintain records for five years after termination of the issuer’s listing on the portal), but most state provisions do not expressly address issuer or portal recordkeeping post-closing. Some state provisions expressly prohibit affiliations between the portal operator and the issuer and/or the escrow agent. Texas expressly prohibits the issuer from paying for portal services with shares of its stock.

G. Escrows and Other Requirements for Offering Proceeds Pre-Closing

The JOBS Act does not require an issuer to deposit offering proceeds in an escrow account unless there is a portal or other intermediary, and in that case the offering proceeds may not be released to the issuer until 60% of the target offering is reached. This is a relatively permissive feature of JOBS Act.

Five states that have exemption provisions for Internet offerings (Indiana, Michigan, Texas, Washington, Wisconsin) require that the issuer deposit offering proceeds in an escrow account, at least until the issuer has raised some minimum target amount. In some cases, there are specific escrow agreement requirements (e.g., that no third party may have a claim on funds held in the account), state-provided escrow agreement forms, requirements that escrow agreements be filed with the state securities regulatory agency or requirements that the state agency have unfettered access to escrow account records (Washington). Michigan and Wisconsin require that offering proceeds be held in escrow only until the issuer has raised the minimum target amount necessary to carry out its business plan, so, presumably, after that level has been reached additional offering proceeds are not subject to escrow requirements. In Washington, the escrow agent may not be an affiliate of the portal operator. In Texas, the escrow bank must be located in the state. Maryland does not require an escrow account but does require that the issuer disclose to prospective investors that there is no escrow account if that is the case.

For offerings in Maine, the issuer may deposit offering proceeds in a separate account within the control of the issuer, but there are other protective requirements. Under final regulations, offering proceeds must be returned within 30 days if the minimum target level is not reached within one year or if the Securities Division otherwise terminates the registration. Proposed regulations in Maine would require an impound account and that investor checks be made payable to the impound account. They would also provide that the minimum target offering amount may not be less than 30% of the maximum target offering amount, the issuer must deposit funds received from investors within three days of receipt, and no securities may be issued until the issuer has raised minimum target offering proceeds.

Even if state intrastate offering exemptions do not expressly require an issuer to maintain offering proceeds in an account separate from the issuer’s other accounts, it would be foolhardy and probably a violation of other state laws to commingle the offering proceeds with other funds of the issuer before closing the offering, or at least reaching a minimum level of investment capital that would allow the issuer to carry out its business plan without further capital from investors.

Conclusion

It should be clear to the owner or management team of a new or existing small business planning to raise capital by means of an offering on the Internet that state and federal laws may present an unexpected minefield, potentially affecting the business financially, legally and from the public relations and marketing perspectives. For a small business that plans to offer securities to the general public, but not in the near future, a review of some of the state crowdfunding requirements may provide helpful guidance about what types of information the business may need to retain for the future and may inform current decisions on how to structure intellectual capital, accounting and recordkeeping systems.

There has been no attempt here to cover the penalties that may be imposed if an issuer does not strictly follow state and federal requirements for intrastate Internet offerings. Such penalties can be severe and have the potential to restrict management’s ability to legally engage in future securities offerings. We also have not examined the fledgling Internet portals that are being formed to provide services to issuers under the JOBS Act and for intrastate Internet offerings. Prospective issuers are wise to seek competent legal advisors to assume the responsibility for compliance unless they have confidence that responsible portal operators have the expertise to provide guidance on navigating state laws covering Internet offerings. In short, due diligence is in order.

_________________________________________________________
1According to a June 23, 2014 Slate article by Jim Saska entitled “Kickstarter,
But With Stock,” (http://www.slate.com/articles/business/moneybox/2014/06/sec_and_equity_crowdfunding_it_s_a_disaster_waiting_to_happen.html)
“the SEC estimates that it would cost $39,000 in fees to accountants,
lawyers, and the funding portal to raise just $100,000, and more than $150,000
to raise $1 million. Those are insanely high capital costs—companies would
be better off financing their operations with credit cards. (Just think of the
reward points!) For comparison, underwriting fees for a large public offering
are usually under 4 percent.”

2Section 3(a)(11) of the Securities Act of 1933, 15 U.S.C. Section
77c(a)(11), and SEC Rule 147, 17 C.F.R. 230.147. Section 3(a)(11) of the Securities
Act is the federal exemptive provision. It exempts from federal registration
requirements any “security that is a part of an issue offered and sold
only to persons resident within a single State or Territory, where the issuer
of such security is a person resident and doing business within * * * such State
or Territory.” Rule 147 is the safe harbor regulation promulgated by the
SEC as an interpretation of the statute stating that if the conditions of the
rule are satisfied, the SEC deems the offering to qualify for the intrastate
exemption under Section 3(a)(11). Rule 147 by its terms is not an exclusive
safe harbor, however, and, in theory at least, there may be other ways to qualify
for the intrastate exemption even if the rule requirements are not met. As a
practical matter, and by the terms of many state crowdfunding exemptions, all
intrastate offerings must meet Rule 147 requirements.

3 In this regard, it is worthy of note that the Georgia Division of Securities
and Business Regulation, in 2014 guidance on its website, states that qualification
for an intrastate crowdfunding offering in the state is a matter of federal
rather than state law.

4 The Maryland exemption, however, came into being under an order
issued by the Maryland Securities Division pursuant to a statute authorizing
the Division to create transactional exemptions, and the crowdfunding order
itself contemplates that the Maryland Securities Division will expand the types
of securities covered and make other exceptions, in individual cases or generally,
that are in the public interest and appropriate for protection of investors.
One might imagine that the individual investment limit is just such an appropriate
exception.

EXCEL TABLE COMPARING STATE CROWDFUNDING PROVISIONS


[Click on the image to open Excel table]
Note:Click on Read Only to View File

The table and the article that accompanies it are intended for use as reference tools and as indications of the types of requirements and restrictions that may be found in various state statutes and regulations. They should not be relied upon, may not be current, accurate or complete and do not constitute legal advice for readers. Any small business interested in conducting a state crowdfunding offering should consult competent legal counsel in the applicable home state before taking any action.

LINKS

Alabama

1. Enrolled crowdfunding bill

Alaska

1. Notice of proposed regulations and proposed changes to existing regulations

2. House Bill 308 as enacted from Alaska legislature website

Colorado

1. Colorado Revised Statutes – registration by qualification

Georgia

1. Invest Georgia Exemption from the Georgia administrative code, Georgia Comp. R. & Regs § 590-4-2-.08

2. “Understanding the Invest Georgia Exemption by the Staff of the Securities Division March 2014” from the Georgia Securities Division website

3. Invest Georgia Exemption Form

Idaho

1. Order by the Director of the Department of Finance of the State of Georgia exempting Treasure Valley Angel Fund, LLC from registration requirements

2. Idaho Code section providing authority for the issuance of exemptions from registration by regulation or order, Idaho Code § 30-14-203

Indiana

1. The codified Exempt Indiana Exemption in an excerpt from the Alabama Code, Indiana Code § 23-19-2-2(27)

2. Emergency rule “temporarily adding noncode provisions [to the administrative code] to assist in the implementation of new intrastate securities exemptions,” LSA Document # 14-248(E)

Kansas

1. The codified Exempt Kansas Exemption in an excerpt from the Kansas Administrative Rules, KAR § 81-5-21

2.Special Order of the Securities Commission authorizing modifications for the Invest Kansas Exemption

Maine

1. Bill adopting Maine crowdfunding registration provision,codified at 32 MRSA § 16304 (6-A)

2. Proposed Rule Regarding Short-Form Seed Capital Registrations issued by Maine Office of Securities

3. Proposed Fund Maine subscription agreement form

4. Proposed Fund Maine offering circular form

5. Maine Seed Capital Tax Credit Program rules

Maryland

1. Excerpt from Maryland Code, Md. Ann. Code., Corps. & Ass’ns. § 11-601(16), authorizing the Securities Commission to adopt an intrastate exemption from registration requirements and providing for conditions to the authorization

2. Maryland Small Intrastate Small Business Exemption, House Bill 1243

3. Maryland Securities Commission Order creating Maryland Intrastate Small Business Exemption

4. Excerpt from Maryland Code section on transactional exemptions (see new (16) and (17))

5. Maryland Securities Commission Order re: local issuer exemption – eligible entities

Michigan

1. Enrolled Michigan Invests Locally bill from Michigan legislature website

2. Notice of Issuer form for Michigan Invests form Locally exemption

3. Notice of Website Operator form for Michigan Invests Locally Exemption

Tennessee

1. Senate bill 1481 adopting Invest Tennessee Exemption from Tennessee legislature website

Texas

1. Intrastate Crowdfunding Exemption, 7 Tex. Admin.Code § 139.25

2. Regulation on portal registration and activities, 7 Tex. Admin. Code §115.19

3. Texas State Crowdfunding Exemption Notice form

4. Texas Crowdfunding Portal Registration form

Washington

1. Securities Division Rulemaking Order creating crowdfunding exemption, 460-99C-010 WAC

2. Final Washington crowdfunding exemption rule, 460-99C-010 WAC

3. Washington Crowdfunding Form

Wisconsin

1. New section 551.205,an add-on exemption to existing Wis. Stat. § 551.202, Par. 26

Articles about Individual State Provisions

Georgia:
“Invest Georgia Exemption: Crowdfunding in Georgia,” on Georgia Crowdfunding Investment Association web page.

Idaho:
Richard A. Riley, “New, Loosened Restrictions on Securities Offerings by Small Idaho Businesses,” (3/28/12) from webpage of the law firm of Hawley Troxell.

Maine:
Christopher C. Dana,“Maine Crowdfunding Law,” (3/4/14) from the website of the law firm of Drummond Woodsum.

Michigan:
Alan McGlade, “Michigan Governor Signs Michigan Crowdfunding Exemption,” (12/31/13).

Washington:
Joe Wallin,“An Inside View of the Washington Equity Crowdfunding Law,” (5/6/14).

Wisconsin:
Rick Rommell,“MobCraft Beer becomes first to use state’s crowdfunding law,” (9/24/14), Milwaukee Journal Sentinel.

News on Pending and Proposed State Crowdfunding Legislation/Regulations

District of Columbia:
Notice of Proposed Rulemaking

New Mexico:
Proposed rules; see article on this Proposed Intrastate Crowdfunding Exemption

North Carolina:
Paul Foley, Will Joyner, Jeffrey Skinner, and Kate McCurry “North Carolina JOBS Act – Pioneering Investment Crowdfunding Exemption,” (7/14) from the website of the law firm of Kirkpatrick Townsend.

Oregon:
Notice of proposed rulemaking [proposed to amend regulations OAR 441-035-0005, implement statute ORS 59.035]

Utah:
HB 142, introduced in 3/14; proposed change to Utah Securities Act existing exemption lifting 15-investor limit and ban on general solicitation and advertising for intrastate offerings, limited to $1MM.

Solari Postings on the Subject of Crowdfunding

Coming Clean: Crowdfunding

Jumpstart Our Business Startups (JOBS) Act of 2012

A Special Solari Report: Crowdfunding & the Legal Pathways to Raising Capital

The Comfort Calls Story: Organizing the Legal Structure for Your Startup

A Solari Report – Independent Media Sustainability: A Review of Existing Media Capital Structures

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