State Level Crowdfunding Relies on the 80% Rules
A few important requirements in Rule 147 that must be met for the offering to be exempt
Equity and debt crowdfunding became a hot topic with the passing of the Federal JOBS Act on April 5, 2012. Title III of the legislation, which is most pertinent to crowdfunding, was sent to the SEC and then FINRA for further rulemaking before implementation. We are still awaiting those rules and do not expect to see them before the end of 2014. Many state lawmakers have jumped into the void and quickly passed crowdfunding laws, exemptions, or administrative rules (“laws”) within their states. Currently, Kansas, Georgia, and Michigan have active state crowdfunding laws, with Alabama, North Carolina, Texas, Washington, and Wisconsin expected to enact their laws soon.
In reviewing all of the state laws, one will notice that they are fairly brief. As an example, the “Invest Kansas Exemption” is less than one and a half-printed pages. The brevity of the laws might be misleading because they all refer to and rely on existing federal securities laws. Every state law has a provision requiring that the transaction meets the requirements of the federal exemption for intrastate offerings in section 3 (a)(11) of the Securities Act of 1933 and Rule 147. It is easy to gloss over that reference and miss some important requirements.
Crowdfunding Offer Exemptions
In order for the offering to be exempt from federal regulation, and thus eligible for state regulated crowdfunding, there are a few important requirements in Rule 147 that must be met:
It must be incorporated or organized under state law (that means no Delaware or Nevada incorporations unless the business is located in one of those states),
It must be doing business in the state (this is the one to watch out for),
80% of its gross revenue must be generated in the state,
80% of its assets are located within the state,
80% of the proceeds must be deployed within the state, and
During the offering and for a period of 9 months after the last sale of the offering by the issuer, the securities can only be resold to people who are residents of the state.
Can a company get away without following Rule 147? They might be able to initially, but if anything goes wrong, and one of the investors contacts a competent securities attorney, they will find that the offering did not meet the intrastate exemptions, thus falling under federal securities laws, and resulting in the offering being illegal. The company would then be required to refund the money to all investors.
State crowdfunding has the potential to be a very powerful tool for raising equity and debt for small and early-stage companies. However, be careful not to rush into the crowdfunding effort without getting proper guidance from a securities attorney or broker-dealer who understands the detailed requirements of crowdfunding.
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Steve Sprindis is co-founder and managing director of Waypoint Private Capital. © 2014 Waypoint Private Capital, Inc. All Rights Reserved.