The Latest on Crowdfunding—Intrastate Intrigue

With all the constant chatter about Crowdfunding, I’ve come to realize that, as the three-year Halloween anniversary of my first post on Crowdfunding approaches, I was ahead of the curve on this one.

Frequent readers of this blog know that several authors have been actively following Crowdfunding developments. They also know that federal and state securities regulators are not excited about the prospect of equity Crowdfunding. Even back in 2011, when I predicted that the SEC would miss the initial deadline for adopting Crowdfunding regulations, I couldn’t have imagined that they might miss it by over two years!

While the SEC has been taking its time enacting the final rules, at least 12 states have enacted “intrastate” exemptions to permit Crowdfunding equity capital to be raised from investors. Each of these statutes has their own requirements (filings, disclosure obligations, limits, etc.), but a common element is that each one makes Crowdfunding available only to companies who meet the requirements of Section 3(a)(11) of the federal Securities Act. This means that they must be organized in the state where the offering is being made, have significant business in the state, and make offers and sales only to residents of that state.

While it isn’t clear how useful these exemptions will be in the context of Crowdfunded equity in general, at least another 12 states have also begun the process of adopting similar regulation. This includes the Land of 10,000 Lakes (or, if you prefer, the North Star State) where this initial draft legislation is in its infancy.

While I fully support the adoption of an intrastate Crowdfunding exemption to make sure that the great state of Minnesota isn’t viewed as too provincial and doesn’t get left behind, the utility of these exemptions remains unclear. Before you rush out to raise equity capital from an intrastate crowd, consider the following: 

• If you don’t want to have to become a reporting public company, you still 
   can’t have more than 500 non-accredited shareholders (or 2,000 total  
   shareholders). While provisions of the JOBS Act permit you to exclude 
   Crowdfunding investors from the count for the purposes of determining 
   whether you need to become a reporting company, only Crowdfunding investors 
   under Section 4(6) of the Securities Act (the federal Crowdfunding exemption) 
   are excluded. At least until the SEC finalizes its Crowdfunding rules, you’ll need 
   to count those who invest in an intrastate Crowdfunding.

• To be exempt in an intrastate Crowdfunding, you’ll need to implement
   technological measures to limit your communication about the offering to only 
   persons within the state where the intrastate Crowdfunding is happening. 
   In addition to disclaimers and legends on the topic, it may mean restricting
   access to those whose IP address originates from the particular state.

• Almost all of the state Crowdfunding exemptions (and those 
   of about a dozen more states that have proposed legislation) require delivery
   of specific disclosure information (description of issuer, risk factors, use of
   proceeds, identification of officers and directors, offering terms, etc.) 
   to prospective investors. Not that you’d want to, but you won’t be able to 
   avoid your friendly neighborhood entrepreneurial services attorney to pursue 
   an intrastate Crowdfunding.

The landscape for equity Crowdfunding is undoubtedly evolving rapidly. If the journey to what it may ultimately look like is a trip from San Francisco to Tokyo, we just passed under the Golden Gate Bridge (maybe we should sing it a song). Stay tuned for updates on federal and state Crowdfunding initiatives.