U.S. Intrastate Equity Crowdfunding Exemptions: 5 State Bills Adopted and 16 Pending

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Intrastate Crowdfunding in the US Today

As Canadians we are often told by the media, and the uninformed, we need one securities regulator just like United States (US). Canadians truly believe that there is only one securities regulator in the US and only one set of securities rules and regulations.  Those of you living in the US know this is not true. Each US state and territory (state) has its own securities regulator and its own set of securities rules and regulations. Many of these state securities rules and regulations are based on the Uniform Securities Acts of 1956 and 2002 agreed to by the North American Securities Administrators Association (NASAA). NASAA encourage its members to seek uniformity of state securities laws but recognizes difference may emerge requiring local rules be adopted to address important issues in a particular state’s jurisdiction. Equity crowdfunding is one issue where individual state regulators have chosen to not wait for the US Securities and Exchange Commission (SEC) or NASAA to implement a uniform rule.

As of March 18, 2014, five (5) states have adopted an intrastate equity crowdfunding exemption and sixteen (16) other states are in various stages of review in passing their own intrastate equity crowdfunding exemption (see charts below for detail).  No one could have predicted twenty-one (21) states would work towards adopting their own crowdfunding exemption when the Jumpstart Our Business Startups Act (Job’s Act) was enacted on April 5, 2012.

These intrastate exemptions share quite a lot in common with the Title III crowdfunding exemption of the Job’s Act, but they differ in material ways. An issuer may raise up to $1,000,000 to $2,000,000 under an intrastate crowding funding exemption in a 12 month period. Individual investment amounts are capped to an amount certain; $5,000 and $10,000 caps being most popular.  The disclosure requirements are simplified. Most intrastate crowdfunding exemptions do not require issuers to provide audited financial statements or any mandatory financial statements unless an issuer is raising more than $1,000,000.  The exemptions also have no post-offering disclosure requirements.  Instead, the regulators are relying on the crowd to dictate what type of disclosure issuers must provide during and after an equity crowdfunding campaign.

The requirement for portal operators state to state varies more than the requirements for issuers relying on an intrastate crowdfunding exemption. Portals either need to be registered as a broker-dealer or agent, or are exempt from registration on the basis they are not providing investment advice, or must register as a funding portal by filing a simple disclosure document. There is no requirement in any state that portal operators be resident in the state, only that the money received by a portal during a campaign be held within the state.

This light hand approach to equity crowdfunding regulation makes sense. It is a new industry and state regulators want to allow equity crowdfunding to develop in their state.  Locavesting is how most successful non-equity crowdfunding campaigns are funded.  Local angels also represent the majority of in state investing in start-ups and early stage businesses. Introducing a new crowdfunding “perk” in the form of equity and allowing 98% of the population that is not an accredited investor to participate in these offerings, may have a huge impact in a state even with a small population base.

What makes intrastate crowdfunding attractive is the cost of starting an offering is less of a burden to issuers and investors than the proposed Title III Job’s Act version of equity crowdfunding.  The professional fees for lawyers, accountants and auditors for intrastate crowdfunding are eliminated or brought down to under $1,000.  The disclosure documents, rather than daunting and full of legalese, are easy for issuers to prepare on their own.  With no audit requirement, there is no need for an auditor; and any accounting statements voluntarily provided can be prepared by management. Issuers can use 99% of the money they raise for growing their business versus keeping a securities regulator happy.  Investors can ask for the type of information and ongoing disclosure they want that fits the size of the business versus receiving information that does not make sense for the business or the size of investment.

There are few intrastate crowdfunding portals in operation.  The rules have only been recently adopted in most states.  It will take time for this form of equity crowdfunding to take hold.

Two charts have been provided below. The first chart summarizes the basic requirements of the intrastate equity crowdfunding exemptions available now. The second chart provides a list and link to all of the pending intrastate equity crowdfunding bills.

Intrastate Crowdfunding Exemptions Available Now**

Georgia, Kansas, Maine, Michigan, and Wisconsin have each adopted an intrastate crowdfunding specific prospectus exemption. An intrastate exemption provides an exemption from federal registration requirements and state registration requirements, provided the issuer is a resident of and doing business within the state in which all offers and sales are made, and no part of the offering is offered or sold to non-residents.  In other words, this is not a crowdfunding exemption Canadian issuers or anyone else outside of that specific state can rely on to raise capital.

INTRASTATE EQUITY CROWDFUNDING EXEMPTIONS

Available Now

Intrastate
Exemption

Invest Georgia Exemption 590-4-2-.08

Invest Kansas Exemption 81-5-21

Maine: An Act to Increase Funding for Start-Ups S.P. 568 – L.D. 1512

Michigan Uniform Securities Act (2002) Section 202a

Wisconsin Section9.551.202 (26)

State Population1

2,853,118

9,687,653

1,328,361

9,883,640

5,686,986

Offering Limit

$1,000,000 cap every 12-month period.

$1,000,000 cap every 12-month period.

$1,000,000 cap every 12-month period.

$1,000,000 cap every 12-month period if no audited financial statements provided.

$2,000,000 cap every 12 months if audited financial statements provided.

$1,000,000 cap every 12-month period if no audited financial statements provided.

$2,000,000 cap every 12 months if audited financial statements provided.

Type of Securities

All.

Securities issued are restricted securities.

All.

Securities issued are restricted securities.

All.

Securities issued are restricted securities.

All.

Securities issued are restricted securities.

All.

Securities issued are restricted securities.

Issuer Restrictions

Available to non-reporting issuers involved in all for profit business sectors other than issuers who are an investment company, or without a specific business plan, or involving persons with a criminal or disciplinary history.

Entity must be organized in Georgia by registration with the Georgia Secretary of State, and must be located in Georgia, including management, with at least 80% of its assets and operations within Georgia.

Available to non-reporting issuers involved in all business sectors other than issuers who are an investment company, or without a specific business plan, or involving persons with a criminal or disciplinary history.

Entity must be organized in Kansas by registration with the Kansas Secretary of State, and must be located in Kansas, including management, with at least 80% of its assets and operations within Kansas.

Available to non-reporting issuers involved in all business sectors other than issuers who are an investment company, or without a specific business plan, or involving persons with a criminal or disciplinary history.

Entity must be organized in Maine by registration with the Maine Secretary of State, and must be located in Maine, including management, with at least 80% of its assets and operations within Maine.

Available to non-reporting issuers involved in all business sectors other than issuers who are an investment company, or without a specific business plan, or involving persons with a criminal or disciplinary history.

Entity must be organized in Michigan by registration with the Michigan Secretary of State, and must be located in Michigan, including management, with at least 80% of its assets and operations within Michigan.

Available to non-reporting issuers involved in all business sectors other than issuers who are an investment company, or without a specific business plan, or involving persons with a criminal or disciplinary history.

Entity must be organized in Wisconsin by registration with the Wisconsin Secretary of State, and must be located in Wisconsin, including management, with at least 80% of its assets and operations within Wisconsin.

Investor Restrictions

Must be Georgia residents and all offers and sales transactions must occur within Georgia. (SEC Rule 147: any resales during the offering and for a period of 9 months after the offering is completed must be limited to Georgia residents.)

12-month investment cap of $10,000 per issuer by an investor unless an accredited investor.

Must be Kansas residents and all offers and sales transactions must occur within Kansas and any resales during the offering and for a period of 9 months after the offering is completed must be limited to Kansas residents.

12-month investment cap of $5,000 per issuer by an investor unless an accredited investor.

Must be Maine residents and all offers and sales transactions must occur within Maine. (SEC Rule 147: any resales during the offering and for a period of 9 months after the offering is completed must be limited to Maine residents.)

12-month investment cap of $5,000 per issuer by an investor unless an accredited investor.

Must be Michigan residents and all offers and sales transactions must occur within Michigan and any resales during the offering and for a period of 9 months after the offering is completed must be limited to Michigan residents.

12-month investment cap of $10,000 per issuer by an investor unless an accredited investor.

Must be Wisconsin residents and all offers and sales transactions must occur within Wisconsin. (SEC Rule 147: any resales during the offering and for a period of 9 months after the offering is completed must be limited to Wisconsin residents.)

12-month investment cap of $10,000 per issuer by an investor unless an accredited investor.

Financial Statements

Optional.

Optional.

Unaudited financial statements reviewed by a public accountant if amount raised in preceding 12 month period in aggregate more than $100,000 but no more than $500,000.

Unaudited financial statements plus most recent tax return if amount raised in preceding 12 month period in aggregate $100,000 or less.

Audited financial statements if amount raised in preceding 12 month period in aggregate more than $500,000.

Audited financial statement required if raising more than $1,000,000.

Audited financial statement required if raising more than $1,000,000.

Document Requirements

Form GA-1 Invest Georgia Exemption must be filed in paper form before any general solicitation or within 25 days of the sale of securities.

Subscription agreement.

Notice of Reliance on the Invest Kansas Exemption Form must be filed in paper form before any general solicitation or within 25 days of the sale of the security.

Subscription agreement.

Disclosure statement containing the information prescribed in subsection 6-A.E of the rule.

Subscription agreement.

Notice of Issuer Michigan Invests Locally Exemption Form and disclosure statement containing the information prescribed in subsection 202a (1)(e) of the rule must be filed electronically within 10 days before the offering of the securities.

Risk acknowledgement in required form to be signed by each investor.

Subscription agreement.

Advance notice form and disclosure statement containing the information prescribed in subsection 551.202 (26)(f) of the rule must be filed electronically within 10 days before the offering of the securities.

Risk acknowledgement in required form to be signed by each investor.

Subscription agreement.

Disclosure Liability

Full disclosure liability with a knowledge exception and anti-fraud liability.

Full disclosure liability with a knowledge exception and anti-fraud liability.

Full disclosure liability with a knowledge exception and anti-fraud liability.

Full disclosure liability with a knowledge exception and anti-fraud liability.

Full disclosure liability with a knowledge exception and anti-fraud liability.

Post Offering Requirements

None.

None.

None.

Quarterly report in required form must be provided to all purchasers within 45 days after the end of each fiscal quarter until none of the securities issued under the exemption are outstanding. Requirement may be satisfied by posting on website.

Wisconsin securities regulator may adopt a rule or order requiring periodic reports while a registration statement is effective. Right now no requirements.

Portal Requirements

Direct sales by issuer or portal operator must be registered as a broker-dealer or agent under Georgia Securities Act.

Direct sales by issuer or portal operator must be registered as a broker-dealer or agent under Kansas Securities Act.

Direct sales by issuer or portal operator must be registered as a broker-dealer or agent under Maine Securities Act.

Direct sales by issuer or portal operator must be registered as a broker-dealer or agent under Michigan Securities Act or exempt from registration. (Notice of website operator.)

Sales must be through an online funding portal. Portal operator must be registered as a broker-dealer or agent under Wisconsin Securities Act or exempt from registration.

Advantages

(1) Can sell to anyone resident in Georgia; (2) All types of securities may be sold; and (3) No annual report or other continuous disclosure requirements because of offering.

(1) Can sell to anyone resident in Kansas; (2) All types of securities may be sold; and (3) No annual report or other continuous disclosure requirements because of offering.

(1) Can sell to anyone resident in Maine; (2) All types of securities may be sold; and (3) No annual report or other continuous disclosure requirements because of offering.

(1) Can sell to anyone resident in Michigan; (2) All types of securities may be sold; and (3) May raise up to $2,000,000 if audited financial statements provided.

(1) Can sell to anyone resident in Wisconsin; (2) All types of securities may be sold; and (3) May raise up to $2,000,000 if audited financial statements provided.

Disadvantages

(1) Offering size limited to maximum of $1,000,000 every 12 month period including all other offerings; (2) Only available to state resident issuers and investors; and (3) civil liability attached.

(1) Offering size limited to maximum of $1,000,000 every 12 month period including all other offerings; (2) Only available to state resident issuers and investors; and (3) civil liability attached.

(1) Offering size limited to maximum of $1,000,000 every 12 month period including all other offerings; (2) Only available to state resident issuers and investors; (3) financial statements must be reviewed if raising more than $100,000 and under $500,000 and audited financial statements must be provided if raising more than $500,000; and (4) civil liability attached.

(1) Offering size limited to maximum of $2,000,000 every 12 month period including all other offerings; (2) Only available to state resident issuers and investors; (3) audited financial statements must be provided if raising more than $1,000,000; (4) quarterly report must be provided until securities are no longer outstanding; and (5) civil liability attached.

(1) Offering size limited to maximum of $2,000,000 every 12 month period including all other offerings; (2) Only available to state resident issuers and investors; (3) audited financial statements must be provided if raising more than $1,000,000; (4) Issuer must make offering through a registered broker dealer; and (5) civil liability attached.

Active Portal Examples

Sterling Funder; and SparkMarket

Note: (1) United States Census Bureau, 2010 Census.

Nebraska amended its Securities Act May 2, 2013, to include an intrastate exemption (subsection 8-1108.01(23) ) allowing Nebraska resident issuers to raise up to $250,000 in a 12 month period.  Only a registered agent of a registered broker-dealer may receive commission in these offerings.

**See Update – U.S. Intrastate Equity Crowdfunding Exemptions: 7 State Bills Adopted and 13 Pending posted April 7, 2014 which includes a PDF chart of all 7 State Bills Adopted.

Intrastate Crowdfunding Exemption Bills Pending

Alaska, Alabama, Indiana, Florida, Maryland, Missouri, North Carolina, New Jersey, South Carolina, Tennessee, Utah, Virginia, and Washington are all considering intrastate crowdfunding exemption bills. Connecticut, New Mexico and Texas have ordered committee reports on crowdfunding for possible action in the next legislature in their respective states. There is no guarantee however, any of these proposed bills will pass. The intrastate crowdfunding bill introduced in Mississippi for example failed to garner support and died.

The chart below provides the name and status of the intrastate crowdfunding related bills that are pending as of March 18, 2014. This list may not be complete. Several states have competing intrastate crowdfunding bills pending in the house and senate, or renumber and rename the same bill depending if it is in the state house or senate.

INTRASTATE EQUITY CROWDFUNDING IN UNITED STATES

Pending

State

Bill Name

Status

Last Action Date

Next Action Required

AK

HB 303 An Act establishing an   exemption for the sale and offering of certain securities

Read 1st time in house. Bill referred to labor and commerce committee.

02/12/14

Bill must now go through house committee process.

AL

SB44 – Intrastate Crowdfunding   Exemption

Read 2nd time in house.

02/12/14

Bill must be read 3rd time in house. If   passed by house it is ready for enrollment and transmittal to Governor for final approval/veto.

CT

HB05577An Act Concerning A Crowdfunding Study by the   Department of Banking

Introduced and referred to joint committee on commerce.

03/11/14

Request the banking commissioner study   crowdfunding legislation in other states and provide recommendations for   implementation in CT by 01/01/15.

IN

HB 1119 Crowdfunding Bill

Read 3rd time in senate.

02/27/14

Bill requires house signature. Once received it is ready for enrollment and transmittal to Governor for final   approval/veto.

FL

SB 1596 Crowdfinance Bill

HB 1296 Small Business Investment   Bill

Introduced in senate.

Introduced in house.

03/10/14

03/11/14

Bill must now go through senate committee process.

Bill must now go through house committee process.

MD

SB 811 Crowdfunding Bill

1st reading in house. Bill referred to   economic matters committee.

03/11/14

Bill must now go through house committee process.

ME

S.P. 568 – L.D. 1512 An Act To   Increase Funding for Start-ups

Passed by house 02/13/14 and now senate.

02/18/2014

Bill became law without Governor’s   signatures (emergency measure) 03/02/2014.

MO

HB 1736 Crowdfunding Bill

2nd reading in house. Bill referred to   financial institutions committee.

02/12/14

Bill must now go through house committee process.

NC

HB 680 North Carolina Jump-Start Our Business Start-ups   Act of 2013

Referred to commerce committee.

06/24/13

Bill must now go through house committee process. (In Recess.)

NJ

SB 712 2014 Crowdfunding Bill

A 2073 2014 Provides certain issuers of securities with exemption from registration

Introduced in the senate, referred to senate   commerce committee.

Introduced in the NJ assembly.

01/14/14

01/16/14

Bill must now go through house committee process.

Referred to assembly financial institutions and insurance committee.

NM

House Memorial 85 Study Potential Crowdfunding Benefits

Introduced and passed by house.

02/19/14

The economic development department is to   prepare a report on bill and present findings to interim legislative committee by 11/01/14.

SC

HB 4799 Small Business Tax Incentive Act

Buried in this bill is proposed changes to   the SC Securities Act to   include an intrastate crowdfunding exemption.

Member requested name added as sponsor.

03/04/14

HB 4799 assigned to committee of ways   and means.

TN

SB 2440 Invest Tennessee   Exemption

HB 2363 Invest Tennessee   Exemption

Introduced by senate.

Introduced by house.

03/12/14

03/12/14

Placed on senate C&L commerce calendar   for 3/18/2014.

HB 2363 assigned to insurance and banking subcommittee.

TX

Speaker Joe Straus Interim Committee Charges

Texas House of Representatives83rd Legislature: House Committee on Investments and Financial Services – Item3 page 28

House committees will conduct a study of the   issue. Committee is required to submit a final report no later than December 1, 2014.

01/31/14

The findings of house committee will likely   from the basis of legislation under consideration during the 84th legislative   session in Texas beginning in January 2015.

UT

HB 142 – 2014 Securities Act   Amendments (see changes to 61-1-14(2)(q) which now provides an intrastate crowdfunding exemption)

Read 2nd time in house.

02/25/14

Bill must now go through house committee process.

VA

Invest in Virginia Exemption

HB 880 Invest in Virginia Exemption

SB351 introduced to senate. Bill sent to senate commerce and labor committee.

HB 880 left in house commerce and labor.

01/27/14

02/12/14

Bill must now go through senate committee process. (In recess).

Bill must now go through house committee process.

WA

HB 2023 – 2013-14 Washington Job’s Act of 2014

Delivered to Governor.

03/13/14

Waiting for Governor for final approval/veto.

Minnesota and Pennsylvania are amending their respective Securities Acts to recognize funding portals. These states have not proposed a corresponding intrastate crowdfunding exemption.

Intrastate Crowdfunding Exemptions and Canada

In an ideal world, we would like to see National Instrument 45-106 – Prospectus and Registration Exemptions (NI 45-106) amended to include one equity crowdfunding exemption available to every issuer and investor in Canada.  Currently, we have two equity crowdfunding exemption models in Canada: the Saskatchewan model and the proposed Ontario model.  Time will tell whether these two models are adopted in the other provinces in Canada or if a new crowdfunding exemption is proposed for consideration in these other provinces or as a new exemption in NI 45-106.  We should not expect just one crowdfunding exemption model will immediately emerge in Canada given the US has twenty-one (21) state  and one (1) federal equity crowdfunding exemption models.  Equity crowdfunding is too young of a concept for just one model to be agreed on by all constituents.

*   *   *

Disclaimer

This blog is not intended to create, and does not create an attorney-client relationship. You should not act or rely on information on this blog post without first seeking the advice of a lawyer.  This material is intended for general information purposes only and does not constitute legal advice.  For legal issues that arise, the reader should consult legal counsel.

Alixe_CormickAuthor: Alixe Cormick is the founder of Venture Law Corporation in Vancouver, British Columbia and a member of the Advisory Board of the National Crowdfunding Association of Canada. You can reach Alixe by phone at 604-659-9188, by e-mail at acormick@venturelawcorp.com, on twitter @AlixeCormick or on Google+.

4 thoughts on “U.S. Intrastate Equity Crowdfunding Exemptions: 5 State Bills Adopted and 16 Pending

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