The Best and Worst About the Washington Crowdfunding Law

Washington Crowdfunding Law

By Joe Wallin, Seattle Crowdfunding Attorney

The Washington crowdfunding law is not perfect. No law is. However, I think the Washington crowdfunding law comes close. And I don’t just say that because I am the person who dreamed up the idea in the first place.

What are the best things about the Washington equity crowdfunding law?

  1. You can raise money from both non-accredited and accredited investors
  2. You can raise up to $1M during any 12 month period.
  3. You do not need audited financial statements.
  4. You do not have to comply with the horrendous complexity of the federal equity crowdfunding law.
  5. The DFI has published an easy to use form to get you started in the process.
  6. A relatively small fee to pay to the state securities regulatory agency ($600).

What are the worst things about the Washington equity crowdfunding law?

  1. You can’t advertise your offering using the unrestricted Internet. (This is a consequence of the interplay between state and federal law.)
  2. In order to use the Internet to raise money, you are going to have to post your offering on web sites accessible only by people who can demonstrate that they are Washington residents.
  3. You have to be organized or incorporated in the State of Washington.
  4. You can only take investors who are resident in the State of Washington.
  5. Once you crowdfund you have to make public disclosure of executive officer and director compensation, and financial results. Many companies may not want to make these public disclosures.
  6. The exemption is not available for debt offerings.

Many of the above negatives are a consequence of the overlay of federal law. In order for the Washington State crowdfunding law to not have to comply with Title III of the JOBS Act, offerings have to be completely intrastate. This explains the first four items listed above.

Should You Take Advantage of the New Law?

Before plunging ahead, carefully consider your fundraising alternatives. For most companies, the traditional path–an all accredited 506(b) offering–will still be the best route. For others, a 506(c) generally solicited offering may be appropriate. Consult with counsel who is familiar with all of the choices available and your business and long term goals.

Washington Equity Crowdfunding: Minimum Target Amount and Escrow

Minimum target amountBy Joe Wallin, Seattle Crowdfunding Lawyer

Minimum Target Amount and Escrow

There are a number of key concepts in the Washington equity crowdfunding law, but two that all companies considering equity funding raising should know about are the “Minimum Target Offering” amount and the requirement to use an escrow.

Minimum Target Offering

A company has to specify a minimum that is sufficient to implement its business plan. The company has to show to the DFI that the minimum, along with other sources of financing, is sufficient. The minimum has to be divulged on the face of the Crowdfunding Form. On the first page.

Crowdfunding Form

Here is what the regulator provisions say, exactly:

WAC 460-99C-110: Minimum Target Offering Amount
(1) The issuer shall specify a minimum target offering amount and deadline to raise the minimum target offering amount in its Washington Crowdfunding Form. The issuer must demonstrate to the director that the minimum target offering amount, together with other sources of financing, is sufficient to implement the business plan of the issuer. If the proceeds are insufficient, the director may require a revised minimum target offering amount.
(2) The deadline by which the issuer must raise its minimum target offering amount may be no longer than twelve months from the date the offering is declared exempt by the director.

Who Can Be an Escrow Agent?

The escrow agent has to meet this definition:

“Escrow Agent” means a bank, trust company, savings bank, national banking association, building and loan association, mortgage banker, credit union, insurance company, an escrow agent that is registered under chapter 18.44 RCW, or any other independent escrow agent acceptable to the director. The entity acting as the escrow agent must be independently audited or examined, in a manner acceptable to the director, on a regular basis.

Here are the escrow agreement provisions:
WAC 460-99C-130: Escrow Agreement Provisions

(1) The issuer must enter into an escrow agreement with an independent escrow agent , as defined in WAC 460-99C-020, located in the State of Washington that includes the following terms:

(a) All offering proceeds shall be maintained in an account controlled by the escrow agent;

(b) All offering proceeds will be released to the issuer only when the aggregate capital raised from all purchasers is equal to or greater than the minimum target offering amount specified in the Washington Crowdfunding Form;

(c) If the proceeds do not meet the minimum requirements by the deadline set forth in the Washington Crowdfunding Form, the escrow agent must:

(i) Release and return the proceeds directly to the investors;

(ii) Pay to investors, on a pro rata basis, any interest earned on the proceeds;

(iii)Not deduct any expenses, including fees of the escrow agent.

(d) No creditor or affiliate of the issuer, portals engaged by the issuer, or escrow agent will have any claim to the escrowed proceeds;

(e) The escrow agent agrees to maintain its independence from the issuer and its officers, directors, managing members, and affiliates.

(f) The director may inspect the records of the impound account maintained by the escrow agent at any reasonable time at the location of the records, and copy any record that is inspected.

(2) The escrow agreement must be signed by an officer of the issuer and an authorized representative of the escrow agent.

(3) The escrow agent may not be affiliated with the issuer or its officers, directors, managing members, or affiliates.

I am working on compiling a list of available escrow agents for companies to use. If you are an escrow agent, please email me and let me know if you are going to be able to provide this service.

Equity Crowdfunding: Disclosure and Accountability

2014-08-01 08.29.07
By Joe Wallin, Seattle Crowdfunding Lawyer

Disclosure and Accountability
The Washington Equity Crowdfunding law is not perfect. No law is. However, it is pretty good. And it looks like it is actually going to work. One of the reasons I think it is going to work is because of the disclosure and accountability requirements built into the law.

For example, you cannot use the law unless you first file paperwork with the DFI and it approves your offering.

Another example: you have to make continuous public disclosures of executive officer and director compensation once you crowdfund. These disclosures have to appear on your company’s website, and be publicly accessible. There is apparently no opportunity to password protect or lock the information for shareholder viewing only. These are significant obligations.

Let’s take a look at the law.

The Text of the Law Itself

The law has this to say, exactly:

(3) For as long as securities issued under the exemption provided by this section are outstanding, the issuer shall provide a quarterly report to the issuer’s shareholders and the director by making such report publicly accessible, free of charge, at the issuer’s internet web site address within forty-five days of the end of each fiscal quarter. The report must contain the following information:
(a) Executive officer and director compensation, including specifically the cash compensation earned by the executive officers and directors since the previous report and on an annual basis, and any bonuses or other compensation, including stock options or other rights to receive equity securities of the issuer or any affiliate of the issuer, received by them; and
(b) A brief analysis by management of the issuer of the business operations and financial condition of the issuer.

By the way, if you want to know where to find the law, so that you can read it yourself, you can find it here: http://apps.leg.wa.gov/billinfo/summary.aspx?bill=2023

The Text of the Regulations

WAC 460-99C-180 sets forth the regulatory interpretation of the statute, and adds a few things. Specifically, items 2 and 3 do not appear in the statute.

Quarterly Reporting Requirements

For as long as securities issued under the crowdfunding exemption in RCW 21.20.XXX remain outstanding, the issuer shall provide a quarterly report to the issuer’s shareholders by making such report publicly accessible, free of charge, at the issuer’s internet website address within forty-five days of the end of each fiscal quarter. The report must contain the following
information:
(1) Executive officer and director compensation, including specifically the cash compensation earned by the executive officers and directors since the previous report and on an annual basis, and any bonuses or other compensation, including stock options or other rights to receive equity securities of the issuer or any affiliate of the issuer, received by them;
(2) The names of the issuer’s owners of twenty percent or more of a class of outstanding securities, directors, officers, managing members and or other persons occupying similar status or performing similar functions on behalf of the issuer;
(3) Financial statements for the issuer’s most recent fiscal quarter prepared in accordance with generally accepted accounting principles in the United States; and
(4) A brief analysis by management of the issuer of the business operations and financial condition of the issuer.

The Impact on Crowdfunders

One of the complaints about crowdfunding is the lack of accountability. Sam Altman, President of Y Combinator (model for funding early stage startups), had this to say recently:

I know that many people will not be entirely happy with these disclosure requirements. There is a good argument that companies ought to be able to password restrict the information so that only shareholders can access it. However, the disclosure requirements directly hit the accountability question.

What should you do before committing to a Washington intrastate equity crowdfunding offering? Make sure you are willing and able to meet these disclosure requirements.

The Washington State Equity Crowdfunding Law

Equity CrowdfundingBy Joe Wallin, Seattle Crowdfunding Lawyer

It looks like Washington State is going to have equity crowdfunding before it becomes available under the JOBS Act. Let the people rejoice.

We have Washington State elected officials, such as Governor Jay Inslee, Cyrus Habib and Steve Litzow–just to name a few–to thank for that. We should also offer our sincere gratitude to state securities regulators, Bill Beatty and Faith Anderson, and other folks at the DFI who are working on this.

Thank you.

What Does The Equity Crowdfunding Law Allow

If you are wondering what the new law will allow, I have put together the following summary for you.

  • The bill would allow companies to raise up to $1M during any 12 month period.
  • Companies could raise those funds from accredited or non-accredited investors.
  • Companies would have to be organized or incorporated in Washington and doing business in Washington to use this law.
  • Only Washington residents could invest (investors would have to provide evidence or certification of residency in the State of Washington at the time of purchase).
  • The aggregate amount sold to any investor by one or more issuers during the 12-month period preceding the date of sale could not exceed: (i) For investors with an annual income or net worth of less than $100,000, the greater of either (i) $2,000 or (ii) five percent (5%) of the investor’s annual income or net worth. (ii) For investors with an annual income or net worth of $100,000 or more, ten percent (10%) of the annual income or net worth of the investor, up to $100,000.
  • Offerings would first have to be declared exempt by the Department of Financial Institutions before they could move forward.
  • Companies would have to file with the DFI an escrow agreement providing that offering proceeds will be released only when the aggregate capital raised equals or exceeds a minimum target amount, as determined by the DFI.
  • Companies would have to make ongoing disclosures to shareholders and the DFI for as long as securities sold using the crowdfunding exemption were outstanding.
  • Companies could (but would not be required to) use a funding portal.

When Can We Crowdfund?

Check out the Crowdfunding Draft Rules.

It looks like we are going to have rules that are final and in place and ready to use this year.

Why Washington State Crowdfunding Is Going To Rock

Washington State equity funding appears ready to be of great use by entrepreneurs. Again, we have to thank great Washington a State political leadership.

The Uneasy Relationship Between Advertising and Equity Crowdfunding

Equity Crowd FundingThere is an uneasy relationship between advertising and equity crowdfunding.

You might think the opposite. After all, isn’t the point of crowdfunding to be able to access the crowd? How else do you access the crowd if you can’t advertise?

The Federal JOBS Act

The JOBS Act expressly disallowed advertising in equity crowdfunding campaigns. The text of the law has this to say, exactly:

For purposes of section 4(6), an issuer who offers or sells securities shall…not advertise the terms of the offering, except for notices which direct investors to the funding portal or broker.”

The draft crowdfunding rules ease up on this a bit. They allow the following:

“Under the proposed rules, an issuer could publish a notice advertising the terms of an offering in reliance on Section 4(a)(6), provided that the notice includes the address of the intermediary’s platform on which additional information about the issuer and the offering may be found. Consistent with Section 4A(b)(2), an issuer would not otherwise be permitted to advertise, directly or indirectly, the terms of an offering made in reliance on Section 4(a)(6).”

But then the draft rules go on to say:

“The proposed rules would allow notices advertising the terms of the offering to include no more than the following: (1) a statement that the issuer is conducting an offering, the name of the intermediary through which the offering is being conducted and a link directing the potential investor to the intermediary’s platform; (2) the terms of the offering; and (3) factual information about the legal identity and business location of the issuer, limited to the name of the issuer of the security, the address, phone number and website of the issuer, the e-mail address of a representative of the issuer and a brief description of the business of the issuer. Under the proposed rules, “terms of the offering” would include: (1) the amount of securities offered; (2) the nature of the securities; (3) the price of the securities; and (4) the closing date of the offering period.”

See the discussion starting on page 107.

Washington State’s Restrictions

Washington State’s draft intrastate equity crowdfunding rules also contain restrictions on advertising.

First, when you submit your crowdfunding form to the state, you are going to have to include a “copy of all advertising and other materials directed to or to be furnished to investors” in the offering.

Second, under proposed WAC 460-99C-250, all advertising directed to or to be furnished to investors in an offering under the Washington State crowdfunding law has to be filed with the DFI no later than seven days prior to publication or distribution.

These restrictions are going to cause issuers to have to be very careful as they proceed through their offering. Companies will want to make sure that they do not inadvertently advertise their offering using materials that weren’t filed with the DFI before their use.

Federal Law Restrictions Applicable to State-Level Crowdfunding

In addition to following the DFI’s restrictions, in general companies using Washington State’s intrastate exemption will want to be careful not to use the Internet in an unrestricted fashion in discussing their offering. The SEC takes the view that this is not consistent with the intrastate exemption. Companies that do not comply with the intrastate exemption will have to comply with the federal crowdfunding law.

What’s An Issuer to Do?

In general, issuers conducting equity crowdfunding offerings are going to have to be very careful with advertising.

For example, suppose you are conducting a Washington state intrastate crowdfunding. If so:

  • You are not going to want to Tweet about your offering, or post it to Facebook. This will trip some people up.
  • To the extent that you are posting signs in your place of business, soliciting investors–you will want to make sure that advertising has been pre-approved.

The bottom line on advertising your equity crowdfunding offering? Exercise caution. You will want to make sure your team knows the rules and carefully follows them.

Washington Equity Crowdfunding Coming Soon

Washington CrowdfundingWill we equity crowdfund in Washington State before it becomes legal under the JOBS Act?

I think there is a good chance, which is good news for businesses in Washington, and folks who are considering moving here.

When Will Federal Equity Crowdfunding Go Live?

No one really knows when the federal rules will go final.

Mary Juetten, Founder and CEO of Tracklight.com, is optimistically thinking it might be this year. I hope she is right, of course. The sooner the better. I think she is also right that we need to get the current rules done and put them into use so that we can learn from them, and then start improving them.

When Will Washington Equity Crowdfunding Go Live?

The comment period on Washington’s draft rules ends September 23rd. I think we can expect that the rules will be final either before year-end or in the first quarter of next year. The great thing about Washington State crowdfunding is that once the rules are final companies will be able to start the process right away. Under the federal process, even after the SEC adopts the rules FINRA will still have to certify portals before things can get started.

State vs. Federal Law, Which Will Be Better?

There are going to be pros and cons to each approach. Equity crowdfunding under Washington State’s law is going to be easier from an administrative, legal and accounting perspective than the federal approach.

  • Federal law requires companies to work through an intermediary that is going to charge them 8-10% of the offering proceeds. There is no such requirement under Washington law.
  • Federal law also requires companies to have audited financials if they want to raise more than $500,000. This will add more costs to a federal crowdfunding offering. There is no similar requirement under Washington law.
  • If you take a look at the disclosures required under the federal law, and compare them to the Washington Crowdfunding form, you will find the that the Washington Crowdfunding form is quite a bit friendlier and easier to use.
  • From an investment size point of view, both the federal law and Washington State law have the same aggregate size of round limitations ($1M during any 12 months), and the individual investor limitations mirror each other.

The big drawbacks to Washington State crowdfunding are:

  • The offering has to be intrastate. Meaning, the issuer has to be a Washington corporation, doing business in Washington, and the investors have to be resident in Washington State.
  • Under a Washington offering, you won’t be able to generally solicit or generally advertise your offering. This is an odd quirk that results from the interplay of state and federal law. The Washington State exemption relies upon being an “intrastate” exemption, and the SEC takes the position that generally soliciting or advertising an offering is not “intrastate.”

What Does This Mean For You?

I think most companies are going to shy away from federal crowdfunding, because it is going to be too costly and too complex. The Washington law is different. Companies will be able to access the law without spending fortunes in legal and accounting fees. All things considered, I think state-level equity crowdfunding, at least in Washington State, will be preferable to the federal approach.

Bill Carleton Poem

A special gift: a Bill Carleton poem!

My friend Bill quit blogging about the law recently. His daily blog, wac6.com, was one of my favorites. And I have to admit, I still find myself going there, expecting to find some new law blogging from him, only to be reminded that he no longer blogs about the law.

Instead, he writes poetry! The law blogging world is poorer without Bill, but the poetry world is richer.

Bill Carleton Poem

Cucumbers Are Better by Bill Carleton

All anybody wants is love
Because love is all there is
All is the only thing wanting
Love is the only everything

Nobody has it but he wants it
Not it but all, he wants love
Love is all anybody lacks
These are ascertainable facts

In the mode of discourse we call
Scriptural exegesis, love
Is God and God is everywhere
Meaning necessarily God

Equals everything, or there’s no
Where for God to be, unless
He is everywhere in the sense
That God inhabits the spaces

Between minutest particulate places
Of matter, though we suppose
God matters, and in the Christian Tradition it goes God troubled

Himself to materialize, out of love
(What else?) no less, while the God
Who remained everywhere at once
Aloof, still loved; what is love?

St. John wrote that God did give
His only Son that we might live
Reading that Abraham’s near
Sacrifice of Isaac wasn’t

Motivated by fear alone
But by love of God and so
For love and thereby everything
And really for Isaac again

Paralleling Christ’s atonement for sin
He read it by righting it writing
As though he feared God’s lack of
Love on the literal level

Disturbed by the way God deviled
The chosen with double
Messages, he set a precedent for
Defensive and righteous reactions

Copyright Bill Carleton