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 Traklight.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.