State equity crowdfunding is taking off, thanks in part to the SEC’s inability to finish the federal crowdfunding rules.
So far, there are more than a dozen states that have enacted state-level equity crowdfunding laws, including Washington State. For a guide to the state of the states, see the work of Anthony Zeoli:
Avoiding Federal Law
State crowdfunding laws have to find a way to avoid the federal crowdfunding law. If they don’t, then they can’t operate without complying with the yet non-effective federal law. Thus, they wouldn’t work at all.
Most states have built their laws on Section 3(a)(11) of the Securities Act of 1933. Section 3(a)(11) provides an exemption from the federal Securities Act for offerings that are intrastate. The problem with intrastate offerings lies in the definition of what constitutes an intrastate offering.
The Drawbacks of 3(a)(11)
State crowdfunding laws built on Section 3(a)(11) have the following drawbacks:
- The company has to be incorporated or organized in the state in which the offering is being held
- The investors have to be from the state in which the offering is being held
- The company has to be a local business
- The company can’t advertise its offering on the Internet across state lines
State registered offerings under Rule 504
But there is another path to avoiding federal law–federal Rule 504. This is the path Maine chose.
Why are registered offerings under Rule 504 a good alternative to 3(a)(11) intrastate offerings?
- Because an offering registered with a state securities division can be generally advertised.
- Because the company selling the securities does not have to be a local business and comply with the various 80% tests under Section 3(a)(11) and Rule 147.
Highlights of the Maine Law
Here are the highlights of the Maine law:
- A short-form registration statement.
- The company does not have to be an entity incorporated or organized under Maine law.
- Companies do not have to retain escrow agents; instead they can use a segregated bank account until the offering minimum has been reached.
- The full text of the Maine law is embedded below.
Conclusions and Recommendations
If your state has built its equity crowdfunding law on Section 3(a)(11), don’t fret. Depending on how your law is constructed, a one sentence addition to the statute might work to allow both 3(a)(11) reliance or Rule 504 offerings. In Washington State, for example, we could probably add one sentence to the law to allow reliance on Rule 504 as as well as 3(a)(11) at the election of the company.