For a while there has been a concern about Washington’s equity crowdfunding law because of limitations inherent in the law.
Washington’s equity crowdfunding bill was built on Section 3(a)(11) of the Securities Act of 1933 and its accompanying Rule 147.
The problems with basing the law on Rule 147 were as follows:
- Rule 147 doesn’t allow advertising across state lines. So, no use of Twitter to advertise your equity crowdfunding offering.
- Rule 147 has a variety of limitations and tests that are designed to ensure that the business raising the money is truly a local business. These rules limit the number of businesses that can use the law.
Almost all states that have put in place state equity crowdfunding rules have built their laws on Rule 147. Maine is the exception. Maine built its law on Rule 504 and a registration process. Under Rule 504 issuers can advertise, and are not bound by the limitations in Rule 147.
This year a bill was proposed in the Washington State legislature to address this, to allow Washington companies to rely on either Rule 147 or Rule 504 when crowdfunding. But no law was necessary. Instead the DFI has adopted an administrative position allowing this approach. I have quoted the FAQ in pertinent part below. The FAQ is also very helpful for a lot of issues relating to the new crowdfunding law.
The DFI’s Guidance
Can my company use the Washington Crowdfunding Form without having to comply with all the intrastate restrictions of federal Rule 147?
An issuer may not want to conduct a crowdfunding offering under federal Rule 147 for a number of reasons, including the restrictions that Rule 147 places on internet advertising and the use of proceeds. To accommodate issuers that would like to conduct a crowdfunding offering that is not subject to the restrictions of Rule 147, the Division will allow an issuer to use the Washington Crowdfunding Form as the disclosure document for an offering of up to $1 million that is registered under RCW 21.20.210. As such an offering would be registered at the state level, the offering could qualify for an exemption under federal Rule 504 instead of Rule 147. In an offering that is registered in one or more states, federal Rule 504 does not impose the restrictions on internet advertising that apply in intrastate offerings conducted under Rule 147. In addition, none of the other intrastate restrictions of federal Rule 147 apply in a Rule 504 offering.
An issuer that wishes to use the Washington Crowdfunding Form in order to conduct an offering registered under RCW 21.20.210 will need to submit the completed form, an Application for Registration by Qualification, and the required fee. Please note that with respect to the majority of the required exhibits to the Application for Registration by Qualification, the issuer may simply include a cross reference to the location in the Washington Crowdfunding Form where this information is available. Further, the financial statements specified in the Washington Crowdfunding Form will satisfy the financial statement requirements under RCW 21.20.210 (thus an issuer may disregard the financial statement instructions in the application form). The fee is calculated as $100 for the first $100,000 of securities to be offered in this state plus 0.0005 times the amount of securities to be offered in excess of $100,000. For example, an offering of $1 million would require the submission of a fee in the amount of $550.
It should be noted that if the issuer wishes to make the offering in additional states, the issuer will likely need to register the offering in the other states where the offering will be made. If an issuer is planning to make a multi-state offering using the internet and other forms of general solicitation, the issuer should consider conducting a SCOR offering instead as most states will accept the SCOR Form to conduct a registered offering and multi-state coordinated review is available. For more information, please see our Small Company Offering Registration (SCOR) page.
The staff in the Small Business Assistance Section of the Securities Division would be happy to answer your questions regarding the use of the Washington Crowdfunding Form and/or SCOR registration. Please call us at 360-902-8760 and ask to speak to a staff member regarding your offering options.