State Crowdfunding: Comparing Oregon and Washington Law

Crowdfunding

State Crowdfunding

State crowdfunding is growing in importance. This is driven in part by the inability of the SEC to finalize the Title III crowdfunding regulations (which the JOBS Act required to be finalized long ago).

Both Washington and Oregon have passed state crowdfunding laws (and many other states have as well).

And you might be wondering how Oregon’s crowdfunding law compares to Washington’s crowdfunding law.

And you might be curious because Oregon’s law has already been used by a bunch of companies, and Washington’s has not yet been used at all.

Crowdfunding: Oregon Law vs. Washington Law

Here are the highlights of the Oregon law, and which probably explain why Oregon’s law is being actively used and Washington’s is not.

  • Oregon’s law does not require the use of an escrow agent. In Washington, you can’t proceed without first hiring an escrow agent.
  • Oregon’s law does not require the pre-approval of the state securities regulators before a company can proceed.
  • The Oregon Crowdfunding Form is substantially less complex than the Washington Crowdfunding Form.
  • Oregon’s law does not require the public disclosure of executive and director compensation. See Public Disclosure of Executive and Director Compensation.
  • Oregon’s law allows the use of debt. Despite the fact that the Washington crowdfunding statute says that it can be used to raise money through the sale of securities, and the Washington securities act defines debt as a security–final regulations from Washington prohibit the sale of debt (such as convertible debt) in a crowdfunding offering.

Here is the Oregon Crowdfunding Law.

What Washington Can Do?

I think Washington should simplify its law. Let’s strike the escrow requirement. Let’s strike the pre-approval requirement. Let’s strike the public disclosure of executive compensation. If there is a concern about potential abuse–let’s reduce the overall amount that can be raised from $1M during any 12-month period to something less.

In any event, it is disappointing we have hit hitches in Washington and our law is not yet being used.

Big News From The DFI re Washington Crowdfunding

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.

 

 

Crowdfunding Advertising in the Intrastate Crowdfunding Context

Suppose you want to run a crowdfunding offering for equity in Washington State. Suppose you have filed your Crowdfunding Form with the DFI and it has approved of your offering.

Crowdfunding Advertising

Can you advertise the offering?

There are multiple layers to the analysis.

First you have to comply with the Washington law. The Washington law requires that the DFI first approve of your advertising.

When you submit your Crowdfunding Form, you also have to submit a “copy of all advertising and other materials directed to or to be furnished to investors in this offering.” WAC 460-99C-040.

In addition, WAC 460-99C-250 requires the following with respect to advertising:

(1) All advertising directed to or to be furnished to investors in an offering under RCW 21.20.880 shall be filed with the director no later than seven days prior to publication or distribution.
(2) The following forms and types of advertising are permitted without the necessity for filing or prior authorization by the administrator, unless specifically prohibited.
(a) So-called “tombstone” advertising, containing no more than the following information:
(i) Name and address of issuer;
(ii) Identity or title of security;
(iii) Per unit offering price, number of shares and amount of offering;
(iv) Brief, general description of business;
(v) Name and address of broker-dealer or underwriter, or address where offering circular or prospectus can be obtained; and
(vi) Date of issuance.
(b) Dividend notices, proxy statements and reports to shareholders, including periodic financial reports.
(c) Sales literature, advertising or market letters prepared in conformity with the applicable regulations and in compliance with the filing requirements of the SEC, FINRA, or an approved securities exchange.
So, under Washington law, it is possible to advertise your offering.

What about federal law?

Federal law imposes more limitation on advertising crowdfunding offerings. You can find the SEC guidance at the following links:
This guidance generally prohibits the unrestricted posting of crowdfunding advertising on the Internet. However, the guidance allows you to post to web sites if you restrict viewers to residents of the state.

Question: Can an issuer use its own website or social media presence to offer securities in a manner consistent with Rule 147?

Answer: Issuers generally use their websites and social media presence to advertise their market presence in a broad and open manner so that information is widely disseminated to any member of the general public. Although whether a particular communication is an “offer” of securities will depend on all of the facts and circumstances, using such established Internet presence to convey information about specific investment opportunities would likely involve offers to residents outside the particular state in which the issuer did business.

We believe, however, that issuers could implement technological measures to limit communications that are offers only to those persons whose Internet Protocol, or IP, address originates from a particular state or territory and prevent any offers to be made to persons whose IP address originates in other states or territories. Offers should include disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law. Issuers must comply with all other conditions of Rule 147, including that sales may only be made to residents of the same state as the issuer. [October 2, 2014]

This advice from the SEC is very helpful. Thus, you can advertise your offering, if you follow these rules. But you will want to be extremely careful to follow this advice and not inadvertently advertise your offering more broadly on the Internet.

Rethinking Section 3(a)(11) for State Crowdfunding

Section 3a11Guest post by Andrew Stephenson of CrowdCheck.

Over the past few months, Anthony Zeoli, Georgia Quinn, and CrowdCheck have been maintaining a chart of existing and proposed state crowdfunding statutes and rules. These state crowdfunding rules all follow a typical model:

  • Short form registration at the state level;
  • Issuers must comply with Section 3(a)(11) of the Securities Act and Rule 147;
  • Issuers must provide basic information about the company, risk factors, and material information to investors; and
  • General solicitation is permitted.

Statues like this have been in effect since Georgia and Kansas first enacted their crowdfunding rules in 2011, and ten other states have adopted similar rules. However, since 2011 only a handful of issuers have actually utilized these rules. For statutes that purport to provide “entrepreneurs with expanded access to much needed capital,” there is not much access to capital that is occurring. Still, even with clear evidence that there has not been uptake of state crowdfunding under these rules, state legislators are still under the belief that Section 3(a)(11) is the proper federal standard for state crowdfunding.

The primary reason that issuers are not using these state crowdfunding rules is the inherent limitations of the intrastate offering. Section 3(a)(11) has always been understood to be an exemption for securities offerings that are genuinely local in character. Not only must the issuer be registered and doing business in the state where it is making an offering, the securities may not be offered or sold to residents of other states. As we know, “offer” is a very broad terms that includes any attempt to sell the security, or to condition the market or arouse interest.

As such, a bootstrapping start-up that posts to Twitter that it is looking for funding has now lost the availability of the Section 3(a)(11) exemption, and may even be found to have violated Section 5 of the Securities Act—an enumerated Bad Act that could prevent the company from being able to access capital under Rule 506, and the to-be adopted Regulation A+ and federal securities crowdfunding.

That is a lot of damage from one little Tweet. No wonder very few issuers have taken advantage of these rules.

Maine, however, has taken a different course. The bill initially proposed for state crowdfunding in Maine followed the Section 3(a)(11) standard. However, in committee, the bill was changed to fit within the small offering exemption of Rule 504, specifically for the purpose of allowing solicitation methods that include social media and the internet. This is the model that states should follow if they want to make crowdfunding successful in their states.

One thing that is different about Rule 504 is that in order to engage in general solicitation, a substantive disclosure document must be filed with a state and be provided to investors. Previously, the SEC has indicated that the NASAA U-7 Form would suffice. While the disclosure requirements of the U-7 are significant, they are not impossible to comply with. Entrepreneurs with a good understanding of their own business should be able to complete the disclosures with minimal assistance from legal counsel (and I would never advise an entrepreneur to engage in any form of capital-raising without the assistance of counsel).

The switch to Rule 504 and the substantive disclosure requirement will be easy for some states that have already adopted a disclosure document for their state crowdfunding rules relying on Section 3(a)(11). For instance, the State of Washington and the District of Columbia have adopted a disclosure form that is slightly pared down from the U-7. These disclosure documents would likely satisfy the SEC’s standard for “substantive” disclosure.

States that are truly interested in providing rules by which entrepreneurs can raise money in a crowdfunding campaign would be smart to focus on the federal exemption under Rule 504. Section 3(a)(11) just doesn’t work.

QUICK COMPARISON

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