Thirteen states have now enacted state crowdfunding laws. Twelve of these state laws have been built on Section 3(a)(11) of the federal Securities Act of 1933. The only exception is Maine, which built its law on Rule 504. See this great table put together by Anthony Zeoli.
The Troubles with State Crowdfunding
The trouble with state crowdfunding laws is that they have to comply with the strictures of Section 3(a)(11) (ignoring Maine for a minute). In other words, the problem with these state laws is that the federal law is too restrictive!
Section 3(a)(11) exempts from the federal act the following types of offerings:
Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.
The SEC has adopted a rule, Rule 147, interpreting Section 3(a)(11). And the SEC has issued interpretive guidance on Section 3(a)(11) offerings.
The SEC guidance crimps the usefulness of Section 3(a)(11). For example:
Under Rule 147, issuers have to meet a variety of 80% tests in order to be considered intrastate.
Under SEC guidance, companies conducting an intrastate crowdfunding campaign can’t advertise on the unrestricted Internet–because that would be considered an offer across state lines.
Rule 504 Is Better
Under federal Rule 504, an offering can involve general solicitation if the offering has been registered in the states in which the offering is made. Section 502(c) is the advertising limitation, and it is expressly carved out from coverage for state registered offerings under Rule 504. I have quoted the relevant provision of Rule 504 below.
Maine has structured its crowdfunding rule as a registration so that such offerings can be made in reliance on federal Rule 504.
State registered offerings under Rule 504 are not be subject to the 80% rules or intrastate advertising limitations of Rule 147. States should consider minor modifications to their laws built on 3(a)(11) to take advantage of federal Rule 504.
I’ve become a big fan of Hackpad. It is a tool that easily allows you to share and collaboratively edit documents. What do I like about it so much? I can create a Hackpad in literally like 3-4 taps on my phone and share it with you. It is super easy to use.
I’ve embedded in this post a Hackpad on what you would need to do to conduct a Washington State crowdfunding offering. If you have edits or suggestions to the Hackpad, please edit away. I plan to continue to work on this from time to time as I guide companies through the process. I am the moderator of the Hackpad, so I will have the ability to fine tune or make any suggestions to what you edit or suggest be added to the document.
Washington Crowdfunding: Highlights of the Law
If you are not familiar with the Washington Crowdfunding law, it is one of the first of its kind in the country. It is in effect and is currently available for use by companies. Here are the highlights of the law:
Under the law companies can raise up to $1M during any 12 month period from both accredited and non-accredited investors.
Before you can proceed, you have to fill out the Washington Crowdfunding Form and file with the DFI and obtain the DFI’s approval to proceed.
There is a $600 filing fee.
There are individual investor limitations that track the federal crowdfunding law.
You might be wondering, what are the downsides to the Washington crowdfunding law?
You have to be a Washington corporation or business entity to use it.
You can only raise money from Washington residents.
There are in general prohibitions on unrestricted Internet advertising.
If you want to know more about the law, please ask away.
If you are not aware, the Washington crowdfunding law is now in effect, and companies can start the process of using it right now. If you want to read the law , here are the links to the statute and regulations:
There was an article in the New York Times yesterday on state-level equity crowdfunding. Overall, I think the article was negative on state efforts to put in place crowdfunding laws. Maybe I am being unfair to the author (@StevenDavidoff). I would love it if he commented on this blog post.
I think this is the money quote:
“For good or bad, the states don’t seem to care as much about the fraud issue.”
I don’t think this is true. I know it is not true at all in Washington State. I think we have put in place a really good law here. A better than the law federal law for sure. And one that will not be easily used by fraudsters.
Embedded below is a slide deck I did some time ago on the topic. I still think it is timely.