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.



Finding Funding For Your Big Idea in 2015

Funding your Big IdeaUsing Current Funding Trends to Raise Capital

Cheaper tools have lowered the cost of launching a startup over the past dozen years or so. Despite decreased entry costs, however, obtaining funding for a startup remains difficult, but less so if you know what to do and where to look.

Before running out there and trying to find money, it is good idea from both a legal and business standpoint to evaluate your options and gain an understanding of the current fundraising landscape. Join Joe Wallin and BJ Lackland for a discussion of current funding trends, capital raising tips, and what investors look for.

Coffee & pastries will be provided!

BJ Lackland, CEO of Lighter Capital has spent his career working with emerging technology companies as an operating executive and investor. He has been a venture capitalist, the CFO of a public technology company, an angel investor, and a senior finance and marketing leader at tech startups.

Register Here

Wednesday, December 17, 2014
8:00 AM – 9:00 AM

Davis Wright Tremaine LLP
1201 Third Avenue, Suite 2200
Seattle, WA 98101

What Are Successful Crowdfunding Campaigns?

What Are Successful Crowdfunding CampaignsBy Jor Law – Co-Founder of

We get a lot of inquiries from companies that are looking for more information on crowdfunding and how to find accredited investors. The scary thing is that many of those companies have already started trying to raise capital, but don’t know what a securities offering is. Let’s be clear about one thing; if you raise capital and promise your investors a passive return on their investment, you’re probably conducting a securities offering. That means you need proper paperwork to evidence the sale of those securities, and you need to make proper disclosures. Failure to follow the right steps could be rather disastrous.

Crowdfunding is “in.” There are about 3,420,000 results if you run a search on “crowdfunding” using Google and new articles are written about it everyday. It’s gone beyond Kickstarter and Indiegogo now. With the recently passed Jumpstart Our Business Startups (JOBS) Act came new crowdfunding opportunities, some of which are already legalized, and some which are pending final rules. Companies in need of cash are learning about crowdfunding, and they’re getting quite excited that a random stranger halfway across the country or even the globe might be able to learn about their company and invest. The fact, however, that crowdfunding seems so simple and accessible doesn’t mean that it actually is.

Campaigns and Regulation D

A successful crowdfunding campaign generally requires planning, legal compliance, and a little bit of luck. Crowdfunding, and the various manifestations of it, often is legal only if certain conditions are met. For example, most of the crowdfunding that happens today in which investors can invest in a company for an investment return (as opposed to pre-buying of products or simple getting rewards), is conducted through Regulation D. Check out this post on Reg D requirements.

Equally important is the proper and adequate disclosure of information to your investors. The law requires that you accurately and completely disclose all material information to your investors. When you’re trying to persuade an investor of why they should invest, you’ll naturally want to share positive aspects of your business. As long as that information is true, that’s fine. However, you’ll also need to share the risks of your business. Sounds annoying? It is, but if you were the investor, wouldn’t you want to know the downsides as well before making an investment? The government thinks so.

What’s Proper Material, and What’s Not?

How do you know what you have to disclose because it’s material? It’s not always clear, but here are two good rules of thumb:

  1. If it’s information you think that an average investor would want to know about or consider before making the investment, it’s probably material.
  2. If you have to wonder whether something is material or not, it probably is.

Crowdfunding is powerful, and it can even be fun. Just make sure you get the right help BEFORE you start actually marketing or soliciting for investors.

Jor-Law-headshot-130x130Jor Law practices corporate/securities transactional law with Homeier & Law, P.C. He is also the co-founder of, the accredited investor verification service trusted by discriminating law firms, companies, and investors. Rule 506(c) of Regulation D requires proper verification of accredited investors.

Washington Crowdfunding: What To Do Now


Washington Crowdfunding Will Be Live November 1

The Washington crowdfunding rules go live on November 1. Meaning, you can file your Crowdfunding Form with the Washington Department of Financial Institutions November 1.

You can find the form here: Crowdfunding Form.

There is no reason for you to wait until November 1st to start getting ready, however. In fact, you probably have several weeks of work ahead of you to get ready to file the form.

Steps to Take Now

If you want to be one of the first companies to file the Crowdfunding Form and start the process, here is what I recommend you do:

  1. First, determine if you are eligible to use the new law. There are a number of limitations. Consult with counsel to determine your eligibility.
  2. Second, determine whether a crowdfunding offering is right for you and your business. It may not be. There may very well be other, better alternatives for you.
  3. If you determine that you are eligible, and that it is the best choice for you, start working on completing the Crowdfunding Form.
  4. Read the Final Rules and the Law itself.
  5. Retain counsel to assist you.
  6. Talk to your accountants and make sure that you have financial statements prepared in accordance with GAAP. Your financial statements may need some work in order to get them in the right form.
  7. Review the ongoing disclosure requirements for using the Washington State crowdfunding law. Make sure that you are ready to continue to make those disclosures on a quarterly basis to the public.
  8. Conduct bad actor due diligence.
  9. Decide what type of security you are going to sell. Under the rules, you can’t sell debt or convertible debt. If you are a corporation, you can sell common stock or preferred stock, but preferred stock will have to have certain designated characteristic.
  10. Hire an escrow agent.
  11. Determine your Minimum Funding Amount.

What You Will Need Counsel to Do

  • Help you determine your eligibility to use the law.
  • Help you evaluate alternatives.
  • Review the Crowdfunding Form.
  • Help you determine what type of security to sell.
  • Prepare the securities purchase agreements for the crowdfunding offering.
  • Update your existing corporate documents (you may need to amend your charter documents).
  • Help you comply with any preemptive rights obligations
  • Help you understand the limitations related to intrastate offerings to help you comply with them on an ongoing basis
  • Help you understand the limitations on advertising or soliciting your offering.

More to Do

I will update this list as I get feedback on it. Don’t hesitate to email me at with suggestions, or comment below. Thank you!