By Cliff Ennico
In October 2013, the U.S. Securities and Exchange Commission (SEC) issued proposed regulations to implement the provisions of Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012. Under Title III, startup companies would be allowed to use crowdfunding websites (such as Kickstarter and Indiegogo) to raise money for their companies from ordinary folks like you and me and – drum roll – issue stock in their companies to their crowdfunded investors.
Almost 18 months later, and several months of public comment, the SEC has not yet acted to issue the final regulations that would make so-called “equity crowdfunding” legal.
What’s going on here?
Well, two things I can think of (there are probably more). First, the current SEC Commissioner, Mary Jo White (who joined the SEC shortly before the proposed regulations were issued) is not a regulatory type of person. She is a prosecuting attorney, or more accurately, a “cop”. Her tenure at the SEC has so far been marked mostly by actions to enforce the existing securities laws (chasing after insider traders, rogue investment bankers and other “bad guys”) than making new regulations.
But I think there’s another reason for the SEC’s hesitation to pull the trigger on equity crowdfunding, one that has to do with the success of another part of the JOBS Act, known as “Title II”.
Under Title II of the JOBS Act, companies looking to issue securities to the public without doing an initial public offering (IPO) can use “general solicitation and general advertising” methods to advertise their offerings, as long as they allow only “accredited investors” (extremely rich and/or sophisticated people who know what they are getting into) to purchase the securities.
Unlike Title III of the JOBS Act, Title II did not require any implementing regulations from the SEC: companies and “angel investor” websites such as http://angel.co leaped out of the starting gate and got into the Title II “private placement” business before the ink was even dry on the statute.
My suspicion – not based on any inside knowledge, mind you – is that the SEC is taking a “wait and see” attitude, looking to see how Title II offerings proceed before making a final determination on crowdfunded offerings of securities under Title III. If the SEC is convinced that Title II is working well, raising capital for the right companies without putting unsophisticated investors at risk (the SEC’s primary mission is to protect consumers, after all), then they will move forward on Title III. If not, not.
There are rumors that the SEC will act to approve final crowdfunding regulations in the next couple of months, but like all rumors, there are to be taken with a ton of Morton’s finest.
If you are planning a crowdfunded offering of securities for your startup or growing company, however, you may not need to wait until the SEC approves the final regulations. Interestingly, state governments and legislatures are taking the lead on equity crowdfunding.
Just about every state has adopted some sort of “intrastate exemption” for securities offerings by local companies. Generally, if your company is organized and located in the state, makes offers and sales only to people who reside in the same state, and comply with other restrictions which vary from state to state (for example, limiting the number of purchasers or the dollar amount of the offering), your offering is exempt from BOTH the federal and state securities laws.
In the past 18 months, no less than 12 states and the District of Columbia have amended their “intrastate offering” exemptions to allow equity crowdfunding. In these places, equity crowdfunding is already available, and the SEC be damned!
The 12 states are: Alabama, Idaho, Indiana, Maine, Massachusetts, Michigan, New Mexico, Oregon, Pennsylvania, Texas, Washington and Wisconsin.
In all 12 states, an “intrastate” crowdfunded offering would need to comply with all restrictions imposed by the SEC’s Rule 147 relating to intrastate offerings (the text of which can be found online here. For example:
- The issuer must be organized and located in the state (in Wisconsin, the majority of the issuer’s full-time workers must also work in Wisconsin); and
- All prospective purchasers must reside in the state (in Texas, the offering must also be completed in Texas); and
- The issuer must file an offering notice with the state securities regulator on a prescribed form.
In some states (including Texas and Wisconsin), the offering must also comply with all restrictions in the SEC’s proposed crowdfunding regulations. Presumably, these restrictions will be updated to conform to any changes made in the final SEC regulations when these are published.
This is excellent news for startups and “concept” stage companies looking to raise small amounts of money from friends, angel investors and social media followers who are located in the same state. The downside? Even one out-of-state purchaser in an offering blows the exemption.
But until the SEC gets it act together and issues final regulations, hey, it’s better than nothing.
Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of Small Business Survival Guide, The eBay Seller’s Tax and Legal Answer Book and 15 other books. Follow him at @cliffennico.