Georgia, one of the frontrunners of the intrastate crowdfunding movement, has changed its exemption to allow for larger offerings. The new cap, which has not yet been publicly announced but went into effect in October, raises the aggregate amount that Georgia-based companies can raise in a year through the Invest Georgia Exemption from $1 million to $5 million, among the highest amounts allowed by any state.
“Issuers were telling us they needed higher limits,” explained Georgia Secretary of State Brian Kemp at the recent Crowdfunding Professional Association summit in Washington.
Georgia was the second state, after Kansas, to enact an intrastate exemption back in 2011. Since then, 28 other states have followed suit, and a half-dozen more have intrastate crowdfunding laws in the works that allow state residents to invest in local companies. The Peach State is the first to update a crowdfunding exemption to make it more useful, but likely not the last.
If securities-based crowdfunding is a huge experiment in true financial innovation, states are its real laboratories. Able to move more quickly then federal bureaucrats and to tailor laws for their particular needs, states are a vital testing ground for policies that may someday filter up to the federal level, where the sprawling JOBS Act is just coming together four years after its passage. Title III of the JOBS Act, also known as Regulation Crowdfunding, will open up crowdfunding to all U.S. investors for the first time when it goes into effect in May. Under that federal law, companies can raise up to $1 million a year.
Many states allow for larger offerings, raising the question of whether local companies will find intrastate crowdfunding more useful than Title III.
The Securities & Exchange Commission is also considering changes to Rule 147 and Rule 504—the federal laws that most states base their intrastate crowdfunding exemptions on—that, if adopted, will fix some of the problematic issues that have held back intrastate crowdfunding as a whole, such as the impractical ban on advertising offerings across state lines.
“It’s a sea change for everyone—investors, lawyers, everyone involved”
Georgia officials decided to raise the offering threshold after it became clear the $1 million threshold limited the usefulness of the exemption. First, Groundfloor, an Atlanta-based company that has used IGE to offer Georgia investors a piece of local real estate deals, began bumping up against the $1 million aggregate limit. In March, state officials granted the company a waiver so that it could raise up to $2 million in funds. But it wasn’t long before the company was closing in on that threshold as well. In 2014, Groundfloor relocated to Georgia from North Carolina—which has failed to pass an intrastate crowdfunding bill—specifically to take advantage of IGE.
At the same time, state officials were hearing from issuers that the exemption would be more useful to them if they could use it to raise more money. Since IGE became law three years ago, other states have set more liberal limits—typically for companies willing to provide independently audited financial statements. In Minnesota, companies can raise up to $5 million with audited financials, while Illinois allows $4 million. (Georgia does not require audited financials).
Finally, state officials questioned the usefulness of the aggregate limit in protecting investors. The more effective protection is accomplished by capping the amount that unaccredited investors can invest, and therefore lose, through IGE. In Georgia, that’s $10,0000 per deal.
Cade Joiner is one entrepreneur who is excited about the higher caps—and IGE in general. He is planning to launch a new crowdfunding platform in the first quarter of next year that will make use of IGE. “As intrastate crowdfunding gains more traction, the higher level will be valuable,” he said. “This will free up a lot of capital for a lot of companies. If we had to rely on the JOBS Act, we wouldn’t be doing this,” he added.
It remains to be seen whether the bigger offering size will persuade more companies to give IGE a try. To date, 36 companies have filed notice that they intend to use the exemption, but only two—Groundfloor and Bohemian Guitars, a maker of quirky musical instruments made out of oil cans—have successfully followed through, raising a total of just over $2 million. “That’s not a big amount,” acknowledges Secretary Kemp, a former small business owner. “But it’s millions of dollars that would not have been raised otherwise.”
The slow take up is not unique to Georgia—across the 30 states with exemptions, only about 120 filings have been made to date. And not all of those companies have gone on to raise money.
The problem is largely one of awareness and education. “It’s a sea change for everyone—investors, lawyers, everyone involved,” said Ryan Germany, General Counsel for Secretary of State Kemp.
Will other states go back and tweak their exemptions as well? Georgia created IGE through administrative rule-making, as opposed to a drawn out legislative process that requires buy-in from state legislators and getting onto crowded legislative calendars. A handful of other states, including Oregon, Massachusetts, Mississippi and Texas, have created their laws administratively as well. Those states have more flexibility to change their rules. “We literally crossed out a ‘1’ and added a ‘5’ ” said Germany.
For a state-by-state summary of enacted crowdfunding rules, see this analysis by Anthony Zeoli.