Intrastate crowdfunding is poised to take a giant leap forward next week when the S.E.C give a thumbs up—or down—to important changes proposed to two key exemptions that underlie all state-based crowdfunding activity.
The Commission will meet on Wednesday morning to consider whether to adopt rule amendments related to Securities Act Rules 147 and 504 to facilitate intrastate and regional securities offerings, the agency announced in a notice. Chief among those amendments is a proposal to allow local businesses to widely advertise their securities offerings without worrying about reaching out-of-state residents, as long as they allow only in-state residents to invest.
The current ban on such “general solicitation” is considered impractical in the digital age and has effectively killed marketing on web sites and social media—and even old-school radio and newspapers. As a result, small businesses and crowdfunding platforms conducting intrastate offerings have had to devise clunky workarounds or erect firewalls to prevent non-state residents from viewing their offerings.
As of June 2016, a total of 166 intrastate offerings have been filed and approved, according to state regulators.
The proposed fix is a common sense measure similar to how Title II of the JOBS Act works. Under that exemption, companies may generally solicit investors, as long as they only sell to accredited investors.
If adopted by the SEC, the amendment to Rule 147 could solve the single biggest obstacle to intrastate crowdfunding. That could in turn spur greater use of the laws and make state-based crowdfunding an attractive alternative to national crowdfunding options.
Since 2011, more than 30 states have enacted intrastate crowdfunding laws—essentially their own mini-JOBS Acts. (All but a handful are based on Rule 147). As of June 2016, 166 offerings have been filed and approved across those states, according to state regulators. In comparison, more than 130 companies have filed under the federal Regulation Crowdfunding since it went into effect less than 6 months ago.
However, there’s a catch. The SEC’s fix, as proposed, would scrap Rule 147 altogether and create a new improved rule, Rule 147a. That would render intrastate laws based upon the original Rule 147 invalid, and would require state legislatures to amend their laws.
As attorney Sam Guzik put it in a recent article: “Failure to fix this glitch would require the large majority of states authorizing intrastate investment crowdfunding to go back to their state legislatures to incorporate any new rule which replaces the current Rule 147. And until then, intrastate crowdfunding would be shut down.”
A Long Wait
The SEC proposed the rule changes on October 30, 2015—the same day that it approved the final rules for Regulation Crowdfunding, also known as Title III of the JOBS Act. A public comment period ended in January 2016.
Many of the comments urged the SEC to reconsider replacing the current Rule 147 with a new one, on the grounds that it would disrupt existing state exemptions based upon the rule and require states to pass new legislation. In a letter to the SEC sent earlier this month, a bipartisan group of Congress members advocated for the same, and needled the Commission to move quickly on the matter.
Reason for Cheer
We won’t find out until Wednesday, but people close to the agency expect it to heed the recommendations. Unlike some other issues before the SEC, the Rule 147 and 504 changes are uncontroversial and widely supported. Sara Hanks of CrowdCheck suggested the SEC could update the existing Rule 147 while also adding a new rule 147A, similar to what it did in creating Rule 506(c) under Title II of the JOBS Act.
The news cheered advocates of intrastate crowdfunding, who have waited for months for the SEC to move on this issue.
“The hoped-for changes in Rule 147 related to public advertising will save precious time and money, remove an unnecessary pain point for entrepreneurs, and finally move state investing into the 21st Century,” said Amy Pearl, founder & executive director of Hatch Innovation, an accelerator and coworking space in Portland that championed Oregon’s intrastate exemption. At a conference Pearl organized earlier this year called ComCap that focused on intrastate crowdfunding, the advertising ban “was a constant topic of frustration,” she said.
The advertising ban is just one of several amendments that the SEC will consider for adoption. Other include:
Offering limits: The SEC proposed capping the amount that issuers can raise under the Rule 147 to $5 million—a move that has been criticized by state regulators and others who feel it is best left to the states to decide. (Currently, only Georgia has an offering ceiling as high as $5 million).
Screening investors: The agency proposed a “reasonable belief” standard for determining a prospective investor’s residency at the time of an offering, more in line with the standard used for Regulation D offerings. The reasonable belief standard could be satisfied by a pre-existing relationship or common documents such as a recent utility bill, pay stub or state-issued ID. Currently, issuers can have their entire offering invalidated if they inadvertently sell to a single out-of-state resident.
Issuer’s state of residence: The SEC proposed scrapping the requirement that issuers must be incorporated in the state where they conduct an offering and replacing it with more flexible ways of determining their residency, such as a company’s principal place of business. The change would help local companies that are incorporated in Delaware and those with multiple locations.
Increased offerings: The SEC has proposed increasing the amount that can be raised by an issuer from $1 million to $5 million under this exemption.
Eliminate: The SEC has proposed ditching the little-used exemption, which falls under Regulation D.
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