Texas is the latest of a half dozen states to propose an intra-state Crowdfunding law. Typically, these laws allow issuers to raise money from non-accredited investors, even before Title III of the JOBS Act comes into effect, as long as all the investors are residents of the state in question and the offering satisfies requirements that vary from state to state.
At the Austin event, an audience member asked a very good question: If I comply with the Texas law, do I also have to comply with a Federal law? The answer is a qualified Yes.
Federal law begins with the proposition that securities may not be issued unless registered under the Securities Act of 1933. However, section 3(a)(11) of the Act provides an exemption for:
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.
Thus, Federal law includes an exemption for some purely intrastate offerings.
SEC Rule 147 (17 CFR 230.147) provides a “safe harbor” under section 3(a)(11). Where all the conditions of Rule 147 are satisfied, the SEC will assume that the offering is exempt from Federal registration:
- The issuer may neither offer nor issue any securities within the six month period before the first offer or sale of the intrastate offering nor within six months after the last offer or sale of the intrastate offering.
- The issuer must be incorporated in the state where the offering is made. (Caution: Many lawyers use Delaware entities as a matter of course. Unless you’re in Delaware, don’t.)
- At least 80% of the issuer’s revenues must come from business within the state.
- At least 80% of the issuer’s assets must be located in the state.
- At least 80% of the money raised in the offering must be used in the state.
- All of the investors in the offering must be residents of the state.
- While the offering is being conducted and for nine months thereafter, all resales must be to state residents.
- The issuer must place a legend on stock certificates referencing these restrictions, and take other steps to ensure that the offering remains intrastate only.
Rule 147 is just a “safe harbor.” An intrastate offering that does not satisfy all of these conditions might still qualify for the statutory exemption under section 3(a)(11), depending on all the facts.
Some State Crowdfunding exemptions, Texas included, require that that the issuer satisfies Rule 147. In those States, by definition, an issuer that satisfies the requirements of the State exemption satisfies the Federal requirements as well. In other States, an issuer that dots all the I’s and crosses all the T’s of an intrastate Crowdfunding offering has a very good chance of qualifying under the Federal statutory exemption as well, even if the State exemption does not refer to Rule 147 explicitly.
That’s why the answer is a qualified Yes. An issuer that complies with the Crowdfunding rules of a State still has to qualify for the Federal exemption, but that shouldn’t be hard.
Questions? Let me know.