On October 26, 2016, the Securities and Exchange Commission (“SEC”) adopted final rules regarding intrastate crowdfunding offerings. The final rules amend Securities Act Rule 147 to update the safe harbor protections under Section 3(a)(11) of the Securities Act, so that issuers may continue to use state law exemptions that are conditioned upon compliance with both Section 3(a)(11) and Rule 147.
As background, the Jumpstart Our Business Startups (“JOBS”) Act was signed into law in 2012, but the SEC did not adopt final rules implementing Title III of the JOBS Act until October 30, 2015. During this regulatory limbo, many states—including Georgia (see below)—decided to jump start the process by enacting their own legislation permitting intrastate offerings in reliance upon the federal exemption.
Each company relying on the federal intrastate offering exemption must (i) be organized in the state where it is offering the securities; (ii) carry out a significant amount of its business in that state; and (iii) make the particular offer and sale of securities only to residents of that state. The issuing company is also responsible for ensuring that securities offered under the intrastate exemption are neither sold to any out-of-state residents nor resold to residents of other states with a certain time-period (typically nine months). Beyond that, the SEC is effectively deferring to the states to oversee intrastate crowdfunding offerings.
With that in mind, all participating states require issuers to do one of the following:
- register their intrastate securities offering with that state’s securities commission; or
- qualify for an exemption from state registration.
Although registering securities offerings at the state level is not as costly and onerous as registering securities offerings with the SEC, it can still be a burden. The intrastate crowdfunding exemption can therefore be a useful tool for local businesses looking to raise limited capital from local investors in a cost-effective and timely manner.
To its credit, Georgia was an intrastate crowdfunding pioneer. In 2011, Georgia became the second state (after Kansas) to enact an intrastate crowdfunding exemption when it enacted the Invest Georgia Exemption (“IGE”). Initially, Georgia-based companies could raise up to $1 million through the IGE; however, in October of 2015 Georgia increased the cap to $5 million to address issuer concerns regarding the usefulness of the exemption.
Companies relying on the IGE must meet the following requirements:
- The issuer is a for-profit business entity formed in Georgia and registered with the Secretary of State;
- The transaction qualifies for the federal exemption for intrastate offerings in Section 3(a)(11);
- The issuer raises no more than $5 million from Georgia resident investors; and
- The issuer accepts no more than $10,000 from each non-accredited investor.
Additionally, an issuer must file a notice—called a “Form GA-1”—with the state securities commissioner before the use of “general solicitation” or the 25th sale of the security, whichever occurs first. The notice must contain the names and addresses of the following persons:
- The issuer;
- All persons involved in the offer or sale of securities on behalf of the issuer; and
- The bank or other depository institution in which investor funds will be deposited.
Each state intrastate exemption is unique. State exemptions may vary with respect to the cap on the amount that can be raised, the amount allowed from each non-accredited investor, the number of non-accredited investors allowed per security offering, whether the security must be offered on an equity crowdfunding portal, etc. To ensure compliance with current intrastate exemptions, we strongly suggest contacting an attorney familiar with these types of offerings.
As always, feel free to contact us should you have any questions regarding this post.