Approximately 35 states have created exemptions in their securities acts or rules in order to allow businesses seeking relatively small amounts of capital to raise funds locally without undergoing an expensive and complicated registration process. Offerings under these exemptions – typically called intrastate “crowdfunding” exemptions – have usually required compliance with the federal intrastate offering exemption under either Section 3(a)(11) of the 1933 Securities Act, or SEC Rule 147, which allows issuers to avoid the burdens of federal registration as well.
A key element of most of these newly-adopted state provisions has been to allow issuers to use general solicitation to seek investors. However, the federal exemption, together with restrictive historical SEC staff guidance, effectively operated to prohibit internet advertising, and restrict other types of solicitation. The federal intrastate exemption prohibited out-of-state offers of securities, even when those offers were deemed such solely because of their being visible to non-home state residents on the internet. The federal rules also prohibited an issuer formed in another state from availing itself of the intrastate exemption in its “home” state for all other purposes. Other constraints dealing with the issuer’s business activity (such as determining the percentage of its revenue derived from the home state) sometimes complicated the determination about whether an issuer would qualify for the federal, and therefore the state, exemption.
These restrictions, which had not been significantly changed in many years, led to widespread criticism that changing business and legal practices, not to mention the rise of the internet as a marketing tool, had made the intrastate exemption largely obsolete.
In 2016, the SEC adopted a new rule, 147A, which was designed to modernize the federal intrastate exemption. The rule, which became effective on April 20, 2017, expressly allows internet solicitations, removes the requirement that the issuer be formed in the home state, and only requires that sales, rather than offers and sales, be made in-state. In addition, the new rule liberalizes operational requirements, requiring only a majority of employees be in a state regardless of the source of revenue, making it easier for small businesses operating across state lines to qualify.
Unfortunately, most states’ crowdfunding exemptions had been drafted to require compliance with the old federal rules. Moreover, the means by which states could modify those exemptions, were they so inclined, varied from state to state – ranging from statutory changes to formal rulemaking to a regulatory order. So, although the federal rules governing intrastate exemptions had been liberalized effective this April, the state actions necessary to allow a broad implementation of those changes did not automatically occur.
Fortunately, since the adoption of Rule 147A by the SEC, a growing number of states have been conforming their respective rules to accommodate the liberalized provisions of Rule 147A. (We previously wrote about some of those efforts). Now, Georgia has become the latest state to allow its in-state issuers to fully utilize the new federal rule within its intrastate crowdfunding exemption, the Invest Georgia Exemption (“IGE”).
Under the amended Georgia Rule 590-4-2-.08, Georgia issuers can raise up to $5,000,000 from both accredited and unaccredited investors, with unaccredited investors being limited to an investment cap of $10,000. The offering must comply with either the old Rule 147 or the new Rule 147A, meaning that general solicitation, including internet solicitation, is now acceptable as long as all purchasers are bona fide Georgia residents. The issuer must meet the new rule’s less restrictive operational requirements, but no longer must be a Georgia-formed entity. As was the case before the amendments, the issuer must have a bank depository in Georgia, and a short notice filing form, the GA-1, must be filed with the Secretary of State prior to any offers. No fee is required.
While disclosure and anti-fraud requirements apply to the sale of securities offered and sold under the IGE, as is the case with any securities offering, the amendments should allow Georgia businesses a less-burdensome path to raising modest amounts of capital by loosening solicitation restrictions and operational requirements. For example, a local retail business looking to expand or open other locations can now inform potential investors of its plans through advertisements in its retail locations and even on its website.
Parker MacIntyre provides legal and compliance services to securities issuers, including small businesses, investment advisers, broker-dealers, registered representatives and hedge funds, among others. Our capital formation practice group assists businesses with the complex issues that arise in the course of raising capital at various stages of their formation, operation and growth, including compliance with federal and state laws and rules. Please visit our website for more information.