Last October, the Securities and Exchange Commission adopted amended rules in several areas designed to facilitate capital formation by small businesses, in large part by coordinating federal requirements with requirements of state “crowdfunding” statutes and rules adopted by approximately 35 states since 2011.
Specifically, the SEC amended Rule 504 of Regulation D to raise the offering limit from $1,000,000 to $5,000,000, and created new Rule 147A, broadening the parameters under which intrastate offerings under existing Rule 147 could be conducted. Rule 147A, among other things, allows unlimited solicitation of offerings, including on the Internet, loosens requirements for issuers to qualify as “doing business in” a state, and allows corporate entities formed out-of-state to conduct intrastate offerings in the state where they primarily do business. Also, the previous requirement that intrastate offerings could only be offered to residents of a single state has been eliminated; the single-state restriction now considers only actual sales.
The effective date for the Rule 504 changes was January 20. However, the effective date of the new Rule 147A does not occur until April 20. Most states’ small business crowdfunding exemptions, whether adopted by statute or by rule, are conditioned upon compliance with Section 3(a)(11) of the 1933 Act or Rule 147. In order for issuers in those states to be able to fully utilize the new Rule 147A, those states will have to amend their exemptions to remove that condition.
A few states have begun taking the necessary steps to do so. In the state of Washington, House Bill 1593 is currently pending before the House of Representatives, having passed out of the Business and Financial Services Committee on February 1. The bill, if adopted in its current form, would expand the state crowdfunding provision by eliminating any requirement of satisfying the provisions of any specific federal exemption, clarifying that the state exemption applies to debt and equity offerings, and eliminating the individual investment limitation for accredited investors. Other provisions track changes in Rule 147A.
In Minnesota, HF444 is in a similar legislative posture, having been passed by the House Commerce and Regulatory Reform Committee on February 9. The bill closely tracks the provisions of Rule 147A, and specifies compliance with that Rule as a condition for complying with the MNVEST crowdfunding exemption.
The Vermont Department of Financial Regulation has proposed rule changes, set for a hearing on March 3, which would modify existing crowdfunding and small offering rules. The proposed rule would create Rule VSR Section 5-12(a) as the “2017 Vermont Investor Exemption.” The new rule closely follows Rule 147A and provides that compliance with that Rule is a condition of compliance with the new Vermont exemption. The amendment also retains, as an alternative, the existing rule based on compliance with Section 3(a)(11). Some provisions of the proposed rule are not found in Rule 147A, such as a requirement that any offering seeking to raise more than $1,000,000 must be accompanied by an audited financial statement. The state will also require filing the offering disclosure document and other materials with the state prior to any sales.
Currently pending before the Indiana legislature is HB 1526. The bill would add exemptions for offerings compliant with the recently adopted federal Regulation Crowdfunding and Tier 2 of Regulation A, but it does not appear to address the most recent changes to the intrastate exemption, including Rule 147A.
We believe other states are similarly engaged in preparing modifications to their crowdfunding exemptions in order to comply with the new federal rules on intrastate offerings, and we will post updates as we learn of them.
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 for 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.