McBride Law Blog

Crowdfunding: Is It Right For My Business, Post 4

McBride Law Blog

// R. Shawn McBride // No Comments »

Post 4

Intrastate Crowdfunding

With the delay on the federal front, a dozen states have already adopted some form of crowdfunding exemption, which include: Alabama, Georgia, Idaho, Indiana, Kansas, Maine, Maryland, Michigan, Tennessee, Texas, Vermont, Washington, and Wisconsin, as well as the District of Columbia.[1]  Common features of these exemptions include: sales made exclusively within the state, annual offering limits, simplified limits on amounts that may be invested by unaccredited investors, requirements for sales to be made through internet funding portals or registered dealers, escrow of offering proceeds, and disqualification for issuers controlled by persons with criminal or other disciplinary history.[2]

In a few of these states, the exemption is already in effect.  With a few notable exceptions, however, intrastate crowdfunding does not seem to have gained traction.  This may have to do with the local nature of the exemption (i.e., offerings only to residents of the state where the company is organized and doing business), which may not be a suitable model for companies that want to reach out to a wider, national audience.  Indeed, a lot of modern media, particularly social media, crosses state lines and it is difficult in such situations to keep the information with arbitrary state lines.  Nevertheless, it could still be a useful tool for small, community-based businesses to raise capital, especially while the SEC rulemaking is pending.

 

The Act promises to help startups and small businesses by exempting crowdfunded securities from the registration requirement.  At the same time, the level of compliance required by the Act is such that many small businesses may find it cumbersome to raise money that way.  For those that are not deterred by the SEC requirements, there may be other things to consider.  For instance, unlike offerings to a small number of accredited investors, crowdfunding is open to just about anyone, most of whom the issuer does not know and who may thus be more prone to litigation if things to south.  Also, depending on the industry, a company may prematurely subject itself to additional regulatory scrutiny (e.g., the Food and Drug Administration) by advertising to the world when it shouldn’t.

Crowdfunding may not be right for everyone.  Startups and small businesses that want to raise money through crowdfunding would be well advised to seek the advice of a competent securities lawyer first to explore alternative ways.

 

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

 

 

About the Author

 

So-Eun Lee – So-Eun Lee is an associate attorney in the New York office of The R. Shawn McBride Law Office, P.L.L.C.  She concentrates her practice on business law.  So-Eun can be contacted at: (347) 921-0173 or soeun.lee@rsmlawpllc.com.  Her profile is available on www.mcbrideattorneys.com.

Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258; shawn.mcbride@rsmlawpllc.com, or www.mcbrideattorneys.com.

[1] John Morgan, Intrastate Crowdfunding (presented at 2015 Conference on Securities Regulation and Business Law, Feb. 12-13, 2015, Dallas, Texas), at 3.

[2] Id.

Posted In: JOBS Act, Private Placements, Securities Laws, Uncategorized

Facebooktwittergoogle_pluslinkedinmailAbout the Author Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email or call (214) 418-0258.


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