Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Association of Corporate Counsel | Article by Strasburger & Price LLP Lee Polson and Alana Parker | June 5, 2014
In the race between states vying for startup businesses, Texas proposes to sweeten the deal with a new proposal that exempts crowdfunding initiatives from state securities laws.
For those new to the concept, crowdfunding refers to a method of raising money from a large number of small investors, typically through an online portal or platform, in order to finance a new business venture. Entrepreneurs who raise money through crowdfunding often use social media to share their efforts, which increases traffic to their crowdfunding page. Certain crowdfunding sites, such as Kickstarter, operate on a donations-based model. That is, individuals contribute to their preferred startups and causes without receiving any equity or interest in return. Consequently, Kickstarter campaigns are not considered securities offerings.
Other platforms, such as AngelList and CircleUp, restrict participation to accredited investors. While this allows them to comply with federal securities laws, the limited access to such offerings goes against the appeal of crowdfunding as a more open, egalitarian, and small-business friendly platform for raising capital. Therefore, proponents of crowdfunding have advocated for an exemption to the federal securities laws that would allow them to raise relatively small amounts of capital from the general public while avoiding the burdens of current regulations.
This goal appeared to be within reach after Title III of the JOBS Act prompted the SEC to draft a new exemption making it easier for small businesses to raise money from non-accredited investors via online portals. While observers in the startup community were initially optimistic about the potential for crowdfunded offerings on a national scale, they have lowered their expectations after the SEC took a year and a half to release proposals for its crowdfunding rules. It is not yet known when those rules will go into effect.
The Texas State Securities Board Publishes Proposal for Crowdfunding Exemption
The Texas State Securities Board recently released its own proposed crowdfunding rules for public comment. As with the proposals in other states, the Texas rules rely on the intrastate offering exemption set forth in Section 3(a)(11) of the Securities Act.
This exemption provides that any issue of securities offered only to investors residing within one state, where the issuer is a resident of the same state, is exempt from registration under the federal securities laws. Each state has its own intrastate offering regulations, and exemptions for crowdfunding proposals must generally fall under this exemption or they are preempted by federal securities laws.
The key provisions of the proposed crowdfunding exemption in Texas are as follows:
Eligible businesses may raise up to $1 million per 12-month period.
An issuer must be a Texas entity to be eligible for the crowdfunding exemption, and it may only offer securities in Texas. The eligibility and residency requirements mirror those set forth in Rule 147, enacted pursuant to the federal intrastate offering exemption.
In order to meet the residency requirements, an issuer must be able to demonstrate the following:
Click here to view the image.
While the exemption is designed to benefit startup companies, the company must have a defined business plan and investment goals. Finally, customary bad actor disqualifications also apply, and the issuer may not be an investment company or an SEC reporting company.
Once an issuer meets these requirements, it may raise up to $1 million within each 12-month period (including offerings by control persons).
Non-Accredited investors may contribute up to $5,000 per offering.
Investments pursuant to the proposed crowdfunding exemption are limited to $5,000 per investor, unless the investor is an accredited investor as defined in Rule 501 under the Securities Act of 1933. If an issuer wishes to raise larger amounts from accredited investors, it must verify the investor’s accredited status first. Investor funds must be placed in escrow until the specified minimum offering amount has been raised.
In addition, only investors resident in the State of Texas may participate in crowdfunding offerings. Investors will be required to submit a Texas driver’s license number, voter registration card or property tax records to prove that they are Texas residents. Before purchasing any securities, prospective investors must confirm their acknowledgment of certain customary disclaimers.
Leave a Reply