State crowdfunding rules approved

The SEC on Oct. 26, 2016, unanimously approved final rules that expand entrepreneurs’ ability to raise crowdfunded capital in their home state or region.

So-called “intrastate” crowdfunding allows a start-up company to offer and sell shares to the public within the borders of their home state without registering with the SEC. In recent years, more than half the states have enacted some form of intrastate crowdfunding laws, although critics have said the process remains unwieldy due to restrictions on marketing and eligibility.

The commission issued the rules in Release No. 33-10238, Exemptions to Facilitate Intrastate and Regional Securities Offerings.

The SEC in October 2015 issued a proposal in Release No. 33-9973, Proposed Rule Amendments to Facilitate Intrastate and Regional Securities Offerings, to remove some of those barriers. Under the changes, entrepreneurs won’t be required to restrict offerings to their home states, which had served as an effective ban on Internet marketing. All sales of securities, however, must still be in-state.

A startup company will no longer need to be incorporated in the state in which it raises capital in order to invoke intrastate crowdfunding as long as it has its principal place of businesses there.

The final rules were adopted “largely as proposed,” said SEC Chair Mary Jo White in remarks prior to the vote.

The final version, however, does contain one major concession to critics of the proposal in Release No. 33-9973.

Almost all of the state crowdfunding statutes are based on Section 3(a)(11) of the Securities Act of 1933, with Rule 147 providing safe harbor to start-up companies raising money through the exemption.

The original proposal would have created a new exemption within Rule 147, which commenters, including the North American Securities Administrators Association (NASAA), warned would conflict with existing state crowdfunding statutes. NASAA and others instead urged the commission to preserve the safe harbor under Rule 147, or risk forcing state legislatures to rework their own crowdfunding laws. The commission, they argued, should instead implement the changes in a wholly new exemption.

Accordingly, the final rules approved on October 26 will create a new exemption under “Rule 147A,” while also amending Rule 147.

The final rules also expand an exemption in Rule 504 to let companies raise as much as $5 million in a year, up from $1 million, as long as they comply with state securities regulations where the offering takes place.

Democratic Commissioner Kara Stein voted in favor of the final rules, but in her remarks questioned whether they have “sufficient guardrails to protect investors.” She criticized the lack of a “bad actor” provision in Rule 147A that would disqualify felons and others who have been sanctioned for fraud from participating in offerings under the rule. Allowing bad actors to participate undermines investor confidence and harms legitimate issuers seeking to raise capital, she said.

Republican Commissioner Michael Piwowar praised the final rules as a “well-crafted and thoughtful adoption” of the intrastate crowdfunding proposal.

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