States Taking Crowdfunding Regulation Into Their Own Hands
By Vela Wood
As the crowdfunding community continues to wait (I say “wait” loosely because it’s long overdue) for the SEC to release the crowdfunding regulations, a few states have passed their own intrastate crowdfunding regulations.Those states are Kansas and Georgia.
North Carolina may be joining them soon. On June 20, 2013, the North Carolina House of Representatives passed the North Carolina JOBS Act of 2013 with a vote of 103 to 1. The North Carolina JOBS Act of 2013 will now go to the Senate for approval.
The intrastate crowdfunding legislation allows a greater number of investors, who would otherwise most likely be unable to invest in startup businesses, to receive equity in exchange for funding. The Kansas and Georgia crowdfunding legislations are almost identical. Below is a list of some of the legislation requirements:
- The issuer must be an in-state resident or certified with the Secretary of State.
- The issuer must be organized under that state’s laws.
- The issuer can raise up to $1 million through this exemption, but no more than $10,000 in Georgia and no more than $1,000 in Kansas can come from any one entity or person, unless the investor is accredited.
- All of the funds received must be deposited in a bank authorized to conduct business within the State.
- All of the investors must be in-state residents.
- Before any general solicitation, the issuer shall file notice with the security regulatory agency that contains the names and addresses of the issuer, the persons who are involved in the offer on behalf of the issuer, and the bank in which the investor funds are deposited.
The North Carolina legislation looks to bring a few more requirements including:
- The issuer can raise up to $2 million with audited financials ($1 million can be raised without audited financials).
- Each investor can invest up to $2,000, unless the investor is accredited.
- Issuers may use a crowdfunding platform, but it is not a requirement.
- The investors must certify in writing that they understand the risks involved in such a transaction.
Although Kansas and Georgia passed their intrastate crowdfunding legislation in 2011, it is still too early to tell if issuers and investors are taking advantage of the legislation in those states because the legislation is restricted only to issuers and investors located in those states. Due to the excitement surrounding crowdfunding and the eagerness to get going, I think it’s likely that other states will pass similar legislation before the SEC finally comes out with the federal crowdfunding regulations. Perhaps the SEC will use some of the state legislation to guide the federal rules.