By Vela Wood
A client who recently launched an intrastate, equity-based*, crowdfunding campaign in Texas called me a few weeks ago with an interesting question: “Can we do an accredited investor, interstate, equity-based crowdfunding campaign at the same time?” After some research, I called the client back to give him the most lawyerly answer possible: “it depends.”
First, let me explain why a company would want to have multiple simultaneous crowdfunding campaigns. Relying on the Texas Intrastate Crowdfunding Exemption, a company can only sell its units (or shares, if it’s a corporation) to Texas investors. So, if a company wants to sell units to non-Texas investors, the company must rely on another registration exemption, most frequently Rules 504, 505, or 506 of Regulation D of the Securities Act. Recently enacted Rule 506(c) allows for “general solicitation” of an offering, while still qualifying it as a private offering, provided that the company takes reasonable steps to verify that all of the investors in the offering are accredited. Thus, Rule 506(c) is what allows a company to have an accredited investor only, interstate, equity-based, crowdfunding campaign. These are done through qualified portals which help to facilitate general solicitation to accredited investors only.
My initial thought was, great – there is an exemption for an intrastate crowdfunding offering and an exemption for an interstate crowdfunding offering, therefore, as long as the company doesn’t exceed the $1,000,000 limit in the Texas Intrastate Crowdfunding Exemption, including the aggregate amounts received by the company from sales of its shares or units (a) during, (b) within the six months prior to, and (c) for six months following the intrastate crowdfunding campaign, it can run simultaneous intrastate and interstate crowdfunding campaigns.
Not so fast. Preliminary Note 3 to SEC Rule 147, which governs how the SEC determines whether intrastate offers and sales of securities are part of the same offering, says that it’s a question of fact, depending on the particular circumstances, whether multiple offerings are deemed to be a single offering, and one or more of the following factors may be determinative:
- Whether the offerings are part of a single plan of financing
- Whether the offerings involve the issuance of the same class of securities
- Whether the offerings are made at or about the same time
- Whether the same type of consideration is to be received
- Whether the offerings are made for the same general purpose
It should be noted that, just because a company chooses to go with a Texas intrastate crowdfunding campaign, it’s not precluded from taking out of state investors during the intrastate crowdfunding campaign (relying on Rule 504 or 505) or running an accredited investor only, interstate, crowdfunding campaign as a later round of fundraising, it just means that it can’t run both types of crowdfunding campaigns simultaneously (or within close proximity to each other).
Long story short, if you’re contemplating a crowdfunding campaign, either intrastate, interstate, or both, give us a call and we can help you weigh the pros and cons of each to determine your best course of action.
*An intrastate offering, as opposed to an interstate offering, is essentially an offering that does not cross state lines. It is made by a company that is incorporated/formed in the same state as that in which the bulk of its business occurs to residents of that same state. By contrast, an interstate offering is one made by a company to residents of any state without regard for whether the company and the investors are from the same state.