Intrastate Crowdfunding: Financing Option for Small Businesses

MARCIA KAPLAN | Practical eCommerce | JUNE 11, 2014 – Tired of waiting for the U.S. Securities and Exchange Commission to issue final regulations for equity crowdfunding, several states have passed legislation enabling crowdfunding within their borders. Several more states are considering intrastate equity crowdfunding, an exemption from federal laws in Section 3(a)(11) of the Securities Act of 1933.

When the Jumpstart Our Business Startups (JOBS) Act was passed in 2012, it was perceived as a means of tapping into a new source of money for entrepreneurs and businesses as banks became less interested in lending and venture capital firms narrowed their investment interests. Unfortunately two years after the bill was signed, equity crowdfunding is still limited to accredited (wealthy) investors. Another reason that intrastate crowdfunding is appealing is that equity funds tend to go to high-growth technology start-ups while states with few technology companies are more interested in helping traditional small businesses via crowdfunding.

How Intrastate Crowdfunding Works

Under the intrastate exemption, companies can raise funds only from residents of the state where they are physically located. The states of Alabama, Georgia, Kansas, Maine, Michigan, New Jersey, Texas, Washington, and Wisconsin passed legislation allowing intrastate equity crowdfunding, although not all programs are operational yet. California, Connecticut, North Carolina, South Carolina, and Utah are considering implementation. States can make their own rules or choose to follow the guidelines from the federal law.

Under the intrastate exemption, companies can raise funds only from residents of the state where they are physically located.

Thus far, most states have retained many of the federal investment limits, both for the companies and for the investors. Individuals with an income of less than $100,000 per year are allowed to invest the greater of $2,000 or five percent of their income. Individuals with an income of more than $10,000 can invest up to 10 percent of income, with a maximum of$100,000. On the other hand, Wisconsin allows its residents, regardless of net worth, to invest up to $10,000. Some states allow companies to raise up to $2 million a year — twice the federal limit — if they comply with stricter audit rules.

One of the criticisms of Title III of the federal crowdfunding law is that the compliance fees are too high for the $1 million annual limit for equity investment. Analysts have estimated that compliance could cost companies anywhere from 15 to 25 percent of the raise. While most states have maintained the $1 million annual fundraising limit, other requirements have been streamlined. For example, the fees for accountants, lawyers, and filings in an intrastate offering can be less than $5,000 because compliance is not as onerous.

On the federal level, complaints about the high costs in relation to the maximum raise amount have spurred Representative Patrick McHenry of North Carolina to introduce legislation that would repeal the crowdfunding provision (Title III) of the JOBS Act and replace it with new legislation that would allow crowdfunding in larger amounts. McHenry’s draft legislation would allow companies to raise up to $3 million a year, or $5 million if the company makes audited financial statements available to prospective investors.

read more: http://www.practicalecommerce.com/articles/69251-Intrastate-Crowdfunding-Financing-Option-for-Small-Businesses

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