With all of the excitement around the SEC adopting rules regarding Title III of the JOBS Act of 2012 on October 30th, 2015 many may have overlooked potentially the most interesting developments that occurred on that day. The SEC proposed changes to Rule 147 of the Securities Act of 1933 (Federal Registry proposed Rule change), this is the primary safe harbor that enables the majority of recently passed Intrastate Crowdfunding laws (NASAA Intrastate Resource).

With Federal Crowdfunding (Title III rules) limiting companies to raises of $1,000,000, limiting investments by individuals in many cases to $2,500 in aggregate per year, as well as requiring portals to join FINRA at a cost of around $10,000 (upwards of $100,000 if operating as a Broker/Dealer).
The door has been opened for Intrastate crowdfunding to take hold and become the method of choice for small businesses to raise capital. The proposed rule changes will make state enacted laws even more viable as a means for small business to acquire the capital needed to grow.
We encourage anyone with an interest in Intrastate Equity Crowdfunding, including potential portal owners, small business owners and investors to review the proposed changes to rule 147. Take the time to comment to the SEC on the benefits that the proposed rule changes will have and how can be utilized to grow investment and create jobs in your local economy (Submit comments directly to the SEC).

Below are three examples of comment letters issued to the SEC:

1. Dear SEC:

I would like to thank you for reviewing and proposing updates to Rule 147. The proposed updates, when enacted, will provide a much improved and very workable model for small businesses to raise the capital needed to grow and create jobs in the communities they serve.

I implore the commission to leave the existing Rule 147 safe harbor to Section 3(a)(11) in place while adopting the proposed rules as the new Section 505.

By keeping the existing Rule 147 in place, states that have passed laws permitting and regulating Intrastate Crowdfunding will act as a testing ground for this new method of capital formation.

It had taken nearly two years to have this law enacted in my home state of Illinois and even longer in others. If the SEC removes rule 147 as a safe harbor under Section 3(a)(11) of the Securities Act of 1933 (the Act). The current Illinois Intrastate crowdfunding law would potentially be rendered useless.

It is clear that both the SEC and the states that have passed laws similar to that in Illinois are working towards the same worthy goal of providing a more efficient way for small businesses to obtain the capital required to operate, grow employment and create value.

My belief is that many states including Illinois will potentially take years to update the laws to function under any change to SEC regulation. It would cause states that have been forward thinking to start from scratch delaying potential opportunities for both small business and potential investors.

The proposed changes will be a huge improvement and go a long way in bringing these rules up to date with current business practices. In particular, the proposed change to the 80/80/80 rule with the modification to “or”.

In addition the ability to advertise intrastate offerings without fear that crossing state lines will void an offering utilizing the exemption. These will be perfectly suited to be placed in the new Section 505.

This will allow issuers within states having an existing exemption to continue to explore and potentially use existing law, while state lawmakers determine how best to move forward and take advantage of the improved exemption in Section 505.

If you would like to further discuss any of the recommendations offered please feel free to contact me at the email address provided with my comment submission.

2. To Whom It May Concern,

As a registered broker dealer, and one of the few practitioners attempting to utilize new state-level crowdfunding exemptions, there are a few items to address with the proposed amendments to Rule 147 and Regulation D, Rule 504.

• Ensure that FINRA treats all crowdfunding offerings and private placements the same. The staff states that their proposal would establish a new exemption under Rule 147. If it is the case that this exemption will still fall under Section 3(a)(11) of the Securities Act, the staff should work with FINRA to ensure that the treatment of this new exemption does not fall under the 5110 Corporate Financing Rule for Public Offerings. Currently all exemptions for intrastate crowdfunding, while exempt from registration, are treated as Public Offerings at FINRA under Rule 5110. As a broker dealer and registered FINRA member, all of our Regulation D offerings (including generally solicited 506(c) offerings) fall under FINRA Rule 5123, the Private Placement rule, but intrastate crowdfunding offerings are treated differently, requiring pre-filings with FINRA and expensive up-front fees for these small offerings. Further, most states require a pre-filing to be made and fee to paid prior to offering securities under these exemptions, there does not need to be a duplicate effort made at FINRA for these offerings. This is a substantial hurdle in being able to utilize this exemption and makes it more costly to facilitate these offerings as a broker dealer than using an unregistered entity and filing as a website operator within the state.

• Adopt a policy at the federal level that standardizes the use of an escrow agent. Another reason that intrastate offerings are rarely used is due to the difficulties in finding an escrow agent. In almost all cases, the escrow agent is required to be a bank that is registered within the state in which the offer is being made, and the funds may not leave the state at any point during the fundraising process. We have found it very difficult, and in some cases impossible, to find an escrow agent that meets these requirements and is interested or willing to provide these services. In many cases, eligible escrow agents have refused to provide this service, making it impossible to utilize the intrastate crowdfunding exemptions available.Further, when looking to utilize these exemptions in multiple states, a new escrow agent must be found in every state. The staff should work with the states or use language at the federal level that allows for any US escrow agent to be utilized when using these exemptions.

• Provide guidance on the verification of residency requirement for investors. The staff should work with states to standardize requirements for determining state of residency for allowing investor participation in an offering. In the past, since this has been required at the point of an offer instead of point of sale, states have taken varying views on what is required, ranging from asking for a zip code of residence to requiring verification of a valid driver’s license. Standardization or clearer guidance on this topic would go a long way in helping to ensure compliance with the requirement of verifying residency.

• Provide guidance that offerings made under the new exemption will not be integrated. As mentioned in the Final Rules for Federal Crowdfunding under Section 4(a)(6), the staff states that “an offering made in reliance on Section 4(a)(6) should not be integrated with another exempt offering made by the issuer, provided that each offering complies with the requirements of the applicable exemption that is being relied upon for the particular offering.” This guidance should be extended to the new exemption established under the proposed rules, for the same reasons that it was included in Section 4(a)(6).

• Require that all states provide an option to be used in conjunction with the Regulation D, Rule 504 exemption. While the Staff is to be commended for reviewing this underutilized exemption, many states have not adopted exemptions at the state level to allow for the use of this exemption, requiring instead that an offering being registered. In order for this exemption to be effective in capital formation efforts, there needs to at a minimum be an exemption available at the state level that would allow for the use of this Federal exemption.
• Provide clear guidance on what constitutes an offer. Many exemptions from registration under Regulation D and Crowdfunding offerings (state and federal) have rules specific to the time when an offer occurs. With the current state of technology, the Staff needs to come out with clear guidance on what constitutes an offer. For instance, if a business is engaged in a back-and-forth discussion with potential investors as to what proposed terms of an offer should be (as happens with a term sheet in the offline world), has an offer occurred? What if terms have been made available to investors, but investors are not able to sign an agreement to commit to investing on those terms? There are endless permutations that can be made with technology to adapt to changing circumstances, and in order for these new exemptions to be used effectively, clear guidance needs to be provided on this topic.

3. Please review comment #3 submitted by mail to the SEC here

Specifics on the Illinois Intrastate Crowdfunding Law

Take the time to learn about Intrastate Crowdfunding and add your comments. It truly does make a difference.
More details regarding the specifics, our analysis and why many intrastate laws are more viable than federal crowdfunding to follow shortly.