If you are interested in using equity crowdfunding on a local basis, several jurisdictions have enacted exemptions within existing federal law that allow local small businesses and entrepreneurs to use intrastate equity crowdfunding to help grow their small businesses by tapping into the crowd within their state’s borders.
What is Crowdfunding?
Crowdfunding is an online money-raising strategy.
Crowdfunding began as a way for the public to donate small amounts of money, often through social networking websites, to help artists, musicians, filmmakers and others finance their projects. In return for these donations, donors received items such as t-shirts and CDs. The concept has expanded beyond the donation model.
Small businesses and start-ups can now use crowdfunding to solicit investors who provide the capital necessary to help get their business ventures off the ground.
As of July 31, 2017, thirty-four states and the District of Columbia have enacted intrastate, or state-based, crowdfunding laws, through legislation, rulemaking and orders. These laws allow small and emerging companies in these states to raise capital from local, in-state investors through the issuance of securities. In general, businesses can raise money from local investors directly or through an intermediary such as a broker-dealer or a state-based online platform or portal. The amount a business can raise, and individual investment limits, are determined by each state’s crowdfunding laws.
State and federal securities laws govern a company’s issuance of securities, including through state crowdfunding. Those laws require companies to either register their securities or find an available exemption from registration. Importantly, a business conducting state crowdfunding must meet both a state and federal exemption. Most state crowdfunding laws are linked to the federal “intrastate” offering exemption—Section 3(a)(11) of the Securities Act of 1933 (“Securities Act”) and its corresponding Rule 147. A few state crowdfunding laws are tied to the federal exemption in Rule 504 of Regulation D.
Amendments to these federal regulations, discussed below, stand to directly impact the efficacy and potential of state crowdfunding laws. Specifically, by modernizing the federal securities exemptions that are referenced in state crowdfunding laws, small companies can make better use of state crowdfunding and other local offering exemptions to raise capital. Investors and small companies will also benefit from the rules that maintain important investor protections and preserve state authority.
What types of small businesses have used intrastate crowdfunding?
A wide variety of small businesses have turned to intrastate crowdfunding to raise money to help grow their operations.
Here’s a list of just some of the types of business that have used intrastate crowdfunding:
Breweries, distillery, spirit producer, grocery store, general store, exercise studios, software company, night club, music/real estate venue, farmers (family-run farm, dairy farm, farming coop), retail electronics store, technology companies (medical device, education technology, renewable energy), family-run manufacturing businesses, real estate firms (micro-financing, commercial property, construction), product inventions, hair salon, barbershop, entertainment platforms (movie, album, other media, over-the-air digital TV station), electronic/gaming pub, dog groomer, sushi restaurant, ice cream maker, baseball bat maker, angel funds, defense consultant, food and beverage platforms, restaurants, apparel companies, service providers (home renovation, security alarm systems, food processing), senior care facilities, physician association, media art firms, purse maker, local product distribution company.
How can I learn if I can use equity crowdfunding in my state?
A majority of jurisdictions have adopted crowdfunding provisions in their rules or statutes recognizing that equity crowdfunding, done responsibly, with appropriate disclosure and safeguards, may be another valuable tool that small companies can use to raise capital.
To learn if equity crowdfunding is legal in your state, visit NASAA’s Intrastate Crowdfunding Directory
Note: This information is being provided for your convenience and is not intended as legal advice. The information is illustrative only and not an exhaustive list. Any questions should be directed to the appropriate state regulator. The list is current as of January 2, 2018.
As a small business owner, what should I know about intrastate equity crowdfunding?
NASAA has issued an advisory for small businesses and entrepreneurs interested in intrastate crowdfunding. The advisory outlines several areas of consideration of crowdfunding issuers. The advisory is available here.