The Washington State legislature has passed a crowdfunding bill, HB 2023. The Governor has yet to sign the bill, so it is not yet law. But hopefully it will be law soon.
If you are wondering what the new law will allow, I have put together the following summary for you.
- The bill would allow companies to raise up to $1M during any 12 month period.
- Companies could raise those funds from accredited or non-accredited investors.
- Companies would have to be organized or incorporated in Washington and doing business in Washington to use this law.
- Only Washington residents could invest (investors would have to provide evidence or certification of residency in the State of Washington at the time of purchase).
- The aggregate amount sold to any investor by one or more issuers during the 12-month period preceding the date of sale could not exceed:
- For investors with an annual income or net worth of less than $100,000, the greater of either (i) $2,000 or (ii) five percent (5%) of the investor’s annual income or net worth.
- For investors with an annual income or net worth of $100,000 or more, ten percent (10%) of the annual income or net worth of the investor, up to $100,000.
- Offerings would first have to be declared exempt by the Department of Financial Institutions before they could move forward.
- Companies would have to file with the DFI an escrow agreement providing that offering proceeds will be released only when the aggregate capital raised equals or exceeds a minimum target amount, as determined by the DFI.
- Companies would have to make ongoing disclosures to shareholders and the DFI for as long as securities sold using the crowdfunding exemption were outstanding.
- Companies could but would not be required to use a funding portal.
The bill would fill a void – at least for Washington entities and Washington residents – that federal law has not yet filled. As you may or may not be aware, the federal JOBS Act contains an equity crowdfunding provision, but the SEC has yet to finalize the regulations allowing crowdfunding. Let’s hope the Governor signs the bill!
Update: The Governor signed the bill yesterday, Friday, March 28. The next step is the Department of Financial Institutions will be working on rules.
Founded in 1985, Puget Sound Venture Club (PSVC) is the oldest angel group in Seattle. Even prior to founding the organization, Gary has been a valuable resource and a supporter of the Northwest startup community. His stories are educational as well as entertaining. Moreover, it is his insight into the process of raising angel funds that make this a very special opportunity.
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The word is now out – Title III equity crowdfunding under the JOBS Act is not going to work very well. The problem? It is going to be way too expensive. Estimates to do an equity raise pursuant to Title III range between $140,000-$250,000 for a million dollar raise.
See these two posts on this topic:
Crowdsourcing a Title III Crowdfunding Cost Model
“Death by Expense” of Crowdfunding?
This is simply too steep for it to make any sense except for companies that have a business purpose other than just raising money to do such an offering (e.g., encouraging patronage by turning patrons into stockholders as well).
But here is something interesting to consider. Years ago state and federal securities regulators constructed something called a Small Company Offering Registration, or a SCOR. If you read the description of a SCOR offering on the Washington State Department of Financial Institution’s website (see here: http://www.dfi.wa.gov/sd/scor.htm), you will notice something somewhat remarkable: it looks even better than a Title III equity crowdfunding. Let me show you how they compare.
| ||Title III Crowdfunding||SCOR (“Small Company Offering Registration”)|
|Fund raise limit||$1M during any 12 months||$1M during any 12 months|
|Required to use an intermediary?||Yes (and look for a fee of about 8-10% of the gross proceeds to be paid to the intermediary).||No.|
|Advertisement allowed?||Yes, but subject to limitations.||Yes. But there are no specific advertising limitations as there are in the draft crowdfunding regulations.|
|Investor limitations||Yes; individual investor caps.||No. “Investors are not limited as to number or type, nor is there any restriction on the amount that may be sold to any one person.” See the following link: http://www.dfi.wa.gov/sd/scor.htm|
|Requirement of audited financials?||Yes, if raising more than $500,000.||No, if you only raise money from Washington residents.|
|Geographic availability||Not limited to specific states in which the issuer has gone through the registration process.||The geographic availability of a SCOR offering is limited to the states in which a company has gone through the registration process.|
Will the SCOR come back into popularity now that Title III equity crowdfunding has not turned out as crowdfunding advocates had hoped? It is possible. It will be fun to watch and see. But let’s be honest – there are problems with SCOR offerings, which is the reason they are not very popular. What problems am I referring to? In general just the complexity of an offering that requires you to either register securities with state securities regulators (like a SCOR offering), or go through a difficult and burdensome process (like that described in Title III of the JOBS Act).
The truth is—Congress needs to revisit the crowdfunding provisions of the JOBS Act and simplify those provisions substantially. I am afraid Title III crowdfunding is going to go the way of SCOR—it will be scarcely used, and ultimately forgotten.