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.
Can you generally advertise your private company securities offering now?
Yes! This became possible on September 23, 2013.
But here are some notes of caution. Some suggestions. Some things I’d recommend you do before you generally solicit, if you decide to generally solicit at all. (Keep in mind, many, many companies will choose not to generally solicit because of the potential complications.)
The overarching suggestion here: If you choose to generally solicit, don’t do anything until you have made sure that you are completely ready and are able to generally solicit in compliance with the rules.
Another example: Can the shareholders take action by less-than-unanimous written consent without a shareholder meeting? If not, this should be fixed as well; otherwise, you may have to hold actual shareholder meetings to approve matters that could otherwise be approved in a less cumbersome way, by less-than-unanimous written consent.
- Make sure your company is legally set up to accept investments and make sure you can generally solicit
Many companies will have organizational documents that are missing key provisions or that handle fundamental governance points in the wrong way. For example, some companies will inadvertently set themselves up so that all shareholders are entitled to statutory preemptive rights. Meaning, the company can’t raise any money from anyone without first giving all existing shareholders notice and an opportunity to participate. Statutory preemptive rights can be cumbersome and they are generally not recommended for angel or venture-backed companies. Be aware that if you sold shares in the last 6 months to non-accredited investors, or if you have non-accredited investors holding convertible notes that will convert on your generally solicited offering, you may NOT be able to generally solicit your offering. The problem? Generally solicited offerings cannot include any non-accredited investors, and if you sold shares in the last six months to non-accredited investors your generally solicited offering may be “integrated” with your prior offering, causing the whole offering to fail to have an exemption. This is another reason it is critical for you to have competent securities counsel on your team.
- Are your accounting systems and processes ready?
Do you have a good accounting system and good accounting practices in place? How soon after the end of each month, quarter and year end can you close your books? Is your accounting team ready to respond to investor requests for financial statements? Under state corporate laws, shareholders are entitled to certain financial information. You will have to be ready to respond to requests for information promptly and efficiently.
- What does your board look like?
Do you have a board of directors that includes at least two independent directors who are neither employees, members of the executive management team, or related to any of them? If not, once you have outside investors how are you going to approve related party transactions? This old standard business advice resounds: Surround yourself with top notch business advisors.
- Consider the risks
- Know your Blue Sky securities law or work with a lawyer who does
Some states may require additional filings before general solicitation (e.g., New York). “Blue Sky” refers to state securities laws.
- Beware that the SEC may change the rules on you midstream
Proposed rules have been issued. No one knows what final form they might take or when they may become final.
- Know your investors
Due diligence is a two way process. It is really important that you don’t accept as an investor in your company someone who doesn’t understand the risks or whose expectations are not consistent with yours. This can literally kill your company. It is easier to get divorced than to get someone off your cap table. Don’t accept just anyone simply because they can provide all the information to show that they qualify to make an investment as an accredited investor.
- Construct a general solicitation plan
General solicitation can include simply putting something on your company’s web site. It can also include running ads on TV. What kind of general solicitation will you conduct? What will you say about your company in your generally solicited statements? You are going to want to be careful here. Any statements made here in the nature of promises about future performance that turn out to be untrue will subject you to potential personal liability.
- Has your board approved the plan?
It should do so. And you will want it to do so.
- Slow down
If you hurry through this process, you may make a mistake that will be costly financially and in numerous other ways.