Though the JOBS Act was passed in 2012 and mandated that the Securities and Exchange Commission (SEC) issue rules regarding several statutes, most notably Title III and Title IV, which have yet to be finalized. Currently, Title III is not yet in effect, and with that knowledge, many states took matters into their own hands and enacted state-level crowdfunding legislation.
This article will help you to better understand the difference between federal and state crowdfunding exemptions. Instrastate crowdfunding exemptions allow companies to raise capital from unaccredited investors who are residents of the same state; companies must be headquartered in the state in which they are raising capital and can only raise capital from permanent residents of that state. As of September 2014, 12 states have enacted intrastate crowdfunding exemptions; but since Loquidity focuses on the Midwest, we have expanded on the four states in our region.
In September 2013, the SEC issued rules for Title II crowdfunding, also known as “accredited investor crowdfunding,” and general solicitation. Under these rules, private securities can be advertised through legitimate crowdfunding platforms (i.e., Loquidity); however, funds can only be accepted from accredited investors. This new type of offering is typically referred to as a 506(c) offering, after the official rule designation by the SEC. This rule falls under Regulation D, which prescribes certain of the available exemptions for selling private securities.
Title II – Rule 506(c), which is what Loquidity currently uses (for federal offerings and those that exceed state limitation), does not put a limit on the amount of dollars raised by a business, though only accredited investors may invest in said business. Under this exemption, those accredited investors can invest as much as they’d like. Rule 506(c) exempts the issuer (the business raising capital) from state registration as well.
If and when Title III goes into effect, the use of this rule would put a $1 million cap on the maximum amount of capital raised per year. However, both accredited and unaccredited investors would be able to invest in such offerings. Like the state exemptions, there would likely be a limit on how much an unaccredited investor can invest, which depends on income and net worth. Depending on the size of the offering, companies may not have to provide audited financial statements.
Title IV – Regulation A, which is currently in effect, allows companies to raise up to $5 million per year from all investors. There is no cap on how much a single investor can invest. While audited financial statements are not required, pre-sale information and approval is, and the submission for approval must be approved by the SEC, which could take up to 12 months. Unlike Title II and III, the existing Regulation A does not exempt companies from state registration, which means that the company raising money would have to register in each state it intends to raise money in as well.
As portions of the JOBS Act are still in the works (or reworks), pursuant to Title IV of the JOBS Act, there is a new version in the pipeline called Regulation A+. The proposed changes would greatly affect the platforms that use this exemption. First of all, the maximum amount of dollars raised per year would increase from $5 million to $50 million. That being said, unlike Reg. A, there are per-investor limits, which would be 10 percent of the investor’s income or net worth, whichever is more. Another change is that state law registration would be preempted for certain Reg. A+ offerings. In other words, once the SEC qualifies an offering, it can be offered anywhere in the U.S., without registering under any state law. Reg. A+ allows for much more money to be raised, although audited financials are first required.
Rule 504 of Regulation D was enacted in 1992 as a way to create more freedom in terms of private offerings. Under this rule, companies can raise up to $1 million per year from accredited and unaccredited investors, and there are no per-investor limits. Audited financial statements are not required, however, issuers are not exempt from state registration. Not many people use Rule 504 because complying with various state regulations is both expensive and time consuming.
Named the Michigan Invests Locally Exemption, or MILE, this rule gives Michigan businesses the opportunity to receive crowdfunding from Michigan investors, accredited and unaccredited. It permits a business incorporated or organized and doing business in Michigan to sell securities in its business to Michigan investors—the investors must have a primary residence or business organization with a primary office in the state—without having to register its securities.
A business can accept up to $10,000 from a single unaccredited investor; however, if the investor is an accredited investor, the business is able to accept more than $10,000. The total amount raised cannot exceed $1 million per year unless the business provides audited financial statements or reviewed financial statements to a prospective investor for the business’s most recently completed fiscal year, prepared by a CPA, in which case, the business can raise up to $2 million if it provides the above statements.
At least 10 days before a Michigan business provides a crowdfunding offering to prospective investors, it must file a notice with the Michigan Department of Licensing and Regulatory Affairs (LARA), pay a $100 fee to LARA and provide LARA with a copy of the disclosure statement it will provide to the potential investors with the offering. The business is also required to provide a quarterly report to the crowdfunding investors until none of the crowdfunding securities are outstanding.
The Invest Kansas Exemption (IKE) requires that the company or organization must be organized in Kansas by registration with the Kansas Secretary of State, and must be located in Kansas and doing business within the state. [The 80/80/80 rule is same for all states – 80% assets, 80% revenue, 80% of proceeds within state] With that, companies can sell securities—stock or debt—to accredited and unaccredited investors, provided they are Kansas residents.
Unaccredited investors can invest up to $5,000 in equity or debt securities. This figure was raised from the original $1,000 in 2013. Like Michigan, accredited investors can invest more than the unaccredited investors. Companies can raise up to $1 million per year; larger offerings would need to be registered or comply with another exemption.
The business must file a Form IKE with the Kansas Securities Commissioner (KSC) office before any general solicitation or the 25th sale of a security, whichever comes first, though no fee is required. The business must also provide an offering document to investors, which must disclose the fact that the securities have not been registered and that investors would need to comply with an exemption for resales and other information.
Referred to as the Invest Indiana Crowdfunding Exemption, this rule applies to companies organized and doing business in Indiana.
Businesses can raise up to $5,000 per unaccredited investor, while accredited investors can invest more. Like Michigan, the Indiana exemption allows companies to raise up to $1 million per year without reporting with an audited financial statement. Though if the issuer provides an independently audited financial statement, that limit increases to $2 million per year.
Filing is required at least 10 days before any offer on the SEC Form D. This exemption also protects investors in that it requires the business to provide a specific business plan, standard risk information, escrow and accounting provisions, and a quarterly report to all investors.
Like Michigan, Wisconsin’s answer to Title III has one of the highest limits that unaccredited investors are able to invest. Businesses that are organized and doing business in Wisconsin are able to raise up to $10,000 per investor, unless the investor qualifies as an accredited investor or a certified investor. A certified investor is defined as someone who has an individual net worth of at least $750,000 or has had an income more than $100,000 (joint income with spouse must be in excess of $150,000) in each of the two most recent years. Like the others, Wisconsin companies can raise up to $2 million if they provide independently audited financial statements; otherwise, they are limited to $1 million.
The business must file a notice at least 10 days prior to any offer being made. This notice must include a disclosure document, an escrow agreement with a Wisconsin-chartered financial institution and the $50 filing fee along with other information. Like Indiana and Michigan, Wisconsin businesses must provide a quarterly report to investors.