Intrastate crowdfunding, which legislators are proposing for Illinois, has several attributes that are attractive to startups and small businesses. However, it won’t make it the best fundraising option for many businesses.
Entrepreneurs who rely on an intrastate crowdfunding exemption need to be careful how they publicize their offerings. In April of 2014, the Securities and Exchange Commission (SEC) prohibited the use of social media and company websites to advertise an intrastate offering because they reach beyond state borders. Entrepreneurs can use their websites and social media to advertise their market presence, but they cannot advertise an investment opportunity if they’re participating in intrastate crowdfunding. If they do so, they run the risk of losing their intrastate exemption and their offering may become subject to federal registration requirements. Failure to comply with federal law requirements can also create an investor recession right whereby investors can void their investments.
Nearly 99 percent of crowdfunding occurs on online crowdfunding portals, and many of those portals find that intrastate crowdfunding is not economically attractive. Crowdfunding portals that list intrastate offerings are required to take what the SEC deems as “adequate measures,” such as creating password protected websites or providing disclaimers to certify offerings are only made to residents of that state. This presents an additional encumbrance to portals that many don’t want to accept. Assume Facebook only allowed people to connect with friends and family in their state. Why would anyone choose to use it when there are other sites that allow people to connect with others from all over the world?
Finally, despite the nearly three-year delay, the SEC plans to finalize rules for Title III of the JOBS Act by October of this year, which would allow smaller, unaccredited investors to invest in every state. Title III will allow nearly every American citizen to invest in offerings listed online. There would be no territorial limitations, so entrepreneurs could accept capital from out-of-state investors. This will likely negate the need for intrastate crowdfunding exemptions as many states implemented them simply because they didn’t want to wait for equity crowdfunding rules to pass on a federal level. Granted, some entrepreneurs may still use an intrastate exemption, but the majority will presumably want the national exposure for their fundraising campaigns that Title III permits.
This article was originally published in The Chicago Sun Times.