Will Illinois be next to adopt “intrastate crowdfunding”?
Would you like to accept small investments in your company from your Aunt Rose, your brother-in-law Bobby and your best friend from high school? Many people are surprised to learn that, unless these friends and family members are high-net worth investors, this is not the kind of thing that is safe to do – not, at least, if you want to be fastidious about observing securities regulations.
The promise of so-called “crowdfunding” laws is that they create exemptions to the securities laws, which permit companies to raise meaningful capital by taking small amounts of money from a large base of regular folks (as distinct from sophisticated investors).
I have written previously (here and here) about the highly anticipated crowdfunding regulations under Title III of the federal JOBS Act, about which there was initially great excitement. To summarize: they are a bust. (In any event, the SEC has not yet finalized the rules, and is unlikely to do so until at least the Fall.)
On a brighter sidenote, companies seeking capital are now permitted to seek out “accredited investors” (high net worth individuals, or, more informally, “rich people”) by means of general solicitations and advertising, including through online funding portals such as Angellist, Crowdfunder, CircleUp, Gust and others. This is a big change, courtesy of Title IV of the JOBS Act.
Still, if you want to raise a $200,000 seed round from 40 people willing to invest $5,000 apiece, federal rules are not much help. However, intrastate crowdfuding has become an increasingly viable option. “Intrastate” (not to be confused with its opposite, interstate) means that you are raising money only from people all in your same state. Federal Rule 147 provides an exemption from federal securities regulation for single-state fundraising, so you are left to deal only with state securities laws (also known as “Blue Sky” laws).
About 15 states already provide some form of crowdfunding exemption, and Illinois is poised to become the latest. HB3429 has now been passed by both houses, and currently sits on Governor Bruce Rauner’s desk. It’s hard to imagine he won’t sign it. HB3429 would create a new exemption, Section 4.T, to the Illinois Securities Act.
In summary, 4.T will allow a company to raise up to $1 million in any 12-month period in increments of up to $5,000 per person, regardless of that person’s income or net worth. (There is no individual limit for accredited investors.) The company will have to provide investors with its most recent financial statements, but crucially, these can be internal and unaudited.
A few important details would be fleshed out by administrative rule, assuming the bill is signed, such as the precise nature of the required disclosures and filings. Also, you can’t play it both ways, doing a crowdfunded round for Illinois investors and offering the same securities to accredited investors in other states. That would subject the round to federal regulatory requirements, and run directly afoul of the Illinois crowdfunding law, which will require companies to take steps to limit access to information to residents of Illinois.
But if you are willing to keep the round in Illinois and you don’t need more than $1 million in the next year, passage of this law would provide you with a meaningful option to consider.
Goodcounsel regularly advises clients on funding rounds and securities law compliance, and is tracking the progress of HB3429 and the associated regulations.