Wisconsin today became the fifth state to introduce state legislation which, if enacted, would allow equity crowdfunding targeted at both accredited and unaccredited investors. Two states, Kansas and Georgia, have already implemented laws and regulations which allow equity crowdfunding to unaccredited investors for offerings in their state, and two others have introduced bills – North Carolina and Washington State.
Federal legislation to enable equity crowdfunding, Title III of the JOBS Act, was signed into law in April 2012. However, implementation at the federal level still awaits the adoption of rules by the SEC. Though the federal JOBS Act mandated the SEC to promulgate rules by the end of 2012, this has yet to happen. Proposed regulations are anticipated to be circulated sometime in the fall of 2013, with final regulations expected to be adopted sometime in 2014. Much of the details of equity crowdfunding under the JOBS Act are left to SEC rulemaking, adding to the uncertainty surrounding the federal legislation.
The Wisconsin crowdfunding proposal creates two new crowdfunding exemptions from state registration – one which requires that the offering be conducted exclusively through a state-registered internet portal, which does not have to be a licensed broker-dealer, and a second exemption which does not require the use of an internet portal. Portal-based crowdfunding, which harnesses the power of the internet, appears to be the principal focus of this proposed legislation.
Wisconsin Crowdfunding Portal Exemption
The Wisconsin crowdfunding portal-based exemption, as proposed, bears many similarities to its federal JOBS Act counterpart, including the requirement of solicitation through an internet portal, but with some key differences.
Offering Amount – JOBS Act limits equity crowdfunding to $1,000,000, in a 12 month period, and requires audited financial statements for offerings in excess of $500,000; Wisconsin’s portal exemption allows raises of up to $2,000,000 – with audited financial statements only required for offerings in excess of $1,000,000. This appears to address a major criticism of the JOBS Act counterpart, which both caps the offering amount at $1,000,000 and requires audited financial statements to raise more than $500,000.
Individual Offering Cap –The JOBS Act limits investor participation in an offering to a maximum amount based upon income and net worth. The state portal exemption allows an unlimited investment by an “accredited investor” and $5,000 for unaccredited investors, with the definition of accredited investor reduced substantially – $100,000 per year ($150,000 for joint income) or $750,000 in net worth, including the net equity in a primary residence.
Disclosure Document – The proposed state law mandates disclosure to investors of specific information regarding the issuer’s business, with substantial similarities to the categories of disclosure in the JOBS Act, pre-filed with the state securities administrator. The state proposal also has a catchall proviso requiring disclosure of any other information “material to the offering,”
Limitation on Number of Purchasers – As with the JOBS Act, there is no limit on the number of offerees or purchasers. However, under the state exemption all investors must be Wisconsin residents.
Advertising – Both the JOBS Act and the Wisconsin exemption prohibit advertising by the internet portal.
Company Eligibility – Use of the state exemption is limited to Wisconsin chartered companies with their principal business operations in Wisconsin; SEC reporting companies are not eligible to use this exemption.
Wisconsin Crowdfunding Non-Portal Exemption
The proposed Wisconsin legislation creates a second exemption for non-portal offerings which permits unregistered, local offerings, to an unlimited number of persons. Some key differences from the crowdfunding portal exemption are (i) the absence of any specified form of disclosure document, and (ii) its availability for SEC reporting companies. Advertising is generally prohibited.
Some Observations From a Non-Wisconsin Securities Lawyer
The Wisconsin bill, as proposed, is intended to facilitate the use of the internet to raise equity without the necessity for an often cost prohibitive state registration and review process – something that in the past has blocked access by small businesses and startups to raising equity capital. However, due to the mandated disclosure required by companies relying on the proposed crowdfunding portal exemption, undoubtedly companies will need to retain a lawyer to assist in the preparation of a disclosure document. This is not a criticism of the bill, but simply an illustration of the tension between two competing goals: (1) ensuring that unaccredited investors are provided with detailed and necessary information regarding their investment, including its risks, without registering the offering with securities regulators, and (2) reducing the cost and complexity of the equity fundraising process.
The bill also appears to place a damper on the ability to conduct general advertising for the offering for those companies utilizing these exemptions, similar to the federal JOBS Act provisions for crowdfunded offerings to unaccredited investors . Advertising is allowed under the Kansas and Georgia counterparts (the Invest Kansas Act and the Invest Georgia Act).
No equity crowdfunding bill will be perfect – any crowdfunding exemption will have pros and cons. However, the sponsors of this bill, State Representatives David Craig, Leah Vukmir and Chad Weininger, should be lauded for leading the charge to create new and necessary avenues to raise money for Wisconsin based businesses.
(Note – The Assembly Bill number assigned to this proposed legislation was not available at the time of publication of this article.)
About the Author – Samuel S. Guzik is a corporate and securities attorney and business advisor admitted to practice before the SEC and in New York and California, with over 30 years of experience. During this time he has represented a number of public and privately held businesses, from startup to exit, concentrating in financing startups and emerging growth companies. For additional information regarding Mr. Guzik and his firm, Guzik & Associates, please visit his website at www.guziklaw.com