June 04, 2014
State Crowdfunding Update
Posted by Christine Hurt

While the very long and detailed SEC crowdfunding proposed rules continue to not be final, individual states have passed their own legislation exempting purely local crowdfunding efforts from state securities laws.  Because purely intrastate offerings are exempt from federal legislation already under Section 3(a)(11) of the Securities Act.  Of course, the trick is not to offer crowdfunded securities to residents of more than one state, even if only in-state residents purchase the securities.  This is very tricky when you are using a website to attract investment.

So far, Michigan, Kansas, Georgia, Wisconsin, Washington, Indiana, and Alabama have passed crowdfunding exemptions from state securities laws.  North Carolina's crowdfunding law has passed the House but not the Senate (yet).  Other legislation is pending in Florida, Texas and California.  These exemptions are not identical; crowdfunding portals hoping to serve more than one state will have to be aware of these differences in maximum amounts, disclosure, number of purchasers, and purchaser qualifications.

I took a look at two websites purport to engage in intrastate crowdfunding, Localstake and Groundfloor.  These two sites take two different approaches to ensuring that no offers are made to out-of-state residents.  On Localstake, a potential investor cannot see actual projects until the investor registers, which is a lengthy process that includes giving your driver license number and social security number.  I did not finish the registration process, which also included linking my bank account.  The portal would then know the investor's residence and then show only those intrastate projects suitable to that investor.  (I think Localstake has projects in Michigan and Indiana only).  Groundfloor allows you to see projects, but with the disclaimer "Information on this page is not an offer or a solicitation to sell or purchase securities."  Registration was very quick, but I received an email immediately telling me I could "follow" projects for informational purposes, but I could not invest:  "As soon as we're set up in your state, you'll be among the very first to know."  The Localstake method seems to have a higher likelihood of success fitting the definition of "offer," but I hope that the Groundfloor method would satisfy federal securities laws as well.  However, there could be an argument that letting nonresidents see the projects and "follow" them conditions the market, in securities law jargon.

For more on crowdfunding, see my latest paper, forthcoming in the Illinois Law Review.

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