A Check-In on Crowd Fundraising in Washington State
by Peter Smith
By Amy Riedel
Back in October, I introduced the new crowdfunding laws as another vehicle for corporate fundraising in Washington. I subsequently attended a continuing legal education class that brought regulators and attorneys together to discuss the new laws now that had become effective. Many of the attorneys attending the event raised the same concerns I did back in October. Namely, (1) the burden of quarterly public disclosures regarding officer and director compensation, and (2) the concerns over the number of potential shareholders (companies with more than 500 unaccredited shareholders are required to begin costly public reporting to the SEC – with the $2,000 maximum investment from a single investor, a $1,000,000 raise could easily hit 500 unaccredited shareholders).
For many companies, these will be a sufficient deterrent to prevent them from pursuing crowdfunding. Indeed, as of April 7, 2015, no crowdfunding exemption applications have been received by Washington’s Department of Financial Institutions, despite nearly six months of availability. Given these concerns, how else are companies raising capital receiving their necessary securities registration exemptions?
The most popular exemption from registration for small companies raising funds continues to be Rule 506 of Regulation D. Rule 506 is a federal exemption from registration that has a corresponding provision under Washington State law. Unlike crowdfunding, companies can raise an unlimited amount of money. The disclosure obligations are far less burdensome, and disclosure can be made within 15 days of the receipt of investment funds. In contrast, crowdfunding requires a fairly detailed application be submitted and that exemption permission be obtained before the company solicits and receives funds. The primary hurdle with Rule 506 is that the investors need to be accredited (generally meaning they meet certain minimum requirements for income or net wealth). Rule 506 technically allows for up to 35 unaccredited investors, but once there are unaccredited investors, disclosure obligations increase significantly. Meanwhile crowdfunding does not require that investors be accredited, but instead adds greater burdens on disclosure and limits the total amount invested.
Crowdfunding and Rule 506 provide varied options for both companies and investors. Giving the sticking points I noted above, Rule 506 will likely remain the most popular exemption mechanism for fundraising. However, I am hopeful that crowdfunding finds a home with some of our intrepid social entrepreneurs.
The article provided above is for general information purposes only and should not be relied on as specific legal advice. This article does not form an attorney-client relationship. If you have any questions about this article, please feel free to contact Amy W. Riedel at firstname.lastname@example.org.
May 13, 2015
December 8, 2014