159 posts categorized "Crowdfunding"

Comparing the Federal Crowdfunding Rules with Washington State's

Note from Bill: Before returning to private practice, my colleague, Jordan Rood, worked as a state securities regulator. What's more, Jordan was directly involved in the implementation of the crowdfunding law my friend Joe Wallin was so instrumental in driving into law in the State of Washington. I asked Jordan to give us his perspective on how the new federal Regulation Crowdfunding, promulgated by the SEC pursuant to Title III of the JOBS Act, compares with Washington State's crowdfunding law. Here are his thoughts, in Q&A format.

JordanRood-WebQ: Jordan, before you re-entered private practice, you worked for a few years as a state securities regulator for Washington State. During your time there, I understand you were the person tasked with writing and implementing the Washington crowdfunding rules, which is based on the legislation Joe Wallin proposed and got passed through the sponsorship of Cyrus Habib. So you presumably know the Washington crowdfunding law well. Based on that knowledge base, how do you rate the new federal crowdfunding rules, by comparison?

Great question, Bill. There are actually many similarities between the Washington and federal crowdfunding rules, as certain provisions of the Washington state bill and administrative rules draw from the federal rules. However, there are also some very key differences to consider between the two that make the particular circumstances of an issuer a dispositive factor in determining whether the federal or Washington crowdfunding exemption makes the most sense. For locally-oriented issuers, the Washington exemption may prove feasible, whereas an issuer with greater horizons may find the federal exemption, or another exemption, a better fit.

First, some of the similarities include:

  • Disclosure Requirements: The Washington state rules require that issuers provide prospective investors with material disclosures about the Company, its business and the offering via the “Washington Crowdfunding Form” which is available on the Washington Securities Division’s website, and acts as a short form disclosure document for the issuer. These disclosures include information such as the minimum offering amount, use of offering proceeds, a description of the business and management of the company and risk factors. The federal rules will require similar types of information to be filed on a proposed “Form C” that will be used to provide such information to investors. A significant difference here is that the Washington Crowdfunding Form must be submitted to the Washington Securities Division for review, and potential commentary, prior to the exemption being acknowledged by the Division, whereas the federal Form C must be notice filed with the SEC. However, the information in Form C must be provided to investors by the broker-dealer or crowdfunding intermediary used to offer the securities under the federal rules (more on this below), so it is seems likely that these intermediaries may play a role in setting standards for the information contained in the issuer disclosure materials.
  • Investment Limitations: Both the Washington and federal rules limit the amount of money individuals may invest in offerings conducting under the crowdfunding offerings in a 12-month period. Both exemptions state that  such investment may not exceed:  (1) $2,000 or 5% of the investor’s annual income or net worth, whichever is greater, if either annual income or net worth is less than $100,000; or (2) 10% of the lesser of the investor’s annual income or net worth, not to exceed an amount sold of $100,000, if both annual income and net worth are $100,000 or more. A key difference here is that observance of these limitations must be performed by the broker-dealer or crowdfunding intermediary under the federal rules, whereas the Washington rules require the Company to make such determination (however, each set of rules allows this to be done by investor self-certification, absent the issuer’s knowledge the contrary).
  • Ongoing Reporting: Both the Washington and federal rules require the Company to maintain ongoing reports so long as the securities sold pursuant to the exemption are outstanding. The federal rules require the issuer to post on its website an annual report on Form C-AR, containing an updated version of the information required in the Form C offering statement, as well as financial statements of the issuer certified by its principal executive officer.The Washington rules require quarterly reports to be posted on the issuer’s website, which must contain officer and director compensation, the names of directors, officers, managing members or similar persons and major securityholders (20% or more of the outstanding securities), as well as a brief analysis by the issuer of its business operations and financial conditions.

However, as noted above, there are some significant differences between the federal and the Washington State crowdfunding exemptions:

  • Rule 147 v. Rule 4(a)(6): Perhaps the greatest difference between the two exemptions is that the federal exemption relies on Rule 4(a)(6) of the federal Securities Act, which preempts state blue sky laws in connection with such offerings (with the exception of anti-fraud enforcement authority), and the Washington act relies of federal Rule 147 which allows certain “intrastate” offerings to be exempt under the federal Securities Act. What this means, is that the federal exemption will allow for sales to a nationwide audience, whereas to comply with Rule 147, the Washington exemption is subject to significant restrictions limiting both who may be offered securities, and the operations of the Company itself, to Washington state. Specifically, issuers relying on the Washington exemption may only offer securities to Washington state residents (merely offering securities to out of state parties could jeopardize the offering). Further, for an offering to qualify as “intrastate” to the Securities and Exchange Commission, the activities of the issuer and its use of investment proceeds must be substantially within Washington. In particular, the issuer must be organized in Washington, the principal office must be located in Washington, the issuer must derive at least 80% of its gross revenues from operations within Washington, 80% of the issuer’s assets must be located in Washington and 80% of the proceeds of the offering must be used for operations within Washington. The SEC just recently proposed prospective amendments to Rule 147 that would loosen some of these 80% restrictions, however, until such rules are adopted, the intrastate constraints of Rule 147 make the Washington exemption much more restrictive than an offering conducted pursuant to the federal exemption.
  • Financial Statements: The Washington rules require that the Company’s financial statements be GAAP-compliant, with applicable footnote disclosure, but does not require the statements be reviewed or audited by an independent public accountant. The federal rules have heightened requirements for financial reporting that phase as the size of the offering increases, as follows: (1) if the offering is $100,000 or less, the financial statements must be certified by a principal executive officer of the Company, or if reviewed or audited financial statements are already available for the Company, they must be disclosed; (2) if the offering is between $100,000-$500,000, the financial statements must be reviewed by an independent public accountant, unless audited financial statements are already available, then they must be disclosed; and (3) for offerings greater than $500,000, audited financial statements must be provided, with an exception for first-time issuers, which may have their financial statements reviewed by an independent public accountant.
  • Eligible Issuers: The Washington crowdfunding exemptions prohibits many types of issuers from relying on the crowdfunding exemption, including companies involved in petroleum exploration or production, mining or other extractive industries, real estate programs, “blind pools,”  development stage companies with no specific business plan or purpose, equipment leasing companies, and investment companies subject to the Investment Company Act of 1940, among others. The federal rules only exclude investment companies under the Investment Company Act, while retaining the authority to exclude any issuer the SEC, by rule or regulation, determines appropriate.
  • Eligible Securities: The federal exemption does not provide a limitation on the types of securities that may be offered, and note that debt securities may be offered, though it does not provide a specific exemption from the Trust Indenture Act of 1939. The Washington crowdfunding exemption only allows the sale of equity securities by the issuer, with a prohibition on debt securities and resales. An issuer may issue preferred stock under the exemption, as long as the investors receive the protections called for in WAC 460-99C-030(5) (e.g. liquidation preference, anti-dilution protection, voting rights on the creation of senior securities, among other protective provisions, among others).
  • Intermediaries: A significant difference between the two exemptions is that the federal rules require the offering be conducted online via a single broker-dealer or a crowdfunding intermediary, which will allow the “crowd” to assess the offering through review of the disclosed issuer information, and a public forum for prospective investors to exchange information about the issuer and offering. The Washington exemption has no requirement that the offering be conducted by a broker-dealer or intermediary (though use of a broker-dealer is permitted), and contemplates that the issuer will be marketing the offering itself. However, due to the constraints of federal Rule 147 that the Washington exemption relies on, the issuer is limited in its ability to directly offer the securities on the internet, which is global by nature, or other public forums, as Rule 147 requires all offers of securities be to Washington state residents. The Securities and Exchange Commission has provided Rule 147 C&DI guidance (Questions 141.03-141.05) noting that while Rule 147 doesn’t prohibit general advertising or general solicitation, direct marketing on a Company’s website or social media would likely cause offers to be made to out of state residents, jeopardizing the Rule 147 exemption. The SEC does state in 141.05 that it believes issuers may be able to implement technological measures to limit communications constituting an offer of securities to in-state residents, such as limited communications to those with IP addresses originating from zip codes with the state, but does not provide specific guidance on how to address this issue. As such, although the Washington exemption does not require the use of an online intermediary or broker-dealer, the restrictions of Rule 147 may make it difficult for an issuer to conduct web advertising of its securities without running afoul of the strict intrastate offering requirements called for in Rule 147. However, under the federal exemption, requiring the use of an intermediary or broker-dealer will almost certainly add substantial cost to any offering conducted, as compared to an offering run directly by the issuer under the Washington exemption.

Q: Should a startup based in Washington use the Washington crowdfunding rules, or should it use the federal rules?

As noted above, there are key differences between the two that may make one more attractive than the other based on the specific circumstances of the issuer. For a locally-oriented issuer (e.g. a microbrewery), the Washington exemption may make the most sense, as the Rule 147 restrictions may be less burdensome, the offering cost is likely lower as the issuer may market the offering directly and there is no requirement that financial statements be audited or reviewed by an independent accountant.However, for an issuer that intends to generate substantial business outside Washington, the federal exemption would be the vehicle of choice, as the Rule 147 restrictions would not apply. Although some of the offering and accounting costs may be higher, the issuer will be able to reach a wider, national audience for its offering, potentially increasing its chances of meeting its funding goals, and enhancing its exposure to customers. The issuer may also be able to issuer convertible debt, or other preferred securities that aren’t subject to the requirements of the Washington exemption, as well.

Q: In what ways might Reg A+ make more sense?

Regulation A+ may make more sense for issuers that will need to raise additional proceeds and/or reach a wider investor base, as the issuer may raise up to $50 million (as opposed to the $1 million allowed under the Washington and federal crowdfunding exemptions), and the offering may be advertised in up to all 50 states. Particularly for an issuer that is relying on the federal exemption, Regulation A+ may be a more attractive option as the issuer will already be required to spend a significant amount of money on the offering due to the legal costs of organizing the offering, preparing the offering circular and incurring the costs of a broker-dealer or crowdfunding intermediary to market the offering. As it is conceivable that these costs may rise into the realm of tens, if not hundreds of thousands of dollars, it may make more sense for the issuer to spend the additional money required to prepare a Form 1-A offering circular, and continued reporting requirement, if it is able to raise a significantly higher amount of money under Regulation A+. However, Regulation A+ does have higher regulatory hurdles to clear before the offering may become effective. “Tier 1” offerings, which may include offerings under $20 million, are subject to review and commentary by the SEC and each state securities division where the securities will be sold, and “Tier 2” offerings, which may be up to $50 million, are subject to continuing federal reporting requirements after the conclusion of the offering, as long as there are securities from the offering outstanding.

Q: Gosh, lots of strings and conditions and requirements and expenses. Any other alternatives?

Another “crowdfunding” vehicle arising from the federal JOBS Act of 2012, was the creation of Rule 506(c) which allowed for “accredited crowdfunding” as an alternative to the “old-fashioned” Rule 506 private placement exemption that accounts for the vast majority of private securities offerings. Rule 506(c) allows an issuer to raise an unlimited amount of money, from an unlimited number of investors, through “generally solicitation” (i.e. publicly advertising) its private securities offering, which historically has been prohibited under federal and state securities laws. A key condition, however, is that the issuer must verify that each investor is accredited.  This means that the issuer must actually verify the issuer is “accredited” by obtaining tax returns, bank statements, the opinion of counsel or an accountant or other method by which the issuer can actually establish accredited status. The SEC Rule 501 definition of “accredited investor” includes individuals who have made $200,000 over the prior two years ($300,000 with spouse), or have a net worth of $1 million, excluding the value of the individual’s primary residence. The definition also sets forth multiple institutional investors who will meet the definition, as well. While this is a new area of the law that has been showing promise, the risk involved is that the admission of even one unaccredited investor will disqualify the issuer from relying on Rule 506(c), but will leave it without another private offering exemption to claim if it has engaged in any general solicitation in connection with the offering

Q: You can always do it the old fashioned way, right?

In creating these new crowdfunding exemptions (crowdfunding rules, Regulation A+, Rule 506(c)), Congress and the SEC have left in place the “old-fashioned” 506(b) exemption, which remains the primary way by which issuers conduct private securities offerings. Rule 506(b) allows for issuer’s to raise an unlimited amount of money, from an unlimited number of accredited investors, so long as no “general solicitation” is conducted in connection with the offering, and that each investor has a substantive, pre-existing relationship with the issuer or person offering the securities of its behalf. A key feature here (and in 506(c)) is that the disclosure required to be provided about the issuer in connection with the offering is relaxed for sales to accredited investors. As such, most 506(b) offerings are only sold to accredited investors (even though the Rule allows for the sale of up to 35 non-accredited investors), as the sale to any unaccredited investors requires significantly heightened disclosure to such investors, which can be costly and burdensome to provide, and may increase the exposure of an issuer to liability under federal and state securities acts.

Title III Do-Over

It is an absolutely glorious, summerlike morning in Seattle.

I'm walking to work, listening to a webcast of a hearing of the House Financial Services Committee, which is considering draft legislation to fix things not working with the JOBS Act (both the text of the original legislation, and the implementation of it).

6a01156e3d83cb970c01a3fcfe88cc970b-580wiIt's very gratifying to hear Representative Patrick McHenry openly admit that Title III was a failure from the get-go, and that the fault lies with Congress, not the SEC's prospective implementation. (Title II and the rulemaking surrounding new Form D filing requirements is a different story.)

Gratifying, but not surprising. Rep. McHenry made similar statements at the ACA Summit in Washington DC in March of this year.

State securities administrators are going to be heard on the non-accredited crowdfunding issue. Bill Beatty, the state securities administrator for Washington State, should be speaking at this hearing shortly.

With respect all sides, I think my Individual Crowdfunding Account concept may be part of a holistic, national solution.

When I get to a desktop, I will add links to relevant prior posts on that topic, just below.

Update; links on McHenry Do-Over / Individual Crowdfunding Accounts:

Non-accredited crowdfunding: a license to pillage the vulnerable, or democracy in action?

Monday, a friend sent me a link to a weekend New York Times editorial which strongly condemned the SEC's proposed rules under Title III of the JOBS Act.

However, unlike the criticism coming from those in the nascent non-accredited crowdfunding industry, the NYT editorial board faults the SEC's proposed rules, not for being unworkable, but for not being restrictive enough.

BjvXNWuIgAASow1I'll leave aside the Times' misconception that the faults lie in the agency's rulemaking rather than the legislation itself. In this regard, the editorial board makes the same mistake that non-accredited crowdfunding advocates, coming from the other direction, make. (Interestingly enough, at the ACA Summit last week in Washington DC, Rep. Patrick McHenry, the father of the original federal non-accredited crowdfunding bill, stated that Title III needed to be fixed legislatively, by Congress, not by rulemaking at the SEC.)

I'll also leave aside other aspects of the legislation and proposed rules which the NYT editorial board gets wrong.

Instead, I want to identify certain presumptions implicit in the NYT critique, for purposes of comparing and contrasting those presumptions with those underlying the critique of the very same proposed rules by non-accredited crowdfunding advocates:

Here are what I infer to be the NYT editorial board's presumptions:

  • People of modest means or on fixed incomes will be scammed out of money they can ill-afford to lose.
  • Even if a crowdfunded company turns out to be promising, later, more sophisticated investors will cheat the earliest investors out of fair returns.
  • Reliance on participant representations and self-policing is a recipe for fraud.

Non-accredited crowdfunding advocates approach the subject from a variety of different subcultures, you might say: some our tech start up oriented; others are community activists; others have a small business orientation. But these advocates share at least one or more of the following presumptions:

  • Startup and private company funding should be democratized in some meaningful way, and not remain the private preserve of the 1%.
  • Friends and family should not be shut out of legally investing in the business of a nephew, or a child, or an aunt, or a colleague.
  • More local dollars should circulate through local communities. Neighbors should be able to own a piece of the local restaurants, craft breweries, and other brick-and-mortar small businesses they support with their day-to-day commerce.
  • People are motivated to crowdfund for reasons other than Wall Street-like fixation on financial return.

So, which set of presumptions are correct?

Both sets are correct.

And herein lies the problem with non-accredited crowdfunding under Title III of the JOBS Act: it does not pick a consistent worldview, but instead hedges each feature of the exemption as though the fears of each camp are certain to be realized.

I happen to agree with the New York Times editorial board. For purposes of a federal law which preempts state law, crowdfunding should be limited to accredited investors. Accredited crowdfunding is supported by Title II of the JOBS Act, and the changes to Rule 506 that have been implemented by SEC regulation under Title II. There are transition headaches here, to be sure, but so far these accredited crowdfunding reforms are enabling (some would say, ratifying) significant changes in how angel deals are syndicated.

And I happen to agree with the aims of most of the non-accredited crowdfunding adovcates, though I believe Title III to be a lost cause, not worth fighting anyway because the proper place for non-accredited crowdfunding exemptions is at the state level, where rules can be scoped with local conditions in mind.

Photo: Rep. Patrick McHenry addressing the 2014 Angel Capital Association Summit last week.

Again, which kind of crowdfunding?

Over breakfast, I flipped the pages of a newsprint version of The New York Times and came across an article by Michael J. de la Merced, about a startup crowdfunding portal, called Junction Investments, that is focusing on Hollywood film financing.

Text at the bottom of the first column of the piece startled me into diverting more of my attention from my French toast to the paper:

"Perhaps [the] most notable change [brought by the JOBS Act] was that it blessed crowdfunding. Groups of so-called accredited investors – people who either make $200,000 a year or . . ."

Unexpectedly, I have been handed a coda to the discussion yesterday opening the 2014 Thompson Reuters Online Financial Symposium. At that event, we panelists had debated the right use of the "crowdfunding" term, with some of us eschewing it altogether as risqué; others of us applying it precisely to one subset of crowdsourced financing or another; and still others allowing the term to embrace almost everything, using adjectives to narrow its scope as necessary.

Here was a news article using the term "crowdfunding" to denote Title II crowdfunding limited to accredited investors. A sign, I thought, that an insurgent message (which I approve) is getting traction.

But what the first column inflated, the top of the second column deflated:

" . . . have a net worth of more than $1 million, excluding their home – can band together to buy up to $1 million of a company's equity."

Sigh. That confusion again, conflating JOBS Act Title II accredited crowdfunding with JOBS Act Title III non-accredited crowdfunding.

There is no $1 million limit under Title II, of course, anymore then there is any limit at all on what can be raised under a Rule 506 deal. The $1 million cap is a feature of Title III, still not implemented.

Again, which kind of crowdfunding?

What exactly is crowdfunding?

This morning I took part in a panel at the Thompson Reuters 2014 Online Financial Services Symposium.

Moderated by Suzanne Barlyn of Thomson Reuters, the topic was "disruptive alternatives," including crowdfunding and peer-to-peer lending.

Bjkz7mTIQAEPKAkThe audience is made up of financial services professionals who manage online trading and other retail financial services on a massive scale. As I blog this, a panel is getting into the nitty-gritty of trade execution. A later panel will talk about user interface design and new ways to engage both self-directed and managed investors (and how the categories are blurring).

So I hope that lends context. The panel I took part in was to discuss new classes of investing that might be around the bend for the mainstream online financial services industry.

6a01156e3d83cb970c01a3fcde8425970b-580wiSomething big that I learned in the course of the morning is that peer-to-peer lending is something not far off into the future, like Title III non-accredited crowdfunding, but a phenomenon already here and even embraced by policy makers at the Federal Reserve. Ron Suber (pictured) of Prosper, a San Francisco based marketplace matching consumer borrowers with lenders, captured everyone's imagination with his vision of disintermediating banks in the consumer credit space. He calls it an investable asset class, and emphasized the pains taken to qualify would-be borrowers (eighty percent of applicants are turned down, he said).

Closer to the world with which I am more familiar - equity financing provided by accredited investors to startups - Michael Raneri of Venovate, another San Francisco-based company, described a sweet spot for online activity that is post-seed stage (later than AngelList or FundersClub), but still very much emerging growth. His company is part broker, part part portal, part VC fund (or maybe fully all three). He does not appear to like the term "crowdfunding," however, for the connotations it brings of Title III.

BjlGgPNIUAAnRkwTim Baker, Global Head of Content Strategy at Thomson Reuters, reminded all that angel and venture financing is relatively small - only about $25 billion a year. He cited historical precedents which suggest to him that, if crowdfunding on the equity side is going to take off, it will take 5 years or so to catch on.

If Tim is right, I imagine that, in that span of time, people will get comfortable with the idea that some kind of clearinghouse will standardize accreditation. When that happens, the 506(b)/506(c) distinction - so very existentially critical in this moment of transition - won't be as big a deal. 

So debt crowdfunding at a retail level is here already. And accredited crowdfunding (Tito Singh of Thomson Reuters terms it "elite crowdfunding") is finding its footings and will likely impact angel investing as we know it. What about equity crowdfunding for everyone?

I know there are people in the nascent non-accredited crowdfunding industry, who see non-accredited crowdfunding of startups as a asset class. That is a mistake. In fact, part of why I like the state crowdfunding alternatives (alternatives to JOBS Act Title III) is that they seem to take more of the approach that people want to back small companies for reasons that are as compelling or more compelling than the prospect of financial return.

Picture credits: first two, Lauren Young of Thomson Reuters (from her tweet stream); third is picture I took from the dais of Suzanne Barlyn before she took the podium.

Further thoughts about the public disclosure requirements in the Washington State crowdfunding bill

As we mentioned last time, the Washington State crowdfunding bill (which seems to be making its way to the Governor for signing; looks like the House has signed off on the bill as amended by the Senate, so, both chambers have now approved the identical bill) has a requirement that companies relying on the exemption must make public disclosure of their executive and director compensation, and other financial information.

Here's what the bill says:

"For as long as securities issued under the exemption provided by this section are outstanding, the issuer shall provide a quarterly report to the issuer's shareholders and the director by making such report publicly accessible, free of charge, at the issuer's internet web site address within forty-five days of the end of each fiscal quarter. The report must contain the following information: (a) Executive officer and director compensation, including specifically the cash compensation earned by the executive officers and directors since the previous report and on an annual basis, and any bonuses or other compensation, including stock options or other rights to receive equity securities of the issuer or any affiliate of the issuer, received by them; and (b) A brief analysis by management of the issuer of the business operations and financial condition of the issuer."

My initial reaction was, this disclosure requirement would make the exemption less useful for tech startups. The information to be disclosed would become increasingly sensitive over time, and public disclosure would hurt the companies competitively. Or, alternatively, the disclosure requirement would push companies to issue securities that would evaporate overtime (say, a revenue loan, or a series of stock with call rights in the company's favor).

Now I'm having another thought: maybe if the money is being raised from unsophisticated investors, or from a group of investors, no one of which has a big enough steak to lead (and negotiate a board position, protective covenants, etc.), maybe the very public disclosure requirement serves as a kind of rough proxy for investor accountability.

What board is going to vote itself excessive compensation, even if it is a group of insiders, when all the figures have to be posted publicly every quarter?

Much more to digest, for sure.

Joe Wallin, Jonny Sandlund and I intend to have a Spreecast this Friday about the Washington bill. Shooting for 11:30 AM Pacific time.

Further thoughts about the public disclosure requirements in the Washington State crowdfunding bill

Looking under the hood at the Washington State crowdfunding bill

A Washington State crowdfunding exemption is not yet a law, but substantially identical versions of a crowdfunding bill have now been passed by both houses of the Washington State legislature. So it's a good time to have a look at what the Washington State legislators have come up with.

6a01156e3d83cb970c017d3c5361f7970c-800wiWe're looking here at the bill as amended on the floor of the Senate and passed by that chamber on March 7. (I should say, we're looking as best as I can tell at the bill in its most active form. If 'm reading the official bill history report correctly, the bill as amended by the Senate should now return to the House for consideration.)

One great thing about it is that no portal is required. Portals are optional.

Now, don't misunderstand me; crowdfunding portals are good things, in the area of accredited crowdfunding, particularly, I think. But one of the main ways the federal crowdfunding bill lost its way - forfeited most of the strengths of the original Rep. Patrick McHenry bill that passed the US House of Representatives with such huge bipartisan support and had the support of the White House - was when the Senate added a requirement that a portal must be used.

The Washington bill otherwise copies key parameters of the federal statute:

  • $1,000,000 annual limit, per issuer;
  • same (confusing) per-investor limits (whatever; just say the limit is $2,000 and call it good);
  • escrow of proceeds until a stated target is hit.

But no requirement for audited financials, no new theories of personal liability for directors and officers, no (oxymoronic) ban on advertising, or any of the other show-stoppers in Title III of the JOBS Act.

All in all, I think the bill makes the grade and, if passed and signed by the Governor in its current form - and if not later undermined by administrative rulemaking - it will meet the criteria I set out last summer in testimony before a Washington State legislative committee.

Of course, the Washington crowdfunding exemption is boxed-in; it stops at the borders with Canada, Idaho, Oregon and the Pacific Ocean. Like all the other state crowdfunding exemptions, on the books or in the works, the potential viability of the Washington bill depends on the federal intrastate offering exemption.

The most surprising thing to me is that advocates for the Washington State crowdfunding exemption - indeed, more to the point, the state legislators themselves - doubled down on the utility of the exemption in helping tech startups. Here's a quote from the bill's preamble:

"Helping new businesses access equity crowdfunding within certain boundaries will democratize venture capital and facilitate investment by Washington residents in Washington start-ups while protecting consumers and investors."

Emphasis added. This is more of a tech startup perspective than we've seen in connection with, say, the equity crowdfunding advocacy efforts in North Carolina or Wisconsin. It may speak in part to the widespread perception in Seattle that venture capital financing in the state is too hard to secure, the ranks of venture capital firms here too thin. (Personally, I believe there is plenty of seed financing available in the Seattle area, though agree that it is true that emerging companies typically have to go out of state for VC financing.)

I'm troubled, however, by the bill's requirement of potentially perpetual public disclosure of competitive business information. The following is from Section 3(3) of the bill:

"For as long as securities issued under the exemption provided by this section are outstanding, the issuer shall provide a quarterly report to the issuer's shareholders and the director by making such report publicly accessible, free of charge, at the issuer's internet web site address within forty-five days of the end of each fiscal quarter. The report must contain the following information: (a) Executive officer and director compensation, including specifically the cash compensation earned by the executive officers and directors since the previous report and on an annual basis, and any bonuses or other compensation, including stock options or other rights to receive equity securities of the issuer or any affiliate of the issuer, received by them; and (b) A brief analysis by management of the issuer of the business operations and financial condition of the issuer."

Emphasis added. That aspect of the bill, unless changed, will compel equity crowdfunders in Washington State to figure out how to sunset or buy-out their crowdfunding investors. You'll want to choose a revenue loan or other kind of security that can be bought out or redeemed. One of the benefits of being a private company is that you don't tell your competitors what you pay your management, don't tell them how much revenue you have, etc. It's a bit crazy to think you'll be putting such stuff on the open web every quarter. (Folks involved in the drafting of Section 6 of the bill: is there something there to narrow the scope of Section 3(3)?)

Photo: US National Archives / Flickr.

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