Who Is Eligible?
Texas Formation. Texas crowdfunding exemption is only available if the issuer is a Texas entity that has filed a certificate of formation with the Texas Secretary of State and is authorized to do business in Texas.[1] This means that sole proprietor, general partnerships, or joint ventures would not be eligible to use the exemption, as those types of businesses do not file a certificate of formation, nor would companies whose certificate has been terminated or forfeited for failure to file a required report, to pay franchise tax or penalty, or to maintain a registered office or registered agent.[2]
Local Character. The issuer must be genuinely local, meaning it has the principal office in Texas, derives at least 80% of its gross revenues from Texas, has at least 80% of its assets in Texas, and uses at least 80% of the net proceeds of the offering in connection with the operation of its business within Texas.[3]
Given the proliferation of Internet-based businesses in recent years, how the 80% revenue requirement would be measured might be of great interest to the readers. Although no guidance addressing Internet-based businesses is available, an example of mail order companies from an old SEC guidance is instructive: X Corporation is incorporated in State A and has its only warehouse and only office in that state. X’s only business is selling products throughout the United States and Canada through mail order catalogs. All orders are filled at and products shipped from X’s warehouse to customers throughout the United States and Canada. X purchases the products it sells from corporations located in other states. These activities are X’s sole source of revenue. The SEC’s interpretative response was that X Corporation derives more than 80% of its gross revenues from the operation of a business or rendering services within State A.[4] Texas, of course, could interpret things differently than the SEC and that will be determined in the future.
Ineligible Companies. Because the exemption is designed to assist small issuers conducting offerings that are local in nature, certain issuers, including investment companies, public companies, and companies that have not yet defined business operations or have no business plan are ineligible.[5] Additionally, an issuer cannot use the crowdfunding exemption if the issuer, its predecessors, any affiliated issuer, or any control person (i.e., an officer, director, or other person having power) of the issuer is subject to certain disqualifications arising from past violations of the law, or if any control person of the issuer has been, or is concurrently, involved in another offering in Texas within the previous 12 months.[6]
This post was a part of a multi-part series on Texas crowdfunding exemption. You can find the other posts by searching our blogs at www.mcbrideattorneys.com. In our next post, we will discuss how the offering should be conducted.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C., which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. R. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
[1] 7 Tex. Admin. Code § 139.25(b).
[2] Texas State Securities Board (hereinafter “TSSB”), Information for Issuers Using Crowdfunding (Feb. 3, 2015), https://www.ssb.texas.gov/texas-securities-act-board-rules/texas-intrastate-crowdfunding/information-issuers-using.
[3] 7 Tex. Admin. Code § 139.25(b).
[4] See 39 Tex. Reg. 8967, 8969 (Nov. 14, 2014).
[5] 7 Tex. Admin. Code § 139.25(b). See also 39 Tex. Reg. 8967, 8968 (Nov. 14, 2014).
[6] 7 Tex. Admin. Code § 139.25(m).