In our previous blog series titled “Crowdfunding: Is It Right for My Business?”, we discussed Title III of the JOBS Act, popularly known as the “CROWDFUND Act (Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012),” which would exempt crowdfunded securities from the federal registration requirement. On October 30, 2015, the Securities and Exchange Commission (‘SEC”) finally voted to adopt the final rules to implement the law (see our previous blog titled “SEC Votes To Adopt Federal Crowdfunding Rules”). We will be examining the federal rules in more detail in future blogs.
Prior to the federal rules, a dozen states have, to date, adopted some form of intrastate crowdfunding legislation, and in Texas, the crowdfunding exemption is already in effect. In this blog series, we will discuss the details of the Texas intrastate crowdfunding exemption. The Texas exemption can be used in lieu of the federal exemption (which is not effective yet), depending on which exemption is best for the planned transaction.
What Is the Texas Crowdfunding Exemption?
Under the Texas crowdfunding exemption, an issuer is not required to register its securities offered and sold through a registered general dealer or a registered Texas crowdfunding portal (“TCP”) solely within Texas, provided that certain conditions are met.[1]
Up to $1 million Offering Limit. An issuer may raise up to $1 million in a 12-month period through crowdfunding, reduced by the aggregate amount of securities sales within the six months before, during, and after the close of the crowdfunding.[2] For example, an issuer could conduct a crowdfunding to raise $300,000 over a three-month offering period and immediately conduct a second crowdfunding to raise $500,000 over the next six months, as the two offerings would not exceed the $1 million cap in a 12-month period; but if the issuer wants to raise an additional $300,000 through crowdfunding, it would need to wait until twelve months after the first offering concluded, as an offering prior to that time would exceed the $1 million cap.[3]
Individual Investment Limits. As for individual investors, the issuer can accept up to $5,000 from any single purchaser who is not an accredited investor (a lifetime cap with any one particular issuer); the issuer must have a reasonable basis for believing that the purchaser is an accredited investor (for more on “accredited investor,” please read our previous blog titled “Raising Capital Through Exempt Offerings”).[4] The Texas definition refers to the federal definition discussed there.[5] The issuer may rely on the TCP or dealer to ascertain accredited status, but it should investigate and understand the procedures used by a third party (e.g., detailed investor questionnaire) to determine if it is reasonable to rely upon such procedures.[6] Likewise, while the TCP or dealer would already be checking Texas residency (to be discussed more fully later), the issuer must have a reasonable basis for believing that the purchaser of a security is a Texas resident.[7]
Escrow. Payments from prospective investors must be deposited and held in an escrow account with a Texas bank until the aggregate capital raised from all purchasers reaches the minimum target offering amount.[8] If the target offering amount is not raised or the offering is withdrawn or terminated, the funds must be returned to investors, with no deductions.[9] The issuer or TCP may specify the method for an investor’s payment into the escrow account (subject, of course, to any requirements or restrictions under the applicable escrow agreement), including, for example, credit card payments and wire transfers.[10]
State Exemption. Last, but not least, although an offering conducted as a Texas intrastate crowdfunding is exempt from registration, the issuer must file a notice (Form 133.17) and the offering materials (to be discussed more fully later) with the Texas Securities Commissioner (“TSC”) before using any publicly available website for the offering.[11] Crowdfunded securities are subject to resale restrictions, which fact must be disclosed by placing a legend on the certificate or other document.[12]
Federal Exemption. Texas intrastate crowdfunding is also exempt from the federal registration requirements under Section 3(a)(11) of the Securities Act, which provides that any issue of securities offered only to investors residing within one state, where the issuer is a resident of the same state, is exempt from registration under the federal securities laws.[13]
This post was the first 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 issuer eligibility requirements in more detail.
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 <a ” ” target=”_blank” href=”http://www.rshawnmcbridelaw.com”>www.mcbrideattorneys.com.
[1] 7 Tex. Admin. Code § 139.25(a).
[2] Id. § 139.25(d).
[3] 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.
[4] 7 Tex. Admin. Code § 139.25(e). See also TSSB, Crowdfunding FAQs (July 1, 2015), https://www.ssb.texas.gov/texas-securities-act-board-rules/texas-intrastate-crowdfunding/crowdfunding-faqs.
[5] See 7 Tex. Admin. Code § 107.2(41).
[6] TSSB, supra note 3.
[7] Id.
[8] 7 Tex. Admin. Code § 139.25(f).
[9] Id.
[10] TSSB, supra note 3.
[11] 7 Tex. Admin. Code § 139.25(j).
[12] Id. § 139.25(k).
[13] 15 U.S.C. § 77c(a)(11).