HOW THE JOBS ACT HAS BEEN INEFFECTIVE SO FAR
Crowdfunding has been a frequent topic on the National hot-stove with the recent passage of the Jumpstart Our Business Startups (JOBS) Act, which loosened many securities regulations imposed by the SEC. Of particular interest are the provisions of the Act aimed at making it simpler for businesses and entrepreneurs to raise capital. However, the SEC – charged with promulgating new crowdfunding regulations in compliance with Title II and III – has seemingly dragged its feet in effectuating the spirit of the JOBS Act.
HOW GEORGIA HAS SOLVED THE SMALL START-UP EQUITY DILEMNA
So picture the following situation. You are the CEO of a small start-up in Georgia and looking for capital contribution in order to fund a large project. Now it may be difficult to seek large-scale investors due to the inherent risk of the volatile technology industry. So you instead decide it would be a grand idea to issue a handful of securities to interested parties at a relatively cheap cost, which would offer them a potentially profitable slice of ownership in the company. However, the SEC has essentially handcuffed your equity crowdfunding endeavor.
Well, all is not lost, because the Invest Georgia Exemption allows small business to actively solicit the public for investors through a crowdfunding portal provided certain operative conditions are met. Here is a breakdown of how a small business located in Georgia can bypass SEC restrictions and qualify for the local exemption:
1. Entity Conditions
The entity must be in compliance with Rule 147 of the Securities Act. This Rule allows a company – typically a small business – to raise capital through securities without having to register with the SEC. Pursuant to this rule, a Georgia business must be a corporation or LLC that is currently registered with the Georgia Secretary of State. Moreover, the entity must be for-profit, have its principal offices in Georgia, and conduct a significant amount of business within the borders of Georgia (approximately 80% or more). Lastly, all securities must be sold to only Georgia residents.
2. Capital Conditions
The total amount that a small business can raise through a crowdfunding scheme cannot exceed the maximum ceiling of $1,000,000. Of course, this number is only a limit to external capital issuances; it does not include sales to controlling persons. Additionally, All investments received must be deposited in financial institutions authorized to do business in Georgia.
Now how does the Invest Georgia Exemption differ from other state security laws? Well, it allows both accredited (Georgia residents with annual income exceeding $200,000 or, alternatively, net worth exceeding $1,000,000) and non-accredited investors (Georgia residents with annual income not exceeding $200,000) to partake. However, one must take note that there are limitations to the amount accredited and non-accredited investors can offer pursuant to current SEC rules. A non-accredited investor may not exceed the investment cap of $10,000, while an accredited investor is free to forfeit as much as he, she, or it desires.
3. Issuer Conditions
The issuing company must file a form of notice with the SEC briefly explaining the offering. This notice may be filed after sales have been made, unless there is any general solicitation. In the case of general solicitations, the notice must be filed prior to the solicitation. Also, an issuer must inform any respective purchaser that the securities have not been registered and cannot be sold to non-Georgia residents for a period of 9-months.
THE FUTURE OF STATE-BASED CROWDFUNDING LAWS
Although the JOBS Act gained heady bi-partisan support, it seems that the more right-swinging states have been the most eager to introduce their citizens to the widespread value of crowdfunding. As of today two states have introduced new crowdfunding exemptions: Georgia and Kansas. North Carolina and Washington have both considered similar legislation, but have yet to complete the bill making process.
Needless to say, crowdfunding should not be subjected to the intricacies of partisan debate or stuck in the muster of federal agency politicking. The Invest Georgia Exemption is a breath of fresh air in our stagnant intrastate and interstate economies. Hopefully such legislation will be considered in other states in the near future.