In late April, the Texas Securities Board issued proposed regulations that would allow crowdfunding in intrastate transactions in Texas. The word on the street is that the proposed regulations will become final in August 2014. If they do, Texas will become the 8th and the largest state to enact intrastate crowdfunding.
Under the proposed regulations, the maximum amount that a company can raise in the offering is $1,000,000 in any 12-month period. There is no limit on the amount of money that an accredited investor can invest. (An accredited investor is one with $200,000 in annual income (or $300,000 with his spouse) or a net worth, exclusive of home, of $1,000,000). But an investor who isn’t accredited can’t invest more than $5,000 in any offering. The issuer has to be a Texas entity; at least 80% of its gross revenues must be derived in Texas; at least 80% of its assets must be located in Texas; at least 80% of the net proceeds of the offering must be used for Texas operations; and its principal office must be in Texas. The offering must be made exclusively through an Internet website operated by a registered general dealer or by a registered Texas crowdfinding portal. All funds have to be maintained in an escrow account until the minimum amount established by the Company is raised.
Communications under the proposed regulations are tightly controlled. A company may distribute a limited statement to prospective investors that it is conducting an offering in order to let prospective investors know how to get information about the offering. All other communications between the company and the prospective investors have to take place on the Internet website of the registered general dealer or the crowdfunding portal. Potential purchasers must be able to communicate with each other and all communications must be available to everyone who gets onto the website. The idea here is to give everyone the benefit of everyone else’s questions and concerns as well as to the information being provided by the company.
No prospective investor can enter the website without demonstrating Texas residency. This can be done either by a valid Texas driver’s license, a voter registration card or tax records showing the individual occupies property in Texas as his principal residence.
A company raising money under the new rules has to post extensive information on the website of the general dealer or on the portal. This includes a summary of the offering, a description of the entity, its history, business plan and use of funds; compensation to be paid to any owner, officer, director or manager; the identity of all executive officers, directors and managers, including their prior experience; the identity of all persons owning more than 20% of any class of securities; a description of the securities being offered; the amount of the offering; and the percentage ownership of the company represented by the offering. The company also has to make a disclosure statement available to each prospective purchaser that must contain much of the same information, as well as additional information such as risk factors and information concerning legal proceedings. The issuer has to inform all prospective investors that the securities are not transferable, that they haven’t been registered under state or federal law and cannot be resold, that the investor is relying on his or her own examination, and that no federal or state securities commission has reviewed or passed on the offering information. Finally, the company must provide current financial information. However, unless the company already has audited or reviewed financial statements, the financial statements only need to be certified by the company’s principal executive officer.
With the SEC proposed rules still under consideration, and given how long it typically takes the SEC to finalize proposed regulations, it’s entirely possible that crowdfunding that includes non-accredited investors will come to Texas before it is generally available on a federal level.