Wisconsin’s equity crowdfunding law, which was unanimously passed by the legislature and signed by Gov. Walker last November, officially took effect on June 1, 2014. Wisconsin is one of 11 states that has “taken matters into its own hands” by passing its own crowdfunding laws while the federal rules are still pending.
President Obama signed the JOBS Act back in April of 2012, which was intended to make it easier for small businesses to raise capital. One provision required the SEC to implement rules for a new crowdfunding exemption from the SEC requirements by the end of 2012. Despite this requirement, no federal rules have been issued yet.
While securities law is normally a federal issue, the SEC has a longstanding “intrastate offering exemption” that allows companies to sell securities within their home state without registering the offering with the SEC. States, like Wisconsin, have used this exemption to make their own crowdfunding laws ahead of the federal rules. However, these state crowdfunding laws apply only to intrastate offerings. This means that Wisconsin’s crowdfunding law can only permit companies formed in Wisconsin to solicit Wisconsin investors. Interstate investments, such as an Illinois resident investing in a Wisconsin company, are still governed by federal law and thus are impermissible until the federal rules are released.
The SEC’s Compliance and Disclosure Interpretations from April 11, 2014 (“CDIs”) highlights some of the challenges of intrastate offerings. For one, the intrastate exemption requires that securities are only offered and sold to in-state residents. The CDIs note that it would likely be a violation of the intrastate exemption to use the company’s home website or social media sites, such as Facebook and Twitter, to advertise the offering, since these mediums will almost certainly reach residents of other states, and thus be an “offer” to an out-of-state resident. Eliminating free modes of advertising such as Twitter and Facebook for intrastate offerings could lessen the appeal of crowdfunding until the federal rules are released (and thus interstate investments are permissible) since the primary purpose of crowdfunding is to eliminate the expense of raising capital.
So, at present, crowdfunding puts those who use it at high risk of violating laws until the SEC issues some additional rules.
This article was prepared with the help of Kelsey O’Gorman.