Welcome to the
Equity Crowdfunding Legal Directory

Our goal is to provide up-to the minute information on the legal status of equity crowdfunding in the United States at the Federal and State levels.

Introduction to  Crowdfunding

What is  crowdfunding?  Crowdfunding is the process of raising funding for a project or  venture from a large number of people over the Internet.  Most crowdfunding in the U.S. is done on the rewards-based model, where the promoter of the project pre-sells his or her product or service to the public in order to raise funds to launch the business, as opposed to selling equity (i.e., stock) or debt in the company.  Common projects funded by rewards-based crowdfunding include films and video projects, software, digital games and apps, inventions, art projects and charitable projects.  Two large web sites, KickStarter and IndieGoGo, dominate the general market for crowdfunding, with a number of smaller sites catering to more specialized niche products and services.

Equity crowdfunding is the process of selling equity in a company to the public over the Internet.  This includes stock in a corporation and equity interests in partnerships and limited liability companies (LLC’s).  In the U.S., equity crowdfunding has traditionally not been allowed.  However, there are three modes of equity crowdfunding currently or about to become available to entrepreneurs:

  1.  Internet offerings to accredited investors under the newly enacted Securities and Exchange Commission (SEC) Rule 506(c).
  2.  Intra-state crowdfunding in one of the minority of U.S. states that permit these types of securities offerings.
  3.  Offerings under the Federal Jumpstart Our Business Startups Act (JOBS Act), enacted in 2012, which paved the way for the SEC to regulate equity crowdfunding. In August 2014, the SEC proposed rules to implement equity crowdfunding, and they are currently awaiting final implementation.

For more information on these three options for equity crowdfunding, see https://twitter.com/BJYankowitz.

Rule 506(c): Internet Offerings Solely to Verified Accredited Investors

By definition, a “private placement” of securities is an offering that is not a public offering.  In general, a public offering must be registered with the SEC, a timely and costly process that requires a detailed prospectus containing disclosure about the issuer of the securities as well as audited financial statements.

Most private placements are done in compliance with the SEC’s Regulation D.  Until the JOBS Act came into force, private placements were not valid unless they were conducted without the use of general advertising or general solicitation.  This is what the “private” in private placement” means.  The JOBS Act, however, directed the SEC to adopt a registration exemption for securities offerings solely to accredited investors that would permit the use of general solicitation and general advertising.  The trade off is that all purchasers of the securities must be accredited investors and the issuer must take reasonable steps to verify that the purchasers are accredited investors.  (This is higher than the standard under the older Rule 506(b), which only required that the issuer reasonably believe that the investors are accredited.)  The SEC responded to the directive of the JOBS ACT with Rule 506(c), which became effective in September 2013.  The SEC’s summary of the new Rule can be found here.

Accredited investors includes individuals with annual net income of at least $200,000 (or $300,000 joint income with the investor’s spouse) or a net worth (excluding the value of and mortgage on the investor’s primary residence) of at least $1,000,000.  Certain trusts, corporations and other entities are also accredited if they meet specified net worth requirements.

The new rule contains detailed provisions on how to verify if an investor is accredited.  Generally, it requires documented evidence form the investor (e.g., tax returns, bank or brokerage statements) or a written confirmation from a qualified professional (e.g., a licensed attorney, accountant or broker-dealer).

For more details on these maters you can take a look at the following YouTube video from a leading corporate lawyer.

The Federal JOBS Act

The problem with Rule 506(c) is that it only permits offerings to accredited investors, which eliminates 95% of the investing public.  While there have been a number of Web sites that have sprung up to act as electronic marketplaces for listing equity offerings to accredited investors (such as FundersClub and Realty Mogul), none follow the true crowdfunding model, which is aimed at a large number of relatively small investments from a large number of people.

Congress decided to address this situation in Title III of the JOBS Act, which outlines a regime for establishing and regulating equity crowdfunding portals.  These portals must be registered with the SEC, a process that is similar to (but less stringent than) the process of registering as a securities broker-dealer.  While investors need not be accredited, the amount that each investor may invest varies with their net income and net worth, with an overall cap of $100,000 per investor in all crowdfunding investments made in any 12-month period. An issuer may raise up to $1,000,000 in any 12-month period from equity crowdfunding.  More information can be found from this Southern California business law firm that specializes in crowdfunding.  Their firm is also listed here.

Crowdfunding at the State Level

Several States have enacted statutes that permit equity crowdfunding.  Most of these rely on the registration exemption at the Federal level under SEC Rule 147.  This Rule, adopted under Section 3(a)(11) of the federal Securities Act of 1933 (Securities Act), exempts so-called intra-state offerings, defined as:

Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.

The model for these types of statutes is the Invest Kansas Act, K.A.R. 81-5-2.  Enacted in 2011, it is the model for most State Crowdfunding statutes.  It has the following general requirements; unless otherwise noted, all of the State statutes summarized below have similar requirements:

  • The issuer must be a business or organization formed under the laws of the State in which the offering is taking place, and registered with the Secretary of State.
  • The transaction must comply with Section 3(a)(11) of the Securities Act and SEC Rule 147.
  • There is a cap on the amount that may be raised of $1 million in any 12-month period.
  • There is a cap on the amount that may be invested by any non-accredited investor ($5,000 in Kansas, $10,000 in most other States).
  • Funds must be deposited in a bank or depository institute authorized to do business in the State.
  • A filing must be made with the state regulator before the use of any general solicitation or the 25th sale of a security.
  • The issuer may not be a registered investment company or a public company that is subject to the reporting requirements of Sections 13 or 15(d) of the federal Securities Exchange Act of 1934.
  • The issuer must make certain prescribed disclosures concerning the non-registered and restricted nature of the securities.
  • The exemption may not be used in conjunction with any other securities registration exception, except for offers and sales to controlling persons of the issuer.
  • The exemption is not available if the issuer is subject to certain “bad actor” disqualifying events.

The one exception is Maine, whose statute is based on the federal exemption for small private placements under SEC Rule 504.  Since the federal exemption in this case is not based on an intra-state offering, there is no need to require the issuer and the investors be from the same state.  The limit for offerings under Rule 504 is $1 million in any 12-month period, which is carried over to the Maine statute.

Directory of State Crowdfunding Statutes

Note: If a Sate is not listed, then it has no crowdfunding law in place.

State Equity Crowdfunding Exemptions
AlabamaTitle:

Citation:

Enactment Date:

12-Month Cap:

Maximum Investment per Investor:

Internet Portal Required?

SB 44

Code of Ala. 1975 §8-6-11

23 Jan 2014

$1,000,000

$5,000 (unless accredited)

No

ColoradoTitle:

Citation:

Enactment Date:

12-Month Cap:

Maximum Investment per Investor:

Internet Portal Allowed?

HB 14-1079

C.R.S. §11-51-304(6)

27 March 2014

$1,000,000

No limit

No

GeorgiaTitle:

Citation:

Enactment Date:

12-Month Cap:

Maximum Investment per Investor:

Internet Portal Allowed?

Invest Georgia Exemption

GA Comp R & Regs §590-4-2-.08

8 Dec 2011

$1,000,000

$10,000 (unless accredited)

No

IdahoTitle:

Citation:

Enactment Date:

12-Month Cap:

Maximum Investment per Investor:

Internet Portal Allowed?

None, Although the State can grant individual exemptions

Idaho Code §§30-14-203, 30-14-301

2 July 2012

$2,000,000

Lesser of $2,500 or 10% of net worth excluding home, auto and furnishings) (unless accredited)

No

IndianaTitle:

Citation:

Enactment Date:

12-Month Cap:

Maximum Investment per Investor:

Internet Portal Allowed?

SV375

Ind. C. §23-19-2-2(27)

2 April 2014, effective 1 July 2014

$1,000,000 ($2,000,000 with audited financials)

$5,000 (unless accredited)

Offering must be through one or more Internet Portals

KansasTitle:

Citation:

Enactment Date:

12-Month Cap:

Maximum Investment per Investor:

Internet Portal Allowed?

Invest Kansas Act

K.A.R. §81-5-21

12 Aug 2012

$1,000,000

$1,000 (unless accredited)

No

MaineTitle:

Citation:

Enactment Date:

12-Month Cap:

Maximum Investment per Investor:

Internet Portal Allowed?

Act to Increase Funding for Startups

32 MRSA §16304.6A

2 March 2014

$1,000,000

$5,000 (unless accredited)

No

MarylandTitle:

Citation:

Enactment Date:

12-Month Cap:

Maximum Investment per Investor:

Internet Portal Allowed?

SB 811 and HB 1243

Md. Ann. C., Corps & Ass’ns §§11-101, -606, -601.

15 May 2014, effective 1 Oct 2014

$100,000

$100 (unless accredited)

No

MichiganTitle:

Citation:

Enactment Date:

12-Month Cap:

Maximum Investment per Investor:

Internet Portal Allowed?

Pub.Act 264

MCL §451.2102a et seq.; Pub Act 264

20 Dec2013

$1,000,000 ($2,000,000 with audited financials)

$5,000 (unless accredited)

Yes

TennesseeTitle:

Citation:

Enactment Date:

12-Month Cap:

Maximum Investment per Investor:

Internet Portal Allowed?

Invest Tennessee Exemption

Tenn. C. Ann. §48-1-103(a)

1 Jan 2015

$1,000,000

$5,000 (unless accredited)

No

TexasTitle:

Citation:

Enactment Date:

12-Month Cap:

Maximum Investment per Investor:

Internet Portal Allowed?

Texas State Securities Board Crowdfunding Exemption

7 Tex Admin C. §139.25

17 Nov 2014

$1,000,000

$5,000 (unless accredited)

Required. A Texas registered portal must be used. Regulation of portals governed by 7 Tex Admin C. §115.19.

WashingtonTitle:

Citation:

Enactment Date:

12-Month Cap:

Maximum Investment per Investor:

Internet Portal Allowed?

HB 2023

RCW §21.20 et seq.; HB 2023

12 March 2014

$1,000,000

Greater of $2,000 or 5% of net in come or net worth (unless accredited)

Yes

WisconsinTitle:

Citation:

Enactment Date:

12-Month Cap:

Maximum Investment per Investor:

Internet Portal Allowed?

[None]

Wis. Stat. §§551.202(26). 551.205

8 Nov 2013

$1,000,000 ($2,000,000 with audited financials)

$5,000 (unless accredited)

Offering must be through one or more Internet Portals