New Wisconsin Crowdfunding Bill Plays Off of Federal JOBS Act; Certified Investor and Funding Portal Categories Created
A little over one year since the federal JOBS Act was set into law, and Wisconsin has now established its own statutory scheme with respect to crowdfunding. 2013 Wisconsin Act 52.
Crowdfunding is a method of capital funding through “sales of small amounts of securities to a large number of purchasers.” 2013 AB 350 Memo. Much of this activity is done through Internet portals, such as Kickstarter, and has been successful in creating funds for certain start-up companies.
A few noteworthy distinctions between the new Wisconsin law and the federal law are worth highlighting.
New Certified Investor Category
Wisconsin’s Act creates a new term—certified investors—conceivably to open up certain unregistered securities offerings to an even larger set of individuals. Now, intrastate Wisconsin offerings to certified investors are exempt from certain Wisconsin registration requirements.
Wisconsin’s certified investors term is an expansion on the traditional “accredited investor.” Under federal and Wisconsin law, certain securities offerings are exempt from registration with the Securities and Exchange Commission (“SEC”) and/or Wisconsin Department of Financial Institutions (“DFI”) dependent upon the form of offering or type of investor sought. For example, certain offerings under newly created SEC Rule 506(c) are exempt from registration and general solicitation is allowed, but such offerings must be sold to “accredited investors,” a category of investors meant to include entities and individuals meeting certain asset, income, and net worth thresholds or other characteristics. Accredited investors are thought to include investors with an expected higher level of knowledge of what they are investing in and a better capacity for risk. For natural persons, traditionally to be qualified as an accredited investor, those individuals needed a net income for each of the previous two years of at least $200,000 (or with their spouse of at least $300,000) or, alternatively, a net worth individually or jointly with their spouse of at least $1,000,000.
Wisconsin’s now-lower threshold of certified investors includes natural persons with respective income levels of $100,000 (single person) and $150,000 (jointly with spouse) or with a net worth of at least $750,000.
Crowdfunding Limits Exclude Certified Investors
Wisconsin’s new certified investor category is particularly important for Wisconsin’s crowdfunding investment limitations. The limitation Wisconsin imposes on the amount any particular individual may invest through crowdfunding is $10,000. However, this particular limitation does not exist for purchasers that are accredited investors or certified investors.
The $10,000 limit is also a change from (and expansion beyond) the federal standard for crowdfunding investments by persons with lower net worths. The federal cap is at the greater of $2,000 or 5% of the net worth or income of certain investors whose respective net worth or annual income levels are less than $100,000. Wisconsin’s $10,000 limit increases this amount.
Crowdfunding Through Funding Portals
The Wisconsin law also requires registration of the Internet sites hosting crowdfunding activity—known commonly and under the federal law as funding portals—pending certain exemptions. The federal JOBS Act sets up the likelihood that funding portals would need to register with the SEC, but the only process for federal-specific funding portal registration currently in existence (beyond broker registration) is a voluntary one set up through FINRA (the organization positioned to oversee funding portals). The SEC very recently proposed a set of rules that would define more precisely how federal funding portals need to register (see generally 78 Fed. Reg. 66,428 (Nov. 5, 2013)), but these are only proposed rules at this point in time. Regardless, Wisconsin has now stepped in and required its own registration at least in certain instances. If the funding portal is registered through the SEC though, Wisconsin registration would not be needed—an example of one the exemptions for Wisconsin registration, and possibly a reason for a funding portal that may host intrastate offerings to proactively register with the SEC when that option becomes available.
The concept of funding portals is worth keeping an eye on. These are entirely new forms of registered entities involved in the securities business, though they are not traditional broker-dealers and are not investment advisers. They are more hands-off than the current broker-dealer entities that register with the DFI or SEC, though in Wisconsin the DFI has indicated a desire to register such entities and made clear that such entities are connected to securities transactions in such a way that regulation may be necessary in certain circumstances.
Despite Wisconsin’s new crowdfunding bill, issuers should understand that any state laws or rules regarding the registration of federal covered securities are preempted by the federal laws or rules. Simply stated, any interstate securities offerings are subject only to federal registration and disclosure provisions; states may only require certain notice filing or certificate of service filings with respect to such federal covered securities. The Wisconsin securities registration and regulation laws, as a general matter, will apply only to securities transactions that take place entirely and only within state boundaries, and not to interstate securities offerings that are considered federal covered securities.
The highlights presented above represent just the tip of the iceberg with respect to both the Wisconsin and federal securities law developments in this area. More rules and regulations are already in the pipeline, and these legal developments should be monitored carefully. For example, the SEC has been accepting comments for a proposed Rule 509 that concerns federal securities legend requirements as well as for the funding portal proposed rules mentioned above. Only time will tell whether the many current proposed rules eventually become a part of the securities regulatory framework.
The information contained herein is not intended as and should not be construed as legal advice. Please consult with legal counsel before taking any action based on this information.