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Additional Federal Crowdfunding, Regulation A, and Regulation D Proposals Could Impact State and Federal Securities Landscape

May 7, 2014

Scott W. Brunner

Three recent proposed federal bills and written testimony from the North American Securities Administrators Association, Inc. (“NASAA”) shed light on the impact federal preemption could have on the state and federal securities landscape, and notably state-enacted equity crowdfunding schemes. 

First, the “Equity Crowdfunding Improvement Act of 2014” has been proposed to replace the CROWDFUND Act that was enacted as part of the JOBS Act in 2012.  This replacement bill notably would increase the minimum-cap dollar amount a non-accredited individual investor would be able to invest in an entity through this scheme to $5,000 per 12-month period (up from $2,000).  Other modifications would include changing “funding portal” to just be “intermediary”; overall though, the same general crowdfunding structure would exist.  It is particularly worth tracking this new crowdfunding bill because the public has been awaiting SEC promulgation of the long-overdue rules required to implement the 2012 Act.  Essentially, the federal crowdfunding scheme has been stuck in a holding period since its inception.  This bill would only further delay the legality of interstate equity crowdfunding as it has been contemplated.  The new proposed law would mandate the SEC promulgate the required implementing rules within 120 days of enactment.

Second, the “Startup Capital Modernization Act of 2014” would make changes to federal Regulation A securities offerings, including increasing the maximum dollar amount of a public offering in a 12-month period (to $10,000,000 from $5,000,000) and modifying certain disclosure requirements (including with respect to resale).  Regulation A is designed for smaller public offerings and incorporates its own mini federal registration scheme.  We have previously written on the recent creation of the related Regulation A+ here.  Third, an unnamed bill was proposed that would require the SEC to make revisions to Regulation D and, particularly, the impact and utility of Form D.  Form D currently must be filed for any issuer to sell securities pursuant to SEC Sections 230.504, 230.505, and 230.506, even though those offerings may be exempted from federal registration.  This proposed bill would stress that such exemptions are not conditioned on filing Form D or a similar form that the SEC may create.

All of the above, especially the impending crowdfunding laws, have significant implications on how states regulate securities (and on how issuers and investors must comply with state securities laws in addition to federal securities laws).  We have now seen Wisconsin, and multiple other states, enact state-based crowdfunding schemes focused on intrastate offerings.  The federal preemption of interstate offerings and sales of securities includes, according to current and proposed federal law, offerings and sales done via internet-based crowdfunding through online portals, which greatly restricts the level at which states may administer registration or disclosure laws to those types of offerings.  The recent NASAA testimony (available here) on these three bills evidences that federal preemption is a significant and controversial issue in many respects.  It also evidences that there is a delicate balance that regulators must maintain between protecting investors and overregulating capital formation.

Most importantly, start-up entities, accredited and non-accredited investors, and securities professionals alike all must be well aware of the dynamic and changing landscape of state and federal securities laws.  The above proposed federal laws are merely snapshots of the regulatory framework that is still being worked out for equity crowdfunding and general solicitation offerings.

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.