Issuer Compliance with Wisconsin’s Equity Crowdfunding Laws a Meticulous Process
As I previously indicated here, Wisconsin has enacted its own equity crowdfunding structure for intrastate securities offerings. This equity crowdfunding scheme—operated via online portals—goes live June 1, 2014, which is the legislatively established “effective date.” Once the federal scheme is finally in place, Wisconsin issuers and investors will have two relevant pieces of crowdfunding legislation to think about—but until then, Wisconsin businesses interested in building capital through intrastate crowdfunding must understand the necessary legal compliance requirements within Wisconsin’s scheme. A web of rules ensures that this is no simple task.
As an initial and very important matter, Wisconsin’s crowdfunding provisions apply only to intrastate crowdfunding activity—that is, offers and sales of securities that are from and to Wisconsin persons. See 15 U.S.C. § 77c(a)(11). Thus, the starting point must be that an issuer must be based in Wisconsin (an analysis subject to certain 80% tests that will not be discussed here) and must offer and issue only to others based in Wisconsin. This could be a complicated thing to arrange given that equity crowdfunding is meant to be done over the internet (which happens to be a very national—even global—platform). The SEC has issued some guidance on what it might take to ensure the crowdfunding offer is actually an intrastate offer. Indeed, according to the SEC, use of the internet is not, on its face, an interstate offer, but issuers quite possibly will have to go to fairly significant lengths to ensure the offer is, indeed, “within Wisconsin.” Such lengths would potentially include “at a minimum, disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law, and limiting access to information about specific investment opportunities to persons who confirm they are residents of the relevant state (for example, by providing a representation as to residence or in-state residence information, such as a zip code or residence address).” SEC Compliance & Disclosure Interpretations, Q. 141.04 (Apr. 21, 2014).
Once issuers get past the “Wisconsin-specific” threshold, there are a number of particular filing, disclosure, and other papering requirements that they must meet for compliance with Wisconsin’s law. This includes, without limitation, the following:
- The issuer is a business entity organized in Wisconsin;
- The sum to be received from all sales of the security in reliance on this particular crowdfunding exemption, excluding sales to accredited investors, certified investors, or institutional investors, does not exceed, respectively:
- $1,000,000 (if the issuer has not undergone and made available, to each prospective investor and the DFI, documentation from a financial audit of its most recent fiscal year), not including the aggregate amount received for all sales of securities by the issuer within the 12 months before the first offer or sale made in reliance on the exemption; or
- $2,000,000 (if the issuer has undergone and made available, to the DFI and each respective investor, its certain financial audit results), again, not including the aggregate amount received for all sales of securities by the issuer within the 12 months before the first offer or sale made in reliance on the exemption under this subsection.
- The issuer does not accept more than $10,000 from any single purchaser who is not an accredited investor or certified investor.
- The offering is made exclusively through one or more Internet sites registered with the DFI.
- The issuer pre-files a notice with the DFI, in writing or through an electronic form that the DFI may provide, indicating/providing the following:
- A notice of claim for exemption from registration;
- A prescribed fee of $50;
- A copy of the disclosure statement to be provided to prospective investors, with such disclosure statement including the following:
- A description of the company, its type of entity, the address and telephone number of its principal office, its history, its business plan, and the intended use of the offering proceeds, including any amounts to be paid to any owner, executive officer, director, managing member, or other person occupying a similar status or performing similar functions on behalf of the issuer.
- The identity of all persons (not just individuals) owning more that 10% of any class of securities in the company.
- The identities of the executive officers, directors, etc. – essentially those individuals with notable high ranking titles.
- Information related to the terms and conditions of the securities being offered and any other outstanding securities of the company; the minimum and maximum amounts of the securities being offered; the percentage ownership of the company being put out on this offering; the price per share, unit, etc.; any transfer restrictions; and any anticipated issuances that could dilute share value.
- The identity of the person who has been or will be retained by the issuer to assist the issuer in conducting the offering and sale of the securities, including any internet site operator.
- Any legal proceedings pending or currently ongoing.
- The name and address of the internet site operator.
- Anything else that could be material to a purchaser’s decision to invest in the offering.
- An escrow agreement with a bank in which the investor’s funds will be deposited.
- The issuer is not an investment company.
- The issuer expressly informs the prospective purchasers that the securities are not registered. The following statutory legend must be “conspicuously displayed” on the cover page of the disclosure document to accomplish this:
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR DIVISION OR OTHER REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED BY SUBSECTION (e) OF SEC RULE 147 (17 CFR 230.147(e)) AS PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
- Each actual purchaser then must certify, in writing, the following statutory acknowledgment:
I UNDERSTAND AND ACKNOWLEDGE THAT:
I am investing in a high–risk, speculative business venture. I may lose all of my investment, or under some circumstances more than my investment, and I can afford this loss.
This offering has not been reviewed or approved by any state or federal securities commission or division or other regulatory authority and that no such person or authority has confirmed the accuracy or determined the adequacy of any disclosure made to me relating to this offering.
The securities I am acquiring in this offering are illiquid, that there is no ready market for the sale of such securities, that it may be difficult or impossible for me to sell or otherwise dispose of this investment, and that, accordingly, I may be required to hold this investment indefinitely.
I may be subject to tax on my share of the taxable income and losses of the company, whether or not I have sold or otherwise disposed of my investment or received any dividends or other distributions from the company.
- The issuer obtains evidence from each purchaser that they are a resident of Wisconsin and, if applicable, that they are an accredited investor or certified investor (consistent with what the SEC suggested should be required for an intrastate offering to actually be an intrastate offering).
- All payments are held with the bank as part of an escrow agreement.
- The issuer provides a copy of the disclosure statement to each prospective investor at the time the offer is made to the prospective investor.
See Wis. Stat. §§ 551.202(26), .205.
Again, this is not a complete list of requirements an issuer must meet for compliance. And so, despite that Wisconsin crowdfunding offerings are not registered offerings, issuers clearly must undergo a significant process to ensure they are in compliance with the law.
As for working with a funding or internet portal, such an entity must be registered with the DFI. The DFI has not, as of this writing, introduced a registration mechanism for such entities; it’s still unclear whether those internet portals will have a means of registration by the June 1, 2014 effective date.
Equity crowdfunding is new on the securities scene, but it carries with it the traditional need for issuers to pay careful attention to the rules and regulations. A certain level of meticulousness is required for an issuer to lawfully use this method of capital funding, and having a competent team of advisors is one key to successfully doing so.
[UPDATE: The Wisconsin Department of Financial Institutions has created a registration process for the internet portals described above, which can be located here.]
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.