While many businesspeople throughout the country wait for the SEC to make up its mind about Title III, there is still plenty for us in the crowdfunding community to pay attention to and even celebrate. Intrastate crowdfunding is a state matter that largely doesn’t need any approval from the SEC. If you’re interested in real estate crowdfunding, you should know about developments within the following states.
The Importance of Title III
Title II Regulation D and Title IV Regulation A+ have both been defined by the SEC, but we’re still waiting on them to debut the language for Title III. This is really the component of the JOBS Act that the entire startup community is waiting on and will have a huge impact on how real estate crowdfunding works.
The point of Title III was to make crowdfunding possible for non-accredited investors. For the most part, despite the passage of the JOBS Act three years ago, these individuals have been largely left out of the benefits, though they can still go through accredited investors if they like. Compared to the avenue represented by Title III, though, this is far from ideal.
There’s no telling when Title III will finally be a reality though. Many who have been optimistic since the passing of the JOBS Act are getting more acquainted with the idea that the SEC will simply continue to drag their feet until they see how Title IV rolls out.
While there are arguments to be made regarding Title III (some believe it unnecessary; some believe it will actually do more harm than good), many states aren’t waiting on the SEC. Below is an update on four states that are making their own rules regarding intrastate crowdfunding.
Several Minnesotan senators put forth a bill back in January, SF 138 (as well as HF328, a related House bill) in an effort to make crowdfunding a reality in the Land of 10,000 Lakes. Although politicians presented it, the real push comes from MNVest, a grassroots campaign made up of entrepreneurs, trade groups, business leaders and others, most notably, Zachary J. Robins, Esq.
This bill really pushes the envelope too, which could make Minnesota one of the most important states to watch when it comes to crowdfunding, real estate or otherwise. If MNVest passes, it would allow companies to seek funding up to $5,000,000 as long as they first provided financial information that was independently audited. Otherwise, they would be capped at $2,000,000.
In most enacted states, those limits sit at $2,000,000 and $1,000,000, so this is an aggressive measure to give Minnesota businesses an upper hand. Furthermore, whereas most states will only let unaccredited investors put up $5,000, MN would once again double that to $10,000,000.
The MNVest bill still has a long way to go though. For one thing, the Commissioner of the Minnesota Department of Commerce, Mike Rothman, issued a letter to Senator Bonoff outlining a number of his concerns. Specifically, these were that the limits were too high and that the bill didn’t come with any means for disqualifying “bad actors” from participating.
Earlier this year, Arizona joined other states in proposing intrastate crowdfunding regulations thanks to actions be Senator David Farnsworth and Representative Jeff Weninger. Senate bill SB1450 (and its related bill in the House, HB2591) would be very similar to others passed in states throughout the country.
Issuers could source up to $2,500,000 if they first went through an independent, GAAP-based audit of their financials. Otherwise, the cap would be $1,000,000. Just like in MN, though, non-accredited investors could put forth as much as $10,000.
One unique element of the Arizona bill, though, would be the express right of any investor to withdraw their funds upon notifying the issuer. Obviously, certain stipulations apply.
The main thrust of support for this bill comes from the Arizona Small Business Association (ASBA), which helped draft the earliest version. If passed, oversight of the legislation would fall to the Arizona Corporate Commission. At this time, the commissioner has not come out for the bill or even so much as commented on it, though, so it’s tough to predict which way this one will go.
District of Columbia
While not technically a state, Washington, D.C. functions as one in many important regards, one of which is passing bills. Back in November of 2014, the Department of Insurance, Securities and Banking (DISB), produced a set of rules they proposed for the creation of a D.C. Intrastate Exemption. Impressively, the rules were passed within just one month. Then, in February, the DISB officially authorized the first investment offering to be made through crowdfunding under the D.C. Intrastate Exemption.
Late last year, Colorado Representative, Pete Lee, submitted a draft to the House of Representatives of his crowdfunding bill. Once again, the rules in this draft are very similar to those found in other such bills around the country. Issuers who allow an audit can raise up to $2,000,000, while those who don’t have to stop at $1,000,000 and the maximum amount allowed to any non-accredited investor is $10,000.
What’s interesting about this bill, though, and again, it’s still in its infancy, is the fact that it seems to allow up to $1,000,000 in crowdfunding for every year.
Although this bill would probably be extremely popular to many who are passionate about crowdfunding, the document already has one notable critic worth paying attention to. Ray Burrasca is the current manager of ColoradoCrowdfunding.org, so he definitely has an educated opinion on the matter. According to Mr. Burrasca, the current version of the bill contains too much risk and a lack of liquidity.
This is very important to consider. If there are any two things that scare off investors they are risk and the inability to withdraw funds. When it comes to unaccredited investors, this would most likely be doubly true.
While it’s easy to read over the above and bemoan that crowdfunding progress seems to be moving around slowly, there is still plenty of opportunity for unaccredited investors. Even if the SEC decides to see how Title IV plays out, depending on the state you call home, you may not have to wait much longer.