So you’d like to take advantage of the new Texas intrastate crowdfunding rules, when they’re effective in late November, to raise money for your business. That’s great, but here are ten important factors (in no particular order) for you to consider:
- You must have a Texas entity that is conducting business primarily in Texas. It must have its principal office and at least 80% of its assets in Texas. At least 80% of the gross revenues of its operating business must be from Texas. Also, at least 80% of the net offering proceeds must be used to operate the business in Texas.
- You can’t offer the securities yourself, through your website or otherwise. You can offer the securities only through the internet website of either a “Texas crowdfunding portal” or a registered securities dealer in Texas. It appears that there will be portals available, but any such portal must be registered as such with the Texas State Securities Board. The requirement that communications with prospective and actual investors during the offering be only through the website of the portal or dealer has only one exception: A limited notice acknowledging that the offering is being conducted may be distributed within Texas.
- You must prepare specified disclosure about your business and the offering, including current financial statements, to be posted on the website of the portal or dealer. The dream of offering securities with little or no formal disclosure to prospective investors – and avoiding or greatly minimizing the time, effort, and expense involved in preparing it – remains only a dream.
- You must file a notice, a summary of the offering, and a copy of your disclosure with the State Securities Board, and post the summary and the disclosure on the website of the portal or dealer, at least 21 days before any sale of securities in the offering. Accordingly, advance planning is required; the rules will not provide an exemption after-the-fact for an offering that has been started.
- You are limited to selling a maximum of $1 million of securities in a 12-month period, and no more than $5,000 may be sold to a single purchaser unless the purchaser is an accredited investor. Although the per-purchaser maximum does not apply to accredited investors, the 12-month maximum cannot be exceeded even if you sell only to accredited investors. Also, the 12-month maximum is reduced by the amount received from any sales of securities by your entity within six months before or six months after any offers or sales made under the rules.
- You may sell only to persons who provide evidence that they are Texas residents. A prospective purchaser’s statement that he or she is a Texas resident is not sufficient, but the evidence (such as a valid Texas driver’s license or voter registration) should not be difficult to obtain. You may not sell securities under the rules outside of Texas.
- You must satisfy the requirements of a federal exemption for the offering, in addition to the rules. The rules are written to correspond with the federal exemption provided by SEC Rule 147 for an intrastate offering. Therefore, if you comply with the rules, you will comply with the federal exemption.
- You must implement procedures to restrict resales of securities purchased in an offering under the rules. The restrictions imposed by the rules and SEC Rule 147 are somewhat different than those that apply to securities sold in a private placement. During the nine months after the offering ends, the purchased securities may be resold only to Texas residents.
- You will be subject to the federal and Texas laws prohibiting securities fraud in connection with an offering. Your disclosure and your use of the offering proceeds should comply with those laws to avoid claims by investors, the SEC, or the State Securities Board.
- You can’t use or rely on the rules to exempt an offering if an affiliated entity is also making a securities offering in Texas or has made a securities offering in Texas in the last 12 months or if the offering proceeds will be combined with the proceeds of another entity’s securities offering as a single plan of financing.
OUR TAKE: The new Texas crowdfunding rules represent a welcome and worthwhile effort to promote the funding of businesses (and especially smaller businesses) in Texas, particularly in light of the delay in completing and adopting the SEC’s proposed crowdfunding rules. But the Texas rules involve a number of conditions and limitations that must be understood and considered before a business attempts to use or rely on the rules.