In light of the SEC’s significant delay in implementing the national equity crowdfunding rules regarding the JOBS Act crowdfunding exemption, a growing number of states have recently adopted laws regulating intrastate crowdfunding. In May of 2015 Florida joined the states adopting intrastate crowdfunding when both the Florida Senate and House passed an intrastate crowdfunding bill to permit crowdfunding offerings of up to $1 million over a 12-month period as long as the issuer, intermediary, investor and transaction are all in Florida, and other requirements are met. The bill, which is subject to signature by the governor, will become effective Oct. 1, 2015.
To qualify for this exemption, the issuer of such securities must be a for-profit business entity formed under Florida law and registered with the Florida secretary of state. The issuer must also maintain a principal place of business in Florida and its revenues must primarily come from its activities in Florida. The issuer must not be an investment company, and it must not lack a defined business operation, business plan, or stated investment goal for investment, or have plans to engage in a merger or acquisition with an unspecified business entity. In addition, the issuer, directors, officers and 20 percent shareholders of the issuer must not be subject to a “bad actor” disqualification as set forth in Fla. Stat. 517.1611 or Rule 506(d) of the Securities Act of 1933.
In order to conduct an offering, an issuer must also comply with certain procedural requirements, including filing a notice with Florida’s Office of Financial Regulation (OFR), payment of a $200 filing fee at least 10 days before the offering commences, and execution of an escrow agreement with a qualifying financial institution to deposit and hold investor funds. Importantly, a disclosure statement also must be provided to potential investors through the dealer or intermediary and to OFR at the time it files this notice. The disclosure statement must contain information specified by the statute, including certain financial disclosures, descriptions of the business plan, the offering amount and the price of the securities. The issuer also must file with OFR and provide to investors within 45 days of its fiscal year end an annual report containing certain information about the issuer, including any material changes to disclosure statements, until no securities under the offering are outstanding.
Once the above issuer requirements are satisfied, the offering, of no more than $1 million in a 12-month period, may be advertised to the public (including via the Internet). In order to do so, however, the securities must be sold through a registered dealer or an intermediary that meets certain requirements. The statute defines an intermediary as a natural person residing in Florida or a legal entity registered with the secretary of state to do business in Florida which represents an issuer in a transaction involving the offer or sale of securities under this exemption. Intermediaries must either be registered dealers or must register as an intermediary as set forth in Fla. Stat. 517.12. This requires, among other things, a $200 filing fee and criminal background checks of the intermediary and persons associated with it. It also is important to note that intermediaries who are not registered dealers under the requirements of Florida law cannot engage in certain activities set forth in the statute such as providing investment advice, handling investor funds, or solicit sales or offers to buy securities.
The intermediary is also required to undertake a number of measures in order to reduce risk of fraud, which include, among other things, conducting certain due diligence of the issuer, obtaining certain affidavits and certifications from both issuer and investor, providing monthly updates to investors, depositing and releasing investor funds pursuant to escrow requirements, complying with certain federal and state securities laws, and displaying certain information on its website regarding the high risk of investment in and limitation on the resale of exempt securities.
In order to invest in these unregistered securities, the investor need not be an accredited investor, as required by federal securities law under Rule 501 of Regulation D. If the investor is not accredited, however, the aggregate amount sold to such an investor in a 12-month period must not exceed certain limitations provided by the statute. The new law also provides a protection to investors, allowing them to cancel their investment three days before the offering deadline and requiring refunds to be issued to all investors if the target offering amount is not reached by the offering deadline.
Finally, it is also important to note that in addition to the requirements set forth in this bill, the offer or sale of securities under this exemption must also comply with the requirements of the federal exemption for intrastate offerings under Section 3(a)(11) of the Securities Act of 1933 and Rule 147.