Equity Crowdfunding for Investors: A Guide to Risks, Returns, Regulations, Funding Portals, Due Diligence, and Deal Terms

CHAPTER 4

Intrastate Equity Crowdfunding

Nonaccredited Investors May Invest in Startups Located in Their Own State

For 36-plus months after the Jumpstart Our Business Startups (JOBS) Act was signed into law, U.S. entrepreneurs, intermediaries, and investors waited for the SEC to issue final rules for Title III equity crowdfunding. Crowdfunding portals could not be launched before the rules went into effect.

Meanwhile, some states decided to get their own jumpstart going. Relying on the intrastate exemption from SEC registration, at least 12 states—led by Kansas and Georgia—have enacted legislation or promulgated regulations that allow unlimited numbers of nonaccredited investors to participate in small private securities offerings (See Table 4.1). Several more states and the District of Columbia have introduced similar legislation or have begun the regulatory proposal process.

In October 2013, an intrastate funding portal in Georgia called Spark-Market became the first equity crowdfunding portal in the United States to facilitate the equity financing of a private company (Bohemian Guitars LLC) with participation by nonaccredited investors. The emergence of state-based platforms and what they mean overall for equity crowdfunding for investors are explored in this chapter.

THE INTRASTATE EXEMPTION

In Chapters 2 and 3 we discussed various exemptions that private companies can use to avoid the costly process of registering securities offerings with the SEC. Rule 506 of Regulation D ...