VIRGINIA RELEASED GUIDANCE FOR CROWDFUNDING REGULATIONS
While we still have to wait on the U.S. Securities and Exchange Commission to complete the equity crowdfunding regulations for interstate crowdfunding under the JOBS Act, the Commonwealth of Virginia State Corporation Commission has published new regulations affecting intrastate (solely within Virginia) crowdfunding in Virginia effective in July of 2015.
Traditionally, a company raising equity can be subject to strict registration requirements under the Virginia Securities Act. The new law allows for companies in Virginia to utilize crowdfunding as a way to raise equity (up to $2 million) and bypass those stringent registration requirements.
There are, however, certain standards the business must meet to be eligible for the exemptions. Here is a list of some of the requirements:
- The business entity must be formed under Virginia law, be authorized to conduct business in Virginia, and have its principal place of business in Virginia.
- Staying in line with the regulations governing intrastate exemptions allowed under federal law, the securities must be offered and sold only to Virginia residents.
- The securities offered and sold must be equity. Debt securities are not allowed under this law.
- The sum of cash and any other consideration received for the security cannot exceed $2,000,000.
- If the investor is not accredited (defined by federal law), the company cannot accept over $10,000 in investment from that person.
- At least twenty days prior to the offering, the company must provide certain information and documents to the state, pay a filing fee, and have established an escrow account for which funds will be deposited.
- The company cannot be one that is operating as an investment business, one that is involved in certain natural resource – based ventures, one that is subject to various federal reporting regulations, or one without a certain level of operational details delineated.
- The offering term cannot last 12 months after the initial offer.
- The issuer must provide an annual report, which carries its own requirements, to the security purchasers for three years.
NEW OPPORTUNITY FOR CAPITAL RAISING
Virginia businesses that fall under this new exception are able to take advantage of an equity-raising avenue that is growing rapidly. This growth of crowdfunding can be attributed to the Internet’s significant lowering of the informational and logistical barriers that have traditionally faced entrepreneurs and small businesses.
The attorneys at Pierce/McCoy are well versed and up to speed on the rapidly changing federal and state laws involving crowdfunding. Please feel free to contact us to discuss your concerns in this area.
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This post is purely informational and is not to be construed as legal advice.
Capital raise efforts get another boost from the JOBS Act!
The Securities and Exchange Commission (SEC) adopted amendments to Regulation A that allow private companies to make exempt public offerings of up to $50 million in securities, as required by the Jumpstart Our Business Startups Act (JOBS Act).
The new rules have come to be known as “Regulation A+.” The rules establish two tiers under Regulation A. Tier 1, which covers offerings of up to $20 million within a 12-month period, is very similar to the existing requirements of Regulation A. Tier 2 allows offerings of up to $50 million within 12 months but requires more robust initial and ongoing reporting. For offerings up to $20 million within 12 months, companies can elect to follow either the Tier 1 or Tier 2 requirements. Selling shareholders can sell up to 30% of the annual offering limit of the chosen Tier.
These new rules provide an effective, workable path to raising capital that also provides strong investor protections.
— SEC Chair Mary Jo White
Under the Securities Act of 1933, when a company offers or sells securities to potential investors, it must either register the offer and sale or rely on an exemption from registration. Regulation A is a longstanding exemption from registration that permits unregistered public offerings of up to $5 million of securities in any 12-month period, including no more than $1.5 million of securities offered by security-holders of the company. In recent years, Regulation A offerings have been relatively rare in comparison to offerings conducted in reliance on other Securities Act exemptions or on a registered basis.
The JOBS Act amended the Securities Act to require the Commission to update and expand the Regulation A exemption. In particular, the JOBS Act directed the Commission to:
Adopt rules that would allow offerings of up to $50 million of securities within a 12-month period.
- Adopt rules that would allow offerings of up to $50 million of securities within a 12-month period.
- Require companies conducting such offerings to file annual audited financial statements with the SEC.
- Adopt additional requirements and conditions that the Commission determines necessary.
Highlights of the Final Rules
The final rules, often referred to as Regulation A+, would implement Title IV of the JOBS Act and provide for two tiers of offerings:
- Tier 1, which would consist of securities offerings of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer.
- Tier 2, which would consist of securities offerings of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.
In addition to the limits on secondary sales by affiliates, the rules also limit sales by all selling security-holders to no more than 30 percent of a particular offering in the issuer’s initial Regulation A offering and subsequent Regulation A offerings for the first 12 months following the initial offering.
For offerings of up to $20 million, the issuer could elect whether to proceed under Tier 1 or Tier 2. Both tiers would be subject to basic requirements as to issuer eligibility, disclosure, and other matters, drawn from the current provisions of Regulation A. Both tiers would also permit companies to submit draft offering statements for non‑public review by Commission staff before filing, permit the continued use of solicitation materials after filing the offering statement, require the electronic filing of offering materials and otherwise align Regulation A with current practice for registered offerings.
Effective Date for Regulation A+
The rule amendments become effective 60 days after publication in the Federal Register.