The Washington state legislature has a unique opportunity in front of it right now. It can pass a state-specific crowdfunding law.
You can read the bill, which has already unanimously passed out of a House committee here.
The bill would allow Washington state businesses to raise up to $1 million during any 12-month period from Washington state residents in a crowdfunding campaign. The funds could be raised from non-accredited investors, as well as accredited investors.
The bill has a good chance of passing in a form that would actually be usable. It also strikes the right balance between capital formation and investor protection.
The trouble with securities law exemptions on the books today is that many of them are not usable — except at great and impractical expense to businesses that want to use them. This puts entrepreneurs who want to raise money in a difficult spot, slows down or completely inhibits their ability to raise funds, and hampers economic growth.
This is the reason almost all startups raise money solely from accredited investors under what is known as Rule 506 of Regulation D. If you raise money under that rule, as long as you take money only from accredited investors, there are less complex and less costly requirements than other exemptions.
- Rule 506 does not require companies to work with a registered broker-dealer (which is required under the federal crowdfunding law).
- Rule 506 does not require a company to have audited financials (which is required under the federal crowdfunding law if you are raising more than $500,000).
- Under Rule 506, you have to file a form known as Form D, but it is a short form, and you don’t have to file it until 15 days after you actually raise money. So, if you don’t succeed in raising money, you don’t have to file the form.
Rule 506 is practical and usable, and that is why a very high percentage of financings fall under it. Other laws passed over the years to try to allow companies to raise money through the sale of securities languish on the books unused because they are impractical.
Of course, the trouble with Rule 506 is that you have to limit your offerings to accredited investors. There is no ability under Rule 506 to raise small amounts of money from lots of people, including non-accredited investors, in a crowdfunding campaign.
If you don’t know any accredited investors, raising funds can be tough. A real slog. Like persistence hunting.
Enter state level crowdfunding. Several states have realized that to support startups and small and emerging growing businesses, they need state securities law exemptions that are more usable and practical, yet balance capital formation with investor protection in a reasonable way. Wisconsin passed a state crowdfunding bill. Both Kansas and Georgia have regulations in place. (See Bill Carleton’s web site statecrowdfundinglaw.com for detail on the various state initiatives).
Washington could be next.
The Washington State bill, HB 2023, is sponsored by Representatives Habib, Ryu, Zeiger, Maxwell.
It is an important bill. It would send a signal to the entire world that Washington takes the business of starting and growing companies seriously, and is willing to amend its laws to bring them up to date with the 21st century.
You might ask: Isn’t a federal crowdfunding bill on the horizon? Shouldn’t we just wait for that?
The answer is no. The federal bill is too complex.
It will cost companies a lot to raise money in compliance with its requirements. For example, suppose you want to raise $1 million under the federal bill. You’re probably going to have to spend something on the order of $250,000 in legal, accounting and broker fees to raise the cash. That’s impractical. It doesn’t make sense. Unfortunately, the federal bill is going to go the way so many prior attempts to write sensible laws have gone. I suspect it will not be used nearly as much as advocates hoped. This is truly unfortunate.
But states have the opportunity to put their own laws in place that will actually work.
The Washington Bill HB 2023 would not put companies trying to raise money in such a difficult spot.
This bill needs the support of the startup community, or it is not going to get a vote on the House Floor. This is an urgent matter, as time is running out in this short legislative session.
Joe Wallin is an attorney at Davis Wright Tremaine. He’s the editor of the Startup Law Blog. Related posts: Crowdfunding: Current Legalities & Proposals… The President Favors Crowdfunding, But Is It Good Enough?…The Troubles With The New Crowdfunding Law
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