Securities Crowdfunding: Legal within Seven Months
Our first statewide meeting was May 27. From then to now, the draft law that resulted in a new exemption via administrative rule-making will have taken seven months from start to finish. Pretty good for a bunch of grassroots organizations that care about small and social enterprises in Oregon who took things into their own hands.
On Monday, the Division of Finance and Corporate Securities posted the new Oregon CPO Rules for public comment. It allows securities offerings of all types – equity and debt – and everything in between. (Many people aren’t aware that debt and debenture notes are securities when offered as investment.) It also has many features which are still poorly understood.
Let’s run through a few key points:
First, these rules are not a direct result of the JOBS Act, nor are they under it or connected to it. That is federal law. These Rules are written under the (3)(a)(11) federal exemption that allows states to craft state law so long as the it meets the criteria of ‘intrastate’. See the SEC description (search for 3(a)(11) within the body, and see a quote below)
Intrastate offering exemption
Section 3(a)(11) of the Securities Act is generally known as the “intrastate offering exemption.” This exemption facilitates the financing of local business operations. To qualify for the intrastate offering exemption, your company must:
- be organized in the state where it is offering the securities;
- carry out a significant amount of its business in that state; and
- make offers and sales only to residents of that state.
The intrastate offering exemption does not limit the size of the offering or the number of purchasers. Your company must determine the residence of each offeree and purchaser. If any of the securities are offered or sold to even one out-of-state person, the exemption may be lost. Without the exemption, the company could be in violation of the Securities Act.
What this translates into is that only Oregon businesses who have at least 80% of their assets and income WITHIN the state can use the exemption. And, every single one of their investors must be an Oregon resident. Some states have called their law their “Main Street Law” since it truly forces citizens to limit the use of the exemptions to locally owned business. It creates an entirely different framework through which to look at investing. It is, de facto, local investing.
However, note that the Oregon-only criteria apply only during the raise and that “going big” or moving outside of Oregon may happen for that company down the road. These rules do not restrict that growth that may come as a result of the raise in the future. Startups who don’t qualify (or want) angel investors, or who are raising less than the cap of $250,000 will find this opportunity quite palatable, once they fully understand the implications and requirements.
“This is unprecedented. I have said in an earlier blog post that this exemption may create the biggest earthquake Oregon has ever experienced–that no one feels. Will Oregonians rise to the occasion?”
I also believe it turns Oregon into a whole state, meaning that people may begin to see it all as a place, rather than a collection of cities and “the rest of the state.” Oregonians will begin to connect to Joseph, Bend, Cannon Beach, and Ashland because they love being there, whether they live there or vacation there…that we are a part of a state worth investing in every bit of it.
In fact, Oregon will likely be the 14th(ish) state to craft law under the federal intrastate exemption. Washington State signed theirs into law June 12, 2014, but it is quite different from the one we began here in Hatch on May 27. Other states include Maryland, Vermont, Michigan, Texas, Alabama, Kansas, and others. Each is slightly different, but they all meet the criteria.
Oregon’s Rules were originally crafted by a grassroots team who established a set of goals for the law to serve small businesses, social enterprises, and startups who lack access to the capital they need. Many of these are in rural Oregon. That meant our goals were to streamline the process as much as possible, keep costs and complexity down by limiting the need for legal and financial help, provide for investor protections, and yet allow for investing by average Oregonians.
We have worked through many issues surrounding the crafting of the law. The team is relatively happy with its form right now, though the disclosures grew more than we intended as it went through review. We sought a streamlined process relatively easy for entrepreneurs and investors. We hope you will explore the law, and attend one of our upcoming events. January 22 will see the launch of nearly a dozen entrepreneurs from all over the state, from Joseph to Klamath Falls, and there will be two conferences (March and May) where further discussion will happen.
Will Oregon rise to the occasion?
Here at Hatch we have launched a dozen workshops for entrepreneurs who wish to learn more. For more information, email your interest to us at [email protected]. Because the rules are not legal yet, we have privacy and disclosure issues until the first of January 2015.
Oregon Now on the Securities Crowdfunding Map
Wendy Culverwell of Sustainable Business Oregon just published a great piece on the new Oregon opportunity afforded by new Administrative Rules posted Monday for public comment. Also, Anthony Zeoli just wrote a somewhat unpleasant review of the Rules, but mostly because he’s right, in general, of Oregon’s version.
For more information, please see our brand new site hatchoregon.com.