MORE ON CROWDFUNDING IN COLORADO (Part 2)
The ability to complete a crowdfunding offering in Colorado pursuant to the federal intrastate exemption is less defined (and therefore subject to fewer restrictions) than that available in many states. There have historically been few limited offering registrations in Colorado. There is no reason, however, why this process cannot be used by a Colorado company with its principal place of business in Colorado intending to use the proceeds in Colorado.
- Form RL provides the basis for public disclosure and is subject to review by the Colorado Division of Securities. Rather than being limited to the $1,000,000 federal crowdfunding exemption (if the implementing rules are approved), Form RL can be used in an intrastate (Rule 147) offering to raise up to $5,000,000. The minimum investment can be $100.00 or $100,000; ultimately that, and other aspects of the offering, will be resolved in discussions between the issuer and the Division of Securities.
- Where the proposal is to offer $1,000,000 or less and use the federal Rule 504 exemption, the Colorado limited offering registration on Form RL will still be required if the issuer desires to use general solicitation or advertising in Colorado for the offer and sale of the securities.
- Where the issuer intends to make the offer through a third party, broker-dealer registration and the licensing of sales representatives under Colorado law also has to be considered.
The rules published by the Colorado Division of Securities have not been updated to contemplate crowdfunding, and therefore there are no restrictions on the minimum size of investment, the number or sophistication of investors, any “bad actor” limitations, or broker-dealer requirements (other than as generally applicable, described in the August 2014 newsletter). Any offering using Form RL will be subject to review by the Colorado Division of Securities and may be limited by ad hoc limitations imposed by the examiner during that review process.
Crowdfunding Under Rule 147 – the C&DI’s
The SEC has a number of Compliance and Disclosure Interpretations (“C&DIs”) discussing SEC Rule 147 and the ability to use general solicitation or advertising. C&DI 141.03 (April 10, 2014) notes that Rule 147 does not prohibit general solicitation or advertising, but notes that any such advertising or solicitation must be conducted in a manner consistent with the limitations of 1933 Act § 3(a)(11) and SEC Rule 147. These include a number of requirements that tie the offering, the issuer, its business, and the use of proceeds to a single state.
Question 141.04 (April 10, 2014) addresses the use of a third-party Internet portal “to promote an offering to residents of a single state in accordance with a state statute or regulation intended to enable securities crowdfunding within that state. With some limitations (such as disclaimers and limitation of access), the C&DI responds (using a double negative) that “[u]se of the Internet would not be incompatible with a claim of exemption under Rule 147.”
On October 2, 2014 the SEC issued C&DI 141.05, the SEC addressed the question: “[c]an an issuer use its own website or social media presence to offer securities in a manner consistent with Rule 147.” In response, the SEC noted that generally these sites are widely available “in a broad and open manner” to customers and the public in general. The SEC raised the concern that using such a site for the “offer” of securities “would likely involve offers to residents outside of the particular state in which the issuer did business.”
The SEC then went on to discuss certain measures that the issuer could use “to limit communications that are offers only to those persons whose Internet Protocol, or IP, address originates from a particular state or territory.” This would (in the SEC’s judgment) prevent offers from being made to persons whose IP address originates outside of the targeted state. The SEC went on to suggest that “[o]ffers should include disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law” (in addition to compliance with the other limitations of Rule 147).
Given the ability of computer users to mask IP addresses, this is likely an unavailable solution. Of course, setting up a separate site on an issuer’s web accessible only to persons answering questionnaires and otherwise providing qualifying information (as contemplated in C&DI 141.04 and prior no action letters as long ago as Angel Capital Electronic Network (1996 WL 636094 (No Act. 10/25/1996)) and IPONet (1996 WL 431821 (No Act. 7-26-1996))) may satisfy the requirements.
The Rule 147 intrastate exemption from registration of securities transactions under the federal Securities Act of 1933 remains a viable alternative where companies seek to have a federal exemption for intrastate public offerings while the federal crowdfunding exemption is languishing at the SEC.
When the SEC rules are finally approved, the federal crowdfunding exemption will pre-empt state law and companies using that exemption will be able to offer crowdfunding securities across state lines following the guidance to be contained in the federal rules. Until then, intrastate crowdfunding is available in a number of states, and Colorado, through its limited offering registration with Form RL, is one.