Thanks to a recent Washington law, Southwest Washington companies have a new way to raise money. As of November 1, certain Washington companies can issue equity to investors under the state’s new crowdfunding law. Crowdfunding (the practice of raising money through small contributions from a larger number of people, typically via the Internet) has been around for years. Previously, companies could give crowd-sourced funders gifts or other rewards, but could not issue equity to donors without running afoul of securities laws.
The new law, enacted as part of the 2014 Washington Jobs Act, allows a broader group of investors to take an equity stake in the company they are helping to fund. This represents a significant change, as securities laws have traditionally permitted businesses to raise funds only through accredited investors (usually institutional investors or wealthy individuals).
Who can raise money?
Companies must be organized and doing business in Washington. Certain companies, such as development stage companies with no business plan and companies with complex capital structures, are excluded. Companies could use third-party portals to provide information to potential investors and otherwise facilitate the funding. Advertising the offering is permitted, but issuers must ensure that offers are presented only to Washington residents.
Who can invest?
Qualifying companies can raise up to $1 million during any 12-month period from either accredited or non-accredited investors residing in Washington. The aggregate amount of securities sold to an investor by any issuer during the 12-month period before the sale date must not exceed (a) the greater of $2,000 or 5 percent of the investor’s annual income or net worth for investors with an annual income or net worth of less than $100,000, or (b) the greater of $100,000 or 10 percent of the investor’s annual income or net worth for investors with annual income or net worth in excess of $100,000. “Net worth” excludes an investor’s principal residence. It is the issuer’s responsibility to confirm that investors are Washington residents and otherwise eligible. Although changes at the federal level are proposed, equity crowdfunding involving non-Washington issuers or investors, which is subject to federal law, is still prohibited.
Planning is key
Significant planning will be required for companies hoping to raise funds through equity crowdfunding. Companies must first complete a Crowdfunding Form with the Washington Department of Financial Institutions (DFI) that includes disclosures to investors, financial statements prepared in accordance with GAAP, and other documentation. DFI must approve the offering before money can be accepted from investors. Each issuer must set a minimum fundraising target in advance, and until the company reaches the target, all investor funds must be held in escrow. Moreover, prospective issuers should carefully consider how crowdsourced investment will impact their ability to raise funds through more traditional means. For example, a significant crowdfunding investment one year may preclude or delay a company from obtaining a private investment from an accredited investor that same year.
There are a number of other restrictions and steps required to comply with the new law. For example, federal and state laws governing the sale and resale of securities, such as anti-fraud provisions and bad actor disqualifications, apply to securities sold through crowdfunding. It is recommended that prospective issuers consult with legal counsel before engaging in any offering.
Ongoing compliance
A company raising money through crowdfunding must make ongoing disclosures and quarterly reports (including information such as executive compensation and business plans) publicly available on the company’s website so long as the securities sold are outstanding.
Although much is still uncertain about how widely the new crowdfunding law will be used, it presents a new opportunity for start-up and growth-stage businesses to access capital in a manner that has never been permitted before.
Matthew Bisturis is an attorney in the Vancouver office of regional law firm Schwabe, Williamson & Wyatt. He focuses his practice in the areas of business and real estate transactions and can be reached at mbisturis@schwabe.com or 360.905.1113.
