The SEC is at it again. While they have yet to finalize their own equity crowdfunding rules they are now attempting to regulate Intrastate Crowdfunding Exemptions that have been passed by several states, including Michigan. These state wide laws make it possible for companies to raise capital using crowdfunding as long as they are located within that state and only work with investors that are also located within the state. In this manner, it is similar to the existing Intrastate Offering Exemption that is part of the SEC’s federal regulations.
These state wide laws have been issued as a response to the SEC continuing to drag their feet on the implementation of the JOBS Act. Investors and local businesses can benefit if they live in Michigan, Kansas, Georgia, Indiana, Washington, Maine and Wisconsin. The laws encourage local economic growth by connecting local companies with local investors. The challenge is that the SEC has now issued statements in response to these recent laws.
On April 11th, the Compliance and Disclosure Interpretations (CDIs) was issued by the SEC relating to these intrastate crowdfunding offerings. In it, the SEC clearly states that companies and crowdfunding portals need to ensure that offerings are not seen by investors that are located out of state. They suggest closed portals with login access etc. Due to their hard stance; social media sites would not be allowed since out of state people could run across the post.
This is an extreme overreach by the SEC and hurts the very core of what crowdfunding is, user engagement. Social media is the best way to engage the crowd because it is done in real time. You can write a post, a user responds, and a conversation develops. Without social media, the dynamic aspects of crowdfunding are all but taken away. Word of mouth and soliciting via telephone calls become the primary method for reaching potential investors. This is unwise and extremely restrictive.
It will be interesting to see how states respond to the SEC. The smart ones will fight back against the restrictions placed on social media. After all, many states passed these laws because they want to encourage economic growth and recruit businesses to their state. If the SEC meddles in the affairs of the state, the state is no longer able to exercise its authority to govern statewide transactions. Since the legislative session is over the only way for the states with intrastate crowdfunding laws on the books to respond is to do so in a special session, these are called from time to time or to wait until January of 2015. In the meantime companies that are going to launch intrastate crowdfunding campaigns should consult with an attorney to get a formal opinion on how the states guidelines and the SEC contradict each other and how to protect themselves in the event of an SEC imposed violation.