State-Level Equity
Crowdfunding
Joe Wallin
Davis Wright Tremaine LLP
joewallin@dwt.com
@joewallin
(206) 757-8184
What is it?
• State-level equity crowdfunding is equity
crowdfunding under a particular state’s law, not
the federal law.
...
Why is it Important?
• Equity crowdfunding for non-accredited
investors is not yet legal at the federal level.
• The JOBS ...
Accredited Equity
Crowdfunding
• You could say that equity crowdfunding does
exist now, but only for “accredited investors...
“Accredited Investor”
For those of you who don’t know, an accredited
investor is an individual:
• With a $1M net worth exc...
In Contrast to Federal Law:
• State-level equity crowdfunding laws will be
usable by startups.
• Startups won’t have to sp...
Example
• To raise $1M under the federal law, estimates
are that it will cost $250,000 in fees.
• You must use an intermed...
Example
• To raise $1M under Washington’s state
crowdfunding law, costs will be substantially
lower.
• No third party inte...
Third Party
Intermediaries
What is an intermediary? What do we mean by
that?
• a registered-broker dealer, or
• a register...
State Level
• States have an opportunity to save equity
crowdfunding by not requiring companies to use
intermediaries.
• I...
State/Federal Law
Interaction
How do state laws avoid the application of the
federal law?
• “intrastate” exemption.
• The ...
Intrastate Exemption
How do you qualify?
• must be a business incorporated or organized
in the state.
• must do business i...
Individual Investor
Limitations (WA)
• The greater of $2,000 or five percent of the
annual income or net worth of the inve...
Concerns
Will state-level crowdfunding result in a bunch of
fraud?
• There is always a risk of fraud.
• Do due diligence.
...
Investor Disclosure
The Washington law requires that investors sign
the following statement, conspicuously presented:
"I a...
Wisdom of the Crowds
• How does the wisdom of the crowds work?
• In theory, prospective investors exchange notes
on invest...
Conclusion
• State-level equity crowdfunding efforts are
underway across the country.
• See statecrowdfundinglaw.com.
• De...
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State-Level Equity Crowdfunding: The Next Big Deal

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A discussion of state-level equity crowdfunding.

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State-Level Equity Crowdfunding: The Next Big Deal

  1. 1. State-Level Equity Crowdfunding Joe Wallin Davis Wright Tremaine LLP joewallin@dwt.com @joewallin (206) 757-8184
  2. 2. What is it? • State-level equity crowdfunding is equity crowdfunding under a particular state’s law, not the federal law. • You are selling an equity interest in your business. • You are not soliciting gifts, or donations, or pre- selling goods (not the KickStarter model).
  3. 3. Why is it Important? • Equity crowdfunding for non-accredited investors is not yet legal at the federal level. • The JOBS Act created a statutory framework for it, but regulations are not yet final. • Even when the federal rules are final, federal equity crowdfunding is going to be too expensive for most startups.
  4. 4. Accredited Equity Crowdfunding • You could say that equity crowdfunding does exist now, but only for “accredited investors.” • Because there are a variety of platforms on the Internet that allow “accredited investors” to seek out investments. • For example, Angel List.
  5. 5. “Accredited Investor” For those of you who don’t know, an accredited investor is an individual: • With a $1M net worth excluding their primary residence, or • $200,000 in income in the last 2 years, with the expectation of the same in the year of investment, or $300,000 with spouse.
  6. 6. In Contrast to Federal Law: • State-level equity crowdfunding laws will be usable by startups. • Startups won’t have to spend fortunes to access the law. • The federal bill is constructed in such a way that the cost of capital will be prohibitive.
  7. 7. Example • To raise $1M under the federal law, estimates are that it will cost $250,000 in fees. • You must use an intermediary (8-10% of gross, SEC estimates). • Audited financial statements. • Lawyer fees. • etc.
  8. 8. Example • To raise $1M under Washington’s state crowdfunding law, costs will be substantially lower. • No third party intermediary required. • No audited financial statements. • You will need a lawyer. • Lawyer fees should be comparable to current angel rounds.
  9. 9. Third Party Intermediaries What is an intermediary? What do we mean by that? • a registered-broker dealer, or • a registered funding portal The federal crowdfunding bill requires that you work with one of these entities to conduct a federal equity crowdfunding.
  10. 10. State Level • States have an opportunity to save equity crowdfunding by not requiring companies to use intermediaries. • Intermediaries are expensive, and most companies raising money don’t use them now. • Washington’s statute doesn’t require the use of a portal or intermediary.
  11. 11. State/Federal Law Interaction How do state laws avoid the application of the federal law? • “intrastate” exemption. • The federal law doesn’t apply to offerings that are completely within one state.
  12. 12. Intrastate Exemption How do you qualify? • must be a business incorporated or organized in the state. • must do business in that state. • investors must come from that state. • offering can’t be solicited all over the Internet.
  13. 13. Individual Investor Limitations (WA) • The greater of $2,000 or five percent of the annual income or net worth of the investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; or • 10% of the annual income or net worth of the investor, as applicable, up to $100,000, if either the annual income or net worth of the investor is $100,000 or more.
  14. 14. Concerns Will state-level crowdfunding result in a bunch of fraud? • There is always a risk of fraud. • Do due diligence. • Know how risky this investment segment is. • Do not have unrealistic investment return expectations.
  15. 15. Investor Disclosure The Washington law requires that investors sign the following statement, conspicuously presented: "I acknowledge that I am investing in a high- risk, speculative business venture, that I may lose all of my investment, and that I can afford the loss of my investment";
  16. 16. Wisdom of the Crowds • How does the wisdom of the crowds work? • In theory, prospective investors exchange notes on investment opportunities on the Internet, enabling everyone to make more informed decisions. • Will it work for state-level crowdfunding? • It may. We have to wait and see.
  17. 17. Conclusion • State-level equity crowdfunding efforts are underway across the country. • See statecrowdfundinglaw.com. • Definite trend.

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