State-Level Equity Crowdfunding: The Next Big Deal
Davis Wright Tremaine LLP
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
• You are not soliciting gifts, or donations, or pre-
selling goods (not the KickStarter model).
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.
• 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
• For example, Angel List.
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.
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 federal bill is constructed in such a way that
the cost of capital will be prohibitive.
• 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,
• Audited financial statements.
• Lawyer fees.
• To raise $1M under Washington’s state
crowdfunding law, costs will be substantially
• No third party intermediary required.
• No audited financial statements.
• You will need a lawyer.
• Lawyer fees should be comparable to current
What is an intermediary? What do we mean by
• 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
• States have an opportunity to save equity
crowdfunding by not requiring companies to use
• 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.
How do state laws avoid the application of the
• “intrastate” exemption.
• The federal law doesn’t apply to offerings
that are completely within one state.
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
• 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.
Will state-level crowdfunding result in a bunch of
• There is always a risk of fraud.
• Do due diligence.
• Know how risky this investment segment is.
• Do not have unrealistic investment return
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";
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
• Will it work for state-level crowdfunding?
• It may. We have to wait and see.
• State-level equity crowdfunding efforts are
underway across the country.
• See statecrowdfundinglaw.com.
• Definite trend.