As of July 31, 2015, Virginia has joined a handful of states that allow businesses to raise capital through “crowdfunding,” subject to a few rules. The Jumpstart Our Business Startups (JOBS) Act of 2012 amended the federal securities laws to permit crowdfunding at the federal level, subject to rules to be adopted by the U.S. Securities and Exchange Commission (SEC). Three years later the SEC has still not adopted the required rules and their delay has prevented crowdfunding at the federal level. However, it has not prevented Virginia and several other states from drafting their own rules.
To take advantage of Virginia’s Intrastate Crowdfunding Exemption, a company must:
- be organized in Virginia,
- be headquartered in Virginia,
- raise the capital from Virginia residents only and
- provide annual reports to each crowdfunding investor for three years after the offering.
At least 20 days prior to the offering, the business is required to file with the Virginia State Corporation Commission a disclosure document, which must satisfy certain informational requirements and be provided to each prospective investor.
The offering can be conducted:
- through an online portal,
- through registered broker-dealers or
- directly by the company.
If the total offering is more than $500,000, the offering business may also be required to provide financial statements, to be reviewed or audited by an independent accounting firm. The offering company can raise, through the sale of stock or other equity, up to $2 million, with no more than $10,000 from each investor — unless the investor is qualified as an “accredited investor” under federal securities laws. The offering cannot last for longer than 12 months.
Companies that are formed outside Virginia, are headquartered in another state or want to raise capital from investors who live outside the commonwealth cannot rely on this new Intrastate Crowdfunding Exemption, but must rely on other state or federal securities exemptions until the SEC finally adopts federal crowdfunding rules.
Despite several states’ taking the lead in terms of crowdfunding, not everyone believes it to be a viable option to obtain new capital. Critics often cite administrative costs involved in raising funds from a large number of investors as outweighing the associated benefits of new capital. However, for small and start-up businesses, the new Virginia Intrastate Crowdfunding Exemption provides another option to raise capital without having to register securities or otherwise comply with federal or state exemptions that may impose requirements that are more difficult for small businesses to meet.