Why Illinois Should Pass the Intrastate Crowdfunding Exemption Bill
The bill protects investors while providing clarity for crowdfunding portals
Last week, I was fortunate enough to attend a press conference announcing the introduction of HB 3429 in the Illinois General Assembly. HB 3429 is an intrastate crowdfunding exemption proposal that would allow Illinois companies to make certain investment offerings available to Illinois residents in small blocks.
As the founder and CEO of PeerRealty, a Chicago-based real estate crowdfunding platform, I’m not exactly a neutral party. Anthony Zeoli, who has worked on the language of this bill for months, is actually one of our attorneys, so there’s no question that I have a dog in this fight. Putting all that aside, I strongly believe that HB 3429 can be, as Elliot Richardson of the Small Business Advisory Council (SBAC) has said, “an absolute game-changer for the Illinois small business community.” I urge the Illinois General Assembly to pass the bill at the earliest possible opportunity.
First, a bit of background on the current regulatory regime that crowdfunding platforms operate under. PeerRealty, like many equity crowdfunding platforms nationwide, operates under Title II of the federal JOBS Act, as implemented by the SEC in Regulation D. Rule 506(c). Under these current regulations, crowdfunding platforms may use general solicitation or advertising to market securities offerings to investors, but these offerings may only be sold to accredited investors (generally individuals with an income of over $200,000 for the last two years or a net worth of over $1 million excluding their primary residence). The platform must also take “reasonable steps” to verify that all purchasers are accredited investors. The JOBS Act, which was passed in 2012, also contains a Title III which would allow certain non-accredited investors to invest under limited circumstances; however, this section has not yet been implemented by the SEC.
While the SEC is waiting to act, several states have passed their own intrastate crowdfunding exemptions. While the details of these bills obviously vary from state to state, the bills generally allow crowdfunding platforms to make offerings without subjecting the platform to the stringent registration and compliance requirements that large public companies must meet, provided that the offerings are made by companies domiciled to do business in that particular state and are limited to investors in that state. Some intrastate crowdfunding exemptions allow non-accredited investors to invest, but generally limit the amounts that they can invest to relatively small sums.
The Illinois Bill
As I mentioned above, Anthony Zeoli, an industry-recognized crowdfunding attorney (who we’re fortunate enough to have as one of our attorneys at PeerRealty), has been working for months to draft language for an Illinois intrastate crowdfunding exemption proposal. On February 26, 2015, the proposal was filed by Rep. Carol Sente in the Illinois House of Representatives.
The proposal would create a new intrastate exemption for Illinois securities offerings, provided that the issuer has met certain requirements. First, the current bill states that the aggregate purchase price of all securities sold by an issuer within any 12-month period that rely upon the intrastate exemption may not exceed $3 million, unless the issuer has made audited financial statements available to prospective purchasers, in which case the limit is $5 million. Zeoli notes, though, that these limits will likely be changed to $1 million and $4 million, respectively. The bill would also allow non-accredited investors in Illinois to invest in offerings, but no issuer would be able to raise more than $5,000 from any individual non-accredited investor per year. There was some confusion on this point at the press conference - while a non-accredited investor can invest more than $5,000 per year, they can only invest $5,000 per year with any one issuer.
The bill would also regulate Illinois crowdfunding portals, while clarifying the activities that these portals are permitted to conduct. Portals would be required to establish “commercially reasonable measures” to ensure that access to these offerings is limited to Illinois residents. This could include obtaining a copy of an investor’s Illinois drivers’ license or state ID, or verifying the investor’s IP address. The proposal also exempts crowdfunding portals from registration as a broker-dealer or an investment adviser, provided that the portal meets certain requirements.
The main features of the bill work hand-in-hand to benefit both investors and crowdfunding portals. The $5,000 per year limit that issuers can raise from any individual non-accredited investor ensures that unscrupulous portals will not be able to take undue advantage of these investors. The flexible funding caps also provide portals with incentive to make audited financial statements available to investors. Getting these statements requires additional time and expense, so the larger funding cap for these offerings will allow more investors to participate while compensating the issuer for the added expense.
As the owner and CEO of a crowdfunding portal, what I appreciate most about the proposal is the clarity that it would provide for our business. As I mentioned, the bill lists certain activities that a portal can conduct without being required to register as a broker-dealer or an investment adviser. For example, the bill makes clear that a portal does not need to register as a broker-dealer or investment adviser so long as it does not (among other things) collect or hold funds, compensate employees or agents based on the solicitation of securities offered on the portal, and as long as the portal is not compensated based upon the amount of securities sold. We have been waiting for the SEC to provide this type of guidance for three years.
Obviously, getting legislation introduced, much less passed, requires compromise. In whole, though, I believe that the Illinois intrastate crowdfunding exemption proposal strikes a balance between providing important investor protections and the flexibility that Illinois small businesses and entrepreneurs need to raise capital. Many states have already passed intrastate crowdfunding exemptions, and this bill takes those states’ experiences into account. The bill would be a great help for Illinois small businesses looking to raise capital, and I urge the Illinois General Assembly to pass it as soon as possible.