The JOBS Act (enacted in 2012) sought to ease the burdens of capital formation by relaxing various federal securities registration requirements. Despite these changes, a company intending to raise equity capital may still find the various federal exemptions unhelpful or unavailable. However, Georgia and a number of other states have addressed these challenges by enacting state laws or rules that permit the use of some form of crowdfunding for pursuing equity investment.
Georgia is one of the leaders in this area. The Invest Georgia Exemption (“IGE”) provides a broad crowdfunding exemption that allows issuers to raise amounts up to $5 million (with integration of all investment funds received in the previous twelve months). This is the largest cap of any of the various state crowdfunding exemptions and has been a major benefit to local companies raising equity funds. It has also helped attract companies from out of state to relocate to Georgia. Under IGE, companies may raise up to $10,000 from each unaccredited investor and unlimited amounts from each accredited investor, subject to the overall cap. The issuer must be registered with the Georgia Secretary of State (so no partnerships or sole proprietorships, and all funds must be deposited into a bank authorized to do business in Georgia.
In order to remain exempt from federal registration requirements, an offering taking advantage of IGE or the crowdfunding rules of any other state must also qualify as an intrastate offering under the federal securities laws. The applicable federal rules provide that to be considered an intrastate offering, the issuer must have its principal place of business in-state and satisfy at least one of the following requirements:
- derive at least 80% of its gross revenues from the operation of a business located in-state or from the rendering of services in-state;
- have at least 80% of its assets located in-state;
- use at least 80% of the net proceeds from the offering towards the operation of a business in-state or the rendering of services in-state; or
- have a majority of its employees based in-state.
Assuming that an offering meets the requirements of IGE and the federal intra-state offering criteria, one of the major advantages of IGE is that it specifically allows what is called “general solicitation” – i.e., newspaper ads, postings to web sites, etc. With only a few exceptions, the various federal private offering exemptions still prohibit general solicitation, which is a substantial barrier to raising equity. Consequently, the ability to use general solicitation in a qualifying IGE offering is a major advantage.
A company wanting to utilize IGE or any other state crowdfunding rule needs to have competent counsel to navigate the details of the specific exemption and to ensure that the offering qualifies under federal rules as an intrastate offering. The above information is not a complete list of all of the requirements; other provisions of IGE include requirements for specific information that must be provided to investors and a requirement that the company file appropriate forms and documentation with the Georgia Secretary of State before engaging in the offering. So – as is always the case when raising equity funds – good professional advice is essential (shameless self-promotion!).