The Alabama Legislature passed a crowdfunding exemption bill this April, but the bill is still awaiting the Governor’s signature to become effective. Alabama is the eleventh state to enact legislation or develop regulations on this topic. Other states that have adopted crowdfunding exemption bills include, Washington, Idaho, Wisconsin, Michigan, Kansas, Georgia, Tennessee, Indiana, Maryland, and Maine.
Similar to the approach taken by other states, Alabama’s new legislation is intended to unlock capital and increase access to it for local small businesses and entrepreneurs. While it is still uncertain how successful state measures such as these will be in achieving the goal of increased capital access, the ability of small business owners to raise capital should be enhanced through the relaxation of some of the previous constraints. It is important to note, however, that regulatory agencies will require strict adherence to the new standards in return for less-regulated access to capital. Businesses using the Alabama crowdfunding exemption, and other, similar state exemptions, bear the burden of ensuring its sale of unregistered securities does not run afoul of restrictions governing them.
Businesses seeking to use the new Alabama exemption should be aware of several limitations and restrictions in the law. These include residency requirements, aggregate capital limits, and individual contribution limitations. The exemption applies to securities offerings made pursuant to the federal intrastate offering exemption under Section 3(a)(11) of the Securities Act of 1933 and SEC Rule 147.
In accordance with Rule 147, any business using the Alabama crowdfunding exemption must both be a resident of Alabama and be licensed to do business in the state. Likewise, the business may only solicit and sell investments to other residents of Alabama. This restriction, which if violated could destroy the safe harbor for the entire offering, is of particular interest to any business using general solicitation to publicize its securities offering. The use of internet resources, including social media, brings with it the risk of violation because of the nature of these methods of advertising and solicitation.
Businesses planning to use general solicitation in connection with the crowdfunding exemption must file a notice with the state 10 days prior to the first sale to comply with the exemption. However, if the business is not using general solicitation in connection with its offering, then the notice filing can wait until 15 days after the first sale.
The legislation places capital limits on both the amount of funds a business may raise through the exemption and also the amount such businesses may accept from an individual investor. Businesses may raise up to an aggregate of only $1 million in a 12-month period, and non-accredited investors may purchase only $5,000 or less of the exempted securities. However, the individual investor cap doesn’t apply if the investor is a Rule 501 “accredited investor.”
While the Alabama crowdfunding exemption is designed to help unlock capital for entrepreneurs within its borders, not everyone may take advantage of it. Investment companies, issuers subject to the 1934 Securities Exchange Act reporting requirements, investment advisors, and issuers subject to the “bad boy” disqualification rules are all barred from using the exemption. The “bad boy” disqualification standards applies not only to issuers that are deemed disqualified, but also to issuers whose officers, controllers, or promoters are disqualified.
The wave of state-based crowdfunding exemptions comes as the SEC’s own attempts to fully implement the JOBS Act requirements stall. Because these exemptions are wholly tied to the state in which they are adopted, businesses wishing to take advantage the exemptions must fully comply with the federal intrastate exemption as well as the state specific requirements. While the new exemptions in Alabama and elsewhere are enticing, they operate under a web of compliance that may be difficult to navigate for entrepreneurs.