RD174 - Equity Crowdfunding in Virginia – June 30, 2017

Executive Summary:
Chapters 400 and 354 of the 2015 Virginia Acts of Assembly(*1) direct that,

“[T]he State Corporation Commission ("Commission") shall report by July 1, 2016, and each year thereafter until 2020, to the Chairmen of the House and Senate Commerce and Labor Committees on the implementation of this act, including (i) any updates on federal action, (ii) the number of filings in the Commonwealth made pursuant to this act, (iii) the means, median, and total values related to money raised under offerings made pursuant to this act, and (iv) any recommendation for revisions to this act.”

The Commission is pleased to submit its 2017 annual report to the Chairmen of the House and Senate Commerce and Labor Committees on the implementation of the crowdfunding legislation.

Chapters 400 and 354 authorize the Commission to adopt, by rule or order, an exemption for certain offerings of securities by small and startup companies from the registration provisions of the Virginia Securities Act ("Act").(*2) These small offerings, known as equity "crowdfunding," are intended to cover the offer and sale of securities to a broad base of persons who invest small amounts of money. Effective July 31, 2015, the Commission, by rule, adopted the Intrastate Crowdfunding Exemption ("ICE") that provides the exemption and sets forth certain conditions and filing requirements to be met by the offerors and purchasers of the security. As of the date of this report, the Commission has not received any notice filings under ICE.

ICE is closely tied to the federal intrastate exemption in that it is conditioned upon compliance with Section 3(a)(11)(*3) of the Securities Act of 1933 and its safe harbor regulation, Federal Rule 147(*4) ("Rule 147") The Securities and Exchange Commission ("SEC") recently made it easier for a company to qualify for the federal intrastate exemption by adopting updates to its Rule 147 and establishing new Rule 147A. General Assembly legislation and Commission rule amendments would be necessary in order for companies that rely on new Rule 147A to qualify for Virginia's ICE.

With respect to crowdfunding regulations on the federal level, the SEC's Regulation Crowdfunding exemption went into effect on May 16, 2016. This federal rule permits companies to use crowdfunding offerings to raise money from investors residing in any state. However, on April 26, 2017, a bill was introduced in Congress that could result in significant changes to the SEC's Regulation Crowdfunding. The Financial CHOICE Act of 2017(*5) ("CHOICE Act") is a major proposed revision of financial services regulation, including certain small business capital formation policies. Subtitle P of the CHOICE Act proposes substantive changes to federal crowdfunding rules that include removal of individual and aggregate investment caps, elimination of the need for a registered intermediary, less disclosure to investors, reduced reporting to the SEC and prohibiting states from collecting fees in connection with notice-type filings.

The Commission has no recommended changes to Chapters 400 or 354 at this time. The Commission believes that possible legislative and rule changes that adjust the Virginia crowdfunding exemption provisions merit consideration. Namely, the Commission believes that the feasibility of adding new Rule 147A as an alternative for federal compliance for intrastate crowdfunding offerings in Virginia should be investigated in detail.
(*1) Codified in Va. Code § 13.1-514 ("Chapters 400 and 354").
(*2) Va. Code § 13.1-501 et seq.
(*3) 15 USC 77c(a)(11) provides an exemption from registration for "[a]ny security which is part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within, or, if a corporation, incorporated by and doing business within, such State or Territory."
(*4) Rule 147 is a federal rule that permits small companies to raise a limited amount of funds instate without registering securities with the SEC. Companies can rely on Rule 147 as a safe harbor under Section 3(a)11 of the Securities Act of 1933, or intrastate offering exemptions.
(*5) H.R. 10, 115th Cong. (2017)