RD195 - Equity Crowdfunding in Virginia – June 29, 2018

Executive Summary:

Chapters 400 and 3 54 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 2018 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 limited amounts of money. Effective July 31, 2015, the Commission, by rule, adopted the Intrastate Crowdfunding Exemption ("ICE") that establishes the exemption and sets forth certain conditions and filing requirements to be met by the offerors and purchasers of the security. ICE, under certain specified conditions and to the extent permitted by the Commission, exempts the securities offered and sold in the crowdfunding offering from the securities registration requirements of the Act and also exempts broker-dealers and agents from the registration requirements of the Act. As of the date of this report, the Commission has not received any notice filings under ICE.

With respect to crowdfunding regulations on the federal level, the Securities and Exchange Commission's ("SEC") 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. 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"). In 2017, the SEC 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. Rule 147A provides an alternative way for small businesses to raise capital locally and expands the number of companies that are able to seek financing through intrastate offerings as compared to Rule 147. 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.

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 examined further.

(*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 in-state 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.