RD248 - Equity Crowdfunding in Virginia – July 20, 2020

Executive Summary:

Pursuant to Chapters 400 and 354 of the 2015 Virginia Acts of Assembly, the Commission hereby submits its final 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 authorized the Commission to adopt, by rule or order, an exemption for certain offerings of securities by small and startup companies from the securities, broker-dealer and agent registration provisions of the Virginia Securities Act ("Act"). 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 established the exemption and set forth certain conditions and filing requirements to be met by the offerors and purchasers of such exempted securities. As of the date of this report, the Commission has not received any notice filings under ICE.

Akin to ICE, 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)(*1) of the Securities Act of 1933 and its safe harbor regulation, Federal Rule 147(*2) ("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 can seek financing through intrastate offerings as compared to Rule 147.

In past annual reports, the Commission indicated that possible legislative and rule changes that adjust the Virginia crowdfunding exemption provisions merit consideration; namely, that the feasibility of adding new Rule 147A as an alternative for federal compliance for intrastate crowdfunding offerings in Virginia should be examined further.

Heretofore, Chapters 400 and 354 contained a "sunset provision" under which authorization for the crowdfunding exemption would expire on July 1, 2020, absent further action by the General Assembly. In the 2020 Session, the General Assembly passed legislation, Chapters 331 and 279 of the Virginia Acts of Assembly, repealing the sunset provision of Chapters 400 and 354 and authorizing the Commission to broaden the ICE exemption to apply to securities offerings conducted pursuant to Rule 147A. This would expand the exemption's availability to small businesses that are based in Virginia but formed under the laws of a different state.

On June 25, 2020, the Commission adopted amendments to the ICE regulation effective July 1, 2020. Pursuant to Chapters 331 and 279, the amendments widened the availability of the exemption by making it available to issuers that qualify for the Rule 147A intrastate exemption.
(*1) 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."
(*2) 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.