It has been more than two years since Congress passed the JOBS Act, and almost one year since the SEC issued proposed rules for equity crowdfunding. With the SEC moving slowly on federal crowdfunding rules, many states are choosing to bypass the SEC and adopt their own crowdfunding laws, including states that South Carolina competes with for businesses, jobs and investors.
Twelve states have passed crowdfunding laws, and another 12, including D.C., have either legislation pending or have started studies on legislation.
In early 2014, state Rep. Dwight Loftis of Greenville introduced House Bill 4799, which would create an intrastate offering exemption for South Carolina businesses and investors. Because House Bill 4799 was introduced in the second year of a two-year session, the bill died last June and must be reintroduced, which Rep. Loftis plans to do in January.
Loftis’ bill is patterned after rules recently proposed by the District of Columbia Department of Insurance, Securities and Banking to permit crowdfunding within the District of Columbia. The proposed D.C. rules, which are intended to facilitate small-entity capital-raising, would permit D.C.-based startups and small businesses to engage in equity-based crowdfunding with D.C. residents through online platforms.
The proposed rules would allow businesses in D.C. that are organized under D.C. law and authorized to do business in D.C. to raise up to $2 million in any 12-month period from D.C. residents. The amount businesses would be permitted to raise under the exemption would be based primarily on the level and quality of financial disclosure provided (from $500,000 for a company with basic financial statements to up to $2 million for a company with audited financials).
Non-accredited investors (individuals with annual income below $200,000 or net worth below $1 million) with annual income under $100,000 would be limited to investing $10,000 in any 12-month period, and those with annual income between $100,000 and $200,000 would be limited to investing $25,000 in any 12-month period. Non-accredited investors who are not natural persons, such as trusts, LLCs and partnerships, would be required to have annual gross income or net worth exceeding $1,000,000 to be eligible.
Like the proposed D.C. rules, the South Carolina bill would permit crowdfunding if done solely within South Carolina, would allow businesses to advertise their investments throughout the state and, most importantly, would allow South Carolina businesses to raise capital from everyone, even non-accredited investors. Similar to the D.C. rules, the South Carolina proposal would place limits on the amount of money that could be raised from non-accredited investors: up to $15,000 in any calendar year, with no more than $5,000 invested in a single business.
South Carolina has an excellent opportunity to enhance the capital markets for small businesses at its next legislative session by passing an intrastate offering exemption similar to that which was introduced last legislative session.
Further, South Carolina must send a message to investors and businesses throughout the U.S. that it will support legislation aimed at creating economic opportunities and enhancing the competitive positions of businesses and investors located in the Palmetto State.
