New rule permits equity crowdfunding in South Carolina
South Carolina recently joined 27 other U.S. states or jurisdictions in permitting crowdfunding through the sale of securities in capital-raising transactions to both accredited and non-accredited investors.
Prior to this new South Carolina rule, you could donate to your favorite cause or startup business through a website and get a T-shirt or maybe a signed poster by a movie star, but you could not invest in the stock of your favorite startup. This is because federal and state securities laws prohibit the sale of securities, like stock and certain promissory notes, unless those securities have been registered with the government or are exempt from registration.
It has been more than three years since Congress passed the JOBS Act, and almost two years since the SEC issued its 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. Until the SEC completes its regulations to allow equity crowdfunding to non-accredited investors, this form of raising money remains illegal if done on a nationwide basis. However, if you are a South Carolina business and interested in equity crowdfunding to non-accredited investors on a local basis, you now have some options.
The South Carolina Intrastate Offerings Exemption (Crowdfunding) Rule 13-206 creates an exemption for certain crowdfunding transactions in South Carolina, including the sale of stock in South Carolina businesses through a website.
General overview of the new South Carolina Crowdfunding Rule:
- For-profit businesses may raise up to $1 million annually.
- Businesses must be formed and based in South Carolina.
- Only South Carolina residents may purchase the securities and be solicited.
- Prior to any offer or sale, the business must obtain from the prospective purchaser documentary evidence that the investor is a South Carolina resident.
- An offering placed on a publicly available website or actively promoted on social media and viewable by out-of-state residents is impermissible under the rule.
- A notice/form must be filed with the state, along with a $300 filing fee.
- Where advertising will be used, the notice must be filed five days before advertising commences.
- The capital-raising transaction must comply with federal Section 3(a)(11) and SEC Rule 147.
- Non-accredited investors may invest no more than $5,000 in one business. There is no limit for accredited investors.
- The business must believe the purchasers are purchasing for investment (as opposed to purchasing for purposes of immediately reselling or distributing the securities).
- Commissions for raising capital may be paid only to registered broker-dealers – i.e., a business cannot pay a “finder” or “consultant” a commission for arranging a sale of stock unless that person has the appropriate licenses and registrations.
- All funds received from investors shall be deposited into a bank or depository institution authorized to do business in South Carolina, and all of the funds shall be used in accordance with representations made to investors.
- Investment companies and “public” SEC companies may not use the rule.
- The rule cannot be used by “bad actors,” such as persons found guilty of securities fraud.
Businesses considering taking advantage of the new South Carolina crowdfunding rule should seek the counsel of professionals experienced with South Carolina and U.S. securities and corporate finance laws. Conducting a crowdfunding offering through a website involves complex rules and regulations, the violation of which can result in civil sanctions and criminal prosecution.
The North American Securities Administrators Association (NASAA), a voluntary association devoted to investor protection and whose membership consists of 67 state, provincial and territorial securities administrators in the U.S., Canada and Mexico, has published an Investor Advisory on Equity Crowdfunding (bit.ly/crowdfunding-advisory), which should be read by those considering investing in crowdfunding securities or raising capital through a crowdfunding offering.