It appears that the Washington D.C. Department of Insurance, Securities and Banking (DISB) may have little faith in the promise of the SEC Chairman, Mary Jo White, promise to deliver final Title III crowdfunding rules by the end of the year. How else would you explain their decision to propose a D.C. Intrastate Exemption?
Late Friday the 8th the DISB, quite under the radar, published a set of proposed rules which would create a D.C. Intrastate Exemption. According to Chester McPherson, the acting commissioner of the DISB, “the goal of this proposed rulemaking is to provide an innovative way of raising capital that is both beneficial to the District’s small business community and contains the appropriate safeguards for investors.” While I can certainly side with Mr. McPherson’s sentiment, I wouldn’t exactly call the proposed rules “innovative.”
The rules are, in terms of material provisions, substantially similar to a majority of the enacted and other proposed intrastate exemptions (for a side-by-side comparison, see the updated “proposed” chart HERE). They allow for issuers to raise up to a maximum of: $2,000,000 (if they provided independently audited, GAAP based, financials); $1,000,000 (if they provided independently reviewed, GAAP based, financials); or $500,000. The rules also provide investment caps for individual investors of: $10,000 (if the purchaser’s annual gross income is less than $100,000); or $25,000 (if the purchaser’s annual gross income is less than $200,000). One odd difference in the proposed rule 254.2 which ties “disqualification” to Regulation A under the Securities Act of 1933 (17 C.F.R. § 230.262) rather than Rule 506(d) as provided in the other intrastate exemptions. Another provision that should be noted is Section 256.1 which provides that:
“Any person acting as an Internet site operator must be an issuer, broker-dealer licensed in the District, or a Funding Portal that is in compliance with all District, SEC and FINRA requirements, including if it is a Funding Portal, making any required notice filings with the Department of Insurance, Securities and Banking”
The proposed rules do not go into what is meant by “Internet site operator” which, in my opinion, would make this rule virtually impossible to follow. Furthermore, there appear to be some other minor bugs in the proposed rule language that need to be worked out. For example, the individual investor cap amounts noted above do not appear to have a time limit (e.g. time limit), which can only be read as meaning the cap amount is the most an individual can invest in the issue ever. Second, Section 251.1 provides that general solicitation may be used to offer securities for sale so long as the issuer files notice at least “at least 20 calendar days before any sale of the security.” Easy enough, except Section 253.1 provides that the issuer shall file notice with the commission (along with several other documents) “no later than 20 calendar days prior to offer or sale of any offering made in reliance on the exemption under this subsection.”
Minor issues aside, it is good to see D.C. joining the intrastate movement. It begs the question however, why now??? All information from the SEC has been that we can expect to receive final Title III rules by the end of the year so what could be the impetus for the DISB to lead this charge now. Maybe it thinks that the $1,000,000 raise cap under Title III is too small even if passed. Or perhaps, like many of us, the DISB is simply tired of waiting on SEC promises. Now this is all pure speculation of course, but whatever the reason I am very interested to see how the SEC will react to the DISB’s proposed rules.
Special thanks to my one of my Intrastate Exemption comparison chart co-authors, Andrew Stephenson of Crowdcheck, for discovering the proposed rules and helping to update the “proposed” exemption comparison chart available HERE.