Oregon Releases Proposed Intrastate Crowdfunding Exemption Rules; BUT Will They Be Useful?

Flag of OregonWhile just recently uploaded, sometime in October David Tatman, the administrator of the Division of Finance and Corporate Securities, filed a “Statement Of Need And Fiscal Impact” with the Oregon Secretary of State proposing , what he refers to as, “Community Public Offerings” (CPOs) … which, between you and I, are intrastate crowdfunding offerings. While I applaud Administrator Tatman’s efforts in pushing intrastate crowdfunding forward, and his stated purpose for the proposed legislation, in my humble opinion this legislation misses its intended mark.

I have looked at enough of these intrastate rules to know one thing, there needs to be a trade-off between the amount of money an issuer can ultimately raise and the amount of money/time the issuer will need to spend (in terms of rules and compliance) in order to raise such funds. Administrator Tatman apparently believes the same as noted in his statement of purpose which provides:

The Opportunity for Oregon: “Community Public Offerings” (CPOs):

The SEC allows for intrastate direct public offerings and has since 1934—the nation’s original “crowdfunding law”—but the process is prohibitive for those raising less than $250,000, which are the vast majority of startups and small business that build vibrant communities, especially in rural Oregon, and create our state’s jobs.

Oregon’s new exemption will create a cost-effective, appropriate pathway for registered Oregon small businesses and startups to raise limited amounts of capital (securities of all kinds) directly from Oregon residents.

Business OregonI originally read that statement of purpose and thought to myself, “ok, they are focused on creating an fast and cheap way for local companies to raise small amounts of capital so the process must be pretty simple and have minimal disclosures.” Well, not so much. The proposed rules require a slew of specific disclosures to be made by the issuer (including detailed information regarding key executives and majority equity holders) as well as the filing of a “post-sale” report with respect to the offering and the delivery of semi-annual reports to investors (again which require detailed information regarding key executives and majority equity holders).

Now these may not be unreasonable requests in terms of the gambit of current intrastate crowdfunding regulations, but when you consider that the issuer is only able to raise a maximum of $250,000, these proposed rules can hardly be described as “cost-effective.” In fact, as far as other regulations go, Oregon’s disclosure/reporting requirements land on the more onerous end of the spectrum while its maximum offering cap is the lowest of them all. Not a good cost benefit relationship if you ask me. Moreover, and I will give them the benefit of the doubt that it was an oversight, the proposed rules don’t technically limit the $250,000 cap to any particular period (e.g. during a 12-month period). As a result, by the straight letter of the current proposed rules, an issuer is only entitled to raise a maximum of $250,000 using this exemption, period.

There are some other irregularities with the proposed rules as well, such as the fact that it alludes to the potential use of an escrow and the establishment of a minimum offering amount, while simultaneously alluding to the fact that the internet portal can allow for investor funds to be delivered directly to the issuer. I won’t go into detail on these irregularities in this post though as I am not trying to nit-pick the drafters in any way. I do think however, that the proposed rules are going to need some significant revision/clarification before they are ready for practical use.

$50 GrantLike many bills I feel like these rules began with a good mission statement and somehow lost focus in the execution. If Administrator Tatman is only trying to provide a “cost-effective.” means for raising small amounts of capital, than in my opinion Administrator Tatman should re-examine (and scale back) the required disclosures/deliveries. If, however, Administrator Tatman considers these disclosures/deliveries as essential, then I would recommend raising the cap to at least $1,000,000. If not, I see no reason why an issuer wouldn’t by-pass the proposed exemption altogether in favor of using Rule 504 (i.e. under Rule 504 an issuer would have to provide virtually the same (if not less) disclosures, but would be able to raise up to $1,000,000 and would not have to provide ongoing reports/disclosures).

Again I sincerely applaud the effort as I know how difficult this balancing process can be. That being said, I do believe that Oregon needs to focus on one goal, and revise the proposed rules accordingly, or they will end up taking something that was a good idea and turning it into legislation that no-one will use.

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Anthony Zeoli  2Anthony Zeoli is an experienced transactional attorney with a national practice. Specializing in the areas of securities, commercial finance, real estate and general corporate law, his clients range from individuals and small privately held businesses to multi-million dollar entities. Mr. Zeoli is also an industry-recognized crowdfunding and JOBS Act expert who, most recently, has drafted a bill to allow for an intrastate crowdfunding exemption in Illinois, a copy of which can be found on his website: IllinoisCrowdfundingNow.com. Anthony is also currently actively involved with the entrepreneurship program at the University of Illinois at Chicago as both a mentor and a student advisor and is an active advisory board member of the New York Distance Learning Association (NYDLA).

  • Amy Pearl

    Hey Anthony…

    Well, you (mostly) nailed it. I am the CEO of Springboard Innovation and I am the one who started this whole process for Oregon’s exemption back in March. I invited a statewide team of small business service providers and incubators to explore what our law should include. We did establish goals regarding the capital gap we were trying to fill. The low cap on the raise was intentional, exactly for the reasons you outline… to streamline and simplify. You ask…What happened?

    Well, my perspective is this: The challenge appears to be everyone’s (everyone related to securities that is) traditional frame of reference. While I am sure you know that most people do not understand this stuff, the issue becomes one of trying to get those who do to use a new framework for thinking about it. What they tend to do, from the regulators to the litigators, is use an old set of references… “Well, when people raise capital they typically provide all these disclosures, and do quarterly reporting, and share this and that with potential investors.” As if that’s the only way it can happen because that’s what is required when one raises millions. The list of disclosures only grew as we worked together and more “experienced” folks (litigators) entered the process.

    Your point is exactly the one we have tried to make, namely, the amount is intentionally low so that it can be streamlined for the issuer. But, to share with you the experience I had speaking directly with both the state regulators (David Tatman did not write these Rules, by the way, but he will write the final ones after public comment) and the Securities litigators of the State Bar, it took quite a bit of time for them to even begin to consider this idea as viable.

    In other words, getting them to this place was considered quite a win.

    In fact, this started out as law that would move through the legislative process. Representative Tobias Read was to be the chief sponsor. In very little time it morphed into Administrative Rules, for a variety of reasons, which to us was exciting since it cut nearly 14 months off the wait time. It also allows for easier change in the future, presumably because we will be able to demonstrate with data the need for a raise in the caps. We are meeting again in a few weeks to iron this out.

    We do have over a dozen businesses, including small farms, who plan to use the exemption the minute it becomes legal. An entire crew of professionals are working to understand the Rules and help a dozen entrepreneurs use them. On January 22 a statewide party is planned (in six cities) to celebrate those businesses throughout the entire state using the exemption, and in each citizens will be allowed to invest. We’re excited about it, plan for success, and will seek changes in the future. More can be found at http://www.hatchoregon.com.

    We are also holding a national conference called a Community Capital Convergence (ComCap:US) May 1, 2, and 3 here in Portland, OR. I look forward to talking about your presence there as well. These exemptions are going to be important to track and support. State leaders need to collaborate as we move into making these laws benefit those small, social, and start-up enterprises that improve communities across the country.

    Stay tuned!

    • Anthony Zeoli

      Amy,
      Thank you for filling me in, and my apologies for mis-crediting who wrote the bill (should it be your office then?). I absolutely understand the battle you are fighting, both to educate the public/regulators and to push this type of legislation through. I am fighting a similar battle here in Illinois. I also understand how a good idea can get buried with compliance issue when us lawyer get in the room 😉 So I congratulate you for getting to this through and I look forward to seeing how it works in practice. Please keep me updated and if there is ever anything I can do to help please feel free to contact me.
      One quick question, as I noted, if there is going to be the extra compliance why would your entrepreneurs not just do a Rule 504 offering?
      Anthony Zeoli

      • erinely

        one of the differences for the Oregon law is there is limited public advertising, you do not have to be an accredited investor, this is legal local investing for the 99% essentially. Some of Rule 504 would not work in this instance.

        • Anthony Zeoli

          So the public solicitation component is the key then. That would explain it.

          You may still want to address the 1 issue I noted regarding the lack of a time frame on the cap (making it essentially a lifetime cap).

          • erinely

            Actually Anthony I’m not sure about that. It states that you can do an initial offering for 12 months and it can be extended to 24 months.

            (4) The duration of an OIPO will not exceed twelve (12) months, unless the issuer applies to extend the offering for a period not to exceed twelve (12) additional months. An issuer may apply to extend the offering by submitting an amended filing with the Directorin conformance with these rules.

          • Anthony Zeoli

            You are correct, that is with respect to the duration of a particular OIPO offering. However, it also states in 441-035-0090(6) that “The aggregate purchase price of all OIPO securities cannot exceed two hundred fifty thousand dollars ($250,000).” It doesn’t say, for example, $250,000 per year, so the only way I can read this is as a lifetime cap; unless that was the intent.