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Crowdfunding Act – What about state securities laws?

On April 5, 2012 President Obama signed the JOBS Act into law. Part of the JOBS Act is the Crowdfunding Act, the full title of which is the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012”.  The SEC has been mandated with the task of drafting the crowdfunding rules and regulations by early 2013.


In addition to federal securities laws, each state has its own securities laws and governing body which oversees and enforces such laws.  The individual state securities statutes are not uniform – every state is different.  However, many aspects of federal securities law pre-empt state securities laws.  This is a major advantage to issuers because abiding by the myriad of disclosure and pre and post-filing requirements of the federal statutes and individual state statutes concurrently is an arduous and expensive effort.

For instance federal law does not pre-empt state law for a Rule 505 offering, but it does for a Rule 506 offering.  It is for this very reason, that Rule 505 is practically never used.  Also, pre-emption is never complete pre-emption.  Although the federal securities laws often pre-empt the state securities laws in the area of form and procedure of an offering, state regulators are always empowered to investigate and prosecute violations of their state anti-fraud securities provisions.  Moreover, state regulators can require certain disclosure filings and the payment of fees.  So even when completing a Rule 506 offering, the Issuer has to “blue sky” in the state’s it sells in by filing a copy of its Form D, a Form U-2 (consent to service of process) and pay a filing fee.

The Crowdfunding Act and State Securities Laws

In an offering under the Crowdfunding Act, which is internet based, investors will come from any or all of the 50 states.  It would be incredibly difficult and expensive for a Company to learn about and abide by the laws of each of these states.  Section 305 of the Crowdfunding Act (Relationship with State Law) amends Section 18 of the Securities Act of 1933, to include securities sold in a crowdfunding offering as “covered securities” for purposes of federal pre-emption of state law.

However, Congress clarified the preemption by specifically stating that the Section 305 relates “solely to State registration, document and offering requirements…and shall have no impact or limitation on other State authority to take enforcement action with regard to an issuer, funding portal, or any other person or entity using the exemption from registration provided by Section 4(6) of the Act.”

Consistent with other securities matters, the Crowdfunding Act ads specific language to the portion of Section 18 of the Securities Act granting the securities commission (or agency or office performing like functions) of any State the jurisdiction and authority to investigate and bring enforcement actions, respect to fraud or deceit, or unlawful conduct by, against any broker dealer, funding portal or Issuer in a crowdfunding offering.

Specific Provision as to Issuer’s Filing and Fee Requirements

In addition, the Crowdfunding Act adds a provision to Section 18 specifically prohibiting states from requiring a filing or charging a fee in connection with notice requirements, except for the home state of the Issuer and any state where more than 50% of all the investors reside.  I think it is unlikely that any state, other than the home state of the Issuer, would attract 50% of the investors.

Specific Provision as to Funding Portal’s Registration Requirements

The Crowdfunding Act amends Section 15 of the Securities Exchange Act of 1934 (Registration and Regulation of Broker Dealers) to prohibit any state from enforcing any law, rule or regulation against a registered funding portal for operating as such.  In layman’s terms, a state cannot require a funding portal to register as a broker dealer in that state nor can they prosecute a funding portal for acting as an unregistered broker dealer.  State’s can still investigate and prosecute funding portals for fraud.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

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