Are You Eligible to File for Texas Crowdfunding?
If you live in Texas and want to raise capital through equity crowdfunding, your opportunity is fast approaching. We all know the Texas State Securities Board unanimously voted to allow intrastate crowdfunding, but you may not know what this means for you. Once all of the high fives and cheering subside, some entrepreneurs may be faced with the realization of not knowing where to start and each day you let pass is costing you money. Once the gates are lifted, chances are there will be an influx of non-accredited investors browsing and pledging on Texas crowdfunding platforms. You need to start preparing today to be ready for these eager investors.
The following filing information for Texas intrastate crowdfunding was taken directly from the Texas State Securities Board (TSSB) website. Equity crowdfunding is new for everyone, and before you apply you need to know if you’re eligible and meet the official requirements. Pay close attention because it’s time to learn if you’re eligible for Texas intrastate crowdfunding.
Texas Intrastate Crowdfunding Issuer Eligibility
1.) First and foremost, Texas intrastate crowdfunding exemption Rule 139.25 is only eligible for “an entity that has filed a certificate of formation with the Texas Secretary of State and is authorized to do business in Texas.” It is very important to know what kind of businesses can and can’t participate in Texas intrastate crowdfunding. Here is a quick list:
Most Common Eligible Companies Non-Eligible Companies
-Corporations -Sole Proprietors
-LLC’s -General Partnerships
-Limited Partnerships -Joint Ventures
If you need assistance in selecting your business structure, please reference the Secretary of State’s website.
2.) In addition to the type of business you operate, your business must be authorized to do business in Texas. You cannot participate in Texas Intrastate crowdfunding if your charter or certificate has been terminated or forfeited because of:
-a failure to file a report
-nonpayment of franchise tax or penalty
-failure to maintain a registered office or agent
Other factors that will not permit you to use the Rule 139.25 exemption as well. These include:
-engaging in or proposing to engage in the business of investing, reinvesting, owning, holding, or trading in securities. Such a company would probably be an investment company;
-being subject to the reporting requirements of the Securities and Exchange Act of 1934, Section 13 or Section 15(d), 15 U.S.C. §78m and §78o(d). These are generally referred to as SEC reporting companies; or
-being a company that has not yet defined its business operations, has no business plan, has no stated goal for the funds being raised, or that plans to engage in a merger or acquisition with an unspecified business entity. These types of companies are usually referred to as blank check companies or blind pools.
3.) There are also disqualifications for “Bad Actors” and “Other Offerings.” Bad Actors refers to the problems with the individuals in charge of the offering. Other Offerings refers to the individuals in charge having recent involvement with any other securities offerings. As for the Bad Actors rule, a disqualification will occur if the issuer or entities:
-within the last five years, has filed a registration statement which is the subject of a currently effective registration stop order entered by any state securities administrator or the SEC;
-within the last five years, has been convicted of any criminal offense in connection with the offer, purchase, or sale of any security, or involving fraud or deceit;
is currently subject to any state or federal administrative enforcement order or judgment, entered within the last five years, finding fraud or deceit in connection with -the purchase or sale of any security; or
-is currently subject to any order, judgment, or decree of any court of competent jurisdiction, entered within the last five years, temporarily, preliminarily, or permanently restraining or enjoining such party from engaging in or continuing to engage in any conduct or practice involving fraud or deceit in connection with the purchase or sale of any security.
The Other Offerings rule will render Rule 139.25 unavailable if:
-a control person of the issuer is also a control person of another issuer that has made a securities offering in Texas within the previous 12‑month period;
-a control person of the issuer is also a control person of another issuer that is concurrently conducting a securities offering in Texas; or
-the proceeds of the offering will be combined with the proceeds of a securities offering by another issuer as part of a single plan of financing.
4.) If you operate an eligible company, and you’re authorized to do business in Texas, the TSSB still wants to confirm your securities offering is local. In fact, the SEC requirements begin at this stage as well with SEC Rule 147. To satisfy Rule 139.19(b)(1) and SEC Rule 147, your company must prove:
-at least 80% of your gross revenues during the most recent fiscal year prior to the offering are derived from the operation of a business in Texas;
-at least 80% of your assets at the end of the most recent semiannual period prior to the offering are located in Texas;
-you will use at least 80% of the net proceeds of this offering in connection with the operation of its business within Texas; and
-the principal office of the issuer is located in Texas.
I know this may have been a lot to handle, and there is more to learn, but the Texas State Securities Board is taking every precautionary step they can for a good reason. Nobody wants to deal with a fraudulent company trying to acquire capital, so requiring such specific information is a surefire way to ensure every issuer is legit. When you think about it, federal Title III equity crowdfunding is going to require as much or even more paperwork than Texas intrastate crowdfunding. If everything goes well in Texas, to which all of the rules and requirements appear to be structured and firm, hopefully the SEC will notice sign off on nationwide Title III equity crowdfunding.
This is a very exciting time for any qualified entrepreneur in Texas. Thank you for reading, and if you are eligible for Texas intrastate crowdfunding, start preparing now because the portals open in a couple of weeks!