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Abstract

States, through the recent implementation of intrastate crowdfunding exemptions, have become significant players in the creation of an equity crowdfunding industry in the United States. Crowdfunding is an alternative capital-raising source for businesses and entrepreneurs, where investing and capital-raising takes place through solicitations of small amounts of money from a large number of people, typically via the Internet. While the federal crowdfunding provisions in Title III of the federal Jumpstart Our Business Startups Act (“JOBS Act”) have received much publicity, states are taking a leading role in enacting equity crowdfunding laws. State-enacted intrastate crowdfunding laws authorize securities offerings by residents of a single state so long as the securities are sold to residents of only that state. Securities offerors who meet a state’s intrastate crowdfunding exemption can engage in a securities offering without registering the offering with the federal or applicable state government. U.S. Supreme Court Justice Louis Brandeis famously referred to states as the “laboratories of democracy.” The experiments that take place in these “laboratories” are often a direct result of the action, or inaction, of the federal government. In recognition of this reality, this Article explores the link between intrastate crowdfunding laws and Title III of the JOBS Act. States are enacting their own crowdfunding regimes for two primary reasons. First, states have grown tired of waiting for the implementation of the federal crowdfunding regime by the U.S. Securities and Exchange Commission, which, as of this Article’s publication, over three years after the JOBS Act’s passage, has yet to enact final regulations. Second, many believe the federal crowdfunding regime, when finally enacted, will be too costly for most issuers and, thus, will not provide a feasible capital raising option for small businesses and new start-up companies. As a result, states are taking the initiative by enacting intrastate crowdfunding regimes, while still complying with federal securities laws by meeting the federal securities exemptions in section 3(a)(11) of the Securities Act of 1933, Rule 506 of Regulation D, or Rule 147. While intrastate crowdfunding laws are a useful capital-raising tool for many small businesses and start-up companies, they suffer from major impediments. And, these impediments have limited the utility of the intrastate crowdfunding laws and have led to their underutilization by securities issuers. Ultimately, this Article finds that intrastate securities laws are not able to fully meet the capital-raising needs of small businesses and start-up companies. Due to a lack of capital raising sources, these companies are stuck between a proverbial rock and a hard place. On the one hand, the costs associated with the federal crowdfunding provisions make it an impractical capital-raising source. While on the other hand, intrastate crowdfunding laws passed by states, while not cost prohibitive, suffer from ailments that prevent them from acting as effective capital-raising mechanisms. In recognition of this quandary, this Article recommends that a new federal “small business” crowdfunding regime be created. This regime would authorize nationwide crowdfunding offerings and would require minimal reporting and disclosure requirements, keeping offering costs at a minimum. Additionally, to limit the effect of potentially fraudulent activity, the issuer would be limited to raising $500,000 in any twelve-month period and each individual investor would be limited to an investment of $1,000 in any twelve-month period. This new crowdfunding regime would provide an affordable and effective capital raising mechanism for many small businesses and start-ups.

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