Emerging Markets Law

Integration Problems for Intrastate Crowdfunding

Posted In Crowdfunding

Jonathan Frutkin, writing in his blog at Cricca Funding, makes some interesting points about the problem of integration for intrastate crowdfund offerings.

As he notes, the SEC's rules will sometimes require that two separate offerings of securities be "integrated" for regulatory purposes.  This means that all of the offers and sales in both deals will be treated as part of one continuous offering, so that the entire offering will be required to satisfy all of the applicable rules.

For intrastate crowdfund offerings this can be a problem.  For example, if an issuer uses the Invest Georgia Exemption to raise $500,000 and subsequently uses Regulation D to raise an additional $1 million, the SEC might require these two offerings to be integrated into a single offering for regulatory analysis purposes.  If that happens, the offering will probably fail.  In this hypothetical, the combined $1.5 million offering will exceed the $1 million limit on aggregate offering size in the Invest Georgia Exemption (not to mention the residency requirement if any of the investors in the Regulation D offering are not Georgia residents).  On the federal side, if any of the IGE investors are not accredited investors, the Regulation D offering will fail and the entire integrated offering may fail to satisfy an exemption.

The SEC's rules make the integration problem especially difficult because they do not clearly define when an offering must be integrated.  The SEC provides a "safe harbor" for offerings that are conducted more than six months apart, but not all offerings conducted within six months of each other are integrated.  Integration is required when the two or more offerings are factually part of a single offering and, like the famous definition of "pornography", the SEC knows an integrated offering when it sees it.

Jonathan Frutkin correctly points out that the SEC has favored offerings under Section 4(a)(6) of the Securities Act (i.e., interstate crowdfunding under the JOBS Act) by stipulating that any offering of Section 4(a)(6) will not be integrated with another offering that is exempt from registration by virtue of another exemption.  How nice of them!

While that will make it much easier for issuers to do crowdfunding under Section 4(a)(6) (which is not possible today because the SEC's crowdfunding rules are not yet final) it puts at risk any offering conducted under a different exemption (like intrastate crowdfunding) because of the potential for integration.

All is not lost, however, because there are other ways to get some comfort that an intrastate offering won't be integrated with a subsequent exempted offering.

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