Intrastate Crowdfunding

Abstract

Crowdfunding is the practice of raising small amounts of money from a large number of people over the Internet. Until now, businesses trying to raise capital over crowdfunding sites such as Kickstarter have solicited contributions by offering rewards instead of a possible return, which allows them to avoid federal securities laws. However, after proposed SEC rules are finalized, it will be legal for issuers to sell securities–such as equities and interest-bearing debt–over crowdfunding platforms without incurring the expense of registration.

The new federal crowdfunding exemption has been the subject of considerable debate and anticipation in both the media and scholarly literature. However, securities-based crowdfunding is already legal in several states so long as the issuers offer and sell securities only to in-state residents. This Note engages in the first sustained comparison of the state and federal exemptions. It claims that although the state exemptions offer issuers access to a smaller pool of potential investors, they present a viable, lower-cost alternative to the federal exemption because they subject issuers to significantly fewer regulatory expenses. It further claims that in spite of their less stringent requirements, certain features of the state exemptions can help to promote investor protection by encouraging the participation of large investors. This Note concludes by offering four recommendations for improving both the state and federal laws, in each case urging that the exemptions draw on the best aspects of one another.