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19 Jun 2017


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Washington State New Rules on Crowdfunding

The Washington State published new crowdfunding rules.  It  provides for a simplified way for businesses to provide information to investors about the securities offering.  [visit the Washington State Department of Financial Institutions].

In order to be able to raise capital under Washington’s crowdfunding exemption, the company must be able to establish that the offering qualifies for the federal exemption from registration under Section 3(a)(11) of the Securities Act of 1933 and Rule 147 adopted thereunder, which states the following:


- The issuer of the securities is incorporated or otherwise legally organized under the laws of the state in which the offers or sales of securities will take place;


- The principal office of the issuer is located within the same state;


- The issuer must derive at least 80% of its gross revenues from the operation of a business located within the same state;


- At least 80% of the issuer’s assets are located within the same state; and


-The issuer uses at least 80% of the funds raised in the offering for the operation of the business within the same state.

If qualified for the federal exemption then a company can apply for the Washington State crowdfunding exemption.

The Washington crowdfunding exemption is available only to a corporation or centrally managed limited liability company or limited partnership that is resident and doing business within Washington at the time of any offer or sale of securities.

The following types of businesses will not be allowed to utilize the crowdfunding exemption unless written permission is obtained from the Securities Division based upon a showing that adequate disclosure can be made to investors using the Washington Crowdfunding Form:


- Holding companies, companies whose principal purpose is owning stock in, or supervising the management of, other companies;


 - Investment companies subject to the Investment Company Act of 1940, including private equity funds;


- Portfolio companies, such as real estate investment trusts;


- Development stage companies that either have no specific business plan or purpose or have indicated that their business plan is to engage in merger or acquisition with an unidentified company or companies or other entity or person;


- Companies with complex capital structures;


- Blind pools;


- Commodity pools;


- Companies engaging in petroleum exploration or production or mining or other extractive industries;


- Equipment leasing programs; and


- Real estate programs.

The Washington crowdfunding exemption is available only to equity offerings.  Convertible preferred stock may be allowed as long as the protections found in WAC 460-99C-030(5) Apply. 

To use the Washington crowdfunding exemption, an issuer must first make a filing with the Securities Division. The issuer must wait to commence the offering until it has received notice from the Securities Division that the offering has been declared exempt.

The maximum that can be raised is $1,000,000.  It must be raised within 12 months.

A minimum target offering amount and deadline to raise the minimum target offering amount must be set.  The maximum timeframe allowed to raise the minimum amount is 12 mounts.

All funds raised in the offering must be deposited with an independent escrow agent until the minimum offering amount has been raised.

The offering can be made online or offline.  A funding portal cannot be used.  Brokers can be used to assist in the offering but the company must make a direct offering.

Businesses must include their financial statements as of the end of the most recent fiscal year.   While the financial statements need not be audited by an accountant, they must be prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). It is strongly recommended that businesses obtain a compilation or review from a qualified accountant to ensure the proper preparation of the financial statements.

For as long as securities issued under the crowdfunding exemption remain outstanding, the issuer is required to provide a quarterly report to the issuer's shareholders by making such report publicly accessible, free of charge, at the issuer's internet web site address within 45 days of the end of each fiscal quarter. The report must contain the following information:


- Executive officer and director compensation, including specifically the cash compensation earned by the executive officers and directors since the previous report and on an annual basis, and any bonuses or other compensation, including stock options or other rights to receive equity securities of the issuer or any affiliate of the issuer, received by them;


- The names of the issuer's owners of twenty percent or more of a class of outstanding securities, directors, officers, managing members and/or other persons occupying similar status or performing similar functions on behalf of the issuer; and


- A brief analysis by management of the issuer of the business operations and financial condition of the issuer.


The filing requirements include:


- Completed copy of the Washington Crowdfunding Form;


- Copy of the issuer’s articles of incorporation or other charter documents pursuant to which the issuer is organized and all amendments thereto;


- Copy of the issuer’s bylaws or operating agreement and all amendments thereto;


- Copy of any resolutions by directors or members concerning the securities to be issued in the offering;

Financial statements for the most recent fiscal year and, if applicable, those for the interim period, prepared in accordance with U.S. GAAP;


- Copy of any agreement with a portal;


- Copy of the escrow agreement with an escrow agent located in Washington concerning the offering proceeds;


- Copy of the subscription agreement for the offering;


- Copies of any planned advertising;


- A check in the amount of $600 for payment of the filing fee.  Checks should be made payable to the “Washington State Treasurer.”

The Small Company Offering Registration (“SCOR”) offers an optional method of registration that utilizes a question and answer disclosure document and enables corporations and limited liability companies (LLCs) to raise up to $1 million during a period of up to 12 months through the sales of securities to the public.

Investors may invest under one of the two options (whichever is lesser):


- $2,000 or 5% of the annual income or net worth of the investor, whichever is greater, if either the annual income or the net worth of the investor is <$100,000; or


- 10% of the annual income or net worth of the investor, up to $100,000, if either the annual income or net worth of the investor is ≥$100,000.


Washington State Department of Financial Institutions
Section 3(a)(11) of the Securities Act of 1933
Rule 147 of the Securities Act of 1933


By Bill Williams













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