Equity Crowdfunding Comes to Texas

The Texas Securities Board voted 4 to 0 approving new regulations on equity crowdfunding. The decision greatly expands a small firm’s pool of potential investors. Previously, only accredited investors could make equity investments in startup firms. Qualifications for being an accredited investor include a $1M net worth, excluding a primary residence, and a typical annual income of $200,000.

The regulations only apply to Texas intrastate investments. This means both investor and company must be Texas based. Participating companies must have 80% of their assets and revenues in Texas.  Investors must be Texas residents, verified by a state-issued ID such as a driver’s license or voter registration card.

The law allows for the creation of Texas crowdfunding portals to connect investors with companies. Portals are required to verify both company and investor eligibility. Currently, sites like Kickstarter.com and Indiegogo.com allow people to fund startup companies, but only in exchange for a gift or through advanced-purchase of the company’s product. These existing sites do not permit someone to become an owner of the company through an equity investment.

Texas companies raising money will be required to disclose financial information to their investors and abide by other regulations, but they don’t need audited statements. A company can raise up to $1M annually through the Texas crowdfunding portals. Non-accredited investors may invest up to $5,000 annually in a company. Accredited investors using the portals face no investment limits.

In 2012, the federal JOBS Act included crowdfunding rule changes to spark innovation and stimulate the economy. Federal regulators at the Securities and Exchange Commission have yet to finalize those rules, even though the Congressionally mandated deadline has passed. These Texas regulations give a state-level alternative to companies and potential investors. Texas’ rules should take effect before December. [Texas Securities Board Website]