March 28, 2016

Countdown to Crowdfunding: Illinois Intrastate Crowdfunding Portals Expected Soon

Illinois intrastate crowdfunding is coming soon, offering new fundraising and investment opportunities to Illinois businesses and Illinois investors. Enacted in 2012, Illinois intrastate crowdfunding is just weeks from implementation. The final proposed set of rules, governing internet crowdfunding portals, was issued on Friday, March 18, 2016. The Illinois Secretary of State will be taking applications for registration as an internet portal during the 45-day comment period, which ends May 2. It is expected that Illinois crowdfunding portals will be authorized to do business relatively soon after the comment period ends in May.

Unlike reward-based or donation-based crowdfunding platforms such as Kickstarter or Indiegogo, Illinois crowdfunding will be securities-based: it will let average investors buy a little piece of the company being offered. Unlike fully registered, exchange-traded stocks, resale of these stocks will be restricted. But they will be investments nevertheless.

The process will parallel that of the federally-registered crowdfunding platforms authorized under Title III of the Jumpstart Our Business Startups (JOBS) Act, which will also start operating in May. For federal Title III crowdfunding, issuers of securities will be able to raise up to $1 million per offering, per year, through internet portals registered with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). The portals will provide information about the investments offered, provide a platform for investors to communicate with issuers about the offering, and screen investors to ensure that they invest only the amount permitted based on their income and net worth. The portals’ role will be limited: they will not provide investment advice or actually handle the investments or securities. Any member of the public will be able to invest at least $2,000 per year, with the allowable total investment, which will vary based on income and net worth, capped at $100,000.

While the portals will be similar, the innovation of Illinois intrastate crowdfunding lies in its means of providing greater access to capital for the issuers involved. First, Illinois intrastate crowdfunding issuers will be able to raise $4 million per offering, making the costs of putting on a larger offering smaller percentagewise in relation to the amount of funds raised. The higher maximum offering amount also provides additional access to capital for those who wish to raise more funds that the $1 million permitted under Title III crowdfunding.

Second, rather than limiting overall investments to a specific amount per investor, caps are per individual per offering. Illinois issuers will be permitted to raise $5,000 per non-accredited investor for each offering, and unlimited amounts from investors that meet the federal definition of an accredited investor. Individual Illinois investors, regardless of income, will be able to participate in as many crowdfunding offerings as they desire, with no cap on total investments. Accordingly, the pool of potential capital is potentially far greater than comparable pools of Title III crowdfunding and those states that follow the federal model more closely.

Thirty states have now enacted intrastate crowdfunding, with mixed success. The greater access to capital provided by Illinois intrastate crowdfunding provides reason for optimism that the new Illinois portals will greatly expand fundraising and investment opportunities for Illinois businesses and investors.

Article by Elaine Wyder-Harshman


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