Texas Approves Equity-Based Crowdfunding Rules

By LAURA LOREK
Reporter with Silicon Hills News

Crowdfunding conceptTexas companies will soon be able to raise money from the average investor.

The Texas State Securities Board voted 4-0 on Wednesday to approve new intrastate equity-based crowdfunding rules.

The rules are expected to go into effect in late November, said Bob Elder, the board’s spokesman.

“The board and the commissioner believe there is enough of a market in Texas for intrastate crowdfunding rules,” Elder said.

That makes Texas the 13th state, and the largest to date, to adopt its own equity-based crowdfunding rules in advance of the U.S. Securities and Exchange Commission’s expected national rules. The JOBS Act of 2012 authorized the SEC to create new crowdfunding rules for the country, but they have been delayed by more than a year. So several states have taken matters into their own hands and adopted their own.

“This gives Texas residents and companies an opportunity to participate in equity crowdfunding before what the SEC plans to do,” Elder said.

Texas’ rules allow a company to raise up to $1 million a year through an approved Texas crowdfunding portal. Any resident of Texas can invest up to $5,000 per company. But only accredited investors, high net worth individuals who have assets of more than $1 million excluding their home and net income annually of $200,000, may invest any amount.

And only Texas residents are able to invest in the deals. And only Texas crowdfunding portals are able to manage those investments.

The Texas State Securities Board must approve the Texas crowdfunding portals. That process is expected to begin in late November. It’s uncertain when the first portals will begin soliciting investment for companies, Elder said.

HiveEquity, an equity crowdfunding portal, plans to submit an application and plans to begin deals as soon as possible, said Roberto “R.C.” Rondero de Mosier, partner in the RAM Law Firm. He co-founded HiveEquity with his law firm partner Nathan Roach and they’ve lined up three deals seeking between $600,000 and $1 million that plan to raise funds on the site.

“The beauty of these types of rules is it’s very Texas centric,” Rondero de Mosier said. “It’s about Texas investing for Texas.”

HiveEquity focuses just on raising funds for real estate deals in Texas. The money will be used to pay for constructing a building or buying land and developing it, Rondero de Mosier said. The first three deals are in Austin and San Antonio, he said. But the portal expects to raise funds for real estate projects throughout Texas, he said.

The board first issued its proposed rules on May 9th and has been soliciting comment from the general public through August.

The private offerings are exempt from the usual level of oversight and regulations involved in raising capital through conventional means, Elder said.

Investors are required to be told these securities are inherently risky, because these are exempt offerings, Elder said.

“Investors must also be told the money they put in may be illiquid,” Elder said. “There’s no resale market for these securities. Once you put this money in these companies a lot of restrictions apply.”

Another key part of the process involves the portals establishing communications channels with investors, Elder said. The goal is to get a dialog going to help the investors make an informed decision, he said.

Hand and cap with moneyThe crowdfunding rules apply to all types of companies seeking funding from high-tech startups to mom and pop restaurants, hair salons and dog grooming businesses.

The equity-based crowdfunding rules are not to be confused with perk-based crowdfunding on sites like Rockethub, Kickstarter and IndieGoGo. Those sites allow individuals to crowdsource donations to a project or product in exchange for a reward. But the people donating to the site do not get any ownership of the company. Under the equity-based crowdfunding rules, investors do become owners of the company.

“This legitimizes friends and family money in a big way,” said Hall Martin, head of the Texas Entrepreneur Network.

Companies initially get their first few dollars of capital from friends and family, Martin said. And the Texas equity-based crowdfunding gives them a vehicle to take an equity stake in the company, he said.

Martin is putting in an application with the Texas State Securities Board to run an equity-based crowdfunding portal. He currently runs the Texas Entrepreneurs Network Funding Portal that allows companies to do rewards-based crowdfunding as well as raise money from accredited investors.

The companies are generally looking for $50,000 to $250,000 in funding, Martin said.

Martin charges companies $247 a month to run a campaign on his site. He uses Goldstar Bank in Amarillo to handle the transactions, he said. Companies must specify a minimum amount and a maximum amount they want to raise, he said.

“We have companies that want to use the intrastate campaign,” he said. “It probably will not be ready until the beginning of December.”

Accredited investors make up less than 5 percent of the population, Martin said. This provides a way for startups to tap into accredited investors and regular investors to finance a deal. They might get a check for $25,000 from accredited investors and the rest from regular investors in $5,000 individual investments, he said. Companies are going to need lawyers to get their documents together, he said.

These are the proposed rules, which are similar to the approved rules, which will be published next week.

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