While most familiar with Regulation Crowdfunding are aware that federal registration of a crowdfunded offering preempts registration at the state level, the fact that states have the discretion to require notice filings of such offerings has largely escaped the public discourse on Regulation Crowdfunding.
A number of federal securities registration exemptions preempt (the often arduous) registration requirements under state “blue sky laws,” allowing states to instead require short “notice filings” of exempted offerings (which is usually little more than a summary of the key terms). Regulation Crowdfunding is no exception. The JOBS Act, the 2012 law that created Regulation Crowdfunding, provides that securities issued under Regulation Crowdfunding are “covered securities,” and are thereby exempt from state registration. However, Section 305(c) of Title III of the JOBS Act provides that states may require Regulation Crowdfunding issuers to make a notice filing and pay related filing fees, provided either:
- the issuer’s principal place of business is located within that state; or
- purchasers of 50% or more of the aggregate amount of the securities sold in the offering are state residents.
Regulation Crowdfunding went live on May 16, 2016. Currently, two states require Regulation Crowdfunding notice filings. Alabama and Washington have each adopted the model rule and uniform notice filing released by the North American Securities Administrators Association on September 11, 2016. Under these state laws, Regulation Crowdfunding issuers located in or selling to residents of either state as described above must: (i) file a completed Uniform Notice of Federal Crowdfunding or a consent to service of process on Form U-2; and (ii) pay a filing fee of $40, plus a registration fee of 0.1% of the aggregate offering price of the securities offered within the state (in the case of Alabama), or $100, plus a registration fee of 0.2% of the aggregate offering price of securities in excess of $100,000 (in the case of Washington).
Issuers with a principal place of business in Alabama or Washington must make this state filing when filing their initial Form C. Other issuers must make the filing as soon as they become aware that 50% of the securities issued in their Regulation Crowdfunding offering have been purchased by Alabama or Washington state residents.
While Alabama and Washington are so far the only states that require notice filings, other states like Massachusetts are currently considering notice filings for other titles of the JOBS Act. Consequently, we may see similar state notice filing requirements being promulgated in the future.