By Caleb A. Williams
In a recent edition of Business Briefs we discussed crowdfunding and the opportunity to use such an investment vehicle for real estate development. Recent events in Oregon require that we return to the topic of crowdfunding. “Crowdfunding” is used to describe several different forms of raising capital, including advance sales of products or services (such as those featured on Kickstarter.com) or small investments by a large number of people in equity of a company. The last form of crowdfunding is the focus of this article.
In late January, the Oregon Department of Consumer and Business Services adopted regulations permitting Oregon companies to raise capital from Oregon residents through the sale of equity interests without registering those interests as a security. Prior to this year, the offer or sale of shares of stock would likely have required the registration of those equity interests as a security, an expensive and risky endeavor for most small businesses.
Oregon joins approximately 15 other states in permitting crowdfunding on some scale as an exemption to state securities laws.
As we discussed in our article last year, and which remains true as of the date of this writing, crowdfunding is not yet exempt from federal securities laws. Federal laws govern interstate transactions of securities. This means that Oregon companies cannot sell equity to residents of other states. The Securities and Exchange Commission is significantly delayed in its promised regulations addressing crowdfunding, although some commentators believe regulations will be adopted yet in 2015.
Under Oregon’s new law, up to $250,000 may be raised by an Oregon company through crowd-funding without registration or licensing a salesperson. The most significant requirements include:
- The company must be registered and doing business in Oregon and the securities can be offered only to Oregon residents.
- The company can provide limited advertising to Oregonians on the investment.
- The company must meet with a business technical service provider (a small business advisor approved by the Oregon Department of Consumer and Business Services) to discuss the issuer’s business plan before advertising, offering or selling the security.
- Written disclosures about the investment are required and the investor must receive and review the disclosure documents before an investment decision becomes final.
- No single investor can invest more than $2,500 in any one investment.
Oregon companies are already taking advantage of these relaxed securities rules for small investments. The Oregon nonprofit organization Hatch Innovation has launched a website (hatchoregon.com) with a platform for Oregon business to raise capital through crowdfunding. A number of business were prepared for the crowdfunding opportunity in Oregon and are both featured on this website and Oregonians may invest in those businesses through the website.
The opportunity for start-up cideries to raise capital through crowdfunding was discussed with some interest at the recently concluded CiderCon 2015 (the annual conference of the United States Association of Cidermakers), and in Oregon it is an option worth exploring for those in the craft beverage industry. It should go without saying that any winery, brewery or cidery considering crowdfunding needs experienced legal counsel to assist in evaluating the structure of any investment and navigate the complex securities laws and regulations. But producers or retailers of alcoholic beverages need to take additional care when considering raising capital through crowdfunding. Oregon and federal liquor laws prohibit investment by an individual with an interest in a retailer of alcoholic beverages from investing in a producer, and vice versa. In addition, owners of more than 10% of the equity in a company must be disclosed to the OLCC and TTB. Although it is likely that most investors through crowdfunding will own less than 10% of the company in which they invest, this is an additional factor to weigh when considering crowdfunding. Ultimately, craft beverage producers need to carefully structure the investment to avoid unnecessary licensing and operational difficulties.
If you are interested in learning more about crowdfunding in Oregon, please contact any one of our corporate transactional lawyers.