by: Hall Martin/ Austin Business Journal
The crowdfunding portion of the federal Jumpstart Our Business Startups Act continues to wind its way through the Securities and Exchange Commission, and will take another six months to two years to be implemented, based on who you talk to.
Meanwhile, some states are setting up their own version of the JOBS act under the name of “intrastate crowdfunding.” Twelve states already have passed their laws and Texas will soon join them.
Texas is unique, however, in that the State Securities Board determines the rules and passes the ruling so we don’t have to go through the Legislature as was the case in other states. The proposed ruling gives residents in the state the ability to invest up to $5,000 per person each year in a startup, which must have 80 percent of its assets and revenue within the state.
The maximum capital raise is $1 million and the startup has one year to complete the raise or at least reach a minimum goal. The funds must be moved through a certified Texas crowdfunding portal into escrow in a Texas bank, and all securities documents related to the offer must be on the portal available so every investor receives the same information.
The Securities Board was originally scheduled to vote on August 28, but the meeting was postponed to Oct. 22. There’s a 30-day registration period after the vote which means the ruling could be available by the end of November.
For states that have an intrastate law, the biggest hurdle was finding a funds escrow facility in a state bank. For Texas, we found one with Goldstar Trust in Amarillo. The cost has been negotiated down to 45 basis points of the capital raise or a minimum of $500. Aside from that there are not many rules as Texas is a low-cost, business-friendly state and the proposed intrastate ruling is consistent with that philosophy.
Currently, there are 10 portals lining up to use the intrastate law including those in Dallas, Austin, Houston, and San Antonio, with a focus on startups, real estate, and oil and gas. We’re looking at creating a Texas Crowdfunding Portal Association to foster the industry.
The ideal spot for an intrastate raise is $50,000 to $250,000. Below $50,000, most use credit cards to fund their business. It’s possible to raise more than $250,000 but at $5,000 from each investor, that takes a lot of investors. Most startups will move to an accredited investor raise for $250,000 or above.
The biggest impact of the ruling is that it will legitimize family and friends funding. According to the Angel Capital Association, angels across the country invest more than $25 billion each year in startups. Family and friends, by comparison, invest more than $65 billion.
Since most family and friends are not accredited investors, their investments are treated as loans, gifts, or not at all. An intrastate raise puts a formal legal document on the funding — something, many family and friends will be glad to see. Hall Martin is director of the Texas Entrepreneur Network