What CEOs and Founders Need to Know About Texas Crowdfunding.

CEOs, Founders, and Funding

Part 1 of the CapitalReady guide for issuers.

Can my company get funded, and who is an "issuer"?

If you read the (proposed) rules for either Texas intrastate crowd funding, or the (proposed) Title III rules at the national level, you'll see the term "issuer" come up over and over again. This article is written to address the Texas rules.

Simply put, an issuer is a company. It is the company that issues equity to investors, thus the term. The sale of equity in the company is an "offering", most often in the form of shares of company stock.

Depending upon which rule set you are looking at, that company may be a corporation, limited liability company, or even in some cases a limited partnership. However, the easiest and most reliable funding vehicle is going to be a C-Corporation.

Although it is customary for venture capital investors to take preferred shares in a private offering, I believe that the majority of crowd funded offerings will involve common stock. Companies may wish to incentivize investors by making an offering of preferred shares, but due to the variety of terms possible in a preferred stock offering, few unaccredited investors will demand additional terms.

Most privately-held corporations offering common stock will qualify under the Texas rules, provided that the company is not a S-corp and is chartered in Texas, does most of its business in Texas (or derives it's revenue from a business "operated" in Texas), and will use the proceeds of fundraising primarily in Texas. Naturally, the company's headquarters or primary place of business must be in Texas.

The Texas rules are designed to conform to the 'safe harbor' provisions of SEC Rule 147, which sets out the requirements to guarantee that a sale of stock is free from the restrictive regulations of multi-state transactions.

Although it is possible to have a 147-compliant offering outside the safe harbor guidelines, it is unlikely that a crowd funded sale of shares would be permitted outside these guidelines because of the restrictions placed on funding portals to clear the offerings.

One of the biggest planning steps for executives and their advisors will be planning the amount of the offering. Texas will have a million-dollar cap (per 12 months) on crowd funded offerings, and the temptation is to offer the maximum. But, if a raise falls short of the target amount, it may be considered an undercapitalized offering and portals will return the escrowed money to investors. Because there is a 21-day period in which an offering must be published before sales commence, failure to accurately set a minimum offering can seriously delay fundraising if the sale winds up undercapitalized. As a result, companies should set minimum and maximum amounts available for purchase in the offering, and look for a portal that supports disclosure statements with an appropriate range of shares made available for sale.

This concludes Part 1, and just scratches the surface of issuance planning for companies thinking of raising funds under Texas intrastate rules. Always consult with your attorney and accountant before undertaking an offering of securities. Subscribe to the CapitalReady newsletter to be notified when the next part in this series is posted! This post is informational in nature only and is not intended as legal or tax advice.