In this blog post from long ago, I wondered whether a company raising money through Regulation A could legally sell directly to investors. On one hand, the law in a handful of states require all sales to be through broker-dealers. On the other hand, those state laws might be invalid under section 18(b) of the Securities Act of 1933.

It looks as if common sense and the market are answering the question without litigation.

Late last year, Florida changed its laws to allow direct sales. Florida is a big state with lots of investors, so that’s a big deal. What we once referred to as four “problems states” has become three:  Texas, New Jersey, and Washington.

In my humble opinion, the state laws don’t make sense. A Regulation A offering is reviewed by the Securities and Exchange Commission through a process much like a public offering. Under federal law, the SEC review is enough to allow sales to both accredited and non-accredited investors. I cannot see a justification for a state to require more protection in the form of a broker-dealer review; in fact, this reasoning makes me think that section 18(b) should override the state laws.  

The state laws also add a very significant cost to a Regulation A offering. I’m not aware of any broker-dealer willing to sell Regulation A securities only to residents of three states. Instead, broker-dealers charge more than 2% of the whole raise. Broker-dealers need to charge these fees to cover their own costs and risks, obviously. By driving up the costs of the offering, however, the state laws undermine a primary goal of Crowdfunding, i.e., to make great investments available to ordinary Americans.

Off the soapbox now.

Of the three remaining problem states, New Jersey is the easiest. You file a form to register as a “dealer” and you’re done.

Washington is hard. Washington also allows registration as a dealer, but in my experience the designated dealer must be an individual who is also a general partner/manager of the issuer. For liability reasons, that might not be acceptable. If in doubt, don’t sell securities in Washington.

Texas also allows registration as a dealer. While Texas generally requires that the individual registering have FINRA licenses, that requirement can be waived. The process can take a couple months.

My recommendation:  register in New Jersey; register in Texas and ask for a waiver (start that process early); and don’t sell in Washington.

If anyone has more current advice or information I’d love to hear it.

Questions? Let me know.

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• Source: https://crowdfundingattorney.com/2024/06/27/four-becomes-three-regulation-a-offerings-are-easier-now/