Texas – 13th state to introduce equity crowdfunding rules

By AltFi on Tuesday 12 August 2014

Savings and Investment

The largest of the southern states seeks to increase their 2 per cent contribution to the US venture capital scene through equity crowdfunding

The Texas State Securities Board is in the final stages of rendering crowdfunding initiatives exempt from State Securities Laws. The SEC was presented in April with a 175 page proposed rulebook produced by the Securities Board of the State of Texas. The rules do not look to supersede the SEC itself, but if Texas passes it’s own crowdfunding rules, the state would allow equity-based crowdfunding before the federal government.  

Nationally, the Jobs Act of 2012 allows for crowdfunding investments but the SEC are yet to finalise guidelines. There are clauses which enable companies to offer deals directly to investors, but those investors are required to prove that they have $1 million in liquid assets or earn $250,000 or more a year. Only through meeting these thresholds can they then become “accredited investors”.

Un-accredited investors are permitted to invest up to $5,000 in one year through an offering on a platform in exchange for equity.  Michele Skelding, Senior Vice President of Global Technology strategies at the Greater Austin Chamber of Commerce held a roundtable discussion of fifty members from start up businesses within the industry.

Paul Trowe of Replay Games in particular expressed his concern regarding the $5,000 limit per un-accredited investor. He made the point that his company received $650,000 in 30 days on Kickstarter in 2012 and multiple donors gave more than $10,000 each.

“My question is why would I want to do equity based crowdfunding with such strict regulations when I can go onto Kickstarter or IndieGoGo or any of the other platforms and not have such restrictions?”

The final rule is expected to be passed in late August. Texas Securities Commissioner John Morgan stated that on the approval of the rule, investors will no longer be required to meet such criteria.

The crowdfunding portals upon which investors will seek investment opportunities are required to register with the Texas State Securities Board. Background checks on operators and unannounced inspections will be carried out frequently to ensure optimum security.

John Morgan, Texas Securities Commissioner stated:

“There are 20 million Texans 18 or older who could invest up to $5,000 a year. That creates $100 billion in investment capital in Texas alone. Texas will be the largest equity crowdfunding state in America.”

“The portal is an intermediary, it will host the investor offerings, post all documents required regarding that offering and there will be a discussion area. It’s a fairly streamlined approach.”

Austin companies received $626 million in venture capital in 2013 (49 per cent of the venture capital for the state), and generated more than $20 million in pledges with over 1,000 companies reaching their funding targets. The prospect of finalised equity crowdfunding rules will be a welcome addition for early stage Texan businesses. The finalised rules are set to be announced later this month.

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