The Washington Jobs Act – Crowdfunding – Draft Rules

Two years after the Federal government passed the JOBS Act, legalizing crowdfunding the sale of startup equity, the law sits idle, awaiting a final set of regulations from the SEC.  Here in the State of Washington, we grew tired of waiting, passed the Washington Jobs Act, and are moving forward toward legal equity crowdfunding for Washington companies and residents.

The last step in that process are the rules from our State regulator, the Department of Financial Institutions (“DFI“).  Unlike the SEC, our regulators are a pleasure to work with, and within two months of the law being signed, have already published a set of draft rules and draft form for review.

crowdfunding-draft-rules.pdfWashington Crowdfunding Form (draft).pdf

To understand these rules, you’ll need to first read the full text of the law.  That can be found at 2023-SLP.  To fully understand the regulatory complexity of selling private equities to investors, you also need to understand the Federal Securities Laws.

Simplifying all that, the new Washington law explicitly specifies a few areas for the DFI to provide rules:

• How to ensure the investors are Washington State residents
• How to ensure the investors abide by the limits set forth in the law
• What organizations or individuals may act as “portals”
• What forms the company must fill out to register for the crowdfunding exemption
• What information the company must provide potential investors
• What information the company must report annually to investors
• How to deal with the escrow requirements
• The filing fees for working with the DFI

I am personally quite satisfied that the DFI was, in the draft rules, able to cover all of this in just 16 pages.  As written, the rules seem quite usable and the process quite workable.  The draft form seems quite complete, easily understandable, and far from onerous.

The three areas I’d like to see changed or clarified before the rules are complete are:

• A description of where the line is drawn between a “portal” and an “intermediary”.  For example, in the current private equity fundraising, Angel groups are deemed intermediaries, and thus do not have to be licensed broker-dealers.  Or in simpler terms, I want the DFI to point to the SECs definition of when a broker-dealer is needed, and explicitly state that others organizations may help companies raise money via the Washington Jobs Act as long as they do not cross that line.
• A removal of the list of types of companies which are not allowed to use this law.  This list mirrors that of SCOR offerings.  Nothing in the law requires such limits.  I’d suggest we let the investors choose what companies they want to invest in, rather than the DFI.
• A specification of how companies will have to disclose their fundraising advertising efforts.  The rules imply that all advertising must be first disclosed to the DFI prior to use, but doesn’t state how, nor what exactly the DFI will be looking for in those advertising materials.

Meanwhile, this blog will keep providing updates as the rule making process continues.  And as soon as these rules are complete, this entrepreneur will have a few interesting investments for the Washingtonians to invest in.

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DFI’s rulemaking: http://www.dfi.wa.gov/sd/rulemaking.htm#crowdfunding

Full text of the bill: 2023-SLP

Official web site for the bill/law: http://apps.leg.wa.gov/billinfo/summary.aspx?bill=2023

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