The questions and answers set forth below pertain to equity crowdfunding offerings that are made under the intrastate crowdfunding exemption and the rules set forth in Title 460-99C. Additional information about the crowdfunding exemption is available on the Securities Division’s Crowdfunding page.

Getting Started

What requirements do I have to follow to use the crowdfunding exemption?

In order to claim the crowdfunding exemption, issuers must first file with the Securities Division a complete Washington Crowdfunding Form and other exhibits required by WAC 460-99C-040. The filing must be accompanied by a fee of $600. Additional information on initial, renewal, and amendment filing requirements may be found below and on the Securities Division’s Crowdfunding page.

When can I start my crowdfunding offering?

After you have filed your crowdfunding materials with the Securities Division, you must wait until the Securities Division has declared the offering exempt in writing. You may not solicit investors or sell securities in the crowdfunding offering before that time.

How long will it take for the Securities Division to review my crowdfunding exemption filing and to declare the offering exempt?

You can expect a response from the Securities Division within three to four weeks of filing your crowdfunding materials. Upon completion of our review, we will either declare the offering exempt or send a comment letter if there are any outstanding issues to be addressed before the offering is declared exempt. In the event the Securities Division issues a comment letter, the offering will not be declared exempt until the issuer has satisfactorily addressed those comments. Depending on the nature and amount of the comments, and especially the length of time the issuer takes to respond, it may be anywhere from a few weeks to several months before the offering is declared exempt.

What restrictions am I required to follow in order to use the crowdfunding exemption under federal law?

The crowdfunding exemption is designed to be used in conjunction with one of two intrastate offering exemptions under federal law: the issuer must conduct its offering in compliance with either (1) federal Section 3(a)(11) and Rule 147 adopted thereunder, or (2) federal Rule 147A. These rules require the issuer, its business activity, and the securities offering itself, to be contained within the boundaries of a single state.
To conduct a crowdfunding offering under the intrastate offering exemption under Section 3(a)(11) and Rule 147 adopted thereunder, the rule) requires, among other things, that:

  • The issuer is incorporated or legally organized under Washington law;
  • The principal place of business  of the issuer is located in Washington;
  • All offers and sales of securities are made only to Washington residents, or to persons who the issuer reasonably believes are Washington residents; and
  • The issuer meets one of the following requirements:
    • 80% of the issuer’s gross revenues are derived from business activity in Washington;
    • 80% of the issuer’s assets are located in Washington;
    • 80% of the proceeds of the securities offering are used in Washington; or
    • A majority of the issuer’s employees are based in such state or territory.

The Securities and Exchange Commission interprets this exemption narrowly. Any deviation from the requirements of the exemption may cause the issuer to be disqualified from relying on the exemption and subject the company and its affiliated persons to liability under federal securities law.

Similar to federal Section 3(a)(11) and Rule 147, federal Rule 147A provides a federal  exemption from securities registration requirements for sales of securities that are made to residents of a single state.  However, Rule 147A allows offers that are accessible to out-of-state residents (but states may only be made to in-state residents) and for issuers to be incorporated or organized out-of-state. Rule 147A requires, among other things, that:

  • The principal place of business of the issuer is located in Washington;
  • All sales of securities are made only to Washington residents, or to persons who the issuer reasonably believes are Washington residents; and
  • The issuer meets one of the following requirements:
    • 80% of the issuer’s gross revenues are derived from business activity in Washington;
    • 80% of the issuer’s assets are located in Washington;
    • 80% of the proceeds of the securities offering are used in Washington; or
    • A majority of the issuer’s employees are based in such state or territory.

What constitutes a “reasonable belief” that a purchaser is a Washington resident?

Under federal Rule 147, offers and sales of securities shall be made only to residents of the state in which the issuer is resident, or who the issuer reasonably believes, at the time of the offer and sale, are residents of the state in which the issuer is resident.

Under federal Rule 147A, sales of securities shall be made only to residents of the state in which the issuer is resident, or who the issuer reasonably believes, at the time of sale, are residents of the state in which the issuer is resident.

Accordingly, offers and sales under the Washington crowdfunding exemption are limited to Washington residents, or persons who the issuer reasonably believes are Washington residents.  

Both Rule 147 and 147A require that an issuer obtain a written representation from each purchaser as to his or her residence.  This requirement has been incorporated into the Washington Crowdfunding Form. However, obtaining a written representation from purchasers as to their in-state residency status will not, without more, be sufficient to establish a reasonable belief that such purchasers are in-state residents.  

In addition to written representation, other facts and circumstances could include, for example, a pre-existing relationship between the issuer and prospective purchaser that provides the issuer with sufficient knowledge about the prospective purchaser’s principal residence or principal place of business so as to enable the issuer to have a reasonable basis to believe that the prospective purchaser is an in-state resident.  An issuer may also consider other facts and circumstances, such as evidence of the home address of the prospective purchaser, as documented by: a recently-dated utility bill; pay-stub; information contained in state or federal tax returns; any documentation issued by a federal, state or local government authority, such as a driver’s license or identification card; or a public or private database that the issuer has determined is reasonably reliable, including credit bureau databases, directory listings, and public records.

What is considered a “real estate program” subject to disqualification from using the crowdfunding exemption?

The crowdfunding rules are intended to allow start-up companies and other small businesses to raise capital in small securities offerings. The crowdfunding rules therefore provide for the use of a simplified offering document, which is generally unsuitable for issuers such as real estate programs and those with complex capital structures. However, the crowdfunding rules and form may be used by an entity formed to invest in a single, income-producing real estate property. The Securities Division invites issuers with questions about terms such as “complex capital structures” and “real estate programs” and that want to do a crowdfunding offering to contact the Securities Division. As specified in WAC 460-99C-030, these issuers may still use the crowdfunding exemption if they demonstrate to the Securities Division that they can provide appropriate disclosure using the Washington Crowdfunding Form.

Advertising Requirements

Do advertisements for crowdfunding offerings have to be submitted to and reviewed by the Securities Division?

Yes, pursuant to WAC 460-99C-250, all advertisements that do not otherwise meet the exception criteria set forth in WAC 460-99C-250(2) must be submitted to the Securities Division for review prior to dissemination.

Are there any exceptions from the requirement to file advertising with the Securities Division?

WAC 460-99C-250(2) sets forth limited forms of advertising that do not need to be filed prior to use, including:

  • Tombstone advertisements containing the limited information provided for in WAC 460-99C-250(2)(a)(i)-(vi);
  • Dividend notices, proxy statements and reports to shareholders, including periodic financial reports; and
  • Sales literature, advertising or market letters prepared in conformity with the applicable regulations and in compliance with the filing requirements of the SEC, FINRA, or an approved securities exchange.

Can portals advertise crowdfunding offerings using the internet?

Some requirements must be satisfied in order for a portal to advertise a crowdfunding offering. The crowdfunding exemption is designed to be used in conjunction with one of twoexemptions from federal registration:Section 3(a)(11) of the federal Securities Act of 1933 and Securities and Exchange Commission Rule 147, or federal Rule 147A.

Among the requirements of Rule 147 is the requirement that the offering be offered and sold only to residents of a single state. The staff of the Securities and Exchange Commission (“SEC”) have indicated that use of the Internet is not incompatible with the requirements of Rule 147, if the portal implements adequate measures so that offers of securities are made only to persons resident in the relevant State. Specifically, in the context of a state crowdfunding offering, the SEC provides that adequate measures would include, at a minimum, disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law, and limiting access to information about specific investment opportunities to persons who first confirm they are residents of the relevant state (for example, by providing a representation as to residency or in-state residency information, such as a zip code or residential address). Please note, however, that these measures pertain only to the requirement that the offering be made solely to residents of a single state. The issuer must meet all other requirements of Rule 147.

Federal Rule 147A does not contain similar restrictions on offers (but sales may only be made to residents of this state). Accordingly, issuers can engage in general solicitation so long as sales are made only to in-state residents and prominent disclosure is provided.

For further guidance, please see SEC Compliance and Disclosure Interpretation (“C&DI”) Question 141.04, as well as all other related C&DIs, available at: http://www.sec.gov/divisions/ corpfin/guidance/securitiesactrules-interps.htm.

Can issuers advertise their crowdfunding offering using the internet?

An issuer’s ability to advertise its offering using the internet is limited. As stated above, issuers seeking to rely on the state crowdfunding exemption must also comply with the requirements of federal Rule 147. Although Rule 147 does not prohibit general advertising or general solicitation, the use of websites or social media to advertise an offering typically occurs in a broad, indiscriminate manner. SEC staff have stated that using an issuer’s established Internet presence to convey information about specific investment opportunities would likely involve offers to residents outside of the relevant state, which may negate the issuer’s ability to rely on the exemption provided for in federal Rule 147, and may subject the issuer and affiliated persons to liability under federal securities law.

SEC staff has also stated, however, that issuers could implement technological measures to limit internet communications about an offering to those persons whose Internet Protocol (“IP”) address originates from a particular state or territory and thereby prevent any offers to be made to persons whose IP address originates in other states or territories. Such offers should include disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law. Please note that issuers must comply with all other conditions of Rule 147.

For further guidance, please see SEC Compliance and Disclosure Interpretation (C&DI) Question 141.05, as well as all related C&DIs, available at: http://www.sec.gov/divisions/ corpfin/guidance/securitiesactrules-interps.htm.  Note, however, that these limitations do not apply to offerings conducted in compliance with federal Rule 147A.

Can I use Facebook, Twitter, and other social media platforms to advertise my crowdfunding offering?

Not if the issuer is conducting an offering in compliance with federal Section 3(a)(11) and Rule 147 adopted thereunder. Given an issuer’s inability to implement technological measures to limit communications on social media platforms, any advertising on these platforms will likely communicate offers to residents outside of Washington. Accordingly, the use of social media platforms would most likely violate the limits of the federal Rule 147 intrastate offering exemption. As discussed in the prior FAQs, advertising on a portal or the issuer’s own website may be allowed with certain restrictions.

Note, however, that these limitations do not apply to offerings conducted in compliance with federal Rule 147A.

Can my company use the Washington Crowdfunding Form without having to comply with all the intrastate restrictions of federal Rule 147 or Rule 147A?

An issuer may not want to conduct a crowdfunding offering under federal Rule 147 or federal Rule 147A for a number of reasonsTo accommodate issuers that would like to conduct a crowdfunding offering that is not subject to the restrictions of Rule 147, the Division will allow an issuer to use the Washington Crowdfunding Form as the disclosure document for an offering of up to $1 million that is registered under RCW 21.20.210. As such an offering would be registered at the state level, the offering could qualify for an exemption under federal Rule 504 instead of Rule 147. In an offering that is registered in one or more states, federal Rule 504 does not impose the restrictions on internet advertising that apply in intrastate offerings conducted under Rule 147. In addition, none of the other intrastate restrictions of federal Rule 147 or Rule 147A apply in a Rule 504 offering.

An issuer that wishes to use the Washington Crowdfunding Form in order to conduct an offering registered under RCW 21.20.210 will need to submit the completed form, an Application for Registration by Qualification, and the required fee. Please note that with respect to the majority of the required exhibits to the Application for Registration by Qualification, the issuer may simply include a cross reference to the location in the Washington Crowdfunding Form where this information is available. Further, the financial statements specified in the Washington Crowdfunding Form will satisfy the financial statement requirements under RCW 21.20.210 (thus an issuer may disregard the financial statement instructions in the application form). The fee is calculated as $100 for the first $100,000 of securities to be offered in this state plus 0.0005 times the amount of securities to be offered in excess of $100,000. For example, an offering of $1 million would require the submission of a fee in the amount of $550.

It should be noted that if the issuer wishes to make the offering in additional states, the issuer will likely need to register the offering in the other states where the offering will be made. If an issuer is planning to make a multi-state offering using the internet and other forms of general solicitation, the issuer should consider conducting a SCOR offering instead as most states will accept the SCOR Form to conduct a registered offering and multi-state coordinated review is available. For more information, please see our Small Company Offering Registration (SCOR) page.

The staff in the Small Business Assistance Section of the Securities Division would be happy to answer your questions regarding the use of the Washington Crowdfunding Form and/or SCOR registration. Please call us at 360-902-8760 and ask to speak to a staff member regarding your offering options.

What is the procedure for filing advertising with the Securities Division?

Advertising material must be submitted to the Securities Division with the initial filing of the crowdfunding form. After the initial filing, any new advertising material must be sent to the Securities Division for review prior to use. To expedite review, please send the advertising materials to the attention of the Securities Division, and include a cover letter containing the issuer’s name, DFI-issued file number, and statement that the issuer is submitting the enclosed advertising for proposed use in connection with its crowdfunding offering.

What is the waiting period to use the advertising after submission to the Securities Division?

The proposed advertising material must be submitted to the Securities Division for review at least seven days prior to first use. Issuers may disseminate their advertisements after seven days have passed, unless the Securities Division provides the issuer with written notice otherwise.

May I advertise prior to distributing the Crowdfunding Form to prospective investors?

Yes. Once the crowdfunding exemption has been declared effective, the issuer may begin advertising the offering, provided that all advertising is first filed with the Securities Division or otherwise meets one of the exceptions from filing in WAC 460-99C-250(2). The issuer may not advertise prior to the offering being declared exempt by the Securities Division, and the issuer must provide prospective investors the most recent Crowdfunding Form a reasonable period of time prior to accepting an investment commitment or funds.

What is considered “advertising?”

Advertising is construed broadly to include any communication, written, broadcast or otherwise disseminated, in connection with the offer or sale of the securities at issue. The Securities Act of Washington defines "offer" or "offer to sell" to include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value. "Sale" or "sell" includes every contract of sale of, contract to sell, or disposition of, a security or interest in a security for value. This includes providing information about the offering, soliciting purchases of the issuer’s securities, or otherwise intending to generate publicity for the offering or otherwise condition the market for the securities offered.

Advertising may include, for example, newspaper advertisements, internet advertisements, social media posts, informational seminars, radio and television advertisements, informational flyers and pamphlets, press releases, etc. If issuers are not sure whether something constitutes advertising that must be filed with the Securities Division, they should err on the side of caution and file it with the Securities Division.
No. While these organizations may act as portals, they are not required to do so.

May an entity acting as a crowdfunding portal charge a fee for its services?

Yes, an entity acting as a portal or other intermediary in connection with the crowdfunding exemption may charge a fee for its services. However, portals and other intermediaries should take care to note that if any fees for services are directly or indirectly connected with the size or dollar amount of the offering, contingent on the success of the offering, constitute commissions related to sale of the securities, or reflect some other arrangement that constitutes “transaction-related” compensation, the portal or other intermediary may be engaging in conduct that may trigger broker-dealer registration requirements under state and federal securities laws. Portals or other intermediaries seeking to charge fees for services may wish to consult the Securities and Exchange Commission’s Compliance Guide to Broker-Dealer Registration for further information regarding fee structure.

Are issuers relying on the crowdfunding exemption required to use the services of a portal or other intermediary?

No. Portals or other intermediaries are optional; issuers are not required to use the services of such to rely on the crowdfunding exemption. An issuer may prepare the crowdfunding filing and conduct a securities offering on its own once declared effective by the Securities Division, without any assistance from a portal.

Investor Limits

Can I have an unlimited number of investors?

There is no restriction under Washington law as to the number of investors that may invest in a crowdfunding offering. Issuers, however, should be aware of federal securities law requirements. In particular, Section 12(g) of the federal Securities Exchange Act of 1934 (“Exchange Act”) provides that an issuer will become subject to public reporting requirements if the issuer has a class of equity securities held of record by either 2,000 persons or 500 persons who are not accredited investors and total assets in excess of $10 million. Exchange Act reporting requirements include, for example, Form 10-K annual reports, Form 10-Q quarterly reports, and Form 8-K current reports.

How much money can I raise from each investor?

The following individual investment limitations apply in crowdfunding offerings under WAC 460-99C :

  • If either the annual income or net worth of an investor is less than $100,000, the aggregate amount of securities sold to that investor shall not exceed $2,000 or 5% of the investor’s annual income or net worth.
  • If either the annual income or net worth is equal to or exceeds $100,000, the aggregate amount of securities sold to that investor may be as much as 10% of the investor’s annual income or net worth, up to a maximum of $100,000.

The “lesser of” these limits applies. For example, if an investor’s annual income or net worth is under $100,000, then the investor may only invest up to $2,000 or 5% of his annual income or net worth, whichever is greater.

It is important to note that this maximum investment amount applies in the aggregate to all offerings conducted under the Washington crowdfunding exemption. In other words, the maximum amount an investor may invest in a year is fixed regardless of whether the investor invests in only your crowdfunding offering or in multiple crowdfunding offerings by other issuers. The issuer must have a reasonable belief that these individual investment limits have not been exceeded.

These individual investment limitations do not apply to “accredited investors” as the term is defined under the Securities Act of 1933.  “Accredited investors” include any natural person whose individual net worth, or joint net worth together with that person’s spouse, exceeds $1,000,000, exclusive of the value of the person’s personal residence.  See: Accredited Investor Definition.

Financial Statements

What format is required for preparing and presenting an issuer’s financial statements?

The financial statements required to be provided with the Washington Crowdfunding Form to prospective investors must be prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), including footnote disclosure when appropriate. The financial statements do not need to be audited. If you do not, however, have experience preparing financial statements in accordance with U.S. GAAP, you may want to obtain a compilation or review of your financial statements from a certified public accountant. Compilations and reviews are generally less expensive services than a full audit.

Offering Limits

How much money can my company raise in a crowdfunding offering?

An issuer is permitted to raise up to $1 million in a crowdfunding offering during any 12 month period using the crowdfunding exemption. An issuer may elect to renew an offering for one additional 12-month period. There is no limit on the number of crowdfunding offerings an issuer may conduct, but the most that can be raised in crowdfunding offerings during any 12-month period is $1 million.

What if I decide to abandon my crowdfunding offering and raise money privately instead or otherwise pursue registration of an offering, or what if I have raised capital prior to this crowdfunding offering?

If an issuer that commences a crowdfunding offering instead decides it wants to raise money through a different exemption or in a registered offering, an issue that arises is whether the different offerings will be “integrated” and treated as a single offering. If the offerings are integrated, it can create compliance problems. For example, an exempt private offering of more than $1,000,000 that is integrated with a prior crowdfunding offering would create a compliance problem due to the $1,000,000 offering limit under the crowdfunding exemption.

As stated above, in order to raise capital under Washington’s crowdfunding exemption, the company must be able to establish that the offering qualifies for one of two federal exemptions from registration: (1) federal Rule 147 or (2) federal Rule 147A.
Both federal Rule 147 and Rule 147A provide substantially similar integration safe harbors to address this issue.  Offers or sales made in reliance on either rule will not be integrated with:

  • Offers or sales of securities made prior to the commencement of offers and sales in reliance on the rule;
  • Offers or sales made after completion of offers and sales of securities pursuant to the rule that are:
    • Registered under the federal Securities Act of 1933;
    • Exempt from federal registration requirements under Regulation A;
    • Exempt from federal registration requirements under Rule 701;
    • Made pursuant to an employee benefit plan;
    • Exempt from federal registration requirements under Regulation S;
    • Exempt from federal registration requirements under section 4(a)(6) of the Securities Act of 1933;  or
    • Made more than six months after the completion of an offering under the rule.

If none of the above-referenced safe harbors apply, whether subsequent offers and sales of securities will be integrated with any securities offered or sold under either Rule will depend on the particular facts and circumstances.

Other

What is considered a material change that would require the amendment of an issuer’s Crowdfunding Form pursuant to WAC 460-99C-090?

Regardless of whether an issuer is relying on an exemption from registration, federal and state securities laws require an issuer to inform each potential investor of all material information regarding the issuer, its principals, and the investment opportunity. Generally, information is material if a reasonable investor would consider it important in evaluating whether to purchase the securities (or to continue his or her investment commitment). When there is a material change affecting the disclosure provided to prospective investors in the Crowdfunding Form, the issuer must amend the form and submit it to the Securities Division. A material change occurs when an event or other change in circumstances for the issuer renders the information in the Crowdfunding Form to be inaccurate or incomplete. For further guidance on this matter, issuers may wish to consult Regulation S-K of the federal Securities Act, as well as the Securities Division’s “Role of Disclosure” publication.

As a broker-dealer representative, what information should I provide to a client if they wish to invest in a crowdfunding offering, or seek to liquidate assets in order to invest in a crowdfunding offering?

In making a recommendation to purchase or sell securities, broker-dealers and their representatives must have reasonable grounds for believing that the recommendation is suitable for the customer based upon the customer’s other security holdings and his or her financial situation and needs. Further, a broker-dealer or representative must ensure that any investment advice rendered is solely incidental to its conduct as a broker-dealer or representative and not compensated unless they are appropriately registered as an investment adviser or investment adviser representative. These requirements apply to all offerings, including securities offered under the crowdfunding exemption.

A broker-dealer or representative that effects transactions in a crowdfunding offering must furnish the investor a copy of the most recent Crowdfunding Form prior to making an investment commitment. Representatives must not engage in any sales of crowdfunded securities that have not been approved by their firm.

Broker-dealers and representatives may consider providing written information to clients regarding the risks of purchasing securities in a crowdfunded offering. They may also check on the status of an offering with the Securities Division in situations where the client is considering investing in crowdfunding securities outside of their relationship with the broker-dealer or representative. If an offering has not been filed or declared effective, the broker-dealer or representative may inform the client and encourage them to contact the Securities Division. Complaints regarding solicitations for unlawful crowdfunding offerings may be submitted online to the Securities Division using the online complaint form. In addition, broker-dealers and other financial institutions may refuse transactions requiring disbursal of funds in the account of a vulnerable adult they believe is the subject of financial exploitation under RCW 74.34.215. Complaints regarding financial exploitation may also be referred to the Department of Social and Health Services, which has contact information for reporting abuse listed online at www.dshs.wa.gov/altsa/home-and-community-services/reporting-abuse.

May the Securities Division revoke a crowdfunding exemption after the offering has been declared exempt?

Yes, the Securities Division may revoke a crowdfunding exemption at any time if the Securities Division has concerns that a crowdfunding issuer or affiliated persons are committing fraud.