Janice Gauthier

On Aug. 13, three members of the Wisconsin legislature held a news conference to announce that they planned to introduce new legislation that would permit equity crowdfunding in Wisconsin.

Recently, this eagerly awaited legislation was introduced in the Wisconsin Assembly. If the proposed bill, known as the CASE (Crowdfunding and Securities Exemptions) for Jobs Act (AB350) (the "Act" or the "CASE for Jobs Act") is passed, Wisconsin would join only two other states - Georgia and Kansas - that have amended their state securities laws to permit equity crowdfunding.

The Wisconsin proposal comes in the wake of the federal JOBS Act, passed in 2012, which directed the Securities and Exchange Commission to amend certain federal securities rules to permit crowdfunding. Unfortunately, the SEC has been slow to implement this directive of the JOBS Act and has not yet approved final rules that would permit crowdfunding under federal securities laws. Some states, such as Georgia and Kansas, however, have stepped into this breach and have already approved crowdfunding legislation of their own. If the CASE for Jobs Act is passed, Wisconsin could be the next state to create its own, state, crowdfunding exemption.

Under existing Wisconsin law, no one may offer or sell a security, such as company stock, in Wisconsin unless: (1) that security is registered with the Division of Securities (the "Division") of the Wisconsin Department of Financial Institutions (the "WDFI"); (2) the transaction or the security is exempt from this registration requirement; or (3) the security is defined by Wisconsin law as a "federal covered security." The CASE for Jobs Act would create a new exemption from registration, under Wisconsin law, for the offering of securities via the Internet, provided that the offering: (a) is made exclusively through one or more web sites that have been registered with the Division; and (b) also satisfies all of the other requirements of the proposed Act.

Among other requirements, the proposed law imposes two geographic restrictions on the use of the new exemption, one on the company using crowdfunding to sell its stock or other securities and the second on the purchaser who buys those securities. Under the proposed law, the company selling the securities must be organized under, and authorized to do business in, Wisconsin, and the purchaser of the securities must be a Wisconsin resident. The transaction must also satisfy all of the requirements of the intrastate offering exemption to federal securities registration requirements. In other words, the CASE for Jobs Act would not allow an out-of-state company to use crowdfunding to raise money in Wisconsin, nor would it allow a Wisconsin company to use crowdfunding to raise money from residents of other states, such as Illinois.

To protect less sophisticated investors, the CASE for Jobs Act also sets limits on the amount of money that a company can raise, through crowdfunding, from investors who are not accredited or institutional investors, as defined by Wisconsin law. A company relying on the new crowdfunding exemption could not (with certain exceptions) raise more than $2,000,000, in the aggregate (if the company has undergone a financial audit and made it available) or $1,000,000, in the aggregate (if the company has not undergone a financial audit and made it available) from investors who are not accredited or institutional investors, as defined by Wisconsin law. In addition, a company relying on the new exemption could not raise more than $5000 from any individual investor who is not an accredited investor, as defined by Wisconsin law. This $5000 limit would not be subject to adjustment, to reflect inflation, but the aggregate limits, described above, would be adjusted for inflation every five years.

While the bill contains these dollar limits on the amount of money that can be raised from unsophisticated investors, via crowdfunding, the bill also redefines "accredited investor" and "institutional investor" so that more individuals and institutions will fall into these categories and, therefore, will not be protected by the dollar limits described in the preceding paragraph. Under existing Wisconsin law, an accredited investor includes certain institutional investors, such as banks and insurance companies, as well as a natural person: (a) who has an individual net worth, or joint net worth with the person’s spouse, that exceeds $1,000,000, generally excluding any indebtedness secured by, and the asset value of, the primary residence of such person; or (b) a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. Under the CASE for Jobs Act, the net worth threshold described in (a) would be lowered from $1,000,000 to $750,000, including, rather than excluding, any indebtedness secured by, and the asset value of, the primary residence, and the income threshold described in (b) would be lowered from $200,000 to $100,000, for an individual, and from $300,000 to $150,000 for joint income with a spouse. Consequently, under the CASE for Jobs Act, many people who would not be defined as "accredited investors" under existing state or federal law, would be defined as "accredited investors" for the purposes of determining whether a securities offering qualifies for the new crowdfunding exemption.

Similarly, the proposed legislation would change the existing, state law definition of "institutional investor" so that more institutions will qualify as "institutional investors" and thus be excluded from the bill's limits on the amount of money that may be raised, via crowdfunding, from investors who are not institutional or accredited investors. Under current Wisconsin law, an "institutional investor" is defined to include certain categories of institutions, such as banks and insurance companies, as well as any entity of an institutional character that has more than $10,000,000 of assets. Under the CASE for Jobs Act, this $10,000,000 threshold would be lowered to $2,500,000, meaning that, under the new law, many more companies would satisfy the state law definition of "institutional investor."
Companies that plan to sell securities relying on the Wisconsin crowdfunding exemption would be required to pay a $50 fee and file a notice of the proposed offering with the Division at least ten days prior to the offering. This notice must include certain information specified in the Act, including a copy of a disclosure statement (the "Disclosure Statement") to be provided to prospective investors.

Under the Act, all money received from investors via crowdfunding must be deposited in an escrow established at a financial institution chartered in Wisconsin, and all investor money must be held in that escrow until the aggregate capital raised from investors is equal to, or greater than, the minimum target offering amount set forth in the Disclosure Statement. If this minimum target offering amount is not reached by the date set forth in the Disclosure Statement, investors can cancel their commitments to invest.

The Act also creates a second, new exemption to Wisconsin's securities registration requirements. Many of the terms of the second exemption are similar to the first but the second exemption does not permit general solicitation or general advertising, so it would not permit crowdfunding. Under the proposed law, a company could not offer or sell securities under either the crowdfunding exemption or this second, new exemption, more than once every 12 months.

While this article summarizes some of the more important provisions of Wisconsin's proposed crowdfunding bill, it is not an exhaustive list of all of the Act's requirements, so readers who want to understand every detail of the proposed Act are advised to consult the actual text of AB350. In addition, it is important to note that the initial draft of this bill was just introduced in the Wisconsin Assembly late last week, so the proposed legislation may change, considerably, before it becomes law. It is also possible that it will never become law, at all. Regardless of what ultimately happens to this crowdfunding bill, however, it is likely to trigger a lively debate about the benefits and risks of permitting equity crowdfunding in Wisconsin.

This article was written by Janice Gauthier, a startup attorney, author of startupblawg.com and owner of The Gauthier Law Group LLC, a boutique startup law firm in Milwaukee that represents founders, entrepreneurs, startups and early-stage businesses in Wisconsin and Illinois.