BY RITA W. GARRY & NICHOLE M. FUNDORA

2016 brings ample opportunity and inspiration for hopeful entrepreneurs and young startups in Illinois. Illinois recently enacted House Bill 3429 (“HB 3429”) which amends the Illinois Securities Law of 1953 (the “Act”) to allow Illinois companies and entrepreneurs to raise capital from Illinois residents, subject to monetary limitations, through equity crowdfunding.

What is Equity Crowdfunding?

Equity crowdfunding is an online financing mechanism, which enables multiple parties to make small contributions to a small company or startup in exchange for ownership interest in such company. Since equity crowdfunding typically involves the sale of securities, federal and state security registration requirements are triggered.

Registration is a complex and expensive process. Since the purpose of crowdfunding is to facilitate multiple small offerings and sales, registration is often impractical for a startup company. However, both state and federal law provide certain exemptions which allow a business to circumvent registration (companies must still comply with other requirements of securities law, such as antifraud provisions). Although federal law provides for an intrastate offering exemption, intrastate sales of securities are still subject to state law. Prior to HB 3429, Illinois’ registration exemptions did not extend to equity crowdfunding, even for entirely intrastate transactions.

Illinois House Bill 3429

Most notably, HB 3429 modified the Act with the addition of two new sections: Exemption 4T and Section 8d.

Exemption 4T

Exemption 4T permits a company in good standing under Illinois law (an “Issuer”) to offer and sell securities to Illinois resident investors, without registering such securities, if:

• The offer/sale complies with the federal exemption for intrastate offering
• The Issuer does not raise more than $1,000,000 through intrastate crowdfunding in a twelve (12) month period. This monetary limit is expanded to $4,000,000 if the Issuer provides audited financial statements to prospective purchasers.
• The Issuer does not sell to a particular Illinois resident investor an aggregate amount exceeding $5,000 within a twelve (12) month period.
• Importantly, HB 3429 adopts the definition of “Accredited Investor” as defined by federal law and amends Exemption 4H to comply with such definition. As such, money contributed by an Accredited Investor does not count towards the monetary limitations of Exemption 4T.
• Beyond monetary limitations, Exemption 4T requires an Issuer to make certain financial disclosures, provide detailed offering materials for prospective purchasers, and designate a Qualified Escrowee, who receives and holds payments in connection with an offer or sale, pursuant to an escrow agreement. A “Qualified Escrowee” is either a title company or a bank, regulated trust company, savings bank, savings and loan association, or credit union which is authorized and has a physical business located in Illinois.

Section 8d

Section 8d requires an Issuer seeking to make an offering or sale pursuant to Exemption 4T to make such offer through the use of one or more Registered Internet Portals. To be a “Registered Internet Portal,” the internet portal or the owning entity must be one of following:

• Registered broker dealer as required under federal law (15 U.S.C. 78o);
• Funding portal required under federal law (15 U.S.C. 77d-1);
• Dealer registered under the Act; or
• An exempt internet portal that files an application for registration as a Registered Internet Portal and pays the filing fee ($300). An internet portal qualifies for exempt internet portal status if all of the following conditions are met:
  • It does not solicit purchases, sales, or offer to buy securities offered on its internet portal
  • It does not hold or collect funds in connection with the offerings/sales
  • It does not compensate its employees based on the sales
  • It is not compensated based on amount of securities sold
    The fee it charges to issuers is a fixed amount for each offering
  • It does not offer investment advice (subject to a few exceptions /assumptions)

Conclusion

HB 3429 became effective on January 1, 2016, with supplementary regulations being finalized shortly thereafter. In addition, on October 30, 2015, the SEC adopted final rules that permit crowdfunding from non-accredited investors, subject to the monetary limitations, which are scheduled to become effective January 29, 2016. HB 3429 stands to deliver opportunities for Illinois startups and Illinois resident investors alike, while also keeping successful businesses and people in Illinois.

Contact Rita Garry, (312)696.1366, rwgarry@golanchristie.com or Nichole Fundora (312)696.1367, nmfundora@golanchristie.com to discuss how crowdfunding relates to your business.

Turnaround Management Association Chicago/Midwest Chapter

On November 23, 2015, Golan & Christie partner, Barb Yong, chaired the Executive Speakers Forum of the Turnaround Management Association Chicago/Midwest Chapter. She is pictured here with her husband, Jim Yong and with speakers, Robert Gates (far right) and Leon Panetta (far left), the 22nd and 23rd Secretaries of Defense, who addressed a sell-out crowd of over 650 business leaders and turnaround professionals.