United States: Texas Opens Its Doors To Crowdfunding

In the race between states vying for startup businesses, Texas proposes to sweeten the deal with a new proposal that exempts crowdfunding initiatives from state securities laws.

For those new to the concept, crowdfunding refers to a method of raising money from a large number of small investors, typically through an online portal or platform, in order to finance a new business venture. Entrepreneurs who raise money through crowdfunding often use social media to share their efforts, which increases traffic to their crowdfunding page. Certain crowdfunding sites, such as Kickstarter, operate on a donations-based model. That is, individuals contribute to their preferred startups and causes without receiving any equity or interest in return. Consequently, Kickstarter campaigns are not considered securities offerings.

Other platforms, such as AngelList and CircleUp, restrict participation to accredited investors. While this allows them to comply with federal securities laws, the limited access to such offerings goes against the appeal of crowdfunding as a more open, egalitarian, and small-business friendly platform for raising capital. Therefore, proponents of crowdfunding have advocated for an exemption to the federal securities laws that would allow them to raise relatively small amounts of capital from the general public while avoiding the burdens of current regulations.

This goal appeared to be within reach after Title III of the JOBS Act prompted the SEC to draft a new exemption making it easier for small businesses to raise money from non-accredited investors via online portals. While observers in the startup community were initially optimistic about the potential for crowdfunded offerings on a national scale, they have lowered their expectations after the SEC took a year and a half to release proposals for its crowdfunding rules. It is not yet known when those rules will go into effect.

The Texas State Securities Board Publishes Proposal for Crowdfunding Exemption

The Texas State Securities Board recently released its own proposed crowdfunding rules for public comment. As with the proposals in other states, the Texas rules rely on the intrastate offering exemption set forth in Section 3(a)(11) of the Securities Act.

This exemption provides that any issue of securities offered only to investors residing within one state, where the issuer is a resident of the same state, is exempt from registration under the federal securities laws. Each state has its own intrastate offering regulations, and exemptions for crowdfunding proposals must generally fall under this exemption or they are preempted by federal securities laws.

The key provisions of the proposed crowdfunding exemption in Texas are as follows:

Eligible businesses may raise up to $1 million per 12-month period.

An issuer must be a Texas entity to be eligible for the crowdfunding exemption, and it may only offer securities in Texas. The eligibility and residency requirements mirror those set forth in Rule 147, enacted pursuant to the federal intrastate offering exemption.

In order to meet the residency requirements, an issuer must be able to demonstrate the following:

  • The issuer must be organized in and have its principal place of business in Texas;
  • at least 80% of the issuer's gross revenues during its most recent fiscal year prior to the offering must be derived from the operation of a business in Texas;
  • at least 80% of the issuer's assets at the end of its most recent semiannual period prior to the offering are located in Texas; and
  • at least 80% of the net proceeds of the offering must be used in connection with the operation of the issuer's business within Texas.

While the exemption is designed to benefit startup companies, the company must have a defined business plan and investment goals. Finally, customary bad actor disqualifications also apply, and the issuer may not be an investment company or an SEC reporting company.

Once an issuer meets these requirements, it may raise up to $1 million within each 12-month period (including offerings by control persons).

Non-Accredited investors may contribute up to $5,000 per offering.

Investments pursuant to the proposed crowdfunding exemption are limited to $5,000 per investor, unless the investor is an accredited investor as defined in Rule 501 under the Securities Act of 1933. If an issuer wishes to raise larger amounts from accredited investors, it must verify the investor's accredited status first. Investor funds must be placed in escrow until the specified minimum offering amount has been raised.

In addition, only investors resident in the State of Texas may participate in crowdfunding offerings. Investors will be required to submit a Texas driver's license number, voter registration card or property tax records to prove that they are Texas residents. Before purchasing any securities, prospective investors must confirm their acknowledgment of certain customary disclaimers.

Offerings must be carried out online through a registered dealer or crowdfunding portal.

The responsibility for verifying eligibility of investors lies with each online dealer or crowdfunding portal. Each site must review any documents submitted by a prospective investor and confirm the investor's residency in Texas before allowing access to the portal. In addition, crowdfunding portals must conduct background and regulatory checks on each issuer and each of the issuer's directors, officers, and other control persons to determine eligibility with the crowdfunding exemption and the potential risk of fraud.

Those establishing crowdfunding portals may register by filling out a form, completing a background check and paying the standard registration fee for securities dealers in Texas. Principals are not required to pass the General Securities Registered Representative (Series 7) Exam or the Uniform Securities Act State Law (Series G5) Exam. Instead, new procedures have been proposed to allow such portals to register as restricted dealers. Crowdfunding portals operating under the proposed rules must limit their access and trading activity to Texas, and may not offer investment advice, manage investor funds, or facilitate secondary market transactions, among other prohibited activities.

While crowdfunding portals will be required to maintain certain offering-related records for at least five years following an offering, they are not required to monitor individual offerings on an ongoing basis. Portals are, however, subject to certain post-registration reporting requirements and renewal fees.

Issuers are required to submit limited disclosures.

Issuers raising money through crowdfunding must claim an exemption from registration by filing new Form 133.17 with the State Securities Board. Issuers must post a summary of the offering and an offering disclosure on a registered crowdfunding portal or dealer site at least 21 days before any securities may be sold. The disclosure must include risk factors, a description of the issuer's business, operations, and management, a description of the securities and other material information. However, the required disclosure will be brief compared to disclosures required for larger offerings. The State Securities Board expects to release guidance for crowdfunding disclosures simultaneously with the rules' enactment.

All communications with investors must occur on the portal via open message boards accessible to other prospective investors. Issuers are permitted to distribute a limited notice stating that the issuer is conducting an offering and providing a link to the crowdfunding portal that will host the offering, but the notice may only be distributed to investors located in Texas. This provision limits the possibility of advertising crowdfunding offerings through social media.

Notably, issuers relying on the crowdfunding exemption will not be required to provide reviewed or audited financial statements unless audited financial statements are already available for any of the three years prior to the offering. Issuers may instead have their CEO certify that the issuer's financial statements are accurate and complete as of the date of the offering.

SEC's Crowdfunding Exemption Seen as Flawed

The SEC's proposed rules have been widely criticized by analysts for being overly burdensome and costly. In particular, the proposal requires issuers raising $500,000 or more to submit audited financial statements on an annual basis, and all issuers must be prepared to submit financial statements in accordance with GAAP. Companies raising $100,000 or less must submit a tax return for the most recent fiscal year. Furthermore, issuers are subject to annual filing requirements.

As a result of these and other regulatory burdens, the SEC estimates the cost of compliance for raising capital at up to 40% of the proceeds raised, while some analysts have noted that the cost can be even higher for offerings at the lower end of the scale. Furthermore, the SEC's proposal requires funds to be held in escrow during a review period, even after the target minimum amount has been raised.

These federal-level obstacles have led several states to propose new rules or legislation that rely on the intrastate offering exemption under the Securities Act. All of these initiatives would allow small businesses within each state to tap into crowdfunding as an innovative way to raise capital from the general public.

Texas' Recipe for Crowdfunding Success

What makes the Texas proposal unique is the sheer size of the state. With a population of 26 million, Texas offers a business-friendly regulatory environment and a sufficiently large market for small- and medium-sized businesses to raise financing through crowdfunding. At present, Texas is the second largest state to support a crowdfunding initiative. California, the largest state, has pending a Crowdfunding proposal which would require action by the state legislature. Michigan, the next largest state to enact a crowdfunding exemption, has less than half the population of Texas.

The Texas proposal also has a few advantages over the proposed exemptions in other large states. For example, the Texas proposal was initiated by and enjoys the support of the Texas State Securities Board. By contrast, Florida recently saw its legislation die in committee following reported opposition from the Florida Office of Financial Regulation.

Furthermore, while issuers in Texas would be subject to the customary rules related to fraud, nothing in the proposed rules would create additional liabilities for small businesses raising capital through crowdfunding. California's crowdfunding bill, however, contains potential pitfalls for the unwary small business issuer and has not yet left the sponsor's committee in the State Assembly. In particular, the California legislation entails greater risks of litigation for issuers by authorizing courts to award treble or punitive damages to purchasers of securities where the issuer violates certain qualification provisions of the crowdfunding exemption. Indeed, Texas' proposal is focused on striking the balance between protecting investors and encouraging small businesses to thrive.

Next Steps for Crowdfunding in Texas

The rules proposed by the Texas State Securities Board were published in the Texas Register on May 9, 2014 and are subject to a 30-day public comment period before they may be adopted. After the comment period ends, the State Securities Board may adopt the proposal as published, adopt it with amendments, or revise it and republish it for public comment. Strasburger & Price will keep you apprised of developments, and our attorneys are always open for discussion about how these changes can affect your business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.