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New Regulation Facilitates Crowdfunding-Type Investments for D.C. Small Businesses

Monday, October 27, 2014

District of Columbia small businesses now have another option for raising capital through a new regulation issued by the D.C. Department of Insurance, Securities and Banking.

The new regulation, “District of Columbia-Only Securities Offerings Exemption,” establishes an exemption from the District’s full securities registration requirements in order to simplify and encourage investing in D.C.-based small businesses.

“The steps we are announcing today represent yet another way my administration is advancing the goals of our Five-Year Economic Development Strategy,” said Mayor Vincent C. Gray. “By providing the District’s small businesses with innovative ways to raise capital, we continue to help grow and diversify the District’s economy and create jobs for our residents.”   

This type of offering, known as “intrastate,” is exclusive to District-based businesses and can only be offered and sold to District residents. Intrastate offerings, securities that can only be purchased in the state of issue, are not subject to Securities and Exchange Commission registration but fall within the department’s jurisdiction. In addition, the business entity must be organized under D.C. law to qualify.

“Our goal is to provide a streamlined, cost-effective alternative for raising capital that benefits District entrepreneurs and at the same time protects local investors,” said Chester A. McPherson, the department’s acting commissioner.

District residents with incomes of $100,000 or less may purchase the securities in amounts not to exceed $10,000. District residents with incomes of between $100,000 and $200,000 may purchase the securities in amounts not to exceed $25,000. District residents with incomes greater than $200,000 may purchase the securities with no limitation on the amount of the investment, subject to a graduated offering ceiling of $2 million. Also, District of Columbia-organized companies with assets or net income in excess of $1 million may purchase the securities with no limitation on the amount of the investment, subject to the graduated offering ceiling.

Businesses with audited financials may raise up to $2 million under this regulation. One million may be raised by issuers without audited financials if they provide financials reviewed by certified public accountants. An issuer can raise up to $500,000 provided it has financial statements and representations on the part of the company principals. 

Also, in this regulation, issuers can advertise the offering through the website of a licensed broker-dealer, or through the issuer’s website, to the extent permitted by the Securities and Exchange Commission’s Rule 147. The Jumpstart Our Business Startups Act or “JOBS Act” established a new class of securities firms called “funding portals.” District issuers may use funding portals when the Securities and Exchange Commission and the Financial Industry Regulatory Authority implement the funding portal provisions of the JOBS Act.

To view the final rule and for more information, follow this link.