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The Invest Georgia Exemption: How Intrastate Offerings or "Crowdfunding" Can Help Start and Grow Georgia's Businesses
By Nicholas P. Flint
Who would have thought that Georgia would be a pioneer of the crowdfunding movement? Georgia was just the second state to enact a regulatory framework to allow crowdfunding under the new federal exemptions from security registration for intrastate offerings. Through this legislation, Georgia has provided a valuable tool to its businesses to raise capital from in-state investors.
What is the Invest Georgia Exemption?
The Invest Georgia Exemption (IGE) is a tool that allows Georgia businesses to raise capital by offering their securities solely to in-state investors. This relatively new law provides an avenue for Georgia-based companies to "go public" without having to go through the costly and time-consuming reporting procedures for going public on national exchanges. However, there are some limitations with the IGE – most notably, that investors can only be Georgia residents and that the amount that can be raised is capped.
What is an intrastate offering?
The federal Securities Act of 1933 imposed strict registration requirements for companies wanting to sell their shares publicly. This, in effect, precluded smaller companies from selling their securities to the general public because the process became so expensive and time-consuming. To help such companies grow, the Securities and Exchange Commission (SEC) provided an exemption from the registration requirements for in-state businesses that offer their securities to only in-state investors – the "intrastate offering" exemption. The SEC later adopted Rules 147 and 504 to provide guidelines and limitations for businesses seeking to use this exemption.
How does it work?
In 2011, Georgia adopted its original version of the IGE to provide a regulatory framework for businesses to take advantage of the intrastate offering exemption in Georgia, becoming just the second state to adopt such a framework. The early IGE effectively mirrored the SEC's rules, but its requirements made it difficult for companies to qualify for the exemption, and companies were only allowed to raise a maximum of $1 million through an offering. At the end of 2016, the SEC amended Rule 147 and promulgated new Rule 147A in an attempt to modernize the intrastate offering exemption and lower the regulatory burden on companies using the exemption. These changes, which took effect in April 2017, make it easier for companies to qualify for the exemption and allow companies to raise increased amounts from in-state investors.
In response to the new SEC rule, Georgia revised the IGE, giving companies more flexibility in their use of its intrastate offering framework. The amended IGE took effect in July 2017. As of this writing, only 50 companies have taken advantage of the IGE by filing with the Secretary of State to issue securities under Georgia's intrastate offering framework. It is a useful tool of which startups, small businesses, and larger, established companies in industries such as real estate, construction, health care, restaurants, and film production should be aware.
What are the requirements?
Companies may issue their securities to in-state investors if the following general requirements (among other things) are met:
- The company must be a for-profit entity that has its principal place of business, and is doing business, in Georgia.
- Offers to sell securities can only be made to residents, or individuals the issuing company reasonably believes to be residents, of Georgia.
- The company cannot raise more than $5 million through a single offering.
- The company cannot accept more than $10,000 from a non-accredited investor.
- The company must file a notice with the Georgia Secretary of State before conducting an offering.
Nicholas Flint is an associate attorney with Flint, Connolly & Walker, LLP who represents domestic and international clients on a variety of corporate and transactional matters, including mergers and acquisitions, joint ventures, private equity and venture capital transactions, financing and lending arrangements, and debt and equity offerings. In addition to his transactional work, Nick routinely serves as a general business and legal advisor to his clients, counseling on matters such as corporate governance, executive compensation, regulatory compliance, and commercial contracts.
