Revised 10/20/2016

Table of Contents

Eligibility to be a Texas Crowdfunding Portal (TCP).

To be eligible for registration as a TCP, the applicant:

  • must be a Texas entity incorporated or organized under the laws of Texas, authorized to do business in Texas, and engaged exclusively in intrastate offers and sales of securities in Texas;
  • must limit its activities to operating an Internet website utilized to offer and sell securities exempt from registration pursuant to Rule 139.25 (Texas Intrastate Crowdfunding Exemption); and
  • does not operate or facilitate a secondary market in securities.

See Rule 115.19(a)(1)-(3).

The simplified registration process for TCPs is designed so that applicants will be subject to fewer regulatory requirements than general securities dealers because they will be able to do fewer things than general dealers. Among other things, the rule prohibits TCPs from engaging in solicitation, making recommendations, and providing investment advice. The TCP's passivity and neutrality, especially with respect to the investing public, are reasons underlying the TCPs streamlined regulatory treatment.

Neither the applicant for registration as a TCP nor its agents are required to pass examinations; they are eligible for a full waiver of the dealer examination requirements. See Rule 115.3(c)(2)(H).

A TCP is prohibited from engaging in certain activities, including:

  • offering investment advice or recommendations;
  • compensating employees, agents, or other persons not registered with the Securities Commissioner for soliciting offers or sales of securities displayed or referenced on its Internet website;
  • holding, managing, possessing or otherwise handling investor funds or securities;
  • being affiliated with or under common control with an issuer whose securities appear on the Internet website;
  • holding a financial interest in any issuer offering securities on the TCP's Internet website; or
  • receiving a financial interest in an issuer as compensation for services provided to or on behalf of an issuer.

See Rule 115.19(c).

A successful applicant would be approved for registration as a Texas restricted dealer, registered to act exclusively as a Texas Crowdfunding Portal (TCP), which offers and sells securities exempt from securities registration solely pursuant to the Texas Intrastate Crowdfunding Exemption (Rule 139.25). Since a TCP is limited to offering and selling securities within Texas, it is anticipated that a TCP that appropriately limits its activities would qualify for the federal exemption for intrastate dealer activity. If an applicant wants to engage in securities activities in Texas beyond those permitted to a TCP, it should consider pursuing registration as a Texas general securities dealer.

An out‑of‑state entity could not register under Rule 115.19 to be a TCP. An out‑of‑state entity could register in Texas as a general dealer to operate an Internet website for Rule 139.25 offerings; however, such an entity would probably also have to register as a broker‑dealer at the federal level due to the interstate nature of its business operations.

Persons desiring to operate a crowdfunding website to offer and sell securities in multiple states should consider pursuing portal registration under the federal securities laws and Securities and Exchange Commission (SEC) rules, when they become final

CAUTION: A securities dealer that conducts all of its business in one state does not have to register with the SEC, but this federal exemption for intrastate dealer activity is very narrow. To qualify, all aspects of all transactions must be done within the borders of one state. More information on SEC broker-dealer registration can be found on the SEC's website. Further, securities-related activities in another state can trigger the requirement to register in that other jurisdiction as well. Contact information for the securities agencies in other states can be found online. The Texas State Securities Board (TSSB) cannot provide interpretations of federal securities laws or securities laws of other states.

Other business.

The TCP may not offer any other types of securities on its website. A TCP could provide general information and resources to issuers but could not provide issuer‑ or offering‑specific guidance. Other securities-related activities, such as advising on a securities offering, or underwriting, marketing, structuring, syndicating, or pricing securities are not permitted under the TCP restricted registration. However, a registered general dealer that operates an Internet website that offers and sells securities exempt from registration under Rule 139.25 would be able to advise an issuer on structuring and valuation of its offering and, generally, offer a wider range of securities‑related services consistent with the capacity in which the general dealer is registered.

The TCP may engage in other non-securities business on its website, including donation- or rewards-based crowdfunding. The TCP should be careful not to commingle the records of its securities and non-securities business. In the event that records are commingled, the commingled records would be subject to inspection and review by the representatives of the Securities Commissioner. See Rule 115.19(e)(7).

A crowdfunding portal registered with the SEC/Financial Industry Regulatory Authority (FINRA) is restricted by the Jumpstart Our Business Startups Act (JOBS Act) from offering securities other than those offered pursuant to Section 4(16) of the Securities Act of 1933 (the federal crowdfunding exemption). Securities offered pursuant to Rule 139.25 are offered under the exemption in Section 4(11) of the 1933 Act so would not be eligible to be listed on a federal crowdfunding portal.

In February 2013, the SEC Division of Trading and Markets issued Frequently Asked Questions (FAQs), providing guidance on the exemption from federal broker‑dealer registration in Title II of the JOBS Act. The JOBS Act added Section 4(b) to the federal Securities Act of 1933. This provision allows a person meeting certain conditions to maintain an online platform that offers and sells securities through general solicitation or advertisements in a 506(c) offering without having to register as a broker or dealer under federal law. The exemption from broker‑dealer registration in the federal act, Section 4(b) only applies when securities are offered and sold under Rule 506 of Regulation D. Other activities by the platform that do not fall within the exemption (such as offering securities under an intrastate exemption) would appear to require such an online platform to register federally. Since the federal exemption in Section 4(b) does not also provide an exemption from state registration requirements, the activity of offering and selling securities pursuant to SEC Rule 506(c) on the platform to Texas residents would require registration in Texas as a general dealer. A general dealer can make intrastate offers and sales of securities pursuant to Rule 139.25 through an Internet website. See Rule 139.25(d).

Avoid offering investment advice or recommendations.

A TCP is prohibited from offering investment advice or recommendations. See Rule 115.19(c). The determination of whether a particular communication rises to the level of investment advice depends on the facts and circumstances and is construed broadly. To the extent a TCP limits its securities activities to those permitted by the rule, it should not come within the meaning of the term investment adviser. If the TCP conducts other activities, such other activities may bring it within the meaning of the term.

Objective criteria.

A TCP may apply objective criteria to limit the offerings on its platform, without being deemed to be providing investment advice. For example, a TCP could limit the offerings on its platform to securities in technology
companies. Those criteria would be required to be reasonably designed to result in a broad selection of eligible issuers offering securities through the TCP's Internet website and be applied consistently to all potential issuers and offerings so as not to recommend or implicitly endorse one issuer or offering over others. The requirements that the objective criteria be reasonably designed to result in a broad selection of issuers and applied consistently are intended to ensure that the TCP does not provide impermissible investment advice. The TCP should not, for example, apply criteria that would so limit the number of issuers that the TCP could be viewed as providing an implicit endorsement or recommendation of those issuers' offerings. An issuer that meets these criteria, and is not otherwise disqualified, would, subject to the TCP's measures to reduce the risk of fraud, be eligible to list its offering on the TCP's Internet website.

One possible criterion could include the type of security being offered (such as common stock, preferred stock, or debt securities). This criterion would be appropriate because potential investors may be interested in certain types of securities. Other criteria also could include the geographic location of the issuer or the industry or business segment of the issuer. These criteria would be appropriate because a TCP may wish to specialize and focus its efforts on facilitating offerings in particular areas or industries. The TCP should disclose to investors the criteria they use to limit the offerings available on their Internet website. This should help investors better appreciate any niche focus of a TCP and the scope of the offerings available on its website. In addition, a TCP may seek to limit the number of issuers or offerings on its website at any given time, including for resource reasons. The application of the objective criteria could, in practice, result in the number of issuers or offerings displayed on the website being very small, such as, for example, in the period soon after a TCP begins operations. The TSSB would not consider the TCP to be providing investment advice if the objective criteria are designed to result in a broad selection of issuers.

A TCP may not use criteria based on an assessment of the merits or the shortcomings of a particular issuer or offering. In particular, a TCP may not deny access to an issuer based on the advisability of investing in the issuer or its offering. However, a TCP must deny access if it believes that the issuer or its offering has potential for fraud or otherwise raises concerns regarding investor protection.

Highlighting offerings.

A TCP may highlight particular offerings of securities on its Internet website based on objective criteria that may include: the type of securities being offered (e.g., common stock, preferred stock, or debt securities); the geographic location of the issuer; the industry or business segment of the issuer; the number or amount of investment commitments made; and the progress in meeting the target offering amount or, if applicable, the maximum offering amount, and minimum or maximum investment amount. These criteria are sufficiently objective, so as to reduce the risk of a TCP applying them to advance a particular bias or subjective assessment of the issuers or offerings. Consistent with the prohibition on investment advice and recommendations, the criteria must be reasonably designed to highlight a broad selection of issuers, so as not to recommend or implicitly endorse one issuer or offering over another, and must be applied consistently to all potential issuers and offerings.

The selection criteria may not be based on an assessment of the merits of a particular issuer or offering and must be clearly displayed on the TCP's platform, to permit investors to comprehend on what basis certain issuers are being highlighted, and, thereby, to help prevent them from misconstruing the highlighting as a recommendation or implicit endorsement of any issuer or offering. The TCP may not highlight an issuer or offering based on the advisability of investing in the issuer or offering. To help prevent conflicts of interest and incentives for TCPs to favor certain issuers over others, a TCP is prohibited from receiving any compensation for highlighting (or offering to highlight) one or more issuers or offerings on its Internet website.

A TCP may not distinguish offerings based on riskiness. Such an assessment of risk necessarily involves the exercise of judgment indicative of the giving of investment advice.

Search functions.

A TCP may provide search functions or other tools that users could use to search, sort or categorize the offerings available on its Internet website according to objective criteria. Search functions could help potential investors to more efficiently search for offerings that focus on a specific industry, funding goal or other criteria. A TCP also would be able to categorize offerings into general subject areas, so a potential investor could readily find those offerings on the website. The potential investor may have the ability to sort offerings based on a combination of different criteria, such as by the percentage of the target offering amount that has been met, geographic proximity to the investor, and number of days remaining before an offering is to close. These objective criteria are consistent with those for highlighting issuers and offerings.

Consistent with the activities specifically prohibited, TCPs would not be permitted to use criteria that search, sort, or categorize offerings based on the advisability of investing in the issuer or its offering or an assessment of any characteristic of the issuer, its business plan, its management, or risks associated with an investment. A TCP could give potential investors the ability to create automated email notifications, based on the objective criteria they have provided to identify particular offerings on the TCP's website.

Permitted activities not constituting investment advice.

A TCP is permitted to advise an issuer on the format or content of the issuer's offering. This includes reviewing and commenting on the issuer's offering documentation. A TCP could advise an issuer on the format and content of the issuer's offering in a number of ways. A TCP could, for example, provide pre‑drafted templates or forms for an issuer to use in its offering that would help it comply with its proposed disclosure obligations. Other examples of permissible assistance could include advice about the types of securities the issuer can offer, the terms of those securities, and the procedures and regulations associated with crowdfunding.

Commissions and other remuneration.

An issuer may not pay a commission or other remuneration for the offer or sale of its securities unless the person receiving the compensation is registered in Texas as a dealer, as a TCP, or as an agent of one of these registered entities. Securities of an issuer may not be listed on an Internet website of a general dealer or TCP that holds an interest in the issuer or that is affiliated with or under common control with the issuer. The issuer may not compensate a general dealer or a TCP by providing a financial interest in the issuer as compensation for services provided to or on behalf of the issuer. See Rule 139.25(l).

Compensation arrangements with registered dealers.

A TCP could enter into certain arrangements with a registered dealer through which they could compensate each other for services. Because of the limited permissible activities in which a TCP may engage, a TCP may wish to contract or affiliate with a registered dealer, which is not subject to similar constraints. For example, a registered dealer could, among other things, recommend securities offered on the TCP's website or provide services involving the handling of investor funds and securities. Conversely, TCPs may wish to offer certain services, including information technology services, to a dealer for a fee. Each party to this type of arrangement would, because it is a regulated entity, need to comply with all applicable regulations, including the rules of any national securities association of which it is a member. A TCP is permitted to pay or offer to pay compensation to a registered dealer for services in connection with its offer or sale of securities in reliance on Rule 139.25. A TCP is permitted to provide services to and receive compensation from a registered dealer in connection with the TCP's offer or sale of securities in reliance on Rule 139.25. Compensation could include any monetary form of payment such as fees, discounts, commissions, concessions, reimbursement of expenses, and other allowances. However, a TCP is not permitted to receive transaction-based compensation for referrals of potential investors in other types of offerings being effected by a registered dealer such as a Rule 506 offering.

Registration application and other filings.

An application for registration as a TCP consists of the following:

  • Form 133.15 (Texas Crowdfunding Portal Registration), including all applicable schedules and supplemental information.
  • Form U‑4, for the TCP's designated officer.
  • Form U‑4, for each of the TCP's agents to be registered. Officers of a corporation or partners of a partnership are not deemed to be agents solely because of their status as officers or partners.
  • A copy of the articles of incorporation or other documents which indicate the applicant's form of organization. The copy must be certified by the Texas Secretary of State or by an officer or partner of the applicant.
  • Registration fee(s). These would be $75 for the TCP and $35 for each designated officer or agent to be registered in Texas.

See Rule 115.19(f)(1).

The Commissioner may require additional information from the applicant if necessary to determine the applicant's financial responsibility, business repute, or qualifications. See Rule 115.19(f).

An applicant can not engage in any securities-related activity until its registration application is approved by the Securities Commissioner. Such activities that occur prior to approval will be considered to be unregistered activity by the applicant and may delay the approval of the application. Unregistered activity may subject the applicant to administrative fines or other actions for the unlawful activity.

Duty to update.

Any material change to the information or responses to questions on Form 133.19 (Texas Crowdfunding Portal Registration) must be reported to the Securities Commissioner by filing an amendment to the form within 30 days of the change. See introductory paragraph on Form 133.19. A TCP is also required under Rule 115.9 and Rule 115.19(f)(2) to report other matters within 30 days including certain:

  • administrative orders;
  • criminal actions or convictions;
  • court orders;
  • actions by self-regulatory organizations; and
  • bankruptcies.

Be sure to timely report anything that changes a response on Form 133.19 or Form U-4.

Renewal of registration.

The registration of a TCP, its designated officer, and its agents expires at the close of the calendar year. These registrations can be renewed for each succeeding year on written application and payment of the appropriate renewal fee(s). The renewal fees are $40 for the TCP and $20 for each designated officer or agent. The filing of further statements or furnishing any further information is not required unless specifically requested by the Commissioner. See Rule 115.19(f)(3).

Withdrawal of registration.

A TCP would file Form 133.16 (Texas Crowdfunding Portal Withdrawal of Registration) to withdraw its registration in Texas.

Website operation - overview.

It is contemplated that the website would be structured to have multiple layers of access. Rule 115.19(b) and Rule 139.25 restrict access to certain areas of the website to Texas residents. Below is an overview of one way this may be accomplished. Other options are available to the TCP so long as it meets the requirements of Rule 115.19 and the securities offerings comply with Rule 139.25.

Tier I Access.

This is the portion of the TCP's website viewable by the general public (Visitors). It must contain the disclaimers to preserve the intrastate character of any offerings appearing elsewhere on the website. See Question 141.04 discussing implementation of adequate measures so that offers of securities are made only to persons residing in a single state. The SEC has indicated that such measures in connection with an intrastate offering include, at a minimum, disclaimers and restrictive legends making it clear that the offering is limited to residents of a single state and limiting access to information about specific investment opportunities to persons who confirm they are residents of the relevant state. Accordingly, this level of access should include appropriate disclaimers and legends stating that offers and sales of any securities on the website are made only to Texas residents. This level could include general information about crowdfunding and the TCP and could be accessible by the general public. It should not include names of issuers in any contemplated or ongoing securities offering but may include information on offerings that have concluded.

Tier II Access.

This portion of the TCP's website would be restricted to persons who have affirmatively represented that they are Texas residents (Authorized Users). See Question 141.04 discussing implementation of adequate measures so that offers of securities are made only to persons residing in a single state and to limit access to information about specific investment opportunities to persons who confirm they are residents of the state. This level would contain the securities-related offering materials (summary of the offering and the issuer's disclosure statement specified in Rule 139.25(h)(2)) for each of the offerings on the TCP's site and the communications channels (See Rule 139.25(g)) through which the issuer and Authorized Users communicate about the offering. See Rule 115.19(h)(1)(B).

Tier III Access.

This is the area on the TCP's website that an Authorized User visits to purchase securities offered on the website. Before the sale can be made, the TCP must repeat the verification process to assure that the purchaser is a Texas resident. The TCP must also obtain certain affirmative representations from the Authorized User before it can permit securities to be sold.

Once the Authorized User has made the required representations and Texas residency has been confirmed, the Authorized User would be a Verified Purchaser. The dollar amount of securities that a Verified Purchaser may buy from an issuer is capped at $5,000 unless the Verified Purchaser is an accredited investor. It is at this level that the TCP would screen a Verified Purchaser to determine if there is a reasonable basis for believing that the Verified Purchaser is accredited. Once the Authorized User has gone through this process, the sale can be made.

TCP's website operations - specifics.

Prior to offering an investment opportunity to residents of Texas and throughout the term of the offering, the TCP must give the Securities Commissioner access to its Internet website. The access must include access to all securities offering information, disclosure materials, and communications between the issuer and prospective investors. See Rule 115.19(b)(3). This enables the Texas State Securities Board (TSSB) to monitor Rule 139.25 crowdfunding offerings in Texas and TCP operations for compliance with Texas securities laws and rules.

Compliance with Rule 139.25.

Since a TCP may only deal in securities offered and sold in compliance with Rule 139.25, the TCP must be familiar with the requirements for that exemption. If the TCP is aware of, or should be aware of, any reason why the exemption is unavailable, it should immediately suspend or terminate the offering on the website. A detailed discussion of Rule 139.25 provisions is available on this website under "Information for Issuers Using the Intrastate Crowdfunding Exemption."

Section 37 of the Texas Securities Act places the burden of proof on a person claiming an exemption to prove up the availability of the exemption.

Content disclaimer.

The TCP's Internet website must contain a disclaimer that reflects that access to securities offerings on the website is limited to Texas residents and offers and sales of the securities appearing on the website are limited to persons that are Texas residents. See Rule 115.19(b)(1) and Rule 139.25(h)(1). This requirement is designed to preserve the intrastate character of the offering and the TCP's activities so the federal registration provisions are not triggered by interstate activities.

Affirmation and verification of Texas residency.

Before a person visiting the TCP website (Visitor) can view securities-related offering materials on the website, the TCP must obtain an affirmative representation of Texas residency from the Visitor. A Visitor who affirms that he or she is a Texas resident to the TCP would be an Authorized User. Only an Authorized User can view the securities offering materials on the TCP website. See Rule 115.19(b)(2).

A separate verification process for Texas residency occurs before an Authorized User is permitted to invest (become a Verified Purchaser) in any of the offerings on the TCP website. See Rule 115.19(b)(2). This to assure that the intrastate character of the securities transaction is preserved and all purchasers will be Texas residents.

Verification of residency may be accomplished by an affirmative representation by the Authorized User that the Authorized User is a Texas resident, and the TCP must confirm residency from an independent source. This confirmation may be through at least one of the following:

  • the Authorized User has a valid Texas driver license or official personal identification card issued by the State of Texas;
  • the Authorized User has a current Texas voter registration; or
  • general property tax records show that the Authorized User owns and occupies property in this state as the Authorized User's principal residence (homestead exemption filed);

See Rule 115.19(b)(2) and Rule 139.25(h)(1)(B).

To give the TCP's flexibility, these are not the only methods a TCP may use to verify Texas residency. Whatever method used should be verifiable through an independent or governmental source or other auditable records. An affirmative representation by the Authorized User is not, in and of itself, sufficient to meet this verification requirement. A record of the method used to verify Texas residency is required to be maintained by the TCP. See Rule 115.19(e)(2)(D).

Ascertaining accredited investor status.

Rule 139.25 requires that the issuer have a reasonable basis for believing that the purchaser is an accredited investor before accepting an investment greater than $5,000. See Rule 139.25(e). Since a TCP can only offer and sell securities pursuant to the Rule 139.25 exemption, the TCP must establish that a prospective purchaser is accredited before permitting an individual investment that exceeds the $5,000 cap. Accordingly, the TCP must take reasonable steps to confirm that purchaser's accredited investor status.

One way to accomplish this is to have the prospective purchaser complete a detailed investor questionnaire prior to transferring any shares or finalizing the sale. The questionnaire should solicit information necessary to confirm the purchaser's status as an accredited investor. An investor can self-certify accredited status. This can be accomplished by having the prospective purchaser provide information that confirms the status, such as identifying the accreditation category applicable to the purchaser. Simply asking a prospective purchaser if he or she is accredited and having the purchaser check "yes" or "no" would likely not be considered a reasonable step. It is prudent to have a purchaser that self-certifies affirm that the information provided to confirm accreditation is true and accurate to the best of their knowledge. Another way to confirm accredited investor status is to rely on pre-screened lists of accredited investors created and maintained by a reliable third party, such as a registered dealer.

Regardless of the method used, the TCP is required to maintain the records used to confirm that a prospective purchaser or investor is an accredited investor. See Rule 115.19(e)(2)(E).

Communications channels.

The TCP or general dealer on whose Internet website the offering appears must provide communications channels that permit the issuer, prospective purchasers, and investors to communicate. All communications must occur on the Internet website and the communications must be visible to all persons with access to the securities offering materials on the website. See Rule 139.25(g)(1).

If the issuer uses video in connection with the offering, it would be included in the communications between the issuer, prospective purchasers, or investors that must occur through the Internet website of the registered general dealer or TCP. The video could not appear in another location where prospective purchasers or investors could view it until after the Rule 139.25 offering has concluded. The video would need to be retained by the TCP pursuant to the recordkeeping requirements in Rule 115.19(e)(2)(G).

One of the integral elements of crowdfunding is to have access to communications with others to tap into the "wisdom of the crowd." No particular methodology is provided in the rule for how the communications channels should be structured so the TCP has flexibility in setting up this mechanism. Since all communications must be archived and retained by the TCP as part of its recordkeeping responsibilities (See Rule 115.19(e)), it should be able to establish accountability for comments made in the communication channels.

A TCP or general dealer may establish guidelines pertaining to the length or size of individual postings in the communication channels and, in the event that communications are made that are obscene, illegal, or irrelevant, the TCP is permitted to remove such postings. The registered dealer or registered TCP also have the option of removing or barring an user that makes such postings. Any posting removed must be maintained by the TCP or dealer as part of its recordkeeping obligations. See Rule 115.19(e) (TCPs) and Rule 115.5 (dealers).

Required acknowledgments before purchase permitted.

In addition, the TCP must obtain an affirmative acknowledgment by an Authorized User that the Authorized User understands certain things before purchasing any of the securities offered through the TCP's website. These acknow-ledgments include:

  • There is no ready market for the sale of the securities acquired from this offering; it may be difficult or impossible for an investor to sell or otherwise dispose of this investment. An investor may be required to hold and bear the financial risks of this investment indefinitely.
  • The securities have not been registered under federal or state securities laws and, therefore, cannot be resold unless the securities are registered or qualify for an exemption from registration under federal and state law.
  • In making an investment decision, investors must rely on their own examination of the issuer and the terms of the offering, including the merits and risks involved.
  • No federal or state securities commission or regulatory authority has confirmed the accuracy or determined the adequacy of the disclosure statement or any other information on this Internet website.

See Rule 115.19(b)(4).

The acknowledgment must be obtained before each investment made by the Verified Purchaser. A Verified Purchaser buying securities in different offerings must make these acknowledgments before being allowed to invest in each of the offerings.

Escrow of funds.

Payments received from investors for the purchase of securities (investment commitments) must be directed to and deposited in an escrow account with a bank or other depository institution located in Texas. The funds must be held in escrow until the amount raised from all purchasers is equal to or greater than the minimum target offering amount specified in the issuer's disclosure statement. If the offering is withdrawn or terminated by the issuer, TCP, or general dealer, or if the target amount of the offering is not raised by the time stated in the issuer's disclosure statement, all of the funds must be returned to the investors in full. See Rule 139.25(f).

The escrow account needs to be in a federal or Texas‑chartered bank or depository institution located in Texas. An account at a Texas branch of a federal‑charted bank or depository institution would meet this requirement. A depository institution is an entity with the power to accept deposits under applicable law and so could hold funds deposited into an escrow account. A trust company with the power to accept deposits under Texas law could be among the Texas‑chartered entities permitted to hold funds in an escrow account. There is no requirement that the escrow account be interest bearing. 

Offerings raising $100,000 or less may opt to use a segregated account in lieu of an escrow account. When a segregated account is used, additional disclosures must be made to investors and other requirements apply.  Information specific to use of a segregated account to hold investor funds is provided in Use of a Segregated Account.

Obligations of parties to an escrow agreement, and liability that attaches for failing to meet any of those obligations, are governed by the terms of the escrow agreement and general contract law. The rule gives the parties the ability to set the terms of the escrow contract, including any indemnification agreement that they deem appropriate. Accordingly, liability arrangements should be addressed in the contract between the parties and in disclosures made in connection with the limitation on liability for small business issuances in Section 33.N of the Act.

The issuer, dealer, or TCP have flexibility to specify the method for an investor's payment into the escrow account and may limit payment methods if they so choose. The parties to the escrow agreement or contract could impose requirements or restrictions, such as requiring that all payments be made through the ACH (Automated Clearing House) network. Some TCPs or dealers may choose to permit purchasers to buy securities by using a credit card to make payments, rather than through money or funds transfer between financial institutions.

If the offering is terminated without being funded or closed, each investor receives back the full amount of his or her investment from the escrow account. Rule 139.25(f). No deductions may be made from the investors' funds. Any fees collected by the escrow agent for maintaining the escrow account or issuing checks to investors must be paid by a party other than the investor. It is anticipated that the other party to the escrow agreement (whether the dealer, TCP, or the issuer) would pay any such fees charged by the escrow agent.

Distribution of funds.

The offering must disclose the target offering amount and the deadline to reach the target offering amount. If the offering is conducted as a minimum-maximum offering, the issuer should disclose, at the commencement of the offering, both the minimum and maximum amounts. For example, if the issuer sets a target offering amount of $200,000 but is willing to accept up to $750,000, the issuer would be required to disclose both the $200,000 target offering amount and the $750,000 maximum offering amount that it will accept. In addition, the issuer would be required to disclose, at the commencement of the offering, how shares in oversubscribed offerings would be allocated. The issuer has flexibility to structure the offering as it believes is appropriate and investors must be provided with the disclosures they need to make an informed investment decision.

Investors should receive clear disclosures about their right to cancel, the circumstances under which an issuer may close an offering early and the need to reconfirm the investment commitment under certain circumstances, so investors are aware of their rights to rescind an investment commitment. The description provided by issuers should describe the process to cancel an investment commitment or to complete the transaction once the target amount is met, including:

  • Cancellation rights of the investor and the deadline for a cancellation;
  • That the issuer, TCP, or general dealer may withdraw or terminate the offering;
  • Identify how the investors will be notified when the target offering amount has been met;
  • If an issuer reaches the target offering amount prior to the deadline identified in its offering materials, it could close the offering early if the issuer provides notice about the new offering deadline to investors;
  • Notice of material changes to the offering must be given to investors and investors given an opportunity to cancel or reconfirm their investment commitment; and
  • If the investment commitments do not reach the target offering amount at the time of the offering deadline or if the offering is withdrawn or terminated, no securities will be sold in the offering, investment commitments will be cancelled, and all funds committed by investors will be returned.

Limitation on liability.

Section 33.N of the Texas Securities Act contains a provision that may limit liability in certain small business offerings. If the limitation applies, the maximum amount that may be recovered against a person to which the limitation applies in a civil action brought under Section 33 of the Texas Securities Act is three times the fee paid by the issuer to the person for services related to the offer of securities. The limitation does not apply if a trier of fact finds the person engaged in intentional wrongdoing in providing the services.

To invoke the liability limitation, the small business issuer offering the securities must provide a written disclosure of the limitation of liability created by Section 33.N to the prospective buyer and have received a signed acknowledgment that the disclosure was provided. See Texas Securities Act, Section 33. More information on this limitation of liability provision is provided later in this material.

The issuer could choose to provide the notification through the Internet website and the TCP or general dealer could provide a mechanism to receive signed acknowledgments from purchasers of the securities.

Background and regulatory checks on issuers and control persons.

A TCP must conduct a reasonable investigation into the background and regulatory history of an issuer whose securities are offered on its website. This check includes the issuer's control persons. An issuer's "control persons" include its:

  • officers;
  • directors;
  • other persons having the power, directly or indirectly, to direct the management or policies of the issuer, whether by contract or otherwise; and
  • persons holding more than 20% of the issuer's outstanding equity.

See Rule 115.19(d).

A TCP must deny an issuer access to its Internet website if it has a reasonable basis for believing that:

  • The issuer or any of its control persons is subject to a disqualification listed in Rule 139.25(m). These disqualifications include certain actions by the SEC or state securities administrators, criminal convictions, certain court orders, and related party transactions.
  • The issuer has engaged in, is engaging in, or the offering involves any act, practice, or course of business that will, directly or indirectly, operate as a fraud or deceit upon any person.
  • The TCP cannot adequately or effectively assess the risk of fraud by the issuer or its potential offering.

See Rule 115.19(d).

These checks must be performed prior to any offering being displayed publicly on the TCP's Internet website. The TCP is given flexibility on conducting these checks and can conduct them itself or contract them out to a third-party provider. A TCP should investigate and understand the procedures used by a third party to determine if it is reasonable to rely upon the results provided by the third party. Whether conducting the check itself or relying on a third party, a TCP must have a reasonable basis for believing that the check was thorough enough to disclose any of the listed disqualifications or likelihood of fraud. See Rule 115.19(d).

The rule does not establish specific procedures for TCPs to follow to reduce the risk of fraud beyond conducting the prescribed background and regulatory checks. This approach allows a TCP to use its experience and judgment, as well as its concern for the reputational integrity of its Internet website, to design systems and processes to help reduce the risk of fraud in securities‑based crowdfunding.

The checks should be conducted to help assure both investor protection and the health of the crowdfunding industry by aiding in fraud deterrence and detection. Suggested information to review and steps to take in conducting an effective background and regulatory check include, but are not limited to, the following:

  • Credit reports, uniform commercial code filings, bankruptcy filings, state or federal tax liens, court judgments.
  • Business or professional licenses, if required.
  • The entity's franchise tax status ‑ obtain a "certificate of account status" from the Texas Comptroller of Public Accounts.
  • Company address - confirm that a company address is a business address of the company and not just a service‑of‑process address or a mail drop location.
  • Other offerings by the issuer or its affiliates. A TCP should verify the amounts raised by the issuer through other securities offerings within the relevant time period in the rule. See Rule 139.25(d) and (m)(4).
  • Background checks must be performed on the issuer and its control persons. These should include, but are not limited to, administrative, civil, and criminal actions.
  • State document comparison. Check to ensure the entity has a certificate of formation on file with the Texas Secretary of State, and obtain a "certificate of status" from the Secretary of State. A certificate of status provides a statement of an entity's status, as well as the entity's current legal name and date of formation or registration. Check that the persons listed as officers and/or directors on the issuer's disclosure statement are the same as reflected on the issuer's state filings.
  • Regulatory filing. Verify that the issuer has filed Form 133.17, Crowdfunding Exemption Notice, with the TSSB prior to the offering appearing on the Internet website.

The TCP may wish to review the crowdfunding best practices guide promulgated by CrowdFund Intermediary Regulatory Advocates (CFIRA) for additional ideas on how to conduct thorough regulatory and background checks. 

Since a TCP is required to conduct background and regulatory checks on the issuer and its control persons and must deny access to an issuer if the TCP has a reasonable basis for believing the issuer is engaging in fraud or the offering would operate as a fraud or deceit, the TCP could discuss its specific findings and assessments with the issuer.

Recordkeeping.

The TCP is required to keep certain records related to offers and sales made through its Internet website and in transactions where it receives compensation. The records must be kept for a minimum of five years from the date of the document or communication or the date of the closing or termination of the securities offering. These records may be archived when they are over two years old. A detailed list of records and the retention periods are contained in Rule 115.19(e) and includes items such as:

  • compensation records;
  • information provided by the TCP and communications between the TCP, issuers, prospective purchasers, and investors, including information provided through the communications channels during an offering;
  • agreements and/or contracts between the TCP and an issuer, prospective purchaser, or investor;
  • information used to establish Texas residency or accredited investor status; and
  • records that reflect all of the TCP's assets and liabilities, income and expense, and capital accounts.

In addition, the TCP must keep a copy of all filings made with the Securities Commissioner. These include Form 133.15 (the Texas Crowdfunding Portal Registration application), Form 133.16 (the Texas Crowdfunding Portal's Withdrawal of Registration), Form U‑4 (Uniform Application for Securities Industry Registration or Transfer used to register the TCP's designated officer and agents), and any amendments made to those forms. See Rule 115.19(e)(3).

Video used by the issuer in connection with the offering is considered a communication between the issuer, prospective purchasers, or investors that must occur through the Internet website of the registered general dealer or TCP. The video could not appear in another location where prospective purchasers or investors could view it until after the Rule 139.25 offering has concluded. The video would need to be kept by the TCP pursuant to the recordkeeping requirements in Rule 115.19(e)(2)(G).

These records must be furnished to the Securities Commissioner on written request. Additionally, the TCP must provide the Commissioner with access, inspection, and review of the Internet website operated by a TCP. A TCP is subject to inspection as provided in Section 13-1 of the Texas Securities Act. See Rule 115.19(e).

These records must be maintained in a manner so that they are available for immediate and complete access by representatives of the Securities Commissioner. If an electronic storage system is used, it must preserve the records in a non‑rewriteable, non‑erasable format and verify automatically the quality and accuracy of the storage media recording process. If the required records are commingled with records not required to be kept, representatives of the Commissioner may review all commingled records. See Rule 115.19(e)(7).

Limitation on liability.

Section 33.N of the Texas Securities Act contains a provision that may limit liability in certain small business offerings. If the limitation applies, the maximum amount that may be recovered against a person to which the limitation applies in a civil action brought under Section 33 of the Texas Securities Act is three times the fee paid by the issuer to the person for services related to the offer of securities. The limitation does not apply if a trier of fact finds the person engaged in intentional wrongdoing in providing the services.

A "small business issuer" is an issuer of securities that, at the time of an offer to which the limitation applies:

  • has annual gross revenues in an amount that does not exceed $25 million; and
  • does not have equity securities registered, or required to be registered, with the U.S. Securities and Exchange Commission.

The limitation applies to:

  • offers and sales of a small business issuer's securities that, in an aggregate amount, do not exceed $5 million; and
  • a person (including an attorney, accountant, consultant, or the firm of the attorney, accountant, or consultant) who has been engaged to provide services relating to such offers and sales of securities.

To invoke the liability limitation, the small business issuer offering the securities must provide a written disclosure of the limitation of liability created by Section 33.N to the prospective purchaser and have received a signed acknowledgment that the disclosure was provided.

Penalties for noncompliance.

If a registered restricted dealer, including a TCP, engages in activities that are beyond the scope of its registration (i.e., unregistered activity), it can result in criminal, civil, and/or administrative action being taken against it as well as its control persons and others who aid or assist the TCP.

If an issuer fails to comply with the terms of the Rule 139.25 exemption from securities registration, the issuer and those assisting the issuer in the offer and sale of the unregistered securities are subject to criminal, civil and/or administrative action. A dealer (including a TCP) involved in an unregistered offering may also be liable for assisting or offering securities when there is no exemption for the offer and sale of those securities. This includes criminal, civil, and administrative liability.

Persons engaging in, or assisting another to engage in, the offer or sale of a security by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, are subject to criminal, civil, and/or administrative action.

If the offers and sales also result in the loss of a federal intrastate exemption from securities or dealer registration, additional remedies and liability exist under federal law.

More information on the criminal, civil, and administrative penalties available to address unregistered or fraudulent activities under the Texas Securities Act can be found by reviewing Sections 14, 23, 23-1, 23-2, 29, and 33.

Other.

Social media.

Outside of the communications channel on the general dealer or TCP’s Internet website, Rule 139.25 allows the issuer to distribute a limited notice. Dissemination of the notice must be restricted to Texas. The content of the notice is limited to a statement that the issuer is conducting an offering, the name of the registered general dealer or TCP through which the offering is being conducted, and a link directing potential investors to the dealer or TCP’s Internet website. The notice must contain a disclaimer that the offering is limited to Texas residents and offers and sales of the securities appearing on the Internet website are limited to persons who are Texas residents. See Rule 139.25(g)(2). Some options for the issuer’s distribution of the notice may be unavailable due to the requirement that distribution be limited to Texas if the distribution channel cannot, by its nature, be restricted to Texas.

As for SEC Rule 147, compliance with which is required to claim the Rule 139.25 exemption, the SEC issued the following guidance on October 2, 2014:

Issuers generally use their websites and social media presence to advertise their market presence in a broad and open manner so that information is widely disseminated to any member of the general public. Although whether a particular communication is an "offer" of securities will depend on all of the facts and circumstances, using such established Internet presence to convey information about specific investment opportunities would likely involve offers to residents outside the particular state in which the issuer did business.

We believe, however, that issuers could implement technological measures to limit communications that are offers only to those persons whose Internet Protocol, or IP, address originates from a particular state or territory and prevent any offers to be made to persons whose IP address originates in other states or territories. Offers should include disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law. Issuers must comply with all other conditions of Rule 147, including that sales may only be made to residents of the same state as the issuer.

Given this guidance, we recommend that issuers consult with an attorney to ensure compliance with SEC Rule 147 when using a website or social media in connection with their securities offerings.

Anti-money laundering.

The Texas Securities Act and Board rules do not contain any anti‑money laundering provisions other than the requirement that a registered securities dealer or registered investment adviser establish, maintain, and enforce written supervisory procedures to supervise the activities of its agents or representatives that are reasonably designed to achieve compliance with the Texas Securities Act, Board rules, and all applicable securities laws and regulations. See Board Rules 115.10 and 116.10. It appears likely that a TCP would not be subject to the requirements in the federal anti‑money laundering requirements since it cannot handle funds, securities, etc. A TCP  should avoid engaging in activities that would cause it to be required to register with the SEC, but if the TCP is careful to conduct only intrastate activities, it should fall within the intrastate exemption from broker‑dealer registration at the federal level. Whether the escrow agent is subject to the federal anti‑money laundering provisions  is a matter outside of our jurisdiction, and the TSSB cannot opine on the applicability of federal laws. Guidance on federal anti-money laundering requirements can be obtained by visiting the U.S. Department of Treasury's Financial Crimes Enforcement Network website and the Federal Financial Institutions Examination Council website.