WHAT YOU DIDN’T KNOW ABOUT TEXAS CROWDFUNDING

Texas plans to introduce intra-state Crowdfunding within the next couple of months. If you thought Texas would follow the lead of Georgia and other states, you’re in for a surprise.

In fact, many of the things being done in Crowdfunding around the country will be prohibited in Texas:

  • An entrepreneur looking to raise money under the Texas intra-state rules will not be allowed to do it himself. Instead, all Texas Crowdfunding must go through a Texas broker/dealer or a registered Texas Crowdfunding portal.
  • In the Crowdfunding industry today, from FundersClub to RealtyMogul to Fundrise, it’s typical for the portal or its affiliate to take an interest in the issuer, i.e., a “carried interest” or a “promote”. Not in Texas, where the portal may not receive or hold any financial interest in the issuer.
  • In the Crowdfunding industry today, third party services like bancbox typically serve as escrow agents. Not in Texas, where a Texas depository institution (e.g., a real bank) must hold the initial escrow.
  • In the typical Crowdfunded debt transaction, exemplified by Patch of Land or RealtyMogul, the portal or an affiliate lends the money to the ultimate borrower and then borrows money from the crowd. Not in Texas, because technically the portal or its affiliate is then the issuer, which is prohibited.

For some of these hurdles there are Texas-specific workarounds, while for others there are not. However that plays out, it’s interesting that Texas, more often associated with laissez faire economics, adopted what looks to be the most restrictive intra-state Crowdfunding law in the country.

Questions? Contact Mark Roderick

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