Crowdfunding

Is it Time for State-Based Crowdfunding to Shine?

Locavesting Staff | August 13, 2017

Facebooktwittergoogle_plusredditlinkedinmailFacebooktwittergoogle_plusredditlinkedinmail

What do Alaska, Florida, Texas and Vermont have in common? They’re among the 34 states that have passed state-based crowdfunding laws.

When it comes to crowdinvesting, most of the attention goes to the JOBS Act, the 2012 federal legislation that gave us Regulation Crowdfunding, Regulation A+ and other provisions that make it easier for small companies to raise money from individual investors through the use of crowdfunding.

But the JOBS Act isn’t the only game in town. In fact, its requirements and fees can be overkill for smaller, local businesses that have a strong local following but may not be able to (or want to) attract a national audience of investors.

For these businesses, state-based crowdfunding may be a better route.

Since 2011, 34 states and the District of Columbia have enacted or passed laws that allow investment crowdfunding within their borders. Think of them as mini JOBS Acts intended to be used only by in-state businesses raising money from in-state residents. The laws tend to be simpler and less costly than the JOBS Act, often requiring just a one or two-page form to be filed with state regulators. In some states, businesses don’t even have to use a crowdfunding portal to raise money; the offering can take place on their own web site or entirely offline.

The state-based laws were created by local lawmakers out of frustration with the slow pace of federal reforms (the last piece of the JOBS Act didn’t go into effect until May 2016) and a desire to create workable rules tailored to their states.

ComCap17

The intrastate crowdfunding club spans states large and small, red and blue, sultry and snowy. They vary in how much capital they allow companies to raise, how much unaccredited investors may invest, and even what kind of companies may participate (for example, Vermont and Oregon bar extractive industries). What they all share is a desire to help their homegrown businesses raise capital, create jobs and strengthen their local economies.

From this perspective, intrastate crowdfunding offers several potential advantages over federal frameworks:

1. It is uniquely aimed at community-scale entrepreneurs—which is to say the majority of the nation’s small businesses.

2. The familiarity that investors have with the local market and companies (they may be customers or know the entrepreneur) allows them to make more informed investment decisions.

3. The relationships, reputations and social capital at stake in these intrastate deals can mitigate the risk of fraud and ‘bad actors.’

4. Rather than purely speculative motives, such as ‘getting in on the next Facebook’, intrastate crowdfunding may be driven by social and civic motives, and can help channel capital to deserving enterprises that otherwise have limited funding options.

5. It can help build local financial ecosystems in capital deserts.

6. Many intrastate crowdfunding issuers choose simple financing options, such as revenue or profit-sharing agreements, which can be more suitable than equity or fancy convertible notes for small businesses and novice investors.

7.  Intrastate crowdfunding helps build local wealth by allowing local residents to invest in and share in the success of local businesses, rather than having profits flow to outside investors.

8. States are more nimble than the federal government and can tailor investment crowdfunding laws to their own needs.  They are laboratories that allow for experimentation and refinements that may ultimately trickle up to the federal level.

For all its promise, state-based investment crowdfunding has lagged behind Regulation Crowdfunding and other JOBS Act-based exemptions. While there is a general lack of awareness and knowledge around crowdinvesting, that’s particularly true with intrastate. Entrepreneurs, investors and the broader ecosystem of service providers (including lawyers, SBDCs, Chambers of Commerce, etc.) are often unaware of that these state laws exits at all.

There’s also little coordination or knowledge sharing among state leaders. And insufficient outreach and support infrastructure prevents state-based crowdfunding from reaching disadvantaged communities where capital is most needed.

Two developments should help.

Rule 147A
Last October, the S.E.C. amended the federal rules that underlie the majority of state crowdfunding laws (Rule 147) to address some major obstacles. The new Rule 147A lifted a ban on advertising beyond state borders. So businesses may now publicize their offerings via social media and other forms of promotion. (However, they still can only accept in-state investors). There are also more flexible terms to determine what businesses qualify as an in-state. These changes should make intrastate crowdfunding a more attractive option.

The only hitch is, states need to update their intrastate laws to reference the new Rule 147A, which often requires legislative action. At least 8 states have adopted the new rules to date, according to the North American Securities Administrators Assoc.

Infrastructure
There are also efforts to connect isolated state-based crowdfunding activities, share knowledge and coordinate initiatives. In September, the second national ComCap conference will take place in Monterey, Calif., bringing together leaders from a dozen states. The event is co-sponsored by a new non-profit organization called the National Coalition for Community Capital (NC3), which is being formed to plug gaps in the ecosystem supporting intrastate crowdfunding and other forms of community capital.

Locavesting is a partner of both NC3 and ComCap. If you’re interested in creating an entrepreneurial ecosystem that works for all in your community, use code NC3 for a 25% discount to ComCap17. We hope to see you there!

Facebooktwittergoogle_plusredditlinkedinmailFacebooktwittergoogle_plusredditlinkedinmail

Tags: , , , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *