Intrastate crowdfunding is starting to heat up in Illinois. VestLo, the state’s first official intrastate crowdfunding platform, launched its maiden offering earlier this month, with more planned for January. And the founders have been accepted into a Chicago-based incubator, which is leading to new connections and growth opportunities.
“Illinois companies are hungry for growth capital and there will be plenty of exciting deal flow,” says Howard Orloff, cofounder and chief marketing officer of VestLo (pictured above, right). “Our challenge will be educating and introducing the investing public to these new opportunities.”
The Illinois law is one of the more liberal intrastate exemptions, which to date have been passed by 34 states. It allows Illinois-based companies to raise up to $4 million from state residents in a 12-month period. That’s higher than most states allow (with the exception of Georgia, which allows companies to raise up to $5 million) and four times more than companies can raise under Title III of the JOBS Act. Unaccredited investors are capped at a $5,000 investment per company, per year.
The first issuer on VestLo is Card Frenzy, a discount card and gift shop. The company, which has three locations in Illinois, is raising $500,000 from Illinois investors through a preferred share offering to expand its franchising operations.
Orloff considers it a soft launch—he plans to officially launch the first week of January with four additional offerings. “We launched very quietly just to make sure everything was working as expected.”
But then, what’s a few more weeks? For Orloff, this moment has been a long time coming. In 2011, after stumbling across Kickstarter—which he thought was “change the world stuff”—he created a crowdfunding review site for fun. In the young industry, “I became an accidental crowdfunding expert,” he says. In 2013, he was contacted by an investment bank and helped create IPO Village, an early investment crowdfunding site that was a little too ahead of its time, and closed before conducting any deals. His next stop was Zacks Group, where he helped create an investment platform for accredited investors.
Through Anthony Zeoli, an Illinois attorney who championed Illinois’ intrastate law, Orloff was introduced to Hector Robles (pictured on left), a Wall Street sales and trading executive who was also looking to get involved in the new crowdfunding space. “Our ideas were more similar,” says Orloff of his now-partner. A lot of people who professed interest in crowdfunding simply wanted to move investment banking onto the Internet, he said. “That’s not what I wanted the platform to be.”
He and Robles set out to create their own site using the Illinois Intrastate Crowdfunding Exemption. Passed with broad bipartisan support in May 2015 , the law did not go into effect until January 1, 2016.
VestLo was approved by Illinois regulators in May 2016. But there were other hurdles to tackle.
Illinois law, like many intrastate laws, requires investor funds to be held in escrow until they are released to the business. But VestLo had a hard time finding a bank that would act as an escrow agent. For big banks, the amounts were too small to bother with, he says. And while smaller banks were more enthusiastic, they didn’t have the resources to dedicate. After several months, he and Robles found a willing partner in Lakeside Bank.
So what kind of businesses will use the exemption? Orloff says he’s seeing interest from small-scale real estate developers, including some on Chicago’s south side that have had difficulty obtaining capital from banks and traditional sources. He also sees demand from local retailers that, like Card Frenzy, have two or three established locations and are looking to expand.
“What I find exciting is the opportunity for folks in a neighborhood to lift up their own neighborhood,” he says.
In addition, Orloff believes many businesses will carve out smaller pieces of a bigger institutional or accredited investor deal for friends and family and the marketing benefits that such campaigns can bring.
VestLo charges a $500 due diligence fee and a flat fee of 5% of the midpoint between the minimum and maximum offering amount. (Under Illinois’s law, the minimum cannot be less that half of the maximum—a provision designed to protect investors from companies that set very low minimums that don’t allow them to accomplish their goals).
The founders are proceeding at a deliberate pace. “We want to be as careful as we can in this fledgling market and make sure businesses are far along enough to raise money from their neighbors,” says Orloff.
Like others, he says the biggest challenge is educating the public about this new investment option. Many would-be investors equate crowdfunding with donation sites like GoFundMe, he says. “Without question, our ability to educate folks is the number one challenge.”
Things may pick up starting in the spring of next year when changes to Rule 147, the federal exemption that underlies most intrastate crowdfunding laws, goes into effect. In October, the SEC adopted changes aimed at modernizing the rule. The changes include a more flexible formula for determining a company’s principal place of business. In addition, the SEC created a new rule, Rule 147A, that eliminates the ban of advertising beyond state borders, opening the way for more Internet and social media promotion.
Those changes remove two of the biggest obstacles that have held back broader use of intrastate crowdfunding. However, states will have to amend their rules if they want to make use of the new Rule 147A.
Case in point: Card Frenzy, like many companies, is incorporated in Delaware, even though it is physically based in Illinois. So the company had to create an Illinois-based LLC for the franchise part of its business in order to use the current intrastate exemption.
Orloff believes Illinois will move quickly on implementing Rule 147A. Zeoli, he says, is already working on the amendment and legislators have been receptive. “It will open things up tremendously.” In particular, he adds, “the clarity provided will give attorneys the comfort they need to recommend this capital-raising option to their clients.”
So how will intrastate crowdfunding fare against Title III crowdfunding, which allows for a nationwide audience of investors?
“For me it’s very clear: intrastate, for many businesses, has tremendous advantages.” In Illinois, those advantages include a higher offering limit, a simple registration process and no audited financials for offerings below $1 million.
Recently, VestLo was accepted into the inaugural incubator program created by the Chicago-based tech incubator 1871 and the Illinois Hispanic Chamber of Commerce (IHCC). “The relationships we are building by participating in the 1871/IHCC incubator are already proving to be priceless,” says Orloff. “Along with structured learning from leaders in the Chicago start-up community, we have the opportunity to work with and be challenged by our peers. These entrepreneurs in many cases fit the exact profile of issuing companies we are looking to host on VestLo—and in some cases just might.”
Other funding portals active in Illinois include TruCrowd, which has done mostly Title III to date.
Photo by 1871/Rena Naltsas