On Jan. 22, nine entrepreneurs stepped onto a small stage at a launch party in Portland and into Oregon—and crowdfunding—history. There was an artisan ice cream company, a maker of all-terrain farm vehicles, a healthcare startup and, this being Portland, a taproom-cum-barbershop. The nine men and women were the first entrepreneurs to raise capital under the state’s brand new crowdfunding rules.
Oregon may not be the first state to pass such a law—it followed at least thirteen other states that have allowed investment crowdfunding within their borders. But it’s easily the fastest out of the gate.
The Oregon Intrastate Offering Exemption was created with a seven-month administrative process instead of the slower and more common trek through the state legislature. And coordinated efforts to train and organize entrepreneurs meant that Oregon had more capital-raising campaigns launched on Day 1 than most states hope to have in a year.
By studying the successes and failures of the states that have gone before it, and involving a broad range of stakeholders, Oregon has forged perhaps the clearest path yet to this new form of community finance.
Under the new rules, Oregon-based companies can raise a maximum of $250,000 through debt or equity offerings—far below the limits in some other states. And to protect investors, state regulators capped each investor at $2,500 per deal, the lowest of any state. Reflecting the small-scale nature of the deals and the types of businesses the law was intended to help, it was dubbed by those who use it the Community Public Offering, or CPO.
Amy Pearl, the head of Portland-based nonprofit and incubator who championed the new rules, calls it “compatible capital—funding that’s compatible with the realities of the business.” Because the entrepreneur writes the terms of the offer, she says, it’s more likely to be aligned with their plans. It’s also compatible with the values and interests of investors and even communities. “It’s just a more balanced approach to economic activity,” says Pearl, pictured above (in green dress) with the nine entrepreneurs and state Representative Tobias Reed. “The CPO creates a real stakeholder economy.”
By Pearl’s estimates, if Oregonians shift just 1% of their savings into local crowdfunding, they would inject nearly $1 billion into the state’s economy.
The initial CPO campaigns are still underway, and not all may be successful—in fact one entrepreneur had dropped out by April. But Oregon’s story is instructive for other states struggling to generate momentum around intrastate crowdfunding.
As trailblazing as it is, Oregon’s crowdfunding law was born in a “me too” moment, after its northern neighbor, Washington state, enacted crowdfunding rules.
Pearl, who leads Hatch Innovation, a social enterprise incubator and co-working space in northeast Portland, had watched closely as Washington debated and, in March 2014, passed its law. When she bumped into Oregon’s Secretary of State at an event a month later, she asked what Oregon was doing to create its own rules. The official was puzzled. “That’s when I decided to gather some folks together,” says Pearl.
She reached out to the local business development organization, community activists, a key legislative staffer and local lawyers to see what could be accomplished.
“You have to start with everyone in the ecosystem, and you have to plow forward even though there are those in the status quo who say it will never amount to anything,” Pearl says. “I would attribute our success to the relationship building early on.”
Indeed, people warned Pearl not to “poke the hornets nest” by going to regulators or the state bar association’s securities division. And in some of the early conversations with them “it was a little like a firing squad,” she said. But by partnering with the potential hornets, they built the nest together.
Rules vs. Laws
Although Pearl was headed down a legislative route, she got a receptive hearing at the state’s Finance and Corporate Securities Division, which has rulemaking authority. “There’s no need to take this to legislature,” explained David Tatman, the Division’s Administrator. “We decided we can do this and we have the authority.”
As Tatman explains: “The legislature tends to do things in a very broad brushes. When it comes to consumer protection and things that are fairly fine tuned, sometimes they don’t have the opportunity to get the details right and we have to come back every two years to fine tune it. If we didn’t get it right, it could sit fallow for two years.”
Tatman’s staff convened a rulemaking committee, composed mainly of the team that Pearl assembled. “One of the goals for us was not to make this so complex that it defeated the goals behind it, and Amy was a great help in reminding us of that,” he said.
The process, from start to finish, took seven months. It was so successful that Tatman recommends that any state regulator seeking to create crowdfunding rules convene a stakeholder committee.
One innovative requirement is that entrepreneurs pursuing a CPO must meet face-to-face with a small business development center, economic development district or state-approved non-profit accelerator or incubator. These experts review the company’s business plan, although they do not sign off on or approve the offering or the business plan.
That requirement helps assure potential investors that the entrepreneur is indeed a real person and is local. And it gives entrepreneurs a chance to plug into some expertise that could help build their businesses, Tatman said.
Flying the plane as you’re building it
Many states might have stopped there. But Pearl wasn’t content to get the law changed. She wanted it used—right away. While the rules were still in draft form, she assembled entrepreneurs from across the state to begin preparing them to use the CPO the minute the rules went live.
In a series of workshops at Hatch’s light-filled Portland incubator in a former car dealership, Pearl and a team of lawyers and
advisors coached the entrepreneurs. They worked on their business plans, organizational structures and their required filings, even as the CPO rules shifted with each draft. “You are flying the plane as you’re building it. That’s one of the overarching themes for us,” Pearl said. (This reporter participated in the workshops and worked on Hatch’s launch efforts.)
The Hatch team also built a web portal, http://hatchoregon.com, that acts as a clearinghouse for information and a place for entrepreneurs to list and sell their securities. And it worked with Hatch’s resident law firm, Catalyst Law, LLC, to create a trust service to hold investors’ money until the entrepreneurs reached their required funding minimums.
With some last minute scrambling and down-to-the-wire trips to the post office, the nine entrepreneurs submitted the paperwork enabling them to launch as soon as legally possible (the Oregon exemption became law on January 15, but there was a 7-day waiting period before entrepreneurs could begin marketing their offerings).
Allowing Innovation to Flourish
To celebrate the milestone, Pearl held a launch party at Hatch that drew hundreds of interested and simply curious Oregonians. The nine entrepreneurs took to the stage and pitched their products. That evening, some received their first checks from investors.
Pearl is excited about the potential to unleash local innovation through start-ups and small business. And she sees a broader trend at work. “We talk about impact investing in other countries, but these statewide investing laws ask us to look inward—they connect us to our communities, and they ask us to choose investments based on what we care about. Local investing is, de facto, impact capital.”
Tatman, the regulator, agrees. “Most of us that invest in American commerce are doing it for our own personal gain,” he said. Crowdfunding serves two purposes. “Yes, we’re doing for our own financial gain, but there’s a sense that we’re helping our neighbors, particularly those here in Oregon, to try to put business on its feet, to help put people to work and improve the Oregon economy.”
Bruce Melzer is a Portland-based business journalist and a business advisor.