Since 2011, 35 states plus the District of Columbia have passed laws that allow investment crowdfunding within their borders. At the recent ComCap conference, state leaders discussed their state laws, including what’s working and what’s not. If your state is one of the 15 or so without an intrastate crowdfunding exemption, or with one in the works, you can learn from those that have come before you.
Here are some hard-won tips and advice offered by intrastate crowdfunding veterans:
Lawmaking is not poetry. Bills make their way through legislatures with geeky titles like HB 3429. But when it comes to introducing them to the public, a catchy name goes a long way. “It helps a lot,” says Zach Robins, a securities attorney who helped write Minnesota’s MNvest law, which went into effect in June 2016.
Some other notable names include Kansas’ Invest Kansas Exemption, or IKE, a reference to Kansas native Dwight Eisenhower. Michigan’s Michigan Invests Locally Exemption spells MILE. Oregon nicknamed its law the Community Public Offering, or CPO. And, of course, putting “jobs” in the name always helps—like the federal Jumpstart Our Business Startups (JOBS) Act.
Line up Partners
The bigger the tent, the stronger your coalition. Partners are critical, on both the left and the right, notes Robins. His group courted local Chambers of Commerce as partners alongside social entrepreneurship groups. The good news is, getting capital to small and local businesses is one of those rare areas that attract bipartisan support.
In a similar vein, how you talk about your proposed law can win over potential skeptics. In Michigan, where many lawmakers are leery of government, Chris Miller, economic and downtown developer for Adrian, Michigan and the chief instigator behind the state’s MILE law, talks of small business and “working in support of the free market.” With Democratic leaders, he might play up the democratizing nature of crowdfunding. And who isn’t for creating jobs?
Don’t Fear the Regulators
In places like Oregon and Vermont, crowdfunding portals have established close working relationships with their state regulators, creating a supportive atmosphere. Amy Pearl of Hatch Oregon (who organized the conference) and Janice Shade of Milk Money in Vermont both noted that they can call up their regulators to discuss issues when they come up. “Regulators are your friends!” says Pearl.
The one regulator on the panel, Faith Anderson, Chief of Registration and Regulatory Affairs of the Securities Division of the Washington State Department of Financial Institutions, says she personally works with companies that are looking to raise money through Washington’s intrastate law. So seek out your regulators and get to know them.
Consider a Rule
Laws are messy. And given the limited time that some state legislatures are in session, it can be hard to get laws on the docket, much less passed. In contrast, rules can be created administratively, bypassing the need for a legislative vote. Therefore, they can be done much faster and without all the fuss. Oregon, Georgia, New Mexico and several other states have gone the administrative route.
Portal or no portal?
Many states don’t require dedicated crowdfunding portals, giving entrepreneurs the option to raise money on their own web sites—or even completely offline (hello, Kansas). That’s a big consideration in states where swaths of the population do not have regular Internet access. However, crowdfunding portals can play an important role in raising awareness, streamlining the process and creating transparency.
North Carolina created a novel two-tier system that includes “local public offerings” of up to $250,000 without a funding portal. Larger raises (of up to $2 million) are conducted under a law similar to the federal JOBS Act and require the use a crowdfunding portal.
Don’t Forget the Ecosystem
Crowdfunding does not happen in a vacuum. One stumbling block that early crowdfunding states encountered was a lack of escrow agents—the financial intermediaries that are entrusted to hold onto investors’ money while the company they invested in reaches its minimum funding target. Some laws required that role to be played by in-state banks, yet banks are conservative by nature and many state laws languished for lack of an escrow agent. More recently, states have addressed this gap by allowing organizations other than banks to act as escrow agents. That might include law firms (as in North Carolina) or credit unions (as in Vermont).
Crowdfunding is brand new. And as it evolves, state exemptions will need to evolve as well. Several state have already tweaked their original exemptions to address issues that have arisen or to raise funding caps. Keep that in mind when crafting your exemption. “Give lawmakers an and/or,” says Benji Jones of law firm Ward and Smith in North Carolina. “Broad flexibility gives them leeway to stay nimble.” North Carolina also based its exemption on the newly updated Rule 147A, which is much more permissive and flexible than its predecessor, Rule 147.
Don’t Go it Alone!
At ComCap, a new nonprofit advocacy & educational organization was launched to help create a national support infrastructure for intrastate crowdfunding and other forms of community capital, such as community loan funds. Called the National Coalition for Community Capital (NC3), it is intended to be a resource and collaborative for leaders like you who want to create sustainable local economies that work for all. Locavesting is proud to be a founding member. Join us?