Crowdfunding is a great new option for small businesses in need of funding, but either can’t or won’t go through traditional banks for a loan.
The rewards crowdfunding model has become very popular over the last few years with platforms like Kickstarter and Indiegogo, but the trend towards online equity crowdfunding has been growing in leaps and bounds.
These changes come with the adoption of the Jumpstart Our Business Startups Act, a law that is meant to encourage the creation of jobs and funding for small businesses by easing securities regulations.
Unfortunately Title III of the JOBS Act, which will allow startups to solicit investments from unaccredited investors, has continuously been delayed with the SEC planning to finalize the act in October 2015.
Until then, many states have recently chosen to take on their own intrastate crowdfunding exemptions – giving non-accredited investors an opportunity to invest in local startups.
Overview
Most intrastate crowdfunding bills currently propose an overall funding cap of $2,000,000 per year (for businesses who provide independently audited finances), otherwise the cap is $1,000,000.
While some bills required platforms to be founded within-state, most of the newer versions only require that the platforms be authorized to transact business in the state. In most cases, the public can invest up to $5,000 in a company.
State-by-State Info
As of June 2015, twenty-four states have currently enacted or adapted their laws to include some form of intrastate crowdfunding.
These include: Alabama, Colorado, DC, Florida, Georgia, Idaho (decided case-by-case), Illinois, Indiana, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Mississippi, Montana, Nebraska, Oregon, Tennessee, Texas, Vermont, Virginia, Washington, and Wisconsin.
The two states that have rejected proposed intrastate crowdfunding bills are Nevada and Utah.
States that are currently investigating or pending legislation include: Arizona, Arkansas, Alaska, Hawaii, Ohio, California, Missouri, Minnesota, New Jersey, New Mexico, Iowa, West Virginia, North Carolina, New Hampshire, Connecticut, and Rhode Island.
The States that have still not looked at or considered intrastate crowdfunding laws include: North Dakota, South Dakota, Oklahoma, Wyoming, Louisiana, Delaware, Pennsylvania, and New York
Companies Taking Advantage of Intrastate Crowdfunding Exemptions
In June 2015, Crowdfund Insider highlighted the first crowdfunding platform in Texas to leverage new intrastate crowdfunding rules – NextSeed. One of the co-founders, Youngro Lee, shared:
“From the beginning, we wanted to focus on non-accredited crowdfunding because (1) we believe the potential for growth and impact is exponentially greater in the non-accredited space based on sheer demographics (i.e., accredited Investors are less than 3% of the US population and, on a global basis, much smaller), and (2) we really wanted to be able to use our experiences and expertise to help regular people. While implementation of Title III of the JOBS Act has been delayed, we knew that individual states were increasingly taking matters into their own hands. When it became clear that Texas was also going to implement its own crowdfunding laws, we decided to start here due to the size and strength of the Texas economy (Texas is the 2nd largest state in the US with 4 of top 11 largest cities in US), as well as our personal and professional ties to Texas.”
The first funding offer closed by the company was Hair Revolution, who funded a $25,000 loan from 17 investors. The estimated annualized return for investors is 7.69% over a target payment period of 11 months. In addition to revenue sharing the team also offered investors bonus rewards based on the amount of the investment. For example, investors of $2,000 or more were able to receive:
“[A] consultation from one of Hair Revolution’s expert stylists and a special makeover session! Includes a cut, color, style, makeup, and before & after photos.”
Another Texas-based platform that makes use of new intrastate crowdfunding laws is MassVenture, notes a post by Silicon Hills News. As noted on the company’s website:
“When you invest in local businesses and real estate, you’re diversifying your income and protecting your future. Now you don’t need to rely on the twists and turns of the stock market or the low-returns of your savings accounts. You can take a portion of your savings and put them to work, generating short term cashflow and long term value in businesses you can actually see working in your community.”
One other one I found was Michigan Funders, launched using the CrowdEngine platform. Currently the platform is due to relaunch soon, and their website states:
“We are Michigan’s first homegrown equity crowdfunding portal to welcome all investors, regardless of their income bracket. We’re kind of like Kickstarter, mixed with The TV Show Shark Tank. You only invest and support companies you believe in, but when you support a project, you become a stakeholder — so, you see return value if the company succeeds. We’re locally grown, locally focused, and working to grow Michigan: We’re from here. We love this place.”
Unfortunately, it seems like even though many states are embracing intrastate crowdfunding laws, there aren’t very many new platforms launching to take advantage of these opportunities so far.
Conclusion
Even though many states have already adopted intrastate crowdfunding laws (with others set to follow suit), there is still a long way to go before these rules are put to use on a wide scale. Right now one of the biggest challenges is educating the public about this new opportunity to help make adoption more widespread.
Still, many are hoping that will fewer restrictions small businesses will find it easier to secure loans. Allowing non-accredited investors to participate in equity offerings will not only drastically change the number of available investors to small businesses but also give them a chance to interact with local stakeholders on a more personal level.
Feel free to share your experiences below, or comment with a state you would like us to write a specific post about!
