With New State Rules, WeFunder to Offer Equity Crowdfunding in MA
Massachusetts has joined the growing list of states that are opening up private company investing to people who aren’t already rich, and one online investing startup is already planning to take advantage.
Under new state rules issued this week, private Massachusetts companies can begin selling stock to just anybody who wants to purchase it—provided they’re also in the Bay State.
“It was a pleasant surprise for us,” said Mike Norman, co-founder of online investment company WeFunder, which plans to help businesses seek investment under the new state rules. “Massachusetts doesn’t necessarily have a reputation for being super progressive on this kind of stuff.”
The rule change is a huge shift from previous laws governing risky, early stage investments, which have generally been limited to people who make hefty annual salaries or have a large net worth.
It’s part of a broader legal change that began with federal approval of the JOBS Act, which will eventually let everyday investors buy stock in private companies. It’s part of a broader movement toward “crowdfunding,” which harnesses the Internet to collect pools of customers or investors who can raise large sums of money through a ton of smaller contributions.
Entrepreneurs and investors are waiting eagerly for the Securities and Exchange Commission to finish putting that national law into effect. Until the SEC acts, private companies are generally only allowed to raise money nationwide from “accredited” investors, which are those who make at least $200,000 per year or have a net worth of $1 million.
But in the meantime, state officials have begun loosening their own restrictions, giving companies the ability to raise money from smaller investors within their home state. More than a dozen states have jumped at the chance to legalize “equity crowdfunding” within their borders, including Wisconsin, Washington, Michigan, and Colorado.
Massachusetts joined the group on Thursday with an announcement from Secretary of the Commonwealth William Francis Galvin, the state’s top securities regulator.
“This exemption will enable Massachusetts startups and entrepreneurs to more easily use the internet to raise capital which I hope will, in turn, give a boost to the Commonwealth’s economy and foster job growth here,” Galvin said. “And a carefully crafted regulation such as this offers protections for investors and companies using this new form of generating capital.”
There are some restrictions. Companies are limited to $1 million in equity crowdfunding in a year, or $2 million if the company’s financial statements are audited and made public.
Massachusetts residents whose income and net worth are less than $100,000 can chip in either $2,000 or 5 percent of their income or net worth to each company, whichever is larger. For investors above that $100,000 income threshhold, the individual investment limit is $100,000.
WeFunder—whose founders have been heavily involved in federal crowdfunding policy—has previously used its online system to raise money for early stage companies, including Woburn, MA-based flying-car manufacturer Terrafugia.
But WeFunder has not yet taken advantage of state-level equity crowdfunding to open up its website to everyday investors in any particular state. Instead, like most other sites of its type, WeFunder has been waiting for the SEC to put national rules into effect.
That will change with Massachusetts’s new equity crowdfunding rules. Norman said that, since the company is headquartered in Massachusetts, it will soon begin searching for companies that want to open up their fundraising efforts for in-state equity crowdfunding.
“We have all the systems and everything set up to be able to do this. It’s just a matter of finding the right kind of companies,” Norman said.
What’s not clear right now is how WeFunder might make money on such campaigns, Norman said. The state regulations say companies can only get paid if they are registered broker-dealers or agents in the state, which WeFunder is not.
But the company still plans to open its website and systems up to companies and investors seeking to break new ground with equity crowdfunding—keen to make sure it’s capturing the early ripples of what could become a sizable wave of financial change.
“Entrepreneurship is this thing which is just such a part and parcel of the American culture and identity, but so few of us have a chance to play a part in it,” Norman said. “This idea of being able to collectively fund the kind of businesses that you want to exist in your community is really powerful.”