Equity Crowdfunding Backers Clash Over Fundraising Limits in States

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crowdfunding campaigns to $100,000 and $250,000, respectively.

Given the fees and legal expenses associated with setting up investment crowdfunding, Wilmington, NC-based angel investor Tom Vass believes the Maryland and Oregon fundraising caps make crowdfunding prohibitively expensive for companies in those states. Vass wants no limits on how much a company can raise, calling crowdfunding caps an unnecessary restriction on a company’s ability to grow.

“No public purpose is served by limiting the amount of capital a company can raise,” Vass says. “Companies need capital to grow. That’s what the public interest is.”

But Bill Warner, an angel investor and co-founder of EntreDot, a Research Triangle Park, NC,-based organization that supports entrepreneurs, says crowdfunding is intended for small businesses, not tech and biotech companies. It fills an investment gap for small businesses and seed-stage firms, which have the hardest time securing financing, he says. At that stage, Easley doubts most companies are seeking more than a few hundred thousand dollars. “If you’re a more mature company that needs $5 million, $10 million, you can get it, there’s other places,” he says, citing venture capital firms.

Instancy’s Singh has traveled the venture capital road before. As the co-founder of another e-learning software company, MindLever, he helped raise $5 million in venture capital to grow that company prior to its 2001 acquisition by Centra Software. In his search of $5 million for Instancy, Singh has made his case to venture capitalists. But he now sees venture capital firms narrowing their investments, choosing companies that have already hit certain revenue and customer benchmarks, which reduces a venture capitalist’s investment risk.

Singh adds that venture capitalists want to be close to their portfolio companies, which means that the dearth of VC firms in the Southeast compared to the Northeast and the West Coast puts a North Carolina company at a disadvantage. That’s why Singh supports intrastate crowdfunding and why he wants higher fundraising limits, or no cap at all.

State crowdfunding legislation won’t pass without a cap, says Zeoli, who was involved in the Illinois effort to write crowdfunding legislation this year. Though he pushed for no restrictions on how much companies could raise, he says his state’s lawmakers were unwilling to consider crowdfunding legislation without limits. Zeoli countered with a $20 million cap. Lawmakers settled on $4 million.

Despite the cap, Zeoli says companies still have crowdfunding options. A section of federal securities law permits companies to raise money from unaccredited investors in any state by offering up to $5 million in securities in any 12-month period. It’s rarely used. This “Regulation A” also requires companies to register these offerings in each state where securities are to be sold, making such offerings expensive.

But securities regulators last week approved rule changes in the JOBS Act that remove the requirement to register such offerings in each state. The “Regulation A+” changes also lift the fundraising ceiling to $50 million, enough for a “mini-IPO,” Zeoli says.

Zeoli still prefers that states don’t restrict how much companies can raise through intrastate crowdfunding. But he says companies can still crowdfund under the federal rules, as long as they’re willing to disclose more information and subject themselves to the regulatory scrutiny that comes with raising more money under Regulation A, and A+.

“You’re still getting access to money you didn’t have access to before,” Zeoli says. “If it’s not enough, it’s more than you had to begin with.”

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Frank Vinluan is an Xconomy editor based in Research Triangle Park. You can reach him at [email protected] Follow @frankvinluan

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