Startups and 13 States Jumpstart Equity Crowdfunding Without SEC

Ever wanted to own your own little piece of a startup, but found you don’t quite have the money to do it? Well, now you can buy a stake in a local brewery, restaurant, or software company—at least if you live in Wisconsin, Michigan, Washington, Colorado, or other states with new laws that let companies raise money by selling equity through online crowdfunding sites.

Texas also recently passed new regulations that are expected to go into effect soon, while bills in California and North Carolina allowing “equity crowdfunding” were defeated but could be reintroduced this year.

With the rules in place, some startups already are launching websites, sometimes called “online portals,” to connect investors and entrepreneurs. One of the first is Milwaukee-based CraftFund, which allows Wisconsin craft breweries, restaurants, and real estate companies to sell equity through its website.

“This is totally new, and this is the first public offering of this type in the state,” CraftFund founder and CEO David Dupee said.

Or anywhere in the U.S., really. Since 2012, 13 states have passed new laws or changed their regulations to make equity crowdfunding available to the masses. Wisconsin and Michigan enacted their new laws last year, while Washington’s went into effect in April. Texas security regulators approved the necessary changes for the state in October.

The details of each state’s rules are different, but the goal is the same: to make it easier for startups of all types to raise money, even if they are in geographic areas without a strong base of angel and seed-stage investors. Advocates such as AOL co-founder Steve Case believe equity crowdfunding could enable cities outside of Silicon Valley to emerge as startup and tech hubs.

The policies also are intended to make investing an option for people who previously were barred from investing in private companies by the Securities and Exchange Commission because they didn’t have the high salaries or net worth to become “accredited investors.”

So far, it’s very early to talk about any traction that sites like CraftFund have created. Just two Wisconsin companies are selling equity through the site, one of which is Madison, WI-based MobCraft. Others are heading in that direction, Dupee said. There are more than a dozen Wisconsin businesses that have created profiles on CraftFund, and he thinks five to seven might begin selling stock in the next few months.

Dupee said he is legally barred from discussing details about individual companies, but he did say the average investment through CraftFund has been around $1,500, and more than 30 people had invested in the first few weeks after the site went live in late September.

Nearly 80 companies nationwide have created profiles on CraftFund, Dupee said, including businesses in Colorado, California, and North Carolina, but they can’t raise money through the site unless they’re based in Wisconsin. That’s because the state’s crowdfunding law only permits Wisconsin investors to put money into locally based companies. The SEC has yet to approve final federal rules that would permit interstate equity crowdfunding. (More on that later.)

Other sites have track records that are a bit longer than CraftFund’s—which suggests the idea of using the Web to sell stock in private companies could work. Indianapolis-based Localstake says it has helped Indiana and Michigan businesses raise more than $3 million from more than 3,100 investors, although most of its deals are loans.

The biggest player in equity crowdfunding is AngelList. The important distinction between that site and one like CraftFund is that CraftFund is open to non-accredited investors.

Equity crowdfunding could help small businesses raise money, but there’s also a motive that’s not financially related—giving supporters an emotional stake in entrepreneurs and startups they know and wish well.

“The concept makes a lot of sense for these types of companies because they really have an incentive to connect and engage with customers, and this is the ultimate form of customer participation,” Dupee said.

While CraftFund is focusing on small business startups that could thrive locally, its success might have national implications. Dupee’s ambitions aren’t … Next Page »

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