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 limited to the Badger State. He wants to become a national leader in what could be an important, rapidly growing market.

“We want to become a national platform for investments, it’s just a question of how you get there,” he said. “Whether the SEC comes out with a workable rule or not, or whether it’s on a state-by-state basis, that’s the future we’re envisioning.”

So, while the way Dupee would realize that vision remains a little unclear, how he and CraftFund got to this point is not. It starts in Washington, DC, and requires a very brief lesson about investing regulations.

The impetus behind CraftFund was the JOBS Act, a federal law passed in 2012. The law changed securities regulations in a few ways, but the provisions people like Dupee noticed were those that seemed to loosen the rules about who could make equity investments in privately held companies.

Current SEC rules require those accredited investors to have a net worth of more than $1 million or annual income greater than $200,000 in the past two years. With the JOBS Act, people who did not meet the criteria would be able to make small investments in companies using online fundraising sites.

Cash-hungry entrepreneurs and would-be investors rallied behind the idea, seeing it as a blend of seed investing and Kickstarter that would democratize investing and usher in the age of equity crowdfunding. The concept has its share of skeptics, though, who raise concerns about protecting against fraud and question whether it’s wise for tech startups following the traditional venture capital pathway to take on hundreds or even thousands of shareholders through crowdfunding.

With high hopes, entrepreneurs rushed in to create the funding platforms. But more than two-and-a-half years later, everyone is still waiting on the SEC to finalize the long-overdue regulations. The reasons the agency has taken so long are convoluted—one reason is it has to balance the need for companies to raise money with keeping new investors from getting fleeced by bad apples.

A Wall Street Journal article explained the issues, but the bottom line is, as Dupee said, “it’s kind of a mess.”

That’s when he switched to Plan B and looked to Madison instead of the feds.

“It became clear that that was not going to go anywhere, so that’s why we became involved with the Wisconsin Legislature,” he said.

States are able to regulate businesses located within their borders that only want to sell stock to in-state residents, and that presented an opening. There was some lobbying involved, but in early June, the state’s new law went into effect.

While each state’s laws are different, the new rules usually cap the amount companies can raise. In Wisconsin, it’s up to $1 million unless the companies agree to be audited and share the results with investors, in which case they can raise $2 million.

The laws also cap the amount individual investors can put into a company. Wisconsin limits it to $10,000 in a single offering, and all investors have to do is be able to prove they’re legal residents in the state. The amount is uncapped if they meet the national accredited investor standard or Wisconsin’s new, less-strict criteria for “certified investors.”

In short, this is still unchartered territory, and investors and entrepreneurs are studying matters like how the laws would impact them and the best way to run crowdfunding campaigns. While Dupee thinks “crowdfunding has been talked about ad nauseam” in startup circles, he realizes people running portals need to do outreach to potential investors.

“There’s a lot of education that needs to be done, and building awareness,” he said. “Our focus on Wisconsin now is just to show that this could work, that the general public can make these kinds of investments, and they can succeed.”

After all, supporters don’t want state-level equity crowdfunding to be the same disappointment the national version has become.

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