How States Are Moving Faster than Federal Regulators on Equity Crowdfunding


Despite legislation that allows equity based crowdfunding from 2012, little movement has been made on a national level to change the rules of investing to allow this. Designed to give businesses a chance to get back on their feet, several states have sought to adopt their own rules to allow residents to invest small amounts of money into their local businesses.

The State of Maryland is one of the leaders of this local movement to support local businesses. Under their proposed legislation that could potentially be enacted by Q4 2014, businesses would be able to raise up to $100,000 in $100 increments for equity or debt. That doesn’t seem like a lot of cash and if you’re a tech startup, it’s not going to help you get off the ground. What it will do, however, is let a business innovate, add a second location, or invest into cost-saving measures that can help pay investors back.

There Are 12 States That Have Adopted Equity Crowdfunding

As of August 2014, a dozen states, including Maryland, have made it possible for businesses to begin considering equity crowdfunding. Another 12 states and the District of Colombia are considering provisions at some level within the chain of government at the moment. This means the vision that the 2012 legislation isn’t being achieved on a national level, but a grassroots movement is still trying to make equity crowdfunding a reality.

This isn’t going to help all businesses, but it will help a few. That’s because a state can only regulate businesses that exist and do business within their own borders. For a business with a national presence, there would be a limited scope to the investment that is possible because an equity crowdfunding campaign could only operate on a state-by-state level.

In other words, if 12 states allow equity crowdfunding, a national business with a location and presence in those states would need to run 12 separate equity crowdfunding campaigns that were independent of each other. Still… that’s a better solution than not being able to do any equity crowdfunding at all.

How Come Out of State Investors Are Not Allowed?

Under current crowdfunding rules, a business that accepts funds from an out of state investor could run afoul of national regulations that haven’t caught up to the local rules that are starting to be put into place. This means a potential SEC violation could occur and that has the potential of severe financial penalties and even criminal investigation. Not something a small business needs.

Even if states would allow cooperative equity crowdfunding, it may be a potential SEC rules violation. For that reason, businesses would be forced into a small fundraising box until national legislation catches up to what local businesses need. Although it has been two years in the making, the times are changing. There should be movement in this area of crowdfunding soon. That means businesses can get the capital they need from investors who may wish to contribute, but would normally not be allowed to do so.