States Are Starting to Pass Crowdfunding Laws

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Raising $67,000 from just 52 local backers, Henry Schwartz and Andrew Gierczak are getting their brewery called MobCraft off the ground. Based in Madison, WI they benefited from local laws and rules about crowdfunding that their state put into place because the federal government has been dragging their feet on creating a national set of equity crowdfunding rules.

Wisconsin is one of 22 states, along with the District of Columbia, that have enacted rules which allow small businesses and start-ups to get equity funding from the general public. At the time of this writing, 11 additional states are considering legislation on their own rules and 3 states are just waiting for their governor to sign equity crowdfunding rules into law.

For MobCraft, it was an easy way to get the financing they needed in exchange for putting just 2% of their company’s equity up for grabs. As an added bonus, almost all of their local backers were first-time business backers. In some states, this could be an amazing economic benefit. In others, however, equity crowdfunding may just need to wait.

State Laws Restrict Who Can and Who Cannot Invest

Unlike the JOBS Act which would allow everyone in the general public to invest into a small business anywhere in the country, the state rules and laws that are being passed are a little more restrictive. They require businesses to only do equity crowdfunding from state residents where the business resides. This naturally limits the pool of backers to businesses and limits the effectiveness of crowdfunding in some areas.

Let’s compare the states of Texas and Vermont. In Texas, there are 26 million residents that could potentially invest money into a new start-up. In comparison, Vermont has just 500,000 residents. The Dallas-Ft. Worth area alone has almost 10x the amount of people. This makes it a lot easier for Texas crowdfunding to be successful.

The limits that states are putting on the general public for non-accredited equity crowdfunding are also much more restrictive than the anticipated SEC rules. Most states limit the amount a business can raise locally to $2 million or less. The amount that any single backer can provide is typically capped at $10,000. Of course accredited backers still get a different set of rules, but this is a start and all journeys begin with that first step taken.

Niche Crowdfunding Sites Are Opening to Accommodate

Although many states are setting forth rules that allow for equity crowdfunding, they aren’t creating the mechanisms to make it happen. The states are instead encouraging businesses and entrepreneurs to turn to the internet and crowdfunding platforms to implement their campaigns. In response, dozens of sites have begun to pop up.

1. Crudefunders allows backers to look at purchasing an equity share of an oil well in Texas.
2. CraftFund helps people in Wisconsin invest in restaurants and food or beverage services.
3. HoosierCrowd lets Indiana residents invest up to $5,000 per year in local small businesses.

Although the structure is in place, there isn’t a guarantee of success. Just ask SterlingFunder, which was created in 2013 and was the first regional equity crowdfunding platform. They stopped accepted campaigns recently because in more than 2 years, only one company was able to reach the goals it had set.

This means the issue is shifting. Instead of equity crowdfunding being affected by a lack of rules, it is being affected by a lack of awareness. The average person with a few hundred dollars to invest doesn’t realize that they can actually invest it. Maybe that will change when the SEC issues national level rules, but maybe it won’t. What we do know is that new rules mean changes and uncertainty.

Will equity crowdfunding at the state level be allowed under the national guidelines? Will national rules trump state rules? One thing is for certain: companies like MobCraft are taking advantage of the moment that is available to them right now. They are able to expand their presence, get the community involved with their business, and can keep working hard at doing something they love.

There is economic power in the hands of the general public. Equity crowdfunding helps to give that power a place to go. Local jobs, local sales tax dollars, and other benefits are happening right now because of the rules US states are passing. Right now the streets are being maintained and utility services supplemented. What could happen when equity crowdfunding goes national? We’ll just have to wait and see.