Equity Crowdfunding Goes Local With Adoption of State Regulations

Twenty-two states and the District of Columbia have now legalized some form of equity crowdfunding at the local level. Many more, including New Jersey, have proposed legislation that would allow entrepreneurs to solicit financing from “everyday” investors, otherwise known as the “crowd.”

Equity crowdfunding was supposed to be a centerpiece of the Jumpstart Our Businesses (JOBS) Act. The statute authorizes companies to raise up to $1 million in any 12-month period from everyday investors using Internet funding portals approved by the Securities and Exchange Commission (SEC). Under existing laws, only “accredited” investors who meet certain net worth and income requirements can purchase these securities.

Unfortunately, the SEC continues to miss its rule making deadlines for enacting crowdfunding rules. While SEC Chair Mary Jo White maintains that completing rulemakings under the JOBS Act is a top priority, the comment period for the agency’s proposed rules expired on February 3, 2014. To date, the SEC has failed to take further action.

To fill the void, states are taking matters into their own hands and enacting their own crowdfunding regulations. Under these state laws, issuers can sell securities via the Internet to investors who reside in the same state, subject to certain caps. For instance, New Jersey’s proposed crowdfunding bill would allow local entrepreneurs to seek up to $1 million in private investment in increments of up to $5,000 from unaccredited investors residing in New Jersey.

As highlighted in a recent New York Times article, locally based crowdfunding has the potential to help get start-ups off the ground. Under a new Wisconsin law, a brewery called MobCraft raised $67,000 in growth capital from 52 Wisconsin residents. Equally impressive — almost all were first-time business investors.

Given the scarcity of traditional funding, crowdfunding presents a unique opportunity for entrepreneurs and start-ups to solicit capital directly from the public. However, despite the rapid adoption of state crowdfunding laws, entrepreneurs and investors have yet to fully buy into the new opportunity. According to the New York Times, less than 100 companies filed applications under state crowdfunding laws to date. Going forward, it will be interesting to see if the finalization of the SEC rules will provide the “jumpstart” the equity crowdfunding industry needs.