As federal regulators move slowly on equity crowdfunding, states adopt their own rules


The crowdfunding allowed by the Jumpstart Our Business Startups Act, which was signed by President Obama in April 2012, offers companies the ability to issue securities, such as debt or equity, to micro-investors in exchange for their money. (Matt Sullivan/Getty Images)

With federal regulations for equity-based crowdfunding still unfinished more than two years after the practice was signed into law, numerous states are moving ahead with their own measures that allow residents to funnel small sums of money to local businesses.

But the deals allowed by state-level crowdfunding are typically smaller in size and scope than those envisioned by the federal crowdfunding provisions, which entrepreneurs and economic development officials alike have heralded as a new mechanism for businesses to raise capital needed for expansion.

Take Maryland as an example. Earlier this year, legislators passed a crowdfunding-light bill that, tentatively starting Oct. 1, will allow Maryland businesses to collect up to $100,000 in $100 increments from state residents in exchange for equity or debt.

That may help a restaurant open a second location, for instance, but it won’t do much to launch the next technology company. Still, state regulators say the funding caps give small businesses the opportunity to raise money without posing a significant financial risk to investors.

Federal “crowdfunding is not going to have those kind of limitations on those deals,” Maryland Securities Commissioner Melanie Lubin said. “When we were in Annapolis discussing it, a $100 investment in a lot of ways is almost a goodwill investment for a local business when you’re a customer of the business.”

In that regard, the Maryland provision tracks closer to donation-based crowdfunding, which has become popular on Web sites such as Kickstarter and Indiegogo. In those instances, the business offers its funders a perk other than equity.

The crowdfunding allowed by the Jumpstart Our Business Startups Act, which was signed by President Obama in April 2012, offers companies the ability to issue securities, such as debt or equity, to micro-investors in exchange for their money.

Twelve states, including Maryland, had adopted equity-based crowdfunding as of Aug. 1, according to the North American Securities Administrators Association. Another 12 states and the District have recently considered or are currently considering provisions.

“Basically you are not seeing the ultimate expression of the goal of the JOBS Act as approved by Congress and the president in terms of unaccredited investors investing in companies on a national basis,” said Richard B. Levin, a regulatory attorney at BakerHostetler.

Indeed, states can only regulate business within their borders. That means their provisions automatically shrink the scope of a business’s crowdfunding efforts to investors who reside within the state.

“That’s extremely limited, and what I’ve heard anecdotally, not very successful,” Levin said. “You would have to screen everybody and make sure they’re in the state that allows state-level crowdfund investing.”

A company that sells securities to those outside the state risks running afoul of federal law because the Securities and Exchange Commission has not yet crafted rules for equity-based crowdfunding on a national level. The deadline for those rules has passed, and regulators have not provided a new time frame.

Equity-based crowdfunding failed to clear the Virginia General Assembly for that reason. Lawmakers there were concerned a company may violate federal law by selling securities outside the commonwealth, said Ron Thomas, director of the State Corporation Commission’s Division of Securities and Retail Franchising. As a result, any state law is likely on hold until the federal rules are complete, he said.

The District’s Department of Insurance, Securities, and Banking proposed rules earlier this month concerning equity-based crowdfunding that would allow D.C. companies to raise as much as $2 million from city residents. The cap on residents’ contributions is dictated by income and starts at $10,000 for those who make less than $100,000 a year.

Those rules are subject to a 30-day comment period and could go into effect as soon as next month, said Theodore A. Mills, the associate commissioner for securities.

“We did wait for a good while [for the federal rules] and I think our structure will provide an alternative,” Mills said. “Even if they came out with the rule tomorrow, there would be good reason for us to offer this other option.”

Steven Overly is a national reporter covering federal technology and energy policy with a focus on Capitol Hill. He previously covered the business of technology, biotechnology and venture capital.
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