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Equity based crowdfunding is not crowdfunding in the traditional KickStarter sense, but rather occurs when a company sells a small amount of equity to many investors. Entrepreneurs and others see this form of crowdfunding as a good way of securing investments, but this practice importantly raises the possibility of getting ensnared in various securities laws, since soliciting investments from the general public is most often illegal unless the opportunity has been filed with an appropriate securities regulatory authority, such as the Securities and Exchange Commission (“SEC”) and mandated disclosures made.
Access to equity driven crowdfunding may soon become easier, however, at least for Colorado startups and residents. Unaccredited investors and Colorado startups can look forward to big changes in how they raise capital as a new intrastate crowdfunding bill is expected to become law by fall of this year. The bill is based on the SEC’s intrastate offering emption set forth in the Securities Act of 1933, and helps entrepreneurs gain access to funds, which previously have been too difficult or expensive to obtain.
On March 30, the General Assembly approved a bill, which would provide an exemption to Coloradans, giving them the ability to invest in Colorado businesses through online intermediaries. The intermediaries would connect issuers with purchaser, but would not solicit on behalf of issuers or securities. Colorado startups would then be able to raise up to $1 million from Colorado investors, or in the case that the company can provide audited financial statements, they’ll be allowed to raise up to $2 million.
The bill will also change the rules on who can invest. Traditionally startups looking for investors have faced headaches in searching for accredited investors by SEC standards; however, the new bill will make life easier as startups will be able to seek investments from individuals who do not meet the definition of an accredited investor for up to $5,000 in investment funds. Notably issuers will also still required to provide a series of disclaimers as to the nature of the securities to all investors. Disclaimers will be provided in the online purchasing process, and investors will be required to sign off that they understand the risk of their investment.
Under the bill, the issuer would also set a minimum and maximum number for the investment round, or offering. The minimum is required to be at least half of the maximum set, and must be achieved before the company can take the funds. Following a successful offering, the business will be required to provide quarterly reports to investors, which can be made available on the intermediaries’ websites.
If the bill is passed, the new law will be a game changer for the Colorado startup community allowing for smaller investors to have an opportunity to participate in the marketplace. The bill is expected to be signed into law as early as August 2015, and has been hugely favored with 40 sponsors in the House and 28 in the Senate, with both chambers approving without amendment.
Have questions about securities, raising capital, or investing in a company? Sparkman + Foote has a team of highly experienced securities and business attorneys who are happy to chat with you. Please give us a call at 303-396-0270 or e-mail Christina Saunders at [email protected].
