Saturday, April 5, 2014

Move Over JOBS Act: States Are the Real Laboratories for Crowdfunding

Today marks two years since the passage of the JOBS Act—the landmark legislation that was supposed to open up gushers of capital for the nation's small businesses and create jobs. But as the law inches closer to implementation, it's becoming clear to even (or especially) the law's most ardent supporters that it will fall short of those lofty goals. If the SEC's 600 pages of proposed crowdfunding rules are adopted as laid out, the complexities and requirements they entail will likely make it too expensive and onerous for most of the small businesses the law was originally intended to help. 

For example, the SEC estimates that companies raising less than $100,000 could pay up to 15% in legal and other fees. For companies raising $1 million (which requires audited financials), the costs could be as much as $250,000.

As that reality sets in, a number of states impatient to spur job creation and entrepreneurship are crafting laws that allow investment crowdfunding within their own borders. Kansas was the first, with its Invest Kansas Exemption (IKE), followed by Georgia. In late 2013, Wisconsin and Michigan joined in with laws of their own. 

Already this year, Maine, Alabama, Washington, Indiana and Maryland have passed their own mini-JOBS Acts, and many more are likely to follow. Why? Because they see it as pragmatic economic development, a way to strengthen their local economies. 

“I hope that IKE can serve as a model for all fifty states,” one Kansas state regulator told me. (Fittingly, Kansas was the first state in the country to regulate securities, in 1911. The argument—to keep "Kansas money in Kansas" and help local farmers and businesses rather than enriching "New York Stock Exchange speculators and gamblers"—rings as true now as it did then. (See chapter 2 of my book for more on these genesis of the Blue Sky laws) 

Although the state laws vary, generally they allow any business based in the state to raise money from any resident of the state, without all of the red tape and restrictions entailed that come with JOBS Act crowdfunding. In Kansas and Georgia, for example, companies raising money submit a simple one-page form to state regulators, and there are no audited financials required. Unlike the JOBS Act, transactions in those two states don't even need to take place on a portal (although I think portals can provide clear value). 

Because companies are restricted to raising money from residents of their state, intrastate crowdfunding may not appeal to high-flying firms that can attract a national or global audience of investors. But then, those companies typically do not have problems raising capital—unlike thousands of smaller or less sexy businesses that the JOBS Act was expected to boost.

So where does state crowdfunding stand? It's been slow to take off so far, mainly because it is so new and much education needs to be done. In Kansas and Georgia, there have been just a handful of deals so far, and many residents still don't know the laws exist. I'm most impressed with Michigan, which is taking a more hands on approach to promote the Michigan Invest Local Exemption (MILE). The Michigan Municipal League, a well respected organization that represents counties and towns throughout the state, has taken the lead in educating businesses and investors, and has partnered with two crowdfunding platforms- Localstake and Fundrise - to encourage MILE deals. The first Michigan state crowdfunding campaign - for the Tecumseh Brewery - is now live on Localstake. 

I still hold out hope for a workable JOBS Act someday. But, as with so many things these days, states are becoming the true laboratories for crowdfunding. They have an opportunity to show how crowdfunding—or in this case, communityfunding—can be done. 

Me & Patrick McHenry at the Rose Garden signing ceremony April 5, 2012