Intrastate CrowdFunding

Art by Mike Lucas

Art by Mike Lucas

By Donald Quinn, Low access to capital, heavy regulations and burdensome taxes are some of the reasons businesses choose to leave Maryland. The right crowd-funding legislation can change one of those while we work on changing the other two.
In April of 2012, the United States Congress passed a bill that if implemented correctly could have far-reaching consequences on small businesses and jobs across the nation.
Called the Jumpstart Our Business Startups (JOBS) ACT, the ACT has two key components on which the Securities and Exchange Commission (SEC) would have to take action. The first was to allow companies who planned to sell securities or shares through a private offering to advertise provided they met certain criteria. The second had to do with the phenomena of crowdfunding. There were plenty of other provisions and lots of technical jargon but for the business leaking environment in Maryland, it is the crowdfunding piece that should be particularly interesting.
Crowdfunding, for those who have not followed the rise of this Internet sensation, is simply a way for companies to raise money over an open platform on the internet.
Crowdfunding first began with companies, artists, and a whole host of others offering a small reward for a donation. In other words, a crowd of people would each give the company or individual a small amount of money and in exchange would get something like a t-Shirt, free tickets, or a download. The larger the amount, the better the gifts usually got with extravagant presents including all-expense paid weekends to Las Vegas. The more donors (“crowd”) one got, the more money was funded to the project.
The JOBS Act will allow for something slightly different, where companies would be able to sell shares in their company through the crowdfunding platforms. While the ball and chains of bureaucracy have dragged their way towards regulation for two years, the idea has caught on with some state legislators. The SEC, one might add, has proposed their rules and is in the process of enacting the formal Federal guidelines with regards to crowdfunding investment. These are going to be quite severe, something that has prompted the state legislators of at least three states to come up with and launch their own rules about crowdfunding.
Governor Rick Snyder of Michigan recently signed a bill into law allowing Michigan-based companies to use crowdfunding to sell shares in their company as long as the investor was also within the state. This followed on the heels of Kansas and Georgia, which were the first two states to jump on the crowdfunding bandwagon. Two other states, North Carolina and Alabama, are also considering legislation allowing equity based crowdfunding in their states. The caveat for all of these is this, since the Federal Government still regulates interstate sale of equity through the SEC, all companies choosing to crowdfund must be based in the state they are seeking funds in. Additionally the investors, the crowd so to speak, must also be residents of the state. In other words, Michigan-based companies can sell equity shares through crowdfunding to Michigan state residents only.

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