Washington state is considering a bill that will enable startups to take advantage of donations from in-state investors and get around complex federal securities regulations.
Washington may become the latest state to adopt a crowdfunding law to help entrepreneurs raise money for their businesses.
House Bill 2023 – The Washington Jobs Act of 2014 – enables Washington state businesses to raise up to $1 million during any 12-month period using crowdfunding, as long as those contributions only come from residents and businesses in the state. According to The Wall Street Journal, about a dozen states, including Alabama, Georgia, Kansas and Wisconsin, have proposed or enacted similar measures.
Unlike traditional online crowdfunding where a donor receives a reward of some type for their pledge, equity crowdfunding gives an investor a small piece of the company they are helping to fund.
Introduced by Rep. Cyrus Habib, D-Kirkland, the Washington bill operates on what’s referred to as the intrastate exemption under federal securities laws. As long as the money is transferred inside the state, startups are clear of most of the U.S. Securities and Exchange Commission (SEC) red tape.
While the federal Jumpstart Our Business Startups (J.O.B.S.) Act gives businesses the ability to use crowdfunding, the requirements are burdensome. Many startups instead raise funds through Rule 506 of Regulation D of the SEC.
The trouble with that method of fundraising, however, is that Rule 506 requires a business to solicit funding through only accredited investors – big businesses or wealthy individuals – which excludes picking up small amounts of money from a large group of regular people (non-accredited investors). Because HB 2023 is narrowly tailored, it allows startups to take donations from both groups without running afoul of Uncle Sam.
In an interview with Government Technology, Habib explained that the SEC has been “very slow” in issuing its rules around the J.O.B.S. Act, leading to uncertainty. He mentioned a recent SEC proposal would require the use of a licensed portal to do crowdfunding, such as Kickstarter. But Habib felt crowdfunding shouldn’t be limited to online venues.
“We’re trying to create a more flexible product at the state level, which also protects consumers,” Habib said. “We think a lot of crowdfunding is going to be local anyway, so a Washington state product, for Washington state investors and Washington state companies makes a lot of sense.”
HB 2023 has flown through both the Washington House of Representatives and Senate this year, passing on 89-9 and 46-2 votes, respectively. It now awaits Gov. Jay Inslee’s signature to become law. Habib said he’s worked with the governor’s policy staff and kept them informed on the bill, so he’s optimistic Inslee will sign it.
Not everyone is in favor of businesses taking part in crowdfunding, however. In an October 2012 column written for FoxBusiness, Rohit Arora, CEO of Biz2Credit, a loan broker that specializes in startup businesses, presented seven reasons why crowdfunding isn’t an ideal way to raise funds.
Among Arora’s concerns were that lawsuits may pop up if the startup fails to generate profits, lack of prestige about raising money via crowdfunding and the potential negative impact on future financing options, as the startup is beholden to “unsophisticated investors” who own small shares in the business.
Despite those issues, equity crowdfunding is continuing to find favor among state lawmakers. Habib explained the greatest challenge he had with HB 2023 was getting his legislative colleagues to understand that crowdfunding isn’t just a technology initiative through online platforms such as Indiegogo -- the concept is equally valuable for non-high tech companies.
Habib said that there’s any number of different kinds of small businesses such as food trucks, record labels or wineries that are not traditionally eligible for venture capital that could benefit from equity-based crowdfunding.
“[I’m] just really being as clear as possible about what the upside is and the tremendous opportunities there are, not just in technology, but across a number of sectors and making sure people understand that,” he said.