How State and Federal Crowdfunding Regulations Differ
Grow Your Business, Not Your Inbox
In May, new rules from the SEC went into effect that allow companies to raise capital from anyone in the U.S., opening up opportunities for people, who typically did not have access to these types of deals in the past. It took nearly four years for the rules to kick in after the 2012 JOBS Act allowed for equity crowdfunding, and meanwhile, 30 states enacted their own crowdfunding laws.
While many startups may want to raise money from Americans in every state, some businesses may want to raise money directly from their local community.
The best feature of the new federal rules is that startups will be able to raise up to $1 million from crowdfunding and wealthier individuals simultaneously. The SEC distinguishes between crowd investors and wealthy investors, but many platforms, like FlashFunders, will have those regulatory nuances streamlined seamlessly.
Entrepreneurs who raise money from crowdfunding, following the federal rules, require financial filings with the SEC.
Offerings under $100,000 require self-certified financial reports, and offerings between $100,000 and $500,000 require financial documents reviewed by an accountant. First-time Regulation Crowdfunding, or Reg CF, offerings more than $500,000 also require accountant-reviewed financials.
Businesses need to consider these costs and view them as a litmus test for determining if the venture is ready for the next stage in the process.
There are advantages to raising money in Oregon.
Oregon’s crowdfunding laws may be the most successful in the nation. The portal in charge of the state’s crowdfunding operations is a business incubator called Hatch, which has hosted 17 offerings so far. Hatch helped draft the state’s crowdfunding regulations, designed to make the process as painless as possible for businesses.
Businesses are limited to raising only $2,500 from each individual, for a total limit of $250,000. Startups will need to provide semi-annual investor reports and must pay a $200 filing fee with the state as well as $50 a month to list their offering on Hatch. Hatch also charges $500 up front and between a $1,000 and $2,000 success fee for closings through its InvestOR Ready Accelerator program.
Washington provides inspiration but lags on performance.
Oregon’s laws were based on Washington’s crowdfunding regulations, but despite many successful businesses out of Seattle, the state has failed to produce any successful crowdfunded equity rounds.
Its upper limit of $1 million per round may look like a blessing, but it has turned into a regulatory curse with its complicated process bogging companies down.
Related: 10 Top Crowdfunding Websites
Similar to the national Title III regulations, investors are more limited and may invest up to the greater of $2,000 or five percent of the investor’s net worth or income, if it’s less than $100,000, or 10 percent of the greater - net worth or income -- if that figure is higher than $100,000.
Colorado has less red tape with high caps.
At face value, Colorado’s laws seem slightly less cumbersome than Washington’s; however, Colorado has produced zero successful fundraises, even though five platforms have registered as portals.
Related: The Basics of Crowdfunding
The latest platform to register, and perhaps most promising, Invest Local, plans to charge a $2.50 fee per investor, regardless of the amount raised. Colorado’s rules ban platforms from charging percentage-based success fees, so they are obliged to charge a flat fee whether a company reaches its funding goals or not. Colorado startups can raise up to $1 million.
California crowdfunding makes its way through the legislature.
California’s crowdfunding law sat in an Assembly committee as of May 27, unlikely to pass before recess. The law would require startups to meet certain conditions before they would be allowed to solicit their offerings after filing with the state, so residents can expect red tape snarls.
California’s proposed fundraising limit is $1 million per year, with individual investors limited to investing the lesser of $5,000 or 10 percent of their net worth. The law would also require a $200 filing fee, plus one-fifth of two percent of the aggregate value of the securities sold.
Why raise money from state or national crowd investors?
A company selling securities to the national crowd has to file financial disclosures with the SEC. Local funding can avoid those federal reporting requirements, but states have different requirements to keep investors updated.
State crowdfunding laws might offer businesses a smart stepping stone to growth if a company’s eventual aim is to go national, or they might provide the right environment for small companies that intend to stay local and don’t need evangelists outside their immediate ecosystems.
Whatever the scope and wherever the startup, the new era of crowdfunding offers entrepreneurs more options than ever before to grow. Companies can add to their cap tables passionate customers-turned-investors on the local, national and international level in the same round.