Crowdfunding has picked up momentum in recent years as a way to raise money for art projects, social causes and philanthropic ventures — from microfinance in developing countries to class field trips.
For Maine business startups, it could soon be a viable means for raising serious capital to get a new venture off the ground.
Sure, crowdfunding for startups isn’t new. But crowdfunding that allows funders to become investors with a stake in a business venture is less common, though it’s catching on through a patchwork of new state laws and regulations under consideration by the federal Securities and Exchange Commission.
Maine this year could join the handful of states with equity crowdfunding laws on the books. The law under consideration in the Maine Legislature — LD 1512, which had its public hearing Wednesday — offers Maine entrepreneurs a more workable means for raising startup capital than federal rules proposed by the SEC in October.
We urge Maine lawmakers to pass the legislation that comes before them. In a state dominated by small businesses that often struggle to grow into engines of job creation, a crowdfunding tool that allows entrepreneurs to appeal to small-time investors for capital in exchange for equity offers those entrepreneurs an accessible avenue for growth.
The bill, sponsored by Senate President Justin Alfond, D-Portland, comes about two-and-a-half months after the SEC released 585 pages of proposed regulations for equity crowdfunding meant to carry out a provision of the 2012 Jumpstart Our Business Startups Act. Those regulations haven’t yet taken effect, and the SEC hasn’t indicated how it might change them in response to public comment or when the revised rules might take effect.
The proposed Maine law and the proposed SEC regulations would both allow entrepreneurs to raise a maximum of $1 million through crowdfunding, keeping the equity crowdfunding mechanism firmly in the camp of small businesses.
The Maine law would cap most individual investments at $2,000. The federal regulations would cap one person’s investment at $2,000 or at 5 percent of the investor’s annual income or net worth — whichever is greater. But that’s only if the investor’s salary or net worth is less than $100,000. If it’s greater, the investor can chip in 10 percent of his or her annual income or net worth, whichever is greater, as long as the investment doesn’t exceed $100,000.
Plus, the federal regulations would require entrepreneurs to use registered equity brokers or new registered entities known as “funding portals.”
And, the SEC rules would impose more complicated registration and disclosure requirements than Maine’s proposed law, which would require startups to register with the state Office of Securities and offer varying degrees of financial disclosure depending on the amount of money they want to raise.
Ultimately, some in entrepreneurial circles worry that the SEC rules could impose significant administrative and accounting-related expenses on business startups that detract from equity crowdfunding as a more affordable and workable means for raising capital.
A number of details, such as terms surrounding how investors will sell their stock, would have to be worked out through state rulemaking. But the Maine law, if enacted with enough support so it could take effect immediately, offers startups the prospect of being able to use equity crowdfunding the moment it passes — rather than wait for the SEC to implement its equity crowdfunding rules — and relatively straightforward administrative and accounting requirements.
The tradeoff is that the SEC’s rules would offer startups access to potential investors located across the country. The Maine law, meanwhile, would mostly limit Maine startups to raising capital from Maine investors and a limited number of out-of-state investors by virtue of federal securities law. However, that approach is superior to equity crowdfunding laws that have passed in other states that allow startups to raise capital only from residents of those states.
Maine lawmakers have the option to offer Maine entrepreneurs an affordable, workable tool to help them grow. They should act on it.