Why states are now creating their own crowdfunding rules

Crowdfunding is changing, how states are keeping up

Crowdfunding is rapidly changing, and on the forefront of that movement is Judd Hollas, Founder and CEO of EquityNet. As investors and businesses become fatigued with waiting on the federal government to set national regulations for the crowd funding industries, the states are stepping in.

In his own words below, Hollas explains why states are creating their own crowdfunding rules:

Over two years ago, President Obama signed the Jumpstart Our Business Startup Act (JOBS Act) into law; however, regulations for equity-based crowdfunding that would allow the average American citizen, who has less than a million dollars in assets, to invest in privately held companies have yet to be finalized. Crowdfunding has been around long enough now for people to see its potential to drive additional capital to small and emerging businesses, and states naturally do not want to wait any longer for their business communities to be able to use it.

Texas legislators have recently convened to vote on laws that would permit intrastate crowdfunding. These laws would enable Texans classified as non-accredited investors to invest up to $5,000 a year in privately held Texas-based companies. Any company in Texas would be able to raise up to $1 million per year. If this vote passes, Texas will join several states like Georgia, Kansas, Michigan, and Wisconsin in creating programs that would allow their residents to help startups and small companies create jobs and bolster their economies.

In fact Texas based companies have already started to engage in equity based crowdfunding from accredited investors with more than 100 companies each seeking to raise on average $1.2 million in capital on sites like EquityNet. Moreover, one company, Envoy Investments, is well under way to meeting its funding goal of $2 million, demonstrating the impact of equity crowdfunding on funding emerging businesses in Texas.

Small businesses fuel economic growth

Small businesses and startups have long been considered a major cause of economic growth. Not only do they provide job opportunities; they are often innovators of new technologies that lead to enhancements in productivity. Access to human capital and advancements that lead to higher productivity are key inputs to successful economic expansion. Many Texan entrepreneurs and investors are keen on this idea. After all, a company cannot grow without readily available capital.

Title III of the JOBS Act would allow unaccredited investors across the nation to invest in privately held companies, but the Securities and Exchange Commission (SEC) has yet to adopt rules, meaning that the movement that would allow nearly anyone to have an impact on the national economy is stalled for the time being.

The delay is understandable, but…

It’s understandable why the SEC is proceeding with such caution on this matter. Investments in startups and other privately held businesses can be quite risky; but, existing crowdfunding models are leveraging the “wisdom of the crowd,” meaning that potential investors can communicate with others who have invested in companies that crowdfund and aid in due diligence processes in real time. This self-policing mechanism inherent to crowdfunding mitigates risks of fraud and faulty investments.

For non-accredited investors, intrastate crowdfunding will create a whole new asset class that they have never had access to before. It would allow them to potentially increase their total returns from their investment portfolios over time and have a hand in aiding their local economies in the process.

If intrastate crowdfunding comes to Texas it may take a while for the market to adopt it; however, the benefits it could provide for the state’s economy will be evident as more people begin to participate. Time will tell, but it is definitely a step forward to the democratization of capital.