Thursday, May 19, 2016

Why Are State Crowdfunding Laws Still Useful After Federal Crowdfunding?

By: Jim Verdonik

Jim Verdonik
Founder of Innovate Capital Law
Contact me at:

Check me out at
I write a column about business and law for American Business Journals

You can purchase my book Crowdfunding Opportunities and Challenges at 

The SEC's Regulation Crowdfunding became effective on May 16, 2016.  Unaccredited investors can now invest in offerings on investment platforms.  There are now four new Federal Crowdfunding exemptions that allow you to advertise offerings.

Having so many new Federal capital-raising alternatives raises the question:  Do we still need state crowdfunding laws?

Let's answer that question from three perspectives:

  • Investors
  • Securities regulators
  • Businesses Raising Capital
    People and Communities are the Biggest Reason for State Crowdfunding
    State Crowdfunding laws are needed for reasons that have little to do with technical legal rules.

  • People like the idea of investing in their neighbors' businesses.
  • People like reinvesting in their own communities.
    This should come as no surprise.  People like to buy fresh locally grown fruits and vegetables.  People like to drink local craft beers.  People like to root for their local high school or college team even though professional athletes are bigger, faster and stronger.  People like local live concerts by musicians who don't have a national audience.
    Collectively, we call these things our local culture.  Laws that make it difficult to create a healthy local culture are bad, but that is what securities laws have been doing for decades.  Securities laws divert money away from local communities to international money centers.
    State Crowdfunding laws that legalize platforms that are limited to local businesses simply help investors find the local investment opportunities they want.
    State Crowdfunding laws are the equivalent of state run farmers markets.  They bring together local buyers and sellers in an identified safe place.
    Isn't it foolish for state government to get in the way of people building and investing in their local communities?
    Why should it be easier to invest in a business that is halfway around the world than one that is in the next town?
    Market Opportunity for States to Get Back Into the Game
    State securities regulators have been underutilized for the past two decades, because most securities offerings use Federal exemptions that preempt state laws that require offerings to be reviewed by state securities administrators. 
    The old state regulatory system is so antiquated that people almost always choose to avoid it, if they can.
    The surprising thing about state Crowdfunding laws is that the biggest proponents of state Crowdfunding laws should be people who want to increase state regulation of securities offerings, because state Crowdfunding offerings are reviewed by state securities regulators before businesses can sell securities.
    Why would anyone think that regulators reviewing securities offerings would put investors at risk? 
    Of course, modern state securities regulation requires both carrots and sticks.  The old saying is that: "You can lead a horse to water, but you can't make it drink."
    That's the way securities modern laws work.  You have to have carrots to entice businesses to use the state system.  These carrots primarily involve offering alternatives to some of the imperfections of the Federal Crowdfunding laws we discussed below. 
    Imperfections of Federal Laws for Businesses Raising Capital
    If the four new Federal Crowdfunding laws were perfect, then most business would refuse to enter the state crowdfunding system.
    But who ever heard of a perfect law?
    Each of the Federal Crowdfunding laws lacks some attributes that are useful to some types of issuers: 

  • Rule 506(c) does not allow sales to non-accredited investors.
  • SEC rules and review processes for both Tier 1 and Tier 2 Regulation A offerings are both expensive and time consuming.
  •  Tier 2 of Regulation A and Regulation Crowdfunding impose ongoing reporting requirements on issuers that are expensive and may harm their ability to compete by making public information their competitors can use against them.
  • Tier 1 of Regulation A does not pre-empt state registration laws.
  • Regulation Crowdfunding allows you to raise only $1 million per year.
  • Regulation A and Regulation Crowdfunding have expensive financial statements requirements beyond the normal securities rules about disclosing material facts.
    Virtues of State Crowdfunding laws
    Luckily, we have a Federal system of government where the states have the power to experiment with new laws.  State Crowdfunding laws are imperfect, but they offer some advantages to some businesses:

  • Allow unaccredited investors to invest, unlike SEC Rule 506 (c).
  • Are much cheaper to comply with than SEC Regulation A.
  • Allow businesses to raise more than $1 million, unlike Regulation Crowdfunding.
  • Allow businesses to make greater sales efforts outside a technology platform to attract investors to their offering, unlike Regulation Crowdfunding.
  • Have greater flexibility than Regulation A or Regulation Crowdfunding for businesses to give investors the types of financial statements that smaller businesses actually prepare to use to run the businesses. 
    In summary, most businesses will use the Federal Crowdfunding exemptions, but there are good reasons to add state Crowdfunding to the list of capital-raising choices.

Thursday, May 5, 2016

Crowdfunding: Closing the Capital Raising Gender Gap without Really Trying

By: Jim Verdonik

Jim Verdonik
Founder of Innovate Capital Law
Contact me at:


Check me out at
I write a column about business and law for American Business Journals

You can purchase my book Crowdfunding Opportunities and Challenges at 
(this article is based on my article that was first published by Triangle Business Journal on May 5, 2016)
I've always been fascinated by the unintended consequences of tools.  Toolmakers often start out trying to achieve a specific goal, but when people start using the tool they sometimes find that its useful for many other purposes.
Crowdfunding illustrates this point.  Designed as a capital-raising tool, we are just beginning to see some of the many socio-economic effects.
In researching my book Crowdfunding Opportunities and Challenges (Thompson Reuters), I found early statistics showing that Crowdfunding makes it easier for women entrepreneurs to raise money. 
 Early statistics were startling.  Women led businesses get:
    • 4% of SBA loans
    • 7% of venture capital investments
    • 34% of online capital
The Crowdfunding success rate of 52% for women was higher than the 39% success rate for men.  Women were also getting higher valuations.  But the men also benefitted.  Crowdfunding success rates and valuations are higher for both men and women compared to traditional capital-raising.  So, Crowdfunding is a rare win-win solution. I note these Crowdfunding statistics were based on only one large Crowdfunding platform – CircleUp.  But even assuming the statistics are not representative of all platforms, something startling seems to be going on in the Crowdfunding world. 
Crowdfunding's designers probably didn't know they were unleashing a force that could close the capital-raising gender gap, but that may be just one of the  big unintended consequences.
 So, what's going on Online?  Why is this happening?
One thing is that CircleUp attracts a lot of consumer products entrepreneurs and investors.  It has very few technology plays dominated by engineers and Silicon Valley nerds.  Maybe Crowdfunding is like the investor version of Home Shopping Network.  Will Home Shopping Network seize the opportunity to become an investment marketplace too?

Successful Crowdfunding offerings use videos and social media to generate investor interest.  Seeing the actual product and how consumers use it is probably a better selling tool than trying to describe a new software product or medical device.
Each investor in Crowdfunding deals usually invests a smaller amount per investor than traditional capital raising deals.  The Crowd seems to love giving small amounts to women entrepreneurs.  The beauty of Crowdfunding is that small amounts from lots of people can create big wads of cash for entrepreneurs.

It will be interesting to see whether the same holds true for minority entrepreneurs.
Wouldn't it be amazing if one of the unintended consequences of this new Crowdfunding tool achieved what all the conferences, articles and laws that focus on closing the gender gap couldn't to?  Just think of all the time and money spent going in the wrong direction.  When you are lost in the forest, having a good sense of direction matters more than having good intentions.

This raises a question:  Why has it taken so long for Crowdfunding to come?  Neither the technology nor the business model is really new.  Crowdfunding is just selling something on the Internet.  People have been doing that for decades.  Why didn't we close the gender gap twenty years ago?
The answer, of course, is that securities laws made Crowdfunding illegal until recently.  So, we have the strange situation that the same Government that promotes gender equality made it illegal to use a tool that may outperform all Government programs designed to create equality.

This brings us to my home state - North Carolina.  More than 30 states have legalized Crowdfunding, but North Carolina is still sitting on the sidelines watching.  It's time to pass the NC PACES ACT that will legalize state Crowdfunding in North Carolina.
Bob Dylan said: "Get out of the way if you can’t lend a hand."  That's a good motto for Government to live by every day.
Ronald Regan said:  "Mr. Gorbachev tear down that wall."
The times won’t be changing if we don't tear down the walls Government builds.
If two very different leaders like Dylan and Reagan both agree, then why does North Carolina still have a legal wall between entrepreneurs and investors?   

Mother's  Day is a few days away.  So, for Mother's  Day 2016, how about giving the Mothers of North Carolina what they really need:  Crowdfunding to grow their businesses.  Your Mom would be so proud of you if you do.  Who knew your Mom would turn out to be such a free market Libertarian?