News‎ > ‎Blog‎ > ‎

As feds drag feet on investment 'crowdfunding' rules, states — including Oregon — fill void

posted Dec 13, 2014, 3:38 PM by David Khorram

crowdfund tecumseh brewingIt's a made-for-Oregon story: A couple of employees at an award-winning craft brewery decide to take an entrepreneurial leap and open their own brewpub.

But Tim Schmidt and Kyle DeWitt were looking to set up shop in Tecumseh, Michigan, a community of about 8,500 an hour southwest of Detroit. They had $155,000 borrowed from friends and family and the deed to a shuttered restaurant, but no bank would lend the rest of the money they needed to start brewing.

"We were running out of money and running out of time pretty fast," DeWitt said.

Their venture turned out to be a timely one. A year ago, Michigan passed a bill that would let businesses crowdfund startup or expansion costs through small investments from a large number of investors, and Tecumseh Brewing Co. was ready to be a test case.

The rest of the brewery's capital — $175,000 — ended up coming from 21 Michigan investors, most of whom Schmidt and DeWitt had never met.

Despite approval from the U.S. Congress in 2012, federal regulators have been slow to implement nationwide investment-crowdfunding rules. So individual states are filling the vacuum, passing their own laws and rules under what had been a little-used federal exemption.

CrowdFunding Planning logo animation CrowdFunding marketing

Oregon, it appears, is next in line. The state Department of Consumer and Business Services 
has already drafted rules that could be implemented as soon as January.

There is a catch: the so-called intrastate exemption to federal securities law only allows offerings made within a state's borders, so Oregon businesses could only seek investments from Oregon residents.

And with no finalized rules from the SEC, each state is coming up with its own playbook. Fourteen states and the District of Columbia have come up with crowdfunding rules, and no two are the same. More are on the way. Like Oregon, New Mexico is still in the middle of a rulemaking process.

Under the proposed rules in Oregon, businesses could raise up to $250,000, a lower cap than in most states that have adopted crowdfunding rules. Individuals could invest up to $2,500 apiece, even if they aren't "accredited investors" — a regulatory term meaning those who meet certain wealth or income thresholds and are therefore permitted to participate in higher-risk investments.

"You can now accept investment from the 99 percent," said Amy Pearl, a co-founder of Portland business incubator Hatch and a supporter of the Oregon initiative. "This is extremely significant, not only for the raising of capital ... but also it lets investors become actual stakeholders in their own community economy, and potentially make some money."

The Michigan brewers raised $53,000 before a single large investor came forward with the remaining $122,000. The offering closed several weeks early.

Some investments were as small as $250, Dewitt said, and none of the investors live more than 25 miles away. Many attended tasting nights for prospective investors.

"Crowdfunding opened it up to people who were super excited about it, couldn't wait to get the brewery open," he said. "They knew the town, they got to meet us and they knew the brewery concept."

When the brewery opens — in February, if all goes according to plan — 7 percent of its gross sales will be distributed among the investors until they make back one and a half times their investment.

Congress opened the door to equity crowdfunding with the JOBS Act of 2012, which unwound restrictions on the advertising of securities that had been in place since the Great Depression. Lawmakers decided the rules, put in place to protect small investors from losing their savings on bad deals, were out of date — and a hindrance to small businesses.

But the Securities and Exchange Commission has been slow to finalize rules that would implement crowdfunding. It proposed rules in October 2013, but the supposed 90-day comment period has dragged on for more than a year.

The agency declined to comment on the delay, but Chairwoman Mary Jo White told Congress in May that implementing crowdfunding was among the agency's priorities. When it might actually happen, however, remains a mystery to those following the issue.

"We just don't know," said Anya Coverman, deputy director of policy for the North American Securities Administrators Association, a state and provincial regulator's group. "They don't have a deadline on finishing any rulemaking. Where you're seeing the action and the innovation now is at the state level."

The result is a patchwork of rules and laws that vary wildly from place to place. Washington state's crowdfunding law took effect in November and allows companies to raise up to $1 million, though it has yet to be used by a single company.

Oregon's rules are comparatively conservative. Among the states that have rules in place, only Maryland has a lower cap on the amount a business can raise.

Offerings would not be registered with the federal government, and the state's oversight would be limited. That's by design, said David Tatman, administrator of the state's Division of Finance and Corporate Securities.

"Our goal was to try and keep this simple and streamlined, rather than create a more complex process," Tatman said. "We've put the dollar amount where we're not as concerned as we would be otherwise."

The businesses would also be required to make detailed disclosures to potential investors, as well as periodic updates throughout the life of the investment.

But the program does away with restrictions that for decades were thought to provide protection to unsophisticated investors, and some say it goes too far.

Alex Pawlowski spent 35 years as a banker and now works in economic development in southern Oregon. He saw capital for small business dry up in the recession, so he knows there's a need.

But he's also seen entrepreneurs struggle with even basic financial documents. And he's watched businesses collapse quickly.

"The first business that fails, there's going to be fingerpointing," Pawlowski said. "People are going to say, 'Who approved this?' 'Who looked at this plan?' I think that's where you're going to see things unravel."

Posted from: