Crowdfunding — the idea of getting lots of people to donate small amounts of cash for a particular project or organization — has been around since long before the Internet.
The concept has been used for everything from public radio pledge drives to helping families with medical bills.
With advances in technology, however, crowdfunding has become a popular way to raise money for just about any purpose, from an art project to a video game startup.
To date, there have been two distinct ways of using electronic crowdfunding. One is using websites like Kickstarter or Indiegogo, where people funding an idea get something in return for their money. For example, the developers of Pebble Smartwatch raised more than $10 million by offering investors the first batches of watches once they were manufactured, and at a discount.
The other type of crowdfunding is aimed at more serious investors who are looking to take an equity stake in a company. Platforms like CircleUp offer legitimate businesses a way to do an initial public offering, where the public can buy stock in a new venture.
But regulations from the Securities and Exchange Commission limit equity crowdfunding activity to “accredited investors,” defined as individuals with a net worth of $1 million or more (not counting a primary residence) and income of at least $200,000 annually or $300,000 for a couple.
Those laws restricting who can invest date to the formation of the SEC in 1933 and were designed to protect the public from stock scams that had robbed many Americans of their savings prior to the 1929 market crash. Today, those rules ban about 80 percent of the public from access to investments left only to the wealthiest citizens.
But in 2011, with unemployment running at over 9 percent, Congress began looking at ways to help funnel more capital to emerging companies, which are likely to create the most new jobs.
A year later, it passed the Jumpstart Our Business Startups (JOBS) Act with the intention of allowing businesses to raise up to $1 million annually in small amounts from average Americans or those who don’t qualify as accredited investors. The idea was to give business startups a chance to raise money without going through the high costs of a public stock offering.
Final rules from the SEC, however, were 585 pages long and critics said complying with the new rules could well negate any cost savings or burden-lightening the JOBS Act hoped to provide.
Looking to bypass those issues, Wisconsin lawmakers earlier this year began pursuing state-specific rules for equity crowdfunding. Earlier this month, Gov. Scott Walker signed a crowdfunding bill that gets around the SEC requirements by restricting any investment to in-state companies and in-state investors.
“Bills like this are a reaction to the frustration surrounding the federal JOBS Act and the fact the SEC is struggling to find that balance between protecting the public and unleashing capital for entrepreneurs,” says Zach Brandon, president of the Greater Madison Chamber of Commerce which had lobbied in the support of the Wisconsin measure.
To qualify under the new Wisconsin law, the issuing business must have its principal office in the state and the majority of its full-time employees must also work here. Businesses can raise up to $2 million with an audit and up to $1 million without one.
The legislation also creates a new class of investor called “certified investor” defined as a Wisconsin resident with a minimum net worth of $750,000 or annual income of $100,000. Their investment is not capped. Wisconsin residents who fall below that threshold are allowed to invest up to $10,000 in a qualifying company.
“This bill reforms government for the 21st century by providing a market-driven solution in helping startups raise the capital they need to grow and create jobs,” said Walker during the bill signing ceremony at University Research Park.
So will crowdfunding solve Wisconsin’s long-standing challenge of access to capital?
With a maximum raise of $2 million, it won’t likely be enough to support a lifesciences or technology startup, says Brandon, but every little bit helps.
“This won’t replace the shortfall of venture capital or angel investors but will hopefully introduce a new group of people to investing,” he says.
Rather than appealing to a technology company, Brandon says he sees the Wisconsin crowdfunding effort helping smaller businesses.
“If a bunch of people wanted to support a microbrewery in their neighborhood, this would be a good way to do it,” he says. ￼
— Mike Ivey
‘This won’t replace the shortfall of venture capital or angel investors but will hopefully introduce a new group of people to investing.’ ZACH BRANDON