Two St. Mary's Law School graduates and State Representative Mike Villareal (D-San Antonio) have asked the state legislature to investigate equity crowdfunding during the interim between legislative sessions. Today, Speaker of the State House Joe Straus has brought that request to the House Committee on Investments and Financial Services.
Sparked by the success of crowdfunding portals like Kickstarter or Indiegogo, which allow individuals to donate toward the funding of a particular good or service in return for modest rewards, in 2012 President Barack Obama passed the JOBS Act (Jumpstarting Our Business Startups) which takes the concept further, allowing non-accredited investors (read: the vast majority of Americans) to buy equity stakes in small, private companies. For the startups, it offers a potential godsend as accredited investors are typically either the notoriously hard-to-access venture capital firm variety or the rigorous small business loan variety. For investors, the rate of return is potentially higher than on the publicly traded exchanges and likely more valuable than the handpainted CD jacket you go six months after contributing to your college roommate's Kickstarter campaign.
Federal regulations under the JOBS Act cap investment from non-accredited investors at $1 million total, and place a limit based on percentage of annual income on would-be investors. I spoke with one of the St. Mary's grads, entrepreneur Rondero "R.C." De Mosier whose currently rebranding he and his partner's real estate crowdfunding venture CapitalReady, on why he wanted Texas to investigate further. "In-state, you could have more flexibility," said De Mosier this morning, noting that a few states, including North Carolina, Kansas and Georgia, have either passed laws or altered existing regulation to address this type of crowdfunding. States could choose to have a higher crowdfunding cap, say $5 million or even $10 million, said De Mosier. Or they could reduce or raise the investment limit.
Another worry with the SEC regulations (which are still forthcoming and anticipated to be fully in-place later this year) is that they may be too expensive and onerous to make crowdsourcing any more attractive than, say, hitting up every bank in town for a loan. De Mosier sees state-based regulation as a "happy medium" which could ease certain restrictions or make them more palatable in exchange for the requirement that both startups and funders be located in-state.
De Mosier gave the example of funding a small corner bakery that needs $500,000 in start-up cash. They'd present their business plan via a crowdfunding portal and supporters, likely neighborhood residents craving a great croissant, could buy stakes. Maybe not for the $1 you can pledge to a project on Kickstarter—De Mosier estimates many companies may choose $500-$1000 as a more reasonable lowest tier.
While this all may sound well and good, Business Week recently reported that states that already have such regulations in place haven't seen much enthusiasm for the equity crowdfunding model. Georgia and Kansas, the two earliest adapters, have seen only 20 companies between the two of them use equity crowdfunding since 2011. Meanwhile, Canada has allowed crowdfunding, but only amongst accredited investors.
Which leads me to ask, as either a business owner or an investor, would you do it?