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Why the slow start for equity crowdfunding in Colorado?

31 Oct 2017 8:42 AM | Karl Dakin (Administrator)

By Monica Mendoza  –  Reporter, Denver Business Journal,  Oct 31, 2017, 6:30am MST

Denver Business Journal Article

Two years ago, the Colorado Crowdfunding Act was rolled out with high hopes.

Its backers promised it would make investing more accessible to the average person who wanted a piece of the equity pie and it would help small businesses and startups raise the capital that had often eluded them.

But after all the buzz and they hype, there was silence.

“It was all quiet on the crowdfunding front,” said Gerald Rome, Colorado's securities commissioner.

Rome convened a panel of equity crowdfunding experts Oct. 25 at the University of Colorado Denver Business School to discuss why equity crowdfunding -- the kind in which an investor gets a stake in a company -- has been so slow to takeoff.

So far there has only been one equity crowdfunding campaign launched -- Paradox Ventures Inc., a Colorado hemp and extracting oil company which is trying to raise $250,000 to expand its business.

Karl Dakin, a lawyer and small business advocate, says the law was not a flop and he still believes equity crowdfunding has a place in raising money for small businesses and startups.

"We think the hard part is behind us," Dakin said. "Right now I see it all going forward."

Dakin is behind one of the approved equity crowdfunding sites, Invest Local, which featured the first fundraising campaign.

The biggest issue is that it took two years to get an operational website where equity crowdfunding offerings could be made, he said. The sites, called intermediaries, are listed on the Colorado Division of Securities website. They ensure that the businesses meet the disclosure rules and that the investors are from Colorado.

As of late October, there are now two websites up and running -- Invest Local and CFEX Holdings.

The sites had to be built from scratch and it took time, said Dakin, principal in Dakin Capital Services LLC, which plans and manages capital campaigns.

“But now that the site is open, we don’t see serious obstacles to expanding this rapidly and making this available as a common service to small businesses in Colorado,” Dakin said.

The challenge now will be getting the word out that equity crowdfunding is as a way to raise money for a new business or expansion of an existing business.

“The thing that will sell it is a successful raise,” Dakin said.

In 2015, Colorado became the 24th state to enact a law that allows non-accredited investors to make small equity investments in a privately held business in the state over the internet.

A Colorado business can now raise a maximum of $1 million from equity crowdfunding, and up to $2 million if the business submits audited financial statements to the state’s Division of Securities.

Before equity crowdfunding, investors had to be accredited – which means they have an annual income of $200,000 and a net worth that exceeds $1 million. Dakin said it limited who could invest. Under equity crowdfunding, anyone can invest up to $5,000 in a business.

Roughly around the same time Colorado was setting up its rules for equity crowdfunding, the rules for the federal Jumpstart Our Business Startups (JOBS) Act were approved. The law was signed by President Barack Obama in 2012.

But the U.S. Securities and Exchange Commission was slow to write the rules under the new law; those rules were finalized in May 2016.

It was a shift from existing non-equity crowdfunding models like Kickstarter and Indiegogo, where someone with an idea asks for money via an online pitch, but instead of equity, gives out perks like T-shirts or first dibs on a product.

Under the JOBS Act, investors don’t have to be accredited, and entrepreneurs could use the internet to pitch their ideas.

Obama called the JOBS Act a “game changer,” saying that average Americans could invest in the businesses they believed in.

But even at the federal level, equity crowdfunding has been slow to take off. Critics say supporters overestimated the enthusiasm for equity crowdfunding.

CU Boulder law professor Andrew Schwartz recently went to New Zealand, as a Fulbright research scholar, to study its equity crowdfunding laws, which have been operational for three years.

New Zealand has had successes, he said. There, businesses can raise up to $2 million in a 12-month period using equity crowdfunding. He saw some stark differences in the rules between New Zealand and Colorado, which have comparable economies.

“In Colorado, an issuer who wants to raise money must file certain forms with certain disclosures with the Division of Securities and provide it to investors and provide a quarterly report also to SEC and investors,” he said. “New Zealand has no mandatory disclosures. There is no form to file.”

In the first year of equity crowdfunding, New Zealand businesses raised 30 times as much as U.S companies and had 13 times as many offerings, when scaling for the two nations' sizes, Schwartz said. The raises were successful about 80 percent of the time compared to 50 percent of the time in the U.S.

But Rome is a little squeamish about running an equity crowdfunding program – selling a security -- with no disclosure required. And no one in Colorado seems to be advocating for tossing out the disclosure requirements.

“I like laissez faire, but I also like for people to get into things with their eyes open and having an opportunity to evaluate all the facts,” said Jack Donenfeld, a Boulder-based securities lawyer and general counsel to Boomtown Accelerator in Boulder, which focuses on internet, mobile and software firms.

Attorney Herrick Lidstone, managing director of Greenwood Village law firm Burns, Figa & Will, has an alternative idea.

Businesses looking to raise small amounts – less than $200,000 – shouldn’t be mandated to use the intermediary. It should be voluntary, he said. It could cost a business $50,000 to run a crowdfunding campaign on an intermediary site and with fees, escrow and marketing costs.

“Every time you add a layer to the mix, you are costing them money,” he said.

There might be more small businesses trying equity crowdfunding if they could put up an offering on their own websites – like an investor page.

Rome said he wants equity crowdfunding to work and he’s open to adjusting some of the rules, which he said were designed to protect the investors.

Dakin said the rules and regulations have not been the main hang-up. The role of the Colorado intermediary was designed to be low cost – the intermediary cannot engage in marketing or take a stake in the business. Most businesses wouldn't have the infrastructure to handle the investments and keep up with the SEC rules.

"The largest issue is generally a lack of knowledge and a lack of systems available for people to use," he said.

But now there are two approved websites and the crowdfunding is ready for takeoff, he believes.

"I think we will get there eventually once people see success stories and see this as an alternative to the only choice they had before," he said.DT Updated an hour ago

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