When people hear the word “crowdfunding,” websites such as Kickstarter or IndieGoGo usually come to mind.
Those sites provide a platform for people to donate money to charitable events, help a music band launch a new album and help local businesses get off the ground.
But if a private company wants to raise money through shareholders, similar to selling shares a public stock exchange, the general public can’t participate by federal and state law. That’s reserved for only “accredited investors,” or wealthy, financially savvy individuals.
But that could soon change in Arizona.
House Bill 2591 would allow “equity crowdfunding,” meaning any Arizona resident with any income could buy stock in a locally based private company.
The idea behind equity crowdfunding is to create a new avenue for small businesses and start-ups to gain access to capital they otherwise couldn’t obtain through traditional routes, such as a bank, angel investor or venture capitalist.
“They’re struggling to find those earlier and smaller amounts of funding,” said Sidnee Peck, director of the Center for Entrepreneurship at Arizona State University’s W.P. Carey School of Business. “So they’re not quite ready for an angel group, they’re definitely not ready for venture capital and they don’t have what a bank typically requires in order to get a loan. So they might be stuck needing $10,000, $20,000, $50,000 and they just can’t obtain it.”
During a Senate Financial Institutions Committee hearing last week, Senator David Farnsworth said he thinks it’s one of the most important bills this session.
“I have yet to find someone who is not in favor of this most important piece of legislation,” Farnsworth said.
The basis for the bill stems from the Jumpstart Our Business Start-Ups Act, also known as the JOBS Act, signed by President Barack Obama in 2012. A portion of the JOBS Act required the Securities and Exchange Commission, which regulates the nation’s securities industry, to create new rules to allow equity crowdfunding nationwide.
Those rules were supposed to be in place by December 2012, but the SEC still hasn’t acted.
Thus, some states began taking matters into their own hands.
About 15 states have passed their own equity crowdfunding laws so far and Arizona is among several currently considering doing the same.
These state laws allow crowdfunding only if the business and investors are located within that state. Crowdfunding can’t happen across state lines until the new SEC rules are in place.
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