Think GoFundMe, but for amateur investors: Colorado's small businesses could get a leg up thanks to new rules governing crowdfunding.
In 2015, Colorado lawmakers approved a bill to help startups use crowdfunding for investment, essentially by selling stocks through an online marketplace. At the time, says Rep. Pete Lee, a Democrat from Colorado Springs who sponsored the bill, "the biggest complaint we were hearing from businesses was the difficulty of raising capital."
The intent behind the Colorado Crowdfunding Act was to help small businesses get investors without having to go through the complex state securities registration process. However, the state Division of Securities' first rules on crowdfunding, issued a few months after the legislation was passed, were cumbersome, says securities lawyer Herrick Lidstone.
"Everything that the securities division did in its rulemaking was afforded by the legislation, but the difficulties that were created bore no relationship to economic reality for small businesses seeking to raise capital," Lidstone says.
Those difficulties included a requirement that businesses use a broker or online intermediary, that the minimum offering be no less than half of the maximum offering, and that the minimum offering be held in an escrow account.
"Anything where you’re raising capital is subject to possible abuse, and that’s something that the legislature and the securities division are properly concerned about," Lidstone says. "But my experience with many regulators is that they assume abuse. I would like them to assume that people are really intending to be honest, which is my experience as a lawyer."
Pete Lee: "I think this could be a real shot in the arm for small businesses."
Lidstone and other experts on securities law recommended changes to the Division of Securities, and on July 31 — more than three years after the original legislation was passed — new rules were put in place that Lidstone, as well as Securities Commissioner Gerald Rome, feel will make crowdfunding a more appetizing solution for small businesses looking to raise capital.
"It’s important that we enable small companies to access capital through the capital markets, and it’s difficult for them to do that simply because usually they don’t have a track record," Rome says. "It’s just a difficult stage in the growth of their company to go out and get institutional investors to invest in their company. So [crowdfunding] is a means of allowing a large number of people to invest in a local, small business here."
Now, businesses looking to raise less than $500,000 in a year don't have to go through an online intermediary, which Lidstone says can be expensive. They also don't have to comply with the minimum-offering requirement.
Also, the new rules allow a person helping a small company to have an ownership — something that was previously prohibited. "As you may know in the equity world, one of the things that might reduce the cost to the small business issuer is to say, you help me with these things, and I’ll give you a piece of my pie," Lidstone says.
There are still disclosure requirements in place for businesses looking to start crowdfunding, and the rules require the investor and issuer to reside in Colorado. While there are federal rules that accommodate crowdfunding, Lidstone says they aren't particularly friendly to small businesses.
Rome says he doesn't believe anyone has taken advantage of the changes yet, and advises interested businesses to contact the Division of Securities. (You can reach them at DORA_SecuritiesWebsite@state.co.us
The businesses best suited to crowdfunding are those that already have community backing in place, Rome says: "If you’re running, say, a small brewery and you want to expand, or maybe a small restaurant you want to expand, then the people that are going to invest in your company through crowdfunding are the people that go and show up at your brewery or show up at your restaurant."
"I think this could be a real shot in the arm for small businesses," Lee says. "And as we know, small businesses drive the economy."