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updated 2:54 PM CDT, Jul 28, 2018

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State crowd-funding legislation to ease raising money for startups gets early legislative focus

A proposal that would permit entrepreneurs to raise up to $1 million a year from small investors through what's known as crowd funding, which is seen as a tool to both facilitate the launch new companies and create jobs, will get its initial hearing before the Washington Legislature the end of this week.

 

Washington is among a handful of states where lawmakers have decided that no matter what finally happens with long-awaited implementation of a federal crowd-funding law, they want to move ahead at the state level to open new funding doors for entrepreneurs and startups. And the scheduled hearing Friday may suggest there's some momentum to get the bill passed soon.


The bill (HB2023) is viewed by legislative supporters, and there is no visible opposition, as "a tool for small-business growth all around the state" as well as a potential lure to attract would-be entrepreneurs in other states to move here to launch their business. Only state residents could raise equity under the proposed law and only state residents could buy shares in the companies.

 

Rep.  Cyrus Habib

The federal crowd-funding legislation was passed by Congress in the spring of 2012 as the JOBS Act and directed the Securities and Exchange Commission to come up with the rules that would allow entrepreneurs to begin raising funds under the act. The SEC has moved at a glacial pace in implementing the rules and may still be as much as a year away from final approval to allow crowd funding to begin.

 

If supporters of the bill in the Washington Legislature are successful, the state measure will become law and create the opportunity for entrepreneurs in this state to begin using crowd-funding to raise money from large groups of small investors, primarily on the Internet, before the federal legislation even becomes operative.

 

The fact that Washington and a handful of other states are pressing ahead without regard to what happens in Washington, D.C., is an example of a growing realization that it has become more workable for legislation and regulation to be done at the state level. The reason for that emerging sentiment isn't just the gridlock that allows little to get done in Washington, but also the brainlock that occurs when something does get approved in Congress and is then turned over to the bureaucracy and regulators to implement.

 

Rep. Jeff Morris

HB2023, sponsored by Rep. Cyrus Habib, whose 48th District spans Redmond, Bellevue and Kirkland, would like the federal act allow companies to raise up to $1 million a year from small investors. The Internet is viewed as the most likely vehicle to reach large numbers of those small investors, who would be permitted to invest a maximum of $2,000.

 

Rep. Jeff Morris, D-Mount Vernon, a key supporter of the state legislative proposal, is one who thinks state legislation will serve the needs of both start-up entrepreneurs and small investors who would like to have equity in such companies better than the eventual federal act.


"The federal crowd-funding law, even once rules are in place, is going to require companies to work through an intermediary and is likely to have compliance expenses that will be cost-prohibitive for many start-ups," said Morris.


Morris, who is a co-founder of the Northwest Energy Angels and former director of the Northwest Energy Technology Collaborative (NWETC) at the Washington Technology Center (WTC), is an angel investor far more knowledgeable on the topic of funding start-ups than might be expected of legislators.


The SEC has produced more than 500 pages of proposed rules as it nears the point, more than 18 months after the legislation was approved by Congress, of clearing the way for entrepreneurs to actually begin raising money under the act. But observers think the

90-day comment period will likely produce voluminous comments that will cause the SEC to extend the time when the rules actually go into effect until late this year or early next.

 

Habib says flatly it would be "highly undesirable" for entrepreneurs to have only the federal legislation to deal with in seeking to employ the crowd-funding concept of raising money and selling equity.

 

"I think it will be far easier for start-up entrepreneurs to deal with local regulators who, can design rules that fit our culture, that are less burdensome to issuers, and give us the opportunity to create our own fund-raising product," said Habib, a Seattle attorney who works with many small firms.

 

Habib's first attempt at the bill last session would have imposed an excise tax of 3 to 5 percent, a tax of up to $50,000 on a $1 million fund raise, with the explanation that it was necessary to cover costs the state would incur in things like more consumer protection for investors and added costs for state oversight of the crowd-funding activity.

 

But he has backed off of that in the current version, saying thatrather than imposing an excise tax, "we will give authority to regulators to decide what kind of a fee to impose on the entrepreneurs. The program has to pay for itself, but we decided it's best to leave that to the Department of Financial Institutions to determine what's necessary to achieve that."

 

It was Habib who made the observation that the bill would be a tool for economic development for all parts of the state.

"Using equity crowd funding for those who can't just start a business without money and don't happen to know a friendly millionaire will be a way to raise capital for small businesses anywhere in the state," Habib said.

 

And he and Morris both suggested that small economic development organizations or chambers of commerce could serve the role of gatekeeper, meaning someone to fill the legally required role of an entity to sign off on the legitimacy of the fund-raising effort, to say it wasn't a scam or fraud. Otherwise the gatekeepers would be attorneys, accountants or similar professionals who would be involved in reviewing the legitimacy of would-be entrepreneurs.

 

Scott Jarvis, director of the state Department of Financial Institutions, which has been working closely with lawmakers as the legislation has taken shape, says it is "closely monitoring the SEC's final action to be sure the state legislation avoids conflict with it or sends confusing messages."

 

He said lawmakers and his department must also provide some sort of cost benefit analysis to ensure that any costs incurred by the state or the agency must be provided for and that will depend, in part, on the size of the group of entrepreneurs seeking to raise money through crowd funding.

 

"To steal liberally from 'Field of Dreams,' there is a question as to'If we build it, will they come in sufficient numbers as to justify the costs,'" Jarvis quipped.

 

Among angel investors in favor of the proposed state legislation is Tom Simpson, longtime venture capitalist now head of the Spokane Angel Alliance, who suggests "it will broaden the capital-formation alternatives for certain unique, early-stage enterprises not otherwise candidates for traditional angel or v.c. funding."

 

 

In fact, Simpson shares the view of many angel investors that traditional funding won't likely follow crowd-funded businesses but adds "as long as everyone knows the pros and cons, I expect this form of fund raising to stimulate the growth of new, innovative businesses in this state."

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