Crowdfunding bill seen having good chance of passing in General Assembly

State Rep. Steve Riggs of Louisville has introduced legislation that would allow Kentuckians to help fund startups through an online platform in exchange for a stake in the future company.

This method of raising startup capital, known as equity crowdfunding, is gaining popularity with entrepreneurs who lack the support of wealthy contributors.

A rapidly growing number of crowdfunding websites offer funding opportunities for a variety of industry specializations. Among the most notable is Kickstarter.com, which has raised more than $1.4 billion in contributions to projects such as music, design and technology. Project creators on the site attract financial pledges by offering rewards, such as copies of the work to be produced.

Although rewards-based crowdfunding has proven successful, other sites allow contributors to purchase equity in the the company. At present, that’s illegal in Kentucky.

But House Bill 76 would change that.

By permitting equity crowdfunding, the bill would open investment opportunities to middle- and lower-income people who would otherwise be excluded under federal regulations. The U.S. Securities and Exchange Commission limits the purchase of shares in a private company to accredited investors who either earn more than $200,000 annually, have a net worth of over $1 million, or are a general partner, executive officer or director of the company.

But under the federal Securities Act of 1933, buyers and sellers of equity who reside in the same state are exempt from this regulation, provided that the transaction occurs strictly within that state.

What we’re doing is taking advantage of that SEC exemption, said Riggs, a Democrat. You have to establish these requirements to be exempt from that Securities Act, and that’s what this does.

And by passing this law, it allows Kentucky investors to invest in Kentucky businesses. And I’m talking about investors who aren’t multimillionaires — investors of ordinary means.

Riggs said he hasn’t heard any opposition to the bill. (I’m) not sure why people would not want to give middle-class people the same opportunity very wealthy people already have, he said.

Businesses that want to grow always need capital to grow, so I think it will be very helpful to the economy.

At least 13 other states have passed legislation to allow equity crowdfunding — including bordering states Indiana and Tennessee — and at least 15 are in the process of reviewing crowdfunding bills.

Investing in startup businesses under relaxed government oversight, however, carries inherent risk. To protect investors, the bill would prohibit issuers of equity from accepting more than $10,000 from a single investor. Additionally, it would limit the total amount issuers can receive to $1 million in a year — or $2 million if the issuer has undergone a financial audit of its most recent fiscal year.

Riggs said issuers would be required to register with Kentucky’s Department of Financial Institutions. The department would monitor security offerings to make sure they actually exist and that they don’t come from a false company or a sham, he said.

The bill also would establish rules for the operators of crowdfunding websites to ensure they remain uninvoled in the financial transactions they host. It prohibits them, for example, from offering investment advice or holding securities themselves.

Riggs said he became inspired to introduce the bill after attending a presentation by Indiana Sen. Travis Holdman at the National Conference of State Legislatures last summer in Minneapolis. I thought it was very interesting, and so I contacted him, and he told me how wonderful he thought the idea was.

Crowdfunding is popular with entrepreneurs in part because they can gauge an idea’s potential by the enthusiam it receives.

And Riggs has found that banks are not opposed to this new method of garnering funds. These are normally things banks wouldn’t loan to, he said.

Lots of times, these folks who are running these small businesses have tapped out their capital. They’ve maxed their credit cards; they’ve brought everything they can from their friends and relatives. And this — we’re taking advantage of technology here by taking advantage of the Internet.

For investors, getting financial return isn’t the only reason to fund businesses through crowdfunding. Riggs said it’s often a matter of helping a friend or relative who has a promising business. Part of your reward is to see that business grow and be an owner in that business, even though you’re a small owner, he said.

If the business is growing and prospering, then the community prospers. And a lot of people like to see their community do better.