And how Massachusetts is trying to help make it easier, but is it really?
In 2012, the U.S. Congress passed the JOBS Act and it was signed into law by President Obama. Part of this legislation provided ways for businesses to use crowdfunding techniques to find investors online, rather than going through traditional routes like IPOs and regular stock offerings.
However, as legislation often does, the Jobs Act left the details of crowdfunding vague, limiting it to investors who could participate to accredited investors only.
What's an accredited investor? Investopedia states that an accredited investor is a term used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by certain government filings. Accredited investors:
1) Earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income.
2) Have a net worth exceeding $1 million, either individually or jointly with his or her spouse.
3) Be a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.
These investors are considered to be fully functional without all the restrictions of the SEC.
What's a non-accredited investor? Investopedia states that a non-accredited investor is an investor who does not meet the net worth requirements for an accredited investor under the Securities & Exchange Commission's Regulation D. A non-accredited individual investor is one who has a net worth of less than $1 million (including spouse) and who earned less than $200,000 annually ($300,000 with spouse) in the last two years.
Initially, the Jobs Act left "regular"people with money to invest out of these crowdfunding efforts. Then, the SEC implemented Title IV, also known as Regulation A+, in March 2015 that allowed non-accredited investors to join in.
How Regulation A+ Help Businesses at the Federal Level
Here is a link to an article on Forbes that simply explains the Regulation A+. Essentially, it allows businesses to:
- Crowdfund up to $20 million per year for non-audited financials.
- Crowdfund up to $50 million per year for audited financials.
- Fundraise intrastate.
- Fundraise from non-accredited investors - though there are caps on how much non-accredited investors can invest. (A maximum of 10% of their annual income/net worth per year)
Massachusetts Tries to Help Even More
While the feds created Regulation A+ to try and help non-accredited investors, Massachusetts Secretary of State, William F. Galvin, had expressed concerns over the regulation, fearing that non-accredited investors might be taken advantage of when it comes to crowdfunding. However, despite those concerns, Galvin did implement a Crowdfunding Exemption in Massachusetts designed to help small business, which differ slightly from federal rules. In MA a company may:
- Raise up to $1 million from Massachusetts investors in a given 12 month period.
- Raise up to $2 million per year if the company has audited financials.
- Raise money from individuals at a rate of $2000 per year or 5% of their income or net worth. Whichever is greater.
- Raise money from individuals who make over $100k per year at a rate of $100,000 or 10% of their income or net worth. Whichever is greater.
Galvin has been quoted as saying, “This exemption will enable Massachusetts startups and entrepreneurs to more easily use the internet to raise capital which I hope will, in turn, give a boost to the Commonwealth’s economy and foster job growth here. And a carefully crafted regulation such as this offers protections for investors and companies using this new form of generating capital.”
What's the Impact on Liquor License holders in MA?
Well, let's face it, every brewery, cidery, distillery and winery owner knows that access to capital is one of the biggest challenges their business will face. There can virtually never be enough capital to support growth. So the idea of crowdfunding sounds like a great alternative to finding stellar private investors, or securing complicated bank loans, state funding through local organizations, or even the burden of high interest lines of credit. However, proceed with caution and know the challenges that crowdfunding may caus your business when it comes to ABCC disclosure.
Attorneys Donna Truex and Libbie Howley of Bodwitch and Dewey outline the requirements that a brewery must follow to utilize the MA crowdfunding exemption.
"To comply with the requirements of the Exemption, a company must:
Okay, that's fine and good, but what impact does it have on disclosure to the ABCC? Well, to comply with the exemption, in addition to the above, you will need to verify your investors' net worth and annual income AS WELL AS submit your investors' personal information to the ABCC. Yep, that's right, that means each investor must also be willing to submit a CORI report and fingerprints to the ABCC. Before you do, you should ask yourself -- "How well do I actually know investors I find through crowdfunding?" And how about these questions? Are these actually people you want on your team? How much time and energy will you spend on the paperwork and approvals, and, is it worth it because every young brewery, etc. is strapped for time and resources? You may also want to think about how many additional investors you want to bring on in a crowdfunding scenario and how the addition of new shareholders may impact the dynamic of your organization.
That's a lot to think about. So, what are your other alternatives to landing big fish private investors, securing bank loans and high interest lines of credit? A different type of crowdfunding, perhaps.
Crowdfunding Without Losing Ownership
Different types of crowdfunding do exist. The kind that can help startup brewers bypass the SEC rules and allow them to retain control over their businesses. While the SEC rules govern crowdfunding investing, in which investors purchasing shares in the business and get a return on investment, other crowdfunding sites like Kickstarter and Bolstr can provide funding without giving up ownership of your company.
With Kickstarter, you simply create a project, set a monetary goal for your project and assign rewards that your "backers" will get if they make a pledge towards your project. A project takes place for a certain length of time and if the company reaches the project goal, it receives all of the pledged money from its backers. Kickstarter does not require you to give up equity in your company. Since 2009 the company has helped businesses raise over $1.5 billion dollars.