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Bill opens door to crowdfunding investments for businesses

March 19, 2014

Privately owned businesses in Indiana will be able to raise investments online as part of a bill on the way to Gov. Mike Pence's desk.

Senate Enrolled Act 375, which still needs Pence’s signature to become law, would mirror similar pending changes to federal law from the Jumpstart Our Business Startups, or JOBS, Act.

Both acts would loosen up rules for investing in private companies, allowing them to use a relatively new online practice known as crowdfunding. It first was popularized as a way to raise money for not-for-profits and art projects. Under the acts, investors would be able to buy small equity stakes in companies over the Internet.

The state bill cruised through the Indiana General Assembly in the recently finished short session. Both the Senate and House of Representatives passed it in February before amending the legislation last week.

The state bill “is complementary” to its federal equivalent, said its author, Sen. Travis Holdman, R-Markle.

One of the main differences between the state and federal crowdfunding bills involves who can invest.

The JOBS Act stipulates that anyone using crowdfunding for raising equity capital must offer their investment opportunities to the entire U.S. But the Indiana bill lets Hoosier businesses raise money just within Indiana.

Keeping fundraising within state boundaries is a lot cheaper, said Kevin Hitchen, a founder of Localstake, an Indianapolis investment firm centered around online fundraising.

“[For] a lot of small businesses and startups, it takes too much money to do,” Hitchen said about fundraising across state borders. The businesses have to pay for costs such as audits and legal guidance in order to meet the more stringent federal requirements.

Also, the Indiana law likely could go into effect sooner than the federal one, Holdman said.

The JOBS Act became law in mid-2012, but the U.S. Securities and Exchange Commission still must issue rules on the crowdfunding piece of the act before that part goes into effect.

The Indiana law could go into effect as early as July 1, when the state implements laws passed this General Assembly. But Holdman expects the process to take until at least September. Much like how the federal law needs the SEC’s input, the state version needs the Indiana Secretary of State’s office to issue rules.

Assuming Pence signs the bill, the state office “would try to make sure we got it ready as soon as possible,” said Valerie Kroeger, a spokeswoman for the secretary of state.

Not everyone is convinced the bill is a good idea.

James Klimek, an attorney who specializes in securities law, expressed a slew of concerns with the state’s act, as well as its federal counterpart and the notion of crowdfunding investments in general.

Klimek is concerned that companies could jump into crowdfunding without realizing that the fundraising process for investment capital carries significant fees. In addition, private companies that use crowdfunding wouldn't be required to disclose as much information to investors as public companies typically do. And inexperienced investors can weigh down companies’ operations with their questions and concerns, he said.

Also, without the SEC setting legal precedent for the JOBS Act yet, Klimek fears Indiana is rushing into legislation that federal law could in some way overturn or make obsolete.

About the SEC, “actions can speak louder than words,” he said. “They’ve been very slow to adopt rules, which they still haven’t done.”

Holdman countered that the Indiana bill offers several protections for both investors and businesses. The law, for example, caps investments at a $5,000 maximum to make sure no one puts too much money into one venture.

The bill cleared the legislature, but it has not yet arrived at the governor’s office. David Long, president pro tempore of the Indiana Senate, needs to sign the bill first, which he intends to do by the end of the week, spokespeople for the Republican caucus said.

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