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State firms up crowdfunding rules for businesses

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Indiana firms can use the Internet to raise up to $2 million in a single securities offering, and Hoosiers can invest up to $5,000 each online, according to rules the Indiana Secretary of State's office announced Tuesday.

The rules apply to a law the Indiana Legislature passed earlier this year that opened the door to businesses raising investments via the Internet—a process loosely known as "crowdfunding." The state passed the law to mirror similar legislation on the federal level.

Crowdfunding began as an online fundraising strategy to collect donations for not-for-profit, artistic and humanitarian projects. Indiana's new rules allow small businesses and entrepreneurs, for example, to sell equity stakes to investors online.

“It can be used in conjunction with other traditional financing options, but by using multiple investors, crowdfunding will allow the entrepreneur to stay in control of the vision and direction of the business,” Indiana Secretary of State Connie Lawson said Tuesday during a press conference at The Speak Easy, a co-working space for startups south of Broad Ripple.

“And it’s intended to be one more tool to help Indiana companies stay off the ground and be productive,” Lawson said.

State law previously barred companies from selling equity stakes or other securities online, unless it was done through a professional brokerage.

“It can be anything,” said Indiana Securities Commission Commissioner Carol Mihalik. "It can be an ice cream shop, a brewery. [If] I want to raise capital via non-traditional sources—my bank has only given me 'X' dollars and I need more—I may be able to use crowdfunding as way to get additional financing or my only financing."

Under the rules developed by the Secretary of State, only Indiana businesses may register to crowdfund investments, and only Indiana residents can invest.

Indiana’s rules apply to any type of securities sold online. Online investing sites in Indiana no longer need to be certified brokerages as long as they file with the state. Unlike brokerages, however, they cannot collect commissions on security sales—only flat fees. The website hosts also must maintain all records for five years.

The law also lifts requirements that companies could only raise money from accredited investors who met certain income thresholds set by the U.S. Securities and Exchange Commission.

Lawson and Mihalik noted that companies will still need to meet many disclosure requirements.

All businesses need to provide a business plan and escrow agreement when they register to crowdfund their securities. And crowdfunding sites also must prominently note that private equity investments are high-risk and often illiquid.

“It’s full disclosure, like it has been in the past,” Mihalik said. “And so businesses need to be very careful to be sure the information they give is accurate.

“The best way to say it is: You say what you do and you do what you say. You can’t leave anything out that would let someone be uninformed about what the risk might be."

 

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  • penalty
    what is the penalty for a CEO raising funds with misleading or absent critical information?
  • A good development...
    This is another tool that young entrepreneurs to utilize in order to raise capital for projects that avoids borrowing money from banks and large fees from brokerages. I hope that the state will provide a list of reputable securities dealers / sellers.
  • Lot's of Effort for Little Return
    At $5,000 maximum per investor per deal, the cap tables for some of these companies will be enormous. And the management of those larger numbers of investors will be rather burdensome for the entrepreneurs. The lower maximum makes sense, though, in order to provide a degree of protection for investors from potential crowdfunding scams.

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