APRIL 13, 2015 · By Tamara Chuang
With the help of four pens on Monday, Gov. John Hickenlooper signed the Colorado Crowdfunding Act into law to let residents buy stock in local companies without becoming an accredited investor.
House Bill 1246 sped through the legislature with no opposition or changes since its February introduction.
"This is to help Colorado small businesses trying to raise capital and Colorado residents who want to invest in Colorado businesses," said Rep. Pete Lee, D-Colorado Springs, who co-sponsored the bill with Rep. Dan Pabon, D-Denver. "It was the perfect bill."
The new law eases the process of raising that first $1 million by letting people ask their neighbors for up to $5,000. While companies must inform investors of the risk and provide quarterly reports, they can skip the audit and other expenses typically needed to attract investors.
That would have saved Matthew Shifrin, CEO and co-founder of Utivity, a Denver company that connects people who want to learn with people who want to teach.
He spent six months talking to potential investors in 22 states and raised $1 million from 74 investors — spending 90 minutes each talking to 250 people.
"It was incredibly difficult," said Shifrin, who attended Monday's signing. "We had to get a broker-dealer license in New York."
Crowdfunding has been popularized by sites like Kickstarter and Indiegogo, which have helped companies raise a few dollars to $20 million in exchange for a small gift or reward.
But the ability to sell stock to non-accredited investors has been in limbo since 2012, when the federal JOBS (Jumpstart Our Business Startups) Act passed. Three years later, the Securities & Exchange Commission has still not adopted equity-crowdfunding rules.
Colorado didn't want to wait any longer, and that's probably why the bill sped through the legislature, passing in less than seven weeks. At least a dozen other states have also passed rules allowing crowdfunding.
The state's Securities Commission must now create rules before the first equity crowdfunding deal in Colorado is made. Draft rules will be completed by the end of the month and must go through an approval process before becoming official, according to deputy state securities commissioner Lillian Alves.
In the U.S., only accredited investors can buy stock in a private company. And such investors must make at least $200,000 annually and have a $1 million net worth.
Colorado's crowdfunding law requires the investor and the company be in the state. It also requires the company to provide quarterly reports, inform investors of risk and spend 80 percent of the proceeds in Colorado. Companies are limited to raising $1 million, but can raise $2 million if they provide audited financial statements.
While there is wide support, some had concerns regarding fraud risk and the non-accredited investor.
"My personal view is non-accredited investors should rarely, if ever, be investing in early-stage startups. They just can't afford to invest the money, and most early-stage startups fail," said Michael Weiner, a partner at Dorsey & Whitney, who works with startups and venture capital.
Some also felt the limit was too low or not appropriate for some businesses. Many technology startups are looking for more than $2 million.
"A small business is what you see on an (American Express) commercial. A startup has aspirations to scale," said Roger Hauptman, managing partner at Certified506, a Denver company that verifies qualified investors.
Weiner also noted: "VC investors don't like to invest in companies with hundreds of shareholders. It's not very practical."
Pabon said that the target user is the small business owner who looks to the local community for support.
"I really think they're looking at friends and neighbors to invest in the company and not some private equity firm," Pabon said. "It's the people they see at the grocery store."
Tamara Chuang: 303-954-1209, firstname.lastname@example.org or twitter.com/Gadgetress