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9/6/2014

EquityNet Featured in Bloomberg Businessweek

Below is an article by Bloomberg Businessweek entitled “With federal rules in limbo, Texas moves forward on crowdfunding” 

With federal rules in limbo, Texas moves forward on crowdfunding
By: Dan Zehr, Bloomberg Businessweek
Sep 6, 2014

When Congress passed the Jumpstart Our Business Startups Act in 2012, it directed federal securities regulators to establish rules for equity crowdfunding by January 2013.

More than 18 months past that deadline, the Securities and Exchange Commission has yet to adopt the regulations that would allow everyday citizens to invest and take an ownership stake in startups and other companies raising money online.

So Texas and a dozen other states have taken matters into their own hands, crafting rules that will allow in-state companies to solicit and raise money from a much broader cohort of in-state investors.

The Texas State Securities Board has published its set of proposed rules for equity crowdfunding, and it's expected to vote on them at its next meeting. If passed, the regulations would allow Texas companies to raise up to $1 million a year from virtually any Texan, not just those with enough wealth to qualify as accredited investors.

"Texas has a large capital market. We're responding to that," said state securities Commissioner John Morgan. "In some states, this won't work quite as well, but Texas is large enough and there's enough interest here to do it well."

Compared with the current SEC proposals, the Texas rules would provide more flexibility for both companies and investors.

For companies, the Texas approach would strip away many of the SEC's reporting requirements, as well as the costs associated with them. For non-accredited investors, the Texas rules would retain the $5,000 cap on investments in a single company but do away with overall caps on how much an investor can spread across all their crowdfunding investments.

"It's definitely a move down the road to deregulation," Morgan said. "On the other hand, there are safeguards in place in respect to this exemption that will maintain basic investor protections."

For example, he said, in addition to the board's ongoing anti-fraud efforts the rules would require that fundraising companies make public any information and correspondence between it and potential investors.

Sharing that information through the online crowdfunding portal will allow groups of investors to collaborate and aggregate their expertise and interest.

"It's not by any means foolproof," Morgan said. "But the best thing you can do is get a lot of information out there" and give investors "more resource to protect themselves and evaluate the nature of the offering."

Crowdfunding proponents have pointed to the "wisdom of the crowd" as one of the key benefits of the approach--a consensus that could help less-wealthy and less-savvy investors avoid shaky companies and scams.

Both federal and state rules require companies to post financial and other corporate information. Portals can then layer forums, investor reviews and other resources to help investors share resources and opinions.

"If an investor takes the time to look at a deal and makes an opinion on it and can somehow transmit that knowledge to fellow investors, they can collectively compile due diligence," said Judd Hollas, CEO of EquityNet, one of the country's largest equity crowdfunding portals.

EquityNet shares some similarities with crowdfunding sites that allow companies to raise money in exchange for products or other types of rewards. The difference is EquityNet and other equity crowdfunding portals facilitate actual investments, with investors receiving an ownership stake for their money.

Currently, that's available only to accredited investors--essentially, individuals with at least $1 million in net wealth or at least $200,000 in annual net income. The SEC's rules would open those portals to investors of all stripes.

In the meantime, the state's rules will allow Texas businesses to use equity crowdfunding to raise money from Texas residents. And given the size of the state, that possibility already has several groups working to prepare portals.

This article was originally published in Bloomberg Businessweek.