“Crowdfunding:” The practice of raising capital from a large number of individuals by accepting funding in small dollar amounts from each contributor. Certainly the idea of crowdfunding has been around for ages, but with advances in technology crowdfunding has become a popular alternative way to fund a project or business venture, which can be especially helpful for small businesses. Websites like Kickstarter and Indiegogo are online crowdfunding platforms for creative projects where investors can pledge money to make projects happen. The drawback of such websites, however, is that the project creators keep 100% ownership of their work and the websites cannot be used to offer financial returns or equity in a company. In order to actually offer financial returns or equity in a company, an offering by the company must comply with over 585 pages of applicable SEC rules, which can be cost prohibitive for many small businesses.
In 2014, Wisconsin became one of the first states to create crowdfunding laws that allow companies to get around the lengthy SEC rules. Under the new law, Wisconsin businesses in need of capital can seek investments of up to $2 million (with an audit) or up to $1 million (without an audit) from local investors. Wisconsin Statutes Sections 551.202(26) and 551.202(27) provide intrastate crowdfunding exemptions that allow Wisconsin businesses to raise money from Wisconsin investors. Under both exemptions, investors are allowed to purchase shares or investment interests in a Wisconsin company and investors become actual owners of the companies they invest in. The main difference between the two different exemptions relates to how investments may be solicited. The exemption in Section 551.202(26) may be used if the offering is made exclusively through one or more internet sites. The exemption in Section 551.202(27) is to be used for more targeted investors and cannot be used if there is any general solicitation or general advertising done in connection with the sale of the securities, such as via the internet.
In order to use either exemption, the following rules apply:
- The company must be organized under the laws of the State of Wisconsin.
- Only Wisconsin residents may be investors.
- Each resident is only allowed to invest up to $10,000 in a qualifying company, unless they are a “certified investor” (the legislature created a new class of investors called “certified investors,” defined as a Wisconsin resident with a minimum net worth of $750,000 or annual income of $100,000, whose investment amount is not capped).
- All funds received from investors must be deposited into a state chartered bank or credit union.
- Shares purchased cannot be resold for a period of time (typically 9-12 months) except under limited circumstances.
- Investors are responsible for conducting all of their own due diligence.
Both exemptions provide business startups an avenue with which they can raise money without incurring the high costs of a public offering that must comply with SEC rules. While it is unlikely that crowdfunding will replace traditional venture capital, it is an innovative way for local small business to raise capital by connecting and engaging with their customers. Mallery & Zimmerman routinely provides advice and counsel to businesses throughout Wisconsin. If you need more information or assistance to explore Crowdfunding options, please contact us.
If you have questions about this article, please contact an attorney at Mallery & Zimmerman, S.C.