A pair of Georgia brothers started a company making oil-can guitars. In Kansas, a brew-pub startup is off and making beers. Both companies raised seed money through crowdsourcing funds, in a way similar to a Kickstarter campaign. The difference is that instead of just donating money to a cause, those numerous low-level funders are now shareholders in those companies, shares they can sell or get a return on investment once the company is sold.
It’s called crowdfunding equity and it’s on its way to Washington state.
Traditionally, such investments are limited to a special class of wealthy “accredited investors” that can invest in a limited number of million dollar companies. A bill resoundingly approved by the state Senate Friday would lower the barrier of entry for both investors and companies alike, allowing startups in Washington to crowdsource money for shares. It also gives startups the option to avoid going to a bank for a loan.
“We want to make it easier for companies to raise money, so that we can grow businesses,” said Joe Wallin, a Seattle attorney that specializes in startups. “And in some respects, we’re trying to allow ordinary people to invest, not just limiting it to wealthy people.”
The bill (HB 2203), which now heads back to the House, is sponsored by Democratic Rep. Cyrus Habib, who represents the tech-dominated 48th District encompassing Bellevue and Redmond.
In 2012 Wallin, an attorney for Davis Wright Tremaine LLP, wrote a blog post titled “Washington Needs It’s Own Crowdfunding Law,” where he outlined the need for a crowdfunding bill:
It is a common lament in Washington that there is not enough funding to go around for all of the companies here. We suffer some “flight”—meaning that smart folks take their pitches to Silicon Valley, where there is more money to fund companies. I agree that we need more money for companies here, and that is why I am writing to advocate that the state of Washington should adopt its own “mini-crowdfunding” law.
Since then, Wallin has testified three times in Olympia on the bill he helped spark. The bill is intended to simplify a cumbersome federal process that was passed in 2012, but there are still some complex rules. First, only Washington residents can invest in Washington companies. There are some restrictions over how much funders can invest given their income, and fundraising companies are limited to raising $1 million. The mechanism for issuing shares has not yet been determined, although sites like Kickstarter could be used if they adapt to Washington state law.
Investors must sign a statement acknowledging the investment is high risk and they must hold onto their shares for one year. Like other crowdfunding mechanisms, funds raised are only disbursed once the target amount is reached, otherwise the money is returned to investors.