When the Jumpstart Our Business Startups Act of 2012 passed, the Securities and Exchange Commission was given the task of promulgating rules to allow and promote the crowdfunding of equity (currently limited by law for non-accredited investors). The creatively titled portion of the law — the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act, or CROWDFUND Act — called for this rulemaking to take place within 270 days of the passing of the legislation, which would have been Dec. 31, 2012. So far, the SEC has yet to create all the necessary rules, but that hasn’t stopped one group from banding together to make the commonwealth receptive to equity crowdfunding when it finally clears regulatory hurdles.
CommonWealth Crowdfunding formed early in 2013 with an eye toward educating the state at large on the forthcoming opportunities presented with equity crowdfunding. Its stated mission is to “support capital and job formation in the region by gaining knowledge of, and building awareness and support for, crowdfund investing,” according to the group’s general background statement.
“We got interested in crowdfunding because we think it’s a very large and coming trend, and with the president signing the JOBS Act in 2012, it opened the door for a very large pool of participation in early-stage companies,” said Kent Oyler, chair of CommonWealth Crowdfunding and managing director of OPM Financial.
After researching crowdfunding, Oyler and others realized the potential that these regulation changes could have for equity investment.
“We think there’s literally trillions of dollars — with a ‘T’ — that could be unleashed out of IRAs and savings accounts and other things in a responsible way,” Oyler said.
The group members took it upon themselves to form a grassroots committee made of entrepreneurs, investors and other interested stakeholders based in the Louisville region of Kentucky. Despite the Louisville roots, Oyler maintains that this is a statewide effort.
“It's not a Louisville, Lexington or northern Kentucky thing, but very much a regional movement to make sure the commonwealth of Kentucky is not left behind when it comes to having companies that are well prepared to accept crowdfunded financing and to have investors who are well prepared in how to invest in crowdfunded companies.”
The group is regimented into several committees with defined focus areas, including communications, infrastructure, education, and advocacy and awareness. Education and advocacy are the centerpiece efforts for this group as a whole, however, with several upcoming educational events planned.
“We want to prepare entrepreneurs and small-business owners for these opportunities that lie ahead,” said Mary Thorsby, CEO of Thorsby & Associates and a founder of CommonWealth Crowdfunding. “And we also want to prepare vendors who can help support those campaigns.”
The necessary securities regulations are still a moving target. A recent loosening of limitations on general solicitation is the first step in the process, and a signal that the rest of the regulations may not be far behind. In spite of the uncertain timing, the group decided to get out in front of the curve and take decisive action.
“There are people in regions who will be leaders in crowdfunding and others will be laggards. In Kentucky, we don’t have the luxury of being a laggard. We need to be a leader,” Oyler said.
To that end, CommonWealth Crowdfunding is already working with other varieties of crowdfunding as a way of divining what is and isn't working. There are four basic types of crowdfunding: donation-based, where supporters donate to the campaign; rewards-based, where supporters receive rewards for funds; lending/debt-based, where supporters make loans to the campaign; and equity-based, where supporters receive company equity in exchange for funds. The group has adopted two rewards-based campaigns: one to fund an edition of a book on tailgating in the Southeastern Conference, and another to fund an entrant in a Red Bull Flugtag, a flight show that highlights homemade flying machines.
The ultimate goal, according to Oyler, is to get Kentuckians in on the ground floor with equity crowdfunding.
“The main thing is we want Kentuckians to understand what equity crowdfunding is, to be very comfortable with it,” Oyler said, “and when Kentucky-based companies are ready with their equity campaigns, so are investors.”
When the regulations are finally issued, equity crowdfunding will face a few restrictions. According to the JOBS Act, equity crowdfunding will be restricted to portals that have been approved by the Financial Industry Regulation Authority within the SEC, and each equity crowdfunding campaign will be able to receive a maximum of $1 million per 12-month period.