Putting aside their existential struggle over policy and power, Illinois' legislators have found common ground in supporting the state's entrepreneurial community. Come January, with Gov. Bruce Rauner's widely assumed approval, Illinois will boast an intrastate crowdfunding law that is more friendly to small business than any in the nation.
Equity crowdfunding connects entrepreneurs with small investors online, allowing early-stage businesses access to an untapped source of the capital they need to grow while protecting investors in small companies against fraud and predatory practices. No wonder votes in both the House and Senate were unanimous.
Illinois' crowdfunding law, which provides for offerings of up to $1 million—increased to $4 million if the issuing company makes audited financial statements available to investors—allows any Illinois resident to buy equity in, or lend money to, an Illinois company whose securities offering is made through a qualified Internet portal. To protect the most vulnerable investors' nest eggs, only an “accredited” investor—generally a high-net-worth individual—may invest more than $5,000 per year in any one company.
IT'S DIFFERENT THIS TIME
The Illinois measure complements the Securities and Exchange Commission's new “Regulation A+,” its long-awaited rule to implement the equity crowdfunding provisions of the Jumpstart Our Business Startups, or JOBS, Act. The federal law was enacted in 2012 to encourage the funding of small American businesses by easing onerous securities regulations. But Regulation A+, three years in the drafting, may not have achieved its objective.
The rule enables smaller companies to offer and sell up to $50 million of securities in a 12-month period without first registering them with the SEC, but only if they comply with Byzantine eligibility, disclosure and reporting requirements. The U.S. House Committee on Appropriations, in the report accompanying a federal budget appropriations bill for the fiscal year ending Sept. 30, 2016, recently concluded that Regulation A+ “could potentially result in limiting small businesses from securing much-needed, early-stage capital formation and liquidity.”
The committee harshly criticized the SEC for the likely effects of the rule on “the efficiency, transparency and affordability for small companies and investors seeking crowdfunding offerings,” realities lost on commentators who argue that since the JOBS Act now allows small, nonaccredited investors to invest in every state, intrastate crowdfunding exemptions like Illinois' serve little practical purpose.
Early skeptics of the Illinois law also miss its greater value: By funneling investment dollars back to the state, Illinois' crowdfunding law will increase the number of small investors that help fund local businesses, boost corporate competitiveness, create jobs and rebuild communities. The General Assembly has engineered a game-changer.
The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems.
A SIB isn't a traditional bond where investors are guaranteed a fixed return but a contract among a government agency that agrees to pay for improved social outcomes, a private financing intermediary and private investors. SIBs shift the risk of experimenting with promising but untested intervention strategies from government to private capital markets, with public funds expended only after targeted social benefits have been achieved.
Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system.
The government decided which goals would be supported, but exactly how those goals would be achieved was left to the private sector. It was the investors, through a bond-issuing organization, who ultimately endorsed the allocation of investment proceeds — how much would be invested in job training, drug rehabilitation and other interventions.
If the Peterborough plan eventually shrinks recidivism rates by 7.5 percent or more, the government will repay the investors' capital and share the taxpayers' savings with them, delivering up to a 13 percent return. If the target isn't hit, the investment will have failed and the government will owe the investors nothing.
Illinois' SIB effort was spearheaded by the state's Task Force on Social Innovation, Entrepreneurship and Enterprise — the governor's think tank on social issues, which I am privileged to chair — with support from Harvard University's John F. Kennedy School of Government, the Rockefeller Foundation and the Aurora-based Dunham Fund. A request for information issued by the Office of Management and Budget on May 13 yielded responses from service providers eager not only to reduce recidivism here but also to create jobs, revitalize communities, improve public health outcomes, curb youth violence, cut high school dropout rates and alleviate poverty.
Now the governor has issued a request for proposals intended to spur better outcomes for Illinois' most at-risk youth — by increasing placement stability and reducing re-arrests for youth in the state's Department of Children and Family Services, and by improving educational achievement and living-wage employment opportunities justice-involved youth most likely to re-offend upon returning to their communities.
Kudos to Mr. Quinn for bringing SIBs to Illinois. May they soon start delivering on their promise.- See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf
Marc J. Lane is a Chicago-based business and tax attorney and financial adviser.
Reprinted from Marc Lane's July 8, 2015 editorial which appeared in Crain's Chicago Business. Crain Communication Inc.'s permission is gratefully acknowledged. Copyright © 2015 by Crain’s Communications Inc.
The Law Offices of Marc J. Lane, A Professional Corporation
180 North La Salle Street
Chicago, Illinois 60601-2701
Nationwide: (800) 372-1040
Facsimile (312) 346-1040