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Putting aside their existential struggle over policy and power, Illinois' legislators have found common ground in supporting the state's entrepreneurial community. Come January, 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.
Marc J. Lane is a Chicago-based business and tax attorney and financial adviser.
Adapted 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.
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