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State Equity Crowdfunding?

May 21, 2013 by James Johnson Leave a Comment

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The startup community has been awaiting the launch of equity crowdfunding, authorized by last year’s JOBS Act and which will be made fully legal upon the adoption of necessary rules and regulations by the Securities and Exchange Commission. But given the fact that the previous SEC administration essentially delayed work on equity crowdfunding rules, as well as the fact that the SEC is still backlogged with work on Dodd-Frank rules five years on, it may be some time before crowdfunding is legalized on a national scale.

However, securities laws are a two-tier system, with laws at both the federal and state level. States are of course perfectly free to adopt their own equity crowdfunding laws — although the JOBS Act appears to create a Rule 506-like exemption from state securities laws for equity crowdfunding offerings, until equity crowdfunding becomes fully legal at the federal level states are pretty much free to treat equity crowdfunding however they want.

Washington state has been considering adopting its own equity crowdfunding laws (although the matter has been pushed off until 2014). Perhaps the biggest hurdle to states adopting their own laws is the uncertain demand for equity crowdfunding — there has been vocal demand for it, but no one is really certain if that vocal group is the majority or a minority of startups and small businesses. Securities regulators also have a difficult time trying to balance making the process easy for entrepreneurs (or their legal counsel, reducing costs to the entrepreneur) without also making the system an easy target for fraud.

States with sizable entrepreneurial communities, such as Massachusetts, may want to consider adopting its own equity crowdfunding laws as a stopgap measure until the federal laws become fully legal. Of course, a state law only has effect within its borders — if Massachusetts were to pass a equity crowdfunding law, a Massachusetts startup would only be able to solicit investment from Massachusetts residents. But perhaps giving the option for state residents to invest in and propel local startups is what states like Massachusetts needs to take their entrepreneurial communities to the next level.

Legal News, Startup Financing

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