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Op-Ed: Intrastate crowd funding

By Donald Quinn     Jan 20, 2014 in Politics
Annapolis - Low access to capital, heavy regulations and burdensome taxes are some of the reasons businesses choose to leave Maryland. The right crowd-funding legislation can change one of those while we work on changing the other two.
In April of 2012, the United States Congress passed a bill that if implemented correctly could have far-reaching consequences on small businesses and jobs across the nation.
Called the Jumpstart Our Business Startups (JOBS) ACT, the ACT has two key components on which the Securities and Exchange Commission (SEC) would have to take action. The first was to allow companies who planned to sell securities or shares through a private offering to advertise provided they met certain criteria. The second had to do with the phenomena of crowdfunding. There were plenty of other provisions and lots of technical jargon but for the business leaking environment in Maryland, it is the crowdfunding piece that should be particularly interesting.
Crowdfunding, for those who have not followed the rise of this Internet sensation, is simply a way for companies to raise money over an open platform on the internet.
Crowdfunding first began with companies, artists, and a whole host of others offering a small reward for a donation. In other words, a crowd of people would each give the company or individual a small amount of money and in exchange would get something like a t-Shirt, free tickets, or a download. The larger the amount, the better the gifts usually got with extravagant presents including all-expense paid weekends to Las Vegas. The more donors (“crowd”) one got, the more money was funded to the project.
The JOBS Act will allow for something slightly different, where companies would be able to sell shares in their company through the crowdfunding platforms. While the ball and chains of bureaucracy have dragged their way towards regulation for two years, the idea has caught on with some state legislators. The SEC, one might add, has proposed their rules and is in the process of enacting the formal Federal guidelines with regards to crowdfunding investment. These are going to be quite severe, something that has prompted the state legislators of at least three states to come up with and launch their own rules about crowdfunding.
Governor Rick Snyder of Michigan recently signed a bill into law allowing Michigan-based companies to use crowdfunding to sell shares in their company as long as the investor was also within the state. This followed on the heels of Kansas and Georgia, which were the first two states to jump on the crowdfunding bandwagon. Two other states, North Carolina and Alabama, are also considering legislation allowing equity based crowdfunding in their states. The caveat for all of these is this, since the Federal Government still regulates interstate sale of equity through the SEC, all companies choosing to crowdfund must be based in the state they are seeking funds in. Additionally the investors, the crowd so to speak, must also be residents of the state. In other words, Michigan-based companies can sell equity shares through crowdfunding to Michigan state residents only.
The states have also put other limitations in place including lowering the cap on how much a company can raise using the method. State rules often limit an investor to $10,000 or less in a single offering, while proposed SEC regulation has a sliding scale of $2,000 up to $100,000. For cash-strapped businesses, this can hardly be a deterrent and certainly is an incentive to relocate their businesses to one of the states currently offering crowdfunding. This gets even more apparent when you consider that most of the states have reduced the amount of paperwork and red tape that companies, seeking crowdfunding, would have to wade through under proposed SEC regulations. The availability of capital is the lifeblood of innovation, in the barren landscape of today’s financial world there is little doubt that this idea could most definitely catch on. States that have put in place their own regulations have a chance to jump ahead of the curve and attract small businesses. Here are some reasons why Maryland should consider similar legislation (but probably won’t under the current liberal regime).
Jobs: Small businesses typically generate a large number of jobs, by many standards up to 64 percent of all jobs in America. While there is some debate about what constitutes a small business, here is an undeniable fact. Small businesses hired over 8.7 million workers between March 2011 and March 2012 according to the Washington Post. A single large issue is the joblessness situation in Maryland which continues to shed jobs, due in part to our dependence largely on government employment.
Customers: The largest problem facing many small businesses is access to customers. Being able to sell goods and services is what keeps any business going. This is where crowdfunding at a statewide level is extremely interesting. Because the crowd is local, and the business is local, chances of there being a built in market for the business are very high. Since crowdfunding depends heavily on word of mouth and social media, it is raising money while raising awareness. Maryland has the ability to grow and nourish small local businesses that will thrive in the local economy.
The US Economy: If investors were worried before, they are not going to be happy with the most recent forecasts, like the one released by Economic Outlook, which paints a grim recovery for the US Economy in 2014. This is important because when the economy tightens, traditional investment and access to capital also tightens and companies start looking at places they can go where they can either get capital or reduce costs (read taxes for one) to make a profit. In that event Maryland is far from the ideal destination. Giving people a place where they can raise money from local populations and keep much of that money within the state is an ideal way to grow the economy, something Maryland could most definitely use.
It goes without saying that each small business is more than just a single unit employer. Every small business depends on suppliers, transportation and logistics, marketing and advertising, and a host of other businesses to operate. The importance of the small business model is way too large to add on to the importance of crowdfunding, and why Maryland should consider it legislatively, suffice to say small business brings a lot more than direct investment into the economy.
Perhaps the current liberal administration will surprise me and take a long hard look at intrastate crowdfunding as a way to boost our flagging business environment to create opportunity, then again so far it seems to be business as usual (for an election year) in Annapolis.
Disclaimer: I am a candidate running for Maryland State Senate and have a vested interest in making Maryland a business friendly state.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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