Maryland Moves Forward With Crowdfunding as Feds Lag
In 2012, President Obama signed the Jumpstart Our Business Startups Act, allowing companies to issue debt or equity in small quantities to “micro-investors.” At the time, the practice, known as crowdfunding, was hailed as an innovative tool for new businesses in need of capital. Two years later, there are still no federal regulations in place to implement the act.
In the last few months, Maryland and eleven other states have moved ahead on their own, adopting state crowdfunding laws. Twelve other states and the District of Columbia are considering legislation.
Starting October 1, Maryland businesses can raise up to $100,000 in a twelve-month period from state residents by issuing equity or debt in $100 increments. Capped at a much lower level than the planned federal approach, the Maryland law will still allow businesses to raise funds, while minimizing risks to local investors.
A $100 investment is small enough that customers of a business may invest as a gesture of goodwill. For this reason, the Maryland law has been compared to websites such as Kickstarter or Indiegogo. On those sites, investors may invest in ventures for reasons beyond simply getting a financial return. Sometimes they just like the idea or the people behind it. The Maryland legislature hoped that passing the bill would promote closer ties in communities, while also allowing businesses and investors to profit.
The District of Columbia is weighing a more ambitious local plan. New rules proposed by its Department of Insurance, Securities, and Banking would, if adopted, allow businesses to raise up to $2 million from District residents. The cap on contributions would be dictated by income, starting at $10,000 for investors who earn less than $100,000 annually.
State and local crowdfunding solutions have drawbacks, however. Securities cannot be sold out of state because there are, as of yet, no federal regulations governing their purchase or sale. Virginia’s General Assembly declined to pass a crowdfunding bill, fearing that companies would end up selling their securities outside the state in violation of federal law. The Securities and Exchange Commission has not announced a timetable for issuing any. Until the federal government acts, businesses in Maryland can use crowdfunding only with in-state investors.
Launching a startup or a business expansion takes time, effort, and capital. It also requires a careful consideration of the legal issues and risks. For guidance on corporate, tax, regulatory, and other issues facing start-ups and growing companies, expert counsel is essential. The Bethesda and Rockville, Maryland business attorneys at Longman & Van Grack advise new and established businesses on a wide range of issues. Call (301) 291-5027 for a consultation today.
