Turning Innovation Into Enterprise

TCWV in the News

Bring Equity Crowdfunding to West Virginia

Charleston Gazette-Mail, October 4, 2015

By Anne Barth and Joe Carlucci

When the Jumpstart Our Business Startups Act (JOBS Act) passed Congress in 2012, a new source of capital opened up for entrepreneurs seeking startup or expansion funds. For the first time, startups could seek financial backing through online “crowdfunding” from average individuals and not just wealthy investors.

Many business experts believe that equity crowdfunding could be a game-changer for entrepreneurs, communities and state economies.

While federal regulators are still writing the rules to make this law effective, many states have already passed their own versions of the legislation to open a new source of capital for small businesses.

Twenty-two states and the District of Columbia have enacted crowdfunding laws, many within the past six months. Meanwhile, legislation or rule changes are pending in three states, awaiting their governors’ signatures. And eleven states are considering the creation of such laws and procedures.

In the last session of the West Virginia Legislature, a similar bill (HB 2615) passed the House of Delegates. The Small Business Capital Act would have opened up this avenue of financing for startups and expansion.

We urge the Legislature to reconsider this bill when it convenes in January because small businesses need additional sources of capital. Communities need vibrant businesses to retain and attract residents, and it couldn’t hurt to diversify and broaden the state’s tax base with new startup and expansion ventures.

So what is intrastate crowdfunding, exactly?

Companies in need of capital can sell equity shares or securities to local customers. Small investors (“unaccredited investors”) do their own due diligence and make their own investments in companies attempting to raise capital. They use the Internet — not a broker — to do this.

Intrastate crowdfunding is different from a Kickstarter or Indiegogo campaign in that a person making an investment gets equity in the company, not a product or T-shirt or other promotional item, in return for a donation. In short, every deal turns customers into actual owners of the companies that they are passionate about.

There are, generally, limitations on how much an individual may invest in any one company, and only residents of the state where the offering company is located may invest in deals. Therefore, only West Virginia residents could invest in West Virginia companies.

In addition to offering an alternate investment source for startup or expansion funding, intrastate crowdfunding offers an innovative way for companies to connect with and engage local customers, creating a vested community interest in local companies.

The possibilities are endless. Crowdfunding could be used as a tool to finance a local West Virginia grocery store, bringing a much-needed store to a food desert, creating full-time jobs and generating healthy sales.

It could be used to finance a company focused on youth poverty, tourism, agribusiness or even a micro-brew house.

Startups are notoriously difficult to find seed capital from traditional lending and debt financing, and that’s where this pioneering new form of finding startup capital can be utilized.

Another great example of how this new form of capital is being used is Georgia’s first intrastate crowdfunding site, Sparkmarket.com. Bohemian Guitars, a creative company that makes and decorates guitars out of oil cans, started an intrastate capital campaign after a successful Kickstarter campaign raised $54,000. Wanting to expand and grow, they leveraged that startup capital from Kickstarter to reach their next goal of $100,000 using SparkMarket’s equity platform.

Crowdfunding will spur entrepreneurship, create jobs, track capital investment into each community and ultimately enable the state to meet the next generation of business leaders halfway. By using this new, disruptive form of capital, we’ll see organic, grassroots efforts to support fragile startups or to assist that local mom and pop store that has an established business to expand to new communities, renovate their store or hire new people.

Yes, there are drawbacks to consider. For example, if a company chooses to play in the intrastate crowd-sourcing arena, it might limit further courting of equity investment partners outside the state. So a company in a high-growth market might restrict itself to only in-state investors and not have access to a much broader capital base nationwide.

Another issue might be burdensome reporting to the Securities and Exchange Commission (it will require an annual statement to stockholders and financial reporting), but this can be dealt with through education, business support and automation.

Even with some hurdles to overcome, the potential for crowdfunding seems to outweigh the possible drawbacks. Intrastate crowdfunding won’t solve all of the problems in the “access to capital” conundrum.

But let’s give it a try.

Even as a small-scale move, it could send a strong signal that West Virginia is committed to supporting businesses and economic growth in the 21st century.

So please let’s be on the forefront of cheerleading new and innovative efforts to assist companies in a business landscape that has already embraced this change.

Anne Barth is director of TechConnect West Virginia. Joe Carlucci is business coach for the New River Gorge Regional Development Authority.