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Lawmakers Support Equity Crowdfunding for Virginia Startups

posted Feb 26, 2015, 12:04 AM by J Shaw   [ updated Mar 1, 2015, 12:47 AM ]
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While startups can't equity crowdfund from "unaccredited investors," House Bill 1360 would allow those in Virginia to take advantage of an intrastate exemption.


(Tribune News Service) -- A bill that's garnered bipartisan support from lawmakers seeks to open up an alternate source of funding for Virginia startups instead of waiting on federal rulings about crowdfunding.

"I think there is no doubt that this vehicle will create a structure that absolutely will create jobs in our region," said Del. Scott Taylor (R-Virginia Beach), who introduced the bill in the House.

Crowdfunding — or raising small amounts of money from multiple people, typically online — has been used to fund Hampton Roads projects like creating video games, films, music and even product development for budding entrepreneurs. Websites like Kickstarter.com and Indiegogo.com facilitate raising money in exchange for the product or other tokens of appreciation, but not for a stake in a company.

In 2012, the federal Jumpstart Our Business Startups (JOBS) Act allowed companies to use crowdfunding as a way to raise capital and allow investors to take an equity stake. While the Securities and Exchange Commission isn't expected to finalize its crowdfunding rules until later this year, it began allowing advertising of such deals

Still, startups can't equity crowdfund from "unaccredited investors." Taylor said House Bill 1360 would change this, allowing Virginia startups to take advantage of an intrastate exemption that allows equity crowdfunding as long as the investors are Virginians. Other states have allowed for this exemption, and Taylor researched Georgia and Kansas in particular.

The legislation, which has a similar Senate version, limits startups to raising $2 million per venture per year and to taking no more than $10,000 from any unaccredited investor. Taylor noted that businesses are still subject to fraud rules and the bill includes language that gives the State Corporation Commission leeway in regulating such investment crowdfunding.

In addition to giving the "little guy" access to capital through peers, Taylor said such crowdfunding would allow entrepreneurs to prove their business concepts and also find "brand ambassadors" who may believe in a particular venture.

Ryan O'Hara, a 37-year-old engineer of Hampton, agreed. He successfully raised $52,000 — far more than his initial goal of $3,000 — on Kickstarter in 2013 to produce LED "building block" hardware for arts and architectural lighting projects.

The owner of a home-based engineering and design consulting business wanted to have multiple pieces of the hardware to use in different applications, but knew it could be cheaper to hire a manufacturer.

"What better place to test your idea out to see if people really want it?" O'Hara said. "It's great marketing. You get a lot of visibility."

While crowdfunding can fund product development, O'Hara said it also takes a lot of work, particularly in marketing, customer service and answering hundreds of backers' questions.

John Paris, head of the Williams Mullen Private Equity Group in Virginia Beach, acknowledged that equity crowdfunding provides another alternative. However, he said he would likely recommend trying to find private investment in more traditional ways first — particularly since Virginia companies would have to be careful about verifying where unaccredited investors reside.

Investors may be wary of a company having too many owners or shareholders, and startups using lawyers and accountants may not view crowdfunding as less expensive, he said. He also wondered if companies would still use the intrastate exemption if the SEC finalizes rules to allow for crowdfunding across state lines.

"Will people really use it? I don't know," Paris said about the proposed Virginia crowdfunding. "It's going to be interesting to see what happens."

©2015 the Daily Press (Newport News, Va.) Distributed by Tribune Content Agency, LLC