Can you spare $5,000? If so, you can now invest in startups in Colorado and 23 other states, which have outpaced the federal government in developing regulations to help startups and small-time investors do business together.
Add Colorado to the list of 23 other states that have passed equity crowdfunding laws. Due to go into effect on Aug. 5, the law opens the investment doors to anyone in Colorado who wants to invest up to $5,000 in a Newco.
It remains to be seen whether and where equity crowdfunding gets traction, but here are some highlights:
1. Before a crowdfunding offering can proceed, it must be properly registered with the Colorado Securities Division.
2. There are limits to how much capital can be raised and how much individual investors can contribute.
3. It can only take place between Colorado residents. Crowdfunding transactions that reach outside of Colorado run the risk of violating federal securities laws.
4. An investor can sell his or her stock. However, there is no public stock exchange for this kind of equity... yet. I'd look for them soon where equity crowdfunding is legal.
5. An equity issuer must be a Colorado business and do 80% of their business in Colorado.
6. The company can do things other than just issue stock. They can take money as a loan and pay interest or they can create a profits pool and share with investors on a periodic basis.
7. Disclosure requirements to investors are still not defined.
8. Legal remedies for failure to disclose material facts are unclear.
9. Three years after the passage of the JOBS ACT, the SEC still has not released its rules.
10. A recent poll of potential investors indicated that about 40% of respondents said “you bet” and about 20% said “no way.”
Equity crowdfunding is obviously not for all companies or for all investors. However, it does open new avenues for cash hungry startups looking to love in the right places.