Illinois Approves Equity-Backed Crowdfunding Investments

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Illinois Gov. Bruce Rauner has signed new legislation into law this week that will expand fundraising opportunities for startups from the prairie state. The law, which will take effect January 1, 2016, will allow crowdfunding sites to facilitate equity-backed investments from anyone, including investors with a net worth under one million dollars and an annual salary under $200,000 per year, a longstanding legal threshold that prevented non-wealthy citizens from investing in startups. The new law was passed unanimously by a state senate eager to shed its anti-business reputation, and was signed by the governor on Wednesday.

Equity-backed crowdfunding has the potential to flood emerging markets with fresh investment capital because it significantly increases the number of of potential investors with capital to contribute. By legal definition, the SEC defines an accredited investor as a person with a net worth greater than one million dollars. Until recently, only accredited investors were eligible to make direct equity-backed investments in startups. For years, startups worked around this legality through non-equity-backed crowdfunding sites like Kickstarter or Indiegogo, where consumers pledged money toward a startup’s investment goal to help it launch, and were typically promised merchandise later on when the startup launched. A prime example of this is the Pebble smartwatch, which raised over $20 million in non-equity backed pledges from 78,000 investors.

In 2012, Congress passed the JOBS Act which included provisions that removed investment limitations on non-accredited investors. Those provisions were put on hold indefinitely until the SEC could draft new regulations to control equity-backed investments and ensure that investors were adequately protected. Despite being due by January 1, 2013 the SEC took until May 2015 before publishing its updated rules, effective June 19. The new rules state that non-accredited investors are free to invest in startups raising less than $50 million in their funding round.

The new rules also override some state-level rules that attempt to uphold restrictions on non-accredited investors,but do not remove requirements that startups comply with other state-level legal obligations. Known as “blue sky laws,” all 50 states have some version of legal regulation over small business fundraising and now with federal restrictions essentially neutralized, states with business-friendly blue sky laws are in a great position to attract startups eager to cash in on the potential that crowdfunding-based investment rounds offer.

To this end, Illinois has essentially rewritten its blue sky laws to explicitly permit online crowdfunding platforms to operate within its state borders. Illinois is setting a four million dollar cap on investment rounds facilitated through local crowdfunding sites, far less than the $50 million cap set by the SEC, but higher than the two million dollar cap recently established by other business-friendly blue sky states.

With equity-backed crowdsource platforms rapidly approaching, the time has never been better for entrepreneurs working in emerging markets.


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