By Anthony Edwards
Recognizing the critical role start-up companies play in expanding economic opportunity, Colorado Gov. John Hickenlooper signed into law the Colorado Crowdfund Act this April with almost unanimous support from the General Assembly.
The act became effective Aug. 5 and enables existing and start-up businesses in Colorado to seek equity investment via the Internet from the general population, with some restrictions.
Previously, with few exceptions, investing in private Colorado start-ups and businesses was reserved for accredited investors – an individual whose net worth exceeds $1 million or has an income that exceeds $200,000 annually. Unlike traditional bank loans or credit cards, equity-based crowdfunding enables small business owners to raise capital from investors without having to take on immediate debt.
The law now allows existing businesses and start-ups to raise up to $1 million a year, which can be increased up to $2 million if the business submits audited financial statements to the Colorado Division of Securities. Non-accredited Colorado investors can invest up to $5,000 in a business, whereas there are no investment restrictions for accredited investors. Investors must be Colorado residents and prior to sale, “the issuer shall obtain documentary evidence from each prospective purchaser that provides the seller with a reasonable basis to believe that the purchaser meets the (Colorado residency) requirements.”
Before an offering becoming available for investment, an issuer must file specific forms with the state Division of Securities, including a full and fair disclosure, which must be amended within five days when new material information arises or is disclosed. In addition, the issuer and offering must be exempt from federal registration requirements pursuant to the Securities Act of 1933 and Securities and Exchange Commission rules. Investor protections are incorporated within the Crowdfund Act include barring what is commonly referred to as “bad actors” from participating as an issuer or an online intermediary. Rules also restrict individuals who have had a securities or fraud related conviction in the past 10 years from participating as an issuer of securities under the law.
Issuers can raise capital using a broker-dealer, sales representative or online intermediary. A few of the key restrictions for intermediaries include:
Online intermediaries cannot handle or possess funds or securities in the offering process.
Online intermediaries cannot own a financial interest in any crowdfunding participant or receive compensation that is based on the amount raised.
Online intermediaries cannot be affiliated with or under common control with an issuer conducting a crowdfunding offering through that intermediary.
Online intermediaries cannot offer investment advice or recommendations or solicit purchases or sales of securities displayed on its website (but is merely a repository for the information displayed).
Online intermediaries must post the disclosure documents, and likely will have extensive terms and conditions, risk warnings and investor acknowledgements that must be accepted as a condition precedent to the investor continuing to the funding site.
Online intermediaries have specific record-keeping obligations and must take steps to ascertain that the people viewing crowdfunding offerings through their website are in fact Colorado residents.
Online intermediaries may generally advertise their website but may not “identify, promote or otherwise refer to a security offered by it.”
The potential of the Colorado Crowdfund Act to assist Colorado entrepreneurs in capital formation is yet to be realized. In time, the act may prove to increase access to capital, the lack of which, as recognized by the General Assembly, is an obstacle to starting and expanding small business, inhibits job growth and has negatively affected Colorado’s economy.
Anthony Edwards is an attorney and the owner of San Juan Law Office, LLC in Silverton, and assists Western Slope individuals and businesses with their civil affairs. He also serves as a Region 9 Economic Development board member and consultant for the Colorado Small Business Development Center. Reach him at anthony.edwards@sjlollc.com.
