In April 2015, Governor John Hickenlooper signed the Colorado Crowdfunding Act into law. The law reduced the amount of regulation for companies soliciting relatively small amounts of equity investment from the general public. This made it easier for average citizens to invest in local entrepreneurial businesses. The purpose of the act was to redirect Coloradan investment dollars back into the local economy.
Put another way, the government wanted to incentivize Coloradans “to invest in their local coffee shop or brew pub.”
Equity crowdfunding vs Kickstarter
Most crowdfunding consisted of campaigns over sites like Kickstarter that raise funds in return for first dibs on products, services, or giveaways. With this law, Colorado tried to change that pattern by providing Coloradans a new way to invest in local companies and receive equity. But that didn’t happen.
A slow start for local crowdfunding
Former President Obama loosened regulations to allow non-accredited investors, or the average American, to invest in startups with his Jumpstart Our Business Startups (JOBS) Act. Colorado responded with a complementary crowdfunding act to keep investor dollars in the state.
But unfortunately, Colorado has been “all quiet on the [equity] crowdfunding front” according to DORA’s Securities Commissioner Gerald Rome. Only one filing under the act has been made thus far.
A forum to raise awareness
The University of Colorado Denver Business School and the Colorado Department of Regulatory Agencies hosted a panel of experts to discuss the Colorado Crowdfunding Act and its less than enthusiastic start.
The forum’s purpose was to determine the reason for this lack of interest and learn what roadblocks businesses are running into in relation to the crowdfunding program.
DORA formed a partnership with Ira Selkowitz, JD, senior instructor of Management at the CU Denver Business School to break down the problem at hand. Moderated by Monica Mendoza, reporter for the Denver Business Journal, the panel of experts included:
- Karl Dakin, Founder, Dakin Capital Guild
- Jack Donenfeld, Co-founder, Boomtown Accelerator
- Herrick Lidstone, shareholder and Managing Director, Burns, Figa, & Willl
- Andrew Schwartz, Professor of Law, University of Colorado Boulder
The experts speculated on why Colorado businesses aren’t taking advantage of the law. They discussed some potential deterrents.
- The process itself is too long, too complicated, and overall too intimidating.
- Businesses must use intermediaries, or sites where crowdfunding offerings are made. It took two years to get these sites built and functioning for businesses to use. Unfortunately, these intermediaries are expensive for small businesses because of their fees.
- Companies might not see the value of this type of crowdfunding because individual investors are limited to giving 5,000 dollars.
- The only people that can invest are Colorado residents. Companies don’t necessarily have the knowledge or resources to raise awareness to the public about their crowdfunding efforts.
“We are faced with a population that believes that simply because you post [a business] up on the internet, everyone is going to give you money. The problem is a general lack of knowledge and a lack of systems that are available for people to use.” Dakin claimed.
Using intermediaries to overcome barriers
Luckily these newly established intermediaries have the ability to reduce these barriers by guiding businesses through the crowdfunding process. Even though they are required and incur costs, they do help properly file paperwork, are familiar with the legal requirements, and provide an online site for businesses to advertise.
In regards to the financial burden of using intermediaries, Lidstone discussed loosening the regulations on mandating an intermediary if the business is looking to raise less than $200,000. He suggested the possibility of allowing businesses to create a page on their own website for potential investors and avoid expensive legal fees.
Dakin spoke from his personal experience and recommended most businesses would benefit from using intermediaries. “You have to…tell your story, build your crowd, and get the message out. Most businesses don’t have these skills or infrastructure in place.”
Next steps for crowdfunding
The forum brought a lively debate with many voices sharing their experiences and ideas on solving the problem at hand. CU Denver Business School students, alongside members of the business community, were among those to present comments and questions to the panelists.
Reflecting on the event, Selkowitz shared, “The forum was an ideal opportunity for the Business School to further its mission interacting with the Denver and Colorado business communities and for the Business School to apply its expertise in finance and entrepreneurship.”
The debate continues on whether the laws should be relaxed to promote more businesses to join the crowdfunding movement. Will we see Colorado crowdfunding develop to support small businesses and entrepreneurs? While intermediaries are now up and running, it’s too early to tell.
For more information read Denver Business Journal’s take: Why the slow start for equity crowdfunding in Colorado