March 31, 2014

CT seeks to safely 'crowd' in on funding startups

Photo | Pablo Robles
Photo | Pablo Robles
State Sen. Gary LeBeau, left, wants crowdfunding to be legally accessible to CT Inc.
Mark Nowotarski, member, Connecticut Business & Industry Association

Connecticut businesses should have access to the hot trend of online "crowdfunding," but the state needs more time to craft protections for both investors and startups, lawmakers say.

The state legislature's Commerce Committee last week passed a bill (HB 5577) that orders the state Banking Department to study "crowdfunding'' rules already in place in a handful of states as a prelude to Connecticut shaping its own regulations.

The potential oversight comes on the heels of the 2010 federal Jobs Act, which makes crowdfunding a more attractive equity-financing option for American businesses and investors. In recent years, online crowdfunding, which allows investors to pool capital via the Internet to stake fledgling firms' business models, has gained in popularity, raising concerns about potential fraud and abuse.

Georgia, Kansas, North Carolina, Michigan, Wisconsin, and Washington are among states where equity crowdfunding regulations are either in place or being deliberated.

Crowdfunding has always been available to Connecticut businesses, and some have taken advantage of it. However, state policymakers say formal rules are needed to remove any legal ambiguity and to set up a framework for regulatory oversight.

Connecticut's bill aims for the banking department to present its study findings, plus recommendations for crowdfunding oversight by next January, so lawmakers can create enabling legislation perhaps in the 2015 session.

"To be honest, I don't understand what crowdfunding really is,'' said State Sen. Gary LeBeau, an East Hartford Democrat who co-chairs the Commerce Committee. "I just know it's a source of funds. Other states are doing it. And if they are, why can't we?''

Crowdfunding as an equity-financing concept has existed, in various forms, for ages worldwide. In 1884, Americans responded to newspaper publisher Joseph Pulitzer's plea and each chipped in a dollar or less to raise more than $100,000 in six months to finish restoration of the Statue of Liberty.

Modern crowdfunding in the U.S. has been associated more with financing local, state and national political campaigns from individual donors.

But a growing number of Web-based portals such as Kickstarter in the U.S., and abroad Indiegogo and Great Britain's highly popular Seedrs portal, are altering the financing landscape by allowing startups to access capital more directly than using traditional bank loans, registered stock offerings and other public, private funding sources, experts say.

Actual estimates for the sums crowdfunding generates yearly in this country and abroad are difficult to come by. But as crowdfunding's appeal as a finance tool grows, so too have state and federal regulators' concerns about the potential for fraud by unscrupulous business operators and investors.

Eric Wilder, director of the state Banking Department's securities division, said his agency still harbors those concerns it had when crowdfunding emerged on its radar at least two years ago.

Wilder said the agency also must ensure that any Connecticut crowdfunding regulation is in keeping with federal Securities and Exchange Act of 1933 rules.

Mark Nowotarski of Darien advises inventors and others how to protect and extract maximum value from their intellectual properties. Crowdfunding potentially solves, Nowotarski said, the perpetual dilemma facing all startups: "How do you get money when your idea is still an idea?''

With no viable product or service to show customers or leverage as collateral, financiers almost always are reluctant to invest, he said.

Connecticut has had success with rules for "angel" investors to stake technology startups in exchange for a state income tax credit. Crowdfunding, too, would be right up angel investors' alley, said Nowotarski, president of his firm, Markets, Patents & Alliances LLC.

"They're going to love it,'' he said, "because nobody wants to go in by themselves on an investment.''

Nowotarski, a member of the Connecticut Business & Industry Association and author of several CBIA online posts examining crowdfunding's role, risks and rewards, says state bank regulators ought to talk first to their counterparts in Britain, where business crowdfunding has a deeper track record.

He also says Connecticut should leverage to its benefit its expertise as the world's insurance capital. Any state crowdfunding legislation, he said, ought to require that crowdfunding solicitors have a sort of investment liability-insurance policy to protect equity in the event their business models go awry.

"That's an area,'' Nowotarski said, "where Connecticut can set itself apart as a desirable place to do crowdfunding.''

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