“We believe new models for investment in local businesses benefits the entire community.”
From funding pet surgeries to assistance with paying college tuition, rewards-based crowdfunding projects on Kickstarter have raised over $2.8 billion to date. With such enormous potential to pitch ideas and gather momentum, it is natural to extend the concept of crowdfunding towards helping aspiring entrepreneurs grow and scale their companies.
That said, previously founders could only fundraise from “accredited investors” (individuals who make $200,000 per year, or had $1 million in net worth). That all changed in January 2016.
The state of Illinois took a big step forward in this regard with legislation being finalized to enable intrastate equity crowdfunding -- allowing everyday people to invest in local and statewide businesses, in exchange for some form of ownership in the company.
Showcased as a step towards empowerment and building a critical mass of support for entrepreneurs, the rule allows Illinois businesses to raise up to $4 million per year (significantly higher than the federal cap of $1 million, thus making it one of the highest permitted amounts in the country). The investors have to also be based in Illinois, and they may be high-network, accredited or non-accredited (essentially, everyday citizens). As opposed to rewards-based crowdfunding, where one might get a t-shirt or another perk, this is debt or equity-based crowdfunding.
At a recent press conference held at local technology incubator 1871, Representative Carol Sente (D-Ill.), a former small business owner herself, noted the rule's bipartisan support in both the House and Senate, despite the ongoing budget impasse in Springfield.
Entrepreneurs running equity crowdfunding sites said it opens up a new opportunity for businesses.
“We believe new models for investment in local businesses benefits the entire community, said Howard Orloff, cofounder of VestLo, the crowdfunding platform focused on Illinois, who was present at the press conference. For VestLo to provide a platform by which a community can support and take ownership of local businesses is both exciting and a disruptive new way of thinking about investment.”
Business founders have also started to get on board. Three small businesses and early adopters of the platform also shared some details of their offerings at the event: Native Sons of Chicago, aiming to rejuvenate communities with community infrastructure investments; CrossTown Fitness in Lakeview that emphasizes community building via fitness and recreation; and CardFrenzy, a boutique and gift card retailer. Their offerings can be viewed on VestLo.com, and are open to all Illinois residents.
Native Sons and CardFrenzy are both equity offerings (minimum investment of $250) whereas CrossTown Fitness is a debt offering. As with all speculative investments, Mr. Orloff suggested evaluating risk carefully, considering the social impact of the investment, and asking questions to the business owners via the platform before making an investment.
While the rule went into law last January, equity crowdfunding hasn’t quite yet taken off in Illinois. VestLo, for example, only has the above three businesses on its platform, and none have been fully funded yet.
At the press conference, Orloff said he believes this is due to a lack of awareness about the law. Freeborn & Peters LLP, legal experts and authors of the law, noted in a blog that the “administrative realities of actually conducting offerings” delayed rollout of equity crowdfunding.
That said, if this law picks up momentum – currently the only hindrance seems to be a lack of awareness – it has the potential to retain businesses and grow the number of available jobs for Illinois residents, while also providing financial returns for citizens who want to try their hand at investing.
(Header image via Vimeo)
