Crowdfunding, a system in which entrepreneurs raise large amounts of capital by soliciting small investments from a large number of investors, has become an increasingly important resource for startup companies, inventors and small businesses in recent years.When websites like Kickstarter, RocketHub and Indiegogo began to explode in popularity, raising $2.7 billion for more than 1 million campaigns in the year 2012 alone, the federal government responded by passing the JOBS Act.
The Act loosened federal sanctions that prevented companies from soliciting investments from the general population. These historic sanctions were put into place to combat investment fraud after the stock market crash of 1929.
In 2013, Wisconsin passed its own Crowdfunding laws under 2013 Wisconsin Act 52, which loosens the limits even more for crowdfunding solicitations and investments that occur entirely within the state
How Does Crowdfunding Work?
Professor Steven Bainbridge of the UCLA School of Law has identified four distinct models of crowdfunding: the donation model, the reward model, the pre-purchase model and the equity model.
The first three models encompass donations to a cause, monetary contributions rewarded with small gifts such as t-shirts, discounts, or tickets to a movie’s premiere, and advance purchase of products that may not yet be in production.
As the crowdfunding sphere has transitioned from being primarily dominated by artists, charitable causes, and other projects that don’t expect extraordinary profits, to also include startups, inventors and small businesses that can offer a significant return on investment, the equity model comes into play.
In the equity model, investors contribute capital and, in turn, are granted a share in the profits generated by the company. Therefore, returns for the investors are contingent upon the success of the project. As Bainbridge points out, in this model, the expectation of profit is the sole motivation for investors to contribute.
It is the equity model of crowdfunding that led congress and the federal government to pass the JOBS Act, which allows websites to sell certain securities to certain investors, as long as they meet requirements pertaining to investor categorization, information disclosed to investors, and whether the funding portal website is registered.
Federal Crowdfunding Laws
Under federal law, equity crowdfunding startups may more easily accept higher contributions from accredited investors, the classification indicating that they are a person of wealth who is also likely to understand investment risks and be able to sustain potential losses. Federal law dictates that accredited investors must have an annual income of at least $200,000 for two years in a row ($300,000 if a spouse is included) or a net worth of $1,000,000.Federal law also limits the total amount of capital that can be raised via crowdfunding to $500,000, and raises that limit to $1 million when the companies provide investors with certified audited financial statements. The SEC also limits the amount non-accredited investors can contribute to $2,000 or 5% of their net worth if the investor’s income or net worth is less than $100,000. If the investor’s net worth or annual income is greater than $100,000, they are limited to contributions of up to 10%.
Wisconsin Crowdfunding Laws
Wisconsin crowdfunding law makes it easier for investors to contribute, expanding upon the federal accredited investor definition, doubling the amount of money companies can raise through these means, and allowing individual investors to contribute larger amounts. Essentially, less wealthy people can invest more money through crowdfunding in Wisconsin.
Under 2013 Wisconsin Act 52, Wisconsin creates a certified investor category, which is more easily attainable than the federal accredited investor category. To qualify as a certified investor, the individual must only have an annual income of $100,000 ($150,000 including spouse), or a net worth of $750,000.
Wisconsin companies may also raise a total of $2,000,000 when they provide certified audited financial statements, or $1,000,000 without certified financial statements. Instead of imposing a percentage-based restriction on how much a non-certified investor can contribute, Wisconsin imposes a limit of $10,000, significantly higher than the $2,000 that federal law allows. Both accredited and certified investors are legally able to exceed this limit.
Wisconsin will also require companies to issue stock through funding portal that’s registered with the Department of Financial Institutions.
The Future of Crowdfunding
Along with Wisconsin, other states moving forward with their own crowdfunding exemptions and regulations include Michigan, Kansas, Georgia, California and Florida.
Although the potential for fraud remains a concern in the eyes of many lawmakers, attorneys, and scholars, and it’s a fact that many startups fail, crowdfunding also has the capacity to contribute to a growing economy as more business startups leads to more industry and job creation.
For advice and legal guidance on starting a business or a crowdfunding venture in Wisconsin, please contact our Green Bay business attorneys at Gerbers Law.