SALEM, Ore. — Oregon is moving toward joining a growing number of states that allow small businesses to pick up a large number of small investors through crowdfunding.
Many businesses already use crowdfunding platforms like Kickstarter to raise money from hundreds or thousands of people, but the money is a donation, not an investment. The donor can expect nothing more than a future product from the company.
If Oregon’s proposal goes forward, ordinary Oregonians ponying up no more than $2,500 could reap financial rewards or even own a sliver of the company.
Financial laws and regulations spell out strict rules about who can invest in businesses and how investment opportunities can be advertised. Oregon’s proposal would loosen some of the rules, allowing an Oregon-based business to raise up to $250,000 from Oregon residents in chunks of $2,500 or less. The investors would not have to be accredited.
“Most of the infrastructure for investing is designed and supported by the one percent,” said Amy Pearl, founder and director of Hatch, a Portland group that seeks to help community-minded entrepreneurs grow their businesses. “It really is either a bank loan or angel investing. And angels are one percent of the one percent. It’s a teeny tiny sliver.”
Pearl has worked with state finance regulators to prepare the crowdfunding rules, which she says have the potential to open access to capital for thousands of businesses. She said it could be a particularly strong tool in rural communities where it’s even harder for local businesses to secure large investors.
“Suddenly rural communities can invest in their own businesses,” Pearl said. “They truly and literally could not do that beforehand unless they were family or friend.”
Not everyone is convinced that crowdfunding is an appropriate way to match small businesses with the money they need to grow, however.
The crowdfunding rules would pair inexperienced business owners with unsophisticated investors, a scenario that’s likely to result in failures and recrimination, said Alex Pawlowski, a banker and longtime economic development official from southern Oregon.
“This is not Kickstarter where these are just gifts we’re giving to support our local business,” Pawlowski said. “This is an investment, in which investors have a right to expect a return on investment.”
The Oregon Department of Consumer and Business Services is accepting public comment on the proposal through Wednesday. The Division of Finance and Corporate Securities administrator, David Tatman, will then decide whether to move forward with the rule, which would take effect next year.
The rule as proposed would allow businesses to advertise the basic terms of their investment offering without promising windfall payouts. They’d also have to disclose a variety of information about the business owners, existing investors, lawsuits, potential risks and other pertinent details.
Business owners would have to meet with an expert before they can seek investors. Investments could take the form of debt or stock in the firm.
The U.S. Securities and Exchange Commission has issued draft rules for crowdfunding at the federal level, but it has not finalized them. That’s left it up to the states to decide whether they want to allow their own businesses to raise capital from their residents, which was allowed under 2012 legislation approved by Congress to promote job creation.
State rules vary significantly, with many allowing investors to raise up to $1 million.