Wisconsin crowdfunding bill raises concerns

Oct 10, 2013, 2:57pm CDT

Equity crowdfunding has gotten a lot of positive press, particularly quoting startups eager for a new source of capital.

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Much of the news coverage of a Wisconsin proposal reforming state securities law has focused on the creation of an online equity crowdfunding mechanism, but the bill also lowers the threshold of qualifying as an accredited investor — and that has raised some concerns.

The state Assembly passed the bill Tuesday and it appears poised to move quickly toward passage in the Senate, according to Patricia Struck, administrator of the securities division of the Wisconsin Department of Financial Institutions.

A part of the bill that has flown somewhat under the radar, perhaps given the trendy topic of crowdfunding, would amend the definition of “accredited investor” in Wisconsin and create a new category called “certified investor,” according to the amendment posted on the Legislature’s website. The criteria for achieving this designation would be lowered from individual income of $200,000 to $100,000 (or lowered from $300,000 to $150,000 for jointly filed income with a spouse), and would lower the net worth threshold from $1 million to $750,000.

“I think that threshold is pretty low if the premise is the person has enough resources to withstand” a loss on their startup investments, said Struck, speaking on a panel hosted by the Wisconsin Innovation Network’s Milwaukee chapter at the Crowne Plaza Hotel in Wauwatosa.

The Wisconsin Innovation Network is the membership arm of the Madison-based Wisconsin Technology Council.

Much of the discussion at Thursday’s event still focused on crowdfunding, which has been made popular by sites like Kickstarter and Indiegogo. Online portals are poised to allow non-accredited investors to purchase equity in startups, thanks to a federal law passed last year.

But the rules for that option have yet to be written by the U.S. Securities and Exchange Commission, and the Wisconsin bill is in part a reaction to that delay, said Dan Blake, director of the Wisconsin Angel Network. If the state bill passes, Wisconsin would join Georgia and Kansas in allowing intrastate equity crowdfunding. North Carolina is also close to enacting such a law.

“This is truly on the fast track,” Struck said, noting that the Wisconsin bill could hit the Senate floor next week. “It sure hasn’t seen a lot of obstacles yet.”

Equity crowdfunding has gotten a lot of positive press, particularly quoting startups eager for a new source of capital.

Those in the legal community are a bit more “guarded” about the implications of this new frontier for raising capital, said Ryan Van Den Elzen, attorney in Milwaukee. The scenario of startup companies raising money from citizens that don’t have much investing experience raises some concerns.

“If you’ve got an unsophisticated company selling to unsophisticated investors, there’s a material risk there,” Van Den Elzen said during the panel discussion. “Some of these investments aren’t going to be successful. We could have an area of new state and federal regulation” crop up in response.

Jeff Engel is The Business Journal’s reporter covering the manufacturing industry and technology.

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