I think that these constraints (at least the investors being in CO) is due to SEC rules. I read Locavesting ( http://locavesting.blogspot.com/p/about-locavesting.html ) a while ago and seem to remember that state regulated stock exchanges operate under a different set of rules.
I'd love if this existed in California. It would make it dramatically easier to raise money for doing an independent film. Right now you still have to do a regulation D filing and verify the accreditation status of investors, so you're strongly incentivized to go after a small number of large investors, which is not always optimal for the success of the project. The SEC is due to issue new guidelines for Title III crowdfunding, but they're quite late on this already and nothing is likely to happen before the end of the year. Of course you can go the Kickstartter route and just ask for donations, but as I've ointed out before this is much trickier to do if you don't have some sort of existing fanbase, eg doing a sequel, involving a celebrity, or doing a documentary on an issue with an existing activist base. All practical options in their way, but it means a very amrketing-driven approach from the outset.
http://www.filmfinanceattorney.com/page/483179582 Typically a film production co. offers investors something like a 50% interest in an LLP or LLC split into units keyed to the budget, first position, and 25% interest, to reflect the high risk inherent in such a venture. And no, this is not meant as a solicitation!
FWIW, personally I am not optimistic about this but would love to be proven wrong.
Information asymmetry, risk mismanagement, chasing quick riches, etc - too many reasons imho why startups are not a viable asset class for most people.
Don't forget, this law doesn't let people bet their life savings on a whim. From the article:
"The new law eases the process of raising that first $1 million by letting people ask their neighbors for up to $5,000. While companies must inform investors of the risk and provide quarterly reports, they can skip the audit and other expenses typically needed to attract investors."
So, it is $5k at a time. The main difference between this and the normal "friends and family financing" is that it can be a larger number of less connected investors and the company needs to provide reports.
Being a member of an investment club (and being surprised at the lack of uptake), I'll be interested to see whether or not the investments allowed by this law are worth entrepreneurs' time.
I hope you are right and I hope it works out but I am skeptical.
I will give you a simple example. If you get a random sample of people in the US, I am afraid more than 90% of them won't even understand that investing 5K in a neighbor's kid's shiny new startup is not a binary proposition (invest or don't invest); one actually is buying N of something (shares, options, warrants, etc) for those 5K, with all sorts of properties like seniority, etc, etc, etc.
Regular people can understand a loan - I give a neighbor's kid 5K and get back 5K+3% in 1 year. But equity-based investment is significantly harder to grasp.
There are certainly downsides, but people can already piss their money away in many, many ways. Gambling, drink, risky stocks, buying junk that they don't need.
I think in this case I'd think it should be up to individuals to determine how they use their money.
I think this is a very bad idea. You're going to have a lot of fraud and people getting taken advantage of. I think the accredited investor guidelines are very practical.
Why punish entrepreneurs who want to start a company because of a few bad apples? Anyone who invests in anything needs to do their research, understand the risks and make the right choice for themselves.
You could make that argument about anything. People who use credit cards need to do their research and understand the 200 page card agreement, so we shouldn't punish lenders by having consumer protection laws.
Startups are exactly this same sort of risk, except it's even worse - there aren't even terms and agreements saying exactly what's being received in return for money. There's no way crowd funded equity owners are going to get access to due diligence that would make it a responsible investment. And there's no way way, ever, that a startup makes sense from a responsible investing perspective to a random Joe off the street. It's essentially a lottery ticket because there's no way to accurately assess the value and risk of what they're investing in, and even if there was any sane financial planner will tell you it's a bad investment for regular people.
Outright deception is wrong and consumer protection laws are in place for good reason. To remove that option completely for the 99% of a society is ridiculous and harms innovation, entrepreneurs, and the notion of having a "free" market.
As a small business owner in Colorado, I've had several friends, family, co-workers, potential customers, etc... offer to invest small amounts in my company ($500 - $5000). I've had to turn them away because of government intervention. I wouldn't have accepted money from everyone that offered but don't think that the government should remove that option from the table.
You are making huge assumption that people know how to do their own research and think with reason rather than emotions. If that was indeed true then there would be no casinos, lotteries, credit card debt, MLM schemes, mortgage defaults, etc
not that these don't add value to the economy but average person is probably better off without them
The rule says that you have to be an investor in the state. Could you start a fund that takes money and invests in smaller Colorado startups using this new law?
I think the rules are still in flux. From the article:
"The state's Securities Commission must now create rules before the first equity crowdfunding deal in Colorado is made. Draft rules will be completed by the end of the month and must go through an approval process before becoming official, according to deputy state securities commissioner Lillian Alves."
I'd love to be able to pick nice projects on Kickstarter/Indiegogo and really invest in things I find promising. Sure, getting the product eventually is nice but more than once I thought, this will blow-up, if only I could invest some money. I don't have much to spend so the gain will be little but still, I'd give me some "practice" and trust in the method, who knows what I'll do later.
You can only have investors from colorado, to a company formed in colorado and 80% of the investment has to be spent in colorado.
Still this is a move in the right direction, and I hope it helps some of my CO-based peers get off the ground.
source:
http://www.leg.state.co.us/CLICS/CLICS2015A/csl.nsf/fsbillco...
(A) THE INVESTOR IS A COLORADO RESIDENT OR IS AN ENTITY FORMED PURSUANT TO COLORADO LAWS;
(B) THE ISSUER OF THE SECURITIES IS AN ENTITY FORMED PURSUANT TO COLORADO LAWS AND DOING BUSINESS IN COLORADO; AND
(C) THE ISSUER INTENDS TO USE AND USES AT LEAST EIGHTY PERCENT OF THE PROCEEDS OF THE SALE OF SECURITIES IN COLORADO