Wisconsin is one of the first states in the U.S. to offer intrastate crowdfunding as an option for companies to raise revenue, according to Aaron Hagar, vice president of entrepreneurship and innovation at the Wisconsin Economic Development Corporation (WEDC). We recently sat down with Aaron to discuss how crowdfunding can complement other state resources including WEDC grants and loan programs.
Q: How do companies use “crowdfunding” as a method for raising funds?
A: Until now, crowdfunding has for the most part been limited to project-based investment. Websites like Indiegogo and Kickstarter have reached more than $4 billion in total pledges, but these campaigns more closely resemble product pre-sales, gifts, public broadcasting pledge drives or bake sales than investment. Businesses can and do use these sites to develop new products such as the Pebble watch and Pono music player, or Wisconsin’s own Fasetto. But many of the projects seeking support are art, music or other passion pursuits, and these campaigns are not investment in the traditional sense, since the “investors” don’t receive equity in the company.
Q: When did the crowdfunding trend start?
A: The concept of crowdfunding for business finance is not entirely new. Companies have been able to raise equity through multiple small investments for a long time—through the stock market, which is an almost $19 trillion endeavor in the U.S. alone. But the complexity and expense of “going public” presents a significant barrier to small companies, and their ability to raise equity outside of the public markets has historically been limited to investment from small numbers of wealthy “accredited investors.” Now, the rise of crowdfunding is providing a new avenue for raising capital that may especially appeal to smaller companies.
Q: How has crowdfunding evolved in Wisconsin?
A: In 2014, Wisconsin became one of the first states to authorize intrastate equity crowdfunding, and since then businesses have been able to raise money through Internet crowdfunding sites. The Wisconsin legislation is restricted to intrastate offerings (Wisconsin companies raising funds from Wisconsin investors), and any fundraising that crosses state borders is regulated at the federal level. Already, there are a number of Internet site operators registered in Wisconsin, including CraftFund, InVestWisconsin, Badger Crowdfunding and MoolaPitch.com.
Q: How are crowdfunding rules changing at the federal level?
A: Since the U.S. Securities and Exchange Commission announced new crowdfunding rules in October 2015, companies now can also seek investment from individuals outside of their state’s boundaries. The federal guidelines allow for companies to raise up to $1 million in a 12-month period, with limits on how much can come from any individual investor based on income. For investors with less than $100,000 in income, the maximum amount they can invest in all companies in a year is either $2,000 or 5 percent of income, whichever is greater.
Both the state and federal paths have significant reporting and disclosure requirements, but advocates report that these requirements are easily met using modern means of communication. There are also opinions that crowdfunding may potentially complicate subsequent angel or venture capital (VC) efforts. Due to the relative newness of equity crowdfunding, both the benefits and complications have yet to be proven.
Q: Any advice or things to consider for Wisconsin companies looking to explore crowdfunding campaigns?
A: These new state and federal rules open another option for smaller companies, for whom listing on a stock exchange may not be feasible to attract investment. With the help of modern technology, crowdfunding is revolutionizing business finance for both small companies and small investors. Additionally, as the new crowdfunding paths become better known and more widely used, it is quite possible that the option will become better incorporated into typical fundraising strategies for companies, and that the practices of angel and VC investors will evolve to account for the restrictions and benefits offered by crowdfunding.
Q: Anything else you’d like to add?
A: Crowdfunding is an excellent option for smaller businesses, but is certainly not the only funding option for companies looking to grow. For example, in addition to a successful crowdfunding campaign, Fasetto also pursued Qualified New Business Venture (QNBV) certification to make the company more attractive to potential investors. The QNBV certification program gives investors tax credits for a percentage of the amount they invested. More information on other resources from the state and WEDC can be found at inwisconsin.com/entrepreneurs/assistance/.