Ashley Stewart (@ashannstew) recently wrote a great piece in the Puget Sound Business Journal on Washington State equity crowdfunding titled “Crowdfailure: Not a single company has been able to use Washington’s 2-year-old crowdfunding law.” She also wrote an accompanying blog post.
Washington State Equity Crowdfunding
The article tells the story of a company frustrated at its inability to make use of Washington’s equity crowdfunding law, and what might be done to fix it.
I know many people who think that equity crowdfunding is going to be a failure and that the whole concept is a bad mistake.
I don’t think we should give up yet. I think the concept has huge promise, but we need to continue to refine our laws and regulations until we get this right.
Here are my suggestions on how to make the Washington crowdfunding law more usable, more user friendly, and better.
- Allow companies to use the law for smaller rounds ($250,000 or less) without having to hire an escrow agent and without have the DFI review and approve their Crowdfunding Form first. In other words, allow what they allow in Oregon: File the form, pay the fee, wait 7 days, and you can go ahead. This is one of the secrets of Oregon’s success. Oregon’s law went into effect after ours–and not through legislative action–the regulators just put a rule in place. Query whether we couldn’t just do that in Washington now. How about we adopt rules substantially similar to Oregon’s?
- Don’t require public disclosure of executive officer and director compensation. It makes sense to require these disclosures to company shareholders for sure. But requiring disclosure of to the public at large doesn’t make sense. The public at large is not invested in these companies, and these are, after all, private companies. Either RCW 21.20.880(3) needs to be amended or the Washington State DFI needs to adopt a regulatory exemption like Oregon’s.
- Allow portal operators or similarly situated people to earn a success fee on the closing of an offering (such as 3-5%) without having to be registered broker-dealers. As of right now, not a single person in Washington State has started a crowdfunding portal. This could be because there is no money to be made in it. If you can’t charge a success fee without being a registered broker dealer, and registration and maintenance of that registration costs hundreds of thousands of dollars, it makes the business calculus hard. It is hard to see people taking the time and effort to create a portal without being able to make a reasonable fee for the work they do. I don’t think allowing a portal to make a fee of some percent without a broker-dealer registration should be off limits. Allowing market participants to make a reasonable fee will help this industry take off.
- Allow the law to be used for real estate investments. Right now crowdfunding a real estate investment requires special approval of the DFI. This doesn’t make sense. Non-accredited investors ought to be able to pool their money to buy rental properties.
- Allow the law to be used to sell convertible debt securities (such as convertible note, convertible equity instruments, and revenue loans). Right now the DFI’s rules disallow the sale of debt securities. Again, I don’t think this makes sense. Most early stage companies raise money in convertible debt offerings. Under the Washington State DFI’s current rules, the crowdfunding law can’t be used to sell debt securities.
- Repeal the DFI’s rules on what preferences preferred stock must have. The DFI adopted minimum standards for preferred stock that are out of market. The most common form of early stage company preferred stock investment right now is the Series Seed round. But the Series Seed terms won’t meet the minimums the DFI laid out in its regulations for what rights, preferences and privileges preferred stock must have to be sold under the law. The current DFI rules push companies that want to issue preferred stock into a more complex, more expensive position than what angel and early stage VC funds demand in terms of deal terms.
- Allow accredited investors to invest an unlimited amount. There is no reason to limit the amount accredited investors can invest. They are not limited in a Rule 506 offering.
- Allow non-individuals to invest. Right now, only individuals can invest, but it would be better if an LLC could invest. That way, a company could take on one shareholder (the LLC), rather than potentially dozens of individual shareholders.
On Monday, May 16th, Title III equity crowdfunding is going to launch. It may turn out to be a lot more successful than people thought. I am optimistic, especially after having WeFunder Co-Founder Nick Tommarello on TheLawofStartups podcast (www.thelawofstartups.com). This isn’t the time to give up, but to improve what we have done to make it better.