Legislation that would have permitted Florida startups to engage in “crowdfunding” under exemptions from certain state and federal securities laws died at the committee stage. With the failure of the law to pass this year, the Legislature missed an opportunity to bring Florida in line with other states that have updated their laws to encourage economic growth by removing bureaucratic obstacles to business funding.
Crowdfunding generally refers to raising money for a business through small contributions from a large number of investors. A person or company with limited resources, typically a startup, pitches its idea to investors of all sizes (the “crowd”), who then hopefully invest something into the company. Crowdfunding takes place online through websites that are known as crowdfunding platforms. While the idea may sound simple, asking for money to invest in a business can quickly get one entangled in state and federal securities laws. Without any type of exemption or special legislation, raising venture capital currently requires compliance with a number of regulations. One federal exemption — “Regulation D” — does allow raising money from investors without registering such offering as securities, but the exemption only allows accredited investors to contribute and also exacts a heavy legal and regulatory burden on a company seeking compliance.
Washington state’s crowdfunding law, which passed in March, served as a model for Florida's proposed law. In order to encourage investment small businesses, the newlegislation allows Washington-based businesses to raise up to $1 million from Washington investors, whether accredited or not, during any 12-month period. Because the investment is limited to businesses and investors from within the state only, it does not run amok of federal law.
The Washington legislation is a tremendous step in helping entrepreneurs and creative types get much-needed funds. Florida’s now-defunct crowdfunding legislation had similar goals. The legislation, called the “Crowdfinance Act of 2014” would have permitted Florida residents or Florida businesses duly registered with the secretary of state to raise up to $1 million a year — just like in Washington — from either accredited or unaccredited investors, without violating Florida’s securities laws. The amount that any unaccredited investor could invest would be limited by that investor’s income. Plus, since the investors must be Florida residents and the investment can only go to a Florida company, the investment would be exempt from federal law as well.
Legislation like this is particularly important for Florida in order to keep the state competitive and attract entrepreneurs. A crowdfunding exemption can create incredible opportunities for startup businesses that otherwise would have little access to capital. Many startups at the initial “garage phase” are either too early for an angel investor or have no idea where to go find one. As many of these entrepreneurs are arguably tech-savvy, providing an online-based forum for raising capital makes crowdfunding a perfect fit for them. Even one investor who believes in an idea can make a huge difference by not only contributing funds, but by sharing his or her own contacts and referrals to other interested parties.
Crowdfunding legislation is needed to help Florida contend as a top state for technology jobs and innovation. InfoWorld recently listed Florida as number three in the nation for IT jobs. Many Florida jurisdictions are promoting Florida as ideal for tech companies to locate or relocate. The Greater Fort Lauderdale Alliance, for example, promotes the area's history of homegrown tech companies.
Florida is a leader in many areas, some better than others. With the good incentives and safeguards provided in Florida’s proposed crowdfunding laws, the state can become a national example of growth and technological innovation.
Let’s hope the Legislature does not hold us back during the next session and instead makes this important step into the future.
Attorney Gary D. Farmer Jr. is of counsel in the Fort Lauderdale office of the national law firm Hinshaw & Culbertson LLP. He focuses on domestic and international businesses across a variety of industries in their commercial litigation and disputes. firstname.lastname@example.org.