Equity Crowdfunding Officially Legal in Colorado

Equity Crowdfunding Officially Legal in Colorado

As of today, the Colorado Crowdfunding Act (the “Act”), a Colorado State securities law that permits non-accredited investors to purchase securities in local companies, is now in effect. This Act will “enable Colorado businesses to obtain capital, democratize venture capital formation, and facilitate investment by Colorado residents in Colorado startups, thereby promoting the formation and growth of local companies.” The local act came in response of the delay in federal crowdfunding rules made legal through the Jumpstart Our Business Startups (JOBS) Act of 2012.

Now that the Act is officially in effect, there are a few key aspects that all businesses and investors need to be aware of:

  • All aspects of any offering made pursuant to the Act must take place between Colorado residents; otherwise they run the risk of violating federal securities laws. The JOBS Act of 2012 technically made equity crowdfunding legal at a federal level, yet since the Securities and Exchange Commission has not yet outlined the specific rules, national crowdfunding is still not permitted at the federal level.
  • Before a company may crowdfund pursuant to the Act, it must be registered with the Colorado Securities Division, a division of the Colorado Department of Regulatory Agencies. Like crowdfunding under the JOBS Act, crowdfunding transactions done pursuant to the Act must be conducted through an online intermediary. These intermediaries are subject to federal law and have certain limitations in their role in securities transactions in how they are compensated. This intermediary must also be registered with the Colorado Securities Division.
  •  There are limitations on how much capital that can be raised and how much investors can contribute:
    • Companies may only raise to $1 million. However, that cap can be raised to $2 million if the business annually submits audited financial statements to the division.
    • Non-accredited investors cannot invest more than $5,000. Accredited investors (as that term is defined under the rules promulgated pursuant to the Securities Act of 1933) have no cap and may invest whatever amount they desire. Companies interested in raising money through crowdfunding should consult with legal counsel in determining who qualifies as an accredited investor.

Last week, the Colorado Division of Securities released a set of the rules that go into further detail on the specifications and restrictions of equity crowdfunding in Colorado.  A full set of the rules can be found here.

Because of the discrepancy between state and federal law, Companies should seek the advice of legal counsel before selling securities. If you would like more information on how your business might benefit from equity crowdfunding or any other form of private investment, feel free to contact any of BHGR’s business attorneys.