Banking & Finance  July 30, 2015

Colorado releases rules on equity crowdfunding

DENVER — The Colorado Division of Securities on Thursday released a set of rules that will govern how individuals and companies go about raising capital through crowdfunding. The Colorado Crowdfunding Act will go into effect Aug 5.

The new rules clarify and expand the regulations outlined in the initial Colorado Crowdfunding Act, approved by the state Legislature this spring and signed by Gov. John Hickenlooper on April 13.

Included in the new rules are specifications on the role of the required online intermediary, further description of required escrow accounts, a more detailed list of prohibited activities, and clarification on how issuers and intermediaries are to keep the offerings within Colorado. All aspects of the transaction must take place only between Colorado residents.

SPONSORED CONTENT

Business Cares: March 2024

WomenGive, a program of United Way of Larimer County, was started in Larimer County in 2006 as an opportunity for women in our community to come together to help other women.

“We made sure to carefully outline the rules for the implementation of equity crowdfunding in Colorado to both instruct and make the option as clear and easy as possible for potential issuers, but with an eye toward ensuring that consumers who may want to invest are protected,” securities commissioner Gerald Rome said in a prepared statement. “Our focus was to keep the paperwork and ‘red tape’ requirements to a minimum while imposing strict disclosure and record-keeping rules in order to limit fraudulent offerings.”

Equity crowdfunding differs from current crowdfunding enterprises such as Kickstarter and Indigogo. With equity crowdfunding, businesses that choose to solicit money from the general public will now be able to offer equity or a stake in the company.

Previously, individuals who contributed to crowdfunding campaigns were not allowed shares in the company, and their contributions were considered donations to an effort. Colorado joins a handful of other states in legalizing this method of capital acquisition in response to a delay in federal crowdfunding rules that were made legal through the 2012 Jumpstart Our Business Startups Act.

There are three basic tenants to the new rules.

First, before a crowdfunding offering can proceed, the issuer must file various forms with the Colorado Division of Securities, a division in the Colorado Department of Regulatory Agencies. Online intermediaries, through whom the crowdfunding transactions will be conducted, must also file a form with the division. Online intermediaries are subject to certain limitations in their role in securities transactions and in how they are compensated in order to avoid running afoul of federal securities laws.

Second, there are limits to how much capital can be raised and how much individual investors can contribute. The act states that the issuer of the securities can raise up to $1 million. However, the cap can be raised to $2 million if the business submits audited financial statements to the division. Individual investors cannot contribute more than $5,000. If an investor is accredited, the $5,000 cap is removed. An accredited investor is defined under federal law, but is generally an individual whose net worth exceeds $1 million or who has an income that exceeds $200,000.

The final item is that all aspects of the transaction must take place only between Colorado residents. Crowdfunding transactions that reach outside of Colorado run the risk of violating federal securities laws. The Jumpstart Our Business Startups (JOBS) Act of 2012 technically made equity crowdfunding legal at the federal level. However, the Securities and Exchange Commission has yet to outline rules that would permit national crowdfunding offers to proceed.

The full set of rules can be found online.

DENVER — The Colorado Division of Securities on Thursday released a set of rules that will govern how individuals and companies go about raising capital through crowdfunding. The Colorado Crowdfunding Act will go into effect Aug 5.

The new rules clarify and expand the regulations outlined in the initial Colorado Crowdfunding Act, approved by the state Legislature this spring and signed by Gov. John Hickenlooper on April 13.

Included in the new rules are specifications on the role of the required online intermediary, further description of required escrow accounts, a more detailed list of prohibited activities, and clarification on how issuers and…

Sign up for BizWest Daily Alerts