The General Assembly of the state of Delaware recently approved, unanimously, legislation that will legalize equity crowdfunding for startups in Delaware.
This means that both startups and small businesses will have increased access to investors and, as a result, increased access to capital.
At the same time, House Bill 327 will allow more Delaware residents—regular people, not millionaires—to invest in Delaware startups and reap the benefits of early stage investors.
HB 327 is sponsored by Representative Bryon Short (D-Highland Woods) and Senator Brian Bushweller (D-Dover). Representative Short says, “We need to make sure our laws keep pace with technology so that our small businesses have access to new methods of raising much-needed capital. […]. This bill will take steps to help new companies by enabling Delaware residents to invest and participate in the success of homegrown Delaware startups.”
Previously, only certain types of investors were qualified to buy equity in startups—investors had to have either a one million dollar net worth or earn at least $200,000 per year. Thus, the term “angel investing” came about, as these wealthy investors were considered angels who funded startups with the right qualities.
As of mid-May, 2016, the new federal crowdfunding law allowed any Average Joe or Jane to invest in startup companies.
If you earn under $100,000 per year, you are allowed to invest up to $2,000 or 5 percent of your annual income—whichever number is greater. If you earn more than $100,000 per year, you are allowed to invest up to 10 percent of your income once every 12 months.
The startups themselves are allowed to raise up to one million dollars every 12 months.
The new Delaware law will focus specifically on local companies and local investors. Startups have to abide by the same million dollar fundraising limit; however, people can invest up to $5,000 at a time.
There are, of course, risks involved with selling pieces of your company to strangers, and some entrepreneurs will likely prefer the old-school model of angel investing, which often includes mentoring, brainstorming and networking.
Although the Delaware startups participating in equity crowdfunding will not be mandated to acquire a comprehensive valuation before accepting investors, there will be safeguards in place in order to protect investors. The Investor Protection Unit (part of Delaware’s Department of Justice) will be in charge of oversight.
Senator Bushweller states, “We must strike the right balance between protecting the public from fraudulent activity and making sure our small businesses can access investment capital, and this bill accomplishes that.”
Since Delaware is such a small state, the number of extremely wealthy people—there are no billionaires and very few multi-millionaires—who are willing to invest in entrepreneurs is quite low. This equity crowdfunding bill “removes some of the roadblocks and widens the pool of investors […] businesses can access,” says Vincent DeFelice, who works at the University of Delaware’s Horn Program in Entrepreneurship.
This law won’t go into effect until at least October of 2016; however, Delaware Governor Jack Markell is fully supportive of the bill, and signed the crowdfunding equity legislation into law on Monday, July 11, 2016. He is confident it will help keep the state competitive.
Markell says, “When combined with progress in strengthening our workforce, streamlining regulations and leading the nation in broadband availability, these efforts will ensure Delaware remains well-positioned to thrive in our new economy.”
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