New Crowdfunding Law Lends Mainers A Hand

By Whit Richardson
Portland Press Herald, Maine.

Kay Aikin and her partners had spent years bootstrapping their software startup, investing $250,000 of their own money. In 2013, they were ready to raise the next bit of capital they needed to bring their product — information management software for architecture firms — to market.

But the investors she approached in Maine’s business community didn’t have experience in the architecture market and shied away from the investment.

“They looked at our investment as, ‘Oh, you’re in architectural software? There’s nothing there,’ ” said Aikin, CEO of the Portland-based startup, Introspective Systems. “They make (uninformed) decisions. I was in Top Gun (a program for Maine entrepreneurs); we got good press. We are capable of being an international company here, but we got relatively little support from the investment community.”

She would have preferred to raise a smaller amount of money, say $150,000, from her potential customers — architects in Maine and elsewhere who saw the potential of her software — by selling shares in her startup. At the time, that wasn’t an option.

It is now, thanks to a law that took effect Jan.1 allowing crowdfunding in Maine.

The new law allows entrepreneurs to raise capital by selling a stake in their nonpublic companies to anyone with the money and willingness to invest.

“If I had 50 or 100 architects who all put in $2,000 and they owned a little bit of (the company), that would have given me customer validation and money, and then the investment community would have started to look at us differently,” Aikin said.

Introspective Systems, which now has five employees, sold its first software product to a Maine-based architect two weeks ago. Aikin estimates that if she were able to use crowdfunding back in 2013, it would have sped up the process, allowed the company to hire more people and bring the product to market as many as eight months earlier.

“I’m sure I would have grown more quickly,” she said.

Crowdfunding has become a buzzword in entrepreneurial communities over the last several years.

There are an estimated 200 crowdfunding websites like Kickstarter, Indiegogo and Fundable in the United States alone, and between 600 and 700 globally, according to Brad McCurtain, president of Maine Securities Corp. and an advocate for Maine’s crowdfunding rules.

Globally, crowdfunding sites are estimated to have raised more than $5 billion in 2014, which is twice the amount raised in 2012, and 10 times the amount those types of websites raised in 2009, according to McCurtain.

But crowdfunding practices now allowed in Maine are very different from the crowdfunding practices facilitated by Kickstarter. In those cases, entrepreneurs are able to raise money from people without offering them anything in return, although in practice they often offer gifts like a T-shirt, a name on a brick, or an invitation to an exclusive VIP launch party, depending on the amount donated.

Under Maine’s crowdfunding law, entrepreneurs can raise capital by selling equity or debt in their companies to anyone. The exchange of money for equity or debt does require regulatory oversight and includes some restrictions. For instance, Maine’s law limits the amount any one person can invest to $5,000 and limits companies from raising more than $1 million in any 12-month rolling period. Additionally, convicted felons are not allowed to sell equity in their businesses.

Elizabeth Chabe, CEO at High Touch Courses, a startup in Bangor that’s building online education applications, has kept tabs on the law since its introduction in the Legislature. She sees two potential benefits of the new rules: It expands exponentially the number of potential investors who may have interest in providing capital to early-stage companies — “As anyone who’s tried to launch a company knows, it can be very complicated and daunting, so some funding at the pre-seed level is nice,” she said — and it gives innovators a chance to test the marketability of their product or service.

“So, essentially, it is another way of proving traction. Now, when you go to the Maine Angels or Bangor Angels or the Maine Venture Fund, you can show traction,” she said. “Those are really the main two reasons why this legislation is good for Maine.”

Ben Slayton, owner of Farmers’ Gate Market in Leeds and co-founder of The Farm Stand in South Portland, said Wednesday that he’s heard about crowdfunding and it’s piqued his interest.

“I can say that it sounds like the kind of financing we’d be interested in — we like closely connected, unencumbered investors,” he said. “Funding the local food system is about relationship building … and distributing broadly the risks and rewards.”

It’s not for everyone, though.

Robert Bruce, CEO of Zylo Media, a digital media startup in Portland, is currently seeking investors, but he doesn’t think crowdfunding is an avenue he’ll pursue because he’s trying to raise a significant amount of money.

“When I look at our business model and what we need, crowdfunding doesn’t really fit for us,” Bruce said, though he’s quick to add that he thinks the new law is positive for the state’s economy. “I personally see it as more beneficial, or a more workable model, when the amount you need to raise is not that significant, say under $100,000, and you’re using the money to develop something tangible.”

While a local restaurant or some sort of hardgoods manufacturer might have luck with raising $1,000 to $5,000 from individuals, he thinks it would be harder for a digital media startup to do so because of the lack of a tangible product. Investing is often driven by emotions, Bruce said.

“I think Maine is a perfect place for this tool because there are entrepreneurs who are building things and innovating with tangible products,” Bruce said. “The challenge of being a digital media company is there’s not a lot of activity or understanding in the state about that.”

When it comes to crowdfunding, Maine is leading the nation.

Since 2012, 14 states have passed laws that allow entrepreneurs to solicit investment from the public, according to the North American Securities Administrators Association. However, those state laws specify that entrepreneurs can only sell shares to investors in the same states. Maine is the first state to allow entrepreneurs to sell shares in their companies to investors no matter where they reside.

“I think this is part of the boom in entrepreneurship financing that is going to take place in 2015 and beyond,” said Don Gooding, executive director of the Maine Center for Entrepreneurial Development. “I think the simultaneousness, implementation of the (revived Maine) investment tax credit and the new crowdfunding rules together make this a very robust environment.”

Judith Shaw, administrator of Maine’s Office of Securities, said a few states are looking at Maine’s law. She also plans to be proactive about touting Maine’s law to her colleagues in other states. As the president-elect of the North American Securities Administrators Association, she has a good platform to do so.
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“It’s been a long time since this agency has really stepped out and tried to build relationships and facilitate capital formation and we’re glad to do that and very excited about it,” Shaw said.

Another event that spurred interest in crowdfunding is the federal JOBS Act, which President Obama signed into law in 2012. Federal law currently allows companies to sell securities to “accredited investors,” which are high net-worth individuals, but the JOBS Act opened the doors for equity crowdfunding from nonaccredited investors. The U.S. Securities and Exchange Commission has yet to finalize the necessary rules, however, a delay caused in part by opposition from groups such as the AARP, which worries that this will open the gates for shysters to fleece senior citizens.

“It’s extremely controversial,” according to Gregory Fryer, a securities attorney at Verrill Dana in Portland, and one of the authors of Maine’s new law. “There are people who think crowdfunding is great, but there also people worried that it will offer tantalizing investments to people who can’t afford it.”

Fryer is in the first camp.

“There’s a lot of entrepreneurial activity going on these days and an interest by people in getting in on the ground floor of some of these startups,” Fryer said. “And until now that’s been the province of accredited investors because regulatory requirements were too burdensome.”

He believes Maine has struck the right balance between protecting investors and providing entrepreneurs with more opportunities to raise capital. He also has no quibble with the $1 million cap.

“For the vast majority of businesses, that is more than enough,” Fryer said. “For the high-fliers who need more capital, there are other available routes they’ll pursue.”

Maine’s law was built atop federal securities law. The state legislation was drafted in such as way that it works with a federal exemption, known as Rule 504. That exemption boils down to: “If the investment is under $1 million, the SEC isn’t going to worry about it and leaves the regulation of that offering to states,” Fryer said.

Maine’s new law is not the first attempt to allow entrepreneurs and small-business owners to be able to raise capital from the public. A state securities law called the Small Company Offering Registration was adopted by Maine in 1992. However, it’s a burdensome and expensive process and it never gained traction, according to Shaw. There have been 22 filings under this law since 1992, and none of those has occurred since 2002, Shaw said.

“The main point of this (new law) was less about expanding who could get access, but the way they get access and reduce that regulatory burden and still have adequate investor protections in place,” Shaw said.

Shaw said her office will be reviewing its use and polishing it now that the law has taken effect.

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