NJ considers crowdfunding that give investors a stake in the business

Small businesses in New Jersey could sell securities to the public under a bill before the Legislature, but there’s a catch — investors would need to live within state borders.

The “intrastate crowdfunding” measure is similar to what online services such as Kickstarter offer for new business and arts projects. But instead of T-shirts or mugs as a thank-you gift, mom-and-pop investors would get small amounts of equity in the business. Each investor would be able to supply up to $5,000 worth of capital; entrepreneurs couldn’t collect more than $1 million in total.

Similar federal legislation passed in 2012 as part of the JOBS Act, but the SEC hasn’t yet crafted the rules needed to implement the law. In the interim, nearly two dozen states have passed their own laws.

“We just want to be ahead of the game,” said bill co-sponsor Assemblyman Angel Fuentes, a Democrat representing Camden and Gloucester counties. “The community can share ownership with that business … it’s a win-win.”

The measure passed the Assembly in March on a 75-0 vote, with one abstention. After clearing a Senate committee earlier this month, it is awaiting a full vote.

Kickstarter, the largest “reward-based” platform, has raised more than $1 billion for ventures since launching in 2009.

“There is really this chance for democratization — people getting access to money who would never have had it before,” says Ethan Mollick, a professor at the University of Pennsylvania’s Wharton School who has studied crowdfunding models.

He cautions, though, that a state-by-state approach limits the potential positive impact for investors and entrepreneurs.

“There is danger of fraud, or people being overconfident, and the best way to deal with that is to have large, open crowdfunding markets with appropriate levels of regulation.”

While “equity-based” crowdfunding bills are popular among lawmakers on both sides of the aisle, critics caution that uninformed investors stand to lose money in typically high-risk start-up ventures.

Bill co-sponsor Sen. Joe Kyrillos, a Republican from Monmouth County, said investors today have tools to research companies and can make educated decisions, but that regulation in the measure does offer protections.

“There’s a risk when you go to Atlantic City and gamble … there’s a risk when you buy a penny stock, there’s a risk when you buy a blue-chip stock that has a really bad day, and you lose half its value,” said Kryillos. “But risk is rewarded.”

During the Great Depression, federal lawmakers banned private companies from advertising the sale of stock directly to the public due to concerns of fraud. But during the Great Recession’s credit crunch, entrepreneurs began pressing lawmakers for access to new streams of capital.