Hey Oregon! Let’s Invest at Home.
What would happen if regular people could invest in the local businesses they love? Oregon is about to find out.
Last week Oregon adopted new rules that enable a new kind of investing: securities crowdfunding.
This is a big idea. And the first Oregon companies to launch their offers will do so today.
What, exactly, are we talking about?
The word crowdfunding is new, but the concept on which it’s based is as old as the hills. Think barn raising — the idea that many small contributions can enable very big things.
Crowdfunding (online and at scale) is what Kickstarter, IndieGoGo, and its kin make possible for entrepreneurs, artists, and inventors with project ideas. Donors (“backers” in Kickstarter vernacular) contribute to the projects they want to go forward. Although small gifts or sample products are commonly afforded donors, the money these donors provide does not constitute an investment in the entrepreneur’s company. Donors do not own shares or otherwise expect a financial return, though they may receive a sticker, t-shirt, product, or reputation-enhancing gratitude on social media.
But securities crowdfunding is different. It refers to individuals who invest in a business by purchasing securities offered by that business. Securities promise investors shares in the form equity or debt. Securities crowdfunding turns “backers” into investors who own a share of the value of the businesses they support or a hold debt redeemable according to the terms of a contract with the business.
In 2012, the US Congress passed, and President Obama signed, the Jump Start Our Business Startups (JOBS) Act. The legislation tasked the US Securities and Exchange Commission with drafting rules for facilitating securities crowdfunding. Enthusiasts cheered.
But the rules proved so controversial (and some argue unworkable) that states interested in moving forward began using an existing federal exemption within the Securities Act of 1933 (Section 3(a)(11) and SEC Rule 147) to enable securities crowdfunding governed by their own rules.
The exemption allows states to regulate intrastate investing — investing by state residents in businesses owned by state residents that conduct the majority of their business within the state boundaries.
This month, Oregon’s Department of Consumer and Business Services published new rules enabling this exemption in Oregon, and enacting securities crowdfunding law.
What changes in Oregon?
Until now, investing in Oregon companies was largely restricted to institutional investors (like banks) and individual accredited investors — those whose net worth exceeds $1M (excluding their primary residence) or whose household income for each of the previous two years exceeds $200K ($300K for married couples).
For the first time, beginning this week, Oregon joins 13 other states in allowing regular Oregonians to invest in local companies. The vehicle for this is the Community Public Offering (CPO).
[The other states include: Alabama, Colorado, Georgia, Idaho, Indiana, Kansas, Maine, Maryland, Michigan, Tennessee, Texas, Washington, and Wisconsin.]
Why does this kind of investing matter?
Securities crowdfunding enables more investors.
Although the number of US households that meet the threshold for accredited investor has reached 8.5 million, that represents only 6% of total households — the other 94% are largely restricted from investing directly in companies. Moreover, only 3% of accredited investors actually invest. That’s 255,000 households — a tiny number.
The CPO opens the world of investing to regular people who want to see the business they love grow but lack the assets that make investing feasible under federal statue: the unaccredited tens of millions.
Community investing has the potential to increase access to the capital so many of our small and early stage businesses need.
Every couple of years, like many states and communities, Oregon produces a report on capital flows — what kinds of capital is supporting what kind of economic activity in Oregon and where. The most recent capital scan shows that investment capital aimed at fast-growing firms in the state’s target sectors is increasing. (This is not surprising given the significant investments of time and resources at the policy level and among industry groups and professional networks these firms and sectors have commanded in recent years). This is a good thing for Oregon — we need these firms to anchor important industries, provide “thick” labor markets that enable people to learn and grow, and continue to enhance the Northwest’s reputation as a source of high quality (and sustainable) products and services that contribute to the world’s well-being.
But few Oregon businesses ever receive this kind of capital. Because we count “deals” rather than firms, it’s possible that more than one deal occurred in a single firm, but let’s be generous and say the 157 deals that occurred in Oregon 2012 and 2013 all occurred in individual firms. That 157 constitutes a tiny percentage of the 388,121 registered businesses in Oregon. There are other sources of capital — Small Business Administration and rural development loans, for example — but many small businesses have long struggled to secure these institutional resources, a situation made worse by the recession.
Oregon’s rural communities are even more dependent on small businesses — and they have far fewer economic development tools and resources than the more urban parts of the state.
The new securities crowdsourcing rules err on the side of investor protection, limiting both the size of individual investments ($2,500 per company) and cap of each CPO ($250,000). But even with Oregon’s conservative limits, regular people could vastly increase available capital: if Oregonians invested only 1% of their savings in this way, a nearly a billion dollars would flow into Oregon small businesses.
Finally, the kinds of small businesses for whom a community public offering holds appeal are exactly the ones we want in our neighborhoods and communities — businesses that provide products and service we need, enable livelihoods (and not just jobs), and invest in the communities in which they operate.
They are the kinds of businesses we smile about—we know their owners and are proud to be customers. We like them in our neighborhoods.
These are exactly the kinds of businesses that, until now, have the most difficulty accessing capital for start-up or growth.
[NOTE: Based on the composition of inaugural class of companies using the CPO, the tool has broad appeal. Companies launching their offerings this week include those representing agriculture, technology, artisan food, and manufacturing, and serving local and global markets (or aspiring to).]
Because securities crowdfunding is relatively new, few states have much of a track record, but what we do know is that getting the word out matters.
That’s why Hatch Innovation is launching the Oregon Community Capital Initiative. For the next year, Hatch Innovation and its many partners from across the state, will be stewarding a public outreach and education campaign for businesses, business support professionals (like attorneys and accountants), people (potential investors), and communities (so that they know how they can invest in themselves).
It all starts today!
Join us in growing local businesses, becoming smarter investors, and creating new opportunities in our own communities.
Pioneer Square at 12:30pm: An explosive celebration.
HatchLab at 7:00: Make Oregon history! Come join us as the first nine companies to use the CPO launch!
The tour continues…
January 27, 1025, Medford, OR
Sustainable Valley Technologies Group
January 29, 2015, Eugene, OR
Red Wagon Creamery
February 4, 2015, Nehalem, OR
White Clover Grange
And there’s more to come…
More on securities crowdsourcing in Oregon:
- Oregon Public Broadcasting (This morning! January 22, 2015)
- Oregon Public Broadcasting (January 5, 2015)
- Portland Business Journal (December 30, 2014)
- OregonLive (December 12, 2014)
- Oregon Public Broadcasting (December, 3, 2014)
- Portland Business Journal (November 20, 2014)
PostScript: Kristin Wolff is a policy analyst, business owner, student, and Hatch Innovation Board member who believes fervently in the power of many. You can find her at @kristinwolff, LinkedIn, and in-person at Hatch on 24th and NE Sandy in Portland, OR (or hiking in Forest Park).