MONTGOMERY — Alabamians trying to start small businesses in a tough credit market may soon have a new method that will allow them to raise small amounts of capital from many Alabama investors.
Known as “crowd funding,” the process has been used for years to generate money for political campaigns, artistic projects and charities. It will become a legal way to raise capital for small businesses in Alabama if the Legislature approves a bill in the next session, starting Jan. 14.
The bill’s sponsor, Republican Sen. Arthur Orr, R-Decatur, said the Alabama Securities Commission asked him to introduce the bill because small business people need a different way to raise money. “It’s difficult for startups to get bank loans and other traditional financing,” he said.
Under the legislation, someone trying to start a small business in Alabama could use the Internet, social media or other methods to seek Alabama investors. Small investors would be limited to putting in $5,000 each, and the most any new business venture could raise is $1 million. The money would have to be put in a bank authorized to do business in Alabama until the small business raises enough to proceed with its business plan.
The legislation is limited to Alabama businesses and investors because that’s where the Alabama Securities Commission has regulatory authority, Director Joe Borg said. Companies will still file information about the company and its leaders with the Alabama Securities Commission, but there will be less paperwork, regulation and expense than normally associated with seeking investors, Borg said.
The securities chief said there has never been any investment idea that someone hasn’t tried to take advantage of, and that’s why the legislation makes clear that all Alabama fraud laws apply to crowd funding.
Kansas and Georgia already allow crowd funding, but only a few companies have used it, according to regulators. Several states have bills prepared for their 2014 legislative sessions.
Borg figures crowd funding will become more popular as people looking to start small businesses learn more about it. “It is an experiment whose time has come,” he said.
Congress felt that way in 2012 when it passed the Jobs Act, which allowed the federal Securities and Exchange Commission to set up rules for crowd funding across state lines.
The commission is still working on those rules, which is why states are coming up with legislation affecting small businesses and investors within their borders, Borg said.
Like the Alabama legislation, the proposed federal rules limit crowd funding projects to $1 million, but the federal rules have different investment limits than the Alabama legislation.
Borg said people looking at investing through crowd funding need to remember that they could lose their money if the business fails, and business people thinking of using it need to realize that communicating regularly with dozens or hundreds of small investors will be time-consuming.
But he and Orr said crowd funding creates a quick way for people with good ideas to get together with potential investors through the Internet.
“A guy in Brewton could log on and purchase shares in your restaurant company,” Orr said.
Posted: Sunday, January 5, 2014
