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Lawmaker: ‘Equity crowdfunding’ could employ thousands of Arizonans

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PHOENIX – People nationwide have funded movies, smartwatches, video games and even potato salad through crowdfunding websites.

The funding mechanism could become an even bigger industry here if legislation winding its way through the state Legislature becomes law.

If passed, the legislation would allow state residents to purchase equity in Arizona companies.

One of the sponsors said it could help thousands of Arizonans start businesses and lead to even more jobs in a state where unemployment is still above the national average.

In traditional crowdfunding efforts, such as Kickstarter and Indiegogo, people donate funds, and in return, they may receive goods or services based on how much they donate.

The bills, SB 1450 and its identical counterpart HB 2591, would allow what is called equity crowdfunding.

People could buy into the company – essentially like stock – similar to what angel investors provide growing businesses.

“The bill allows regular people who don’t have a lot of money necessarily to participate in the creation of a new business and receive ownership in that new business,” said state Sen. David Farnsworth, R-Mesa, the primary sponsor of SB 1450.

In 2012, U.S. Congress passed legislation asking the Securities and Exchange Commission to create standards regarding equity crowdfunding. The commission has yet to do so, but more than a dozen states have since started their own equity crowdfunding programs.

“It is a great opportunity for small businesses to raise dollars outside of the traditional way of friends and family,” said Rick Murray, CEO of the Arizona Small Business Association, which helped lawmakers write the bill.

The bill also could create a new industry, Murray said. He said new Internet companies could launch to serve as clearinghouses for what is essentially stock in these small businesses and startups.

Although the bill has no registered opposition, national critics of this type of legislation have voiced concerns about potential fraud.

Murray and Farnsworth said the Arizona Corporation Commission would have oversight to safeguard the process. The bill also stipulates that no one can invest more than $10,000 in any one venture and no company may accept more than $1 million in unaudited funding or $2 million in audited investment.

The bill would require strict timelines for the company to raise the money. If a company does not meet its goal, it would have to return all investor funds.

SB 1450 is awaiting a vote on the Senate floor. On Tuesday, the Banking and Financial Services Committee passed the House version, and it now heads to the rules committee for approval.

Sidnee Peck, director of the Center for Entrepreneurship at the W. P. Carey School of Business at Arizona State University, said startups now have few places to go for capital. If a bank won’t provide a loan, entrepreneurs have to seek out accredited investors, who often earn hundreds of thousands of dollars a year.

“Sometimes as an entrepreneur, you may not be connected in those circles and it may take a long time for you to get a ‘yes,’ ” she said. “What this bill will allow is for you to go to other individuals in your network, who may not be accredited, for smaller amounts of money.”

However, she said this type of investment isn’t for everyone.

“This is a very risky investment,” she said. “So as a consumer, you need to understand that this is not somewhere you should put your money if you need your money back.”

Her advice to entrepreneurs is similar: Be mindful who you take money from and prepare to deal with an entirely different breed of investor as the general public begins to enter the market.

“You need to keep in mind that the kind of people that are investing in you now may not be savvy investors, so they may need more updates. They may bug you more,” Peck said. “This isn’t free money. This isn’t a simple process.”