Regulators Trying To Implement Arizona Crowdfunding Law

Date: May 12, 2015

Law Allows Buying Stakes Of Companies, Doesn’t Specify How To Sell

When Arizona Gov. Doug Ducey signed a crowdfunding bill into law last month, supporters heralded it as an innovation in finance. However, it turns out that the law, House Bill 2591, did not contain a provision for investors to sell their shares of startup businesses, and now state lawmakers and Arizona Corporation Commissioner Tom Forese are trying to figure out how best to proceed. HB2591 allows individual Arizona investors to invest in new businesses, even if they do not meet the capital requirements mandated by Federal law. The investments would occur through an online marketplace similar to Kickstarter, but with the ability to buy shares of the company. “The [Commissioner] will need to put together the regulations that balance both the opportunity with protecting investors,” said Forese. “The law lets us move forward, but it doesn’t cover all aspects of what happens with raising capital.” Without amendment, there are very few opportunities to sell shares of a company acquired through crowdfunding. The law requires the following warning to be accepted by all crowdfunded investors: “There is no ready market for the sale of such securities, it may be difficult or impossible for me to sell or otherwise dispose of this investment, and accordingly, I may be required to hold this investment indefinitely.”

What Happens Next

State authorities are working to address the law’s deficiencies, and some members of the legislature plan to amend it in the next session. Arizona’s troubles underscore the difficulties of implementing innovative business laws. At the Federal level, the JOBS Act of 2012 was supposed to create a national system for crowdfunding and had not yet been implemented. Colorado recently passed a crowdfunding law that the state anticipates only four businesses per year will use.

What This Means For Small Business

Crowdfunding has the potential to become an important source of investment for some small businesses. Under Arizona’s law, crowdfunded investment would give participants a share of the company worth up to $10,000, and companies could raise as much as $2.5 million total ($1 million if they do not want to go through an audit). Small businesses without ready access to capital through traditional means could gain a lifeline if the implementation problems can be solved.

Additional Reading

The Phoenix Business Journal also covers HB2591’s implementation quandary.

Related Content: Small Business News | Legal | Phoenix, AZ

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