January 31, 2015 11:00 pm • By ZACH PLUHACEK | LINCOLN JOURNAL STAR
A Kickstarter donation can get you a lot of things: a free T-shirt, naming rights to a goat, an old Nike sneaker signed — and worn — by the director Spike Lee.
“You can do that all day long,” says Colby Coash, a state senator from Lincoln.
But no matter how many days’ lunch money you donate to your favorite project on a crowdfunding website, you can’t get an ownership share in return. No stock. And no income from your investment, other than the aforementioned goat naming.
State law forbids it. So Coash wants to change the law.
A bill he sponsored in the Legislature this year would allow Nebraskans to buy small stakes in local startups online without jumping through the same regulatory hoops as big investors buying into major corporations.
“The main difference between a Kickstarter website and this legislation is that when you contribute to a project on Kickstarter, typically you receive a T-shirt, or a poster, or other promotional gift depending on the size of the contribution, but have no monetary stake in the project,” Coash says in the statement of intent for his bill. “LB226 gives the investor a monetary stake in the project, not a donation.”
The bill is modeled on an Indiana law that went into effect in 2014. Twenty other states considered or passed crowdfunding laws last year, as well.
The measures allow companies to operate exchanges, similar to Kickstarter, where people can invest in startup companies or other businesses that operate within their own states, though not elsewhere.
Coash’s bill — which is cosigned by Sens. Heath Mello of Omaha and Tyson Larson of O’Neill — would enable Nebraskans worth less than $1 million or couples making under $300,000 a year to invest as much as $5,000 in a single business online.
In many cases, those people would need to go through a broker to buy shares in a business registered under current state law, said Patricia Herstein, general counsel for the Nebraska Department of Banking and Finance.
Companies would be able to solicit smaller investments — $5,000 from each person, up to $2 million total — online without preparing as many legal and accounting records, a costly process for a small business or startup, Herstein said.
National efforts to enable crowdfunding investments between states have been opposed by consumer protection and labor groups, who argue it could expose inexperienced investors to fraud. The Securities and Exchange Commission continues to craft nationwide crowdfunding rules.
“That’s where the action’s at,” said Bart Dillashaw of Lincoln, a corporate and securities lawyer who works with Nebraska startups and is president of the Nebraska Angels investment network. “Nothing really happens until the SEC tells us what the rules are.”
Regulations create an “artificial barrier” that allows only people with a certain amount of money to invest, he said.
“So long as the risks are disclosed, they should be able to make those decisions for themselves.”
Herstein said the goal of regulation is to protect investors, “and you accomplish that through full disclosure of every material fact.”
Coash’s bill includes an all-caps disclaimer to appear on disclosure documents. Investors must also acknowledge that they are investing in a “high-risk, speculative business venture,” and that they can afford to lose all of their investment or even more under some circumstances.
The bill also would require companies to provide investors with quarterly reports on their operations, financial status and executive pay.
Firms would still need to register with the Banking Department, and pay a $200 filing fee. The Legislative Fiscal Offices estimates the bill would raise the state about $5,000 a year, assuming 25 companies apply with the state each year.
Coash’s plan offers an avenue for people with moderate incomes to invest in a bar, restaurant or other small business, Dillashaw said.
“I’m excited to see the Legislature paying attention to the startup sector,” said Dillashaw. “I think it’s a step in the right direction.”