The Colorado Crowdfunding Act was signed into law by Governor John Hickenlooper on April 13, 2015, making the use of crowdfunding efforts through which investors can acquire debt or equity interests in a prospective company lawful in the State of Colorado. Although businesses may issue debt or equity under the new Act, this method of capital formation is commonly referred to as "equity crowdfunding." Before businesses decide to pursue equity crowdfunding as a means of raising funds, there are a few important things to note:
- First, before a crowdfunding offering can proceed, the issuer must file various forms with the Colorado Division of Securities, a division in the Colorado Department of Regulatory Agencies (DORA). Online intermediaries, through whom the crowdfunding transactions will be conducted, must also file a form with the Division. Online intermediaries are subject to certain limitations in their role in securities transactions and in how they are compensated in order to avoid running afoul of federal securities laws.
- Second, there are limits to how much capital can be raised and how much individual investors can contribute. The Act states that the issuer of the securities can raise up to $1 million. However, the cap can be raised to $2 million if the business submits audited financial statements to the Division. Individual investors cannot contribute more than $5,000. If an investor is accredited, the $5,000 cap is removed. An “accredited investor” as defined under federal law but is generally an individual whose net worth exceeds $1 million or who has an income that exceeds $200,000.
- The final item to be aware of is that all aspects of the transaction must take place only between Colorado residents. Crowdfunding transactions that reach outside of Colorado run the risk of violating federal securities laws, which should be reviewed since the implementation of the SEC's 2016 crowdfunding rules.
In January 2016, federal crowdfunding rules under the United States Securities and Exchange Commission took effect.
Review the SEC Crowdfunding Rule.