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Crowdfunding in WI: a Good or Bad Idea?

Posted in Business Formation, Buying, Owning and Selling a Business, Technology Related Topics

“Crowdfunding” is a relatively new word. You may have heard of the concept, but may not yet know the word. Crowdfunding is a method by which money is raised to put capital into a business. Usually, this is done through an internet site, such as Indiegogo, Razoo, Upstart or a host of others. I am not linking to any of these, because I personally don’t know the operators of any such sites and cannot vouch for them. What happens is this:  an entrepreneur sets up an arrangement with such a website to raise small amounts of money from a very large number of prospective investors. If the offering is successful, the entrepreneur gets the capital he or she needs for the business, and the investors get a small stake in the venture.

I am concerned about such funding. When America suffered the Great Crash of the markets in 1929, it was determined that we needed significant regulation to be sure investors were protected. The result was the Security Acts of 1933 and 1934, both of which put into place many of the basic regulations we still live with today. What has happened in the past 80 years? America has become the largest, most successful economy in the world. Why change something that is working?

Crowdfunding didn’t start in Wisconsin. It started on the internet. The federal government responded in 2012 with the JOBS Act, which allowed certain websites to sell certain securities to certain investors, if they met certain requirements. Those requirements seem to fit into 3 categories: 1. how the investor is categorized; 2. what information is disclosed; and 3. whether the website may have to be registered. Wisconsin passed its Crowdfunding law as 2013 Wisconsin Act 52.

These are all very complicated issues in a new law that itself is very complicated. This comment is not intended, nor could it within the confines of such a short piece, address all the issues and complexities of the new law. Anyone intending to get involved with crowdfunding should certainly hire an attorney with securities experience that may show them the way.

Federal law governs offerings that cross state lines. Wisconsin law only covers offerings that take place entirely within the State of Wisconsin. The federal law already had a term, “accredited investor” or “AI.” An accredited investor is someone of wealth and sophistication that is expected to know the risks involved with certain financial investments and be more able to sustain losses on such investments without being destroyed. That person generally has to have an annual income of at least $200,000 for two years in a row ($300,000 including spouses), or a combined net worth of at least $1,000,000.  Wisconsin has created a new classification of “certified investor” or “CI,”  who only has to have $100,000 annual income($150,000 including spouse) or $750,000 net worth.

There are also limits on how much can be raised. The feds limit the amount to $1 Million, with certified financial statements ($500,000, if not) and Wisconsin doubles those amounts. Likewise, there are limits as to how much an investor may invest. The feds limit Non-AI investors to $2,000 or 5% of income or net worth, if under $100,000 of  income or net worth, and 10%, if above $100,000. Wisconsin just sets the limit at $10,000. Neither limits AI’s or CI’s (for Wisconsin). That means a much less wealthy person can invest a lot of money in Wisconsin.

The following table may help:


Federal AI

Federal non-AI

 Wisconsin CI

Wisconsin – non CI

Accredited Investor (AI) 2 year annual income at least $200,000 ($300,000 with spouse) or $1,000,000 net worth N/A Same as Federal N/A
Certified Investor (CI) N/A N/A 2 year annual income at least $100,000 ($150,000 with spouse) or $750,000 net worth N/A
Limit on Investment by an Investor with income or net worth <$100,000 None $2,000 or 5% of net worth or net income None $10,000
Limit on Investment by an Investor with income or net worth >$100,000 None 10%, up to $100,000 investment None $10,000
Maximum Amount Entrepreneur may Raise with Certified Financials $1,000,000 $1,000,000 $2,000,000 $2,000,000
Maximum Amount Entrepreneur may Raise without Certified Financials $500,000 $500,000 $1,000,000 $1,000,000


Now, my thoughts: I think this new system takes away all the protections we have in place for small investors. I think many shady people will hide behind these legitimate offerings and gather money and it will be gone before the investors can know what happened. And since the amount they have put at risk is relatively small, no prosecutor will be interested in going after the wrongdoers. This scheme makes no sense under any circumstances, because even if investors only put in $10 each, if the crook getting all the money gets a million or two, it won’t make any difference, it will just hurt a lot of people a little bit, instead of a few people a lot. This is just a very bad idea!