It’s time for Ohio to take up intrastate crowdfunding

I often hear that Stow needs some high-end and/or locally-owned restaurants. When you look around town, it’s not hard to see why. We have some, but not to the extent of our neighbors in Cuyahoga Falls, Hudson, Kent and Akron. When a couple goes on a date, those dollars often leave Stow’s borders.

As the President of City Council, this issue has hit my desk on numerous occasions. Same with our economic development experts. The first instinct, of course, is to examine whether the city can pass a new law or stimulate development with a grant or tax abatement.

There is another way.

Another situation that I often see, in my day job as a business attorney, is a small-business owner who needs funding for a new piece of equipment. If she can find the money to buy the equipment, she can take on more orders or expand into a new business line. This creates prosperity for the business owner, of course. But it also creates new jobs for the community and tax revenue for government operations.

The typical options for the business owner are asking the banker for more credit, looking for investors among the business owners’ contacts, or having the business owner put up the money. Other times, a government agency will fund the project with your tax dollars. One of these options might work for a mid-sized business with a solid track record. For a smaller operation, it can be impossible.

There is another way.

But first, some background about Securities Law. … Generally, a business is not permitted to advertise the sale of stock unless it registers with the federal SEC and the state’s securities division. This is costly. For a business owner who is seeking, say, $200,000, it’s completely cost-prohibitive.

But it is important to note that federal law does not apply to intrastate offerings of stock–i.e., offerings of stock by a business operating within a state to residents of that same state. In spite of this gap in federal law, all 50 states have their own regulations that pick up where federal law left off.

Here’s where federalism comes in handy. In the past few years, 31 states have allowed “crowdfunding” inside their states and within the intrastate exemption to federal law. Surprisingly, Ohio is not one of them. For those who have not followed the news, “crowdfunding” is raising capital for a business from the masses through the internet.

I propose that Ohio’s general assembly immediately take up crowdfunding legislation, to allow an Ohio small business to advertise its stock and sell to Ohio residents over the internet or apps. Like the other states that have taken up this matter, there will be protections against fraud.

Now, back to the Stow restaurant example. If Ohio law is changed, a successful restaurateur can seek out funding from the multitude of Stow residents who have clamored for a suitor in this market. The family living in Stow can invest $100, or even $1,000, to help buy kitchen equipment and build out a vacant storefront. In exchange, the family receives a proportionate share of the profits, and perhaps even priority reservation rights or the right to use a banquet facility without rent. Of course, there is risk in any venture (and a disproportionate amount in the food and beverage industry), but there is also risk in a stock portfolio.

This is just one example. A Stow manufacturer that needs equipment can offer its stock with a preferred right to share in the profits resulting from the investment. A tech startup can get seed capital. A developer can build a spec industrial plant. The examples really are endless. The one consistent component is the potential for community growth.

The federal government is lagging behind the states on this matter. The federal crowdfunding regulations are so strict that few businesses have taken advantage of it. Compliance costs are estimated to range between $50,000 and $100,000. There is no telling whether the SEC will tighten the requirements even further. It’s time for Ohio to take action.

Intrastate crowdfunding is a market-based proposal that will move capital to where it is most needed and will create prosperity, jobs and quality of life for Ohioans. It would allow for a community-based funding mechanism to address community-based problems–without risking taxpayer dollars.