A bill was introduced at the Arizona State Legislature during the 2015 session and signed by Gov. Doug Ducey that allows entrepreneurs to raise equity for their company from the general public.
The passage of HB2591 allows people to invest and potentially hold stock in companies that raise money through crowdfunding websites such as Kickstarter and Indiegogo.
“It’s basically the idea that companies shouldn’t be limited to having just rich people be their investors, and individuals shouldn’t be restricted from investing small amounts of money in companies that they know and love,” said Jonathan Frutkin, a Scottsdale attorney and author of “Equity Crowdfunding: Transforming Customers into Loyal Owners.”
Crowdfunding has become a popular method used by up-start businesses to raise money for product launches or other business ventures. It works by allowing anyone to funnel money into thousands of projects you can find online.
However, concerns over fraud loom over the different crowdfunding websites. Although many remain hesitant to give money to companies electronically, concerns over fraud and embezzlement may be unfounded, Frutkin said.
“When an organization may ask ‘hey, you want to raise money online?’ Give me a copy of your articles of organization, your lease, intellectual properties.’ When you ask those question the fraudsters say, ‘there’s a lot easier ways to steal money that this,’ ” Frutkin explained.
HB2591 was originally introduced to the legislature by Rep. Jeff Weninger, R-Phoenix. The Arizona Small Businesses Association helped write it.
Besides Arizona, 17 other states have passed crowdfunding bills. Frutkin said he expects at least 25 states total to have passed similar bills to HB2591 by the end of 2015.
Only Arizona residents would be allowed to invest in Arizona companies, according to the bill. Investors can donate up to $10,000, while companies can raise up to $2.5 million through crowdfunding campaigns.
Arik Tasa-Bennett, a finance major at Arizona State University, has run his own phone-resale business for several years. Tasa-Bennett said he hopes to become a successful entrepreneur, and sees the potential for future businesses to grow through crowdfunding.
“I think this system could be more efficient than traditional ways of financing a product,” Tasa-Bennett said. “With this idea, where the public can see the product and get an opportunity to invest in it, the advantage is that it brings the product closer to the end-user. That’s the whole goal of marketing. You want to know your consumer as well as possible.”
Said Frutkin: “The ability for the small investors, regular people, to invest $100, $200 in a company they love, a night club or restaurant they go to, that really doesn’t exist now. That’s what the Arizona crowdfunding bill will allow. It will allow Arizona people to invest in Arizona businesses.”