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By Mary Winter

Say you’ve designed a better picnic cooler­—one that, in addition to keeping the beer and wieners cold, makes fancy crushed-ice drinks, plays music and comes with LED lights in the lid, a USB phone charger and a built-in bottle opener, among other features.

Coolest Cooler (Photo from dudeiwantthat.com)How do you find out if anyone will actually buy your product – which you have named “The Coolest Cooler”?

If you’re Ryan Grepper, you go to Kickstarter.com, where you describe your cooler, including photographs, and discover that thousands of people are willing to put up more than $8 million for it, either by placing a $185 order for a cooler, or by giving a smaller amount just because they like your idea and want to support you. (People who give $55 get a “Coolest Cooler” T-shirt and other swag.)

Grepper’s cooler – yes, it exists -- has been a huge success recently on Kickstarter, one of a number of websites developed in the past few years where small donors can give money to budding entrepreneurs as well as to philanthropic causes, from restoring an old community theater to paying an abused English bulldog’s veterinary bill.

The innovative funding concept was the topic of a session titled “Crowdfunding: Simplifying the Investment Process in States” on Tuesday at the 2014 NCSL Legislative Summit in Minneapolis.

States are interested in crowdfunding because they see it as a way to boost business and revenue and to create jobs. Panelists included Anya Coverman of the North American Securities Administrators Association, Indiana Senator Travis Holdman (R) and Indiana Securities Commissioner Carol Mihalik. Moderator was Minnesota Representative Joe Atkins (DFL).

Atkins kicked off the session by describing crowdfunding as “an exciting an opportunity as there is out there right now.” Minnesota, he said, is entrepreneurial by nature, as evidenced by the fact that it’s home to 19 Fortune 500 companies, more per capita than any state in the country. But as much as state leaders want to encourage innovative financing like crowdfunding, they also want to make sure small investors are protected from fraud, he said.

Coverman, an attorney who is deputy director of policy for the securities administrators administration, said that in its simplest terms, crowdfunding is collecting small amounts of money from large numbers of people, typically online. It’s exciting because it opens up investment opportunities, for the first time, to people who aren’t wealthy, she said. The payoff may be nothing more than a T-shirt or a free donut once a month for six months, but the process of investing engages people and democratizes finance, she said. And as a funding model, it has huge potential, most agree.

Currently, entrepreneurs often can’t their businesses off the ground because they lack capital. They can max out their credit cards and ask for help from friends and family, but big investors generally won’t touch them, and federal securities laws prohibit private start-ups from selling stock to anyone but high net-worth investors. The purpose of the laws, which have been in effect since the 1930s, is to protect unsophisticated investors from unsound or unscrupulous companies.

Because of the laws, it’s likely many worthy new businesses are never launched, and many state and federal leaders see missed opportunity. The federal Jumpstart Our Business Startups Act, or JOBS Act, signed by President Obama in April 2012,

loosened federal restrictions for crowdfunding ventures, but it awaits finalization by the Securities and Exchange Commission.

States are moving ahead on their own to allow crowdfunding of start-up companies.  Legislation enacted in July in Indiana, for example, allows entrepreneurs in the state to sell shares of up to $5,000 to members of the public, otherwise called “unaccredited investors.” Senator Holdman, who carried the bill, said sales of stock are limited to Indiana residents, and that $1 million is the most a company can raise unless it is audited.

Carol Mihalik, Indiana’s securities commissioner, said the legislation allows the state to tap a new group of investors and lets middle-income people exercise their right to invest. “The non-accredited investor now has access to certain exempt private offerings via the Internet,” she said. “The business now has a new sources of capital at $5,000 per investor.”

Mary Winter is assistant editor of State Legislatures magazine. Email Mary.

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About the NCSL Blog

This blog offers updates on the National Conference of State Legislatures' research and training, the latest on federalism and the state legislative institution, and posts about state legislators and legislative staff. The blog is edited by NCSL staff and written primarily by NCSL's experts on public policy and the state legislative institution.

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