Localstake is an investment crowdfunding platform for small businesses and real estate developers to raise funds from investors in their community. Founded in 2011 by three young entrepreneurs with backgrounds in investment banking and investment management, Localstake provides businesses access to the tools and guidance necessary to raise funds efficiently, effectively and securely online. Localstake also provides investors access to local investment opportunities where they can act as consumers and evangelists for businesses. Localstake's platform is making it easier for businesses to raise money locally from investors that have typically been excluded from these types of investment offerings.
Despite just launching the platform a year and a half ago, Localstake has already garnered attention in the crowdfunding market. They have been featured in such national publications as CNBC, Entrepreneur and Investopedia. How did this Indianapolis-based company go from a tech-startup to an emerging leader in this new, meaningful, capital-raising alternative?
Getting Ahead of the JOBS Act
The Jumpstart Our Business Startups Act of 2012 (the JOBS Act) directed the Securities and Exchange Commission (SEC) to undertake new rulemaking to implement a framework for crowdfunding. Crowdfunding is the fundraising technique of soliciting small amounts from many individuals over the Internet.
Before the SEC issued proposed rules to implement crowdfunding in October of 2013, the SEC's activity on crowdfunding was limited to issuing a "frequently asked questions" article on its website and a reminder that the crowdfunding exemption could not be relied on until the SEC has issued final rules implementing the new exemption. The new rules are not expected to be issued until the end of 2014.
So with the JOBS Act rules yet to come, equity crowdfunding (where investors receive equity, debt or revenue share securities in a business) is currently not allowed and cannot be done, and the only permissible form of crowdfunding is reward/donation based crowdfunding on sites like Kickstarter and Indiegogo where the investors do not receive these types of securities, right?
Wrong. Early on, Localstake made the decision to register as a broker-dealer with the SEC to differentiate itself from other crowdfunding platforms like Kickstarter and Indiegogo that are donation/reward based. The distinction allows for equity crowdfunding to occur over the Localstake platform. As a registered broker-dealer, Localstake relies on existing securities registration exemptions to enable companies to make private investment offerings to both accredited investors (those individuals with either a net worth of more than $1 million (excluding the value of their homes) or an annual income of more than $200,000) and non-accredited investors.
To allow such investments to take place on the Localstake platform, it was necessary to have a strong understanding of the state and federal securities laws exemptions that could be relied upon by Localstake clients. Ice Miller's business attorneys provided legal advice and guidance on how these offerings could be structured in compliance with state and federal securities laws exemptions. This allowed Localstake to provide a platform where businesses could raise capital from, and sell securities to, all investors (not just accredited investors) and take advantage of this new, alternative source of capital.
Before Localstake could help other businesses raise capital, Localstake itself needed funding to secure its broker-dealer registration, build the platform, recruit and hire software developers, accelerate its marketing initiatives and provide for other start-up costs and expenses. Ice Miller helped the founders form Localstake, obtain registration as a broker-dealer, and structure friends and family and angel financing rounds to give it the capital it needed to launch the platform.
As Localstake expands out of Indiana and enhances its product and service offerings, Ice Miller continues to provide ongoing advice to Localstake with respect to its regulatory compliance as a registered broker-dealer with the SEC and FINRA. The Ice Miller team also works closely with Localstake on equity incentive programs for new hires and the ongoing changes to federal and state securities laws being implemented that allow small business use of social media and other general solicitation and advertising without accredited investor restrictions to raise funds.
Looking to the Future
With new funding in hand and many states enacting or introducing state-specific crowdfunding legislation ahead of the SEC's anticipated final crowdfunding rules, Localstake is poised to continue its impressive growth and will hopefully become another technology success story that will help reinforce Indianapolis' growing reputation as a burgeoning technology hub.
Much of what has been understood about private investment offerings is being upended by the JOBS Act and state securities law legislation. Ice Miller's attorneys are on the leading edge of how market practice is responding and how businesses planning to raise capital can explore these new alternatives.
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