Small Business RULES in Illinois: HB3791 and HB2946

We are all well aware that the majority of job growth and economic activity are driven by small business. From the Wall Street Journal to the New York Time to CNBC, all have ran story after story confirming that small business is the engine that drives economic growth.

One state that has, for the most part, been left behind in the growth of small innovative businesses is Illinois. Budget issues and folks leaving our state have hampered small business growth. What can be done?

Recently we are see legislative changes that have the potential to make a dramatic improvement in this negative phenomenon. In May of 2016, Illinois unanimously passed the Illinois Intrastate Offering Exemption (Illinois Investment Crowdfunding Law HB 3429). State Representative Carol Sente filed the bill written by, Freeborn Peters partner / attorney, Anthony Zeoli supported by the SBAC and (state registered and regulated) Illinois intrastate crowdfunding portal VestLo.com. This major accomplishment now appears to be only the beginning in the move to once again make Illinois the leader in small business growth.

Two new Bills have been introduced to the State Legislature by Carol Sente and the team involved in last years victory. In late October, 2017 the SEC updated Rule 147 (Intrastate Investment Exemption) allowing for improved conditions for Intrastate crowdfunding, by creating Rule 147A. The original rule 147 allowed for some 29 states to enact laws allowing local businesses to raise funds from its neighbor (state residents) without the onerous (and expensive) regulation of the Federal government. Working directly with state regulators, in most cases the individual states, Secretary of State Securities division. The updated rules require the states to amend the current Intrastate crowdfunding laws to take advantage of these positive changes to the federal update.

Illinois, under Carol Sente’s leadership, has taken the lead by filing bill HB 3791 on Feb. 10th, 2017. Among other things, this amendment will allow for companies formed in states other than Illinois (ie. Delaware) who operate and employ in Illinois to raise growth capital under the Illinois Investment crowdfunding law. The new bill which enables for the rules under the new 147A, will also allow companies to receive local investment when complying with one of the 3 requirements (80/80/80 rule) that allow companies to meet the intrastate exemption. Rather than being required to have 80% of revenue, 80% of employees and 80% of use of funds within the state. Now an Illinois small business will only need to meet ONE of these 3 requirements rather than all 3. Yet another advantage of enacting HB 3791 is the ability for small business to use General Solicitation, meaning although investment must come from Illinois residents, companies can advertise their offering without fear of losing the exemption when social medial or other means take the advertisement beyond state lines.

BUT WAIT… There’s MORE (much, much more)

Launched in 2011, the State of Illinois passed the Illinois Angel Tax credit (25% of Angel investments) enabling for $10,000,000 in state tax credits for investors in qualified investment in qualified Illinois based businesses. That law expired effective Dec. 31, 2016.

In a potentially revolutionary move, Rep. Carol Sente along with State Representative Elgie R. Sims, Jr. and Representative Emanuel Chris Welch have filed a bill (HB 2946) to re-instate and IMPROVE the Angel Investment Tax credit to $20,000,000 and run through 2021.
Why is this revolutionary??
Bill HB 2946 allows (and encourages) investment in Illinois business from not only accredited Angel Investors but from ordinary unaccredited Illinois residents!!
Qualifying investment opportunities are required to set aside 25% of the investment to unaccredited investors through the Illinois Investment Crowdfunding law. This encourages Angel investors to “slice off a piece” of their vetted investments allowing participation to regular citizens through a registered Illinois Intrastate Investment Crowdfunding Portal. The new bill also loosens the requirements for businesses eligible for the Illinois Angel Tax credit to extend beyond Technology companies to include wholesale, retail, hospitality and more. If enacted this Illinois law will be the 1st of its type in the United States, modeled after the run-away success of the equity crowdfunding tax credit in the United Kingdom. Small business investment exploded in the UK following enactment of their small business investment tax credit.

This law would help to fulfill the vision of VestLo, Anthony Zeoli and the Small Business Advocacy Council by encouraging Angel Investors and Angel groups to include Illinois residents of average means to participate in the types of small business private investments that have the potential to create real wealth and growth in Illinois.

We encourage EVERY Illinois resident to contact your local State Representative, State Senator and Governor Rauner to support these incredible bills to become the Law. They have the potential to truly impact the economy and job growth in Illinois.

Disclaimer: The author of this article is neither an Accountant or and Attorney. Illinois Business owners and Investors are encouraged to speak with a licensed Attorney and/or CPA before filing for this type of Tax credit / Tax incentive when available.

 

 

 

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Illinois Intrastate Investment Crowdfunding

On Jan. 1st 2016 the Illinois equity crowdfunding law became effective. In a state with a reputation for being unfriendly to business and overprotective of its citizens, Illinois legislators passed the most aggressive intrastate crowdfunding law in the country. Title III of the Jobs Act which legalized investment crowdfunding limits companies to raising $1mm in a 12 month period and has strict limits on the amounts that both accredited and unaccredited investors can invest. In some cases limiting investors to $2,500 in aggregate (all investments) in a 12 month period. The Illinois crowdfunding law allows companies registered and operating  in Illinois to raise up to $4mm a year. Illinois residents who are unaccredited can invest up to $5,000 per deal while accredited investors have no limit to the amount in which they can fund offering companies.

Although the Illinois law became effective on January 1st, companies and investors have been waiting for the Illinois Secretary of State to release the administrative rules and applications for capital raises to being. The delay does not come without a potential payoff. The Secretary of State will have the ability to update the rules and regulations within the law as they gauge what is needed to allow this new market to flourish. We are excited to announce that we fully expect the rules to be released by April 1st.

As we await these rules we are beginning to find news stories and landing pages for Illinois crowdfunding portals. Portals are the mandatory internet intermediaries that must host any Illinois company looking to raise capital using the crowdfunding exemption (which operated under federal rule 147). So far we have come across many developers offering to create internet portals including crowdforce and crowdfundconnect. We have seen that truCrowd (who also operated an intrastate portal in Texas) say they will be entering the market and VestLo who will be operating a custom created Illinois portal operating out of 1871 (famous Chicago startup co-working space). VestLo will be working with the author of the Illinois crowdfunding law, attorney Anthony Zeoli and Axia Law, one of the leading law firms for Chicago based tech startups.

We are very excited to watch this new fundraising mechanism put to use in Illinois as it will quickly become the most powerful tool in the Invest Local Illinois movement. The law (Illinois HB 3429)is designed to allow and encourage investment in local communities by the customers who frequent the businesses looking to raise capital and grow.

Presentation explaining the Illinois equity crowdfunding law.

Sign-up for more information on Illinois Equity Crowdfunding

Evaluating Local Investment Opportunities

Deciding to invest locally can be an exciting and daunting decision. There are so many factors you need to consider beyond just which business you want to support. When you do pick a business to invest in, what happens next? Do you just cut them a check, shake hands, and hope for the best? Not if you want to be a savvy local investor. Cutting a check is more like a donation. If you want to invest, you need to make sure you follow through with due diligence. Due diligence is evaluating risks in order to make better investment decisions and, in turn, improve positive outcomes for you and the local business.

Step one in the due diligence process is deciding your own needs, goals, and the risk on investing in the particular company.   You may need to consult with a financial adviser for this step. Look at your current investments, income, and expenses. Do you have enough to pay your bills? Can you cover an emergency if needed? If your current situation is meeting all your needs, then investing locally is a great idea. If you’re unsure if you’re ready to take the big step into investing in small businesses, invest in yourself. You are your own business. Pay off your credit cards, pay down your mortgage, buy a house if you currently rent, go solar. There are a lot of ways to invest in yourself before moving on to a higher community impact project like investing in a small business.

After you’ve done your due diligence, you can move on to step two which includes researching and evaluating the local business you hope to invest in.  You may want to look over the business plan, read through financial statements, ask for profit projections, and talk to their current investors (if they have any).   The important thing to remember is you need to do as much research and gather as much information as you personally need to make a decision regarding the potential investment. Are you comfortable supporting the business? If so, great. If not, figure out why or move on to doing due diligence on your next investment opportunity.

Step three is deciding on contract terms. Make sure you get all terms from investment amount to time frame on return in writing. The contract should be drafted by a lawyer and signed by both parties. After that, it’s cutting a check time! Once that’s out of the way, don’t just walk away from the investment. Stay engaged. It’s better to be hands on (unless you’ve agreed to be a silent partner).

If there is any part of the due diligence process that you are unfamiliar with, you may want to consider teaming up with several like minded local investors. This is usually referred to as a “club” or “network.” Local investment clubs are a great way to play off the strengths of the other members. Maybe you’re great with understanding contracts but not so great with reading profit projection reports. Team up! Everyone wins when you’re well informed on all aspects of the risk process.

The number one piece of advice to remember when evaluating local investment opportunities, is to trust your instincts. If there is anything at all that makes you uncomfortable about the deal, don’t sign.   Expressing interest means just that – you’re interested. You only commit when you are ready.

Investing locally is a wonderful way to support your community.   Have fun with it, though never lose sight of the fact that it is an investment, not a donation. Do your due diligence so everyone involved – you, the business, and the community – can be winners.

TOP FIVE WAYS TO INVEST LOCALLY

You’ve heard of Small Business Saturday where, one day a year after Black Friday, you’re encouraged to go out and support local businesses. Why should you limit your support to once a year? Small businesses are the cornerstone that holds a community together.   They make a community unique by providing specialized products instead of just the standard cookie cutter goods and services you can get from the big name businesses that pop up everywhere. Chain stores serve a purpose, but local Mom and Pop stores existed long before the chains moved in.   You may already shop local, but have you considered investing local? Just like giving a pledge to your local PBS station keeps them on the air, you can invest in local businesses to keep them up and running.   Sound easy? It is. Investing locally creates a strong, local economy and sense of community. Here are some of the best ways for you to invest local:

  1. Move your money –   Move your checking, savings, credit cards, and loans to a local credit union or bank versus the national chain banks. Local banks and credit unions account for 20% of small business loans. They invest locally when you do. If your community doesn’t have a local credit union, start one! Credit unions are easier to start up than banks and most can be run by part time employees and volunteers.

 

  1. Donate Locally – Giving to charity is a great way to help others. You probably know the big names, but what about smaller local charities and non profits? Your donations allow the local charities to invest local by helping small businesses be successful. It’s a win win for you and the community.

 

  1. Sponsor Local Businesses – Investing locally by sponsoring small businesses goes beyond getting you or your business’s name up on the sport’s field, on the back of a t-shirt, or in a yearbook. Check popular sites like Kickstarter and Indiegogo for local business campaigns to invest in. You may only get a t-shirt or a thank you note, but you can feel good knowing you and others like you invest locally to help a entrepreneur achieve their dream.

 

  1. Prepare a Community List – Sites like Craigslist and Freecycle are great for finding local goods, but what about finding local investment opportunities? Create a craigslist like list for local investors looking to support local businesses. It may take time to track down leads, but overall it is an easy project to create. As a bonus, once word gets out about your invest local list, businesses will come to you with leads.

 

  1. Promote Program Related Investments – By law, foundations must donate at least 5% of their assets each year. The other 95% usually goes to non local stocks, bonds and other causes. Try to convince your local foundations and non profits to invest that 95% into local businesses instead. This is called Program Related Investments.   If the local business is not successful, the foundation can always apply the loss toward their grant-giving requirement.

 

Investing local is a great way to give back to your community.   It strengthens the local economy and ensures that small businesses will continue to be around to produce their unique goods and services. Why be cookie cutter when you can stand out? Investing locally is also a lot easier than you’d think. Anyone can do it. With a little bit a practice, you can become an Invest Local pro! What are you waiting for? Go Invest Local.