Editor’s note: The VTDigger video by Cory Dawson explains how the new small business investment rules work.
The state wants to make it easier for Vermonters to invest in local businesses.
Individuals can invest up to $10,000 in a registered Vermont business offering, or more if they can demonstrate a high net worth. Companies can raise up to $2 million in stock equity, or $1 million if they don’t have audited financial statements.
In-state securities regulations allows Vermont companies to sell stock in their operations — but only to Vermonters. Like the stock market, firms can raise money they need in order to grow, and residents can invest in enterprises they find promising.
But several provisions make the Vermont Small Business Offering Exemption, or VSBOE, unique among other securities.
Keeping the transactions in state borders allows Vermont companies and residents to bypass complex federal securities laws associated with public offerings and stock exchanges.
“The stock market can be daunting,” said Susan Donegan, commissioner of the Department of Financial Regulation. “Or, for whatever their personal reasons, some people just don’t want to go to Wall Street.”
Vermont and many other states have had small business offering exemptions on the books for years. But market needs had long since since outgrown Vermont’s version of the regulation, Donegan said.
What worked for Ben & Jerry’s back in the 1980s, and later Earth’s Best baby food and Catamount Brewery, no longer fit the cost of growing a business, she said.
“We had maybe 14 exemptions on the old regulation,” Donegan said. “It wasn’t flexible enough. It didn’t allow them to raise enough money. It was not a useful regulation.”
Vermont was late to update its small business offering exemption, Donegan says. Other states revamped their parallel exemptions a decade ago.
But in catching up, state regulators surpassed others in the key area of general solicitations, according to Eli Moulton, an attorney with the Burlington-based financial law firm Merritt & Merritt & Moulton.
Vermont’s law allows businesses to openly advertise to non-accredited investors — people who aren’t required to prove the value of their assets in order to invest.
“You can put stuff up on Facebook, on a website, at a restaurant on takeaway cards,” Moulton said.
Most other securities laws at the federal and state level prohibit general solicitations. In those cases, if a firm wants investors, company representatives can only reach out personally to people they know are eligible to invest.
But by strictly limiting the exempted transactions to Vermont businesses selling stock to Vermont residents, Donegan’s office steers clear of those restrictions.
The result: Even non-accredited investors can play the game.
“It cuts both ways,” Moulton said. People who may not have a lot of money to spend could lose what they risk, he said.
“But from a fairness perspective, it means early stage investment opportunities are opened up not just to high net-worth individuals,” Moulton said.
That’s part of what financial consultant Cairn Cross thinks is most interesting about the new VSBOE. Cross is co-founder of the venture capital firm Fresh Tracks Capital, based in Shelburne.
“The Main Street Vermont investor has had difficulty participating in private offerings,” Cross said. “They simply don’t get invited. They don’t have a way to gain access to that (opportunity).”
For a Vermont company with good brand recognition, he said, the combination of general solicitations with non-accredited investors could line up “some powerful matches.”
The modernized rules, which took effect June 16, involve a few other key changes, Donegan said.
Previously, the amount of money a business could raise was capped at $500,000, and there were limits to the number of Vermonters that could come from.
Donegan said the revisions also streamline the process for businesses wanting to register securities with her office. Even companies without audited financial statements potentially can get through the process in a couple months, she said, while still maintaining consumer protections.
How it works
The first business to avail itself of the revision defies the standard profile of a company likely to use it.Village Builders of Wolcott will sell shares for $500 each to raise $1 million. The money will fund renovations of a five-unit house in Hardwick. Owners Fred and Sally Martin may also purchase more land, buy construction materials and equipment and build another single-family home.
“They’re seeing growth,” Donegan said. “Now it’s time for expansion.”
Typically, she said, businesses willing to relinquish ownership for the sake of capital are lighter on physical collateral. Their most valuable asset — intellectual property — can’t be put on the line to secure a bank loan, for example. That’s why they look for alternative ways to raise the money they need to get started or grow.
Moulton said he expects to see the exemption used most in sectors where Vermont entrepreneurialism is seeing the fastest growth: so-called “green tech” businesses, speciality food producers and restaurants.
But more than industry or sector, Moulton said companies will self-select for participation with VSBOE based on their financial needs and administrative capacity.
“Even when we do offerings with 30 or 40 investors, it’s a fair amount of work,” Moulton said. Maintaining communications with shareholders and keeping up with securities paperwork — even in-state securities — is heavy on paperwork.
He said electronic platforms are being developed to lighten the administrative load, but it remains to be seen whether they can be scaled down effectively for affordable use by small businesses.
The other major consideration for companies considering VSBOE, said Cross, is whether or not they really want to relinquish control.
“You are now joined at the hip with these other investors, and they have rights under state law and they have concerns, and you have an obligation to them as an entrepreneur to preserve their capital, do the right thing with it, and make them money,” he said.
Donegan said the local nature of the transaction offers no guarantees for investors.
“Investments are always at risk,” she said. “There is no such thing as a guarantee in the stock market. And this is basically the stock market.”
She said that’s why companies are required to explain their risks to potential investors, and why it’s essential for investors to risk their hard-earned money carefully.