Gov. Gavin Newsom has signed Assemblymember Al Muratsuchi’s (D-Torrance) AB 511, the California Small Business Equity Crowdfunding Act.

This new law will help entrepreneurs and start-up small businesses use federally approved crowdfunding portals to find investors who can provide early-stage seed capital offerings to help jump-start companies and help them become candidates for larger rounds of financing. AB 511 also provides greater consumer protections to investors participating in equity crowdfunding financing. 

Assemblymember Al Muratsuchi (right( was recently interviewed by Frank Buckley of KTLA5.

This bill was sponsored by Small Business California and supported by the California Chamber of Commerce, National Federation of Independent Business, National Association of Women Business Owners and many other small business advocacy organizations.

“I thank Gov. Newsom for signing the California Small Business Equity Crowdfunding Act,” stated Muratsuchi. “This new law will help start-up small businesses find investors who can provide early seed capital to grow and create jobs, while at the same time provide greater consumer protections to investors participating in equity crowdfunding. 

“Small businesses, which account for over two-thirds of new jobs nationally, often lack access to capital and rely heavily on credit card debt, home equity, and friends and family to start and grow. This new law will support California’s entrepreneurs and small businesses to innovate, grow, and create jobs in our state.”

“AB 511 enhances the JOBS Act’s reach by broadening the class of entrepreneurs who can now access seed capital,” said Mark Hiraide, director of Small Business California. “Prior to the JOBS Act, securities law restrictions — well-intentioned in the aftermath of the stock market crash of 1929 and the Great Depression — made raising equity capital unattainable for most people. It relegated entrepreneurs to raising seed capital from family, friends and other wealthy sources.

“An entrepreneur’s parents and the neighborhood in which one lived were significant factors in determining who received funding, who owned businesses, and who accumulated capital and wealth in this country. AB 511 equals the playing field, allowing entrepreneurs from around California access to capital who otherwise would not have it.”

“We are grateful to Assemblymember Muratsuchi for his leadership and applaud Gov. Newsom for enacting AB 511,” said Scott Hauge, president of Small Business California. “Small, micro and start-up businesses have struggled through the pandemic for over a year and will now have a new option to access the capital they desperately need to grow and create jobs, while providing greater protections to California investors participating in crowdfunding.”

To help new businesses and start-ups, Congress enacted in 2012 the Jumpstart Our Business Startups Act (JOBS Act), which modernized regulations for raising equity capital by establishing crowdfunding provisions. The JOBS Act has successfully facilitated capital access by larger later-stage enterprises, but it has not been effective in providing small businesses with access to critical seed-stage capital.

For example, the cost associated with independent CPA reviews or audits, required by Regulation CF under Title III of the JOBS Act, is prohibitively expensive for startup businesses, and yet the reviews and audits do not provide meaningful information to investors, as start-ups do not yet have significant operations.

AB 511 creates an exemption from state securities qualification to enable a business in California to conduct an offering pursuant to SEC Regulation Crowdfunding without the requirement to provide reviewed financial statements for seed offerings of up to $300,000.

AB 511 also provides investor protections not present in the JOBS Act such as an attorney’s fees and costs provision for prevailing investors and a prohibition against class action waivers.

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