Tax change lets small businesses sell stocks as a local investment

MIDDLEBURY — Finding sources of funding for a small business is difficult, especially when traditional lenders such as banks are hesitant to lend in the wake of the Great Recession.
Now, the state Department of Financial Regulation is trying to facilitate investment in Vermont’s small businesses with a change in regulatory policy.
Michael Pieciak, deputy commissioner of the Department of Financial Regulation, last week detailed changes to the Vermont Small Business Operating Exemption. The VSBOE, as it is known, now allows Vermonters to sell stock in their companies exclusively to Vermonters as a way to finance operations without the hassle and expense of complying with federal securities regulations.
“It’s an intra-state exemption, meaning that the feds are taken completely out of the picture,” Pieciak said, adding that federal regulations prevent extending the exemption to residents of other states. “It’s purely a Vermont offer.”
Pieciak made the remarks on Nov. 6 in his keynote address at the “Financing the Working Landscape” conference, sponsored by the Addison County Relocalization Network (ACORN) and the Addison County Economic Development Corporation.
He said the new policy makes it easier for small businesses to seek financing from friends, neighbors and the greater community.
“What the VSBOE does is provides not only a framework that’s helpful and useful, but does so in a way that’s very easy and straightforward manner,” he said.
Instead of putting up personal assets such as a home or property as collateral for business loans, the VSBOE gives entrepreneurs the opportunity to raise cash without tying their personal and business assets together, which could bring catastrophe should the business fail.
The Department of Financial Regulation, as its name implies, ensures that banks, insurance companies and investment firms comply with state securities law. It also protects consumers against fraud. Pieciak said the department pulls in 7 percent of the state’s annual revenue.
Pieciak explained that states have regulated securities for more than a century. Kansas was the first state to pass what became known as “blue sky laws” after unscrupulous bankers sold fraudulent securities to farmers.
The other states followed suit and passed legislation requiring all securities — and those hawking them — to register with a state agency. Following the stock market crash of 1929, the federal government felt that state laws were inadequate to prevent future catastrophes. Congress created the Securities and Exchange Commission in 1934 to enforce federal securities laws.
The Vermont Small Business Operating Exemption has existed for decades, but Pieciak said he and his colleagues felt it needed to be updated to better serve the small business community.
Under the old exemption, a business could raise up to $500,000 from up to 50 people. There was no cap on how much any single person could invest.
The new exemption changes each of those things. Businesses can now raise $1 million, or up to $2 million if they provide several years of audited financial documents. There is no limit on how many people may invest, though there is a $10,000 per person cap on those investments. There is one exception — investors with a net worth of more than $1 million and $200,000 in liquid assets can be designated an “accredited investor” and invest as much money as they choose.
To expand the outreach efforts of the Department of Financial Regulation, Pieciak said the department created a new position, the Director of Capital Markets.
“This position was created solely to help small businesses navigate the regulatory process to raise money for themselves and answer any questions from the public,” Pieciak said.
Businesses pay a $200 fee to file paperwork with the state, which Pieciak said is as short has a few dozen pages and can be done without the assistance of an attorney. He added that the entire process could be complete in a month, if not sooner, and that DFR staff can help applicants through the process.
ACEDC Executive Director Robin Scheu said the Working Landscape conference does not normally have a keynote speaker, but organizers asked Pieciak to come down from Montpelier to explain the change to the small business exemption. She said it’s an example of how government can be receptive to the needs of small business and the communities they serve.
“They decided to change the rules that were too onerous, and they’re looking to make it easier for businesses,” Scheu said.
Scheu added that she views the amended rules as not just beneficial to business, but good for people who want to invest in them. She said that some small Addison County businesses have used crowd-sourcing to raise cash, and would likely be attracted to taking advantage of the new state policy.
“It’s a way for business owners to get investors without going through all the federal hoops and hurdles,” she said.

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