Crowdfunding through sites such as Indiegogo and Kickstarter has grown like gangbusters over the past few years, allowing thousand of small companies to rake in tens of millions of dollars. Yet equity crowdfunding initiatives at the state level are largely failing entrepreneurs.

That's one of the takeaways from a new survey, conducted by business information company CT Corporation, a division of Wolters Kluwer. Earlier this month, it set out to research the 50 most successful crowdsourcing campaigns since 2012 to ascertain what made them so successful. Apart from obvious marketing plusses, such as entrepreneurs that made their own videos and had a good handle on social media, it also found that companies in certain states--primarily California--were more successful than others. What’ s more, they all benefitted primarily from the rewards fundraising model.

“These crowdsourcing platforms allow businesses that are located anywhere to take advantage of the platforms,” says Jen Friedman, chief marketing officer of the small business segment for CT Corporation.

The difference between the two funding options is that sites like Indiegogo and Kickstarter don’t allow investors to take equity, and so are free of Securities and Exchange Commission oversight. Instead campaign participants get a reward, like access to an early version of a product. Equity crowdfunding falls into a more complex category that’s governed by both federal or statewide guidelines, so small businesses that want to raise money this way have to jump through more regulatory hurdles, because investors are actually buying shares in the company.

False Starts

The Jumpstart Our Business Startups (JOBS) Act, enacted in 2012, was intended to give smaller companies access to more funding by allowing so-called non-accredited investors to buy equity in private companies, through a section in the law known as Title III. (An accredited investor has a net worth of $1 million or more, or an annual income of $200,000. A non-accredited investor has a net worth or annual income less than that amount.)

But the SEC has dragged its feet on fully implementing the various provisions of the law that would allow such investors to participate in private equity sales. In the face of that sluggishness, nearly half of the states have opened up their regulations to allow businesses to crowdfund more broadly from both accredited and non-accredited investors. Ironically, California is not one of those states.

Yet the Golden State, where Silicon Valley figures so prominently, ruled the roost for crowdfunding, according to the CT study. Its companies pulled in 54 percent of crowdsourced funds in the past three years, primarily through Indiegogo, Kickstarter and other rewards-based platforms, Friedman said. Companies in California have raked in $117 million since 2012. Coming in second was Georgia, where three companies have pulled in $10 million over the same time period. Next up was Texas, where three companies garnered $9 million from crowdfunding campaigns.

None of these other states has been particularly successful rewriting their own financial regulations to make equity fundraising easier for smaller businesses, says Anthony Zeoli, a Chicago-based attorney who runs the blog The blog delves into the various state efforts to make crowdfunding simpler for businesses, looping in both accredited and non-accredited investors. To date, only about 100 businesses have successfully raised funds in the states that have rewritten their laws, Zeoli says.

System Flaws

A big reason the more pro-active states haven't met with much success is that they rely on an older SEC rule, referred to as section 147, which requires companies to be incorporated in the state where they're seeking investment. As a result, a company must sell its securities solely to that state's investors, and must use 80 percent of the net proceeds of the sale in its state operations.

"It really limits the number of people you can raise money from," says Kristin Gerber, an attorney in the corporate law practice of Mintz Levin in New York.

Meanwhile, companies in states that are working to allow equity crowdfunding for both sets of investors have run into difficulties.

In North Carolina, for instance, the state legislature introduced a bill in February that would give non-accredited investors access to private sales of up to $2 million. Yet despite support from the governor, that bill hasn't moved forward. 

Thanks to that quagmire--and limits on intrastate investing in N.C.--companies there have had to adjust. Raleigh-based funding platform Malartu Funds, for example, has switched from exclusively funding in-state startups in need of cash to a broader base of national companies that emerge from accelerators. The company, launched in 2014, creates a fund structure that allows accredited investors to buy a portfolio of startups, and works in tandem with venture capital or founder funds that already invest in the accelerator companies.

“We pivoted to Title II, because we saw a larger group of accredited investors who could help startups,” says Sean Steigerwald, co-founder of Malartu, who referred to the portion of the JOBS Act that allows for general solicitation of private investment opportunities among accredited investors.

Untapped Potential

Meanwhile, the SEC’s attempt to allow more non-accredited investors to invest in so-called mini-initial public offerings of between $20 million and $50 million through its Regulation A+, has similarly struck out. It's just too expensive and complicated for most small companies, Steigerwald says.

And he's hoping that will change soon.

“In theory, Title III will be more effective at activating this new pool of investment for early-stage startups and small business," Steigerwald says.