Thursday, October 16, 2014

Maryland Adopts Intrastate Small Business Exemption

[This story previously appeared in Securities Regulation Daily.]

By Jay Fishman, J.D.

The Maryland Legislature adopted, effective October 1, 2014, a non-crowdfunding intrastate small business exemption.

Legislation. The exemption covers any security issued by a Maryland-organized entity that:
  • Conducts a securities offering in accordance with Securities Act Section 3(a)(11)/SEC Rule 147 and in accordance with any Maryland Securities Commissioner-adopted additional conditions such as issuer restrictions, offering limitations, and required disclosures and notice filings;
  • Offers and sells the securities only to Maryland residents;
  • Caps the aggregate price of the securities offering at $100,000;
  • Caps the consideration paid by any single purchaser at $100; 
  • Allows commissions or other remuneration to be paid to only Maryland-registered broker-dealers or agents; and
  • Is not subject to any Maryland Securities Commissioner-defined disqualification or to the Maryland Securities Act anti-fraud provisions.
Regulation. The Maryland Securities Commissioner adopted by administrative order, effective October 1, 2014, the following additional conditions that an issuer must meet to claim the statutory intrastate small business exemption.
  • The issuer must be an entity organized under Maryland law, qualified to do business in Maryland, and have its principal place of business in Maryland. Additionally, the issuer must use at least 80 percent of its net proceeds from sales made under the exemption to operate its Maryland business or to provide services in Maryland.
  • Offers and sales must be made exclusively in Maryland, i.e., offerees and purchasers must be “Maryland residents” as defined. 
  • The aggregate offering price during any 12-month period may not exceed $100,000.
  • Investors may cancel an investment at any time before the issuer has raised the minimum offering amount.
  • The issuer, before selling the security, must deliver to each prospective purchaser: (1) for a note offering, a complete Form MISBE-2 or a disclosure document containing the Form MISBE-2- required information; or (2) for a Commissioner-approved non-note offering, a disclosure document containing the Form MISBE-2 required information that has been adapted to the non-note offering.
  • The issuer must file with the Maryland Securities Commissioner not later than 15 days after the first sale of securities under the exemption: (1) a Form MISBE-1 or a document containing the MISBE-1 required information; and (2) a $100 filing fee.
  • The sold securities may not be resold.
The exemption is available only for promissory notes, but the Maryland Securities Commission may extend the exemption to other security-types.

The “bad boy” disqualification provisions for the Maryland limited offering exemption (MLOE) apply to this intrastate small business exemption. The integration provisions and the insignificant deviation provisions for MLOE also apply.

In addition, the issuer must, in connection with the documentation of any securities sold under this intrastate small business exemption: (1) place a legend on the securities-evidencing documentation stating that the securities have not been registered under the Maryland Securities Act and setting forth the resale restriction; and (2) obtain from each purchaser a written representation of the purchaser’s residence.

In connection with any offer or sale under the exemption, the issuer must also: (1) disclose the resale restriction in writing; and (2) comply with the SEC’s guidance regarding the issuer’s use of its website to promote the offering and intrastate offerings found in Question 141.05 at

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