Tuesday, January 20, 2015

Massachusetts Adopts Emergency Crowdfunding Exemption

[This story previously appeared in Securities Regulation Daily.]

By Jay Fishman, J.D.

The Massachusetts Securities Division adopted an emergency intrastate crowdfunding exemption, permitting job growth by helping Massachusetts small and early-stage businesses find investors and gain greater access to capital with fewer restrictions.

Benefits. The exemption, available to Massachusetts-based corporations, LLPs and LLCs, allows the issuers to: (1) offer both equity and debt securities on the Internet; and (2) raise up to $1 million in a 12-month period, and up to $2 million if they have audited financial statements. The exemption allows investors to purchase an amount of securities either greater than $2,000 or 5 percent of their annual income or net worth if both the income and net worth are less than $100,000. Investors may, alternatively, buy an amount of securities up to 10 percent of their income or net worth if the income or net worth is $100,000 or more, subject to an investment limit of $100,000.

Qualifications and disqualifications. Issuers, to be eligible for the exemption, must be Massachusetts-formed entities authorized to do business in the state with their principal place of business in the state. Issuers must ensure that their transactions comply with Securities Act Section 3(a)(11) and SEC Rule 147.

Issuers whose officers, directors or majority shareholders are subject to specified “bad boy” provisions, such as securities fraud or misrepresentation, are disqualified from the exemption. The exemption is also prohibited for blind pool and blank check offerings, investment companies, hedge funds, commodity pools, and oil, gas or mining exploration industries.

Restrictions. The following restrictions apply:
  • Securities may be offered and sold only to Massachusetts residents.
  • Commissions (or other remuneration) may not be paid to any person for soliciting prospective purchasers, unless the person is a Massachusetts-registered broker-dealer or agent.
Requirements. The following requirements apply:

  • Issuers must file a prescribed notice with the Secretary no later than 15 days after the first Massachusetts sale of a security under the exemption.
  • Issuers must disclose all material facts pertaining to the company and offering, along with the fact that the offering is not registered under federal or state law.
  • Issuers must set a minimum amount to be raised under the exemption.
  • Issuers must place all funds received from investors in an escrow account at a Massachusetts-authorized insured bank or depository institution. Investor funds must remain at this institution until the minimum offering amount is reached.