Thursday, April 16, 2015

Massachusetts Permanently Adopts Emergency Crowdfunding Exemption

By Jay Fishman, J.D.

The Massachusetts Securities Division permanently 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 if the issuer did not make available to the secretary of state and prospective investors its most recent fiscal year’s GAAP-prepared financial audit, or up to $2 million if the issuer did make available to the secretary of state and prospective investors its most recent fiscal year’s GAAP-prepared financial audit.

The exemption allows an investor to purchase an amount of securities not exceeding the greater of: (1) $2,000 or 5 percent of the investor’s annual income or net worth, whichever is greater, if both the annual income and net worth are less than $100,000; and (2) 10 percent of the investor’s annual income or net worth, whichever is greater, but not to exceed an amount sold of $100,000, if either the investor’s annual income or net worth is $100,000 or more.

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

Issuers whose officers, directors, or beneficial owners 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 of state no later than 15 days after the first Massachusetts sale of a security under the exemption. 
  • 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. 
  • Set a minimum amount to be raised under the exemption. 
  • 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.

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