Friday, November 20, 2015

New Jersey Enacts Crowdfunding Exemption

By Jay Fishman, J.D.

The New Jersey State Legislature enacted an intrastate offering exemption (crowdfunding) to help small businesses raise capital in the state.

Qualifications. To qualify for the exemption, an issuer must be a business entity organized under New Jersey law and authorized to do business in the state. The issuer’s transaction must meet Securities Act Section 3(a)(11) and SEC Rule 147 requirements. The issuer must not have previously sold securities in reliance on this exemption.

Disqualifications. The transaction may not be a blind pool offering. The New Jersey Securities Bureau must, by rule, set forth additional disqualifying events that may include certain criminal convictions, injunctions, and court, false representation or stop orders.

Aggregate offering amount. The aggregate offering amount from all cash and consideration received for sales except for sales made to accredited or institutional investors may not exceed $1 million. Offers or sales to the issuer’s officers, directors, partners, trustees, persons occupying a similar status or persons owning at least 10 percent of the outstanding securities will not count toward the aggregate monetary limit.

Single investor limit. An issuer may not accept more than $5,000 from any single investor unless the investor is an accredited investor or institutional buyer.

Residency requirement. Investors must be New Jersey residents.

Investor certification. Investors must certify electronically or writing that they understand: (1) the high-risk speculative nature of the business in which they are investing; (2) that the investment has not been reviewed or approved by any federal or state securities regulatory authority; (3) that the securities are illiquid and may not have a ready market for their sale; (4) that the investor may be taxed on the taxable income and losses of the company; and (5) any additional information the Bureau finds relevant.

Legend. The Bureau must create a legend for issuers to provide their prospective purchasers, which contains: (1) a statement that the securities have not been registered with either the SEC or the Bureau; (2) a statement that the securities are subject to resale limitations; and (3) any other information the Bureau finds relevant for the legend.

Escrow. The issuer must execute an escrow agreement with a New Jersey-located bank, savings bank, savings and loan association or credit union. Investor funds must be deposited with the designated financial institution, which may not release the offering proceeds to the issuer until the aggregate capital raised from all investors equals or exceeds the minimum offering amount specified in the issuer’s business plan. The escrow agreement must additionally provide that all investor funds will be returned to investors within 60 days of the stated date in the required disclosures if the minimum offering amount is not raised.

Internet site/operator. The offering must be made exclusively through an Internet site that is registered with the Bureau. An Internet site operator, which does not include a broker-dealer, must be a business entity organized under New Jersey law that is authorized to do business in the state. The Internet site operator is not required to register as a broker-dealer in New Jersey if: (1) the Internet site operator is an Exchange Act-registered broker-dealer or a Securities Act-registered funding portal; (2) the SEC has adopted rules governing funding portals; (3) the Internet site operator files with the Bureau Chief the Internet site operator’s SEC-filed documents that the Bureau Chief requires by rule (or otherwise); and (4) the Internet site operator consents to service or process and pays a Bureau-determined fee.

Disclosure document. An issuer must disclose to prospective purchasers on the Internet site the following information:

(1) a copy of the legend (mentioned above);

(2) evidence that the issuer is a business organized under New Jersey law that is authorized to do business in the State;

(3) a description of the company, its form and date of business organization, the address and telephone number of its principal office, its history, its business plan, a description of material agreements and the intended use of the offering proceeds;

(4) the identity of all persons owning at least 10 percent of the ownership interests of any class of the company’s securities (with a description of the outstanding options or other contingent securities);

(5) the identity of the executive officers, directors, managing members, and other persons occupying a similar status or performing similar functions on the issuer’s behalf (with a description of the outstanding options or other contingent securities);

(6) the terms and conditions of the securities being offered and of any outstanding securities of the company, the minimum and maximum amount of securities being offered, if any, and the percentage ownership of the company represented by the offered securities and the valuation of the company implied by the price of the offered securities; the minimum offering amount that is necessary to implement the business plan, and a notice that the funds will only be released to the issuer if the minimum offering amount is raised;

(7) the time and date, which may be no more than 12 months from the date of the offering, by which the minimum offering amount must be raised before the funds will be returned to investors;

(8) a provision stating that investors may cancel their commitment to invest for up to 30 days following the date the investment is made, except that investors who invest within 30 days of the time and date by which the minimum offering amount must be reached will only have the amount of time left before the time and date by which the minimum offering amount must be reached in which to cancel their commitment to invest, even if that amount of time is less than 30 days;

(9) the identity of any person who has been or will be retained by the issuer to assist the issuer in conducting the offering and sale of the securities, including any Internet site operator, but excluding persons acting solely as accountants or attorneys and employees whose primary job responsibilities involve the operating business of the issuer, rather than assisting the issuer in raising capital;

(10) a description of the consideration being paid to each person who assists the issuer in conducting the offering;

(11) a description of any litigation or legal proceedings involving the company or its management;

(12) a discussion of significant factors that make the offering speculative or risky;

(13) a description of any conflicts of interest;

(14) financial statements, including a balance sheet, income statement, cash flow statement, and capitalization of issuer;

(15) a statement of current liabilities outstanding, including obligations past due and obligations due within 12 months;

(16) the Internet site address at which the quarterly report (mentioned below) will be made available; and

(17) any additional information material to the offering.

Notice filing. The issuer must file a notice with the Bureau not less than 10 days before the security offering begins. The notice must be on a Bureau-determined form accompanied by a Bureau-determined fee. The notice must contain the information required to be posted on the Internet site (disclosure document mentioned above).

Records. The issuer and Internet site operator must maintain records of all securities offers and sales effected through the Internet site, and provide the Bureau with ready access to the records on request.

Quarterly report. Issuers must provide a quarterly report to investors, free of charge.

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