The Massachusetts Securities Division has recently joined a number of other states in adopting a “crowdfunding” exemption from securities registration requirements for certain offerings made within the Commonwealth, with the stated purpose of enabling startups and entrepreneurs to more easily use the Internet to raise capital. Adopted as an emergency regulation that took effect immediately, the exemption permits companies that are incorporated in Massachusetts to raise capital from Massachusetts investors.
Much has been written about crowdfunding at the federal level, which was addressed by the Jumpstart Our Business Startups Act in 2012, but for which the SEC has indicated it is in no hurry to adopt the final regulations that would allow the practice to proceed. Impatient to release the purported floodgates of investor interest in funding local businesses, several states have taken matters into their own hands in passing regulations allowing intrastate crowdfunding, using rules similar to the ones just adopted in Massachusetts.
Under the new rules, a Massachusetts company may use the exemption for offerings of up to $1 million in securities in a one-year period, and up to $2 million in securities in a one-year period if the company has made audited financial statements available to each prospective investor. The regulations also impose restrictions on the investors in these offerings. Investors with annual incomes and net worth of less than $100,000 are limited to purchases of the greater of $2,000 or 5% of their annual income or net worth. Investors with incomes or net worth of $100,000 or more may purchase up to the greater of 10% of their annual income or net worth, with an investment limit of $100,000. An investor’s annual income and net worth are to be calculated in accordance with the accredited investor calculation under Rule 501 of Regulation D. The company must also establish a minimum offering amount and, if such amount is not met, the company must return all funds to investors.
Furthermore, offerings must be made in accordance with the requirements of Section 3(a)(11) of the Securities Act of 1933, as amended, commonly known as the intrastate offering exemption, and Rule 147 under the Securities Act, a safe harbor that issuers may use to ensure that they meet the requirements for the intrastate offering exemption.
Certain companies may not use the exemption, including investment companies; hedge funds, commodity pools or similar investment vehicles; reporting companies under the Securities Exchange Act of 1934; companies engaging in blind pool or blank check offerings; or any company involving petroleum exploration or production, mining or other extractive industries. Certain “bad boy” exceptions also apply.
While we continue to wait patiently for the crowdfunding wheels to turn at the federal level, these rules may provide some flexibility to the small, scrappy Massachusetts startup looking to raise much-needed capital.