A new exemption passed in the Montana 2015 legislative session will allow Montana companies to use crowdfunding to offer and sell securities in Montana beginning July 1, 2015. This exemption is subject to various limitations and restrictions. Companies considering the use of crowdfunding to raise money must first be aware of the legal requirements of this funding mechanism and carefully consider the associated business implications.
“Crowdfunding” has generated a lot of buzz among startups and emerging companies, entrepreneurs and investors. Generally, crowdfunding enables a large number of small or unsophisticated investors to make investments in a company, often through an online portal or platform. Until recently, offering securities to a large number of small or unsophisticated investors has generally not been practical under state and federal securities laws.
The 2012 federal Jumpstart Our Business Startups (JOBS) Act made significant revisions to the federal securities laws including some fundamental changes in the manner which startups and emerging companies approach capital formation. One of these revisions exempts crowdfunding from the registration requirements under the federal Securities Act of 1933.1
The JOBS Act requires the SEC to adopt regulations implementing the crowdfunding provisions. The proposed regulations have received some criticism and have not yet been adopted. In the interim, more than 10 states have enacted legislation permitting intrastate crowdfunding and another 10 are in various stages of enacting or considering similar legislation.
During the 2015 legislative session, Montana passed an exemption patterned after statutes in Vermont and Alabama. Beginning July 1, 2015, Montana companies will be permitted to use crowdfunding to offer and sell securities in Montana. The exemption is subject to various limitations and restrictions, including the following:
- The company must be formed under the laws of Montana and be registered with the Montana Secretary of State.
- The company may offer and sell securities only to purchasers who provide documentation reasonably indicating they are a Montana resident.
- The offer and sale must comply with the federal intrastate exemption requirements under section 3(a)(11) of the Securities Act of 1933.2
- The company may sell up to $1 million of securities in any 12 month period, minus the aggregate amount of other securities sold within 12 months prior to the first offer or sale made under the exemption.
- Each non-accredited investor may purchase up to $10,000 of securities in an offering under the exemption.3
- Funds received must be deposited into a bank or depository institution authorized to do business in Montana and used in accordance with representations made to investors.
- The company must file a notice with, and pay a $50 fee to, the Montana securities commissioner within 10 days of any solicitation or within 15 days after the first sale, whichever occurs first.
- The company cannot pay a commission with respect to the offer or sale of securities to anyone that is not a registered broker-dealer.
- There is no requirement that an online portal or platform be used for an offering.
Crowdfunding may not be the best option for every company. There are important legal requirements not addressed here, as well as business implications that should be considered and discussed with an experienced securities lawyer, prior to deciding to raise money under this exemption. Crowdfunding could potentially have negative impacts on future fundraising efforts, and complicated corporate governance and corporate approval issues may result. Nevertheless, Montana’s new crowdfunding exemption may open the door for certain companies and entrepreneurs to more easily access sources of capital.
For more information on Montana crowdfunding or other corporate or capital raising topics, please contact Jack Manning at 406.721.6025 or manning.jack dorsey.com; Erin McCrady at 406.329.5585 or mccrady.erin dorsey.com; Jeremy Brown at 406.329.5575 or brown.jeremy dorsey.com; or Kymra Archibald at 406.329.5573 or archibald.kymra dorsey.com.
1 For a further discussion of the JOBS Act, see the Dorsey & Whitney LLP memorandum dated March 30, 2012 entitled “The Jumpstart Our Business Startups Act: General Solicitation, Crowd Funding, and Decreased Securities Regulation for Emerging Growth Companies” which can be found at http://www.dorsey.com/EU_Corp_StartUpActs_032712/.
2 This is a significant limitation. Under the federal intrastate exemption, the issuer must be incorporated or organized in Montana and derive 80% of its gross revenues from Montana. Offers and sales under this exemption cannot be made to anyone other than Montana residents.
3 “Accredited” has the meaning provided in Rule 501of Regulation D under the federal Securities Act of 1933. An individual is deemed an accredited investor under Regulation D if he or she has a net worth (excluding the value of his or her principal residence) exceeding $1,000,000 either individually or jointly with his or her spouse or income in excess of $200,000 in each of the two most recent years and reasonably expected in the current year (or joint income with his or her spouse of $300,000).