Massachusetts Adopts State Crowdfunding Exemption

Last week, the Massachusetts Securities Division adopted an equity crowdfunding exemption to the securities registration requirement under Massachusetts law, effective immediately. The new rule, 950 CMR 14.402(B)(13)(o), is an emergency regulation adopted by the Securities Division without legislative activity, is available to a business entity that (1) is formed under Massachusetts law, (2) is authorized to do business under Massachusetts law, and (3) has its principal place of business in Massachusetts. It permits companies to offer and sell equity or debt securities up to $1 million if the company has not undergone (and made available to prospective investors) a financial audit of the company’s most recent full fiscal year, or $2 million if such an audit is completed and made available. Eligible investors are limited to residents of Massachusetts, who may not invest in excess of $2000 or 5% of annual income or net worth (as calculated under the SEC’s Regulation D), whichever is greater, if both annual income and net worth are less than $100,000; or 10% of annual income or net worth, whichever is greater, if annual income or net worth is equal to or more than $100,000 (up to a maximum investment limit of $100,000). This scheme tracks the individual purchaser investment limits in Title III of the JOBS Act. Investment companies, hedge funds, resource extraction, “black check”, and ’34 Act reporting companies are precluded from offering securities under the Massachusetts crowdfunding exemption. The exemption is also unavailable if the issuer or an affiliate of the issuer falls under one of a number of “bad boy” disqualifications. Issuers are not permitted to pay compensation to persons for soliciting purchasers, unless said persons are registered as a broker-dealer or agent. Issuers must also set a minimum offering amount, disclosed in its offering materials, which cannot be less than 30% of the maximum offering amount; issuers have one year from the start offering to meet the minimum offering amount, otherwise all funds must be returned to investors. Prior to the completion of the offering, all investor funds must be placed in an escrow account with a bank authorized to do business in Massachusetts. Within 15 days of the first sale, the issuer must make a notice filing with the state that provides the names and addresses of all the officers, directors and control persons of the issuer and all the persons involved with the offering, identifies the bank where investor funds will be deposited, and includes a copy of all offering materials. At the completion or termination of the offering, or 12 months after the commencement of the offering, the issuer must file a sales report with the state disclosing the number of purchasers and value of securities sold. Investors must provide each prospective purchaser an offering or disclosure document, which must contain a number of pieces of information, such as: a description of the issuer and its business; the intended use of the funds raised; any litigation involving the issuer or its management; the identity of the directors, officers, managing members, and persons owning more than 10% of any class of security; and, if appropriate, a discussion of factors that make the offering speculative or high risk. The Massachusetts crowdfunding exemption tracks to large extent the provisions of the JOBS Act and the SEC’s proposed rules to implement federal equity crowdfunding. However, the exemption is only effective for up to 12 months (subject to annual renewal), likely a nod to the fact that the SEC is expected to finalize the rules for federal equity crowdfunding sometime in 2015. Further reading:

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