On March 2, 2014, a bill entitled “An Act To Increase Funding for Start-ups” became law in Maine. The law allows companies to engage in crowdfunding-like transactions provided that the company is located in Maine, and a parallel, pre-existing SEC rule generally would require all investors to also be located in Maine. “Crowdfunding,” in this context, is the raising of capital from a large group of small investors, typically using the internet. To summarize, the law permits a Maine-based company to raise up to $500,000 from investors if the company provides the investors financial statements reviewed by a public accountant, and up to $1 million if the company provides audited financial statements. Notably, investors would not have to be “accredited investors” as defined under SEC rules, and the company could use general solicitation and advertising (i.e., the internet, newspapers, magazines, etc.), provided that the solicitation and advertising are limited to Maine. Investments are limited to $5,000 per investor, unless the investor is an accredited investor under SEC rules, in which case there is no limit on such investor’s investment. The company would have to state a minimum total investment amount at the start of the fundraising, and if it failed to meet that minimum amount within one year, it would have to return all funds to investors. All offerings under the law have to be registered with the Maine Office of Securities. Although the law is titled “An Act to Increase Funding for Start-ups,” the law applies to all companies regardless of size, as long as they are not public. There theoretically is the possibility that offers and sales could be made to investors outside of Maine in certain circumstances, though the additional compliance burdens for that option make it largely unrealistic.
As can be gleaned from the summary above, a few aspects of the bill might, unfortunately, limit its application. First, the $5,000 per investor limitation may make the law attractive only to true start-ups, and even then to relatively small ones. Second, any company conducting an offering under the law must file a short-form registration statement with the Maine Office of Securities, which would need to include the company’s financial statements, a description of the capital structure of the company, and a business plan for the company, among other information. Third, the general solicitation allowed by the law could theoretically be conducted over the internet, but under SEC rules any offering that used general solicitation and advertising would need to be limited to Mainers, which makes use of the internet a bit complicated. It is uncertain whether inclusion of a prominent disclaimer on an internet advertisement making clear that the offer is limited to Maine residents would suffice for compliance with the SEC rules. A few other states (Georgia, Kansas, Michigan) have effected similar laws, and it initially appears that not many companies are using them.
In all, the law is a welcome attempt to facilitate capital raising for small companies in the internet age. However, the $5,000 per investor limit and the federal securities rules that generally would require limiting offers and sales of the securities to Maine residents may have serious practical limitations on the application of the new law. The law also requires the Maine Office of Securities to issue implementing regulations before the law can be used, and there is no timeline for when that might happen. Many companies may decide that, for the time being, raising equity through a traditional “Regulation D” offering, which is normally limited to accredited investors, or other private placement is still the easiest path to take.
If you have any questions about the topic discussed in this article, please contact your Drummond Woodsum attorney or Christopher C. Dana, 207-253-0536
207-253-0536, cdana@dwmlaw.com.
