On January 15, 2015 the Massachusetts Securities Division adopted emergency regulations permitting intrastate crowdfunding. Effective immediately, this regulation permits Massachusetts-based businesses to offer equity and debt securities to Massachusetts investors, within certain limits.
Crowdfunding allows start-ups to reach more investors and at earlier stages. The exemption allows companies to make offerings and sell securities to accredited and unaccredited Massachusetts investors, including via solicitations over the internet.
Qualifications. Issuers must be Massachusetts entities authorized to do business in Massachusetts with their principal place of business within the state. The offering also must comply with, and be subject to the significant compliance risks of, Section 3(a)(11) of the Securities Act of 1933, as amended, and Rule 147 thereunder.
Company Fundraising Limits. The exemption allows companies to utilize crowdfunding to issue $1,000,000 in securities per year, or up to $2,000,000 per year if the company provides GAAP-based audited financial statements. Sales made to shareholders that own at least 10% of the issuer's outstanding shares, officers, directors, partners, or trustees do not count towards the monetary limits under the crowdfunding exemption.
Investor Contribution Limits. Investors whose income and net worth (not including their primary residence) are both less than $100,000 may invest a maximum of either (1) $2,000 or (2) 5% of their annual income or net worth, whichever is greater. Investors whose income is at least $100,000 per year or whose net worth (not including their primary residence) is at least $100,000 may invest up to 10% of either their annual income or net worth, whichever is greater, subject to a $100,000 cap.
Key Disclosures. Issuers need to provide disclosures to investors, including, but not limited to:
- Material facts, including descriptions of the issuer, the planned use of the proceeds, any pending litigation, and the identity of officers, directors, managers and certain investors who own at least 10% of any class of the issuer's securities;
- Minimum offering amount to be raised under the exemption, which must be no less than 30% of the maximum offering amount;
- Any person or internet website to be retained by the issuer in the offering;
- That the offering is not registered under federal and state law;
- Limitations on resale;
- The risks the investors incur if they choose to invest; and
- Disclosures required under SEC Rule 147 because the offering must be made in compliance with SEC Rule 147.
Issuer Filing Requirements. Issuers must file: (1) a notice indicating the issuer is relying on the exemption, a copy of all the materials used in connection with the offering, and a Form U-2 no later than 15 days after the first sale; and (2) a report indicating the number and value of the securities sold in the offering and the number of purchasers.
Exemption Unavailable to Certain Issuers. The exemption is not available to certain types of issuers, including, but not limited to, blind pool and blank check offerings, investment companies and hedge funds, nor is it available to issuers whose officers, directors, or major shareholders have been "bad actors" and violated the securities laws or other financial regulations, or who have committed other types of misconduct or fraud.
Additional Information. For additional information, see
This advisory was prepared by Jeremy Halpern and Thomas Powers, members of the Emerging Companies Group at Nutter McClennen & Fish LLP. For more information, please contact your Nutter attorney at 617-439-2000.
This advisory is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.