montana state auditorfiles.ctctcdn.com/3e765937001/cce69e53-6680-46a4-974e-93... · 2015-11-24 ·...

The Office of Montana State Auditor, Commissioner of Securities and Insurance, is a criminal justice agency whose primary mission is to protect Montana’s consumers through insurance and securities regulation. We work hard everyday to educate and assist the public about the wide range of issues in insurance and securities. We are committed to ensuring fairness, transparency and access in the securities and insurance industries.

Montana State Auditor

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Get What You’re Owed

Jury finds Reynolds guilty in multi-million dollar Ponzi scheme (December 11, 2013)

Criminal Justice Agency

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What is crowdfunding?

• Crowdfunding is an money-raising strategy that began as a way for the public to donate small amounts of money, often through social networking websites, to help artists, musicians, filmmakers and other creative people finance their projects.

• The concept recently has been promoted as a way of assisting small businesses and start-ups looking for investment capital to help get their business ventures off the ground.

Types of crowdfunding NOT subject to securities law.

• Gifts: Wedding guests pay for a couples’ honeymoon.

• Charities & non profits: Money is given to promote the organization with no expectation of returns.

• Sales and donation based models: Startups pre-sell items they hope to produce or people donate to help a product or creative project become reality., IndiGogo, GoFundMe, Kickstarter etc.

Record $13 Million raised on Kickstarter

In 1946 the Supreme Court of the United States outlined a method of determining if an investment is covered by the Securities Act of 1933. It is known as the Howey test.

1) An investment due to 2) an expectation of profits arising from3) a common enterprise4) which depends on the efforts of a promoter or third

party.

What is a security?SEC v. W. J. Howey Company

Equity Crowdfunding

• Federal JOBS Act of 2011 required SEC to write rules. On October 30, 2015 the SEC started the process of promulgating rules. Until the rules become effective, Montana issuers must limit their crowdfunding efforts to Montana.

• On July 1, Montana businesses became eligible to do Equity/Investment Crowdfunding within Montana, joining 25 other states.

• Investment based on-line models: AngelList, WeFunder, issuer’s own website; etc. (currently only available to accredited investors)

Accredited Investor

• Net worth exceeds $1,000,000 (excluding the value of the primary residence) OR

• Annual income exceeds $200,000 (or $300,000 jointly with a spouse) OR

• An entity such as a bank, insurance company, corporation or trust with assets in excess of $5,000,000

CSI is aware that equity crowdfunding has been happening illegally for a long time. It looks like

this…

Cindy wanted to buy this farm and grow potatoes.

Cindy needed money to hire help.

She needed money for irrigation.

She needed money for buildings too, so she went to the bank.

The bankers all laughed at Cindy. They laughed hard.

Cindy turned to friends and family…

for capital to grow….unwittingly entering the area of Securities Regulation.

Types of Securities

• Debt securities - raise money by obtaining loans from investors.

• Equity securities – raise money by selling ownership interest in your company.

Cindy sold equity securities, raised potatoes, made money, broke securities law but did not get

in trouble. Why?

Crowdfunding in Montana

• CSI helped write the bill to allow intrastate (only in Montana) crowdfunding. It was passed unanimously by the 2015 legislature and became effective July 1, 2015.

• There is a 5 page application form on our web site which must be completed and submitted with a $50 filing fee 10 days prior to any solicitation for money OR 15 days after the first unsolicited sale of the security.

Requirements of the new crowdfunding law:

• The issuer (seller) can raise $1 million from Montana investors in any 12 month period.

• Investors can invest up to $10,000 in the offering.

• Accredited investors can invest an unlimited amount in the offering.

• The issuer must be a Montana business.

• You must comply with all state laws, including proper registration for your company with the Montana Secretary of State www.sos.mt.gov

• Money collected must be deposited into a Montana accredited bank and used only for the purpose(s) stated to investors.

• People must invest for “investment purposes” which means they intend to hold the investment for at least 2 years versus speculative intentions.

• No commission is paid to issuer unless the issuer uses a registered broker-dealer to sell the investment.

More requirements of the new crowdfunding law:

• Provide the identity and contact information of all individuals involved in the sale of the security on behalf of the issuer.

• The issuer must affirm the crowdfunding exemption outlined in Montana Code Annotated 30-10-105(22) is the exemption being used and no other exemptions.

• Issuer must comply with all anti-fraud provisions.

Even more requirements of the new crowdfunding law:

• The issuer is an investment company, investment advisor, a person convicted within the past 10 years, or barred from financial transitions by a government authority.

• The business plan is vague. The issuer must have a specific, well defined purpose and plan for the company.

The crowdfunding exemption will NOT work if…

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• The crowdfunding exemption is only an exemption from securities law registration requirements. It does not change the securities law disclosure requirements.

• The requirements of both federal and state securities laws regarding disclosures, including disclosures of all material facts and risks to investors, remains in place.

Don’t discount disclosure

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• If you do not comply with disclosure requirements, you and your business may have committed securities fraud and be subject to private lawsuits as well as administrative or criminal enforcement actions. Full disclosure is the best way for a business to protect itself.

The benefits of full disclosure

• Description of the security• Description of the issuer• Risks associated with the issuer and the investment• Names and salaries of company officers• The company’s capitalization• Long-term debt and other securities outstanding• Estimated net proceeds to be received in the offering• How the proceeds will be used• And more…anything material…full disclosure protects

everyone and is required by Montana law

Examples of what may be considered full disclosure

Beware: Investing in early stage companies is inherently risky

U.S. Small Business Administration: 50% of small businesses fail in the first five years*

Not a law…just advice… Don’t go it alone.

The crowdfunding exemption is meant to lower your capital-raising costs by exempting $1 million or less capital formation efforts from registration.

Small businesses using this exemption still need legal guidance as to how to comply with the Montana law.

Issuers need to consider speaking with an attorney to help with the offering and should contact the CSI for assistance prior to conducting an offering.

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• Having hundreds of “owners” may distract the company’s management from devoting the time and energy that is necessary to run a successful business.

• Venture capital companies or private equity funds may be less inclined to invest in a company that already has a crowd of small investors.

Potential crowdfunding pitfalls

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• Consider your funding alternatives. Crowdfunding may be less expensive than doing a public offering of securities, but it could be more expensive than other alternatives.

Crowdfunding is a new option for small businesses but there are other options.

A speedy overview of other exemptions

• MCA § 30-10-104: Exempt Securities• MCA § 30-10-105: Exempt Transactions• MCA § 30-10-105(8)(a): Exempt Securities

offer to not more than 10 investors• MCA § 30-10-105(8)(b): Exempt Securities

offer to not more than 25 investors

• MCA § 30-10-105(22): Exempt Securitiescrowdfunding exemption

Federal Reg D exemption

Rule 506 (b) – ban on general solicitation, unlimited accredited investors and 35 nonaccredited investors

Rule 506 (c) – eliminates ban on general solicitation as long as all participating investors are accredited.

MCA § 30-10-211(b) – Montana’s notice filing requirement for Rule 506 filings

Rule 506

• Most securities sold in this country are done using Regulation D, Rule 506, a federal exemption.

• Nearly $1 trillion annually is raised nationally.

• Beware of ‘bad actors’ disqualification – it could bar you from using this offering type.

• Federal exemptions require notice filing of Form D with the state regulator within 15 days of the sale.

Office of the Montana State Auditor, Commissioner of Securities and Insurance

Commissioner of Securities & Insurance, Office of the Montana State Auditor840 Helena Ave Helena, MT 59601

Main: 406-444-2040Toll Free: 800-332-6148Web: csimt.gov

Lynne Egan, Deputy Securities CommissionerDirect: 406-444-4388

Credits

• North American Securities Administrators Association, www.nasaa.org

• U.S. Small Business Administration, www.sba.gov

Crowdfunding

Lynne Egan, Deputy Commissioner of Securities

Jesse Laslovich, Chief Legal Counsel