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How Massachusetts Is Leading The Way In Title III Crowdfunding

The Commonwealth joins approximately 15 other states in their decision to pass Title III Crowdfunding at the state-level, despite the reluctance of the U.S. Securities and Exchange Commission (SEC) to approve it nationally.
How Massachusetts Is The Leading The Way In Title III Crowdfunding - Lioness Magazine
Map courtesy of Anthony J. Zeoli

The Massachusetts Securities Division has adopted an emergency regulation permitting intra-state crowdfunding offerings. The Commonwealth joins approximately 15 other states in their decision to pass Title III Crowdfunding at the state-level, despite the reluctance of the U.S. Securities and Exchange Commission (SEC) to approve it nationally.

The Crowdfunding Exemption is designed to foster job creation by helping small and early-stage Massachusetts companies find investors and gain greater access to capital with fewer restrictions.

“Title III Crowdfunding will allow investors (who have less than $1 million in net worth – which is most working class Americans) to invest in businesses online and gain equity shares in companies,” Kimberley Brown, senior account manager at LeveragePR, said. “This opens the doors for many Americans [in Massachusetts] to be able to invest and gain wealth through equity investing online, and, it opens the doors for small businesses to gain access to more investors, since they won’t just be limited to investors who have a net worth of $1 million or more.”

Title III is part of the JOBS Act President Barack Obama signed into law three years ago. The SEC did not meet its initial deadlines to set regulations for Title III and now has set October 2015 as a target date, though sources say even with that deadline it will be until 2016 before small businesses are able to take advantage of the legislation.

Judd Hollas, CEO of EquityNet and an expert on crowdfunding, believes Title III will have a positive effect on businesses and investors in Massachusetts.

Hollas explained that in the past banks have been the intermediaries between people who have money and people who need to borrow money. He said crowdfunding takes out the middleman and allows entrepreneurs to interact directly, through online marketplaces such as EquityNet, with investors who have money to help them advance their businesses.

“What crowdfunding does is it brings together such large populations of entrepreneurs and investors all online into a marketplace to where the size of the Rolodex now is literally thousands of times greater [than in traditional funding],” Hollas said.

EquityNet has more than 60,000 registered entrepreneurs and investors that interact using their system and Hollas has seen quite the rise in female-owned businesses. Traditionally, women receive only 2 percent of total funding from outside equity. Hollas said that when it comes to crowdfunding, that number rises to 20 percent.

“What it really tells you is that crowdfunding is the great equalizer, it really is leveling the playing field for minorities and female-owned businesses,” Hollas said.

On the topic of why the SEC has thus far denied Title III Crowdfunding nationally, Hollas commented that it is not uncommon for new financial laws and regulations to take several years to be passed, so it is possible that the law is still on its way to that point. However, within the Massachusetts economy at least, the law will allow capital to be more accessible to new, growing businesses and will lead to employment growth as well.

Investor Paul Silva, of River Valley Investors, agreed that crowdfunding initiatives have numerous benefits for entrepreneurs. “Crowdfunding proves [a business] is worth paying attention to,” he said. “I predict in the future investors will ask businesses to link to a successful crowdfunding campaign, and if they can’t, don’t bother.”

Brian McNiff, spokesperson for the office of Secretary of the Commonwealth William Francis Galvin, said Massachusetts went ahead with adopting regulation because the SEC has been “playing around with it for some time now.”

He explained the exemption also provides necessary investor protections by requiring key disclosures to stave off violations of securities laws and financial fraud.

“It will be a benefit to entrepreneurs because investors will have more confidence that there are rules [in place]. They are more inclined to not only look into the undertaking but to put money in them,” McNiff said.

The state is hosting a crowdfunding public hearing on the intra-state regulations on March 24 at the Massachusetts Securities Division in Boston.

Read on for the summary and highlights of the Massachusetts Crowdfunding Exemption:

The Crowdfunding Exemption permits Massachusetts companies to raise capital from Massachusetts’s investors in intra-state securities offerings. The exemption is designed to be used for offerings over the Internet that will typically raise capital from numerous investors, each of whom will invest a limited amount of money.

The Crowdfunding Exemption is available to a range of Massachusetts business entities, including corporations, limited liability companies (LLCs), and limited liability partnerships (LLPs).

Companies may offer equity or debt securities under the Crowdfunding Exemption.

Companies may raise up to $1 million in a 12-month period, and up to $2 million if the company has audited financial statements.

Investors may purchase an amount of securities that is the greater of $2,000 or 5 percent of their annual income or net worth if both their income and net worth are less than $100,000, or up to 10 percent of their income or net worth if their income or net worth are equal to or more than $100,000, with an investment limit of $100,000.

No commission or fee may be paid to any person for soliciting a transaction under the Crowdfunding Exemption unless that person is registered as a broker-dealer or agent in Massachusetts.

Issuers shall specify a minimum-offering amount to be raised under the Crowdfunding Exemption. Until the minimum offering amount is reached, investor funds must be held at an insured Massachusetts’s depository institution.

The Crowdfunding Exemption is not available to certain types of issuers: blind pool and blank check offerings; investment companies; hedge funds, commodity pools, and similar investment vehicles; and businesses involving oil and gas exploration or production, mining, or other extractive industries.

The Crowdfunding Exemption is tied to the federal intra-state offering exemption provided under Section 3(a)(11) of the Securities Act of 1933 and S.E.C. Rule 147. Issuers will be responsible to make sure their transactions meet the requirements of those federal exemptions. Offerings that fail to meet the requirements of those exemptions will lose the federal exemptions, and as a consequence would also lose the benefit of the Massachusetts Crowdfunding Exemption.

The Crowdfunding Exemption requires issuers to provide full and fair disclosure of material facts relating to the company and the offering, including a description of the company and the planned use of proceeds of the offering, as well as the risks involved.

The Crowdfunding Exemption requires all issuers to provide a disclosure that the offering is not registered under federal and state law. Issuers are also required to provide written disclosure of the limitations on the resale of securities that are purchased pursuant to the exemption provided by S.E.C. Rule 147.

The Crowdfunding Exemption is not available for issuers whose officers, directors, or major shareholders have been found to have violated the securities laws or other financial regulations, or have committed other types of misconduct or fraud.

stephanieSteph Elizondo is an intern at Lioness. The 21-year-old Western New England University (WNEU) junior is an English-Literature major. She is the Editor-in-Chief of the literary magazine at WNEU, as well as a staff writer for the school’s newspaper. She enjoys writing stories and poetry creatively, as well as essays and articles professionally. She hopes to become a professional writer and editor.

Additional reporting  by Natasha Clark.

About the author

Natasha Zena

Around age eight Natasha Zena was told it was a woman’s job to take care of the home and since then she has built a career out of telling women they can do whatever the hell they want to do. She is the co-founder of Lioness, the digital magazine for female entrepreneurs, and the first media outlet solely dedicated to helping women launch and scale high-growth startups. Natasha was recognized as an emerging leader in digital media by The Poynter Institute and the National Association of Black Journalists. She has mentored women entrepreneurs at a number of accelerators, Startup Weekends and conferences, including The Lean Startup Conference in San Francisco, Calif. Natasha is also the author of the popular whitepaper, "How To Close The Gender Gap In Startup Land By 2021." In her spare time, she writes short fiction and hangs out with her son, Shaun.

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