Crowd funding comes in many varieties, with a few being more popular than others. You probably know someone who has participated in the reward model, where individuals contribute toward a project in exchange for a small token of appreciation – think a movie poster or t-shirt. Kickstarter and Indiegogo are two popular reward crowd funding Internet platforms. Kickstarter proudly touts that since its launch in 2009, 8.4 million people have pledged more than $1.7 billion toward 83,000 projects. Indiegogo claims it has assisted with over 275,000 campaigns since its launch in 2008, and that at any time it has over 7,000 active campaigns. A similar “feel good” model facilitates a donation to a charity or cause with the giver receiving nothing in return. Think back to last summer’s ALS Ice Bucket Challenge as a widely popular example of this model.
The variety gaining the most attention in the start-up world is the equity model, where individuals still contribute toward a project but this time in exchange for an equity position in the company trying to raise funds (the “Offerer”). Traditionally this type of fundraising involved the Offerer having to comply with complex state and federal security laws and the preparation of complex offering memorandums. Thanks to the 2012 JOBS Act in certain situations those requirements are being relaxed.
JOBS created a new federal exemption to the formal registration of securities and allowed small businesses to raise money through offerings conducted over the Internet. The Securities and Exchange Commission was charged with adopting rules to implement this new method, but it has yet to formally adopt those rules. Believing that simplified fundraising could be a real game changer, several states have adopted their own rules. It should then come as no surprise that our Secretary of State, who is building a legacy of doing great things to encourage business development in Mississippi, has taken steps to allow crowd funding here.
On February 9, 2015, the Mississippi Secretary of State proposed two new administrative rules to allow Mississippi businesses to utilize crowd funding. Barring any objections, these rules are expected to become effective at the end of May. Generally speaking, the rules provide parameters on how much an offerer can attempt to raise, who may invest and how much an investor may contribute. A few absolutes include that the offerer must be a Mississippi entity and the funds collected must be escrowed with a local bank in Mississippi, where they must remain until at least half of the offering amount has been secured. The offerer will also be required to complete an online registration statement with the Secretary of State. To help ensure compliance with applicable state and federal disclosure requirements, in a “step-by-step” format the online form addresses many of the topics that a traditional offering memorandum would address. Offerer’s are cautioned to take the online registration serious because even in this informal format, all responses must be complete, accurate and information must be truthful in terms of the nature of the project and how the funds will be used. Failure to meet appropriate disclosure rules can result in civil, administrative and/or criminal actions for fraudulent, misleading or unregistered activity.
Finally, it is important to note that the Secretary of State will not actually conduct the offering. The offerer will need to engage the services of a broker dealer, bank or website operator to design the Internet portal and to conduct the offering. The portal operator must be registered with the Secretary of State, so the offerer should do its due diligence and confirm that the registration is in place.
If crowd funding seems like something that might be helpful to your business, here are a few big things you need to know:
1. Limits on the ask – participants and amounts to be raised:
a. Proposed Rule 2.04 addresses offerings to both Mississippi and out-of-state residents and sets the offering limit at $1 million.
b. Proposed Rule 7.21 addresses offerings limited to Mississippi residents and sets the offering limit at $1 million ($2 million if certified financial statements are provided).
2. Caps on contributions – under both rules the amount of money a potential investor may contribute to an offerer is capped based on widely recognized investor categories, defined by the SEC and which are tied to specific and measurable income, net worth and sophistication levels.
a. Qualified Investors face no caps
b. Accredited Investors face a cap of 10 percent of their net worth or annual income, not to exceed $50,000; and
c. Non-Accredited Investors face a cap of 5 percent of their net worth, 5% of annual income or $5,000, whichever is greater.
When you consider how much business is conducted over the Internet and how the Internet has removed barriers by allowing people immediate access to information and therefore the ability to participate in new opportunities, it only makes sense that the Internet would be utilized in a way to connect small businesses in Mississippi with potential investors.
» Wendy Mullins is Counsel in the Jackson office of Bradley Arant Boult Cummings LLP as a member of the Corporate & Securities practice group where she assists clients with corporate projects arising along the lifeline of every company. Wendy was previously in-house with SkyTel which is where her love of working with “idea people” really started. Today she works hard to help her clients strike the right balance between legal requirements and business demands.
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