Starting January 1, 2015, businesses in Maine have a new crowdfunding alternative for raising capital. Maine Office of Securities (“MOOS”) Rule 523 – entitled “Rule Regarding Short-Form Seed Capital Registrations” – provides a relatively simple route for selling up to $1 million of equity or debt per year over Internet social media sites, through Internet advertising, using a securities broker-dealer, or on the company’s own website.

The new rule requires prior filing and clearance by MOOS before any offer or sale may be made. That filing includes a company business plan, a set of prior-year financial statements and Q&A disclosures covering a range of topics. This is a simpler set of filings than would be required for other registered offerings in Maine. However, there are some conditions. Importantly, the rule imposes a $5,000 limit on purchases per person per year unless the purchaser qualifies as an “accredited investor.” All subscription proceeds must be deposited with a bank until a company-specified minimum dollar amount has been raised. Sales outside of Maine will often be impractical, due to other states’ securities laws.

To our knowledge, no filings under this rule have yet been made with MOOS, so how Maine companies will make use of the new crowdfunding rule remains unclear. However, if you think your business might be interested in raising capital through this new route, here are a few steps you might take to help you prepare:

  • Refine your business plan – The business plan is an important piece of the filing with MOOS. A professional and intelligent business plan can help increase the chances that a crowdfunding campaign will be successful. More importantly, however, thinking through your business plan will help you decide how much financing you need to raise and whether crowdfunding is the right route.
  • Get a CPA involved early – Be sure to consult with a qualified CPA to assist you with the preparation of your company’s financial statements. For offerings that are more than $100,000 the business will need to file and disclose a set of financial statements for the most recent completed year that have either been reviewed or audited by an independent public accountant. This is not something to be done at the last minute. In fact, involvement of the CPA a year in advance can be quite helpful.
  • Consider the form of security that will be offered – When deciding on the type of security that will be offered through crowdfunding, you must keep in mind the need for future capital and how crowdfunding might constrain your company in the future. A successful campaign could result in hundreds of new holders, which could be a headache to administer and a headache to own. It therefore is important to consult with a knowledgeable business lawyer to design the security in such a way that investment will not drive the company or the investor crazy. A company likely does not want huge numbers of voting shareholders, and an investor likely does not want a security that significantly complicates his or her income tax returns. Depending on the type of entity, the proper design of the security might not be obvious – hence the need for competent counsel.

As discussed in a previous article, some companies will be better candidates for crowdfunding than others. There is no point engaging in this type of offering unless your company is one that will have broad appeal and support. But if yours is the type of company that can inspire excitement or trust among a broad swath of potential supporters, this new crowdfunding rule can help you raise significant capital in new and interesting ways.

Because the disclosure requirements of the rule are relatively simple, some companies will be tempted to “bootstrap” an offering on their own, with little outside assistance, especially if the company is a startup with no prior year financial history to disclose. However, offerings of stock and other securities are heavily regulated under both federal and state laws, and it is not yet clear what level of review MOOS will impose on these offerings. Given the current uncertainties and lack of a reliable track record for these offerings, those considering crowdfunding under the new Maine rule are encouraged to talk to a lawyer knowledgeable about securities laws and to take appropriate steps to plan for a successful offering.