A new Maine Crowdfunding rule from the Maine Office of Securities went into effect January 1 and is sparking lots of interest.
For many people, the word “crowdfunding” conjures up images of campaigns to raise money through video clips on Kickstarter, Indiegogo or other popular crowdfunding platforms (referred to here generically as “Kickstarter”). How does Maine Crowdfunding under the new rule compare to Kickstarter? Though there are some similarities, there also are many differences. Here are some highlights to illustrate the point.
Eligible Businesses. Most any for-profit business, wherever located, can conduct its own Kickstarter campaign. Maine Crowdfunding presently is available only to entities that have their principal place of business in Maine.
Dollar Limits. Like Kickstarter, Maine Crowdfunding allows a business to raise cash from large numbers of people. However, the rule regulates both the size of the offering (not more than $1 million in 12 months) and the amount any one person can provide (not more than $5,000 in 12 months, except for “accredited investors”).
Benefits Offered to Participants. Unlike typical Kickstarter campaigns, Maine Crowdfunding allows a business to promise participants a potential financial return (whether in the form of equity or debt or some combination of both). Offerings of equity or debt instruments are heavily regulated by state and federal securities laws. Accordingly, those pursuing Maine Crowdfunding must pay close attention to the legal conditions imposed.
Location of Participants. Kickstarter does not impose geographical limitations on where participants are located, and thus funds can be drawn from people around the country or even around the world. The Maine Crowdfunding rule allows sales of equity or debt instruments only to Maine residents, and extending the offering outside Maine to people in other states raises complex legal issues.
Mandatory Written Disclosures. Unlike Kickstarter, Maine Crowdfunding requires the business to prepare and circulate a written document (called an “Offering Circular”) as disclosure for prospective investors. The rule specifies minimum content, which includes:
- A detailed business plan;
- At least the prior year’s financial statements, audited or reviewed by a Certified Public Accountant or (for small offerings of only $100,000 or less) last year’s tax returns for the business;
- A discussion of risk factors facing the business and investors; and
- Other standard disclosures, in a Q&A format.
The Offering Circular (along with certain other documents) must be filed with and pre-cleared by the Maine Office of Securities before any offering activities can begin. If the disclosures in the filed document are amateurish, incomplete or misleading, the review by regulators likely will not go well, and the offering will (at a minimum) be delayed.
Publicizing the Offering. The Maine Crowdfunding rule allows the business much latitude in publicizing its offering. Use of a Kickstarter-style video solicitation is permitted, but not required. The rule also allows, but does not require, use of a Kickstarter-like web portal to communicate with prospective participants/investors. As with Kickstarter campaigns, Maine Crowdfunding offerings may make liberal use of social media to generate publicity for the offering. Publicity content must meet strict legal standards for truthfulness and must not be inconsistent with disclosures contained in the Offering Circular.
Minimum Target Amount; Mechanics of Payment. Kickstarter and the Maine Crowdfunding rule both require the business to specify a minimum funding target. Kickstarter controls the payment account through which participants’ funds are collected, and does not release funds to the business unless the specified minimum target is achieved. The Maine Crowdfunding rule similarly requires that the funds paid by investors be “impounded” until the minimum is achieved, but payment is handled through a bank selected by the business.
Fees. Kickstarter does not impose an upfront fee to set up an account but does charge 5% on all funds raised if the campaign meets its minimum target. For a Maine Crowdfunding offering, the Maine Office of Securities charges a flat fee of $300 at the time the filing is first made, regardless of the amount sought or (ultimately) raised. In addition to the Maine Office of Securities filing fee, a business may incur legal fees, accountant fees and other administrative costs in connection with the preparation and filing of the Officer Circular.
BOTTOM LINE: Maine Crowdfunding differs from Kickstarter in many important ways, but provides a relatively simple and flexible process that allows a Maine-based business to raise investment capital from large numbers of Maine residents through widespread publicity.