On April 5th, President Obama signed the CROWDFUND Act into law, allowing anyone - regardless of wealth - to invest at least $2000 into the startups they care about. Startups will be able to raise up to $1 million dollars from an unlimited number of investors, across all states. They'll also be able to advertise their fundraising efforts to the general public.
Unfortunately, the SEC will not implement the CROWDFUND Act until early 2013. So crowd investing - as described above - is still illegal.
We've heard from a lot of startups that are excited to start raising capital from the crowd, today. So we met up with our very expensive lawyers, consumed lots of Red Bull, and hashed out how to implement crowd investing under current law. The hard part was minimizing compliance costs to keep the fundraising practical and affordable for small fundraising amounts... but we did it.
While crowd investing is now possible, there are important limitations:
For your lawyer: The offering must also be "private" for purposes of federal law. http://taft.law.uc.edu/CCL/33Act/sec4.html
With that out of the way, here's some guidelines on compliance. First, all the states have a ban on advertising and general solicitation. Each state has their own legal code that handles offerings of securities.
For your lawyer: Have them review California Corporations Code section 25102(f)
New York requires three forms be filed before any offering is directed to New York residents. You cannot start your offering until your registration is approved.
For your lawyer: Have them review New York's Securities Registration Information
Massachusetts does not require any forms to be filed or fees to be paid.
However, there is an additional wrinkle: there is a limit of 10 investors who are residents of MA. Also, unlike other states, the cap of 10 includes accredited investors who are located in MA (in this offering). If you want more than 10 accredited investors from MA, you'll have to wait for a future offering.
If you've reached your cap of 10 MA investors, you can have 25 unaccredited investors - and unlimited accredited ones - in the other states.
For your lawyer: Have them review MA Section 402. (a) and 950 CMR 14.400:
Put simply, an accredited investor makes over $200,000 a year (if filing individually) or has over $1 million in assets. For more detail, read the Longer Definition.
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