Montana deserves credit for enacting legislation in 2015 that makes it easier for inventors and startup businesses to attract investors by eliminating onerous securities registration requirements for fundraising up to $1 million. Prior to the enactment of this legislation, companies soliciting capital investments from Montana investors were required to undergo a costly and time-consuming securities registration process with the Montana Commissioner of Securities. With the adoption of this legislation, Montana companies seeking to raise money from Montana residents can raise up to $1 million without complying with these requirements.
Although the term "crowdfunding" is not found anywhere in the recently enacted legislation, Montana House Bill 481 amends Mont. Code Ann. § 30-10-105 to provide an exception to the registration and notice filing requirements of Mont. Code Ann. § 30-10-201 et seq. for individual investment transactions not exceeding $10,000. The exception applies only to Montana companies targeting Montana investors, and all funds raised must be deposited with a Montana-based financial institution. Companies seeking to avail themselves of this legislation must have a business plan and complete an Application for Crowdfunding Exemption found here. The application consists of twelve questions and can be completed in about five minutes.
According to the North American Securities Administrators Association, Montana was one of 21 states to have enacted similar crowdfunding legislation as of August 1, 2015, with seven states soon to follow. Only two states—Nevada and Utah—have rejected such legislation.
The term "crowdfunding" refers to the act of soliciting relatively small capital contributions by offering equity or other perks (such as thank-you gifts or other promotions) to investors via the Internet. Historically, people willing to send money via crowdfunding sites were provided with no guarantees that the promises made by the participating companies would be honored, and companies operating crowdfunding websites were typically exempt from liability. These types of transactions were often based solely on the integrity of the individuals involved, and enforcement of breach of contract claims was not practical given the relatively small sums of money involved.
Crowdfunding sites, such as Kickstarter and Indiegogo, set their own rules for participating in their platforms. These rules may involve minimum fundraising requirements, the fees charged by the crowdfunding site, and the types of businesses to which the site caters. For a pithy comparison of four of the top crowdfunding sites, click here.
Transactions involving the receipt of perks such as product samples, discounts, etc. are not as problematic as those that promise investors an equity share in the company. Federal and state securities laws and regulations require a certain level of disclosure on the part of the company and a certain level of sophistication on the part of the investor; however, with the advent of Internet-based crowdfunding, companies and investors alike sought a simpler way to facilitate early and relatively small investment transactions.
For this reason, the federal government passed the Jumpstart Our Business Startups (JOBS) Act in 2012, and states followed with the enactment of crowdfunding exemption legislation. The intent of the JOBS Act was to ease various securities regulations pertaining to small businesses. The U.S. Securities and Exchange Commission adopted its final rules relative to equity crowdfunding last October, and these rules went into effect on May 16, 2016. For a copy of the SEC's final rule, click here and scroll down to 33-9974. It remains to be seen how the federal regulations will affect the crowdfunding legislation already passed in numerous states, but it is important to keep in mind that companies seeking investment outside of the state in which they are incorporated must comply with federal securities regulations.
