Local Investment Made Easy (LIME) Act

Local Investment Made Easy (LIME) Act

Summary

Investment crowdfunding—raising money through small contributions from a large number of investors—provides start-ups and smaller enterprises with access to the capital they need to start new business ventures. It also provides the public with the opportunity to invest in ideas, people and businesses in their community, which fosters economic growth and job opportunities for the state. The Local Investment Made Easy Act facilitates intrastate investment crowdfunding by creating an exemption in state securities law that allows for the crowdfunding of projects within the state. The Act also establishes protections for investors and the public through disclosure requirements, issuer caps and investment limits.

Model Policy

{Title, enacting clause, etc.}           

To amend relevant sections of [insert state name] securities law to provide for an exception for certain investments.

BE IT ENACTED BY THE LEGISLATURE OF [INSERT STATE NAME]:

To amend Sections XX of the Code of XX by adding the following

Section 1. {Exemption.}

(A)  Except as otherwise provided in this Act, an offer or sale of a security by an issuer is exempt from state securities law if the offer or sale is conducted in accordance with each of the following requirements:

(1) The issuer of the security is a business entity formed under the laws.

(2) The transaction meets the requirements of the federal exemption for intrastate offerings in section 3(a)(11) of the Securities Act of 1933, 15 U.S.C. § 77c(a)(11), and SEC rule 147, 17 C.F.R. § 230.147.

(i.) A person’s agreement to purchase or the purchase of, a security pursuant to this act is considered a representation that the person is a resident of this state at the time that agreement is made, and if this representation is subsequently shown to be false, the agreement for the sale of the security is void.

(ii.) Each of the following is prima facie evidence that an individual is a resident of this state:

2. A current state voter registration.

3. A signed affidavit as described in the tax code of the state, that indicates that the purchaser owns and occupies property in this state as his or her principal residence.

4. An approved mortgage application indicating this state as his or her principal residence.

5. Any government issued identification or other record or documents issued by this state or the federal government that establishes that the purchaser’s principal residence is in this state.

(iii.) If an agreement to purchase, or the purchase of, a security is void under subsection (i) of this subsection, the issuer of the security may recover damages from the misrepresenting investor. These damages include, but are not limited to, the issuer’s expenses in resolving the misrepresentation. However, damages described in this subsection shall not exceed the amount of the person’s investment in the security.

(3) The sum of all cash and other consideration to be received for all sales of the security in reliance upon this exemption does not exceed the cap provided in this subsection:

(i.) One million dollars ($1,000,000), less the aggregate amount received for all sales of securities by the issuer within the 12 months before the first offer or sale made in reliance upon this exemption, if the issuer has not undergone and made available to each prospective investor and the administrator audited financial statements or reviewed financial statements for the issuer’s most recently completed fiscal year, prepared by a certified public accountant.

(ii.) Two million dollars ($2,000,000), less the aggregate amount received for all sales of securities by the issuer within the 12 months before the first offer or sale made in reliance upon this exemption, if the issuer has undergone and made available to each prospective investor and the state securities administrator audited financial statements or reviewed financial statements for the issuer’s most recently completed fiscal year, prepared by a certified public accountant.

(4) The issuer has not accepted more than ten thousand dollars ($10,000) from any single investor unless the investor is an accredited investor as defined by rule 501 of SEC regulation D, 17 C.F.R. § 230.501.

(5) Notice Filing Requirements: Not less than 10 days prior to the commencement of an offering of securities in reliance on this exemption or the use of any publicly available website in connection with any such offering, the issuer shall file a notice with the state securities administrator, in writing or in electronic form as specified by the state securities administrator, containing the following:

(i.) A notice of claim of exemption from registration, specifying that the issuer will be conducting an offering in reliance upon this exemption, accompanied by the filing fee as specified in subsection (F) of this Act.

(ii.) A copy of the disclosure statement to be provided to prospective investors in connection with the offering, containing the following:

  1. A description of the issuer, including its type of entity, the address and telephone number of its principal office, its history, its business plan, and the intended use of the offering proceeds, including any amounts to be paid, as compensation or otherwise, to any owner, executive officer, director, managing member, or other person occupying a similar status or performing similar functions on behalf of the issuer.
  1. The identity of each person owning more than ten percent (10%) of the ownership interests of any class of securities of the issuer.
  1. The identity of the executive officers, directors, managing members, and other persons occupying a similar status or performing similar functions in the name of and on behalf of the issuer, including their titles and their prior experience.
  1. The terms and conditions of the securities being offered and of any outstanding securities of the issuer, the minimum and maximum amount of securities being offered, if any, and either the percentage ownership of the company represented by the offered securities or the valuation of the issuer implied by the price of the offered securities.
  1. The identity of any person who has been or will be retained by the issuer to assist the issuer in conducting the offering and sale of the securities, including any websites, but excluding persons acting solely as accountants or attorneys and employees whose primary job responsibilities involve the operating business of the issuer rather than assisting the issuer in raising capital, and for each person identified in response to this paragraph, a description of the consideration being paid to such person for such assistance.
  1. A description of any litigation or legal proceedings involving the issuer or its management.
  1. The name and address of any website that the issuer intends to use in connection with the offering, including the URL of any website that will be used in connection with the offering. If the issuer has not engaged a website described in this subsection at the time the issuer files the disclosure statement described in this subsection with the state securities administrator but subsequently does engage a website for use in connection with the offering, the issuer shall provide the information described in this subsection to the state securities administrator by filing a supplemental notice.

(iii.) An escrow agreement with a bank or other depository institution in which the investor funds will be deposited, providing that all offering proceeds will be released to the issuer only when the aggregate capital raised from all investors is equal to or greater than the minimum target offering amount specified in the business plan as necessary to implement the business plan and that all investors may cancel their commitments to invest if that target offering amount is not raised by the time stated in the disclosure document.

(6) The issuer is not, either before or as a result of the offering, an investment company, as defined in section 3 of the Investment Company Act of 1940, 15 U.S.C. § 8a-3, or an entity that would be an investment company but for the exclusions provided in section 3(c) of that Act, or subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m and 78o(d).

(7) The issuer shall inform all prospective purchasers under this Act that the securities have not been registered under federal or State securities law and that the securities are subject to limitations on resale. The issuer shall display the following legend conspicuously on the cover page of the disclosure document:

“IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED BY SUBSECTION (E) OF SEC RULE 147, 17 C.F.R. § 230.147(E) AS PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.”

(8)  The issuer shall require each investor to certify in writing “I understand and acknowledge that:

(i.) I am investing in a high-risk, speculative business venture. I may lose all of my investment, and I can afford the loss of my investment.

(ii.) This offering has not been reviewed or approved by any state or federal securities commission or other regulatory authority and that no such person or authority has confirmed the accuracy or determined the adequacy of any disclosure made to me relating to this offering.

(iii.) The securities I am acquiring in this offering are illiquid, that there is no ready market for the sale of such securities, that it may be difficult or impossible for me to sell or otherwise dispose of this investment, and that, accordingly, I may be required to hold this investment indefinitely.

(iv.) I may be subject to tax on my share of the taxable income and losses of the company, whether or not I have sold or otherwise disposed of my investment or received any dividends or other distributions from the company.

(9) If the offer and sale of securities under this Act is made through an Internet website, the following requirements apply:

(i.) Prior to the offer of an investment opportunity to residents of this State through a website, the issuer shall provide to the website and to the state securities administrator evidence that the issuer is organized under [insert state here] law and that it is authorized to do business within the State.

(ii.) The issuer shall obtain from each purchaser of a security under this Act evidence in accordance with Section 1 (ii) that the purchaser is a resident of [insert state here] and, if applicable, an accredited investor and may obtain such information through the website.

(iii.) The website operator shall provide notice with the state securities administrator by filing a statement that it is a business entity that is organized under [insert state] law and that it is authorized to do business within the State and that it is being utilized to offer and sell securities pursuant to this exemption. As part of the registration, the website shall notify the state securities administrator of its and the issuer’s identity, location, and contact information. Beginning 12 months after the date of the written notice, a website operator that has filed a written notice under this subsection shall annually notify the administrator in writing of any changes in the information provided to the administrator under this subsection.

(iv.) The issuer and the website must keep and maintain records of the offers and sales of securities effected through the website and must provide ready access to the records to the state securities administrator, upon request. The state securities administrator may access, inspect, and review any website described in this subsection and its records.

(10) No offers or sales of a security shall be made through a website unless the website provided notice to the state securities administrator pursuant to subsection (A)(9)(iii) of this Act.

(11) The website shall not be subject to the registration provisions of the broker-dealer, investment adviser or investment adviser representative registration requirements of the state if the website meets the following conditions:

(i.) It does not offer investment advice or recommendations.

(ii.) It does not solicit purchases, sales, or offers to buy the securities offered or displayed on the website.

(iii.) It does not compensate employees, agents, or other persons for the solicitation or based on the sale of securities displayed or referenced on the website.

(iv.) It is not compensated based on the amount of securities sold, and it does not hold, manage, possess, or otherwise handle investor funds or securities.

(v.) It does not engage in such other activities as the state securities administrator, by rule, determines inappropriate.

(12) All payments for purchase of securities must be directed to and held by the bank or depository institution subject to the provisions of subsection (A)(5)(iii.) of this Act.

(13) The issuer shall not pay, directly or indirectly, any commission or remuneration to an executive officer, director, managing member, or other individual who has a similar status or performs similar functions in the name of and on behalf of the issuer for offering or selling securities unless he or she is registered as a broker-dealer, investment adviser, or investment adviser representative under [insert applicable state statute]. An executive officer, director, managing member, or person occupying a similar status or performing similar functions in the name of and on behalf of the issuer shall be exempt from the registration provisions required by state law provided that the person does not receive, directly or indirectly, any commission or remuneration for offering and selling securities of the issuer pursuant to this exemption.

(14) The issuer must provide a copy of the disclosure document provided to the state securities administrator pursuant to subsection (A)(5)(ii.) of this Act to each prospective investor at the time the offer of securities is made to the prospective investor. In addition to the information described in subsection (A)(5)(ii.) of this section, the disclosure document provided to the Administrator and to prospective investors should include additional information material to the offering, including, where appropriate, a discussion of significant factors that make the offering speculative or risky. This discussion should not present risks that could apply to any issuer or any offering.

(B) Every fifth year the administrator shall cumulatively adjust each of the following dollar amounts to reflect the change in the Consumer Price Index for all Urban Consumers produced by the Bureau of Labor Statistics:

(1) The dollar limitations in subsection (A)(3)(i.) and subsection (A)(3)(ii.) of this Section, rounding each dollar limitation to the nearest $50,000.00.

(2) The dollar limitations in subsection (A)(4) of this Section, rounding each dollar limitation to the nearest $100.00.

(C) An issuer of a security, the offer and sale of which is exempt under this section, shall provide a quarterly report to the issuer’s investors until no securities issued under this Act are outstanding. The report required by this subsection shall be provided free of charge. An issuer may satisfy the reporting requirement of this subsection by making the information available on an Internet website address if the information is made available within 45 days of the end of each fiscal quarter and remains available until the succeeding quarterly report is issued. An issuer shall file each such quarterly report with the state securities administrator and must provide a written copy of the report to any investor upon request. The report must contain each of the following:

(1) Compensation received by each director and executive officer of the issuer, including cash compensation earned since the previous report and on an annual basis and any bonuses, stock options, other rights to receive securities of the issuer or any affiliate of the issuer, or other compensation received.

(2) An analysis by management of the issuer of the business operations and financial condition of the issuer.

(D) The exemption allowed by this Act shall not apply if an issuer or person affiliated with the issuer or offering is subject to any disqualification established by the administrator by rule or contained in Rule 262 as promulgated under the Securities Act of 1933 (17 C.F.R. § 230.262). The provisions of this subsection shall not apply if:

(1) Upon a showing of good cause and without prejudice to any other action by the state securities administrator, the state securities administrator determines that it is not necessary under the circumstances that an exemption be denied; and

(2) The issuer establishes that it made factual inquiry into whether any disqualification existed under this subsection but did not know, and in the exercise of reasonable care could not have known, that a disqualification existed under this subsection. The nature and scope of the requisite inquiry will vary based on the circumstances of the issuer and the other offering participants.

(E) The state securities administrator may adopt rules to implement the provisions of this Act and to protect investors who purchase securities under this section.

(F) The state securities administrator shall charge a nonrefundable filing fee of one hundred dollars ($100.00) for filing an exemption notice required by subsection (A)(5)(i.) of this Act. The fees paid to the state securities administrator pursuant to this subsection shall be used to pay the costs incurred in administering and enforcing this Act. The revenue derived from the fee shall be credited to a nonreverting agency revenue account.

Section 2. {Severability Clause.}           

Section 3. {Repealer Clause.}

Section 4. {Effective Date.}

 

Approved by the ALEC Board of Directors July 1, 2014.

Keyword Tags: 2014 STFS, Commerce Insurance and Economic Development Task Force, Communications and Technology Task Force