A bill that received preliminary approval Thursday in the state Senate would allow all Mainers, even those of modest means, to get into the game of investing in local startups and small businesses.
The bill, L.D. 1512, “An Act To Increase Funding for Start-ups,” now moves to the House for its initial approval. If successful, it would then return to the Senate for enactment.
The proposed measure would allow small businesses in Maine to raise up to $1 million by advertising and selling company shares to Maine residents, even those who do not meet federal “accredited investor” standards.
Businesses seeking investors would be able to advertise publicly on “crowd investing” websites such as Wefunder.com, which allows registered users to invest as little as $100 in the startup of their choosing.
L.D. 1512 would prohibit the companies offering shares from selling more than $5,000 worth per year to any single investor. The bill only would apply to investment activity between companies and investors located in Maine.
Its sponsor, Senate President Justin Alfond, a Democrat from Portland, said the bill’s purpose is to make it easier for small businesses in Maine to raise capital while giving residents a chance to invest in high-growth potential firms.
“With this bill, we have a unique opportunity to support entrepreneurs, increase investing opportunities for more Maine people, and be a national leader in turning ideas into jobs,” Alfond said. “This bill is a win-win.”
Prior to April 2012 when the federal Jumpstart Our Business Startups Act, or JOBS Act, was approved, advertising and selling shares in a private company to non-accredited investors was a violation of federal law.
The Securities Act of 1933 established criteria for what it called an accredited investor, including a net worth of at least $1 million or annual income of at least $200,000. The point was to protect people of modest means from losing all of their money in a risky business venture.
The JOBS Act created an exception for relatively small investment amounts. It allows companies to publicly advertise and sell $2,000 to $5,000 worth of shares per person to investors earning no more than $100,000 a year. The limits are $2,000 or 5 percent of the investor’s annual income, whichever amount is greater.
Investors earning $100,000 per year and up may invest up to $100,000 or 10 percent of their annual income, whichever is less, in a private venture.
However, the crowd investment activity authorized by the JOBS Act remains suspended until the U.S. Securities and Exchange Commission approves a set of proposed rules by which shares can be advertised and sold.
Without such rules, investors could face the risk of losing their money to fraudulent schemes, regulators have said.
The SEC has missed multiple deadlines to approve the new rules. On Oct. 23, it finally issued a set of proposed rules that some investment experts say are overly complex and would be prohibitively expensive for most startup companies to follow.
The federal rules do not preclude states from creating their own, with the proviso that a state’s rules only supersede the federal ones if the company issuing the shares and the investor buying them are both located in that state.
In other words, Mainers investing in an out-of-state business and Maine-based companies seeking investors outside the state would still be subject to the SEC rules.
Jess Knox, state innovation hub leader for Blackstone Accelerates Growth, a non-profit economic development initiative, said the authors of L.D. 1512, which included state Securities Administrator Judith Shaw, have done a good job of balancing the need to create more job opportunities in Maine with the need to protect investors from negligence and fraud.
“I think there are adequate protections in that bill,” Knox said. “I think the bill itself is a great opportunity for Maine.”
J. Craig Anderson can be contacted at 207-791-6390 or at:
CORRECTION: This story was updated at 7:20 p.m. on Friday, Feb. 7, 2014 to correct the amount of money small businesses would be allowed to raise under the proposal.