A measure allowing Maine businesses to raise up to $1 million through “crowd investing” became law Monday.

The bill, L.D. 1512, “An Act To Increase Funding for Start-ups,” was approved overwhelmingly in both the House and Senate last month and allowed to take effect without the usual wait.

Additional Photos

Shutterstock.com

The measure allows 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 now can 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.

The law prohibits the companies offering shares from selling more than $5,000 worth per year to any single investor. It only applies to investment activity between companies and investors located in Maine. A similar, federal law governs crowd-investment activity that crosses state lines, but the specific rules of conduct have yet to be approved by the U.S. Securities and Exchange Commission.

The Maine law’s sponsor, Senate President Justin Alfond, a Democrat from Portland, said its purpose is to enable small businesses in Maine to raise capital while giving residents a chance to invest in firms with high-growth potential.

“Maine is a great place to start a business. This new law will support entrepreneurs and increase investing opportunities for more Maine people,” Alfond said in a written statement. “Maine can be a national leader in turning great ideas into great jobs.”

As a result of the law’s passage, any Maine-based business interested in crowd investing can register with the state Office of Securities and sell small amounts of equity to individual investors. The business must set a target amount to raise of no more than $1 million, along with a hard deadline to raise it by. If the business owners do not raise the target amount by the set deadline, all of the contributed money must be returned to the investors.

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 allowed investment amount is based on the investor’s annual income.

Investors earning $100,000 per year or more may invest up to 10 percent of their annual income, with a maximum limit of $100,000.

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.

J. Craig Anderson can be contacted at 207-791-6390 or:

canderson@pressherald.com

Twitter: jcraiganderson