What is crowdfunding?
Crowdfunding is the practice of funding a project or venture by raising small financial contributions from a large number of people. The most well-known types of crowdfunding are internet-based and typically involve a donation instead of an investment. HB 481, passed by the 2015 Montana Legislature, allows a unique kind of Montana-made equity crowdfunding in our state.
Why was legislation needed?
Prior to the passage of HB 481, if a company wanted to solicit investors in Montana, it had to register its securities with the Commissioner of Securities, Montana State Auditor. Registration is a lengthy and expensive process. The new law now exempts Montana-based companies from the securities registration process – including, but not limited to, the following caveats:
- Before soliciting investors, complete an application available on the CSI website and pay a $50 fee;
- All investors must be Montana residents;
- A maximum of $1 million can be raised;
- Investors can invest a maximum of $10,000, however, accredited investors can invest more;
- Businesses must register with the Montana Secretary of State;
- Deposit money into a Montana-accredited financial institution;
- The business must have a specific plan and purpose;
- All material information must be disclosed to the investor;
- Individuals who have been in trouble with the law or regulatory agencies may not raise money under this exemption.
Why cap funding at $1 million?
A Montana business could only crowdfund up to $1 million because federal securities law would require registration beyond this level.
Has this been done elsewhere?
Yes. Some 25 different states have enacted statutes or rules to allow for crowdfunded investments, with several more states currently proposing crowdfunding legislation.
What’s an example of how crowdfunding might be beneficial?
In late 2014, the Montana Movie Factory LLC, a company located in Butte, wanted to raise money for the production of an independent feature film entitled “The Tinderbox.” It needed less than $1 million for the project. In order to avoid the cost and time constraints of a securities registration, it had to rely on an exemption that limited the number of investors it could seek money from to no more than 25 people. It was also prohibited from advertising the offering because the exemption did not allow it.
Due to these constraints, the Montana Movie Factory was only able to raise a fraction of the money it needed. If a crowdfunding exemption had been available, the Montana Movie Factory would have been able to raise up to $1 million from an unlimited number of investors in Montana and those potential investors would have an ownership interest in “The Tinderbox.”