Funding the American Dream

By Commissioner Troy Downing

There is a lot of confusion about when an investment in a company becomes a “security” and what the legal requirements are once it does.

If you and a friend or family member join forces to start a business, and you both invest money into that business, and you both have control and decision-making power in that business, it is likely more of a partnership and not necessarily a security. If you have investors with limited or no control of the business, that ownership is likely a security.

Why does this matter? When raising money to build or expand a business from friends, family, or strangers, there are both federal and state requirements on how that investment needs to be structured, including filing requirements, reporting requirements, and investor qualifications. It’s important to understand these requirements to avoid running afoul of federal or state laws.

The focus of this article is to introduce some high-level thoughts on raising capital to fund your business.  It is not meant to be exhaustive or complete.

In simplest terms, the less complicated the filing and reporting requirements are, the more sophisticated the investors are required to be.

If you are raising business capital from investors (selling securities),  you are required under the Securities Act of 1933 to register as a public company, unless your offering qualifies for a specific exemption. The registration requirements for a public company are strict, exhaustive, and expensive. These rules came in the wake of the big stock market crash of 1929 to protect investors from bad actors, but there are exemptions to these requirements.

For most small businesses and startups, the hurdles of registering a public offering are too high and expensive. However, the Securities Act allows exemptions so entrepreneurs starting small businesses can access investor capital without always requiring expensive filings and exhaustive reporting.

One of the more common exemptions is the “Regulation D” exemption. Simply put, this exemption allows you to raise money from accredited investors. Accredited investors are investors who are financially sophisticated with certain minimum income or assets. Generally, accredited investors must have $1 million in net worth (excluding their home), or have an income greater than $200,000/year.

Another exemption to the Securities Act is the “intrastate” exemption. This allows business owners and entrepreneurs whose business is substantially in the same state and who’s investors are also in the state to raise money from non-accredited investors. Generally, certain Montana laws allow intrastate exemptions for offerings up to 25 investors.

Another form of the intrastate exemption, crowdfunding, has received attention the last few years. In terms of both an intrastate and a crowdfunding exemption, the regulation falls squarely on the shoulders of state regulators. In the case of a Montana intrastate or crowdfunding offering, the regulator is the Montana State Auditor, Commissioner of Securities and Insurance (CSI).

The Montana Securities Act, in part, allows entrepreneurs to raise money from Montana investors, including non-accredited investors using this [intrastate or crowdfunding] exemption. Generally, a non-accredited investor may invest up to $10,000 into this type of investment and an accredited investor may invest any amount up to the maximum offering (the total amount you are trying to raise).

In short, if you are raising money from investors, this is – by definition – a security. There are several ways to register or exempt these investments but all require some form of paperwork. My goal here is to raise awareness of the state and federal requirements when seeking investments to help build Montana businesses. The bottom line is there are avenues that are accessible to small businesses as well as larger ones.

We are here to help. One of the CSI missions is to promote capital formation. In other words, we want to help entrepreneurs find ways to capitalize their businesses. Reach out on our website ( ), call us at 444-2040, or find a professional to help you navigate the state and federal requirements for funding your business with investor dollars.

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