OPTIONS FOR RAISING CAPITAL

All securities offerings must either be registered with the CSI Securities Division or be exempt from registration in accordance with the Securities Act of Montana. Below find descriptions of various registration options and exemptions available in Montana.

The summaries of the Securities Act of Montana and related regulations provided here are not intended to be complete statements of their terms and conditions. For more general information on conducting a securities offering, please see our Raising Capital webpage.

KEY TERMS

Any investor whose income, net worth, or business purpose meet certain requirements defined by the Securities and Exchange Commission (SEC). Banks, registered broker-dealers, insurance companies, investment and business development companies, certain employee benefit plans, and charitable organizations with assets over $5 million are considered accredited investors.

Accredited investors also include: directors, executive officers, and general partners of the issuer; persons with income greater than $200,000 in each of the two most recent years (or joint income greater than $300,000), and a reasonable expectation of the same income in the current year; and persons whose individual or joint net worth exceeds $1 million excluding the value of that person’s primary residence.

An ownership interest in a corporation.
A consent to service of process form submitted by the issuer allows the CSI to be served with legal papers on the issuer’s behalf. This form must be filed for each financing option.
A security in which the seller must repay the investor’s original investment amount plus interest. A company can offer debt securities only when it can demonstrate that it has the ability to service the debt based on current earnings.
The disclosure document distributed to potential investors is the primary source of information about your company. This document is also referred to as a prospectus or offering circular. In a private placement, it is generally referred to as a private placement memorandum (PPM).
An unincorporated entity that combines the limited liability features of a corporation with the pass-through taxation and structural flexibility of a general partnership.
Any investor not included in the definition of an accredited investor.
Stock that has priority over common stock as to dividend payments and/or the distribution of the assets of the company. Preferred stock can have the characteristics of either common stock or debt securities.
Equity securities that were issued within the last three years, or that are to be issued, to certain founders or organizers of the issuer for less than 85% of the public offering price.
Selling expenses include those costs that are directly related to issuing and selling the securities, such as underwriting and brokerage discounts and commissions, printing costs, and filing fees paid to the SEC and/or state securities divisions. Fees paid to attorneys and shares made available to underwriters are also counted as selling expenses.
The investor and/or his/her representative have sufficient business knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of an investment opportunity.

The most common offering exemptions relied upon by small business issuers are those contained in “Regulation D,” or “Reg D.”

Regulation D is a set of rules enacted by the federal Securities and Exchange Commission (SEC) pursuant to the Securities Act of 1933 which provides exemptions from registration for offerings meeting certain requirements. Many states have enacted rules to facilitate offerings under federal Regulation D, including Montana.

There are three (3) exemptions contained in federal Regulation D:

The Montana counterparts to these rules can be found at ARM 6.10.301 and ARM 6.10.210, respectively.

THE BASICS

The maximum offering amount that may be raised under the SOE is $1,000,000 regardless of the location of the investors.

The offering can be sold to not more than 25 non-accredited investors in Montana, or 35 if the company is based in Montana. However, you may sell to an unlimited number of accredited investors and investors residing outside Montana, subject to the $1,000,000 offering limit and the laws of other states in which the offering is made. This exemption can be used for all types of securities.

DISCLOSURE REQUIREMENTS

There is no prescribed format for presenting the disclosure document, but you must disclose all the material information necessary to allow potential investors to make an informed decision. The CSI Securities Division recommends that you include the information required by the Form SCOR referred to below.

SELLING CONSTRAINTS

You cannot advertise or attempt any general solicitation under this exemption. In addition, no sales commissions or payment of any kind, direct or indirect, can be made to anyone for soliciting potential purchasers.

When selling to non-accredited investors, you must make a reasonable effort to determine that the investment is financially suitable for the investor, or that the investor meets the sophistication standard. An investor meets the sophistication standard if the investor alone or with representatives has sufficient knowledge and experience in financial and business matters to demonstrate the capability to evaluate the merits and risks of the investment.

RESALE RESTRICTIONS

If your offering is made in conjunction with federal Rule 147, your investors cannot sell their securities to any person outside this state for at least nine months after the offering has been completed. You must inform potential investors of this resale restriction.

BAD ACTOR DISQUALIFICATION

An issuer is disqualified from conducting an offering in reliance on the exemption if the issuer or other relevant persons (such as underwriters, placement agents and the directors, officers and significant shareholders of the issuer) have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specified laws.

FILING PROCEDURES

There are two ways to claim this exemption:

  • If you will be conducting the offering in more than one state, then you must file with the CSI Securities Division a copy of the Form D that you filed electronically with the SEC, along with the filing fee and a representation that no sales have occurred in Montana at least 10 business days prior to any sales.
  • If the offering will be confined to Montana and you will be relying upon the federal intrastate offering exemption found in federal Rule 147, then you must represent no sales have occurred in Montana at least 10 business days prior to any sales. No SEC filing is necessary. In many cases, this exemption requires only a minimum review, but the application for the offering must be submitted to the CSI Securities Division at least 10 business days before you begin to sell the offering. The CSI Securities Division has the right to review your offering materials upon request.

See: ARM 6.10.210

Note: The National Securities Markets Improvement Act of 1996 preempts substantive state regulation of securities sold pursuant to Reg D, Rule 506. However, the Act allows states to continue to require notification filings. See the Notification Filing Procedures section below for filing requirements.

THE BASICS

There is no maximum offering amount for offerings under Rule 506(b).

Under Rule 506(b), the offering may be sold to an unlimited number of accredited investors and to not more than 35 non-accredited investors, regardless of residency.

DISCLOSURE REQUIREMENTS

17 CFR 230.502 sets forth the information required to be furnished to purchasers who are not accredited investors. The specific disclosure requirements depend on a number of factors, including whether the issuer is a reporting company and the size of the proposed offering. This information must be furnished to such purchasers a reasonable time prior to the sale.

Issuers are not required to provide information to accredited investors. However, in light of the anti-fraud provisions of the federal and state securities laws, issuers should consider providing such information to accredited investors as well.

As discussed below, you must furnish each purchaser with a written description of any matters that would have triggered disqualification under § 230.506(d)(1) (“bad actor” events) but for the fact the matter(s) occurred before September 23, 2013.

SELLING CONSTRAINTS

You cannot advertise or attempt any general solicitation under this exemption.

When selling to non-accredited investors, you need not determine financial suitability; however, any non-accredited investors must be sophisticated. An investor meets the sophistication standard if the investor alone or with representatives has sufficient knowledge and experience in financial and business matters to demonstrate the capability to evaluate the merits and risks of the investment.

RESALE RESTRICTIONS

You must inform potential investors of resale restrictions. Federal Rule 144 sets forth rules to allow for resale of restricted securities.

ISSUER DISQUALIFICATION

Rule 506(b) offerings are subject to “bad actor” disqualification provisions, which disqualify an issuer from conducting an offering in reliance on the exemption if the issuer or other relevant persons (such as underwriters, placement agents and the directors, officers and significant shareholders of the issuer) have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specified laws on or after September 23, 2013.

In addition, you must furnish each purchaser with a written description of any matters that would have triggered disqualification under § 230.506(d)(1) (“bad actor” events) but for the fact the matter(s) occurred before September 23, 2013.

NOTIFICATION FILING PROCEDURES

The following must be filed with the CSI Securities Division:

  • A copy of the Form D filed electronically with the SEC;
  • Filing fee; and
  • A report of the date of first sale to a Montana resident, or an indication that sales have yet to occur (may be included in cover letter).

The notice filing for the offering must be submitted to the CSI Securities Division no later than 15 days after the first sale or receipt of a signed subscription agreement from a resident of the state of Montana, unless the due date falls on a Saturday, Sunday, or holiday, in which case the due date is the next business day.

You must file the Form D with the CSI Securities in order to qualify for the exemption.

ARM 6.10.210

Note: The National Securities Markets Improvement Act of 1996 preempts substantive state regulation of securities sold pursuant to Reg D, Rule 506. However, the Act allows states to continue to require notification filings. See the Notification Filing Procedures section below for filing requirements.

THE BASICS

There is no maximum offering amount for an offering under Rule 506(c).

Under Rule 506(c), all purchasers of the securities must be accredited investors. Further, the issuer must take reasonable steps to verify that all purchasers are accredited investors. In this regard, issuers must consider a number of factors, such as (1) the nature of the purchaser and the type of accredited investor that the purchaser claims to be; (2) the amount and type of information that the issuer has about the purchaser; and (3) the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.

Please note that self-certification of accredited investor status by a purchaser would likely never be a sufficient form of verification under Rule 506(c). For more specific information on the verification requirements, see SEC Release No. 33-9415.

DISCLOSURE REQUIREMENTS

17 CFR 230.502 sets forth the information required to be furnished to purchasers who are not accredited investors. The specific disclosure requirements depend on a number of factors, including whether the issuer is a reporting company and the size of the proposed offering. This information must be furnished to such purchasers a reasonable time prior to the sale. Please see 17 CFR 230.502(link is external) for more details.

Issuers are not required to provide information to accredited investors. However, in light of the anti-fraud provisions of the federal and state securities laws, issuers should consider providing such information to accredited investors as well.

As discussed below, you must furnish each purchaser with a written description of any matters that would have triggered disqualification under § 230.506(d)(1) (“bad actor” events) but for the fact the matter(s) occurred before September 23, 2013.

SELLING CONSTRAINTS

Rule 506(c) permits an issuer to engage in general solicitation or general advertising in offering and selling securities pursuant to Rule 506(c), provided that all purchasers of the securities are verified accredited investors.

Should the offering fail to qualify under Rule 506(c), an issuer that has engaged in general solicitation may not alternatively rely on the non-public offering exemptions in Section 4(a)(2) of the Securities Act of 1933, nor Mont. Code Ann. § 30-10-105.

Any securities salespersons or broker-dealers involved in the offering are subject to registration under MCA § 30-10-201.

RESALE RESTRICTIONS

You must inform potential investors of resale restrictions. Federal Rule 144 sets forth rules to allow for resale of restricted securities.

ISSUER DISQUALIFICATION

Rule 506(c) offerings are subject to “bad actor” disqualification provisions, which disqualify an issuer from conducting an offering in reliance on the exemption if the issuer or other relevant persons (such as underwriters, placement agents and the directors, officers and significant shareholders of the issuer) have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specified laws on or after September 23, 2013.

In addition, you must furnish each purchaser with a written description of any matters that would have triggered disqualification under § 230.506(d)(1) (“bad actor” events) but for the fact the matter(s) occurred before September 23, 2013.

NOTIFICATION FILING PROCEDURES

The following must be filed with the CSI Securities Division:

  • A copy of the Form D filed electronically with the SEC;
  • Filing fee; and
  • A report of the date of first sale to a Montana resident, or an indication that sales have yet to occur (may be included in cover letter).

The notice filing for the offering must be submitted to the CSI Securities Division no later than 15 days after the first sale or receipt of a signed subscription agreement from a Montana resident, unless the due date falls on a Saturday, Sunday, or holiday, in which case the due date is the next business day.

You must file the Form D with the CSI Securities Division in order to qualify for the exemption.

Mont. Code Ann. § 30-10-105(22)

Click HERE for information about Crowdfunding in Montana.

Click HERE for more information about SCOR.

MCA 30-10-204

THE BASICS

Any offering for which a registration statement has been filed with the Securities and Exchange Commission (SEC) under the federal Securities Act of 1933 may be registered by coordination. Any filing made under federal Regulation A also fits in this category.

There is no maximum offering amount nor is there a limit on the number of investors, except for offerings made pursuant to Regulation A where the maximum offering amount is $50 million.

DISCLOSURE REQUIREMENTS

The disclosure requirements vary with the type of federal filing made. These requirements are defined in various federal regulations. Regulation A filers have the option of using a SCOR question-and-answer format offering circular similar to the Form SCOR. Please contact the SEC for further information on disclosure requirements.

FILING PROCEDURES

The federal registration statement and a uniform application to register securities (Form U-1) are considered the application for registration of the offering. They should be submitted to CSI Securities with a cover letter and appropriate fee. In addition to the disclosure document, you must submit any additional information and documents required by MCA § 30-10-204.

The fee for the first $100,000 of securities to be offered in Montana is $200 plus 1/10 of 1% for any excess over $100,000. The maximum fee is $1,000.

This application will be carefully reviewed, and comments related to substantive and disclosure requirements will be communicated to you. In order to obtain a permit, you must revise and resubmit your disclosure document as requested until you have met all substantive and disclosure requirements. Once all issues have been resolved and the offering has been declared effective by the SEC, the CSI Securities Division will send a permit for the sale of securities to allow you to commence the offering.

The CSI Securities Division recommends hiring an experienced securities attorney to prepare and conduct this type of offering, particularly when the issuer is not utilizing the Regulation A question-and-answer format option.

If you plan to sell to residents of more than one (1) state, a coordinated review of your offering may be available. Coordinated Review-Equity (CR-Equity) is designed to streamline the review process and ease the burden on issuers of having to deal with securities examiners in multiple states. More information about this program is available at www.coordinatedreview.org.

SELLING CONSTRAINTS

The securities can be sold by the issuer or a securities broker, but in either case the broker and/or salesperson must be licensed with the CSI. Salespersons who will receive commissions for selling the offering must pass qualifying examinations. If no commissions will be paid, officers and directors may be exempt from the offering if no remuneration is paid for soliciting a prospective buyer and the offer is limited to not more than 10 persons within this state. Mont. Code Ann. § 30-10-105(8).

You may use advertisements and announcements to solicit investors for the offering; however, content restrictions apply. Any advertisements or announcements must be filed with the CSI Securities Division at least five business days before they are used. If the offering is not firmly underwritten, you may be required to establish a minimum offering amount. Under these circumstances, all funds received must be placed in an impound/escrow account at a bank or similar financial institution until the minimum offering amount has been raised.

REPORTING REQUIREMENTS

Federal law may require your company to file periodic reports during and for an extended period after the completion of the offering. You should contact the SEC for information on reporting requirements.

MCA 30-10-205

THE BASICS

Any security that is not required to be registered under the federal Securities Act of 1933, except those offerings being conducted pursuant to federal Regulation A(link is external), may register by qualification for sale in Montana.

There is no maximum offering amount, nor is there a limit on the number of investors.

RELATED RULES

This registration can be used for debt securities only if the company can demonstrate the ability to service the debt based on current earnings and subject to policy considerations such as affiliated transactions, excessive options and warrants, and promotional shares.

DISCLOSURE REQUIREMENTS

The disclosure document must include the information required by MCA § 30-10-205. Under federal and state securities laws, you must disclose all the information necessary to allow potential investors to make an informed decision.

FILING PROCEDURES

The disclosure documents listed are considered the application for registration of the offering. They should be submitted to the CSI Securities Division with a cover letter and appropriate fee. The fee for the first $100,000 of securities to be offered Montana is $200 plus 1/10 of 1% for any excess over $100,000. The maximum fee is $1,000.

This application will be carefully reviewed, and comments related to substantive and disclosure requirements will be communicated to you. In order to obtain a permit, you must revise and resubmit your disclosure document as requested until you have met all substantive and disclosure requirements. The CSI recommends hiring an experienced securities attorney to prepare and conduct this type of offering.

SELLING CONTRAINTS

The securities can be sold by the issuer or a securities broker, but in either case the broker and/or salesperson must be licensed with the CSI. Salespersons who will receive commissions for selling the offering must pass qualifying examinations. If no commissions will be paid, officers and directors may be exempt from the offering if no remuneration is paid for soliciting a prospective buyer and the offer is limited to not more than 10 persons within this state. MCA § 30-10-105(8).

You may use advertisements and announcements to solicit investors for the offering; however, content restrictions apply. Any advertisements or announcements must be filed with the CSI Securities Division at least five business days before they are used.

If the offering is not firmly underwritten, you may be required to establish a minimum offering amount. Under these circumstances, all funds received must be placed in an impound/escrow account at a bank or similar financial institution until the minimum offering amount has been raised. The financial institution cannot release the funds until authorized to do so by the CSI. MCA § 30-10-206.

RESALE RESTRICTIONS

If this registration is being used with federal Rule 147, then investors cannot sell their shares to any non-Montana resident until at least nine months after the offering has been completed.

REPORTING REQUIREMENTS

You must provide a securities sales report and updated financial statements to the CSI Securities Division each quarter until the offering is completed.

If any event occurs that would materially affect the accuracy of the prospectus, you must immediately report this information to the CSI Securities Division. The prospectus might require revisions to include the new information, and the revised prospectus must be used when soliciting new investors.

This document is designed to acquaint the small businessperson with the different registration and exemption options available for raising capital through a securities offering in Montana. It should not be relied upon to actually make a securities offering. There are many additional important issues, of which a person making a securities offering should be aware. This brochure summarizes only some of these issues.

For more information on federal securities laws, contact the Office of Small Business Policy of the Securities and Exchange Commission (SEC):

Office of Small Business Policy | U.S. Securities and Exchange Commission | 100 F Street, N.E. | Washington, D.C. 20549-3628 | 202.551.3460 | www.sec.gov/info/smallbus.shtml

Small Business Development Centers—Information on how to prepare a business plan may be available and are located throughout the state.

SCORE—A nonprofit organization of retired businesspersons called SCORE often operates programs to assist entrepreneurs. Location of chapters around the state usually can be found in the white pages of the telephone directory.

The U.S. Small Business Administration— May also be able to provide assistance to the entrepreneur. Regional offices are located in Helena and Billings.

ADDITIONAL INFORMATION FOR SMALL BUSINESSES CLICK HERE

Many small businesses reach a point in their development when the owner’s capital, gifts from friends and family, and lines of credit or other loans are exhausted prior to the company becoming self-sustaining.

If your business is at this point, you might want to consider whether raising capital through a securities offering is right for you. This webpage provides an overview of securities regulation and securities offerings, and provides general information on how to prepare for, register, and sell a securities offering in Montana.

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