🔒No takers for Maine’s crowdfunding program

Maine's crowdfunding law, which was heralded as a boon for startups when it went into effect on Jan. 1, 2015, has yielded no funding-raisings in its first year.

Gregory Fryer, partner at Portland law firm Verrill Dana, says he knows of a few businesses considering a Maine crowdfunding offering, but does not know of anyone “who has pulled the trigger yet.”

Mainebiz found no companies on the Maine Crowdfunding Facebook page trying out Maine crowdfunding. Instead they opted for the popular IndieGoGo, Kickstarter and Barnraiser fund-raising platforms. And the February PubHub meeting on crowdfunding featured two companies with Kickstarter campaigns. The Maine Office of Securities, which oversees the offering registrations, did not respond to a request for information.

There are several issues holding back Maine crowdfunding, or Fund-Me, under Rule 523, experts say. Among them are the paperwork and expense to register for the offering and finding a bank that will manage a required impoundment fund. Another issue is confusion about Fund-Me, which offers securities in exchange for funding instead of a company product like Kickstarter and other campaigns.

The impoundment fund requires a bank or credit union to hold the raised funds until at least 30% of the overall offering is reached, then release them to the company. The problem is finding a bank or credit union in Maine that will accept the state's fund impoundment agreement.

“We spent three-and-one-half months trying to work at this,” says Eben Dingman, co-owner of Bear Bones Beer with partner Adam Tüüri. The Lewiston brewery is scheduled to open this month. “We eventually abandoned the idea.”

Dingman says they started with their local credit union, then moved on to a series of banks in Maine.

“All said 'no' after varying lengths of deliberation. Many offered to do debt financing, however this didn't situate with our strategy,” he says. Finally, USBank said it would do the impoundment account, but for a fee of $1,500. “This was not a palatable option, and we found we could file a federal exemption due to the limited amount we needed to raise.”

Maine Mead Works ran into a similar situation, though it has not yet filed an application with the Maine Office of Securities.

“Our existing financial institution declined to give that service,” says Ben Alexander, founder and president of the seven-year-old honey wine maker, which is based in Portland. “The person I spoke to didn't know about the rule, and when they got back to me after two weeks, they said they couldn't offer it.” Alexander is hoping to raise up to $500,000, an amount which requires a financial review but not the expensive audit for over that amount.

Alexander says he looked at the Fund-Me program because the winery's largest customer base is in Maine and it made sense to try to attract Maine investors.

He also points out there are costs associated with filing the application. Joel Shaw, an attorney at Bernstein Shur, says they could run several thousand dollars.

Alexander says he sees other challenges down the road. “Once you get all the applications done and accepted and do the offering, there will probably be a significant public relations and marketing challenge so people are aware this is an opportunity,” he says.

Fryer of Verrill Dana says the impoundment issue has not been solved yet. “No banks in Maine have endorsed the form posted by the Maine Office of Securities, and no one (to my knowledge) has come up with an alternative form of agreement that they like,” he says. “I am optimistic that this problem will be resolved once we really have a filing that is pending. It really shouldn't be that hard to get past this hurdle.” Vermont solved a similar set of issues, he says.

Banks are concerned about the impoundment fund because they will have to administer it, so it's not clear that it makes economic sense for them; there is a potential risk of fraud, which could put the bank's reputation at risk; and there may be disputes over when the 30% level has been reached, says Shaw, who with Fryer and others drafted the new rule.

“We need a test case,” says Shaw, adding that banks can alter the state's form as long as the provisions comply with the state rule. He advises fund raisers to hire an attorney the first time they consider Fund-Me to assure they are meeting securities and other regulations.

Shaw says more than 30 states have enacted state crowdfunding regulations in the absence of a federal crowdfunding regulation. The U.S. Securities and Exchange Commission's crowdfunding rule, Section 4(a)(6) of the Securities Act of 1933, is expected to be effective within a few months. It isn't clear what impact that will have on state crowdfunding, but Shaw believes the two systems can co-exist.

Meantime, states are conducting their crowdfunding differently. Maine's version relies on an exemption from federal registration for offerings of $1 million or less under federal Rule 504. Other states are relying on the federal intrastate offering exemption, which is less flexible than Rule 504, Shaw notes. Maine's approach may open the door for certain types of investors outside the state, in which case the securities laws of that other state will have to be honored.

Kickstarter vs. Maine crowdfunding

Like Kickstarter, Fund-Me lets businesses raise cash from a large number of people. However, it keeps the size of the offering at not more than $1 million in 12 months, and the amount one person can invest to $5,000 in 12 months, except for accredited investors. It also allows a business to promise participants a potential financial return.

The Maine rule also restricts sales of equity or debt to state residents in most cases, whereas Kickstarter allows most for-profit businesses, regardless of location, to raise money. Fund-Me also requires more documentation from businesses, including an offering circular with a detailed business plan, part of the prior year's financial statements and a discussion of risks.

Kickstarter doesn't impose an upfront fee to set up an account but does charge 5% on the funds raised, according to a Verrill Dana brief. For a Maine crowdfunding offering, the Maine Office of Securities charges $300 at the time of first filing. There may also be legal and accountant fees and other administrative costs to prepare the Fund-Me Offering Circular.

Good candidates for Fund-Me include those seeking to raise at least $150,000 because of the work needed to get the offering up and running, according to Verrill Dana. Companies also should be willing to devote a few months to the process. It's also important to have a receptive set of prospective investors like customers or fans of the product.

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