In March of 2014, the Maryland General Assembly passed legislation enabling small businesses to participate in intrastate crowdfunding. The Maryland Securities Commissioner released its final rules for compliance with the exemption on October 1, 2014, making intrastate crowdfunding in Maryland fully legal.
There are two important differences between the Maryland intrastate exemption and many of the other state-based crowdfunding laws. First, Maryland has limited the amount and type of funds that can be raised under the exemption to a $100,000 debt offering. In addition, each individual investor can invest only $100 in a particular offering without regard to whether or not they are considered an “accredited investor” under Securities and Exchange Commission rules. By restricting fundraising in this fashion, Maryland seems to have committed its intrastate crowdfunding market to small local businesses seeking to raise funds from its closest supporters and customers.
The second key characteristic of the Maryland law is that there is no separate treatment for funding portals. While many states, similar to the federal law, have created exceptions from broker-dealer registration for web sites that would seek to match investors to companies looking to raise money, the Maryland law explicitly states that the exemption will be unavailable to any issuer that pays “commission or other remuneration . . . in connection with an offering of securities under this item to any person who is not registered as required under this title.” MD Corp. and Assoc. Code. § 11-601(16)(v).
Instead of using funding portals to make offerings, the Maryland rules contemplate small businesses using their own websites to advertise their fundraising campaigns. Given the SEC’s recent guidance on how to conduct intrastate offerings (See SEC Compliance and Disclosure Interpretation 141.05) that access to an issuer’s website should be restricted on the basis of IP address, it is unclear exactly how Maryland small businesses will execute their offerings. Because restricting access to a website by location of IP address is not an exact science, issuers using the Maryland intrastate exemption will have to either conduct the offering through Maryland registered broker-dealers or contract with web services that can reliably restrict access based on geo-location.
Although Maryland’s law is relatively limited in terms of fundraising amounts and advertising of offerings, the rules call for corporate disclosures that are quite simplified and less burdensome than other states. Like all states, Maryland’s rules contain disqualification provisions to prevent certain “bad actors” from using the exemption to defraud investors. Finally, investors in a Maryland intrastate offering will not be able to resell the debt securities that they purchase.
Overall, Maryland’s intrastate crowdfunding exemption is one of the more conservative laws that have been passed, but the state has become one of the first to offer its small businesses a fully legal crowdfunding alternative for their financial services.