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New Mexico Proposes CrowdFunding Regulations

New Mexico Proposes CrowdFunding Regulations


On Sept. 24, 2014, the New Mexico Securities Division proposed crowdfunding regulations for offerings of securities under the Federal Securities Act’s intrastate offering exemption.

Federal law exempts securities from federal registration if the offering company makes its security offering only to residents of its state – the intrastate exemption. The division is proposing that New Mexico business be able to use crowdfunding portals to offer securities to New Mexico investors through the Internet.

The regulations will add New Mexico to a growing list of states that permit intrastate crowdfunding of securities offerings – including Texas and Colorado. The proposed New Mexico regulations are intricate. What follows is a brief overview of the proposed regulations with the caveat that the division may change the proposed regulations after it receives comments.

The New Mexico crowdfunding rules require that the portal be a New Mexico entity. Out-of-state portals will have to set up New Mexico subsidiaries. The New Mexico portal website must verify that the offering business is a local business and that there is no ready market for the securities and other cautionary provisions. The division will require the New Mexico portal to verify online the individual investor’s New Mexico domicile by proof of driver’s license, voter ID or residential property tax before the investor can view the offering. The portal must meet detailed requirements concerning each offering and record keeping.

The issuing company must meet stringent requirements for the offering. A business must be a New Mexico corporation or entity. The offering must be through the New Mexico crowdfunding portal exclusively. The issuer cannot combine debt and equity securities, but may do separate series of debt or equity offerings. The issuer cannot accept more than $10,000 from any single investor although the investor can file for an exception.

The issuer and portal must furnish channels by which potential investors may communicate with each other. The proposed regulations provide for an escrow in a regulated New Mexico trust, escrow or financial institution.

Although the regulations are to be issued under the existing small issue provisions of the New Mexico securities regulations that have a $2,500,000 cap, no such cap appears to exist in the current proposals. In addition, although there are disclosure obligations, there are apparently no requirements of audited financials.

The division’s proposals are designed to ensure that the New Mexico offering company is New Mexico-centered to ensure compliance with federal securities law. At least 80 percent of the company’s revenues must be from New Mexico during the prior year. It must hold 80 percent of its assets in the state in the prior semi-annual period and use 80 percent of the proceeds from the offering in New Mexico.

Finally, the division’s proposed regulations would require that the offering company derive 80 percent of its earnings each year from within New Mexico if it is a newly formed company, as well as use and hold 80 percent of its earnings in New Mexico.

While the division’s proposed regulations are reasonable and business friendly, the impact of intrastate crowdfunding in New Mexico cannot be predicted. The 80 percent limitation on earnings of new companies is designed to meet SEC intrastate exemption rules but it may be problematic with high-tech startups or companies with out-of-state markets.

With a small New Mexico investor pool, the expense of establishing an efficient crowdfunding portal may be a challenge.

The division avoided the SEC’s cumbersome investor limitations and needless expense. The division has also exceeded the SEC’s record on crowdfunding in both time to publication and reasonableness. The measures are one more funding avenue for New Mexico’s small companies.

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