You have some securities law issues. We have all of the following: 1) an investment of money; 2) in a common enterprise; 3) with the expectation of a profit; and 4) to be drived in whole or substantial part from your efforts. Under Federal law, Maryland law, and the laws of the 50 other jurisdictions that is a security. Also your offering falls under the definition of Security set forth in Title 11, Section 101 (r) of the Maryland Corporations and Associations Code, because it is a certificate of paparrticipation in a profit sharing agreement, and it is also an investment contract. Therefore your offering must comply with both federal and state securities laws
Clearly, you want to structure the offering so that it is a private offering of securities and not a public offering. There are three possible ways to structure the offering for it to remain a private offering:
Rule 504 (17 CFR 230.504) exempts offerings of less than $1,000,000 to an unlimited number of investors from the definition of a public offering. But all 504 offerings must comply with states laws and regulations. The state laws and regualtions on 504 offerings vary from state to state. Many states do not allow an unlimited number of investors in a 504 offering, unlike the federal regulation. Many states will require your attorney to prepare a prospectus, and provide it to all prospective investors, before you take any money. In some states, you may have to go through registration, which is very expensive in terms of attorneys fees. I do not recommend using 504.
Rule 505 (17 CFR 230.505) exempts offers of less than $5,000.000 from definition of a public offering, so long as the offering is made to no more than 35 unaccredited investors. All states recognize the 505 exemption. But your attorney must prepare a prospectus for you to give to every unaccredited investor who is interested in the offering. I would strongly recommend giving even accredited investors a prospectus due to the anti fraud rules in federal and state securities laws (duty to disclose all material information to prospective investors). Also a claim of exemption must be filed in each and every state that you make an offer. I usually use Rule 505.
Rule 506 (17 CFR 230.506) exempts offerings of an unlimited dollar amount to no more than 35 unaccredited investors. Again all unaccredited investors must receive a prospectus, before giving you any money. Also because of the anti fraud rules, I strongly recommend giving accredited investors a prospectus as well. The drawback to 506 offerings is that the state laws vary. I can usually find some exemption in each states law to put a 506 offering in , but you may be limited to the total number of investors in that state. Also a claim of exemption must be filed in each and every state that you make an offer. If I cannot use 505, then I use 506.
Who is an accredited investor?
- Banks
- Broker Dealers
- Mutual Funds
- Registered Small Business Investment Companies
- Businesses with assets more than $5,000,000
- Trust funds with assets more than $5,000,000
- Individuals with a net worth of over $1,000,000, excluding hourse, car, and life insurance.
- Individuals who earn more than $200,000 in salary, and you have every expectation that will continue (do not rely on these people remaining accredited investors)
- Wife and husband who earn more than $300,000 per year, and you have every expecation this will continue (Again, given the economy, I would treat this group of people the same as an unaccredited investor)
You cannot do any public advertising of 504, 505, and 506 offerings, so be careful of what is on your web site.
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Normally I advise my clients who do any securities offerings to establish therir LLC in Delaware, and not Maryland. Because it is far easier for a disgruntled investor to petition a Maryland Court to break a Maryland LLC, that it is for a disgruntled investor to petition the Delaware Court of Chancery to break up a Delaware LLC. Also it takes 16 months to get a decision in a Maryland District or Circuit Court, as opposed to 8 weeks in the Delaware Chancery Court.
However, you already have an exisitng Maryland LLC with an Operating Agreement that allows for the issuance of membership units. At this point, you need a securities attorney to write your prospectus. I work solely on a flat fee basis, and I do not exceed the quoted amount. If you have any questions, please contact me at (240) 481-2706.
Sincerely,
Steven Rinaldi
