You are a small business based in New Jersey. You need to raise capital to grow (or even launch) your business. However, you want to avoid spending too much initial capital on securities filings with the SEC or state authorities (including lawyers, accountants, etc.).
Fortunately, there is a very interesting, albeit narrow, exemption in New Jersey that can allow you to skip both federal and state filings and skip straight to raising capital. The exemption lies in a specific unregulated space, but may be enough for some companies to raise that initial seed capital.
Section 3(a)(11) of the Securities Act of 1933 is often known as the “intrastate exemption.” Essentially, under this rule, an issuer of securities is exempt from any federal filings with the SEC if it sells securities ONLY to residents of the state in which it is organized and does its business. The federal law leaves alone entirely intrastate transactions and allows for them to be governed by state securities laws only.
Under this rule, we look at the state securities laws in New Jersey. The New Jersey Uniform Securities Act provides a list of exemptions under N.J.S.A. 49:3-50—most of these are not readily useful to small private commercial businesses. However, N.J.S.A. 49:3-50(b)(9) offers an exemption to any transaction where sales of securities are made to no more than 10 persons in any 12-month period.
The subsection restricts sales of such securities through any general solicitation or general advertisement and that no commissions are paid to anyone for soliciting the investors. However, other than that there are no restrictions on the nature of the investors (i.e. whether accredited or not).
Thus, to put merge both the federal and the New Jersey state statutes we arrive at the following conditions:
- The business must be organized under New Jersey state law.
- The business must be doing significant business in New Jersey.
- The securities issued by the business must be sold ONLY to New Jersey residents.
- The securities cannot be sold using any general solicitation (i.e. social media marketing, email blasts, newspaper or TV ads, etc.).
- The business cannot pay any commissions to a third-party to market to investors in New Jersey.
Let’s look at an example for more clarification:
Company A is organized under New Jersey state law and invests in real estate properties mostly in New Jersey (but some in other states). Company A wants to raise $500,000 to portfolio of 3 properties that it will renovate and hold to generate rental revenue. Company A can raise $50,000 from 10 investors to reach its raise target. No registration or filings are required with the SEC or with any NJ state agencies.
Although there are no filing requirements, issuers still must have a sound corporate structure, clear and effective contracts and proper disclosure documents for investors. It’s still advised to retain a corporate and securities attorney to ensure that all sides are legally protected and that the company remains in compliance with federal and state laws.