Monday, June 20, 2016

Crowdfunding Update: MNvest Goes Live Today!

Way back in October of 2014 I was writing about proposed legislation in Minnesota that (as in several other states) would legalize “equity crowdfunding” for intrastate offerings. While that legislation, cleverly branded as MNvest, actually became law during the 2015 legislative session, since then we have been waiting for final rulemaking by the Minnesota Department of Commerce.

Enacting these rules has taken long enough that in the interim the SEC has even managed to finalize, publish, and give effect to the federal crowdfunding rules (albeit more than three years after the deadline required under the JOBS Act). But wait no longer: The final rules under the MNvest crowdfunding law are live today!

At first blush, it might seem like Regulation CF (the federal rule) undermines the need for an intrastate exemption like MNvest. However, as regular readers know, Regulation CF has plenty of hoops to jump through. In the right situation, MNvest may be a better option for raising equity crowdfunding.

As is the case with raising capital under Regulation CF, there are plenty of requirements for a MNvest offering. These include regulatory filings. While I don’t plan to use this post to detail all of the MNvest requirements (you can read the final law and the final rules here if you’ve got nothing better to do—at least they don’t take up almost 700 pages like the Regulation CF adopting release), I’ve prepared this handy summary of some of the key differences between Regulation CF and MNvest.

Here are a few key MNvest requirements (which are not required under Regulation CF):

  • Your entity must be organized under Minnesota law (which eliminates all of the Delaware entities that have their principal operations in Minnesota —although I understand that there are legislative efforts underway to change this requirement).
  • Your business must have its principal office and 80% of its assets located in Minnesota.
  • Unless your business’s most recent annual gross revenue is under $5,000, you must have derived 80% of your gross revenue from operating a business in Minnesota.
  • Because this is an intrastate offering exemption, the offering, which must be conducted exclusively through a MNvest portal, must be made only to investors in Minnesota, and such investors will need to make certifications to that effect, in connection with their investment.
  • You are required to place proceeds in a third-party escrow until you raise your minimum offering.  You also need to provide a written explanation of how the minimum offering will be used.

And a few differences that may make MNvest a better choice (if you meet the above requirements):

  • You can raise up to $2 million in a MNvest offering v. a maximum of only $1 million in an offering under Regulation CF.
  • You don’t need your financial statements to be audited (or reviewed) by a CPA, unless you are raising greater than $1 million.
  • Maybe most importantly, unlike the relatively small limits on investment described in my prior post (which means the majority of the population can only invest an aggregate of $2,000 annually across all Regulation CF deals), each non-accredited investor in a MNvest offering is allowed to invest up to $10,000 in each MNvest offering.

One other important thing to keep in mind if you decide to raise equity through crowdfunding under MNvest instead of Regulation CF: Unlike the specific rules under the JOBS Act and Regulation CF that permit you (if you meet certain requirements) to exclude crowdfunding investors from your shareholder count in determining whether you need to become a public reporting company, there is no such relief in a MNvest offering. If you take on too many investors you may be forced to become a reporting company—a complicated and expensive proposition.

I continue to believe that there will be opportunities, particularly for consumer-facing businesses, to use both MNvest and Regulation CF. Time will tell if the burdens and costs outweigh the benefits to make them viable tools for raising early stage capital.

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