Latest from the Office of Small Business Advocacy

I’ve written previously about the SEC’s catchily-titled Office of the Advocate for Small Business Capital Formation (OASB). In summary, the OASB was created to support emerging companies through education and guidance on capital raising and other formation/start-up issues, to provide analysis and policy recommendations, and (as the name suggests) to advocate on behalf of emerging companies and their investors, with an eye to the perspectives of, and impacts on, small businesses. 

In January 2026, the OASB released its Staff Report[1], required as part of the Office’s statutory mandate, summarizing its work and presenting research and information on capital formation and

The Latest on Equity Crowdfunding

We’re excited to share that Lathrop GPM lawyers have again worked with an entrepreneurial client to successfully launch a crowdfunding offering. This time with a company specializing in products and related services for producing non-alcoholic offerings in the craft beverage industry. As always, we are constantly amazed at the level of originality, energy, effort, and, to state the obvious, entrepreneurship that infuses these endeavors at every level!

Our latest crowdfunding client success made us realize that it’s been a while since we’ve written about Equity Crowdfunding; so I think we’re well overdue for an update! As we have written before, prior to the 2021 SEC rule changes (the “2021 Rule Changes”), crowdfunding was limited to offerings of up to only $1.07 million, and investment by the “crowd” through “special purpose vehicles” (which has the practical effect of listing potentially hundreds of “crowd” investors as a single shareholder on your cap table) was not permitted. As a result, crowdfunding at that time did not present a very attractive capital-raising mechanism for most entrepreneurs; few such offerings had been initiated and most of them had not been unsuccessful. The 2021 Rule Changes, among other things, increased the maximum raise to $5 million, and permitted the use of a special purpose vehicle, organized and operating for the sole purpose of acquiring, holding and disposing of securities issued pursuant to a crowdfunding offering, and into which all “crowd” members made their investment. Three years on, how have the 2021 Rule Changes affected the use of crowdfunding as a productive means of raising capital?

Let’s roll the tape! *

Can You Use Someone Who Isn’t a Registered Broker to Help Me Raise Capital?

Tackling a question that so often entices entrepreneurs – can I pay someone to help me find investors? When funding a new enterprise, how can a scrappy small business owner break into those upper echelons and c-suites where high-dollar investors are presumably just looking for the right start-up to fund – folks who would recognize the brilliance of your vision and gladly sink capital into your enterprise…if only they were aware of it!

It’s about at this point that many an entrepreneur remembers they have a rich relative, or a deep pocketed friend or business connection, or maybe just know a high roller that knows a bunch of other high rollers that can be convinced to invest. And this high roller – let’s call him Rich Uncle Pennybags – not only knows all the Sharks (see this post and this post by fellow entreVIEW authors if you’re interested in more about the “Tank”), he will be happy to find investors for you in exchange a fee that’s based on the amount of capital he successfully raises for you, so you’re not out of pocket one dollar! Brilliant, right?

And now we’re reached the point where the buzzkilling entrepreneur’s attorney weighs in – in most cases you can’t do this (well, at least legally anyway…). Unfortunately, Uncle Pennybags’ efforts would likely be deemed “broker-dealer activity”, which is subject to regulation and requires licensure.

Both federal (SEC) and state rules prohibit a person from acting as a “broker” unless that person is registered with the SEC and the state in which the person conducts business. A “broker” is defined as “any person engaged in the business of effecting transactions in securities for the account of others.” Unfortunately, the rules do not define what constitutes “effecting transactions in securities for the account of others,” but the SEC has identified certain activities that will generally be deemed to “effect” securities transactions, including:

• assisting in structuring a transaction,
• identifying potential purchasers,
• soliciting transactions,
• participating in taking orders for purchase of the subject securities,
• advising investors on the merits of the investment, or
• receiving commission or other transaction-based compensation in exchange for their services.

Well, so what if Uncle Pennybags just introduces you to potential investors? Unlike a broker, someone just acting as a “finder” does not need to be registered, although the line between “broker” activities and “finder” activities is at least a little blurry. In general, a “finder” is someone who merely provides a prospective investor’s contact information to the company that’s raising capital. But remember, by far the biggest red flag for securities regulators is the payment of commission-based compensation; that is, paying a fee based on the number of investors or a percentage of the amount of money invested. We here at entreVIEW urge caution if you want to go down the “finder” road – there’s a possibility it can be done, but only if you really pay close attention to the structure and compensatory arrangements.

Why should you care? You, the entrepreneur, are not the one engaging in unlicensed activity – isn’t that just a problem for Rich Uncle Pennybags? Unfortunately, no – the entrepreneur’s association with an unregistered broker in prohibited by state and federal law, violation of which can lead to fines, penalties, and sanctions. Worse, an investor whose investment was solicited by an unregistered broker may be able to force you to return any money invested. In addition, it could negatively impact your ability to raise future capital and or sell your Company in the future!!

If you still believe Uncle Pennybags and his rolodex can be really helpful, the safest thing to do is to try and work out a compensation arrangement that is not commission-based, such as a flat fee, and limiting his activities to only providing introductory information. And don’t forget other sources of funding that may be available to you—family, friends, and your own connections, small business loans or grants, angel investors, and crowdfunding platforms as discussed in this post.

I’m From the SEC, and I’m Here to Help!

Most entrepreneurs (okay, actually pretty much most people) don’t typically think of industry regulators as their friends, but the Securities and Exchange Commission’s Office of the Advocate for Small Business Capital Formation is here to change that!

Let’s take a moment to conceptualize the SEC for most entrepreneurs and start-ups: they’re the ones that burden you with those complex (and pricey!) registration requirements for offerings of your securities, and those pesky licensure requirements for anyone who wants to help you sell them. Yeah, yeah, there are a number of exceptions, but if you miss a step or try to get too creative, the SEC may be waiting with sanctions, penalties, or hefty fines (just ask Kim Kardashian what Section 17(b) of the Securities Act has to say about undisclosed payments for touting a security). And trying to do everything by the book generally requires filing of multiple notices and sometimes ongoing reports, all of which can get complicated and run up expenses and legal fees. So yeah…entrepreneurs might not think of the SEC as their best friend.

Crowdfunding the Entrepreneurial Spirit!

Author: Patricia Garrigner-Strickland

We had a bit of a snowy winter here in Kansas City and after every storm, I had at least one teenage boy ring my doorbell and ask to shovel off my driveway (for a price). On a recent trip to the grocery store, I encountered a group of Girl Scouts selling cookies (I bought three boxes of Thin Mints and ate an entire sleeve on my way home). A new client, a photographer and graphic designer, is looking to expand her business to include art shows and more event bookings. Another client is looking to develop an interactive video game based on martial arts instruction.

From Linebacker to Food Entrepreneur: Blake’s Seed Based

Regular readers of entreVIEW may be familiar with my enthusiasm for Wisconsin sports. As an alumna of the University of Wisconsin-Madison, it is particularly exciting to see other alumni experiencing professional success — especially when it links sports, entrepreneurship, and my (required) dietary restrictions.

I, along with an estimated 3 million other U.S. adults, am allergic to tree nuts. This can make for awkward social situations (eating alone at weddings because it takes so long to get a nut-free meal) and challenging grocery store selections (if it says it was “processed at a facility that also processes tree nuts,” it’s probably fine, but on the off-chance it’s not, I’m stuck with an entire box of granola bars). So, when I heard the story of a former Wisconsin Badgers football player who had developed a line of allergy-free seed based snack and protein bars, I was intrigued.

Blake Sorensen, a Minnesota native and budding food entrepreneur, was recently featured in a forbes.com article. Between 2007 and 2010, Sorensen was a linebacker for the Wisconsin Badgers. Like me, he has a tree nut allergy. While getting his MBA at Indiana University, Sorensen took a social entrepreneurship class from which a business idea was born: Blake’s Seed Based, a line of snack bars featuring a combination of seeds and fruit free from the major allergens of nuts, dairy, and gluten.

SELF-REPORTING OF UNREGISTERED INITIAL COIN OFFERINGS: PERHAPS A FRAMEWORK FOR AVOIDING HEFTY CIVIL PENALTIES

Keeping with the theme of my prior post covering recent oversight and enforcement action by the Securities and Exchange Commission (SEC) of the cryptocurrency industry/exchanges, Gladius Network (an issuer of unregistered cryptocurrency tokens) recently reached a settlement with the SEC which avoided civil penalties entirely.

Gladius, a Washington D.C. firm dedicated to using the Ethereum Blockchain as a means of mitigating Distributed Denial of Serve attacks, raised over $12 million USD in an initial coin offering (ICO) in 2017 – the peak of the cryptocurrency investor craze. 

As SEC enforcement activity increased over the last several years, and the SEC maintained that most ICOs qualified as the sale of unregistered securities, Gladius decided to proceed with caution and self-reported its unregistered ICO to the SEC during the summer of 2018.  Gladius cooperated with the SEC’s investigation and agreed to take certain remedial actions, including registering its tokens as a security and repaying investors that requested their investments back.

Most significantly, however, is the SEC’s determination not to levy any civil penalties against Gladius. The SEC explained that “the SEC did not impose a penalty because the company [Gladius] self-reported the conduct, agreed to compensate investors and will register the tokens as a class of securities.” Robert Cohen, Chief of the SEC’s Cyber Unit, further commented that the case “shows the benefit of self-report and taking proactive steps to remediate unregistered offerings.”

The Gladius settlement follows similar enforcement actions initiated by the SEC in November 2018 against companies that conducted unregistered ICOs. In those instances, the companies did not self-report and were penalized by the SEC, sometimes to the tune of $250,000.

If nothing else, the Gladius case sends a clear and deliberate message that self-reporting to the SEC can result in meaningful cooperation credit – in particular the avoidance of hefty civil penalties. 

If you or your company are interested in learning more about the SEC’s guidance regarding cryptocurrency or ICOs and the recent regulatory activity, or have questions about how to make sure you are in compliance with securities law, the GPM team is here to help.

SEC Publishes Initial Crowdfunding Statistics

A couple of months ago, I posted about crowdfunding in Minnesota under the “intra-state” legislation commonly referred to as MNVest, along with some general tips for crowdfunding success. Since then, I came across an article published by the SEC that provides some statistical analysis regarding crowdfunding that occurred in 2016 under Title III of the JOBS Act.  

As background for those who haven’t been paying attention to the myriad of entreVIEW posts on crowdfunding, the JOBS Act, short for Jumpstart our Business Startups, was enacted on April 5, 2012.  Title III of the JOBS Act created a new exemption from registration for Internet-based securities offerings of up to $1 million over a 12-month period. The SEC adopted final crowdfunding rules on October 30, 2015.

MNvest and Crowdfunding Tips

A few weeks ago, I attended a luncheon hosted by the Association for Corporate Growth, or ACG, regarding MNvest.  For those who may be unfamiliar (or who haven’t been reading posts like this one from my colleague and fellow entreVIEW author Dan Tenenbaum), MNvest is the shorthand reference to the MNvest Securities Registration Exemption, an amendment to the Minnesota Securities Act. MNvest, which “went live” on June 20, 2016, permits eligible Minnesota businesses to engage in “intra-state” equity crowdfunding campaigns. An equity crowdfunding campaign is an online approach to raising small amounts of capital from a large number of people. Whereas donation-based crowdfunding – think Kickstarter, Indiegogo, or GoFundMe  – permits individuals to contribute to various causes without necessarily receiving anything in return, through an equity crowdfunding campaign like MNvest, a Minnesota business can solicit investment funds from Minnesota residents in exchange for a financial stake in the business.  

Buyer (and Seller) Beware: Crowdfunding

A few weeks ago, I spoke on a panel to entrepreneurs and potential investors about equity crowdfunding. Takeaway: Lawyers are a bunch of downers (which, I guess, is hardly news to most of you). 

First, however, let me begin by acknowledging the wonderful things about crowdfunding:

• If you are a “regular person,” you can now invest on the internet!
• If you have an early-stage company, you can now raise capital on the internet!

Although you may infer from my tone that I’m a skeptic (disclaimer: I may be), I don’t want to detract from the fact that crowdfunding offers another tool for both investing and raising money. And since raising capital is one of the most challenging aspects of being an entrepreneur, having another tool to do so is a good thing. If you are an investor, crowdfunding provides an avenue for directly investing in companies you want to see succeed, which is obviously empowering.

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.

What You Really Need to Know About Regulation Crowdfunding

Regulation Crowdfunding was finally adopted by the SEC, as detailed in this release (all 686 pages of it) several days ago. Even my nine year old was amused by the irony of a 35-page section of the release related to the “Paperwork Reduction Act”…

Frequent readers know that I first started writing about “equity crowdfunding” all the way back in November 2011, before the JOBS Act was even called the JOBS Act! They also know that I predicted in this later post that the SEC would miss the deadline for adopting required rules relating to equity crowdfunding, which was late in 2012. While I might have expected that the rules would be delayed long enough to have a baby, I didn’t realize that you’d also have time to get that child off to preschool!

There are already dozens of law firm summaries of the release ranging from two-pagers (that really don’t tell you much about the meat of the regulation) to 15-pagers that sound like they were written by a bunch of lawyers (which, to be fair, they were). While I won’t try to detail all of the regulation here, I will try to tell you what you really need to know:

Seed Capital reVIEW—It’s Survey Time (again)!

Having our Seed Capital reVIEW report for the second half of 2014 (which analyzes seed and angel capital raised by early-stage companies in Minnesota) in the rear view mirror can only mean one thing—it’s time for us to start collecting data on deals completed during the first half of this year.

As you may recall, Seed Capital reVIEW is our compilation of data regarding what types of companies are raising early-stage capital in Minnesota (typically between $100,000 and $2,000,000) and the terms relating to that fundraising activity. I know, it isn’t quite as fun as taking a survey to find out which character from the movie Inside Out you are (easily the best movie of the summer, if you ask me). For the record: according to the survey, I’m Joy and I’m living with Anger and Disgust.

We did add a few new questions to the survey to try to gauge emerging trends like crowdfunding
(including equity crowdfunding, which is almost legal in Minnesota). Of course, the key to making the data meaningful is to have broad-based participation to ensure the data provides an accurate reflection of seed capital activity. 

With that in mind, please CLICK HERE NOW to help us out. Please also send this link to others who you know were involved in seed and angel capital raising in the first half of the year. 

As added incentive to respond to our survey, the Gray Plant Mooty Foundation has pledged to make a $10 donation to MEDA, the Minnesota Economic Development Association, for each survey completed. MEDA is an organization that provides business development services, business financing, and access to market opportunities to support entrepreneurs of color.

Thanks for helping us collect some data of interest to entrepreneurs and investors.

Crowdfunding (the SEC’s Version): What Is It and Where Does It Stand?

Recently, I attended a two-day continuing legal education seminar on the topics of Regulation D Offerings and Private Placements (sounds exciting, doesn’t it?). Crowdfunding, which as you know has been a frequent topic on this blog (see here and here, and even here and here for some examples), was also a significant topic at the seminar. Here are some of the presenters’ key points on the topic:

Crowdfunding is defined as using the Internet and social media to raise capital, usually from a large number of people, and in relatively small amounts from each person. Many start-up businesses that do not have easy access to traditional capital markets and/or venture capital fundraising are eager to engage in crowdfunding.  

In April of 2012, Congress passed the JOBS (Jumpstart Our Business Startups) Act. The JOBS Act  permits crowdfunding, but only subject to rules to be adopted by the SEC. The SEC has not yet adopted any such rules; its Regulation Crowdfunding, known as “Regulation C/F,” was proposed in October 2013, but the SEC is currently continuing to review comments. Unfortunately, until the SEC formally adopts Regulation C/F, crowdfunding as envisioned by the JOBS Act, other than traditional “non-equity” crowdfunding (or possible intra-state crowdfunding), is illegal.

Nevertheless, crowdfunding remains a hot topic in the entrepreneurial services world.  Here are just a few likely specifics about crowdfunding, as currently contemplated by Regulation C/F: 

• It will be Internet- and social media-based only (in other words, it cannot be conducted by word-of-mouth);
• Not just anyone will be able to engage in crowdfunding; in fact, public companies, hedge funds, and shell companies are just a few examples of entities that will be prohibited from crowdfunding;
• There will be a $1 million maximum on funds raised via crowdfunding in any 12-month period;
• Crowdfunding will have to be conducted through a (i) licensed broker-dealer or (ii) “funding portal” (either is referred to as an “intermediary”). Funding portals will be regulated by the SEC and FINRA and, although they will not be able to offer investment advice or solicit investments, they will have obligations regarding investor education, disclosure, and anti-money laundering; 
• An investor’s annual investment will be limited. Investors whose income and net worth are below $100,000 will be limited to a maximum investment of (a) $2,000 or (b) 5% of their income or net worth; those whose income or net worth exceeds $100,000 will be able to invest 10% of their income or net worth, but not more than $100,000;
• Entities engaged in crowdfunding will be required to disclose certain information to the intermediary and investors, including a business plan and financial statements prepared in accordance with GAAP. Additionally, crowdfunders will have to file a minimum of two updates with the SEC, one when the capital raise reaches 50% of its target and another at 100%; and 
• Shares issued pursuant to crowdfunding will contain transfer restrictions. For a period of one year after issuance, the shares will be transferable only to (i) accredited investors, (ii) the company, (iii) pursuant to an offering registered with the SEC, (iv) family members, or (v) certain trusts.

Unlike “non-equity” funding campaigns managed by Kickstarter or Indiegogo, which provide a gift such as a T-shirt, trinket, or beta access to a product or service in exchange for contributed funds, the SEC’s version of crowdfunding will involve raising capital for a piece of the upside in a business entity, such as shares or membership interests.

The equity crowdfunding dialogue has been going on for several years, and members of our Entrepreneurial Services Group will continue to stay plugged into developments from the SEC (or at the state level) as they occur. 

MN Cup: Second Annual Women in Entrepreneurship Conference

Last week, I attended the second annual Women in Entrepreneurship Conference hosted by the MN Cup. I found the panel on financing to be the most inspiring. There were two panelists who shared their path to fundraising with the group. Maia Haag, the co-founder and president of I See Me!, self-funded her company through bank loans and a small inheritance that she had received. Katie Jasper, the co-founder and CEO of Prescribe Nutrition, used crowdfunding (indieagogo.com) to raise $40,000. The other panelist, Chris Mahai, a partner at Aveus, shared insights into her experience within the angel investment community.

As the three panelists discussed their experience in the capital raising world, a few themes became clear:

• Be purposeful in your decision to raise funds. Make sure your company is ready for outside investors. Be certain that you have a proven concept before you take too much money from investors.
• Be tenacious. Whether you are pursuing bank financing, crowdfunding, or seed/angel investments, dive into it. Once you decide that financing is necessary, be ready to work to get others to invest. 
• Be honest with yourself and with others. Be realistic and don’t overpromise to investors, especially if they are family members. 
• Seek good advice. Find mentors that will be brutally honest with you.

Ann Winblad, the keynote speaker and the co-founder and managing director of Hummer Winblad Venture Partners, reiterated the importance of finding mentors that will support and challenge you. She noted that if you find a mentor that is going to be brutally honest with you, it’s better for them to be brutally honest in the beginning of your capital raising process. 
As you consider fundraising options, know what terms are standard for raising funds in Minnesota. Avid readers of the entreVIEW blog may know that Gray Plant Mooty’s Entrepreneurial Services Group has published two reports that analyze seed and angel capital that has been raised by Minnesota start-up and early-stage companies. Information like this can be extremely helpful to determine what terms investors expect to receive in a financing deal. Click here to review the report that covers financings in the first half of 2014.

Of course, you’re always welcome to contact your friendly, neighborhood member of the Gray Plant Mooty Entrepreneurial Services Group. We’re always glad to share our knowledge and help out however we can.  

In the meantime, happy capital raising!

The Latest on Crowdfunding—Intrastate Intrigue

With all the constant chatter about Crowdfunding, I’ve come to realize that, as the three-year Halloween anniversary of my first post on Crowdfunding approaches, I was ahead of the curve on this one.

Frequent readers of this blog know that several authors have been actively following Crowdfunding developments. They also know that federal and state securities regulators are not excited about the prospect of equity Crowdfunding. Even back in 2011, when I predicted that the SEC would miss the initial deadline for adopting Crowdfunding regulations, I couldn’t have imagined that they might miss it by over two years!

While the SEC has been taking its time enacting the final rules, at least 12 states have enacted “intrastate” exemptions to permit Crowdfunding equity capital to be raised from investors. Each of these statutes has their own requirements (filings, disclosure obligations, limits, etc.), but a common element is that each one makes Crowdfunding available only to companies who meet the requirements of Section 3(a)(11) of the federal Securities Act. This means that they must be organized in the state where the offering is being made, have significant business in the state, and make offers and sales only to residents of that state.

While it isn’t clear how useful these exemptions will be in the context of Crowdfunded equity in general, at least another 12 states have also begun the process of adopting similar regulation. This includes the Land of 10,000 Lakes (or, if you prefer, the North Star State) where this initial draft legislation is in its infancy.

While I fully support the adoption of an intrastate Crowdfunding exemption to make sure that the great state of Minnesota isn’t viewed as too provincial and doesn’t get left behind, the utility of these exemptions remains unclear. Before you rush out to raise equity capital from an intrastate crowd, consider the following: 

• If you don’t want to have to become a reporting public company, you still 
   can’t have more than 500 non-accredited shareholders (or 2,000 total  
   shareholders). While provisions of the JOBS Act permit you to exclude 
   Crowdfunding investors from the count for the purposes of determining 
   whether you need to become a reporting company, only Crowdfunding investors 
   under Section 4(6) of the Securities Act (the federal Crowdfunding exemption) 
   are excluded. At least until the SEC finalizes its Crowdfunding rules, you’ll need 
   to count those who invest in an intrastate Crowdfunding.

• To be exempt in an intrastate Crowdfunding, you’ll need to implement
   technological measures to limit your communication about the offering to only 
   persons within the state where the intrastate Crowdfunding is happening. 
   In addition to disclaimers and legends on the topic, it may mean restricting
   access to those whose IP address originates from the particular state.

• Almost all of the state Crowdfunding exemptions (and those 
   of about a dozen more states that have proposed legislation) require delivery
   of specific disclosure information (description of issuer, risk factors, use of
   proceeds, identification of officers and directors, offering terms, etc.) 
   to prospective investors. Not that you’d want to, but you won’t be able to 
   avoid your friendly neighborhood entrepreneurial services attorney to pursue 
   an intrastate Crowdfunding.

The landscape for equity Crowdfunding is undoubtedly evolving rapidly. If the journey to what it may ultimately look like is a trip from San Francisco to Tokyo, we just passed under the Golden Gate Bridge (maybe we should sing it a song). Stay tuned for updates on federal and state Crowdfunding initiatives.

Follow-Up on Food For Thought

In my first entreVIEW post, I wrote about the Kickstarter campaigns of Travail and Birchwood. The New York Times recently published an article on the increased skepticism toward crowdfunding. The article highlighted two small business owners in Brooklyn who needed funds to relocate their business because their landlord increased their rent by more than 500%. To help alleviate the financial stress, they decided to start a crowdfunding campaign on Kickstarter. The business owners did receive some support, but a majority of the responses they received were negative.

Some of the critics of crowdfunding disapprove of business owners asking customers to provide funds for their projects, arguing that they are asking for “hand-outs” when they may have other means to achieve their financial goals. But others defend the practice as providing the opportunity to financially support a business that adds value to the local community in exchange for a gift and/or service from the business. In the conclusion of the documentary “Food, Inc.,” the narrator states that we vote three times a day on how we want to have our food processed. The same rule applies here—we can vote with our wallets to reward the businesses we value. 

I’m glad that the Twin Cities community has shown that it values Birchwood. Birchwood surpassed its goal and raised $112,126 in its Kickstarter campaign. The purpose of its campaign was to raise money for a much-needed expansion of the restaurant. I recently went to Birchwood for dinner (I had the black bean quinoa burger and a slice of key lime pie – yum!) to have one last meal before they close for the next ten weeks. Before they closed this past weekend, they asked customers to “leave your mark” on a piece of the original Birchwood that will be torn down during construction (see above). If you can’t wait until the renovation is complete, Birchwood will be operating a pop-up at nearby Verdant Tea on March 1st.

I look forward to visiting Birchwood when it reopens this spring!

Featured Comic: Friends, Family & Fools 11/25/13

Food for Thought

It’s no surprise that for my first entreVIEW blog post, I am writing about the local restaurant scene (see the top three things I am most likely to blog about). I love food. In fact, in law school, some friends and I created an informal food club where each month one person was assigned with choosing a new restaurant. It was a great distraction from the stress of law school! 

A recent trend for Minneapolis restaurants owners is to raise capital through Kickstarter.  Somewhat like Angel List, Kickstarter is a website that provides a platform for business owners to raise capital, but in Kickstarter’s case without giving up equity in their company. On its Kickstarter web page, the company describes the creative project they would like to pursue and the public can support the company’s endeavor by donating funds to the project. In exchange for their capital, the donor will receive a service or good from the business. For instance, Travail sought to raise $75,000 on Kickstarter by offering investors tickets to the soft opening of the proposed new restaurant, cooking classes with the chef, and reservations at their existing restaurant (there’s normally a 45 minute wait).  Travail’s fundraising efforts were hugely successful; they raised $255,669 in one month. 

After Travail’s success, Birchwood, another one of my favorite restaurants, is hoping to raise $100,000 on Kickstarter to fund an expansion of their restaurant. Birchwood is off to a great start, having raised over $30,000 in eight days. 

The question for other restaurant owners (or entrepreneurs for that matter) is whether they can achieve similar success using websites like Kickstarter. The biggest challenge for a business owner is to create awareness of the business’s fundraising campaign and to develop such a strong connection with customers that they want to contribute to the growth of the company. If you have been to Travail, you know that their food is consistently excellent and unique. They have created quite a loyal following with the success of Travail, Pig Ate My Pizza, and Umami.  They have carved out a niche in the Minneapolis restaurant market; customers are willing to wait over an hour to eat at their restaurants. If a business doesn’t have a dedicated following similar to Travail, it may be more challenging to attain its fundraising goals. Vast support from the community is vital to a successful fundraising campaign through online websites like Kickstarter. 

Congratulations to Travail for their fundraising efforts. I look forward to visiting the new Travail with my food club!

What Could Be More Fun Than A 585-Page Release on Proposed Crowdfunding Rules?

After about 18 months of eager anticipation, the SEC just published its proposed rules regarding Crowdfunding under the Title III of the JOBS Act. The release is 585 pages long so I’d suggest it may be an ideal time to buy stock in companies that supply paper to law firms across the country!

Unlike the recent changes under Rule 506 detailed in this prior post, which permit raising capital from accredited investors only using general solicitation (if you jump through all the right hoops to verify accredited status), the Crowdfunding rules, once finalized, will permit the raising of small sums of money from a large number of investors (whether accredited or not).

Unless you’ve been living in a cave, you know that companies have been crowdsourcing capital (on sites like Kickstarter and indiegogo ) for a while. Of course, this capital hasn’t come with any equity strings attached (maybe just a T-shirt or beta test promise). Title III of the JOBS Act is supposed to change all of this by permitting up to $1 million in equity capital to be raised in any twelve-month period from all types of investors.

Since these are only proposed rules (it took almost a year to get from proposed rules to final rules on the Rule 506 general solicitation), I haven’t yet dropped everything else on my desk to pour through all the details. A couple of key things to know that haven’t changed since I wrote about the crowdfunding provisions of Title III back when the JOBS Act was originally passed:

·         These are still just proposed rules. You still cannot conduct a crowdfunded securities offering (general solicitation with unaccredited investors) until the final rules are adopted (likely a minimum of months from now). You don’t want to end up like the buy a beer company guys.

·         There are still many requirements in the proposed rules that could limit the usefulness of crowdfunding for most companies. These include certain financial disclosures (depending on the amount of total capital being raised), other mandatory disclosures, the use of a broker or "funding portal,"  along with some ongoing reporting obligations to the SEC. The bottom line may be what I said in my original post:  “You won’t be able to do it without the assistance of a skilled securities lawyer (and, depending on the amount you’re raising, an independent CPA).”

·         There’s still quite a bit unresolved about crowdfunded equity offerings. For example, state securities commissioners (like Ohio) appear openly hostile to equity crowdfunding.

As with every JOBS Act post, stay tuned for updates as the final Title III Crowdfunding rules develop.