New rules announced this week will make it easier for small companies to raise capital from small-time investors, another step forward for Minnesota’s fledgling investment crowdfunding community.
The Securities and Exchange Commission on Wednesday released the guidelines, drafted in response to the 2012 JOBS Act, for in-state crowdfunding by companies who aren’t required to register with federal regulators.
Such a law gives entrepreneurs the chance to raise money from the general public even when they can’t attract the attention of a venture capitalist or angel investor. The process works like Kickstarter, except rather than making a donation in exchange for a knickknack, the investor buys a stake in the company.
Under the new rules, companies can raise up to $5 million through crowdfunding instead of just $1 million, and they can be incorporated out of state, advertise a stake in their firm on the internet and use social media to promote their offerings, so long as they sell only to in-state residents.
Up to now, internet advertising was considered a rules violation, because it reached across state lines, and a company based in Minnesota but incorporated in Delaware couldn’t raise money in Minnesota.
The new rule “eliminates an existing restriction on offers that has been outmoded by the tremendous expansion of internet communications,” Mary Jo White, the chairwoman of the Securities and Exchange Commission, said in a statement.
Mike Rothman, Minnesota’s commerce commissioner, said the “rule changes represent a significant step toward better alignment with modern technology and business practices” and the state Department of Commerce will review the final rules to see whether the amendments affect Minnesota’s securities regulations.
It will be a while before small-time investors can buy a stake in a local entrepreneur’s brewery or restaurant.
“Next spring is when most of this is going to take effect, which is fine because we’re going to need to amend the state statutes to match the federal law,” said Zach Robins, a Minneapolis attorney who helped write MNvest, Minnesota’s crowdfunding legislation.
Minnesota’s crowdfunding rules now cap the amount a company can raise at $2 million, or $1 million, depending on the format used.
And it is still impossible for a company to raise investment from crowdfunding in the state, because no portals for transactions have gained approval from the Minnesota Department of Commerce. Two portals have applied to operate in the state, Robins said.
Even once the portals are in place and Minnesota’s laws are amended, investing won’t be for the faint of heart. It can cost thousands of dollars in legal and accounting fees to do a deal, though work is underway to drive down costs in Minnesota and elsewhere.
Two weeks ago, MNvest.org signed a deal with a firm called iDisclose, which makes software for securities-issuing documents for a flat fee of $2,000. Meanwhile, MNvest.org and tech.mn, a technology website, are working to create a series of documents that could finalize a deal, which will be offered for free or very low cost, Robins said.
About half of all investment crowdfunding in the U.S. is debt, with the investor lending to the business for a fixed term at a fixed rate, Robins said. For equity investing to really take off, someone will need to develop secondary markets and portals will need to build tools to allow investors to sell their shares, something that would require a hunt for a specific buyer today.