After meeting stiff resistance from regulators in January, a bill that would make it easier for start-up companies to raise capital in Minnesota has survived and moved forward at the Legislature, with supporters cautiously optimistic that it will become law.
The bill would make legal in Minnesota a new way for entrepreneurs to raise money: equity crowdfunding — think of Kickstarter, except rather than making a donation, the investor actually buys a stake in the company.
A compromise hammered out in recent weeks addresses objections raised by state regulators, though negotiations are ongoing. The debate quietly playing out in the Capitol mirrors one happening nationally.
Equity crowdfunding was supposed to be legal nationwide by now, enabled by the 2012 JOBS Act. But federal regulators dragged their feet over worries that unscrupulous people will use crowdfunding to steal money from investors. Advocates fear that when the federal rules are finally adopted, they will be so burdensome that deals won't happen.
States anxious to promote small-business growth moved into the void with rules of their own. So far, 13 states, including Wisconsin, have passed laws to legalize equity crowdfunding. The bill introduced in Minnesota, pushed by a group called MNvest, initially proposed allowing people to invest up to $10,000 in local companies that are trying to raise up to $5 million.
Such a law would give 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 legislation gathered support from the Minnesota Chamber of Commerce, LifeScience Alley, the Minnesota High Tech Association and the Minnesota Black Chamber of Commerce.
Minneapolis attorneys Zach Robins and Ryan Schildkraut, who started MNvest, met with the Minnesota Department of Commerce in September to discuss the legislation, and Sen. Terri Bonoff, a centrist DFLer from Minnetonka, jumped on board. Rep. Jenifer Loon, R-Eden Prairie, shepherded the proposal in the House.
"I think it will spur economic growth. It'll spur innovation, creativity, and allow us to continue growing in the sectors that will make Minnesota strong," Bonoff said.
An early setback
When the legislation was first introduced in January, it got a cool reception from state regulators. Commerce Commissioner Mike Rothman laid out a list of nine objections in a Jan. 28 letter to Bonoff.
"As currently drafted, the commerce department cannot support this legislation," he wrote.
Rothman's concerns boiled down to worries that investors could lose money, might not be able to discern legitimate offerings from improper ones, and could be defrauded. It was the first formal communication on the legislation from the department and was released at a Senate hearing.
"The nature of their objections wasn't exactly surprising in light of the fact that the department considers protecting investors to be its primary purpose," Schildkraut said. "I personally was surprised at the timing and manner in which they delivered their objections, and we left the hearing with serious doubts about whether the bill could withstand the commissioner's opposition."
Department officials did warn lawmakers of their objections before unveiling the letter, and they agreed to meet with Robins and Schildkraut weekly to work out problems with the bill.
Coming to compromise
In Friday meetings for the next six weeks, the two sides sat down and hashed out a compromise.
The maximum amount a company can raise was dropped from $5 million to $2 million in the Senate version, addressing Rothman's view that $5 million is "too high." Language was added on data privacy and how to disqualify bad actors. The two sides talked through some of Rothman's other objections and the bill's supporters agreed to require that companies looking for investors advertise only to Minnesotans.
One thing the bill's supporters would not budge on was Rothman's contention that crowdfunding transactions must go through a registered broker-dealer. Such a rule would undercut the entire bill, Robins and Schildkraut said, since a central idea is to eliminate the need for a broker.
"It just wasn't a very practical consideration," Robins said. "If this system is going to work and it's going to be effective, cost needs to be low."
The Commerce Department backed down on that point, and Robins said the department has been "open-minded" throughout negotiations.
The state agency declined to make someone available for an interview Tuesday, but Rothman issued a statement saying he mostly supports the latest version of the legislation.
"The department has worked with all parties and the bills are much improved over the introduced versions," Rothman said in the statement. "Nearly all of the concerns the Commerce Department has expressed have been addressed."
The next step for the legislation is to get through finance committees in each chamber of the Legislature. Bonoff said it likely won't pass until the very end of the session, but its "prospects are good."
A final sticking point, according to Robins, is the $10,000 limit for investment by an individual. Rothman wants that limit lowered to $5,000. It's important from MNvest's perspective that the department support whatever ultimately is passed.
"We need the department to be comfortable with this bill," Robins said, "because it falls into their hands."