Beyond MNvest: 7 Ways to Crowdfund Your Business in Minnesota

By Todd Taylor and Brian Edstrom

Are you a Minnesota entrepreneur considering equity crowdfunding (MNvest in Minnesota) to raise money for your business? Great! Minnesota law lets Minnesota companies raise money from local investors. However, MNvest is not the only, and is often not the best, option to raise money from the crowd. Part I clarifies a few misconceptions about MNvest. Part II outlines a few alternative options business owners should consider before embarking upon a crowdfunding campaign and introduces the process we employ as business lawyers when helping a company decide how to raise money. Part III puts these options into context by analyzing them against a hypothetical scenario.

Part I: Common Myths about MNvest

MNVest.org and MNvest (the law) are not the same thing

“MNvest” is the shorthand title of a Minnesota state law, the MNvest Securities Registration Exemption (Minn. Stat. § 80A.461), which became law in 2015. When MNvest was introduced in the Minnesota Legislature, supporters of the law created MNvest.org, a website and non-profit organization designed to promote the bill and provide information about equity crowdfunding. While MNvest.org is a great resource, it is not a government agency nor is it a government-sponsored program, and companies who want to raise money using MNvest are not required to work with or through MNvest.org. Companies are, however, required to meet certain notice filing requirements with the Minnesota Department of Commerce. Information on those requirements is available on the Commerce website at https://mn.gov/commerce/industries/securities/mnvest/. 

Complying with MNvest is not necessarily easy, or cheap

MNvest has been presented, in part, as an easier, cheaper option for companies to raise money. While it is true that it is easier and cheaper to raise money through MNvest than it is to do an initial public offering (“IPO”), MNvest is still a complicated law that includes many requirements. Companies using MNvest will probably need to hire an attorney and an accountant. Some attorneys say a MNvest offering will cost a company $30,000 in legal and accounting fees. Though we believe other options may be less expensive, companies should be prepared to spend money to raise money through MNvest.  

It was not illegal to engage in equity crowdfunding before MNvest became law

There are numerous options to raise money through an equity crowdfunding or crowdfunding-like campaign, several of which existed before MNvest. Some reports on equity crowdfunding have celebrated MNvest as a groundbreaking law that, for the first time, made it legal to crowdfund your business in Minnesota. There are many great reasons to celebrate MNvest; new options that help businesses raise money are always welcome. However, MNvest should be celebrated as adding to existing options available to companies, not as the only option. In fact, in some ways, MNvest is an option that puts more limits on raising money that many other options. Other options that companies can use to raise money will be discussed in Parts II and III.

MNvest does not bring the crowd to you

MNvest lets companies offer and sell stock over the Internet to investors who are not necessarily wealthy or highly sophisticated (“non-accredited investors”). However, a company using MNvest will not necessarily find a vast crowd of untapped, willing buyers to purchase shares; it is fairly unlikely that web-surfing strangers will simply happen upon a MNvest offering and decide to invest. The best way for a company to attract investors is to: (1) create a well-thought-out business plan that tells a good story and gives people a compelling reason to invest, and (2) make that business plan available to the company’s own crowd of potential investors (e.g., friends and family, neighbors, alumni networks, etc).

MNvest requires companies to raise money through a MNvest portal, a website that is registered with the Minnesota Department of Commerce. The primary purpose of the portal is to provide disclosure documents about the company to potential investors and transfer money from investors to a bank account held for the company. The portal also helps the company track investments and ensure that it meets some of the conditions and restrictions of MNvest (such as the requirement that sales be limited to Minnesota residents). Though conducting an offering through a portal can help tremendously with logistics, the portal does not find a crowd of investors. In fact, the portal is prohibited from recommending a specific company or providing investment advice to people visiting the portal. To run a successful MNvest campaign, a company will need to find ways to drive its own crowd to the portal.

MNvest does not permit unrestricted advertising of your offering

Some people think MNvest lets companies freely advertise that they are raising money, such as by posting information on social media, engaging in media interviews, or conducting in-person presentations about the offering. This is not true. Although MNvest permits companies to engage in some advertising, they can share only limited information about the offering outside of the portal where it is posted. If a company plans to conduct media interviews, post information about the offering on its Facebook page, or otherwise discuss the offering outside of the portal, it should be careful to first figure out what is possible (or not) under the law so as to not commit an advertising violation. These restrictions also apply to any portal that is used, as well as anyone that is a formal supporter of the company. In a worst-case scenario, an advertising violation could lead the state regulator to shut down an offering or impose penalties, such as fines.

Part II: Choosing the Right Option for You

When raising money using equity crowdfunding, a company must comply with both federal and state securities laws (and sometimes multiple states’ securities laws). The bad news: the relationship between these laws can be very complex. The good news: because there are various federal and state laws at play, a company often has different options to choose from when considering how to legally run an equity crowdfunding campaign. Ultimately, the company must balance its unique circumstances and fundraising goals against the various restrictions included in these different legal options. A good saying to keep in mind is, “what one hand giveth, the other taketh away.” Each option presents certain advantages, as well as certain disadvantages. Companies may find that no option perfectly matches their goals, meaning they need to give something up to make the offering work. 

At Avisen, our attorneys help companies navigate this balancing act by working together to bring different perspectives to our clients. For example, Todd has over 20 years of experience providing legal advice to companies looking to raise money, and Brian previously served as the Director of Securities at the Minnesota Department of Commerce, where he oversaw staff that enforced Minnesota’s securities regulations. The below chart provides an overview of questions we ask companies interested in equity crowdfunding, and outlines how the questions come into play under seven options companies can consider. A high-level explanation of each question follows the chart. The 7 regulatory options included in the chart are: Regulation Crowdfunding (“Reg CF”); MNvest; Rule 504/SCOR; Regulation A Tier 1 (“Reg A Tier 1”); Regulation A Tier 2 (“Reg A Tier 2”); Rule 506(b); and Rule 506(c).

It is extremely important to note that this chart, and the information provided throughout this article, is a starting point only for what goes into a more detailed legal analysis. Each of the laws referenced include additional restrictions and requirements that are not discussed here. For example, the chart does not address “bad actor” restrictions, integration issues, anti-fraud provisions, regulations applicable to finders, agents, broker-dealers or investment advisers, reporting requirements, or other regulations that may apply to a company conducting a securities offering. This article is not intended as legal advice, and no one reading this article should depend on it without consulting an attorney.

Companies interested in utilizing one of the 7 options referenced in the chart should consider the following questions.

Question 1: How much money do you need?

Some fundraising options limit how much money you can raise. For example, Regulation CF only allows you to raise up to $1 million in one year, and MNvest only allows you to raise up to $2 million in one year. Other options, such as Rules 506(b) and 506(c), allow you to raise an unlimited amount, but include other significant limitations. You should only plan to raise as much money as you think you will need to accomplish what you tell investors you intend to accomplish.

Question 2: Do you want non-accredited investors?

Some options prohibit or limit sales to “non-accredited” investors. The best way to understand who is “non-accredited” is to understand what is required to be accredited. Accredited investors include individuals who, for the past two years, have made at least $200,000 per year (or $300,000 if joint with a spouse’s income), or who have a net worth of at least $1 million, not including the value of the individual’s home. Most people (over 90% of the U.S. population) do not meet these thresholds, making them non-accredited investors. 

Some options allow sales to non-accredited investors, subject to certain limitations. For example, Rule 506(b) allows you to sell to up to 35 non-accredited investors (along with an unlimited amount of accredited investors) so long as the non-accredited investors are “sophisticated.” Reg A Tier 2, MNvest, and Regulation CF all permit you to sell to an unlimited number of non-accredited investors, but place limitations on how much you can accept from those investors. For example, MNvest prohibits you from accepting more than $10,000 from any individual, non-accredited investor. A Rule 504 offering paired with a SCOR registration allows you to raise money from an unlimited number of non-accredited investors (so long as they live in the state(s) where the SCOR is filed), and does not limit the amount those individuals can invest.

If you really want to raise money from anyone and everyone, you should choose an option that permits sales to non-accredited investors. That said, selling stock to non-accredited investors always adds a layer of complexity to your offering. As a general rule, non-accredited investors are less sophisticated than accredited investors when it comes to purchasing stock. For this reason, companies selling stock to non-accredited investors may experience heightened regulatory scrutiny. They may also need to spend more time explaining their offering, or responding to investor questions and requests.

Question 3: Do you want to advertise?

Some options let you engage in “general advertising and solicitation,” while others prohibit it. Still other options permit you to engage in some advertising, but limit what is included in the advertisement. 

What is “general advertising and solicitation”? The answer is complicated. Generally speaking, general advertising and solicitation occurs if you publicize your offering to anyone with whom you do not have a substantial, pre-existing relationship. If you publish an advertisement in a widely-circulated newspaper or trade journal, you are engaged in general advertising and general solicitation. If you send an email to 20 of your closest friends, you are not. The question gets trickier when you are publicizing your offering in a way where you reach people with whom you have some relationship, but who you do not know well. For example, if you send an email to 20 repeat-customers who are not otherwise your friends or family, did you generally advertise or solicit? Perhaps not (though it will depend on the unique facts and circumstances). If you post about the offering in a Facebook group including 200 members you have not met, but with whom you share a common interest, did you generally advertise or solicit? Probably.

Reg A and Rule 506(c) permit general advertising and solicitation. Rule 506(b) prohibits it. MNvest and Regulation CF permit you to engage in limited advertising, but require you to include certain language in advertisements. Rule 504 allows you to engage in general advertising, but only in states where you also comply with a state law that allows general advertising and solicitation. Most companies conducting a Rule 504 offering comply with such state requirements by conducting a Small Corporate Offering Registration (“SCOR”) offering. If you know you want to advertise your offering as widely as possible, you should consider a Rule 506(c), Rule 504/SCOR, or Reg A offering.

Question 4: Do you want to raise money from investors in multiple states?

Some options place limitations on where you can sell stock, while others do not. MNvest is only available to businesses located and doing business in Minnesota, and can only be used to raise money from Minnesota residents. Rule 504 permits you to raise money in any state, so long as you also comply with state laws where sales occur. Regulation CF, Rule 506(c), Rule 506(b), and Reg A Tier 2 allow you to raise money from residents anywhere in the United States. If you already know you will have investors in multiple states interested in investing in your business, you should probably cross MNvest off your list. On the other hand, if you want your offering to be “hyper-local,” focusing on residents of a specific community in Minnesota, MNvest may be a good option for you. 

Question 5: How important is it to you to minimize legal & accounting fees?

Registering a stock offering is a time-consuming, expensive process. Although most of the options discussed in this post are exempt from registration, many require companies to file documents with regulators, and/or to draft a disclosure document and attachments to share with investors. Compiling and drafting these documents correctly, and in a manner that gives you the most legal protections if something goes wrong, can be daunting. Some of the regulations—namely Reg CF and Reg A Tier 2— also require you to file ongoing reports with regulators, which create added expenses and headaches down the road.

In the chart above, we identify which options are “high cost,” “medium cost,” and “low cost.” We label the options in this way based on our experience working with clients, however these labels may not be accurate for every company under every set of circumstances. The exact amount of legal and accounting fees you will need to spend may vary widely depending on your business and the law firm or accounting firm you work with. 

Part III: Putting it All into Context

Now, let’s put this all into context. Using the chart above, consider the following hypothetical and determine which option may be best for Company A. 

Hypothetical: Company A needs to raise $1.5 million to $3 million to pursue their business plan. They want to raise money from friends, family and members of their community in Minnesota, and they also know a few wealthy investors in Wisconsin and Florida who would like to invest. They want to raise money over the Internet. Though they do not plan to promote the offering over social media, they are working with a local journalist who wants to profile them in a newspaper article. The journalist plans to mention that they are conducting a crowdfunding campaign. The Company has not budgeted much money for legal and accounting fees and wants to spend as little as possible to conduct the offering.

• If Company A wants to raise more than $1 million, Reg CF is out. Although all other options remain available, Company A will need to reduce its maximum to $2 million to comply with MNvest.
• If Company A wants to raise money from people who are non-accredited investors, Rule 506(c) is out. The other options remain available, subject to other limitations.
• Any offering conducted online where anyone can see it involves general advertising, meaning Rule 506(b) is out. Rule 504 is only available in states where Company A also complies with state law, such as by submitting a SCOR filing to a state regulator. 
• The newspaper article profiling Company A and mentioning its crowdfunding campaign is general advertising. MNvest and Reg CF are out unless the article complies with the advertising limitations included in those regulations.
• If Company A wants to sell stock to investors in multiple states, MNvest is out. Rule 504/SCOR and Reg A Tier 1 remain available, but only if the company complies with state laws in Minnesota, Wisconsin, and Florida (the states where Company A knows potential investors).
•  If Company A wants to spend as little money as possible, Reg A Tiers 1 and 2 probably do not make sense, as they involve relatively high costs, and Company A does not need to raise up to $20 million or $50 million.  

You will quickly notice that no option is perfect. But, hopefully this example will help as you consider various options for your own company. Remember, this is just the tip of the iceberg. If you need more assistance conducting an equity crowdfunding offering, you can reach us at Avisen at 612-584-3400.

Todd has over 20 years of experience practicing business law at law firms large and small and has assisted numerous companies in raising money. Prior to joining Avisen, Brian was the Director of Securities at the Minnesota Department of Commerce, where he oversaw registration activity and enforcement investigations involving securities offerings occurring in Minnesota, including MNvest offerings.

Business owners planning to conduct an equity crowdfunding offering are subject to highly complex federal and state regulations, the violation of which can lead to serious consequences. This article offers general information only and is not offered as legal advice. If you have more questions about complying with federal or state securities regulations, contact Todd or Brian at Avisen Legal, P.A.