In recent years, crowdfunding has grown in popularity as an option for business owners and entrepreneurs to raise money. Generally speaking, equity crowdfunding describes the process where a business owner utilizes an online intermediary or “portal” to ask for money from investors in exchange for the promise of a financial return on that investment. This type of transaction is a security subject to state and federal regulations. Equity crowdfunding differs from donation-based crowdfunding (think Kickstarter or Indiegogo), where “investors” are actually donating money to a company in exchange for nothing, or something of nominal value, in return. Donation-based crowdfunding is not subject to securities regulations.
As a result of the JOBS Act of 2012, several new opportunities have emerged for business owners to lawfully engage in equity crowdfunding. One such example is Regulation Crowdfunding (or “Regulation CF”), a federal law permitting companies to engage in equity crowdfunding to raise up to $1 million in 12 months from investors throughout the U.S. (subject to additional conditions and limitations.) Several state legislatures have followed suit and implemented state regulations permitting intrastate equity crowdfunding. In 2015, the Minnesota Legislature passed the MNvest Securities Registration Exemption (or “MNvest), which permits certain business owners doing business in Minnesota to raise up to $2 million in 12 months from Minnesota residents (again, subject to additional conditions and limitations).
Two recent changes to Regulation CF and MNvest may make these options more attractive to business owners. The Securities Exchange Commission (SEC) recently increased the investment limits included in Regulation Crowdfunding (“Regulation CF”) to account for inflation. Now Regulation CF permits issuers to raise up to $1.07 in 12 months, as well as a slightly higher amount from each individual investor participating in the offering. This change became effective on April 12, 2017. Further, the Minnesota Legislature amended the MNvest statute to make it more flexible for business owners by loosening restrictions on what it means to “have a principal place of business” and to be “doing business in” Minnesota. The MNvest amendments also clarify that business owners can sell securities “registered by qualification” over an MNvest portal. This means that, so long as the security offering is first registered with the Minnesota Department of Commerce and otherwise complies with Minnesota law, business owners can raise an unlimited amount of money from Minnesota residents when conducting the offering through an online intermediary that is registered with the state as a broker-dealer or MNvest portal. Changes to the MNvest statute became effective on April 20, 2017.
Minnesota business owners should also understand that Regulation CF and MNvest are not the only means of engaging in equity crowdfunding – or crowdfunding-like – financing campaigns. Several other exemptions from federal and state securities registration are described below.
Rule 506(c) of Regulation D.
Rule 506(c) allows a company to raise an unlimited amount of money from investors located throughout the U.S., so long as it takes “reasonable steps” to ensure all investors purchasing securities are “accredited investors.” Broadly speaking, accredited investors include: certain institutional investors; corporations or trusts with assets in excess of $5 million; directors and officers of the issuer; and individuals with an income of $200,000 or more (or $300,000 if income is joint with a spouse), or a net worth of $1 million or more, excluding the value of a primary residence. Business owners relying on Rule 506(c) must file notice of the offering with the SEC and state regulators where offers occur using “Form D.”
Rule 504 of Regulation D.
Rule 504 allows companies to raise up to $5 million within a 12-month period. Rule 504 places limitations on an issuer’s ability to engage in general advertising and solicitation, unless the offers and sales of securities meet certain state registration requirements in states where the offer occurs. Many states have adopted a registration process, called Small Company Offering Registration (“SCOR”) as a companion law to Rule 504. The SCOR process is described in more detail below. Issuers relying on Rule 504 must file notice of the offering with the SEC using “Form D” and must comply with applicable state registration requirements.
Regulation A Tier 1.
Regulation A Tier 1 allows a company to raise up to $20 million in any 12-month period, so long as the offering is first “qualified” by the SEC and with state regulators in states where sales occur. The qualification process requires the issuer to draft and file with regulators documents that provide important information about the offering and the company and to make those documents available to prospective investors.
Regulation A Tier 2.
Regulation A Tier 2 allows a company to raise up to $50 million in any 12-month period, so long as the offering is first “qualified” by the SEC. The qualification process requires the issuer to draft and file with regulators documents that provide important information about the offering and the company and to make those documents available to prospective investors. Tier 2 issuers are also required to file ongoing reports with the SEC. Finally, Regulation A Tier 2 limits issuers to accepting from non-accredited investors no more than the greater of 10% of the investor’s annual income or net worth. (No such limits apply to accredited investors.)
Small Company Offering Registration (“SCOR”).
Minnesota has adopted a SCOR registration process to assist issuers wishing to rely on the Rule 504 federal exemption. This means that issuers can utilize SCOR to raise up to $5 million from residents of Minnesota in 12 months. SCOR places no individual investment limits on purchasers and permits sales to non-accredited investors. SCOR issuers must file a short-form registration application with the Minnesota Department of Commerce before commencing with the offering. However, SCOR registration is generally less onerous and expensive to the issuer than a full registration. Minnesota law permits issuers to conduct a SCOR offering via a registered MNvest portal.