Traditional crowdfunding sites like Kickstarter and Indiegogo are “rewards-based”, meaning they are selling goods and services, not financial profit. When a company sells crowdfunding investments, they are within the purview of federal and state securities law.
There are only a few different ways that a private company can publicly sell securities to ordinary investors without breaking the law.
Spoiler alert: none of them are great.
Federal Regulation A
Lawyers call this a “mini-IPO”. Under Regulation A, a company can sell up to $50 million in securities. It can advertise and sell to anybody across the country, and is exempt from state-level securities regulations. To qualify for this law, the SEC requires an extremely detailed disclosure filing and ongoing annual financial reports.
The biggest downside to Regulation A is the legal and accounting costs for the initial filing (likely over $100k) and ongoing reports (likely over $10k each year). However, it does give companies a lot of freedom to sell investments.
When I launched U.S. Clean Energy Fund back in April, Regulation A was the only option available.
Fortunately, a better option is available now.
Federal Equity Crowdfunding
And that better option is not federal crowdfunding.
Equity crowdfunding was one of the provisions of the JOBS act, passed back in 2012. On May 16 (of 2016!), the SEC approved the final rules for the new exemption. They allow companies to sell up to $1 million of securities, with some significant restrictions:
- Most individuals are limited to $2,000/year across all crowdfunding offerings.
- Investments must occur through an independent “portal” website.
These issues make it quite expensive to sell securities via federal crowdfunding. These costs may go down over time, but right now they are a major roadblock.
MNVest (and the SEC Intrastate Exemption)
“MNVest” is a brand-new Minnesota law that went into effect on June 20, 2016. It allows Minnesota businesses to sell securities to Minnesota residents. By remaining entirely within a single state, securities are exempt from most federal regulation.
MNVest is similar to federal crowdfunding, with a few important differences:
- Companies can raise twice as much (up to $2 million).
- Individuals can invest 5 times as much (to $10,000) — per company.
- Portal websites can be operated by the companies actually selling the securities.
These laxer requirements make MNVest a much easier way to raise capital — of course, the big sticking point is the whole “intrastate” thing. Fortunately, Minnesota is in the midst of a solar power boom, so there are ample opportunities for clean energy investment within the state.
What Do You Think?
I’d love to hear any thoughts or questions you have about crowdfunding. Add a comment below, or send me an email!
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