To attorneys Ryan Schildkraut and Zachary Robins with the law firm Winthrop & Weinstine, MNvest is a big deal. Schildkraut and Robins helped craft the bill, and have been pushing it since last year.
"This is about allowing growing Minnesota companies to use the Internet to connect with ordinary Minnesotans who want to be investors," Schildkraut said. "And conversely allowing ordinary Minnesotans to use the Internet to seek out opportunities to invest in the next great generation of Minnesota companies."
The idea of crowdfunding is not new -- think Kickstarter. But the idea of selling securities, that is, equity or debt in a company, involved getting around Depression-era protections that limited such dealings both for investors and companies seeking capital.
Some of those barriers have been removed at the federal level, notably with the 2012 JOBS Act. But delays in getting the federal rules written have spurred individual states to act. According to crowdfundinglegalhub.com, 24 states have enacted securities crowdfunding laws or have them pending. Minnesota became the 25th with Gov. Dayton's signature.
But it did not come without controversy. In January, state Commerce Commissioner Mike Rothman expressed his opposition in a letter to Sen. Terri Bonoff, DFL-Minnetonka, who was pushing the legislation.
Among other things, Rothman was worried that MNvest strayed too far from established fraud protections for investors and data security.
These concerns were mitigated in a series of meetings to craft the present law -- which includes caps on investments, on capital raised, and a series of disclosures. The money has to stay in Minnesota.
The securities will be sold through state-registered Internet portals -- private sector websites set up to connect potential small investors with small businesses seeking funding.
Next up, the state Commerce Department will write the rules for how MNvest will be implemented and the portals certified.
This will include a public comment period and possibly hearings, Commerce spokesman Ross Corson said. The process begins with the start of the state's fiscal year, July 1.
In a recent interview, Schildkraut and Robins talked about MNvest, why it was needed and how it will work. Their answers have been edited for context and clarity.
If the private sector is running this, why do we need a state law?
Schildkraut: It comes down to advertising, and what's called general solicitation. The main securities laws we have are the federal Securities Acts of 1933 and 1934. As a general rule, anytime anyone is selling securities, they have to register the securities with the federal government, the SEC and states where the securities are being sold; or they can find an available exemption.
So the main exemption that most small companies use is called the private placement exemption. That says you can sell securities and not register them as long as it is not a public sale. Well, in order for it to be not a public sale, you can't use general solicitation, which is advertising.
And so what we're doing is fixing that advertising problem. Because if you can't advertise, you can't crowdfund.
And how do companies on Kickstarter get around this?
Schildkraut: They don't sell securities. What they're selling is a perk, a donation, a reward, a T-shirt or a CD.
A security is broadly defined under federal law as an investment contract. In layman's terms that means anything that has the possibility of financial upside.
There's other sites that do crowdfunding where they sell securities, and they're doing that under a new federal law that's been on the books for about 18 months, and that allows people to advertise and crowdfund, but they can only sell to accredited investors.
Robins: I see this as three problems. The first problem is general solicitation. The second problem is accredited versus non-accredited investors. And there are limits on the number of non-accredited investors. And about 97 percent of the population is deemed to be a non-accredited investors.
Schildkraut: Accredited is defined as having annual income for three consecutive years of over $200,000 or $300,000 jointly with your spouse. Or net worth of over a million dollars, not including the value of your primary residence.
I guess part of the theory, when they adopted the laws back in 1933, was that accredited investors are sophisticated individuals who don't need the protection of the laws.
Robins: And that's the part that bugs me the most. Because I just don't think it's fair to say that 97 percent of the population isn't sophisticated enough to invest in a coffee shop or a restaurant or a brewery.
Those are three different types of examples of companies that would love to use this bill to raise capital.
Does this get back to Commissioner Rothman's initial opposition -- protecting the small investor?
Schildkraut: I think so. I think (Commerce) view their role as the agency that protects consumers more than anything else, and they're doing their job.
But I think it's important to keep in mind that this law has more protections in it than the current system does.
You said this solves three problems, what's the third one?
Robins: The third element is bringing it online. So that's what MNvest does, it allows both broker-dealers and non-broker-dealers to create what's known as a MNvest portal to sell these securities online.
Who runs the portals and how do they get started?
Schildkraut: Anyone can run a portal, provided they comply with the requirements in the law, and they register and they are approved by the Department of Commerce.
That was kind of a key issue; in the proposed federal rules, one of the main criticisms was that they said portals could only be run by registered broker-dealers.
Those would be the same investment banks that don't do these small deals right now. What we were pretty adamant about, for the Minnesota bill, was the ability for anyone to run a portal.
So I think it will be interesting to see what happens. You may very well see some niche portals for certain industries. For example, the first portal in Wisconsin, to utilize the Wisconsin law, is called craftfund.com, and they are a niche portal that only focuses on craft breweries, distilleries and wineries.
Robins: There's this sort of new trend known as social investing, or impact investing, local investing. And it's a very powerful movement. What it basically says is, if I'm an investment fund, or mutual fund, pension fund, I may want to take 5 percent of the assets and put it in local investments, or community investments or social investments; that's where I think this becomes very powerful.
What's the incentive to starting a portal?
Schildkraut: Obviously it's got to be a viable business for someone to jump into it. They have to charge either a flat fee, or kind of a variable fee, a monthly fee, based on the amount of time the deal is listed on the portal. What they can't do, unless they're a broker-dealer, is charge a success fee, a percentage compensation.
What's to prevent broker-deals from getting involved?
Schildkraut: Nothing, we hope they do get involved. It's just that that's how the current system has fallen apart. Because in the current system, broker-dealers are not doing these small deals, they just simply are not interested.
Even the smallest shops we know in town, they're saying if it's less than 5 million dollars, we're not interested.
So this really is for the little guy; small business meets small investor.
Schildkraut: Yes, because this is going have a cap, the cap on the deals is going be $2 million. Non-accredited investors are capped at $10,000. Accredited investors are not subject to a cap.
How has the investment community responded to this?
Schildkraut: The investment bankers and private equity groups, they love this, because they're not playing in this space, they're not competing. And they want to invest in companies that have a few years of success, have a high trajectory.
So they view this was a way to help the early-stage companies, which will lead to more middle-market growing companies, which are more targets for them to be involved with.
©2015 the Pioneer Press (St. Paul, Minn.) Distributed by Tribune Content Agency, LLC.
