SEC Updates Rules For Equity Crowdfunding

Minnesota entrepreneurs could benefit from the new guidelines, which relax several restrictions and raise the cap on amounts that can be raised.

The Securities and Exchange Commission adopted final rules on Wednesdy that ease restrictions on intrastate equity crowdfunding, a move that is likely to impact entrepreneurs throughout Minnesota.
The updates allow businesses to put out offers in the state where they do business rather than where they’re incorporated, lifts restrictions on advertising through social media and raises the amount an issuer can offer up to $5 million.
The changes are likely to affect Minnesota’s equity crowdfunding law, known colloquially as MNvest, which governs both offerings in the state and the portal on which they can raise money. It passed in 2015 and made it through the state’s Department of Commerce rulemaking process this summer. But the legislation is based off the previous guidelines by the SEC—which hadn’t been updated since 1988.
The most visible of the changes is the ability to raise up to $5 million per offering, which was previously capped at $1 million. That update reflects the increased cost of starting a business.
The other changes largely impact who can list their offerings on the portals. Previously, companies that operate in one state but are incorporated in another—such as tax-friendly Delaware—were ineligible to raise capital through MNvest. Now, organizations are tested on their residence based on where the majority of their employees are headquartered. The rules also streamline residency requirement verification for investors.
Zach Robins, an attorney at Winthrop & Weinstine and cofounder of MNvest, which pushed Minnesota legislation, said the new corporate residency rule was a “very practical change,” because as many as half of the companies he works with are based in Delaware.
The final major change allows issuers to advertise to out-of-state residents. The prohibition on that meant, in a practical sense, that offerings couldn’t be posted on social media websites.
The SEC “acted in the best interest of small business, which I think can only be characterized as a good thing,” Robins said. “These changes helped clean up some details within existing laws that were causing big headaches.”
He said that, in particular, the updates would be beneficial for startups, young entrepreneurs that lack a network of well-heeled investors and firms in Greater Minnesota, which has fewer options for angel investing.
Even with the new rules in place, nothing changes for Minnesota investors immediately. That will require changes to MNvest law during the next legislative session.
In fact, while legislation and rules are place, equity crowdfunding is essentially impossible at this time: No portals for companies to list their offerings are currently available, as they’re waiting approval from the Department of Commerce. Robins said he’s hoping to see them online the next week or two. If that’s the case, he said there are offerings already ready to go and could be available for the public to invest by the end of November.