Would MNvest crowdfunding draw investors?

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By Karlee Weinmann, Finance and Commerce

“April 9 — Policymakers this week continue to fine-tune proposed legislation that would loosen restrictions on who can invest in Minnesota companies, but industry watchers say it’ll take more than the bill’s passage to make it a game-changer for emerging outfits with limited access to capital.”

The proposed law, known as MNvest, would plant Minnesota among nearly 20 other states that allow equity crowdfunding, making it legal for businesses to advertise investment opportunities to all Minnesota residents – not just the standard pool of accredited investors.

Mirroring other states’ equity crowdfunding legislation, MNvest relies on an exemption from federal securities law that for decades has put stiff contours around who can even know about a company’s fundraising efforts, essentially narrowing the field to accredited investors and funds.

Crowdfunding advocates, including bipartisan supporters in the state Legislature, say the current framework puts companies and consumers at a disadvantage, stifling growth by keeping consumers and community members from feeding into capital-hungry outfits they support.

“There are huge swaths of the population basically cut off from the opportunity to raise capital,” said Zach Robins, a corporate and securities attorney at Winthrop & Weinstine who helped craft the bill. “We hope this tool will break down some barriers to allow anyone with a great idea and support behind them to raise capital with support from the community.”

The bill’s champions say they’re cautiously optimistic the legislation will pass as part of the omnibus bill after clearing a handful of committees in both chambers and hammering out a series of compromises with the Minnesota Department of Commerce, its toughest critic so far.

On Tuesday, the House Committee on Job Growth and Energy Affordability Policy kept up the momentum when it laid over the legislation for potential omnibus inclusion after a brief presentation by the House bill’s chief author, Rep. Jenifer Loon, R-Eden Prairie, and testimony from Robins.

A companion bill in the Senate, with Sen. Terri Bonoff, DFL-Minnetonka, as chief author, is awaiting further consideration from the Environment, Economic Development and Agriculture Budget Division of the Finance Committee, which can include MNvest in its omnibus bill.

But even if the legislation wins approval, businesses and investors alike will need to parlay their curiosity into returns to sprout a permanent new marketplace that actually delivers on the opportunities MNvest theoretically presents.

Several of the states with similar legislation on the books have struggled so far to put momentum behind equity crowdfunding in practice. In neighboring Wisconsin, one of the first states to establish its own crowdfunding platform, just two deals have cropped up since its system went online last year after a clean pass through the state legislature.

Technical problems, strict escrow requirements and a general lack of awareness in the business community fed into the sluggish start, said David Dupee, the attorney and entrepreneur who helped shape Wisconsin’s pioneering law.

A couple more Wisconsin deals are scheduled over the next few months, he said, but participation still lags. That’s primarily because business owners who could cash in don’t understand the ins and outs of the system, he said.

That’s a pitfall Minnesota organizers are already trying to avoid with a website and connections in the startup world, even before their law is on the books. They also formed a 501(c)(4) nonprofit to own MNvest and serve as the central hub for prospective investors and ventures with crowdfunding portals.

Robins and another Winthrop attorney who helped build MNvest, Ryan Schildkraut, said they’re focused on the messaging around the initiative and outreach efforts, and are eager to help clients tap into crowdfunding.

“You really need attorneys and accountants and other practitioners who understand this and get it, and are willing to advise people who do it,” Dupee said. “Because it’s so new and often professionals are very risk-averse, there’s often an incentive to counsel people away from considering it.”

Still, even with a lower profile, the payoff was relatively substantial for the two Wisconsin operations that pounced. A fledgling brewery in Hudson raked in $21,000 total from nine investors, Dupee said, while Madison’s better-established MobCraft nailed down $75,000 in commitments from more than 50 backers.

A more open crowdfunding marketplace can make sense for early-stage companies that aren’t yet big enough to draw interest from venture capitalists or are more locally oriented, like breweries and restaurants. The appeal could also stretch beyond traditional startups, providing farmers and longtime businesses access to the cash they need to upgrade equipment and expand, Robins said.

The attorneys said they’re already fielding calls from multiple clients seeking crowd-funded offerings.

“Every single day we’re being contacted by so many different companies,” Robins said. “Is MNvest going to be the answer every time? No, but it’s another option.”

Interest among practitioners – and their enthusiasm for integrating equity crowdfunding into Minnesota’s investment landscape – suggests things could play out differently from Wisconsin’s more skittish climate.

More than 250 people have added their names to a list in support of the legislation on the MNvest website. On top of that, some of the state’s highest-profile groups focused on entrepreneurship and business, including the Minnesota High Tech Association and the Minnesota Chamber of Commerce, have thrown their weight behind the proposed bill.

“This has really shaped up into something that’ll be a great tool for business to raise capital,” Rep. Loon told the House panel on Tuesday.

Still, there’s a high bar for defining lasting success, said Gordon Burtch, a professor in the University of Minnesota’s Carlson School of Management whose research focuses on crowdfunding. The long-term viability of a crowdfunding platform hinges on how many ventures are willing to test their luck without a well-traveled blueprint.

If there’s enough to choose from, investors will show up.

“The only way it’ll be successful is if there’s enough interest that can be stimulated in ventures that need money at the outset, to get them trying to raise funds on these platforms,” Burtch said.

If the legislation passes, being among the first companies to dive in could be a risky proposition. Though the marketplace — especially in entrepreneur circles — is buzzing, it remains to be seen how seriously companies will treat a completely new fundraising system, especially one designed to draw in a new kind of investor.

“There’s a steep learning curve. And when you’re talking about equity [crowdfunding], if your first go at it is miserable, it can do a lot of damage to your brand,” Burtch said. “It’s not clear how receptive the market will be to letting someone fail and then letting them come back to try again.”

Comments

  • http://twitter.com/casey__allen Casey Allen

    As with most marketplaces starting out it’s likely that one side will drag the other side to it.

    What’s likely to happen for the first five years is this:

    Startup CEO: “It was great talking on the phone this AM. Here’s a unique URL to our company page. Please create an account and we can finalize your investment of $1500.”

    Prospective Investor: “I have to create an account?”

    In this manner the marketplace will be seeded by relationships that start offline and end online.

    It will take a while before “investors” leisurely surf a marketplace scouting out companies to fund. It will happen. Just not for a while, especially in small markets.

    AngelList bypassed this because it was started by credible investors who were also credible entrepreneurs and were credibly located in Silicon Valley. AngelList is the exception, not the norm.

    And this is all perfectly OK. No marketplace explodes right out of the gate. Any policy maker that expects it to will be woefully disappointed and needs to have a longer horizon.

    [photo below is the homepage of Kickstarter from May, 2009. The dollar amounts are downright scoffable to us today. They had to start somewhere. Click to enlarge.]

  • http://tech.mn Jeff Pesek

    If the investment opportunities are sufficiently attractive, then the investors will go to/through the appropriate mechanism to participate.

    Having a marketplace may help in some ways (cross polination, lower costs, etc), but it isn’t necessary for individual success considering a company can create and promote their own campaign under current bill.

    MNvest is really only enabling the means for this to happen legally. The burden of responsibility is on the entrepreneurs and their companies to create such compelling opportunities and promote them, not MNvest or investors.

    • http://twitter.com/casey__allen Casey Allen

      True, MNvest is just the legal framework, not the technological one.

      However the burden will be so high on the startup that it will likely only make sense to do it through a marketplace “portal” so that certain verification can take place via a third party service.

      • http://tech.mn Jeff Pesek

        “However the burden will be so high on the startup that it will likely only make sense to do it through a marketplace” – maybe? In cases when the issuer is the portal, independent of 3rd party, it’s currently set at $500 ($300 + $200) to register (for 12 months).

        To breakdown the technical “burden”:

        1) a means of restricting IP to MN
        2) user registration/communication management
        2) storing and sharing documents (ie – prospectus)
        3) Regulator access
        4) Escrow agent connection

        It is interesting to see how little traction such deregulation effects have received thus far, at least initially. 2 deals in Wisconsin?! I’d de curious to see what states are leading the pack in terms of intrastate crowdfunding, also to understand what’s working and what’s not.

        FWIW – Earlier in a capital call session, I think it was this one ( http://tech.mn/news/2015/03/12/video-midwest-capital-call-2015-angels-entrepreneurs/ ) – both the entrepreneurs indicated that they *would not* have pursued such means of early capitalization, given the choice.

  • http://minnovation.co Joe Serrano

    I really would like to see this succeed.

    However, how do you draw the Minnesota “investors” out of their gopher holes? If the burden is on the entrepreneur (yet again), this is a hard sell in our bandwagon state culture. That is, unless Kim Kardashian is going to sponsor MNvest or the startups are 110% guaranteed to return 1000% on the investment. Our problem is our ingrained Scandinavian DNA (That ketchup is too spicy Lena.) Of course, keep in mind I am just a crotchety old startup guy. :) This is our problem: http://en.wikipedia.org/wiki/Law_of_Jante

    Can we have a “invest” button on our Facebook or LinkedIn profile?

    • http://tech.mn Jeff Pesek

      Keep in mind Joe that what we’re talking about here are the non-accredited investors, so for example a tech startup could bypass the investment groups/clubs and fundraise directly from the community :)

      • http://twitter.com/casey__allen Casey Allen

        Or, more likely, NOT a tech startup but rather a coffee shop, tree nursery, golf course, tractor dealership…

        • Zach Robins

          Casey – looks like someone beat you to it :(
          http://caseytrees.org/about/treefarm/

          • http://twitter.com/casey__allen Casey Allen

            Yes, I remember, they were trying to crowdfund capital and naturally they came to me.

            I told them I could introduce them to Sequoia.

            They called me a heretic and I never heard from them again.

  • Chris Hanson

    MNvest provides a real opportunity for existing, established small businesses to secure expansion capital. Traditional funding channels such as bank loans and private investors address only 40-60% of the need. While startups are fun, and the potential return can be significant, they are high risk and high fail. An ongoing entity with a track record of operations and profit can offer every Minnesotan an opportunity to invest locally, create local economic growth, and yield the investor a decent return. Full disclosure: I’m one of the founding board members of MNvest, president of the Twin Cities Metro Independent Business Alliance, and co-founder/CEO of thedatabnk, gbc. a Minneapolis based software company.

    • http://tech.mn Jeff Pesek

      good points chris, not just for startups!

  • Jeff Haagenstad

    When we started EXOGAL, we considered using Kickstarter as a funding source but rejected it as not appropriate to the amount of capital we needed to raise vs our ability to appeal to a lot of small investors. Honestly, if the legislators wanted to help startups, they’d create some sort of a Credit Union that helped emerging companies gain reasonable access to working capital. The current banking establishment is so risk averse that they ask for ridiculous amounts of security for working capital credit lines. I know people who’ve been asked to back their credit lines with 5x security. Show me the 2-5 year old startup with those kind of assets! (And I bet if you find one, they have enough working capital!)

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