Crowdfunding in Texas & Minnesota

December 20, 2021  |  By Candace Groth

Crowdfunding has become the new “go-to” funding mechanism for some types of startups, led by platforms like Fundify, Republic.co, SeedInvest, and Microventures. We previously covered some of the basics of crowdfunding when it was adopted by the State of Texas and federal government. You can find some of these articles here.

This article explains more about recent crowdfunding regulations, including recent federal changes and state crowdfunding offerings in Texas and Minnesota.[1]

What is crowdfunding?

Crowdfunding is a tool for small businesses and startups to raise capital from a large number of individuals who may not otherwise qualify as an “accredited investor” or under other state and local securities rules. Crowdfunding platforms or portals help facilitate communication between a number of unrelated individuals and companies seeking investors. Notably, unlike other forms of securities offerings that may prohibit or limit solicitation of investors, federal and state crowdfunding issuers can generally advertise and solicit investors, both accredited and non-accredited; however, such issuers may only solicit most investors via a crowdfunding portal or platform, and not through other advertising methods.

The amount a business can raise through crowdfunding, the length of the investment period, and the limitations on individual investments are all determined by each state’s crowdfunding laws.

Federal Crowdfunding

The U.S. followed other countries by increasing their crowdfunding limits in the wake of a tumultuous pandemic period. The SEC amended Reg CF in March 2021, raising the offering limit in regulation crowdfunding from a total of $1.07M to $5M within a 12-month period. Under Reg CF:

• All transactions are required to take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal.
• A crowdfunding intermediary must register with the Securities and Exchange Commission (SEC) as a broker or as a funding portal and become a member of a national securities association (FINRA).
• The maximum raise is $5 million. (A nearly $4 million increase from previous rules).
• CF Securities generally cannot be resold for a year after purchase.
• Non-accredited investors can only invest a certain percentage of their income or net-worth over a one-year period.
  • The aggregate amount of Reg CF securities sold to any non-accredited investor across all issuers during any 12-month period shall not exceed:
    • (i) the greater of $2,200, or 5% of the greater of the investor’s annual income or net worth (if either the investor’s annual income or net worth is less than $107,000); or
    • (ii) 10% of the greater of the investor’s annual income or net worth, not to exceed an amount sold of $107,000 (if both the investor’s annual income and net worth are equal to or more than $107,000).
  • Accredited investors have no investment limits, aside from the $5 million aggregate limit applicable to the offering.
  • The SEC has extended the temporary exemption from certain financial statement requirements for offerings of $250,000 or less until August 28, 2022.
  • As part of the amendments to Reg CF in March 2021, the SEC has added a new exclusion from the Investment Company Act of 1940 to permit the use of certain special purpose vehicles to facilitate investing in Reg CF issuers.

State Crowdfunding

Issuers also have the option of using state crowdfunding laws rather than the federal regulations. State regulations may have higher or lower investment limits for accredited and non-accredited investors, lower filing fees and portal fees, as well as less restrictive financial reporting requirements. We previously covered regulations passed by some early adopters of crowdfunding here. Issuers relying only on state crowdfunding laws are limited to offering the investment only to investors within a particular state. Although 30 plus states have crowdfunding rules on the books, we will focus here on Texas and Minnesota.

Texas

The state’s growing market and already large population has branded Texas as an attractive state for small businesses to engage in crowdfunding. Texas implemented crowdfunding regulations back in November 2014, as discussed in our prior blog post located here. In Texas,

• It is required to use state registered crowdfunding portals/intermediaries.
• Texas State Securities Board (TSSB) adopts the crowdfunding rules and regulates Texas crowdfunding portals.
• Companies must use state-certified Texas equity crowdfunding portals, and campaigns are capped at $1 million in any 12-month period.
• Texas is unique in that it has a 21-day “cool-off” period in which an issuer’s disclosure statement and offering summary must be made available for 21 days before any securities can be sold in the offering. This waiting period is designed to foster communications between the issuer and prospective purchasers.
• Only Texas residents can invest in a Texas equity crowdfunding campaign.
• Unless accredited, an investor may only invest $5,000 in any one crowdfunding investment. (There is no dollar limit for SEC-accredited investors.)
• Any company using a Texas portal must originate in Texas, with a valid Certificate of Formation from the Texas Secretary of State authorizing it to conduct business in the state. The company’s principal place of business also must be located in Texas, and the company must derive 80% of its gross revenue from Texas or have 80% of its assets located in Texas.
• Any Texas resident can participate without proof of income.

Minnesota

MNvest provides an exemption from registration under federal and Minnesota state securities laws. By meeting the requirements of MNvest, companies may raise capital within Minnesota’s borders. This includes making a notice filing, paying a $300 fee, and waiting ten days after making the filing before creating an offering. In Minnesota,

• It is required to use state registered crowdfunding portals/intermediaries.
• Offerings and portals are subject to regulatory oversight by the Minnesota Commerce Department.
• Investors must reside in Minnesota.
• All Minnesota residents can be investors.
• Non-accredited investors can invest up to $10,000 per offering. (There is no dollar limit for SEC-accredited investors.)
• MNvest is only available to entities with their principal office located in Minnesota.
• Offerings must be sold through a portal registered with the Minnesota Department of Commerce.
• The purchaser must provide risk certification and the companies must provide detailed disclosure documents.
• Entities are subject to annual caps on amount of funds raised via MNvest.
• $2M with audited or reviewed financial statements
• $1M with internally prepared financial statements

• Issuers may publish limited advertisements, so long as they include disclaimers per statute.
• All investor funds must be deposited into an escrow account within three days of being received.
  • Funds will be held in escrow until the earliest of the following:

• The funds deposited reach the minimum offering amount.
• Twelve months have passed since the effective date of the offering.
• The offering reaches the expiration date set by the issuer.

• • If none of the above are met, the issuer must notify the escrow agent to refund the investors’ money in full.
  • If the minimum offering amount is met, the issuer must issue securities to investors within five days of the funds’ release from escrow to the issuer.

While crowdfunding has become a valuable tool for businesses to raise capital, successful campaigns require a lot of time, money, and personal devotion. One advantage of crowdfunding is that it simplifies and streamlines the investment process by allowing companies to raise capital from large numbers of investors, including unaccredited investors. While other types of securities offering rules and exemptions prohibit general solicitation and advertising—particularly Internet advertisement—crowdfunding provides a unique and legal avenue to solicit investors through web-based platforms. On the other hand, crowdfunding can make a company’s cap table highly complex as crowdfunding raises small amounts of money from many different investors. Another disadvantage is that companies must adhere to state and federal filing requirements after closing. Additionally, crowdfunding is often accompanied by various fees not typically found in other fundraising vehicles. These include costs for the portal operator, filing fees, and, in Minnesota, escrow agent fees. Given the various nuances of crowdfunding, including compliance with industry-specific securities regulations, it is important to consult an attorney knowledgeable about crowdfunding offerings and other fundraising alternatives to help select the best option for your particular business or startup.

[1] This article covers some crowdfunding rules applicable at the federal level to startups, and rules applicable in Texas and Minnesota, where the author of the article is licensed to practice law. However, each state has its own requirements, which may differ from the federal, Minnesota, and Texas requirements set forth herein.

About the Author(s)

Candace Groth

Candace Groth is a senior attorney at Vela Wood. She focuses on mergers & acquisitions and complex LLC matters.

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