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New Minnesota rules allow private companies to sell stock to average individuals. Is it worth the extra work?

The rules, finalized in 2016, feature relatively tight investment caps that are determined by income and net worth, ranging from $2,000 to $100,000.

Clockwise from top left: Jordan Standish and Max Jordon, Clutch Brewing Co.; David Duccini, Silicon Prairie; Clutch Brewing Co. is building out space within the historic Schmidt Brewery.
Courtesy of Twin Cities Business

When Debbie and David Torgersen open up their own brewery in the northern Twin Cities suburb of Spring Lake Park, it will be a dream fulfilled — with backing from average Joes and Janes.

David’s career in the military took him and Debbie to every corner of the world, and at each stop, the couple sought out great beer. So it was a logical step when, after his retirement in 2015, the two ventured into home brewing. In the first 18 months alone, they produced a staggering 66 batches of beer — impressing friends who encouraged them to bring their beverages to the masses. Several beers and brewery tours later, they decided to go for it: Torg Brewery is scheduled to open in spring of 2018.

Starting up a brewing operation requires considerable capital for real estate, equipment, staff and other expenses. The couple cobbled together about 90 percent of what they needed through their own equity and loans backed by the Small Business Administration and traditional bank lenders.

But they also wanted individual investors to support their idea — people with regular jobs who couldn’t necessarily contribute tens or hundreds of thousands of dollars. It wasn’t so much for their money as it was for their buy-in as potential customers and, in turn, product evangelists who would tell others about the Torgersens’ beer.

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Enter equity crowdfunding, officially marketed under Minnesota law as “MNvest.” It allows businesses to publicly market shares of stock to people who don’t normally play in the world of private-stock offerings, which previously was reserved exclusively for the wealthiest, or “accredited,” investors. Supporters describe it as akin to Kickstarter, but instead of getting a trinket for a contribution, people become equity investors in the company.

Shaping MNvest

Until recently, this type of lending was more or less illegal. The Securities and Exchange Act of 1932 prohibited startups from marketing financial offerings to, and receiving investments from, non-accredited individuals. Kickstarter campaigns couldn’t exchange shares of stock for cash.

That began to change with the Jumpstart Our Business Startups (JOBS) Act of 2012, part of which required the SEC to write new rules that would make it easier for job-creating, small businesses to raise capital. It also included initial rules allowing for online platforms to conduct securities transactions without them having to be formally registered.

The final rules that emerged in 2016 — called regulation crowdfunding (CF) — exempt security registration and allow public marketing for businesses raising up to $1 million during a 12-month period. The rules feature relatively tight investment caps that are determined by income and net worth, ranging from $2,000 to $100,000.

Results are slowly trickling in. In the second half of 2016, 156 companies put forth 163 offerings, according to a report by the SEC’s Division of Economic and Risk Analysis. The median sought-after amount was $53,000. During that period, 33 companies completed their fundraising with the median total-raised amount of $171,000. Twenty-four offerings were withdrawn.

The findings of the report, however, really only tell part of the story. During the four years between the passage of the JOBS Act and regulation CF emerging from the rulemaking process, 35 states took matters into their own hands by passing intrastate equity crowdfunding laws that were permitted in the federal legislation.

Minnesota was one of them: the Legislature created MNvest as a way to provide “wider, cheaper and faster access to seed funding for entrepreneurs.” It allows any Minnesota-based business to use online portals to raise $1 million, and expands that amount to $2 million if they’ve completed an external audit. Non-accredited residents of the state can invest up to $10,000 per person per offering.

So why two different approaches? MNvest is designed for funding deals within the state, while the federal regulation CF is designed for interstate funding. If business owners need to seek financing beyond Minnesota, they need to pursue the federal plan instead of, or in addition to, MNvest.

“We think there are a lot of Minnesotans that want to invest in the next great company,” says Ryan Schildkraut, director at investment bank Freeland Briese and cofounder of a MNvest advocacy group that pushed the legislation.

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MNvest was signed into law in 2015, but rulemaking by the Minnesota Department of Commerce pushed its rollout to the summer of 2016. Even then, delays in getting the online portals up and running meant the first campaigns weren’t registered with the Department of Commerce until the last days of December.

Community focus

Intrastate crowdfunding comes with limits, one of which is that offerings on MNvest can only come from Minnesota businesses and are only available to Minnesota investors. But advocacy groups and businesses have used that limitation to their advantage by marketing these restrictions as a way for investors to foster local businesses that they themselves would patronize.

That approach appeals to the Torgersens. The couple hopes to bring “approachable” beer to the untapped masses in the north metro who aren’t looking for super-hoppy IPAs or high-ABV suds. And they hope they can do that by persuading their future customers to buy into the brewery — and spread the word.

“We think getting local money is the best, especially if you’re trying to build a community,” David Torgersen says. “We want a family of ambassadors who go to the bar every week and talk about it. That’s the direction we wanted to go.”

Torg isn’t the only brewery that seems to have that idea. Of the seven companies that had filed by May 31 with the Minnesota Department of Commerce to offer securities through MNvest, five are focused on beer production. That, in part, can likely be chalked up to supporters of the law like Zach Robins, a lawyer at Winthrop & Weinstine who specializes in craft brewery law and is a co-founder alongside Schildkraut of a MNvest advocacy group. But the ability to build a community of local owners who have a personal stake in the business’ success — rather than a big-time investor that just wants ROI — holds considerable appeal.

It was that same community aspect that drove the founders of Broken Clock Brewing, which opened in Northeast Minneapolis this May, to pursue equity crowdfunding. Broken Clock faced challenges through traditional lending channels because it is organized as a co-op, but co-founder Jeremy Mathison says using MNvest was attractive to them regardless. “Even if banks were willing to work with us, we would have wanted to go the MNvest route,” he says. “It allows us to keep more money in our local economy and allow everyday, hard-working Minnesotans to invest in a company from the ground floor.”

‘Eating our own dog food’

Among the half-dozen companies working their way through the crowdfunding process, Silicon Prairie Online stands out, and not just because it isn’t a brewery. The St. Paul-based company is taking advantage of the new law to raise money — and to offer their services to others looking to raise cash. That’s because it’s one of just a handful of portal operators in the state.

Who’s Raising Money with MNvest?

Bluenose Gopher Brewery

Location: Granite Falls
Industry: Brewing
Filed: December 28, 2016
Wants to raise: $200,000
Minimum investment: $500
So far: $40,500

Torg Brewery

Location: Spring Lake Park
Industry: Brewing
Filed: December 29, 2016
Wants to raise: Up to $600,000
Minimum investment: $5,000
So far: Will close above $200,000 (exceeded minimum)

Broken Clock Brewing

Location: Minneapolis
Industry: Brewing
Filed: January 4, 2017
Wants to raise: $200,00
Minimum investment: $500
So far: $57,000

Clutch Brewing Co.

Location: St. Paul
Industry: Brewing
Filed: January 27, 2017
Wants to raise: $450,000
Minimum investment: $1,000
So far: $160,000

Silicon Prairie

Location: St. Paul
Industry: MNvest portal
Filed: February 16, 2017
Wants to raise: $50,000
Minimum investment: $100
So far: Over $107,000

Culhane Brewing

Location: St. Paul
Industry: Brewing
Filed: April 24, 2017
Wants to raise: N/A
So far: N/A

Farm + Vine

Location: Minnetonka
Industry: Restaurant
Filed: June 2, 2017
Wants to raise: $500,000
Minimum investment: $5,000
So far: N/A

These portals are fundamental to MNvest; all offerings are required to be listed on a state-approved portal operator. While a company is legally allowed to build an online portal of its own, most are likely to go through one of a handful of companies that can build and host a fundraising campaign. In addition to Silicon Prairie, two other companies offer the service: Venture Near and MNstarter.

Silicon Prairie founder and CEO David Duccini says the new law is exciting—a way to “democratize capital.” He touts his portal’s features, such as block chain technology that provides security and the ability to directly transfer money from an investor’s bank account. But he wanted to go a step further in marketing by actually running a campaign on his platform to prove the portal’s compliance with the law and viability.

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“I’ve been calling it an ‘eating our own dog food’ moment,” says Duccini. “This feels like that turn-of-the-century time [100 years ago] when the public needed to be shown that elevators were safe.”

The demonstration seems to have caught on. Silicon Prairie was the first company to surpass its minimum funding goal of $50,000, blowing past that number and raising more than $112,000 from 12 investors. Some of that might be due to a Kickstarter-like perk for investors: an in-kind portal fee credit for the next two years.

“We put the perk in to see if we could prime our pipeline,” Duccini says. “It appears to have worked.”

But Duccini also expects more small-time investors who aren’t interested in the portal fee credit to want in soon. In anticipation of that, he’s dropped the minimum investment from $1,000 to $100.

Money from the raise will help the company grow in several ways, including the development of a mobile app for the portal and allowing Silicon Prairie to expand its services beyond intrastate crowdfunding. That includes regulation CF—the federal interstate funding — and other investment options like a “self-directed IRA” that might include crowdfunding as part of the portfolio.

With proof that the concept will work, Duccini says he’s prodding companies to consider a campaign. As he sells it, he tells people that crowdfunding can serve as “a bridge after your bank says no and before your angel/VC says yes.”

Dipping a toe

Though many businesses interested in equity crowdfunding focus on the benefits of community involvement, some see it as a potential new avenue to tap into capital. That’s the case for Martell Diagnostics Inc., which offers a blood test to detect a specific form of breast cancer known as HER2. The test they offer is taken about 2,000 times per year. But the market for it is closer to 4 million — if the company can find a way to scale.

The Roseville-based biotech laboratory was founded in 2008 and has the support of angel investors. But like any company looking to expand—and, in Martell’s case, expand its marketing to oncologists — the “growth of the business has a never-ending appetite for capital,” says Franklin Pass, its co-founder and CEO.

The company previously dabbled in crowdfunding of the Kickstarter variety on a platform called MedStartr. The campaign, which offered prizes like T-shirts to donors, flopped: In 45 days, it raised just $600 of a $40,000 goal. Pass attributes the failure to the difficulty of getting word out and little incentive for people to give.

He thinks crowdfunding that offers equity could be different. “It’s exciting to see a new tool here.”

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Though Pass hasn’t decided if he’ll pursue a MNvest campaign rather than seek capital through more traditional means, he sees the potential, especially given the elevated awareness that marketing campaigns have brought to breast cancer and related research. And while Martell’s board of directors would likely prefer a handful of large investors over potentially hundreds of small ones, Pass says he sees value in allowing people to invest small.

“This could be a way to participate in a biotech startup for a reasonable sum of money,” Pass says. “By the time companies do IPOs these days, they’re unicorns — they have valuations over $1 billion. How can a $10,000 investor really participate? [A MNvest campaign] could be a way to do that.”

Still, Pass has concerns with equity crowdfunding, especially as it relates to costs. Among the expenses required to get a campaign off the ground are legal fees, transaction fees that go to the portal operator and any marketing that drives awareness.

“It’s a function of maturity of the [investment] vehicle,” he says. “People haven’t yet figured out how to package it economically for little companies like Martell.”

Those costs can really add up. A business using the federal regulation CF for a campaign raising up to $100,000 could see as much as 39 percent of their investment eaten up by portal and compliance fees, according to the SEC’s own estimates in its 2013 proposed rules.

While MNvest campaigns are still too new to make a hard-and-fast determination of their costs, federal regulations are considered to have higher compliance costs. MNvest cofounder Robins says prospective businesses should budget up to $30,000, with about half that amount related to legal fees.

Ultimately, MNvest’s biggest challenge likely won’t be cost but awareness. An investment tool for the 97 percent of people that aren’t — or can’t be — accredited investors needs those people to know it exists before any money can pour in.

“We were at a chamber of commerce meeting and broached the subject [of MNvest],” Debbie Torgersen says. “With chamber leaders, bankers, financial planners and other small-business owners in attendance, no one had heard of MNvest.”

Twin Cities BusinessThat’s not surprising to MNvest activist group co-founder Schildkraut. He says it’s a bit of a chicken-and-egg problem: Companies won’t pursue equity crowdfunding if they think people don’t know about it, and investors won’t become engaged if there aren’t solid companies in which to invest — and robust portals to make investing easy. “It will take years for all these pieces to come together.”

The Torgersens aren’t sitting by waiting for others to find out about equity crowdfunding on their own. They’ve developed a presentation to share with business leaders. The effort seems to have paid off — at least for them. They have surpassed their minimum amount needed and plan to close their offering with over $200,000 in escrow. Having seen their own success, they hope others can take advantage of it too.

“We feel MNvest offers a great economic advantage to small, local business and the general public, which up to this point has had limited investment opportunities,” Torgersen says. “We want to raise awareness so that all Minnesotans can take advantage of this great tool.”

Andre Eggert is TCB’s online and e-newsletter editor.

This article is reprinted in partnership with Twin Cities Business.