State can't afford to wait for feds on crowdfunding

It's about time somebody in the state decided to quit waiting for workable rules for equity crowdfunding from federal securities regulators.

A Minnesota group, calling itself MNvest and started by Minneapolis attorneys Ryan Schildkraut and Zach Robins, is hoping to persuade the ­Legislature next year to go ahead and let equity crowdfunding take place here. Quite a number of ­Minnesotans have jumped on board to help, including Sen. Terri Bonoff, a DFLer from Minnetonka.

It's great that Minnesotans are pushing to open up equity crowdfunding here, but it's the kind of state initiative that shouldn't have been necessary.

Broad-based equity crowdfunding was supposed to be legal nationwide by now, enabled by the 2012 JOBS Act. The rules aren't yet final and advocates fear, with good reason, that when adopted they will be so burdensome that crowdfunded deals just won't happen.

One summary concluded that a company trying to raise $1 million could incur fees and expenses of $250,000 to get one of these deals done. So much for the efficiency of the Internet.

So the states have been going ahead on their own, about a dozen so far.

It may seem like crowdfunding is already taking off here in Minnesota, with high-profile campaigns on popular such websites as Kickstarter, but people who agree to help fund a project right now on Kickstarter aren't really investing in anything.

The JOBS Act was intended to help ease the rules around raising capital, including allowing crowdfunding. Crowdfunding is now allowed for investments bought by accredited investors, the people with high enough income or enough wealth that the regulators think they can look out for themselves.

The section that created equity crowdfunding opportunities for the rest of the public got turned over to the Securities and Exchange Commission for final rules. And to get a sense of what the SEC thinks, perhaps it's just enough to note that the draft rules were contained in a 585-page document.

Schildkraut and Robins, corporate lawyers at the Minneapolis law firm Winthrop & Weinstine, have closely watched these developments, in part because Schildkraut has over the past few years developed something of a specialty helping craft brewers. Crowdfunding looked like a promising avenue for a brewer to raise capital.

Schildkraut earlier this year joined a panel discussion at a major brewing conference, and there met David Dupee from Milwaukee. Dupee told him he was starting an equity crowdfunding site for regular folks, which Schildkraut happened to know was still illegal.

It turned out it was soon going to be legal in Wisconsin. Dupee had started working on his crowdfunding site, called CraftFund, expecting federal rules to be enacted. In frustration he helped lead the push to get a new law passed legalizing intrastate deals in Wisconsin.

So they decided to start building support for a Minnesota law. As Schildkraut pointed out, their proposal was based on what's worked in other states, including Wisconsin.

Dupee has the only portal open in Wisconsin so far, and he said some types of businesses are a really good fit for the crowdfunding approach. At the top of his list are craft brewing operations, an easy business for investors to understand.

Dupee has clearly thought this through, and he suggests good candidates won't be the kind of high-potential businesses that characterize the Silicon Valley start-up community. Just a solid small business will do, so the investor could have a reasonable shot at regular dividends or other distributions of profits as the business chugs along. He intends to only let entrepreneurs use his site to raise money for brewing, food and real estate ventures.

These are not, of course, businesses without any risk. While the craft beer industry has been on a roll, a shakeout someday should surprise no one. And plenty of investors have been impaled on bad real estate deals. Dupee certainly knows that, and his investor 101 section is refreshingly straightforward.

He states that investors are unlikely to find the next Facebook there. They almost certainly won't be able to easily sell or transfer their shares. Dividends are likely to be only way to get any financial return if there's going to be any return at all. Most important, investors need to do their homework on the investment because CraftFund is not going to do it.

That outcome is actually perfectly legal. Securities law is basically based on the philosophy of disclosure, a concept baked into the fundamental reform laws enacted in the Great Depression. Basically, it's not wrong to sell a bad deal, it's only wrong to withhold the information that should have let the investor reasonably conclude that it might be a bad deal.

Robins and Schildkraut certainly aren't arguing for anything less than full disclosure. Robins said providing business plans, a list of the business risks and other documents through a web portal actually improves the flow of information compared to conventional private financing. And it's possible without the kind of requirements the SEC seems to want.

As Robins put it, "there's certainly a reasonable middle ground we think works for everyone."