Crowdfunding Legislation Proposed in Minnesota and the Potential for Investment Fraud

A coalition of business people and politicians are leading a grass-roots effort to allow equity crowdfunding under Minnesota law. The initiative, known as MNvest, seeks a “MNvest Registration Exemption” which would exclude qualified crowdfunding transactions from certain regulations.

The MNvest Act would permit unaccredited investors to make equity investments in MNvest offerings through a “MNvest portal,” i.e., a website designated to contain the crowdfunding offerings.

Crowdfunding has been heralded as a means to spur investment in small businesses that otherwise cannot afford to comply with state or federal securities regulations and that may be unable to attract accredited investors. Crowdfunding also permits average investors to take equity positions in startups where previously they were excluded from doing so because they did not meet the definition of an ‘accredited investor.’

The danger with crowdfunding is that securities regulations are in place for good reason, namely, to deter investment fraud. Crowdfunding, however, relies on exemptions from these regulations. Thus, for example, you have the problematic combination of unsophisticated investors being exposed to unregulated advertisements which encourage equity investments in risky startups. If fraud occurs and the investor loses their money:

  1. the defrauded (and unaccredited) investor may not be able to afford an attorney to recover the losses;
  2. the amount lost may not be large enough for an attorney to be able to take the case on contingency; and
  3. the issuer may be out of business or otherwise not in a position to satisfy a judgment obtained by the investor.

Indeed, the MNvest issuer is, by definition, a small company that did not have gross revenue exceeding $5,000 during the most recent period of twelve months preceding that company’s MNvest offering.

The text of the proposed bill can be found here.