Earlier this year, we brought you information on solar garden subscriptions and whether they are securities. Since then we have busy working with community solar developers on another project: crowdfunding community solar. Crowdfunding provides new possibilities for solar developers. With those opportunities come legal complexities, some of which are introduced below.
What is crowdfunding?
At its core, crowdfunding is the practice of obtaining needed funding by soliciting contributions from a large number of people, especially from the online community (the “crowd”). If you have ever contributed money to a cause on GoFundMe or to a campaign on Kickstarter, you have been participating in one type of crowdfunding—"rewards crowdfunding.” However, rewards crowdfunding is not the only game in town.
In 2015, the Securities and Exchange Commission (“SEC”) adopted rules enabling companies to offer and sell securities through securities crowdfunding. In other words, business owners needing to raise money can now use crowdfunding to, for example, sell equity interests in their business or solicit investments in exchange for notes promising to repay investors’ principal plus interest.
The SEC’s crowdfunding rules (dubbed “Regulation Crowdfunding” or “Regulation CF” for short) permit business owners to engage in securities crowdfunding to raise up to $1.07 million online from investors located throughout the country, so long as the entity raising the money (the “issuer”) meets certain requirements and files notice of the offering with the SEC. Securities offerings that comply with Regulation Crowdfunding are exempt from federal securities registration requirements, which previously had been prohibitively expensive for business owners needing to raise a relatively small amount of money. Also, Regulation CF allows issuers to publicly sell securities online to “everyday investors”—neighbors, friends, and community members— not only wealthy investors or seemingly inaccessible angel investors and venture capitalists.
Many state legislatures have passed state versions of Regulation Crowdfunding that provide exemptions from state securities registration requirements. In Minnesota, the MNvest Securities Registration Exemption (“MNvest”) permits Minnesota-based businesses to engage in “intrastate” securities crowdfunding offerings to raise up to $2 million from Minnesota residents, so long as the business and offering complies with certain requirements and the issuer files notice of the offering with the Minnesota Department of Commerce. Now three years following the implementation of the MNvest exemption, around a dozen Minnesota businesses have relied on MNvest to engage in securities crowdfunding.
What does crowdfunding have to do with Community Solar?
The most successful securities crowdfunding campaigns are those where the issuer brings the crowd to the investment opportunity rather than the investment opportunity to the crowd. In other words, business owners wishing to crowdfund a brand-new startup should not expect investments to rain from the sky from strangers stumbling on the offering online. Rather, crowdfunding works best if the business owner has already tapped into a community of would-be supporters that will come to bat when an investment opportunity arises. In addition to making investments, members of such a crowd also serve as brand ambassadors, helping to amplify knowledge of and support for the business, further expanding the crowd of potential investors.
In the relatively short history of securities crowdfunding, certain types of business stand out as being the best suited for a successful crowdfunding campaign—perhaps most notably, craft breweries have emerged as promising users of crowdfunding. In the first full year that MNvest was available as a state exemption in Minnesota, 6 of 10 companies that relied on MNvest to raise money were breweries. The reason breweries are positioned well for raising money through securities crowdfunding is not necessarily that they present the best opportunity for investors to see a return on their investment. Rather, in addition to hopes for profits, “everyday investors” invest in breweries because they like supporting and feeling a part of the community surrounding the brewery. By investing in a new brewery being built down the street, investors are able to take pride in ownership, feel part of a community of supporters, (and perhaps enjoy the occasional free beer at their neighborhood tap room now and then).
Community solar developers are poised to do well using
a securities crowdfunding model for similar reasons. There is strong appetite among both investors
and entrepreneurs looking to grow renewable energy projects in Minnesota, and
Minnesota’s community solar program continues to thrive. Solar crowdfunding campaigns could be a great
way to bring together those with the ideas and technological expertise with
those with money who are looking to invest in renewable energy. As with breweries, investors supporting
community solar can hopefully see a return on investment, while also joining
neighbors and community members to support a cause they believe in.
How do I get started with my Community Solar crowdfunding campaign?
If you are thinking about crowdfunding a community solar project, here are some questions to get you started:
1. Have you formed a business?
form a new business, and what type of business to form, is a preliminary
question that all entrepreneurs face at some point. The pros and cons of various business
structures warrant a separate article (and many have been written on this subject). Take
a look at this chart
for a quick breakdown on some important differences between a C
Corporation, an S Corporation, and a limited liability company.
2. How much money do you need?
The amount of money you need to raise will determine, in part, whether and which securities registration exemptions are available to you. As stated above, Regulation CF caps issuers to raising no more than $1.07 million in 12 consecutive months and MNvest caps issuers to raising no more than $2 million in 12 consecutive months. Other exemptions and simplified registration processes exist that allow you to raise more money. See here for a more detailed description of other options.
3. Where (in which states) will you be looking for investors?
To conduct a lawful MNvest campaign, you can only raise money from investors who reside in Minnesota. Knowingly accepting an investment from even a single investor from outside of Minnesota could cause you to “blow” the MNvest exemption and violate federal and state securities laws. Though Regulation CF permits an issuer to raise money from investors residing in any U.S. state or territory, Regulation CF includes other requirements that are more restrictive than MNvest. Again, see here for more details on other options that would permit you to raise money from investors residing in states other than Minnesota.
4. Where/how do you want to advertise the offering?
Regulation CF and MNvest allow and require issuers to conduct their crowdfunding campaign online through a registered crowdfunding portal. Both regulations also significantly restrict what the issuer can say, post, and publish about the offering outside of that portal. If you have creative ideas of how and where you want to draw attention to your securities crowdfunding campaign, it is important to first take a close look at these restrictions (and consult your attorney). See here for additional insights into advertising restrictions in crowdfunding campaigns.
5. How much can you afford to spend on legal and accounting fees?
Though rewards-based crowdfunding is largely unregulated, the sale and offer of securities is highly regulated. Therefore, to conduct a lawful securities crowdfunding campaign, you will need to find experienced and knowledgeable securities counsel to assist you. Counsel will be able to help you navigate the complex securities regulations at both the state and federal level to identify the most appropriate crowdfunding option for your project.
You will also need to work with an experienced, independent accountant. An accountant will help you navigate the impact of a securities offering on your business from a financial and tax perspective. Also, to comply with federal and state securities regulations permitting securities crowdfunding, you may need to have the business’s financial statements reviewed or audited by an accountant.
Legal and accounting fees may add significant expenses
to your crowdfunding campaign. It is
best to speak with an attorney and accountant early in the process to obtain an
idea of what these expenses may be.
Who do I
contact for help?
You can start with us, of course. You can reach Brian Edstrom at firstname.lastname@example.org
Brian Edstrom is a Shareholder and Attorney at Avisen Legal, P.A. He brings to Avisen clients the ability to “speak regulator,” having spent several years working for federal and state regulators in Washington D.C. and Saint Paul, MN before entering private practice.
Rachell Henning is a third-year student in the Mitchell Hamline School of Law's innovative Hybrid program. Rachell is an Avisen Fellow alum who enjoys spending time with her husband and two young daughters when she is not working or studying.