Crowdfunding Bill Intended to Assist Entrepreneurs and Small Businesses

On December 30, 2013, Governor Snyder signed into law Public Act 264, Michigan Invests Locally Exemption (MILE), which permits crowdfunding for small business. It is an intrastate exemption from the State of Michigan and Federal securities laws, whereby Michigan residents can invest in Michigan businesses.

Crowdfunding refers to funding a company by selling a small amount of equity to a large number of investors. Michigan is one of the first states to give people the opportunity to support growing local businesses such as restaurants, manufacturers, merchants, and service providers, by helping to fund their startup and growth in exchange for a return on investment. These investments can be made online. If the entire deal stays within the State, the Federal Government does not have jurisdiction, and Federal securities regulations do not apply to the transaction. On signing the bill, Governor Snyder said that the new law will streamline government procedure and eliminate unnecessary regulation.

Raising capital is a challenge all small companies understand. Often small business owners have little access to credit or capital investment and are limited to raising investment or borrowing from family or friends. The crowdfunding process is a new and innovative way for Michigan businesses to gain access to capital to grow and expand, and to create jobs. Because it is less formal than the process of registration of securities, it is important for investors to carefully investigate and evaluate investment opportunities.

The crowdfunding law is intended to allow for more efficient access to capital. It permits a business to raise up to $1,000,000 per year or $2,000,000 per year if the issuer provides audited or reviewed financial statements to the prospective purchaser. An unaccredited investor having a net worth of less than $1,000,000 can invest up to $10,000 a year per business. Accredited investors, having an income in excess of $200,000 (or $300,000 for a married couple) or a net worth in excess of $1,000,000, can invest an unlimited amount.

On April 5, 2012, President Barack Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act), which authorizes crowdfunding at the national level. Because of broad political support, it is expected that the Securities Exchange Commission and the Financial Industry Regulatory Authority will complete the rule making process this year, although the new laws provisions governing equity crowdfunding have been criticized as unduly cumbersome.

Crowdfunding has potential drawbacks. Costs, including accounting and legal, may be significant. The law permits only limited direct advertising, and requires disclosures to investors and the State of Michigan on a quarterly basis. Investors will have to be careful to avoid fraud and will have to consider the possible difficulty of selling their interests if they wish to get out of an investment.

We will address the issue of liquidity in a second article discussing the recently introduced House Bill 5273, which would permit the creation of local stock exchanges, and would permit investors and entrepreneurs to buy and sell in state stocks.

Robert J. Hahn is an attorney in our Livonia office where he concentrates his practice on corporate and business law, commercial litigation, utility law and collection and creditor’s rights law. He may be reached at (734) 261-2400 or rhahn@cmda-law.com.