On May 22, 2014, the Michigan House of Representatives passed House Bill 5273, Michigan Investment Markets (MIM). This Bill amends the Michigan Uniform Securities Act to provide for the creation and regulation of intrastate security markets or exchanges. It is designed to complement the Michigan Invests Locally Exemption (MILE), recently signed into law by Governor Snyder, which permits investment crowdfunding for small businesses.
The Bill is currently pending before the Senate. Given the strong support for the previously enacted crowdfunding legislation and the strong vote in favor of the Bill in the House of Representatives, it is expected to pass when brought to a vote later this year.
A Liquid Market for Crowdfunding Investments
The purpose of the MIM Bill is to legalize and facilitate the transfer of crowdfunding investments. The exchanges created under the proposed law will allow companies, after raising capital through crowdfunding, to apply for listing so shareholders could trade their shares.
The Bill defines “Michigan Investment Market” as a broker dealer, exempt from registration under federal securities laws, which provides a market or exchange, and includes an online market or exchange operated through a web portal. These markets will conduct the purchase and sale of crowdfunded securities issued under the intrastate offering exemption created by the MILE Act. Connecting buyers and sellers of interests in crowdfunded businesses will create liquidity of shares, enlarge the market for companies seeking money through the crowdfunding mechanism, and increase the value of these interests to investors.
A Michigan Investment Market will only serve businesses that are resident and doing business in the State of Michigan at the time the business conducts any offers, sales, or resales of its intrastate securities. The Bill would require the Market to be solvent, not subject to a disciplinary court order or injunction, and not a defendant in a pending court proceeding. It would also require the Market to keep records of transactions that would be subject to examination by regulators, and provide sanctions and penalties for violations of the law or fraudulent conduct or transactions.
The MILE Act and the Michigan Investment Markets legislation present new and untested opportunities for Michigan entrepreneurs and business owners. Although the crowdfunding movement is spreading across the country, it is still in its infancy and complex issues need to be resolved in order for it to succeed. One critical question is the relationship between the State law, the Michigan Invests Locally Exemption, and the crowdfunding provision of the Federal JOBS Act recently signed by President Obama, which appear to be in conflict. Anecdotal evidence suggests that this conflict has created confusion in the business community and has slowed implementation and use of the MILE Act.
In addition, it will be necessary to construct the infrastructure to permit issuers and investors of crowdfund interest’s access to reliable information and transaction hubs for the sales of interest by investors. It will be important to create confidence in valuation of the interest, permit proper price discovery, and ensure accurate settlement of transactions. In other words, the infrastructure of the markets must be developed in order to draw investors and foster the growth of small business as intended by the MILE Act and the Michigan Investment Markets legislation. It can be anticipated that as the regulatory environment takes shape, standardized business practices will emerge. With time and use, greater certainty will emerge that will permit these new opportunities to fulfill their promise.
In future articles we will look at developments in crowdfunding and the establishment of liquid markets in crowdfunded securities. We will also discuss the use of crowdfunding by municipalities to develop local business and improve communities.
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 firstname.lastname@example.org.