Focus, Law, and Small Business & Startups

Two new laws expected to spur growth for ‘the little guy’

Crowdfunding and local stock exchange rules open investment opportunities.

May 30, 2014
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Mom-and-pop shops stand to benefit the most from two new laws passed in Michigan this spring in an effort to spur entrepreneurial investment in local Michigan communities.

First, Michigan legislators passed the Michigan Invest Locally Exemption, which opens the door for non-accredited investors within the state to invest in Michigan business ventures.

Prior to the MILE law, only accredited investors, those with a net worth of $1 million or more or who earn at least $200,000 annually, could invest in businesses without the business having to complete a long and expensive disclosure process in order to sell company shares.

“Michigan has rolled back that accredited investor limit and now anyone can invest up to $10,000 of their money into a Michigan business,” said Eric Misterovich, an attorney at Revision Legal.

Misterovich said the law is a game-changer for businesses.

It is a major fundamental shift in how Michigan businesses can raise money,” he said. “Instead of being forced to go to a bank for a loan, they can turn to the Michigan crowd and ask for money.”

The second law, passed two weeks ago, complements the MILE by allowing for the creation of local stock exchanges, which would allow investors to sell their shares, hopefully at a profit.

“The law that just passed allows for local communities to host exchanges,” said Nathaniel Wolf, an attorney with Mika Meyers. “It complements what crowdfunding is designed to do. … The exchanges allow for the buying and selling of those investments so it doesn’t require a long-term commitment in a company, necessarily. You can invest in something and then try to turn that around. It creates a marketplace for those ventures.”

Businesses, investors and communities stand to gain from the new laws.

The process begins with identifying a crowdfunding portal.

Wolf said there are a handful of portals that already have launched, including multistate portals localstake.com and fundrise.com, and Michigan-specific portal crowdfundingmi.com, which is sponsored by the Michigan Municipal League, to help businesses connect with investors.

Similar to crowdfunding sites like Kickstarter and Indiegogo, these websites allow businesses to upload information about their projects to the site so investors can easily search out the types of businesses in which they are interested in investing and connect with them.

Misterovich said while the sites are limited right now, he expects to see growth in the number of portals available to businesses and investors.

“I would expect to see a tremendous increase in that kind of business model,” he said. “It aggregates users. It gets all the investments in one spot.

“You will probably start to see some of these pop up in very niche markets. For example, craft brewing: … You go to the website portal that is specifically for breweries, or region-specific portals, and here are the businesses currently looking for investors in southwest Michigan.”

He said these approved portal sites include the added benefit of screening investors.

There aren’t a lot of rules or regulations to follow when starting a portal.

“It’s not a burdensome process,” Misterovich said. “There are some general guidelines about things not to do, but other than that there isn’t a ton of requirements imposed by the state to be these kinds of website portals.”

There is an annual dollar cap on how much money can be raised by a business through crowdfunding.

“You can raise $2 million in 12 months if you provide an audited financial statement, or you can raise up to $1 million without providing investors with audited financial statements,” Wolf said.

Not having to complete a costly audited financial statement is one of the biggest benefits and purposes of the crowdfunding law because it allows a business to raise money without having to spend a large sum on the front end.

Wolf said businesses are required to follow several rules focused on transparency in order to help investors not fall prey to bad investments.

“That is the delicate balance of crowdfunding: how to allow for new entrepreneurial and fledgling businesses to raise money, but at the same time providing protections for investors. They try to do that balance by requiring transparency,” he said.

So far only a couple of companies have ventured into intrastate crowdfunding since March, leaving a lot of entrepreneurs a bit apprehensive about giving it a go.

“The downside right now is not a lot of companies are doing it in Michigan,” Misterovich said. “I think mainly there is a little hesitancy because it’s so new and because it’s unknown.”

But Misterovich said he sees very few downsides to the process.

Any time you are selling equity, you are giving up ownership of your business,” he said. “You may not want 1,000 shareholders in your company because they all have a voice now. 

“The reality is you would likely set up a shareholder agreement to limit the voice of those shareholders, to exclude them from having voting rights on certain decisions.”

Additionally, businesses need to be careful about how they advertise their crowdfunding campaigns.

“There are restrictions on using social media to advertise for your crowdfunding effort,” he said. “If you aren’t careful, you could get into hot water with the Securities and Exchange Commission.”

On the upside, he said raising capital through crowdfunding is a great way to build brand loyalty.

“It’s going to build a brand loyalty that you’ve never encountered before,” Misterovich said. “That is not just someone who is just part of a mug club. They will be advocating for your beer at whatever bar they go to. They want this kind of beer there. They are going to make money off of it if the business does well.”

It is also a great opportunity for businesses that would not likely be approved for a bank loan.

“Banks and traditional lenders have fairly strict requirements of who they will lend to and certain types of businesses — like lifestyle, restaurants and bars, and breweries — are outside the scope of what a traditional lender will do, and that is really where crowdfunding comes in,” Wolf said. 

“They can fund those local businesses that may not have access to capital from traditional sources. I think it works consistently with what the microloans and those organizations are trying to do. It is similar.”

He said organizations providing microloans are likely to retain an advantage for a while yet because it is a better known and understood route for new entrepreneurs, but he expects crowdfunding will eventually take off in Michigan, bringing a new economic prosperity to local communities.

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