LARA Corporations, Securities & Commercial Licensing Bureau Offers Tips on Intrastate Equity Crowdfunding; 2013 PA 264 streamlines process for Michigan investors to invest in Michigan's small businesses

Contact: Melanie Brown 517-373-9280
Agency: Licensing and Regulatory Affairs

January 24, 2014 - Licensing and Regulatory Affairs (LARA) Corporations, Securities & Commercial Licensing Bureau (CSCL) provides tips regarding intrastate equity crowdfunding. 

Governor Snyder signed into law House Bill 4996 of 2013 on December 26, 2013 (2013 PA 264), with an effective date of December 30, 2013, which allows Michigan corporations and limited liability companies to sell an interest in its business to non-accredited investors without having to register these interests as securities.  The new law provides a streamlined procedure to allow Michigan investors to invest in Michigan small businesses; in turn, allowing these businesses to raise capital. 

“This is an exciting new way to raise capital, but investors and small businesses need to make sure they know and understand all of the federal and state requirements of raising capital through crowdfunding,” said LARA Deputy Director Shelly Edgerton. “It may also be prudent for investors and small businesses to seek the assistance of an attorney who specializes in securities law before participating in intrastate equity crowdfunding.”

Small businesses must be aware of the requirements for qualifying for the exemption from registration so they don’t run afoul of federal and state securities laws.  Some important things to be aware of include, but are not limited to:

  • If the small business does not meet the federal intrastate exemption requirements found in section 3(a)(11) of the Securities Act of 1933, 15 USC 77c(a)(11), and SEC rule 147, 17 CFR 230.147, its offering would have to be registered with the U.S. Securities and Exchange Commission (SEC) or must qualify for another exemption from federal and state registration. 
  • A person operating a website, authorized under the new legislation, may be required to register with the SEC as a broker-dealer or a funding portal. 
  • A small business should be very cautious when offering the sale of an interest over the Internet because they may no longer qualify for the exemption from registration if they offer or sell to anyone who is not a Michigan resident.  This can have significant federal and state legal consequences.
  • A corporation that wishes to utilize this exemption cannot offer or sell more shares than it has authorized in its formation documents.

Edgerton emphasized that investors should do their research before investing in any small business.  Crowdfunding does not make investing in a small business any less risky.  Investors should understand the risk they are taking and understand that they could lose all of their investment.  They should ask questions, know who they are dealing with, and verify all of the information they are told.

“It is an exciting time for Michigan to be in the forefront of economic improvement,” said Edgerton.  “We are excited with all of the possibilities this new legislation may bring to Michigan and look forward to seeing new business development in Michigan.  However, we urge investors and small businesses to do their due diligence and comply with all federal and state laws.”

Finally, the recently enacted Jumpstart Our Business Startups Act of 2012 (JOBS Act) requires the SEC to promulgate rules on crowdfunding.  The SEC published its proposed rules on October 23, 2013 for public comment and the rules are expected to be finalized in the first quarter of 2014.  Both investors and small businesses should continue to watch the progress of these rules, and once they are finalized, they may want to reevaluate what they are doing to make sure they conform to these rules.

If you suspect fraud, contact the Michigan Attorney General in Lansing at 517-373-1110, or by email at miag@michigan.gov, or the Corporations, Securities, and Commercial Licensing Bureau, Enforcement Division at 517-241-9202 or by Fax at 517-241-9280.

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