On October 22, 2014, Michigan took a significant step to increase investment crowdfunding opportunities for Michigan businesses by becoming the first state to establish an intrastate market where broker-dealers can sell securities of Michigan-based companies. While “crowdfunding” can have different meanings, including rewards-based fundraising campaigns on sites like Kickstarter and Indiegogo, “investment crowdfunding” generally refers to small businesses seeking investment capital in small amounts from a large number of investors.
The signing of House Bill 5273 by Governor Rick Snyder, along with the state’s preexisting registration exemption for securities issued by Michigan businesses under the Michigan Invests Locally Exemption (“MILE Act”), allows Michigan business to raise capital over the Internet or though general solicitation by selling the exempt securities within a newly-created alternative intrastate market.
In order to sell exempt securities in the new market provided for by House Bill 5273, certain requirements must be met. The sale of securities must be facilitated by a “Michigan investment market.” A Michigan investment market is a broker-dealer that is exempt from federal registration and that provides a market for the sale of the exempt securities. Any broker-dealer wishing to participate in the alternative intrastate market must register with the state of Michigan by submitting an application, consenting to service of process, paying fees, and providing other required information. Once an application is submitted, a sixty-day public comment period begins, at the conclusion of which an administrator may approve, limit, or deny the Michigan investment market’s registration.
Additional requirements must also be met once a broker-dealer is approved to be a Michigan investment market. The Michigan investment market can only conduct business in Michigan and is required be a Michigan resident. Each Michigan investment market must create and maintain a list of detailed information concerning all transactions conducted through the market for at least seven years. Moreover, prior to any secondary offer, sale, purchase or trade of securities, certain information of the issuer’s management and financials must be made available to any purchaser within a reasonable amount of time when the transaction is facilitated by a Michigan investment market. Michigan investment markets are also permitted to charge fees of up to 5% of the transaction’s value.
This action taken by the Michigan legislature represents a growing trend in state’s efforts to facilitate small business growth by providing other methods for state businesses to raise capital locally. At the moment, at least fourteen states have passed similar legislation and other states may be soon to follow.
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