Crowdfunding is the process of asking the general public for contributions to fund a new project or business. It is innovative because it allows entrepreneurs to bypass typical investors (venture capitalists, banks, etc.) and connect directly with consumers who are genuinely interested in making the project creator’s vision a reality. The project owners create the presentation on an online portal.
In 2013, Michigan passed the Michigan Invests Locally Exemption (the “MILE Act”). The MILE Act is structured to provide a return on investment, either through an equity or debt position. Investors with an equity position receive an ownership stake in the business they choose to fund. Investors with a debt position are provided a predetermined rate of return that can be uniquely structured in a way that best fits the investment offering.
The MILE Act makes crowdfunding easier by exempting this type of fundraising from the complex state securities laws. Capital is essential in creating and growing startups and small businesses. Many startups are cash strapped and acquiring capital from funding sources such as banks and venture capital firms can be challenging. Early stage companies are often not able to qualify for traditional bank loans because they lack collateral, cash and a successful operating history. Although some venture capital firms finance early stage startups, the financing process is competitive. Venture capital firms typically invest in high technology industries such as IT; leaving many other types of startups and small businesses out in the cold.
Under the MILE Act, project funding ranges from business start-ups and expansions to real estate purchases. Crowdfunding, however, comes with tedious requirements and notable risks. Lawyers must stay abreast of changes in both state and federal law to advise clients on the legal aspects of successfully launching a crowdfunding campaign including the preparation of corporate documents, investment documents and disclosures. Before using the MILE Act to raise crowdfunding investments, businesses should consult with an experienced corporate and securities attorney to ensure the crowdfunding investment meets their short-term and long-term objectives.