Heralded by backers as a novel way for in-state businesses to raise capital, 2014’s Michigan Invests Locally Exemption (MILE) Act came with great promise.
More than three years later, the state law that allows businesses to secure funding from in-state investors through a crowdfunding campaign has actually had limited use. Just 14 Michigan-based companies conducted intrastate crowdfunding offerings under the MILE Act since it was signed into law, according to the Department of Licensing and Regulatory Affairs website.
Only two companies used intrastate crowdfunding since the start of 2016, the last of which was nearly a year ago.
“I was really excited for it because I thought it presented a really cool opportunity for local communities to invest in local businesses,” said Eric Misterovich, a business law attorney at Revision Legal PLLC in Portage. “In practice, I don’t think it’s been very effective.”
Misterovich attributes the MILE Act’s slow start in part to a relative lack of awareness and understanding about how crowdfunding works, particularly equity-based campaigns where investors can acquire shares in a company.
“I was certainly hoping for more and I think it just ran into practical problems with crowdfunding and equity crowdfunding,” he said. “One is that it’s new and it’s complicated, and when people don’t know new things, they tend to try to avoid them.”
The MILE Act allows Michigan-based companies to use crowdfunding campaigns to seek investors who live in the state. The transactions are exempt from federal securities regulations.
Companies can sell securities in the businesses or opt to use a debt and revenue-sharing model where they dedicate a set percentage of sales or earnings to pay back investors. A state website listing the 14 offerings conducted to date under the MILE Act does not differentiate between the types of campaigns the companies conducted.
The state law allows non-accredited investors to put up to $10,000 into a single issuer. Accredited investors can make unlimited investments. Issuers can raise up to $2 million if they make their financial statements available to investors and state regulators, and up to $1 million if they chose not to.
One of the more notable intrastate offerings occurred in early 2016. The Detroit City Football Club raised $741,250 over 109 days from 527 investors to pay for renovations to a soccer stadium in Hamtramck. Conducted through Michiganfunders.com, the offering used a debt and revenue-sharing model.
Of the 14 campaigns conducted under the MILE Act since 2014, the first four were for craft brewers and occurred in 2014. The first to do a campaign was Tecumseh Brewing Co., which three years ago raised $175,000 in startup capital through crowdfunding that it matched with a bank loan and investments from friends and family.
Other campaigns include a vintage clothing store in Detroit, a food cooperative in Marquette, and a school for dog groomers in Royal Oak.
Corporate law and securities attorney Max Barnes of the Grand Rapids office of Miller, Johnson, Snell & Cummiskey PLC views crowdfunding primarily as a niche option that can work for some companies. Crowdfunding can work for lifestyle or neighborhood businesses to draw local investor support “from the community and customers who like that service in their area,” Barnes said.
“Those are the people that will probably take advantage of it — people starting a business and that’s their livelihood, the flower shop or the restaurant in the neighborhood or the brewery in the neighborhood,” Barnes said. “It’s not going to grow crazy, but it’s their job and livelihood and people in the community want that there or like it and want to support it.”
Attorneys contacted for this report suggest the disclosure and reporting requirements have limited companies’ use of the MILE Act.
Many entrepreneurs also may conclude that it’s easier to recruit friends and family to invest in their small businesses or to pursue commercial bank loans, Misterovich said. He’s had several clients ask about using crowdfunding to raise capital, but none actually pursued it.
“It has a niche, and it’s pretty small. I thought it’d be bigger, but I think just the market availability of funding for a business that has legs is there,” Misterovich said. “You just know what you have with a traditional bank loan and if you can get it, great.”
One barrier in the MILE Act is the requirement for issuers to work with a Michigan bank to set up an escrow account that holds the money invested in a company until the campaign is done. If the campaign is successful, the funds are forwarded to the company. If not, the money gets returned to the investors.
Joe Elias, co-founder and COO of Grand Rapids-based Loquidity LLC, said the crowdfunding platform formed in 2015 to invest in commercial real estate had trouble finding a bank willing to help with an escrow account.
One regional bank wanted to see a steady volume and a “massive book of business” before it would handle the escrow account, which Loquidity could not guarantee. That resulted in Loquidity altering its business plan, Elias said.
“It just never went anywhere,” Elias said. “We decided we needed to pivot since we were running into roadblocks.”
The change involved forming Red Oak Capital Group LLC last October, a company that provides loans of $1 million to $5 million for projects and then uses Loquidity to crowdfund for investors in the debt.
Loquidity is one of 10 platforms registered with the state to handle crowdfunding campaigns performed under the MILE Act.
Elias would like to see state lawmakers revisit the MILE Act to address some of the barriers in the way of its broader use. The escrow requirement “really just needs to go away,” said Elias, who faults the state for not following up to see how well the law has worked.
“There’s nobody reaching out to say, ‘How can this be better to make it work?’” Elias said. “What’s the sense of having a law put into place if it’s non-useable?”
LEARNING CURVE REMAINS
Michigan is one of more than 30 states that enacted laws in recent years allowing intrastate crowdfunding campaigns that were exempt from federal regulations, said Anthony Zeoli, a partner at Chicago law firm Freeborn & Peters LLP.
Zeoli said Michigan has “one of the better” laws, although some states have gained more traction than others.
While intrastate crowdfunding generally has seen limited use in most states, Zeoli offers a reminder that it remains in its infancy. Entrepreneurs and investors alike still have a learning curve, he said.
Zeoli expects people who use the major crowdfunding sites like Kickstarter and Indiegogo to look for a cool new product, project or idea to support will turn their attention in the next few years to investing in companies, whether locally or across the country.
“You’re still seeing millions dumped into Kickstarter and Indiegogo to support ideas, and it should be natural for some of that money to move (from) supporting ideas to supporting ideas with the potential for a return,” Zeoli said. “We just have to get people who are doing those types of things to understand the difference and the fact that they can still support ideas and causes and businesses that are local and still have the potential to make a profit.
“We’re just not getting that push. We haven’t moved that needle yet. When that happens, there’ll be a lot more use of these types of rules.”
Entrepreneurs who are interested in raising capital through crowdfunding and want to reach beyond Michigan investors can do so under the federal JOBS Act, a law passed by Congress in 2012 and signed by former President Obama that opened crowdfunding to equity investments by non-accredited investors.
Federal rules that took effect a year ago allow entrepreneurs to raise up to $1 million through crowdfunding offerings over a 12-month period. However, experts say the federal law also has regulatory requirements that can prove burdensome and costly for entrepreneurs to meet.
Regardless, even some traditional crowdfunding platforms are taking notice. Last November, Indiegogo said it would move into equity crowdfunding in a partnership with MicroVentures, an online platform for venture capital investments.
Through April, about 270 companies nationwide raised around $32 million in crowdfunding campaigns conducted under the new federal rules, known as Title III, according to a dashboard operated by NextGen Crowdfunding.