Four Steps to MILE Act CrowdfundingBy Joshua M. Borson on April 20th, 2015 /
All start-ups face the same dilemma when going to market: how to turn an idea into an ongoing business with scarce resources. Equity crowdfunding pursuant to the Michigan Invests Locally Exemption (MILE Act) is an alternative method that Michigan entrepreneurs can use to raise money if traditional sources are not available. The MILE Act allows local businesses to reach out to Michigan residents for the opportunity to invest in their company. Below are the top four takeaways for any company looking to raise money through MILE Act crowdfunding:
1. Develop a Business Plan
Crowdfunding is not a one-size-fits-all fundraising tool. Investment opportunities come in all shapes and sizes—including Common or Preferred Stock and Senior or Mezzanine Debt. It is essential that any company launching a MILE Act crowdfunding campaign understand the economic needs of their business. Determine which investment vehicle is best suited to accomplish short-term and long-term objectives.
2. Understand the Law
The Michigan Department of Licensing and Regulatory Affairs (LARA) regulates the MILE Act, and offerings are subject to the federal securities laws. To remain compliant, a company must be organized and incorporated in the State of Michigan, and implement certain safeguards to verify that all prospective purchasers are Michigan residents. A company may raise up to $10,000 from any investor, but investors verified with an “accredited investor” status can invest more than $10,000. The maximum amount of funds that may be raised in a 12-month period is $1 million. However, a company may raise up to $2 million if they provide prospective purchasers with audited or reviewed financial statements for the most recently completed fiscal year. At least 10 days prior to launch, a company must file a notice with LARA, pay a $100 application fee, and submit a disclosure statement that details the terms of the offering and the risks involved (this document must also be provided to all prospective purchasers). MILE Act crowdfunding campaigns should proceed with caution, as there may be severe consequences to violating either the MILE Act or federal securities laws.
3. Create a Strategy
Prior to taking a MILE Act crowdfunding campaign live, a company should have a sound fundraising strategy in place. All proceeds raised from a MILE Act campaign must be deposited into a bank account held in Michigan with instructions not to release the funds unless the minimum target offering is raised by the time stated in the disclosure statement. In the event that a company is unsuccessful in raising their target amount, all deposited funds must be returned to investors. Time and capital are critical to any entrepreneur, and the failure to fund a MILE Act campaign could have a grave impact on a start-up at the early stages of its life cycle.
4. Educate Yourself
The Michigan House of Representatives is currently reviewing legislation that, if implemented, would regulate local stock exchanges. Under House Bill 5273, a “Michigan Investment Market” would provide a market or exchange for the sale of securities acquired under the MILE Act. Although a marketplace may facilitate an investor’s ability to resell its securities, companies must follow several requirements, some of which must be addressed prior to the launch of a MILE Act campaign. Accordingly, a company should consider such long-term objectives when preparing their initial business plan.
Overall, the MILE Act is an up-and-coming financing strategy that entrepreneurs should consider when raising money. The benefits of MILE Act crowdfunding are twofold, as it assists local entrepreneurs obtain the capital they need to get up-and-running and allows Michigan residents to become invested in their community.
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