On December 30, 2013, Governor Rick Snyder signed Public Act 264 into law (MCL 451.2202a), thereby enacting the Michigan Invests Locally Exemption Act or MILE Act. The Mile Act established an intrastate registration exemption for crowdfunding in the state of Michigan. In enacting this legislation, the legislature intended to make it easier for startups and small businesses to seek funding from local investors.
As a general rule, any offering of debt or equity (each a security) by an entity must be registered with the applicable regulatory authorities, often at both the state and federal level. However, there are numerous exemptions to this general registration requirement. At the federal level, Section 3(a)(11) of the Securities Act of 1933 provides an exemption from registration for offerings that are completely contained within one state. This exemption is known as the intrastate exemption.
If an offering falls within the intrastate exemption (or any other federal exemption) it need not be registered with the Securities and Exchange Commission (SEC); however, the issuing entity may still have to register the offering with the state in which the offering is taking place. In the context of small businesses or startups seeking capital, state registration exemptions historically have not been widely available. However, the MILE Act presents a relatively straightforward exemption for smaller Michigan-based companies that want or need to raise capital.
In order to qualify for the registration exemption, the entity seeking capital (called the issuer) must ensure the offering comports with MILE Act requirements. These requirements include the following:
a. The issuer must file notice with and pay a $100 filing fee to the Michigan Securities Division 10 days prior to the first day of the offering.
b. The issuer must provide audited or reviewed financial statements to potential investors. If the total value of the offering is $1 million or less, a reviewed financial statement must be provided. If the total value of the offering is between $1 and $2 million, an audited financial statement must be provided. The MILE Act exemption is not available for offerings exceeding $2 million in total value.
c. The MILE Act places limitations on the amount of funds that may be accepted from investors depending on whether the investor is accredited or unaccredited. An accredited investor is an investor that meets certain income and/or net worth criteria as defined by the SEC. If an individual is accredited, then there is no cap on the amount of funds that he/she can invest. If an individual is unaccredited, then he/she may not invest more than $10,000.
d. The issuer must escrow deposited funds with a third party until the conditions of the offering are satisfied.
e. The issuer must provide investors with quarterly reports.
Although an offering pursuant to this statute is exempt from the registration requirement, issuers still need to adhere to a number of different procedural rules in order to ensure compliance with the statute. Thus, MILE Act offerings are not completely void of regulatory oversight and may not be a viable option for all small businesses or startups seeking capital. Ideal candidates for the MILE Act or equity crowdfunding in general are existing businesses that are unable to obtain financing from traditional sources and need growth capital or startups with a novel idea and enough seed money to cover the regulatory compliance costs of a MILE Act offering.