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Legal Considerations for Michigan Crowdfunding Campaigns

Crowdfunding has revolutionized how small businesses and entrepreneurs raise capital. In Michigan, state-specific legislation has created new opportunities for businesses to access funding from a broader pool of investors. However, crowdfunding is subject to complex state and federal regulations, and failing to comply can result in legal and financial consequences.

At True North Legal Group, we help small businesses navigate the legal complexities of crowdfunding. Whether you are considering launching a campaign or already in the process, understanding the legal landscape is essential. This guide explores the key legal considerations for Michigan crowdfunding campaigns, including state and federal regulations, compliance requirements, and best practices for success.

Understanding Crowdfunding in Michigan

Crowdfunding allows businesses to raise capital by collecting small contributions from many investors, typically through online platforms. While this method provides an alternative to traditional funding, businesses must comply with both Michigan-specific laws and federal securities regulations.

The Michigan Invests Locally Exemption (MILE) Act

In 2013, Michigan passed the Michigan Invests Locally Exemption (MILE) Act, making investment crowdfunding more accessible for local businesses. This law allows Michigan-based businesses to raise capital from Michigan residents with fewer regulatory hurdles than federal securities laws typically require.

Key Features of the MILE Act

  • Allows unaccredited Michigan residents to invest up to $10,000 per business.
  • Enables businesses to publicly promote investment opportunities via online platforms and social media.
  • Provides an exemption from certain federal crowdfunding rules, making local fundraising more accessible.

This legislation has expanded capital-raising opportunities for Michigan small businesses by allowing them to tap into a broader investor base, including individuals traditionally excluded from private equity investments.

Federal Crowdfunding Regulations

While the MILE Act provides opportunities at the state level, federal laws still govern crowdfunding activities in certain circumstances. The Jumpstart Our Business Startups (JOBS) Act, passed in 2012, established a framework for equity crowdfunding nationwide.

Under Securities and Exchange Commission (SEC) regulations, businesses engaged in crowdfunding must comply with investment limits, disclosure requirements, and reporting obligations. Even if a business operates under the MILE Act, federal rules may still apply in certain situations, such as when investment campaigns involve non-Michigan residents or exceed state-imposed limits.

Key Legal Considerations for Michigan Crowdfunding Campaigns

Launching a crowdfunding campaign requires more than just a compelling business idea. Businesses must navigate a range of legal requirements to ensure compliance with Michigan and federal laws.

Choosing the Right Crowdfunding Model

Before launching a campaign, businesses must determine which crowdfunding model aligns with their goals and legal obligations.

  • Donation-based crowdfunding – Platforms like GoFundMe allow donors to contribute without expecting financial returns. This model involves minimal legal complexities but still requires transparency regarding how funds will be used.
  • Reward-based crowdfunding – Common on Kickstarter, this model offers backers non-financial rewards. Businesses must ensure compliance with consumer protection laws and fulfillment obligations related to promised rewards.
  • Equity crowdfunding – This model, authorized under the MILE Act, allows businesses to sell securities to investors. Equity crowdfunding is subject to the most stringent regulations, requiring proper filings, disclosure statements, and investor limitations.

Complying with the MILE Act

Businesses using the MILE Act for crowdfunding must adhere to specific compliance requirements:

  1. File the necessary documents with the Michigan Department of Licensing and Regulatory Affairs (LARA), including a notice of intent to conduct a crowdfunding offering.
  2. Pay a $100 filing fee to LARA when submitting the required documentation.
  3. Establish an escrow agreement with a Michigan-based bank to hold investor funds until the fundraising goal is met.
  4. Provide a detailed disclosure statement outlining the business’s financials, risks, and plans for using the raised funds.
  5. Ensure that non-accredited investors contribute no more than $10,000 per company per year, while accredited investors have no investment limit.

Failure to comply with these requirements can result in fines, legal disputes, and potential revocation of fundraising privileges.

Transparency and Disclosure Obligations

Under both state and federal crowdfunding laws, businesses must provide accurate and comprehensive information to potential investors. Required disclosures typically include a detailed business plan, leadership structure, investment risks, and regular updates throughout the funding process and beyond. Misleading investors or failing to disclose material information can lead to legal liability and penalties from regulatory authorities.

Investment Limits and Investor Qualifications

Crowdfunding regulations impose specific investment limits based on investor status. Under the MILE Act, non-accredited investors can invest up to $10,000 per company per year, while accredited investors can invest without limits. The total amount a business can raise is capped at $1 million within a 12-month period unless audited financial statements are provided.

Securities Transfer Restrictions

Investors purchasing securities through MILE Act crowdfunding cannot transfer or sell their shares for at least nine months after purchase, except under specific conditions. Businesses must clearly communicate this restriction to investors and have systems in place to enforce it.

Ongoing Reporting Requirements

Businesses that successfully raise funds through crowdfunding have ongoing obligations to their investors, including providing annual financial reports, operational updates, and disclosures of any material business changes. Failure to meet reporting obligations can erode investor confidence and expose businesses to legal challenges.

Best Practices for a Legally Compliant Crowdfunding Campaign

To ensure compliance and avoid legal pitfalls, businesses should:

  • Seek legal counsel before launching a campaign to ensure compliance with state and federal laws.
  • Develop a strong business plan that clearly outlines goals, risks, and financial projections.
  • Be transparent with investors and provide accurate, detailed disclosures.
  • Understand ongoing obligations, including investment limits, reporting requirements, and securities transfer restrictions.
  • Choose the right crowdfunding platform that aligns with business needs and complies with legal requirements.
  • Stay informed about changes in crowdfunding laws and regulations.

Partner with True North Legal Group for Crowdfunding Compliance

Navigating the legal complexities of crowdfunding can be challenging, but you don’t have to do it alone. At True North Legal Group, we provide comprehensive legal guidance to help Michigan small businesses launch successful and legally compliant crowdfunding campaigns.

Our legal membership model offers ongoing support for a predictable, monthly fee, ensuring you have the expertise you need before, during, and after your fundraising efforts.

Don’t let legal uncertainties derail your crowdfunding success. Contact True North Legal Group today to learn how our team can help you navigate the crowdfunding landscape while ensuring full legal compliance.