Crowdfunded design projects, artistic endeavors and sustainability initiatives have become quite common. But what about crowdfunding a restaurant, or tech startup, or bookstore? What if the power of the crowd could be applied to entrepreneurial projects? And, what if all the investments were sourced locally?
These are the questions that the Michigan Invests Locally Exemption (MILE) Act addresses. Sponsored by Rep. Nancy Jenkins, the bill, which moved almost unanimously through state legislature and was signed into law by governor Rick Snyder in less than four months, allows Michigan businesses to raise capital from Michigan investors. New businesses can raise $1 million per year and existing businesses can raise $2 million per year from local investors. Investors are allowed to give $10,000 per year, per business, per person if they have less than $1 million in net worth. That amount is unlimited if investors have more than $1 million.
The act harnesses the power created when crowdfunding meets what Angela Barbash, founder of Reconsider, calls the “juggernaut of opportunities that the entrepreneurship movement has proven to be.” It also provides investors a way to invest in their communities.
MILE also sets a precedent for other states, including Washington, North Carolina and Maine, that are discussing similar legislation. In addition, it lays a foundation for the creation of a local stock exchange where people can get into and out of investments quickly and easily. Another Michigan bill, HB 5273, also sponsored by Rep. Jenkins, would create registration and oversight requirements and paves the way for communities to start working to create exchange businesses in Michigan. It is, what Barbash calls “cutting edge work.”
“With this kind of legislative traction,” she explains, “Michigan may join the roster of disruptive innovators before long.”
Recently, Shareable’s Mira Luna and Barbash had the opportunity to discuss the importance of local investing, the entrepreneurial renaissance it’s creating, and how other states can create similar legislation.
Mira Luna: How do you see this impacting low income, underemployed communities, like in Detroit?
Angela Barbash: Often low income entrepreneurs or those who have had marks against their credit in the past are not eligible for traditional bank financing. Investment crowdfunding, either eventually through the JOBS Act or through a state that has passed legislation such as Michigan, will allow all people to have access to raising capital for their business ventures.
What we're seeing in Michigan, and in Detroit, is a renaissance of new entrepreneurs who have been unemployed or underemployed from quite some time and now turning to entrepreneurship to forge a new path for themselves.
How are you working (or hoping to work) with local economic development agencies?
Reconsider launched in 2012 and began connecting with economic development agencies who were interested in these new economy initiatives such as crowdfunding and the local first movement, but they weren't quite sure how to incorporate them into their existing frameworks. We began with our own local county economic development office who was motivated to take advantage of new solutions. The resulting report is available on our website.
We are now helping them roll out some of our suggestions during 2014. With MILE now passed and the conversation spreading across our state we're not getting calls from other economic development agencies and municipalities who are in the exploration and learning phase, so we're happy to say that our calendar is filling up with events and speaking engagements with these partners.
What’s the national context of MILE and what can other states do?
MILE creates an intrastate exemption for companies to raise capital. In other words, Michigan businesses can raise capital from Michigan residents and, if the entire deal stays within the confines of our state border, then the federal government does not have jurisdiction. This essentially allows a state to implement some of the provisions of the JOBS Act without having to wait for the SEC to finalize and issue the rules.
Even when the JOBS Act rules are issued, our own state limits are more generous in terms of how much an investor can invest and how much a company can raise. Other states have the opportunity to pick up the momentum that the local investing conversation has created in their communities and go above and beyond what the JOBS Act allows to really accelerate the amount of capital flowing throughout their state. What we've done is just take advantage of the existing legal structure and other states have the ability to do the same.
Which states have passed?
So far Wisconsin and Michigan are the only states to have passed an intrastate exemption legislatively. Georgia and Kansas implemented an intrastate exemption, but did not do it legislatively. Of all four states, Michigan has the highest limit of $10,000 per person per company per year if the investor is non-accredited (less than $1 million in net worth).
What's the ideal policy proposal for this to pass in other states (both the crowdfunding and exchange pieces)?
We think that what we've done in Michigan with MILE really takes the best practices of those who have considered similar measures before us, so starting with the Michigan legislation as a model and working from there would be ideal. We imagine that over the next few years as the ecosystem grows, expands, and lessons are learned, an improved model may emerge; but, for where we are right now, MILE is a great start.
The local stock exchange legislation is much trickier. At last week's Commerce Committee testimony some legal questions came up that can only really be answered by a conversation with the SEC. There may actually be a way to launch an exchange by filing an exemption application with the SEC that would not require our state to pass separate legislation, but again it remains to be seen how this will get hashed out.
Beyond having the legal ability to launch an exchange though, you need a capable entrepreneurial team willing to put the business together and you would need a critical mass of quality companies and investors to reduce the risk for everyone involved. Answering the legal questions though becomes the first step.
Image by Libby Levi (CC)