Equity Crowdfunding in Michigan: The Bad Actor Rule

Michigan’s equity crowdfunding law, technically referred to as the “Michigan Invests Locally Exemption,” represents a fundamental shift in how businesses can raise capital. The power of turning to the crowd, instead of banks, is an opportunity Michigan businesses have never possessed before.

But, equity crowdfunding in Michigan comes with a number of regulations. One of those regulations is called the “bad actor” rule.

The Bad Actor Rule

The Michigan equity crowdfunding exemption is found at MCL 450.2202a. Subsection 5 states that the exemption does not apply if a number of people affiliated with the issuer or offering are subject to disqualification pursuant to 17 CFR 230.262.

17 CFR 230.262, or Rule 262, is a Securities and Exchange Commission rule that disqualifies certain “bad actors” from using exemptions to the traditional disclosure process involved with the sale of securities. The bad actor disqualification applies to the issuer itself, and its directors, officers, or general partners of the issuer, 10% owner (or more) of the issuer, promoters, and the underwriter and its directors, officers, or partners.

In general, the bad actor rules states that if an individual identified above has been convicted of a felony or misdemeanor in connection with the sale or purchase of a security, a false statement to the SEC, or arising out of the conduct of an underwriter, broker, or investment advisor, the exemptions from the general disclosure and reporting requirements are not available. In other words, issuers with a “bad actor” cannot utilize Michigan’s equity crowdfunding laws.

Preparing an Equity Crowdfunding Campaign

Similar to the list of requirements in making and submitting the disclosure statement, or using a website to facilitate the raising of money online, the bad actor rule is another regulation businesses must be aware of before investing time, money, and effort into a crowdfunding campaign.

To be prepared, you must have a complete understanding of your business partners, including their background with any misconduct in connection with the sale of securities. This requires business owners to conduct a level of due diligence on the individuals involved in the company and its large investors.