Crowdfunding and Control of Investors

By Eric Misterovich

 

The Michigan Invests Locally Exemption (MILE), gives Michigan businesses and investors an opportunity not available on the federal level: the ability to raise capital by selling equity online. This democratization of funding can cause a fundamental shift in how businesses raise money.

But, as with any type of investment, taking other people’s money brings certain obligations. Most notably, businesses are expected to perform to investor demands. And when you take a small amount of money from a large number of people, you have a lot of demands to manage.

Options for the Crowdfunding Business

It is possible to structure your business to minimize the effect of having a large number of shareholders. For example, you could choose to sell a class of shares that have limited, or no voting rights, or the shares could be subject to restrictions on dividends, or any number of other restrictions. But, the more restrictions the less likely people will be willing to invest substantial sums of money into your business.

Tecumseh Brewing Company

The first Michigan company to take advantage of MILE, Tecumseh Brewing Company, provides a great example of how Michigan businesses can raise money from the crowd while limiting exposure to a deluge of stockholder concerns.

The brewery is seeking to raise between $150,000 and $175,000. The minimum investment is $500 while state law sets the maximum at $10,000 (for a non accredited investor). The brewery is offering a revenue share in which 7% of the company’s monthly gross revenue is shared between purchasers according to their pro rata share. Purchases, however, are capped at earning 1.5 times their original investment. The company expects to pay each investor the maximum share by July, 2019.

Factors to Consider

Founders need to weigh their options when turning to the crowd and ask themselves a number of questions. What is the minimum investment you will permit? The lower the number, the more likely you can limit your investors’ control in your business. On the other hand, you will more quickly reach your funding goals through a few large investments. Would guidance from wealthier, experienced investors be an asset?

Anyway you cut it, investors will play a role in a crowdfunded business. Some businesses may seek maximum involvement, some businesses may want to limit it as much as possible. With the proper corporate structuring, your goals, whatever they may be, are possible.

For more information on the Michigan Invests Locally Exemption, check out our related posts:

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