Equity Crowdfunding in Michigan: The Disclosure Statement

By Eric Misterovich

While businesses and investors are waiting for the SEC to finalize rules to implement equity crowdfunding on a national scale, Michigan businesses and residents can begin utilizing this innovative method of raising money today.

 

The “Michigan Invests Locally Exemption” now permits Michigan businesses and citizens to use the power of the Michigan-crowd to offer, sell, and purchase equity in privately held companies without adhering to the general (and burdensome) disclosure and reporting requirements.

 

That being said, the “Michigan Invests Locally Exemption” contains a number of rules, conditions, and regulations that must be satisfied. For a general overview of the crowdfunding law, click here.

 

This post will focus on one aspect of equity crowdfunding in Michigan: the disclosure statement.

 

Disclosure Statements for Equity Crowdfunding

Any business wishing to offer or sell securities to Michigan residents is required to issue a disclosure statement to prospective investors. The elements of what must be contained in the disclosure statement are divided into two general categories: required and discretionary disclosures.

 

Required Elements of the Disclosure Statement

 

Pursuant to MCL 451.2202a(e)(ii)(A)-(G), the disclosure statement must include the following:

  • Description of the issuer including the type of entity, the address and telephone number of principal office, formation history, business plan, intended use of the offering proceeds, including any amounts to be paid, as compensation or otherwise, to any owner or managing member;
  • Identity of each person that owns more than 10% of the ownership interests of any class of securities of the issuer;
  • The identity of the executive officers, directors, and managing members of the issuer, and any other individuals who occupy similar status, including titles and experience;
  • Terms and conditions of the securities being offered and any outstanding securities of the issuer, the minimum and maximum amount of securities being offered, if any, and either the percentage ownership of the issuer represented by the offered securities or the valuation of the issuer implied by the price of the offered securities;
  • The identity of any person that the issuer has or intends to retain to assist the issuer in conducting the offering and sale of securities, including the owner of any websites, if known, but excluding any person acting as an accountant or attorney and employees that are primarily involved in operating the business rather than raising money. For each person identified, include a description of consideration being paid to each;
  • Description of any litigation or legal proceedings involving the issuer or its management, and;
  • Name and address of any website that the issuer intends to use in connection with the offering (although you can provide this notice at a later time if you have not selected a website yet).

 

Discretionary Elements of the Disclosure Statement

 

Michigan’s crowdfuding law requires additional disclosures in certain situations. Specifically, pursuant to MCL 451.2202a(m), businesses should include information “material to the offering, including, where appropriate,  a discussion of significant factors that make the offering speculative or risky.”

 

The statute makes clear that this additional information should not be boilerplate disclosures, but instead, should be tailored to the specific securities at issue.

 

From a practical approach, it is likely a safer bet to always include the discretionary elements into the disclosure statement to fully inform prospective purchases of any and all risks.

Required Submissions of the Disclosure Statement

 

First, at least 10 days before the offer is made, the disclosure statement must  be submitted to Department of Insurance and Financial Services. This is typically done in connection with the other required documents that must be filed with the state.

 

Next, the disclosure statement, including all of the elements (when required) above, must be provided to each prospective purchaser at the time the offer of securities is made. MCL 451.2202a(m). Often times, this will be accomplished through a website that includes information about the crowdfunded project and/or business.

 

Conclusion

 

The disclosure statement is one of the most important documents to prepare in the process of raising money via the Michigan-crowd. Care and caution must be taken to accurately inform prospective purchases about the securities being offered, the team behind the corporation or company, and the risk involved.

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