While Michigan has democratized raising capital with its passage of the “Michigan Invests Locally Exemption,” it has also placed some, lets say interesting, regulations on the websites that act as a portal or third-party between the issuing company and the investor. If you are considering using Michigan’s crowdfunding process, explained in general here, you should be aware of the regulations regarding the website used to host your project.
When Can a Company Offer Its Securities On a Website?
Before any business can take advantage of Michigan’s crowdfunding laws, including using a website in connection with the offering of securities, it must file a notice with the Michigan Department of Insurance and Financial Services (DIFS). This notice is described in more detail here. Specifically, this notice must be filed 10 days before making the securities available for purchase on any website.
And, as described below, issuers cannot offer securities for sale through a website unless the website, not the issuer, has filed a notice regarding the website’s contact details with the DIFS.
What Website Information Must be Included in the Disclosure Statement?
Discussed in detail here, the disclosure statement is one of the most important documents created under Michigan’s equity crowdfunding process. This document must be provided to all prospective purchasers at the time of the offer. Like the notice above, it must also be filed with the DIFS. Among the many required disclosures, two are related to the website used in connection with the offering of securities.
First, the issuer is required to disclose “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.” MCL 451.2202a(1)(e)(ii)(E). This expressly includes the “owner of any websites, if known….” This section also requires the issuer to disclose the compensation being paid to the website owner.
Second, the disclosure statement must include the name and address of the website to be used in connection with the offer, including its domain name. If, at the time the disclosure statement is filed with the DIFS, the issuer has not engaged a website for this purpose, but later selects a website, the issuer is required to filed a supplemental notice with the DIFS.
What Other Requirements Exist if I Want to Use a Website In Connection with the Sale of Securities?
If an issuer uses a website to foster the offering or sale of securities under Michigan’s equity crowdfunding law, the following requirements must be met:
- The Issuer must provide evidence to the website and to DIFS that the issuer is authorized to conduct business in Michigan;
- The issuer must obtain from each purchaser evidence that he or she is a resident of Michigan and if applicable, an accredited investor. This can be accomplished by obtaining a copy of a Michigan driver’s license, identification card, signed property tax affidavit indicating the person owns and occupies property in Michigan as his or her principal residence. MCL 451.2202a(1)(b)(i)(C);
- As described above, the website operator, not the issuer, must file a written notice with the DIFS that includes the website operator’s name, business address, and contact information. Further, the notice must state that the business is authorized to do business within Michigan. Finally, it must state the website is being utilized to offer and sell securities under the Michigan Invests Locally Exemption. This notice is must be filed before the sale of securities through a website may be made;
- The Issuer and the website must maintain records of offers and sales of securities made through the website and provide access to DIFS on request.
Are there Rules about Collecting the Money?
Issuers must take care to select a website that complies with the banking requirements of Michigan’s equity crowdfunding law. Currently, many crowdfunding websites place a hold on a credit card to secure funds. However, a different process is required in Michigan.
Specifically, the issuer is required to enter into an escrow agreement with a bank or other depository institution located in Michigan. This agreement must state that the offering proceeds will be released to the issuer only when the aggregate capital raised is equal to or greater than the minimum target offering amount specified in the disclosure statement (and that if that minimum goal is not accomplished, purchasers will be refunded). This escrow agreement must be filed with the DIFS.
Issuers are advised to review the terms of service for any website used in connection with the sale of securities to determine their exact method for collecting funds.
What Requirements are Placed on the Website Itself?
As already summarized, the website is required to file a notice with the DIFS and to keep accurate records of sales and offerings. But, the fun doesn’t end there.
Article 4 of Michigan’s Securities Act places registration requirements on “broker-dealers and investment advisers. In order for the website to be excluded from those registration requirements, the website must meet all of the following conditions:
- It does not offer investment advice or recommendations.
- It does not solicit purchases, sales, or offers to buy the securities offered or displayed on the website.
- It does not compensate employees, agents, or other persons for the solicitation or based on the sale of securities displayed or referenced on the website.
- It does not hold, manage, possess, or otherwise handle purchaser funds or securities.
- It does not engage in any other activities that the DIFS by rule determines are inappropriate for an exemption from the registration requirements under article 4.
While the State of Michigan is opening up a new method of raising money, this new process comes with substantial regulations. If your business is considering selling securities online, you should consult with experienced attorneys to ensure compliance with Michigan’s equity crowdfunding provisions.
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