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SEC Rule 147 and the Michigan Invests Locally Exemption

By Eric Misterovich

Michigan Invests Locally Exemption

We have written repeatedly on Michigan’s new crowdfunding regulations established as the Michigan Invests Locally Exemption (“MILE”). Whether you like them or not, the MILE regulations take aim at striking a balance between permitting new avenues of equity-driven fundraising, while seeking to protect its participants from unscrupulous offerors.

MILE only applies, however, to strictly intrastate equity offerings. Interstate equity-crowdfunding activity, on the other hand, is subject to oversight by the Federal Securities and Exchange Commission.

SEC Rule 147

Rule 147 (see 17 CFR 230.147) is nicknamed the “safe harbor” exemption because it outlines how the SEC analyzes whether or not a company’s activities are intrastate, and thus free from its oversight when engaging in equity sales via crowdfunding.

A company’s “safe harbor” is obtained when it demonstrates (1) its residency within the state; (2) a significant amount of its business is conducted within the state; (3) and all offers or sales are made only to residents of the state. Let’s review the three main requirements:

  1. Residency is demonstrated by a company’s organization within the state or by the company stationing its principal place of business within the state.
  2. 80% Rule: The offering company must derive at least 80% of its gross revenues from the state; have at least 80% of its assets located in the state prior to any offering; use at least 80% of the net proceeds of the exempt offering to operate its business in the state; and have its principal office located in the state.
  3. The offering company can only offer and sell securities to residents of the chosen state.

What effect do the Safe Harbor provisions have on MILE?

The requirements of Rule 147, particularly that of the so-called 80% rule, demonstrate the SEC’s intention to narrowly limit the application of its “safe harbor” rule. The fact is that unless your business is hyper-local (e.g. a restaurant, bar, etc.) and intends to earn a substantial measure of its revenue, and reinvest any earnings, within the state, your business must pay close attention to whether or not it qualifies for the Rule 147 “safe harbor” exemption – or whether it must comply with SEC regulations of financial offerings beyond those enumerated in MILE.

In short, crowdfunding is a new and fluid area of the law and you should be reluctant to risk the equity and control of your business without first consulting competent legal counsel. The attorneys at Revision Legal are well-versed in the nuances of crowd-funding regulations and would be glad to help you determine how to move forward with your planned equity offering and whether your business qualifies for Rule 147’s “safe harbor” provision.

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