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.
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:
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.
Securities law is built around a fundamental divide between offerings that are contained within a single state and offerings that cross state lines. Intrastate offerings — those made solely to residents of the state in which the issuer is incorporated or does business — have historically been exempt from federal registration requirements under Section 3(a)(11) of the Securities Act of 1933. State securities laws (“Blue Sky laws”) govern these offerings exclusively.
Rule 147 provides the SEC’s safe harbor interpretation of what constitutes a qualifying intrastate offering. Comply with Rule 147 and you can be confident the SEC will treat your offering as intrastate. Deviate from Rule 147 — even slightly — and the offering loses its exemption and becomes subject to full federal registration or another federal exemption such as Regulation A, Regulation D, or Regulation Crowdfunding under Title III of the JOBS Act.
For Michigan businesses using MILE, this distinction is critical. MILE is a Michigan Blue Sky exemption. It applies only to intrastate offerings. If a Michigan company conducts its crowdfunding offering in a way that causes it to lose Rule 147 safe harbor status — for example, by accepting an investment from an out-of-state investor — the entire offering can be deemed an unregistered securities offering subject to SEC enforcement.
The 80% rule under Rule 147 catches many businesses by surprise. The rule requires compliance across four separate dimensions simultaneously: revenues, assets, proceeds, and principal office location. A Michigan company that derives a significant portion of its revenue from customers in other states — including through e-commerce, online subscription services, or national distribution — may fail the 80% gross revenue test even if it is incorporated in Michigan and physically located here.
Consider a Michigan-based software company that sells subscriptions nationally. Even if the founders, employees, and servers are all in Michigan, the company’s revenue stream is national. Unless at least 80% of that revenue comes from Michigan residents, the company cannot qualify for the Rule 147 safe harbor and therefore cannot use MILE for its equity crowdfunding offering.
Technology companies, manufacturers with national distribution, and any business that earns significant revenue from out-of-state customers must carefully analyze their revenue geography before assuming MILE is available to them.
Companies that cannot satisfy Rule 147 are not without options. Federal law provides several exemptions that allow equity crowdfunding without full SEC registration:
Each of these exemptions has its own eligibility requirements, disclosure obligations, and investor limitations. Selecting the right exemption requires a careful analysis of the company’s fundraising goals, investor base, and operational characteristics.
The intersection of Michigan’s MILE regulations and federal securities law is genuinely complex. Getting it wrong can expose founders to investor rescission rights and SEC enforcement. Before launching an equity crowdfunding campaign, Michigan businesses should work with an experienced crowdfunding attorney to determine which exemption applies, prepare required disclosures, and structure the offering to minimize legal risk.
Revision Legal’s attorneys have advised Michigan businesses through equity crowdfunding offerings under MILE and federal exemptions. Contact us at 855-473-8474 or through our website to schedule a consultation.
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