The Equity Crowdfunding Revolution: Differences Between Michigan Legislation and the Proposed SEC Rules (JOBS Act)

Last month the SEC proposed rules for a new age of raising capital via equity crowdfunding. This month Michigan has joined the ranks of Georgia, North Carolina and other states wishing to take this investment channel to the next level.

The Michigan House passed HB4996 on November 5, 2013 offering more lenient income requirements and higher annual caps on funding (view the summary here). If passed by the Michigan Senate the new bill will allow the following criteria to Michigan residents, investing in Michigan businesses:

- Accredited investors may invest without limitation (SEC proposal: accredited investors may invest up to 10% of annual income or net worth)

- Non-accredited investors will be permitted to invest up to $10,000 (SEC proposal: non-accredited investors may invest up to $2,000 or 5% of their annual income or net worth)

- Companies may raise up to $1 million per year, without audited financial statements, or up to $2 million if audited financial statements are provided (SEC proposal: Those raising less than $100,000 do not need audited financial statements; those raising between $100k and $500k must have statements reviewed by a CPA; those raising over $500k up to the $1 million maximum must have their financial statements formally audited)

Michigan is not the first state to propose such legislation. According to Bloomberg Law Georgia allows for non-accredited investors to invest up to $10,000 annually regardless of income and North Carolina offers an annual cap of $2 million for companies with audited financial statements.

While increasing the annual fundraising cap will likely encourage the utilization of equity crowdfunding as a means of raising capital, more lenient income requirements may do more harm than good. Non-accredited investors are new to the startup capital scene and may over-extend financially based on a fantasy that they’d found the next Facebook FB or Twitter TWTR. Under the new legislation, investors are required to sign disclosures stating an understanding of such risk, but it is highly unlikely this will deter the "get rich quick", "win the lotto" American mentality.