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States Leading the Crowdfunding Surge

Crowdfunding is providing funding opportunities for startups that they would not have previously had.

For more than two years, plans to build and open Tecumseh Brewing in Tecumseh, Michigan, were frozen by inadequate funding. Co-founders Kyle DeWitt and Tim Schmidt had raised about $150,000 from family and friends to start a microbrewery, but they couldn’t find a bank with the courage to lend them the matching amount they still needed. Then last winter, the Michigan legislature created an intrastate exemption for equity crowdfunding that allowed companies based in the state to sell shares and other forms of investment over the Internet to non-accredited investors. And practically overnight, DeWitt became convinced that Tecumseh Brewing would open after all.

“Crowdfunding is everything for us right now,” says the 32-year-old DeWitt, an experienced microbrewer. A lot of his new investors also will rank among his best customers. “We’re the first company in Michigan to go through it; and now, we hope to be open by October.”

Popular sites like Kickstarter created a cultural buzz around crowdfunding with successes, such as providing financing for the Veronica Mars movie. However, Kickstarter is donation-based and therefore not a potent enough fund-raising engine for most ambitious startups. It also doesn’t tap into states’ economic- development powers or into local pride that can attract small- time investors to companies they can see and visit.

Enter state-sponsored equity crowdfunding initiatives. Georgia created the Invest Georgia Exemption program.

Kansas came up with one, too, and Wisconsin’s crowdfunding law took effect in the spring. Washington State, North Carolina, Indiana and Maine are now advancing efforts.

The MILE (Michigan Invests Locally Exemption) program sailed through the state’s normally combative legislature in two months with only one nay vote. It allows a maximum of$2 million in crowdfunding, depending on the level of financial documentation of the issuer. Furthermore, companies can’t accept more than $10,000 from a single non-accredited investor. To get around objections that higher-level investors might have to dealing with equity positions held by dozens of individuals before they fund a company, MILE gives startups a choice of issuing equity- or of using debt-based and revenue-sharing mechanisms to pay back investors.

With funding caps and continued uncertainties about how the Securities and Exchange Commission ultimately will regard such programs, some doubt state equity-crowdfunding programs can actually generate much traction.

But such concerns aren’t stopping Christopher Miller, director of economic development for Adrian, Michigan, from touting MILE to every expansion-minded, small-business owner he knows.

“A lot of entrepreneurs were imagining what could happen if it [were] possible to access capital in their own communities that previously was unavailable,” Miller says. “Now, they’ll be able to find out.”

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