How a Crowdfunded Brewery Paved the Way for a New Kind of Economic Development
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Michigan law provides boost to small businesses.
When Kyle DeWitt and business partner Tim Schmidt were looking to secure bank lending to build a brewery in Tecumseh, Michigan, they hit one financing obstacle after another.
“We went through the wringer with banks. We went to one and then another,” the California transplant to the Great Lakes State told GovExec State & Local. “We had one bank say, ‘Do you have a rich uncle who can co-sign?’”
With tougher lending restrictions making banks hesitant to give loans to many untested start-up enterprises, DeWitt and Schmidt ended up like so many other business owners who are largely locked out of traditional financing.
“We had exhausted all our options,” DeWitt said.
Then Chris Miller, the executive director for economic development and the downtown development authority for the nearby Lenawee County city of Adrian, came to them with an interesting proposal.
Miller is a champion of the state’s brand new crowdfunding investment exemption law, which allows small state-based investors an exemption from tax code provisions so they can get a financial stake in projects in their communities. He thought the brewery would be an excellent first candidate to prove that the law could be a powerful tool for small businesses needing to pull financing together. Crowdfunding is the practice of financing a project or enterprise by raising small amounts of money from a large number of people.
Not only can investment crowdfunding give small businesses the seed money they need to get off the ground, Miller said, but it can give them additional leverage to obtain a traditional bank loan.
“It gives them access to a pool of capital that they couldn’t get to before,” Miller said.
The brewery was the first project in the state that successfully crowdfunded investors through the Michigan Invests Locally Exemption (MILE) Law. Tecumseh Brewing Co., after hitting its crowdfunding target this spring, is on track to open this fall and join the state’s vibrant craft-brewing industry.
Michigan wasn’t the first state to pass legislation to authorize state-based investment crowdfunding, but its law is regarded as one of the better designed measures in the 26 states that have implemented or are considering investment crowdfunding legislation.
“Michigan’s bill is just terrific. It’s much more generous … and the paperwork is way less onerous,” said Miller, who describes himself as the “biggest cheerleader” for the MILE Law.
It’s so well-crafted, he said, that someone in neighboring Indiana told him Hoosier State lawmakers essentially “just Xeroxed” Michigan’s bill.
“If you look at the two laws, they’re very similar,” said Kevin Hitchen, a founder of Indianapolis-based LocalStake, one of two crowdfunding platforms being used in Michigan’s program. (The other is Washington, D.C.-based FundRise.) Indiana’s crowdfunding investment law went into effect July 1.
“In Michigan, they’ve had some time to see how other states have rolled it out to see what were the good parts of it and what were the bad parts of it,” he said.
“We have very favorable parameters compared to other states,” said Summer Minnick, director of policy initiatives and federal affairs for the Michigan Municipal League, which has been engaged in an aggressive campaign to educate local officials, business owners and citizens across the state, which included the recent launch of a new website, CrowdfundingMI.com, where “people have a central place to learn about the project,” Minnick said.
“Now you can invest $1,000 [locally] and get some investment return,” she said. “That’s what we think is the next way to support your local community.”
Michigan communities who have heard MML’s pitch on investment crowdfunding “are craving for details,” Minnick said.
The MILE legislation, signed into law by Gov. Rick Snyder in late December, is not a vehicle for traditional civic crowdfunding, which is typically used to raise money on a one-time basis for parks and public-space improvements. Investment crowdfunding is designed for for-profit enterprises only. Beyond that, there are few restrictions on who can participate, except that would-be investors must be Michigan residents.
“There’s been a lot of frustration for people who want to invest in their communities,” said Miller, who thinks the MILE Law is destined to become a popular tool for businesses and the communities that want to support them.
According to Michigan’s law, each individual non-accredited investor can invest $10,000 per project per year. There are no limits on accredited investors. The MILE Law allows businesses, which must pay a one-time $100 application fee, to raise up to $1 million of investment crowdfunding with no audited financial statements and up to $2 million of such funding with audited statements.
Investments made through the MILE law are held in an escrow account until the target amount is raised. If that target isn’t reached, the money raised is returned to the investor.
Tecumseh Brewing co-owners Tim Schmidt and Kyle DeWitt. (Photo courtesy Tecumseh Brewing Co.)
Tecumseh Brewing’s crowdfunding goal was to raise $175,000 over the course of 90 days. But it turned out that in about half that time, 21 investors — 17 of whom DeWitt and Schmidt didn’t know — contributed funds ranging from the $250 minimum contribution to $122,000, which hit the project’s crowdfunding ceiling.
“They were willing to do more,” DeWitt said of Tecumseh Brewing’s biggest crowdfunding investor. “Since we maxed out, we had to start to declining [additional investors] that day.”
Perhaps more importantly, a local bank said if Tecumseh Brewing could crowdfund the full $175,000, it would finance a $200,000 loan.
That formula — investment crowdfunding that leads to traditional bank loans — could be one that many small businesses and enterprises use. Additionally, communities that successfully harness investment crowdfunding could help multiple projects for downtown development, especially in smaller cities like Tecumseh, which is about 30 miles southwest of Ann Arbor.
“Tecumseh shows that [investment crowdfunding] will work well in small cities” in addition to larger cities like Detroit and Grand Rapids — where there is also interest in Michigan’s law, Hitchen said.
As DeWitt and Schmidt move toward opening their brewery this fall, their business has become a poster child for how the MILE Law could be used. “It is such a hot topic,” Minnick said. “Everyone wants to know about it. I’ve got requests from all over.”
Miller has been traveling around the state along with the Michigan Municipal League to promote investment crowdfunding and the MILE Law. “It was clear from the get-go … that this law would have a huge impact,” Miller said. “I wanted to help my own community but be able to make an impact across the state and beyond.”
Although there’s a lot of on-the-ground enthusiasm for potential investment crowdfunding campaigns across the state, there’s still a lot of education to do around the new law.
But Minnick said she believes the momentum can be sustained. “In year two and year three, we’ll hopefully see it take off,” she said.