CHAPTER 5 Crowdfunding T
itle III of the JOBS Act addresses crowdfunding, an outgrowth of social media that provides an emerging source of funding for a variety of ventures. Crowdfunding works
based on the ability to pool money from individuals who have a common interest and are willing to provide small contributions for a venture. Given the difficulty in relying on existing exemptions from registration for crowdfunding efforts involving the offer and sale of securities, Title III of JOBS Act amended section 4(a) of the Securities Act to add a new paragraph (6), which provides for a new crowdfunding exemption from SEC registration (subject to rulemaking by the SEC), as well as pre-emption from state Blue Sky laws. Crowdfunding can be used to accomplish a variety of
goals (such as raising money for a charity or other causes of interest to the participants), but when the goal is of a commercial nature and there is an opportunity for crowdfunding participants to participate in the venture’s profits, it is likely that federal and state securities laws will apply. Absent an exemption from registration with the SEC, or registering the offering with the SEC, crowdfunding efforts that involve the offer and sale of securities are in all likelihood illegal. In addition to SEC requirements, those seeking capital through crowdfunding need to be aware of state securities laws, which include varying requirements and exemptions. By crowdfunding through the internet, a person or venture can be exposed to potential liability at the US federal level, in all fifty states, and potentially in foreign jurisdictions. Existing exemptions present some problems for persons
seeking to raise capital through crowdfunding. Regulation A requires a filing with the SEC and disclosure in the form of an offering circular, which would make conducting a crowdfunding offering difficult. The Regulation D exemptions generally would prove too cumbersome (with the possible exception of Rule 504), and a private offering approach or the intrastate offering exemption is inconsistent with widespread use of the internet for crowdfunding. The potential illegality of crowdfunding efforts involving the offer and sale of securities was demonstrated
44 JOBS Act Quick Start
in the SEC enforcement action In the matter of Michael Migliozzi II and Brian William Flatow,1
which the SEC
brought against two individuals in connection with their efforts to allegedly raise small contributions using the internet in order to purchase Pabst Brewing Company for $300 million. Migliozzi and Flatow settled the proceeding, consenting to a cease and desist order relating to the alleged violation of the registration provisions of the Securities Act. The order indicates that Migliozzi and Flatow established the
BuyaBeerCompany.com website, and then used Facebook and Twitter to advertise the website. They sought pledges from participants in the crowdfunding effort, and in return participants were told that if the $300 million necessary to purchase Pabst was raised, the participants would receive a “crowdsourced certificate of ownership” as well as an amount of beer of a value equal to the money invested. While no monies were ever collected from the crowdfunding participants who made the pledges, the SEC alleged that Migliozzi and Flatow nonetheless violated the registration provisions of the federal securities laws by offering the security (in this case, the crowdsourced certificate of ownership) without registering the offer with the SEC or having an exemption, such as the private placement exemption, available for the offer. In recent years, crowdfunding advocates have requested
that the SEC consider implementing an exemption from registration under the federal securities laws for crowdfunding efforts. For example, a rulemaking petition submitted by the Sustainable Economies Law Center suggested that the SEC exempt crowdfunding offerings of up to $100,000, with a cap on individual investments not to exceed $100.2
Also, following a recent SEC Forum on
Small Business Capital Formation, the Small Business & Entrepreneurship Council submitted comments suggesting that the SEC adopt a small business offering exemption for offerings of less than $1 million with a limit on the amount any one individual could contribute to no more than 10% of the previous year’s stated income of the issuer or up to $10,000 per individual. Before enactment of Title III of the JOBS Act, the SEC was considering whether to implement an exemption for crowdfunding, in
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