Adventures in Ex Ante Crowdfunded Securities Law


14 Responses to “Adventures in Ex Ante Crowdfunded Securities Law”

  1. Anonymous says:

    You seem focused on equity, but much of this could be obviated by using debt. This would be easy to put together on as a loan. Loans put the pressure on the borrower, so while it’s still “crowdsourced,” you’re under more pressure to perform and “give them a cut.” You retain the upside beyond the debt repayment, which is a long shot, as you would acknowledge. But if you are confident of your ideas and don’t want to run up a huge legal bill trying to change a securities law that has been in place since the Depression, do what small businesspeople have been doing for centuries: borrow.

    It is asking a lot to expect people to throw money at you on the premise of some activity having a slim chance of them getting an unspecified “cut” from you later, and yes, that kind of activity is exactly what securities laws were set up to oversee. If you aren’t confident enough to commit to borrowers, then you should go through the full conventional PPM process.

  2. pelleb says:

    I agree that the way to do it is to do it sufficiently small and grass roots that it would fly under the radar for a while. Then see what happens.

    I’ve written quite a bit about this. This post has specific suggestions on crowdfunded securities:

    There are several of us working on new kinds of technology for banking and finance based on some of these principles here. With several OpenSource offerings out there.

  3. zebbart says:

    I’ve been looking for a way to get small private investments to put up a warehouse for my start-up organic produce distribution company. The answer I’ve been getting from farmers who have raised funding from customers and supporters is to write up a promissory note. I haven’t had time to work out the details with a lawyer yet, but my impression is that we can write it how we want. Our plan is to have a 5-year term so that cash flow is not bound up in the beginning. Here is an old NYT story about a fellow PA farmer who did this:

  4. Anonymous says:

    I’ve been poking around this space for a while and have heard conflicting reports from different sets of lawyers – one of whom says it’s doable, the other claiming we’ll get arrested! So short answer, I haven’t figured out something that works yet, but I know people who have done something similar.

    The Age of Stupid for example, was a crowd sourced movie, which accepted donations (like Kickstarter etc) as well as investments. Their faq ( calls the investment vehicle a “limited recourse debentures” – basically making them more like loans and less like shares. I’m looking at things more in that direction these days, rather than purely as equity.

    Would love to hear others’ thoughts on this…


  5. sgj says:

    @ #9

    I thought they might make a claim like that. What about just excluding the US, and instead running in whatever jurisdictions would allow this sort of scheme? Do the UK and Canada have the same regulatory structure to prevent this sort of thing? Once the system is in place and working somewhere, it may be an easier sell to legitimize with American authorities.

  6. scottbateman says:

    Max Keiser’s new Pirate My Film site (still in beta) is offering people a small piece of the action to invest in peoples’ films. Too early to know how well it’s working.

  7. gogodanae says:

    I agree. The SEC laws are ripe for some innovation here. The Securities Acts of 1933 and 1934 were written to protect the widow in Texas from investing all her savings with that sketchy oil speculator. At the time, the laws were useful and important and are still to this day… for large investors and investments.

    But the internet has opened up a new world of possibility around micro-finance and/or micro-patronage. To protect investors you can:

    > require disclosure
    > limit exposure (i.e. limited $ invested)

    The current laws on the books adhere to the former approach. I believe innovation is coming as more of uscontinue to explore the latter approach.

    (In my prior life before IndieGoGo, I was a analyst on Wall Street – CFA and all, so SEC laws are something I’m quite familiar with).

    That said, I’d love to see you raise funds to push a bill forward. You can use IndieGoGo to raise money and offer perks in the process.

    IndieGoGo is a collaborate way to fund ideas and fuel innovation. Anyone can pitch their projects and offer perks to their funders in return.

    I’d fund your bill project if I could give you feedback on the bill or get my name at the bottom as a perk.

    IndieGoGo is in over 90 countries. Both US and non-US projects are welcome.

    There’s no funding time limit either (unless you set one yourself). You keep all the funds you raise; so it’s not all-or-nothing.



  8. aaronhelton says:

    I actually looked into something similar for a graduate school capstone project. What I decided early on is that setting up your own market for securities exchange (equity or debt) was going to be a real headache, so I decided to go down the non-profit crowdfunding donations route (alas, without any specific concept of rewards), which appears to be Kickstarter’s entire model. I see some structural differences and some eye-openers, but the concept was otherwise identical. Regardless, I think there’s still room in that space to innovate, and my recommendation would be to search it out a bit more. It’s certainly easier than trying to either circumvent or change laws that may still serve a useful purpose.

  9. Kevin Kenny says:

    I’m less than optimistic about the “working within the system” solutions. The regulations are set up at least in part to protect the existing investment banking system. The established players will see crowdsourcing as competition, and they run the regulatory agencies to suit their own needs.

    I wonder whether a better solution would be to offer to the public shares in a “real” corporation that functions as intermediary – and then have the “real” corporation’s bylaws set up so that each shareholder has exclusive control over a proportionate share of the corporation’s investments (and is paid a proportionate dividend on their earnings). The corporation can then be the sole investor in the crowdsourced projects, circumventing the “blue sky” laws.

    One major drawback is that everything will be multiply taxed. The project owner will have to pay income tax before paying back the corporation, the corporation will have to pay corporate taxes before paying a dividend, and the individual investor will then owe taxes on the dividend. But the opportunity for multiple taxation is the only reason that I could see the government approving such a scheme – because it still provides the entrenched players with a competitive advantage.

  10. AndrDrew says:

    I was incredibly excited the moment I heard of kickstarter. It was like a lightbulb went on: OF COUSE something like that existed. Then I looked deeper at it and was slightly less excited – due to Amazon’s policies only folks in the US can start a kickstarter project, and I’m in Canada. No one I know is going to be using kickstarter (for incoming), so this feeling of “and if I wanted to, I could do it too” goes out of it. I’m not sure I can explain why that’s so much of a loss, but it is, even though I wasn’t about to start one anyways.

    Don’t get me wrong, I’m still very excited at this kind of ‘crowdfunding’ existing.

  11. Bryan3000000 says:

    The problem with this whole thing, as has been pointed out, is that there is this thing would be quite literally the perfect way to scam people. You can talk about internal protections and audits whatnot all you want. The SEC was set up, and this type of thing was specifically outlawed, for VERY good reasons. Those reasons do not go away just because you throw the word “internet” into the mix. In fact, the protections become far more important.

    Just because you have a generous attitude and would want to share proceeds with others who would be willing to support such ventures doesn’t mean that it should be legal. I have the same attitude, and I’ve learned that you have to assume people on both ends will be dishonest. I believe that most people want to be honest, but the ones that don’t are very, very good at leading others down a very harmful path. Most people in civil society accept a facade of legitimacy as the real thing. That’s why we’re in the economic situation we’re in right now. Corporate attorneys literally sit around all day trying to come up with a way to take something illegal outside of the regulatory framework and make it look legal, at least for a while, so that some parties can benefit.

    Going forward with this would make you one of those people who ultimately is just manipulating the system for your own benefit. Sorry.

  12. Anonymous says:

    Your best bet is probably to set up the company in a less well regulated jurisidiction. Just be sure to report the earnings to the IRS.

  13. sgj says:

    What about simply hosting the fund raising project site outside the USA? Sealand springs to mind. IANAL, but it seems that if everyone paid their taxes in a responsible manner, there would be relatively little to complain about…

    • Anonymous says:

      @ #2: That would be treated, like all obvious dodges, as a security. While its true the laws protect the system to an extent, they were enacted in the wake of 1929 to protect regular folks from manipulative brokers, especially ones pitching dubious penny stocks. To the SEC, there is little way to distinguish this venture from a dubious penny stock meant to fleece Grandma out of her savings.

      @ #4 & #5: U.S. citizens offering securities, or foreign entities directing offering at U.S. citizens, are within the SEC’s jurisdiction.

      @ #6 & #7: Debt is still a security. It is the original security.

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