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The Fine Line Between Crowdfunding & An Illegal Securities Offering Part II: SEC Fines Ad Execs Over Pabst Stunt

from the saw-that-one-coming dept

Way back in February of 2010, we talked about some ad execs who had set up a website,, asking people to help crowdfund the $300 million it was expected it would take to buy Pabst Brewing, Kickstarter-style (i.e., make pledges, with different "rewards" based on pledge amount, and pledges only due if the total amount raised). While there was some press about this publicity stunt at the time, I believe I was the only one who pointed out that this whole thing almost certainly ran afoul of SEC guidelines on selling securities -- even if it was a stunt. Apparently, the SEC agreed. It only took 16 months, but Davis Freeberg alerts us to the news that the SEC went after the ad execs, and they've now "settled."

From the description from the SEC, it sounds like no money changed hands here. It's just that these guys agreed to "cease" making such offerings. I'm assuming that the SEC spotted this independently of me bringing it up, but if I brought it to their attention, sorry guys. I can definitely see the reasoning behind the SEC getting involved here, as there's certainly a reasonable risk of fraud on some random website offering people an opportunity to buy a company. However, the internet has certainly opened up new ways to raise money -- such as via crowdfunding. While most crowdfunding offerings don't involve an "ownership" stake, and thus no equity that the SEC might be concerned about, it does make you wonder if the tight regulation from the SEC over such matters might squeeze out some interesting, and entirely legitimate opportunities.

Reader Comments (rss)

(Flattened / Threaded)

  1. identicon
    Anonymous Coward, Jun 15th, 2011 @ 4:44pm

    So.. next time, they'll simply start it outside the almighty US of A. Problem solved.

    reply to this | link to this | view in thread ]

  2. identicon
    Anonymous Coward, Jun 15th, 2011 @ 7:13pm

    "it does make you wonder if the tight regulation from the SEC over such matters might squeeze out some interesting, and entirely legitimate opportunities."

    Of course, because the only way innovation is allowed to happen is through patents and government imposed monopolies. Any attempts to crowd fund open sourced innovation is illegal. Then IP maximists can claim, "but patents are the only way innovation can be funded". Only because other ways have been made illegal.

    and you wonder why the U.S. doesn't innovate and all the innovation is occurring elsewhere while the U.S. simply copies others.

    reply to this | link to this | view in thread ]

  3. identicon
    paul brinker, Jun 15th, 2011 @ 8:16pm

    If the SEC does make stuff like this legal, there needs to be a formalized way to do it, like limiting it to 100 owners or some other method.


    The company could form a non-profit that can accept donations of money for the purpose of buying the beer company.

    There are ways this could be done, but if opened up to much you end up with lots of scams and vary little real value.

    On a side note, I had to ask my mayor why hes going to Wallstreet for funding (at a healthy 6-10% interest) when he could instead do a paid back bond, aka The taxes are raised for the bond, the bond is used to improve the community, and the community gets paid back + interest for its investment in itself. This is even the kind of Bond republicans would like since its just a loan.

    Sadly I was looked at like I lost my mind, but with modern technology this kind of system would be fairly easy to put in place.

    reply to this | link to this | view in thread ]

  4. identicon
    Paul Keating, Jun 16th, 2011 @ 3:05am

    Error in Definition

    " While most crowdfunding offerings don't involve an "ownership" stake, and thus no equity that the SEC might be concerned about, "

    Mike, the SEC is concerned about the offering AND the sale of "Securities". This does not require an ownership interest. Rather it is a very broad term that references any exchange of money wherein the money is sought (the offer) or provided (the sale) and the following conditions are present: (1) an expectation of profits arising from (2) a common enterprise that (3) depends “solely” for its success on the efforts of others. SEC v. W.J. Howey Co.
    328 U.S. 293 (1946).

    Thus even a promissory note could be a "security" if the interest is calculated based on the profits derived from the use of the principal in the hands of the debtor.

    reply to this | link to this | view in thread ]

  5. identicon
    Zak Cassady-Dorion, Jun 16th, 2011 @ 10:36am

    I'm part of a team that is leading the campaign to get an exemption passed with the SEC to allow entrepreneurs and small businesses to raise up to $1 million through crowd funding. With the transparency that the internet provides today and with safe guards in place to protect both the investor and protect against fraud, there is an amazing opportunity with crowd funding to get capital flowing from the people who have it to the people who can use it to create jobs.
    It most certainly needs to be something that is regulated and monitored (unlike this situation with the beer company). For all of those interested take a look at our petition, our framework, and all of the progress we've made, including testimony presented at a congressional hearing on capital formation in May:

    @Mike Masnick- My understanding of how the SEC found out about this is that an SEC lawyer read about the campaign in a newspaper while on an airplane and he brought it to the attention of his superiors.

    reply to this | link to this | view in thread ]

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