Rules Are Still Rules: Even with Novel Crowdfunding Approaches, the Current SEC Rules Have to be Respected

Rules Are Still Rules: Even with Novel Crowdfunding Approaches, the Current SEC Rules Have to be Respected

On June 8, 2011, the SEC entered a cease and desist order against two individuals, Michael Migliozzi II and Brian William Flatow, who launched a crowdfunding campaign at their website to raise $300 million to buy Pabst Brewing Company. Migliozzi and Flatow solicitated investors through Facebook and Twitter and actually received $200 million worth of pledges. The offering never closed because it did not reach the $300 million funding goal and because of the SEC action. The site was shut down in April 2011. The SEC press release is copied below.

Cases like this inevitably bring negative publicity to crowdfunding. The first question that comes to mind is whether these individuals ever consulted a securities attorney prior to starting their venture. There is a plethora of resources now available on the Internet (including this blog) that continuously discuss the issues relating to compliance with the securities laws and the SEC regulations. Unless a securities offering qualifies for one of the available exemptions, it must be registered with the SEC, regardless of whether this is an Internet offering and whether it comes under the aegis of a fashionable trend called "crowdfunding."

My second reaction to this case was the astonishment with the amount of money that these individuals were able to raise (in pledges). Many seasoned companies have trouble raising a lot less. But in their case, there was not even a company, - just two people with an idea to buy a beer company. Was their "success" due clever online marketing and reaching out to the potential investors through their social networks? This approach, propagated by crowdfunding, seems to work. However, one still needs to balance the need to raise money with the necessity to remain compliant with the securities laws directed at protecting investors from fraud, deception and monetary loss.

SEC press release

Read more commentary from Arina Shulga on the legal aspects of operating new and growing businesses at Business Law Post.

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