Proceed at Your Peril: Crowdfunding and the Securities Act of 1933
Joan MacLeod Heminway
University of Tennessee College of Law
Shelden Ryan Hoffman
affiliation not provided to SSRN
January 16, 2012
Tennessee Law Review, Vol. 78, p. 879, 2011
University of Tennessee Legal Studies Research Paper No. 154
A promising Web-based funding model for small business firms has emerged over the past few years. Crowdfunding (as this model has come to be known) actually includes a variety of business models, all of which use the Internet to fund business ventures by connecting promoters of businesses or projects needing funding with potential funders. Most of these funders are not professional investors; instead, they are just members of the Internet “crowd” that like the business idea of a particular entrepreneur and want to help him or her out with a nominal amount of funding — even $10.
Some (but not all) manifestations of crowdfunding result in the offer and sale of interests that are securities under the Securities Act of 1933, as amended. Offers and sales of securities that are neither registered nor exempt from registration violate the Securities Act. The high cost of registration is prohibitive for small businesses that might benefit from crowdfunding. Accordingly, if crowdfunding is to achieve its optimal benefit (or even just survive or thrive), there must be some intervention. This dilemma has caught the attention of many, including the U.S. Congress and Securities and Exchange Commission (SEC).
This article first shows how crowdfunding interests may be securities under the Securities Act and describes key legal effects of that security status - including the requirement of registration (absent an exemption). The article then explains why the offer and sale of crowdfunding interests under certain conditions should not require registration and offers the principles, process, and substantive parameters of a possible solution in the form of a new registration exemption adopted by the SEC under Section 3(b) of the Securities Act.
Number of Pages in PDF File: 94
Keywords: crowdfunding, securities, investment contract, registration, exemption, Section 3(b), small business
JEL Classification: D29, G32, K22, M13, O16, P43Accepted Paper Series
Date posted: June 30, 2011 ; Last revised: January 16, 2012
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