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Proceed at Your Peril: Crowdfunding and the Securities Act of 1933

94 Pages Posted: 30 Jun 2011 Last revised: 18 May 2014

Joan MacLeod Heminway

University of Tennessee College of Law

Shelden Ryan Hoffman

affiliation not provided to SSRN

Date Written: January 16, 2012


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.

Keywords: crowdfunding, securities, investment contract, registration, exemption, Section 3(b), small business

JEL Classification: D29, G32, K22, M13, O16, P43

Suggested Citation

Heminway, Joan MacLeod and Hoffman, Shelden Ryan, Proceed at Your Peril: Crowdfunding and the Securities Act of 1933 (January 16, 2012). Tennessee Law Review, Vol. 78, p. 879, 2011; University of Tennessee Legal Studies Research Paper No. 154. Available at SSRN: or

Joan Heminway (Contact Author)

University of Tennessee College of Law ( email )

1505 West Cumberland Avenue
Knoxville, TN 37996
United States
865-974-3813 (Phone)
865-974-0681 (Fax)

Shelden Hoffman

affiliation not provided to SSRN ( email )

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