Cartoons by Janelle Orsi of theSustainable Economies Law Center
Kansas adopted the first securities law in 1911 to “keep ‘Kansas money inKansas’ and help local farmers and small businesses rather than enriching ‘New York Stock Exchange speculators and gamblers.’”
What is a security?“a contract, transaction or schemewhereby a person invests his money in acommon enterprise and is led to expectprofits solely from the efforts of thepromoter or a third party.” - Howeytest
The Risk Capital TestAre the funds being raised for a business venture or enterprise?Is the transaction offered indiscriminately to the public at large?Are the investors substantially powerless to effect the success ofthe enterprise?Is the investor’s money substantially at risk because it isinadequately secured?CA Supreme Court - Silver Hills Country Club v. Sobieski (1961) Compare to United Housing Foundation v. Forman
What kinds of securities can you sell?•Common stock•Preferred stock•Straight notes•Convertible notes•Notes payable in produce•Revenue sharing agreements•Preferred stock with no voting rights and no appreciation in value(Equal Exchange)•Securities that can be bought and sold in secondary markets•Securities with no transfer rights•Etc.
Why does it matter if something is a security?Extensive compliance work –• federal registration•qualification in every state where the security is being offeredUsually costs > $100,000 in filing fees, legaland accounting fees, printing costs, etc.
There are exemptions to this requirement . . .But even the exemptions can beonerous and costly to comply with
Ways to raise funding from unaccredited and other non-traditional investors Non-securities Grants and public-private partnerships Co-ops Private Offerings Direct Public Offerings
Nonsecurities •crowdfunding e.g. Kickstarter, Indiegogo • zero interest loans • memberships/discount cards • pre-sales/gift cards • active involvement Tangerine PowerLittle City Gardens Awaken Cafe
On March 12, 2011, the Store reached the minimum Offering amount of $500,000 andbegan operations. Shares cost $100 a piece and are available to residents of New YorkState. The maximum number of shares one investor can purchase is 100.
The Crowdfund Act A History Sustainable Economies Law Center, Summer 2010Never doubt that a small group of thoughtful, committed citizens can change theworld. Indeed, it is the only thing that ever has. Margaret Mead
Federal Reserve Bank of S.F. – CommunityDevelopment Investment Review, Vol. 5, Issue 2, 2009 Local Stock Exchanges and National Stimulus by Michael Shuman
Paul Spinrad of Make Magazine Launches a Crowdfunding Campaign
September 2011Congressional hearings and support from President Obama!
Entrepreneur Access to Capital Act Passes the HouseNov. 3,2011
The CROWDFUND ActSigned by the President onApril 5, 2012Creates a new federalexemption for offerings ofup to $1 million in which each investor invests nomore than 5% of his/her Exempt from state registration requirementsannual income or net worth More than $100k – reviewed offerings are conducted financialsthrough a registeredintermediary More than $500k – audited financials Not expected to go into effect for at least one year.