CROWD FUNDING: What You Should Know About The Legal Issues Of Crowd Funding
Daniel M. Satorius | Satorius Law Firm, PLLC Page 3
There can be disadvantages to crowd funding as well.Crowd funding when done incorrectly may create violations of lawsrelating to the sale of securities, charitable fundraising, and consumerfraud.
SECURITIES LAWS ISSUES
. If crowd funding involves the offer of sale of securities, one must comply with both federal and state laws. On theother hand, if crowd funding is done in a way that does not involve theoffer or sale of securities then there is no violation of the securitieslaws.What is a security? A security is any contract, transaction or schemewhereby a person invests money in a business and is led to expectprofits from the efforts of the business in which the money is placed.(Securities and Exchange Commissioned v. Howey Co., 328 U.S. 293, 66S. Ct. 1100, 90 L.Ed. 1244 (1946)).When might crowd funding involve the offer or sale of securities? If afan gives money to a producer to support the production of anindependent film and the fan has an expectation that he or she willshare profits and the fan does not actively participate in themanagement of the business, then a security is involved. The sale of securities must comply with state and federal securities laws andrequires the assistance of a knowledgeable and experienced lawyer.It is illegal to offer or sell securities without filing a registrationstatement with The Securities and Exchange Commission and theappropriate state authorities unless the securities or the transactionqualify for an exemption from registration. Failure to comply withsecurities laws can result in severe penalties. A violation of SecuritiesAct of 1933 is a felony punishable by up to five years in prison and a$10,000 fine for each violation. The Commissioner may also seek civilpenalties up to $500,000 per violation. The Securities Act also permitsinjured parties to bring civil actions seeking rescission of the transactionand also damages, penalties and other remedies. States have similarpenalties.To avoid a claim that your crowd funding activities involve the sale of securities, you should not promise any return
of the fan’s money in any