Crowdfunding – Clearing Away the Fog

“Crowdfunding” is a capital-raising strategy by which groups of people, often composed of small individual contributors, pool their capital, usually via a website, Internet portal or other social media. The practice began by using crowdfunding to raise money for charitable and community projects, it then developed into a perk-based model where businesses solicited funds for artistic projects like films and books or new consumer products in exchange for a perk or commemorative memorabilia of some sort such as a first edition of the product or the author’s signed photo, or a custom experience such as a back-stage pass. A further adaptation lead to B-to-B non-interest bearing loans crowdfunding. Investors were not able to legally receive a financial return, such as equity or interest on a loan, because financial returns are fundamentally derived from securities, and the Securities Act of 1933 (the “Securities Act”) prohibits the sale of a security other than pursuant to an effective registration statement or an exemption from the registration requirement under the Securities Act. Thus, absent new legislation, selling a security through a crowdfunding site like Kickstarter or IndieGoGo would be an unregistered sale with no exemption, and consequently would have violated the Securities Act.

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