Friday, June 10, 2011

Rules are Still Rules: Even with Novel Crowdfunding Approaches, the Current SEC Rules Have to be Respected

On June 8, 2011, the SEC entered a cease and desist order against two individuals, Michael Migliozzi II and Brian William Flatow, who launched a crowdfunding campaign at their website to raise $300 million to buy Pabst Brewing Company. Migliozzi and Flatow solicitated investors through Facebook and Twitter and actually received $200 million worth of pledges. The offering never closed because it did not reach the $300 million funding goal and because of the SEC action. The site was shut down in April 2011. The SEC press release is copied below.

Cases like this inevitably bring negative publicity to crowdfunding. The first question that comes to mind is whether these individuals ever consulted a securities attorney prior to starting their venture. There is a plethora of resources now available on the Internet (including this blog) that continuously discuss the issues relating to compliance with the securities laws and the SEC regulations. Unless a securities offering qualifies for one of the available exemptions, it must be registered with the SEC, regardless of whether this is an Internet offering and whether it comes under the aegis of a fashionable trend called “crowdfunding.”

My second reaction to this case was the astonishment with the amount of money that these individuals were able to raise (in pledges). Many seasoned companies have trouble raising a lot less. But in their case, there was not even a company, - just two people with an idea to buy a beer company. Was their “success” due clever online marketing and reaching out to the potential investors through their social networks? This approach, propagated by crowdfunding, seems to work. However, one still needs to balance the need to raise money with the necessity to remain compliant with the securities laws directed at protecting investors from fraud, deception and monetary loss.

SEC Enters Cease and Desist Order in Connection with Online Campaign to Buy Beer Company
Washington, D.C., June 8, 2011 — The Securities and Exchange Commission today announced a settlement with two advertising executives who launched a campaign to buy a beer company through a solicitation of investors on Facebook and Twitter without first registering with securities regulators and making the necessary disclosures.
Additional Materials
Administrative Proceeding
Michael Migliozzi II and Brian William Flatow consented to a cease and desist order after directing investors to their website,, and soliciting pledges for a hoped-for $300 million purchase of the Pabst Brewing Company.

Under federal securities laws, the two men were required to register their offering before seeking to sell shares to the public. The registration requirements include publicly disclosing a company's financial condition and other information that could help investors determine whether to invest.

"All investors are entitled to know certain basic information about a company before being asked to invest," said Scott Friestad, Associate Director in the SEC's Division of Enforcement. "Just because would-be investors are being solicited online doesn't make them less deserving of the protections under our securities laws."
The SEC's order found that Migliozzi and Flatow intended to solicit funds in two stages. In the first stage, the two sought pledges and required that pledgors only supply an e-mail address, first name, last name, and pledge amount. If they received $300 million in pledges, the second stage would consist of collecting the pledges and undertaking to purchase Pabst.

According to the order, Migliozzi and Flatow also created a Facebook page and Twitter account in order to advertise their offering. Would-be investors visiting the website were told that each investor would receive a certificate of ownership as well as beer of a value equal to the amount invested.

The order further states that in February 2010, the two men said they had received more than $200 million in pledges from more than five million pledgors, and that Migliozzi and Flatow were searching for a firm to assist in the acquisition. The website, which the two men launched in November 2009, continued to solicit pledges until it was taken down in April 2010.

In the end, the two never received the $300 million in pledges, and never collected any money.

The SEC's order finds that Migliozzi and Flatow violated Section 5(c) of the Securities Act of 1933. As a result, it directs Migliozzi and Flatow to cease and desist from committing or causing any violations and from committing or causing any future violations of Section 5(c) of the Securities Act. Migliozzi and Flatow consented to the issuance of the order without admitting or denying any of the findings in the order except jurisdiction, which they admitted.

While federal laws require the registration of solicitations or "offerings," some offerings are exempt. Some of the most common exemptions from the registration requirements include private offerings to a limited number of accredited investors or institutions, as well as offerings of limited size. For information about the securities registration process and the types of information to be disclosed in offering documents, see the SEC's online publication Registration Under the Securities Act of 1933.

# # #
For more information about this enforcement action, contact:
Scott W. Friestad
Associate Director, SEC Division of Enforcement
(202) 551-4962
Nina B. Finston
Assistant Director, SEC Division of Enforcement
(202) 551-4961

No comments:

Post a Comment