The Law Offices of John P. Connell, P.C.: In light of the digital age, it is a growing trend for start-up companies and entrepreneurs to use online crowdfunding to finance their operations. Internet portals have become a convenient tool for emerging businesses striving to meet their start-up costs. Businesses in the brewing industry, especially smaller craft breweries, are one such example of projects using these online sites to reap the benefits of crowdfunding.
In Massachusetts, however, the law requires craft breweries and other liquor license applicants to disclose the personal information of each and every investor in the business. Yet crowdfunding sites accept funds from the general public; those making contributions are random and not generally known by the business they are funding. For this reason, applicants for liquor licenses should be aware of the current and future legal implications they may encounter if choosing to finance their venture through online crowdfunding.
Prior to approving a liquor license application for a business, Massachusetts state law requires disclosure of any and all funds poured into that business. In Number Three Lounge, Inc. v. Alcoholic Beverages Control Commission, 7 Mass. App. Ct. 301, 310 (1979), the Appeals Court of Massachusetts affirmed the decision of the Alcoholic Beverages Control Commission (ABCC) that licensees are required to disclose all indirect interests in a license and that “indirect interest” is not defined narrowly to mean “only such interests as are possessed by the owners of the corporation’s stock.” The ABCC instead determined that the concept of “indirect interest” should be considered in a “broad” sense. Id. at 311.
Many crowdfunding portals are designed to allow anyone the ability to sign up and set a finance goal for their emerging business project, with an expectation that the public will then pledge nominal amounts that might add up to this goal. Those that pledge to back a project are not asked to supply personal information like that which would be required on a Massachusetts state liquor license application. Yet, whether or not this lack of investor disclosure may cause legal implications for a liquor license applicant is an issue that has yet to be ruled on. Since crowdfunding portals are a new trend for businesses in the alcoholic beverage industry, laws that regulate such sites are not yet well developed.
On April 5, 2012, the President signed the Jumpstart Our Business Startups Act (JOBS Act) that, once effective, will aim to exempt certain crowdfunding transactions from SEC registration requirements. In particular, the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012 (CROWDFUND Act) will exempt crowdfunding portals from SEC registration for transactions that occur within a 12-month period and are not more than one million dollars. Some crowdfunding portals, however, have sought out ways to avoid SEC regulations and registration regardless of these impending laws. This is because not all crowdfunding sites solicit the same type of funding.
While equity crowdfunding is subject to SEC regulations, other types of crowdfunding may not be. Unlike in equity crowdfunding, where the public contributes money to business projects in exchange for company equity or ownership, some types of crowdfunding portals mandate that business projects provide contributors with tangible rewards, rather than a stake in their future business. Business projects that use rewards-based crowdfunding portals set finance goals and offer different rewards to each contributor according to the amount of money they pledge to help meet that goal. For example, a start-up craft brewery may give a pint glass or a T-shirt to someone pledging five or ten dollars to back their potential brewing business. Since tangible rewards are given to contributors as consideration for their pledges, it is a common view that the contributors are more of donators rather than “investors.” Accordingly, contributors are not characterized as purchasers of securities nor holders of a stake in the business project and, for this reason, the fact that business projects accept money from contributors does not necessarily render the transaction under the purview of SEC regulations.
Yet there is a gray area when rewards-based online crowdfunding intersects with the ABCC’s policy of requiring full disclosure of funds. Whether or not those who contribute pledges to brewery projects on crowdfunding portals need to be disclosed on a liquor license application will be a hot issue for the ABCC, as online crowdfunding continues trending and as more and more brewers want to get going in the Massachusetts craft beer industry.
CONTRIBUTED BY COURTNEY N. McGEE
© Law Offices of John P. Connell, P.C., 2013.