Social Media, I’d like to introduce you to my friend, Intrastate Equity Crowdfunding

The use of social media as the tool that makes crowdfunding work has made securities law people very nervous. After all, underlying the success of Kickstarter and Indiegogo is a social phenomenon – campaigns that are effectively promoted are the ones that are successful. The securities regulators’ concern is that people won’t take the time necessary to personally vet potential investments and will have an over-reliance on social media messages rather than financial facts. Of course all this hand wringing will ultimately prove unnecessary, since the primary flow of investment capital for equity crowdfunding campaigns will likely mirror that of their rewards-based brethren. A vast majority of the money will come from people who have a direct connection to the company (or its founders) and people who have a direct connection to those initial investors. Although there are certainly going to be exceptions to this pattern – there are already exceptions that can be pointed to in reward crowdfunding – the vast majority of investors will be tier one or tier two connections with the company. As the JOBS Act flounders without final rules that may unleash its promise of equity crowdfunding, more and more states are passing laws (or promulgating administrative rules) to allow crowdfunding. The way that federal securities laws are structured, the states have the ability to carve out their own exemptions only if the campaigns are conducted within state lines. And these intrastate crowdfunding rules generally stand in stark contrast to the complex JOBS Act requirements. The state approach is much more simple and cheap. But there has been worry that use of the Internet (a key component to make crowdfunding successful) will get companies in trouble – since information about their offering will necessarily be seen by people from other states. On April 10, 2014, the SEC issued some C&DIs to help us understand how companies using intrastate exemptions could conduct themselves to communicate their offerings. By the way, C&DI means “Compliance and Disclosure Interpretations”. Normal people call these “FAQs”. Question 141.03 Question: If an issuer plans to conduct an intrastate offering pursuant to the Section 3(a)(11) exemption, may the issuer engage in general advertising or a general solicitation? Answer: Securities Act Rule 147 does not prohibit general advertising or general solicitation. Any such general advertising or solicitation, however, must be conducted in a manner consistent with the requirement that offers made in reliance on Section 3(a)(1) and Rule 147 be made only to persons resident within the state or territory in which the issuer is a resident. ENGLISH: You can advertise an intrastate crowdfunding offering – BUT only in a way that makes it likely that the potential investor is actually in your state. Of course, it makes practical sense anyway since you don’t want to deal with a bunch of inquiries from out-of-state people who aren’t allowed to invest anyway. Because you can geo-target Internet advertising through networks or Google, a company promoting its offer online should have the ad display exclusively in its home state. But how about using social networks? Question 141.05 Question: Can an issuer use its own website or social media presence to offer securities in a manner consistent with Rule 147? Answer: Issuers generally use their websites and social media presence to advertise their market presence in a broad, indiscriminate manner. Although whether a particular communication is an “offer” of securities will depend on all of the facts and circumstances, using such established Internet presence to convey information about specific investment opportunities would likely involve offers to residents outside the particular state in which the issuer did business. ENGLISH: The SEC really doesn’t want companies blasting their intrastate offering across the Internet. However, I think it is reasonable to use social networks to indicate that there is an investment opportunity available to residents of a particular state, BUT that the Tweet is NOT an offer of securities. So how do that in 140 characters or less? “GA residents only: Learn more about investing in Jon’s Jewels? This ain’t an offer. For that, go to” Combined with additional guidance recently provided by the SEC respecting social media, I do not believe that full, lengthy disclaimers are required when the communication made on Twitter (or Facebook) is designed to direct someone to more complete information. So once an investor gets to a website, are they allowed to see all the various securities offerings or just the ones for their own state? Question 141.04 Question: An issuer plans to use a third-party Internet portal to promote an offering to residents of a single state in accordance with a state statute or regulation intended to enable securities crowdfunding within that state. Assuming the issuer met the other conditions of Rule 147, could it rely on Rule 147 for an exemption from Securities Act registration for the offering, or would use of an Internet portal necessarily entail making offers to persons outside the relevant state or territory? Answer: Use of the Internet would not be incompatible with a claim of exemption under Rule 147 if the portal implements adequate measures so that offers of securities are made only to persons resident in the relevant state or territory. In the context of an offering conducted in accordance with state crowdfunding requirements, such measures would include, at a minimum, disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law, and limited access to information about specific investment opportunities to persons who confirm they are residents of the relevant state (for example, by providing a representation as to residence or in-state resident information, such as a zip code or residence address). Of course, any issuer seeking to rely on Rule 147 for the offering also would have to meet all the other conditions of Rule 147. ENGLISH: Under the JOBS Act, there will be a new type of intermediary called a “funding portal” which requires FINRA registration and compliance with a bunch of rules. But in a state with its own exemption (Georgia, for example) there is no requirement that a company must use a third-party portal for crowdfunding (although they do exist in Georgia – they just aren’t separately regulated). It is not clear that the SEC understands that some companies may use their own website for intrastate offerings. But no matter how a company raises money online, either through their own website or a portal, there needs to be a gatekeeper function. That means that out-of-state investors should not be able to see the offering. Frankly, I don’t think this is a very difficult task. Basically, an online visitor should be required to put their zip code in, and if it is located in the state, they can review the offering materials. If it doesn’t match, they can’t see the materials. Once someone makes the decision to invest, there will need to be an enhanced residency check to ensure that the person is actually in-state. However, the SEC’s guidance is encouraging, because it lets a company or portal “take the word” of the prospective investor to simply review the offering materials. Previous to this guidance, it would have been safer to require a prospective investor register all their information on a site being seeing any offers. And let’s face it, people hate going through a registration process just to browse. The simple requirement to enter a zip code is quick and easy. By the way, none of this is legal advice. These are just some thoughts about how issuers and promoters need to consider the SECs reaction to the emerging use of social media to communicate their securities offerings. Time will tell what the “safe” formula is to balance the SEC’s interest in having lots of disclaimer and disclosure and the social media requirement to KISS (keep it simple, stupid). *  A special thank you to Charles Vaughn, Esq. of Nelson Mullins Riley & Scarborough LLP in Atlanta, GA for his thoughts regarding the SEC’s rule interpretations. His extensive securities law experience is incredibly helpful when discussing an emerging regulatory area like that surrounding crowdfunding.  And, most importantly, he has been generous with his friendship as well. —————————————————————————-

Jonathan FrutkinJonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

Making a Stand for a Social Purpose

Make a Stand logoThis past weekend, I had the opportunity to attend the Arizona premiere of the movie “#Standwithme”. The film tells the story of one determined little girl’s quest to end child slavery by selling one glass of lemonade at a time. Her parents bought a photograph depicting slave children carrying heavy stones in Nepal.

That photo touched a nerve in the Northern California eight year-old. It inspired her to try to end the scourge of child slavery throughout the world.

Instead of charging a fixed price for her lemonade, the girl charged “whatever is in your heart”. Those efforts raised $150,000 – enough to free 1,500 slaves. Now her father has been working to sell bottles of his daughter’s lemonade in grocery stores throughout the country. I do encourage you to check out the movie at

Prior to the screening, I had the opportunity to have dinner with that little girl, Vivienne Harr and her father, Eric Harr. Eric is the CEO of Make a Stand, Inc., the company that grew out of his daughter’s vision of helping save a societal ill by selling a product.

Now this isn’t a blog about great people trying to make a giant difference. But what Eric (and his family) are doing highlights an important emerging trend in brand marketing. Make a Stand is a certified “B Corporation”. These are for-profit businesses that redefine success in business. Instead of merely maximizing shareholder profit, these companies try to become not only the best in the world, but#standwithme photo also the best for the world.

These social purpose companies aren’t totally new. In 1982, Paul Newman formed “Newman’s Own” (which is also a food products company). Any profit generated by the business is divided between a number of tax-exempt charities through the Newman’s Own Foundation. Since its inception, nearly $400 million has been raised for charities, including the SeriousFun Children’s Network which provides residential summer camp experiences for seriously ill children. More than 400,000 children have attended one of the camps (in 50 different countries) as a result of consumers choosing Newman’s Own salad dressings or other food products at the grocery store.

Toms Shoes was founded in 2006 with a different laudatory social purpose. When you buy a pair of shoes from Toms, a second pair of shoes is given to an impoverished child somewhere in the world. Recently, Toms began selling eyewear. And when someone buys a pair of glasses … you guessed it – an impoverished child gets a pair for free.

The proceeds from the Make a Stand lemonade sales go to a handful of non-profit organizations that work to free bonded slaves throughout the world.

Eric Harr knows that he can’t effectively run a non-profit organization. The groups that receive the benefit of his lemonade sales have a great deal of experience navigating the complex world of freeing bonded slaves. Freeing slaves may be his passion, but it isn’t Eric Harr’s specialty. He knows marketing (he’s one of the leading social marketers in the world).

Eric noted that one of the largest challenges for a non-profit is to create scale. After all, there is constant pressure from a board of directors to take small bites at major problems. At the same time, a non-profit is raising small dollar amounts. So it is no surprise that few effective non-profits are very large (when compared to the business community).

By growing quickly, Make a Stand will be able to make big differences quickly. According to Eric, their lemonade sales projections could result in the elimination of child slavery within eight years.

Make a Stand has a major built-in advantage over its competitors. Assuming that they will be able to sell lemonade at a similar price point, who isn’t going to give the product a try? By tying into their prospective customer’s emotional needs, Make a Stand gets an initial sale and a taste.

Consumers flock to places like Whole Foods and Starbucks. The reason for going to those stores is different than why some are driven to value brands like Wal-Mart. What is the lesson for premium brand marketing? People believe in causes and things that are larger than themselves. And they are willing to pay for more than the product – they are willing to pay for an experience.

Forbes columnist and frequent crowdfunding commentator Devin Thorpe wrote the book “Crowdfunding for Social Good”. “Anyone can start a business. But those that do so with a social purpose will always have the wind at their back,” he argues. Most start-up businesses fail. But Mr. Thorpe is right. That start-up failure rate can be ameliorated by creating an energized customer base that believes in you, your product and your social purpose.

The convergence of social good with business is going to be a growing trend over the next decade. After all, there are an awful lot of lemonades out there. But there is no competition for quenching your thirst at the same time that you do good.

Jonathan FrutkinJonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

Minecraft gives Marketers Direction

Minecraft is an incredibly popular game with the younger set. And by younger, I mean kids under the age of 15. If you don’t have kids, you just need to know that basically, this game has taken over more than one family – mine included!

The object of the game is described in its Wikipedia page:

The creative and building aspects of Minecraft allow players to build constructions out of textured cubes in a 3D procedurally generated world. Other activities in the game include exploration, gathering resources, crafting, and combat. Gameplay in its commercial release has two principal modes: survival, which requires players to acquire resources and maintain their health and hunger; and creative, where players have an unlimited supply of resources, the ability to fly, and no health or hunger.

There is very little in common with most video games that adults are used to playing. Adult games are usually focused on points, passing levels, killing bad guys and defeating the game for the highest score possible. The graphic quality of Minecraft minecraft logois very poor compared to adult games, and for years the creation of the game was simply the work of one man. However, the game obviously does have something that is very attractive to these millions of young people around the world.

The game of Minecraft is much different: it is about building things and discovery. It is also about showing off the things that you’ve built and discovered to your friends. And that is the most important and notable difference that has driven the game into unprecedented popularity.

Rather than share something simple like project merely built from a Lego set, the game allows users to build entire cities upward and to dig underground too – hence the name Minecraft. After these complex worlds are constructed, other players can visit, and sometimes construct more on top of the world. This is pretty amazing-what it basically means is that people are playing a collaborative game, with friends and other people online. In fact there are millions of people playing the game.

There are very few adults who are interested at all in Minecraft. But some basic research reveals that millions of kids from around the world are actually playing the game obsessively. And that proves the point – collaborative building together, aka crowdsourcing, is a common activity for young people. Marketers need to understand that the world of on-line competition is slowly making way for the world of on-line collaboration. Setting a high score is no longer a brag – building a roller coaster in your virtual city can make you legendary. Kids get together, build shared worlds, and tell jokes that make no sense to their parents.

The pioneer spirit that drove America’s growth is being replaced by a new spirit of cooperation and community, especially amongst our youngest people. Watch your kids and you know why forward-thinking marketers are turning to the crowd.

Jonathan Frutkin
Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

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