Attempted Business Venture Goes Flat Thanks To SEC Intervention

Posted on June 15, 2011


Earlier this year, founders of received a cease and desist order from the U.S. Securities and Exchange Commission (SEC) to immediately end their unique business venture.

Powered by social networking sites such as Facebook and Twitter, in addition to their own personal website, recruited investors to raise $300 million by numerous pledge donations that would result in the purchase of Pabst Blue Ribbon brewing company. According to the SEC, The donations would entitle each “investor” to a certificate of ownership as well as an equivalent beer supply — if the plan had worked.

The business partners raised approximately $200 million in pledged donations, however, none of the promised monies were ever received.

According to the SEC, the business was in violation of Section 5(c) of the Securities Act of 1933. The owners of never registered their company so prospective investors were never informed of the financial conditions of and given proper background information on the enterprise.

This is the first significant occasion wherein the SEC has approached the issue of “crowdsourcing,” a term used to define situations where businesses and entrepreneurs utilize the public as a means to generate revenue. Crowdsourcing has become a popular fundraising method; gathering the masses to fund a good idea.  Indeed, I think the regulators should provide rules whereby entrepreneurs can access capital in this manner without having to comply with the onerous regulations of being a public company.

However, currently, it can easily run afoul of numerous state and federal securities laws. While the premise of might seem to be just an amusing anecdote, the takeaway for a legitimate business owner is that it is difficult to mesh this mechanism with the securities raising prohibition against public offerings, as a company is either public and subject to regulation, or private. Entrepreneurs must be mindful to not engage in public offerings without consulting an attorney specializing in securities law.

Mike Goodrich
Goodrich Firm, LLC