One of the easiest ways to raise money from investors for a venture is to structure the raise in such a way that the securities laws do not apply. To do this, it is necessary to be very familiar with the definition of a security. If an instrument does not meet the definition, there is no need to worry about state and federal securities law compliance.
The Supreme Court has said that the following will be considered a security: “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
So what if someone invests in a venture with the expectation of receiving a beautiful gift basket at the end of one year – could that be considered an “expectation of profits”?
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Unfortunately, this issue has not been addressed directly by the courts. Crowdfunding web sites like IndieGoGo and Kickstarter are based on the assumption that giveaways would not be considered “profit” and therefore subject to securities regulations.
At what point might a reward be valuable enough that it could be seen as a financial return on investment? Just because it is not paid in cash surely could not be the determining factor – that would be a loophole big enough for a mack truck!
The Supreme Court has already held that the initial investment does not have to be in cash – it could be in the form of goods or services. Can the decision that profits can be in the form of goods and services be far behind?
Because of this uncertainty, if you are conducting a non-securities funding campaign and providing giveaways to your donors, it is best to structure it so that the primary motivation is not the giveaway but other intangible benefits of supporting a wonderful venture.