--- title: Advances in Technology May Prompt the SEC into Revising Securities’ Registration Requirements description: Advances in Technology May Prompt the SEC into Revising Securities’ Registration Requirements --- [![Jacko Law Group, PC - Securities Law](https://resources.jackolg.com/hubfs/Jackolawgroup%20February2018/image/brand.png)](http://www.jackolg.com/) Call Today for a Consultation San Diego 619-298-2880 San Francisco 415-766-3599 Los Angeles 213-631-2549 Menu [Contact](http://www.jackolg.com/Contact.shtml) - [Home](http://www.jackolg.com/) - [Firm Overview](http://www.jackolg.com/Firm-Overview/) - [Professionals](http://www.jackolg.com/Professionals/) - [Events](http://www.jackolg.com/Events.shtml) - [News](http://www.jackolg.com/News-Room/) - [Blog](http://www.jackolg.com/blog/) - [Videos](http://www.jackolg.com/Videos.shtml) - [Contact](http://www.jackolg.com/Contact.shtml) # Understand. Define. Achieve. Uniquely situated to offer comprehensive services to registered investment advisers, securities broker-dealers, hedge funds, financial professionals and organizations of all sizes. View Our Practice Areas - [SEC/FINRA Regulatory Counsel](http://www.jackolg.com/Regulatory-Examinations-and-Inquiries-SEC-and-FINRA/) - [Private Equity & Hedge Fund Counsel](http://www.jackolg.com/Private-Equity-Counsel/) - [Investment Adviser Services](http://www.jackolg.com/Legal-Considerations-for-Breaking-Away/Investment-Adviser-Counsel.shtml) - [Breakaways And Transitions](http://www.jackolg.com/Legal-Considerations-for-Breaking-Away/) - [General Corporate Counsel](http://www.jackolg.com/Corporate-Counsel/) - [Broker- Dealer Counsel](http://www.jackolg.com/Broker-Dealer-Counsel/) #### News - [Legal Tips](http://www.jackolg.com/News-Room/) - [Publications](http://www.jackolg.com/News-Room/Publications.shtml) - [Blog](http://www.jackolg.com/blog/) # Jacko Law Group Blog # Advances in Technology May Prompt the SEC into Revising Securities’ Registration Requirements In November of 2009, two advertising executives, and longtime fans of Pabst Brewing Company (“PBR”), attempted to purchase the company. The advertising executives made offers for the company, but could not approach the $300 million asking price. In order to raise capital for the buyout, the advertising executive utilized “crowd funding.” Crowd funding is the use of social media and the internet to organize a large group of individuals to achieve a common goal, in this instance, to raise capital for the purchase of a brewery. Accordingly, the advertising executives decided to solicit online pledges in exchange for a “certificates of ownership” and beer equal to the amount pledged. To that end, the advertising executives established the website buyabeercompany.com to facilitate and centralize their fundraising efforts. They also formed a FaceBook page and Twitter account for buyabeercompany.com to help generate interest and publicity for the buyout. Shockingly, the two advertising executives ultimately received pledges of $200 million from over five million people. While the $200 million dollars was not enough to purchase PBR, it was enough to catch the attention of the Securities and Exchange Commission (“SEC”), who in June of this year issued a Cease and Desist Order[\[1\]](http://jackolg.wordpress.com/wp-admin/post-new.php#_ftn1) against the two advertising executives for violation of federal securities laws. Under the Securities Act of 1933, the offer or sale of securities is prohibited unless registered or exempt from registration.[\[2\]](http://jackolg.wordpress.com/wp-admin/post-new.php#_ftn2) The list of what constitutes a “security” for purposes of the Securities Act of 1933 is long, but its contours were fleshed out in the seminal Supreme Court case *SEC v. Howey.*[\[3\]](http://jackolg.wordpress.com/wp-admin/post-new.php#_ftn3) Under *Howey*, a “security” is defined as an exchange of money with an expectation of profits arising from a common enterprise which depends solely on the efforts of a promoter or third party. Clearly, under *Howey*, any crowd funding arrangement (like that conducted for PBR) in which people are asked to contribute money in exchange for potential profits based on the work of others would be considered a security. Consequently, the attempt to raise money by soliciting millions of small pledges from people on Facebook or Twitter in exchange for a “certificate of ownership” was in direct violation of the Securities Act of 1933. Likely given the amount of time, effort and cost associated with registering their “certificates of ownership,” the advertising executives unsurprisingly ignored this requirement, and took their capital raising efforts directly to the people.[\[4\]](http://jackolg.wordpress.com/wp-admin/post-new.php#_ftn4) An alternative method of complying with federal securities laws may have been available if the advertising executives, and similarly situated crowd funders, would have used an exemption from the registration requirement, such as those afforded under Regulation D. However, given the facts and circumstances surrounding the offering, it is doubtful as to whether they would have qualified for an exemption. *Current Regulatory Framework*: Rules 504, 505 and 506 under Regulation D of the Securities Act of 1933 are the most commonly used exemptions to avoid the registration requirement. Summarily, Rule 504 provides an exemption for certain offerings not exceeding an aggregate of $1 million within a 12-month period. Given the $300 million buyout price of the brewery and the amount of money that is commonly attempted to be raised by crowd funders, the $1 million cap of Rule 504 often renders this exemption unavailable. Similarly, Rule 505 oftentimes does not suit crowd funders’ purposes because this exemption is capped at offerings not exceeding $5 million within a 12-month period and places a limit on the number of investors who are not “accredited investors.”[\[5\]](http://jackolg.wordpress.com/wp-admin/post-new.php#_ftn5) While Rule 506 does not place a cap on the amount of the offering or the number of accredited investors, such an offering is limited thirty five non-accredited investors who must also meet certain sophistication requirements. Consequently, given the fact that over five million people provided funds to the advertising executives, this offering could not be exempted under Rule 506. Moreover, given that Rules 504, 505 and 506 all prohibit general solicitation or advertising of the investment opportunity, attempts at exempting crowd funding efforts under these Rules is not available. *What is On the Horizon*:Loosening the restrictions on entrepreneurs’ ability to raise capital through crowd funding offers numerous benefits. For instance, crowd funding allows entrepreneurs to quickly and easily reach investors who are interested in backing their product or services, and may spur the economy through the facilitation of small business formation. Moreover, jobs are likely to be created as small businesses are born or grow through their ability to access capital through crowd funding. For these reasons, Representative Darrell Issa, Chairman of the Committee on Oversight and Government Reform, and Mary Shapiro, Chairman of the SEC, have been corresponding on ways to address changes in the securities laws governing initial public offerings and capital formation and raising.[\[6\]](http://jackolg.wordpress.com/wp-admin/post-new.php#_ftn6) --- [\[1\]](http://jackolg.wordpress.com/wp-admin/post-new.php#_ftnref1) SEC Enters Cease and Desist Order in Connection with Online Campaign to Buy Beer Company (June 8, 2011) *available at* [www.sec.gov/news/press/2011/2011-122.htm](http://www.sec.gov/news/press/2011/2011-122.htm). [\[2\]](http://jackolg.wordpress.com/wp-admin/post-new.php#_ftnref2) 15 U.S.C. § 77e. [\[3\]](http://jackolg.wordpress.com/wp-admin/post-new.php#_ftnref3) *SEC v. W. J. Howey Co.*, 328 U.S. 293 (1946). [\[4\]](http://jackolg.wordpress.com/wp-admin/post-new.php#_ftnref4) According to the SEC’s Cease and Desist Order, at least one of the advertising executives met with counsel, and it was thought that they had discussed the possibility of an initial public offering, which would have required the registration of the “certificates of ownership.” *See* *id*. [\[5\]](http://jackolg.wordpress.com/wp-admin/post-new.php#_ftnref5) Among other things, “Accredited Investors” have certain sophistication requirements but are commonly defined asnatural persons whose individual net worth, or joint net worth with that person's spouse, at the time of the purchase exceeds $1,000,000. *See* 17 C.F.R. § 230.215. [\[6\]](http://jackolg.wordpress.com/wp-admin/post-new.php#_ftnref6) *See* letter from Chairman Mary L. Schapiro to The Honorable Darrell E. Issa, dated April 6, 2011, *available at* [www.sec.gov/news/press/schapiro-issa-letter-040611.pdf](http://www.sec.gov/news/press/schapiro-issa-letter-040611.pdf). ### Legal Tip Archive - [September 2011 (5)](https://resources.jackolg.com/archive/2011/09) - [April 2014 (5)](https://resources.jackolg.com/archive/2014/04) - [August 2014 (5)](https://resources.jackolg.com/archive/2014/08) - [September 2015 (5)](https://resources.jackolg.com/archive/2015/09) - [August 2011 (4)](https://resources.jackolg.com/archive/2011/08) - [October 2011 (4)](https://resources.jackolg.com/archive/2011/10) - [June 2012 (4)](https://resources.jackolg.com/archive/2012/06) - [July 2012 (4)](https://resources.jackolg.com/archive/2012/07) - [August 2012 (4)](https://resources.jackolg.com/archive/2012/08) - [October 2012 (4)](https://resources.jackolg.com/archive/2012/10) - [November 2012 (4)](https://resources.jackolg.com/archive/2012/11) - [January 2013 (4)](https://resources.jackolg.com/archive/2013/01) - [March 2013 (4)](https://resources.jackolg.com/archive/2013/03) - [April 2013 (4)](https://resources.jackolg.com/archive/2013/04) - [May 2013 (4)](https://resources.jackolg.com/archive/2013/05) - [June 2013 (4)](https://resources.jackolg.com/archive/2013/06) - [September 2013 (4)](https://resources.jackolg.com/archive/2013/09) - [October 2013 (4)](https://resources.jackolg.com/archive/2013/10) - [January 2014 (4)](https://resources.jackolg.com/archive/2014/01) - [February 2014 (4)](https://resources.jackolg.com/archive/2014/02) - [March 2014 (4)](https://resources.jackolg.com/archive/2014/03) - [May 2014 (4)](https://resources.jackolg.com/archive/2014/05) - [June 2014 (4)](https://resources.jackolg.com/archive/2014/06) - [July 2014 (4)](https://resources.jackolg.com/archive/2014/07) - [December 2014 (4)](https://resources.jackolg.com/archive/2014/12) - [January 2016 (4)](https://resources.jackolg.com/archive/2016/01) - [November 2011 (3)](https://resources.jackolg.com/archive/2011/11) - [December 2011 (3)](https://resources.jackolg.com/archive/2011/12) - [January 2012 (3)](https://resources.jackolg.com/archive/2012/01) - [February 2012 (3)](https://resources.jackolg.com/archive/2012/02) - [April 2012 (3)](https://resources.jackolg.com/archive/2012/04) - [May 2012 (3)](https://resources.jackolg.com/archive/2012/05) - [September 2012 (3)](https://resources.jackolg.com/archive/2012/09) - [December 2012 (3)](https://resources.jackolg.com/archive/2012/12) - [July 2013 (3)](https://resources.jackolg.com/archive/2013/07) - [August 2013 (3)](https://resources.jackolg.com/archive/2013/08) - [November 2013 (3)](https://resources.jackolg.com/archive/2013/11) - [December 2013 (3)](https://resources.jackolg.com/archive/2013/12) - [January 2015 (3)](https://resources.jackolg.com/archive/2015/01) - [February 2015 (3)](https://resources.jackolg.com/archive/2015/02) - [March 2015 (3)](https://resources.jackolg.com/archive/2015/03) - [July 2015 (3)](https://resources.jackolg.com/archive/2015/07) - [August 2015 (3)](https://resources.jackolg.com/archive/2015/08) - [November 2015 (3)](https://resources.jackolg.com/archive/2015/11) - [February 2016 (3)](https://resources.jackolg.com/archive/2016/02) - [March 2012 (2)](https://resources.jackolg.com/archive/2012/03) - [February 2013 (2)](https://resources.jackolg.com/archive/2013/02) - [October 2014 (2)](https://resources.jackolg.com/archive/2014/10) - [November 2014 (2)](https://resources.jackolg.com/archive/2014/11) - [April 2015 (2)](https://resources.jackolg.com/archive/2015/04) - [May 2015 (2)](https://resources.jackolg.com/archive/2015/05) - [June 2015 (2)](https://resources.jackolg.com/archive/2015/06) - [October 2015 (2)](https://resources.jackolg.com/archive/2015/10) - [December 2015 (2)](https://resources.jackolg.com/archive/2015/12) - [July 2011 (1)](https://resources.jackolg.com/archive/2011/07) - [September 2014 (1)](https://resources.jackolg.com/archive/2014/09) see all #### News - [Legal Tips](http://www.jackolg.com/News-Room/) - [Publications](http://www.jackolg.com/News-Room/Publications.shtml) - [Blog](http://www.jackolg.com/blog/) [Email Us For A Response](http://www.jackolg.com/Contact.shtml) #### How Can We Help? Email us to request more information or to schedule an appointment. **Bold** labels are required. #### Follow Us ON - [![Facebook](https://resources.jackolg.com/hubfs/Jackolawgroup%20February2018/image/facebook.jpg)![Facebook](https://resources.jackolg.com/hubfs/Jackolawgroup%20February2018/image/facebook-o.jpg)](https://www.facebook.com/pages/Jacko-Law-Group-PC/293111140703429)Facebook - [![Google Plus](https://resources.jackolg.com/hubfs/Jackolawgroup%20February2018/image/google-plus.jpg)![Google Plus](https://resources.jackolg.com/hubfs/Jackolawgroup%20February2018/image/google-plus-o.jpg)](https://plus.google.com/103406198138900359700/posts)Google Plus - [![LinkedIn](https://resources.jackolg.com/hubfs/Jackolawgroup%20February2018/image/linkedin.jpg)![LinkedIn](https://resources.jackolg.com/hubfs/Jackolawgroup%20February2018/image/linkedin-o.jpg)](https://www.linkedin.com/company/469106?trk=vsrp_companies_res_name&trkInfo=VSRPsearchId%3A1915712591417541495513%2CVSRPtargetId%3A469106%2CVSRPcmpt%3Aprimary)LinkedIn - [![Twitter](https://resources.jackolg.com/hubfs/Jackolawgroup%20February2018/image/twitter.jpg)![Twitter](https://resources.jackolg.com/hubfs/Jackolawgroup%20February2018/image/twitter-o.jpg)](https://twitter.com/JackoLawGroup)Twitter **San Diego Office** 1350 Columbia Street Suite 300 San Diego, CA 92101 [Map & Directions](https://maps.google.com/?q=Jacko+Law+Group,+PC+1350+Columbia+Street+Suite+300+San+Diego+CA+92101) Toll Free: 866-497-2298 Phone: 213-631-2549 Phone: 619-298-2880 Fax: 619-298-2882 **San Francisco Office** Four Embarcadero Center Suite 1400 San Francisco, CA 94111 [Map & Directions](https://www.google.co.in/maps/place/4+Embarcadero+Center,+San+Francisco,+CA+94111,+USA/@37.7950648,-122.3986392,17z/data=!3m1!4b1!4m2!3m1!1s0x808580613083aa1d:0x7e2bd59759260996) Phone: 415-766-3599 **Los Angeles Office** 535 N. Brand Boulevard Suite 279 Glendale, CA 91203 [Map & Directions](https://www.google.co.in/maps/place/535+N+Brand+Blvd+%23279,+Glendale,+CA+91203,+USA/@34.154319,-118.2576643,17z/data=!3m1!4b1!4m2!3m1!1s0x80c2c05300cb02e7:0xa610477ee4f38e64) Phone: 213-631-2549 © 2018 by [Jacko Law Group, PC](http://pview.findlaw.com/cmd/view?wld_id=4003514&pid=1). All rights reserved. [Disclaimer](http://www.jackolg.com/Disclaimer.shtml) | [Site Map](http://www.jackolg.com/Site-Map.shtml) [Privacy Policy](http://www.jackolg.com/Privacy-Policy.shtml) | [Business Development Solutions](https://www.lawyermarketing.com/?utm_source=FirmSite&utm_medium=footer%2Bcopyright&utm_term=law%2Bfirm%2Bmarketing&utm_campaign=FirmSite%2BInbound) by [FindLaw](http://www.findlaw.com/), part of Thomson Reuters.