The Securities and Exchange Commission on Wednesday reached a settlement with two advertising executives that used their website BuyaBeerCompany.com along with social networking websites Twitter and Facebook to secure pledges of $200m in an experimental effort to buy Pabst Brewing Company. What does this have to do with filmmakers? Keep reading…

The SEC has just popped the top on a scheme that doesn’t quite rival Bernie Madoff.

In a case that gives new meaning to the British term “small beer,” our courageous securities regulators today nabbed two guys who made no money running an online gag about Pabst Blue Ribbon.

Two advertising executives, Michael Migliozzi II of California and Brian William Flatow of Connecticut, agreed Wednesday to cease and desist from running a web site that solicited pledges from PBR drinkers to supposedly buy the Pabst brewery.

Fortune | Read the Full Article

What makes this unique is the investors didn’t receive normal stock. They where promised a certificate of ownership and beer equivalent to the amount of money pledged. Now you may be thinking that sounds a lot like indie filmmakers trying to solicit “donations” in exchange for a movie credit, DVD or other swag.

The SEC found them guilty of violating Section 5(c) of the Securities Act of 1933.

Section 5 (c)
It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under section 8.

SEC.GOV | PDF File

Quote from the SEC on Wednesday:

“All investors are entitled to know certain basic information about a company before being asked to invest,” said Scott Friestad, Associate Director in the SEC’s Division of Enforcement.

Does this mean everyone on Kickstarter and similar sites are in violation of Federal Law? I’m not an attorney, but the answer could very well be yes.

You may be asking why haven’t they done anything about it. It could be as simple as no one has filed a complaint yet. Someday one of those projects is going to do very well or very bad and an “investor” will get upset and lawyer-up. When that happens who knows what the fallout could be.

In the case of these two guys, it was the media attention that got them on the SEC’s radar. They collected $14.75 million dollars in pledges, but because no money was exchanged they where basically told to shut down and the SEC settled the case without prosecution.

The lesson is, if you are going to ask for money, no matter how big or small you need to talk to an attorney. Just because you don’t think it’s a security doesn’t mean Big Brother will agree.

UPDATE:

I found the PDF file of the SEC’s cease-and-desist order. It sheds a little more light on their rational of shutting the down. Reading it over I think this is what got them in trouble:

9. A March 15, 2010 article in The Daily Deal reported that Migliozzi and Flatow had retained counsel and planned to incorporate Buy a Beer Company LLC. Thus, in lieu of a certificate of ownership, pledgors would receive stock in the acquisition corporation. The entity was never incorporated.

SEC.GOV | PDF File

It doesn’t say what rights or privileges that stock would have. Maybe that was the SEC’s point. It seems to me they where trying to copy the Green Bay Packers ownership structure. Where they would be a non-profit, community-owned business.

Because the two individuals did not challenge the order we will never know if it would have stood up in court. Another thing that should be noted is that even if there is no current law/rule that you are violating if the SEC believes you created a scheme solely to circumvent filing rules they can still charge you.

ANOTHER UPDATE:

The Wall Street Journal is reporting it was all just a big joke/experiment and they never intended to buy PBR.

Berkowitz said Migliozzi and Flatow were simply “a couple of friends in the ad business trying out an idea.” They never intended to buy Pabst and the experiment was “successful beyond their wildest dreams.” They cooperated with the SEC as soon as they were contacted by the regulator, he said.

WSJ.com | Read the Full Article

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Madison Paige

Ya. It’s number two that seems to me to be the no brainer. The onus is on the recipient to make clear that the donation is NOT an investment. Why is that hard? It’s not.

Madison Paige

Interesting. I don’t think kickstarter is going to have an issue. Theyre very explicit that those whompost there make it clear that the donors know they aren’t investing in the project but donating to it’s furtherance. Also kickstarter,iirc, checks all posts before they go up. I think.

Donors are not investors and it’s simple enough for people to communicate that. Just because someone donates to a cause or project doesn’t make them a stakeholder. Artists and others who solicit funds from folks need to be very clear on that. And that easy enough to do, IMO.

It seems like this pbr thing could’ve had some room for serious confusion. The dudes were “raising money” to buy a pbr brewery. I can see where someone might think they would be buying into the brewery in some small amount. Even if it was a prank. And I can also see how someone might understand that they weren’t buying in (because it was made clear) and still file a complaint at some point because the thing actually took off and they decided to see if they could sue and get a few bucks out of the deal.

Interesting article. This is especially interesting for me right now because I am doing something similar, building a grassroots funding arm for my tv studio. I am, however, forming it as a non profit, so we won’t have these issues but I do find the article interesting and informative. Thanks for posting.

James Madara

Not knowing the SEC’s definition of ‘security’, I speculate the PBR promotion to “Buy a Beer company” can be viewed as selling a public company in some weird way.

I believe the difference is filmmakers are selling something of no real value. It would be different if they were selling a stake in a production company. Which would be subject to SEC filings.

I’m not all that familiar with the details of Kickstarter, but again you are paying money in return of a product, not a stake in said company.

That being said, I would make sure you claim all money donated against losses. Since we do it for the Art, it shouldn’t be too hard to claim more loss than gain.

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